[Federal Register: May 5, 2003 (Volume 68, Number 86)]
[Notices]
[Page 23766-23782]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr05my03-104]
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
[Application No. D-10992, et al.]
Proposed Exemptions; Local 705 International Brotherhood of
Teamsters Pension Plan (the Plan)
AGENCY: Employee Benefits Security Administration, Labor.
ACTION: Notice of proposed exemptions.
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SUMMARY: This document contains notices of pendency before the
Department of Labor (the Department) of proposed exemptions from
certain of the prohibited transaction restrictions of the Employee
Retirement Income Security Act of 1974 (the Act) and/or the Internal
Revenue Code of 1986 (the Code).
Written Comments and Hearing Requests
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
[[Page 23767]]
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-5649,
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: ``moffittb@pwba.dol.gov'',
or by FAX to (202) 219-0204 by the end of the scheduled comment period.
The applications 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 exemptions will be provided to all
interested persons in the manner agreed upon by the applicant and the
Department within 15 days of the date of publication in the Federal
Register. Such notice shall include a copy of the notice of proposed
exemption as published in the Federal Register and shall inform
interested persons of their right to comment and to request a hearing
(where appropriate).
SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in
applications filed pursuant to section 408(a) of the Act and/or section
4975(c)(2) of the Code, and in accordance with procedures set forth in
29 CFR part 2570, subpart B (55 FR 32836, 32847, August 10, 1990).
Effective December 31, 1978, section 102 of Reorganization Plan No. 4
of 1978, 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, these notices of proposed exemption
are issued solely by the Department.
The applications contain representations with regard to the
proposed exemptions which are summarized below. Interested persons are
referred to the applications on file with the Department for a complete
statement of the facts and representations.
Local 705 International Brotherhood of Teamsters Pension Plan (the
Plan) Located in Chicago, Illinois
[Application No. D-10992]
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 purchase of a 10 ft. x 52.6 ft.
parcel of real property (the Property) by the West Side Realty
Corporation (West Side), a wholly owned affiliate of the Plan from
Local 705 Building Corporation (the Building Corporation), a party in
interest with respect to the Plan, provided that the following
conditions are met:
(a) The purchase of the Property by the Plan is a one-time
transaction for cash;
(b) The Plan pays no more than the lesser of: (i) $147,000; or (ii)
the fair market value of the Property as determined at the time of the
transaction;
(c) The fair market value of the Property is established by an
independent, qualified, real estate appraiser that is unrelated to the
Building Corporation or any other party in interest with respect to the
Plan;
(d) The Plan will not pay any commissions or other expenses with
respect to the transaction; and
(e) The Townsend Group, Institutional Real Estate Consultants (the
Townsend Group), acting as an independent, qualified, fiduciary for the
Plan, determines that the proposed transaction is in the best interest
of the Plan and its participants and beneficiaries.
Summary of Facts and Representations
1. The Plan is a defined benefit plan. The approximate aggregate
fair market value of the total assets of the Plan is $1,035,500,093.
The percentage of the fair market value of the total assets of the Plan
that is involved in the exemption transaction is .0001% as of April 12,
2001. The Plan has eight (8) trustees, four (4) of whom are selected by
employers who are parties to collective bargaining agreements with the
Truck Drivers, Oil Drivers, Filling Station and Platform Workers Union,
Local 705, International Brotherhood of Teamsters, Chauffeurs,
Warehousemen and Helpers of America (the Union) and four (4) of whom
are selected by the Union. These eight (8) individuals who serve as
trustees of the Plan also serve as directors of West Side, which is an
Illinois corporation wholly owned by the Plan.
2. The Building Corporation, a nominee corporation controlled by
the Union owns the Property which consists of a 10 ft. x 52.6 ft.
parcel in Chicago, Illinois. In 1992, the Plan completed construction,
at 1645 West Jackson Boulevard, Chicago, Illinois, of a multi-tenant
office building which is owned by West Side and which is currently
leased to the Union and many other tenants. Sometime thereafter, the
Plan became aware that the multi-tenant office building encroached, in
part, on the Property.
As a result, the Plan now proposes, through West Side, to purchase
the Property from the Building Corporation. The Property is contiguous
to other parcels owned by the Building Corporation, and the parties
contemplate granting each other cross-easements for parking and ingress
and egress over their respective parcels pursuant to a reciprocal
easement agreement.\1\
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\1\ The Department is providing no relief herein with respect to
any prohibited transactions that may arise in connection with any
cross-easement agreements.
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3. The proposed purchase is in the interest of the Plan and its
participants and beneficiaries since it resolves any concerns involving
ownership boundaries between the Property and the multi-tenant office
building. The applicant represents that the proposed purchase by the
Plan from the Building Corporation is the most equitable and convenient
method to resolve this matter. The purchase of the Property will
enhance the future marketability of the Property and will avoid the
expense of possible future litigation. The rights of the Plan
participants and beneficiaries are adequately protected by the
transaction in question. The Building Corporation has offered to sell
the Property to the Plan for cash in the amount of $147,000.\2\
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\2\ The Building Corporation has determined that a price of
$147,000 in cash for the Property would be acceptable.
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4. The Property was appraised by Michael S. MaRous, an employee of
MaRous and Company (the Appraiser), a real estate appraisal firm
located in Park Ridge, Illinois. The Appraiser
[[Page 23768]]
utilized a sales comparison methodology in valuing the Property. To
develop the opinion of value, the Appraiser performed a complete
appraisal process as defined by the Uniform Standards of Professional
Appraisal Practice. The Appraiser concluded that the unencumbered fee
simple interest in the Property would have a fair market value of
approximately $402,300, as of July 17, 2001.
5. The Townsend Group has been appointed by the Plan trustees to
act as an independent fiduciary for the Plan for purposes of the
transaction. The Townsend Group is an institutional real estate
consulting company based in Cleveland, Ohio. Townsend acknowledges and
represents that in serving as an independent fiduciary, the Townsend
Group is a fiduciary of the Plan within the meaning of section 3(21) of
the Act. Townsend is familiar with the duties imposed on fiduciaries
under the Act, including the requirement that a fiduciary act solely
and exclusively in the interest of a plan's participants and
beneficiaries. Townsend's familiarity with the Act stems from its
provision of a diverse array of real estate consulting services to a
large base of domestic pension funds, as well as through transactional
assignments for other intuitional investors during the firm's history.
The Townsend Group represents that it is an independent fiduciary and
not an affiliate of, or related to, the entities involved in the
subject transaction. In this regard, the Townsend Group certifies that
less than one (1) percent of its annual income (measured on the basis
of the prior year's income) comes from business derived from The
Building Corporation and its affiliates.
7. The Townsend Group has reviewed all of the terms and conditions
of the proposed purchase of the Property by the Plan.
Based of this review and analysis, the Townsend Group concluded
that the transaction is in the best interests of the Plan and its
participants and beneficiaries.
8. In summary, the applicant states that the transaction will
satisfy the statutory criteria of section 408(a) of the Act because:
(a) The proposed purchase of the Property by the Plan is a one-time
transaction for cash; (b) the Plan will not pay more than the lesser of
either $147,000, or the fair market value of the Property as determined
at the time of the transaction; (c) the fair market value of the
Property was established by an independent, qualified, real estate
appraiser; (d) the Plan will not pay any commissions or other expenses
with respect to the transaction, other than the services of an
independent fiduciary (as described herein); and (e) the Townsend
Group, acting as the Plan's independent fiduciary, determined that the
proposed transaction is in the best interest of the Plan and its
participants and beneficiaries.
Notice to Interested Persons: Notice of the proposed exemption
shall be given to all interested persons in the manner agreed upon by
the applicant and Department within 15 days of the date of publication
in the Federal Register. Comments and requests for a hearing are due
forty-five (45) days after publication of the notice in the Federal
Register.
FOR FURTHER INFORMATION CONTACT: Mr. Khalif I. Ford of the Department,
telephone (202) 693-8540. (This is not a toll-free number.)
Skandinaviska Enskilda Banken AB (SEB) Located in Stockholm, Sweden
[Application No. D-11133]
Proposed Exemption
Based on the facts and representations set forth in the
application, the Department of Labor 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).\3\
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\3\ For the 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 exemption is granted, the restrictions of section
406(a)(1)(A) through (D) of the Act and the sanctions resulting from
the application of section 4975 of the Code, by reason of section
4975(c)(1)(A) through (D) of the Code, shall not apply, effective
October 23, 2002, to: (1) The lending of securities that are assets of
a plan (the Plan) to SEB's head office in Stockholm (the Borrower) in
accordance with the conditions set forth below (the foregoing being
Part One of this proposed exemption); and (2) the lending of
securities, under certain exclusive borrowing arrangements, to the
Borrower by Plans including commingled investment funds holding assets
of such Plans with respect to which SEB or any of its affiliates is a
party in interest; and (3) the receipt of compensation by SEB or any of
its affiliates in connection with these exclusive borrowing
transactions (the foregoing being Part Two of this proposed exemption).
This proposed exemption is subject to the conditions contained
below in Sections II, III, and IV.
Section II. Conditions Applicable to Part One of the Proposed
Exemption--Securities Lending Between Plans and the Borrower
(a) Neither the Borrower nor any of its affiliates has
discretionary authority or control with respect to the investment of
Plan assets involved in the transaction, or renders investment advice
(within the meaning of 29 CFR 2510.3-21(c)) with respect to such
assets.
(b) Each Plan receives from the Borrower, either by physical
delivery or by book entry in a securities depository located in the
United States, by the close of business on the day on which the
securities lent are delivered to the Borrower, collateral consisting of
U.S. currency, securities issued or guaranteed by the United States
Government or its agencies or instrumentalities, or irrevocable United
States bank letters of credit issued by persons other than the Borrower
(or any of its affiliates), or any combination thereof, having, as of
the close of business on the preceding business day, a market value
(or, in the case of letters of credit, a stated amount) equal to or not
less than 100 percent of the then market value of the securities lent.
The collateral referred to in this exemption, shall in all cases, be in
U.S. dollars or dollar-denominated securities or United States bank
letters of credit and must be held in the United States.
(c) Each loan is made pursuant to a written loan agreement (the
Loan Agreement), which may be in the form of a master agreement
covering a series of securities lending transactions, and which
contains terms at least as favorable to the Plan as those the Plan
could obtain in an arm's length transaction with an unrelated party.
(d) In return for lending securities, each Plan either
(1) receives a reasonable fee which is related to the value of the
borrowed securities and the duration of the loan, or (2) has the
opportunity to derive compensation through the investment of cash
collateral. In the latter case, the Plan may pay a loan rebate or
similar fee to the Borrower, if such fee is not greater than the Plan
would pay an unrelated party in a comparable arm's length transaction
with an unrelated party.
(e) Each Plan receives at least the equivalent of all distributions
made to holders of the borrowed securities during the term of the loan,
including, but not limited to, cash dividends, interest payments,
shares of stock as a result of stock splits and rights to
[[Page 23769]]
purchase additional securities that the Plan would have received (net
of tax withholdings)\4\ had it remained the record owner of such
securities.
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\4\ The Department notes that the Applicant's representation
that dividends and other distributions on foreign securities payable
to a lending Plan may be subject to foreign tax withholdings and
that the Borrower will always put the Plan in at least as good a
position as it would have been in had it not loaned the securities.
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(f) If the market value of the collateral on the close of trading
on a business day falls below 100 percent of the market value of the
borrowed securities at the close of trading on that day, the Borrower
delivers additional collateral, by the close of business on the
following business day to bring the level of the collateral back to at
least 100 percent of the market value of all the borrowed securities as
of such preceding day. Notwithstanding the foregoing, part of the
collateral may be returned to the Borrower if the market value of the
collateral exceeds 100 percent of the market value of the borrowed
securities, as long as the market value of the remaining collateral
equals at least 100 percent of the market value of the borrowed
securities.
