Proposed Exemptions; D-11318, Barclays Global Investors, N.A.,
(BGI) and Its Investment Advisory Affiliates, Including Barclays Global [09/10/2007]
Volume 72, Number 174, Page 51668-51685
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
Proposed Exemptions; D-11318, Barclays Global Investors, N.A.,
(BGI) and Its Investment Advisory Affiliates, Including Barclays Global
Fund Advisors (BGFA; Together, the Applicants); and D-11420 BlackRock,
Inc. (Black Rock) and Merrill Lynch & Co. (Merrill Lynch)
(Collectively, the Applicants)
AGENCY: Employee Benefits Security Administration, Labor.
ACTION: Notice of proposed exemptions.
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SUMMARY: This document contains notices of pendency before the
Department of Labor (the Department) of proposed exemptions from
certain of the prohibited transaction restrictions of the Employee
Retirement Income Security Act of 1974 (ERISA or the Act) and/or the
Internal Revenue Code of 1986 (the Code).
Written Comments and Hearing Requests
All interested persons are invited to submit written comments or
requests for a hearing on the pending exemptions, unless otherwise
stated in the Notice of Proposed Exemption, within 45 days from the
date of publication of this Federal Register Notice. Comments and
requests for a hearing should state: (1) The name, address, and
telephone number of the person making the comment or request, and (2)
the nature of the person's interest in the exemption and the manner in
which the person would be adversely affected by the exemption. A
request for a hearing must also state the issues to be addressed and
include a general description of the evidence to be presented at the
hearing.
ADDRESSES: All written comments and requests for a hearing (at least
three copies) should be sent to the Employee Benefits Security
Administration (EBSA), Office of Exemption Determinations, Room N-5700,
U.S. Department of Labor, 200 Constitution Avenue, NW., Washington, DC
20210. Attention: Application No. ----, stated in each Notice of
Proposed Exemption. Interested persons are also invited to submit
comments and/or hearing requests to EBSA via e-mail or FAX. Any such
comments or requests should be sent either by e-mail to:
moffitt.betty@dol.gov, or by FAX to (202) 219-0204 by the end of the
scheduled comment period. The applications for exemption and the
comments received will be available for public inspection in the Public
Documents Room of the Employee Benefits Security Administration, U.S.
Department of Labor, Room N-1513, 200 Constitution Avenue, NW.,
Washington, DC 20210.
Notice to Interested Persons
Notice of the proposed exemptions will be provided to all
interested persons in the manner agreed upon by the applicant and the
Department within 15 days of the date of publication in the Federal
Register. Such notice shall include a copy of the notice of proposed
exemption as published in the Federal Register and shall inform
interested persons of their right to comment and to request a hearing
(where appropriate).
SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in
applications filed pursuant to section 408(a) of the Act and/or section
4975(c)(2) of the Code, and in accordance with procedures set forth in
29 CFR part 2570, subpart B (55 FR 32836, 32847, August 10, 1990).
Effective December 31, 1978, section 102 of Reorganization Plan No. 4
of 1978, 5 U.S.C. App. 1 (1996), transferred the authority of the
Secretary of the Treasury to issue exemptions of the type requested to
the Secretary of Labor. Therefore, these notices of proposed exemption
are issued solely by the Department.
The applications contain representations with regard to the
proposed exemptions which are summarized below. Interested persons are
referred to the applications on file with the Department for a complete
statement of the facts and representations.
Barclays Global Investors, N.A., (BGI) and Its Investment Advisory
Affiliates, Including Barclays Global Fund Advisors (BGFA; Together,
the Applicants), Located in San Francisco, California
[Application No. D-11318]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR 2570,
subpart B (55 FR 32836, 32847, August 10, 1990).
Section I. Transactions Involving Open-End Management Investment
Companies Other Than Exchange-Traded Funds
Effective as of September 10, 2007, the restrictions of sections
406(a) and (b) of the Act, section 8477(c)(1) and (c)(2) of FERSA, and
the taxes imposed by section 4975(a) and (b) of the Code, by reason of
section 4975(c)(1)(A) through (F) of the Code, shall not apply to the
acquisition, sale or exchange by an Account of shares, including
through in-kind redemptions of shares or acquisitions of shares in
exchange for Account assets transferred in-kind from an Account, of an
open-end investment company (``the Fund'') registered under the
Investment Company Act of 1940 (the 1940 Act), other than an exchange-
traded fund (an ``ETF''), the Investment Adviser for which is also a
fiduciary with respect to the Account (or an affiliate of such
fiduciary) (hereinafter, BGI and all its affiliates will be referred to
as ``Investment Adviser''), and the receipt of fees for acting as an
investment adviser for such Funds, as well as fees for providing other
services to the Funds which are ``Secondary Services,'' as defined
herein, in connection with the investment by the Accounts in shares of
the Funds, provided that the conditions set forth in Section II are
met.
Section II. Conditions
(a) The Account does not pay a sales commission or other similar
fees to the Investment Adviser or its affiliates in connection with
such acquisition, sale, or exchange.
(b) The Account does not pay a redemption or similar fee to the
Investment Adviser in connection with the sale by the Account to the
Fund of such shares, and the existence of any other redemption fee is
disclosed in the Fund's prospectus in effect at all times.
(c) The Account does not pay an investment management, investment
advisory or similar fee with respect to
[[Page 51669]]
Account assets invested in Fund shares for the entire period of such
investment. This condition does not preclude the payment of investment
advisory fees by the Fund under the terms of its investment advisory
agreement adopted in accordance with section 15 of the Investment
Company Act of 1940 (the 1940 Act). This condition also does not
preclude payment of an investment advisory fee by the Account under the
following circumstances:
(1) For Accounts billed in arrears, an investment advisory fee may
be paid based on total Account assets from which a credit has been
subtracted representing the Account's pro rata share of investment
advisory fees paid by the Fund;
(2) For Accounts billed in advance, the Investment Adviser must
employ a reasonably designed method to ensure that the amount of the
prepaid fee that constitutes the fee with respect to the Account assets
invested in the Fund shares:
(A) Is anticipated and subtracted from the prepaid fee at the time
of payment of such fee,
(B) Is returned to the Account no later than during the immediately
following fee period or
(C) Is offset against the prepaid fee for the immediately following
fee period or for the fee period immediately following thereafter. For
purposes of this paragraph, a fee shall be deemed to be prepaid for any
fee period if the amount of such fee is calculated as of a date not
later than the first day of such period; or
(3) An investment advisory fee may be paid based on total plan
assets if the Account will receive a cash rebate of such Account's
proportionate share of all fees charged to the Fund by the Investment
Adviser for investment management, investment advisory or similar
services no later than one business day after the receipt of such fees
by the Investment Adviser.
(d) The rebating, crediting, or offsetting of any fees in paragraph
(c) is audited at least annually by the Investment Adviser through a
system of internal controls to verify the accuracy of the fee mechanism
adopted by the Investment Adviser under paragraph (c).
(e) The combined total of all fees received by the Investment
Adviser for the provision of services to an Account, and for the
provision of any services to a Fund in which an Account may invest, is
not in excess of ``reasonable compensation'' within the meaning of
section 408(b)(2) of the Act;
(f) The Investment Adviser and its affiliates do not receive any
fees payable pursuant to Rule 12b-1 under the 1940 Act in connection
with the transactions covered by this proposed exemption;
(g) In advance of any initial investment in a Fund by a Separately
Managed Account or by a new Plan investor in a Pooled Fund, a Second
Fiduciary with respect to that Plan, who is independent of and
unrelated to the Investment Adviser or any affiliate thereof, receives
in written or in electronic form, full and detailed written disclosure
of information concerning such Fund(s). The disclosure described in
this paragraph (g) includes, but is not limited to:
(1) A current prospectus issued by each of the Fund(s);
(2) A statement describing the fees for investment advisory or
similar services, any Secondary Services, and all other fees to be
charged to or paid by the Account and by the Fund(s), including the
nature and extent of any differential between the rates of such fees;
(3) The reasons why the Investment Adviser may consider such
investment to be appropriate for the Account;
(4) A statement describing whether there are any limitations
applicable to the Investment Adviser with respect to which Account
assets may be invested in shares of the Fund(s) and, if so, the nature
of such limitations, and
(5) A copy of the proposed exemption and the final exemption if it
is published in the Federal Register, and any other reasonably
available information regarding the transaction described herein that
the Second Fiduciary requests.
(h) After receipt and consideration of the information referenced
in paragraph (g), the Second Fiduciary of the Separately Managed
Account or the new Plan investing in a Pooled Fund approves in writing
the investment of Plan assets in each particular Fund and the fees to
be paid by a Fund to the Investment Adviser.
(i)(1) In the case of existing Plan investors in a Pooled Fund,
such Pooled Fund may not engage in any covered transactions pursuant to
this proposed exemption, unless the Second Fiduciary receives in
written or in electronic form, the information described in paragraph
(2) of this paragraph (i) not less than 30 days prior to the Investment
Adviser's engaging in the covered transactions on behalf of the Pooled
Fund pursuant to this proposed exemption.
(2) The information required by paragraph (1) of this section
includes:
(A) A notice of the Pooled Fund's intent to engage in the covered
transactions described herein, a copy of the notice of proposed
exemption, and a copy of the final exemption if it is published in the
Federal Register;
(B) Any other reasonably available information regarding the
covered transactions that a Second Fiduciary requests; and
(C) A Termination Form, within the meaning of paragraph (j).
Approval to engage in any covered transactions pursuant to this
proposed exemption may be presumed notwithstanding that the Investment
Adviser does not receive any response from a Second Fiduciary.
