[Federal Register: September 18, 2000 (Volume 65, Number 181)]
[Notices]
[Page 56337-56344]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr18se00-112]
-----------------------------------------------------------------------
DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Prohibited Transaction Exemption 2000-46; Exemption Application No. D-
10590, et al.]
Grant of Individual Exemptions; Bank of Oklahoma (the Bank)
AGENCY: Pension and Welfare Benefits Administration, Labor.
ACTION: Grant of individual exemptions.
-----------------------------------------------------------------------
SUMMARY: This document contains exemptions issued by the Department of
Labor (the Department) from certain of the prohibited transaction
restrictions of the Employee Retirement Income Security Act of 1974
(the Act) and/or the Internal Revenue Code of 1986 (the Code).
Notices were published in the Federal Register of the pendency
before the Department of proposals to grant such exemptions. The
notices set forth a summary of facts and representations contained in
each application for exemption and referred interested persons to the
respective applications for a complete statement of the facts and
representations. The applications have been available for public
inspection at the Department in Washington, D.C. The notices also
invited interested persons to submit comments on the requested
exemptions to the Department. In addition the notices stated that any
interested person might submit a written request that a public hearing
be held (where appropriate). The applicants have represented that they
have complied with the requirements of the notification to interested
persons. No public comments and no requests for a hearing, unless
otherwise stated, were received by the Department.
The notices of proposed exemption were issued and the exemptions
are being granted solely by the Department because, 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 proposed to the Secretary of
Labor.
[[Page 56338]]
Statutory Findings
In accordance with section 408(a) of the Act and/or section
4975(c)(2) of the Code and the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990) and based upon
the entire record, the Department makes the following findings:
(a) The exemptions are administratively feasible;
(b) They are in the interests of the plans and their participants
and beneficiaries; and
(c) They are protective of the rights of the participants and
beneficiaries of the plans.
Bank of Oklahoma (the Bank), Located in Tulsa, OK
[Prohibited Transaction Exemption 2000-46; Exemption Application No. D-
10590]
Exemption
Section I. Covered Transactions
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 to
the purchase or redemption of shares by an employee benefit plan (the
Plan), in certain mutual funds that are either affiliated with the Bank
(the Affiliated Funds) or are unaffiliated with the Bank (the Third
Party Funds),\1\ in connection with the participation by the Plan in
the Bank-sponsored Foundations Program (the Foundations Program).
---------------------------------------------------------------------------
\1\ The Affiliated Funds and the Third Party Funds are
collectively referred to herein as the Funds.
---------------------------------------------------------------------------
In addition, the restrictions of section 406(b) of the Act and the
sanctions resulting from the application of section 4975 of the Code,
by reason of section 4975(c)(1)(E) and (F) of the Code, shall not apply
to the provision, by the Bank, of asset allocation services to an
independent fiduciary of a participating Plan (the Primary Independent
Fiduciary) or to a participant (the Directing Independent Fiduciary) of
a Plan that provides for participant investment direction (the
Participant-Directed Plan), which may result in the selection of
portfolios in the Foundations Program for the investment of Plan
assets, by the Primary Independent Fiduciary or the Directing
Independent Fiduciary, and the receipt of fees by the Bank and/or its
affiliates.
This exemption is subject to the conditions set forth below in
Section II.
Section II. General Conditions
(a) The participation by a Plan in the Foundations Program is
approved by a Primary Independent Fiduciary or a Directing Independent
Fiduciary, in the case of a Participant-Directed Plan, and, no Plan
covering employees of the Bank or any of its affiliates is eligible to
participate in the Foundations Program.
(b) As to each Plan, the total fees that are paid to the Bank and
its affiliates constitute no more than reasonable compensation for the
services provided.
(c) With the exception of distribution-related fees that are paid
to the Bank pursuant to Rule 12b-1 (the Rule 12b-1 Fees) of the
Investment Company Act of 1940 (the Investment Company Act) which are
offset, no Plan pays a fee or commission by reason of the acquisition
or redemption of shares in the Funds.
(d) The terms of each purchase or redemption of shares in the Funds
remain at least as favorable to an investing Plan as those obtainable
in an arm's length transaction with an unrelated party.
(e) The Bank provides written documentation to each Plan's Primary
Independent Fiduciary or Directing Independent Fiduciary of its
recommendations, as well as on the design and parameters with respect
to an asset allocation model (the Asset Allocation Model) based upon
objective criteria that are uniformly applied.
(f) Any recommendation or evaluation made by the Bank to a Primary
Independent Fiduciary or a Directing Independent Fiduciary is
implemented only at the express direction of such fiduciary.
(g) The Bank retains an independent financial analyst (the
Independent Financial Analyst) to--
(1) Review the investments of Plan assets in a Third Party Fund for
purposes of satisfying Representation 13 of the notice of proposed
exemption (65 FR 42248, 42255 and 42256, July 7, 2000);
(2) Review determinations by the Bank to add a Third Party Fund or
replace an Affiliated Fund with a Third Party Fund; and
(3) Ensure that only one Fund fits an asset segment (the Asset
Segment) such that there is no overlap between a Third Party Fund and
an Affiliated Fund.
