[Federal Register: May 6, 2009 (Volume 74, Number 86)]
[Notices]
[Page 20974-20990]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr06my09-101]
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
[Application Nos. and Proposed Exemptions; D-11498, MarkWest Energy
Partners, L.P.; D-11508, Barclays Global Investment, N.A. and Its
Affiliates and Successors (BGI) and Barclays Capital Inc. and Its
Affiliates and Successors (BarCap) (collectively Applicants); and D-
11523, The Bank of New York Mellon Corporation (BNYMC) and Its
Affiliates (Collectively, BNY Mellon), et al.]
Notice of Proposed Exemptions
AGENCY: Employee Benefits Security Administration, Labor
ACTION: Notice of Proposed Exemptions.
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[[Page 20975]]
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.
MarkWest Energy Partners, L.P. Located in Denver, Co
[Application No. D-11498]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR part
2570, subpart B (55 FR 32836, 32847, August 10, 1990).
I. Retroactive Transactions
If the proposed exemption is granted, the restrictions of sections
406(a)(1)(A), 406(a)(1)(E), 406(a)(2), 406(b)(1), and 406(b)(2) of the
Act and the sanctions resulting from the application of section 4975 of
the Code, by reason of section 4975(c)(1)(A) and 4975(c)(1)(E) of the
Code,\1\ shall not apply, effective February 21, 2008:
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\1\ For purposes of this proposed exemption, references to
specific provisions of Title I of the Act, unless otherwise
specified, refer also to the corresponding provisions of the Code.
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(a) To the acquisition by the individually, directed accounts (the
Account(s)) of participants in the MarkWest Hydrocarbon, Inc. 401(k)
Savings and Profit-Sharing Plan (the Plan), of publicly traded
partnership units (the Units) issued by MarkWest Energy Partners, LP
(Partners), the parent of MarkWest Hydrocarbon Inc. (Hydrocarbon),
which is the sponsor of the Plan, as a result of the conversion of the
common stock of Hydrocarbon (the Stock) held by the Plan into Units,
pursuant to a plan of Redemption and Merger (the Merger); and
(b) to the holding of such Units by the Accounts in the Plan;
provided that the conditions, as set forth, below, in this section
I(b)(1) through (13), and the general conditions, as set forth, below,
in section III of this proposed exemption, were satisfied at the time
the transaction, described, above, in sections I(a) of this proposed
exemption, was entered into and the transaction, described, above, in
section I(b) of this proposed exemption occurred:
(1) The past acquisition and holding of the Units by the Accounts
in the Plan occurred in connection with the conversion of the Stock,
pursuant to the terms of the Merger, which was the result of an
independent act of Hydrocarbon, as a corporate entity;
(2) All shareholders of the Stock, including the participants in
the Accounts in the Plan, were treated in a like manner with respect to
all aspects of the redemption and conversion of the Stock, pursuant to
the terms of the Merger;
(3) The past acquisition and holding of the Units by the Accounts
in the Plan occurred in accordance with provisions in the Plan for
individual participant direction of the investment of the assets of
such Accounts;
(4) The past acquisition and holding of the Units were each one-
time transactions, and the dispositions of the Units by the Accounts in
the Plan occurred in a series of transactions for cash on the New York
Stock Exchange (NYSE);
(5) The participants in the Accounts in the Plan were provided with
all shareholder rights and with the opportunity to direct the trustee
of the Plan to vote ``for'', ``against,'' or ``abstain'' with regard to
the redemption and conversion of the Stock held in the Accounts in the
Plan, pursuant to the terms of the Merger.
(6) The decision as to which compensation package to accept, in
connection with the redemption and conversion of the Stock held in
Accounts in the Plan, was made in accordance with the directions of the
individual participants in whose Accounts such Stock was held, or, in
the case of Accounts in the Plan for which no participant direction was
given, the decision as to which compensation package to accept, in
connection with the redemption and conversion of the Stock held in such
Accounts in the Plan, was made in accordance with the directions of an
independent, qualified fiduciary (the I/F), acting on behalf of such
Accounts;
(7) The Units acquired, as a result the conversion of the Stock
held in the Accounts in the Plan, pursuant to the
[[Page 20976]]
terms of the Merger, were held in such Accounts for no more than a
period of sixty (60) days after such Units were acquired by such
Accounts;
(8) The Accounts in the Plan disposed of all of the Units that such
Accounts acquired as a result of the conversion of the Stock; and such
dispositions occurred on the NYSE in a series of blind transactions for
cash resulting in a weighted average price per Unit of no less than
$32.394,
(9) The cash proceeds from such dispositions of the Units by the
Accounts in the Plan were distributed thereafter to each of the
Accounts based on the number of Units held in each such Account;
(10) The decision to dispose of the Units, acquired by the Accounts
in the Plan as a result of the conversion of the Stock was made by the
I/F, acting on behalf of each such Account;
(11) The Accounts in the Plan did not pay any fees, commissions,
transaction costs, or other expenses in connection with the redemption
of the Stock by Hydrocarbon, the conversion of the Stock into Units,
the acquisition and holding of such Units by such Accounts in the Plan,
or the disposition of the Units on the NYSE ;
(12) At the time each of the transactions, described, above, in
sections I(a) and I(b) of this proposed exemption occurred, the
individual participants whose Accounts in the Plan engaged in each such
transaction, or the I/F, acting on behalf of Accounts in the Plan for
which no participant direction was given, determined that each such
transaction was in the interest of the participants and beneficiaries
of such Accounts; and
(13) The I/F took all appropriate actions necessary to safeguard
the interests of the Accounts in the Plan, in connection with the
transactions, described, above, in sections I(a)and I(b) of this
proposed exemption.
II. Prospective Transactions
If the proposed exemption is granted, the restrictions of sections
406(a)(1)(E) and 406(a)(2) of the Act shall not apply, effective, as of
the date a final exemption is published in the Federal Register, to:
(a) The purchase of Units in the future by the Accounts in the
Plan, and
(b) The holding of such Units by the Accounts in the Plan, provided
that the conditions, as set forth below, in this section II(b)(1)
through (8), and the general conditions, as set forth, below, in
section III of this proposed exemption, are satisfied at the time the
transaction, described, above, in section II(a) of this proposed
exemption is entered into, and at the time the transaction, described,
above, in section II(b) of this proposed exemption occurs:
(1) The decision by the Accounts in the Plan as to whether to
engage in the purchase, the holding, or the sale of the Units shall be
made by the individual participants of the Accounts in the Plan which
engage in such transactions;
(2) Hydrocarbon, rather than the Accounts in the Plan, shall bear
any fees, commissions, expenses, or transaction costs, with respect to
the purchase, holding, or sale of the Units;
(3) Each purchase and each sale of any of the Units shall occur
only in blind transactions for cash on the NYSE at the fair market
value of such Units on the date of each such purchase and each such
sale;
(4) Each purchase and each sale of any of the Units shall occur on
the same day (or if such day is not a trading day, the next day) as the
direction to purchase or to sell the Units is received by the
administrator of the Plan from the applicable participant of an Account
which is engaging in such purchase or such sale;
(5) The terms of each purchase and each sale are at least as
favorable to the Account as terms generally available in comparable
arm's-length transactions between unrelated parties;
(6) Prior to the purchase by an Account in the Plan of any Units,
Partners provides the participant who is directing the investment of
such Account in the Units with the most recent prospectus describing
the Units, and the most recent quarterly statement, and annual report,
concerning Partners, and thereafter, provides such participant with
updated prospectuses on the Units, and updated quarterly statements,
and annual reports of Partners, as published;
(7) Prior to a participant of an Account in the Plan engaging in
the purchase of any Units, Partners must provide the following
disclosures to such participant. The disclosure must contain the
following information regarding the transactions and a supplemental
disclosure must be made to the participant directing the covered
investments if material changes occur. This disclosure must include:
(A) Information relating to the exercise of voting, tender, and
similar rights with respect to the Units;
(B) The exchange or market system where the Units are traded; and
(C) A statement that a copy of the proposed and final exemption
shall be provided to participants upon request.
(8) Each participant in an Account in the Plan shall have
discretionary authority to direct the investment of such Account:
(A) To sell the Units purchased by such Account no less frequently
than monthly, and
(B) to vote, tender, and exercise similar rights with respect to
the Units held in such Account.
III. General Conditions
(a) Partners or its affiliates maintain, or cause to be maintained,
for a period of six (6) years from the date of each of the covered
transactions such records as are necessary to enable the persons
described, below, in section III(b)(1), to determine whether the
conditions of this exemption have been met, except that--
(1) No party in interest with respect to the Plan which engages in
the covered transactions, other than Partners and its affiliates, shall
be subject to a civil penalty under section 502(i) of the Act or the
taxes imposed by section 4975(a) and (b) of the Code, if such records
are not maintained, or are not available for examination, as required,
below, by section III(b)(1); and
(2) A separate prohibited transaction shall not be considered to
have occurred solely because, due to circumstances beyond the control
of Partners and its affiliates, such records are lost or destroyed
prior to the end of the six-year period.
(b)(1) Except as provided, below, in section III(b)(2), and
notwithstanding any provisions of subsections (a)(2) and (b) of section
504 of the Act, the records referred to, above, in section III(a) are
unconditionally available at their customary location for examination
during normal business hours by--
(A) Any duly authorized employee or representative of the
Department, the Internal Revenue Service, or the Securities and
Exchange Commission; or
(B) Any fiduciary of the Plan that engages in the covered
transactions, or any duly authorized employee or representative of such
fiduciary; or
(C) Any employer of participants and beneficiaries and any employee
organization whose members are covered by the Plan that engages in the
covered transactions, or any authorized employee or representative of
these entities; or
(D) Any participant or beneficiary of the Plan that engages in the
covered transactions, or duly authorized employee or representative of
such participant or beneficiary;
(2) None of the persons described, above, in section III(b)(1)(B)-
(D) shall be authorized to examine trade secrets of Partners and its
affiliates, or commercial
[[Page 20977]]
or financial information which is privileged or confidential; and
(3) Should Partners or its affiliates refuse to disclose
information on the basis that such information is exempt from
disclosure, Partners or its affiliates shall, by the close of the
thirtieth (30th) day following the request, provide a written notice
advising that person of the reasons for the refusal and that the
Department may request such information.
Summary of Facts and Representations
1. The Plan is a 401(k) defined contribution profit-sharing plan,
established on August 1, 1993. Fidelity Management Trust Company
(Fidelity) with offices in Boston, Massachusetts is the trustee for the
Plan.
Full-time permanent employees of Hydrocarbon are eligible to
participate in the Plan. There are an estimated 441 participants and
beneficiaries in the Plan. Individual Accounts are maintained for each
participant in the Plan. Each participant's Account is credited with
the participant's contribution, non-discretionary matching
contributions made by Hydrocarbon, any allocations of discretionary
contributions made by Hydrocarbon, and any earnings or losses and
expenses, which are allocated based on the balance in each
participant's Account.
Participants direct the investment of their contributions into
various investment options offered by the Plan. The Plan currently
offers mutual funds and a collective trust fund as investment options.
As of September 9, 2008, the approximate aggregate fair market value of
the total assets of the Plan was $23,058,075.
Prior to the consummation of the Merger, discussed in greater
detail below, the Plan permitted investments in shares of the common
Stock of Hydrocarbon, which at that time was publicly traded. It is
represented that shares of such Stock are ``qualifying employer
securities,'' pursuant to section 407(d)(5) of the Act.\2\
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\2\ The Department, herein, is not opining as to whether the
Hydrocarbon Stock satisfies the definition of ``qualifying employer
securities'', as set forth in section 407(d)(5) of the Act, nor is
the Department, herein, providing any relief from Title I or Title
II of the Act for the acquisition and holding of such Stock by the
Plan.
