Proposed Class Exemption To Permit Certain Loans of Securities by
Employee Benefit Plans
[10/23/2003]
Volume 68, Number 205, Page 60715-60725
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
[Application Nos. D-08295 and D-10365]
Proposed Class Exemption To Permit Certain Loans of Securities by
Employee Benefit Plans
AGENCY: Department of Labor.
ACTION: Notice of proposed amendment to PTE 81-6 and proposed
restatement and redesignation of PTE 82-63.
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SUMMARY: This document contains a notice of pendency before the
Department of Labor (the Department) of a proposed amendment to PTE 81-
6 and a proposed restatement of PTE 82-63. If granted, the proposed
exemption would amend and replace Prohibited Transaction Exemption
(PTE) 81-6 (46 FR 7527, January 23, 1981) which exempts the lending of
securities by employee benefit plans to certain banks and broker-
dealers, and would replace PTE 82-63 (47 FR 14804, April 6, 1982),
which exempts certain compensation arrangements for the provision of
securities lending services by a plan fiduciary to an employee benefit
plan. The class exemption proposed in this notice, if granted, would
incorporate PTEs 81-6 and 82-63 and expand those class exemptions to
additional parties, subject to modified conditions. If granted, the
proposed exemption would affect participants and beneficiaries of
employee benefit plans, persons who lend securities on behalf of such
plans, and parties in interest who engage in securities lending
transactions with such plans.
DATES: Written comments and requests for a public hearing must be
received by the Department on or before December 8, 2003. The
replacement exemption and the revocation of PTEs 81-6 and 82-63 would
be effective 60 days following publication of the final grant.
ADDRESSES: All written comments and requests for a public hearing
(preferable three copies) should be addressed to: U.S. Department of
Labor, Office of Exemption Determinations, Employee Benefits Security
Administration, Room N-5649, 200 Constitution Avenue, NW., Washington,
DC 20210 (Attention: Application No. D-10365.) Interested
[[Page 60716]]
persons are also invited to submit comments and/or hearing requests to EBSA by email to: moffitt.betty@dol.gov or by fax at (202) 219-0204 by
the end of the scheduled comment period. All comments received will be
available for public inspection in the Public Disclosure Room, U.S.
Department of Labor, Room N-1513, 200 Constitution Avenue, NW.,
Washington, DC 20210.
FOR FURTHER INFORMATION CONTACT: Allison Padams Lavigne, Office of
Exemption Determinations, Employee Benefits Security Administration,
U.S. Department of Labor, (202) 693-8540 (This is not a toll-free
number.)
SUPPLEMENTARY INFORMATION: Notice is hereby given of the pendency
before the Department of a proposed class exemption that would amend
and incorporate PTEs 81-6 and 82-63 into a new class exemption and
would expand the existing relief from the restrictions of sections
406(a)(1)(A) through (D) and 406(b)(1) of ERISA and the taxes imposed
by section 4975(a) and (b) of the Code by reason of section
4975(c)(1)(A) through (E) of the Code to additional parties under
modified conditions.\1\ Notice is also hereby given of the pendency
before the Department of a proposed revocation of PTEs 81-6 and 82-63.
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\1\ Section 102 of Reorganization Plan No. 4 of 1978 (5 U.S.C.
App. 1 (1996)) generally transferred the authority of the Secretary
of the Treasury to issue exemptions under section 4975(c)(2) to the
Secretary of Labor.
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The proposed exemption was requested in two applications. One was
submitted by the American Bankers Association (ABA) (D-08295)\2\ and
the second application was submitted by the Robert Morris Associates,
now known as the Risk Management Association (RMA) (D-10365). The
applications were filed pursuant to section 408(a) of ERISA 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, August 10, 1990.)
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\2\ The ABA requested broad relief to permit employee benefit
plans to lend securities to any foreign bank or broker-dealer. In
this regard, the ABA did not continue to pursue their exemption
request by responding to issues raised by the Department relating to
the definition of eligible borrowers and providing information on
how securities markets in other countries operate as compared to
those in the United States. However, the ABA's request is being
addressed, in part, by this Notice which is based on exemption
application D-10365.
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Background
PTE 81-6 provides relief from section 406(a)(1)(A) through (D) of
ERISA and Code section 4975(c)(1)(A) through (D) for the lending of
securities by employee benefit plans to banks and broker-dealers
registered under the Securities Exchange Act of 1934, who are parties
in interest with respect to such plans. The exemption was amended in
1987 to include broker-dealers exempted from registration as dealers in
exempted government securities, provided that all other conditions of
the exemption are met.
Securities lending transactions generally operate in the following
manner. An institutional investor, such as a plan, lends securities
from its portfolio to a broker-dealer or bank in order to augment the
return on those securities while continuing to enjoy the benefits of
owning the securities (e.g., from the receipt of any interest,
dividends, or other distributions made on the loaned securities and
from any appreciation in the value of the securities). The lender
generally requires that the securities loaned be fully collateralized,
and the collateral usually is in the form of cash or high quality
liquid securities, such as U.S. Government or Federal Agency
obligations or irrevocable bank letters of credit. If the borrower
deposits cash collateral, the lender invests the collateral, and the
borrowing agreement may provide that the lender pays the borrower a
previously-agreed upon rebate and keeps the earnings on the collateral.
If the borrower deposits government securities, the borrower is
entitled to the earnings on its deposited securities and pays the
lender a lending fee. If the borrower deposits bank letters of credit
as collateral, the borrower pays the lender a fee as compensation for
the loan of its securities.
PTE 82-63 exempts certain compensation arrangements for the
provision of securities lending services by a plan fiduciary to an
employee benefit plan, provided that: the loan of securities is not
prohibited by section 406(a); the lending fiduciary is authorized to
engage in lending transactions on behalf of the plan; the compensation
is reasonable and is paid in accordance with terms of a written
instrument; the compensation arrangement is approved by an independent
fiduciary; and the authorization is provided only after the independent
fiduciary has received all information necessary to approve the
arrangement with the lending fiduciary.
Currently, relief under PTE 81-6 is limited to securities lending
transactions in which a plan loans securities to a U.S. broker-dealer
or U.S. bank which is a party in interest to the plan. Moreover, only
collateral consisting of cash, securities issued or guaranteed by the
United States Government or its agencies or instrumentalities, or
irrevocable bank letters of credit may be accepted by the plan. As
discussed more fully below, the applicant(s) have asked the Department
to extend relief to foreign broker-dealers and banks and to allow plans
to accept additional forms of collateral.
Discussion of the Application
The application contains facts and representations with regard to
the requested exemption which are summarized below. Interested persons
are referred to the application on file with the Department for the
complete representations of the applicant.
1. The Applicant
The RMA is the primary association of securities lending
professionals. RMA's membership is composed of approximately 2800
member institutions consisting of banks and regulatory agencies. RMA
states that its purpose as an association is to foster standards and
performance in the practice and management of lending and credit
activities in its members and other institutions which comprise the
financial service industry.
