[Federal Register: December 6, 2000 (Volume 65, Number 235)]
[Notices]
[Page 76292-76306]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr06de00-114]
[[Page 76292]]
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-10901 and D-10902,
et al.]
Proposed Exemptions; IRAs for Eldon Nysether and Mark Nysether
(the IRAs)
AGENCY: Pension and Welfare Benefits Administration, Labor
ACTION: Notice of Proposed Exemptions.
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SUMMARY: This document contains notices of pendency before the
Department of Labor (the Department) of proposed exemptions from
certain of the prohibited transaction restrictions of the Employee
Retirement Income Security Act of 1974 (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
request 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 request for a hearing (at least
three copies) should be sent to the Pension and Welfare Benefits
Administration, Office of Exemption Determinations, Room N-5649, U.S.
Department of Labor, 200 Constitution Avenue, NW, Washington, DC 20210.
Attention: Application No. ______, stated in each Notice of Proposed
Exemption. The applications for exemption and the comments received
will be available for public inspection in the Public Documents Room of
the Pension and Welfare Benefits Administration, U.S. Department of
Labor, Room N-5638, 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.
IRAs for Eldon Nysether and Mark Nysether (the IRAs)
Located in Seattle, Washington
[Application Nos. D-10901 and D-10902]
Proposed Exemption
The Department is considering granting an exemption under the
authority of 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). If the exemption is granted, 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 proposed sale by the IRAs of their interests in certain improved
real property (the Property) to Sea-Land Development Corporation (Sea-
Land), a disqualified person with respect to the IRAs,\1\ provided that
the following conditions are satisfied: (1) The sale is a one-time
transaction for cash; (2) the IRAs pay no commissions nor other
expenses relating to the sale; and (3) the sale price received by the
IRAs equals the Property's fair market value, as of the date of the
sale, as established by a qualified, independent appraiser.
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\1\ Pursuant to 29 CFR 2510.3-2(d), the IRAs are not within the
jurisdiction of Title I of the Act. However, there is jurisdiction
under Title II of the Act, pursuant to section 4975 of the Code.
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Summary of Facts and Representations
1. The two IRAs are individual retirement accounts, as described
under section 408(a) of the Code. One IRA was established by Eldon
Nysether, the sole participant. The other IRA was established by Mark
Nysether, the sole participant. As of November 8, 2000, the IRAs had
total assets of $684,124.26 and $684,124.26, respectively. The
custodian of both IRAs is The Commerce Bank of Washington, located in
Seattle, Washington.
2. The Property consists of a currently unoccupied one-story
commercial office building with approximately 20,300 sq. ft. on a 2.17
acre lot. It is located in Skagit Industrial Park, 500 Metcalf Street,
Sedro Woolley, Washington. The adjacent parcel to the west of the
Property is already owned by Sea-Land. The adjacent parcel is improved
with a number of buildings that, together, form an industrial complex.
3. The Property is held as equal interests by each IRA. Except for
a small amount of cash, the Property consists of the IRAs' sole asset.
According to the applicants, the Property was originally acquired as an
investment by the Sea-Dog Corporation 401(k) Profit Sharing Plan (the
Sea-Dog Plan) from unrelated parties in 1993 for a total cash purchase
price of $275,000.\2\ The IRAs obtained the Property in 1997 in a
rollover of assets as distributions to which the Nysethers were each
entitled as participants in the Sea-Dog Plan, when they were informed
by the Sea-First Bank that it would no longer permit real estate to be
held in 401(k) plan accounts at the bank. At that time, the Property
had an appraised value of $550,000. The Sea-Dog Corporation, in which
Mark Nysether has a 34.28% ownership interest and his father Eldon has
a 28.15% ownership interest, is a sister company of Sea-Land, the
proposed purchaser of the Property. Mark Nysether is also a 50% owner
of Sea-Land.\3\
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\2\ The applicants represent that, at the same time the Sea-Dog
Plan purchased the Property, Sea-Land purchased the adjacent
industrial complex. In this regard, the Department expresses no
opinion herein as to whether the acquisition and holding of the
Property by the Sea-Dog Plan violated any of the fiduciary
responsibility provisions of Part 4 of Title I of the Act. Section
404(a)(1) of the Act requires, among other things, that a fiduciary
of a plan act prudently and solely in the interest of the plan and
its participants and beneficiaries, when making investment decisions
on behalf of the plan.
\3\ The applicants state that Sea-Land is a ``disqualified
person'' with respect to the IRA for Mark Nysether. Section
4975(e)(2)(G) of the Code defines the term ``disqualified person''
to include, in pertinent part, a corporation of which (or in which)
50 percent or more of the combined voting power of all classes of
stock entitled to vote or the total value of shares of all classes
of stock of such corporation is owned directly or indirectly, or
held by, a fiduciary of a plan.
The applicants state that Sea-Land is also a ``disqualified
person'' with respect to the IRA for Eldon Nysether, Mark's father,
despite Eldon's having no direct ownership interest in Sea-Land.
Section 4975(e)(4) of the Code, in part, provides that, for purposes
of paragraph (2)(G)(i), there shall be taken into account indirect
stockholdings which would be taken into account under section
267(c), the attribution rules under the Code.
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[[Page 76293]]
The applicants represent that, as of May 5, 2000, the IRAs had
received gross rental income, since acquiring the Property, in the
following amounts: $26,433.21 to the IRA for Eldon Nysether and
$26,433.22 to the IRA for Mark Nysether. In regard to certain expenses
relating to the Property, the IRAs, as of May 5, 2000, had each paid
$6,921.63 in taxes and $2,506.00 for insurance. The applicants further
represent that the Property has not been leased to, nor used by, by a
disqualified person with respect to the IRAs, at any time since being
acquired by the IRAs.\4\
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\4\ The Department notes that any lease or use of the Property
by a ``disqualified person,'' as defined in section 4975(e)(2) of
the Code, would be a separate prohibited transaction under section
4975(c)(1)(D) of the Code.
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4. The Property has been appraised by David Parsons & Associates,
Inc., qualified, independent appraisers located in Mount Vernon,
Washington. Mr. Parsons, M.A.I., a general appraiser certified in the
State of Washington, and Roger Lindblom, Associate Appraiser, estimated
that the fair market value of the Property was $1,334,000, as of July
11, 2000. In their report, Messrs. Parsons and Lindblom state that they
utilized all three valuation approaches: Cost, Sales Comparison, and
Income, with greater consideration given to the latter two approaches.
They state that the Property is a sound strucure, but the interior
needs to be completely refurbished. The Property is zoned CBD, which
represents the prime commercial designation for small-to-moderate scale
commercial activities in the area where the Property is located.
Further, in a subsequent letter dated November 3, 2000, Mr. Parsons
states that, in making an appraisal of the Property, he was aware that
the adjacent industrial complex is already owned by Sea-Land, which
rents out its buildings to approximately 19 different tenants. Mr.
Parsons states that, because most of these tenants operate businesses
with small offices, there is not deemed a specific demand for office
space from this complex that may affect the value of the subject
Property. Thus, according to Mr. Parsons, no premium would be
associated with its purchase by Sea-Land.
5. The applicants propose that Sea-Land purchase the Property from
the IRAs for an amount in cash equal to the fair market value of the
Property ($1,334,000 as of July 11, 2000), as of the date of the sale,
based upon an updated, independent appraisal. The IRAs will pay no
commissions nor other expenses relating to the sale. Each IRA will
receive one-half of the sale proceeds, in accordance with their one-
half ownership interests in the Property.
The applicants represent that the proposed exemption is in the best
interests of the IRAs because the sale will allow the IRAs an
opportunity to divest their respective portfolios of an illiquid asset.
In addition, the sale proceeds received by each IRA will be reinvested
in other assets that will increase the diversification of the IRAs'
assets and facilitate the payment of retirement benefits.
6. In summary, the applicants represent that the proposed
transaction satisfies the statutory criteria for an exemption under
section 4975(c)(2) of the Code for the following reasons:
(a) the sale will be a one-time transaction for cash; (b) the IRAs
will pay no commissions nor other expenses relating to the sale; (c)
the sale price received by the IRAs will equal the Property's fair
market value, as of the date of the sale, as established by a
qualified, independent appraiser; and (d) the sale will allow the IRAs
an opportunity to divest their respective portfolios of an illiquid
asset, increase the diversification of the IRAs' assets by reinvesting
the proceeds of the sale in other assets, and facilitate the payment of
retirement benefits.
Notice To Interested Persons
Because the Nysethers are the sole participants in their IRAs, it
has been determined that there is no need to distribute the notice of
proposed exemption to other interested persons. Comments and requests
for a hearing with respect to the proposed exemption are due within 30
days of the date of publication of this notice in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Ms. Karin Weng of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
ING Barings LLC,
ING Institutional Trust Company and Affiliates
Located in New York, New York
[Exemption Application No.: D-10908]
Proposed Exemption
Section I--Transactions
The Department of Labor 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 as set forth in 29
C.F.R. Part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990).\5\
If the exemption is granted, effective as of the date of the
publication of the proposed exemption in the Federal Register, the
restrictions of sections 406(a), 406(b)(1) and (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) through (E) of the Code, shall
not apply to:
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\5\ For purposes of this exemption, references to specific
provisions of Title I of the Act, unless otherwise specified, refer
to the corresponding provisions of the Code.
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(a) the lending of securities to:
(1) ING Barings LLC (ING);
(2) the London branch (ING Bank London) of ING Bank N.V. or any
successor in interest bank which is subject to the laws of the United
Kingdom and the Netherlands;
(3) ING Barings Limited (ING London);
(4) ING Baring Securities (Japan) Limited (ING Japan); and
(5) any broker-dealer that, now or in the future, is an affiliate
of ING which is subject to regulation under the laws of the United
States or the United Kingdom or Japan;\6\ by employee benefit plans,
including commingled investment funds holding assets of such plans (the
Client Plan(s)), for which in connection with securities lending
activities, an affiliate of the ING Borrowers, the ING Institutional
Trust Company (ING Institutional), its corporate successors, or any
foreign or domestic affiliate of ING,\7\ acts as a securities lending
agent (or sub-agent) or as a directed trustee or custodian for such
Client Plans under either of two
[[Page 76294]]
securities lending arrangements referred to herein as Plan A and Plan
B; and
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\6\ ING, ING Bank London or any successor in interest bank which
is subject to the laws of the United Kingdom and the Netherlands,
ING London, ING Japan, and any broker-dealer that, now or in the
future, is an affiliate of ING which is subject to regulation under
the laws of the United States or the United Kingdom or Japan are
referred to herein collectively as ING Borrowers or individually as
ING Borrower.
\7\ ING Institutional, its corporate successors, or any foreign
or domestic affiliate of ING are referred to herein collectively as
IITC.
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(b) the receipt of compensation by IITC in connection with
securities lending transactions, provided that for all transactions
described above the conditions, as set forth in Section II, below, are
satisfied.
