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Secretary of Labor Hilda L. Solis
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EBSA Notices

Proposed Exemptions; Metropolitan Life Insurance Company (Metlife Insurance Company) et al.   [9/27/2001]
[PDF]
[Federal Register: September 27, 2001 (Volume 66, Number 188)]
[Notices]               
[Page 49400-49418]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr27se01-100]                         

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DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

[Application No. D-10954, et al.]

 
Proposed Exemptions; Metropolitan Life Insurance Company (Metlife 
Insurance Company) et al.

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-1513, 200 Constitution Avenue, NW, 
Washington, DC 20210.

Notice to Interested Persons

    Notice of the proposed exemptions will be provided to all 
interested persons in the manner agreed upon by the applicant and the 
Department within 15 days of the date of publication in the Federal 
Register. Such notice shall include a copy of the notice of proposed 
exemption as published in the Federal Register and shall inform 
interested persons of their right to comment and to request a hearing 
(where appropriate).

SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in 
applications filed pursuant to section 408(a) of the Act and/or section 
4975(c)(2) of the Code, and in accordance with procedures set forth in 
29 CFR part 2570, subpart B (55 FR 32836, 32847, August 10, 1990). 
Effective December 31, 1978, section 102 of Reorganization Plan No. 4 
of 1978, 5 U.S.C. App. 1 (1996), transferred the authority of the 
Secretary of the Treasury to issue exemptions of the type requested to 
the Secretary of Labor. Therefore, these notices of proposed exemption 
are issued solely by the Department.
    The applications contain representations with regard to the 
proposed exemptions which are summarized below. Interested persons are 
referred to the applications on file with the Department for a complete 
statement of the facts and representations.

Metropolitan Life Insurance Company, (MetLife Insurance Company) 
and Its Affiliates (collectively, MetLife), Located in New York, NY

[Application No. D-10954]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Act (or ERISA) and section 
4975(c)(2) of the Code and in accordance with the procedures set forth 
in 29 CFR part

[[Page 49401]]

2570, subpart B (55 FR 32836, 32847, August 10, 1990).\1\
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    \1\ For purposes of this proposed exemption, references to 
provisions of the Act refer also to corresponding provisions of the 
Code.
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Section I. Retroactive Exemption for the Acquisition, Holding and 
Disposition of MetLife, Inc. Common Stock
    If the proposed exemption is granted, the restrictions of sections 
406(a)(1)(D), 406(b)(1) and section 406(b)(2) of the Act and the 
sanctions resulting from the application of section 4975 of the Code by 
reason of section 4975(c)(1)(D) and (E) of the Code, shall not apply, 
as of December 7, 2000 until the date this proposed exemption is 
granted, to the acquisition, holding and disposition of the common 
stock of MetLife, Inc. (the MetLife, Inc. Stock), by Index and Model-
Driven Funds (collectively, the Funds) that are managed by MetLife, in 
which client plans of MetLife invest, provided that the following 
conditions and the General Conditions of Section III are met:
    (a) The acquisition or disposition of MetLife, Inc. Stock is for 
the sole purpose of maintaining strict quantitative conformity with the 
relevant index upon which the Index or Model-Driven Fund is based, and 
does not involve any agreement, arrangement or understanding regarding 
the design or operation of the Fund acquiring MetLife, Inc. Stock which 
is intended to benefit MetLife or any party in which MetLife may have 
an interest.
    (b) All aggregate daily purchases of MetLife, Inc. Stock by the 
Funds do not exceed on any particular day the greater of--
    (1) 15 percent of the average daily trading volume for the MetLife, 
Inc. Stock, occurring on the applicable exchange and automated trading 
system (as described in Section I(c) below) for the previous 5 business 
days, or
    (2) 15 percent of the trading volume for MetLife, Inc. Stock 
occurring on the applicable exchange and automated trading system on 
the date of the transaction, as determined by the best available 
information for the trades occurring on that date.
    (c) All purchases and sales of MetLife, Inc. Stock occur (i) either 
on a recognized U.S. securities exchange (as defined in Section IV(j) 
below), so long as the broker is acting on an agency basis; (ii) 
through an automated trading system (as defined in Section IV(i) below) 
operated by a broker-dealer independent of MetLife that is registered 
under the Securities Exchange Act of 1934 (the 1934 Act) and thereby 
subject to regulation by the Securities and Exchange Commission (SEC), 
or an automated trading system operated by a recognized U.S. securities 
exchange, which, in either case, provides a mechanism for customer 
orders to be matched on an anonymous basis without the participation of 
a broker-dealer, or (iii) in a direct, arm's length transaction entered 
into on a principal basis with a broker-dealer, in the ordinary course 
of its business, where such broker-dealer is independent of MetLife and 
is registered under the 1934 Act, and thereby subject to regulation by 
the SEC.
    (d) No transactions by a Fund involve purchases from, or sales to, 
MetLife (including officers, directors, or employees thereof), or any 
party in interest that is a fiduciary with discretion to invest plan 
assets into the Fund (unless the transaction by the Fund with such 
party in interest would otherwise be subject to an exemption).
    (e) No more than 5 percent of the total amount of MetLife, Inc. 
Stock, that is issued and outstanding at any time, is held in the 
aggregate by Index and Model-Driven Funds managed by MetLife.
    (f) MetLife, Inc. Stock constitutes no more than 5 percent of any 
independent third party index on which the investments of an Index or 
Model-Driven Fund are based.
    (g) A fiduciary of a plan, which is independent of MetLife, 
authorizes the investment of such plan's assets in an Index or Model-
Driven Fund which purchases and/or holds MetLife, Inc. Stock, pursuant 
to the procedures described herein.
    (h) A fiduciary independent of the MetLife directs the voting of 
MetLife, Inc. Stock held by an Index or Model-Driven Fund on any matter 
in which shareholders of MetLife, Inc. Stock are required or permitted 
to vote.
Section II. Prospective Exemption for the Acquisition, Holding and 
Disposition of MetLife, Inc. Stock and/or the Common Stock of a MetLife 
Affiliate
    If the proposed exemption is granted, the restrictions of sections 
406(a)(1)(D), 406(b)(1) and section 406(b)(2) of the Act and the 
sanctions resulting from the application of section 4975 of the Code by 
reason of section 4975(c)(1)(D) and (E) of the Code, shall not apply to 
the acquisition, holding and disposition of MetLife, Inc. Stock and/or 
common stock issued by a MetLife affiliate (the MetLife Affiliate 
Stock; together, the MetLife Stock), by Index and Model-Driven Funds 
that are managed by MetLife, in which client plans of MetLife invest, 
provided that the following conditions and the General Conditions of 
Section III are met:
    (a) The acquisition or disposition of MetLife Stock is for the sole 
purpose of maintaining strict quantitative conformity with the relevant 
index upon which the Index or Model-Driven Fund is based, and does not 
involve any agreement, arrangement or understanding regarding the 
design or operation of the Fund acquiring MetLife Stock which is 
intended to benefit MetLife or any party in which MetLife may have an 
interest.
    (b) Whenever MetLife Stock is initially added to an index on which 
an Index or Model-Driven Fund is based, or initially added to the 
portfolio of an Index or Model-Driven Fund, all acquisitions of MetLife 
Stock necessary to bring the Fund's holdings of such stock either to 
its capitalization-weighted or other specified composition in the 
relevant index, as determined by the independent organization 
maintaining such index, or to its correct weighting as determined by 
the model which has been used to transform the index, occur in the 
following manner:
    (1) Purchases are from, or through, only one broker or dealer on a 
single trading day;
    (2) Based on the best available information, purchases are not the 
opening transaction for the trading day;
    (3) Purchases are not effected in the last half hour before the 
scheduled close of the trading day;
    (4) Purchases are at a price that is not higher than the lowest 
current independent offer quotation, determined on the basis of 
reasonable inquiry from non-affiliated brokers;
    (5) Aggregate daily purchases do not exceed 15 percent of the 
average daily trading volume for the security, as determined by the 
greater of either (i) the trading volume for the security occurring on 
the applicable exchange and automated trading system on the date of the 
transaction, or (ii) an aggregate average daily trading volume for the 
security occurring on the applicable exchange and automated trading 
system for the previous 5 business days, both based on the best 
information reasonably available at the time of the transaction;
    (6) All purchases and sales of MetLife Stock occur either (i) on a 
recognized U.S. securities exchange (as defined in Section IV(j) 
below), (ii) through an automated trading system (as defined in Section 
IV(i) below) operated by a broker-dealer independent of MetLife that is 
registered under the 1934 Act, and thereby subject to regulation by the 
SEC, which provides a mechanism for customer orders to be matched on an