(g) Prior to entering into a loan agreement, the Borrower furnishes
to the independent fiduciary of the Plan who is making decisions on
behalf of the Plan with respect to the lending of securities: (1) The
most recently available audited statement of the Borrower's financial
condition, (2) the most recent available unaudited statement of the
Borrower's financial condition, and (3) a representation by the
Borrower that, as of each time it borrows securities, there has been no
material adverse change in its financial condition since the date of
the most recently furnished financial statement that has not been
disclosed to the Plan fiduciary.
Such representation may be made by the Borrowers' agreeing that
each loan shall constitute a representation by the Borrower that there
has been no material adverse change in its financial condition since
the date of the most recently furnished statements of financial
condition.
(h) Each Loan Agreement and any securities loan outstanding may be
terminated by the applicable Plan at any time, whereupon the Borrower
delivers securities identical to the borrowed securities (or the
equivalent thereof in the event of reorganization, recapitalization, or
merger of the issuer of the borrowed securities) to the Plan within (1)
the customary delivery period for such securities; (2) five business
days; or (3) the time negotiated for such delivery by the Plan and the
Borrower, whichever is lesser, or, alternatively such period as
permitted by Prohibited Transaction Class Exemption (PTE) 81-6 (43 FR
7527, January 23, 1981), as it may be amended or superseded.\5\
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\5\ PTE 81-6 as amended at 52 FR 18754, May 19, 1987, provides
an exemption under certain conditions from section 406(a)(1)(A)
through (D) of the Act and the corresponding provisions of section
4975(c) of the Code for the lending of securities that are assets of
an employee benefit plan to certain broker-dealers or banks which
are parties in interest.
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(i) In the event that the loan is terminated and the Borrower fails
to return the borrowed securities or the equivalent thereof within the
time described in paragraph (h) above, then the Plan may purchase
securities identical to the borrowed securities (or their equivalent as
described above) and may apply the collateral to the payment of the
purchase price, any other obligations of the Borrower under the Loan
Agreement, and any expenses associated with the sale and/or purchase.
The Borrower indemnifies the Plan with respect to the difference, if
any, between the replacement cost of the borrowed securities and the
market value of the collateral on the date the loan is declared in
default, together with expenses not covered by the collateral plus
applicable interest at a reasonable rate. Notwithstanding the forgoing,
the Borrower may, in the event it fails to return borrowed securities
as described above, replace non-cash collateral with an amount of cash
not less than the then-current market value of the collateral, provided
that such replacement is approved by the independent plan fiduciary.
(j) Each Plan maintains the situs of any Loan Agreement in
accordance with the indicia of ownership requirements under section
404(b) of the Act and the regulations promulgated under 29 CFR
2550.404(b)-1. However, the Borrower shall not be subject to the civil
penalty, which may be assessed pursuant to section 502(i) of the Act,
or to the taxes imposed by section 4975(a) and (b) of the Code, if the
independent plan fiduciary fails to comply with the requirements of 29
CFR 2550.404(b)-1.
If the Borrower fails to comply with any condition of this
exemption in the course of engaging in a securities lending
transaction, the Plan fiduciary which caused the Plan to engage in such
transaction shall not be deemed to have caused the Plan to engage in a
transaction prohibited by section 406(a)(1)(A) through (D) of the Act
solely by reason of the failure on the part of the Borrower to comply
with the conditions of the proposed exemption.
Section III. Conditions Applicable to Part Two of the Proposed
Exemption--Exclusive Borrowing Arrangements Between Plans and the
Borrower
(a) For each Plan, neither the Borrower nor any affiliate has or
exercises discretionary authority or control over the Plan's investment
in the securities available for loan, nor do they render investment
advice (within the meaning of 29 CFR 2510.3-21(c)) with respect to
those assets.
(b) The Borrower is a party in interest with respect to each Plan
(including a fiduciary) solely by reason of providing services to the
Plan, or solely by reason of a relationship to a service provider
described in section 3(14)(F), (G), (H), or (I) of the Act.
(c) The Borrower directly negotiates an exclusive borrowing
agreement (the Borrowing Agreement) with a Plan fiduciary which is
independent of the Borrower and its affiliates.
(d) The terms of each loan of securities by a Plan to the Borrower
are at least as favorable to such Plan as those of a comparable arm's
length transaction between unrelated parties, taking into account the
exclusive arrangement.
(e) In exchange for granting the Borrower the exclusive right to
borrow certain securities, each Plan receives from the Borrower either
(1) a flat fee (which may be equal to a percentage of the value of the
total securities subject to the Borrowing Agreement from time to time),
(2) a periodic payment that is equal to a percentage of the value of
the total balance of outstanding borrowed securities, or (3) any
combination of (1) and (2) (collectively, the Exclusive Fee). If the
Borrower deposits cash collateral, all the earnings generated by such
cash collateral shall be returned to the Borrower; provided that the
Borrower may, but shall not be obligated to, agree with the independent
fiduciary of the applicable Plan that a percentage of the earnings on
the collateral may be retained by the Plan or the Plan may agree to pay
the Borrower a rebate fee and retain the earnings on the collateral
(the Shared Earnings Compensation). If the Borrower deposits non-cash
collateral, all earnings on the non-cash collateral shall be returned
to the Borrower; provided that the Borrower may, but shall not be
obligated to, agree to pay the applicable Plan a lending fee (the
Lending Fee, together with the Shared Earnings Compensation, is
referred to as the Transaction Lending Fee). The Transaction Lending
Fee, if any, shall be either in addition to the Exclusive Fee or an
offset against such Exclusive Fee. The Exclusive Fee and
[[Page 23770]]
the Transaction Lending Fee may be determined in advance or pursuant to
an objective formula, and may be different for different securities or
different groups of securities subject to the Borrowing Agreement. Any
change in the Exclusive Fee or the Transaction Lending Fee that the
Borrower pays to the Plan with respect to any securities loan requires
the prior written consent of the independent fiduciary of the Plan,
except that consent is presumed where the Exclusive Fee or the
Transaction Lending Fee changes pursuant to an objective formula. Where
the Exclusive Fee or the Transaction Lending Fee changes pursuant to an
objective formula, the independent fiduciary of the Plan must be
notified at least 24 hours in advance of such change and such
independent Plan fiduciary must not object in writing to such change,
prior to the effective time of such change.
(f) The Borrower may, but shall not be required to, agree to
maintain a minimum balance of borrowed securities subject to each
Borrowing Agreement. Such minimum balance may be a fixed U.S. dollar
amount, a flat percentage or other percentage determined pursuant to an
objective formula.
(g) By the close of business on or before the day the loaned
securities are delivered to the Borrower, each Plan receives from the
Borrower (by physical delivery, book entry in a securities depository
located in the United States, wire transfer, or similar means)
collateral consisting of U.S. currency, securities issued or guaranteed
by the U.S. Government or its agencies or instrumentalities,
irrevocable bank letters of credit issued by a U.S. bank other than SEB
or any affiliate thereof, or any combination thereof, or other
collateral permitted under PTE 81-6, as amended or superseded. Such
collateral will be deposited and maintained in an account which is
separate from the Borrower's accounts and will be maintained with an
institution other than the Borrower. For this purpose, the collateral
may be held on behalf of a Plan by an affiliate of the Borrower that is
the trustee or custodian of such Plan.
(h) The market value (or in the case of a letter of credit, the
stated amount) of the collateral initially equals at least 102 percent
of the market value of the loaned securities on the close of business
on the day preceding the day of the loan and, if the market value of
the collateral at any time falls below 100 percent (or such higher
percentage as the Borrower and the independent fiduciary of a Plan may
agree upon) of the market value of the loaned securities, the Borrower
delivers additional collateral on the following day to bring the level
of the collateral back to at least 102 percent. The level of the
collateral is monitored daily by each Plan or its designee, which may
be SEB or any of its affiliates which provides custodial or directed
trustee services in respect of the securities covered by the applicable
Borrowing Agreement. Such Borrowing Agreement shall give the applicable
Plan title to the collateral until such collateral is redelivered to
SEB pursuant to the terms of the Borrowing Agreement.
(i) Before entering into any Borrowing Agreement, the Borrower
furnishes to the applicable Plan the most recent publicly available
audited and unaudited statements of its financial condition, as well as
any publicly available information which it believes is necessary for
the independent fiduciary to determine whether the Plan should enter
into or renew the Borrowing Agreement.
(j) Each Borrowing Agreement contains a representation by the
Borrower that as of each time it borrows securities, there has been no
material adverse change in its financial condition since the date of
the most recently furnished statements of financial condition.
(k) Each Plan receives the equivalent of all distributions made
during the applicable loan period, including, but not limited to, cash
dividends, interest payments, shares of stock as a result of stock
splits, and rights to purchase additional securities, that the Plan
would have received (net of tax withholdings) \6\ had it remained the
record owner of the securities.
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\6\ See Footnote 2, infra.
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(l) Each Borrowing Agreement and any outstanding securities loans
with respect thereto may be terminated by either party at any time
without penalty (except for, if a Plan has terminated its Borrowing
Agreement, the return to the Borrower of a pro rata portion of the
Exclusive Fee paid by the Borrower to the Plan), whereupon the Borrower
delivers securities identical to the borrowed securities (or the
equivalent thereof in the event of reorganization, recapitalization, or
merger of the issuer of the borrowed securities) to the applicable Plan
within the lesser of five business days of written notice of
termination or the customary settlement period for such securities.
(m) In the event that the Borrower fails to return securities in
accordance with the Borrowing Agreement, the applicable Plan has the
right under the Borrowing Agreement to purchase securities identical to
the borrowed securities and apply the collateral to payment of the
purchase price. If the collateral is insufficient to satisfy the
Borrower's obligation to return the Plan's securities, the Borrower
will indemnify the Plan in the U.S. with respect to the difference
between the replacement cost of the securities and the market value of
the collateral on the date the loan is declared in default, together
with expenses incurred by the Plan plus applicable interest at a
reasonable rate, including reasonable attorneys' fees incurred by the
Plan for legal action arising out of default on the loans, or failure
by the Borrower to properly indemnify the Plan, except to the extent
that such losses or damages are caused by the Plan's own negligence.
(n) Except as otherwise provided herein, all procedures regarding
the securities lending activities, at a minimum, conform to the
applicable provisions of PTE 81-6 (as amended or superseded), as well
as to applicable securities laws of the United States and/or Sweden, as
appropriate.
(o) Only Plans with total assets having an aggregate market value
of at least $50 million are permitted to lend securities to the
Borrower; provided, however, that--
(1) In the case of two or more Plans which are maintained by the
same employer, controlled group of corporations or employee
organization (the Related Plans), whose assets are commingled for
investment purposes in a single master trust or any other entity the
assets of which are ``plan assets'' under 29 CFR 2510.3-101 (the Plan
Asset Regulation), which entity is engaged in securities lending
arrangements with the Borrower, the foregoing $50 million requirement
shall be deemed satisfied if such trust or other entity has aggregate
assets which are in excess of $50 million; provided that if the
fiduciary responsible for making the investment decision on behalf of
such master trust or other entity is not the employer or an affiliate
of the employer, such fiduciary has total assets under its management
and control, exclusive of the $50 million threshold amount attributable
to plan investment in the commingled entity, which are in excess of
$100 million.