(j) All authorizations made by a Second Fiduciary regarding
investments in a Fund and the fees paid to the Investment Adviser will
be subject to an annual reauthorization wherein any such prior
authorization shall be terminable at will by an Account, without
penalty to the Account, upon receipt by the Investment Adviser of
written notice of termination. A form expressly providing an election
to terminate the authorization (``Termination Form'') with instructions
on the use of the form will be supplied to the Second Fiduciary no less
than annually, in written or in electronic form. The instructions for
the Termination Form will include the following information:
(1) The authorization is terminable at will by the Account, without
penalty to the Account, upon receipt by the Investment Adviser of
written notice from the Second Fiduciary. Such termination will be
effected by the Investment Adviser by selling the shares of the Fund
held by the affected Account within one business day following receipt
by the Investment Adviser of the Termination Form or any other written
notice of termination; provided that if, due to circumstances beyond
the control of the Investment Adviser, the sale cannot be executed
within one business day, the Investment Adviser shall have one
additional business day to complete such sale; and provided further
that, where a Plan's interest in a Pooled Fund cannot be sold within
this time frame, the Plan's interest will be sold as soon as
administratively practicable;
(2) Failure of the Second Fiduciary to return the Termination Form
will result in continued authorization of the Investment Adviser to
engage in the covered transactions on behalf of an Account; and
(3) The identity of BGI, the asset management affiliate of BGI, and
the affiliated investment advisers, and the address of the asset
management affiliate of BGI. The instructions will state that this
exemption is not available, unless the fiduciary of each Plan
participating in the covered transactions as an investor in a Pooled
[[Page 51670]]
Fund is, in fact, independent of the Investment Adviser. The
instructions will also state that the fiduciary of each such Plan must
advise the asset management affiliate of BGI, in writing, if it is not
a ``Second Fiduciary,'' as that term is defined, below, in Section
V(l).
However, if the Termination Form has been provided to the Second
Fiduciary pursuant to this paragraph or paragraphs (i), (k), or (l),
the Termination Form need not be provided again for an annual
reauthorization pursuant to this paragraph unless at least six months
has elapsed since the form was previously provided.
(k) In situations where the Fund-level fee is neither rebated nor
credited against the Account-level fee, The Second Fiduciary of each
Account invested in a particular Fund will receive full disclosure, in
written or in electronic form, in a statement which is separate from
the Fund prospectus, of any proposed increases in the rates of fees for
investment advisory or similar services, and any Secondary Services, at
least 30 days prior to the implementation of such increase in fees,
accompanied by a Termination Form. In situations where the Fund-level
fee is rebated or credited against the Account-level fee, the Second
Fiduciary will receive full disclosure, in a Fund prospectus or
otherwise, in the same time and manner set forth above, of any
increases in the rates of fees to be charged by the Investment Adviser
to the Fund for investment advisory services. Failure to return the
Termination Form will be deemed an approval of the increase and will
result in the continued authorization of the Investment Adviser to
engage in the covered transactions on behalf of an Account.
(l) In the event that the Investment Adviser provides an additional
Secondary Service to a Fund for which a fee is charged or there is an
increase in the rate of any fees paid by the Funds to the Investment
Adviser for any Secondary Services resulting from either an increase in
the rate of such fee or from a decrease in the number or kind of
services provided by the Investment Adviser for such fees over an
existing rate for such Secondary Service in connection with a
previously authorized Secondary Service, the Second Fiduciary will
receive notice, at least 30 days in advance of the implementation of
such additional service or fee increase, in written or in electronic
form, explaining the nature and the amount of such services or of the
effective increase in fees of the affected Fund. Such notice shall be
accompanied by a Termination Form. Failure to return the Termination
Form will be deemed an approval of the Secondary Service and will
result in continued authorization of the Investment Adviser to engage
in the covered transactions on behalf of the Account.
(m) On an annual basis, the Second Fiduciary of an Account
investing in a Fund, will receive, in written or in electronic form:
(1) A copy of the current prospectus for the Fund and, upon such
fiduciary's request, a copy of the Statement of Additional Information
for such Fund which contains a description of all fees paid by the Fund
to the Investment Adviser;
(2) A copy of the annual financial disclosure report of the Fund in
which such Account is invested, which includes information about the
Fund portfolios as well as audit findings of an independent auditor of
the Fund, within 60 days of the preparation of the report; and
(3) With respect to each of the Funds in which an Account invests,
in the event such Fund places brokerage transactions with the
Investment Adviser, the Investment Adviser will provide the Second
Fiduciary of such Account, in the same manner described above, at least
annually with a statement specifying the following (and responses to
oral or written inquiries of the Second Fiduciary as they arise):
(A) The total, expressed in dollars, brokerage commissions of each
Fund's investment portfolio that are paid to the Investment Adviser by
such Fund;
(B) The total, expressed in dollars, of brokerage commissions of
each Fund's investment portfolio that are paid by such Fund to
brokerage firms unrelated to the Investment Adviser;
(C) The average brokerage commissions per share, expressed as cents
per share, paid to the Investment Adviser by each portfolio of a Fund;
and
(D) The average brokerage commissions per share, expressed as cents
per share, paid by each portfolio of a Fund to brokerage firms
unrelated to the Investment Adviser.
(n) In all instances in which the Investment Adviser provides
electronic distribution of information to Second Fiduciaries who have
provided electronic mail addresses, such electronic disclosure will be
provided in a manner similar to the procedures described in 29 CFR
section 2520.104b-1(c).
(o) Any Separately Managed Account does not hold assets of a Plan
sponsored by the Investment Adviser or an affiliate. If a Pooled Fund
holds assets of a Plan or Plans sponsored by the Investment Adviser or
an affiliate, the total assets of all such Plans shall not exceed 10%
of the total assets of such Pooled Fund.
(p) In-kind transactions with an Account shall only involve
publicly-traded securities for which market quotations are readily
available, as determined pursuant to procedures established by the
Funds under Rule 2a-4 of the 1940 Act, and cash in the event that the
aforementioned securities are odd lot securities, fractional shares, or
accruals on such securities. Such securities will not include:
(1) Securities that, if publicly offered or sold, would require
registration under the Securities Act of 1933;
(2) Securities issued by entities in countries that (i) restrict or
prohibit the holding of securities by non-nationals other than through
qualified investment vehicles, such as the Funds, or (ii) permit
transfers of ownership of securities to be effected only by
transactions conducted on a local stock exchange;
(3) Certain portfolio positions (such as forward foreign currency
contracts, futures and options contracts, swap transactions,
certificates of deposit and repurchase agreements), that, although
liquid and marketable, involve the assumption of contractual
obligations, require special trading facilities, or can be traded only
with the counter-party to the transaction to effect a change in
beneficial ownership;
(4) Cash equivalents (such as certificates of deposit, commercial
paper, and repurchase agreements);
(5) Other assets that are not readily distributable (including
receivables and prepaid expenses), net of all liabilities (including
accounts payable); and
(6) Securities subject to ``stop transfer'' instructions or similar
contractual restrictions on transfer.
(q) Subject to the exceptions described in section (p) above, in
the case of an in-kind exchange of assets [in-kind redemptions and in-
kind transfers of Plan assets] between an Account and a Fund (other
than an ETF), the Account will receive its pro rata portion of the
securities of the Fund equal in value to that of the number of shares
redeemed, or the Fund shares having a total net asset value (NAV) equal
to the value of the assets transferred on the date of the transfer, as
determined in a single valuation, using sources independent of the
Investment Adviser, performed in the same manner as it would for any
other person or entity at the close of the same business day in
accordance with the procedures established by the Fund pursuant to Rule
2a-4 under the 1940 Act, and the then-existing valuation procedures
[[Page 51671]]
established by its Board of Directors or Trustees, as applicable for
the valuation of such assets, that are in compliance with the rules
administered by the Securities and Exchange Commission (the SEC). In
the case of a redemption, the value of the securities and any cash
received by the Account for each redeemed Fund share equals the NAV of
such share at the time of the transaction. In the case of any other in-
kind exchange, the value of the Fund shares received by the Account
equals the NAV of the transferred securities and any cash on the date
of the transfer.
(r) The Investment Adviser shall provide the Second Fiduciary with
a written confirmation containing information necessary to perform a
post-transaction review of any in-kind transaction so that the material
aspects of such transaction, including pricing, can be reviewed. Such
information must be furnished no later than thirty (30) business days
after the completion of the in-kind transaction. This information shall
include:
(1) With respect to securities either transferred by, or received,
by an Account in-kind in exchange for Fund shares,
(i) the identity of each security either received by the Account
pursuant to the redemption, or transferred to the Fund by the Account,
(and the related aggregate dollar value of all securities) determined
in accordance with Rule 2a-4 under the 1940 Act and the then-existing
procedures established by the Board of Trustees of the Fund (using
sources independent of the Investment Adviser); and
(ii) the current market price of each security transferred or
received in-kind by the Account as of the date of the in-kind transfer.
(2) With respect to Fund shares either transferred by, or received
by, an Account in-kind in exchange for securities,
(i) the number of Fund shares held by the Account immediately
before the redemption (and the related per share net asset value and
the total dollar value of Fund shares, determined in accordance with
Rule 2a-4 under the 1940 Act, using sources independent of the
Investment Adviser); or
(ii) the number of Fund shares held by the Account immediately
after the in-kind transfer (and the related per share net asset value
of the Fund shares received and the total dollar value of Fund shares,
determined in accordance with Rule 2a-4 under the 1940 Act using
sources independent of the Investment Adviser).
