[Federal Register: July 8, 2003 (Volume 68, Number 130)]
[Notices]
[Page 40689-40701]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr08jy03-96]
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
[Exemption Application No. D-10988 et al.]
Prohibited Transaction Exemption 2003-20; Grant of Individual
Exemptions; Deutsche Bank Securities, Inc. and Its Affiliates
AGENCY: Employee Benefits Security Administration, Labor.
ACTION: Grant of individual exemptions.
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SUMMARY: This document contains exemptions issued by the Department of
Labor (the Department) 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).
A notice was published in the Federal Register of the pendency
before the Department of a proposal to grant such exemption. The notice
set forth a summary of facts and representations contained in the
application for exemption and referred interested persons to the
application for a complete statement of the facts and representations.
The application has been available for public inspection at the
Department in Washington, DC. The notice also invited interested
persons to submit comments on the requested exemption to the
Department. In addition the notice stated that any interested person
might submit a written request that a public hearing be held (where
appropriate). The applicant has represented that it has complied with
the requirements of the notification to interested persons. No requests
for a hearing were received by the Department. Public comments were
received by the Department as described in the granted exemption.
The notice of proposed exemption was issued and the exemption is
being granted solely by the Department because, 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 proposed to the Secretary of Labor.
Statutory Findings
In accordance with section 408(a) of the Act and/or section
4975(c)(2) of the Code and the procedures set forth in 29 CFR part
2570, subpart B (55 FR 32836, 32847, August 10, 1990) and based upon
the entire record, the Department makes the following findings:
(a) The exemption is administratively feasible;
(b) The exemption is in the interests of the plan and its
participants and beneficiaries; and
(c) The exemption is protective of the rights of the participants
and beneficiaries of the plan.
Deutsche Bank Securities Inc. and Its Affiliates Located in New York,
NY
[Prohibited Transaction Exemption 2003-20; Exemption Application No. D-
10988]
Exemption
The restrictions of sections 406(a)(1)(A) through (D) of the Act
and the sanctions resulting from application of section 4975 of the
Code, by reason of section 4975(c)(1)(A) through (D) of the Code, shall
not apply to any purchase or sale of securities, in the context of a
portfolio liquidation or restructuring, between (i) Deutsche Bank
Securities Inc. (DBSI) and its current and future affiliates, including
certain foreign broker-dealers or banks (the Foreign Affiliates, as
defined in Section III below), (collectively, the Applicant) and (ii)
employee benefit plans (the Plans) with respect to which the Applicant
is a party in interest, provided that the conditions set forth in
Section II are satisfied.
Section II--Conditions
A. The Applicant customarily purchases and sells securities for its
own account in the ordinary course of its business as a broker-dealer
or bank;
B. The Applicant (including an affiliate) does not have
discretionary authority or control with respect to the investment of
the Plan assets involved in the transaction, nor renders investment
advice (within the meaning of 29 CFR 2510.3-21(c)) with respect to
those assets.
[[Page 40690]]
Notwithstanding the foregoing, the Applicant may be a directed
trustee (as defined in Section III below) with respect to the Plan
assets involved in the transaction.
In addition, although the Applicant does not have discretionary
authority or control over such Plan assets at the time of the
transaction and has not used its discretion to appoint the transition
broker-dealer, it may act as a fiduciary with respect to the Plan
assets involved in the transaction, solely as: (i) The investment
manager of such assets to be managed as an Index or Model-Driven Fund;
or (ii) the investment manager of such assets who supplies a list of
securities or other investments to be purchased, which list is prepared
without regard to the identity of the broker-dealer and without
reference to the portfolio being liquidated or restructured, and is
substantially the same list that would be provided to other similarly
situated investors with substantially similar investment guidelines and
objectives, or is substantially similar to the investments in existing
portfolios managed in the same style.
Lastly, a transaction will not fail to meet the requirements of
this section if the Applicant is being terminated as a manager of the
Plan assets involved in the transaction, its investment discretion is
terminated prior to the commencement of the portfolio liquidation or
restructuring, and the Applicant has not used its discretion to appoint
the transition broker-dealer;
C. The transaction is a purchase or sale, for no consideration
other than cash;
D. The terms of any transaction are at least as favorable to the
Plan as those obtainable in a comparable arm's length transaction with
an unrelated party;
E. An Independent Fiduciary has given prior approval that the
transaction may be effectuated as a principal transaction and at a
price that--
(1) For an equity security, is specified in advance by the
Independent Fiduciary and is a stated dollar amount, or is based on an
objective measure (as of a specified date or dates), including, but not
limited to, the closing price, the opening price, or the volume-
weighted average price; or
(2) For a fixed income security, is a stated dollar amount, or is
within the bid and asked spread, as of the close of the relevant market
(or another predetermined time on a specified date or dates), as
reported by an independent third party reporting service or a publicly
available electronic exchange or trading system;
F. In the case where the price for any transaction is not based on
an objective measure, the Independent Fiduciary has given prior
approval for the transaction, specifying whether the transaction is to
be agency or principal, either on a security-by-security basis, or
based on the whole portfolio or an identifiable part of the portfolio
(such as all debt securities, all equity securities, all domestic
securities, or the like);
G. All purchases and sales executed on a principal basis are
effected within two days following the Independent Fiduciary's
direction to purchase or sell a given security--except that, with the
approval of the Independent Fiduciary, the Applicant may extend such
initial period for a time not exceeding two additional days, on the
same terms;
H. The Independent Fiduciary is furnished with confirmations
including the relevant information required under Rule 10b-10 of the
Securities Exchange Act of 1934 (the 1934 Act), to the extent required
under Rule 10b-10, as well as a report, within five business days after
the transaction is completed, containing the following information with
respect to each security:
(1) The identity of the security;
(2) The date on which the transaction occurred;
(3) The quantity and price of the securities involved; and
(4) Whether the transaction was executed with the Applicant as
principal or agent;
I. Each Plan shall have total net assets with a value of at least
$100 million. For purposes of the net assets test, where a group of
Plans is maintained by a single employer or controlled group of
employers, as defined in section 407(d)(7) of the Act, the $100 million
net assets requirement may be met by aggregating the assets of such
Plans, if the assets are pooled for investment purposes in a single
master trust;
J. The Applicant complies with all applicable securities or banking
laws relating to the transaction;
K. Any Foreign Affiliate is a registered broker-dealer or bank
subject to regulation by a governmental agency, as described in Section
III, B, and is in compliance with all applicable rules and regulations
thereof in connection with any transaction covered by the exemption;
L. Any Foreign Affiliate, in connection with any transaction
covered by the exemption, is in compliance with the requirements of
Rule 15a-6 (17 CFR 240.15a-6) of the 1934 Act, and Securities and
Exchange Commission (SEC) interpretations thereof, providing for
foreign affiliates a limited exemption from U.S. broker-dealer
registration requirements;
M. Prior to any transaction, the Foreign Affiliate enters into a
written agreement with the Plan in which the Foreign Affiliate consents
to the jurisdiction of the courts of the United States for any civil
action or proceeding brought in respect of the subject transactions. In
this regard, the Foreign Affiliate 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); and (iii) consent to service of process on the Process
Agent;
N. The Applicant maintains, or causes to be maintained, within the
United States for a period of six years from the date of any
transaction, such records as are necessary to enable the persons
described in Paragraph O, below, to determine whether the conditions of
the exemption have been met, except that--
(1) A party in interest with respect to a Plan, other than the
Applicant, shall not be subject to a civil penalty under section 502(i)
of the Act, or the taxes imposed by section 4975(a) and (b) of the
Code, if such records are not maintained, or not available for
examination, as required by Paragraph O; and
(2) This record-keeping condition shall not be violated if, due to
circumstances beyond the Applicant's control, such records are lost or
destroyed prior to the end of the six year period; and
O. Notwithstanding any provisions of subsections (a)(2) and (b) of
section 504 of the Act, the Applicant makes the records referred to in
Paragraph N, above, unconditionally available within the United States
during normal business hours at their customary location to the
following persons or a duly authorized representative thereof: (1) The
Department, the Internal Revenue Service, or the SEC; (2) any fiduciary
of a Plan; (3) any contributing employer to a Plan; (4) any employee
organization any of whose members are covered by a Plan; and (5) any
participant or beneficiary of a Plan. However, none of the persons
described in Items (2) through (5) of this subsection is authorized to
examine the trade secrets of the Applicant, or commercial or financial
information which is privileged or confidential.
