[Federal Register: November 24, 2006 (Volume 71, Number 226)]
[Notices]
[Page 67904-67914]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr24no06-105]
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
[Application No. D-11381]
Notice of Proposed Individual Exemption Involving the Bear
Stearns Companies, Inc. (BS), Bear Stearns Asset Management, Inc.
(BSAM), and Bear, Stearns & Co., Inc. (BSC) (collectively, the
Applicants) Located in New York, NY
AGENCY: Employee Benefits Security Administration, U.S. Department of
Labor.
ACTION: Notice of proposed individual exemption.
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SUMMARY: This document contains a notice of pendency before the
Department of Labor (the Department) of a proposed individual exemption
from certain prohibited transaction restrictions of the Employee
Retirement Income Security Act of 1974 (the Act) and the Internal
Revenue Code of 1986 (the Code). If granted, the proposed exemption
would permit the purchase of certain securities (the Securities), by an
asset management affiliate of BS from any person other than such asset
management affiliate of BS or any affiliate thereof, during the
existence of an underwriting or selling syndicate with respect to such
Securities, where a
[[Page 67905]]
broker-dealer affiliated with BS (the Affiliated Broker-Dealer) is a
manager or member of such syndicate and the asset management affiliate
of BS purchases such Securities, as a fiduciary: (a) On behalf of an
employee benefit plan or employee benefit plans (Client Plan(s)); or
(b) on behalf of Client Plans, and/or in-house plans (In-House Plans)
which are invested in a pooled fund or in pooled funds (Pooled
Fund(s)); provided certain conditions as set forth, below are satisfied
(an affiliated underwriter transaction (AUT)).\1\ The proposed
exemption, if granted, would affect Client Plans and In-House Plans and
their participants and beneficiaries.
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\1\ For purposes of this proposed exemption an In-House Plan may
engage in AUT's only through investment in a Pooled Fund.
DATES: Effective Date: If granted, this proposed exemption will be
effective as of the date the final exemption is published in the
Federal Register.
Written Comments and Hearing Requests
All interested persons are invited to submit written comments and/
or requests for a public hearing on the pending exemption to the
address, as set forth below, within the time frame, as set forth below.
All comments and requests for a public hearing will be made a part of
the record. Comments and hearing requests should state the reasons for
the writer's interest in the proposed exemption. A request for a public
hearing must also state the issues to be addressed and include a
general description of the evidence to be presented at the hearing.
Comments and hearing requests received will also be available for
public inspection with the referenced application at the address, as
set forth below.
DATES: Written comments and requests for a public hearing on the
proposed exemption should be submitted to the Department within 45 days
from the date of publication of this Federal Register Notice.
ADDRESSES: All written comments and requests for a public hearing
concerning the proposed exemption should be sent to the Office of
Exemptions Determinations, Employee Benefits Security Administration,
Room N-5700, U.S. Department of Labor, 200 Constitution Avenue, NW.,
Washington, DC 20210, Attention: Application No. D-11381.
Alternatively, interested persons are invited to submit comments or
hearing requests to the Department by e-mail to
leblanc.angelena@dol.gov or by facsimile at (202) 219-0204.
Notice to Interested Persons
Notice of the proposed exemption will be provided to all interested
persons in the manner agreed upon by the Applicants 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: This document contains a notice of proposed
individual exemption from the restrictions of section 406 of the Act
and section 4975(c)(1)(A)-(F) of the Code. The proposed exemption has
been requested in an application filed by BS, BSAM, and BSC, pursuant
to section 408(a) of the Act and section 4975(c)(2) of the Code and in
accordance with the procedures set forth in 29 CFR part 2570, subpart B
(55 FR 32836, August 10, 1990). Effective December 31, 1978, section
102 of Reorganization Plan No. 4 of 1978, (43 FR 47713, October 17,
1978) transferred the authority of the Secretary of the Treasury to
issue exemptions of the type requested to the Secretary of Labor.
Accordingly, this proposed exemption is being issued solely by the
Department.
The application pertaining to the proposed exemption contains
representations with regard to the proposed exemption which are
summarized below. Interested persons are referred to the application on
file with the Department for a complete statement of the facts and
representations. The application pertaining to the proposed exemption
and the comments received will be available for public inspection in
the Public Disclosure Room of the Employee Benefits Security
Administration, U.S. Department of Labor, Room N-1513, 200 Constitution
Avenue, NW., Washington, DC 20210.
FOR FURTHER INFORMATION CONTACT: Ms. Angelena C. Le Blanc, Office of
Exemption Determinations, Employee Benefits Security Administration,
U.S. Department of Labor, telephone (202) 693-8540. (This is not a
toll-free number.)
Summary of Facts and Representations
1. The Applicants for the proposed exemption are BS, BSAM, and BSC.
BSAM is an investment advisor registered with the Securities and
Exchange Commission (SEC) under the Investment Advisors Act of 1940.
BSC is registered with the SEC as both a broker-dealer and an
investment advisor. BSAM and BSC are affiliates of BS.
2. It is represented that the Applicants and their various
affiliates are regulated by federal government agencies, such as the
SEC, as well as by state government agencies, and industry self-
regulatory organizations (e.g., the New York Stock Exchange and the
National Association of Securities Dealers).
3. The Applicants request an exemption permitting the purchase of
certain Securities by an asset management affiliate of BS, acting on
behalf of Client Plans, subject to the Act or Code, and acting on
behalf of Client Plans and In-House Plans which are invested in certain
Pooled Funds for which an asset management affiliate of BS acts as a
fiduciary, from any person other than such asset management affiliate
of BS or any affiliate thereof, during the existence of an underwriting
or selling syndicate with respect to such Securities, where an
Affiliated Broker-Dealer is a manager or member of such syndicate.
Further, the Affiliated Broker-Dealer will receive no selling
concessions in connection with the securities sold to such plans.
4. The Applicants represent that in accordance with Prohibited
Transaction Class Exemption 75-1, 40 FR 50845 (October 31, 1975) (PTCE
75-1), an asset management affiliate of BS may purchase underwritten
securities for plans, where an Affiliated Broker-Dealer is a member of
an underwriting or selling syndicate. In this regard, Part III of PTCE
75-1 provides limited relief from the prohibited transaction provisions
of the Act for plan fiduciaries that purchase securities from an
underwriting or selling syndicate of which the fiduciary or an
affiliate is a member. However, such relief is not available if the
Affiliated Broker-Dealer manages the underwriting or selling syndicate.
5. Further, PTE 75-1 does not provide relief for the purchase of
unregistered securities. This includes those securities purchased by an
underwriter for resale to a ``qualified institutional buyer'' (QIB)
pursuant to the SEC's Rule 144A under the Securities Act of 1933 (the
1933 Act). It is represented that Rule 144A is commonly utilized in
connection with sales of securities issued by foreign corporations to
U.S. investors that are QIBs. Notwithstanding the unregistered nature
of such shares, it is represented that syndicates selling securities
under Rule 144A (Rule 144A Securities) are the functional equivalent of
those selling registered securities.