(3) The identity of each pricing service or market-maker consulted
in determining the value of the securities.
(s) Prior to the consummation of an in-kind transaction, the
Investment Adviser must document in writing and determine that such
transaction is fair to the Account and comparable to, and no less
favorable than, terms obtainable at arm's-length between unaffiliated
parties, and that the in-kind transaction is in the best interests of
the Account and the participants and beneficiaries of the participating
Plans.
(t) All of the Accounts' other dealings with the Funds, the
Investment Adviser, or any affiliated person thereof, are on terms that
are no less favorable to the Account than such dealings are with other
shareholders of the Funds.
(u) BGI and its affiliates, as applicable, maintain, or cause to be
maintained, for a period of six
(6) years from the date of any covered transaction such records as
are necessary to enable the persons, described, below, in Section
II(v), 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 BGI, and its affiliates, as
applicable, shall be subject to a civil penalty under section 502(i) of
the Act or the taxes imposed by section 4975(a) and (b) of the Code, if
such records are not maintained, or not available for examination, as
required, below, by Section II(v); and
(2) A separate prohibited transaction shall not be considered to
have occurred solely because due to circumstances beyond the control of
BGI or its affiliate, as applicable, such records are lost or destroyed
prior to the end of the six-year period.
(v)(1) Except as provided, below, in Section II(v)(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(t) 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(v)(1)(ii)-
(iv) shall be authorized to examine trade secrets of the Investment
Adviser, or commercial or financial information which is privileged or
confidential; and
(3) Should the Investment Adviser refuse to disclose information on
the basis that such information is exempt from disclosure, the
Investment Adviser 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. Transactions Involving Exchange-Traded Funds
Effective as of September 10, 2007, the restrictions of sections
406(a) and (b) of the Act, section 8477(c)(1) and (c)(2) of FERSA, and
the taxes imposed by section 4975(a) and (b) of the Code, by reason of
section 4975(c)(1)(A) through (F) of the Code, shall not apply to the
following transactions involving an Account and an ETF, the Investment
Adviser for which is also a fiduciary with respect to the Account (or
an affiliate of such fiduciary) (i.e., ``Investment Adviser''), and the
receipt of fees for acting as an investment adviser for such ETF, as
well as fees for providing other services to the ETF which are
``Secondary Services,'' as defined herein, in connection with the
investment by the Account in shares of the ETF, provided that the
conditions set forth in Section IV are met:
(a) The acquisition, sale or exchange by an Account of ETF shares,
including through in-kind exchanges, in a principal transaction with a
broker-dealer not an affiliate of the Investment Adviser, registered
under the Securities Exchange Act of 1934, including an Authorized
Participant.
(b) The acquisition or sale by an Account of ETF shares on a
national securities exchange when a broker-dealer not an affiliate of
the Investment Adviser, registered under the Securities Exchange Act of
1934, including an Authorized Participant, acts as agent for the
Account.
(c) The acquisition, sale or exchange by an Account of ETF shares,
including through in-kind exchanges, through an Authorized Participant,
acting as an agent dealing directly with the ETF, and the Account is
exchanging securities and/or cash for the ETF shares during a Creation
process, or exchanging ETF
[[Page 51672]]
shares for securities and/or cash during a Redemption process.
Section IV. Conditions
(a)(1) In the case of a principal transaction described in Section
III(a), the specific terms of the transaction are fixed at the time the
Account agrees to exchange the in-kind assets with the broker-dealer.
(2) In the case of a transaction described in Section III(c), the
value of the securities transferred to the ETF, in exchange for ETF
shares issued at the closing ETF NAV at the end of the business day,
and the value of the securities received from the ETF, in exchange for
ETF shares redeemed at the closing ETF NAV at the end of the business
day is: (A) Determined pursuant to a single valuation using sources
independent of the Investment Adviser; and (B) Performed in the same
manner as it would for any other person or entity at the end of the
same business day. Such valuation is made in accordance with procedures
established by the ETF pursuant to Rule 2a-4 under the 1940 Act, and
the then existing valuation procedures established by its Board of
Directors or Trustees, as applicable, that are in compliance with the
rules administered by the SEC.
In the case of a redemption, the value of the securities and any
cash received by the Account for each redeemed ETF share equals the NAV
of such share at the time of the transaction. In the case of any other
in-kind exchange, the value of the ETF shares received by the Account
equals the NAV of the transferred securities and any cash on the date
of the transfer.
(b) All ETFs are either Index Funds or Model-Driven Funds.
(c) The Authorized Participant is not an affiliate of the
Investment Adviser.
(d) Conditions (a) through (p), and (r) through (v) of Section II
have been met. For purposes of this Section IV(d), the term ``Fund'' in
Section II includes an ETF.
Section V. Definitions
(a) The term ``Account'' means either a Separately Managed Account
or a Pooled Fund in which investments are made by plans described in
section 3(3) of the Act and/or section 4975(e)(1) of the Code and a
plan covered by The Federal Employees' Retirement System Act of 1986
(FERSA).
(b) An ``affiliate'' of a person includes any person directly or
indirectly through one or more intermediaries, controlling, controlled
by, or under common control with the person; any officer of, director
of, highly compensated employee (within the meaning of Code section
4975(e)(2)(H)) of, or partner in any such person; and any corporation
or partnership of which such person is an officer, director, partner or
owner, or highly compensated employee (within the meaning of Code
section 4975(e)(2)(H)).
(c) The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
(d) The term ``Authorized Participant'' means a broker-dealer
registered under the Securities Exchange Act of 1934 which may acquire
or redeem ETF Shares directly from ETFs. Such Authorized Participant is
not an affiliate of the Investment Adviser.
(e) The term ``Fund'' means any open end investment company
registered under the Investment Company Act of 1940, including
exchange-traded funds.
(f) The term ``Index'' means a securities index that represents the
investment performance of a specific segment of the public market for
equity or debt securities in the United States and/or foreign
countries, but only if--
(1) The organization creating and maintaining the index is--
(A) Engaged in the business of providing financial information,
evaluation, advice or securities brokerage services to institutional
clients;
(B) A publisher of financial news or information;
(C) A public securities exchange or association of securities
dealers; and,
(2) The index is created and maintained by an organization
independent of the Applicants and their affiliates; and,
(3) The index is a generally accepted standardized index of
securities which is not specifically tailored for the use of the
Applicants.
(g) The term ``Index Fund'' means any investment fund, sponsored,
maintained, trusteed or managed by the Applicants, 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 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 Applicants do not use their discretion, or data
within their control, to affect the identity or amount of securities to
be purchased or sold; and
(3) That involves no agreement, arrangement or understanding
regarding the design or operation of the Fund which is intended to
benefit the Applicants, their affiliates, or any party in which the
Applicants or their affiliates have an interest.
(h) The term ``Investment Adviser'' means Barclays Global
Investors, N.A. or any of its current or future affiliates.
(i) The term ``Model-Driven Fund'' means any investment fund,
sponsored, maintained, trusteed or managed by the Applicants, 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 Applicants, to transform an index (as defined
in (f), above); and
(2) That involves no agreement, arrangement or understanding
regarding the design or operation of the fund or the utilization of any
specific objective criteria which is intended to benefit the
Applicants, their affiliates, or any party in which the Applicants or
their affiliates may have an interest.
(j) The term ``Plan'' means a plan described in section 3(3) of the
Act, a plan described in section 4975(e)(1) of the Code, and a plan
covered by FERSA.
(k) The term ``Pooled Fund'' means any commingled fund sponsored,
maintained, advised or trusteed by the Investment Adviser, which fund
holds Plan assets.
(l) The term ``Second Fiduciary'' means a fiduciary of a Plan who
is independent of and unrelated to the Investment Adviser. For purposes
of this exemption, the Second Fiduciary will not be deemed to be
independent of and unrelated to the Investment Adviser if:
(1) Such fiduciary directly or indirectly controls, is controlled
by, or is under common control with the Investment Adviser;
(2) Such fiduciary, or any officer, director, partner, or employee
of the fiduciary is an officer, director, partner, employee or
affiliate of the Investment Adviser; or
(3) Such fiduciary directly or indirect receives any compensation
or other consideration for his or her own personal account in
connection with any transaction described in this exemption. If an
officer, director, partner, affiliate or employee of the Investment
Adviser is a director of such Second Fiduciary, and if he or she
abstains from participation in (A) the choice of the Plan's investment
adviser, (B) the approval for the acquisition, sale, holding, and/or
exchange of Fund shares by such Plan, and (C) the
[[Page 51673]]
approval of any change in fees charged to or paid by the Plan in
connection with any of the transactions described herein, then
subparagraph (2) above shall not apply.
(m) The term ``Secondary Service'' means a service other than an
investment management, investment advisory or similar service which is
provided by the Investment Adviser to the Funds, including but not
limited to custodial, accounting, brokerage, administrative or any
other similar service.
(n) The term ``Separately Managed Account'' means any Account other
than a Pooled Fund, and includes single-employer Plans.
(o) The term ``Creation'' or ``Redemption'' refers to a transaction
where the ETF is the buyer or seller of large-blocks of ETF shares.
Summary of Facts and Representations
1. BGI is a national banking association headquartered in San
Francisco, California. BGI serves as an investment manager and
fiduciary for employee benefit plans governed by the Act which are
invested in both separately managed accounts and pooled funds. BGI also
manages certain assets for the Federal Thrift Savings Plan established
pursuant to the provisions of FERSA. The employee benefit plans to be
covered by this exemption, including the Thrift Savings Plan, will be
referred to as ``Plans.''