Further, such Independent Financial Analyst may not derive more
than 5 percent of its total annual revenues from the Bank and/or its
affiliates.
(h) The quarterly fee that is paid by a Plan to the Bank and its
affiliates for asset allocation and related services (the Wrap Fee)
rendered to such Plan under the Foundations Program is offset by--
(1) All investment management fees (the Advisory Fees) that are
paid to it and/or its affiliates by the Affiliated Funds;
(2) All non-advisory fees, including custodial fees, Rule 12b-1
Fees or subadministration fees (collectively, the Administrative Fees)
that are paid to the Bank and/or its affiliates by the Affiliated
Funds; and
(3) All Administrative Fees which include, but are not limited to,
Rule 12b-1 Fees and sub-transfer agency fees, that are paid to the Bank
and/or its affiliates by the Third Party Funds, such that the sum of
the offset and the net Wrap Fee will always equal the aggregate Wrap
Fee, thereby making the Bank's selection of Affiliated Funds or Third
Party Funds for the Asset Allocation Models a ``fee-neutral'' decision.
(i) The Plan is automatically rebalanced on a quarterly basis
(using net asset values of the affected Funds as of the close of
business) on a pre-established date to the Asset Allocation Model
previously prescribed by such fiduciary if authorized in writing by the
Primary Independent Fiduciary, and if one or more Fund allocations
deviates from the Asset Allocation Model prescribed by such fiduciary
because--
(1) At least one transaction required to rebalance the Plan among
the Funds involves a purchase or redemption of securities valued at
$100 or more; and
(2) The net asset value of the Fund affected would be more than 5
percent of the Plan's investment in such Fund.
(j) The Bank may make adjustments to the composition of the Asset
Allocation Model (the Model Adjustments) unilaterally only within
certain authorized parameters approved by the Primary Independent
Fiduciary, or upon the consent of the Primary Independent Fiduciary, if
the Bank proposes to exceed the parameters.
(1) If the Model Adjustment is made unilaterally pursuant to
Section II(j) above, the Bank may only deviate from the Normal Position
of a given Asset Allocation Model within a specified range, not to
exceed 15 percent (above and below) the Normal Position under Section
III(l), which is applied to the Asset Allocation Model's entire
allocation.
(2) With respect to a Model Adjustment requiring independent
fiduciary consent, the Bank may not change the asset mix outside the
limits authorized by the Primary Independent Fiduciary unless it
provides the Primary Independent Fiduciary and the Directing
Independent Fiduciary, upon the request of the Primary Independent
Fiduciary, 30 days' advance written notice of the impending change.
(k) The notice referred to above in Section II(j) includes a
termination
[[Page 56339]]
advisory form (the Termination Advisory) which--
(1) Advises the Primary Independent Fiduciary of the right to
withdraw from the Foundations Program or, in the case of the Directing
Independent Fiduciary, of the right to transfer to a different Asset
Allocation Model without penalty; and
(2) States that absent any affirmative action by the Primary
Independent Fiduciary or the Directing Independent Fiduciary, the Plan
will be reallocated within the revised Normal Positions for the Asset
Allocation Model, effective as of a given date.
(l) The Bank provides the Termination Advisory to the Primary
Independent Fiduciary and, if applicable, the Directing Independent
Fiduciary, at least annually; and provides the Termination Advisory in
all cases whenever the Bank --
(1) Makes a Model Adjustment where fiduciary consent is needed;
(2) Adds a new Fund to an Allocation Model;
(3) Removes an existing Fund within an Allocation Model; or
(4) Increases its Wrap Fee.
Under such circumstances, the notice and Termination Advisory are
provided at least 30 days prior to the implementation of the change.\2\
---------------------------------------------------------------------------
\2\ For an annual mailing of the Termination Advisory or in the
event the Bank makes a Model Adjustment that is outside of current
parameters or a Fund is added or substituted, the Termination
Advisory will include language similar to that contained in Section
II(k)(1) and (2). In the event the Bank proposes an increase in its
Wrap Fee, the Termination Advisory will also include language
similar to that contained in Section II(k)(1). However, under such
circumstances, Section II(k)(2) will be modified state that absent
any affirmative action by the Primary Independent Fiduciary or the
Directing Independent Fiduciary, the revised Wrap Fee will be
effective as of a specified date.