Section III--Definitions
A. The term ``DBSI'' means Deutsche Bank Securities Inc. DBSI and
its domestic affiliates must be one of the following: (i) A broker-
dealer registered under the 1934 Act; (ii) a reporting
[[Page 40691]]
dealer who makes primary markets in securities of the United States
Government or of any agency of the United States Government
(``Government securities'') and reports daily to the Federal Reserve
Bank of New York its positions with respect to Government securities
and borrowings thereon; or (iii) a bank supervised by the United States
or a State. DBSI and its current and future affiliates, including the
Foreign Affiliates (as defined in Paragraph C, below), are collectively
referred to herein as ``the Applicant.''
B. The term ``affiliate'' shall include: (1) Any person directly or
indirectly, through one or more intermediaries, controlling, controlled
by, or under common control with such person; (2) any officer,
director, or partner, employee or relative (as defined in section 3(15)
of the Act) of such person; and (3) any corporation or partnership of
which such person is an officer, director or partner. For purposes of
this definition, the term ``control'' means the power to exercise a
controlling influence over the management or policies of a person other
than an individual.
C. The term ``Foreign Affiliate'' means an affiliate of DBSI that
is subject to regulation as a broker-dealer or bank by: (1) The
Securities and Futures Authority or the Financial Services Authority in
the United Kingdom, (2) the Federal Authority for Financial Services
Supervision, i.e., der Bundesanstalt fuer Finanzdienstleistungsaufsicht
(the BAFin) in Germany, (3) the Ministry of Finance and/or the Tokyo
Stock Exchange in Japan; (4) the Ontario Securities Commission and/or
the Investment Dealers Association, or the Office of the Superintendent
of Financial Institutions, in Canada, (5) the Swiss Federal Banking
Commission in Switzerland, or (6) the Australian Prudential Regulation
Authority or the Australian Securities & Investments Commission, and/or
the Australian Stock Exchange Limited, in Australia, or any
governmental regulatory authority that is a successor in interest to
any such regulator.
D. The term ``security'' shall include equities, fixed income
securities, options on equity or fixed income securities, government
obligations, and any other instrument that constitutes a security under
U.S. securities laws. The term ``security'' does not include swap
agreements or other notional principal contracts.
E. The term ``index'' means a securities index that represents the
investment performance of a specific segment of the public market for
equity or debt securities in the United States and/or foreign
countries, but only if--
(1) The organization creating and maintaining the index is--
(i) Engaged in the business of providing financial information,
evaluation, advice, or securities brokerage services to institutional
clients,
(ii) A publisher of financial news or information, or
(iii) A public securities exchange or association of securities
dealers;
(2) The index is created and maintained by an organization
independent of the Applicant; and
(3) The index is a generally accepted standardized index of
securities that is not specifically tailored for the use of the
Applicant.
F. The term ``Index Fund'' means any investment fund, account, or
portfolio trusteed or managed by the Applicant, in which one or more
investors invest, and--
(1) Which is designed to track the rate of return, risk profile,
and other characteristics of an independently maintained securities
index (as ``index'' is defined in Paragraph E, above) by either (i)
replicating the same combination of securities that compose such index,
or (ii) sampling the securities that compose such index based on
objective criteria and data;
(2) For which the Applicant does not use its discretion, or data
within its control, to affect the identity or amount of securities to
be purchased or sold;
(3) That contains ``plan assets'' subject to the Act, pursuant to
the Department's regulations (see 29 CFR 2510.3-101, Definition of
``plan assets''--plan investments); and
(4) That involves no agreement, arrangement, or understanding
regarding the design or operation of the Fund that is intended to
benefit the Applicant or any party in which the Applicant may have an
interest.
G. The term ``Model-Driven Fund'' means any investment fund,
account, or portfolio trusteed or managed by the Applicant, in which
one or more investors invest, and--
(1) Which is composed of securities, the identity of which and the
amount of which, are selected by a computer model that is based on
prescribed objective criteria using independent third party data, not
within the control of the Manager, to transform an Index (as defined in
Paragraph E, above);
(2) Which contains ``plan assets'' subject to the Act, pursuant to
the Department's regulations (see 29 CFR 2510.3-101, Definition of
``plan assets''--plan investments); and
(3) That involves no agreement, arrangement, or understanding
regarding the design or operation of the Fund, or the utilization of
any specific objective criteria, that is intended to benefit the
Applicant or any party in which the Applicant may have an interest.
H. The term ``Plan'' means an employee benefit plan that is subject
to the fiduciary responsibility provisions of the Act.
I. The term ``Independent Fiduciary'' means a fiduciary of a Plan
who is unrelated to, and independent of, the Applicant. For purposes of
the exemption, a Plan fiduciary will be deemed to be unrelated to, and
independent of, the Applicant if such fiduciary represents that neither
such fiduciary, nor any individual responsible for the decision to
authorize or terminate authorization for transactions described in
Section I, is an officer, director, or highly compensated employee
(within the meaning of section 4975(e)(2)(H) of the Code) of the
Applicant and represents that such fiduciary shall advise the Applicant
if those facts change.
(1) Notwithstanding anything to the contrary in this Section III,
I, a fiduciary is not independent if:
(i) Such fiduciary directly or indirectly controls, is controlled
by, or is under common control with the Applicant;
(ii) Such fiduciary directly or indirectly receives any
compensation or other consideration from the Applicant for his or her
own personal account in connection with any transaction described in
the exemption;
(iii) Any officer, director, or highly compensated employee (within
the meaning of section 4975(e)(2)(H) of the Code) of the Applicant,
responsible for the transactions described in Section I, is an officer,
director, or highly compensated employee (within the meaning of section
4975(e)(2)(H) of the Code) of the Plan sponsor or the fiduciary
responsible for the decision to authorize or terminate authorization
for transactions described in Section I. However, if such individual is
a director of the Plan sponsor or the responsible fiduciary, and if he
or she abstains from participation in (A) the choice of the Plan's
broker-dealer or bank executing the transactions covered herein, and
(B) the decision to authorize or terminate authorization for
transactions described in Section I, then Section III, I(1)(iii) shall
not apply.
(2) The term ``officer'' means a president, any vice president in
charge of a principal business unit, division or function (such as
sales, administration
[[Page 40692]]
or finance), or any other officer who performs a policy-making function
for the entity.
J. The term ``directed trustee'' means a Plan trustee whose powers
and duties with respect to any assets of the Plan involved in the
portfolio liquidation or restructuring are limited to (i) the provision
of nondiscretionary trust services to the Plan, and (ii) duties imposed
on the trustee by any provision or provisions of the Act or the Code.
The term ``nondiscretionary trust services'' means custodial services
and services ancillary to custodial services, none of which services is
discretionary. For purposes of the exemption, a person who is otherwise
a directed trustee will not fail to be a directed trustee solely by
reason of having been delegated, by the sponsor of a master or
prototype Plan, the power to amend such Plan.
EFFECTIVE DATE: This exemption is effective as of February 6, 2003.
For a more complete statement of the facts and representations
supporting the Department's decision to grant this exemption, refer to
the notice of proposed exemption published on February 6, 2003 at 68 FR
6187.