2. BGI seeks an exemption under the Act, as amended, the Code, and
FERSA, for the investment of Plan Account assets in certain open-end
investment companies registered under the 1940 Act (i.e., ``Funds''),
some of which are exchange-traded funds (i.e., ``ETFs''), managed or
advised by BGI or its investment advisory affiliates, including BGFA.
3. The Applicants represent that the proposed transactions may
violate the Act, the Code, and/or FERSA, because the investment of Plan
assets in the Funds may constitute a prohibited furnishing of services,
or transfer of Plan assets to a party in interest or a fiduciary.
4. The relief sought by the Applicants involves the investment of
Separately Managed Accounts, as well as the assets of Pooled Funds, in
both ``iShares[reg],'' which are exchange-traded funds (i.e., ETFs)
advised by BGFA, and other open-end investment companies also advised
by BGFA. The Applicants represent that BGFA is an investment adviser
registered under the Investment Advisers Act of 1940. BGFA provides
investment advice to various accounts and funds, including as an
investment adviser or sub-adviser to certain mutual funds and exchange-
traded funds.
5. An ETF is an open-end investment company registered under the
1940 Act. Shares issued by each ETF are registered under the Securities
Act of 1933. ETF shares are continuously offered to the public in the
secondary market through securities exchanges and can be purchased and
redeemed on a daily basis. Such shares can be bought and sold by
investors on a securities exchange, through brokers, acting as agent,
throughout the trading day like other shares of publicly-traded
securities. In such a case, the investors would pay the price then
prevailing on the exchange plus customary brokerage commissions.\1\
There is no minimum investment for such secondary market transactions.
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\1\ In Advisory Opinion 2002-05A (June 7, 2002), the Department
considered whether Prohibited Transaction Exemption 77-4 (PTE 77-4,
42 FR 18732, April 8, 1977) applies to purchases or sales of ETF
shares through unaffiliated brokers. The Department stated that the
term ``sales commission'' as used in section II(a) of PTE 77-4 does
not include brokerage commissions paid to a broker in connection
with purchases or sales of shares of registered open-end investment
companies on an exchange if the broker is unaffiliated with the
fund, its principal underwriter, investment adviser or any affiliate
thereof.
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6. Alternatively, an investor who buys or sells iShares may engage
in the transaction directly with the broker, which executes as
principal. Under this circumstance, the broker (which may or may not be
an Authorized Participant) may buy the iShares for its own inventory or
sell the iShares from its own inventory (on a principal basis), in
which case the customer would pay a mark-up or a mark-down (dealer
spread) that is part of the sales price. The Account in this case
specifies a set number of iShares that it wants to buy from, or sell
to, the broker. The Account and the broker negotiate upfront and agree
upon (i) what the purchase or sale price of the iShares will be and
(ii) whether the Account will pay or receive (as the case may be) cash,
in-kind securities, or a combination of both. Thus, the specific terms
of the transaction are fixed at the time the parties agree to enter the
transaction.
7. The ETF purchases and redeems shares at the ETF's then net asset
value (i.e., ``NAV'') only in large blocks, generally through an in-
kind tender of a basket of securities by a broker-dealer called an
``Authorized Participant.'' \2\ Only Authorized Participants may
acquire or redeem iShares directly from iShares Funds, and only in
large block sizes (e.g., 50,000 shares). Such an acquisition and
redemption are called ``Creation'' and ``Redemption,'' respectively. An
Authorized Participant may acquire or redeem iShares as principal for
its own account, or as agent on behalf of a customer in a transaction
directly with an ETF.
---------------------------------------------------------------------------
\2\ Where purchases and redemptions involve an in-kind
transaction, cash may be exchanged to make up for any difference
between securities exchanged and the NAV of a Fund.
---------------------------------------------------------------------------
8. To effect a purchase or sale through an Authorized Participant
on an agency basis where the buyer or seller is the Fund and the
process is by creation or redemption, the Investment Adviser, acting as
a fiduciary, may approach an Authorized Participant who is not one of
the Applicants (or an affiliate) to purchase or sell ETF shares on
behalf of an Account. As part of this process, the Authorized
Participant may purchase ETF shares on behalf of an Account by
assembling a ``creation unit'' of the securities held by the ETF, such
as S&P 500 securities in appropriate weights for an S&P 500 Index ETF.
An Account may provide all or part of the securities necessary to make
up a ``creation unit.'' For creation units, the Account transfers cash,
in-kind securities, or a mix of cash and in-kind securities to the Fund
in exchange for iShares using that day's NAV, at the close of business,
as determined by the ETF in accordance with the rules governing
registered investment companies. For redemptions, the Plan transfers
the iShares to the ETF in exchange for in-kind securities and cash, if
necessary, using the valuation of the assets used by the ETF in
accordance with the rules governing registered investment companies.
The purchase and sale price is the NAV of iShares next determined after
an order is placed and is the same price that is paid or received for
the iShares by any other investor at that time dealing with the ETF.
Thus, if an order is placed for shares during the day, it is priced at
the NAV at the end of that day. The basket of securities to be
delivered or received on account of a creation or redemption is
specified by the ETF to all Authorized Participants in advance each day
because the securities ``called for'' each day may be driven by the
output of a model which may require deviations from the underlying
index. The amount of cash needed to round out the order would be
determined as of the time the NAV is calculated based on the difference
between the value of the in-kind securities and the Fund NAV as of the
time that the NAV is calculated.
9. The Applicants represent that the decision as to which method is
used to effect a purchase or sale is a fiduciary decision which is
governed by the prudence and exclusive benefit requirements of the Act.
Because the
[[Page 51674]]
transactions are never executed through an affiliated broker, the
Applicants' affiliates do not benefit from the trading. The fiduciary
makes the decision for the Plan, as it makes all trading decisions, and
bases the decisions on the most cost-effective method for the Plan,
where the Plan will receive the most advantageous prices available for
the securities with the lowest attendant transaction fees.
10. An Authorized Participant's arrangement with an ETF distributor
\3\ is subject to an agreement between those two parties. Where the
Authorized Participant does not have the requisite ETF shares in its
possession, or prefers not to trade such ETF shares, it may assemble a
creation unit in exchange for ETF shares, pursuant to its arrangement
with the ETF distributor.
---------------------------------------------------------------------------
\3\ The ``distributor'' of a registered investment company is a
statutory term under the 1940 Act. The distributor of an ETF or
other registered investment company is a registered broker-dealer
that accepts orders to purchase or redeem Fund shares from
intermediaries on behalf of the Fund.
---------------------------------------------------------------------------
11. The Applicants represent that the transactions that would be
covered by the proposed exemption are substantially similar to the
transactions permitted under PTE 77-4 and similar individual
exemptions.\4\ As described below, the Investment Adviser will follow
similar procedures to those set forth in PTE 77-4 in order to avoid
duplicative investment management and advisory fees, and procedures
similar to PTE 86-128 and other individual exemptions with respect to
obtaining consent for the transactions described herein. In situations
where the Fund-level fee is neither rebated nor credited against the
Account-level fee, there must be separate disclosure (apart from the
prospectus) of any proposed increases in the rates of fees for
investment advisory or similar services, and any Secondary Services, at
least 30 days prior to the implementation of such increase in fees,
accompanied by a Termination Form, made to the Second Fiduciary.
---------------------------------------------------------------------------
\4\ Although Advisory Opinion 2002-05A addressed whether PTE 77-
4 would be available for purchases or sales of ETF shares on an
exchange if brokerage commissions were paid to an unaffiliated
broker-dealer, the Applicants requested that the transaction
described in that Advisory Opinion be included in the relief
provided by this proposed exemption so that the Investment Adviser
has the ability to comply with the requirements of this proposal
rather than PTE 77-4.
---------------------------------------------------------------------------
12. The Applicants represent that investment in Funds is customary
for Plan investors and is becoming increasingly more popular. If Plans
(particularly those invested in Pooled Funds) cannot invest in Funds,
they cannot take advantage of a beneficial and liquid investment
opportunity. The Applicants also represent that the more practical
rules on negative consent that were adopted by the Department in PTE
86-128 and later exemptions are not included in PTE 77-4 or similar
exemptions, making the latter set of exemptions less helpful.
13. The Applicants represent that among the reasons why the
Investment Adviser may determine that investment in Funds is
appropriate to achieve the investment objectives of an Account is the
management of liquidity. Many Accounts require liquidity, especially in
the defined contribution plan context, and pooled funds have a
particular need for liquidity to deal with inflows and outflows of
assets. Fully investing a pooled fund in securities, only to liquidate
any time a Plan requests a distribution, creates additional costs that
are not in the best interest of these Accounts. On the other hand, cash
left idle (or invested in money market instruments, cash funds, or the
like) fails to replicate the model or index of the Account, creating
tracking error or benchmark drift. The Applicants represent that
another reason that Plans may want to invest in Funds is that they also
provide a beneficial method of equitizing investment assets.
14. The requested exemption would permit acquisitions, sales and
exchanges of Fund shares, both in cash or in-kind. The Applicants
represent that in-kind exchanges are appropriate to advance client
objectives where, for example, a client is changing managers and wants
an Account to have a particular exposure (i.e., exposure to a
particular investment strategy) during the transition period.
15. The Applicants represent that if the Account specifies in its
order that it will use in-kind (or a combination of in-kind and cash)
to acquire the iShares or wants to receive in-kind (or a combination of
in-kind and cash) for its iShares, there is a natural hedge between the
in-kind securities and the iShares. The market value of the in-kind
securities determines the NAV of the iShares. Therefore, as the Account
waits for Creation or Redemption to be done at the end of the day, at
NAV, if the market value of the in-kind securities goes up or down, the
NAV of the iShares will go up or down (as the case may be) in tandem.