6. The Applicants represent that the Affiliated Broker-Dealer
regularly serves as a manager of underwriting or selling
[[Page 67906]]
syndicates for registered securities, and as a manager or a member of
underwriting or selling syndicates for Rule 144A Securities.
Accordingly, the asset management affiliate of BS is currently unable
to purchase on behalf of Client Plans Securities sold in a Rule 144A
Offering, resulting in such Client Plans being unable to participate in
significant investment opportunities.
7. It is represented that since 1975, there has been a significant
consolidation in the financial services industry in the United States.
As a result, there are more situations in which a plan fiduciary may be
affiliated with the manager of an underwriting syndicate. Further, many
plans have expanded investment portfolios in recent years to include
securities issued by foreign corporations. As a result, the exemption
provided in PTCE 75-1, Part III, is often unavailable for purchases of
domestic and foreign securities that may otherwise constitute
appropriate plan investments.
8. The Applicants represent that the asset management affiliate of
BS makes its investment decisions on behalf of, or renders investment
advice to, Client Plans pursuant to the governing document of the
particular Client Plan or Pooled Fund and the investment guidelines and
objectives set forth in the management or advisory agreement. Because
the Client Plans are covered by Title I of the Act, such investment
decisions are subject to the fiduciary responsibility provisions of the
Act.
9. The Applicants state, therefore, that the decision to invest in
a particular offering is made on the basis of price, value, and a
Client Plan's investment criteria, not on whether the securities are
currently being sold through an underwriting or selling syndicate. The
Applicants further state that, because the compensation paid to the
asset management affiliate of BS for its services is generally based
upon assets under management, the asset management affiliate of BS has
little incentive to purchase securities in an offering in which the
Affiliated Broker-Dealer is an underwriter unless such a purchase is in
the interests of Client Plans. If the assets under management do not
perform well, the asset management affiliate of BS will receive less
compensation and could lose clients, costs which far outweigh any gains
from the purchase of underwritten securities. The Applicants point out
that under the terms of the proposed exemption, the Affiliated Broker-
Dealer may receive no compensation or other consideration, direct or
indirect, in connection with any transaction that would be permitted
under the proposed exemption.
10. The Applicants state that the asset management affiliate of BS
generally purchases securities in large blocks because the same
investments will be made across several accounts. If there is a new
offering of an equity or fixed income security that the asset
management affiliate of BS wishes to purchase, it may be able to
purchase the security through the offering syndicate at a lower price
than it would pay in the open market, without transaction costs and
with reduced market impact if it is buying a relatively large quantity.
This is because a large purchase in the open market can cause an
increase in the market price and, consequently, in the cost of the
securities. Purchasing from an offering syndicate can thus reduce the
costs to the Client Plans.
11. The Applicants point out that absent this proposed exemption,
if the Affiliated Broker-Dealer is a manager of a syndicate that is
underwriting a securities offering, the asset management affiliate will
be foreclosed from purchasing any securities on behalf of its Client
Plans from that underwriting syndicate. In this regard, the asset
management affiliate would have to purchase the same securities in the
secondary market. In such a circumstance, the Client Plans may incur
greater costs both because the market price is often higher than the
offering price, and because of transaction and market impact costs. In
turn, this may cause the asset management affiliate to forego other
investment opportunities because the purchase price of the underwritten
security in the secondary market exceeds the price that the asset
management affiliate would have paid to the selling syndicate.
12. The Applicants represent that the Affiliated Broker-Dealer
currently manages and participates in firm commitment underwriting
syndicates for registered offerings of both equity and debt securities.
While equity and debt underwritings may operate differently with regard
to the actual sales process, the basic structures are the same. In a
firm commitment underwriting, the underwriting syndicate acquires the
securities from the issuer and then sells the securities to investors.
13. The Applicants represent that while, as a legal matter, a
selling syndicate assumes the risk that the underwritten securities
might not be fully sold, as a practical matter, this risk is reduced,
in marketed deals, through ``building a book'' (i.e., taking
indications of interest from potential purchasers) prior to pricing the
securities. Accordingly, there is no incentive for the underwriters to
use their discretionary accounts (or the discretionary accounts of
their affiliates) to buy up the securities as a way to avoid
underwriting liabilities.
14. It is represented that each selling syndicate has a lead
manager, who is the principal contact between the syndicate and the
issuer and who is responsible for organizing and coordinating the
syndicate. The syndicate may also have co-managers, who generally
assist the lead manager in working with the issuer to prepare the
registration statement to be filed with the SEC and in distributing the
underwritten securities. While equity syndicates typically include
additional members that are not managers, more recently, membership in
many debt syndicates has been limited to lead and co-managers.
15. It is represented that if more than one underwriter is involved
in a selling syndicate, the lead manager, who has been selected by the
issuer of the underwritten securities, contacts other underwriters, and
the underwriters enter into an ``Agreement Among Underwriters.'' Most
lead managers have a standing form of agreement. This document is then
supplemented for the particular deal by sending an ``invitation telex''
or ``terms telex'' that sets forth particular terms to the other
underwriters.
16. The arrangement between the syndicate and the issuer of the
underwritten securities is embodied in an underwriting agreement, which
is signed on behalf of the underwriters by one or more of the managers.
In a firm commitment underwriting, the underwriting agreement provides,
subject to certain closing conditions, that the underwriters are
obligated to purchase the underwritten securities from the issuer in
accordance with their respective commitments. This obligation is met by
using the proceeds received from the buyers of the securities in the
offering, although there is a risk that the underwriters will have to
pay for a portion of the securities in the event that not all of the
securities are sold.
17. The Applicants represent that, generally, the risk that the
securities will not be sold is small because the underwriting agreement
is not executed until after the underwriters have obtained sufficient
indications of interest to purchase the securities from a sufficient
number of investors to assure that all the securities being offered
will be acquired by investors. Once the underwriting agreement is
[[Page 67907]]
executed, the underwriters immediately begin contacting the investors
to confirm the sales, at first by oral communication and then by
written confirmation. Sales are finalized within hours and sometimes
minutes. In registered transactions, the underwriters are particularly
anxious to complete the sales as soon as possible because until they
``break syndicate,'' they cannot enter the market. In many cases, the
underwriters will act as market-makers for the security. A market-maker
holds itself out as willing to buy or sell the security for its own
account on a regular basis.
18. The Applicants represent that the process of ``building a
book'' or soliciting indications of interest occurs as follows: In a
registered equity offering, after a registration statement is filed
with the SEC and, while it is under review by the SEC staff,
representatives of the issuer of the securities and the selling
syndicate managers conduct meetings with potential investors, who learn
about the company and the underwritten securities. Potential investors
also receive a preliminary prospectus. The underwriters cannot make any
firm sales until the registration statement is declared effective by
the SEC. Prior to the effective date, while the investors cannot become
legally obligated to make a purchase, they indicate whether they have
an interest in buying, and the managers compile a ``book'' of investors
who are willing to ``circle'' a particular portion of the issue. These
indications of interest are sometimes referred to as a ``soft circle''
because investors cannot be legally bound to buy the securities until
the registration statement is effective. However, the Applicants
represent that investors generally follow through on their indications
of interest, and would be expected to do so, barring any sudden adverse
developments (in which case it is likely that the offering would be
withdrawn or the price range modified and the process restarted),
because, if the investors that gave an indication of interest do not
follow through, the underwriters may be reluctant to include them in
future offerings.