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Immediately prior to the Merger, the Plan held approximately 137
million shares of Hydrocarbon Stock, representing 2 percent (2%) of the
outstanding shares of such Stock. As of December 31, 2007, the value of
the Hydrocarbon Stock represented approximately 49 percent (49%) of the
aggregate value of the assets of the Plan. After the effective date of
the Merger, Hydrocarbon Stock was delisted from the American Stock
Exchange, and the Stock was eliminated as an investment option under
the Plan.
2. Hydrocarbon, the sponsor and named fiduciary of the Plan, is the
applicant (the Applicant) for this proposed exemption. Hydrocarbon was
founded in 1988 as a partnership and later incorporated in the state of
Delaware. Currently, Hydrocarbon has offices located in Denver
Colorado. Hydrocarbon completed an initial public offering of its
common Stock in 1996.
3. On January 25, 2002, Hydrocarbon formed Partners, a master
limited partnership with MarkWest Energy, GP, L.L.C., as the general
partner (the GP). As of December 31, 2006, Hydrocarbon owned a 17
percent (17%) interest in Partners and an 89.7 percent (89.7%)
ownership interest in the GP.
Partners is a Delaware limited partnership, engaged in the
gathering, transportation and processing of natural gas, the
transportation, fractionation, and storage of natural gas liquids, and
the gathering and transportation of crude oil. Partners conducts
business in the southwest, northeast, and the Gulf Coast of the United
States.
Partners does not have any employees. Employees of Hydrocarbon
operate Partner's facilities and provide general and administrative
services. As of September 28, 2007, Hydrocarbon employed approximately
318 people for these purposes.
4. On September 5, 2007, Hydrocarbon entered into a Plan of
Redemption and Merger with Partners and with MWEP, L.L.C. (MWEP), which
is a wholly-owned subsidiary of Partners. The terms of the Merger were
negotiated between Hydrocarbon and Partners. It is represented that no
shareholder was treated in a different manner, pursuant to the terms of
the Merger. On February 21, 2008, the Merger was consummated.
Accordingly, as a result of the Merger, MWEP merged with and into
Hydrocarbon, and Hydrocarbon became a direct wholly-owned subsidiary of
Partners.
It is represented that, as minority shareholders, the Accounts in
the Plan did not have the ability to materially influence the structure
of the Merger. It is represented that under the terms of the Plan,
voting rights to the Stock were passed through to participants in
Accounts in the Plan. Accordingly, the participants in the Accounts in
the Plan were provided with shareholder rights to vote ``for'' or
``against,'' or ``abstain'' with regard to the Merger and to elect the
form of consideration such Accounts would receive as a result of the
Merger. The deadline for the exercise of such rights was February 13,
2008.
Under the terms of the Merger, shareholders of the Stock, including
the participants of Accounts in the Plan, were permitted to elect to
receive consideration for their shares of Stock in the form of: (a) An
exchange of all shares of Stock attributable to an Account in the Plan
for a stated consideration of $20 in cash and 1.285 Units per share of
Stock; (b) an exchange of all shares of Stock attributable to an
Account in the Plan for 1.905134 Units per share of Stock, (c) an
exchange of all shares of Stock attributable to an Account in the Plan
for $61.442663 of cash per each share of Stock, or (d) an exchange of a
specific portion of the shares of Stock attributable to an Account in
the Plan for cash and the balance in Units. It is represented that
Stock exchanged for cash was redeemed by Hydrocarbon immediately prior
to the Merger.
As a result of the Merger, it is represented that shareholders of
the Hydrocarbon Stock received in the aggregate consideration of
approximately 15,400,000 Units and $240,000,000 in cash. Specifically,
the Accounts in the Plan exchanged 229,372 shares of Stock for 294,743
Units and received approximately $4.6 million in cash.\3\
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\3\ In the opinion of the Applicant, the cash portion of the
consideration received by the Accounts in the Plan, as a result of
the redemption of the Stock held by such Accounts in the Plan, is
statutorily exempt, pursuant to section 408(e) of the Act. Section
408(e) of the Act provides that a plan may sell ``qualifying
employer securities,'' to a party in interest, provided the plan
receives adequate consideration, and no commission is charged. The
Department, herein, is offering no view, as to whether the cash
redemption of the Hydrocarbon Stock held in the Accounts in the Plan
satisfied the requirements of the statutory exemption provided under
section 408(e) of the Act. The Department, herein, is not providing
any exemptive relief, with respect to such redemption of such Stock
by the Accounts in the Plan.
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It is represented that the cash payments were made to the Accounts
in the Plan through a redemption process in which no brokerage fees
were paid. In order to accommodate the redemption of the Stock, the
Plan adopted an amendment to add a money market fund, Fidelity
Retirement Money Market Portfolio, as an investment option. All cash
proceeds from the redemption of the Stock were directed into this money
market fund for each participant in the Accounts in the Plan.
Units acquired by the Accounts in the Plan as a result of the
Merger were permitted to remain in the Plan for up to sixty (60) days
from the date of such
[[Page 20978]]
acquisition. During this period of time, it is represented that the
Units in the Accounts in the Plan were held by an independent trustee,
other than Fidelity. In this regard, Banker's Trust Company (Banker's)
was appointed to act as directed trustee to receive the Units on behalf
of the Accounts in the Plan. It is further represented that the
participants in the Accounts in the Plan were not permitted to direct
any activity with respect to these Units during this sixty (60) day
period.
Hydrocarbon retained an independent, qualified, fiduciary, as
discussed in greater detail below, to direct the dispositions of the
Units within the 60 day period from the date such Units were acquired
by such Accounts. It is represented that all Units in the Accounts in
the Plan had been sold by April 4, 2008. The proceeds from the
dispositions of the Units received by each participant's Account
equaled the number of Units previously held in each such participant's
Account, multiplied by $32.394, which is the weighted average sales
price of all Units sold from the Plan in a series of blind transactions
for cash on the NYSE. The proceeds from the sale of the Units were
directed to the money market fund in the appropriate participants'
Accounts. The participants in the Account in the Plans did not pay any
fees, commissions or similar charges with respect to the disposition of
the Units on the NYSE.
6. The Units of Partners are limited partnership units. Such Units
are publicly traded on the NYSE under the symbol MWE. As of the date
the application for exemption was submitted to the Department, there
were 56,639,952 Units outstanding. The average daily trading volume for
the Units is approximately 120,000. The Applicant maintains that for
purposes of regulation by the Securities and Exchange Commission and
the rules of the NYSE, the Units are similar to publicly traded
securities.
It is represented that the Units are securities under federal
securities law and constitute ``employer securities'' under section
407(d)(1) of the Act.\4\ However, the Units do not satisfy the
definition of ``qualifying employer securities'' under the section
407(d)(5) of the Act.\5\ Because the Units are not qualifying employer
securities, the Plan could not have acquired the Units in the past, in
connection with the conversion of the Stock into Units, pursuant to the
Merger, without violating section 406(a)(1)(A) and 406(a)(1)(E) of the
Act and 4975(c)(1)(A) of the Code and cannot purchase the Units on the
NYSE in the future without violating sections 406(a)(1)(E) the Act. For
the same reason, the Plan could not have held the Units in the past and
cannot hold the Units in the future, without violating section
406(a)(2) of the Act.
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\4\ Section 407(d)(1) of the Act defines the term, ``employer
security,'' as ``a security issued by an employer of employees
covered by the plan, or by an affiliate of such employer.''
\5\ Section 407(d)(5) of the Act defines the term, ``qualifying
employer security,'' as an employer security which is stock, a
marketable obligation (as defined in subsection (e)), or an interest
in certain publicly traded partnerships.
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It is represented that qualifying employer security investments are
commonly offered by employers when designing 401(k) plans. In the
opinion of the Applicant, there is no valid public policy reason to
deny employees of a publicly traded partnership a similar investment
opportunity. It is represented that, if the requested exemption is
granted, Hydrocarbon will amend the Plan in all necessary respects to
provide for the prospective purchase and holding of the Units.\6\
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\6\ \\ Section 29 CFR 2550.404c-1(d)(2)(ii)(E)(4)(i) provides
that in order for the limitation on liability of plan fiduciaries
under section 404(c) of the Act to apply, the securities must be
qualifying employer securities, as defined in section 407(d)(5) of
the Act. Because the Units are not qualifying employer securities,
as defined in section 407(d)(5) of the Act, the relief afforded by
section 404(c) of the Act would not be available to Hydrocarbon, the
sponsor of the Plan. The Department notes that the fact that a
transaction is the subject of an exemption under section 408(a) of
the Act does not relieve a fiduciary from the general fiduciary
responsibility provisions of section 404 of the Act.
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8. As the employer any of whose employees are covered by the Plan,
Hydrocarbon is a party in interest with respect to the Plan, pursuant
to section 3(14)(C) of the Act. As the owner of Hydrocarbon, Partners
is a party in interest with respect to the Plan, pursuant to section
3(14)(E). Fidelity, as trustee, Hydrocarbon, the named fiduciary, and
Banker's, the directed trustee, are fiduciaries with respect to the
Plan, pursuant to section 3(14)(A) of the Act.
9. Hydrocarbon is seeking an exemption, effective February 21,
2008, for the past acquisition by the Accounts of the Units issued by
Partners, as a result of the conversion of the Stock into Units,
pursuant to the Merger, and the holding of such Units by the Accounts
in the Plan. Accordingly, Hydrocarbon has requested retroactive relief
from the restrictions of sections 406(a)(1)(A), 406(a)(1)(E),
406(a)(2), 406(b)(1), and 406(b)(2) of the Act.
Further, Hydrocarbon and the Plan desire an exemption in order to
make the Units available in the future to the employees of Hydrocarbon
through the Accounts of participants in the Plan. Specifically, the
Applicant requests relief to permit the Accounts in the future to
purchase Units for cash in blind transactions on the NYSE and to hold
such Units. Accordingly, prospective relief from the restrictions of
406(a)(1)(E) and 406(a)(2) of the Act has been requested.
10. It is represented that the past acquisition and holding of the
Units, pursuant to the Merger were feasible in that the past
acquisition and holding of the Units were each one-time transactions.
11. It is represented that the past acquisition and holding of the
Units by the Accounts in the Plan provided sufficient safeguards for
such Accounts and for the participants and beneficiaries of such Plan.
In this regard, the past transactions occurred, in connection with the
Merger, in which all shareholders of the Stock, including the Accounts
in the Plan, were treated in like manner with respect to all aspects of
the redemption and conversion of the Stock. The participants in the
Accounts in the Plan were provided with shareholder rights and with the
opportunity to direct the trustee of the Plan to vote ``for,''
``against,'' or ``abstain'' with regard to the redemption and
conversion of the Stock held in the Accounts in the Plan, pursuant to
the Merger. The decision as to which compensation package to accept, in
connection with the redemption of the Stock held in Accounts in the
Plan, was made in accordance with the directions of the individual
participants in whose Accounts such Stock was held. Furthermore, the
decision to redeem for cash the Stock held in Accounts in the Plan for
which no participant direction was received, and the decision to
dispose of all of the Units in the Accounts in the Plan for cash on the
NYSE within a period of no more than sixty (60) days was made by the I/
F.