This is different than a Plan's purchase of mutual fund shares, where
the Plan would have exposure to market moves between the time it places
an order and the time that the value of any shares (i.e., NAV)
purchased or redeemed is determined.
16. The Applicants represent that, although the requested exemption
will permit the Investment Adviser to consider ETFs and other Funds as
possible investments, where there are identical investment
alternatives, it is up to the investment manager to determine which
approach is best for Plans. In some markets, such as certain emerging
market equity strategies, other reasonable alternatives may not exist.
17. The Applicants represent that investment in the Funds would
only take place when such investment is consistent with the investment
guidelines of a Separately Managed Account or Pooled Fund, and where
such investment is appropriate to achieve the investment objectives of
such account or fund.
18. ETFs have an imbedded management fee (paid to BGFA), and a
commission for secondary market purchases may also be paid to
unaffiliated brokers with respect to investment in an ETF.
19. The Applicants represent that investment management fees
related to investment in the Funds would be offset, credited or waived
at the Account level, as provided for in PTE 77-4 and other similar
individual exemptions. The Applicants represent that the billing
systems and processes at BGI have been designed to correctly rebate or
credit the advisory fees from Funds against the Plan level fees or
credit the Plan level fees. These processes and systems are part of the
billing function of BGI, and with respect to PTE 77-4 compliance, have
been tested over the years to ensure compliance.
20. The Applicants represent that often, where Plans are invested
in a pooled vehicle, the rules in PTE 77-4 that relate to investment of
pooled vehicles in open-end investment companies are expensive to
administer, impractical, time consuming and burdensome. In particular,
it is represented that it is difficult for many pooled vehicles to
comply with written consent requirements similar to those contained in
PTE 77-4.
21. The requested exemption would require the Investment Adviser to
provide certain disclosures to Separately Managed Accounts, and to
Accounts invested in Pooled Funds, prior to investing in the Funds, but
would permit ``deemed consent'' or negative consent to occur where the
Investment Adviser receives no response to such disclosures. In
addition, the proposed exemption contains disclosure and consent
procedures which would apply with respect to existing Account investors
in a pooled fund. The proposed exemption contains annual
reauthorization requirements, which may be satisfied through the use of
a Termination Form,
[[Page 51675]]
similar to the requirements contained in other exemptions similar to
PTE 77-4.
22. The proposed exemption would allow disclosures to be provided
in written or in electronic form. A Second Fiduciary may request a non-
electronic copy of any required disclosure. In all instances in which
the Investment Adviser provides electronic distribution of information
to Second Fiduciaries who have provided electronic mail addresses, such
electronic disclosure will be provided in a manner similar to the
procedures described in 29 CFR section 2520.104b-1(c) to ensure that
the Investment Adviser's system of providing electronic disclosures
results in actual receipt by the intended recipient.
23. The proposed exemption includes a condition which would
prohibit Separately Managed Accounts that hold assets of a Plan
sponsored by the Investment Adviser from engaging in the proposed
transactions. In addition, if a Pooled Fund engaging in the proposed
transactions holds assets of a Plan or Plans sponsored by the
Investment Adviser or its affiliate, the total assets of all such Plans
invested in such Pooled Fund shall not exceed 10% of the total assets
of such Pooled Fund.
24. The proposed exemption contains valuation requirements which
apply to any in-kind exchange between a Plan and a Fund. In general,
the condition requires that the value of securities received by an
Account with respect to an in-kind exchange with a Fund will be
determined based on the same valuation principles which govern
valuation of the underlying securities held by the Fund, and will use
the same pricing sources used by the Fund with respect to its assets.
Each Fund must also value its assets pursuant to procedures established
by the Fund's Board of Directors or Trustees, as applicable, and as
required by the 1940 Act.
25. In summary, the Applicants represent that the criteria of
section 408(a) of the Act are satisfied for the following reasons: (a)
The transactions will allow the Plans to enjoy the advantages of
investment in ETFs, which will provide the Plans with liquid
investments; (b) Prior to the initial investment of Plan assets in the
Funds, a second, independent fiduciary of each Plan will receive full
disclosure regarding the proposed investment and the fees to be
received by the Investment Adviser, and has the opportunity to approve
or disapprove the investment; (c) No sales commissions or similar fees
will be paid by the Accounts to the Investment Adviser in connection
with such purchase, sale or exchange; (d) No Separately Managed Account
holding assets of a Plan sponsored by the Investment Adviser will
engage in the proposed transactions, and if a Pooled Fund engaging in
the proposed transactions holds assets of a Plan or Plans sponsored by
the Investment Adviser, the total assets of all such Plans invested in
such Pooled Fund shall not exceed 10% of the total assets of such
Pooled Fund; (e) In-kind transactions with an Account will only involve
securities which are publicly-traded and for which market quotations
are readily available; (f) The Investment Adviser and its affiliates
will not receive any fees payable pursuant to Rule 12b-1 under the 1940
Act in connection with the transactions described herein; (g) The
Accounts will pay no redemption or similar fees to the Investment
Adviser in connection with the sales by the Account to Funds of Fund
shares; (h) There will be no double payment of investment management,
investment advisory and similar fees to the Investment Adviser by the
Accounts; and (i) The combined total of all fees received by the
Investment Adviser for the provision of services to an Account, and in
connection with the provision of any services to any of the Funds in
which an Account may invest, will not be in excess of ``reasonable
compensation'' within the meaning of section 408(b)(2) of the Act.
FOR FURTHER INFORMATION CONTACT: Mr. Gary H. Lefkowitz of the
Department, telephone (202) 693-8546. (This is not a toll-free number.)
BlackRock, Inc. (BlackRock), and Merrill Lynch & Co. (Merrill Lynch)
(collectively, the Applicants), Located in New York, New York
[Application No. D-11420]
Proposed Exemption
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).
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(k), by an Asset
Manager, as defined below in Section III(f), from any person other than
a Merrill Lynch/BlackRock Related Entity or Merrill Lynch/BlackRock
Related Entities, as defined below in Section III(c), during the
existence of an underwriting or selling syndicate with respect to such
Securities, where a Merrill Lynch/BlackRock Related Broker-Dealer, as
defined below in Section III(b), is a manager or member of such
syndicate and the Asset Manager 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(h); or
(b) on behalf of Client Plans, and/or In-House Plans, as defined
below in Section III(o), which are invested in a pooled fund or in
pooled funds (Pooled Fund(s)), as defined below in Section III(i);
provided that the conditions as set forth below in Section II, are
satisfied (An affiliated underwriter transaction (AUT)).\5\
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\5\ For purposes of this proposed exemption an In-House Plan may
engage in AUTs only through investment in a Pooled Fund.
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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
[[Page 51676]]
(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, 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 pursuant to this
proposed exemption must have been in continuous operation for not less
than three years, including the operation of any predecessors, unless
the Securities to be purchased--
(1) Are non-convertible debt securities rated in one of the four
highest rating categories by Standard & Poor's Rating Services, Moody's
Investors Service, Inc., Fitch Ratings, Inc., Dominion Bond Rating
Service Limited, Dominion Bond Rating Service, Inc., or any successors
thereto (collectively, the Rating Organizations); provided that none of
the Rating Organizations rates such securities in a category lower than
the fourth highest rating category; or
(2) are debt securities issued or fully 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; or
(3) are debt securities which are fully guaranteed by a person (the
Guarantor) that has been in continuous operation for not less than
three years, including the operation of any predecessors, provided that
such Guarantor has issued other securities registered under the 1933
Act; or if such Guarantor has issued other securities which are exempt
from such registration requirement, such Guarantor has been in
continuous operation for not less than three years, including the
operation of any predecessors, and such Guarantor:
(a) Is a bank, or
(b) Is an issuer of securities which are exempt from such
registration requirement, pursuant to a Federal statute other than the
1933 Act; or
(c) Is an issuer of securities that 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 hereunder with the SEC during the preceding twelve (12)
months.
(c) The aggregate amount of Securities of an issue purchased,
pursuant to this proposed exemption, by the Asset Manager 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 Manager; and (iii) the assets of plans to
which the Asset Manager 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 proposed exemption, the amount of Securities in any
issue (whether equity or debt securities) purchased, pursuant to this
proposed exemption, by the Asset Manager 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 proposed
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 any Merrill/Lynch
BlackRock Related Entity.
(f) No Merrill Lynch/BlackRock Related Broker-Dealer receives,
either directly, indirectly, or through
[[Page 51677]]
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 proposed exemption. In this regard, a Merrill Lynch/
BlackRock Related 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 Manager on behalf of any single Client Plan or any Client Plan or
In-House Plan in Pooled Funds.
(g)(1) The amount a Merrill Lynch/BlackRock Related 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 such Merrill Lynch/
BlackRock Related Broker-Dealer for foregoing any selling concessions
for those Securities sold pursuant to this proposed exemption. Except
as described above, nothing in this Section II(g)(1) shall be construed
as precluding a Merrill Lynch/BlackRock Related Broker-Dealer from
receiving management fees for serving as manager of an 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 Manager 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 proposed exemption; and
(2) Each Merrill Lynch/BlackRock Related Broker-Dealer shall
provide to the Asset Manager a written certification, signed by an
officer of such Merrill Lynch/BlackRock Related Broker-Dealer, stating
the amount that each such Merrill Lynch/BlackRock Related Broker-Dealer
received in compensation or consideration during the past quarter, in
connection with any offerings covered by this proposed exemption, was
not adjusted in a manner inconsistent with Section II(e), (f), or (g)
of this proposed 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(j).