According to RMA, securities lending activities in the
international business context have increased greatly. Securities
commonly loaned now include U.S. and foreign corporate and government
securities. Lenders are continuing to expand their global securities
lending networks by becoming familiar with and lending securities
located in new markets and by lending to borrowers located in new
jurisdictions. The applicant represents that plans are effectively
prevented from participating in securities lending transactions in
foreign markets because of the limitations contained in PTE 81-6.
2. Summary of RMA's Application
Eligible Borrowers
In its original submission, RMA requested an exemption to permit
employee benefit plans to lend securities to U.S. banks and broker-
dealers and ``exempted foreign banks and broker-dealers.'' RMA proposed
to define ``exempted foreign banks and broker-dealers'' as either those
subject to the laws and regulations of a country which is a member of
the Organization for Economic Cooperation and Development or those
which are rated with respect to their long-term creditworthiness as at
least ``A'' by Standard & Poors or ``A3'' by Moody's Investors
Services, Inc. RMA also requested that the permissible collateral
[[Page 60717]]
under the exemption be expanded to include foreign currency, securities
issued or guaranteed by the government of an ``exempted country'' or
one of its instrumentalities, or irrevocable letters of credit issued
by a bank which is organized and regulated under the laws of an
exempted country and which is a person other than the borrower or an
affiliate thereof.
The Department requested additional information relating to the
operation and regulatory environment of these foreign countries. The
Department notes that the relief provided in PTE 81-6 was based, in
part, on the regulatory oversight of banks and broker-dealers located
in the United States. This regulatory framework and the conditions
contained in PTE 81-6 were integral to the Department's determination
that the exemption was administratively feasible, in the interests of
the plan and of its participants and beneficiaries, and protective of
the rights of the participants and beneficiaries of such plan.
In response to the Department's questions, RMA amended its request
to narrow the definition of exempted foreign bank or broker-dealer to
include those entities regulated under the laws of the United Kingdom
(the UK). Banks and broker-dealers in the UK which engage in securities
lending activities of the type contemplated by the proposed exemption
are subject to extensive regulation under the Financial Services and
Markets Act 2000 (FSMA) which governs ``the conduct of investment
business'' \3\ in the UK. The Financial Services Authority (FSA) is an
independent non-government body which exercises statutory powers under
the FSMA. The FSA is accountable to the Treasury \4\ of the UK, and,
through them, to Parliament. The FSA must report annually on the
achievement of its statutory objectives to the Treasury which presents
this report to the Parliament.
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\3\ The conduct of investment business in the UK includes: (1)
Buying, selling, subscribing for or underwriting investments; (2)
arranging transactions in the field of investment and (3) giving
investment advice.
\4\ The Treasury is the department of the government in the UK
responsible for formulating and putting into effect the UK's
financial and economic policy.
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The duties of the FSA fall into the following categories: (1)
Authorization of firms; (2) establishing standards for firms; (3)
oversight of firms; (4) enforcement of [investment] laws and rules in
the UK; (5) reducing financial crime; and (6) providing consumer
service. Before a firm may conduct investment business, it must be
authorized by the FSA. Only those firms which demonstrate to the FSA
that they satisfy threshold criteria (which relate to the firms'
honesty, competence and financial soundness) are authorized to engage
in investment. The FSA ensures that financial business is not being
carried out by unauthorized firms. In addition, the FSA collects and
maintains information about the authorized firms. Any investment
agreement entered into without such authorization is unenforceable, and
the counterparty to such agreement is entitled to restitution and
compensation for any loss incurred.
The FSA also establishes ``prudence'' standards for the firms it
regulates. These standards include capital requirements which are
designed to ensure that firms are able to meet financial obligations.
Firms are also required to meet FSA standards relating to management,
accounting and auditing practices. Further, the FSA sets the conduct of
business standards relating to the firms' relationships with consumers.
This involves overseeing a firm's dealings with investors to ensure,
for example, that information is understandable, fair and not
misleading.
The FSA has responsibility for overseeing the integrity of the UK
investment markets. Specifically, it oversees the exchanges, clearing
and settlement houses, and conducts market surveillance and transaction
monitoring. The FSA also supervises the soundness of banks. In so
doing, the aim is, among other things, to protect depositors.
In its enforcement capacity, the FSA investigates and, if
appropriate, disciplines and prosecutes those responsible for
conducting financial business outside of the rules. Under the FSMA, the
FSA has the statutory authority to revoke a firm's authorization,
discipline firms and individuals by public statements and financial
penalties, seek injunctions, prosecute for offenses and require money
to be returned as compensation for consumers.
According to RMA, the FSA's oversight of the securities markets in
the UK provides a sufficient level of safeguards to protect the
interests of the plans that would be lending securities to UK banks and
broker-dealers under this exemption, if granted.
Collateral Offered to the Plan
The RMA requested that the Department expand the types of
collateral permitted to be used in securities lending arrangements to
include currency denominated in UK pounds or Euros, securities issued
or guaranteed by the government of the UK or one of its agencies or
instrumentalities, the sovereign debt of the member countries of the
European Monetary Union denominated in UK pounds or in Euros, or
irrevocable letters of credit denominated in UK pounds or Euros and
issued by a bank which is regulated under the laws of the UK.
With respect to the Euro, RMA represents that, although it is a
relatively new form of currency, it is closely monitored and regulated
in connection with the implementation of the European Monetary Union
(EMU). The EMU \5\ consists of the following nations: Austria, Belgium,
Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg,
Netherlands, Portugal, Spain and Sweden. In order to be admitted as
members, these nations were required to meet five criteria: (1)
Exchange rates must not fluctuate beyond certain predetermined
fluctuation limits for a period of two years; (2) a government deficit
must not exceed 3% of gross domestic product (GDP); (3) a government
debt to GDP ratio is 60% or less; (4) an inflation rate must not be
more than 1.5% above that of the average rate of the three best
performing participating nations; and (5) an average long-term interest
rate is no more than 2% above that of the three best performing
participating nations. The primary goal of the introduction of the Euro
is to establish and maintain price stability throughout the EMU region.
The European Central Bank (ECB) and the European System of Central
Banks (ESCB) provide a comprehensive management and regulatory
infrastructure designed to support this objective. The responsibility
of the ESCB is to maintain price stability and to define and implement
the monetary policy of the EMU nations and promote the smooth operation
of payment systems.
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\5\ Although the UK did not initially participate in the EMU, it
is anticipated that a significant amount of business in the
financial sector of the UK will be transacted in Euros.
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The RMA proposed that, if letters of credit are used as collateral,
they must be issued by a bank whose long-term deposit rating is
investment grade or higher, as determined by a nationally recognized
independent statistical rating organization. Upon further consideration
of this issue, RMA suggested that the ``counterparty credit rating'' of
a bank is a more appropriate measure with respect to these
transactions. Counterparty credit ratings take into account factors
that focus on the bank's capacity to meets its financial
[[Page 60718]]
obligations as they come due. RMA states that rating agencies, such as
Standard & Poor's, look to the credit of the bank when examining
transactions that rely on lines of credit for credit enhancements.
RMA has also requested that plans be allowed to accept collateral
that is denominated in a different currency than the securities lent.
