[Federal Register: January 21, 2009 (Volume 74, Number 12)]
[Notices]
[Page 3647-3654]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr21ja09-130]
[[Page 3647]]
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
[Application Nos. and Proposed Exemptions; D-11477, D-11478, and D-
11479, Respectively, UBS AG (UBS) and Its Affiliates UBS Financial
Services Inc. (UBS Financial), and UBS Financial Services Inc. of
Puerto Rico (PR Financial) (Collectively, the Applicants); and D-11488,
Robert W. Baird & Co. Incorporated, et al.]
Notice of Proposed Exemptions
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.
UBS AG (UBS), and Its Affiliates UBS Financial Services Inc. (UBS
Financial), and UBS Financial Services Inc. of Puerto Rico (PR
Financial) (Collectively, the Applicants), Located in Zurich,
Switzerland; New York, New York; and San Juan, Puerto Rico,
Respectively
[Exemption Application Numbers D-11477, D-11478, and D-11479,
Respectively]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Employee Retirement Income Security
Act of 1974, as amended (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). If the proposed exemption is granted, the
restrictions of sections 406(a), 406(b)(1), 406(b)(2), and 407(a) of
the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1)(A) through (E) of the
Code, shall not apply to: (1) The acquisition by the UBS Savings and
Investment Plan, the UBS Financial Services Inc. 401(k) Plus Plan, and
the UBS Financial Services Inc. of Puerto Rico Savings Plus Plan
(collectively, the Plans) of certain entitlements (each, an
Entitlement) and certain subscription rights (each, a Right) issued by
UBS, a party in interest with respect to the Plans; (2) the holding of
the Entitlements by the Plans between April 28, 2008 and May 9, 2008,
inclusive, pending the automatic conversion of the Entitlements into
shares of UBS common stock; and (3) the holding of the Rights by the
Plans between May 27, 2008 and June 9, 2008, inclusive, provided that
the following conditions were satisfied:
(a) All decisions regarding the acquisition and holding of the
Rights and Entitlements by the Plans were made by U.S. Trust, Bank of
America Private Wealth Management (U.S. Trust), a qualified,
independent fiduciary;
(b) The Plans' acquisition of the Rights and Entitlements resulted
from an independent act of UBS as a corporate entity, and without any
participation on the part of the Plans;
(c) The acquisition and holding of the Rights and Entitlements by
the Plans occurred in connection with a capital improvement plan
approved by the board of directors of UBS, in which all holders of UBS
common stock, including the Plans, were treated exactly the same;
(d) All holders of UBS common stock, including the Plans, were
issued the same proportionate number of Rights based on the number of
shares of UBS common stock held by such Plans;
(e) All holders of UBS common stock, including the Plans, were
issued the same proportionate number of Entitlements based on the
number of shares of UBS common stock held by such Plans;
(f) The acquisition of the Rights and Entitlements by the Plans
occurred on the same terms made available to other holders of UBS
common stock;
(g) The acquisition of the Rights and Entitlements by the Plans was
made pursuant to provisions of each such Plan for the individually-
directed investment of participant accounts; and
(h) The Plans did not pay any fees or commissions in connection
with the
[[Page 3648]]
acquisition or holding of the Rights or Entitlements.
Summary of Facts and Representations
1. UBS is one of the world's largest financial firms and is a
global wealth manager, an investment banking and securities firm, and a
global asset manager. UBS is headquartered in Zurich, Switzerland and
currently operates in over fifty countries and throughout the United
States, including Puerto Rico and the Virgin Islands. Among the wholly-
owned subsidiaries of UBS are UBS Financial and PR Financial. UBS
Financial is headquartered in New York, New York, and PR Financial is
headquartered in San Juan, Puerto Rico.
2. UBS sponsors the UBS Savings and Investment Plan (the Savings
Plan), a defined contribution, profit-sharing plan with a Code section
401(k) feature. The Savings Plan provides for participant-directed
individual accounts that are intended to comply with the provisions of
section 404(c) of the Act and the corresponding regulations located at
29 CFR 2550.404c-1. The Applicants represent that the trustee of the
Savings Plan is State Street Bank and Trust Company of Boston,
Massachusetts. The Applicants further represent that UBS is a party in
interest with respect to the Savings Plan because, under section
3(14)(C) of the Act, it constitutes an employer whose employees are
covered under the Savings Plan. As of December 31, 2007, the Applicants
represent that the Savings Plan had approximately 14,719 participants
and total assets of $1,416,402,131. The Applicants state that the
Savings Plan allows participants to direct investments into various
investment funds, including the UBS Common Stock Fund (the Fund). The
Applicants represent that the Fund is not diversified, and consists
primarily of UBS common stock (each whole share of the Fund comprising
one UBS Share) plus cash for liquidity purposes. According to the
Applicants, the UBS Shares held by the Savings Plan were valued at
$87,773,382 as of December 31, 2007, and comprised approximately 6.2%
of the total assets in the Savings Plan.