Written Comments
The Department received one written comment with respect to the
notice of proposed exemption (the Proposal). The comment was submitted
by the Applicant, who requested certain modifications to the operative
language as discussed below. Some additional editorial changes have
been made by the Department to improve clarity and readability of the
final exemption.
1. The Applicant wished to revise Section II.B. of the Proposal (68
FR 6188, center column) to clarify that this condition permits
situations where the Applicant is both the legacy and the destination
manager and permits legacy or destination positions in all investments,
not just securities (although the exemption for principal transactions
covers only securities).
Thus, Section II.B. has been revised to read as follows (note
bracketed deletions and italicized additions):
B. [Neither] The Applicant (including an affiliate) [nor an
affiliate thereof has] does not have discretionary authority or
control with respect to the investment of the Plan assets involved
in the transaction, [or] nor renders investment advice (within the
meaning of 29 CFR 2510.3-21(c)) with respect to those assets.
Notwithstanding the foregoing, the Applicant may be a directed
trustee (as defined in Section III below) with respect to the Plan
assets involved in the transaction.
[The original third paragraph has been moved to the end of
Section II.B.]
In addition, [a transaction will not fail to meet the
requirements of this section solely because the Applicant is being
retained as an investment manager with respect to the Plan assets
involved in the transaction, provided that:] although the Applicant
does not have discretionary authority or control over such Plan
assets at the time of the transaction and has not used its
discretion to appoint the transition broker-dealer, it may act as a
fiduciary with respect to the Plan assets involved in the
transaction, solely as: (i) [the Applicant has not used its
discretion to appoint the transition broker-dealer; (ii)] the
investment manager of such assets to be managed as an Index or
Model-Driven Fund; or (ii) [(iii)] the investment manager of such
assets who supplies a list of securities or other investments to be
purchased, which list is prepared without regard to the identity of
the broker-dealer and without reference to the portfolio being
liquidated or restructured [(i.e., the] and is substantially the
same list [is substantially the same as] that would be provided to
other similarly situated investors with substantially similar
investment guidelines and objectives, or [consists of] is
substantially similar [the same securities as those in other] to the
investments in existing [investment] portfolios managed in the same
style.
Lastly, [this condition will be deemed satisfied] a transaction
will not fail to meet the requirements of this section if the
Applicant is being terminated as a manager of the Plan assets
involved in the transaction, [the termination is effective] its
investment discretion is terminated prior to the commencement of the
portfolio liquidation or restructuring, and the Applicant has not
used its discretion to appoint the transition broker-dealer.
2. The Applicant wished to eliminate the requirement in Section
II.G. of the Proposal (68 FR at 6188, column 3) that the covered
securities be ``publicly traded.'' According to the Applicant, the
Independent Fiduciary can assess the fairness of pricing for a non-
publicly-traded security by one of the following means: (i) Review the
value at which the security is being carried by the Plan; (ii) review
the price that other dealers are quoting and the prices at which the
security has been trading in the recent past; or (iii) canvass other
holders of the security regarding an appropriate trading price.
Further, the Applicant wished to revise Section II.G(2) of this
condition (68 FR at 6188, column 3) so that the Independent Fiduciary
and the bank or broker-dealer may agree on other objective price
references besides ``close of market.''
Accordingly, Section II.G., which has been relettered Section II.E.
in sequence (while old Section II.E. is now II.F., and old Section
II.F. is now II.G.), has been revised to read as follows (note
bracketed deletions and italicized additions):
E. [Prior to any transaction, the] An Independent Fiduciary has
given prior approval [agrees] that the transaction [purchase or sale
of a security, which must be one that is publicly traded,] may be
effectuated [through] as a principal transaction and at a price
that--
(1) [in the case of] for an equity security, is specified in
advance by the Independent Fiduciary and is a stated dollar amount,
or is based on an objective measure (as of a specified date or
dates), including, but not limited to, the closing price, the
opening price, or the volume-weighted average price; or
(2) [in the case of] for a fixed income security, is a stated
dollar amount, or is within the bid and asked spread, as of the
close of the relevant market (or another predetermined time on a
specified date or dates), as reported by an independent third party
reporting service or a publicly available electronic exchange or
trading system.
Further, Section II.E. of the Proposal (68 FR at 6188, column 3),
which has been relettered Section II.F, has been revised to read as
follows (note bracketed deletions and italicized additions):
F. In the case where the price for any transaction is not based
on an objective measure, [An] the Independent Fiduciary has given
prior approval for the transaction, specifying [(solely in the case
where the price for any principal transaction is not based on an
objective measure)] whether the transaction is to be agency or
principal * * *
Also, Section II.F. of the Proposal (68 FR at 6188, column 3),
which has been relettered Section II.G, has been revised by adding the
italicized language:
G. All purchases and sales executed on a principal basis are
effected within two days following the Independent Fiduciary's
direction to purchase or sell a given security--except that, with
the approval of the Independent Fiduciary, the Applicant may extend
such initial period for a time not exceeding two additional days, on
the same terms.
3. Regarding Section II.H. of the Proposal (68 FR 6188, column 3),
the Applicant noted that this condition requires a Rule 10b-10
confirmation to be sent for every trade, although some trades do not
require such confirmations.
Thus, Section II.H. has been revised to read as follows (note
bracketed deletions and italicized additions):
H. The Independent Fiduciary is furnished with confirmations
including the relevant information required under Rule 10b-10 of the
Securities Exchange Act of 1934 (the 1934 Act), to the extent
required under Rule 10B-10, as well as a report, within five
business days [of] after the transaction is completed, containing
the following information with respect to each security * * *
[[Page 40693]]
4. Finally, regarding Section III.C. of the Proposal (68 FR 6189,
center column), the Applicant noted that, in foreign jurisdictions, the
authority to regulate securities transactions may change from agency to
agency, from time to time, or the legal name of the appropriate
regulator may change.
Thus, Section III.C. has been revised by adding the italicized
language at the end of clause (6):
C. The term ``Foreign Affiliate'' means an affiliate of DBSI
that is subject to regulation as a broker-dealer or bank by: (1) * *
*, or (6) * * *, and/or the Australian Stock Exchange Limited, in
Australia, or any governmental regulatory authority that is a
successor in interest to any such regulator.
The Department concurs in the Applicant's requested changes to the
operative language of this final exemption. Accordingly, based upon the
information contained in the entire record, the Department has
determined to grant the proposed exemption as modified herein.
FOR FURTHER INFORMATION CONTACT: Ms. Karin Weng of the Department,
telephone (202) 693-8540. (This is not a toll-free number.)
Arizona Machinery Group, Inc. (AMG) Located in Avondale, Arizona
[Prohibited Transaction Exemption 2003-21; Exemption Application No. D-
11142]
Exemption
Section I. Transactions Covered
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 date of
this exemption) 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 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)(an 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 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;
(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 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
[[Page 40694]]
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
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 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
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 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 or 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 affiliate'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.
For a more complete statement of the facts and representations
supporting the Department's decision to grant this exemption, refer to
the notice of proposed exemption (the Notice) published on May 5, 2003
at 68 FR 23778.
Written Comments: The Department received one written comment with
respect to the Notice which was submitted by the applicant (AMG). The
applicant states that in Subsection (a) of Section III (Definitions) of
the Notice, the terms ``affiliate'' or ``affiliates'' were defined,
with respect to an employer of employees covered by the Plan, as:
any corporation that is, at the time the Plan acquires a
customer note, a member of a controlled group of corporations (as
defined in 407(d)(7) of the Act and section 1563(a) of the Code),
along with AMG and any other adopting employer. [emphasis added]
In this regard, the applicant represents that only two employers
that have adopted the Plan are part of a controlled group. The
remaining companies, while related, do not have the requisite level of
common ownership to constitute a controlled group, as described in the
definition noted above. Thus, in order to include other adopting
employers of the Plan that are not currently within a controlled group
along with AMG, the applicant requests that the word ``and'' be changed
to ``or'' in the last phrase of the definition of the terms
``affiliate'' or ``affiliates'' in Section III(a) of the exemption.