---------------------------------------------------------------------------
(m) With respect to its participation in the Foundations Program,
prior to purchasing shares in the Affiliated Funds and the Third Party
Funds, each Primary Independent Fiduciary, and, if applicable, each
Directing Independent Fiduciary, receives the following written or oral
disclosures from the Bank:
(1) A brochure describing the Foundations Program;
(2) A Foundations Program Asset Allocation Account Application;
(3) A Foundations Program Asset Allocation Account Purchase Order;
(4) A Foundations Program Account Agreement (the Account Agreement)
providing detailed information on the Foundations Program; the fee
structure of the Foundations Program; procedures and limitations
imposed on the Bank with respect to Model Adjustments; rebalancing of a
participating Plan investor's account; and the Bank's affiliation or
non-affiliation with the Funds, including a copy of the executed
Account Agreement between the Plan and the Bank, to the Primary
Independent Fiduciary rather than to the Directing Independent
Fiduciary;
(5) The Bank's Form ADV--Part II which contains a description of
the Bank's affiliation, if any, with the sponsors, distributors,
administrators, investment advisers, sub-advisers, custodians and
transfer agents of each Affiliated Fund and Third Party Fund; and
(6) Copies of the proposed and final exemptions with respect to the
exemptive relief described herein. (In the case of a Participant-
Directed Plan, this information may be provided directly by the Bank to
the Primary Independent Fiduciary for distribution to the Directing
Independent Fiduciaries.)
(n) Having acknowledged receipt of the documents described in
paragraph (m) of Section II, the Primary Independent Fiduciary submits
a completed Account Agreement to the Bank and represents in writing to
the Bank that such fiduciary is--
(1) Independent of the Bank and its affiliates;
(2) Knowledgeable with respect to the Plan in administrative
matters;
(3) Able to make an informed decision concerning the Plan's
participation in the Foundations Program; and
(4) Knowledgeable with respect to funding matters related to the
Plan.
(o) In addition to the initial disclosures described above in
paragraph (m) of this Section II, prior to investment in an Asset
Allocation Model, the Primary Independent Fiduciary or, if applicable,
the Directing Independent Fiduciary--
(1) Receives a written analysis from the Bank based on the
fiduciary's Investor Profile as well as a description of the Asset
Allocation Model recommended by a Bank's investment counselor which
includes a description of the actual fee structure and the actual basis
points to be rebated to such Plan fiduciary;
(2) Receives a prospectus for each Affiliated Fund and Third Party
Fund in which the Plan may be invested and, upon such fiduciary's
request, is provided a Statement of Additional Information which
supplements the prospectus; and
(3) Acknowledges receipt of the foregoing documents in writing to
the Bank.
(p) With respect to their ongoing participation in the Foundations
Program, each Primary Independent Fiduciary and/or Directing
Independent Fiduciary receives the following continuing disclosures
from the Bank:
(1) Copies of applicable prospectuses;
(2) Written confirmations of each purchase or redemption of shares
of an Affiliated Fund or a Third Party Fund, including transactions
implemented as a result of a realignment of the Asset Allocation
Model's investment mix or from the rebalancing of a Plan's investments
in conformity with the selected Asset Allocation Model;
(3) Telephone quotations of such Plan's balance (or if relevant,
individual account balances of Directing Independent Fiduciaries) under
the Foundations Program;
(4) Periodic, but at least quarterly, account statements showing
the Plan's value (or if relevant, individual account balances of
Directing Independent Fiduciaries), a summary of purchase, sale and
exchange activity and dividends received or reinvested and a summary of
cumulative realized gain and/or loss;
(5) Semiannual or annual reports that include financial statements
for the Funds as well as a description of the fees paid to the Bank and
its affiliates;
(6) At least annually, a written or oral inquiry from the Bank to
ascertain whether the information provided on the Investor Profile is
still accurate and to determine if such information should be updated;
(7) A Termination Advisory provided on an annual basis as well as
at other times noted in paragraph (l) of this Section II; and
(8) The Bank's investment advisory and other agreements with any
Affiliated Fund as well as its distribution agreement pertaining to the
Third Party Funds, upon request of the Primary Independent Fiduciary.
(Communications received from the Funds (e.g., prospectuses, annual
reports, quarterly reports, notices regarding changes in Fund managers,
proxy mailings, etc.) will be distributed to the Primary Independent
Fiduciary, who may elect to pass them through to the Directing
Independent Fiduciaries.)
(q) The Bank maintains, for a period of six years, the records
necessary to enable the persons described in paragraph (r) of this
Section II to determine whether the conditions of this exemption have
been met, except that--
(1) A prohibited transaction will not be considered to have
occurred if, due to circumstances beyond the control of the Bank and/or
its affiliates, the records are lost or destroyed prior to the end of
the six year period; and
[[Page 56340]]
(2) No party in interest other than the Bank 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 (r) of this Section II below.
(r)(1) Except as provided in section (r)(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 (q) of this
Section II 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 Plan or any duly authorized
representative of such fiduciary;
(C) Any contributing employer to any participating Plan or any duly
authorized employee representative of such employer; and
(D) Any participant or beneficiary of any participating Plan, or
any duly authorized representative of such participant or beneficiary.
(r)(2) None of the persons described above in paragraphs (r)(1)(B)-
(r)(1)(D) of this paragraph (r) are authorized to examine the trade
secrets of the Bank or commercial or financial information which is
privileged or confidential.