12. It is represented that on August 17, 2007, well in advance of
the Merger, Hydrocarbon retained Consulting Fiduciaries, Inc. (CFI),
located in Northbrook, Illinois, to serve as the I/F acting on behalf
of the Plan. When hired, CFI acknowledged that it is a fiduciary with
respect to the Plan, as that term is defined in the Act.
CFI is registered as an investment adviser under the Investment
Advisers Act of 1940. CFI is qualified in that it provides professional
independent fiduciary decision making, consultation, and alternative
dispute resolution services to plans, plan sponsors, trustees, and
investment advisers. David L. Heald, JD (Mr. Heald) and Mr. Seymour R.
Zilberstein (Mr. Zilberstein)
[[Page 20979]]
are the founding principals of CFI. It is represented that Mr. Heald's
and Mr. Zilberstein's qualifications include over 37 years and 35
years, respectively, of legal and management experience with trust
companies and institutional investment advisers. Mr. Heald is also a
Charter Fellow of the American College of Employee Benefits Counsel.
Both Mr. Heald and Mr. Zilberstein are active in professional
associations.
CFI was retained to: (a) Review and evaluate the Merger, (b) direct
the trustee of the Plan to take appropriate action (including the
execution of any pass-through voting procedures, if necessary), (c)
make an election on the form of consideration for those Accounts in the
Plan for which no participant direction was received, and (d) to the
extent any Units were acquired in the Merger, to ensure that such Units
were disposed of in a timely and prudent manner. It is represented that
CFI had full discretion and was fully empowered to act on behalf of the
Plan in determining what action to take with respect to the Merger, and
to direct the trustee. In the event of a pass-through vote, CFI had
discretion to determine how to vote any unallocated shares of Stock and
any allocated shares of Stock held in the Plan for which no participant
direction was received and to direct the trustee accordingly. Upon
completion of its assignment, CFI provided a written report to the Plan
summarizing its activities, including, but not limited to, a review of
the process undertaken by CFI, the issues considered, and the
information reviewed in formulating the conclusions reached.
It is represented that in addition to the proxy package provided to
each participant of the Accounts in the Plan, CFI provided a notice to
each such participant that described CFI's role, its process of
consideration, and the position it would take with respect to voting
and to electing the form of consideration to be received from the
Merger. CFI also informed participants that any Units received as a
result of the Merger consideration would be sold on the public market
and that there could be no guarantee as to the price that would be
received in such sale. It is represented that participants returned
voting directions with respect to 69,742 shares of Stock, leaving
165,733 shares of Stock to be voted by CFI. It is represented that on
February 19, 2008, CFI directed the vote on behalf of the Plan in favor
of the Merger and elected to receive the maximum amount of cash
consideration for the Stock. On February 21, 2008, it was announced
that the Merger had been approved. On February 26, 2008, it was
announced that the cash consideration had not been oversubscribed, so
any shareholder, including the Accounts in the Plan, electing all cash
would receive all cash. Subsequently, CFI received information from
Fidelity that the Plan had received approximately 71,994 Units, as part
of the Merger consideration elected by participants. Pursuant to CFI's
direction, the Units were sold in the open market receiving total
proceeds of $2,332,176 or $32.394 per Unit which was the equivalent of
$61.71 per each share of Stock converted into Units.
13. CFI, acting as independent fiduciary for the Plan, determined
that the Merger was fair and in the best interest of the Plan. In
reaching this decision, CFI undertook a process of review which
included visits with the management of Hydrocarbon, review of relevant
documents regarding the business of Hydrocarbon, and the Merger,
discussions with outside advisors and consultants to Hydrocarbon, and
an analysis of the terms of the Merger. In addition, CFI on September
2, 2007, retained the services of Stout Risius Ross, Inc. (SRR) to act
as independent financial advisor in connection with the Merger, to
perform a financial analysis, and to issue a fairness opinion with
respect to the Merger.
SRR is a financial advisory firm specializing in business
valuations, investment banking, and restructuring and performance
improvement. SRR's business valuation practice provides valuations of
privately held business and business interests for all purposes. It is
represented that SRR is qualified in that it has provided financial
advisory services for more than 100 employee benefit plan clients.
SRR represents that it is independent in that the professional fees
for the services rendered in connection with the transactions described
in section I(a) and I(b) of this proposed exemption were not contingent
upon the opinion expressed in their report. Further, neither SRR nor
any of its employees has a present or intended financial relationship
with or interest in the Plan, Hydrocarbon, or Partners.
In order to assess the fairness of the terms and conditions of the
Merger, SRR prepared a valuation analysis of Hydrocarbon and Partners
(ignoring the effects of the Merger) to determine if the publicly
traded price of each entity was a reasonable representation of its
value. In addition, SRR prepared a valuation analysis of Partners on a
post-merger basis, to assess the value of the Units following the
Merger, because part of the consideration was in the form of Units.
In performing its valuation analysis, SRR considered several
valuation approaches, including the Income Approach, the Market
Approach, and the Asset-Based Approach. Specifically, after giving
consideration to the facts and circumstances surrounding Hydrocarbon
and Partners, it is represented that SRR relied on the Guideline
Company Method (a form of the Market Approach) and the Discounted Cash
Flow Method (a form of the Income Approach).
In a written report issued September 28, 2007, SRR concluded that:
(a) The consideration received by the Plan for its Hydrocarbon Stock
was not less than the fair market value of such shares; and (b) the
overall terms and conditions of the Merger were fair to the Plan from a
financial point of view. In the opinion of SRR, the Merger would create
value for the Plan, because the consideration received for the shares
of Stock held by the Plan was worth at least 20 percent (20%) more than
the publicly traded value of those shares (prior to the announcement of
the Merger).
14. It is represented that the prospective transactions are
feasible in that Hydrocarbon will amend the Plan in all necessary
respects to provide for the purchase and holding of the Units in the
future. Further, Hydrocarbon will bear the cost of filing the
application and the cost of notifying interested persons.
15. It is represented that there are sufficient safeguards to
permit the transactions for which prospective relief is requested. In
this regard, future decisions to purchase, to hold, and to sell the
Units will be made by the participants of the Accounts in the Plan no
less frequently than monthly. Prior to the purchase of Units by the
Account in the Plan, participants who are directing such investment in
Units will receive the most recent copies of the prospectus of the
Units, and the most recent quarterly statements, and annual report of
Partners and updates, as published. Prior to purchase, and subsequent
to purchase, if material changes occur, disclosures to participants in
the Accounts of the Plan who are directing the investment in the Units
will include information relating to the exercise of voting, tender,
and similar rights with respect to the Units, the exchange on which the
Units are traded, and a copy of the proposed and final exemption, upon
request. In addition, participants in the Account in the Plan which
holds Units shall have the same rights as all other holders of Units.
These rights include voting rights, as set forth in the
[[Page 20980]]
Third Amended and Restated Agreement of Limited Partnership of MarWest
Energy Partners, L.P.
The imposition of a 20 percent (20%) limitation on the amount of
assets of each Account in the Plan which can be comprised of Units will
also insure that each Account will not become unduly concentrated in
Units.
It is further represented that because the Units are publicly
traded on the NYSE, a ready market for the Units exists. Accordingly,
in the opinion of the Applicant the Units have sufficient liquidity and
market-pricing protections. It is represented that the fact that the
Units are traded on the NYSE will insure that each participant's
Account in the Plan will receive arm's length terms. Further, the fair
market value for the Units, whether the Plan purchases or sells such
Units, will be determined by the price of such Units on the NYSE.
Hydrocarbon, rather than the Accounts in the Plan, shall bear any
fees, commissions, expenses, or transaction costs, with respect to the
purchase, holding, or sale of the Units. It is represented that when
the Accounts in the Plan previously provided for the purchase of Stock
and when the Accounts in the Plan disposed of the Units in the past,
the broker was Fidelity. Fidelity is not an affiliate of Partners and
no fees or other amounts were shared with Partners. A broker has not
yet been selected for the purpose of future purchases or sales of the
Units on the NYSE by the Accounts in the Plan. If the proposed
exemption is granted and the Accounts in the Plan are permitted to
purchase and sell Units on the NYSE, it is represented that no
affiliate of Partners will be used as a broker, and no fees or other
amounts will be shared with Partners.
16. In the opinion of the Applicant, the purchase and holding of
the Units, for which prospective relief is requested, are in the
interest of Accounts in the Plan. In this regard, such transactions in
the future will enable employees of Hydrocarbon to share in the growth
of Partners and provide such employees with a more generally efficient
and inexpensive means to participate in the growth of and profitability
of the energy sector of the economy.
17. In summary, the Applicant represents that the retroactive
transactions and the prospective transactions which are the subject of
this proposed exemption satisfy the statutory criteria of section
408(a) of the Act and section 4975 of the Code because:
(a) The past acquisition and holding of the Units by the Accounts
in the Plan occurred in connection with the conversion of the Stock,
pursuant to the terms of the Merger, which was the result of an
independent act of Hydrocarbon, as a corporate entity;
(b) All shareholders of the Stock, including the participants in
the Accounts in the Plan, were treated in like manner with respect to
all aspects of the redemption and conversion of the Stock, pursuant to
the terms of the Merger;
(c) The past acquisition and holding of the Units by the Accounts
in the Plan occurred in accordance with Plan provisions for individual
participant direction of investments of the assets of such Accounts;
(d) The past acquisition and holding of the Units were each one-
time transactions, and the dispositions of the Units by the Accounts in
the Plan occurred in a series of transactions on the NYSE;
(e) The participants in the Accounts in the Plan were provided with
all shareholder rights and with the opportunity to direct the trustee
of the Plan to vote ``for,'' ``against,'' or ``abstain'' with regard to
the redemption and conversion of the Stock held in the Accounts in the
Plan, pursuant to the Merger;
(f) The decision as to which compensation package to accept, in
connection with the redemption and conversion of the Stock held in
Accounts in the Plan, was made in accordance with the directions of the
individual participants in whose Accounts such Stock was held, or, in
accordance with the directions of the I/F, acting on behalf of Accounts
for which no participant direction was given;
(g) The Units acquired, as a result of the conversion of the Stock
held in the Accounts in the Plan, pursuant to the terms of the Merger,
were held in such Accounts for no more than a period of sixty (60) days
after such Units were acquired by such Accounts;
(h) The Accounts in the Plan disposed of all of the Units that such
Accounts acquired as a result of the conversion of the Stock; and such
dispositions occurred on the NYSE in a series of blind transactions for
cash resulting in a weighted average price per Unit of no less than
$32.394;
(i) The cash proceeds from such dispositions of the Units by the
Accounts in the Plan were distributed thereafter to each of the
Accounts based on the number of Units held in each such Account;
(j) The decision to dispose of the Units, acquired by the Accounts
in the Plan as a result of the conversion of the Stock was made by the
I/F, acting on behalf of each such Account;
(k) The Accounts in the Plan did not pay any fees, commissions,
transaction costs, or other expenses in connection with the redemption
of the Stock by Hydrocarbon, the conversion of the Stock into Units,
and acquisition and holding of such Units by such Accounts in the Plan
or the disposition of the Units on the NYSE;
(l) At the time each of the transactions, described, above, in
sections I(a) and I(b) of this proposed exemption occurred, the
individual participants of the Account that engaged in each such
transaction, or the I/F, acting on behalf of the Accounts for which no
participant direction was given, determined that each such transaction
was in the interest of the participants and beneficiaries of such
Accounts;
(m) The I/F took all appropriate actions necessary to safeguard the
interests of the Accounts in the Plan, in connection with the
transactions, described, above, in sections I(a) and I(b) of this
proposed exemption;
(n) Hydrocarbon, rather than the Accounts in the Plan, will bear
any fees, commissions, expenses, transaction costs, or other expenses
with respect to the prospective purchase, holding, or sale of the
Units;
(o) The decision by the Accounts in the Plan as to whether to
engage in the prospective purchase, holding, or sale of the Units will
be made by the individual participants of the Accounts in the Plan
which engage in such transactions;
(p) Each purchase and each sale of any of the Units in the future
will occur only in blind transactions on the NYSE for cash at the fair
market value of such Units on the date of each such purchase and each
such sale;
(q) Each purchase and each sale of any of the Units in the future
will occur on the same day (or if such day is not a trading day, on the
next day) as the direction to purchase or to sell the Units is received
by the administrator of the Plan from the applicable participant of an
Account which is engaging in such purchase or such sale;
(r) Immediately following a purchase of Units in the future by an
Account, the fair market value of all of the Units held in such Account
will not exceed twenty percent (20%) of the aggregate fair market value
of the assets in such Account;
(s) The terms of each prospective purchase and each prospective
sale of the Units are at least as favorable to the
[[Page 20981]]
Account as terms generally available in comparable arm's-length
transactions between unrelated parties;
(t) Prior to the purchase by an Account in the Plan of any Units,
Partners will provide the participant who is directing the investment
of such Account with the most recent prospectuses, quarterly
statements, and annual reports, and thereafter provides updated
prospectuses, quarterly statements, and annual reports, as published;
(u) Prior to a participant of an Account in the Plan engaging in
the purchase of any Units, Partners will provide the certain
disclosures to such participant and a supplemental disclosure must be
made to the participant directing, if material changes occur;
(v) Each participant in an Account in the Plan will have
discretionary authority to direct the investment of such Account to
sell the Units purchased by such Account no less frequently than
monthly, and to vote, tender, and exercise similar rights with respect
to the Units held in such Account; and
(w) Partners or its affiliates will maintain, or cause to be
maintained, for a period of six (6) years from the date of any of the
covered transactions such records as are necessary to determine whether
the conditions of this exemption have been met.