The Department acknowledges the applicant's comment and has revised
the definition of ``affiliate'' in Section III(a) of the exemption to
reflect the applicant's request.
No other comments, nor any requests for a hearing, were received by
the Department. Accordingly, the Department has determined to grant the
exemption, as modified.
FOR FURTHER INFORMATION CONTACT: Mr. Brian J. Buyniski of the
Department, telephone (202) 693-8545. (This is not a toll-free number.)
Lehman Brothers Holding Inc. (LBHI) and Lehman Brothers Inc. (LBI), et
al. (collectively, the Applicants) Located in New York, NY
[Prohibited Transaction Exemption 2003-22; Exemption Application No. D-
11164]
Exemption
Section I. Covered Transactions
The restrictions of section 406 of the Act and the sanctions
resulting from the application of section 4975 of the Code, by reason
of section 4975(c)(1) of the Code,\1\ shall not apply, effective April
16, 2003, to the purchase of any securities by LBHI and LBI and their
affiliate (collectively the Asset Manager), on behalf of employee
benefit plans (Client Plans), including Client Plans investing in a
pooled fund (the Pooled Fund), for which the Asset Manager acts as a
fiduciary, from any person other than the Asset Manager or an affiliate
thereof, during the existence of an underwriting or selling syndicate
with respect to such securities, where LBI and its affiliates
(collectively, the Affiliated Broker-Dealer) are a manager or member of
such syndicate, provided that the following conditions are satisfied:
---------------------------------------------------------------------------
\1\ For purposes of this exemption, references to provisions of
Title I of the Act, unless otherwise specified, refer also to the
corresponding provisions of Title II of the Code.
---------------------------------------------------------------------------
(a) The securities to be purchased are--
(1) Either:
(i) Part of an issue registered under the Securities Act of 1933
(the 1933 Act) (15 U.S.C. 77a et seq.) or, if exempt from such
registration requirement, are (A) issued or guaranteed by the United
States or by any person controlled or supervised by and acting as an
instrumentality of the United States pursuant to authority granted by
the Congress of the United States, (B) issued by a bank, (C) exempt
from such registration requirement pursuant to a
[[Page 40695]]
federal statute other than the 1933 Act, or (D) are the subject of a
distribution and are of a class which is required to be registered
under section 12 of the Securities Exchange Act of 1934 (the 1934 Act)
(15 U.S.C. 781), and the issuer of which has been subject to the
reporting requirements of section 13 of the 1934 Act (15 U.S.C. 78m)
for a period of at least 90 days immediately preceding the sale of
securities and has filed all reports required to be filed thereunder
with the Securities and Exchange Commission (SEC) during the preceding
12 months; or
(ii) Part of an issue that is an ``Eligible Rule 144A Offering,''
as defined in SEC Rule 10f-3 (17 CFR 270.10f-3(a)(4)). Where the
Eligible Rule 144A Offering is of equity securities, the offering
syndicate shall obtain a legal opinion regarding the adequacy of the
disclosure in the offering memorandum;
(2) Purchased prior to the end of the first day on which any sales
are made, at a price that is not more than the price paid by each other
purchaser of securities in that offering or in any concurrent offering
of the securities, except that --
(i) If such securities are offered for subscription upon exercise
of rights, they may be purchased on or before the fourth day preceding
the day on which the rights offering terminates; or
(ii) If such securities are debt securities, they may be purchased
at a price that is not more than the price paid by each other purchaser
of securities in that offering or in any concurrent offering of the
securities and may be purchased on a day subsequent to the end of the
first day on which any sales are made, provided that the interest rates
on comparable debt securities offered to the public subsequent to the
first day and prior to the purchase are less than the interest rate of
the debt securities being purchased; and
(3) Offered pursuant to an underwriting or selling agreement under
which the members of the syndicate are committed to purchase all of the
securities being offered, except if--
(i) Such securities are purchased by others pursuant to a rights
offering; or
(ii) Such securities are offered pursuant to an over-allotment
option.
(b) The issuer of such securities has been in continuous operation
for not less than three years, including the operation of any
predecessors, unless--
(1) Such securities are non-convertible debt securities rated in
one of the four highest rating categories by at least one nationally
recognized statistical rating organization, i.e., Standard & Poor's
Rating Services, Moody's Investors Service, Inc., Duff & Phelps Credit
Rating Co., or Fitch IBCA, Inc., or their successors (collectively, the
Rating Organizations); or
(2) Such securities are issued or fully guaranteed by a person
described in paragraph (a)(1)(i)(A) of Section I of this exemption; or
(3) Such securities are fully guaranteed by a person who has issued
securities described in paragraphs (a)(1)(i)(B), (C), or (D) of Section
I, and who has been in continuous operation for not less than three
years, including the operation of any predecessors.
(c) The amount of such securities to be purchased by the Asset
Manager on behalf of a Client Plan does not exceed three percent of the
total amount of the securities being offered. Notwithstanding the
foregoing, the aggregate amount of any securities purchased with assets
of all Client Plans managed by the Asset Manager (or with respect to
which the Asset Manager renders investment advice within the meaning of
29 CFR 2510.3-21(c)) does not exceed:
(1) 10 percent of the total amount of any equity securities being
offered;
(2) 35 percent of the total amount of any debt securities being
offered that are rated in one of the four highest rating categories by
at least one of the Rating Organizations; or
(3) 25 percent of the total amount of any debt securities being
offered that are rated in the fifth or sixth highest rating categories
by at least one of the Rating Organizations; and
(4) If purchased in an Eligible Rule 144A Offering, the total
amount of the securities being offered for purposes of determining the
percentages for (1)-(3) above is the total of:
(i) The principal amount of the offering of such class sold by
underwriters or members of the selling syndicate to ``qualified
institutional buyers'' (QIBs), as defined in SEC Rule 144A (17 CFR
230.144A(a)(1)); plus
(ii) The principal amount of the offering of such class in any
concurrent public offering.
(d) The consideration to be paid by the Client Plan in purchasing
such securities does not exceed three percent of the fair market value
of the total net assets of the Client Plan, as of the last day of the
most recent fiscal quarter of the Client Plan prior to such
transaction.
(e) The transaction is not part of an agreement, arrangement, or
understanding designed to benefit the Asset Manager or an affiliate.
(f) The Affiliated Broker-Dealer does not receive, either directly,
indirectly, or through designation, any selling concession or other
consideration that is based upon the amount of securities purchased by
Client Plans pursuant to this exemption. In this regard, the Affiliated
Broker-Dealer may not receive, either directly or indirectly, any
compensation that is attributable to the fixed designations generated
by purchases of securities by the Asset Manager on behalf of its Client
Plans.
(g)(1) The amount the Affiliated Broker-Dealer receives in
management, underwriting or other compensation is not increased through
an agreement, arrangement, or understanding for the purpose of
compensating the Affiliated Broker-Dealer for foregoing any selling
concessions for those securities sold pursuant to this exemption.
Except as described above, nothing in this paragraph shall be construed
as precluding the Affiliated Broker-Dealer from receiving management
fees for serving as manager of the underwriting or selling syndicate,
underwriting fees for assuming the responsibilities of an underwriter
in the underwriting or selling syndicate, or other consideration that
is not based upon the amount of securities purchased by the Asset
Manager on behalf of Client Plans pursuant to this exemption; and
(2) The Affiliated Broker-Dealer shall provide to the Asset Manager
a written certification, signed by an officer of the Affiliated Broker-
Dealer, stating the amount that the Affiliated Broker-Dealer received
in compensation during the past quarter, in connection with any
offerings covered by this exemption, was not adjusted in a manner
inconsistent with Section I(e), (f), or (g) of this exemption.