RMA notes that, because plans are currently not permitted under PTE 81-
6 to accept foreign government debt as collateral for borrowed
securities, plans are not able to fully participate in the overseas
securities lending markets and are prevented from enjoying revenue
opportunities that are available to other lenders. RMA further states
that most broker-dealers who are active in the international securities
lending area are active in several markets. Thus, a broker-dealer may
have a relatively large position in the currency of one country (e.g.,
Euro), but may have a need to borrow securities denominated in the
currency of a another country (e.g., UK pounds). In these
circumstances, the borrower would want to deliver Euros as collateral
for a loan of UK pound denominated securities. RMA believes that plans
would be at a competitive disadvantage if the proposed exemption did
not permit plans to accept collateral that is denominated in a
different currency than the securities that are lent.
Another request of RMA relates to the level of collateral that must
be provided to a lender. RMA suggests that the market value of the
collateral offered to the plan be not less than 100 percent of the then
market value of the securities lent, if the collateral is denominated
in the same currency as the securities, and 102 percent of the then
market value of the securities lent if the collateral is denominated in
a different currency. However, after consideration of the issue, the
Department believes that it would be more protective of the plan to
require that the market value of the collateral be 105 percent of the
then market value of the securities lent where the collateral offered
by a borrower is denominated in a different currency than that of the
securities.
Plan's Rights With Respect to the Collateral Under the Law of the UK
Upon a Borrower's Default
RMA states in its application that under standard securities
lending practices in the UK, title to the collateral given to the
lender in exchange for borrowed securities, passes to the lender.
According to RMA, this practice is reflected in the standard lending
agreements used in the UK RMA represents that the securities lending
transactions contemplated by the proposed exemption would be carried
out in accordance with standard securities lending practices in the
United Kingdom. Because the lending plan will have title to the
collateral in these transactions, such plans will not be restricted in
their ability to apply the collateral towards the cost of replacing the
borrowed securities or to replace the collateral with cash in the event
the borrower were to default.
To further protect the plan's interests in the event of a
borrower's default, RMA proposes that, in the securities lending
agreement, the borrower will agree to submit to the jurisdiction of the
courts of the United States. Once a plan receives a judgment against a
borrower in a U.S. court, the plan would then enforce the judgment in a
UK court. RMA states that the enforcement of U.S. judgments in the UK
courts is governed by common law. A basic principle of such common law
is that any judgment of a court of a foreign country which is for a
debt or a definite sum of money which is final and conclusive on the
merits, and as to which the foreign court had jurisdiction over the
defendant, is enforceable at common law in the absence of fraud. Under
UK common law, a foreign court is considered to have jurisdiction over
the defendant if the defendant agreed to submit to the jurisdiction of
the foreign court prior to the commencement of the proceedings.
To enforce a U.S. judgment under common law, a claimant must
commence an action in a UK court by writ. If a claimant obtains a
favorable judgment in a U.S. court following a summary judgment action
or a trial, the judgment is enforceable in the UK like any other UK
judgment.
As an alternative to submission to the jurisdiction of the United
States courts, if the lending agent is domiciled in the United States,
the lending agent may agree to indemnify and hold harmless each plan
against any shortfall in the value of the collateral as compared to the
value of the loaned securities.
Indicia of Collateral and Location of Collateral Offered to the Plan
In dealing with the indicia of ownership of the collateral offered
to the plan in return for the securities lent to Foreign Banks and
Foreign Broker-Dealers, RMA has represented that the indicia of
ownership of the collateral for the borrowed securities will be
maintained within the jurisdiction of the district courts of the United
States as required by section 404(b) of ERISA, or if held outside the
U.S., in a central clearing facility.\6\ RMA represents that the
requirements of section 404(b) and the Department's regulation
thereunder will be satisfied.
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\6\ In this regard, RMA represents that in the UK, the indicia
of ownership for the foreign collateral is typically held in a
central clearing facility in accordance with customary procedures in
the UK
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Thus, if a Foreign Bank or Foreign Broker-Dealer offers Foreign
Collateral to the plan, under regulation 29 CFR 2550.404b-1, the
indicia of ownership of the collateral must be held within the
jurisdiction of the district courts of the United States \7\, or the
assets must be under the management and control of a fiduciary which is
a corporation or partnership organized under the laws of the United
States or a State which has its principal place of business within the
United States and which is a bank, an insurance company or an
investment advisor (as described in the regulations.) In the
alternative, the regulations require that the indicia of ownership of
the collateral be in the physical possession of a person which is
organized under the laws of the United States which is a bank, as
defined under section 202(a)(2) of the Investment Advisers Act of 1940,
a broker-dealer registered under the Securities Exchange Act of 1934
with a net worth exceeding $750,000, or has its obligations and
liabilities guaranteed by individuals listed in the regulation; be
maintained by a broker-dealer in the custody of an entity designated as
a ``satisfactory control location'' under Rule 15c3-3 under the
Securities Exchange Act of 1934; or be maintained by a bank, in the
custody of an entity that is a foreign securities depository, foreign
clearing agency acting as a securities depository or a foreign bank,
which entity is supervised or regulated by a government agency or
regulatory authority in the foreign jurisdiction having authority over
such depositories, clearing agencies or banks.\8\
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\7\ The indicia of ownership of bank letters of credit (foreign
or U.S.) must always be maintained within the jurisdiction of the
district courts of the United States since they fall outside the
exception provided in regulation 29 CFR 2550.404b-1.
\8\ Regulation 29 CFR 2550.404b-1 has been summarized in part.
Interested persons should consult the complete regulation to ensure
compliance.
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Discussion of Proposed Exemption
Section I of the proposal describes the transactions which are
covered by the exemption. Section I(a) tracks the language of PTE 81-6
by permitting the lending of securities that are assets of an employee
benefit plan to a U.S. Broker-Dealer or U.S. Bank, if the general
conditions set forth in section II are met. However, the conditions
contained in
[[Page 60719]]
PTE 81-6 have been amended to permit additional types of collateral to
be used for the loan.\9\ Section I(b) of the proposal expands PTE 81-6
by permitting the lending of securities that are assets of an employee
benefit plan to a Foreign Broker-Dealer or a Foreign Bank. A Foreign
Broker-Dealer or a Foreign Bank must meet both the general conditions
set forth in section II of the proposed exemption, as well as the
specific conditions described in section III. Section I(c) permits the
payment to a lending fiduciary of compensation for services rendered in
connection with loans of plan assets that are securities, provided that
the conditions set forth in section IV are met. The conditions found in
section IV mirror the conditions currently found in PTE 82-63. Although
the relief provided by section I(c) would apply to a broader range of
lending activities, no changes are being proposed with respect to any
of the conditions that are contained in PTE 82-63.
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\9\ The following discussion of proposed conditions is limited
to conditions which are new or have been modified from the
conditions of PTE 81-6.
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Under the proposal, U.S. Banks and U.S. Broker-Dealers would now be
permitted to give plans Foreign Collateral for securities loans.