Section II--Conditions
(a) For each Client Plan, neither the ING Borrowers nor IITC has or
exercises discretionary authority or control with respect to the
investment of the assets of such Client Plan involved in the
transaction (other than with respect to the investment of cash
collateral after the securities have been loaned and collateral
received), or renders investment advice (within the meaning of 29 CFR
2510.3-21(c)) with respect to those assets, including any decisions
concerning such Client Plan's acquisition or disposition of securities
available for securities lending transactions;
(b) With regard to:
(1) Plan A, under which IITC lends securities of a Client Plan to
an ING Borrower in either an agency or sub-agency capacity, such
arrangement is approved in advance by a fiduciary of the Client Plan
(the Client Plan Fiduciary) that is independent of IITC and the ING
Borrower and is negotiated by IITC, which acts as a liaison between the
lender and the borrower to facilitate the securities lending
transaction.\8\
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\8\ The Department, herein, is not providing exemptive relief
for securities lending transactions engaged in by primary lending
agents, other than IITC, beyond that provided pursuant to Prohibited
Transaction Class Exemption 81-6 (PTCE 81-6) (46 FR 7527, January
23, 1981, as amended at 52 FR 18754, May 19, 1987), and Prohibited
Transaction Class Exemption 82-63 (PTCE 82-63)(47 FR 14804, April 6,
1982).
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(2) Plan B, under which an ING Borrower directly negotiates an
agreement with the Client Plan Fiduciary, including a Client Plan for
which IITC provides services with respect to the portfolio of
securities to be loaned, pursuant to an exclusive borrowing arrangement
(an Exclusive Borrowing Arrangement), such Client Plan Fiduciary is
independent of both the ING Borrower and IITC, and IITC does not
participate in any such negotiations.
(c) Before a Client Plan participates in a securities lending
program with respect to Plan A and before any loan of securities to an
ING Borrower pursuant to Plan A is affected, a Client Plan Fiduciary
that is independent of IITC and the ING Borrower must have:
(1) Authorized and approved a securities lending authorization
agreement with IITC (the Agency Agreement), where IITC is acting as the
direct securities lending agent;
(2) Authorized and approved the primary securities lending
authorization agreement (the Primary Lending Agreement) with the
primary lending agent, where IITC is lending securities under a sub-
agency arrangement with a primary lending agent; and
(3) Approved the general terms of the securities loan agreement
(the Basic Loan Agreement) between such Client Plan and the ING
Borrower, the specific terms of which are negotiated and entered into
by IITC.
(d) The terms of each loan of securities by a Client Plan to an ING
Borrower are at least as favorable to such Plan as those of a
comparable arm's-length transaction between unrelated parties;
(e) A Client Plan may terminate a securities lending agency (or
sub-agency) agreement under Plan A or an Exclusive Borrowing
Arrangement under Plan B at any time without penalty on five (5)
business days notice, whereupon the ING Borrower shall deliver
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 Client Plan within:
(1) the customary delivery period for such securities;
(2) five (5) business days; or
(3) the time negotiated for such delivery by the Client Plan and
the ING Borrower, whichever is less.
(f) The Client Plan (or another custodian designated to act on
behalf of the Client Plan) receives from the ING Borrower (either by
physical delivery or by book entry in a securities depository located
in the United States, wire transfer or similar means) by the close of
business on or before the day the loaned securities are delivered to
such ING Borrower, collateral consisting of U.S. currency, securities
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, irrevocable letters of credit issued by a United
States Bank, other than IITC or the ING Borrowers, or any combination
thereof, or other collateral permitted under PTCE 81-6 (as it may be
amended or superseded);
(g) The market value (or in the case of a letter of credit, a
stated amount) of the collateral on the close of business on the day
preceding the day of the loan is initially at least 102 percent (102%)
of the market value of the loaned securities. The applicable Basic Loan
Agreement gives the Client Plan a continuing security interest in and
an lien on the collateral. The level of collateral is monitored daily
either by IITC under Plan A or IITC or other designee of the Client
Plan under Plan B. If the market value of the collateral, on the close
of trading on a business day, is less than 100 percent (100%) of the
market value of the loaned securities at the close of business on that
day, the ING Borrower is required to deliver by the close of business
on the next day, sufficient additional collateral such that the market
value of the collateral will again equal 102 percent (102%).
(h) With regard to:
(1) Plan A, prior to a Client Plan entering into a Basic Loan
Agreement, the ING Borrower will furnish its most recent available
audited and unaudited statements to IITC, which, in turn, will provide
such statements to the Client Plan before such Client Plan approves of
the terms of the Basic Loan Agreement. The Basic Loan Agreement
contains a requirement that the applicable ING Borrower must give
prompt notice at the time of a loan of any material adverse changes in
its financial condition since the date of the most recently furnished
financial statements. If any such changes have taken place, IITC will
not make any further loans to the ING Borrower, unless an independent
Client Plan Fiduciary is provided notice of any material change and
approves the loan in view of the changed financial condition;
(2) Plan B, prior to a Client Plan entering into an Exclusive
Borrowing Arrangement, the ING Borrower will furnish its most recent
available audited and unaudited statements to the Client Plan before
the Client Plan elects to enter into such agreement. The Exclusive
Borrowing Arrangement contains a requirement that the ING Borrower must
give prompt notice at the time of the loan of any material adverse
changes in its financial condition since the date of the most recently
furnished financial statements;
(i) In return for lending securities, the Client Plan either:
(1) receives a reasonable fee which is related to the value of the
borrowed securities and the duration of the loan; or
(2) has the opportunity to derive compensation through the
investment of cash collateral. (Under such circumstances, the Client
Plan may pay a loan rebate or similar fee to the ING Borrower, if such
fee is not greater than the fee the Client Plan would pay in a
comparable arm's length transaction with an unrelated party.)
(j) All the procedures regarding the securities lending activities
will at a minimum conform to the applicable
[[Page 76295]]
provisions of PTCE 81-6 and PTCE 82-63 as well as the applicable
banking laws of the United Kingdom and the Netherlands and securities
laws of the United States or the United Kingdom or Japan;
(k) ING Institutional agrees to indemnify and hold harmless the
Client Plans in the United States (including the sponsor and
fiduciaries of such Client Plans) for any transactions covered by this
exemption with ING Borrowers so that the Client Plans do not have to
litigate in the case of ING Borrowers in foreign jurisdictions or sue
ING Borrowers to realize on the indemnification. Such indemnification
by ING Institutional is against any and all reasonably foreseeable
damages, losses, liabilities, costs, and expenses (including attorney's
fees) which the Client Plans may incur or suffer, arising from any
impermissible use by ING Borrowers of the loaned securities or from an
event of default arising from ING Borrowers' failing to deliver loaned
securities in accordance with the applicable Basic Loan Agreement or
otherwise failing to comply with the terms of such agreement, except to
the extent that such losses or damages are caused by the Client Plans'
own negligence.
(1) If any event of default occurs, ING Institutional promptly and
at its own expense (subject to rights of subrogation in the collateral
and against such borrower), will purchase or cause to be purchased, for
the account of the Client Plans, securities identical to the borrowed
securities (or their equivalent as discussed above). If the collateral
is insufficient to accomplish such purchase, ING Institutional will
indemnify the Client Plan for any shortfall in the collateral plus
interest on such amount and any transaction costs incurred (including
attorney's fees of the Client Plan for legal actions arising out of the
default on loans or failure to properly indemnify under this
provision). Alternatively, if such replacement securities cannot be
obtained on the open market, ING Institutional will pay the Client Plan
the difference in U.S. dollars between the market value of the loaned
securities and the market value of the related collateral on the date
of the borrower's breach of its obligation to return the loaned
securities.
(2) If, however, the event of default is caused by the ING
Borrower's failure to return securities within a designated time, the
Client Plan has the right to purchase securities identical to the
borrowed securities and apply the collateral to payment of the purchase
price and any other expenses of the Plan associated with the sale and/
or purchase.
(l) The Client Plan receives the equivalent of all distributions
made to holders of the borrowed securities during the term of the loan,
including, but not limited to, cash dividends, and interest payments on
the loaned securities, shares of stock as a result of stock splits and
rights to purchase additional securities, or other distributions.
(m) Prior to any Client Plan's approval of the lending of its
securities to any ING Borrower, a copy of the notice of proposed
exemption and a copy of the final exemption, if granted, will be
provided to such Client Plan.
(n) Each Client Plan receives monthly reports with respect to the
securities lending transactions, including but not limited to the
information described below in representation number 19 of the Summary
of Facts and Representations, so that an independent Client Plan
Fiduciary may monitor such transactions with the ING Borrowers.
(o) Only Client Plans with total assets having an aggregate market
value of at least $50 million are permitted to lend securities to the
ING Borrowers; provided, however, that--
(1) In the case of two or more Client Plans which are maintained by
the same employer, controlled group of corporations or employee
organization (the Related Client Plans), whose assets are commingled
for investment purposes in a single master trust or any other entity
the assets of which are ``plan assets'' under 29 CFR 2510.3-101 (the
Plan Asset Regulation), which entity is engaged in securities lending
arrangements with the ING Borrowers, the foregoing $50 million
requirement shall be deemed satisfied if such trust or other entity has
aggregate assets which are in excess of $50 million; provided that if
the fiduciary responsible for making the investment decision on behalf
of such master trust or other entity is not the employer or an
affiliate of the employer, such fiduciary has total assets under its
management and control, exclusive of the $50 million threshold amount
attributable to plan investment in the commingled entity, which are in
excess of $100 million.
(2) In the case of two or more Client Plans which are not
maintained by the same employer, controlled group of corporations, or
employee organization (the Unrelated Client Plans), whose assets are
commingled for investment purposes in a group trust or any other form
of entity the assets of which are ``plan assets'' under the Plan Asset
Regulation, which entity is engaged in securities lending arrangements
with the ING Borrowers, the foregoing $50 million requirement is
satisfied if such trust or other entity has aggregate assets which are
in excess of $50 million (excluding the assets of any plan with respect
to which the fiduciary responsible for making the investment decision
on behalf of such group trust or other entity or any member of the
controlled group of corporations including such fiduciary is the
employer maintaining such plan or an employee organization whose
members are covered by such plan). However, the fiduciary responsible
for making the investment decision on behalf of such group trust or
other entity--
(A) Has full investment responsibility with respect to Client Plan
assets invested therein; and
(B) Has total assets under its management and control, exclusive of
the $50 million threshold amount attributable to plan investment in the
commingled entity, which are in excess of $100 million. (In addition,
none of the entities described above must be formed for the sole
purpose of making loans of securities.)
(p) With respect to any calendar quarter, at least 50 percent (50%)
or more of the outstanding dollar value of securities loans negotiated
on behalf of Client Plans will be to unrelated borrowers, unless the
Client Plan has entered into an Exclusive Borrowing Arrangement with
the ING Borrowers.