19. Assuming that the marketing efforts have produced sufficient
indications of interest, the Applicants represent that the issuer of
the securities and the selling syndicate managers together will set the
price of the securities and ask the SEC to declare the registration
effective. After the registration statement becomes effective and the
underwriting agreement is executed, the underwriters contact those
investors that have indicated an interest in purchasing securities in
the offering to execute the sales. The Applicants represent that
offerings are often oversubscribed, and many have an over-allotment
option that the underwriters can exercise to acquire additional shares
from the issuer. Where an offering is oversubscribed, the underwriters
decide how to allocate the securities among the potential purchasers.
However, if an issue is a ``hot issue,'' (i.e., it is selling in the
market at a premium above its offering price) the underwriters may not
hold this hot issue in their own accounts, nor sell it to their
employees, officers and directors. Subject to certain exceptions, a hot
issue may also not be sold to the personal accounts of those
responsible for investing for others, such as officers of banks,
insurance companies, mutual funds, and investment advisers.
20. The Applicants represent that debt offerings may be
``negotiated'' offerings, ``competitive bid'' offerings, or ``bought
deals.'' ``Negotiated'' offerings, which often involve non-investment
grade securities, are conducted in the same manner as an equity
offering with regard to when the underwriting agreement is executed and
how the securities are offered. ``Competitive bid'' offerings, in which
the issuer determines the price for the securities through competitive
bidding rather than negotiating the price with the underwriting
syndicate, are performed under ``shelf'' registration statements
pursuant to the SEC's Rule 415 under the 1933 Act (17 CFR 230.415).\2\
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\2\ Rule 415 permits an issuer to sell debt as well as equity
securities under an effective registration statement previously
filed with the SEC by filing a post-effective amendment or
supplemental prospectus.
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21. In a competitive bid offering, prospective lead underwriters
will bid against one another to purchase debt securities, based upon
their determinations of the degree of investor interest in the
securities. Depending on the level of investor interest and the size of
the offering, a bidding lead underwriter may bring in co-managers to
assist in the sales process. Most of the securities are frequently sold
within hours, or sometimes even less than an hour, after the securities
are made available for purchase.
22. It is represented that because of market forces and the
requirements of Rule 415, the competitive bid process is generally
available only to issuers of investment-grade securities who have been
subject to the reporting requirements of the Securities Exchange Act of
1934 (the 1934 Act) for at least one (1) year.
23. Occasionally, in highly-rated debt issues, underwriters ``buy''
the entire deal off of a ``shelf registration'' before obtaining
indications of interest. These ``bought'' deals involve issuers whose
securities enjoy a deep and liquid secondary market, such that an
underwriter has confidence without pre-marketing that it can identify
purchasers for the bonds.
24. The Applicants represent that there are internal policies in
place that restrict contact and the flow of information between
investment management personnel and non-investment management personnel
in the same or affiliated financial service firms. These policies are
designed to protect against ``insider trading,'' i.e., trading on
information not available to the general public that may affect the
market price of the securities. Diversified financial services firms
must be concerned about insider trading problems because one part of
the firm--e.g., the mergers and acquisitions group--could come into
possession of non-public information regarding an upcoming transaction
involving a particular issuer, while another part of the firm--e.g.,
the investment management group--could be trading in the securities of
that issuer for its clients.
25. The Applicants represent that their business separation
policies and procedures are also structured to restrict the flow of any
information to or from the asset management affiliate of BS that could
limit its flexibility in managing client assets, and of information
obtained or developed by the asset management affiliate of BS that
could be used by other parts of the organization, to the detriment of
the clients of the asset management affiliate of BS.
26. The Applicants represent that major clients of the Affiliated
Broker-Dealer include investment management firms that are competitors
of the asset management affiliate of BS. Similarly, the asset
management affiliate of BS deals on a regular basis with broker-dealers
that compete with the Affiliated Broker-Dealer. If special
consideration were shown to an affiliate, such conduct would likely
have an adverse effect on the relationships of the Affiliated Broker-
Dealer and the asset management affiliate of BS with firms that compete
with such affiliate. Therefore, a goal of the Applicants' business
separation policies is to avoid any possible perception of improper
flows of information between the Affiliated Broker-Dealer and the asset
management affiliate of BS, in order to prevent any adverse impact on
client and business relationships.
[[Page 67908]]
27. The Applicants represent that the underwriters are compensated
through the ``spread,'' or difference, between the price at which the
underwriters purchase the securities from the issuer and the price at
which the securities are sold to the public. The spread is divided into
three components.
28. The first component includes the management fee, which
generally represents an agreed upon percentage of the overall spread
and is allocated among the lead manager and co-managers. Where there is
more than one managing underwriter, the way the management fee will be
allocated among the managers is generally agreed upon between the
managers and the issuer prior to soliciting indications of interest.
Thus, the allocation of the management fee is not reflective of the
amount of securities that a particular manager sells in an offering.
29. The second component is the underwriting fee, which represents
compensation to the underwriters (including the non-managers, if any)
for the risks they assume in connection with the offering and for the
use of their capital. This component of the spread is also used to
cover the expenses of the underwriting that are not otherwise
reimbursed by the issuer of the securities.
30. The first and second components of the ``spread'' are received
without regard to how the underwritten securities are allocated for
sales purposes or to whom the securities are sold. The third component
of the spread is the selling concession, which generally constitutes
60% or more of the spread. The selling concession compensates the
underwriters for their actual selling efforts. The allocation of
selling concessions among the underwriters generally follows the
allocation of the securities for sales purposes. However, a buyer of
the underwritten securities may designate other broker-dealers (who may
be other underwriters, as well as broker-dealers outside the syndicate)
to receive the selling concessions arising from the securities they
purchase.
31. Securities are allocated for sales purposes into two
categories. The first and larger category is the ``institutional pot,''
which is the pot of securities from which sales are made to
institutional investors. Selling concessions for securities sold from
the institutional pot are generally designated by the purchaser to go
to particular underwriters or other broker-dealers. If securities are
sold from the institutional pot, the selling syndicate managers
sometimes receive a portion of the selling concessions, referred to as
a ``fixed designation'' or an ``auto pot split'' attributable to
securities sold in this category, without regard to who sold the
securities or to whom they were sold. For securities covered by this
proposed exemption, however, the Affiliated Broker-Dealer may not
receive, either directly or indirectly, any compensation or
consideration that is attributable to the fixed designation generated
by purchases of securities by the asset management affiliate of BS on
behalf of its Client Plans.