Section V(f) defines Foreign Collateral as the currency of the United
Kingdom or Euros, securities issued or guaranteed by the government of
the United Kingdom or one of its agencies or instrumentalities,
sovereign debt of the member countries of the EMU denominated in Euros
or irrevocable letters of credit issued by a Foreign Bank, other than
the borrower, which has a counter-party rating of investment grade or
better as determined by a nationally recognized statistical rating
organization. Further, section II(b) requires that the plan receive
from the borrower: (a) U.S. Collateral having, as of the close of
business on the preceding business day, a market value or, in the case
of letters of credit, a stated amount, equal to not less than 100
percent of the then market value of the securities lent, or (b) Foreign
Collateral having, as of the close of the preceding business day, a
market value or, in the case of letters of credit, a stated amount,
equal to not less than: (1) 102 percent of the then market value of the
securities lent on a recognized securities exchange (as defined in
section V(j)) or an automated trading system (as defined in section
V(k)) on which the securities are primarily traded if the collateral
posted is denominated in the same currency as the securities lent; or
(2) 105 percent of the then market value of the securities lent on a
recognized securities exchange or an automated trading system on which
the securities are primarily traded if the collateral posted is
denominated in a different currency than the securities lent. The
Department notes that, after consideration of the applicant's
suggestion for an appropriate level of Foreign Collateral, it was
determined that the plan's interests will be better protected if the
amount of collateral is increased when Foreign Collateral is offered to
the plan.
The securities lending agreement also must describe any fees to be
received by a plan in connection with the lending of securities,
whether the payment will be made in the same currency as the
collateral, in the currency of the securities lent or in U.S. dollars.
Lastly, the securities lending agreement must give the plan a
continuing security interest in, title to, or the rights of a secured
creditor with respect to the collateral received by the plan.
As an additional safeguard, the Department is requiring that when
the plan receives Foreign Collateral or U.S. Collateral from a foreign
bank or broker-dealer, the collateral itself must be maintained on
behalf of the plan at an ``Eligible Securities Depository'' as defined
in Rule 17f-7 of the Investment Company Act of 1940 [15 U.S.C. 80a].
Rule 17f-7 governs the custody of assets of registered management
investment companies with custodians outside the United States. Rule
17f-7 permits a fund to maintain assets with a foreign securities
depository if, among other things, the depository is an eligible
securities depository. The term ``Eligible Securities Depository'' is
defined in section [17 CFR Part 270] 2710.17f-7(b)(1) as a system for
the central handling of securities that:
(i) Acts as or operates a system for the central handling of
securities or equivalent book-entries in the country where it is
incorporated, or a transnational system for the central handling of
securities or equivalent book-entries;
(ii) Is regulated by a foreign financial regulatory authority as
defined under section 2(a)(50) of the Act (15 U.S.C. 80a-2(a)(50))
\10\;
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\10\ 15 U.S.C. 80a-2(a)(50) states that ``foreign financial
regulatory authority'' means any (A) foreign securities authority,
(B) other governmental body or foreign equivalent of a self-
regulatory organization empowered by a foreign government to
administer or enforce its laws relating to the regulation of
fiduciaries, trusts, commercial lending, insurance, trading in
contracts or sale of a commodity for future delivery, or other
instrument traded on or subject to the rules of a contract market,
board of trade or foreign equivalent or other financial activities,
or (C) membership organization, a function of which is to regulate
the participation of its members in activities listed above.
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(iii) Holds assets for the custodian that participates in the
system on behalf of the Fund under safekeeping conditions no less
favorable than the conditions that apply to other participants;
(iv) Maintains records that identify the assets of each participant
and segregates the system's own assets from the assets of participants;
(v) Provides periodic reports to its participants with respect to
its safekeeping of assets, including notices of transfers to or from
any participant's account; and
(vi) Is subject to periodic examination by regulatory authorities
or independent accountants.
The Department notes that the proposed exemption also permits
collateral to be physically delivered to the Plan. In addition, where
the borrower is a U.S. Bank or Broker-Dealer, the current requirements
(with respect to where the collateral must be held on behalf of the
plan) of PTE 81-6 have been incorporated into the proposal.
The Department also notes that section II(c) requires that, in the
case of a Foreign Broker-Dealer or Foreign Bank, the borrower shall
have furnished the Lending Fiduciary with its most recent available
audited statement of its financial condition as audited by a firm which
is eligible for appointment as a company auditor under the laws of the
United Kingdom.
For purposes of this proposed class exemption, section V(c) defines
the term ``Foreign Broker-Dealer'' as a broker-dealer registered and
regulated under the laws of the Financial Services Authority in the
United Kingdom that has as of the last day of its most recent fiscal
year, equity capital which is equivalent of no less than $200 million.
Section V(d) defines the term ``Foreign Bank'' as an institution having
substantially similar powers to a bank which is described in section
202(a)(2) of the Investment Advisers Act, is subject to authorization
by the Financial Services Authority in the United Kingdom and has as of
the last day of its most recent fiscal year, equity capital which is
equivalent of no less than $200 million.
The Department notes that, the proposed relief for Foreign Broker-
Dealers and Foreign Banks is limited to UK Broker-Dealers and UK Banks
as RMA has requested. Nevertheless, this proposal does not foreclose
consideration by the Department of extending relief to broker-dealers
and
[[Page 60720]]
banks that are subject to regulation in other countries. In this
regard, we note that a sufficient showing must be made that collateral
offered to plans will be held in a manner that will ensure that the
plan's interest in such collateral will be adequately protected. In
addition, information is needed on whether broker-dealers and banks in
countries other than the UK are subject to a scheme of regulatory
oversight comparable to that found in the United States. The Department
invites interested persons to comment on these issues. Specifically, we
request comments on the following: (1) The regulatory oversight of
broker-dealers and banks in countries other than the UK; (2) the
entities that are used in these countries to hold collateral on behalf
of the plan while the securities loan is outstanding, and (3) whether
these entities' have practices and policies designed to protect the
plan's interest in the collateral and are subject to government
supervision and oversight.
Section III of the proposed exemption contains additional
conditions that are applicable to securities lending transactions with
Foreign Broker-Dealers and Foreign Banks. Section III(a) requires that
the lending fiduciary maintain the situs of the loan agreement in
accordance with the indicia of ownership requirements under section
404(b) of ERISA and the regulations promulgated under 29 CFR
2550.404(b)-1. Further, section III(b) requires that a foreign borrower
agree to submit to the jurisdiction of the district courts or the
United States, and agree that the plan may in its sole discretion
enforce the agreement in a U.S. court. It is the Department's
understanding, that in the event the borrower were to default, the plan
generally would be able to secure a judgment in the United States which
would be enforceable in a UK court.
As an alternative to the Foreign Broker-Dealer or Foreign Bank
agreeing to submit to the jurisdiction of the United States courts, the
lending fiduciary may, if domiciled in the United States, agree to
indemnify and hold harmless each plan against any shortfall in the
collateral or losses incurred by the plan arising from a borrower's
default.