Section III. Definitions
For purposes of this exemption:
(a) The term ``Bank'' means the Bank of Oklahoma, N.A., a
subsidiary of BOK Financial Corporation and any affiliate of the Bank,
as defined in paragraph (b) of this Section III.
(b) An ``affiliate'' of the Bank includes--
(1) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with the Bank.
(2) Any individual who is an officer, director or partner in the
Bank or a person described in subparagraph (b)(1) of this Section III,
and
(3) Any corporation or partnership of which the Bank or an
affiliate or person described in subparagraphs (b)(1) or (b)(2) of this
Section III, is a 10 percent or more partner or owner.
(c) The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
(d) The term ``officer'' means a president, any vice president in
charge of a principal business unit, division or function (such as
sales, administration or finance), or any other officer who performs a
policy-making function for the entity.
(e) The term ``Plan'' refers to an employee benefit plan which is
eligible to participate under the Foundations Program. Such Plans are
qualified under sections 401(a) and 501(a) of the Code and include
Keogh plans; individual retirement accounts; simplified employee
pension plans; Salary Reduction Simplified Employee Pensions (SARSEPs),
provided that the SARSEP was established prior to January 1, 1996, the
date as of which the Code provision authorizing such plans was
repealed); and savings incentive match plans for employees; and, in the
case of a Participant-Directed Plan, the individual account of a
Directing Independent Fiduciary.
(f) The term ``Directing Independent Fiduciary'' means, as to a
participating Plan, a participant in a Participant-Directed Plan that
is authorized to direct the investment of his or her account balance.
(g) The ``Administrative Fees'' refer to custodial, Rule 12b-1
Fees, and sub-administration fees that are paid to the Bank or its
affiliates from or on behalf of the Affiliated Funds on account of the
Bank's services to the Affiliated Funds, as well as Rule 12b-1 Fees,
sub-transfer agency fees and other fees that may be paid to the Bank or
its affiliates on account of the investment of participating Plans in
the Third Party Funds.
(h) The ``Advisory Fees'' refer to investment advisory fees that
are paid by the Affiliated Funds to the Bank and its affiliates.
(i) The term ``Affiliated Fund'' means a portfolio of an investment
company registered under the Investment Company Act for which the Bank
or an affiliate of the Bank acts as the investment adviser, and may
also serve as custodian or sub-administrator.
(j) The term ``Asset Segment'' refers to a subdivision of each
asset class (the Asset Class) into which the Asset Allocation Model is
divided (e.g., international equities is an Asset Segment under the
Asset Class ``stocks''). Asset Segments are determined by the Bank with
reference to recognized investment objectives and styles established by
independent mutual fund analysts such as Morningstar, Inc. and Lipper
Analytical Services, Inc.
(k) The ``Investment Management Group'' refers to a committee
comprised of the Bank's senior investment professionals.
(l) The term ``Model Adjustment'' means an adjustment to the Normal
Position of an Asset Allocation Model (i.e., a change in the Asset
Allocation Model among the three Asset Classes, the division of the
Asset Class into Asset Segments, and the identity of the Funds which
represent the various Asset Segments).
(m) The ``Normal Position'' refers to the initial allocation of
each Asset Allocation Model among the various Asset Classes, Asset
Segments and Funds.
(n) The ``Offset Fees'' refer to the Advisory Fees and
Administrative Fees that are paid by, or on behalf of, the Funds to the
Bank and/or its affiliates and which are offset against the Wrap Fee.
(o) The term ``Participant-Directed Plan'' refers to a qualified
Plan under which participants direct the investments of their
individual accounts.
(p) The term ``Primary Independent Fiduciary'' refers to a plan
fiduciary within the meaning of section 3(21)(A) of the Act who has (1)
investment discretion and authority over the Plan's assets and (2) is
not an affiliate of the Bank. Typically, the Primary Independent
Fiduciary will be the plan administrator, the employer which sponsors
the Plan, an investment committee appointed under the Plan document or
an IRA account holder.
(q) The term ``Termination Advisory'' refers to the notice advising
the Primary Independent Fiduciary or the Directing Independent
Fiduciary of the right to withdraw from the Foundations Program without
penalty. The Termination Advisory, which will contain instructions on
its use, will be provided to such participants on an annual basis, or
whenever the Bank makes a Model Adjustment that is outside of a current
Allocation Model, in the event a new Fund is added to an Allocation
Model or an existing Fund is removed from an Allocation Model, or the
Bank's Wrap Fee is increased. Depending on the circumstances
precipitating its distribution, the Termination Advisory will include a
provision advising the Primary Independent Fiduciary or the Directing
Independent Fiduciary that absent any affirmative action by the Primary
Independent Fiduciary or the Directing Independent Fiduciary, the
authorization of the Plan's participation in the Foundations Program
will continue, or the participating Plan will be reallocated in
accordance with the revised Normal Position for the Asset Allocation
Model in which the Plan's assets are invested, or the Bank's Wrap
[[Page 56341]]
Fee will be increased. The Bank will provide the Termination Advisory
to the Primary Independent Fiduciary and/or the Directing Independent
Fiduciary at least 30 days prior to the implementation of the proposed
change.