3. UBS Financial sponsors the UBS Financial Services Inc. 401(k)
Plus Plan (the Plus Plan), a defined contribution, profit-sharing plan
with a Code section 401(k) feature. The Plus Plan provides for
participant-directed individual accounts that are intended to comply
with the provisions of section 404(c) of the Act and the corresponding
regulations located at 29 CFR 2550.404c-1. The Applicants represent
that the trustee of the Plus Plan is the Northern Trust Company of
Chicago, Illinois. The Applicants further represent that UBS is a party
in interest with respect to the Plus Plan under section 3(14)(H) of the
Act because it owns, directly or indirectly, 100% of UBS Financial. The
Applicants state that, as of December 31, 2007, the Plus Plan had
approximately 23,471 participants and total assets of $2,531,642,183.
Like the Savings Plan, the Plus Plan allows participants to direct
investments into the Fund, along with other investments. The Applicants
represent that the UBS Shares held by the Plus Plan were valued at
$547,605,850 as of December 31, 2007, and comprised approximately 21.6%
of the total assets in the Plus Plan.
4. PR Financial sponsors the UBS Financial Services Inc. of Puerto
Rico Savings Plus Plan (the PR Plan), which provides for participant-
directed individual accounts that are intended to comply with the
provisions of section 404(c) of the Act and the corresponding
regulations located at 29 CFR 2550.404c-1. The Applicants represent
that the trustee of the PR Plan is the Northern Trust Company of
Chicago, Illinois. The Applicants state that the PR Plan utilizes the
same trust as the Plus Plan, and allows participants to direct
investments into the Fund, along with other investments. The Applicants
also represent that UBS is a party in interest with respect to the PR
Plan under section 3(14)(H) of the Act because it owns, directly or
indirectly, 100% of PR Financial. The Applicants state that, as of
December 31, 2007, the PR Plan had approximately 368 participants and
total assets of $39,050,978. The Applicants also represent that the UBS
Shares held by the PR Plan were valued at $14,197,762 as of December
31, 2007, and comprised approximately 36.4% of the total assets in the
PR Plan.
5. The Applicants represent that the trustees of each of the Plans
have the authority to invest and reinvest all amounts in each
participant's account, as elected by the participant. Generally, in the
absence of any such election, the trustee shall invest the amounts as
specified by the appropriate investment committee of each of the Plans.
The Applicants further represent that the Savings Plan's trust
agreement provides that its trustee has the authority to exercise the
voting rights of any stocks; to exercise any conversion privileges,
subscription rights, or other options; to consent to or otherwise
participate in changes affecting corporate securities; and generally to
exercise any of the powers of an owner with respect to stocks, bonds,
or other property held in the commingled fund or in the trust. The
Applicants also represent that the Plus Plan's and the PR Plan's trust
agreement provides that rights, options, or warrants offered to
purchase UBS Shares shall be exercised by its trustee to the extent
that there is cash available.
The Applicants state that the Savings Plan's trust agreement
provides that cash dividends and earnings attributable to UBS Shares in
the Fund shall be reinvested in the Fund and allocated in whole shares
and fractions thereof to the account of each participant with respect
to whom directed investments in the Fund are maintained on the date
such allocation is made. The Applicants represent that cash dividends
and earnings received by the Plus Plan and the PR Plan's trust are
reinvested by purchasing additional UBS Shares.
The Entitlements
6. On February 27, 2008, as part of UBS's capital improvement
program, the Applicants represent that the UBS board of directors
proposed, and its shareholders approved, a change to the capital
structure of the company that permitted the replacement of the UBS 2007
cash dividend with an award to existing shareholders (including
participants in the Plans who were invested in UBS Shares) of the
Entitlements. The Applicants represent that, with respect to the
awarding of the Entitlements by UBS, the Plans were treated exactly the
same as the other holders of UBS Shares.
On April 28, 2008, UBS awarded a total of 14,440,531 Entitlements
to existing UBS shareholders on the date of record. According to the
Applicants, the award stipulated that, at any time from April 28, 2008
to May 9, 2008, inclusive (the Entitlements Trading Period),
shareholders in general were permitted to buy or sell the Entitlements
on SWX Europe Limited (SWX), a securities exchange based in London,
England.\1\ The Applicants state that at the end of the Entitlements
Trading Period, any Entitlements held by a shareholder were to be
aggregated and automatically converted into an appropriate whole number
of UBS Shares. In this regard, the Applicants represent that under the
terms of the award, no fewer than twenty (20) Entitlements enabled a
[[Page 3649]]
shareholder the right to receive one UBS Share. For example, if an
individual held 23 Entitlements at the conclusion of the Entitlements
Trading Period, he or she would have received a single UBS Share, and
the remaining three Entitlements would have lapsed without any right of
compensation from UBS.
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\1\ The Applicants represent that SWX Europe Limited is a
wholly-owned subsidiary of SWX Swiss Exchange, the securities
exchange of Switzerland, and provides cross-border trading of
primarily Swiss blue-chip securities. The Applicants also state that
SWX Europe Limited (formerly known as virt-x Exchange Limited) has
been in operation since 2001 and is a recognized investment exchange
that is supervised by the United Kingdom's Financial Services
Authority. The Applicants represent that UBS holds no interest in
any of the foregoing financial exchanges.