Miscellaneous Issues
The Department has received an inquiry regarding whether the relief
provided by the proposed exemption would apply to securities loaned by
plans pursuant to ``exclusive securities lending arrangements.'' Under
these exclusive arrangements, a lender (in this case, a plan) agrees to
make a specific portfolio of securities (that are owned by the plan)
available exclusively to a specific borrower for a specific period of
time. The borrower is given exclusive access to all of the securities
in the portfolio and can borrow such securities as and when the
borrower determines that it wishes to do so. The securities may not be
lent to another person. However, the existence of an exclusive
arrangement will not have any impact on the investment management
decisions of the portfolio. Thus, the securities in the portfolio may
continue to be purchased and sold without regard to the exclusive
arrangement. Neither the borrower nor any of its affiliates has any
discretionary authority or control with respect to the management of
the portfolio, or with respect to the decision to cause the plan to
enter into an exclusive arrangement or to negotiate the terms of such
arrangement on behalf of the plan. The exclusive arrangement will be
negotiated on behalf of the lending plan by a fiduciary who is
independent of the borrower. However, under the terms of an exclusive
arrangement, the borrower has a contractual right to borrow any of the
securities included in the portfolio at any time during the agreed upon
period. In exercising this right, the borrower is acting as a
counterparty pursuant to the written loan agreement and not as a
fiduciary.
Under these exclusive arrangements, compensation is paid by the
borrower to the plan and may consist of one or more components. The
first component generally is a fee paid by the borrower to the plan for
the exclusive right to borrow the securities in the portfolio and may
consist of either a flat fee (which may be equal to a percentage of the
value of the total securities in the portfolio), or a periodic payment
that is equal to a percentage of the value of the total balance of
outstanding borrowed securities or a combination of both. A second
component of the fees may include the plan's right to (a) retain a
portion of the investment earnings generated by its investment of cash
collateral received from the borrower and rebate the remaining earnings
to the borrower, (b) retain all the investment earnings generated by
its investment of the cash collateral and pay a rebate fee to the
borrower; or (c) receive a lending fee paid by the borrower with
respect to securities loans collateralized with non-cash collateral
(based on the value of the borrowed securities and the duration of the
particular loan.) The fees may be different for different securities or
different groups of securities subject to the exclusive arrangement.
These two types of fees may be both paid to the plan, or offset against
amounts due to the lender.
The Department is of the view that such exclusive securities
lending arrangements would be covered by the relief provided in the
proposed exemption, and, accordingly, has clarified section II(e)(1) of
the proposal to more explicitly encompass a variety of compensation
methods.\11\
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\11\ In this regard, the Department notes that the proposed
exemption does not provide relief from section 406(b) with respect
to exclusive securities lending agreements. Accordingly, fees under
an exclusive lending arrangement must be agreed to by the plan's
independent fiduciary in advance of the implementation of the
arrangement, or be determined pursuant to an objective formula.
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The Department notes that ERISA's general standards of fiduciary
conduct also would apply to any proposed securities lending
arrangements. Section 404 requires a fiduciary, among other things, to
discharge his or her duties respecting a plan solely in the interest of
the plan's participants and beneficiaries and in a prudent fashion.
Accordingly, the plan's fiduciary, in deciding to approve the lending
of securities to a Foreign Bank or Foreign Broker-Dealer, should fully
understand the risks involved in this particular type of securities
lending. The fiduciary should understand, for example, the additional
risks involved in lending securities which are plan assets to a foreign
financial institution, as well as, the risk associated with the receipt
of collateral consisting of foreign currency or securities issued by a
foreign country. In connection with the foregoing, the plan fiduciary
should take into account any additional expenses and legal issues that
may arise if a foreign borrower defaults and the plan fiduciary has to
enforce and collect on a judgement in a foreign court.
Paperwork Reduction Act
As part of its continuing effort to reduce paperwork and respondent
burden, the Department of Labor conducts a preclearance consultation
program to provide the general public and Federal agencies with an
opportunity to comment on proposed and continuing collections of
information in accordance with the Paperwork Reduction Act of 1995 (PRA
95) (44 U.S.C. 3506(c)(2)(A)). This helps to ensure that requested data
can be provided in the desired format, reporting burden (time and
financial resources) is minimized, collection instruments are clearly
understood, and the impact of collection requirements on respondents
can be properly assessed.
[[Page 60721]]
Currently, the Department is soliciting comments concerning the
proposed revision of the information collection request (ICR) included
in this Notice of Proposed Amendment to PTE 81-6 and Proposed
Restatement and Redesignation of PTE 82-63. A copy of the ICR may be
obtained by contacting Gerald B. Lindrew, Office of Policy and
Research, U.S. Department of Labor, Employee Benefits Security
Administration, 200 Constitution Avenue, NW, Room N-5647, Washington,
DC 20210. Telephone (202) 693-8410; Fax: (202) 219-4745. These are not
toll-free numbers.
The Department has submitted a copy of the proposed information
collection to OMB in accordance with 44 U.S.C. 3507(d) for review of
its information collections. The Department and OMB are particularly
interested in comments that:
[sbull] Evaluate whether the proposed collection of information is
necessary for the proper performance of the functions of the agency,
including whether the information will have practical utility;
[sbull] Evaluate the accuracy of the agency's estimate of the
burden of the collection of information, including the validity of the
methodology and assumptions used;
[sbull] Enhance the quality, utility, and clarity of the
information to be collected; and
[sbull] Minimize the burden of the collection of information on
those who are to respond, including through the use of appropriate
automated, electronic, mechanical, or other technological collection
techniques or other forms of information technology, e.g., permitting
electronic submission of responses.
Comments should be sent to the Office of Information and Regulatory
Affairs, Office of Management and Budget, Room 10235, New Executive
Office Building, Washington, DC 20503; Attention: Desk Officer for the
Employee Benefits Security Administration. Although comments may be
submitted through December 22, 2003 OMB requests that comments be
received within 30 days of publication of the Notice of Proposed
Rulemaking to ensure their consideration.
The proposed amendment and restatement of existing exemptions was
requested in two applications, one submitted by the ABA and a second
submitted by RMA. The applicants requested that PTE 81-6, which
currently provides exemptive relief from section 406(a)(1)(A) through
(D) of ERISA and Code section 4975(c)(1)(A) through (D) for the lending
of securities by employee benefit plans to banks and broker-dealers
registered under the Securities Exchange Act of 1934, or broker-dealers
exempted from registration under section 15(a)(1) of the 1934 Act as a
dealer in exempted government securities that are parties in interest
with respect to such plans, be broadened to exempt certain foreign
banks and broker-dealers and to permit additional forms of collateral.
In response to the applications, and provided that certain conditions
outlined in the proposed exemption are met, the Department proposes to
amend PTE 81-6 to also exempt the lending of securities by employee
benefit plans to foreign banks and broker dealers and to provide for
the receipt of additional forms of collateral.
PTE 82-63, used in conjunction with PTE 81-6, exempts certain
compensation arrangements for the provision of securities lending
services by a plan fiduciary to an employee benefit plan provided that
the lending fiduciary is authorized to engage in lending transactions
on behalf of the plan and the other conditions of the exemption are
met. The Department has amended PTE 81-6 and incorporated PTE 82-63 in
this proposed exemption. The Department also gives notice of its
revocation of PTE 81-6 and PTE 82-63. The ICR for the proposed
exemption re-states and combines existing ICRs previously approved \12\
in PTE 81-6 (1210-0065) and PTE-82-63 (1210-0062) but with a program
change to reflect both the addition of foreign broker-dealers and banks
as potential borrowers and the related changes in conditions applicable
to these borrowers, and an adjustment in the burden estimates of the
number of respondents based on updated and corrected information. This
ICR constitutes a revision of both PTE 81-6 and PTE 82-63, in that the
two exemptions are combined and revised. Continued approval has been
requested under control number 1210-0065; the control number 1210-0062
will be removed from OMB inventory when OMB approval of the information
collection provision of this revised exemption is received.