(2) In the case of two or more Plans which are not maintained by
the same employer, controlled group of corporations or employee
organization (the Unrelated Plans), whose assets are commingled for
investment purposes in a group trust or any other form of entity the
assets of which are ``plan assets'' under the Plan Asset Regulation,
which
[[Page 23771]]
entity is engaged in securities lending arrangements with the Borrower,
the foregoing $50 million requirement is satisfied if such trust or
other entity has aggregate assets which are in excess of $50 million
(excluding the assets of any Plan with respect to which the fiduciary
responsible for making the investment decision on behalf of such group
trust or other entity or any member of the controlled group of
corporations including such fiduciary is the employer maintaining such
Plan or an employee organization whose members are covered by such
Plan). However, the fiduciary responsible for making the investment
decision on behalf of such group trust or other entity--
(i) Has full investment responsibility with respect to plan assets
invested therein; and
(ii) Has total assets under its management and control, exclusive
of the $50 million threshold amount attributable to plan investment in
the commingled entity, which are in excess of $100 million. (In
addition, none of the entities described above are formed for the sole
purpose of making loans of securities.)
(p) Prior to any Plan's approval of the lending of its securities
to the Borrower, a copy of this exemption, if granted (and the notice
of pendency), are provided to the Plan, and the Borrower informs the
independent fiduciary that the Borrower is not acting as a fiduciary of
the Plan in connection with its borrowing securities from the Plan.\7\
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\7\ The Department notes the SEB representation that, under the
proposed exclusive borrowing arrangements, neither the Borrower nor
any of its affiliates will perform the essential functions of a
securities lending agent, i.e., SEB will not be the fiduciary who
negotiates the terms of the Borrowing Agreement on behalf of the
Plan, the fiduciary who identifies the appropriate borrowers of the
securities or the fiduciary who decides to lend securities pursuant
to either a general securities lending arrangement or an exclusive
borrowing arrangement. However, SEB or its affiliates may monitor
the level of collateral and the value of the loaned securities.
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(q) The independent fiduciary of each Plan receives monthly reports
with respect to the securities lending transactions, including but not
limited to the information set forth in the following sentence, so that
an independent Plan fiduciary may monitor such transactions with the
relevant Borrower. The monthly report will list for a specified period
all outstanding or closed securities lending transactions. The report
will identify for each open loan position, the securities involved, the
value of the security for collateralization purposes, the current value
of the collateral, the rebate or premium (if applicable) at which the
security is loaned, and the number of days the security has been on
loan. At the request of a Plan, such a report will be provided on a
daily or weekly basis, rather than a monthly basis. Also, upon request
of a Plan, the relevant Borrower will provide the Plan with daily
confirmations of securities lending transactions.
Section IV. General Conditions
(a) In addition to the conditions set forth above in sections II
and III of this proposed exemption, all loans involving the Borrower
must satisfy the following supplemental requirements:
(1) The Borrower is a bank which is subject to regulation by the
Swedish Financial Supervisory Authority (Finansinspektionen) (the
SFSA).
(2) The Borrower is in compliance with all applicable provisions of
Rule 15a-6 (17 CFR 240.15a-6) under the Securities Exchange Act of
1934, as amended (the 1934 Act) which provides foreign broker-dealers a
limited exception from United States registration requirements.
(3) All collateral is maintained in United States dollars or in
U.S. dollar-denominated securities or letters of credit, or other
collateral permitted under PTE 81-6 (as amended or superseded).
(4) All collateral is held in the United States and the situs of
the applicable Borrowing Agreement is maintained in the United States
under an arrangement that complies with the indicia of ownership
requirements under section 404(b) of the Act and the regulations
promulgated under 29 CFR 2550.404(b)-1.
(5) Prior to entering into a transaction involving the Borrower,
the Borrower must:
(i) Agree to submit to the jurisdiction of the United States;
(ii) Agree to appoint an agent for service of process in the United
States, which may be an affiliate (the Process Agent);
(iii) Consent to the service of process on the Process Agent; and
(iv) Agree that enforcement by a Plan of the indemnity provided by
the Borrower will occur in the United States courts.
(b) The Borrower maintains, or causes to be maintained, within the
United States for a period of six years from the date of such
transaction, in a manner that is convenient and accessible for audit
and examination, such records as are necessary to enable the persons
described in paragraph (c)(1) to determine whether the conditions of
the exemption have been met, except that--
(1) A prohibited transaction will not be considered to have
occurred if, due to circumstances beyond the control of SEB and/or its
affiliates, the records are lost or destroyed prior to the end of the
six year period; and
(2) No party in interest other than the Borrower shall be subject
to the civil penalty that may be assessed under section 502(i) of the
Act, or to the taxes imposed by section 4975(a) and (b) of the Code, if
the records are not maintained, or are not available for examination as
required below by paragraph (c)(1). (c)(1) Except as provided in
subparagraph (c)(2) of this paragraph and notwithstanding any
provisions of subsections (a)(2) and (b) of section 504 of the Act, the
records referred to in paragraph (b) are unconditionally available at
their customary location or examination during normal business hours
by--
(i) Any duly authorized employee or representative of the
Department, the Internal Revenue Service or the Securities and Exchange
Commission (the SEC);
(ii) Any fiduciary of a participating Plan or any duly authorized
representative of such fiduciary;
(iii) Any contributing employer to any participating Plan or any
duly authorized employee representative of such employer; and
(iv) Any participant or beneficiary of any participating Plan, or
any duly authorized representative of such participant or beneficiary.
(2) None of the persons described above in subparagraphs
(c)(1)(ii)-(c)(1)(iv) of this paragraph (c)(1) are authorized to
examine the trade secrets of SEB or its affiliates or commercial or
financial information which is privileged or confidential. (d) Prior to
any Plan's approval of any transaction with the Borrower, the Plan is
provided copies of the proposed and final exemptions covering the
exemptive relief described herein.
Section V. Definitions
(a) An ``affiliate'' of a person means:
(1) Any person directly or indirectly, through one or more
intermediaries, controlling, controlled by, or under common control
with the person. (For purposes of this paragraph, the term ``control''
means the power to exercise a controlling influence over the management
or policies of a person other than an individual);
(2) Any officer, director, employee or relative (as defined in
section 3(15) of the Act) of any such other person or any partner in
any such person; and
(3) Any corporation or partnership of which such person is an
officer, director
[[Page 23772]]
or employee, or in which such person is a partner.
(b) For purposes of the securities lending arrangements described
in Part One of this exemption, the term ``Borrower'' includes SEB and
any other current or future non-U.S. broker-dealer or bank affiliate of
SEB. For purposes of the exclusive borrowing arrangements described in
Part Two of this exemption, the term ``Borrower'' includes SEB and any
other affiliate of SEB that now or in the future, is a U.S. registered
broker-dealer or a government securities broker or dealer or U.S. bank.
EFFECTIVE DATE: This proposed exemption, if granted, will be effective
as of October 23, 2002.
Summary of Facts and Representations
1. SEB (the Applicant), one of the principal Swedish banking
institutions and one of the largest banking institutions in Europe, is
regulated by the Swedish Financial Supervisory Authority
(Finansinspektionen) (the SFSA). As of December 31, 2001, SEB
(Consolidated Balance Sheet) had approximately $111,246,000,000 USD in
assets and $4,236,000,000 USD in stockholder's equity. SEB currently
conducts its securities borrowing and lending activities principally
through its head office in Stockholm. Under the European laws
applicable to banks, SEB is authorized to engage in a broad range of
financial services, including acting as a securities broker or dealer.
With respect to the transactions described herein, SEB will not act as
a lending agent.
2. The Borrower, acting as principal, actively engages in the
borrowing and lending of securities. The Borrower utilizes borrowed
securities either to satisfy its own trading requirements or to re-lend
to other broker-dealers and entities which need a particular security
for a certain period of time. The Applicant represents that in the
United States, as described in the Federal Reserve Board's Regulation
T, borrowed securities are often used in short sales, for non-purpose
loans to exempted borrowers, or in the event of a failure to receive
securities that a broker-dealer is required to deliver.
The largest holding of equities, both domestic as well as
international, are to be found in the United States. Currently, SEB can
only access ERISA Plan assets by borrowing through a U.S. bank and/or
broker-dealer which substantially increases the cost of borrowing. By
being able to borrow directly, SEB can reduce this cost. SEB's more
efficient presence in the ERISA marketplace should increase the base of
potential borrowers which ERISA Plans can access, thus, also
benefitting the Plans.
3. SEB represents that it is regulated and supervised by the SFSA.
The SFSA supervises the worldwide business of SEB (head office and
branches). In addition, in jurisdictions outside the European Economic
Area, the business of SEB is subject to supervision by the local
regulators. The SFSA has the power to license banks (with the exception
for cases of special importance where license is granted directly by
the Government) in Sweden. The SFSA also has the power to issue
warnings and directives to address violations by or irregularities
involving banks, to require information from a bank or its auditor
regarding supervisory matters and to revoke bank licenses. SEB also
states that the SFSA ensures that SEB has procedures for monitoring and
controlling SEB's worldwide activities through various statutory and
regulatory standards. Among these standards are requirements for
adequate internal controls, oversight, risk management, recordkeeping,
and administration and financial resources. SEB further states that it
is required to provide the SFSA on a recurring basis with information
regarding capital adequacy,\8\ country risk exposure and foreign
exchange exposures as well as periodic, consolidated financial reports
on the financial condition of SEB and its affiliates. The SFSA
continuously conducts inspections and examinations with respect to the
SEB business. The SFSA will appoint one or more auditors to participate
in the audit of the bank together with the auditors elected by the
General Meeting of Shareholders.
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\8\ The rules for capital adequacy are applicable to each
company and on all consolidation levels within the SEB Group with a
license to conduct banking, investment, leasing, mortgage, or
security business. Insurance business is excluded since special laws
apply to insurance activity. In addition, the capital adequacy
regulation is applicable to the financial group of undertakings
(i.e., most of the companies in the SEB Group which are not involved
in the insurance business, and credit institutions which are
consolidated in the financial group of undertakings).
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Although SEB is not a broker-dealer registered with the SEC, SEB
has a Swedish broker-dealer license which is included in the banking
license. SEB represents that its broker-dealer activities are governed
by the rules and regulations of SFSA. Further, SEB is a member of the
self regulatory organization Swedish Securities Dealer's Association
(SSDA) and is accordingly subject to the rules and membership
requirements imposed by SSDA.
4. The Applicant further represents that the Borrower is subject to
the rules of SFSA relating to, among other things, minimum
capitalization, reporting requirements, periodic examinations. In
addition, the Applicant states that SFSA rules impose reporting
requirements with respect to risk management, internal controls, and
transaction reporting and record-keeping requirements. In this regard,
required records must be produced at the request of SFSA at any time.
The Applicant further states that the rules and regulations of SFSA are
backed up by potential fines and penalties as well as rules which
establish a comprehensive disciplinary system.
5. The Applicant represents that in addition to the protections
afforded by the SFSA, compliance by the Borrower with the requirements
of Rule 15a-6 of the 1934 Act (and the amendments and interpretations
thereof) will offer further protections to the Plans.\9\ SEC Rule 15a-6
provides an exemption from U.S. registration requirements for a foreign
broker-dealer that induces or attempts to induce the purchase or sale
of any security (including over-the-counter equity and debt options) by
a ``U.S. institutional investor'' or a ``major U.S. institutional
investor,'' provided that the foreign broker-dealer, among other
things, enters into these transactions through a U.S. registered
broker-dealer intermediary. The term ``U.S. institutional investor,''
as defined in Rule 15a-6(b)(7), includes an employee benefit plan
within the meaning of the Act if (a) the investment decision is made by
a plan fiduciary, as defined in section 3(21) of the Act, which is
either a bank, savings and loan association,
[[Page 23773]]
insurance company or registered investment advisor, or (b) the employee
benefit plan has total assets in excess of $5 million, or (c) the
employee benefit plan is a self-directed plan with investment decisions
made solely by persons that are ``accredited investors'' as defined in
Rule 501(a)(1) of Regulation D of the Securities Act of 1933, as
amended. The term ``major U.S. institutional investor'' is defined as a
person that is a U.S. institutional investor that has total assets in
excess of $100 million or accounts managed by an investment adviser
registered under section 203 of the Investment Advisers Act of 1940
that has total assets under management in excess of $100 million.\10\
The Applicant represents that the intermediation of the U.S. registered
broker-dealer imposes upon the foreign broker-dealer the requirement
that the securities transaction be effected in accordance with a number
of U.S. securities laws and regulations applicable to U.S. registered
broker-dealers.