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The Rights
7. The Applicants represent that, under the foregoing capital
improvement program, UBS decided to effect an ordinary capital increase
by allotting subscription rights (the Rights Offering) to existing
holders of UBS common stock (including participants in the Plans who
were invested in UBS Shares). At its annual general meeting on April
23, 2008, the UBS board of directors proposed, and UBS shareholders
approved, a change to the UBS's capital structure to accommodate the
Rights Offering. The Applicants represent that the Rights Offering
provided for a public offering of approximately 760 million additional
UBS Shares, which would result in approximately $15.5 billion in
additional capital for UBS. The Applicants further represent that the
right to vote on whether to permit the Rights Offering was passed
through under the plans to those participants who held UBS Shares. The
Applicants also represent that, with respect to the awarding of the
Rights by UBS, the Plans were treated exactly the same as the other
holders of UBS Shares. On May 21, 2008, the UBS board of directors
determined the final terms of the Rights Offering, setting the
subscription price at 21.00 Swiss Francs (CHF) per UBS Share (or $20.16
per UBS Share).
On May 27, 2008, UBS awarded one Right for each UBS Share on the
date of record. According to the Applicants, the award stipulated that,
upon receiving the Rights, shareholders in general were permitted to
(i) Exercise their Rights, which entitled them to purchase additional
UBS Shares; (ii) purchase more Rights on the SWX or the New York Stock
Exchange (NYSE); or (iii) sell their Rights on the SWX or the NYSE. The
exercise of twenty (20) Rights allowed the holder to purchase seven (7)
UBS Shares at a price of $20.16 per share. The Applicant states that
the trading period for the Rights ran from May 27, 2008 through June 9,
2008, inclusive (the Rights Trading Period). According to the
Applicant, any Rights that remained unexercised at the end of the
Rights Trading Period lapsed without any right of compensation from
UBS.
8. The Applicants represent that neither the Rights nor the
Entitlements constitute qualifying employer securities as defined in
section 407(d)(5) of the Act. Accordingly, in connection with the
awarding of the Rights and Entitlements by UBS, the applicable
investment provisions of each of the Plans and of the Plans' respective
trust agreements were amended effective April 1, 2008 to expressly
permit the acquisition of the Rights and Entitlements by the Plans
pending the submission of an application for an administrative
exemption with the Department. The Plans and the Plans' respective
trust agreements were further amended as of April 1, 2008 to provide
for the appointment of a designated independent fiduciary possessing
discretionary authority with respect to the holding, exercise,
conversion, sale, or other disposition of the Rights and Entitlements.
In this connection, the provisions of the Plans and of the Plans'
respective trust agreements concerning participant investment elections
were also amended as of April 1, 2008 to permit the designated
independent fiduciary, rather than participants in the Plans, to direct
the disposition of the Rights and Entitlements.
9. On April 28, 2008, each of the Plans contracted with U.S. Trust
to serve both as an investment manager (within the meaning of section
3(38) of the Act) for the Plans and as the designated independent
fiduciary of the Plans with respect to transactions involving the
Rights and Entitlements. The Applicants represent that U.S. Trust is an
experienced and qualified fiduciary with extensive trust and management
capabilities such as discretionary asset management, asset allocation
and diversification, investment advice, securities trading, and the
performance of independent fiduciary assignments for plans covered by
the Act.
At the time of its engagement, U.S. Trust determined that it was in
the interests of the Plans to accept the Rights and Entitlements. In
addition, the Plans' April 28, 2008 engagement agreement with U.S.
Trust specifically charged the independent fiduciary with
responsibility for conducting a due diligence review of the Rights and
Entitlements, as well as developing a prudent strategy for the
disposition of the Rights and Entitlements on behalf of the Plans. In
this connection, the Applicants further represent that they, and not
the Plans, have borne the cost of any fees payable to U.S. Trust for
its investment management and independent fiduciary services.
10. Under the terms of the relevant master trust agreements, the
assets held by each of the trusts in the employer's stock fund must be
invested in UBS Shares. For example, section 3(h) of the master trust
for the Savings Plan states that ``the UBS Stock Fund shall be invested
primarily in UBS Shares,'' and that it ``may be invested in short-term
liquid investments pending investment in UBS Shares.'' In addition,
article 7.5(d) of the UBS Financial Services Inc. Master Investment
Trust Agreement for the Plus Plan and the PR Plan provides that,
``except for short-term investment of cash, [UBS] has limited the
investment power of the Trustee in the Company Stock Investment Fund to
the purchase of [UBS] Stock.'' Accordingly, U.S. Trust decided that
each of the Plans should hold the Entitlements until their automatic
conversion into UBS Shares, rather than permitting the Plans to sell
the Entitlements during the Entitlements Trading Period. U.S. Trust
determined that, absent short-term cash needs, the trustees for the
Plans must invest assets in the Fund in UBS common stock. U.S. Trust
further determined that the Plans would receive substantially the same
value (be it in UBS Shares or in cash) whether the Entitlements were
sold or converted into UBS Shares. In addition, U.S. Trust represents
that selling the Entitlements would have exposed the Plans to market
risk (during the time required to sell the Entitlements and reinvest
the proceeds in UBS common stock), foreign exchange risk (in that the
cash proceeds generated from the sale of the Entitlements on the SWX
would have necessitated a currency conversion to U.S. dollars prior to
reinvestment into UBS common stock), and trading costs associated with
the foregoing transactions.