---------------------------------------------------------------------------
\12\ Approval for the ICR included in PTE 81-6 expires on July
31, 2004; approval for the ICR included in PTE 82-63 expires on June
30, 2004.
---------------------------------------------------------------------------
The Department estimates that there are approximately 13,913
borrowers that might take advantage of the class exemption. Generally,
a plan is authorized to lend securities to two groups of broker dealers
and banks as these are defined in the proposed amended and restated
exemption--U.S. Broker-Dealers and reporting dealers \13\ and U.S.
Banks, and Foreign Broker-Dealers and Foreign Banks regulated under the
laws of the United Kingdom (UK). According to the Securities and
Exchange Commission, 7,900 broker-dealers were registered as members at
the close of FY 2001. Not all member broker-dealers perform services
for employee benefit plans, and, among those broker-dealers that
perform services for employee benefit plans, only those that borrow
plans securities will make use of the exemption. Although fewer broker-
dealers than are registered with the SEC may actually make use of the
proposed exemption, the Department has conservatively based its burden
analysis on the total number of broker-dealers that could borrow
securities. There are also about 6,000 U.S. banks that might choose to
take advantage of the restated exemption; the Department has
conservatively assumed that all U.S. banks with trust powers will
engage in borrowing securities. The applicants have indicated that 5 UK
broker-dealers and 8 UK banks are also likely to borrow securities.
Therefore, approximately 13,913 broker-dealers and banks might borrow
securities under the proposed exemption.
---------------------------------------------------------------------------
\13\ Reporting dealers covered by the exemption are not
accounted for separately because they are bond and security
brokerages that trade in U.S. Government Securities; thus, reporting
dealers are already accounted for in the number of broker-dealer
firms and banks.
---------------------------------------------------------------------------
The proposed exemption provides that before a plan can lend
securities: the borrower must provide the plan with a financial
statement; the transaction or series of transactions must be described
in a written agreement; and, the compensation for the Lending Fiduciary
must be described in a written agreement.
Furnishing a financial statement to the plan. The Department has
not accounted for an hour or cost burden for preparing financial
statements because borrowers of securities will have already prepared
the statements required under the exemption in order to comply with SEC
and FSA rules. It is assumed that borrowers will incur costs of $1 per
mailing and 2 minutes of administrative time to distribute financial
statements quarterly in order to comply with the conditions of the
proposed exemption. This provision is expected to require 1,855 hours
and $56,000 annually.
Providing a written agreement covering the transaction or series of
transactions. The Department understands that it is customary business
practice for agreements related to the lending of securities to be set
[[Page 60722]]
forth in writing. The burden estimate allows for one half hour per year
to review written lending agreements for compliance with this proposed
exemption, and two minutes per agreement for distribution.\14\
---------------------------------------------------------------------------
\14\ Estimates of 2 hours rather than 30 minutes are used for
both lending and compensation agreements involving UK banks and UK
broker-dealers.
---------------------------------------------------------------------------
Compensation. The proposed exemption provides that the compensation
paid to a Lending Fiduciary must be reasonable and must be in
accordance with the terms of a written agreement. As permitted under
section IV(c) of the proposed exemption, the compensation agreement
will most likely be written in the form of a master agreement covering
a series of securities lending transactions at the time the Lending
Fiduciary's services are engaged. Entering into such an agreement is
also customary business practice; however, the Department has allowed
in its estimates for one half hour per compensation agreement for
review of compliance with this proposed exemption and two minutes per
agreement for distribution.
For both the lending and compensation agreements, the hour burden
for U.S. broker-dealers and U.S. banks, at 32 minutes per agreement, is
14,827 hours; for UK broker-dealers and UK banks, at 122 minutes per
agreement, the hour burden is 53 hours. The total hour burden for the
lending and compensation agreements is 14,880 hours.
Type of Review: Revision of a currently approved collection.
Agency: Employee Benefits Security Administration, Department of Labor.
Title: Securities Lending Prohibited Transaction Exemption.
OMB Number: 1210-0065.
Affected Public: Business or other for-profit, Not-for-profit
institutions, Individuals.
Total Respondents: 13,913.
Frequency: On occasion.
Total Responses: 83,478.
Estimated Total Burden Hours: 16,735.
Estimated Burden Cost: $56,000.
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 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 ERISA and the Code. These
provisions include any prohibited transaction provisions to which the
exemption does not apply and the general fiduciary responsibility
provisions of section 404 of ERISA 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 ERISA; 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 any exemption may be granted under section 408(a) of
ERISA and section 4975(c)(2) of the Code, the Department must find that
the exemption is administratively feasible, in the interests of the
plan(s) and of its participants and beneficiaries, and protective of
the rights of the participants and beneficiaries of the plan;
(3) This proposed exemption, if granted, will be supplemental to,
and not in derogation of, any other provisions of ERISA and 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) If granted, the pending class exemption will be applicable to a
particular ransaction only if the transaction satisfies the conditions
specified in the class exemption.
Written Comments
All interested persons are invited to submit written comments or
requests for a hearing on the proposed exemption to the address and
within the time period set forth above. All comments and requests for a
hearing will be made a part of the record. Comments and requests for a
hearing should state the reasons for the writer's interest in the
proposed exemption. Comments received will be available for public
inspection with the application for exemption at the address set forth
above.
Proposed Exemption
On the basis of the facts and representations set forth in the
application, the Department proposes to grant the following exemption
under the authority of section 408(a) of ERISA and section 4975(c)(2)
of the Code and in accordance with the procedures set forth in 29 CFR
part 2570, subpart B (55 FR 32836, August 10, 1990).
I. Transactions
(a) Effective (60-days after the date of publication of the final
class exemption in the Federal Register), the restrictions of section
406(a)(1)(A) through (D) of the Act and the taxes imposed by section
4975(a) and (b) of the Code by reason of section 4975(c)(1)(A) through
(D) of the Code shall not apply to the lending of securities that are
assets of an employee benefit plan to a ``U.S. Broker-Dealer'' or to a
``U.S. Bank'', provided that the conditions set forth in section II
below are met.
(b) Effective (60-days after the date of publication of the final
class exemption in the Federal Register), the restrictions of section
406(a)(1)(A) through (D) of the Act and the taxes imposed by section
4975(a) and (b) of the Code by reason of section 4975(c)(1)(A) through
(D) of the Code shall not apply to the lending of securities that are
assets of an employee benefit plan to a ``Foreign Broker-Dealer'' or
``Foreign Bank'', provided that the conditions set forth in sections II
and III below are met.
(c) Effective (60-days after the date of publication of the final
class exemption in the Federal Register), the restrictions of section
406(b)(1) of ERISA and the taxes imposed by section 4975(a) and (b) of
the Code by reason of section 4975(c)(1)(E) of the Code shall not apply
to the payment to a fiduciary (the Lending Fiduciary) of compensation
for services rendered in connection with loans of plan assets that are
securities, provided that the conditions set forth in section IV below
are met.