[[Page 49402]]

anonymous basis without the participation of a broker-dealer, or (iii) 
through an automated trading system (as defined in Section IV(i) below) 
that is operated by a recognized U.S. securities exchange (as defined 
in Section IV(j) below), pursuant to the applicable securities laws, 
and provides a mechanism for customer orders to be matched on an 
anonymous basis without the participation of a broker-dealer; and
    (7) If the necessary number of shares of MetLife Stock cannot be 
acquired within 10 business days from the date of the event which 
causes the particular Fund to require MetLife Stock, MetLife appoints a 
fiduciary which is independent of MetLife to design acquisition 
procedures and monitor compliance with such procedures.
    (c) Subsequent to acquisitions necessary to bring a Fund's holdings 
of MetLife Stock to its specified weighting in the index or model 
pursuant to the restrictions described in Section II(b) above, all 
aggregate daily purchases of MetLife Stock by the Funds do not exceed 
on any particular day the greater of:
    (1) 15 percent of the average daily trading volume for MetLife 
Stock occurring on the applicable exchange and automated trading system 
(as defined below) for the previous 5 business days, or
    (2) 15 percent of the trading volume for MetLife Stock occurring on 
the applicable exchange and automated trading system (as defined below) 
on the date of the transaction, as determined by the best available 
information for the trades that occurred on such date.
    (d) All transactions in MetLife Stock not otherwise described above 
in Section II (b) are either--(i) entered into on a principal basis in 
a direct, arm's length transaction with a broker-dealer, in the 
ordinary course of its business, where such broker-dealer is 
independent of MetLife and is registered under the 1934 Act, and 
thereby subject to regulation by the SEC, (ii) effected on an automated 
trading system (as defined in Section IV(i) below) operated by a 
broker-dealer independent of MetLife that is subject to regulation by 
either the SEC or another applicable regulatory authority, or an 
automated trading system operated by a recognized U.S. securities 
exchange (as defined in Section IV(j) below) which, in either case, 
provides a mechanism for customer orders to be matched on an anonymous 
basis without the participation of a broker-dealer, or (iii) effected 
through a recognized U.S. securities exchange (as defined in Section 
IV(j) below), so long as the broker is acting on an agency basis.
    (e) No transactions by a Fund involve purchases from, or sales to, 
MetLife (including officers, directors, or employees thereof), or any 
party in interest that is a fiduciary with discretion to invest plan 
assets into the Fund (unless the transaction by the Fund with such 
party in interest would otherwise be subject to an exemption).
    (f) No more than 5 percent of the total amount of MetLife Stock, 
that is issued and outstanding at any time, is held in the aggregate by 
Index and Model-Driven Funds managed by MetLife.
    (g) MetLife Stock constitutes no more than 5 percent of any 
independent third party index on which the investments of an Index or 
Model-Driven Fund are based.
    (h) A fiduciary of a plan which is independent of MetLife 
authorizes the investment of such plan's assets in an Index or Model-
Driven Fund which purchases and/or holds MetLife Stock, pursuant to the 
procedures described herein.
    (i) A fiduciary independent of the MetLife directs the voting of 
MetLife Stock held by an Index or Model-Driven Fund on any matter in 
which shareholders of MetLife Stock are required or permitted to vote.
Section III. General Conditions
    (a) MetLife maintains or causes to be maintained for a period of 
six years from the date of the transaction the records necessary to 
enable the persons described in paragraph (b) of this Section III to 
determine whether the conditions of this exemption have been met, 
except that (1) a prohibited transaction will not be considered to have 
occurred if, due to circumstances beyond the control of MetLife, the 
records are lost or destroyed prior to the end of the six year period, 
and (2) no party in interest other than MetLife shall be subject to the 
civil penalty that may be assessed under section 502(i) of the Act or 
to the taxes imposed by section 4975(a) and (b) of the Code if the 
records are not maintained or are not available for examination as 
required by paragraph (b) below.
    (b)(1) Except as provided in paragraph (b)(2) of this Section III 
and notwithstanding any provisions of section 504(a)(2) and (b) of the 
Act, the records referred to in paragraph (a) of this Section III 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 SEC,
    (B) Any fiduciary of a plan participating in an Index or Model-
Driven Fund who has authority to acquire or dispose of the interests of 
the plan, or any duly authorized employee or representative of such 
fiduciary,
    (C) Any contributing employer to any plan participating in an Index 
or Model-Driven Fund or any duly authorized employee or representative 
of such employer, and
    (D) Any participant or beneficiary of any plan participating in an 
Index or Model-Driven Fund, or a representative of such participant or 
beneficiary.
    (2) None of the persons described in subparagraphs (B) through (D) 