11. Following the acquisition of the Rights by the Plans, U.S.
Trust determined that the Plans lacked sufficient funds in allocated
accounts to exercise the Rights, and U.S. Trust had no authority to
utilize other assets of the Plans for this purpose. Accordingly, U.S.
Trust decided on behalf of the Plans to sell the Rights on either the
SWX or the NYSE, and also determined the appropriate time during the
Rights Trading Period that each of the Plans should sell the Rights on
one of the exchanges. The Applicants further represent that U.S. Trust
has confirmed that, prior to June 9, 2008 (the expiration of the Rights
Trading Period), all of the Rights held by each of the Plans were sold
in arm's length transactions with third parties on the SWX or the NYSE.
[[Page 3650]]
The Applicants represent that U.S. Trust's in-house trade executing
group executed the sales with brokers Cantor Fitzgerald, Knight
Trading, Merrill Lynch, and JP Morgan, based on the group's independent
evaluation of relevant factors such as price, trading volume, trade
flow, and best execution. The Applicants represent that none of the
foregoing brokers were affiliates of either U.S. Trust or of UBS at the
time that the Rights were sold. The Applicants state that the trades
involving the Rights took place at brokerage commission rates ranging
from $0.01 per Right to $0.015 per Right; collectively, the commissions
represented less than 1% of the total sales proceeds from the Plans'
sales of the Rights. The Applicants represent that all trading
commissions were paid to the respective brokers, and that neither U.S.
Trust nor UBS (nor any affiliates of U.S. Trust or UBS) received any
trading commissions in connection with the sale of the Rights.
12. The Applicants represent that an administrative exemption
providing relief for the acquisition and holding of both the Rights and
Entitlements by the Plans would be administratively feasible because an
independent fiduciary was appointed by the Plans to approve the
acquisition, holding, and disposition of the Rights and Entitlements.
In this connection, U.S. Trust subsequently provided, in writing, a
comprehensive, reasoned rationale concerning its determinations with
respect to the Rights and Entitlements. Accordingly, the Applicants
represent, there is no need for monitoring by the Department of the
transactions that are the subject of this exemption request.
The Applicants represent that, with respect to the Entitlements, an
exemption would be in the interests of the Plans and of their
participants and beneficiaries because it would allow the Plans to
acquire additional UBS Shares, which the independent fiduciary believed
to be beneficial to the Plans. The Applicants represent that, with
respect to the Entitlements, an exemption would be protective of the
rights of participants and beneficiaries because it would ensure that
such participants have the same opportunity as other holders of UBS
Shares to receive additional UBS Shares.
With respect to the Rights, the Applicants represent that an
exemption would be in the interests of the Plans, and protective of the
Plans and of their participants and beneficiaries, because it would
ensure that such individuals have the same opportunity as other holders
of UBS Shares to sell the Rights on an exchange and receive the
proceeds from any such sale.
13. In summary, the Applicants represent that the past transactions
for which exemptive relief is sought meet the statutory criteria of
section 408(a) of the Act because: (a) All decisions regarding the
acquisition and holding of the Rights and Entitlements by the Plans
were made by U.S. Trust, Bank of America Private Wealth Management
(U.S. Trust), a qualified, independent fiduciary; (b) the Plans'
acquisition of the Rights and Entitlements resulted from an independent
act of UBS as a corporate entity, and without any participation on the
part of the Plans; (c) the acquisition and holding of the Rights and
Entitlements by the Plans occurred in connection with a capital
improvement plan approved by the board of directors of UBS, in which
all holders of UBS common stock, including the Plans, were treated
exactly the same; (d) all holders of UBS common stock, including the
Plans, were issued the same proportionate number of Rights based on the
number of shares of UBS common stock held by such Plans; (e) all
holders of UBS common stock, including the Plans, were issued the same
proportionate number of Entitlements based on the number of shares of
UBS common stock held by such Plans; (f) the acquisition of the Rights
and Entitlements by the Plans occurred on the same terms made available
to other holders of UBS common stock; (g) the acquisition of the Rights
and Entitlements by the Plans was made pursuant to provisions of each
such Plan for individually-directed investment of participant accounts;
and (h) the Plans did not pay any fees or commissions in connection
with the acquisition or holding of the Rights or Entitlements.
Notice to Interested Persons: Notice of the proposed exemption
shall be given to all interested persons in the manner agreed upon by
the Applicants and the Department within 15 days of the date of
publication in the Federal Register. Comments and requests for a
hearing are due forty-five (45) days after publication of the notice in
the Federal Register.
FOR FURTHER INFORMATION CONTACT: Mr. Mark Judge of the Department,
telephone (202) 693-8339. (This is not a toll-free number).
Robert W. Baird & Co. Incorporated, Located in Milwaukee,
Wisconsin.