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\9\ According to the Applicant, section 3(a)(4)(A) of the 1934
Act defines ``broker'' to mean ``any person engaged in the business
of effecting transactions in securities for the account of others.''
Banks engaging in certain enumerated activities are excepted from
the definition of ``broker.'' Section 3(a)(4)(B) of the 1934 Act.
Section 3(a)(5)(C) of the 1934 Act provides a similar exception for
``banks'' engaging in certain activities from the definition of the
term ``dealer.'' However, section 3(a)(6) of the 1934 Act defines
``bank'' to mean a banking institution organized under the laws of
the United States or a State of the United States. Further, Rule
15(a)(6)(b)(2) provides that the term ``foreign broker or dealer''
means ``any non-U.S. resident person * * * whose securities
activities, if conducted in the United States, would be described by
the definition of ``broker'' or ``dealer'' in sections 3(a)(4) or
3(a)(5) of the [1934] Act.'' Therefore, the test of whether an
entity is a ``foreign broker'' or ``dealer'' is based on the nature
of such foreign entity's activities and, with certain exceptions,
only banks that are regulated by either the United States or a State
of the United States are excluded from the definition of the term
``broker'' or ``dealer.'' Thus, for purposes of this exemption
request, the Borrower is willing to represent that it will comply
with the applicable provisions and relevant SEC interpretations and
amendments of Rule 15a-6.
\10\ Note that the categories of entities that qualify as
``major U.S. institutional investors'' has been expanded by a
Securities and Exchange Commission No-Action letter. See SEC No-
Action Letter issued to Cleary, Gottlieb, Steen & Hamilton on April
9, 1997, expanding the definition of ``Major U.S. Institutional
Investor'' (the April 9, 1997 No-Action Letter).
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6. The Applicant represents that under Rule 15a-6, a foreign
broker-dealer that induces or attempts to induce the purchase or sale
of any security by a U.S. institutional or major U.S. institutional
investor in accordance with Rule 15a-6 \11\ must, among other things:
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\11\ If it is determined that applicable regulation under the
1934 Act does not require SEB or the Borrower to comply with Rule
15a-6, both entities will, nevertheless, comply with subparagraphs
(a) and (b) of Representation 6.
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(a) Consent to service of process for any civil action brought by,
or proceeding before, the SEC or any self-regulatory organization;
(b) Provide the SEC with any information or documents within its
possession, custody or control, any testimony of any such foreign
associated persons, and any assistance in taking the evidence of other
persons, wherever located, that the SEC requests and that relates to
the transactions effected pursuant to the Rule;
(c) Rely on the U.S. registered broker-dealer through which the
transactions with the U.S. institutional and major U.S. institutional
investors are effected to (among other things):
(1) Effect the transactions, other than negotiating the terms;
(2) Issue all required confirmations and statements;
(3) As between the foreign broker-dealer and the U.S. registered
broker-dealer, extend or arrange for the extension of credit in
connection with the transactions;
(4) Maintain required books and records relating to the
transactions, including those required by SEC Rules l7a-3 (Records to
be Made by Certain Exchange Members) and 17a-4 (Records to be Preserved
by Certain Exchange Members, Brokers and Dealers) of the 1934 Act;
(5) Receive, deliver, and safeguard funds and securities in
connection with the transactions on behalf of the U.S. institutional
investor or major U.S. institutional investor in compliance with Rule
15c3-3 of the 1934 Act (Customer Protection-Reserves and Custody of
Securities); and
(6) Participate in certain oral communications (e.g., telephone
calls) between the foreign associated person and the U.S. institutional
investor (not the major U.S. institutional investor), and accompany the
foreign associated person on certain visits with both U.S.
institutional and major U.S. institutional investors. Under certain
circumstances, the foreign associated person may have direct
communications and contact with the U.S. Institutional Investor. (See
April 9, 1997 No-Action Letter.)
7. An institutional investor, such as a pension fund, lends
securities in its portfolio to a broker-dealer or bank in order to earn
a fee while continuing to enjoy the benefits of owning the securities
(e.g., from the receipt of any interest, dividends, or other
distributions due on those securities and from any appreciation in the
value of the securities). The lender generally requires that the
securities loan be fully collateralized, and the collateral usually is
in the form of cash or high quality liquid securities, such as U.S.
Government or Federal Agency obligations or irrevocable bank letters of
credit. If the Borrower deposits cash collateral, and the lender
invests the collateral, then the applicable borrowing agreement may
provide that the lender pay the Borrower a previously-agreed upon
amount or rebate fee and keep the excess of the earnings on the
collateral over the rebate fee as compensation. If the Borrower
deposits government securities, the Borrower is entitled to the
earnings on its deposited securities and may pay the lender a lending
fee. If the Borrower deposits irrevocable bank letters of credit as
collateral, the Borrower pays the lender a fee as compensation for the
loan of its securities. These fees, defined below as the Transaction
Lending Fee, may be determined in advance or pursuant to an objective
formula, and may be different for different securities or different
groups of securities subject to the Borrowing Agreement.
Securities Lending Between Plans and the Borrower
8. SEB requests exemptive relief, effective October 23, 2002, for
the lending of securities, equivalent to that provided under the terms
and conditions of PTE 81-6, a class exemption permitting certain loans
of securities by Plans. However, since PTE 81-6 provides an exemption
only for U.S. registered broker-dealers and U.S. banks, the securities
lending transactions at issue herein (with the Borrower, acting as
principal, and engaging in the borrowing and lending of securities,
typically foreign securities from institutions, including Plans) may
fall outside the scope of relief provided by PTE 81-6.
9. The Borrower represents that it will utilize borrowed securities
to either satisfy its own trading requirements or to re-lend to other
affiliates and entities which need a particular security for a certain
period of time. The Applicant represents that in the United States, as
described in the Federal Reserve Board's Regulation T, borrowed
securities are often used to meet delivery obligations in the case of
short sales or the failure to receive securities that the Borrower is
required to deliver, and SEB represents that foreign broker-dealers and
banks are the most likely entities that seek to borrow foreign
securities. Thus, the proposed exemption will increase the lending
demand for such securities and provide the Plans with increased
securities lending opportunities.
10. Neither the Borrower nor any of its affiliates has or shall
have discretionary authority or control with respect to the investment
of Plan assets involved in a transaction or render investment advice
within the meaning of 29 CFR 2510.3-21(c) with respect to such assets.
11. Each Plan will receive, from the Borrower, either by physical
delivery, book entry in a securities depository located in the United
States, wire transfer or similar means, by the close of business on the
day the loaned securities are delivered to the Borrower, collateral
consisting of U.S. currency, securities issued or guaranteed by the
U.S. Government or its agencies, irrevocable U.S. bank letters of
credit issued by persons other than the Borrower (or any of its
affiliates) or any combination thereof, having, as of the close of
trading on the preceding business day, a market value (or, in the
[[Page 23774]]
case of letters of credit, a stated amount equal to same) equal to or
not less than 100 percent of the then market value of the securities
lent. (The collateral referred to in this Representation will be in
U.S. dollars or dollar-denominated securities or U.S. bank irrevocable
letters of credit and will be held in the United States.)
12. Each loan will be made pursuant to a written Loan Agreement
which may be in the form of a master agreement covering a series of
securities lending transactions. The terms of the Loan Agreement will
be at least as favorable to the Plan as those the Plan could obtain in
a comparable arm's length transaction with an unrelated party. The Loan
Agreement will also contain a requirement that the Borrower pay all
transfer fees and transfer taxes relating to the securities loans.
13. In return for lending securities, each Plan will either (a)
receive a reasonable fee which is related to the value of the borrowed
securities and the duration of the loan or (b) have the opportunity to
derive compensation through the investment of cash collateral. In the
latter case, the Plan may pay a loan rebate or similar fee to the
Borrower if such fee is not greater than what the Plan would pay in a
comparable arm's length transaction with an unrelated party.
14. Each Plan shall receive at least the equivalent of all
distributions made to holders of the borrowed securities during the
term of the loan, including, but not limited to, cash dividends,
interest payments, shares of stock as a result of stock splits and
rights to purchase additional securities that the Plan would have
received (net of tax withholdings). The Department notes the
Applicant's representation that dividends and other distributions on
foreign securities payable to a lending Plan may be subject to foreign
tax withholdings and the Borrower will always put the Plan back in at
least as good a position as it would have been in had it not lent the
securities and remained the record owner of such securities.
15. If the market value of the collateral as of the close of
trading on a business day in a certain transaction falls below 100
percent of the market value of the borrowed securities as of the close
of trading on that day, the Borrower will deliver additional
collateral, by the close of business on the following business day to
bring the level of the collateral back to at least 100 percent.
Notwithstanding the foregoing, part of the collateral may be returned
to the Borrower if the market value of the collateral exceeds 100
percent of the market value of the borrowed securities, as long as the
market value of the remaining collateral equals at least 100 percent of
the market value of the borrowed securities. Matters relating to the
return of the collateral, the substitution of collateral and the
termination of loans, will be determined by applicable provisions of
the Loan Agreement.
16. Prior to the making of any securities loan, the Borrower will
furnish to the independent fiduciary for the Plan who makes decisions
on behalf of the Plan with respect to lending of securities (a) the
most recently available audited and unaudited statements of such
entity's financial condition, and (b) a representation from the
Borrower that, as of each time such entity borrows securities, there
has been no material change in the financial condition of such entity
since the date of the most recently furnished financial statement that
has not been disclosed to the Plan.
17. The Loan Agreement and/or any securities loan outstanding may
be terminated by the Plan at any time, whereupon the Borrower will
deliver securities identical to the borrowed securities (or the
equivalent thereof in the event of a reorganization, recapitalization,
or merger of the issuer of the borrowed securities) to the Plan within
the time period specified by PTE 81-6 as it may be amended from time to
time.
18. In the event that a loan is terminated and the Borrower fails
to return the borrowed securities, or the equivalent thereof, within
the time described in Representation 18 above, the Plan may purchase
securities identical to the borrowed securities, or the equivalent
thereof, and may apply the collateral to the payment of the purchase
price, any other obligations of the Borrower under the Loan Agreement
and any expenses associated with replacing the borrowed securities. The
Borrower shall indemnify the Plan with respect to the difference, if
any, between the replacement cost of the borrowed securities and the
market value of the collateral on the date the loan is declared in
default, together with expenses not covered by the collateral plus
applicable interest at a reasonable rate.
Notwithstanding the foregoing, the Borrower may, in the event it
fails to return borrowed securities as described above, replace non-
cash collateral with an amount of cash not less than the current market
value of the collateral, provided that, such replacement is approved by
the independent Plan fiduciary.
19. Each Plan will maintain the situs of the Loan Agreement in
accordance with the indicia of ownership requirements of section 404(b)
of the Act and the regulations promulgated under 29 CFR 2550.404(b)-1.
However, the Borrower will not be subject to the civil penalty which
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 Plan fails to comply
with the requirements of 29 CFR 2550.404(b)-1.21.