(r) A ``Third Party Fund'' is a portfolio of an investment company
that is registered under the Investment Company Act for which neither
the Bank nor any affiliate of the Bank acts as investment adviser,
custodian and/or sub-administrator.
(s) The term ``Wrap Fee'' refers to the Plan or account-level fee
the Bank, BOSC, Inc. (BOSC) and/or their affiliates charge each Plan
for the asset allocation, custodial and related services under the
Foundations Program.
(t) The term ``Independent Financial Analyst'' means an independent
third party which has entered into a written contract with the Bank to
(1) review the investment of Plan assets in a Third Party Fund, (2)
review the Funds each time the Bank determines to add a Third Party
Fund or replace an Affiliated Fund with a Third Party Fund, and (3)
determine that only one Fund fits an Asset Segment such that there is
no overlap between a Third Party Fund and an Affiliated Fund. The
Independent Financial Analyst may not derive more than 5 percent of its
total annual revenues from the Bank or its affiliates, including its
fee for serving as the Independent Financial Analyst.
As for minimum credentials, the Independent Financial Analyst will
be a Chartered Financial Analyst and will be employed by a firm which
has at least a regional presence in the investment products and
services industry. In addition, the individual assigned the duties of
the Independent Financial Analyst must alone, or with his or her
employer, have a certain minimum number of years experience in the
investment products and services industry and must not be affiliated
with the Bank, BOSC or BISYS Fund Services, Inc. Should the Bank
replace the Independent Financial Analyst, that entity must meet the
same requirements applicable to the current Independent Financial
Analyst. In addition, the Bank will be required to provide the
Department with advance written notification of the change in
Independent Financial Analysts and the qualifications of the successor.
Unless the Department objects to the change, the Foundations Program
will operate with the new Independent Financial Analyst.
For a more complete statement of the facts and representations
supporting the Department's decision to grant this exemption, refer to
the proposed exemption published on July 7, 2000 at 65 FR 42248.
Written Comments
The Department received two written comments with respect to the
proposed exemption and no requests for a public hearing. The first
comment was submitted by the Bank. The second comment was submitted by
the Securities Industry Association (the SIA). Following is a
discussion of each comment and the responses made by either the
Department or the Bank.
The Bank's Comment
In its comment, the Bank requested modification of Section II(g)(1)
of the proposed exemption in order to track the role of the Independent
Financial Analyst to Representation 13 of the Summary of Facts and
Representations. Section II(g)(1) of the proposed exemption states that
the Independent Financial Analyst will review the investments of Plan
assets in a Third Party Fund for purposes of ``performance and
suitability.'' However, the Bank suggested that Section II(g)(1) be
revised to read as follows:
(1) Review the investments of Plan assets in a Third Party Fund
for purposes of satisfying Representation 13 of the notice of
proposed exemption (65 FR 42248, 42255 and 42256, July 7, 2000);
In response to the Bank's comment, the Department has made the
requested change to the operative language of the proposed exemption.
The SIA's Comment
In its comment, the SIA requested that the Department reconsider a
number of conditions contained in the notice of proposed exemption. In
response to the SIA's comment letter, the Bank indicated that it was
not interested in any of the recommendations expressed therein.
Accordingly, the Bank urged the Department to grant the requested
exemption as proposed, subject to the modification discussed above.
For further information regarding the comments and other matters
discussed herein, interested persons are encouraged to obtain copies of
the exemption application file (Exemption Application No. D-10590) the
Department is maintaining in this case. The complete application file,
as well as all supplemental submissions received by the Department, are
made available for public inspection in the Public Documents Room of
the Pension and Welfare Benefits Administration, Room N-5638, U.S.
Department of Labor, 200 Constitution Avenue, NW, Washington, DC 20210.
Accordingly, after giving full consideration to the entire record,
including the comment letters, the Department has decided to grant the
exemption subject to the modification described above.
FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
Goldman, Sachs & Co., Located in New York, New York
[Prohibited Transaction Exemption 2000-47; Exemption Application No. D-
10758]
Exemption
Section I--Transactions
A. The restrictions of section 406(a)(1) (A) through (D) 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 April 15, 1999, to any purchase or sale of
securities between certain affiliates of Goldman, Sachs & Co. (Goldman)
which are foreign broker-dealers or banks (the Foreign Affiliates, as
defined below) and employee benefit plans (the Plans) with respect to
which the Foreign Affiliates are parties in interest, including options
written by a Plan, Goldman, or a Foreign Affiliate, provided that the
following conditions, and the General Conditions of Section II, are
satisfied:
(1) The Foreign Affiliate customarily purchases and sells
securities for its own account in the ordinary course of its business
as a broker-dealer or bank;
(2) The terms of any transaction are at least as favorable to the
Plan as those the Plan could obtain in a comparable arm's length
transaction with an unrelated party; and
(3) Neither the Foreign Affiliate nor an affiliate thereof has
discretionary authority or control with respect to the investment of
the Plan assets involved in the transaction, or renders investment
advice (within the meaning of 29 CFR 2510.3-21(c)) with respect to
those assets, and the Foreign Affiliate is a party in interest or
disqualified person with respect to the Plan assets involved in the
transaction solely by reason of section 3(14)(B) of the Act or section
4975(e)(2)(B) of the Code, or by reason of a relationship to a person
described in such sections. For purposes of this paragraph, the Foreign
Affiliate shall not be deemed to be a fiduciary with respect to a Plan
solely by reason of providing securities custodial services for the
Plan.