Exemption Application Number D-11488
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Employee Retirement Income Security
Act of 1974 (ERISA or the Act) and section 4975(c)(2) of the Internal
Revenue Code of 1986, as amended (the Code), and in accordance with the
procedures set forth in 29 CFR Part 2570, Subpart B (55 FR 32836,
32847, August 10, 1990).\2\
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\2\ For purposes of this proposed exemption, references to
section 406 of ERISA should be read to refer as well to the
corresponding provisions of section 4975 of the Code.
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Section I. Loans Involving Auction Rate Securities
If the proposed exemption is granted, the restrictions of section
406(a)(1)(A) through (D) and section 406(b)(1) and (2) 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, shall not apply,
effective February 1, 2008, to the lending of Auction Rate Securities
(as defined in section III(b)) by a Plan (as defined in section III(e))
to Robert W. Baird & Co. Incorporated or any of its affiliates (Baird),
provided that the conditions set forth in section II have been met.
Section II. Conditions
(a) The last auction for the loaned Auction Rate Security was
unsuccessful;
(b) The Plan does not waive any rights or claims in connection with
the Auction Rate Security as a condition of engaging in the loan (the
Loan);
(c) The transaction is not part of an arrangement, agreement or
understanding designed to benefit a party in interest;
(d) Baird is and remains a broker-dealer registered under the
Securities Exchange Act of 1934 (the Exchange Act) or is exempt from
registration under section 15(a)(1) of the Exchange Act as a dealer in
exempted government securities (as defined in section 3(a)(12) of the
Exchange Act);
(e) The decision to enter into a Loan is made by a Plan fiduciary
who is Independent (as defined in section III(d)) of Baird.
Notwithstanding the foregoing, an employee of Baird who is the
Beneficial Owner (as defined in section III(c)) of a Title II Only Plan
(as defined in section III(f)) may direct the Title II Only Plan to
engage in a Loan if all of the other applicable conditions of this
exemption, if granted, have been met;
(f) Prior to any Loan, Baird shall have furnished the Plan
fiduciary described in paragraph (e) with:
(1) The most recently available audited statement of Baird's
financial condition, as audited by a United States certified public
accounting firm;
[[Page 3651]]
(2) The most recently available unaudited statement of Baird's
financial condition (if the unaudited statement is more recent than the
audited statement described above); 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. Such representations may be made by Baird's agreement that each
Loan shall constitute a representation by Baird that there has been no
such material adverse change. Notwithstanding the foregoing, an
employee of Baird who is the Beneficial Owner of a Title II Only Plan
may receive the information described in this paragraph (f) if all of
the other applicable conditions of this exemption, if granted, have
been met;
(g) The Loan is made pursuant to a written loan agreement (the
Lending 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.
The Lending Agreement must contain all of the material terms of the
Loan and cover only the lending of Auction Rate Securities by the Plan
to Baird. Such Lending Agreement may be in the form of a master
agreement covering a series of Loans;
(h) With respect to any Loan, Baird credits the lending Plan's
account with Baird (the Account) with an amount of cash equal to 100
percent of the total par value of the loaned Auction Rate Securities.
Baird must credit the Account by the close of business on the day on
which Baird receives the Auction Rate Securities from the Plan;
(i) The Plan has the opportunity to derive compensation through the
investment of the cash collateral described in paragraph (h);
(j) The Plan pays Baird a rebate fee negotiated in advance of the
Loan that does not exceed the interest and/or dividends the Plan
receives in connection with its ownership of the loaned Auction Rate
Securities;
(k) The Plan may terminate the Loan at any time and for any reason;
(l) Baird may terminate the Loan if:
(1) The Plan closes its Account or reduces the balance thereof to
less than 100 percent of the total par value of the Auction Rate
Securities that are the subject of the Loan;
(2) The Plan is an individual retirement account described in
section 4975(e)(1)(B)-(F) of the Code (an IRA) and the Beneficial Owner
of the IRA dies or divides the IRA pursuant to a divorce, annulment or
marital settlement;
(3) The Auction Rate Security associated with the Loan is redeemed
by its issuer or may be sold at auction for its par value, or;
(4) Baird identifies a secondary market for the Auction Rate
Security which Baird has a reasonable basis to believe will permit the
lending Plan to receive no less than 90% of the Security's par value if
the Auction Rate Security is promptly offered for sale on such market;
(m) Following any Loan termination as set forth in (k) or (l),
Baird shall deliver Auction Rate Securities to the Plan which are
identical (or the equivalent thereof (in the event of a reorganization,
recapitalization or merger of the issuer of the Auction Rate
Securities)) to the Auction Rate Securities borrowed by Baird 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 Baird;
(n) Following any Loan termination as set forth in (k) or (l), if
Baird fails to return all the borrowed Auction Rate Securities (or the
equivalent thereof (in the event of a reorganization, recapitalization
or merger of the issuer of the Auction Rate Securities)) within the
timeframe set forth in paragraph (m), the Plan may keep the full amount
of cash collateral provided by Baird in connection with the Loan;
(o) Following any Loan termination as set forth in (k) or (l), if
the Plan fails to return the full amount of cash collateral:
(1) Baird may liquidate the borrowed Auction Rate Securities, in
which case the Plan's obligation to return the cash collateral shall
terminate. If the amount received by Baird from the liquidation (after
deducting brokerage commissions and other transaction costs) exceeds
the amount of cash collateral provided by Baird in connection with the
Loan, then Baird shall pay such excess to the Plan. If the amount
received by Baird from the liquidation (after deducting brokerage
commissions and other transaction costs) is less than the amount of
cash collateral provided by Baird in connection with the Loan, then the
Plan shall pay such deficiency to Baird; or
(2) If Baird is unable to liquidate the ARS, Baird will retain the
ARS and reserve its right to sue the Plan;
(p)(1) Where the Plan, as lender, does not return the full amount
of cash collateral in connection with a Loan termination, Baird, as
borrower, can seek interest at the prime rate on the amount of cash
collateral owed by the Plan;
(2) Where Baird, as borrower, does not return the excess described
in (o)(1), if any, the Plan, as lender, can seek interest at the prime
rate on the amount of excess owed by Baird; and
(q) If Baird fails to comply with any provision of a loan agreement
which requires compliance with this exemption, if granted, 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 ERISA solely by reason of
Baird's failure to comply with the conditions of the exemption.