of this Section III(b)(1) shall be authorized to examine trade secrets 
of MetLife or commercial or financial information which is considered 
confidential.
Section IV. Definitions
    (a) The term ``Index Fund'' means any investment fund, account or 
portfolio sponsored, maintained, trusteed, or managed by MetLife, in 
which one or more investors invest, and--
    (1) Which is designed to track the rate of return, risk profile and 
other characteristics of an independently maintained securities Index, 
as described in Section IV(c) below, by either (i) replicating the same 
combination of securities which compose such Index or (ii) sampling the 
securities which compose such Index based on objective criteria and 
data;
    (2) For which MetLife does not use its discretion, or data within 
its control, to affect the identity or amount of securities to be 
purchased or sold;
    (3) That contains ``plan assets'' subject to the Act, pursuant to 
the Department's regulations (see 29 CFR 2510.3-101, Definition of 
``plan assets''--plan investments); and,
    (4) That involves no agreement, arrangement, or understanding 
regarding the design or operation of the Fund which is intended to 
benefit MetLife or any party in which MetLife may have an interest.
    (b) The term ``Model-Driven Fund'' means any investment fund, 
account or portfolio sponsored, maintained, trusteed, or managed by 
MetLife, in which one or more investors invest, and--
    (1) Which is composed of securities the identity of which and the 
amount of which are selected by a computer model that is based on 
prescribed objective criteria using independent third party data, not 
within the control of MetLife, to transform an independently maintained 
Index, as described in Section IV(c) below;

[[Page 49403]]

    (2) Which contains ``plan assets'' subject to the Act, pursuant to 
the Department's regulations (see 29 CFR 2510.3-101, Definition of 
``plan assets''--plan investments); and
    (3) That involves no agreement, arrangement, or understanding 
regarding the design or operation of the Fund or the utilization of any 
specific objective criteria which is intended to benefit MetLife or any 
party in which MetLife may have an interest.
    (c) The term ``Index'' means a securities index that represents the 
investment performance of a specific segment of the public market for 
equity or debt securities in the United States, but only if--
    (1) The organization creating and maintaining the index is--
    (A) Engaged in the business of providing financial information, 
evaluation, advice or securities brokerage services to institutional 
clients,
    (B) A publisher of financial news or information, or
    (C) A public stock exchange or association of securities dealers; 
and,
    (2) The index is created and maintained by an organization 
independent of MetLife; and,
    (3) The index is a generally-accepted standardized index of 
securities which is not specifically tailored for the use of MetLife.
    (d) The term ``opening date'' means the date on which investments 
in or withdrawals from an Index or Model-Driven Fund may be made.
    (e) The term ``Buy-up'' means an acquisition of MetLife Stock by an 
Index or Model-Driven Fund in connection with the initial addition of 
such stock to an independently maintained index upon which the Fund is 
based or the initial investment of a Fund in such stock.
    (f) The term ``MetLife'' refers to Metropolitan Life Insurance 
Company, its parent, MetLife, Inc. and their current or future 
affiliates, as defined below in paragraph (g).
    (g) An ``affiliate'' of MetLife includes:
    (1) Any person, directly or indirectly, through one or more 
intermediaries, controlling, controlled by or under common control with 
the person;
    (2) Any officer, director, employee or relative of such person, or 
partner of any such person; and
    (3) Any corporation or partnership of which such person is an 
officer, director, partner or employee.
    (h) The term ``control'' means the power to exercise a controlling 
influence over the management or policies of a person other than an 
individual.
    (i) The term ``automated trading system'' means an electronic 
trading system that functions in a manner intended to simulate a 
securities exchange by electronically matching orders on an agency 
basis from multiple buyers and sellers, such as an ``alternative 
trading system'' within the meaning of the SEC's Reg. ATS [17 CFR Part 
242.300], as such definition may be amended from time to time, or an 
``automated quotation system'' as described in Section 3(a)(51)(A)(ii) 
of the 1934 Act [15 U.S.C. 8c(a)(51)(A)(ii)].
    (j) The term ``recognized U.S. securities exchange'' means a U.S. 
securities exchange that is registered as a ``national securities 
exchange'' under Section 6 of the 1934 Act (15 U.S.C. 78f), as such 
definition may be amended from time to time, which performs with 
respect to securities the functions commonly performed by a stock 
exchange within the meaning of definitions under the applicable 
securities laws (e.g., 17 CFR Part 240.3b-16).
    Effective Date: If granted, this proposed exemption will be 
effective as of December 7, 2000 with respect to the transactions 
described in Section I above, and as of the date grant notice is 
published in the Federal Register for the transactions described in 
Section II above.