Exclusive Borrowing Arrangements Between Plans and the Borrower
20. The Borrower also requests an exemption for the lending of
securities, under certain exclusive borrowing arrangements, by Plans
with respect to which SEB or any of its affiliates is a party in
interest, for example, by virtue of its providing investment
management, custodial, or other services to such Plans. For each Plan,
neither the Borrower nor any of its affiliates will have discretionary
authority or control over the Plan's investment in the securities
available for loan, nor will they render investment advice (within the
meaning of 29 CFR 2510.3-21(c)) with respect to those assets.\12\
However, because the Borrower, by exercising its contractual rights
under the proposed exclusive borrowing arrangements, will have
discretion with respect to whether there is a loan of particular Plan
securities to the Borrower, the lending of securities to the Borrower
may be outside the scope of relief provided by PTE 81-6.
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\12\ Condition 1 of PTE 81-6 requires, in part, that neither a
borrower nor an affiliate of the borrower may have discretionary
authority or control over the investment of the applicable plan
assets involved in the transaction.
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Generally, the Borrower is a party in interest with respect to
Plans, if at all, solely by reason of providing services to the Plan,
or solely by reason of a relationship to a service provider under
section 3(14)(F), (G), (H), or (I) of the Act.
21. For each Plan, the Borrower will directly negotiate a Borrowing
Agreement with a Plan fiduciary which is independent of the Borrower.
Under the Borrowing Agreement, the Borrower will have exclusive access
for a specified period of time to borrow certain securities of the Plan
pursuant to certain conditions. The Borrowing Agreement will specify
all material terms of the agreement, including the basis for
compensation to the Plan under each category of securities available
for loan. The Borrowing Agreement will also contain a requirement that
the Borrower pay all
[[Page 23775]]
transfer fees and transfer taxes relating to the securities loans. The
terms of each loan of securities by a Plan to a Borrower will be at
least as favorable to such Plan as those of a comparable arm's length
transaction between unrelated parties, taking into account the
exclusive arrangement.
22. The Borrower may, but shall not be required to, agree to
maintain a minimum balance of borrowed securities subject to the
Borrowing Agreement. Such minimum balance may be a fixed U.S. dollar
amount, a flat percentage or other percentage determined pursuant to an
objective formula.
23. In exchange for granting the Borrower the exclusive right to
borrow certain securities, the Borrower will pay each Plan either (a) a
flat fee (which may be equal to a percentage of the value of the total
securities subject to the Borrowing Agreement), (b) a periodic payment
that is equal to a percentage of the value of the total balance
outstanding on the borrowed securities, or (c) any combination of (a)
and (b) (collectively, the Exclusive Fee). If the Borrower deposits
cash collateral, all the earnings generated by such cash collateral
shall be returned to the Borrower; provided that the Borrower may, but
shall not be obligated to, agree with the independent fiduciary of the
applicable Plan that a percentage of the earnings on the collateral may
be retained by such Plan or such Plan may agree to pay the Borrower a
rebate fee and retain the excess of the earnings on the collateral over
the rebate fee paid by such Plan to the Borrower (the Shared Earnings
Compensation). If the Borrower deposits non-cash collateral, all
earnings on the non-cash collateral will be returned to the Borrower
and the Borrower may, but shall not be obligated to, agree to pay the
applicable Plan a lending fee (the Lending Fee, together with the
Shared Earnings Compensation, the Transaction Lending Fee). The
Transaction Lending Fee, if any, may be in addition to the Exclusive
Fee or an offset against such Exclusive Fee. The Exclusive Fee and the
Transaction Lending Fee may be determined in advance or pursuant to an
objective formula, and may be different for different securities or
different groups of securities subject to the Borrowing Agreement. Any
change in the Exclusive Fee or the Transaction Lending Fee that the
Borrower pays to a Plan with respect to any securities loan requires
the prior written consent of the independent fiduciary of the Plan,
except that consent is presumed where the Exclusive Fee or the
Transaction Lending Fee changes pursuant to an objective formula. Where
the Exclusive Fee or the Transaction Lending Fee changes pursuant to an
objective formula, the independent fiduciary of the Plan must be
notified at least 24 hours in advance of such change and such
independent Plan fiduciary must not object in writing to such change,
prior to the effective time of such change.
The Plan will be entitled to the equivalent of all distributions
made to holders of the borrowed securities during the loan period,
including, but not limited to, cash dividends, interest payments,
shares of stock as a result of stock splits, and rights to purchase
additional securities that the plan would have received (net of tax
withholdings in the case of foreign securities), had it remained the
record owner of the securities.
24. By the close of business on or before the day the loaned
securities are delivered to the Borrower, each Plan will receive from
the Borrower (by physical delivery, book entry in a securities
depository located in the United States, wire transfer, or similar
means) collateral consisting of U.S. currency, securities issued or
guaranteed by the U.S. Government or its agencies or instrumentalities,
irrevocable bank letters of credit issued by U.S. banks other than SEB
or its affiliates, or other collateral permitted under PTE 81-6 (as
amended or superseded). Such collateral will be deposited and
maintained in an account which is separate from the Borrower's accounts
and will be maintained with an institution other than the Borrower. For
this purpose, the collateral may be held on behalf of a Plan by an
affiliate of the Borrower that is the trustee or custodian of the Plan.
The market value (or in the case of a letter of credit, a stated
amount) of the collateral on the close of business on the day preceding
the day of the loan will be at least 102 percent of the market value of
the loaned securities. The independent fiduciary of each plan or its
designee, which may be SEB or any of its affiliates, will monitor the
level of the collateral daily and, if the market value of the
collateral on the close of a business day falls below 100 percent (or
such higher percentage as the Borrower and the independent fiduciary of
the Plan may agree upon) of the market value of the loaned securities
at the close of business on such day, the Borrower will deliver
additional collateral by the close of business on the following day to
bring the level of the collateral back to at least 102 percent.
If the Borrower deposits cash collateral, and the Plan invests the
collateral, then all earnings on such cash collateral shall be returned
to the Borrower; provided that the applicable Borrowing Agreement may
provide that the Plan receive Shared Earnings Compensation, which, as
discussed above, may be a percentage of the earnings on the collateral
which may be retained by the Plan or the excess of the earnings on the
collateral over a rebate fee paid by the Plan to the Borrower. The
terms of the rebate fee for each loan will be at least as favorable to
the Plan as those of comparable arm's length transactions between
unrelated parties taking into account the exclusive arrangement, and
will be based upon an objective methodology which takes into account
several factors, including potential demand for the loaned securities,
the applicable benchmark cost of fund indices (typically, the U.S.
Federal Funds rate established by the Federal Reserve (the Federal
Funds), the overnight REPO \13\ rate, or the like) and anticipated
investment return on overnight investments permitted by the independent
fiduciary of the Plan. If the Borrower deposits non-cash collateral,
such as government securities or irrevocable bank letters of credit,
the Borrower is entitled to the earnings on its non-cash collateral and
the Plan may receive a Lending Fee. The Exclusive Fee and the
Transaction Lending Fee may be determined in advance or pursuant to an
objective formula, and may be different for different securities or
different groups of securities subject to the Borrowing Agreement.
---------------------------------------------------------------------------
\13\ An overnight REPO is an overnight repurchase agreement that
is an arrangement whereby securities dealers and banks finance their
inventories of Treasury bills, notes and bonds. The dealer or bank
sells securities to an investor with a temporary surplus of cash,
agreeing to buy them back the next day. Such transactions are
settled in immediately available Federal Funds, usually at a rate
below the Federal Funds rate (the rate charged by the banks lending
funds to each other).
---------------------------------------------------------------------------
The Borrower will provide a monthly report to each such Plan
showing, on a daily basis, the aggregate market value of all
outstanding security loans to the Borrower and the aggregate market
value of the collateral.
25. Before entering into a Borrowing Agreement, the Borrower will
furnish to each Plan the most recent publicly available audited and
unaudited statements of its financial condition, as well as any
publicly available information which it believes is necessary for the
applicable independent fiduciary to determine whether the Plan should
enter into or renew the applicable Borrowing Agreement. Further, the
Borrowing Agreement will contain a representation by the Borrower that
as of each time it
[[Page 23776]]
borrows securities, there has been no material adverse change in its
financial condition since the date of the most recently furnished
statements of financial condition.
26. Prior to any Plan's approval of the lending of its securities
to the Borrower, a copy of this exemption, if granted, (and the notice
of pendency) is provided to the Plan, and the Borrower informs the
independent fiduciary that the Borrower is not acting as a fiduciary of
the Plan in connection with its borrowing securities from the Plan.
27. With regard to those Plans for which SEB or any of its
affiliates provides custodial, clearing and/or reporting functions
relative to securities loans, SEB and a Plan fiduciary independent of
SEB and its affiliates, will agree in advance and in writing to any fee
that SEB or any of its affiliates is to receive for such services. Such
fees, if any, would be fixed fees (e.g., SEB or any of its affiliates
might negotiate to receive a fixed percentage of the value of the
assets with respect to which it performs these services, or to receive
a stated dollar amount) and any such fee would be in addition to any
fee SEB or any of its affiliates has negotiated to receive from any
such Plan for standard custodial or other services unrelated to the
securities lending activity. The arrangement for SEB or any of its
affiliates to provide such functions relative to securities loans to
the Borrower will be terminable by the Plan within five (5) business
days of the receipt of written notice without penalty to the Plan,
except for the return to the Borrower of a pro rata portion of the
Exclusive Fee paid by the Borrower to the Plan, if the Plan has also
terminated its exclusive borrowing arrangement with the Borrower.
28. Each Borrowing Agreement and any outstanding securities loans
with respect thereto may be terminated by either party at any time
without penalty (except for, if a Plan has terminated its Borrowing
Agreement, the return to the Borrower of a pro rata portion of the
Exclusive Fee paid by the Borrower to the Plan). Upon termination of
any securities loan, the Borrower will return the borrowed securities
(or the equivalent thereof in the event of reorganization,
recapitalization, or merger of the issuer of the borrowed securities)
to the Plan within the lesser of five business days of written notice
of termination or the customary settlement period for such securities.
If the Borrower fails to return the securities or the equivalent
thereof within the designated time, the applicable Plan will have
certain rights under the Borrowing Agreement to realize upon the
collateral. In the event that the Borrower defaults on a loan, the
independent fiduciary of the Plan or its agent will have the right to
liquidate the loan collateral to purchase identical securities for the
Plan. If the collateral is insufficient to accomplish such purchase,
the Borrower will indemnify the Plan for any shortfall in the
collateral plus interest on such amount and any transaction costs
incurred (including reasonable attorney's fees of the Plan for legal
actions arising out of the default on the loans or failure to properly
indemnify under such provisions). Alternatively, if such replacement
securities cannot be obtained on the open market, the Borrower shall
pay the Plan the difference in U.S. dollars between the market value of
the loaned securities and the market value of the related collateral on
the date of the Borrower's breach of its obligation to return the
loaned securities.
29. In the event the Borrower fails to return securities in
accordance with a Borrowing Agreement, the applicable Plan will have
the right under the Borrowing Agreement to purchase securities
identical to the borrowed securities and apply the collateral to
payment of the purchase price. If the collateral is insufficient to
satisfy the Borrower's obligation to return the Plan's securities, the
Borrower will indemnify the Plan in the U.S. with respect to the
difference between the replacement cost of securities and the market
value of the collateral on the date the loan is declared in default,
together with expenses incurred by the Plan plus applicable interest at
a reasonable rate, including reasonable attorneys' fees incurred by the
Plan for legal action arising out of default on the loans, or failure
by the Borrower to properly indemnify the Plan except to the extent
that such losses or damages are caused by the Plan's own negligence.