32. The second category of allocated securities is ``retail,''
which are the securities retained by the underwriters for sale to their
retail customers. The underwriters receive the selling concessions from
their respective retail retention allocations. Securities may be
shifted between the two categories based upon whether either category
is oversold or undersold during the course of the offering.
33. The Applicants represent that the inability of the Affiliated
Broker-Dealer to receive any selling concessions, or any compensation
attributable to the fixed designations generated by purchases of
securities by the Client Plans of the asset management affiliate of BS,
removes the primary economic incentive for the asset management
affiliate of BS to make purchases that are not in the interests of its
Client Plans from offerings for which the Affiliated Broker-Dealer is
an underwriter. The reason is that the Affiliated Broker-Dealer will
not receive any additional fees as a result of such purchases by the
asset management affiliate of BS.
34. The Applicants represent that a number of the offerings of Rule
144A Securities in which the Affiliated Broker-Dealer participates
represent good investment opportunities for the Client Plans of the
asset management affiliate of BS. Particularly with respect to foreign
securities, a Rule 144A offering may provide the least expensive and
most accessible means for obtaining these securities. However, as
discussed above PTE 75-1, Part III, does not cover Rule 144A
Securities. Therefore, absent an exemption, the asset management
affiliate of BS is foreclosed from purchasing such securities for its
Client Plans in offerings in which the Affiliated Broker-Dealer
participates.
35. The Applicants state that Rule 144A acts as a ``safe harbor''
exemption from the registration provisions of the Securities Act for
sales of certain types of securities to QIBs. QIBs include several
types of institutional entities, such as employee benefit plans and
commingled trust funds holding assets of such plans, which own and
invest on a discretionary basis at least $100 million in securities of
unaffiliated issuers.
36. Any securities may be sold pursuant to Rule 144A except for
those of the same class or similar to a class that is publicly traded
in the United States, or certain types of investment company
securities. This limitation is designed to prevent side-by-side public
and private markets developing for the same class of securities and is
the reason that Rule 144A transactions are generally limited to debt
securities.
37. Buyers of Rule 144A Securities must be able to obtain, upon
request, basic information concerning the business of the issuer and
the issuer's financial statements, much of the same information as
would be furnished if the offering were registered. This condition does
not apply, however, to an issuer filing reports with the SEC under the
1934 Act, for which reports are publicly available. The condition also
does not apply to a ``foreign private issuer'' for whom reports are
furnished to the SEC under Rule 12g3-2(b) of the 1934 Act (17 CFR
240.12g3-2(b)), or to issuers who are foreign governments or political
subdivisions thereof and are eligible to use Schedule B under the 1933
Act (which describes the information and documents required to be
contained in a registration statement filed by such issuers).
38. Sales under Rule 144A, like sales in a registered offering,
remain subject to the protections of the anti-fraud rules of federal
and state securities laws. These rules include Section 10(b) of the
1934 Act and Rule 10b-5 thereunder (17 CFR 240.10b-5) and Section 17(a)
of the 1933 Act (15 U.S.C. 77a). Through these and other provisions,
the SEC may use its full range of enforcement powers to exercise its
regulatory authority over the market for Rule 144A Securities, in the
event that it detects improper practices.
39. The Applicants represent that this potential liability for
fraud provides a considerable incentive to the issuer of the securities
and the members of the selling syndicate to insure that the information
contained in a Rule 144A offering memorandum is complete and accurate
in all material respects. Among other things, the lead manager
typically obtains an opinion from a law firm, commonly referred to as a
``l0b-5'' opinion, stating that the law firm has no reason to believe
that the offering memorandum contains any untrue statement of material
fact or omits to state a material fact necessary in order to make sure
the statements made, in light of the circumstances under which they
were made, are not misleading.
40. The Applicants represent that Rule 144A offerings generally are
[[Page 67909]]
structured in the same manner as underwritten registered offerings. The
major difference is that a Rule 144A offering uses an offering
memorandum rather than a prospectus that is filed with the SEC. The
marketing process is the same in most respects, except that the selling
efforts are limited to contacting QIBs and there are no general
solicitations for buyers (e.g., no general advertising). In addition,
the role of the Affiliated Broker-Dealer in these offerings is
typically that of a lead or co-manager. Generally, there are no non-
manager members in a Rule 144A selling syndicate. However, the
Applicants request that the proposed exemption extend to authorization
for situations where the Affiliated Broker-Dealer acts only as a
syndicate member, not as a manager.
41. The proposed exemption is administratively feasible. In this
regard, compliance with the terms and conditions of the proposed
exemption will be verifiable and subject to audit.
42. The proposed exemption is in the interest of participants and
beneficiaries of Client Plans that engage in the covered transactions.
In this regard, it is represented that the proposed exemption will
increase investment opportunities and will reduce administrative costs
for Client Plans.
43. The proposed exemption is protective of the rights of the
participants and beneficiaries of affected Client Plans. In this
regard, the notification and other requirements in the proposed
exemption are similar to conditions set forth in other exemptions
published by the Department in similar circumstances.
44. In summary, it is represented that the proposed transactions
meet the statutory criteria for an exemption under section 408(a) of
the Act and section 4975(c)(2) of the Code because: (a) The Client
Plans will gain access to desirable investment opportunities; (b) in
each offering, the asset management affiliate of BS will purchase the
securities for its Client Plans from an underwriter or broker-dealer
other than the Affiliated Broker-Dealer; (c) conditions similar to
those of PTE 75-1, Part III, will restrict the types of securities that
may be purchased, the types of underwriting or selling syndicates and
issuers involved, and the price and timing of the purchases; (d) the
amount of securities that the asset management affiliate of BS may
purchase on behalf of Client Plans will be subject to percentage
limitations; (e) the Affiliated Broker-Dealer will not be permitted to
receive, either directly, indirectly or through designation, any
selling concession with respect to the securities sold to the asset
management affiliate of BS for the account of a Client Plan; (f) prior
to any purchase of securities, the asset management affiliate of BS
will make the required disclosures to an independent fiduciary
(Independent Fiduciary) of each Client Plan and obtain written
authorization to engage in the covered transactions; (g) the asset
management affiliate of BS will provide regular reporting to an
Independent Fiduciary of each Client Plan with respect to all
securities purchased pursuant to the proposed exemption; (h) each
Client Plan will be subject to net asset requirements, with certain
exceptions for Pooled Funds; and (i) the asset management affiliate of
BS must have total assets under management in excess of $5 billion and
shareholders' or partners' equity in excess of $1 million, in addition
to qualifying as a QPAM, pursuant to Part V(a) of PTE 84-14.