Summary of Facts and Representations

    1. MetLife Insurance Company (or the Applicant) is a life insurance 
company organized under the laws of the State of New York and subject 
to supervision and examination by the Superintendent of Insurance of 
the State of New York. MetLife Insurance Company is a wholly owned 
subsidiary of MetLife, Inc., a publicly-held Delaware corporation. As 
of December 31, 2000, MetLife Insurance Company, including its 
insurance company subsidiaries, had total assets under management of 
approximately $302.3 billion and had approximately $2 trillion of life 
insurance in force.
    2. Among the insurance products and services offered, MetLife 
Insurance Company and certain of its affiliates provide funding, asset 
management and other services for thousands of ERISA-covered employee 
benefit plans. The Applicant also maintains pooled and single plan 
separate accounts in which ERISA-covered plans invest. Alone or with 
its affiliates, MetLife Insurance Company may manage all or a portion 
of the separate account assets. Further, MetLife Insurance Company has 
a number of subsidiaries and affiliates that provide a variety of 
financial services, including investment management and brokerage 
services.
    MetLife Insurance Company is also the investment manager, adviser 
or an affiliate of the investment manager or adviser with respect to 
various portfolios subject to ERISA that are invested in a strategy 
which tracks or transforms an index maintained by a third party. The 
index may include the stock issued by MetLife, Inc. or an affiliate.
    3. MetLife acts as investment manager of institutional accounts, 
including employee benefit plans with assets totaling approximately $28 
billion. Additionally, MetLife provides directed trust or investment 
management services to various employee benefit plans. MetLife is, to 
the extent of the provision of investment management services, a 
fiduciary of these plans.
    As a fiduciary, MetLife may be either directed by an independent 
plan fiduciary or plan participants that have the ability to direct 
investments for their own plan accounts. Alternatively, in those cases 
in which MetLife manages the investments, the Applicant represents that 
it does not exercise any discretionary authority over whether an 
employee benefit plan invests in particular Index or Model-Driven 
Funds.
    4. MetLife manages different collective investment funds, trusts 
and separate accounts in various ways to enable plan assets to be 
diversified to reduce risk and to be invested in the types of 
investments that a particular manager for a plan may determine is 
appropriate at a particular time. Index Funds and Model-Driven Funds 
are two examples of MetLife's separate account products which include 
plan investors.
    An Index Fund, as defined above, may be a separately-managed 
account, an insurance company separate account, a collective investment 
fund, or collective trust, the objective of which is the replication of 
the performance of an independently-maintained stock or bond index 
representing the performance of a specific segment of the public market 
for equity or debt securities. The Index Funds are passively-managed, 
in that the choice of stocks or bonds purchased and sold, and the 
volume purchased and sold, are made according to predetermined third 
party indexes rather than according to active evaluation of the 
investments. Since December 7, 2000, there have been 5 Index Funds 
holding the assets of ERISA-covered plans that have acquired, held and/
or disposed of MetLife, Inc. Stock.
    A Model-Driven Fund, as defined above, may be a separately-managed

[[Page 49404]]