30. Except as provided herein, all the procedures under each
Borrowing Agreement will, at a minimum, conform to the applicable
provisions of PTE 81-6 (as amended or superseded), as well as to
applicable securities laws of the United States and Sweden, as
appropriate. In addition, in order to ensure that the independent
fiduciary representing a Plan has the experience, sophistication, and
resources necessary to adequately review the Borrowing Agreement and
the fee arrangements thereunder, only Plans with total assets having an
aggregate market value of at least $50 million are permitted to lend
securities to the Borrower; provided, however, that--
(a) In the case of two or more Plans which are maintained by the
same employer, controlled group of corporations or employee
organization (the Related Plans), whose assets are commingled for
investment purposes in a single master trust or any other entity the
assets of which are ``plan assets'' under 29 CFR 2510.3-101 (the Plan
Asset Regulation), which entity is engaged in securities lending
arrangements with the Borrower, the foregoing $50 million requirement
shall be deemed satisfied if such trust or other entity has aggregate
assets which are in excess of $50 million; provided that if the
fiduciary responsible for making the investment decision on behalf of
such master trust or other entity is not the employer or an affiliate
of the employer, such fiduciary has total assets under its management
and control, exclusive of the $50 million threshold amount attributable
to plan investment in the commingled entity, which are in excess of
$100 million.
(b) In the case of two or more Plans which are not maintained by
the same employer, controlled group of corporations or employee
organization (the Unrelated Plans), whose assets are commingled for
investment purposes in a group trust or any other form of entity the
assets of which are ``plan assets'' under the Plan Asset Regulation,
which entity is engaged in securities lending arrangements with the
Borrower, the foregoing $50 million requirement is satisfied if such
trust or other entity has aggregate assets which are in excess of $50
million (excluding the assets of any Plan with respect to which the
fiduciary responsible for making the investment decision on behalf of
such group trust or other entity or any member of the controlled group
of corporations including such fiduciary is the employer maintaining
such Plan or an employee organization whose members are covered by such
Plan). However, the fiduciary responsible for making the investment
decision on behalf of such group trust or other entity--
(1) Has full investment responsibility with respect to plan assets
invested therein; and
(2) Has total assets under its management and control, exclusive of
the $50 million threshold amount attributable to plan investment in the
commingled entity, which are in excess of $100 million. (In addition,
none of the entities described above are formed for the sole purpose of
making loans of securities.)
The Applicant represents that the opportunity for the Plans to
enter into exclusive borrowing arrangements with the Borrower under the
flexible fee
[[Page 23777]]
structures described herein is in the interests of the Plans because
the Plans will then be able to choose among an expanded number of
competing exclusive borrowers, as well as maximizing the volume of
securities lent and the return on such securities.
Supplemental Requirements
31. In addition to the conditions set forth in Parts One and Two of
the proposal, all loans involving the Borrower must satisfy the
following supplemental requirements:
(a) The Borrower is a bank which is subject to regulation by the
SFSA.
(b) The Borrower is in compliance with all applicable provisions of
Rule 15a-6 under the 1934 Act which provides foreign broker-dealers a
limited exception from United States registration requirements.
(c) All collateral is maintained in United States dollars or in
U.S. dollar-denominated securities or letters of credit, or other
collateral permitted under PTE 81-6 (as amended or superseded).
(d) All collateral is held in the United States and the situs of
the Borrowing Agreement is maintained in the United States under an
arrangement that complies with the indicia of ownership requirements
under section 404(b) of the Act and the regulations promulgated under
29 CFR 2550.404(b)-1.
(e) Prior to entering into a transaction involving the Borrower,
the Borrower must:
(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 the service of process on the Process Agent; and
(4) Agree that enforcement by a Plan of the indemnity provided by
SEB or the Borrower will occur in the United States courts.
32. The Applicant represents that only English or New York law
securities lending agreements will be used. Such agreements provide for
submission to English or New York courts. As a result, the Applicant
expects judgments to be obtained under English law or New York law,
depending on the form of securities lending agreement used.
According to the Applicant, if collateral provided by SEB in
connection with the relevant securities lending transaction is located
in the United States, the Plan can exercise its set-off rights under a
securities lending agreement governed by English law, or it may
foreclose on the collateral and apply the proceeds of such foreclosure
to satisfy SEB's obligations under a securities lending agreement
governed by New York law. All collateral pertaining to this exemption
will be held in the United States.
If for any reason there is no collateral available in connection
with the relevant securities lending transaction, the Applicant states
that the Plan may seek to enforce a judgment from a New York court or
English court against the assets located in the United States of SEB's
New York branch. A judgment from a New York court can be enforced in
New York, or any sister state pursuant to the ``Full Faith and Credit''
clause of the U.S. Constitution and the Implementing Act of 1790.
Almost all states have adopted the Uniform Enforcement of Foreign
Judgments Act, which provides for either filing or registration of
sister state judgments.
The Applicant represents that a foreign money judgment from an
English court can be enforced in any state where the property of SEB or
SEB's New York branch may be attached as a basis of jurisdiction.
Foreign judgments are recognized and enforced pursuant to the relevant
state law which will either be based on common law or the Uniform
Foreign Money-Judgments Recognition Act, which provides that foreign
country money judgments that are final, conclusive, and enforceable
where rendered will be enforceable in the same manner as a judgment of
a court of a sister state which is entitled to ``Full Faith and
Credit.'' The State of New York, as well as 30 other states, has
adopted the Uniform Foreign Money-Judgments Recognition Act. Thus, the
Applicant concludes that the Plan can bring an enforcement action,
under an expedited procedure, on a foreign money judgment in New York
to attach the assets of SEB's New York branch located in New York.
33. In addition to the protections cited above, the Borrower will
maintain, or cause to be maintained, within the United States for a
period of six years from the date of a transaction, such records as are
necessary to enable the Department and others to determine whether the
conditions of the exemption have been met.
34. In summary, the Applicant represents that the transactions have
satisfied or will satisfy the statutory criteria for an exemption under
section 408(a) of the Act because:
(a) The Borrower has negotiated or will directly negotiate a
Borrowing Agreement with an independent fiduciary of each Plan;
(b) The Plans have been permitted or will be permitted to lend to
the Borrower, a major securities borrower who will be added to an
expanded list of competing exclusive borrowers, enabling the Plans to
earn additional income from the loaned securities on a secured basis,
while continuing to enjoy the benefits of owning the securities;
(c) In exchange for granting the Borrower the exclusive right to
borrow certain securities, the Borrower has paid or will pay each Plan
the Exclusive Fee, which as discussed above may be either (1) a flat
fee (which may be equal to a percentage of the value of the total
securities subject to the applicable Borrowing Agreement), (2) a
periodic payment that is equal to a percentage of the value of the
total balance of outstanding borrowed securities, or (3) any
combination of (1) and (2). If the Borrower deposits cash collateral,
all the earnings generated by such cash collateral have been returned
or will be returned to the Borrower; provided that the Borrower may,
but shall not be obligated to, agree with the independent fiduciary of
the applicable Plan that such Plan receive Shared Earnings
Compensation, which as discussed above may be a percentage of the
earnings on the collateral and may be retained by such Plan or the
excess of the earnings on the collateral over the rebate fee paid by
such Plan to the Borrower. The Shared Earnings Compensation, if any,
shall be in addition to the Exclusive Fee or an offset against such
Exclusive Fee. The Exclusive Fee and the Shared Earnings Compensation
may be determined in advance or pursuant to an objective formula, and
may be different for different securities or different groups of
securities subject to the applicable Borrowing Agreement;
(d) Any change in the Exclusive Fee or Shared Earnings Compensation
that the Borrower pays to the Plan with respect to any securities loan
has required or will require the prior written consent of the
independent fiduciary, except that consent will be presumed where the
Exclusive Fee or Shared Earnings Compensation changes pursuant to an
objective formula specified in the Borrowing Agreement and the
independent fiduciary is notified at least 24 hours in advance of such
change and does not object in writing thereto, prior to the effective
time of such change;
(e) The Borrower has provided or will provide sufficient
information concerning its financial condition to a Plan before a Plan
lends any securities to the Borrower;
(f) The collateral posted with respect to each loan of securities
to the Borrower initially has been or will be at least 102 percent of
the market value of
[[Page 23778]]
the loaned securities and will be monitored daily by each independent
fiduciary;
(g) Each Borrowing Agreement and any outstanding securities loans
with respect thereto has been terminated or will be terminated by
either party at any time without penalty, except for the return to the
Borrower of a pro rata portion of the Exclusive Fee paid by the
Borrower to the applicable Plan, and the Borrower has returned or will
return any borrowed securities (or the equivalent thereof in the event
of reorganization, recapitalization, or merger of the issuer of the
borrowed securities) to such Plan within the lesser of five business
days of written notice of termination or the customary settlement
period for such securities;
(h) Neither the Borrower nor any of its affiliates has or will have
discretionary authority or control over the Plan's investment in the
securities available for loan;
(i) The minimum Plan size requirement has ensured or will ensure
that the Plans have the resources necessary to adequately review and
negotiate all aspects of the exclusive borrowing arrangements; and
(j) At a minimum, all the procedures have conformed or will conform
to the applicable provisions of PTE 81-6 (as amended or superseded), as
well as applicable securities laws of the United States and Sweden, as
appropriate.
Notice to Interested Persons
The Applicant represents that because those potentially interested
Plans cannot all be identified, the only practical means of notifying
such Plans of this proposed exemption is by publication in the Federal
Register. Therefore, comments must be received by the Department not
later than 30 days from the date of publication of this notice of
proposed exemption in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Ms. Blessed Chuksorji of the
Department, telephone (202) 693-8567. (This is not a toll-free number.)
Arizona Machinery Group, Inc. (AMG) Located in Avondale, Arizona
[Application No. D-11142]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code, and in accordance with the procedures set forth in 29 CFR part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990).
Section I. Transactions Covered
If the exemption is granted, the restrictions of sections 406(a),
(b)(1) and (b)(2), and 407(a) of the Act and the sanctions resulting
from the application of section 4975(a) and (b) of the Code, by reason
of section 4975(c)(1)(A) through (E) of the Code, shall not apply to:
(a) The acquisition by the Arizona Machinery Group Employees' Profit
Sharing Retirement Plan (the Plan) of customer notes acquired from the
Plan sponsor, AMG, or from any successor employer which sponsors the
Plan at the time of the acquisition of such customer note, or from any
other employer which at the time of the acquisition of such customer
note has adopted the Plan (including employers which adopt the Plan
subsequent to the proposed exemption being granted) and which generates
customer notes as defined herein in section III (B), or from any
affiliate of any such employer, (b) the Plan's holding of the customer
notes, if the notes acquired and held by the Plan are guaranteed by the
respective employer or affiliate, which accepted and held the customer
notes prior to their acquisition by the Plan, as well as by AMG (when
the customer note was accepted and held by an employer other than AMG);
and (c) the repurchase of customer notes from the Plan by the employer
or affiliate which initially transferred those notes to the Plan;
provided that, with respect to each such transaction, the conditions
set forth below in section II are met.
Section II. Conditions
(a) The transaction is on terms that are at least as favorable to
the Plan as an arm's-length transaction with an unrelated party.
(b) Prior to the consummation of a transaction described in section
I of this proposed exemption, the transaction is approved on behalf of
the Plan by a qualified fiduciary who is independent of any of the
sponsoring or adopting employers or affiliates of the employer(s)
(Independent Fiduciary), upon a determination made by such Independent
Fiduciary that the other conditions of this exemption will be
satisfied. The Independent Fiduciary shall acknowledge his or her plan
fiduciary status under the Act in writing with respect to the
transactions. For purposes of this paragraph, a person is independent
of an employer even though he or she was selected by AMG or an adopting
employer (or by a person with an interest in such employer) if he or
she has no other interest in the transaction for which an exemption is
sought that might affect his or her best judgment as a fiduciary under
the Act.