(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 Manager to such
Independent Fiduciary:
(1) A copy of the Notice of Proposed Exemption (the Notice) and a
copy of the final exemption (the Grant) as published in the Federal
Register, provided that the Notice and the Grant are supplied
simultaneously; and
(2) Any other reasonably available information regarding the
covered transactions that such Independent Fiduciary requests the Asset
Manager to provide.
(j) Subsequent to the initial authorization by an Independent
Fiduciary of a single Client Plan permitting the Asset Manager to
engage in the covered transactions on behalf of such single Client
Plan, the Asset Manager 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 Manager 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 proposed exemption, unless the Asset Manager 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 Manager not less than 45
days prior to such Asset Manager engaging in the covered transactions
on behalf of a Pooled Fund, pursuant to this proposed exemption; and
provided further that the information described, below, in this Section
II(k)(2)(i) and (iii) is supplied simultaneously:
(i) A notice of the intent of such Pooled Fund to purchase
Securities pursuant to this proposed exemption, a copy of this Notice,
and a copy of the Grant, 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 Manager 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 Manager 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 the Asset Manager and the
Merrill Lynch/BlackRock Related Broker-Dealer and will provide the
address of the Asset Manager. The instructions will state that this
proposed 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 the Merrill Lynch/BlackRock
Related Entities. The instructions will also state that the fiduciary
of each such plan must advise the Asset Manager, in writing, if it is
not an ``Independent Fiduciary,'' as that term is defined, below, in
Section III(j).
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 proposed exemption for each plan
be independent of the Merrill Lynch/BlackRock Related Entities 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
proposed 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
[[Page 51678]]
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); provided that the
Notice and the Grant, described, above, in Section II(k)(2)(i) are
provided simultaneously.
(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 proposed exemption for each plan
proposing to invest in a Pooled Fund be independent of the Merrill
Lynch/BlackRock Related Entities shall not apply in the case of an In-
House Plan.
(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
Manager 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 Manager 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
Manager 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 this proposed 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 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 Manager 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 Manager has received a written
certification signed by an officer of each Merrill Lynch/BlackRock
Related Broker-Dealer, as described, above, in Section II(g)(2),
affirming that, as to each AUT covered by this proposed exemption
during the past quarter, such Merrill Lynch/BlackRock Related Broker-
Dealer acted in compliance with Section II(e), (f), and (g) of this
proposed 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 Manager was precluded for any period of time
from selling Securities purchased under this proposed exemption in that
quarter because of its relationship to a Merrill Lynch/BlackRock
Related 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,\6\ 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
[[Page 51679]]
be) (the $100 Million Net Asset Requirement).
---------------------------------------------------------------------------
\6\ SEC Rule 10f-3(a)(4), 17 CFR Sec. 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.
---------------------------------------------------------------------------
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) 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 the Asset Manager or a Merrill Lynch/BlackRock Related
Entity exercises investment discretion.
(q) The Asset Manager and the Merrill Lynch/BlackRock Related
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(r), to determine whether the conditions of this proposed
exemption have been met, except that--
(1) No party in interest with respect to a plan which engages in
the covered transactions, other than the Asset Manager, and the Merrill
Lynch/BlackRock Related 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(r); 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 Merrill Lynch/BlackRock Related Broker-Dealer, as
applicable, such records are lost or destroyed prior to the end of the
six-year period.
(r)(1) Except as provided, below, in Section II(r)(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(q) 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(r)(1)(ii)-
(iv) shall be authorized to examine trade secrets of the Asset Manager,
or the Merrill Lynch/BlackRock Related Broker-Dealer, or commercial or
financial information which is privileged or confidential; and
(3) Should the Asset Manager, or the Merrill Lynch/BlackRock
Related Broker-Dealer refuse to disclose information on the basis that
such information is exempt from disclosure, pursuant to Section
II(r)(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 III--Definitions
(a) The term, ``the Applicants,'' means BlackRock Inc. and Merrill
Lynch & Co, Inc.
(b) The term, ``Merrill Lynch/BlackRock Related Broker-Dealer,''
means any broker-dealer that is a Merrill Lynch/BlackRock Related
Entity that meets the requirements of this proposed exemption. Such
Merrill Lynch/BlackRock Related 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(k), being offered or who receives
compensation from the members of the syndicate for its services as a
manager of the syndicate.
(c) The term, ``Merrill Lynch/BlackRock Related Entity(s)''
includes all entities listed in this Section III(c)(i) and (ii): (i)
Merrill Lynch and any person directly or indirectly, through one or
more intermediaries, controlling, controlled by, or under common
control with Merrill Lynch, and (ii) BlackRock and any person directly
or indirectly, through one or more intermediaries, controlling,
controlled by, or under common control with, BlackRock. For purposes of
this proposed exemption, the definition of a Merrill Lynch/BlackRock
Related Entity shall include any entity that satisfies such definition
in the future.
(d) The term, ``BlackRock Related Entity'' or ``BlackRock Related
Entities,'' means BlackRock and any person directly or indirectly,
through one or more intermediaries, controlling, controlled by, or
under common control with BlackRock.
(e) The term, ``Merrill Lynch Related Entity'' or ``Merrill Lynch
Related Entities,'' means Merrill Lynch and any person directly or
indirectly, through one or more intermediaries, controlling, controlled
by, or under common control with Merrill Lynch.
(f) The term, ``Asset Manager,'' means a BlackRock Related Entity,
as defined, above, in Section III(d). For purposes of this proposed
exemption, the Asset Manager must be registered with the
[[Page 51680]]
Securities and Exchange Commission as an investment advisor, have total
client assets under management in excess of $5 billion, have
shareholders' or partners' equity in excess of $1 million, and must
satisfy the definition of a ``qualified professional asset manager''
(QPAM), as that term is defined in Part V(a) of PTE 84-14, 49 FR 9494
(Mar. 13, 1984), as amended, 70 FR 49305 (Aug. 23, 2005). Furthermore,
the requirement that the Asset Manager 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 applies whether such Asset Manager,
qualifies as a QPAM, pursuant to Part V(a)(1), (a)(2), (a)(3) or (a)(4)
of PTE 84-14.
(g) The term, ``control,'' means the power to exercise a
controlling influence over the management or policies of a person other
than an individual.
(h) The term, ``Client Plan(s),'' means an employee benefit plan or
employee benefit plans that are subject to the Act and/or the Code, and
for which plan(s) an Asset Manager 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(o).
(i) 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 Manager, and (iii) for which such Asset Manager
exercises discretionary authority or discretionary control respecting
the management or disposition of the assets of such fund(s).
(j)(1) The term, ``Independent Fiduciary,'' means a fiduciary of a
plan who is unrelated to, and independent of any Merrill Lynch/
BlackRock Related Entity. For purposes of this proposed exemption, a
fiduciary of a plan will be deemed to be unrelated to, and independent
of any Merrill Lynch/BlackRock Related Entity, 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 proposed exemption,
is an officer, director, or highly compensated employee (within the
meaning of section 4975(e)(2)(H) of the Code) of any Merrill Lynch/
BlackRock Related Entity, and represents that such fiduciary shall
advise the Asset Manager within a reasonable period of time after any
change in such facts occur.
(2) Notwithstanding anything to the contrary in this Section
III(j), a fiduciary of a plan is not independent:
(i) If such fiduciary, directly or indirectly, through one or more
intermediaries, controls, is controlled by, or is under common control
with any Merrill Lynch/BlackRock Related Entity;
(ii) If such fiduciary directly or indirectly receives any
compensation or other consideration from any Merrill Lynch/BlackRock
Related Entity for his or her own personal account in connection with
any transaction described in this proposed 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
Manager responsible for the transactions described, above, in Section I
of this proposed 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 a 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 a plan or of the responsible
fiduciary, and if he or she abstains from participation in: (A) the
choice of such plan's investment manager/adviser; and (B) the decision
to authorize or terminate authorization for transactions described,
above, in Section I, then Section III(j)(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 a Merrill Lynch/BlackRock Related Entity.
(k) 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
proposed exemption, mortgage-backed or other asset-backed securities
rated by one of the Rating Organizations, as defined, below, in Section
III(n), will be treated as debt securities.
(l) 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.
(m) 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.
(n) The term, ``Rating Organizations,'' means Standard & Poor's
Rating Services, Moody's Investors Service, Inc., Fitch Ratings Inc.,
Dominion Bond Ratings Service Limited, and Dominion Bond Rating
Service, Inc., or any successors thereto.
(o) 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: (i) A Merrill Lynch Related Entity, as defined, above, in
Section III(e), or (ii) a BlackRock Related Entity, as defined, above,
in Section III(d), for their respective employees.
The availability of this proposed 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.
Effective Date: If granted, this proposed exemption will be
effective as of the date the Grant is published in the Federal
Register.
Summary of Facts and Representations
1. BlackRock, based in New York, NY, is a publicly-traded
investment management firm. BlackRock, through its SEC-registered
investment advisor subsidiaries, currently manages assets for
institutional and individual investors worldwide through a variety of
equity, fixed income, cash management, and alternative investment
products. As of December 31, 2006, BlackRock, through its advisor
subsidiaries, had approximately $1.125 trillion in assets under
management. Furthermore, BlackRock's asset managers satisfy the
definition of the term, Asset Manager, as set forth in Section III(f)
of this proposed exemption.
Merrill Lynch is a holding company that, through its subsidiaries,
provides broker-dealer, investment banking, financing, wealth
management, advisory, insurance, lending, and related products and
services on a global basis. Merrill Lynch is a ``Consolidated
Supervised Entity'' and is subject to group-wide supervision by the
SEC.