(q) In addition to the above, all loans involving Foreign
Borrowers, as defined in Section III (c), below, must satisfy the
following supplemental requirements:
(1) Such Foreign Borrower is a bank which is regulated by both the
Dutch Central Bank (De Nederlandsche Bank or DNB) and the Financial
Services Authority (FSA) of the United Kingdom or must be a registered
broker-dealer subject to regulation by either the Securities and
Futures Authority of the United Kingdom (the SFA) or the Ministry of
Finance (the MOF) and the Tokyo Stock Exchange .
(2) Such Foreign Borrower must be in compliance with all applicable
provisions of Rule 15a-6 (17 CFR 240.15a-6) under the Securities and
Exchange Act of 1934 (the 1934 Act) which provides for foreign broker-
dealers a limited exemption from United States registration
requirements;
(3) All collateral is maintained in United States dollars or United
States dollar-denominated securities or letters of credit;
(4) All collateral is held in the United States and the situs of
the securities lending agreements (either the Basic Loan Agreement
under Plan A or the Exclusive Borrowing Arrangement
[[Page 76296]]
under Plan B) is maintained in the United States under an arrangement
that complies with the indicia of ownership requirements under section
404(b) of the Act and the regulations promulgated under 29 CFR
2550.404(b)-1; and
(5) Prior to entering a transaction involving a Foreign Borrower,
the applicable Foreign Borrower must--
(A) Agree to submit to the jurisdiction of the United States;
(B) Agree to appoint an agent for service of process in the United
States, which may be an affiliate (the Process Agent);
(C) Consent to service of process on the Process Agent; and
(D) Agree that enforcement by a Client Plan of the indemnity
provided by ING Institutional will occur in the United States courts;
(r) ING maintains or causes to be maintained within the United
States for a period of six (6) years from the date of each securities
lending transaction, in a manner that is convenient and accessible for
audit and examination, such records as are necessary to enable the
persons described in Section II (s)(1) below to determine whether the
conditions of this exemption, if granted, have been met; except that--
(1) a prohibited transaction will not be considered to have
occurred if, due to circumstances beyond the control of ING or the
other ING Borrowers, the records are lost or destroyed prior to the end
of the six year period; and
(2) no party in interest with respect to an employee benefit plan,
other than ING or the other ING Borrowers, 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) or (b) of the Code, if such
records are not maintained, or are not available for examination as
required by Section II(s)(1), below.
(s)(1) Except as provided in subparagraph (2) of this Section II(s)
and notwithstanding any provisions of subsections (a)(2) and (b) of
section 504 of the Act, the records referred to in Section II(r),
above, 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 (SEC);
(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 or representative of such employer; and
(D) Any participant or beneficiary of any participating Client
Plan, or any duly authorized representative of such participant or
beneficiary.
(2) None of the persons described in subparagraphs (B)-(D) of
Section II(s)(1) shall be authorized to examine trade secrets of ING or
the other ING Borrowers, or commercial or financial information which
is privileged or confidential.
Section III--Definitions
For purposes of this proposed exemption,
(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, employee, or relative (as defined in
section 3(15) of the Act) of such other person or any partner in such
person; and
(3) Any corporation or partnership of which such other person is an
officer, director, employee or in which such person is a partner.
(b) The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
(c) The term, ``Foreign Borrower or Foreign Borrowers'' means: (1)
ING Bank London or any successor in interest bank subject to the laws
of the United Kingdom and the Netherlands; (2) ING London; (3) ING
Japan; and (4) any broker-dealer that, now or in the future, is an
affiliate of ING which is subject to regulation under the laws of the
United States or the United Kingdom or Japan.
Summary of Facts and Representations
1. The ING Groep N.V. (the ING Groep) is a publicly held Dutch
corporation with slightly under one billion shares outstanding as of
December 31, 1998. American Depository Receipts of the ING Groep are
traded on the New York Stock Exchange.\9\ In addition, the shares of
the ING Groep are traded on the Amsterdam Stock Exchange.
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\9\ As such, shares of the ING Groep are registered pursuant to
section 12(b) of the 1934 Act.
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2. ING Barings LLC (ING), a Delaware limited liability corporation,
is an indirect wholly-owned subsidiary of the ING Groep. ING is a full
service investment firm serving institutional, corporate, and high net
worth individual clients. ING is registered with the SEC and is a
member of all principal securities exchanges in the United States,
including, but not limited to, the New York Stock Exchange, the
American Stock Exchange, as well as the National Association of
Securities Dealers, Inc. As of March 31, 2000, ING had $17.746 billion
in assets.
ING, acting as principal, borrows securities from institutions and
either utilizes such securities to satisfy its own needs, or re-lends
these securities to brokerage firms and other entities. The average
amount of securities on loan to ING during the month of March 2000, was
approximately $11.356 billion, and the average amount of securities
being lent by ING during March 2000, was approximately $7.986 billion.
It is represented that in making securities loans, ING carefully
reviews the credit-worthiness of its counter-parties and conforms to
the requirements of Regulation T, as promulgated by the U.S. Federal
Reserve Board.
3. ING Institutional, an indirect wholly-owned subsidiary of the
ING Groep and an affiliate of ING, is organized as a limited purpose
trust company licensed by the New York State Banking Department. ING
Institutional has its principal executive offices in New York, New
York. ING Institutional acts as a securities lending agent and provides
securities lending services for Client Plans and other entities. ING
Institutional may also be retained from time to time by primary
securities lending agents to provide securities lending services in a
sub-agent capacity with respect to portfolio securities of clients of
such primary securities lending agents. As a securities lending sub-
agent, ING Institutional's role (i.e., negotiating the terms of the
loans with borrowers pursuant to a client-approved form of a loan
agreement, and monitoring receipt of, and marking-to-market, the
required collateral) parallels those under the securities lending
transactions for which ING Institutional acts as a primary lending
agent on behalf of its own clients.
4. ING Bank N.V., a direct subsidiary of the ING Groep, is a Dutch
incorporated public limited liability company regulated by the DNB. As
of December 31, 1999, ING Bank N.V. had total assets of approximately
EUR 349,618 million and shareholder's equity of approximately EUR
13,212 million. ING Bank London, a branch of ING Bank N.V., is
authorized to conduct a banking business in the United Kingdom.
5. ING London, an indirect subsidiary of the ING Groep, is an
English company registered with the Registrar of Companies for England
and Wales. ING
[[Page 76297]]
London is also an international investment banking organization. As of
December 31, 1999, ING London had total assets of approximately
2,595,477,000 pounds. ING London is authorized to conduct an investment
business in and from the United Kingdom as a broker-dealer.
6. ING Japan is an indirect subsidiary of the ING Groep. As of
December 31, 1999, ING Japan had total assets of approximately 39
billion yen. ING Japan is a Japanese company authorized to conduct an
investment business in Japan as a broker-dealer.
7. Brokers and other entities, including banks, often need to
borrow a particular security for certain periods of time in order to
satisfy deliveries in cases of short sales, or in cases where a broker,
bank, or other entity fails to receive securities which it in turn is
required to deliver. An institutional investor, such as a pension fund,
lends securities in its portfolio to a broker-dealer, a bank, or other
entity to earn a fee in addition to any interest, dividends, or other
distributions paid on the loaned securities. The lender generally
requires that the security loans be fully collateralized. In this
regard, the collateral usually is cash or high quality liquid
securities issued by the U.S. Government, Federal Agency obligations,
or certain bank letters of credit. When the collateral is cash, the
lender generally invests the cash and rebates a portion of the earnings
on such cash collateral to the borrower. The fee received by the lender
is the difference between the earnings on the cash collateral and the
amount of the rebate that is paid to the borrower. When a securities
loan is collateralized with U.S. Government or Federal Agency
securities or with letters of credit issued by a bank, the fee is paid
directly by the borrower to the lender.
Institutional investors often utilize the services of an agent in
performing securities lending transactions. The lending agent is also
paid a fee for its services that may be a percentage of the income
earned by the investor from lending its securities. The essential
functions which define a securities lending agent are identifying
appropriate borrowers of securities and negotiating loan terms with the
borrowers. Certain services that are ancillary to securities lending
include monitoring the level of collateral, the value of loaned
securities, and in some instances, investing the collateral.
8. The applicants request an individual administrative exemption
for the lending of securities owned by Client Plans, with respect to
which IITC acts as a directed trustee or custodian and/or securities
lending agent (or sub-agent),\10\ to the ING Borrowers following
disclosure to the Client Plans of IITC's affiliation with such ING
Borrowers, under either of two arrangements--described as Plan A and
Plan B. The applicants also request an individual administrative
exemption for the receipt of compensation by IITC in connection with
such securities lending transactions. Neither IITC nor the ING
Borrowers will have discretionary authority or control over the Client
Plans' decisions concerning the acquisition or disposition of
securities available for lending. However, because IITC under the Plan
A arrangement and the ING Borrowers under the Plan B arrangement (as
discussed further below), will have discretion with respect to whether
there is a loan of the Client Plans' securities to the ING Borrowers,
the lending of securities to the ING Borrowers under such arrangements
may be outside the scope of relief provided by PTCE 81-6 and PTCE 82-
63.\11\
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\10\ Future references to IITC's performance of services as
securities lending agent should be deemed to include its parallel
performance as a securities lending sub-agent, and references to the
Client Plans should be deemed to include those plans for which IITC
is acting as a sub-agent with respect to securities lending
activities, unless otherwise specifically indicated or by the
context of reference.
\11\ PTCE 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
certain broker-dealers or banks which are parties in interest.
PTCE 82-63 provides an exemption under specified conditions from
section 406(b)(1) of the Act and section 4975(c)(1)(E) of the Code
for the payment of compensation to a plan fiduciary for services
rendered in connection with loans of plan assets that are
securities. PTCE 82-63 permits the payment of compensation to a plan
fiduciary for the provision of securities lending services only if
the loan of securities itself is not prohibited under section 406(a)
of the Act.
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Plan A
9. As noted above, the agreement by IITC to provide securities
lending services, as agent, to a Client Plan will be embodied in the
Agency Agreement. In the case of the Plan A arrangement, where IITC
acts as the securities lending agent, the Client Plan Fiduciary who is
independent of IITC and the ING Borrower will sign the Agency Agreement
with IITC before the Client Plan participates in IITC's securities
lending program. Further, the Client Plan and IITC will agree to an
arrangement under which IITC will be compensated for its services as
the lending agent prior to the commencement of any lending activity.
The Client Plan may terminate the Agency Agreement at any time, without
penalty, on no more than five (5) business days' notice.