(c) The Plan's continuing rights under the terms and conditions of
the acquired customer notes, and under this proposed exemption, shall
be monitored and enforced on behalf of the Plan by the same or another
Independent Fiduciary who is independent of any of the sponsoring or
adopting employers and who has acknowledged his or her fiduciary status
and liability as described in paragraph (B) of this section. The
Independent Fiduciary shall be responsible for taking all appropriate
actions necessary to protect the Plan's rights with regard to the
safety and collection of the notes purchased by the Plan. These actions
shall include, but not be limited to, ascertaining that payments are
received timely, diligently pursuing the receipt of delinquent payments
and enforcing the employer's or affiliates' guarantees to repurchase
delinquent notes, with accrued interest, as described in paragraph (e)
of this section.
(d) The acquisition of a customer note from AMG, an adopting
employer, or an affiliate, shall not cause the Plan to hold immediately
following the acquisition: (i) More than twenty-five percent (25%), in
the aggregate, of the current value (as defined in section 3(26) of the
Act) of Plan assets in customer notes of AMG, adopting employers or
affiliates, or (ii) more than five percent (5%) of the current value of
Plan assets in the notes of any one customer who is the obligor under
such notes.
(e) An employer or affiliate from which the Plan acquires a
customer note, as well as AMG (when the customer note was acquired from
an employer other than AMG), guarantees in writing the immediate
repayment of the outstanding balance of the notes and accrued interest
in the event that the note is more than 60 days in arrears or if other
events occur that, in the opinion of the Independent Fiduciary referred
to in paragraph (b) and (c) of section II, impair the safety of the
note as a Plan investment. The Independent Fiduciary may, at his or her
discretion, grant an additional 30-day extension before repurchase of
the note by an employer or affiliate is necessary upon a petition by
the employer or affiliate, if the fiduciary determines, after
consultation with the employer or affiliate, that such an extension is
in the best interests of the participants and beneficiaries of the
Plan. The other events (of impairment) referred to above include, but
are not limited to, the following:
(1) The obligor on the note fails to comply with any terms or
conditions of the note;
[[Page 23779]]
(2) The obligor becomes insolvent, commits an act of bankruptcy,
makes an assignment for the benefit of creditors or a liquidating
agent, offers a composition or extension to creditors or makes a bulk
sale;
(3) Any proceeding, suit or action at law, in equity, or under any
of the provisions of Title 11 of the United States Bankruptcy Code [11
U.S.C. 101 et seq.] or amendments thereto for reorganization,
composition, extension, arrangements, receivership, liquidation or
dissolution is begun by or against the obligor;
(4) A receiver of any property of the obligor is appointed under
any jurisdiction at law or in equity; or
(5) The obligor fails to take proper care of or abandons the
property being financed by the note.
(f) The Plan receives adequate security for the note. For purposes
of this proposed exemption, the term ``adequate security'' means that
the note is secured by a perfected security interest in the property
purchased by the obligor on the note so that if the security is
foreclosed upon, or otherwise disposed of, in default of repayment of
the loan, the value and liquidity of the security is such that it may
reasonably be anticipated that loss of principal or interest will not
result. In no event shall ``adequate security'' mean an interest in
intangible personal property, such as, but not limited to, accounts,
contract rights, documents, instruments, chattel paper, and general
intangibles.
(g) Insurance against loss or damage to the collateral from fire or
other hazards will be procured and maintained by the obligor until the
note is repaid or repurchased by the employer or affiliate from which
the Plan originally acquired the note, and the proceeds from such
insurance will be assigned to the Plan.
(h) Repayment must be provided for in the following manner:
(1) Where the note is secured by heavy equipment, the term of the
note shall in no event exceed 60 months. For purposes of this proposed
exemption, heavy equipment shall include machinery sold by equipment
distributors such as, but not limited to, earth moving, material
handling, pipe laying, power generation, and construction machinery
manufactured according to standard specifications, but shall not
include such equipment which has been specifically designed and
manufactured to a user's specifications and which cannot reasonably be
resold in the ordinary course of the equipment distributor's business;
(2) Where the note is secured by passenger automobiles and light-
duty highway motor vehicles, the term of the note shall in no event
exceed 48 months. For purposes of this proposed exemption, passenger
automobiles and light-duty highway motor vehicles are defined as
vehicles which have a gross weight of 10,000 pounds or less, are
propelled by means of their own motor and are a type used for highway
transportation; and
(3) Where the note is secured by tangible personal property, other
than heavy equipment or motor vehicles described in paragraph (h)(1)
and (2) of this section, the term of the note shall in no event exceed
36 months.
(i) All records, information and data required to be maintained
which relate to Plan investments in customer notes covered by this
proposed exemption shall be unconditionally available at the customary
location for examination during normal business hours by:
(1) The Department of Labor,
(2) The Internal Revenue Service,
(3) Plan participants and beneficiaries, or
(4) Any duly authorized employee or representative of a person
described in subparagraph (1) through (3) above.
Section III. Definitions
For purposes of this proposed exemption, the following definitions
shall apply:
(a) The terms, ``affiliate'' or ``affiliates,'' mean, with respect
to an employer of employees covered by the Plan, any corporation that
is, at the time the Plan acquires a customer note, a member of a
controlled group of corporations (as defined in section 407(d)(7) of
the Act and section 1563(a) of the Code), along with AMG and any other
adopting employer.
(b) The term ``customer note,'' means a two-party instrument,
executed along with a security agreement for tangible personal
property, which is accepted and held in connection with, and in the
normal course of, an employer's (or affiliates's) primary business
activity as a seller of such property. A two-party instrument is a
promissory instrument used in connection with an extension of credit in
which one party (the maker) promises to pay a second party (the payee)
a sum of money.
(c) The term ``Independent Fiduciary'' means a person or entity
which is qualified to serve in that capacity (i.e., knowledgeable as to
the duties and responsibilities as a fiduciary under the Act and
knowledgeable as to the subject transaction) and which is independent
of the party in interest engaging in the transaction and its
affiliates.
(d) The terms ``employer'' or ``adopting employer'' mean those
entities which currently sponsor, or in the future will sponsor, the
Plan and who have, or will have, employees that are participants in the
Plan, and are considered an ``employer'' as that term is defined in
section 3(5) of the Act.
Summary of Facts and Representations
1. AMG is an Arizona corporation that deals in and services farming
equipment and machinery. AMG sponsors the Arizona Machinery Group
Employee's Profit Sharing Retirement Plan (i.e., the Plan), which is a
multiple employer plan with several adopting companies. Although all
the adopting employers are related, only two employers (AMG and Arizona
Machinery, L.L.C.) are members of a ``controlled group'' of companies
pursuant to the applicable provisions of the Code.\14\
---------------------------------------------------------------------------
\14\ As of the date of this proposed exemption, five related
companies have adopted the Plan. The applicant states that the
requisite level of common ownership does not exist among the
remaining adopting employers for them to constitute a ``controlled
group'', as that term is defined under section 1563(a) of the Code.
In this regard, the Department notes that section 407(d)(7) of the
Act states that a corporation is an affiliate of an employer if it
is a member of any controlled group of corporations (as defined in
1563(a) of the Code, except that ``applicable percentage'' shall be
substituted for ``80 percent'' wherever the latter appears in such
section) of which the employer who maintains the plan is a member.
For purposes of the preceding sentence, the term ``applicable
percentage'' means 50 percent, or such lower percentage as the
Secretary may prescribe.
---------------------------------------------------------------------------
2. The Plan is a defined contribution profit sharing plan that was
established in 1969. The trustee of the Plan, Mr. Roy Miller (the
Trustee), is an Independent Fiduciary who will also be responsible for
overseeing the proposed consolidated customer notes fund. The Plan
provides pension benefits to approximately 161 active participants and
41 terminated vested participants. For the year ending December 31,
2001, net assets for the Plan totaled approximately $6,265,256.
Effective as of January 1, 1993, the Plan established the AMCO Customer
Notes Fund, which later became the AMG Customer Notes Fund (the AMG
Notes Fund).\15\ Currently, the AMG Notes Fund invests exclusively in
customer notes purchased from AMG. As of December 31, 2001, the Plan
had approximately twenty-nine percent (29%) of the fair market value of
its total assets invested in the AMG Notes Fund.
---------------------------------------------------------------------------
\15\ Effective April 1, 2002, Arizona Machinery Company, Inc.
changed its name to ``Arizona Machinery Group, Inc.,'' and the name
of the Plan was recently amended to reflect the new name of the Plan
sponsor, and to reflect the new Plan name.
---------------------------------------------------------------------------
3. The Plan provides for individual participant accounts and
permits participants (or beneficiaries, where applicable) to exercise
investment control over the assets in their
[[Page 23780]]
accounts.\16\ The AMG Notes Fund is invested in customer notes relating
to farming equipment and machinery that is sold by AMG to customers,
who are persons or entities unrelated to AMG, in the ordinary course of
its business as a dealer in such equipment and machinery.\17\ The
applicant represents that customers often purchase such items from AMG
by giving AMG a note (i.e., a ``customer note'' as defined herein). The
applicant also represents that for several years the Plan has offered
the AMG Notes Fund as one of several investment options available to
participants who are employed by AMG. The other investment options
available under the Plan consist of stock and bond mutual funds, a
money market fund, and a real estate fund.
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\16\ The applicant represents that the Plan is a 404(c) plan,
pursuant to the applicable provisions of the Act. Section 404(c) of
the Act provides that if a pension plan that provides for individual
accounts permits a participant or beneficiary to exercise control
over assets in his or her account and that participant or
beneficiary in fact exercises control over assets in his or her
account, then the participant or beneficiary shall not be deemed a
fiduciary by reason of his or her exercise of control and no person
who is otherwise a fiduciary shall be liable for any loss, or by
reason of any breach, which results from such exercise of control.
The Department is providing no opinion in this proposed
exemption as to whether the Plan would be considered an ``ERISA
section 404(c) plan'' pursuant to section 404(c) of the Act and the
regulations thereunder (see 29 CFR 2550.404c-1).
The Department notes further that if a participant or
beneficiary of an ERISA section 404(c) plan exercises independent
control over assets in his or her individual account, in the manner
described in the regulations thereunder (see 29 CFR 2550.404c-1(c)),
then no other person who is a fiduciary with respect to such plan
shall be liable for any loss, or with respect to any breach of Part
4 of Title I of the Act, that is the direct and necessary result of
that participant's or beneficiary's exercise of control. However,
the regulations specify, in pertinent part, that this provision does
not apply with respect to any instruction which, if implemented,
would result in a direct or indirect sale, exchange, or lease of
property between a plan sponsor or any affiliate of the sponsor and
the plan except for the acquisition or disposition of any interest
in a fund, subfund or portfolio managed by a plan sponsor or an
affiliate of the sponsor, or the purchase and sale of any
``qualifying employer security'' (as defined in section 407(d)(5) of
the Act) which meets the conditions of 408(e) of the Act and
conditions specified further in such regulations (see 29 CFR
2550.404c-1(d)(2)(ii)(E)(4)).
\17\ For purposes of the proposed exemption, the term ``customer
note'' has the same meaning as set forth in Prohibited Transaction
Exemption (PTE) 85-68, 50 FR 13293 (April 3, 1985). Section I of PTE
85-68 provides that a ``customer note'' is a two-party instrument,
executed along with a security agreement for tangible personal
property, which is accepted in connection with, and in the normal
course of, an employer's primary business activity as a seller of
such property. A two-party instrument is a promissory instrument
used in connection with the extension of credit in which one party
(the maker) promises to pay a second party (the payee) a sum of
money.