account, an insurance company separate account, a collective trust or a 
collective investment fund, the performance of which is based on 
computer models using prescribed objective criteria to transform an 
independently-maintained stock or bond index representing the 
performance of a specific segment of the public market for equity or 
debt securities. The portfolio of a Model-Driven Fund is determined by 
the details of the computer model, which examines structural aspects of 
the stock or bond market rather than the underlying values of such 
securities. An example of a Model-Driven Fund would include a fund 
which ``transforms'' an index, making investments according to a 
computer model which uses such data as earnings, dividends and price 
earnings ratios for common stocks included in the index.
    According to the Applicant, the process for the establishment and 
operation of all Funds, which are model-driven, is disciplined. 
Objective rules are established for each model. Such Funds operate 
pursuant to pre-specified computer programs, the rules and programs are 
changed only infrequently.
    5. MetLife currently offers a number of separate account products 
that are invested according to the criteria of various third party 
indexes or are model-driven based on such indexes. These indexes are 
compiled by financial information agencies that are engaged in the 
provision of financial information or securities brokerage services to 
institutional investors and/or are publishers of financial information. 
For example, some Funds track the Russell 2000 Index,\2\ while other 
funds track the Standard & Poor's 500 Composite Stock Price Index (the 
S&P 500 Index).\3\ Most of the Funds track stock indexes, although some 
Funds track indexes of debt securities, such as the Lehman Brothers 
Bond Indexes.\4\ In each instance, the indexes are compiled by 
organizations that are independent of MetLife and are generally-
accepted standardized indexes of securities that are not tailored for 
the use of MetLife.
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    \2\ The Russell 2000 Index was established and is maintained by 
the Frank Russell Company, which is not an affiliate of MetLife. The 
Russell 2000 Index is a subset of the larger Russell 3000 Index. The 
Russell 3000 Index consists of the largest 3,000 publicly-traded 
stocks of U.S. domiciled corporations, identified by the Frank 
Russell Company, and includes large, medium and small stocks.
    \3\ The S&P 500 Index is composed of 500 stocks that are traded 
on the New York Stock Exchange and the NASDAQ National Market 
System. The S&P 500 Index is a market-weighted index (i.e., shares 
outstanding times the stock price) in which each company's influence 
on the Index's performance is directly proportional to its market 
value.
    \4\ The indexes of debt securities used for the Funds, such as 
the Lehman Brothers Bond Index, consist primarily of high quality 
fixed-income securities representing the U.S. Government, corporate, 
and mortgage-backed securities sectors of the bond market in the 
U.S. In this regard, MetLife's fixed income Index Fund portfolios 
are currently managed against the Lehman Aggregate Bond Index and 
the Lehman Government/Credit Index. However, MetLife is not 
represented in either Lehman Brothers Bond Index nor does MetLife 
hold any of its debt securities in its separate accounts.
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    6. In addition to Funds that are separate accounts or collective 
investment funds, MetLife may have investment responsibility for 
individual investment funds which are separate portfolios for various 
client accounts, including employee benefit plans, where the portfolio 
is invested in accordance with a third party index or a model based on 
that index. The Applicant represents that the ability of all Funds to 
invest in MetLife Stock when the stock is included in an index would 
improve the tracking of such indexes.
    7. Accordingly, the Applicant requests an administrative exemption 
from the Department. If granted, the exemption will permit the 
Applicant and its current or future affiliates to maintain separate 
accounts, collective funds or trusts that hold securities issued by 
MetLife, Inc. and/or the affiliated entities, provided certain 
conditions enumerated in the operative language of the exemption are 
met. For purposes of the exemption, the Applicant and its affiliates 
are collectively referred to as ``MetLife.''
    Specifically, the exemption will allow Index and Model-Driven Funds 
which are managed by the Applicant or its affiliates, in which client 
plans of MetLife participate, to invest in MetLife Stock if such stock 
is included among the securities listed in the index utilized by the 
Fund. The Applicant is not requesting, nor is the Department providing, 
administrative exemptive relief herein for plans sponsored by MetLife. 
MetLife believes that investments on behalf of its in house plans in 
Index and Model-Driven Funds have been made (and will be made) in 
accordance with the statutory exemption provided under section 408(e) 
of the Act.\5\ Therefore, the subject exemption will apply to client 
plans of MetLife only. With respect to its client plans, the Applicant 
states that plan fiduciaries which are independent of MetLife have 
authorized or will authorize the investment of a plan's assets in an 
Index or Model-Driven Fund which purchases and/or holds MetLife Stock 
pursuant to procedures described herein.
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    \5\ The Department is not providing an opinion in this proposed 
exemption on whether the conditions of section 408(e) of the Act 
have been or will be met for such transactions.
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    The Applicant requests that the proposed exemption be made 
effective as of December 7, 2000 with respect to investments in 
MetLife, Inc. Stock by the subject Funds. The Applicant is not 
requesting retroactive relief for investments by the Funds in MetLife 
Affiliate Stock inasmuch as these Funds have not held such stock.\6\ 
Further, the Applicant states that any exemptive relief for cross-
trades of securities, including MetLife, Inc. Stock, by Index and 
Model-Driven Funds maintained by it should be considered separately.\7\
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    \6\ See 29 CFR 2510.3-101; Definition of ``plan assets''--plan 
investments.
    \7\ In this regard, the Department directs interested persons to 
the Proposed Class Exemption for Cross-Trades of Securities by Index 
and Model-Driven Funds (the Cross-Trading Proposal) which was 
published in the Federal Register on December 15, 1999 (64 FR 
70057).
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    8. The Applicant states that the proposed exemption is necessary to 
allow Funds holding ``plan assets'' to purchase and hold MetLife Stock 
in order to replicate the capitalization-weighted or other specified 
composition of MetLife Stock in an independently-maintained, third 
party index used by an Index Fund or to achieve the desired 
transformation of an index used to create a portfolio for a Model-
Driven Fund.
    In addition, the Applicant represents that when MetLife Stock is 
added to an index on which a Fund is based, or when MetLife Stock is 
added to the portfolio of a Fund which tracks an index that includes 
MetLife Stock, all acquisitions necessary, as an initial matter, to 
bring the Fund's holdings of MetLife Stock to its capitalization or 
other specified weighting in the applicable index,\8\ will comply with 
conditions (see Section I(b)(1)-(7) above) that are designed to prevent 
possible market price manipulation and which are based, in part, on the 
restrictions of SEC Rule 10b-18.\9\
---------------------------------------------------------------------------

    \8\ These instances are referred to herein as a ``Buy-up.'' The 
Applicant anticipates that acquisitions of MetLife Stock by an Index 
or Model-Driven Fund in a ``Buy-up'' will occur within 10 business 
days from the date of the event which causes the particular Fund to 
acquire MetLife Stock. MetLife does not anticipate that the amounts 
of MetLife Stock acquired by a Fund in a ``Buy-up'' will be 
significant. In this regard, the Department notes that the 
conditions required herein are designed to minimize the market 
impact of purchases made by the Funds in any ``Buy-up'' of MetLife 
Stock.
    \9\ SEC Rule 10b-18 provides a ``safe harbor'' for issuers of 
securities from section 9(a)(2) of the 1934 Act and SEC Rule 10b-5 
(which generally prohibits persons from manipulating the price of a 
security and engaging in fraud in connection with the purchase or 
sale of a security).
---------------------------------------------------------------------------

    The conditions required for a ``Buy-up'' of MetLife Stock are as 
follows:

[[Page 49405]]