Proposed Exemption
Based on the facts and representations set forth in the
application, the Department of Labor (the Department) is considering
granting an exemption under the authority of section 408(a) of the
Employee Retirement Income Security Act of 1974 (the Act) and section
4975(c)(2) of the Internal Revenue Code of 1986 (the Code) and in
accordance with the procedures set forth in 29 CFR Part 2570, Subpart B
(55 FR 32836, 32847, August 10, 1990) as follows:
Section I--Transactions
If the proposed exemption is granted, 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)(A) through
(F) of the Code, shall not apply to the purchase of certain securities
(the Securities), as defined, below in Section III(h), by an asset
management affiliate of BS, as ``affiliate'' is defined, below, in
Section III(c), from any person other than such asset management
affiliate of BS or any affiliate thereof, during the existence of an
underwriting or selling syndicate with respect to such Securities,
where a broker-dealer affiliated with BS (the Affiliated Broker-
Dealer), as defined, below, in Section III(b), is a manager or member
of such syndicate and the asset management affiliate of BS purchases
such Securities, as a fiduciary:
(a) on behalf of an employee benefit plan or employee benefit plans
(Client Plan(s)), as defined, below, in Section III(e); or
(b) on behalf of Client Plans, and/or In-House Plans, as defined,
below, in Section III(q), which are invested in a pooled fund or in
pooled funds (Pooled Fund(s)), as defined, below, in Section III(f);
provided that the conditions as set forth, below, in Section II, are
satisfied (An affiliated underwriter transaction (AUT)).\3\
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\3\ For purposes of this proposed exemption an In-House Plan may
engage in AUT's only through investment in a Pooled Fund.
---------------------------------------------------------------------------
Section II--Conditions
The proposed exemption is conditioned upon adherence to the
material facts and representations described herein and upon
satisfaction of the following requirements:
(a)(1) The Securities to be purchased are either--
(i) Part of an issue registered under the Securities Act of 1933
(the 1933 Act) (15 U.S.C. 77a et. seq.). If the Securities to be
purchased are part of an issue that is exempt from such registration
requirement, such Securities:
(A) Are 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) Are issued by a bank,
(C) Are exempt from such registration requirement pursuant to a
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 are issued by an issuer
that 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 ninety (90) days
immediately preceding the sale of such Securities and that has filed
all reports required to be filed thereunder with the Securities and
Exchange Commission (SEC) during the preceding twelve (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 of the Securities is of equity securities, the
offering syndicate shall obtain a legal opinion regarding the adequacy
of the disclosure in the offering memorandum;
(2) The Securities to be purchased are purchased prior to the end
of the first day on which any sales are made, pursuant to that
offering, at a price that is not more than the price paid by each other
purchaser of the 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,
[[Page 67910]]
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 the 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, pursuant to that offering,
provided that the interest rates, as of the date of such purchase, on
comparable debt securities offered to the public subsequent to the end
of the first day on which any sales are made and prior to the purchase
date are less than the interest rate of the debt Securities being
purchased; and
(3) The Securities to be purchased are 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 the Securities to be purchased 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, above, in Section II(a)(1)(i)(A); or
(3) Such Securities are fully guaranteed by a person described,
above, in Section II(a)(1)(i)(B), (C), or (D), who has issued the
Securities and who has been in continuous operation for not less than
three years, including the operation of any predecessors.
(c) The aggregate amount of Securities of an issue purchased,
pursuant to this exemption, by the asset management affiliate of BS
with: (i) The assets of all Client Plans; and (ii) the assets,
calculated on a pro-rata basis, of all Client Plans and In-House Plans
investing in Pooled Funds managed by the asset management affiliate of
BS; and (iii) the assets of plans to which the asset management
affiliate of BS renders investment advice within the meaning of 29 CFR
2510.3-21(c) does not exceed:
(1) 10 percent (10%) of the total amount of the Securities being
offered in an issue, if such Securities are equity securities;
(2) 35 percent (35%) of the total amount of the Securities being
offered in an issue, if such Securities are debt securities rated in
one of the four highest rating categories by at least one of the Rating
Organizations; provided that none of the Rating Organizations rates
such Securities in a category lower than the fourth highest rating
category; or
(3) 25 percent (25%) of the total amount of the Securities being
offered in an issue, if such Securities are debt securities rated in
the fifth or sixth highest rating categories by at least one of the
Rating Organizations; provided that none of the Rating Organizations
rates such Securities in a category lower than the sixth highest rating
category; and
(4) The assets of any single Client Plan (and the assets of any
Client Plans and any In-House Plans investing in Pooled Funds) may not
be used to purchase any Securities being offered, if such Securities
are debt securities rated lower than the sixth highest rating category
by any of the Rating Organizations;
(5) Notwithstanding the percentage of Securities of an issue
permitted to be acquired, as set forth in Section II(c)(1), (2), and
(3), above, of this exemption, the amount of Securities in any issue
(whether equity or debt securities) purchased, pursuant to this
exemption, by the asset management affiliate of BS on behalf of any
single Client Plan, either individually or through investment,
calculated on a pro-rata basis, in a Pooled Fund may not exceed three
percent (3%) of the total amount of such Securities being offered in
such issue, and;
(6) If purchased in an Eligible Rule 144A Offering, the total
amount of the Securities being offered for purposes of determining the
percentages, described above, in Section II(c)(1)-(3) and (5), is the
total of:
(i) The principal amount of the offering of such class of
Securities 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 of
Securities in any concurrent public offering.
(d) The aggregate amount to be paid by any single Client Plan in
purchasing any Securities which are the subject of this exemption,
including any amounts paid by any Client Plan or In-House Plan in
purchasing such Securities through a Pooled Fund, calculated on a pro-
rata basis, does not exceed three percent (3%) of the fair market value
of the net assets of such Client Plan or In-House Plan, as of the last
day of the most recent fiscal quarter of such Client Plan or In-House
Plan prior to such transaction.
(e) The covered transactions are not part of an agreement,
arrangement, or understanding designed to benefit the asset management
affiliate of BS or an affiliate.
(f) The Affiliated Broker-Dealer does not receive, either directly,
indirectly, or through designation, any selling concession, or other
compensation or consideration that is based upon the amount of
Securities purchased by any single Client Plan, or that is based on the
amount of Securities purchased by Client Plans or In-House Plans
through Pooled Funds, pursuant to this exemption. In this regard, the
Affiliated Broker-Dealer may not receive, either directly or
indirectly, any compensation or consideration that is attributable to
the fixed designations generated by purchases of the Securities by the
asset management affiliate of BS on behalf of any single Client Plan or
any Client Plan or In-House Plan in Pooled Funds.
(g)(1) The amount the Affiliated Broker-Dealer receives in
management, underwriting, or other compensation or consideration 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 Section II(g)(1)
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
compensation or consideration that is not based upon the amount of
Securities purchased by the asset management affiliate of BS on behalf
of any single Client Plan, or on behalf of any Client Plan or In-House
Plan participating in Pooled Funds, pursuant to this exemption; and
(2) The Affiliated Broker-Dealer shall provide to the asset
management affiliate of BS a written certification, signed by an
officer of the Affiliated Broker-Dealer, stating the amount that the
Affiliated Broker-Dealer received in compensation or consideration
during the past quarter, in connection with any offerings covered by
this exemption, was not adjusted in a manner
[[Page 67911]]
inconsistent with Section II(e), (f), or (g) of this exemption.