Notice to Interested Persons
The persons who may be interested in the publication in the Federal
Register of the Notice of Proposed Exemption (the Notice) include the
participants of the Plan, the fiduciaries of the Plan, and the trustees
of Plan.
It is represented that each of these classes of interested persons
will be notified of the publication of the Notice by mail, within
fifteen (15) calendar days of publication of the Notice in the Federal
Register. Such mailing will contain a copy of the Notice, as it appears
in the Federal Register on the date of publication, plus a copy of the
Supplemental Statement, as required, pursuant to 29 CFR 2570.43(b)(2),
which will advise all interested persons of their right to comment and
to request a hearing.
Any written comments and/or requests for a hearing must be received
by the Department from interested persons within 45 days of the
publication of this proposed exemption in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Ms. Angelena C. Le Blanc of the
Department, telephone (202) 693-8540. (This is not a toll-free number.)
Barclays Global Investors, N.A. and its affiliates and successors
(BGI) and Barclays Capital Inc. and its affiliates and successors
(BarCap) (collectively Applicants); Located in San Francisco, CA, and
New York, NY
[Application No. D-11508]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act, section 8477(c)(3) of the
Federal Employees' Retirement System Act of 1986 (FERSA) 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, 32847, August 10, 1990).
Section I--Temporary Exemption for Securities Lending Transactions
Involving Index and Model-Driven Funds That Are Based on BarCap-Lehman
Indices
If the exemption is granted, for the period from September 22,
2008, through the earlier of (i) the effective date of an individual
exemption granting permanent relief for the following transactions or
(ii) one year from the grant date of this individual exemption (the
Relief Period), the restrictions of section 406(a)(1)(A) through (D)
and 406(b)(1) and (2) of the Act, section 8477(c)(2)(A) and (B) of
FERSA, 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 the lending of securities carried out on
behalf of Client Plans in reliance on Prohibited Transaction Exemption
(PTE) 2002-46 \7\, where the applicable Index or Model-Driven Fund
managed by BGI meets the definition of an ``Index Fund'' or a ``Model-
Driven Fund'' as set forth in Section III of PTE 2002-46 but for the
fact that the underlying index is a BarCap-Lehman Index, provided that
all of the other conditions of PTE 2002-46 and the conditions set forth
in Section IV of this proposed exemption are met.
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\7\ 67 FR 59569, September 23, 2002.
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Section II--Temporary Exemption for Transactions Involving Exchange-
Traded Funds That Are Index and Model-Driven Funds Based on BarCap-
Lehman Indices
If the exemption is granted, effective for the Relief Period, the
restrictions of section 406(a) and (b) of the Act, section 8477(c)(2)
of FERSA, and the taxes imposed by section 4975(a) and (b) of the Code,
by reason of section 4975(c)(1)(A) through (F) of the Code, shall not
apply to transactions carried out on behalf of Client Plans in reliance
upon Prohibited Transaction Exemption (PTE) 2008-01 \8\, where the
applicable Index or Model-Driven Fund would meet the definition of an
``Index Fund'' or a ``Model-Driven Fund'' as set forth in Section V of
PTE 2008-01 but for the fact that the underlying index is a BarCap-
Lehman Index, provided that all of the other conditions of PTE 2008-01
and the conditions set forth in Section IV of this proposed exemption
are met.
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\8\ 73 FR 3274, January 17, 2008.
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Section III--Temporary Exemption for Principal Transactions With the
BarCap-Lehman Broker-Dealer
If the exemption is granted, effective for the Relief Period, the
restrictions of section 406(a) and 406(b)(1) and (2) of the Act,
section 8477(c)(2)(A) and (B) of FERSA, 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 to the purchase or sale of
fixed income securities between BGI on behalf of Client Plans and the
BarCap-Lehman Broker-Dealer (Covered Principal Transactions) provided
that the conditions set forth in Section V are met.
Section IV--Conditions Applicable to Sections I and II
(a) Each BarCap-Lehman Index is a published Index widely used in
the market by independent institutional investors other than pursuant
to an investment management or advisory relationship with BGI and is
prepared or applied in the same manner for non-affiliated customers as
for BGI.
(b) Prior to the use of a BarCap-Lehman Index in connection with
the exemption and on an annual basis thereafter (but in no event prior
to the date that is 90 days following the date of the publication of
this proposed exemption in the Federal Register), BGI will provide
BarCap with a list of BarCap Lehman Indices proposed to be used by BGI
in connection with the exemption. BarCap will certify to BGI whether,
in its reasonable judgment, each such index is widely used in the
market. In making this determination, BarCap shall take into
consideration factors such as (i) publication by Bloomberg, or a
similar institution involved in the dissemination of financial
information, (ii) hits on relevant websites including LehmanLive (or
any successor website maintained by BarCap or its affiliate(s)) and
Bloomberg.com (or similar website), and (iii) delivery of index
information to
[[Page 20982]]
clients by means other than through Web site access.
(c) Any fees charged for the use of the BarCap-Lehman Index are
paid by BGI and not Client Plans.
(d) Information barriers are in place throughout the Relief Period
between BGI and BarCap such that BGI is not provided access to
information regarding the rules, decisions and data underlying the
BarCap-Lehman Indices before such information is provided to users of
such Indices who are independent of BarCap and such rules, decisions
and data are determined objectively without regard to BGI's use of such
BarCap-Lehman Indices.
(e) At the end of the Relief Period, a Qualified Independent
Reviewer, as defined in Section VII(n), shall issue a written report
(the Compliance Report), following its review of relevant BarCap-Lehman
Indices and the underlying rules, certifying to each of the following:
(i) Each BarCap-Lehman Index was operated in accordance with
objective rules, in the ordinary course of business as would be
conducted between unaffiliated parties;
(ii) No manipulation of any BarCap-Lehman Index for the purpose of
benefiting BGI, BarCap, or their affiliates occurred;
(iii) In the event that any rule change occurred in connection with
the rules underlying any BarCap-Lehman Index, such rule change was not
made for the purpose of benefiting BGI, BarCap, or their affiliates;
(iv) Based on a review of the factors cited in condition (b) above,
each BarCap-Lehman Index was widely used in the market during the
Relief Period;
(v) Based on the result of the Qualified Independent Reviewer's
factual inquiries to the Applicants, condition (d) above was met; and
(vi) Based on the Qualified Independent Reviewer's review of paid
bills or invoices, condition (c) above was met with respect to the fee
or fees paid in connection with each transaction.
The Compliance Report shall be issued no later than 90 days
following the end of the Relief Period describing the steps performed
during the course of the Qualified Independent Reviewer's review, the
level of compliance with conditions (e)(i) through (vi), and any
specific instances of non-compliance. The Compliance Report shall be
included in the records maintained by BGI pursuant to Section VI of
this proposed exemption, and BGI shall notify the independent
fiduciary(ies) of each Client Plan, as part of its regular disclosure
with respect to the applicable Fund(s), that the Compliance Report is
available for their review.
(f) The Index or Model-Driven Funds described in Sections I and II
meet the definition of Index Fund or Model-Driven Fund in Sections
VII(k) or (l) of this proposed exemption.
Section V--Conditions Applicable to Section III
(a) BGI exercises discretionary authority or control or renders
investment advice with respect to the Client Plan assets involved in
the Covered Principal Transaction solely in connection with an Index
Fund or Model-Driven Fund in which Client Plans invest.\9\
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\9\ This does not preclude, in the case of a BGI Plan that is a
defined contribution plan under which participants direct the
investment of their accounts among various investment options, the
discretionary authority to select and offer investment options under
the plan.
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(b) Each Covered Principal Transaction occurs as a direct result of
a Triggering Event, as defined in Section VII(o), and is executed no
later than the close of the third business day following such
Triggering Event.
(c) Each Covered Principal Transaction is a purchase or sale, for
no consideration other than cash payment against prompt delivery of a
security.
(d) Each Covered Principal Transaction is on terms that BGI
reasonably determines to be more favorable to the Client Plan than the
terms of an arm's length transaction with an unaffiliated counterparty
would have been.
(e) Each Covered Principal Transaction is executed either:
(i) through an automated routing system reasonably designed to
ensure execution at the best available net price to the Client Plan for
the number of securities to be purchased or sold in the Covered
Principal Transaction; or
(ii) at a net price to the Client Plan for the number of securities
to be purchased or sold in the Covered Principal Transaction which is
as favorable or more favorable to the Client Plan as the prices at
which at least two independent Approved Counterparties, who are ready
and willing to trade the relevant security, offer to purchase or sell
such security.
(f) The Covered Principal Transaction does not involve any security
issued by Barclays PLC.
(g) At the end of the Relief Period, a Qualified Independent
Reviewer shall issue a Compliance Report certifying to each of the
following:
(i) Based on a review of execution policies and procedures during
the Relief Period and a sample of Covered Principal Transactions, that
the policies and execution procedures used in connection with Covered
Principal Transactions were reasonably designed to obtain best
execution for the securities to be purchased or sold in the Covered
Principal Transaction; and
(ii) Each sampled Covered Principal Transaction occurred in
accordance with conditions (a), (b), (c) and (e) above. The Compliance
Report shall be issued no later than 90 days following the end of the
Relief Period describing the steps performed during the course of the
Qualified Independent Reviewer's review, the level of compliance with
conditions (g)(i) and (ii), and any specific instances of non-
compliance. The Compliance Report shall be included in the records
maintained by BGI pursuant to Section VI of this proposed exemption,
and BGI shall notify the independent fiduciary(ies) of each Client
Plan, as part of its regular disclosure with respect to the applicable
Fund(s), that the Compliance Report is available for their review.