     Purchases will be from, or through, only one broker or 
dealer on a single trading day;
     Based on the best available information, purchases will 
not be the opening transaction for the trading day;
     Purchases will not be effected in the last half hour 
before the scheduled close of the trading day;
     Purchases will be at a price that is not higher than the 
lowest current independent offer quotation, determined on the basis of 
reasonable inquiry from non-affiliated brokers;
     Aggregate daily purchases will not exceed 15 percent of 
the average daily trading volume for the security, as determined by the 
greater of either (i) the trading volume for the security occurring on 
the applicable exchange and automated trading system on the date of the 
transaction, or (ii) an aggregate average daily trading volume for the 
security occurring on the applicable exchange and automated trading 
system for the previous 5 business days, both based on the best 
information reasonably available at the time of the transaction;
     All purchases and sales of MetLife Stock will occur either 
(i) on a recognized U.S. securities exchange [as defined in Section 
IV(j)], (ii) through an automated trading system [as defined in Section 
IV(i)] operated by a broker-dealer independent of MetLife that is 
registered under the 1934 Act, and thereby subject to regulation by the 
SEC, which provides a mechanism for customer orders to be matched on an 
anonymous basis without the participation of a broker-dealer, or (iii) 
through an automated trading system [as defined in Section IV(i)] that 
is operated by a recognized U.S. securities exchange [as defined in 
Section IV(j)], pursuant to the applicable securities laws, and 
provides a mechanism for customer orders to be matched on an anonymous 
basis without the participation of a broker-dealer; and
     If the necessary number of shares of MetLife Stock cannot 
be acquired within 10 business days from the date of the event which 
causes the particular Fund to require MetLife Stock, MetLife will 
appoint an independent fiduciary to design acquisition procedures and 
monitor compliance with such procedures.
    9. MetLife states that the independent fiduciary and its principals 
must be completely unrelated to MetLife. The independent fiduciary must 
also be experienced in developing and operating investment strategies 
for individual and collective investment vehicles that track third 
party indexes. Furthermore, the independent fiduciary must not act as 
the broker for any purchases or sales of MetLife Stock and will not 
receive any consideration as a result of the initial acquisition 
program.
    As its primary goal, the independent fiduciary will develop trading 
procedures that minimize the market impact of purchases made pursuant 
to the initial acquisition program by the particular Fund. Thus, the 
Applicant expects that, under the trading procedures established by the 
independent fiduciary, the trading activities will be conducted in a 
low profile, mechanical, non-discretionary manner and would involve a 
number of small purchases over the course of each day, randomly-timed. 
The Applicant further expects that such a program will allow it to 
acquire the necessary shares of MetLife Stock for the Funds with 
minimum impact on the market and in a manner that will be in the best 
interests of any employee benefit plans that participate in such Funds.
    The independent fiduciary will also be required to monitor 
compliance with the trading program and procedures developed for the 
initial acquisition of MetLife Stock. During the course of any initial 
acquisition program, the independent fiduciary will be required to 
review the activities weekly to determine compliance with the trading 
procedures and notify MetLife should any non-compliance be detected. 
Should the trading procedures need modifications due to unforeseen 
events or consequences, the independent fiduciary will be required to 
consult with MetLife and must approve in advance any alteration of the 
trading procedures.
    10. Subsequent to the initial acquisitions necessary to bring a 
Fund's holdings of MetLife Stock to their specified weightings in the 
index or model pursuant to the restrictions described above, all 
aggregate daily purchases of MetLife Stock by the Funds will not exceed 
on any particular day the greater of--
     15 percent of the average daily trading volume for MetLife 
Stock occurring on the applicable exchange and automated trading system 
for the previous 5 business days, or
     15 percent of the trading volume for MetLife Stock 
occurring on the applicable exchange and automated trading system on 
the date of the transaction, as determined by the best available 
information for the trades that occurred on such date.
    11. MetLife represents that as of December 7, 2000 until the date 
this proposed exemption is granted, all purchases and sales of MetLife, 
Inc. Stock by the Funds, other than acquisition of such stock in a Buy-
up have occurred or will continue to occur in one of the following 
ways: (a) On a principal basis with a broker-dealer, in the ordinary 
course of its business, where such broker-dealer is independent of 
MetLife and is registered under the 1934 Act, and thereby subject to 
regulation by the SEC; (b) through an automated trading system (as 
defined in Section IV(i) below) operated by a broker-dealer independent 
of MetLife that is subject to regulation by the SEC or another 
applicable regulatory agency or on an automated trading system operated 
by a recognized U.S. securities exchange (as defined in Section IV(j)) 
which, in either case, provides a mechanism for customer orders to be 
matched on an anonymous basis without the participation of a broker-
dealer, or (c) through a recognized U.S. securities exchange (as 
defined in Section IV(j)), so long as the broker is acting on an agency 
basis.\10\
---------------------------------------------------------------------------

    \10\ The Department notes that no relief is being provided 
herein for purchases and sales of securities between a Fund and a 
broker-dealer acting as principal, which may be considered 
prohibited transactions as a result of such broker-dealer being a 
party in interest under section 3(14) of the Act, with respect to 
any plans that are investors in the Fund. However, such transactions 
may be covered by one or more of the Department's existing class 
exemptions. For example, Prohibited Transaction Class Exemption 84-
14 (49 FR 9497, March 13, 1984) permits, under certain conditions, 
parties in interest to engage in various transactions with plans 
whose assets are invested in an investment fund managed by a 
``qualified professional asset manager'' (i.e., a QPAM) who is 
independent of the parties in interest (with certain limited 
exceptions) and meets specified financial standards.
---------------------------------------------------------------------------

    In addition, MetLife represents that as of the date this proposed 
exemption is granted, all future transactions by the Funds involving 
MetLife Stock which do not occur in connection with a Buy-up of such 
stock by a Fund, as described above, will be either (a) entered into on 
a principal basis in a direct, arm's length transaction with a broker-
dealer, in the ordinary course of its business, where such broker-
dealer is independent of MetLife and is registered under the 1934 Act, 
and thereby subject to regulation by the SEC; (b) effected on an 
automated trading system (as defined in Section IV(j) above) operated 
by a broker-dealer independent of MetLife that is either registered 
under the 1934 Act, and thereby subject to regulation by the SEC, or an 
automated trading system operated by a recognized U.S. securities 
exchange (as defined above) which, in either case, provides a mechanism 
for customer order to be matched on an anonymous basis without the 
participation of a broker-dealer; or (c) effected through a recognized 
U.S.