B. The restrictions of sections 406(a)(1) (A) through (D) and
406(b)(2)
[[Page 56342]]
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 April 15, 1999, to any extension
of credit to the Plans by the Foreign Affiliates to permit the
settlement of securities transactions, regardless of whether they are
effected on an agency or a principal basis, or in connection with the
writing of options contracts, provided that the following conditions,
and the General Conditions of Section II, are satisfied:
(1) The Foreign Affiliate is not a fiduciary with respect to the
Plan assets involved in the transaction, unless no interest or other
consideration is received by the Foreign Affiliate or an affiliate
thereof, in connection with such extension of credit; and
(2) Any extension of credit would be lawful under the Securities
Exchange Act of 1934 (the 1934 Act) and any rules or regulations
thereunder, if the 1934 Act, rules, or regulations were applicable.
C. The restrictions of section 406(a)(1) (A) through (D) 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 April 15, 1999, to the lending of securities
to the Foreign Affiliates by the Plans, provided that the following
conditions, and the General Conditions of Section II, are satisfied:
(1) Neither the Foreign Affiliate nor an affiliate thereof has
discretionary authority or control with respect to the investment of
the Plan assets involved in the transaction, or renders investment
advice (within the meaning of 29 CFR 2510.3-21(c)) with respect to
those assets;
(2) The Plan receives from the Foreign Affiliate (by physical
delivery, by book entry in a securities depository, wire transfer, or
similar means) by the close of business on the day the loaned
securities are delivered to the Foreign Affiliate, collateral
consisting of cash, securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities, irrevocable U.S. bank
letters of credit issued by persons other than the Foreign Affiliate or
an affiliate of the Foreign Affiliate, or any combination thereof. All
collateral shall be in U.S. dollars, or dollar-denominated securities
or bank letters of credit, and shall be held in the United States;
(3) The collateral has, as of the close of business on the
preceding business day, a market value equal to at least 100 percent of
the then market value of the loaned securities (or, in the case of
letters of credit, a stated amount equal to same);
(4) The loan is made pursuant to a written loan agreement (the Loan
Agreement), which may be in the form of a master agreement covering a
series of securities lending transactions, and which contains terms at
least as favorable to the Plan as those the Plan could obtain in a
comparable arm's length transaction with an unrelated party;
(5) In return for lending securities, the Plan either (a) receives
a reasonable fee, which is related to the value of the borrowed
securities and the duration of the loan, or (b) has the opportunity to
derive compensation through the investment of cash collateral. In the
latter case, the Plan may pay a loan rebate or similar fee to the
Foreign Affiliate, if such fee is not greater than what the Plan would
pay in a comparable arm's length transaction with an unrelated party;
(6) The Plan receives at least the equivalent of all distributions
on the borrowed securities made during the term of the loan, including,
but not limited to, cash dividends, interest payments, shares of stock
as a result of stock splits, and rights to purchase additional
securities, that the Plan would have received (net of applicable tax
withholdings) \3\ had it remained the record owner of such securities;
---------------------------------------------------------------------------
\3\ The Department notes the applicant's representation that
dividends and other distributions on foreign securities payable to a
lending Plan may be subject to foreign tax withholdings and that the
Foreign Affiliate will always put the Plan back in at least as good
a position as it would have been in had it not loaned the
securities.
---------------------------------------------------------------------------
(7) If the market value of the collateral as of the close of
trading on a business day falls below 100 percent of the market value
of the borrowed securities as of the close of trading on that day, the
Foreign Affiliate delivers additional collateral, by the close of
business on the following business day, to bring the level of the
collateral back to at least 100 percent. However, if the market value
of the collateral exceeds 100 percent of the market value of the
borrowed securities, the Foreign Affiliate may require the Plan to
return part of the collateral to reduce the level of the collateral to
100 percent;
(8) Before entering into a Loan Agreement, the Foreign Affiliate
furnishes to the independent Plan fiduciary (a) the most recent
available audited statement of the Foreign Affiliate's financial
condition, (b) the most recent available unaudited statement of its
financial condition (if more recent than the audited statement), and
(c) a representation that, at the time the loan is negotiated, there
has been no material adverse change in its financial condition that has
not been disclosed since the date of the most recent financial
statement furnished to the independent Plan fiduciary. Such
representation may be made by the Foreign Affiliate's agreeing that
each loan of securities shall constitute a representation that there
has been no such material adverse change;
(9) The Loan Agreement and/or any securities loan outstanding may
be terminated by the Plan at any time, whereupon the Foreign Affiliate
shall deliver certificates for securities identical to the borrowed
securities (or the equivalent thereof in the event of reorganization,
recapitalization, or merger of the issuer of the borrowed securities)
to the Plan within (a) the customary delivery period for such
securities, (b) five business days, or (c) the time negotiated for such
delivery by the Plan and the Foreign Affiliate, whichever is least, or,
alternatively, such period as permitted by Prohibited Transaction Class
Exemption (PTE)
81-6 (46 FR 7527, January 23, 1981, as amended at 52 FR 18754, May 19,
1987), as it may be amended or superseded; \4\
---------------------------------------------------------------------------
\4\ PTE 81-6 provides an exemption under certain conditions from
section 406(a)(1)(A) through (D) of the Act and the corresponding
provisions of section 4975(c) of the Code for the lending of
securities that are assets of an employee benefit plan to a U.S.