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4. According to the applicant, the current operation of the AMG
Notes Fund complies in all respects with the requirements of PTE 85-
68.\18\ The applicant represents that the AMG Notes Fund invests almost
exclusively in customer notes purchased from AMG in accordance with PTE
85-68. In this regard, the applicant states that to the extent the
amount directed into the AMG Notes Fund by the participants exceeds the
amount of available customer notes, the Plan will invest the money in
short-term interest bearing investments.
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\18\ PTE 85-68 permits a plan to acquire customer notes accepted
by an employer of employees covered by the plan in the ordinary
course of the employer's primary business activity. Among the
conditions contained therein is a requirement that a plan may not
invest more than 50% of its assets in customer notes and not over
10% of its assets in the notes of a single customer. In addition,
there are maximum terms ranging up to five years that are imposed on
the notes, depending on the type of property being financed.
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5. The applicant represents that the Independent Fiduciary for the
Plan, Roy Miller (Mr. Miller), monitors the total amount invested in
the AMG Notes Fund by each participant to ensure compliance with PTE
85-68. Mr. Miller is an experienced trust officer, having served for a
number of years in pension and profit sharing trust management and
administration with institutional trust departments of major banks,
prior to being retained as a full-time trustee and independent
fiduciary for the Plan pursuant to a federal court order and settlement
involving transactions unrelated to the Plan's acquisition and holding
of customer notes. Mr. Miller has served as the Plan's trustee and
Independent Fiduciary, for purposes of acquiring and monitoring
customer notes pursuant to PTE 85-68, since 1992.\19\ The applicant
states that Mr. Miller, as the Independent Fiduciary, continually
monitors the customer notes held in the AMG Notes Fund to ensure that
the notes are being repaid in accordance with PTE 85-68. The
Independent Fiduciary performs a semi-annual review of all the customer
notes including verification of the security for each note and
compliance with the provisions of PTE 85-68. Additionally, the
Independent Fiduciary must take appropriate action in order to
safeguard Plan participants and beneficiaries in the event of a default
of a customer note in the AMG Notes Fund. The applicant states that
since the inception of the AMG Notes Fund in January 1993, there have
been approximately 170 customer notes held by the Plan. None of these
notes has incurred a default. However, the applicant states that two of
the notes had become sufficiently delinquent so that AMG had to
repurchase the notes from the Plan. With respect to these notes, AMG
never had to make any payments on its guarantee to the Plan.
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\19\ With respect to Mr. Miller's current role as the Plan's
Independent Fiduciary, the applicant represents that if it becomes
necessary in the future to appoint a successor Independent Fiduciary
to replace Mr. Miller (the Successor), the applicant will notify the
Department at least sixty (60) days in advance of the appointment of
the Successor. The applicant states that the Successor will have the
responsibilities, experience and independence similar to that of Mr.
Miller.
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6. AMG and the Independent Fiduciary state that the AMG Notes Fund
is a popular investment choice with AMG's employees that are
participants in the Plan. As of December 31, 2001, approximately 29% of
the Plan's total assets, or approximately $1,800,000, was invested in
the AMG Notes Fund. The applicant states that Plan participant demand
for customer notes is significantly higher than AMG's current supply of
good quality notes. If the proposed exemption is granted, AMG, as Plan
sponsor, will establish a new consolidated customer notes fund (the
Consolidated Notes Fund) that would be available to all adopting
employers of the Plan and their corporate affiliates. The applicant
represents that the Consolidated Notes Fund would be preferable to
additional individual customer notes funds for the Plan. In this
regard, the Consolidated Notes Fund would be less complicated to
administer, would reduce the Plan's overall administrative expenses,
and would allow better geographic diversification for the notes vis a
vis the underlying investments (i.e., notes of various customers in
different local economic regions).\20\ Thus, the Consolidated Notes
Fund would enhance the security of the Plan participants' overall
investments in customer notes.
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\20\ With respect to the appropriate Plan fiduciary's
determination to offer a customer notes fund (i.e., the Consolidated
Notes Fund) as an investment choice for Plan participants, the
Department notes that such decision would be subject to the
fiduciary responsibility provisions of Part 4 of Title I of the Act
including, among other things, section 404(a)(1). In addition, once
a customer notes fund is selected as an investment option for the
Plan's participants, the responsible fiduciary's duties would
include prudently selecting the customer notes to be included in the
Consolidated Notes Fund as well as taking appropriate actions to
protect the Plan's interest in connection with delinquent customer
notes.
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7. The applicant represents that each transaction will be on terms
that are at least as favorable to the Plan as an arm's-length
transaction with an unrelated party.
Prior to the consummation of any transaction described herein, the
transaction will be approved on behalf of the Plan by an Independent
Fiduciary. Such fiduciary will be independent of any of the sponsoring
or
[[Page 23781]]
adopting employers, upon a determination made by the fiduciary that the
other conditions of this exemption, if granted, will be satisfied. The
Independent Fiduciary will acknowledge, in writing, his or her plan
fiduciary status under the Act for each transaction. A person will be
independent of an employer, even though he or she was selected by an
adopting employer (or by a person with an interest in such employer),
if he or she has no other interest in the transaction for which an
exemption is sought that might affect his or her best judgment as a
fiduciary under the Act.
8. The Plan's continuing rights under the terms and conditions of
the acquired customer notes, and under this proposed exemption, will be
monitored and enforced on behalf of the Plan by the same or another
Independent Fiduciary who is independent of any of the sponsoring or
adopting employers and who has acknowledged his or her fiduciary status
and liability as described herein. The Independent Fiduciary will be
responsible for taking all appropriate actions necessary to protect the
Plan's rights with regard to the safety and collection of the notes
purchased by the Plan. These actions will include: (i) Ascertaining
that payments are received timely; (ii) diligently pursuing the receipt
of delinquent payments; and (iii) enforcing the employer's or
affiliates' guarantees to repurchase delinquent notes, with accrued
interest.
9. The acquisition of a customer note from a Plan sponsor, an
adopting employer, or an affiliate, will not cause the Plan to hold,
immediately following the acquisition, more than: (i) twenty-five
percent (25%), in the aggregate, of the current value of the Plan's
assets in customer notes of such Plan sponsor, adopting employers or
affiliates, or (ii) five percent (5%) of the current value of the
Plan's assets in the notes of any one customer who is the obligor under
such notes.
The employer or affiliate from which the Plan acquires a customer
note, as well as AMG (when the customer note was accepted and held by
an employer other than AMG), will guarantee in writing the immediate
repayment of the outstanding balance of the notes and accrued interest
in the event that the note is more than 60 days in arrears or if other
events occur that, in the opinion of the Independent Fiduciary, will
impair the safety of the note as a Plan investment. The Independent
Fiduciary may, at his or her discretion, grant an additional 30-day
extension before repurchase of the note by an employer or affiliate is
necessary upon a petition by the employer or affiliate, if the
fiduciary determines, after consultation with the employer or
affiliate, that such an extension is in the best interests of the
participants and beneficiaries of the Plan. Other events of impairment
will include:
(a) The obligor on the note fails to comply with any terms or
conditions of the note;
(b) The obligor becomes insolvent, commits an act of bankruptcy,
makes an assignment for the benefit of creditors or a liquidating
agent, offers a composition or extension to creditors or makes a bulk
sale;
(c) Any proceeding, suit or action at law, in equity, or under any
of the provisions of the Bankruptcy Code, or amendments thereto, for
reorganization, composition, extension, arrangements, receivership,
liquidation or dissolution is begun by or against the obligor;
(d) A receiver of any property of the obligor is appointed under
any jurisdiction at law or in equity; or
(e) The obligor fails to take proper care of or abandons the
property being financed by the note.
The Plan will receive adequate security for each note. In this
regard, the term ``adequate security'' will mean that each note will be
secured by a perfected security interest in the property purchased by
the obligor on the note so that if the security is foreclosed upon, or
otherwise disposed of, in default of repayment of the loan, the value
and liquidity of the security will be such that it may reasonably be
anticipated that loss of principal or interest will not result.
However, in no event will the term ``adequate security'' mean an
interest in intangible personal property, such as accounts, contract
rights, documents, instruments, chattel paper, and general intangibles.
Insurance against loss or damage to the collateral from fire or
other hazards will be procured and maintained by the obligor until the
note is repaid or repurchased by the employer or affiliate which
originally sold the note to the Plan, and the proceeds from such
insurance will be assigned to the Plan.
Repayment will be provided for in the following manner:
(a) Where the note is secured by heavy equipment, the term of the
note will not exceed 60 months. For purposes of this proposed
exemption, heavy equipment will include machinery sold by equipment
distributors such as earth moving, material handling, pipe laying,
power generation, and construction machinery manufactured according to
standard specifications. However, heavy equipment will not include any
equipment which has been specifically designed and manufactured to a
user's specifications and which cannot reasonably be resold in the
ordinary course of the equipment distributor's business;
(b) Where the note is secured by passenger automobiles and light-
duty highway motor vehicles, the term of the note will not exceed 48
months. For purposes of this proposed exemption, passenger automobiles
and light-duty highway motor vehicles are defined as vehicles which
have a gross weight of 10,000 pounds or less, are propelled by means of
their own motor and are a type used for highway transportation; and
(c) Where the note is secured by tangible personal property, other
than heavy equipment or motor vehicles as described herein, the term of
the note will not exceed 36 months.
10. In summary, the applicant represents that the proposed
exemption will satisfy the statutory criteria under section 408(a) of
the Act for the following reasons:
(a) Each transaction will be on terms that are at least as
favorable to the Plan as an arm's-length transaction with an unrelated
party;
(b) Prior to the consummation of any transaction described herein,
the transaction will be approved on behalf of the Plan by an
Independent Fiduciary, upon a determination made by such Independent
Fiduciary that all of the conditions of this proposed exemption will be
satisfied. The Independent Fiduciary will acknowledge, in writing, his
or her fiduciary status for the Plan under the Act with respect to each
transaction;
(c) The Plan's continuing rights under the terms and conditions of
the acquired customer notes, and under this proposed exemption, will be
monitored and enforced on behalf of the Plan by an Independent
Fiduciary, as described herein;
(d) The acquisition of a customer note from either AMG, an adopting
employer, or an affiliate, will not cause the Plan to hold, immediately
following the acquisition, more than: (i) twenty-five percent (25%), in
the aggregate, of the current value of the Plan's assets in customer
notes of AMG, adopting employers or affiliates, or (ii) five percent
(5%) of the current value of the Plan's assets in the notes of any one
customer who is the obligor under such notes;
(e) The employer or affiliate from which the Plan acquires a
customer note, as well as AMG, will guarantee in writing the immediate
repayment of the outstanding balance of the notes, and accrued interest
thereon, in the event
[[Page 23782]]
that the note is more than 60 days in arrears or if other events occur
that, in the opinion of the Independent Fiduciary, will impair the
safety of the note as a Plan investment; and
(f) The Plan will receive adequate security for each note.
Additionally, insurance against loss or damage from fire or other
hazards to the collateral underlying each note will be procured and
maintained by the obligor until the note is repaid or repurchased by
the employer or affiliate which originally sold the note to the Plan,
and the proceeds from such insurance will be assigned to the Plan.
FOR FURTHER INFORMATION CONTACT: Mr. Brian J. Buyniski of the
Department, telephone (202) 693-8545. (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 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 exemptions, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act and/or the
Code, including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction; and
(4) The proposed exemptions, if granted, will be subject to the
express condition that the material facts and representations contained
in each application are true and complete, and that each application
accurately describes all material terms of the transaction which is the
subject of the exemption.
Signed at Washington, DC, this 30th day of April, 2003.
Ivan Strasfeld,
Director of Exemption Determinations, Employee Benefits Security
Administration, Department of Labor.
[FR Doc. 03-11012 Filed 5-2-03; 8:45 am]
BILLING CODE 4510-29-P