(h) In the case of a single Client Plan, the covered transaction is
performed under a written authorization executed in advance by an
independent fiduciary (Independent Fiduciary) of the Client Plan.
(i) Prior to the execution of the written authorization described
in paragraph (h) above of this Section I, the following information and
materials must be provided in hard copy or in electronic form by the
Asset Manager to the Independent Fiduciary of each single Client Plan:
(1) A copy of the notice of proposed exemption and of the final
exemption as published in the Federal Register; and
(2) Any other reasonably available information regarding the
covered transactions that the Independent Fiduciary requests.
(j) Subsequent to an Independent Fiduciary's initial authorization
permitting the Asset Manager to engage in the covered transactions on
behalf of a single Client Plan, the Asset Manager will continue to be
subject to the
[[Page 40696]]
requirement to provide any reasonably available information regarding
the covered transactions that the Independent Fiduciary requests.
(k) In the case of existing plan investors in a Pooled Fund, such
Pooled Fund may not engage in any covered transactions pursuant to this
exemption, unless the Asset Manager has provided the written
information described below to the Independent Fiduciary of each plan
participating in the Pooled Fund. The following information and
materials shall be provided in hard copy or in electronic form not less
than 45 days prior to the Asset Manager's engaging in the covered
transactions on behalf of the Pooled Fund pursuant to the exemption:
(1) A notice of the Pooled Fund's intent to purchase securities
pursuant to this exemption and a copy of the notice of proposed
exemption and of the final exemption as published in the Federal
Register;
(2) Any other reasonably available information regarding the
covered transactions that the Independent Fiduciary requests; and
(3) A termination form expressly providing an election for the
Independent Fiduciary to terminate the plan's investment in the Pooled
Fund without penalty to the plan. Such form shall include instructions
specifying how to use the form.
Specifically, the instructions will explain that the plan has an
opportunity to withdraw its assets from the Pooled Fund for a period at
least 30 days after the plan's receipt of the initial notice described
in paragraph (1) of this Section I(k) above and that the failure of the
Independent Fiduciary to return the termination form by the specified
date shall be deemed to be an approval by the plan of its participation
in covered transactions as a Pooled Fund investor. Further, the
instructions will identify the Asset Manager and its Affiliated Broker-
Dealer and state that this exemption may be unavailable unless the
Independent Fiduciary is, in fact, independent of those persons. Such
fiduciary must advise the Asset Manager, in writing, if it is not an
``Independent Fiduciary,'' as that term is defined in Section II(g) of
this exemption.
For purposes of this paragraph, the requirement that the
authorizing fiduciary be independent of the Asset Manager shall not
apply in the case of an in-house plan sponsored by the Applicants or an
affiliate thereof. However, in-house plans must notify the Asset
Manager, as provided above.
(1) In the case of a plan whose assets are proposed to be invested
in a Pooled Fund subsequent to implementation of the procedures to
engage in the covered transactions, the plan's investment in the Pooled
Fund is subject to the prior written authorization of an Independent
Fiduciary, following the receipt by the Independent Fiduciary of the
materials described in Section I(k)(1) and (2). For purposes of this
paragraph, the requirement that the authorizing fiduciary be
independent of the Asset Manager shall not apply in the case of an in-
house plan sponsored by the Applicants or an affiliate thereof.
(m) Subsequent to an Independent Fiduciary's initial authorization
of a plan's investment in a Pooled Fund that engages in the covered
transactions, the Asset Manager will continue to be subject to the
requirement to provide any reasonably available information regarding
the covered transactions that the Independent Fiduciary requests.
(n) At least once every three months, and not later than 45 days
following the period to which such information relates, the Asset
Manager shall:
(1) Furnish the Independent Fiduciary of each single Client Plan,
and of each plan investing in a Pooled Fund, with a report (which may
be provided electronically) disclosing all securities purchased on
behalf of that Client Plan or Pooled Fund pursuant to this exemption
during the period to which such report relates, and the terms of the
transactions, including:
(i) The type of security (including the rating of any debt
security);
(ii) The price at which the securities were purchased;
(iii) The first day on which any sale was made during this
offering;
(iv) The size of the issue;
(v) The number of securities purchased by the Asset Manager for the
specific Client Plan or Pooled Fund;
(vi) The identity of the underwriter from whom the securities were
purchased;
(vii) The spread on the underwriting;
(viii) The price at which any such securities purchased during the
period were sold; and
(ix) The market value at the end of such period of each security
purchased during the period and not sold;
(2) Provide to the Independent Fiduciary in the quarterly report a
representation that the Asset Manager has received a written
certification signed by an officer of the Affiliated Broker-Dealer, as
described in paragraph (g)(2) of this Section I, affirming that, as to
each offering covered by this exemption during the past quarter, the
Affiliated Broker-Dealer acted in compliance with Section I(e), (f),
and (g) of this exemption, and that a copy of such certification will
be provided to the Independent Fiduciary upon request;
(3) Disclose to the Independent Fiduciary that, upon request, any
other reasonably available information regarding the covered
transactions that the Independent Fiduciary requests will be provided,
including, but not limited to:
(i) The date on which the securities were purchased on behalf of
the plan;
(ii) The percentage of the offering purchased on behalf of all
Client Plans and Pooled Funds; and
(iii) The identity of all members of the underwriting syndicate;
(4) Disclose to the Independent Fiduciary in the quarterly report,
any instance during the past quarter where the Asset Manager was
precluded for any period of time from selling a security purchased
under this exemption in that quarter because of its status as an
affiliate of the Affiliated Broker-Dealer and the reason for this
restriction;
(5) Provide explicit notification, prominently displayed in each
quarterly report, to the Independent Fiduciary of a single Client Plan,
that the authorization to engage in the covered transactions may be
terminated, without penalty, by the Independent Fiduciary on no more
than five days' notice by contacting an identified person; and
(6) Provide explicit notification, prominently displayed in each
quarterly report, to the Independent Fiduciary of a plan investing in a
Pooled Fund, that the Independent Fiduciary may terminate investment in
the Pooled Fund, without penalty, by contacting an identified person.
(o) Each single Client Plan shall have total net assets with a
value of at least $50 million. In addition, in the case of a
transaction involving an Eligible Rule 144A Offering on behalf of a
single Client Plan, each such Client Plan shall have at least $100
million in securities, as determined pursuant to SEC Rule 144A (17 CFR
230.144A). In the case of a Pooled Fund, the $50 million requirement
will be met if 50 percent or more of the units of beneficial interest
in such Pooled Fund are held by plans having total net assets with a
value of at least $50 million. For purchases involving an Eligible Rule
144A Offering on behalf of a Pooled Fund, the $100 million requirement
will be met if 50 percent or more of the units of beneficial interest
in such Pooled Fund are held by plans having at least $100 million in
assets and the Pooled Fund itself qualifies as a QIB, as determined
pursuant to SEC Rule 144A (17 CFR 230.144A(a)(F)).
[[Page 40697]]
For purposes of the net asset tests described above, where a group
of Client Plans is maintained by a single employer or controlled group
of employers, as defined in section 407(d)(7) of the Act, the $50
million net asset requirement or the $100 million net asset requirement
may be met by aggregating the assets of such Client Plans, if the
assets are pooled for investment purposes in a single master trust.
(p) The Asset Manager qualifies as a ``qualified professional asset
manager,'' as that term is defined under Part V(a) of PTE 84-14 (49 FR
9494, 9506, March 13, 1984) and, in addition, has, as of the last day
of its most recent fiscal year, total client assets under its
management and control in excess of $5 billion and shareholders' or
partners' equity in excess of $1 million.