II. General Conditions
(a) Neither the borrower nor any affiliate of the borrower has or
exercises discretionary authority or control with respect to the
investment of the plan assets involved in the transaction, or renders
investment advice (within the meaning of 29 CFR 2510.3-21(c)) with
respect to those assets;
(b)(1) The plan receives from the borrower by the close of the
Lending Fiduciary's business on the day in which the securities lent
are delivered to the borrower:
(A) ``U.S. Collateral'' having, as of the close of business on the
preceding business day, a market value or, in the case of bank letters
of credit, a stated amount, equal to not less than 100 percent of the
then market value of the securities lent, or
(B) ``Foreign Collateral'' having as of the close of business on
the preceding business day, a market value or, in the case of bank
letters of credit, a stated amount, equal to not less than:
(i) 102 percent of the then market value of the securities lent as
valued on
[[Page 60723]]
a recognized securities exchange (as defined in section V(j)) or an
automated trading system (as defined in V(k)) on which the securities
are primarily traded if the collateral posted is denominated in the
same currency as the securities lent; or
(ii) 105 percent of the then market value of the securities lent as
valued on a recognized securities exchange (as defined in section V(j))
or an automated trading system (as defined in V(k)) on which the
securities are primarily traded if the collateral posted is denominated
in a different currency than the securities lent;
(2) If the borrower is a U.S. Bank or U.S. Broker-Dealer, the Plan
receives such U.S. Collateral or Foreign Collateral from the borrower
by the close of the Lending Fiduciary's business on the day in which
the securities are delivered to the borrower. Such collateral is
received by the plan either by physical delivery, wire transfer or by
book entry in a securities depository located in the United States;
(3) If the borrower is a Foreign Bank or Foreign Broker-Dealer, the
plan receives U.S. Collateral or Foreign Collateral from the borrower
by the close of the Lending Fiduciary's business on the day in which
the securities are delivered to the borrower. Such collateral is
received by the plan either by physical delivery, wire transfer or by
book entry in a securities depository located in the United States or
held on behalf of the plan at an Eligible Securities Depository. The
indicia of ownership of such collateral shall be maintained in
accordance with ERISA section 404(b) and regulation 29 CFR 2550.404b-1.
(c) Prior to making of any such loan, the borrower shall have
furnished the Lending Fiduciary with:
(1) The most recent available audited statement of the borrower's
financial condition, as audited by a United States certified public
accounting firm or in the case of a Foreign Broker-Dealer or Foreign
Bank, a firm which is eligible for appointment as a company auditor
under the laws of the United Kingdom;
(2) The most recent available unaudited statement of its financial
condition (if the unaudited statement is more recent than such audited
financial statement); and
(3) A representation that, at the time the loan is negotiated,
there has been no material adverse change in its financial condition
since the date of the most recent financial statement furnished to the
plan that has not been disclosed to the Lending Fiduciary. Such
representations may be made by the borrower's agreeing that each such
loan shall constitute a representation by the borrower that there has
been no such material adverse change;
(d) The loan is made pursuant to a written loan agreement, the
terms of which are at least as favorable to the plan as an arm's-length
transaction with an unrelated party would be. Such loan agreement
identifies the currency in which the payment of any fees described in
section II(e) below, will be made to the plan, and states that the plan
has a continuing security interest in, title to, or the rights of a
secured creditor with respect to the collateral. Such agreement may be
in the form of a master agreement covering a series of securities
lending transactions;
(e) In return for lending securities, the plan:
(1) receives a reasonable fee (in connection with the securities
lending transaction) and/or
(2) Has the opportunity to derive compensation through the
investment of the currency collateral. Where the plan has that
opportunity, the plan may pay a loan rebate or similar fee to the
borrower, if such fee is not greater than the plan would pay in a
comparable transaction with an unrelated party.
The combined total of all fees and other consideration received by
the plan in connection with securities lending transactions is
reasonable.
(f) The plan receives the equivalent of all distributions made to
holders of the borrowed securities during the term of the loan
including, but not limited to, dividends, interest payments, shares of
stock as a result of stock splits and rights to purchase additional
securities;
(g) If the market value of the collateral at the close of trading
on a business day is less than the applicable percentage (described in
section II b(1) of the exemption) of the market value of the borrowed
securities at the close of trading on that day, the borrower shall
deliver, by the close of business on the following business day, an
additional amount of U.S. Collateral or Foreign Collateral the market
value of which, together with the market value of all previously
delivered collateral, equals at least the applicable percentage of the
market value of all the borrowed securities as of such preceding day.
Notwithstanding the foregoing, part of the U.S. Collateral or
Foreign Collateral may be returned to the borrower if the market value
of the collateral exceeds the applicable percentage (described in
section II(b)(1) of the exemption) of the market value of the borrowed
securities, as long as the market value of the remaining U.S.
Collateral or Foreign Collateral equals at least the applicable
percentage of the market value of the borrowed securities;
(h) The loan may be terminated by the plan at any time, whereupon
the borrower shall deliver certificates for securities identical to the
borrowed securities (or the equivalent thereof in the event of
reorganization, recapitalization or merger of the issuer of the
borrowed securities) to the plan within the lesser of:
(1) The customary delivery period for such securities,
(2) Five business days, or
(3) The time negotiated for such delivery by the plan and the
borrower.
(i) In the event that the loan is terminated, and the borrower
fails to return the borrowed securities or the equivalent thereof
within the applicable time described in section II(h) above, the plan
may, under the terms of the loan agreement:
(1) Purchase securities identical to the borrowed securities (or
their equivalent as described above) and may apply the collateral to
the payment of the purchase price, any other obligations of the
borrower under the agreement, and any expenses associated with the sale
and/or purchase, and
(2) The borrower is obligated, under the terms of the loan
agreement, to pay, and does pay to the plan the amount of any remaining
obligations and expenses not covered by the collateral, including
reasonable attorney's fees incurred by the plan for legal action
arising out of default on the loans, plus interest at a reasonable
rate.
Notwithstanding the foregoing, the borrower may, in the event the
borrower fails to return borrowed securities as described above,
replace collateral, other than U.S. currency, with an amount of U.S.
currency that is not less than the then current market value of the
collateral, provided such replacement is approved by the Lending
Fiduciary.
If the borrower fails to comply with any provision of a loan
agreement which requires compliance with this exemption, the plan
fiduciary who caused the plan to engage in such transaction shall not
be deemed to have caused the plan to engage in a transaction prohibited
by section 406(a)(1)(A) through (D) of the Act solely by reason of the
borrower's failure to comply with the conditions of the exemption.
III. Specific Conditions For Transactions Described in Section I(b)
(a) The Lending Fiduciary maintains the written documentation for
the loan agreement at a site within the
[[Page 60724]]
jurisdiction of the courts of the United States.