Merrill Lynch, Pierce, Fenner & Smith Incorporated (MLPF&S) is the
principal wholly-owned subsidiary of Merrill Lynch. MLPF&S is a
Delaware
[[Page 51681]]
corporation registered with and regulated by the SEC as a broker-
dealer, and is a member of the New York Stock Exchange, and the
National Association of Securities Dealers, Inc. MLPF&S is also
regulated by the Municipal Securities Rulemaking Board (with respect to
municipal securities activities) and the Commodity Futures Trading
Commission and the National Futures Association (with respect to the
activities of MLPF&S as a futures commission merchant). MLPF&S is a
broker and/or dealer in the purchase and sale of corporate equity and
debt securities, mutual funds, money market instruments, government
securities, high yield bonds, municipal securities, financial futures
contracts, and options. As an investment banking firm, MLPF&S provides
corporate, institutional, and government clients with a wide variety of
financial services including underwriting the sale of securities to the
public, structured and derivative financing, private placements,
mortgage and lease financing, and financial advisory services,
including advice on mergers and acquisitions. MLPF&S also acts as a
prime broker for hedge funds. MLPF&S further operates mutual fund
advisory programs, in which plans governed by the Act or section 4975
of the Code can receive investment advice in connection with their
purchase of shares of mutual funds.
2. On September 29, 2006, Merrill Lynch combined its asset
management business with BlackRock (the Merger). The resulting entity
retained the BlackRock name and continues to trade on the New York
Stock Exchange under the symbol, ``BLK''. Prior to the Merger, PNC
Financial Services Group, Inc. (PNC) owned approximately 70.6 percent
(70.6%) of BlackRock. As a result of the Merger, Merrill Lynch now owns
a 50.3 percent (50.3%) economic interest and an approximate 45 percent
(45%) voting interest in BlackRock, and PNC's ownership interest has
been reduced to approximately 34 percent (34%) of BlackRock. The
remaining interest in BlackRock is owned by the public and by BlackRock
employees.
Merrill Lynch and PNC each have two seats on the Board of Directors
of BlackRock, as a result of the Merger. The remaining seats on the
Board of Directors, which include a majority of the total board seats,
are held by independent directors. The Applicants represent that the
Merrill Lynch and PNC board members are, except in limited
circumstances, required to cast their votes in the same manner as the
independent directors.
3. It is represented that the BlackRock Related Entities and the
Merrill Lynch Related Entities to which the proposed exemption applies
are regulated by federal government agencies such as the SEC, as well
as state government agencies and industry self-regulatory organizations
(e.g., the New York Stock Exchange and the National Association of
Securities Dealers).
4. The Applicants request an individual administrative exemption
that would permit the purchase of securities, including Rule 144A
Securities, by an Asset Manager acting on behalf of Client Plans, from
underwriting and selling syndicates in which a Merrill Lynch/BlackRock
Related Broker-Dealer is a member or a manager, where such purchase
would be made by such Asset Manager for such plans from any person
other than the Merrill Lynch/BlackRock Related Entities, and such
Merrill Lynch/BlackRock Related Broker-Dealer will receive no selling
concessions in connection with the securities sold to such plans.
5. The Applicants represent that, prior to the effective date of
the Merger, and because BlackRock and Merrill Lynch did not have
ownership interests in each other, asset management affiliates of
BlackRock routinely purchased, on behalf of plans, securities
(including Rule 144A Securities) from underwriting or selling
syndicates where a broker-dealer affiliated with Merrill Lynch was a
member or manager. Since BlackRock and Merrill Lynch did not have any
ownership interest in each other, these purchases could be consummated
without relying on Part III of Prohibited Transaction Exemption 75-1
(PTE 75-1, Part III) or on any individual administrative exemption. In
addition, prior to the effective date of the Merger, the asset
management affiliates of Merrill Lynch could purchase on behalf of
plans, subject to the Act, securities in underwritings or selling
syndicates where a broker-dealer affiliated with Merrill Lynch was a
member in accordance with PTE 75-1, Part III.
6. The Applicants represent that since the effective date of the
Merger, BlackRock has had a general policy with respect to Client Plans
not to purchase securities, including Rule 144A Securities, from
underwriting or selling syndicates with respect to which a Merrill
Lynch/BlackRock Related Broker-Dealer is a member or manager out of
concern that such purchases may give rise to prohibited transactions
under the Act. Notwithstanding the sizable equity stakes in BlackRock,
it is not clear that Merrill Lynch or any subsidiaries of Merrill Lynch
will be considered ``affiliates'' of BlackRock. Among the reasons for
the lack of clarity include the stockholder agreements between
BlackRock and PNC and BlackRock and Merrill Lynch, each of which
severely restricts the ability of Merrill Lynch and PNC, individually
or in combination, to control the activities of BlackRock. For example,
as noted above, Merrill Lynch and PNC board members are generally
required to cast their votes in the same manner as the BlackRock
independent directors. In addition, Merrill Lynch has agreed to cap its
ownership in BlackRock such that it is not permitted to hold greater
than 45 percent (45%) of the voting shares of BlackRock. PNC has a
similar cap. Therefore, an argument can be made that neither Merrill
Lynch nor PNC are or will be in a position to ``control'' BlackRock.
Nevertheless, when an Asset Manager is a fiduciary with investment
discretion with respect to a Client Plan, and such Asset Manager is
deciding whether to purchase securities in an underwriting or selling
syndicate in which a Merrill Lynch/BlackRock Related Broker-Dealer is a
manager or member, it might be argued that the ownership interest of
Merrill Lynch in BlackRock could affect such Asset Manager's best
judgment as a fiduciary, raising issues under Section 406(b) of the
Act. Accordingly, the Applicants seek the requested relief to cover
Merrill Lynch/BlackRock Related Broker-Dealers. The Applicants
represent that the failure to provide the requested relief will result
in Client Plans being unfairly precluded from participating in a
significant amount of investment opportunities.
7. Regardless of whether a fiduciary or its affiliate is a manager
or merely a member of an underwriting or selling syndicate, the
requested exemption modeled on PTE 75-1, Part III would not provide
relief for the purchase of unregistered securities. This includes Rule
144A Securities resold to QIBs. Rule 144A is commonly utilized in
connection with sales of securities issued by foreign issuers to U.S.
investors that are QIBs. Notwithstanding the unregistered nature of
such shares, syndicates selling Rule 144A Securities are the functional
equivalent of those selling registered securities.
8. The Applicants represent that Merrill Lynch/BlackRock Related
Broker-Dealers regularly serve as managers of underwriting or selling
syndicates for registered securities, and as managers or members of
underwriting or selling syndicates for Rule 144A Securities.
Accordingly, Asset Managers are currently refraining
[[Page 51682]]
from purchasing on behalf of Client Plans securities where a Merrill
Lynch/BlackRock Related Broker-Dealer is the manager of the
underwriting or selling syndicate, including Rule 144A Securities sold
in such offerings, resulting in such Client Plans being unable to
participate in significant investment opportunities.
9. It is represented that many plans have expanded investment
portfolios in recent years to include securities issued by foreign
entities. As a result, the exemption provided in PTE 75-1, Part III is
often unavailable for purchases of domestic and foreign securities that
may otherwise constitute appropriate plan investments.
10. The Applicants represent that Asset Managers make their
respective investment decisions on behalf of, or render 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.
11. The Applicants state, therefore, that the decision to invest in
a particular offering is made on the basis of price, value, and the
investment criteria of a Client Plan, not on whether the securities are
currently being sold through an underwriting or selling syndicate. The
Applicants further state that, because an Asset Manager's compensation
for its services is generally based upon assets under management, such
Asset Manager has little incentive to purchase securities in an
offering in which a Merrill Lynch/BlackRock Related 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 Manager
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, a
Merrill Lynch/BlackRock Related Broker-Dealer may receive no selling
concessions, direct or indirect, that are attributable to the amount of
securities purchased by the Asset Manager on behalf of Client Plans.
12. The Applicants state that the Asset Managers generally purchase
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 an Asset Manager 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 Client Plans.
13. The Applicants point out that absent this proposed exemption,
if a Merrill Lynch/BlackRock Related Broker-Dealer is a manager of a
syndicate that is underwriting an offering of securities, the Asset
Managers will be foreclosed from purchasing any securities on behalf of
Client Plans from that underwriting syndicate. In this regard, an Asset
Manager 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 there are transaction and market impact costs. In
turn, this will cause the Asset Manager to forego other investment
opportunities because the purchase price of the underwritten security
in the secondary market exceeds the price that the Asset Manager would
have paid to the selling syndicate.
Registered Securities Offerings
14. The Applicants represent that Merrill Lynch/BlackRock Related
Broker-Dealers currently manage and participate 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 purchases the securities from the issuer and
then resells the securities to investors.
15. 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 generally 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 obligations.
16. It is represented that each selling syndicate has one or more
lead managers, who are the principal contact between the syndicate and
the issuer and who are responsible for organizing and coordinating the
syndicate. The syndicate may also have co-managers, who generally
assist in distributing the underwritten securities. While equity
syndicates may include additional underwriters that are not managers,
more recently, membership in many debt syndicates has been limited to
lead and co-managers.
17. It is represented that if more than one underwriter is involved
in a selling syndicate, the lead manager and the underwriters enter
into an ``Agreement among Underwriters'' in the form designated by one
of the lead managers selected by the issuer. Most lead managers have a
standing form of agreement. This master agreement is then commonly
supplemented for the particular deal by sending an ``invitation wire''
or ``terms telex'' that sets forth particular terms to the other
underwriters.