(h) The covered transactions are performed under a written
authorization executed in advance by an independent fiduciary of each
single Client Plan (the Independent Fiduciary), as defined, below, in
Section III(g).
(i) Prior to the execution by an Independent Fiduciary of a single
Client Plan of the written authorization described, above, in Section
II(h), the following information and materials (which may be provided
electronically) must be provided by the asset management affiliate of
BS to such Independent Fiduciary:
(1) A copy of the Notice of Proposed Exemption (the Notice) and a
copy of the final exemption as published in the Federal Register; and
(2) Any other reasonably available information regarding the
covered transactions that such Independent Fiduciary requests the asset
management affiliate of BS to provide.
(j) Subsequent to the initial authorization by an Independent
Fiduciary of a single Client Plan permitting the asset management
affiliate of BS to engage in the covered transactions on behalf of such
single Client Plan, the asset management affiliate of BS will continue
to be subject to the requirement to provide within a reasonable period
of time any reasonably available information regarding the covered
transactions that the Independent Fiduciary requests the asset
management affiliate of BS to provide.
(k)(1) In the case of an existing employee benefit plan investor
(or existing In-House Plan investor, as the case may be) in a Pooled
Fund, such Pooled Fund may not engage in any covered transactions
pursuant to this exemption, unless the asset management affiliate of BS
provides the written information, as described, below, and within the
time period described, below, in this Section II(k)(2), to the
Independent Fiduciary of each such plan participating in such Pooled
Fund (and to the fiduciary of each such In-House Plan participating in
such Pooled Fund).
(2) The following information and materials (which may be provided
electronically) shall be provided by the asset management affiliate of
BS not less than 45 days prior to such asset management affiliate of BS
engaging in the covered transactions on behalf of a Pooled Fund,
pursuant to this exemption:
(i) A notice of the intent of such Pooled Fund to purchase
Securities pursuant to this exemption, a copy of this Notice, and a
copy of the final exemption, as published in the Federal Register;
(ii) Any other reasonably available information regarding the
covered transactions that the Independent Fiduciary of a plan (or
fiduciary of an In-House Plan) participating in a Pooled Fund requests
the asset management affiliate of BS to provide; and
(iii) A termination form expressly providing an election for the
Independent Fiduciary of a plan (or fiduciary of an In-House Plan)
participating in a Pooled Fund to terminate such plan's (or In-House
Plan's) investment in such Pooled Fund without penalty to such plan (or
In-House Plan). Such form shall include instructions specifying how to
use the form. Specifically, the instructions will explain that such
plan (or such In-House Plan) has an opportunity to withdraw its assets
from a Pooled Fund for a period of no more than 30 days after such
plan's (or such In-House Plan's) receipt of the initial notice of
intent, described, above, in Section II(k)(2)(i), and that the failure
of the Independent Fiduciary of such plan (or fiduciary of such In-
House Plan) to return the termination form to the asset management
affiliate of BS in the case of a plan (or In-House Plan) participating
in a Pooled Fund by the specified date shall be deemed to be an
approval by such plan (or such In-House Plan) of its participation in
the covered transactions as an investor in such Pooled Fund.
Further, the instructions will identify BS, the asset management
affiliate of BS, and the Affiliated Broker-Dealer and will provide the
address of the asset management affiliate of BS. The instructions will
state that this exemption may be unavailable, unless the fiduciary of
each plan participating in the covered transactions as an investor in a
Pooled Fund is, in fact, independent of BS, the asset management
affiliate of BS, and the Affiliated Broker-Dealer. The instructions
will also state that the fiduciary of each such plan must advise the
asset management affiliate of BS, in writing, if it is not an
``Independent Fiduciary,'' as that term is defined, below, in Section
III(g).
For purposes of this Section II(k), the requirement that the
fiduciary responsible for the decision to authorize the transactions
described, above, in Section I of this exemption for each plan be
independent of the asset management affiliate of BS shall not apply in
the case of an In-House Plan.
(l)(1) In the case of each plan (and in the case of each In-House
Plan) whose assets are proposed to be invested in a Pooled Fund after
such Pooled Fund has satisfied the conditions set forth in this
exemption to engage in the covered transactions, the investment by such
plan (or by such In-House Plan) in the Pooled Fund is subject to the
prior written authorization of an Independent Fiduciary representing
such plan (or the prior written authorization by the fiduciary of such
In-House Plan, as the case may be), following the receipt by such
Independent Fiduciary of such plan (or by the fiduciary of such In-
House Plan, as the case may be) of the written information described,
above, in Section II(k)(2)(i) and (ii).
(2) For purposes of this Section II(l), the requirement that the
fiduciary responsible for the decision to authorize the transactions
described, above, in Section I of this exemption for each plan
proposing to invest a Pooled Fund be independent of BS and its
affiliates shall not apply in the case of an In-House Plan, as defined,
below, in Section III(l).
(m) Subsequent to the initial authorization by an Independent
Fiduciary of a plan (or by a fiduciary of an In-House Plan) to invest
in a Pooled Fund that engages in the covered transactions, the asset
management affiliate of BS will continue to be subject to the
requirement to provide within a reasonable period of time any
reasonably available information regarding the covered transactions
that the Independent Fiduciary of such plan (or the fiduciary of such
In-House Plan, as the case may be) requests the asset management
affiliate of BS to provide.
(n) At least once every three months, and not later than 45 days
following the period to which such information relates, the asset
management affiliate of BS shall furnish:
(1) In the case of each single Client Plan that engages in the
covered transactions, the information described, below, in this Section
II(n)(3)-(7), to the Independent Fiduciary of each such single Client
Plan.
(2) In the case of each Pooled Fund in which a Client Plan (or in
which an In-House Plan) invests, the information described, below, in
this Section II(n)(3)-(6) and (8), to the Independent Fiduciary of each
such Client Plan (and to the fiduciary of each such In-House Plan)
invested in such Pooled Fund.