(h) In the case of any Covered Principal Transaction in connection
with an Index Fund or a Model-Driven Fund with respect to which the
underlying Index is a BarCap-Lehman Index, each of conditions (a)
through (f) set forth in Section IV above is met.
Section VI--Recordkeeping Conditions Applicable to Sections I, II and
III
(a) BGI maintains, or causes to be maintained, for a period of six
(6) years following the end of the Relief Period the records necessary
to enable the persons described in paragraph (b) below to determine
whether the conditions of the exemption have been met, including the
Compliance Reports described in Sections IV(e) and V(g), and records
which identify with respect to the Covered Principal Transactions:
(i) On a Fund by Fund basis, the specific Triggering Events which
result in the creation of the index or model prescribed output
describing the characteristics of the securities to be traded; \10\
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\10\ Characteristics of the securities used in rebalancing a
fixed income index would include changes in (a) amount of
securities, (b) duration, (c) yield curve, and (d) convexity.
---------------------------------------------------------------------------
(ii) On a Fund by Fund basis, the index or model prescribed output
which described the characteristics of the securities to be traded in
detail sufficient to allow an independent plan fiduciary or the
Qualified Independent Reviewer to verify that each of the above
decisions for the Fund was made in response to specific Triggering
Events; and
[[Page 20983]]
(iii) On a Fund by Fund basis, the actual trades executed by the
Fund on a particular day, the identity of the counterparty, the prices
offered by the Approved Counterparties, if relevant, and which of those
trades resulted from Triggering Events.
Such records must be readily available to assure accessibility and
maintained so that an independent fiduciary, the Qualified Independent
Reviewer, or other persons identified below in paragraph (b) of this
Section, may obtain them within a reasonable period of time. However, a
prohibited transaction will not be considered to have occurred if, due
to circumstances beyond the control of BGI, the records are lost or
destroyed prior to the end of the six-year period; and no party in
interest other than BGI and its affiliates shall be subject to the
civil penalty that may be assessed under section 502(i) of the Act, or
to the taxes imposed by section 4975(a) and (b) of the Code, if the
records are not maintained, or are not available for examination as
required by paragraph (b) below.
(b) (1) Except as provided in Section (2) of this paragraph and
notwithstanding any provisions of subsections (a)(2) and (b) of section
504 of the Act, the records referred to in paragraph (a) are
unconditionally available at their customary location during normal
business hours by:
(A) Any duly authorized employee or representative of the
Department, the Internal Revenue Service or the Securities and Exchange
Commission;
(B) Any fiduciary of a participating Client Plan or any duly
authorized representative of such fiduciary;
(C) Any contributing employer to any participating Client Plan or
any duly authorized employee representative of such employer;
(D) Any participant or beneficiary of any participating Client
Plan, or any duly authorized representative of such Client Plan
participant or beneficiary; and
(E) The Qualified Independent Reviewer.
(2) None of the persons described above in subparagraphs (B)-(E) of
paragraph (b)(1) are authorized to examine the trade secrets of BGI or
its affiliates or commercial or financial information that is
privileged or confidential.
(3) Should BGI refuse to disclose information on the basis that
such information is exempt from disclosure, BGI shall, by the close of
the thirtieth (30th) day following the request, provide written notice
advising that person of the reason for the refusal and that the
Department may request such information.
Section VII--Definitions
(a) Approved Counterparty: A dealer that (x) is either (i)
registered in accordance with section 15(b) of the Exchange Act or (ii)
exempt from the requirement to register as a dealer under the Exchange
Act because it is a bank that buys and sells government securities (as
such terms are defined in the Exchange Act) and (y) meets the credit
and execution standards of BGI as described in paragraph 20 of the
Summary of Facts and Representations herein.
(b) Barclays: Barclays PLC and its direct and indirect
subsidiaries.
(c) BarCap: Barclays Capital Inc. and its successors.
(d) BarCap-Lehman Broker-Dealer: BarCap's U.S. broker-dealer
business, including the broker-dealer business acquired by BarCap from
Lehman on September 22, 2008.
(e) BarCap-Lehman Index: A generally accepted standardized
securities Index created by Lehman prior to the closing of the Asset
Purchase Agreement on September 22, 2008, and maintained by its
successor, BarCap.
(f) BGI: Barclays Global Investors, N.A., its investment advisory
affiliates and their respective successors.
(g) BGI Plan: A Plan maintained by BGI or an affiliate for the
benefit of its own employees.
(h) Client Plan: An employee benefit plan subject to the Act, FERSA
and/or the Code, whose assets are managed by or which is advised by
BGI, or a BGI-managed fund or separate account in which assets of such
plans are invested.
(i) Exchange Act: The Securities Exchange Act of 1934, as amended.
(j) Index: A securities index that represents the investment
performance of a specific segment of the public market for equity or
debt securities in the United States and/or foreign countries, but only
if--
(1) The organization creating and maintaining the index is--
(A) Engaged in the business of providing financial information,
evaluation, advice or securities brokerage services to institutional
clients;
(B) A publisher of financial news or information; or
(C) A public stock exchange or association of securities dealers;
and
(2) The index is either (i) created and maintained by an
organization independent of Barclays or (ii) a BarCap-Lehman Index; and
(3) The index is a generally accepted standardized index of
securities which is not specifically tailored for the use of BGI.
(k) Index Fund: Any investment fund, account or portfolio
sponsored, maintained, trusteed or managed by BGI in which one or more
investors invest, and--
(1) Which is designed to track the rate of return, risk profile and
other characteristics of an Index by either (i) replicating the same
combination of securities which compose such Index or (ii) sampling the
securities which compose such Index based on objective criteria and
data;
(2) For which either (i) BGI or its affiliate does not use its
discretion, or data within its control, to affect the identify or
amount of securities to be purchased or sold or (ii) the underlying
Index is a BarCap-Lehman Index;
(3) That contains ``plan assets'' subject to the Act; and
(4) That involves no agreement, arrangement or understanding
regarding the design or operation of the Fund which is intended to
benefit BGI its affiliate or any party in which BGI or its affiliate
may have an interest.\11\
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\11\ This requirement does not preclude BGI's payment of fees to
BarCap for use of the Indices.
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(l) Model-Driven Fund: Any investment fund, account or portfolio
sponsored, maintained, trusteed or managed by BGI in which one or more
investors invest and--
(1) Which is composed of securities the identity of which and the
amount of which are selected by a computer model that is based on
prescribed objective criteria to transform an Index using either (i)
independent third-party data not within the control of BGI or an
affiliate or (ii) data provided by the BarCap-Lehman Broker-Dealer that
is commercially available on a widespread basis to unaffiliated end
users such as mutual funds and collective investment funds on the same
terms and conditions;
(2) Which contains ``plan assets'' subject to the Act; and
(3) That involves no agreement, arrangement or understanding
regarding the design or operation of the Fund or the utilization of any
specific objective criteria which is intended to benefit BGI or its
affiliate or any party in which BGI or its affiliate may have an
interest.\12\
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\12\ This requirement does not preclude BGI's payment of fees to
BarCap for use of the Indices or data.
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(m) Lehman: Lehman Brothers Holdings Inc. and, as the context
requires, its subsidiaries and affiliates prior to September 15, 2008.
(n) Qualified Independent Reviewer: A third party appointed by BGI
that is independent of Barclays and its
[[Page 20984]]
affiliates and has extensive experience in reviewing and/or auditing
transactions and procedures involving assets of plans subject to the
Act, FERSA and/or the Code for the purpose of confirming that the
applicable transactions or procedures serve the best interests of such
plans.
(o) Triggering Event: Any of the following events in connection
with an Index Fund or a Model-Driven Fund (together, ``Funds''):
(1) A change in the composition or weighting of the Index
underlying a Fund by either (i) the independent organization creating
and maintaining the Index or (ii) in the case of a BarCap-Lehman Index,
by the BarCap-Lehman Broker-Dealer. In the case of a change described
in clause (ii) of the preceding sentence, the change is uniformly
applied to all customers using the Index, including non-affiliated
customers, and is not adopted for the purpose of benefiting BGI.
(2) A material amount of net change in the overall level of assets
in a Fund, as a result of investments in and withdrawals from the Fund,
provided that:
(A) Such material amount has either been identified in advance as a
specified amount of net change relating to such Fund and disclosed in
writing as a ``triggering event'' to an independent fiduciary of each
Client Plan having assets held in the Fund prior to, or within ten (10)
days following, its inclusion as a ``triggering event'' for such Fund
or BGI has otherwise disclosed to the independent fiduciary the
parameters for determining a material amount of net change, including
any amount of discretion retained by the BGI that may affect such net
change; and
(B) Investments or withdrawals as a result of BGI's discretion to
invest or withdraw assets of a BGI Plan, other than a BGI Plan which is
a defined contribution plan under which participants direct the
investment of their accounts among various investment options,
including the applicable Fund, will not be taken into account in
determining the specified amount of net change;
(3) An accumulation in the Fund of a material amount of either:
(A) Cash which is attributable to interest or dividends on, and/or
tender offers for, portfolio securities; or
(B) Stock attributable to dividends on portfolio securities;
provided that such material amount has been identified in advance as a
specified amount relating to such Fund and disclosed in writing as a
``triggering event'' to an independent fiduciary of each Client Plan
having assets held in the Fund prior to, or within ten (10) days
following, its inclusion as a ``triggering event'' for such Fund, or
BGI has otherwise disclosed to the independent fiduciary the parameters
for determining a material amount of accumulated cash or securities,
including any amount of discretion retained by the BGI that may affect
such net change.
(4) A change in the composition of the portfolio of a Model-Driven
Fund mandated solely by operation of the formulae contained in the
computer model underlying the Fund where the basic factors for making
such changes (and any fixed frequency for operating the computer model)
have been disclosed in writing to an independent fiduciary of each
Client Plan having assets held in the Fund prior to, or within ten (10)
days following, its inclusion as a ``triggering event'' for such Fund;
or
(5) A change in the composition or weighting of a portfolio for an
Index or Model-Driven Fund which results from an independent
fiduciary's direction to exclude certain securities or types of
securities from the Fund, notwithstanding that such securities are part
of the Index used by the Fund.
Summary of Facts and Representations
Background
1. BGI is a national banking association headquartered in San
Francisco, California. BGI is the largest asset manager in the U.S.,
with over $1.9 trillion in assets under management worldwide and over
$1.1 trillion in assets under management in the U.S. as of June 30,
2008. A significant amount of BGI's assets under management in the U.S.
consists of assets of employee benefit plans subject to ERISA, FERSA
and/or the Code, including assets managed by BGI for the Federal Thrift
Savings Fund established pursuant to the provisions of FERSA (the
``Federal Thrift Savings Fund''). BGI is also a market leader in index
and model-driven investment products.
2. BarCap is a U.S. registered securities broker-dealer and futures
commission merchant headquartered in New York, with registered domestic
branch offices in Boston, Chicago, Miami, Los Angeles and San
Francisco. BarCap's broker-dealer activities include significant
participation in the market in U.S. Treasury securities, one of the
most liquid and transparent fixed income securities markets; BarCap had
approximately 10.2% of the overall Treasury securities market as of the
close of the third quarter of 2008. BarCap is also a market leader in
the market for inflation-protected U.S. Treasury securities, with a
market share of approximately 28.5% of the market as of the close of
the third quarter of 2008.