(q) No more than 20 percent of the assets of a Pooled Fund, at the
time of a covered transaction, is comprised of assets of employee
benefit plans maintained by the Asset Manager, the Affiliated Broker-
Dealer, or an affiliate for their own employees, for which the Asset
Manager, the Affiliated Broker-Dealer, or an affiliate exercises
investment discretion.
(r) The Asset Manager and the Affiliated Broker-Dealer maintain, or
cause to be maintained, for a period of six years from the date of any
covered transaction such records as are necessary to enable the persons
described in Section I(s) of this exemption to determine whether the
conditions of this exemption have been met, except that--
(1) No party in interest with respect to a Client Plan, other than
the Asset Manager and the Affiliated Broker-Dealer, shall be subject to
a civil penalty under section 502(i) of the Act or the sanctions
imposed by section 4975(a) and (b) of the Code, if such records are not
maintained, or not available for examination, as required by Section
I(s); and
(2) A prohibited transaction shall not be considered to have
occurred if, due to circumstances beyond the control of the Asset
Manager or the Affiliated Broker-Dealer, such records are lost or
destroyed prior to the end of the six-year period.
(s)(1) Except as provided in subparagraph (2) of this Section I(s)
and notwithstanding any provisions of subsections (a)(2) and (b) of
section 504 of the Act, the records referred to in Section I(r) are
unconditionally available at their customary location for examination
during normal business hours by--
(i) Any duly authorized employee or representative of the
Department, the Internal Revenue Service, or the SEC;
(ii) Any fiduciary of a Client Plan, or any duly authorized
employee or representative of such fiduciary;
(iii) Any employer of participants and beneficiaries and any
employee organization whose members are covered by a Client Plan, or
any authorized employee or representative of these entities; or
(iv) Any participant or beneficiary of a Client Plan, or duly
authorized employee or representative of such participant or
beneficiary;
(2) None of the persons described in subparagraphs (s)(1)(ii)-(iv)
of this Section I shall be authorized to examine trade secrets of the
Asset Manager or the Affiliated Broker-Dealer, or commercial or
financial information which is privileged or confidential; and
(3) Should the Asset Manager or the Affiliated Broker-Dealer refuse
to disclose information on the basis that such information is exempt
from disclosure pursuant to Section I(s)(2) above, the Asset Manager
shall, by the close of the (thirtieth) (30th) day following the
request, provide a written notice advising that person of the reasons
for the refusal and that the Department may request such information.
Section II. Definitions
(a) The term ``Asset Manager'' means any asset management affiliate
of any Applicant (as ``affiliate'' is defined in Section II(c)) that
meets the requirements of this exemption.
(b) The term ``Affiliated Broker-Dealer'' means any broker-dealer
affiliate of any Applicant (as ``affiliate'' is defined in paragraph
(c) of this Section II) that meets the requirements of this exemption.
Such Affiliated Broker-Dealer may participate in an underwriting or
selling syndicate as a manager or member. The term ``manager'' means
any member of an underwriting or selling syndicate who, either alone or
together with other members of the syndicate, is authorized to act on
behalf of the members of the syndicate in connection with the sale and
distribution of the securities being offered, or who receives
compensation from the members of the syndicate for its services as a
manager of the syndicate.
(c) The term ``affiliate'' of a person includes:
(1) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with such person;
(2) Any officer, director, partner, employee, or relative (as
defined in section 3(15) of the Act) of such person; and
(3) Any corporation or partnership of which such person is an
officer, director, partner, or employee.
(d) The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
(e) The term ``Client Plan'' means an employee benefit plan that is
subject to the fiduciary responsibility provisions of the Act and whose
assets are under the management of the Asset Manager, including a plan
investing in a Pooled Fund (as ``Pooled Fund'' is defined in Section
II(f) below).
(f) The term ``Pooled Fund'' means a common or collective trust
fund or pooled investment fund maintained by the Asset Manager.
(g)(1) The term ``Independent Fiduciary'' means a fiduciary of a
Client Plan who is unrelated to, and independent of, the Asset Manager
and the Affiliated Broker-Dealer. For purposes of this exemption, a
Client Plan fiduciary will be deemed to be unrelated to, and
independent of, the Asset Manager and the Affiliated Broker-Dealer if
such fiduciary represents that neither such fiduciary, nor any
individual responsible for the decision to authorize or terminate
authorization for transactions described in Section I, is an officer,
director, or highly compensated employee (within the meaning of section
4975(e)(2)(H) of the Code) of the Asset Manager or the Affiliated
Broker-Dealer and represents that such fiduciary shall advise the Asset
Manager if those facts change.
(2) Notwithstanding anything to the contrary in this Section II(g),
a fiduciary is not independent if:
(i) Such fiduciary directly or indirectly controls, is controlled
by, or is under common control with the Asset Manager or the Affiliated
Broker-Dealer;
(ii) Such fiduciary directly or indirectly receives any
compensation or other consideration from the Asset Manager or the
Affiliated Broker-Dealer for his or her own personal account in
connection with any transaction described in this exemption;
(iii) Any officer, director, or highly compensated employee (within
the meaning of section 4975(e)(2)(H) of the Code) of the Asset Manager,
responsible for the transactions described in Section I, is an officer,
director, or highly compensated employee (within the meaning of section
4975(e)(2)(H) of the Code) of the Client Plan sponsor or of the
fiduciary responsible for the
[[Page 40698]]
decision to authorize or terminate authorization for transactions
described in Section I. However, if such individual is a director of
the Client Plan sponsor or of the responsible fiduciary, and if he or
she abstains from participation in (A) the choice of the Plan's
investment manager/adviser and (B) the decision to authorize or
terminate authorization for transactions described in Section I, then
this Section II(g)(2)(iii) shall not apply.
(3) The term ``officer'' means a president, any vice president in
charge of a principal business unit, division or function (such as
sales, administration or finance), or any other officer who performs a
policy-making function for the entity.
(4) In the case of existing Client Plans in a Pooled Fund, at the
time the Asset Manager provides such Client Plans with initial notice
pursuant to this exemption, the Asset Manager will notify the
fiduciaries of such Client Plans that they must advise the Asset
Manager, in writing, if they are not independent, within the meaning of
this Section II(g).
(h) The term ``security'' shall have the same meaning as defined in
section 2(36) of the Investment Company Act of 1940, as amended (the
1940 Act) (15 U.S.C. 80a-2(36) (1996)). For purposes of this exemption,
mortgage-backed or other asset-backed securities rated by a Rating
Organization will be treated as debt securities.
(i) The term ``Eligible Rule 144A Offering'' shall have the same
meaning as defined in SEC Rule 10f-3(a)(4) (17 CFR 270.10f-3(a)(4))
under the 1940 Act.
(j) The term ``qualified institutional buyer'' or ``QIB'' shall
have the same meaning as defined in SEC Rule 144A (SEC Rule 144A) (17
CFR 230.144A(a)(1)) under the Securities Act of 1933.
(k) The term ``Rating Organizations'' means Standard & Poor's
Rating Services, Moody's Investors Service, Inc., Duff & Phelps Credit
Rating Co., or Fitch IBCA, Inc., or their successors.
EFFECTIVE DATE: This exemption is effective as of April 16, 2003.
For a more complete statement of the facts and representations
supporting the Department's decision to grant this exemption, refer to
the notice of proposed exemption published on April 16, 2003 at 68 FR
18687.
FOR FURTHER INFORMATION CONTACT: Ms. Silvia Quezada of the Department
at (202) 693-8553. (This is not a toll-free number.)