Section III. Definitions
(a) The term ``affiliate'' means any person directly or indirectly,
through one or more intermediaries, controlling, controlled by, or
under common control with such other person;
(b) The term ``Auction Rate Security'' or ``ARS'' means a security:
(1) that is either a debt instrument (generally with a long-term
nominal maturity) or preferred stock; and
(2) with an interest rate or dividend that is reset at specific
intervals through a Dutch auction process;
(c) The term ``Beneficial Owner'' means: The individual for whose
benefit a Title II Only Plan is established and includes a relative or
family trust with respect to such individual;
(d) The term ``Independent'' means a person who is: (1) Not Baird
or an affiliate; and (2) not a relative (as defined in ERISA section
3(15)) of the party engaging in the transaction;
(e) The term ``Plan'' means: Any plan described in section 3(3) of
the Act and/or section 4975(e)(1)(B)-(F) of the Code; and
(f) The term ``Title II Only Plan'' means: Any plan described in
section 4975(e)(1) of the Code which is not an employee benefit plan
covered by Title I of ERISA.
Summary of Facts and Representations
1. The applicant is Baird (hereinafter, either the Applicant or
Baird), an employee-owned wealth management, capital markets, asset
management and private equity firm headquartered in Milwaukee,
Wisconsin. Baird is a registered broker-dealer and a member of the
Financial Industry Regulatory Authority. Baird is also a registered
investment advisor, providing investment advice and asset management
services to clients that include the Plans, which are plans described
in section 3(3) of the Act and/or section 4975(e)(1) of the Code.
2. The Applicant describes Auction Rate Securities (ARS), and the
[[Page 3652]]
arrangement by which ARS are bought and sold, as follows. Auction Rate
Securities are securities (issued as debt or preferred stock) with an
interest rate or dividend that is reset at periodic intervals pursuant
to a process called a Dutch Auction. Investors submit orders to buy,
hold, or sell a specific ARS to a broker-dealer selected by the entity
that issued the ARS. The broker-dealers, in turn, submit all of these
orders to an auction agent. The auction agent's functions include
collecting orders from all participating broker-dealers by the auction
deadline, determining the amount of securities available for sale, and
organizing the bids to determine the winning bid. If there are any buy
orders placed into the auction at a specific rate, the auction agent
accepts bids with the lowest rate above any applicable minimum rate and
then successively higher rates up to the maximum applicable rate, until
all sell orders and orders that are treated as sell orders are filled.
Bids below any applicable minimum rate or above the applicable maximum
rate are rejected. After determining the clearing rate for all of the
securities at auction, the auction agent allocates the ARS available
for sale to the participating broker-dealers based on the orders they
submitted. If there are multiple bids at the clearing rate, the auction
agent will allocate securities among the bidders at such rate on a pro-
rata basis.
3. The Applicant states that Baird is permitted, but not obligated,
to submit orders in auctions for its own account either as a bidder or
a seller and routinely does so in the auction rate securities market in
its sole discretion. In this regard, Baird may routinely place one or
more bids in an auction for its own account to acquire ARS for its
inventory, to prevent: (1) A failed auction (i.e., an event where there
are insufficient clearing bids which would result in the auction rate
being set at a specified rate); or (2) an auction from clearing at a
rate that Baird believes does not reflect the market for the particular
ARS being auctioned.
4. The Applicant states that for many ARS, Baird has been appointed
by the issuer of the securities to serve as a dealer in the auction and
is paid by the issuer for its services. Baird is typically appointed to
serve as a dealer in the auctions pursuant to an agreement between the
issuer and Baird. That agreement provides that Baird will receive from
the issuer auction dealer fees based on the principal amount of the
securities placed through Baird.