The Agency Agreement will, among other things, describe the
operation of the securities lending program, prescribe the form of the
securities loan agreement to be entered into on behalf of the Client
Plan with the borrowers, and identify the securities which are
available to be lent, the required collateral, and daily marking-to-
market. The Agency Agreement will set forth the basis and rate for
IITC's compensation from the Client Plan for the performance of
securities lending services. Further, the Agency Agreement will contain
provisions regarding designation by the Client Plan of a list of
permissible borrowers, including the ING Borrowers. Specifically, the
Client Plan will acknowledge that the ING Borrowers are affiliates of
IITC. Pursuant to the Agency Agreement, IITC will represent to each
Client Plan that each loan made to ING Borrowers on behalf of such
Client Plan will be at market rates, and in no event will such rates be
less favorable to the Client Plan than a loan of such securities made
at the same time and under the same circumstances to an unaffiliated
borrower.
10. When IITC is lending securities under a sub-agency arrangement,
before the Client Plan participates in the securities lending program,
the primary lending agent will enter into the Primary Lending Agreement
with a Client Plan Fiduciary, who is independent of such primary
lending agent, IITC, and the ING Borrowers. The Client Plan may
terminate the Primary Lending Agreement at any time, without penalty,
on no more than five (5) business days' notice.
The Primary Lending Agreement will contain substantive provisions
akin to those in the Agency Agreement described above, relating to the
description of the operation of the securities lending program, the use
of an approved form of securities loan agreement, the identification of
securities which are available to be lent, the required collateral,
daily marking-to-market, and the provision of a list of approved
borrowers, including the ING Borrowers. The Primary Lending Agreement
will specifically authorize the primary lending agent to appoint sub-
agents, including IITC, to facilitate its performance of securities
lending agency functions.
Where IITC is to act as a sub-agent, the Primary Lending Agreement
will expressly disclose such fact. The Primary Lending Agreement will
also set forth the basis and rate for the
[[Page 76298]]
primary lending agent's compensation from the Client Plan for the
performance of securities lending services. Further, such agreement
will authorize the primary lending agent to pay a portion of its fee,
as the primary lending agent determines in its sole discretion, to any
sub-agent(s), including IITC, that the primary lending agent retains
pursuant to the authority granted under such agreement.
Pursuant to its authority to appoint sub-agents, the primary
lending agent will enter into a securities lending sub-agency agreement
(the Sub-Agency Agreement) with IITC under which the primary lending
agent will retain and authorize IITC, as sub-agent, to lend securities
of the primary lending agent's clients, subject to the same terms and
conditions as are specified in the Primary Lending Agreement. Thus, for
example, the form of securities loan agreement will be the same as that
approved by the Client Plan Fiduciary in the Primary Lending Agreement,
and the list of permissible borrowers under the Sub-Agency Agreement
(which will include the ING Borrowers) will be limited to those
approved borrowers listed as such under the Primary Lending Agreement.
The Sub-Agency Agreement will contain provisions that are in
substance comparable to those which would appear in the Agency
Agreement in situations where IITC is the primary lending agent. In
this regard, IITC will make the same representation in the Sub-Agency
Agreement with respect to arm's-length dealings with the ING Borrowers.
The Sub-Agency Agreement will also set forth the basis and rate for
IITC's compensation to be paid by the primary lending agent.
11. IITC, acting as securities lending agent for the Client Plans,
will negotiate the Basic Loan Agreement and any modifications thereto
with the ING Borrowers on behalf of the Client Plans. The Basic Loan
Agreement will set forth the basis for compensation to the Client Plan
for lending securities to the ING Borrowers under each category of
collateral. The Basic Loan Agreement will also contain a requirement
that the ING Borrowers must pay all transfer fees and transfer taxes
related to the security loans. An independent Client Plan Fiduciary
will approve the form of the Basic Loan Agreement before such fiduciary
executes the Agency Agreement. Further, the Basic Loan Agreement will
specify, among other things, the right of the Client Plan to terminate
a loan at any time and the Client Plan's rights in the event of any
default by the ING Borrowers.
12. Prior to making any loans under the Basic Loan Agreement, the
ING Borrower will furnish to IITC (assuming IITC does not already
possess such statements), its most recent available audited financial
statements (and unaudited financial statements if more recent than such
audited statements). IITC will, in turn, provide such statements to the
Client Plan before the independent Client Plan Fiduciary is asked to
approve the terms of the Basic Loan Agreement. The terms of the Basic
Loan Agreement will contain a requirement that the ING Borrower must
give prompt notice at the time of the loan of any material adverse
changes in its financial condition since the date of the most recently
furnished financial statements. If any such changes have taken place,
IITC will request that the independent Client Plan Fiduciary approve
the loan in view of the changed financial condition.
13. Each time a Client Plan loans securities to an ING Borrower
pursuant to the Basic Loan Agreement, such ING Borrower will execute a
designation letter specifying the material terms of the loan, including
the securities to be loaned, the required level of collateral, and the
fee or rebate payable, and any special delivery instructions. The terms
of each loan will be at least as favorable to the Client Plan as those
of a comparable arm's-length transaction between unrelated parties.
14. To assure uniformity of treatment among borrowing brokers and
to limit the discretion IITC would have in negotiating securities loans
to the ING Borrowers, IITC will establish each day a written schedule
of lending fees and rebate rates. In this regard, IITC will adopt
minimum daily lending fees payable by each borrower, including ING
Borrowers, to IITC on behalf of the Client Plans with respect to
securities loans secured with collateral other than cash and will adopt
maximum daily rebate rates payable to each borrower, including the ING
Borrowers, with respect to securities loans secured with cash
collateral. Loans to all borrowers, including ING Borrowers, of a given
security on any day will be made at rebate rates or lending fees on the
relevant daily schedule or at rebate rates or lending fees that may be
more advantageous to the Client Plans. In no case will the loans be
made to ING Borrowers at rebate rates or lending fees less advantageous
to the Client Plan than those on the schedule.
IITC will negotiate on behalf of a Client Plan rebate rates for
loans secured by cash collateral payable to each borrower, including
ING Borrowers. When a loan of securities by a Client Plan is
collateralized with cash, IITC, at the Client Plan's direction, will
either transfer such cash collateral to the Client Plan or its
designated agent for investment. Alternatively, IITC may invest the
cash in short-term securities or interest-bearing accounts. In either
case, IITC will on behalf of the Client Plan rebate a portion of the
earnings on the cash collateral to the ING Borrowers. The rebate rates,
which are established for loans secured by cash collateral made by the
Client Plans, will take into account the potential demand for the
loaned securities, the applicable benchmark cost of funds indices
(typically, the U.S. Federal Funds Rate established by the Federal
Reserve System (Federal Funds), the overnight ``REPO'' \12\ rate, or
the like), and the anticipated investment return on overnight
investments which are permitted by the Client Plan Fiduciary. For
example, where cash collateral derived from an overnight loan is
intended to be invested in a generic repurchase agreement, any rebate
fee determined with respect to an overnight repurchase agreement
benchmark will be set below the applicable ``ask'' quotation therefor.
For example, where cash collateral is derived from a loan with an
expected maturity date (term loan) and is intended to be invested in
instruments with similar maturities, the maximum rebate fee will be
less than the investment return (assuming no investment default). With
respect to any loan to ING Borrowers, IITC will not knowingly negotiate
a rebate rate with respect to such loan which over the anticipated term
of the loan would produce a zero or negative return to the Client Plan
(assuming no default on the investments related to the cash collateral
from such loan where IITC has investment discretion over the cash
collateral). IITC represents that the written rebate rate established
daily for cash collateral under loans negotiated with the ING Borrowers
will not exceed the rebate rate which would be paid to a similarly
situated unrelated borrower with respect to a comparable securities
lending transaction.
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\12\ An overnight ``REPO'' is an overnight repurchase agreement
that is an arrangement whereby securities dealers and banks finance
their inventories of Treasury bills, notes, and bonds. The dealer or
bank sells securities to an investor with a temporary surplus of
cash, agreeing to buy them back the next day. Such transactions are
settled in immediately available Federal Funds, usually at a rate
below the Federal Funds rate (the rate charged by the banks lending
funds to each other).
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Where the collateral consists of obligations other than cash, the
ING Borrowers will pay a fee to the Client Plan based on the value of
the loaned
[[Page 76299]]
securities. The lending fees, which are established with respect to
loans made by the Client Plans collateralized by other than cash, will
be set daily to reflect conditions as influenced by potential market
demand. For loans secured by collateral other than cash, the applicable
lending fee in respect of any outstanding loan will be reviewed daily
by IITC for competitiveness and adjusted, where necessary, to reflect
market terms and conditions. With respect to any calendar quarter, at
least 50 percent (50%) of the securities loans negotiated on behalf of
the Client Plans will be to borrowers not affiliated with IITC, and so
the competitiveness of the loan fee will be tested in the marketplace.
Accordingly, the applicants state that loans to the ING Borrowers
should result in a competitive rate of income to the lending Client
Plan. At all times, IITC will effect loans in a prudent and diversified
manner.
Prior to lending any securities to the ING Borrowers on behalf of
the Client Plan, IITC will disclose the method for determining minimum
daily lending fees and maximum daily rebate rates, as described above,
to an independent Client Plan Fiduciary for approval. The method of
determining the actual daily securities lending rates (fees and
rebates), the minimum lending fees payable by the ING Borrowers and the
maximum rebate payable to the ING Borrowers, will be specified in an
exhibit attached to the Agency Agreement to be executed between the
independent Client Plan Fiduciary and IITC in cases where IITC is the
direct securities lending agent.
15. If IITC reduces the lending fee or increases the rebate rate on
any outstanding loan to an ING Borrower (except for any change
resulting from a change in the value of any index with respect to which
the fee or rebate is calculated), IITC, by the close of business on the
date of such adjustment, shall provide the independent Client Plan
Fiduciary with notice that IITC has adjusted such fee or rebate to such
affiliated borrower, and that the Client Plan may terminate such loan
at any time. IITC shall provide the independent Client Plan Fiduciary
with such information as may reasonably be requested regarding such
adjustment.
16. While IITC will normally lend securities to requesting
borrowers on a ``first come, first served'' basis, as a means of
assuring uniformity of treatment among borrowing brokers, in some cases
it may not be possible to adhere to a ``first come, first served''
allocation. This can occur in instances when: (a) the credit limit
established for such ``first in line'' borrower by IITC and/or the
Client Plan has already been satisfied; (b) the ``first in line''
borrower is not approved as a borrower by a particular Client Plan
whose securities are sought to be borrowed; or (c) the ``first in
line'' borrower cannot be ascertained, as an operational matter,
because several borrowers spoke to different representatives of IITC at
or about the same time with respect to the same security. In situations
(a) and (b), above, loans would usually be effected with the ``second
in line'' borrower. In situation (c), above, securities would be
allocated as equitably as practicable among all eligible requesting
borrowers.