Goldman, Sachs & Co. and Its Affiliates Located in New York, New York
[Prohibited Transaction Exemption 2003-23; Exemption Application No. D-
11169]
Exemption
The restrictions of sections 406(a)(1)(A) through (D) of the Act
and the sanctions resulting from application of section 4975 of the
Code, by reason of section 4975(c)(1)(A) through (D) of the Code, shall
not apply to any purchase or sale of securities, in the context of a
portfolio liquidation or restructuring, between (i) Goldman, Sachs &
Co. (Goldman) and its current and future affiliates, including certain
foreign broker-dealers or banks (the Foreign Affiliates, as defined in
Section III below), (collectively, the Applicant) and (ii) employee
benefit plans (the Plans) with respect to which the Applicant is a
party in interest, provided that the conditions set forth in Section II
are satisfied.
Section II--Conditions
A. The Applicant customarily purchases and sells securities for its
own account in the ordinary course of its business as a broker-dealer
or bank;
B. The Applicant (including an affiliate) does not have
discretionary authority or control with respect to the investment of
the Plan assets involved in the transaction, nor renders investment
advice (within the meaning of 29 CFR 2510.3-21(c)) with respect to
those assets.
Notwithstanding the foregoing, the Applicant may be a directed
trustee (as defined in Section III below) with respect to the Plan
assets involved in the transaction.
In addition, although the Applicant does not have discretionary
authority or control over such Plan assets at the time of the
transaction and has not used its discretion to appoint the transition
broker-dealer, it may act as a fiduciary with respect to the Plan
assets involved in the transaction, solely as: (i) The investment
manager of such assets to be managed as an Index or Model-Driven Fund;
or (ii) the investment manager of such assets who supplies a list of
securities or other investments to be purchased, which list is prepared
without regard to the identity of the broker-dealer and without
reference to the portfolio being liquidated or restructured, and is
substantially the same list that would be provided to other similarly
situated investors with substantially similar investment guidelines and
objectives, or is substantially similar to the investments in existing
portfolios managed in the same style.
Lastly, a transaction will not fail to meet the requirements of
this section if the Applicant is being terminated as a manager of the
Plan assets involved in the transaction, its investment discretion is
terminated prior to the commencement of the portfolio liquidation or
restructuring, and the Applicant has not used its discretion to appoint
the transition broker-dealer;
C. The transaction is a purchase or sale, for no consideration
other than cash;
D. The terms of any transaction are at least as favorable to the
Plan as those obtainable in a comparable arm's length transaction with
an unrelated party;
E. An Independent Fiduciary has given prior approval that the
transaction may be effectuated as a principal transaction and at a
price that--
(1) For an equity security, is specified in advance by the
Independent Fiduciary and is a stated dollar amount, or is based on an
objective measure (as of a specified date or dates), including, but not
limited to, the closing price, the opening price, or the volume-
weighted average price; or
(2) For a fixed income security, is a stated dollar amount, or is
within the bid and asked spread, as of the close of the relevant market
(or another predetermined time on a specified date or dates), as
reported by an independent third party reporting service or a publicly
available electronic exchange or trading system;
F. In the case where the price for any transaction is not based on
an objective measure, the Independent Fiduciary has given prior
approval for the transaction, specifying whether the transaction is to
be agency or principal, either on a security-by-security basis, or
based on the whole portfolio or an identifiable part of the portfolio
(such as all debt securities, all equity securities, all domestic
securities, or the like);
G. All purchases and sales executed on a principal basis are
effected within two days following the Independent Fiduciary's
direction to purchase or sell a given security--except that, with the
approval of the Independent Fiduciary, the Applicant may extend such
initial period for a time not exceeding two additional days, on the
same terms;
H. The Independent Fiduciary is furnished with confirmations
including the relevant information required under Rule 10b-10 of the
Securities Exchange Act of 1934 (the 1934 Act), to the extent required
under Rule 10b-10, as well as a report, within five business days after
the transaction is completed, containing the following information with
respect to each security:
(1) The identity of the security;
[[Page 40699]]
(2) The date on which the transaction occurred;
(3) The quantity and price of the securities involved; and
(4) Whether the transaction was executed with the Applicant as
principal or agent;
I. Each Plan shall have total net assets with a value of at least
$100 million. For purposes of the net assets test, where a group of
Plans is maintained by a single employer or controlled group of
employers, as defined in section 407(d)(7) of the Act, the $100 million
net assets requirement may be met by aggregating the assets of such
Plans, if the assets are pooled for investment purposes in a single
master trust;
J. The Applicant complies with all applicable securities or banking
laws relating to the transaction;
K. Any Foreign Affiliate is a registered broker-dealer or bank
subject to regulation by a governmental agency, as described in Section
III, B, and is in compliance with all applicable rules and regulations
thereof in connection with any transaction covered by the exemption;
L. Any Foreign Affiliate, in connection with any transaction
covered by the exemption, is in compliance with the requirements of
Rule 15a-6 (17 CFR 240.15a-6) of the 1934 Act, and Securities and
Exchange Commission (SEC) interpretations thereof, providing for
foreign affiliates a limited exemption from U.S. broker-dealer
registration requirements;
M. Prior to any transaction, the Foreign Affiliate enters into a
written agreement with the Plan in which the Foreign Affiliate consents
to the jurisdiction of the courts of the United States for any civil
action or proceeding brought in respect of the subject transactions. In
this regard, the Foreign Affiliate 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); and (iii) consent to service of process on the Process
Agent;
N. The Applicant maintains, or causes to be maintained, within the
United States for a period of six years from the date of any
transaction, such records as are necessary to enable the persons
described in Paragraph O, below, to determine whether the conditions of
the exemption have been met, except that --
(1) A party in interest with respect to a Plan, other than the
Applicant, shall not be subject to a civil penalty under section 502(i)
of the Act, or the taxes imposed by section 4975 (a) and (b) of the
Code, if such records are not maintained, or not available for
examination, as required by Paragraph O; and
(2) This record-keeping condition shall not be violated if, due to
circumstances beyond the Applicant's control, such records are lost or
destroyed prior to the end of the six year period; and
O. Notwithstanding any provisions of subsections (a)(2) and (b) of
section 504 of the Act, the Applicant makes the records referred to in
Paragraph N, above, unconditionally available within the United States
during normal business hours at their customary location to the
following persons or a duly authorized representative thereof: (1) The
Department, the Internal Revenue Service, or the SEC; (2) any fiduciary
of a Plan; (3) any contributing employer to a Plan; (4) any employee
organization any of whose members are covered by a Plan; and (5) any
participant or beneficiary of a Plan. However, none of the persons
described in Items (2) through (5) of this subsection is authorized to
examine the trade secrets of the Applicant, or commercial or financial
information which is privileged or confidential.
Section III--Definitions
A. The term ``Goldman'' means Goldman, Sachs & Co. and its current
and future affiliates, including the Foreign Affiliates (as defined in
Paragraph C, below); each domestic affiliate must be one of the
following: (i) A broker-dealer registered under the 1934 Act; (ii) a
reporting dealer who makes primary markets in securities of the United
States Government or of any agency of the United States Government
(``Government securities'') and reports daily to the Federal Reserve
Bank of New York its positions with respect to Government securities
and borrowings thereon; or (iii) a bank supervised by the United States
or a State. Goldman, including its current and future affiliates
(including the Foreign Affiliates), are collectively referred to herein
as ``the Applicant.''
B. The term ``affiliate'' shall include: (1) Any person directly or
indirectly, through one or more intermediaries, controlling, controlled
by, or under common control with such person; (2) any officer,
director, or partner, employee or relative (as defined in section 3(15)
of the Act) of such person; and (3) any corporation or partnership of
which such person is an officer, director or partner. For purposes of
this definition, the term ``control'' means the power to exercise a
controlling influence over the management or policies of a person other
than an individual.