3. Both BGI and BarCap are indirect subsidiaries of Barclays PLC, a
public limited company organized under the laws of England and Wales.
4. On September 16, 2008, BarCap, Lehman Brothers Holdings Inc.
(``Lehman Parent'') and certain subsidiaries of Lehman Parent \13\
entered into an Asset Purchase Agreement (the ``Asset Purchase
Agreement'') pursuant to which BarCap acquired most of Lehman's U.S.
broker-dealer business (the U.S. broker-dealer business of BarCap,
including the acquired broker-dealer business of Lehman, is referred to
herein as the ``BarCap-Lehman Broker-Dealer''). The acquisition
contemplated by the Asset Purchase Agreement (the ``Sale'') closed on
Monday, September 22, 2008.
---------------------------------------------------------------------------
\13\ Lehman Parent and its affiliates and subsidiaries
(including former subsidiaries acquired by BarCap in the Sale) are
collectively referred to herein as ``Lehman''.
---------------------------------------------------------------------------
5. The assets acquired by BarCap in the Sale include rights to all
Lehman indices and the analytics that support such indices. Prior to
the Sale, Lehman was the world's largest provider of fixed income
indices. Lehman published the first total return bond index, the U.S.
Aggregate Index, and was the leading fixed income index provider since
the 1970s. Lehman produced many of the most widely followed benchmarks
in the global and U.S. debt markets. Prior to the Sale, approximately
$4 trillion in assets worldwide was benchmarked to Lehman's Global
Aggregate Index and its subcomponents. Approximately $1.5 trillion of
that amount was benchmarked to Lehman's U.S. Aggregate Index and its
subcomponents. The entire U.S. debt market covered by the U.S.
Aggregate Index is valued at approximately $10.5 trillion; fully one
seventh (14%) of that market was benchmarked to Lehman's U.S. Aggregate
Index. Lehman estimated that more than 90% of fixed income investors in
the U.S. used Lehman indices. BGI used Lehman indices for the vast
majority of its fixed income index and model driven investment
products. Nearly $70 billion (99%) of BGI's U.S. fixed income indexed
assets were indexed to a Lehman index.
6. In addition, prior to the Sale, Lehman was a significant
participant in the fixed income markets as a broker-dealer and was
frequently used by BGI for fixed income principal trades, participating
in approximately 13% of BGI's client trades in fixed income
[[Page 20985]]
securities. Following the Sale, the BarCap-Lehman Broker-Dealer has an
increased presence in the market for U.S. Treasury securities and in
particular inflation-protected securities. Combining the market shares
of Bar-Cap as it existed prior to the Sale with the additional market
share added as a result of the Sale, the BarCap-Lehman Broker-Dealer
had a total share of approximately 12.4% of the overall market for U.S.
Treasury securities and approximately 41.7% of the market for
inflation-protected Treasuries as of October 1, 2008.
7. The Sale took place under extraordinary circumstances for the
U.S. financial services industry generally, and on an unusually
expedited time frame that was dictated by those exigent circumstances.
Accordingly, the Applicants state that it was not practicable to submit
a formal application for exemptive relief for the transactions in
advance of the closing of the Sale. However, the Applicants contacted
the Department on several occasions (in writing and by telephone) in
advance of and immediately after the closing of the Sale to discuss the
transactions, the unusual circumstances of the Sale and the interim
relief that the Applicants expected to seek, which is materially the
same as the relief requested herein.
8. The Applicants state that the advantages to Client Plans and
their participants and beneficiaries of engaging in the transactions,
and the harm to Client Plans and their participants and beneficiaries
that would result if the transactions were prohibited, will continue to
apply in the long term. Accordingly, Applicants expect to submit a
further application at a later date for permanent relief.
Description of the Transactions
Use of BarCap-Lehman Indices
9. Prior to the Sale, Lehman was virtually the sole provider of
standardized fixed income indices used by BGI in the U.S. market. BGI
selected Lehman indices, which are widely regarded as preeminent in the
market, for the vast majority of its fixed income index and model
driven investment products. With these products, BGI either attempted
to replicate the return on the relevant indices or to provide an
enhanced return benchmarked against the indices. The majority of BGI's
largest fixed income clients used Lehman indices, including the Federal
Thrift Savings Fund and a large number of private-sector and other
governmental pension plans.
10. On behalf of Client Plans, BGI effects various transactions
involving Index Funds and Model-Driven Funds (Funds) in reliance on
prohibited transaction exemptions that require the indices underlying
the Funds to be created and maintained by an independent third party.
These transactions include (x) the lending of securities to BarCap and
other affiliates of BGI and the receipt of compensation by BGI in
connection with such transactions where BGI acts as a fiduciary with
respect to the Client Plan assets involved in the transaction in
connection with an Index Fund or a Model-Driven Fund, in reliance on
PTE 2002-46 and (y) the acquisition, sale or exchange by Client Plans
of shares of exchange-traded funds advised by BGI that are Index Funds
or Model-Driven Funds, and the receipt of fees by BGI for acting as an
investment adviser to such funds and for providing certain secondary
services, in reliance on PTE 2008-1. As a result of BarCap's
acquisition of Lehman's indices, the Index Funds and Model-Driven Funds
involved in these transactions that are based on Lehman indices no
longer meet the requirements set forth in the respective exemptions
that the underlying indices must be created and maintained by an
organization independent of BGI and its affiliates.
11. The Applicants request relief, retroactive to September 22,
2008 (the closing date of the Sale), and for a period until the earlier
of (i) effective date of an individual exemption granting permanent
relief for the following transactions or (ii) one year from the grant
date of this individual exemption (the ``Relief Period'') to permit
transactions carried out in reliance on PTEs 2002-46 and 2008-1
involving Client Plan assets invested in Index Funds and Model-Driven
Funds, where the underlying index is a BarCap-Lehman Index, to continue
on a ``business as usual'' basis as if there were no affiliate
relationship between BGI and the entity creating and maintaining the
BarCap-Lehman Indices.
12. As a condition of the exemption, each BarCap-Lehman Index is
required to be a published index widely used in the market by
independent institutional investors other than pursuant to an
investment management or advisory relationship with BGI, and such index
must be prepared or applied in the same manner for non-affiliated
customers as for BGI.
Prior to the use of a BarCap-Lehman Index in connection with the
exemption and on an annual basis thereafter (but in no event prior to
the date that is 90 days following the date of the publication of this
proposed exemption in the Federal Register), BGI will provide BarCap
with a list of BarCap Lehman Indices proposed to be used by BGI in
connection with the exemption. BarCap will certify to BGI whether, in
its reasonable judgment, each such index is widely used in the market.
In making this determination, BarCap shall take into consideration
factors such as (i) publication by Bloomberg, or similar institution
involved in the dissemination of financial information, (ii) hits on
relevant websites including LehmanLive (or any successor website
maintained by BarCap or its affiliate(s)) and Bloomberg.com (or similar
website), and (iii) delivery of index information to clients by means
other than through website access.
Any fees charged for the use of the BarCap-Lehman Index will be
paid by BGI and not Client Plans.
13. Additionally, information barriers will be in place throughout
the Relief Period between BGI and BarCap such that BGI is not provided
access to information regarding the rules, decisions and data
underlying the BarCap-Lehman Indices before such information is
provided to parties outside of BarCap and such rules, decisions and
data must be determined objectively without regard to BGI's use of such
BarCap-Lehman Indices.
14. At the end of the Relief Period, a Qualified Independent
Reviewer will issue a written report (the Compliance Report) following
its review of the relevant BarCap-Lehman Indices and the underlying
rules, certifying to each of the following: (i) Each BarCap-Lehman
Index was operated in accordance with objective rules, in the ordinary
course of business as would be conducted between unaffiliated parties;
(ii) no manipulation of any BarCap-Lehman Index for the purpose of
benefiting BGI, BarCap, or their affiliates occurred; (iii) in the
event that any rule change occurred in connection with the rules
underlying any BarCap-Lehman Index, such rule change was not made for
the purpose of benefiting BGI, BarCap, or their affiliates; (iv) based
on a review of the factors considered by BarCap in its certification
described in paragraph 12 above, each BarCap-Lehman Index was widely
used in the market during the relief period; and (v) certain conditions
of the exemption were met.
The Compliance Report shall be issued no later than 90 days
following the end of the Relief Period describing the steps performed
during the course of the Qualified Independent Reviewer's review, the
level of compliance with the
[[Page 20986]]
applicable conditions ((i)-(v) described in the previous paragraph),
and any specific instances of non-compliance. In addition, the
Compliance Report shall be included in the records maintained by BGI
pursuant to Section VI of this proposed exemption, and BGI shall notify
the independent fiduciary(ies) of each Client Plan, as part of its
regular disclosure with respect to the applicable Fund(s), that the
Compliance Report is available for their review.
15. The Qualified Independent Reviewer will be a third party
appointed by BGI that is independent of Barclays and its affiliates,
and has extensive experience in reviewing and/or auditing transactions
and procedures involving assets of plans subject to the Act, FERSA and/
or the Code for the purpose of confirming that the applicable
transactions or procedures serve the best interests of such plans.
Principal Transactions With the BarCap-Lehman Broker-Dealer
16. Prior to the Sale, Lehman was a significant participant in the
fixed income markets as a broker-dealer. BGI frequently used Lehman as
a dealer for fixed income securities trades on a principal basis based
on a determination that Lehman provided best execution for the
applicable trade, including trades for Index Funds and Model-Driven
Funds in which Client Plans invest. Lehman was the second most
frequently used dealer by BGI for fixed income principal trades,
participating in approximately 13% of BGI' s client trades.
17. The Applicants state that obtaining the best available purchase
or sale price for a particular trade presents special challenges in the
fixed income market, which trades a very large array of different
securities with specific features including some securities issued in
relatively small numbers and/or in which markets are made by only a
small number of dealers. The diminution in the number of market makers
due to the recent exit of several major participants from the financial
services industry through bankruptcies or acquisitions has heightened
these challenges.
18. BGI's ability to obtain best execution of fixed income trades
for Client Plans would be significantly curtailed without the ability
to trade with the BarCap-Lehman Broker-Dealer, according to the
Applicants. The interests of Client Plans and their participants and
beneficiaries would be better served if such trades were permitted
where the BarCap-Lehman Broker-Dealer provides the best available
purchase or sale price for the security being traded, in accordance
with conditions designed to safeguard the interests of Client Plans.
Accordingly, the Applicants are requesting relief to permit principal
trades of fixed income securities on behalf of Client Plans with the
BarCap-Lehman Broker-Dealer, where such trades are carried out in
connection with Index Funds and Model-Driven Funds and pursuant to
``Triggering Events''--that is, events identified in advance as
triggers for purchasing and selling the Fund's portfolio.\14\
Accordingly, the decision to purchase or sell a security would not be
at BGI's discretion but would be made in accordance with pre-determined
objective rules governing the composition of the Fund's portfolio.
---------------------------------------------------------------------------
\14\ Applicants note that in-house plans of BGI (BGI Plans) are
currently invested indirectly through a master-feeder structure in
two U.S. fixed income Index Funds that participate in transactions
for which retroactive relief is requested in the exemption
application. As of September 30, 2008, approximately 0.03% of the
assets of one of these Funds, and approximately 0.61% of the assets
of the other Fund, consist of BGI Plan assets.