17. IITC on behalf of a Client Plan will receive collateral from
ING Borrowers by physical delivery, book entry in a U.S. securities
depository, wire transfer, or similar means by the close of business on
or before the day the loaned securities are delivered to such ING
Borrowers. The collateral will consist of U.S. dollars, securities
issued or guaranteed by the United States Government or its agencies or
instrumentalities, irrevocable United States bank letters of credit
issued by an entity other than the ING Borrowers or any affiliate
thereof, or any combination thereof, or other collateral permitted
under PTCE 81-6 (as amended from time to time or, alternatively, any
additional or superceding class exemption that may be issued to cover
securities lending by employee benefit plans).
The market value of the collateral on the close of business on the
business day preceding the day the loaned securities are delivered to
the ING Borrowers will be at least 102 percent (102%) of the then
market value of the loaned securities. The Basic Loan Agreement will
give the Client Plan a continuing security interest in and a lien on
the collateral. IITC will monitor the level of the collateral daily. If
the market value of the collateral falls below 100 percent (100%), IITC
will require the ING Borrower to deliver by the close of business the
next day sufficient additional collateral to bring the level back to at
least 102 percent (102%).
18. Subject to the terms and conditions of the Agency Agreement (or
the Primary Lending Agreement), IITC will invest and reinvest all or
substantially all cash collateral in approved investments designated by
the applicable Client Plan and identified on a schedule attached to the
relevant agreement. All approved investments made by IITC will be for
the sole account and risk of the applicable Client Plan. From time to
time, the Client Plan may instruct IITC in writing not to make an
approved investment with a certain counter-party, or through a
particular financial institution or intermediary. Alternatively, the
Client Plan may also retain the right to directly control the
reinvestment of the cash collateral.
19. Each Client Plan participating in the lending program will be
sent a monthly transaction report. The monthly report will list for a
specified period all outstanding or closed securities lending
transactions. The report will identify for each open loan position, the
securities involved, the value of the security for collateralization
purposes, the current value of the collateral, the rebate or loan
premium (as the case may be) at which the security is loaned, and the
number of days the security has been on loan. At the request of the
Client Plan, such a report will be provided on a weekly or daily basis,
rather than a monthly basis. Also, upon request of the Client Plan,
IITC will provide the Client Plan with daily confirmations of
securities lending transactions.
In order to provide the means for monitoring lending activity,
rates on loans to the ING Borrowers compared with loans to other
brokers, and the level of collateral on such loans, it is represented
that the monthly report will show, on a daily basis, the market value
of all outstanding loans of securities to the ING Borrowers and to
other borrowers. Further, the monthly report will state the daily fees
where collateral other than cash is utilized and will specify the
details used to establish the daily rebate payable to all brokers where
cash is used as collateral. The monthly report also will state, on a
daily basis, the rates at which securities are loaned to the ING
Borrowers compared with the rates at which securities are loaned to
other brokers. This statement will give each independent Client Plan
Fiduciary information that can be compared to that contained in the
daily rate schedule.
20. Under the Plan A arrangement and, in some instances, under the
Plan B arrangement (see paragraph 21, below, for the types of lending
services which may be provided to the Client Plans by IITC under Plan B
arrangement), the Client Plan will pay a fee to IITC for providing
lending services to the Client Plan, which will reduce the income
earned by the Client Plan from lending its securities to the ING
Borrowers. The Client Plan and IITC will agree in advance to this fee,
which will represent a percentage of the income the Client Plan earns
from its lending activities.
[[Page 76300]]
Plan B
21. With respect to Plan B, the ING Borrowers will directly
negotiate an Exclusive Borrowing Arrangement with a fiduciary of a
plan, including Client Plans for which IITC serves as directed trustee
or custodian, where such fiduciary is independent of the ING Borrower
and IITC. Under the Exclusive Borrowing Arrangement, the ING Borrower
will have exclusive access for a specified period of time to borrow
securities of the Client Plan pursuant to certain conditions. IITC will
not participate in the negotiation of the Exclusive Borrowing
Arrangement. The involvement of IITC, if any, will be limited to such
activities as holding securities available for lending, handling the
movement of borrowed securities and collateral, and investing or
depositing any cash collateral and supplying the Client Plans with
certain reports. The applicants represent that, under an Exclusive
Borrowing Arrangement, neither the ING Borrower nor IITC will perform
for the relevant Client Plan the functions which constitute the
essential functions of a securities lending agent.
22. Upon delivery of loaned securities to the ING Borrower, IITC,
or another custodian on behalf of the Client Plan, will receive from
the ING Borrower on the same day by physical delivery, book entry in a
U.S. securities depository, wire transfer, or similar means collateral
consisting of U.S. dollars, securities issued or guaranteed by the
United States Government or its agencies or instrumentalities,
irrevocable United States bank letters of credit issued by an entity
other than the ING Borrowers, or any combination thereof, or other
collateral permitted under PTCE 81-6 (as amended from time to time or,
alternatively, any additional or superceding class exemption that may
be issued to cover securities lending by employee benefit plans).
The market value of the collateral at the close of business on the
business day preceding the day the loaned securities are delivered to
the ING Borrower will be at least 102 percent (102%) of the then market
value of the loaned securities. IITC or such other custodian will
monitor the level of the collateral daily. If the market value of the
collateral falls below 100 percent (100%) of that of the loaned
securities, the ING Borrower will deliver sufficient additional
collateral on the following day such that the market value of all
collateral will equal at least 102 percent (102%) of the market value
of the loaned securities. The ING Borrower or, in the case of some
Client Plans, IITC, will provide a weekly report to the Client Plan
showing, on a daily basis, the aggregate market value of all
outstanding security loans to the ING Borrower, and the aggregate
market value of the collateral.
23. Before entering into an Exclusive Borrowing Arrangement, the
ING Borrower will furnish to the Client Plan, if such plan does not
already possess such statements, the most recent publicly available
audited and unaudited statements of its financial condition, as well as
any other publicly available information which the ING Borrower
believes is necessary for the Client Plan to determine whether to enter
into or renew the arrangement, and a copy of the final exemption, if
granted, together with this proposed exemption. The Exclusive Borrowing
Arrangement will contain a requirement that the ING Borrower must give
prompt notice at the time of a loan of any material adverse changes in
financial condition of the ING Borrower since the date of the most
recently furnished financial statements. All the procedures under the
Exclusive Borrowing Agreement will conform to the applicable provisions
of PTCE 81-6 and PTCE 82-63 and will be in compliance with the
applicable banking laws of the United Kingdom and the Netherlands, and
the securities laws of the United States, the United Kingdom or Japan.
24. In exchange for the exclusive right to borrow certain
securities from a Client Plan, an ING Borrower will pay such Client
Plan either a flat fee, or a minimum flat fee plus a percentage
(negotiated at the time the Exclusive Borrowing Arrangement is entered
into) of the total balance outstanding of borrowed securities, or a
percentage of the total balance outstanding without any flat fee. A
percentage may be established by reference to an objective formula. The
ING Borrower and the independent Client Plan Fiduciary may agree that
different fee arrangements will apply to different securities or
different groups of securities. Any change in the rate paid to the
Client Plan will require the written consent of the independent Client
Plan Fiduciary. However, such Client Plan's consent will be presumed
where the rate changes pursuant to an objective formula. In such
instances, an independent Client Plan Fiduciary must be notified at
least 24 hours in advance of the rate change, and the independent
Client Plan Fiduciary must not object in writing to such change, prior
to the effective date of the change. Under this fee arrangement, all
earnings generated by the cash collateral will be returned to the ING
Borrower. The Client Plan will receive credit for all interest,
dividends, or other distributions on any borrowed securities. In
addition, under some arrangements, the earnings on the collateral due
to the ING Borrower, and the dividends, interest, and other
distributions on the borrowed securities payable to the Client Plan may
be offset against each other, so that only a net amount will be
returned to the ING Borrower.
25. Either party may terminate the Exclusive Borrowing Arrangement
and/or any outstanding securities loan at any time. Upon termination of
any securities loan, the ING Borrower will deliver any borrowed
securities back to the Client Plan within five (5) business days of
written notice of termination.
26. With regard to those Client Plans for which IITC provides
custodial, clearing, and/or reporting functions relative to securities
lending transactions, IITC and an independent Client Plan Fiduciary and
the ING Borrowers will agree in advance and in writing to any fee that
IITC is to receive for such services. Such fees, if any, would be fixed
fees (e.g., IITC might negotiate to receive a fixed percentage of the
value of the assets with respect to which it performs these services,
or to receive a stated dollar amount) and any such fee would be in
addition to any fee IITC has negotiated to receive from any such Client
Plan for standard custodial or other services unrelated to the
securities lending activity. The arrangement for IITC to provide such
functions relative to loans of securities to the ING Borrower will be
terminable by the Client Plan within five (5) business days of receipt
of written notice without penalty to the Client Plan, except for the
return to the ING Borrower of a part of any flat fee paid by such ING
Borrower to the Client Plan, if the Client Plan has also terminated its
Exclusive Borrowing Arrangement with the ING Borrower. Before entering
into an agreement with the Client Plan to provide such functions
relative to loans of securities to the ING Borrower, IITC will furnish
to the Client Plan any publicly available information which it believes
is necessary for the Client Plan to determine whether to enter into or
renew the Exclusive Borrowing Arrangement.
27. The conditions of this exemption, if granted, will provide
adequate safeguards for the Client Plans which engage in securities
lending transactions. Under the terms of this proposed exemption, only
Client Plans with total assets having an aggregate market value of at
least $50 million are permitted to lend securities to the ING
[[Page 76301]]
Borrowers, as measured in accordance with Section I(o) of this proposed
exemption. This restriction is intended to assure that any lending to
the ING Borrowers will be monitored by an independent Client Plan
Fiduciary of above average experience and sophistication in matters of
this kind who is acting on behalf of a Client Plan.
Further, safeguards are provided in that for any transactions with
ING Borrowers covered by this proposed exemption, ING Institutional, a
U.S. affiliate of ING, has agreed to indemnify and hold harmless the
Client Plans in the United States (including the sponsor and
fiduciaries of such Client Plans) so that the Client Plans will not
have to litigate in the case of ING Borrowers in foreign jurisdictions
or sue ING Borrowers to realize on the indemnification. Such
indemnification by ING Institutional protects the Client Plans against
any and all reasonably foreseeable damages, losses, liabilities, costs,
and expenses (including attorney's fees) which such plans may incur or
suffer, arising from any impermissible use by ING Borrowers of the
loaned securities or from an event of default arising from an ING
Borrower's failure to deliver loaned securities in accordance with the
applicable Basic Loan Agreement or otherwise failing to comply with the
terms of such agreement. If any event of default occurs, ING
Institutional promptly and at its own expense (subject to rights of
subrogation in the collateral and against such borrower), will purchase
or cause to be purchased, for the account of the Client Plans,
securities identical to the borrowed securities (or their equivalent).
Alternatively, if such replacement securities cannot be obtained on the
open market, ING Institutional will pay the Client Plan the difference
in U.S. dollars between the market value of the loaned securities and
the market value of the related collateral, on the date of the
borrower's breach of its obligation to return the loaned securities.