(3) A quarterly report (the Quarterly Report) (which may be
provided electronically) which discloses all the Securities purchased
pursuant to the exemption during the period to which such report
relates on behalf of the Client Plan, In-House Plan, or Pooled Fund to
which such report relates, and which discloses the terms of each of the
[[Page 67912]]
transactions described in such report, including:
(i) The type of Securities (including the rating of any Securities
which are debt securities) involved in each transaction;
(ii) The price at which the Securities were purchased in each
transaction;
(iii) The first day on which any sale was made during the offering
of the Securities;
(iv) The size of the issue of the Securities involved in each
transaction;
(v) The number of Securities purchased by the asset management
affiliate of BS for the Client Plan, In-House Plan, or Pooled Fund to
which the transaction relates;
(vi) The identity of the underwriter from whom the Securities were
purchased for each transaction;
(vii) The underwriting spread in each transaction (i.e., the
difference, between the price at which the underwriter purchases the
securities from the issuer and the price at which the securities are
sold to the public);
(viii) The price at which any of the Securities purchased during
the period to which such report relates were sold; and
(ix) The market value at the end of the period to which such report
relates of the Securities purchased during such period and not sold;
(4) The Quarterly Report contains:
(i) a representation that the asset management affiliate of BS has
received a written certification signed by an officer of the Affiliated
Broker-Dealer, as described, above, in Section II(g)(2), affirming
that, as to each AUT covered by this exemption during the past quarter,
the Affiliated Broker-Dealer acted in compliance with Section II(e),
(f), and (g) of this exemption, and
(ii) a representation that copies of such certifications will be
provided upon request;
(5) A disclosure in the Quarterly Report that states that any other
reasonably available information regarding a covered transaction that
an Independent Fiduciary (or fiduciary of an In-House Plan) requests
will be provided, including, but not limited to:
(i) The date on which the Securities were purchased on behalf of
the Client Plan (or the In-House Plan) to which the disclosure relates
(including Securities purchased by Pooled Funds in which such Client
Plan (or such In-House Plan) invests;
(ii) The percentage of the offering purchased on behalf of all
Client Plans (and the pro-rata percentage purchased on behalf of Client
Plans and In-House Plans investing in Pooled Funds); and
(iii) The identity of all members of the underwriting syndicate;
(6) The Quarterly Report discloses any instance during the past
quarter where the asset management affiliate of BS was precluded for
any period of time from selling Securities purchased under this
exemption in that quarter because of its status as an affiliate of an
Affiliated Broker-Dealer and the reason for this restriction;
(7) Explicit notification, prominently displayed in each Quarterly
Report sent to the Independent Fiduciary of each single Client Plan
that engages in the covered transactions that the authorization to
engage in such covered transactions may be terminated, without penalty
to such single Client Plan, within five (5) days after the date that
the Independent Fiduciary of such single Client Plan informs the person
identified in such notification that the authorization to engage in the
covered transactions is terminated; and
(8) Explicit notification, prominently displayed in each Quarterly
Report sent to the Independent Fiduciary of each Client Plan (and to
the fiduciary of each In-House Plan) that engages in the covered
transactions through a Pooled Fund that the investment in such Pooled
Fund may be terminated, without penalty to such Client Plan (or such
In-House Plan), within such time as may be necessary to effect the
withdrawal in an orderly manner that is equitable to all withdrawing
plans and to the non-withdrawing plans, after the date that that the
Independent Fiduciary of such Client Plan (or the fiduciary of such In-
House Plan, as the case may be) informs the person identified in such
notification that the investment in such Pooled Fund is terminated.
(o) For purposes of engaging in covered transactions, each Client
Plan (and each In-House Plan) shall have total net assets with a value
of at least $50 million (the $50 Million Net Asset Requirement). For
purposes of engaging in covered transactions involving an Eligible Rule
144A Offering,\4\ each Client Plan (and each In-House Plan) shall have
total net assets of at least $100 million in securities of issuers that
are not affiliated with such Client Plan (or such In-House Plan, as the
case may be) (the $100 Million Net Asset Requirement).
---------------------------------------------------------------------------
\4\ SEC Rule 10f-3(a)(4), 17 CFR 270.10f-3(a)(4), states that
the term ``Eligible Rule 144A Offering'' means an offering of
securities that meets the following conditions:
(i) The securities are offered or sold in transactions exempt
from registration under section 4(2) of the Securities Act of 1933
[15 U.S.C. 77d(d)], rule 144A there under [Sec. 230.144A of this
chapter], or rules 501-508 there under [Sec. Sec. 230.501-230-508
of this chapter];
(ii) The securities are sold to persons that the seller and any
person acting on behalf of the seller reasonably believe to include
qualified institutional buyers, as defined in Sec. 230.144A(a)(1)
of this chapter; and
(iii) The seller and any person acting on behalf of the seller
reasonably believe that the securities are eligible for resale to
other qualified institutional buyers pursuant to Sec. 230.144A of
this chapter.
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For purposes of a Pooled Fund engaging in covered transactions,
each Client Plan (and each In-House Plan) in such Pooled Fund shall
have total net assets with a value of at least $50 million.
Notwithstanding the foregoing, if each such Client Plan (and each such
In-House Plan) in such Pooled Fund does not have total net assets with
a value of at least $50 million, the $50 Million Net Asset Requirement
will be met, if 50 percent (50%) or more of the units of beneficial
interest in such Pooled Fund are held by Client Plans (or by In-House
Plans) each of which has total net assets with a value of at least $50
million. For purposes of a Pooled Fund engaging in covered transactions
involving an Eligible Rule 144A Offering, each Client Plan (and each
In-House Plan) in such Pooled Fund shall have total net assets of at
least $100 million in securities of issuers that are not affiliated
with such Client Plan (or such In-House Plan, as the case may be).
Notwithstanding the foregoing, if each such Client Plan (and each such
In-House Plan) in such Pooled Fund does not have total net assets of at
least $100 million in securities of issuers that are not affiliated
with such Client Plan (or In-House Plan, as the case may be), the $100
Million Net Asset Requirement will be met if 50 percent (50%) or more
of the units of beneficial interest in such Pooled Fund are held by
Client Plans (or by In-House Plans) each of which have total net assets
of at least $100 million in securities of issuers that are not
affiliated with such Client Plan (or such In-House Plan, as the case
may be), and the Pooled Fund itself qualifies as a QIB, as determined
pursuant to SEC Rule 144A (17 CFR 230.144A(a)(F)).
For purposes of the net asset requirements described, above, in
this Section II(o), 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 in the
case of an Eligible Rule 144A Offering, the $100 Million Net Asset
Requirement) may be met by aggregating the assets of such Client Plans,
if the assets of such Client Plans are pooled for investment purposes
in a single master trust.
(p) The asset management affiliate of BS qualifies as a ``qualified
professional asset manager'' (QPAM), as that term is defined under Part
V(a) of PTE 84-14. Notwithstanding the fact that the asset
[[Page 67913]]
management affiliate of BS satisfies the requirements, as set forth in
Part V(a) of PTE 84-14, such asset management affiliate of BS must also
have total client assets under its management and control in excess of
$5 billion, as of the last day of its most recent fiscal year and
shareholders' or partners' equity in excess of $1 million. Furthermore,
the requirement that the asset management affiliate of BS must have
total client asset under its management and control in excess of $5
billion, as of the last day of it most recent fiscal year and
shareholders' or partners' equity in excess of $1 million, as set forth
in this Section II(p), applies whether such asset management affiliate
of BS, qualifies as a QPAM, pursuant to Part V(a)(1), (a)(2), (a)(3) or
(a)(4) of PTE 84-14.
(q) No more than 20 percent of the assets of a Pooled Fund at the
time of a covered transaction, are comprised of assets of In-House
Plans for which BS, the asset management affiliate of BS, the
Affiliated Broker-Dealer, or an affiliate exercises investment
discretion.