18. 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 all of the underwritten securities from the
issuer in accordance with their respective commitments, if any
securities are not purchased. This obligation is met by using the
proceeds received from investors purchasing 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 or an investor defaults on its obligation.
19. The Applicants represent that, generally, it is unlikely that
in marketed deals all offered securities will not be sold. In marketed
deals, 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 executed, the underwriters promptly
begin contacting the investors to confirm the sales, at first by oral
communication and then by written confirmation. Sales may be finalized
within hours and sometimes minutes, but in any event prior to the
opening of
[[Page 51683]]
the market for trading the next day. In registered transactions, the
underwriters have a strong interest in completing the sales as soon as
possible because, until they ``break syndicate,'' they cannot
recommence normal trading activity, which includes buying and selling
the securities for their customers or own account.
20. The Applicants represent that the process of ``building a
book'' or soliciting indications of interest occurs in a registered
equity offering, after a registration statement is filed with the SEC.
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, such investors indicate whether they have an interest
in buying, and the lead managers compile a ``book'' of investors who
are willing to ``circle'' a particular portion of the issue. Although
investors cannot be legally bound to buy the securities until the
registration statement is effective, investors generally follow through
on their indications of interest.
21. Assuming that the marketing efforts have produced sufficient
indications of interest, the Applicants represent that the issuer of
the securities, after consultation with the lead manager, will set the
price of the securities upon being declared effective by the SEC. After
the registration statement has been declared effective by the SEC 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 the offering is an initial public offering of an equity
security, then the underwriters may not sell the securities to (among
others) any person that is a broker-dealer, an associated person of a
broker-dealer, a portfolio manager, or an owner of a broker-dealer.
Additionally, underwriters may not withhold for their own account any
initial public offering of an equity security.
22. The Applicants represent that debt offerings and certain equity
offerings may be ``negotiated'' offerings, ``competitive bid''
offerings, or ``bought deals.'' ``Negotiated'' offerings are conducted
in the same manner as marketed equity offerings 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 often performed under
``shelf'' registration statements pursuant to the SEC's Rule 415 under
the 1933 Act (Rule 415) (17 CFR 230.415).\7\
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\7\ The Applicants maintain that 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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23. 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.
24. It is represented that because of market forces and the
requirements of Rule 415, the competitive bid process is generally,
though not exclusively, available only to issuers who have been subject
to the reporting requirements of the Securities Exchange Act of 1934
(the 1934 Act) for at least one (1) year.
25. Occasionally, underwriters ``buy'' the entire deal off of a
``shelf registration'' or in a Rule 144A offering 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 securities.
Information Barriers
26. Prior applicants for similar relief have represented 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.
The Applicants represent that, notwithstanding the concerns raised
herein pertaining to the level of ownership in BlackRock by Merrill
Lynch, the firms are independent businesses, each with policies
restricting the distribution of proprietary and other non-public
information, and each subject to restrictions on disclosure under the
U.S. securities laws. Further, each has a fiduciary obligation not to
share proprietary and non-public information outside the firm. Merrill
Lynch and BlackRock also represent that they do not share information
with each other which is not generally available to the public that may
affect the market price of securities.
27. Prior applicants for substantially similar relief have further
represented that their business separation policies and procedures are
also structured to restrict the flow of any information to or from the
Asset Manager that could limit its flexibility in managing client
assets, and of information obtained or developed by the Asset Manager
that could be used by other parts of the organization, to the detriment
of the Asset Manager's clients. Because BlackRock and Merrill Lynch are
independent businesses, no such policies are required.\8\
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\8\ The Applicants represent that no BlackRock Related Entity is
currently in the business of underwriting or placing securities for
third parties. In the event a BlackRock Related Entity engages in
such activities, the Applicants represent that appropriate business
separation policies and procedures would be instituted.
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28. The Applicants represent that major clients of Merrill Lynch/
BlackRock Related Broker-Dealers include investment management firms
that are competitors of the Asset Manager. Similarly, an Asset Manager
deals on a regular basis with broker-dealers that compete with Merrill
Lynch/BlackRock Related Broker-Dealers. If special consideration was
shown to a Merrill Lynch/BlackRock Related Broker-Dealer, such conduct
would likely have an adverse effect on the relationships of the Asset
Manager with firms that compete with such Merrill Lynch/BlackRock
Related Broker-Dealer. Each of the prior applicants for similar relief
have represented that a goal of its business separation policies is to
avoid any possible perception of improper flows of information in order
to prevent any adverse impact on client and business relationships.
Because BlackRock and Merrill Lynch are independent businesses, it is
represented that no such policies are required.
Underwriting Compensation
29. The Applicants represent that the underwriters are compensated
through
[[Page 51684]]
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.
30. 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.
31. 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.
32. 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
percent (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 (selling
group members) to receive the selling concessions arising from the
securities they purchase.
33. 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, a Merrill Lynch/BlackRock Related 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 an Asset Manager on behalf of
its Client Plans.
34. The second category of allocated securities is ``private
client'' or ``retail,'' which are the securities retained by the
underwriters for sale to their 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.
35. The Applicants represent that the inability of a Merrill Lynch/
BlackRock Related Broker-Dealer to receive any selling concessions, or
any compensation attributable to the fixed designations generated by
purchases of securities by an Asset Manager on behalf of Client Plans,
removes the primary economic incentive for an Asset Manager to make
purchases that are not in the interests of such Client Plans from
offerings for which a Merrill Lynch/BlackRock Related Broker-Dealer is
an underwriter.
Rule 144A Securities
36. The Applicants represent that a number of the offerings of Rule
144A Securities in which a Merrill Lynch/BlackRock Related Broker-
Dealer participates represent good investment opportunities for the
Asset Manager's Client Plans. 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 Manager is
foreclosed from purchasing such securities for its Client Plans in
offerings in which a Merrill Lynch/BlackRock Related Broker-Dealer
participates.
37. The Applicants state that Rule 144A acts as a ``safe harbor''
exemption from the registration provisions of the 1933 Act for re-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.
38. 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.
39. 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).
40. 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 l0b-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.
41. 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
``10b-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.
42. The Applicants represent that Rule 144A offerings generally are
structured in the same manner as underwritten registered offerings.
They may be ``negotiated'' offerings, ``competitive bid'' offerings or
``ought deals.'' One difference is that a Rule
[[Page 51685]]
144A offering uses an offering memorandum rather than a prospectus that
is filed with the SEC. The marketing process is substantially similar,
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, contracts for sale may be entered into with
investors and securities may be priced before a selling agreement is
executed (and this is typically the case with respect to sales of
asset-backed securities). Further, generally, there are no non-manager
members in a Rule 144A selling syndicate. The Applicants nonetheless
request that the proposed exemption extend to authorization for
situations where a Merrill Lynch/BlackRock Related Broker-Dealer acts
as manager or as a member.
43. 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.
44. The Applicants represent that 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 greatly increase the investment opportunities
and will reduce administrative costs for Client Plans.
Further, the Applicants represent that the proposed exemption is
protective of the rights of participants and beneficiaries of affected
Client Plans. In this regard, the notification provisions and other
requirements in the proposed exemption are similar to the conditions
set forth in other exemptions published by the Department in similar
circumstances.
45. 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, an Asset Manager will purchase the securities for its
Client Plans from an underwriter or broker-dealer other than a Merrill
Lynch/BlackRock Related Entity; (c) conditions of the proposed
exemption 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 an Asset Manager may purchase on behalf of Client Plans will be
subject to percentage limitations; (e) a Merrill Lynch/BlackRock
Related Broker-Dealer will not be permitted to receive, either
directly, indirectly or through designation, any selling concession
with respect to the securities sold to an Asset Manager on behalf of an
account of a Client Plan; (f) prior to any purchase of securities, an
Asset Manager will make the required disclosures to an Independent
Fiduciary of each Client Plan and obtain authorization in accordance
with the procedures in the proposed exemption; (g) an Asset Manager
will provide regular reporting to an Independent Fiduciary of each
Client Plan with respect to all securities purchased pursuant to the
proposed exemption, if granted; (h) each Client Plan will be subject to
net asset requirements, with certain exceptions for Pooled Funds; and
(i) an Asset Manager 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.
FOR FURTHER INFORMATION CONTACT: Angelena C. LeBlanc 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 of the Act and/or the Code,
including any prohibited transaction provisions to which the exemption
does not apply and the general fiduciary responsibility provisions of
section 404 of the Act, which, among other things, require a fiduciary
to discharge his duties respecting the plan solely in the interest of
the participants and beneficiaries of the plan and in a prudent fashion
in accordance with section 404(a)(1)(b) of the Act; nor does it affect
the requirement of section 401(a) of the Code that the plan must
operate for the exclusive benefit of the employees of the employer
maintaining the plan and their beneficiaries;
(2) Before an exemption may be granted under section 408(a) of the
Act and/or section 4975(c)(2) of the Code, the Department must find
that the exemption is administratively feasible, in the interests of
the plan and of its participants and beneficiaries, and protective of
the rights of participants and beneficiaries of the plan;
(3) The proposed exemptions, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act and/or the
Code, including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction; and
(4) The proposed exemptions, if granted, will be subject to the
express condition that the material facts and representations contained
in each application are true and complete, and that each application
accurately describes all material terms of the transaction which is the
subject of the exemption.
Signed at Washington, DC, this 30th day of August, 2007.
Ivan Strasfeld,
Director of Exemption Determinations, Employee Benefits Security
Administration, U.S. Department of Labor.
[FR Doc. E7-17676 Filed 9-7-07; 8:45 am]
BILLING CODE 4510-29-P
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