If, however, the event of default is caused by the ING Borrower's
failure to return securities within a designated time, the Client Plan
has the right to purchase securities identical to the borrowed
securities and apply the collateral to payment of the purchase price
and any other expenses of the Plan associated with the sale and/or
purchase. If the collateral is insufficient to accomplish such
purchase, ING Institutional will indemnify the Client Plan for any
shortfall in the collateral plus interest on such amount and any
transaction costs incurred (including attorney's fees of the Client
Plan for legal actions arising out of the default on loans or failure
to properly indemnify under this provision).
28. The proposed exemption will be protective of the rights of
participants and beneficiaries of the Client Plans because of the on-
going oversight of certain regulatory agencies. In this regard, ING
Bank London is subject to primary supervision of DNB (i.e., De
Nederlandsche Bank), the Dutch central bank. DNB is also a member of
the European System of Central Banks. Pursuant to the Dutch banking law
and directives issued by the European Union (EU), DNB is responsible
for safeguarding the solvency and liquidity of Dutch banks and
protecting the rights of creditors thereof, including branches of ING
Bank located in EU Member States. ING represents that the DNB ensures
that there are procedures for monitoring and controlling its worldwide
activities through various statutory and regulatory standards. Among
these standards are requirements for adequate internal controls,
oversight, administration, and financial resources. ING further
represents that it is required to provide the DNB on a recurring basis
with information regarding capital adequacy, as well as periodic,
consolidated financial reports on the financial condition of ING Bank
N.V. and its affiliates.
DNB has adopted rules to insure that Dutch banks, such as ING Bank,
remain solvent through limitations imposed on the risk-bearing
operations of such institutions. DNB has also issued liquidity
directives mandating that Dutch banks maintain a certain level of
liquid assets to insure that all liabilities can be met when due.
Finally, DNB supervises the administrative organizations of Dutch
banks, including their internal accounting systems and internal control
systems. This authority includes taking measures designed to prevent
conflicts of interest within Dutch banks and advising (and, when
necessary, directing) Dutch banks with regard to their internal
administrative organization to insure adequate risk management. It is
represented that such supervisory authority also applies to the ING
Bank London.
To ensure compliance with all applicable rules and to enable DNB to
monitor the operations, Dutch banks are required to submit monthly and
audited annual returns which reflect the banks true and fair financial
position. DNB can withdraw a bank's license for failure to follow
instructions to correct an incorrect return. Failure to file an annual
report, within six (6) months of the end of the fiscal year, can result
in the imposition of a fine or two years imprisonment.
With regard to enforcement, where a Dutch bank fails to comply with
DNB's solvency, liquidity, or administrative organization requirements,
DNB will inform the bank that a violation has occurred and that such
violation must be corrected. In this regard, it is represented that DNB
may instruct the bank on how to correct the violation. Failure to
comply with DNB instructions within a two week period, or failure to
submit a suitable explanation of the violation, may result in: (a) all
management decisions being subject to DNB approval; (b) the appointment
of DNB officers to assume control; or (c) when warranted, a cease and
desist order or significant fines. If officers of a foreign branch of a
Dutch bank, such as ING Bank London, fail to follow DNB instructions,
and if such failure rises to a criminal violation, a fine or two years
imprisonment may be imposed.
Further protection is offered the Client Plans in that ING Bank
London is also subject to regulation by the FSA (i.e., the Securities
and Futures Authority of the U.K.) for the Bank of England. FSA assumed
the regulatory role of the Bank of England in 1998. FSA's powers
include licensing banks in the United Kingdom, issuing directives to
address violations or irregularities involving such banks, requiring
information from a bank or its auditor regarding supervisory matters
and revoking bank licenses.
29. As a broker-dealer authorized to conduct business in the United
Kingdom, ING London is authorized and governed by the rules,
regulations, and registration requirements of the SFA. In this regard,
ING London is subject to rules relating to minimum capitalization,
reporting requirements, periodic examinations, client money and safe
custody rules and requirements for books and records with respect to
client accounts. Although ING London is not registered with the SEC in
the United States, the rules and regulations set forth by the SFA share
a common objective with the SEC in that both protect the investor by
regulating the securities industry under their jurisdiction. The SFA
requires each firm that employs registered representatives or
registered traders to have a positive tangible net worth and be able to
meet its obligations when due. In addition, the SFA rules set forth
comprehensive financial resource and reporting/disclosure rules
regarding capital adequacy. Further, to demonstrate capital adequacy,
the SFA rules impose
[[Page 76302]]
reporting/disclosure requirements on broker-dealers with respect to
risk management, internal controls, and transaction reporting and
record keeping requirements to the effect that required records must be
produced at the request of the SFA, at any time. Finally, the rules and
regulations of the SFA for broker-dealers impose potential fines and
penalties that establish a comprehensive disciplinary system.
30. As a Japanese company authorized as a broker-dealer, ING Japan
is governed by the rules, regulations and membership requirements of
the MOF (i.e., the Ministry of Finance) and the Tokyo Stock Exchange.
In this regard, ING Japan is subject to rules relating to minimum
capitalization, reporting requirements, periodic examinations, client
money and safe custody rules, and requirements for books and records
with respect to client accounts. The MOF and the Tokyo Stock Exchange
share a common objective with the SEC in that each provides protection
for the investor by the regulation of the securities industry. The
rules of MOF and the Tokyo Stock Exchange require each firm that
employs registered representatives or registered traders to have a
positive tangible net worth and to be able to meet its obligations when
due. In addition, the rules of the MOF and the Tokyo Stock Exchange set
forth comprehensive financial resource and reporting/disclosure
requirements regarding capital adequacy. Further, to demonstrate
capital adequacy, the rules impose reporting/disclosure requirements on
broker-dealers with respect to risk management, internal controls, and
transaction reporting and record keeping requirements to the effect
that required records must be produced at the request of the MOF and
the Tokyo Stock Exchange at any time. Finally, the rules and
regulations of the MOF and the Tokyo Stock Exchange for broker-dealers
impose potential fines and penalties that establish a comprehensive
disciplinary system.
31. In addition to the protections afforded by the DNB and the FSA
in the case of the ING Bank London, by the SFA in the case of ING
London, and the MOF and the Tokyo Stock Exchange regulations in the
case of ING Japan, ING represents that the Foreign Borrowers, including
ING Bank London,\13\ ING London, and ING Japan, will comply with all
applicable provisions of Rule 15a-6 of the 1934 Act. In this regard,
Rule 15a-6 provides foreign broker-dealers with a limited exemption
from SEC registration requirements, as described below, and offers
additional protections. Specifically, Rule 15a-6 provides an exemption
from U.S. broker-dealer registration for foreign broker-dealers that
induce or attempt to induce the purchase or sale of any security
(including over-the-counter equity and debt options) by a ``U.S.
institutional investor'' \14\ or a ``U.S. major institutional
investor,'' \15\ provided that the foreign broker-dealer, among other
things, enters into these transactions through a U.S. registered
broker-dealer intermediary.
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\13\ Section 3(a)(4) of the 1934 Act defines ``broker'' to mean
``any person engaged in the business of effecting transactions in
securities for the account of others, but it does not include a
bank.'' Section 3(a)(5) of the 1934 Act provides a similar exclusion
for ``banks'' in the definition of the term ``dealer.'' However,
section 3(a)(6) of the 1934 Act defines ``bank'' to mean a banking
institution organized under the laws of the United States or a State
of the United States. Further, Rule 15(a)(6)(b)(2) provides that the
term ``foreign broker or dealer'' means ``any non-U.S. resident
person . . . whose securities activities, if conducted in the United
States, would be described by the definition of ``broker'' or
``dealer'' in sections 3(a)(4) or 3(a)(5) of the 1934 Act.
Therefore, the test of whether an entity is a ``foreign broker'' or
``dealer'' is based on the nature of such foreign entity's
activities and, with certain exceptions, only banks that are
regulated by either the United States or a State of the United
States are excluded from the definition of the term ``broker'' or
``dealer.'' Thus, for purposes of this exemption request, the
applicants will comply with the applicable provisions and relevant
SEC interpretations and amendments of Rule 15a-6 with respect to all
Foreign Borrowers.
\14\ The term ``U.S. institutional investor,'' as defined in
Rule 15a-6(b)(7), includes an employee benefit plan within the
meaning of the Act, if (a) the investment decision is made by a plan
fiduciary, as defined in section 3(21) of the Act, which is either a
bank, savings and loan association, insurance company, or registered
investment adviser, or (b) the employee benefit plan has total
assets in excess of $5 million, or (c) the employee benefit plan is
a self-directed plan with investment decisions made solely by
persons that are ``accredited investors,'' as defined in Rule
501(a)(1) of Regulation D of the Securities Exchange Act of 1933, as
amended.
\15\ The term ``U.S. major institutional investor'' is defined
in Rule 15a-6(b)(4) as a person that is a U.S. institutional
investor that has total assets in excess of $100 million or an
investment adviser registered under Section 203 of the Investment
Advisers Act of 1940 that has total assets under management in
excess of $100 million.
The Department notes that a SEC No-Action Letter has expanded
the categories of entities that qualify as ```major U.S.
institutional investors''. See SEC No-Action letter issued to
Cleary, Gottlieb, Steen & Hamilton on April 9, 1997.
---------------------------------------------------------------------------
32. Several safeguards, described more fully below, are
incorporated into the proposed exemption to ensure the protection of
the Client Plans' assets involved in these securities lending
transactions. In this regard, ING represents that under Rule 15a-6, any
Foreign Borrower that induces or attempts to induce the purchase or
sale of any security by a U.S. institutional or major institutional
investor must, among other things--
(a) Provide written consent to service of process for any civil
action brought by, or proceeding before, the SEC or any self-regulatory
organization;
(b) Provide the SEC (upon request or pursuant to agreements reached
between any foreign securities authority, including any foreign
government, and the SEC or the U.S. Government) with any information or
documents within the possession, custody, or control of the foreign
broker-dealer, any testimony of any such foreign associated persons,
and any assistance in taking the evidence of other persons, wherever
located, that the SEC requests and that relates to transactions
effected pursuant to the rule;
(c) Rely on the U.S. registered broker-dealer \16\ through which
the transactions with the U.S. institutional and major institutional
investors are effected to (among other things):
---------------------------------------------------------------------------
\16\ ING London and ING Japan, in lieu of relying on a U.S.
broker-dealer and to the extent permitted by applicable U.S.
securities law, may rely on a U.S. bank or trust company, including
ING Institutional, to perform this role.