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19. Each Covered Transaction would be a purchase or sale, for no
consideration other than cash payment against prompt delivery of a
security. Each Covered Principal Transaction would be on terms that BGI
reasonably determines in good faith to be more favorable to the Client
Plan than the terms of an arm's length transaction with an unaffiliated
counterparty would have been, for the number of shares to be purchased
or sold, at the time of the transaction. Covered Principal Transactions
will not involve any security issued by Barclays PLC.
20. Such trades would take place with the BarCap-Lehman Broker-
Dealer only pursuant to procedures designed to ensure that best
execution would be obtained for the Client Plan either through an
automated routing system reasonably designed to ensure execution at the
best available net price to the Client Plan for the number of
securities to be purchased or sold, or at a price at least as favorable
to the Client Plan as the prices at which at least two independent
``Approved Counterparties'' who are ready and willing to trade the
relevant security offer to purchase or sell the security. BGI will keep
records of the prices offered by the Approved Counterparties.
The Applicants provide the following description of the process
used by BGI in approving counterparties. BGI's Global Credit Group
(CGC) monitors counterparty exposures arising from the trading on a
principal basis by BGI's clients/funds and is responsible for
counterparty evaluation, exposure analysis and the management of
trading limits. All counterparties must be formally approved by GCG
prior to engaging in the trading on a principal basis, and trading
limits for such trading are based on metrics which may include the
following: asset class being traded, Ratings (S&P, Moody's, Fitch) book
and market capital, published financials (for qualitative and
quantitative review), due diligence visits covering business and risk
management practices, and credit default swap (``CDS'') spreads (real
time measure of default likelihood). In the case of ``delivery versus
payment'' principal securities transactions and Qualified Forward
Delivery Transactions, Counterparty exposure is controlled and
monitored by establishing specific trading limits for the total amount
of ``delivery versus payment'' exposure and Qualified Forward Delivery
Transaction exposure for the particular counterparty. Exposure to a
particular counterparty, including a counterparty that is a BGI
affiliate, is monitored daily against the counterparty's individual
trading limit and against any updates to GCG's assessment of such
counterparty's credit quality or market volatility over the settlement
period, and any changes to the applicable limit will be made as deemed
appropriate by GCG.
21. At the end of the Relief Period, a Qualified Independent
Reviewer will issue a written Compliance Report certifying to the
following: (i) Based on a review of execution policies procedures
during the Relief Period and a sample of the Covered Principal
Transactions, that the policies and execution procedures used in
connection with the transactions were reasonably designed to obtain
best execution for the securities to be purchased or sold in the
Covered Principal Transaction; and (ii) each sampled transaction
occurred in accordance with certain conditions of the exemption. The
Compliance Report will be issued no later than 90 days following the
end of the Relief Period describing the steps performed during the
course of the Qualified Independent Reviewer's review, the level of
compliance with conditions (i) and (ii) described above, and any
specific instances of non-compliance; and the Compliance Report shall
be included in the records maintained by BGI pursuant to Section VI of
this proposed exemption. In addition, BGI shall notify the independent
fiduciary(ies) of each Client Plan, as part of its regular disclosure
with respect to the applicable
[[Page 20987]]
Fund(s), that the Compliance Report is available for their review.
22. Section VI requires that BGI maintain records necessary to
allow a determination of whether the conditions of the exemption have
been met. Those records must be maintained for a period of six (6)
years from the end of the Relief Period. The records include the
Compliance Reports as well as records which identify with respect to
the Covered Principal Transactions:
(i) On a Fund by Fund basis, the specific Triggering Events which
result in the creation of the index or model prescribed output
describing the characteristics of the securities to buy or sell;
(ii) On a Fund by Fund basis, the index or model prescribed output
which described the characteristics of the securities to buy or sell in
detail sufficient to allow an independent plan fiduciary or Qualified
Independent Reviewer to verify that each of the above decisions for the
Fund was made in response to specific Triggering Events; and
(iii) On a Fund by Fund basis, the actual trades executed by the
Fund on a particular day, the identity of the counterparty, the prices
offered by the Approved Counterparties, if relevant, and which of those
trades resulted from Triggering Events.
23. In summary, the Applicants represent that the transactions will
satisfy the statutory criteria of section 408(a) of the Act and section
4975(c)(2) of the Code because:
a. Administratively feasible. With respect to the use of BarCap-
Lehman Indices for transactions that were covered prior to the Sale by
PTE 2002-46 and 2008-1, the transactions that would be covered by the
requested exemption are essentially identical to those permitted under
those exemptions, except that additional procedures and protections
would be in place to ensure that use of the BarCap-Lehman Indices is
not disadvantageous to Client Plans or manipulated to benefit the
Applicants. With respect to principal transactions with the BarCap-
Lehman Broker-Dealer pursuant to Index Funds and Model-Driven Funds,
the transactions that would be covered by the requested exemption are
substantially similar to the transactions permitted under PTE 75-1,
Part IV (40 FR 50845, Oct. 31, 1975) (Market Maker Exemption). The
Applicants will follow procedures similar to those set forth in the
Market Maker Exemption to ensure that best execution is obtained on
behalf of Client Plans. In addition, at the end of the Relief Period a
Qualified Independent Reviewer will review procedures with respect to
the transactions, and a sample of the transactions for compliance with
the procedures, at the expense of Barclays. Granting the exemption will
require no additional monitoring by the Department.
b. In the interests of plans and participants and beneficiaries. As
discussed above, the Applicants state that the exemption would permit
Client Plans to continue to invest in Index Funds and Model-Driven
Funds based on the leading fixed income indices and to obtain best
execution in purchases and sales of fixed income securities.
c. Protective of the rights of participants and beneficiaries of
such plan. The requested exemption would require the Applicants to: (i)
Obtain certification from a Qualified Independent Reviewer at the end
of the Relief Period that each BarCap-Lehman Index was operated in
accordance with objective rules, in the ordinary course of business as
would be conducted between unaffiliated parties, no manipulation of any
BarCap-Lehman Index for the purpose of benefiting the Applicants
occurred, any change in the rules underlying any BarCap-Lehman Index
was not made for the purpose of benefiting the Applicants, and that
each BarCap-Lehman Index was widely used in the market during the
Review Period; (ii) obtain certification from a Qualified Independent
Reviewer at the end of the Relief Period that execution procedures used
in connection with Covered Principal Transactions were reasonably
designed to obtain best execution for the Client Plans and, based on a
review of a sampling of Covered Principal Transactions, occurred in
accordance with the conditions of the exemption; and (iii) maintain and
comply with information barriers between BGI and BarCap such that BGI
is not provided access to information regarding the rules, decisions or
data underlying any BarCap-Lehman Index used during the Relief Period
before such information is provided to parties outside of BarCap.
Notice to Interested Persons
Written notice will be provided to the Federal Retirement Thrift
Investment Board and will be published in the Federal Register. Any
written comments and/or requests for a hearing must be received by the
Department from interested persons within 30 days of the publication of
this proposed exemption in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Karen E. Lloyd of the Department, 202-
693-8554. (This is not a toll-free number.)
The Bank of New York Mellon Corporation (BNYMC) and its Affiliates
(collectively, BNY Mellon) Located in New York, New York
Exemption Application Number D-11523
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).\15\
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\15\ 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.
---------------------------------------------------------------------------
Section I. Transactions
If the proposed exemption is granted, the restrictions of section
406(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
(D) of the Code, shall not apply, effective October 3, 2008, to the
cash sale (the Sale) by a Plan (as defined in section II(d)) of certain
Auction Rate Securities (as defined in section II(b)) to BNY Mellon,
provided that the following conditions are met:
(a) The Sale was a one-time transaction for cash payment made on or
before December 31, 2008 on a delivery versus payment basis in the
amount described in paragraph (b);
(b) The Plan received an amount equal to the par value of the
Auction Rate Securities (the Securities) plus accrued but unpaid income
(interest or dividends, as applicable) as of the date of the Sale;
(c) The last auction for the Securities was unsuccessful;
(d) The Sale was made in connection with a written offer by BNY
Mellon containing all of the material terms of the Sale;
(e) The Plan did not bear any commissions or transaction costs with
respect to the Sale;
(f) A Plan fiduciary independent of BNY Mellon (in the case of a
Plan that is an IRA, the individual for whom the IRA is maintained)
determined that the Sale of the Securities was appropriate for, and in
the best interests of, the Plan at the time of the transaction, and the
Plan's decision to enter into the transaction was affirmatively made by
such independent fiduciary on behalf of the Plan;
[[Page 20988]]
(g) BNY Mellon took all appropriate actions necessary to safeguard
the interests of each Plan in connection with the Sale;
(h) The Plan does not waive any rights or claims in connection with
the Sale;
(i) The Sale is not part of an arrangement, agreement or
understanding designed to benefit a party in interest to the Plan;
(j) If the exercise of any of BNY Mellon's rights, claims or causes
of action in connection with its ownership of the Securities results in
BNY Mellon recovering from the issuer of the Securities, or any third
party, an aggregate amount that is more than the sum of:
(1) The purchase price paid to the Plan for the Securities by BNY
Mellon; and
(2) the income (interest or dividends, as applicable) due on the
Securities from and after the date BNY Mellon purchased the Securities
from the Plan, at the rate specified in the respective offering
documents for the Securities or determined pursuant to a successful
auction with respect to the Securities, BNY Mellon will refund such
excess amount promptly to the Plan (after deducting all reasonable
expenses incurred in connection with the recovery);
(k) Neither BNYMC nor any affiliate exercises investment discretion
or renders investment advice (within the meaning of 29 CFR 2510.3-
21(c)) with respect to the decision to accept the written offer or
retain the Security;
(l) BNY Mellon maintains, or causes to be maintained, for a period
of six (6) years from the date of any covered transaction such records
as are necessary to enable the person described below in paragraph
(m)(i), to determine whether the conditions of this exemption have been
met, except that--
(i) No party in interest with respect to a Plan which engages in
the covered transactions, other than BNY Mellon, shall be subject to a
civil penalty under section 502(i) of the Act or the taxes imposed by
section 4975(a) and (b) of the Code, if such records are not
maintained, or not available for examination, as required, below, by
paragraph (m)(i);
(ii) A separate prohibited transaction shall not be considered to
have occurred solely because due to circumstances beyond the control of
BNY Mellon, such records are lost or destroyed prior to the end of the
six-year period.
(m)(i) Except as provided, below, in paragraph (m)(ii), and
notwithstanding any provisions of subsections (a)(2) and (b) of section
504 of the Act, the records referred to, above, in paragraph (l) are
unconditionally available at their customary location for examination
during normal business hours by--
(A) Any duly authorized employee or representative of the
Department, the Internal Revenue Service, or the Securities and
Exchange Commission; or
(B) Any fiduciary of any Plan that engages in the covered
transactions, or any duly authorized employee or representative of such
fiduciary; or
(C) Any employer of participants and beneficiaries and any employee
organization whose members are covered by a Plan that engages in the
covered transactions, or any authorized employee or representative of
these entities; or
(D) Any participant or beneficiary of a Plan that engages in a
covered transaction, or duly authorized employee or representative of
such participant or beneficiary;
(ii) None of the persons described, above, in paragraph (m)(i)(B)-
(D) shall be authorized to examine trade secrets of BNY Mellon, or
commercial or financial information which is privileged or
confidential; and
(iii) Should BNY Mellon refuse to disclose information on the basis
that such information is exempt from disclosure, BNY Mellon shall, by
the close of the thirtieth (30th) day following the request, provide a
written notice advising that person of the reasons for the refusal and
that the Department may request such information.