C. The term ``Foreign Affiliate'' means an affiliate of Goldman
that is subject to regulation as a broker-dealer or bank by: (1) The
Securities and Futures Authority or the Financial Services Authority in
the United Kingdom, (2) the Federal Authority for Financial Services
Supervision, i.e., der Bundesanstalt fuer Finanzdienstleistungsaufsicht
(the BAFin) in Germany, (3) the Ministry of Finance and/or the Tokyo
Stock Exchange in Japan, (4) the Ontario Securities Commission and/or
the Investment Dealers Association, or the Office of the Superintendent
of Financial Institutions, in Canada, (5) the Swiss Federal Banking
Commission in Switzerland, or (6) the Australian Prudential Regulation
Authority or the Australian Securities & Investments Commission, and/or
the Australian Stock Exchange Limited, in Australia, or any
governmental regulatory authority that is a successor in interest to
any such regulator.
D. The term ``security'' shall include equities, fixed income
securities, options on equity or fixed income securities, government
obligations, and any other instrument that constitutes a security under
U.S. securities laws. The term ``security'' does not include swap
agreements or other notional principal contracts.
E. The term ``index'' means a securities index that represents the
investment performance of a specific segment of the public market for
equity or debt securities in the United States and/or foreign
countries, but only if
(1) The organization creating and maintaining the index is--
(i) Engaged in the business of providing financial information,
evaluation, advice, or securities brokerage services to institutional
clients,
(ii) A publisher of financial news or information, or
(iii) A public securities exchange or association of securities
dealers;
(2) The index is created and maintained by an organization
independent of the Applicant; and
(3) The index is a generally accepted standardized index of
securities that is not specifically tailored for the use of the
Applicant.
F. The term ``Index Fund'' means any investment fund, account, or
portfolio trusteed or managed by the Applicant, in which one or more
investors invest, and--
(1) Which is designed to track the rate of return, risk profile,
and other characteristics of an independently maintained securities
index (as ``index'' is defined in Paragraph E, above) by either (i)
replicating the same
[[Page 40700]]
combination of securities that compose such index, or (ii) sampling the
securities that compose such index based on objective criteria and
data;
(2) For which the Applicant does not use its discretion, or data
within its control, to affect the identity or amount of securities to
be purchased or sold;
(3) That contains ``plan assets'' subject to the Act, pursuant to
the Department's regulations (see 29 CFR 2510.3-101, Definition of
``plan assets''--plan investments); and
(4) That involves no agreement, arrangement, or understanding
regarding the design or operation of the Fund that is intended to
benefit the Applicant or any party in which the Applicant may have an
interest.
G. The term ``Model-Driven Fund'' means any investment fund,
account, or portfolio trusteed or managed by the Applicant, in which
one or more investors invest, and--
(1) Which is composed of securities, the identity of which and the
amount of which, are selected by a computer model that is based on
prescribed objective criteria using independent third party data, not
within the control of the Manager, to transform an Index (as defined in
Paragraph E, above);
(2) Which contains ``plan assets'' subject to the Act, pursuant to
the Department's regulations (see 29 CFR 2510.3-101, Definition of
``plan assets''--plan investments); and
(3) That involves no agreement, arrangement, or understanding
regarding the design or operation of the Fund, or the utilization of
any specific objective criteria, that is intended to benefit the
Applicant or any party in which the Applicant may have an interest.
H. The term ``Plan'' means an employee benefit plan that is subject
to the fiduciary responsibility provisions of the Act.
I. The term ``Independent Fiduciary'' means a fiduciary of a Plan
who is unrelated to, and independent of, the Applicant. For purposes of
the exemption, a Plan fiduciary will be deemed to be unrelated to, and
independent of, the Applicant if such fiduciary represents that neither
such fiduciary, nor any individual responsible for the decision to
authorize or terminate authorization for transactions described in
Section I, is an officer, director, or highly compensated employee
(within the meaning of section 4975(e)(2)(H) of the Code) of the
Applicant and represents that such fiduciary shall advise the Applicant
if those facts change.
(1) Notwithstanding anything to the contrary in this Section III,
I, a fiduciary is not independent if:
(i) Such fiduciary directly or indirectly controls, is controlled
by, or is under common control with the Applicant;
(ii) Such fiduciary directly or indirectly receives any
compensation or other consideration from the Applicant for his or her
own personal account in connection with any transaction described in
the exemption;
(iii) Any officer, director, or highly compensated employee (within
the meaning of section 4975(e)(2)(H) of the Code) of the Applicant,
responsible for the transactions described in Section I, is an officer,
director, or highly compensated employee (within the meaning of section
4975(e)(2)(H) of the Code) of the Plan sponsor or the fiduciary
responsible for the decision to authorize or terminate authorization
for transactions described in Section I. However, if such individual is
a director of the Plan sponsor or the responsible fiduciary, and if he
or she abstains from participation in (A) the choice of the Plan's
broker-dealer or bank executing the transactions covered herein, and
(B) the decision to authorize or terminate authorization for
transactions described in Section I, then Section III, I(1)(iii) shall
not apply.
(2) The term ``officer'' means a president, any vice president in
charge of a principal business unit, division or function (such as
sales, administration or finance), or any other officer who performs a
policy-making function for the entity.
J. The term ``directed trustee'' means a Plan trustee whose powers
and duties with respect to any assets of the Plan involved in the
portfolio liquidation or restructuring are limited to (i) the provision
of nondiscretionary trust services to the Plan, and (ii) duties imposed
on the trustee by any provision or provisions of the Act or the Code.
The term ``nondiscretionary trust services'' means custodial services
and services ancillary to custodial services, none of which services is
discretionary. For purposes of the exemption, a person who is otherwise
a directed trustee will not fail to be a directed trustee solely by
reason of having been delegated, by the sponsor of a master or
prototype Plan, the power to amend such Plan.
EFFECTIVE DATE: This exemption is effective as of February 6, 2003.
For a more complete statement of the facts and representations
supporting the Department's decision to grant this exemption, refer to
the notice of proposed exemption published on April 16, 2003 at 68 FR
18698.
Written Comments
The Department received one written comment with respect to the
notice of proposed exemption (the Proposal). The comment was submitted
by the Applicant, who requested clarification of a certain statement in
Item 3 of the Summary of Facts and Representations in the Proposal. The
Applicant wished to revise the first full sentence in the first column
of 68 FR at 18701 as follows (note bracketed deletions and italicized
additions):
The Applicant [delete ``believes''] is concerned that some of
its Plan clients may believe that the principal transactions at
issue may fall outside the scope of relief provided by PTE 75-1 (40
FR 50845, October 31, 1975), Part II,[footnote 32] because that
class exemption is unavailable where the broker-dealer's affiliate
is the trustee of a Plan, even if only a directed trustee, and is
unavailable where the broker-dealer or an affiliate thereof is
otherwise a fiduciary with respect to the Plan, such as an asset
manager.
The Department acknowledges the Applicant's clarification to the
record.
FOR FURTHER INFORMATION CONTACT: Ms. Karin Weng of the Department,
telephone (202) 693-8540. (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 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) This exemption is supplemental to and not in derogation of, any
other provisions of the Act and/or the Code, including statutory or
administrative exemptions and transactional rules. Furthermore, the
fact that a transaction is subject to an administrative or statutory
exemption is not dispositive of
[[Page 40701]]
whether the transaction is in fact a prohibited transaction; and
(3) The availability of this exemption is subject to the express
condition that the material facts and representations contained in the
application accurately describes all material terms of the transaction
which is the subject of the exemption.
Signed at Washington, DC, this 1st day of July, 2003.
Ivan Strasfeld,
Director of Exemption Determinations Employee Benefits Security
Administration, U.S. Department of Labor.
[FR Doc. 03-17095 Filed 7-7-03; 8:45 am]
BILLING CODE 4510-29-P