---------------------------------------------------------------------------
(1) Effect the transactions, other than negotiating their terms;
(2) Issue all required confirmations and statements;
(3) As between the foreign broker-dealer and the U.S. registered
broker-dealer, extend or arrange for the extension of credit in
connection with the transactions;
(4) Maintain required books and records relating to the
transactions, including those required by Rule 17a-3 (Records to be
Made by Certain Exchange Members) and Rule 17a-4 (Records to be
Preserved by Certain Exchange Members, Brokers and Dealers) of the 1934
Act;
(5) Receive, deliver and safeguard funds and securities in
connection with the transactions on behalf of the U.S. institutional
investor or U.S. major institutional investor in compliance with Rule
15c3-3 of the 1934 Act (Customer Protection--Reserves and Custody of
Securities); and
(6) Participate in all oral communications (e.g., telephone calls)
between the foreign associated person and the U.S. institutional
investor (not the U.S. major institutional investor), and accompany the
foreign associated person on all visits with both U.S. institutional
and major institutional investors. By virtue of this participation, the
U.S. registered broker-dealer would become responsible for the content
of all these communications.
33. In all cases, ING will maintain records of each transaction and
market records sufficient to assure that all loans
[[Page 76303]]
to the ING Borrowers will be effected under arm's-length terms. Such
records will be provided to the Client Plan Fiduciary, who is
independent of IITC and the ING Borrowers, in the manner and format
agreed to by such Client Plan Fiduciary and IITC, without charge to the
Client Plan.
34. The applicants represent that the proposed transactions are in
the interest of the Client Plans in that the lending of securities is a
low-risk method to enable a plan to enhance its returns on otherwise
idle assets. In this regard, a Client Plan which participates in
securities lending is able to earn a fee for lending the securities to
the borrower while continuing to receive the economic benefits of
receiving dividends, interest payments, and other distributions made
with respect to the loaned securities.
35. The proposed exemption is administratively feasible in that it
will not require any ongoing involvement by the Department, and the
proposed conditions provide for the review and approval of the
securities borrowing agreement by an independent Client Plan Fiduciary.
Further, it is represented that the conditions to which the applicants
have consented are comparable in all material respects to other recent
individual administrative exemptions granted by the Department under
similar circumstances. In addition, the applicants represent that both
the Plan A and Plan B arrangements described herein incorporate the
relevant conditions contained in class exemptions, PTCE 81-6 and PTCE
82-63. Finally, the applicants will bear the cost of filing the
application for exemption and the costs associated with providing
notice to interested persons, and will be responsible for the payment
of all transfer fees and taxes related to securities lending
transactions that are the subject of this proposed exemption.
36. In summary, the applicants represent that the subject
transactions will satisfy the statutory criteria of section 408(a) of
the Act and section 4975(c)(2) of the Code because:
a. Plan A requires approval of the terms of the Basic Loan
Agreement and the execution of the Agency Agreement (or the Primary
Lending Agreement) by an independent Client Plan Fiduciary before such
Client Plan lends any securities to an ING Borrower;
b. Under Plan B, an ING Borrower will directly negotiate the
Exclusive Borrowing Arrangement with the Client Plan and such
arrangement may be terminated by either party to the arrangement at any
time;
c. The lending arrangements will permit the Client Plans to lend
securities to the ING Borrowers, which have a substantial market
position as securities lenders, and will enable the Client Plans to
diversify the list of eligible borrowers and earn additional income
from the loaned securities while continuing to receive any dividends,
interest payments, and other distributions on those securities;
d. Neither the ING Borrowers nor IITC will exercise any
discretionary authority or control with respect to the investment of
the assets of Client Plans involved in the securities lending
transactions, or render investment advice with respect to those assets,
including any decisions concerning a Client Plan's acquisition or
disposition of securities available for lending;
e. Before a Client Plan participates in a securities lending
program under Plan A and before entering into any securities lending
transaction under Plan A with an ING Borrower, an independent Client
Plan Fiduciary must have: (i) Authorized and approved the Agency
Agreement with IITC, where IITC is acting as the direct securities
lending agent; (ii) Authorized and approved the Primary Lending
Agreement with the primary lending agent, where IITC is serving under a
Sub-Agency Agreement with the primary lending agent; (iii) Approved the
general terms of the Basic Loan Agreement between such Client Plan and
the ING Borrower;
f. A Client Plan may terminate any securities lending agency
agreement at any time without penalty on five (5) business days'
notice;
g. By the close of business on or before the day the loaned
securities are delivered to the ING Borrowers, IITC (or another
custodian acting on behalf of the Client Plan) will receive from the
ING Borrowers, by various means, collateral consisting of U.S. dollars,
securities issued or guaranteed by the U.S. Government or its agencies
or instrumentalities, or irrevocable U.S. bank letters of credit
(issued by an entity other than the ING Borrowers) or other collateral
permitted under PTCE 81-6;
h. The market value of the collateral which secures any loan of
securities will at all times equal at least 102 percent (102%) of the
market value of the loaned securities;
i. The Basic Loan Agreement will give the Client Plans a continuing
security interest in, and a lien on, the collateral which secures any
loan of securities;
j. IITC will monitor daily the level of the collateral which
secures any loan of securities;
k. All the procedures regarding the securities lending activities
will conform to the applicable provisions of PTCE 81-6 and PTCE 82-63
and will be in compliance with the applicable banking laws of the
United Kingdom and the Netherlands, and the securities laws of the
United States, the United Kingdom or Japan;
l. In the event the ING Borrower fails to return securities within
a designated time, the Client Plan will have the right under the Basic
Loan Agreement to purchase securities identical to the borrowed
securities and apply the collateral to payment of the purchase price;
m. If the collateral is insufficient to satisfy the obligation of
the ING Borrower to return the Client Plan's securities, ING
Institutional will indemnify the Client Plan with respect to the
difference between the replacement cost of securities and the market
value of the collateral on the date the loan is declared in default,
together with expenses incurred by the Client Plan plus applicable
interest at a reasonable rate;
n. The Client Plan will receive the equivalent of all distributions
made to the holders of the borrowed securities during the term of the
loan;
o. Only those Client Plans which have assets with an aggregate
market value of at least $50 million (except for certain Related Client
Plans or Unrelated Client Plans whose assets are commingled in a group
trust under the conditions discussed herein) will be permitted to lend
securities to ING Borrowers;
p. With respect to any calendar quarter, at least 50 percent (50%)
or more of the outstanding dollar value of securities loans negotiated
on behalf of Client Plans will be to unrelated borrowers, unless the
Client Plan has entered into an Exclusive Borrowing Arrangement;
q. The terms of each loan of securities by the Client Plans to the
ING Borrowers will be at least as favorable to such plans as those of a
comparable arm's-length transaction between unrelated parties;
r. Each Client Plan will receive monthly reports on the securities
lending transactions, so that an independent Client Plan Fiduciary may
monitor the securities lending transactions with the ING Borrower;
s. Before entering into the Basic Loan Agreement and before a
Client Plan lends any securities to an ING Borrower, an independent
Client Plan Fiduciary will receive sufficient information concerning
the financial condition of the ING Borrower, including the audited
[[Page 76304]]
and unaudited financial statements of such ING Borrower;
t. The ING Borrower will provide to a Client Plan prompt notice at
the time of each loan by such plan of any material adverse changes in
such ING Borrower's financial condition, since the date of the most
recently furnished financial statements;
u. The Client Plan will receive a reasonable fee that is related to
the value of the borrowed securities and the duration of the loan, or
will have the opportunity to derive compensation through the investment
of cash collateral;
v. The loan rebate or similar fee paid by the Client Plan to the
ING Borrower will not be greater than the fee such Client Plan would
pay an unrelated party in an arm's length transaction;
w. Prior to the Client Plan's approval of the lending of its
securities to any ING Borrowers, a copy of the final exemption, if
granted, and a copy of this notice of pendency will be provided to the
Client Plan;
x. ING will maintain or cause to be maintained within the United
States for a period of six (6) years from the date of each transaction,
in a manner that is convenient and accessible for audit and
examination, such records as are necessary to enable certain parties to
determine whether the conditions of this exemption, if granted, have
been met; and
y. All loans involving the Foreign Borrowers must satisfy certain
supplemental requirements, as set forth in Section I(q), above, of this
proposed exemption.
Notice to Interested Persons
Included among those persons who may be interested in the pendency
of the proposed exemption are the trustees or fiduciaries of Client
Plans which are interested in lending securities to the ING Borrowers.
In this regard, the applicant represents that because the Client Plans
which will be potentially interested in the transactions cannot be
identified at the time the Notice of Proposed Exemption (the Notice) is
published in the Federal Register, that the only practical means of
notifying the trustees or fiduciaries of the Client Plans is by
publication of the Notice in the Federal Register. Written comments
and/or requests for a hearing must be received by the Department not
later than thirty (30) days from the date of the publication of this
proposed exemption in the Federal Register. Further, it is represented
that prior to entering into a securities lending agreement with a
Client Plan, the applicants will provide the appropriate fiduciaries of
such plan, by first class mail, a copy of such Notice and a copy of the
final exemption, if granted.
FOR FURTHER INFORMATION CONTACT: Angelena C. Le Blanc of the Department
telephone (202) 219-8883. (This is not a toll-free number.)
Cranston Print Works Company General Employees' Retirement Plan (the
Plan)
Located in Cranston, Rhode Island
[Application No. D-10909]
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). If the exemption
is granted, the restrictions of sections 406(a), 406 (b)(1) and (b)(2)
and 407(a) of the Act and the sanctions resulting from the application
of section 4975 of the Code, by reason of section 4975(c)(1) (A)
through (E) of the Code, shall not apply to: (1) the proposed purchase
by the Plan of shares of common stock (the Stock) of Cranston Print
Works Company (Cranston) from Cranston, the Plan's sponsor; (2) the
Plan's holding of the Stock; (3) the acquisition and holding by the
Plan of an irrevocable put option (the Put Option) which permits the
Plan to sell the Stock to Cranston at a price which is the greater of:
(i) the fair market value of the Stock determined by an independent
appraisal at the time of the exercise of the Put Option, or (ii) the
price at which the Stock originally was sold by Cranston to the Plan;
and (4) the possible future repurchase of the Stock by Cranston
pursuant to the Put Option or a right of refusal, provided the
following conditions are satisfied: (a) the purchase of the Stock by
the Plan will be a one-time transaction for cash, and no commissions
will be paid by the Plan with respect to the purchase; (b) the Stock
will represent no more than 7.5% of the value of the assets of the
Plan; (c) the Plan pays no more than the fair market value of the Stock
on the date of the acquisition, as determined by an independent,
qualified appraiser; (d) the transactions will be expressly approved on
behalf of the Plan by a qualified, independent fiduciary based upon a
determination that such acquisition is in the best interests of, and
appropriate for, the Plan; (e) the Plan's independent fiduciary will
monitor the holding of the Stock by the Plan and take whatever action
is necessary to protect the Plan's rights, including, but not limited
to, the exercising of the Put Option if the independent fiduciary, in
its sole discretion, determines that such exercise is appropriate; (f)
the purchase price per share for any shares of the Stock that are
repurchased by Cranston pursuant to the right of first refusal will be
the greater of: (i) the then current fair market value of the Stock, as
determined by a bona fide third party purchase offer from an unrelated
party, or (ii) the fair market value of the Stock, as determined by a
contemporaneous independent appraisal; and (g) Cranston's obligation
under the Put Option is secured by an escrow arrangement, as described
herein, which is maintained by the Plan's independent fiduciary as long
as the Plan continues to hold any shares of the Stock.