[[Page 49406]]

securities exchange (as defined in Section IV(j) above) so long as the 
broker is acting on an agency basis.
    12. With respect to all acquisitions and dispositions of MetLife 
Stock by the Funds since December 7, 2000, the Applicant states that no 
such transactions have involved purchases from or sales to MetLife 
(including officers, directors or employees thereof), or any party in 
interest that is a fiduciary with discretion to invest assets into the 
Fund. The Applicant represents that all future acquisitions and 
dispositions of MetLife Stock by any Index or Model-Driven Funds 
maintained by MetLife will also not involve any purchases from or sales 
to MetLife (including officers, directors or employees thereof), or any 
party in interest that is a fiduciary with discretion to invest assets 
into the Fund (unless the transaction by the Fund with such party in 
interest would otherwise be subject to an exemption).\11\
---------------------------------------------------------------------------

    \11\ In this regard, the Department is providing no opinion 
herein on whether such principal transactions would be covered by 
any existing exemption.
---------------------------------------------------------------------------

    13. The Applicant represents that no more than 5 percent of the 
total outstanding shares of MetLife Stock will be held in the aggregate 
by the Index or Model-Driven Funds managed by MetLife. In addition, the 
Applicant states that MetLife Stock will not constitute more than 5 
percent of the value of any independent third party index on which 
investments of an Index or Model-Driven Fund are based.
    For purposes of the acquisition and holding of MetLife, Inc. Stock 
by all of the Funds since December 7, 2000 until the date this proposed 
exemption is granted, the Applicant states that such stock will 
constitute no more than 5 percent of any independent third party index 
on which the investments in Index or Model-Driven Funds are based. For 
example, the Applicant notes that the current weighting of MetLife, 
Inc. Stock in the S&P 500 Index is 0.213 percent and its weighting in 
the Barra Value Index is 0.41 percent. Although some indexes include 
MetLife, Inc. Stock in percentages that exceed 3 percent of the index, 
MetLife does not currently utilize such indexes for its Index and 
Model-Driven Funds with ``plan assets'' subject to the Act.
    For purposes of future acquisitions and holdings of MetLife Stock 
by the Funds once this proposed exemption is granted, neither MetLife, 
Inc. Stock nor MetLife Affiliate Stock will constitute more than 5 
percent of any independent third party index on which the investments 
of an Index or Model-Driven Fund are based. In this regard, the 
Applicant has identified 5 indexes which include MetLife, Inc. Stock 
where the current approximate capitalization weight of the index 
represented by MetLife, Inc. Stock exceeds 3 percent. Therefore, the 
Applicant requests that the proposed exemption allow MetLife to design 
a passive investment strategy for an Index or Model-Driven Fund which 
seeks to track an index that contains MetLife Stock, or which 
transforms such an index into a model-prescribed way, as long as the 
MetLife Stock does not constitute more than 5 percent of the index.
    With respect to an index's specified composition of particular 
stocks in its portfolio, the Applicant states that future Funds may 
track an index where the weighting for stocks listed in the index is 
not capitalization-weighted. However, the Applicant notes that Funds 
maintained by it or its affiliates may track indexes where the 
selection of a particular stock by the index and the amount of stock to 
be included in the index is not established based on the market 
capitalization of the corporation issuing such stock. Therefore, since 
an independent organization may choose to create an index where there 
are other index weightings for stocks composing the index, the 
Applicant requests that the proposed exemption allow for MetLife Stock 
to be acquired by a Fund in the amounts which are specified by the 
particular index, subject to the other restrictions imposed under this 
proposed exemption. In addition, the Applicant represents that, in all 
instances, acquisitions or dispositions of MetLife Stock by a Fund will 
be for the sole purpose of maintaining quantitative conformity with the 
relevant index upon which the Fund is based, or in the case of a Model-
Driven Fund, a modified version of such an index as created by a 
computer model based on prescribed objective criteria and third party 
data.
    14. The Applicant will appoint an independent fiduciary to direct 
the voting of any MetLife Stock held by the Funds. The independent 
fiduciary will be a consulting firm specializing in corporate 
governance issues and proxy voting on behalf of public and private 
pension funds. The independent fiduciary will be required to develop 
and follow standard guidelines and procedures for the voting of proxies 
by institutional fiduciaries.
    The Applicant will provide the independent fiduciary with all 
necessary information regarding the Funds that hold MetLife Stock on 
the record date for MetLife's shareholder meetings, and all proxy and 
consent materials with respect to MetLife Stock. The independent 
fiduciary will maintain records with respect to its activities as an 
independent fiduciary on behalf of the Funds, including the number of 
shares of MetLife Stock voted, the manner in which such shares were 
voted, and the rationale for the vote if the vote was not consistent 
with the independent fiduciary's procedures and current voting 
guidelines in effect at the time of the vote. The independent fiduciary 
will supply MetLife with the information after each shareholder 
meeting. The independent fiduciary will be required to acknowledge that 
it will be acting as a fiduciary with respect to the plans which invest 
in the Funds which own MetLife Stock, when voting such stock.\12\
---------------------------------------------------------------------------