5. The Applicant states further that Baird may share a portion of
the auction rate dealer fees it receives from the issuer with other
broker-dealers that submit orders through Baird, for those orders that
Baird successfully places in the auctions. Similarly, with respect to
ARS for which broker-dealers other than Baird act as dealer, such other
broker-dealers may share auction dealer fees with Baird for orders
submitted by Baird.
6. According to the Applicant, since February 2008, a minority of
auctions have cleared, particularly involving municipalities. The
Applicant represents that, in certain instances, when an auction fails,
the affected Auction Rate Security may pay little or no interest and/or
dividends to the holder of the Security. The Applicant states that,
when this happens, the owner of the Auction Rate Security may benefit
from lending such low-paying Security as part of a securities lending
transaction that: (1) Is collateralized with cash; and (2) limits the
loan rebate fee (described below) to the interest and/or dividends
attributable to the loaned Auction Rate Security. The Applicant
describes the loan rebate fee as the fee paid by the lender of the
Auction Rate Security (i.e., a Plan) to the borrower of the Auction
Rate Security (i.e., Baird). Under the methodology described above, if,
for example, a Plan lends an Auction Rate Security paying a one percent
rate of interest to Baird, the Plan would pay Baird a loan rebate fee
of one percent, leaving the Plan free to invest and receive interest on
the cash collateral. The Applicant notes that a Plan receiving cash
collateral for its loaned Auction Rate Securities benefits to the
extent it is able to derive a greater rate of return (through the
investment of such cash collateral) than the Plan would otherwise have
received, as interest and/or dividends, from the issuer of the Auction
Rate Security. However, the Applicant points out that lending Auction
Rate Securities pursuant to this methodology may not always be
advisable.\3\ In this regard, the Applicant represents that, in certain
instances, when an auction fails, the affected Auction Rate Security
may default to a high rate of interest or dividends. To the extent a
Plan lends an Auction Rate Security bearing a high rate of interest,
and, under the terms of the loan agreement, the Plan is required to pay
a loan rebate fee equal to the interest or dividends attributable to
the loaned Security, the Plan may be foregoing a greater rate of return
than the Plan is likely to receive from its investment of the cash
collateral. The Applicant explains this detrimental result with the
following example: (1) A Plan earning 10% on an Auction Rate Security
would be paying that 10% to Baird in the form of a loan rebate fee; (2)
the Plan is not likely to receive more than 10% on the investment of
the cash collateral provided by Baird in connection with the loan.
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\3\ The Department notes that the Act's general standards of
fiduciary conduct applies to the transactions described herein. In
this regard, section 404 requires, among other things, that a
fiduciary discharge his duties respecting a plan solely in the
interest of the plan's participants and beneficiaries and in a
prudent manner. Accordingly, a fiduciary with respect to a Plan must
act prudently with respect to, among other things, the decision to
lend Auction Rate Securities to Baird. The Department further
emphasizes that it expects Plan fiduciaries, prior to entering into
any transaction proposed herein, to fully understand the risks
associated with this type of transaction following disclosure by
Baird of all relevant information. Plan fiduciaries are cautioned to
carefully consider their particular facts and circumstances before
determining whether a Loan transaction with Baird would satisfy
section 404 of ERISA.
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7. The Applicant states that several Plans holding Auction Rate
Securities with failed auctions previously expressed an interest in
lending such Auction Rate Securities to Baird and, in response, Baird
sent the Lending Agreement to such Plans. Each Lending Agreement
required, among other things as described in further detail below: (1)
That Baird, as borrower, pay cash collateral to the Plan lending the
Auction Rate Securities; and (2) the Plan, as lender, to pay Baird a
rebate fee equal to the interest or dividends the Plan would otherwise
have received in connection with its ownership of the Auction Rate
Security. The Applicant states that certain of these loans have already
occurred. In this regard, the Applicant represents that, as of December
23, 2008, 6 Plans have lent a total (par value) of $1,175,000 in
Auction Rate Securities to Baird: The first Loan was entered into on
August 22, 2008, and the most recent Loan was entered into on November
24, 2008.
8. In connection with the above Loans, and to permit additional
future Loans, the Applicant is requesting this proposed exemption.
According to the Applicant, all Loans covered by the exemption, if
granted, have been (and will be) structured in a manner that is
protective of lending Plans. In this regard, the Applicant represents
that, prior to entering into a Loan, a Plan fiduciary who is
independent of Baird (with very narrow exceptions) will receive a
written Lending Agreement. Among other things, the Agreement will alert
such fiduciary that lending Auction Rate Securities paying an above-
market rate of interest may not be advisable. The Plan fiduciary will
further receive timely audited information from Baird regarding the
financial condition of Baird; and must
[[Page 3653]]
approve the Plan's participation in the Loan. Upon such approval, Baird
will credit the lending Plan's Account with an amount of cash equal to
100 percent of the par value of loaned Auction Rate Securities. This
crediting must be accomplished by the close of business on the day on
which Baird receives the Auction Rate Securities from the Plan, and the
lending Plan will thereafter have the opportunity to derive
compensation through the investment of the cash collateral. The
Applicant states any rebate fee paid by a lending Plan to Baird
pursuant to a Loan has not (and will not) exceed the interest and/or
dividends the Plan receives in connection with its ownership of the
loaned Auction Rate Securities. The Applicant states also that each
Loan will involve only Auction Rate Securities for which the last
auction was unsuccessful, and that lending Plans will not waive any
rights or claims in connection with the Auction Rate Security as a
condition of engaging in the Loan. The Applicant represents further
that the Loans will not be part of an arrangement, agreement or
understanding designed to benefit a party in interest.