(r) The asset management affiliate of BS, and the Affiliated
Broker-Dealer, as applicable, maintain, or cause to be maintained, for
a period of six (6) years from the date of any covered transaction such
records as are necessary to enable the persons, described, below, in
Section II(s), to determine whether the conditions of this exemption
have been met, except that--
(1) No party in interest with respect to a plan which engages in
the covered transactions, other than BS, the asset management affiliate
of BS, and the Affiliated Broker-Dealer, as applicable, shall be
subject to a civil penalty under section 502(i) of the Act or the taxes
imposed by section 4975(a) and (b) of the Code, if such records are not
maintained, or not available for examination, as required, below, by
Section II(s); and
(2) A prohibited transaction shall not be considered to have
occurred if, due to circumstances beyond the control of the asset
management affiliate of BS, or the Affiliated Broker-Dealer, as
applicable, such records are lost or destroyed prior to the end of the
six-year period.
(s)(1) Except as provided, below, in Section II(s)(2), and
notwithstanding any provisions of subsections (a)(2) and (b) of section
504 of the Act, the records referred to, above, in Section II(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; or
(ii) Any fiduciary of any plan that engages in the covered
transactions, or any duly authorized employee or representative of such
fiduciary; or
(iii) Any employer of participants and beneficiaries and any
employee organization whose members are covered by a plan that engages
in the covered transactions, or any authorized employee or
representative of these entities; or
(iv) Any participant or beneficiary of a plan that engages in the
covered transactions, or duly authorized employee or representative of
such participant or beneficiary;
(2) None of the persons described, above, in Section II(s)(1)(ii)-
(iv) shall be authorized to examine trade secrets of the asset
management affiliate of BS, or the Affiliated Broker-Dealer, or
commercial or financial information which is privileged or
confidential; and
(3) Should the asset management affiliate of BS, or the Affiliated
Broker-Dealer refuse to disclose information on the basis that such
information is exempt from disclosure, pursuant to Section II(s)(2),
above, the asset management affiliate of BS 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 III--Definitions
(a) The term, ``the Applicants,'' means BS, BSAM, and BSC.
(b) The term, ``Affiliated Broker-Dealer,'' means any broker-dealer
affiliate, as ``affiliate'' is defined, below, in Section III(c), of
the Applicants, as ``Applicants'' are defined, above, in Section
III(a), 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, as defined, below, in Section III(h), 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(s),'' means an employee benefit plan(s)
that is subject to the Act and/or the Code, and for which plan(s) an
asset management affiliate of BS exercises discretionary authority or
discretionary control respecting management or disposition of some or
all of the assets of such plan(s), but excludes In-House Plans, as
defined, below, in Section III(l).
(f) The term, ``Pooled Fund(s),'' means a common or collective
trust fund(s) or a pooled investment fund(s): (i) In which employee
benefit plan(s) subject to the Act and/or Code invest, (ii) which is
maintained by an asset management affiliate of BS, (as the term,
``affiliate'' is defined, above, in Section III(c)), and (iii) for
which such asset management affiliate of BS exercises discretionary
authority or discretionary control respecting the management or
disposition of the assets of such fund(s).
(g)(1) The term, ``Independent Fiduciary,'' means a fiduciary of a
plan who is unrelated to, and independent of BS, the asset management
affiliate of BS, and the Affiliated Broker-Dealer. For purposes of this
exemption, a fiduciary of a plan will be deemed to be unrelated to, and
independent of BS, the asset management affiliate of BS, 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 the transactions described,
above, in Section I of this exemption, is an officer, director, or
highly compensated employee (within the meaning of section
4975(e)(2)(H) of the Code) of BS, the asset management affiliate of BS,
or the Affiliated Broker-Dealer, and represents that such fiduciary
shall advise the asset management affiliate of BS within a reasonable
period of time after any change in such facts occur.
(2) Notwithstanding anything to the contrary in this Section
III(g), a fiduciary of a plan is not independent:
(i) If such fiduciary directly or indirectly controls, is
controlled by, or is under common control with BS, the asset management
affiliate of BS, or the Affiliated Broker-Dealer;
[[Page 67914]]
(ii) If such fiduciary directly or indirectly receives any
compensation or other consideration from BS, the asset management
affiliate of BS, or the Affiliated Broker-Dealer for his or her own
personal account in connection with any transaction described in this
exemption;
(iii) If any officer, director, or highly compensated employee
(within the meaning of section 4975(e)(2)(H) of the Code) of the asset
management affiliate of BS responsible for the transactions described,
above, in Section I of this exemption, is an officer, director, or
highly compensated employee (within the meaning of section
4975(e)(2)(H) of the Code) of the sponsor of the plan or of the
fiduciary responsible for the decision to authorize or terminate
authorization for the transactions described, above, in Section I.
However, if such individual is a director of the sponsor of the plan 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, above, in Section I, then Section
III(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 BS or any affiliate thereof.
(h) The term, ``Securities,'' shall have the same meaning as
defined in section 2(36) of the Investment Company Act of 1940 (the
1940 Act), as amended (15 U.S.C. 80a-2(36)(1996)). For purposes of this
exemption, mortgage-backed or other asset-backed securities rated by
one of the Rating Organizations, as defined, below, in Section III(k),
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 the term,
``QIB,'' shall have the same meaning as defined in SEC Rule 144A (17
CFR 230.144A(a)(1)) under the 1933 Act).
(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.
(l) The term, ``In-House Plan(s),'' means an employee benefit
plan(s) that is subject to the Act and/or the Code, and that is
sponsored by the Applicants, as defined, above, in Section III(a) for
their own employees.
The availability of this exemption is subject to the express
condition that the material facts and representations contained in the
application for exemption are true and complete and accurately describe
all material terms of the transactions. In the case of continuing
transactions, if any of the material facts or representations described
in the applications change, the exemption will cease to apply as of the
date of such change. In the event of any such change, an application
for a new exemption must be made to the Department.
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 does not relieve a fiduciary or other
party in interest or disqualified person from certain other provisions
of the Act, including any prohibited transaction provisions to which
the exemption does not apply and the general fiduciary responsibility
provisions of section 404 of the Act, which require, among other
things, a fiduciary to discharge his or her duties respecting the plan
solely in the interest of the participants and beneficiaries of the
plan and in a prudent fashion in accordance with section 404(a)(1)(B)
of the Act;
(2) Before an exemption can be granted under section 408(a) of the
Act, the Department must find that the exemption is administratively
feasible, in the interest of the plan and of its participants and
beneficiaries and protective of the rights of participants and
beneficiaries of the plan; and
(3) The proposed exemption, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act, including
statutory or administrative exemptions. Furthermore, the fact that a
transaction is subject to an administrative or statutory exemption is
not dispositive of whether the transaction is in fact a prohibited
transaction.
Signed at Washington, DC, this 20th day of November, 2006.
Ivan L. Strasfeld,
Director of Exemption Determinations, Employee Benefits Security
Administration, U.S. Department of Labor.
[FR Doc. E6-19826 Filed 11-22-06; 8:45 am]
BILLING CODE 4510-29-P