Summary of Facts and Representations
1. Cranston, the Plan sponsor, is involved in the textile, trucking
and chemical industries. Equity interests in Cranston, including the
Stock, are not publicly-traded. As of December 31, 1999, approximately
97.4% of the outstanding shares of the Stock were held by Cranston's
Employee Stock Ownership Plan (the ESOP). The balance of the
outstanding Stock is held by individual shareholders.
2. The Plan is a defined benefit pension plan. As of December 31,
1999, the Plan had assets with a total market value of approximately
$112,000,000. The Plan had 1,346 participants as of that date and an
accumulated benefit obligation of approximately $56,400,000. The total
market value of the Plan's assets has increased since December 31,
1999; as of June 6, 2000, the total was over $115 million. As of the
January 1, 2000 actuarial valuation, the Plan had projected benefit
obligations of $56.4 million, making the Plan better than 200% funded
with respect to the projected benefit obligations.
3. The Plan proposes to acquire approximately 650,000 shares of the
Stock from Cranston's treasury.\17\ The applicant represents that the
Plan's investment in the Stock will be limited to no more than 7.5% of
the Plan's assets, determined immediately after the sale. No assets of
the Plan are currently invested in any loans to, property leased to, or
securities issued by Cranston or any of its affiliates. No commissions
will be charged with respect to the sale of the Stock to the Plan.
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\17\ As of May 21, 2000, the price per share for the Stock was
$13.29. Therefore, the proposed transaction will involve
approximately $8.6 million in cash.
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4. In connection with the Plan's acquisition of the Stock, the Plan
will
[[Page 76305]]
also obtain a Put Option from Cranston. The Put Option, which will be
exercisable by the Plan's independent fiduciary (see reps. 6 and 9,
below), will permit the Plan to require Cranston to purchase from the
Plan all or any portion of the Stock sold to the Plan upon a
determination by the Plan's independent fiduciary that the Stock is no
longer a prudent investment for the Plan considering: (a) the
diversification and liquidity of the Plan's assets; (b) the relative
size of the investment in the Stock as a proportion of the Plan's
overall assets; (c) the funding of the Plan (i.e., the ratio of the
Plan's assets to its actuarially determined obligations); and (d)
Cranston's prospects as a long-term investment. The purchase price to
Cranston of such Stock sold pursuant to the Put Option will be the
greater of: (i) the fair market value of the Stock at the time the Put
Option is exercised, as determined by an independent appraisal, or (ii)
the price at which the Stock was sold by Cranston to the Plan.
The Plan will also give Cranston a right of first refusal with
respect to the Stock. Thus, if the Plan proposes to sell any or all of
its shares of the Stock to a party other than Cranston, Cranston will
have a right of first refusal to repurchase those shares from the Plan
for cash. The purchase price per share for any shares of Stock that are
repurchased pursuant to the right of first refusal will be the greater
of the then fair market value for the Stock, as determined by a bona
fide third party purchase offer from an unrelated party, or the fair
market value of the Stock as determined by a contemporaneous
independent appraisal.
5. The applicant represents that the acquisition of the Stock by
the Plan will be a one-time transaction for cash, and the Plan will
invest no more than 7.5% of its assets in the Stock. The applicant
further represents that the Stock purchased by the Plan will not be a
``qualifying employer security'' as defined under section 407(d)(5) of
the Act, because it will not be an employer security that satisfies the
requirements of section 407(f)(1) of the Act. In this regard, the Stock
purchased by the Plan will not satisfy section 407(f)(1)(B) of the Act
because that section requires that at least 50% of the aggregate amount
of the Stock which is issued and outstanding be held by persons
independent of the issuer. Thus, since the ESOP holds approximately
97.4% of the Stock, the requirements of section 407(f)(1)(B) will not
be met. Accordingly, the applicant states that the statutory exemption
contained in section 408(e) of the Act (relating to the acquisition or
sale by a plan of qualifying employer securities) will not apply to the
proposed acquisition or sale of the Stock by the Plan, and the
applicant has requested the relief proposed herein.
6. In connection with the Plan's proposed acquisition of the Stock,
Cranston will deposit 12.5% of the sales proceeds as the initial
balance in an escrow account (the Escrow) as an additional safeguard to
support Cranston's obligations to the Plan under the Put Option. Thus,
the Escrow will ensure that the proposed transaction is in the Plan's
best interests and protective of the Plan. Cranston further represents
that it will add deposits of $125,000 to the Escrow at the end of each
calendar quarter thereafter until a total of 25% of the purchase price
of the Stock has been deposited into the Escrow. The applicants
represent that the Escrow will be held by the Plan's independent
fiduciary (see rep. 7, below).
7. State Street Bank and Trust Company (the Bank) headquartered in
Boston, Massachusetts, will act as the Plan's independent fiduciary for
the purposes of approving the proposed transaction and monitoring the
retention of the Stock by the Plan after the acquisition. Cranston has
no corporate lending or banking relationships with the Bank and owns no
interest in the Bank either directly or indirectly. The Bank is an
industry leader in independent fiduciary transactions. Among other
things, the Bank manages over $75 billion in company stock as assets in
retirement and deferred compensation plans. The Bank has acted as an
independent fiduciary in a wide range of transactions, including
leveraged employee stock ownership plan acquisitions, defined benefit
plan investments, mergers and acquisitions, and initial public
offerings.
8. In addition, the Bank has retained Willamette Management
Associates (Willamette), located in Chicago, Illinois, to act as its
financial advisor in connection with its decision to purchase the
Stock. Willamette, which has been in operation for over 31 years, has a
national practice in providing opinions regarding fairness and
securities valuation. Willamette has made a preliminary determination
that, as of May 21, 2000, the Stock had a fair market value of $13.29
per share. Willamette developed this value for the Stock utilizing the
Capitalization of Earnings Method and the Guideline Publicly Traded
Method. Willamette will prepare an appraisal as of the date of sale. In
determining fair market value on the acquisition date, Willamette will
consider the income and cash flow capacities of Cranston. Willamette
will review prior analyses of the Stock which have been conducted for
the ESOP, and discuss with Cranston's management all relevant changes
to Cranston's financial situation since the most recent prior analysis.
Willamette will review financial data bearing upon recent and proposed
operations, and will consider the most current economic environment in
which Cranston operates its business. Neither Willamette nor any of its
principals own any interest in Cranston, and Cranston owns no interest
in Willamette.
9. The Bank represents that it will independently review
Willamette's valuation of the Stock, as well as the annual valuations
performed by Management Planning, Inc. for the ESOP for the years 1997,
1998 and 1999. In addition, the Bank will independently review
Cranston's audited financial statements for the fiscal years ending
June 30, 1997, 1998 and 1999, and unaudited financial statements for
the nine month period ending March 31, 2000. The Bank will also review
the current audited and unaudited financial statements that are
available as of the date of the sale of the Stock to the Plan. The Bank
will interview officers at Cranston and will consider the purchase of
the Stock in the context of the investment goals of the Plan.
Prior to purchasing the Stock, the Bank, as a result of this review
and relying on the opinion of Willamette, will make specific findings
that: (a) it is appropriate for the Plan to purchase the Stock from
Cranston; (b) such purchase is in the Plan's best interests; and (c)
the Plan is paying no more than adequate consideration (i.e., fair
market value) for the Stock. The Bank represents that it has made a
preliminary determination, based upon the advice of Willamette, that
the transaction is prudent for the Plan and in the Plan's best
interests, and that the proposed consideration to be paid for the Stock
by the Plan would not be greater than its current fair market value.
10. The Bank will have the authority and the responsibility, as the
Plan's independent fiduciary, to monitor the Plan's continued holding
of the Stock. The Bank will make all decisions for the Plan regarding
the continued holding or disposition of the Stock.\18\ The Bank
[[Page 76306]]
will direct the Plan's trustee with respect to the exercise of voting
and other privileges applicable to shareholders of Cranston, and the
Plan's rights pursuant to the Put Option as it deems appropriate.
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\18\ The Department notes that any decision made by the Bank as
the Plan's independent fiduciary with respect to the exercise of the
Plan's rights under the Put Option shall be fully subject to the
fiduciary responsibility provisions of the Act. However, by
proposing this exemption, the Department is not expressing an
opinion regarding whether any actions taken by the Bank would be
consistent with its fiduciary obligations under Part 4 of Title I of
the Act. In this regard, section 404(a) requires, among other
things, that a plan fiduciary 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 decisions on behalf of a plan.
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11. In summary, the applicants represent that the proposed
transactions will satisfy the criteria of section 408(a) of the Act
because: (a) the Stock will represent no more than 7.5% of the Plan's
assets at the time of the acquisition; (b) the purchase price for the
Stock will be determined by an evaluation prepared by Willamette, a
qualified independent expert in the valuation of such securities; (c)
the Plan has received an additional safeguard in the form of an
irrevocable Put Option which will enable the Plan, upon the independent
fiduciary's decision, to sell the Stock back to Cranston at a price
which is equal to the greater of the Stock's then current fair market
value, as determined by independent appraisal, or the price at which
the Stock was sold by Cranston to the Plan; (d) the Bank, an
independent fiduciary for the Plan, will determine that the
transactions are appropriate for the Plan and in the best interests of
the Plan's participants and beneficiaries; (e) the Bank will monitor
the holding of the Stock and determine, among other things, when to
exercise the Put Option; (f) any sale of the Stock by the Plan to
Cranston pursuant to Cranston's right of first refusal will be
triggered by a proposed sale of the Stock by the Plan to an unrelated
party pursuant to a bona fide purchase offer, and any shares of the
Stock that are repurchased by Cranston, under its right of first
refusal, will be for cash at a price which is equal to the greater of
the then current fair market value of the Stock, as determined by the
bona fide third party purchase offer, or the fair market value of the
Stock as determined by a contemporaneous independent appraisal; and (g)
Cranston will make an initial deposit of 12.5% of the purchase price
for the Stock into the Escrow (which will be held by the Bank), and
will make additional deposits of $125,000 at the close of each calendar
quarter thereafter until a total of 25% of the purchase price for the
Stock has been deposited into the Escrow to support Cranston's
obligations to the Plan under the Put Option.
FOR FURTHER INFORMATION CONTACT: Gary H. Lefkowitz 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 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 1st day of December, 2000.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, U.S. Department of Labor.
[FR Doc. 00-31017 Filed 12-5-00; 8:45 am]
BILLING CODE 4510-29-P