Section II. Definitions
(a) The term ``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 ``Security'' 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 ``Independent'' means a person who is not BNYMC or an
affiliate (as defined in Section II(a)); and
(d) The term ``Plan'' means: any plan described in section 3(3) of
the Act and/or section 4975(e)(1) of the Code.
Effective Date: This proposed exemption, if granted, will be
effective from October 3, 2008 through December 31, 2008.
Summary of Facts and Representations
1. The Bank of New York Mellon Corporation (BNYMC and, together
with its affiliates, BNY Mellon), is a Delaware financial services
company that provides a wide range of banking and fiduciary services to
a broad array of clients, including employee benefit plans subject to
the Act and plans subject to Section 4975 of the Code.
2. The plans that are the subject of this proposed exemption
(Plans) consist of four Individual Retirement Accounts (IRAs), two
``SEP IRAs'' and a defined contribution profit sharing plan. The Plans
are employee benefit plans or other plans subject to section 4975 of
the Code and/or ERISA for which BNY Mellon currently serves as the
custodian and/or trustee.
3. On October 3, 2008, BNY Mellon communicated in writing to its
clients, including the Plans, its offer to purchase certain auction
rate securities (i.e., the Securities) for an amount equal to the par
value of the applicable Security, plus any accrued and unpaid income
(interest or dividends, as applicable) thereon. The purchase
transactions occurred on the first regular auction date for the
applicable Security that followed the Plan's submission to BNY Mellon
of its written acceptance of the offer. The applicant represents that
no purchase transaction involving plan assets subject to ERISA or
section 4975 of the Code occurred after December 31, 2008.
4. BNY Mellon represents that the Securities are debt or preferred
equity auction rate securities issued with an interest or dividend rate
that is reset on a regular basis (generally between every 7 and 35
days) through a ``Dutch auction'' process. Historically, by means of
such auction process, the interest or dividend rate was periodically
adjusted to a level at which demand for the Security depleted the
available supply at a purchase price equal to the par value of the
Securities. In this way, the auctions served as a form of secondary
market for the Securities, by providing liquidity at par on a regular,
periodic basis to any holder who wished to sell the Securities. The
applicant represents that the Securities were frequently purchased by,
or for the benefit of, clients seeking a reasonable short-term return
and a high degree of liquidity.
5. If an auction for one of the Securities fails (e.g., because
there is insufficient demand for the Security), the interest or
dividend rate will be reset to the ``maximum rate'' or ``failed auction
rate'' (in either case, ``default rate'') for that Security as
specified in the offering documents for such Security. In some cases,
the default rate changes from time to time as specified in the relevant
documents. For the Securities that are the subject of this
[[Page 20989]]
exemption, such rates ranged from .168% to 4.8% per annum as of the
date the purchase offer was made.
6. BNY Mellon states that auctions for the Securities have failed
consistently since approximately February, 2008, with the result that
the interest or dividend rate for each of the Securities presently
equals the default rate and holders of the Securities have been unable
to sell the Securities at their par value. As of the date the purchase
offer was made, the default rate for three of the six Securities held
by the Plans was higher than the rate set by the last successful
auction for such Securities, while the last auction rate for the
remaining three Securities held by Plans exceeded the default rate,
determined as of such date, with respect to such Securities. In
addition, because the auctions have failed consistently since February,
2008 and given the absence of any other meaningful secondary market for
the Securities, the Securities no longer provide the liquidity that had
been anticipated when they were acquired.
7. BNY Mellon represents that the following Securities were held by
Plans and covered by BNY Mellon's offer described in Representation 3,
above: (1) Minnesota St. Higher Ed., (2) Iowa Student Loan, (3) Brazos
Texas Higher Ed., (4) Nuveen Quality PFD Income FDARP, (5) Nuveen PFD &
CVT INC FD2 and (6) Northstar Ed. Fin Inc.
8. Generally, the Plans purchased the Securities through an
underwriter unaffiliated with BNY Mellon. In all of those cases, BNY
Mellon acted as discretionary trustee and caused the Plan to purchase
the Securities. Only one Plan purchased Securities through a capital
markets affiliate of BNYMC. In that one case, BNY Mellon was a non-
discretionary custodian of the Plan and was directed to purchase the
Securities by an independent fiduciary of that Plan.\16\
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\16\ The Department is expressing no opinion in this proposed
exemption regarding whether the acquisition and holding of the
Securities by any Plan, that is subject to Title I of the Act,
violated any of the fiduciary responsibility provisions of Part 4 of
Title I of ERISA. In this regard, the Department notes that section
404(a) of the Act requires, among other things, that a fiduciary of
a plan act prudently, solely in the interest of the plan's
participants and beneficiaries, and for the exclusive purpose of
providing benefits to participants and beneficiaries when making
investment decisions on behalf of a plan. Accordingly, a Plan
fiduciary must act prudently with respect to, among other things,
the decision to engage (or to not engage) in a Sale. Section 404(a)
of the Act also states that a plan fiduciary should diversify the
investments of a plan so as to minimize the risk of large losses,
unless under the circumstances it is clearly prudent not to do so.
Moreover, the Department is not providing any opinion as to whether
a particular category of investments or investment strategy would be
considered prudent or in the best interests of a plan as required by
section 404 of the Act. The determination of the prudence of a
particular investment or investment course of action must be made by
a plan fiduciary after appropriate consideration of those facts and
circumstances that, given the scope of such fiduciary's investment
duties, the fiduciary knows or should know are relevant to the
particular investment or investment course of action involved,
including a plan's potential exposure to losses and the role the
investment or investment course of action plays in that portion of
the plan's portfolio with respect to which the fiduciary has
investment duties (see 29 CFR 2550.404a-1). The Department also
notes that in order to act prudently in making investment decisions,
a plan fiduciary must consider, among other factors, the
availability, risks and potential return of alternative investments
for the plan. Thus, a particular investment by a plan, which is
selected in preference to other alternative investments, would
generally not be prudent if such investment involves a greater risk
to the security of a plan's assets than other comparable investments
offering a similar return or result.
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9. BNY Mellon states that the terms of the offer expressly provided
that a client is not obligated to sell Securities and must
affirmatively agree to enter into a sale of Securities to BNY Mellon
(i.e., a Sale). BNY Mellon represents that any Plan's decision to sell
the Securities to BNY Mellon pursuant to its offer has been made by
such Plan's fiduciary, who in all cases was independent of BNY Mellon.
In the case of a Plan that is an IRA, such fiduciary was the individual
for whom the IRA is maintained.
10. BNY Mellon estimates that the total aggregate par value plus
accrued and unpaid income (interest or dividends, as applicable)
thereon for all Securities held by clients subject to the offer is
approximately $192,840,000. Securities held by the Plans represent
approximately $1,050,000 of such total aggregate amount.
11. BNY Mellon represents that the Sale of the Securities by a Plan
benefited the Plan because of the Plan's inability to sell the
Securities at par as a result of the continuing failed auctions. In
addition, BNY Mellon states that each transaction was a one-time Sale
for cash in connection with which such Plan did not bear any brokerage
commissions, fees or other expenses. BNY Mellon represents that it took
all appropriate actions necessary to safeguard the interests of the
Plans in connection with the Sale of the Securities by the Plans.
12. BNY Mellon states that, pursuant to the terms of the offer, the
sale of Securities by a Plan to BNY Mellon resulted in an assignment of
all of the Plan's rights, claims, and causes of action against an
issuer or any third party arising in connection with or out of the
client's purchase, holding or ownership of the Securities. This
assignment did not include any rights, claims or other causes of action
against BNY Mellon. Rather, such assignment was limited to rights,
claims and causes of action against the issuers of the Securities and
any third parties unrelated to BNY Mellon. This has been the case at
all times from the date as of which retroactive relief has been
requested. BNY Mellon states further that if the exercise of any of the
foregoing rights, claims or causes of action results in BNY Mellon
recovering from the issuer or any third party an aggregate amount that
is more than the sum of (a) the purchase price paid for the Securities
by BNY Mellon and (b) the income (interest or dividends, as applicable)
due on the Securities from and after the date BNY Mellon purchased
Securities from a Plan, at the rate specified in the respective
offering documents for the Securities or determined pursuant to a
successful auction with respect to the Securities, BNY Mellon will
refund such excess amount promptly to the Plan (after deducting all
reasonable expenses incurred in connection with the recovery).
13. In summary, BNY Mellon represents that the transactions
satisfied the statutory criteria of section 408(a) of the Act and
section 4975 of the Code because: (a) Each Sale was a one-time
transaction for cash; (b) each Plan received an amount equal to the par
value of the Securities, plus accrued but unpaid income (interest or
dividends, as applicable), which was beneficial to the Plan due to the
Plan's inability to sell the Securities at par because of continuing
failed auctions; (c) no Plan paid any commissions or other transaction
expenses with respect to the Sale; (d) each Plan voluntarily entered
into the Sale, as determined in the discretion of the Plan's
independent fiduciary; (e) BNY Mellon took all appropriate actions
necessary to safeguard the interests of the Plans in connection with
the transactions; and (f) BNY Mellon will promptly refund to the
applicable Plan any amounts recovered from the issuer or any third
party in connection with its exercise of any rights, claims or causes
of action as a result of its ownership of the Securities, if such
amounts are in excess of the sum of (i) the purchase price paid for the
Securities by BNY Mellon and (ii) the income (interest or dividends, as
applicable) due on the Securities from and after the date BNY Mellon
purchased the Securities from the Plan, at the rate specified in the
respective offering documents for the Securities or determined pursuant
to a successful auction with respect to the Securities.
[[Page 20990]]
Notice to Interested Persons
Written notice will be provided to an independent representative of
each Plan that elected to sell the Securities to BNY Mellon. 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 first class mail within 15 days of the issuance of the
proposed exemption. Any written comments must be received by the
Department from interested persons within 45 days of the publication of
this proposed exemption in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Gary H. Lefkowitz of the Department,
telephone (202) 693-8546. (This is not a toll-free number.)
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and/or section 4975(c)(2) of the Code
does not relieve a fiduciary or other party in interest or disqualified
person from certain other provisions of the Act and/or the Code,
including any prohibited transaction provisions to which the exemption
does not apply and the general fiduciary responsibility provisions of
section 404 of the Act, which, among other things, require a fiduciary
to discharge his duties respecting the plan solely in the interest of
the participants and beneficiaries of the plan and in a prudent fashion
in accordance with section 404(a)(1)(b) of the Act; nor does it affect
the requirement of section 401(a) of the Code that the plan must
operate for the exclusive benefit of the employees of the employer
maintaining the plan and their beneficiaries;
(2) Before an exemption may be granted under section 408(a) of the
Act and/or section 4975(c)(2) of the Code, the Department must find
that the exemption is administratively feasible, in the interests of
the plan and of its participants and beneficiaries, and protective of
the rights of participants and beneficiaries of the plan;
(3) The proposed exemptions, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act and/or the
Code, including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction; and
(4) The proposed exemptions, if granted, will be subject to the
express condition that the material facts and representations contained
in each application are true and complete, and that each application
accurately describes all material terms of the transaction which is the
subject of the exemption.
Signed at Washington, DC, this 30th day of April , 2009.
Ivan Strasfeld,
Director of Exemption Determinations, Employee Benefits Security
Administration, U.S. Department of Labor.
[FR Doc. E9-10361 Filed 5-5-09; 8:45 am]
BILLING CODE 4510-29-P