broker-dealer registered under the 1934 Act (or exempted from
registration under the 1934 Act as a dealer in exempt Government
securities, as defined therein) or to a U.S. bank, that is a party
in interest with respect to such plan.
---------------------------------------------------------------------------
(10) In the event that the loan is terminated and the Foreign
Affiliate fails to return the borrowed securities, or the equivalent
thereof, within the time described in paragraph 9, the Plan may
purchase securities identical to the borrowed securities (or their
equivalent as described above) and may apply the collateral to the
payment of the purchase price, any other obligations of the Foreign
Affiliate under the Loan Agreement, and any expenses associated with
the sale and/or purchase. The Foreign Affiliate is obligated to pay,
under the terms of the Loan Agreement, and does pay, to the Plan the
amount of any remaining obligations and expenses not covered by the
collateral, plus interest at a reasonable rate. Notwithstanding the
foregoing, the Foreign Affiliate may, in the event it fails to return
borrowed securities as described above, replace non-cash collateral
with an amount of cash not less than the then current market value of
the collateral, provided that such replacement is approved by the
independent Plan fiduciary; and
[[Page 56343]]
(11) The independent Plan fiduciary maintains the situs of the Loan
Agreement in accordance with the indicia of ownership requirements
under section 404(b) of the Act and the regulations promulgated under
29 CFR 2550.404(b)-1. However, in the event that the independent Plan
fiduciary does not maintain the situs of the Loan Agreement in
accordance with the indicia of ownership requirements of Section 404(b)
of the Act, the Foreign Affiliate shall not be subject to the civil
penalty which may be assessed under section 502(i) of the Act, or the
taxes imposed by section 4975(a) and (b) of the Code.
If the Foreign Affiliate fails to comply with any condition of the
exemption in the course of engaging in a securities lending
transaction, the Plan fiduciary who caused the Plan to engage in such
transaction shall not be deemed to have caused the Plan to engage in a
transaction prohibited by section 406(a)(1) (A) through (D) of the Act
solely by reason of the Foreign Affiliate's failure to comply with the
conditions of the exemption.
Section II--General Conditions
A. The Foreign Affiliate is a registered broker-dealer or bank
subject to regulation by a governmental agency, as described in Section
III.B, and is in compliance with all applicable rules and regulations
thereof in connection with any transactions covered by this exemption;
B. The Foreign Affiliate, in connection with any transactions
covered by this exemption, is in compliance with the requirements of
Rule 15a-6 (17 CFR 240.15a-6) of the 1934 Act, and Securities and
Exchange Commission (SEC) interpretations thereof, providing for
foreign affiliates a limited exemption from U.S. broker-dealer
registration requirements;
C. Prior to any transaction, the Foreign Affiliate enters into a
written agreement with the Plan in which the Foreign Affiliate consents
to the jurisdiction of the courts of the United States for any civil
action or proceeding brought in respect of the subject transactions;
D. The Foreign Affiliate maintains, or causes to be maintained,
within the United States for a period of six years from the date of any
transaction such records as are necessary to enable the persons
described in paragraph E. to determine whether the conditions of the
exemption have been met, except that--
(1) a party in interest with respect to a Plan, other than the
Foreign Affiliate, shall not 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 by paragraph E; and
(2) a prohibited transaction shall not be deemed to have occurred
if, due to circumstances beyond the Foreign Affiliate's control, such
records are lost or destroyed prior to the end of the six year period;
and
E. Notwithstanding any provisions of subsections (a)(2) and (b) of
section 504 of the Act, the Foreign Affiliate makes the records
referred to in paragraph D. unconditionally available during normal
business hours at their customary location to the following persons or
a duly authorized representative thereof: (1) the Department, the
Internal Revenue Service, or the SEC; (2) any fiduciary of a Plan; (3)
any contributing employer to a Plan; (4) any employee organization any
of whose members are covered by a Plan; and (5) any participant or
beneficiary of a Plan. However, none of the persons described in (2)
through (5) of this subsection are authorized to examine the trade
secrets of the Foreign Affiliate or commercial or financial information
which is privileged or confidential.