(b) Prior to entering into a transaction involving a Foreign
Broker-Dealer or Foreign Bank either:
(1) The Foreign Broker-Dealer or Foreign Bank agrees to submit to
the jurisdiction of the United States; agrees to appoint an agent for
service of process in the United States, which may be an affiliate (the
Process Agent); consents to service of process on the Process Agent;
and agrees that any enforcement by a plan of its rights under the
securities lending agreement will, at the option of the plan, occur
exclusively in the United States courts; or
(2) The Lending Fiduciary, if domiciled in the United States,
agrees to indemnify and hold harmless each plan against any shortfall
in the collateral, (as clearly set forth in the applicable lending
agreement), plus interest and any transaction costs incurred (including
attorney's fees of the plan arising out of the default on the loans or
the failure to indemnify properly under this provision) which the plan
may incur or suffer directly arising out of the lending of securities
of such plan to a Foreign Broker-Dealer or Foreign Bank.
IV. Specific Conditions for Transactions Described in Section I(c)
(a) The loan of securities is not prohibited by section 406(a) of
ERISA or otherwise satisfies the conditions of this exemption.
(b) The Lending Fiduciary is authorized to engage in securities
lending transactions on behalf of the plan.
(c) The compensation is reasonable and is paid in accordance with
the terms of a written instrument, which may be in the form of a master
agreement covering a series of securities lending transactions.
(d) Except as otherwise provided in section IV(f), the arrangement
under which the compensation is paid: (1) is subject to the prior
written authorization of a plan fiduciary (the ``authorizing
fiduciary''), who is (other than in the case of a plan covering only
employees of the Lending Fiduciary or any affiliates of such fiduciary)
independent of the Lending Fiduciary and of any affiliate thereof, and
(2) may be terminated by the authorizing fiduciary within (A) the time
negotiated for such notice of termination by the plan and the Lending
Fiduciary, or (B) five business days, whichever is less, in either case
without penalty to the plan.
(e) No such authorization is made or renewed unless the Lending
Fiduciary shall have furnished the authorizing fiduciary with any
reasonably available information which the Lending Fiduciary reasonably
believes to be necessary to determine whether such authorization should
be made or renewed, and any other reasonably available information
regarding the matter that the authorizing fiduciary may reasonably
request; and
(f) (Special Rule for Commingled Investment Funds) In the case of a
pooled separate account maintained by an insurance company qualified to
do business in a state or a common or collective trust fund maintained
by a bank or trust company supervised by a state or federal agency, the
requirements of section IV(d) of this exemption shall not apply,
provided that:
(1) The information described in section IV(e) (including
information with respect to any material change in the arrangement)
shall be furnished by the Lending Fiduciary to the authorizing
fiduciary described in section IV(d) with respect to each plan whose
assets are invested in the account or fund, not less than 30 days prior
to implementation of the arrangement or material change thereto, and,
where requested, upon the reasonable request of the authorizing
fiduciary;
(2) In the event any such authorizing fiduciary submits a notice in
writing to the Lending Fiduciary objecting to the implementation of,
material change in, or continuation of the arrangement, the plan on
whose behalf the objection was tendered is given the opportunity to
terminate its investment in the account or fund, without penalty to the
plan, within such time as may be necessary to effect such withdrawal in
an orderly manner that is equitable to all withdrawing plans and to the
non-withdrawing plans. In the case of a plan that elects to withdraw
pursuant to the foregoing, such withdrawal shall be effected prior to
the implementation of, or material change in, the arrangement; but an
existing arrangement need not be discontinued by reason of a plan
electing to withdraw; and
(3) In the case of a plan whose assets are proposed to be invested
in the account or fund subsequent to the implementation of the
compensation arrangement and which has not authorized the arrangement
in the manner described in sections IV(f)(1) and IV(f)(2), the plan's
investment in the account or fund shall be authorized in the manner
described in section IV(d)(1).
V. Definitions
For purposes of this exemption:
(a) The term ``U.S. Broker-Dealer'' means a broker-dealer
registered under the Securities Exchange Act of 1934 (the 1934 Act) or
exempted from registration under section 15(a)(1) of the 1934 Act as a
dealer in exempted government securities (as defined in section
3(a)(12) of the 1934 Act).
(b) The term ``U.S. Bank'' means a bank as defined in section
202(a)(2) of the Investment Advisers Act.
(c) The term ``Foreign Broker-Dealer'' means a broker-dealer
registered and regulated under the laws of the Financial Services
Authority in the United Kingdom that has as of the last day of its most
recent fiscal year, equity capital which is equivalent of no less than
$200 million.
(d) The term ``Foreign Bank'' means an institution having
substantially similar powers to a bank as defined in section 202(a)(2)
of the Investment Advisers Act, is subject to regulation by the
Financial Services Authority in the United Kingdom and has as of the
last day of its most recent fiscal year, equity capital which is
equivalent of no less than $200 million.
(e) The term ``U.S. Collateral'' means U.S. currency, securities
issued or guaranteed by the United States government or its agencies or
instrumentalities, or irrevocable letters of credit issued by a U.S.
Bank other than the borrower or an affiliate thereof, or any
combination, thereof.
(f) The term ``Foreign Collateral'' means the currency of the
United Kingdom, Euros, securities issued or guaranteed by the
government of the United Kingdom or one of its agencies or
instrumentalities, sovereign debt of a member country of the EMU that
is denominated in Euros, or irrevocable letters of credit issued by a
Foreign Bank, other than the borrower or an affiliate thereof, which
has a counter-party rating of investment grade or better as determined
by a nationally recognized statistical rating organization.
(g) The term ``affiliate'' of another person means: (1) Any person
directly or indirectly, through one or more intermediaries,
controlling, controlled by, or under common control with such person;
(2) any officer, director, partner, employee, or relative (as defined
in section 3(15) of ERISA) of such other person; and (3) any
corporation or partnership of which such other person is an officer,
director, partner or employee.
(h) The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
(i) The term ``Eligible Securities Depository'' means an eligible
securities depository as that term is defined under
[[Page 60725]]
Rule 17f-7 of the Investment Company Act of 1940 [15 U.S.C. 80a], as
such definition may be amended from time to time.
(j) The term ``recognized securities exchange'' means a U.S.
securities exchange that is registered as a ``national securities
exchange'' under section 6 of the Securities and Exchange Act of 1934
(15 U.S.C. 78f) or a designated offshore securities market as defined
in Regulation S of the Securities Act of 1933 [17 CFR part 230.902(B)],
as such definition may be amended from time to time, which performs
with respect to securities, the functions commonly performed by a stock
exchange within the meaning of the definitions under the applicable
securities laws (e.g., 17 CFR part 240.3b-16).
(k) The term ``automated trading system'' means an electronic
trading system that functions in a manner intended to simulate a
securities exchange by electronically matching orders on an agency
basis from multiple buyers and sellers such as an ``alternative trading
system'' within the meaning of SEC's Reg. ATS [17 CFR part 242.300] as
such definition may be amended from time to time, or an ``automated
quotation system'' as described in section 3(a)(51)(A)(ii) of the
Securities and Exchange Act of 1934 [15 U.S.C. 78c(a)(51)(A)(ii)].
Signed at Washington, DC, this 17th day of October, 2003.
Ivan L. Strasfeld,
Director, Office of Exemption Determinations, Employee Plan Benefits
Administration, U.S. Department of Labor.
[FR Doc. 03-26694 Filed 10-22-03; 8:45 am]
BILLING CODE 4520-29-P
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