9. That Applicant represents also that a Plan may terminate a Loan
at any time and for any reason. Baird, however, may terminate a Loan
only in certain limited and specified instances. In this latter regard,
pursuant to the terms of each Lending Agreement, Baird may only
terminate a Loan if: (1) The Plan closes its Account or reduces the
balance thereof to less than 100 percent of the par value of the loaned
Auction Rate Securities; (2) the Plan is an IRA and the Beneficial
Owner of the IRA dies or divides the IRA pursuant to a divorce,
annulment or marital settlement; (3) the Auction Rate Security
associated with the Loan is redeemed by its issuer or may be sold at
auction for its par value; or (4) Baird identifies a secondary market
for the Auction Rate Security which Baird has a reasonable basis to
believe will permit the lending Plan to receive no less than 90% of the
Security's par value if the Auction Rate Security is promptly offered
for sale on such market.
10. The Applicant states that each Lending Agreement contains
several provisions designed to ensure that any Loan termination, as
described above, will be carried out in a manner that is fair and
equitable to lending Plans. In this regard, the Applicant represents
that if a Loan is properly terminated and Baird fails to return all the
borrowed Auction Rate Securities within the timeframe specified in the
Lending Agreement, the Plan may keep the full amount of cash collateral
provided by Baird in connection with the Loan. If the Plan fails to
return the full amount of cash collateral, Baird may liquidate the
borrowed Auction Rate Securities. In this last regard, if the net
amount received by Baird from the liquidation: (1) exceeds the amount
of cash collateral provided by Baird in connection with the Loan, then
Baird shall pay such excess to the Plan; (2) is less than the amount of
cash collateral provided by Baird in connection with the Loan, then the
Plan shall pay such deficiency to Baird. The Applicant notes that, if
Baird is unable to liquidate the Auction Rate Securities, Baird will
retain the ARS and reserve its right to sue the Plan. The Applicant
notes also that, under the Lending Agreement, if one party to the Loan
does not return the full amount due its counterparty (e.g., if Baird
does not return all the borrowed Auction Rate Securities to a Plan),
the Loan counterparty will be entitled to interest equal to the prime
rate.
10. In summary, the Applicant represents that the transactions
described herein satisfy the statutory criteria set forth in section
408(a) of the Act and section 4975(c)(2) of the Code because, among
other things:
(a) Lending Plans will not waive any rights or claims in connection
with the Auction Rate Security as a condition of engaging in the Loan;
(b) Prior to any Loan, Baird shall have furnished a Plan fiduciary
with, at a minimum, the most recently available audited statement of
Baird's financial condition, as audited by a United States certified
public accounting firm;
(c) Each Loan will be made pursuant to a written Lending Agreement,
the terms of which will be at least as favorable to the Plan as an
arm's-length transaction with an unrelated party would be;
(d) With respect to any Loan, Baird will credit the lending Plan's
Account with an amount of cash equal to 100 percent of the par value of
loaned Auction Rate Securities, and such crediting will occur by the
close of business on the day on which Baird receives the Auction Rate
Securities from the Plan;
(e) The Plan will have the opportunity to derive compensation
through the investment of the cash collateral;
(f) The Plan will pay Baird a rebate fee negotiated in advance of
the Loan that does not exceed the interest or dividends the Plan
receives in connection with its ownership of the loaned Auction Rate
Securities;
(g) The Plan may terminate the Loan at any time and for any reason;
(h) Baird may terminate the Loan in narrow circumstances described
in the Lending Agreement; and
(i) Any termination of the Loan will be fair and equitable to the
lending Plan.
Notice to Interested Persons
The Applicant represents that the potentially interested
participants and beneficiaries cannot all be identified and therefore
the only practical means of notifying such participants and
beneficiaries of this proposed exemption is by the publication of this
notice in the Federal Register. However, written notice will be
provided to a representative of each Plan that has engaged in a Loan as
of the date this notice is published in the Federal Register. The
notice shall contain a copy of the proposed exemption as published in
the Federal Register and an explanation of the rights of interested
parties to comment regarding the proposed exemption. Such notice will
be provided by personal or express delivery within 15 days of the
issuance of the proposed exemption. Comments and requests for a hearing
must be received by the Department not later than 45 days from the date
of publication of this notice of proposed exemption in the Federal
Register.
FOR FURTHER INFORMATION CONTACT: Chris Motta 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,
[[Page 3654]]
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 13th day of January 2009.
Ivan Strasfeld,
Director of Exemption Determinations, Employee Benefits Security
Administration, U.S. Department of Labor.
[FR Doc. E9-962 Filed 1-16-09; 8:45 am]
BILLING CODE 4510-29-P