Section III--Definitions
A. The term ``affiliate'' of another person shall include: (1) any
person directly or indirectly, through one or more intermediaries,
controlling, controlled by, or under common control with such other
person; (2) any officer, director, or partner, employee or relative (as
defined in section 3(15) of the Act) of such other person; and (3) any
corporation or partnership of which such other person is an officer,
director or partner. For purposes of this definition, the term
``control'' means the power to exercise a controlling influence over
the management or policies of a person other than an individual;
B. The term ``Foreign Affiliate'' shall mean an affiliate of
Goldman, Sachs & Co. that is subject to regulation as a broker-dealer
or bank by (1) the Ontario Securities Commission and the Investment
Dealers Association in Canada; (2) the Securities and Futures Authority
in the United Kingdom; (3) the Deutsche Bundesbank and the Federal
Banking Supervisory Authority, i.e., der Bundesaufsichtsamt fuer das
Kreditwesen (the BAK) in Germany; (4) the Ministry of Finance and the
Tokyo Stock Exchange in Japan; (5) the Australian Securities &
Investments Commission (the ASIC) in Australia; or (6) the Swiss
Federal Banking Commission in Switzerland.
C. The term ``security'' shall include equities, fixed income
securities, options on equity and on fixed income securities,
government obligations, and any other instrument that constitutes a
security under U.S. securities laws. The term ``security'' does not
include swap agreements or other notional principal contracts.
Effective Date: This exemption is effective as of April 15, 1999.
For a more complete statement of the facts and representations
supporting the Department's decision to grant this exemption, refer to
the notice of proposed exemption published on June 13, 2000 at 65 FR
37175.
Written Comments
The Department received one written comment with respect to the
notice of proposed exemption (the Notice). The comment was submitted by
the applicant. The applicant requested certain clarifying modifications
and additions to the proposed operative language and to the Summary of
Facts and Representations (the Summary) contained in the Notice (see 65
FR 37175). These modifications and additions, discussed below, are
consistent with other recent similar exemptions granted by the
Department.\5\
---------------------------------------------------------------------------
\5\ See e.g., Prohibited Transaction Exemption (PTE) 97-08 (62
FR 4811, January 31, 1997) for Morgan Stanley & Co.; PTE 97-57 (62
FR 56203, October 29, 1997) for NatWest Securities Corp.; PTE 98-62
(63 FR 71307, December 24, 1998) for Barclays Bank PLC; PTE 99-4 (64
FR 4127, January 27, 1999) for Salomon Smith Barney Inc.; and PTE
99-45 (64 FR 61138, November 9, 1999) for Donaldson, Lufkin &
Jenrette Securities Corporation.
---------------------------------------------------------------------------
1. First, the applicant requested that the following footnote be
added to the end of the first paragraph under the heading ``Proposed
Exemption'' (65 FR at 37176, column 1):
For purposes of this proposed exemption, reference to provisions
of Title I of the Act, unless otherwise specified, refer also to the
corresponding provisions of the Code.
2. Second, the applicant requested that, because the settlement
period for securities transactions in the various jurisdictions covered
by the exemption may be more than three days, the first sentence in
Item 7 of the Summary (65 FR 37180, center column) be revised to read
as follows:
Goldman represents that a normal part of the execution of
securities transactions by broker-dealers on behalf of clients,
including employee benefit plans, is the extension of credit to
clients so as to permit the settlement of transactions in the
customary [delete ``three-day''] settlement period.
3. Finally, the applicant requested that Footnote 6 of the Summary
(65 FR
[[Page 56344]]
at 37180, center column) be revised by adding the following italicized
language:
Goldman represents that currently all such requirements under
Rule 15a-6 relating to record-keeping of principal transactions
would be applicable [delete ``to''] in respect of any Foreign
Affiliate in a principal transaction that would be covered by this
proposed exemption.
The applicant noted that the revisions, above, are consistent with the
language of PTE 99-4 (64 FR 4127, January 27, 1999) for Salomon Smith
Barney Inc., in Footnote 4 of the notice of proposed exemption relating
thereto (see 63 FR 53703, 53707).
The Department acknowledges the applicant's requested modifications
to the language of the Notice and concurs in these changes.
Accordingly, based upon the information contained in the entire record,
the Department has determined to grant the proposed exemption as
modified herein.
FOR FURTHER INFORMATION CONTACT: Ms. Karin Weng of the Department,
telephone (202) 219-8881. (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 to which the exemptions 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) These exemptions are supplemental to and not in derogation of,
any other provisions of the Act and/or the Code, including statutory or
administrative exemptions and transactional 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
(3) The availability of these exemptions is subject to the express
condition that the material facts and representations contained in each
application accurately describes all material terms of the transaction
which is the subject of the exemption.
Signed at Washington, D.C., this 11th day of September, 2000.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, Department of Labor.
[FR Doc. 00-23823 Filed 9-15-00; 8:45 am]
BILLING CODE 4510-29-P