    \12\ Currently, the Applicant is utilizing the Investor 
Responsibility Research Center to vote proxies related to MetLife, 
Inc. Stock. However, any independent fiduciary duly appointed by the 
Applicant has satisfied or will satisfy, in the case of a successor 
independent fiduciary, the criteria described above.
---------------------------------------------------------------------------

    15. In summary, with respect to all acquisitions, holdings and 
dispositions of MetLife Stock by the Funds since December 7, 2000, it 
is represented that the subject transactions meet the statutory 
criteria for an exemption under section 408(a) of the Act because:
    (a) Each Index or Model-Driven Fund involved is based on an index, 
as defined in Section IV(c) above;
    (b) The acquisition, holding and disposition of MetLife, Inc. Stock 
by the Index or Model-Driven Fund is for the sole purpose of 
maintaining strict conformity with the relevant index upon which an 
Index or Model-Driven Fund is based, and will not involve an agreement, 
arrangement or understanding regarding the design or operation of the 
Fund acquiring MetLife, Inc. Stock which is intended to benefit MetLife 
or any party in which MetLife may have an interest;
    (c) All aggregate daily purchases of MetLife, Inc. Stock by the 
Funds do not exceed, on any particular day, the greater of (i) 15 
percent of the average daily trading volume for the MetLife, Inc. Stock 
occurring on the applicable exchange and automated trading system for 
the previous 5 business days, or (ii) 15 percent of the trading volume 
for MetLife, Inc. Stock occurring on the applicable exchange and 
automated trading system on the date of the transaction, as determined 
by the best available information for the trades that occurred on such 
date;
    (d) All purchases and sales of MetLife, Inc. Stock, other than 
acquisitions of such stock in a Buy-up described above,

[[Page 49407]]

occur either (i) on a recognized securities exchange, as defined 
herein, (ii) through an automated trading system (as defined herein) 
operated by a broker-dealer independent of MetLife that is subject to 
regulation by either the SEC, which provides a mechanism for customer 
orders to be matched on an anonymous basis without the participation of 
a broker-dealer, or (iii) in a direct, arm's length transaction entered 
into on a principal basis with a broker-dealer, in the ordinary course 
of its business, where such broker-dealer is independent of MetLife and 
is registered under the 1934 Act, and thereby subject to regulation by 
the SEC.
    (e) No transactions by a Fund involve purchases from or sales to 
MetLife (including officers, directors or employees thereof), or any 
party in interest that is a fiduciary with discretion to invest plan 
assets into the Fund (unless the transaction by the Fund with such 
party in interest would otherwise be subject to an exemption);
    (f) No more than 5 percent of the total amount of MetLife, Inc. 
Stock that is issued and outstanding at any time is held, in the 
aggregate, by Index or Model-Driven Funds managed by MetLife;
    (g) MetLife, Inc. Stock constitutes no more than 5 percent of the 
value of any independent third party index on which investments of an 
Index or Model-Driven Fund are based;
    (h) A plan fiduciary independent of MetLife will authorize the 
investment of such plan's assets in an Index or Model-Driven Fund which 
purchases and/or holds MetLife, Inc. Stock; and
    (i) A fiduciary independent of MetLife directs the voting of 
MetLife, Inc. Stock held by an Index or Model-Driven Fund on any matter 
in which shareholders of MetLife, Inc. Stock are required or permitted 
to vote.
    With respect to all acquisitions, holdings and dispositions of 
MetLife Stock by the Funds after this proposed exemption is granted, 
MetLife represents that such transactions will meet the statutory 
criteria for an exemption under section 408(a) of the Act because:
    (a) Each Index or Model-Driven Fund involved will be based on an 
index, as defined in Section IV(c) above;
    (b) The acquisition, holding and disposition of MetLife Stock by 
the Index or Model-Driven Fund will be for the sole purpose of 
maintaining strict conformity with the relevant index upon which an 
Index or Model-Driven Fund is based, and will not involve an agreement, 
arrangement or understanding regarding the design or operation of the 
Fund acquiring MetLife Stock which is intended to benefit MetLife or 
any party in which MetLife may have an interest;
    (c) Whenever MetLife Stock is initially added to an index on which 
a Fund is based, or initially added to the portfolio of a Fund (i.e., a 
Buy-up), all acquisitions of MetLife Stock necessary to bring the 
Fund's holdings of such stock either to its capitalization-weighted or 
other specified composition in the relevant index, as determined by the 
independent organization maintaining such index, or its correct 
weighting as determined by the computer model which has been used to 
transform the index, will be restricted by conditions which are 
designed to prevent possible market price manipulations;
    (d) Subsequent to acquisitions necessary to bring a Fund's holdings 
of MetLife Stock to its specified weighting in the index or model, 
pursuant to the restrictions above, all aggregate daily purchases of 
MetLife Stock by the Funds will not exceed the greater of (i) 15 
percent of the average daily trading volume for the MetLife Stock 
occurring on the applicable exchange and automated trading system for 
the previous 5 business days, or (ii) 15 percent of the trading volume 
for MetLife Stock occurring on the applicable exchange and automated 
trading system on the date of the transaction, as determined by the 
best available information for the trades that occurred on such date;
    (e) All transactions in MetLife Stock, other than acquisitions of 
such stock in a Buy-up described above, will be either (i) entered into 
on a principal basis with a broker-dealer, in the ordinary course of 
its business, where such broker-dealer is independent of MetLife and is 
registered under the 1934 Act, and thereby subject to regulation by the 
SEC, (ii) effected on an automated trading system operated by a broker-
dealer independent of MetLife that is subject to regulation by either 
the SEC or another applicable regulatory authority, or an automated 
trading system operated by a recognized U.S. securities exchange which, 
in either case, provides a mechanism for customer orders to be matched 
on an anonymous basis without the participation of a broker-dealer, or 
(iii) effected through a recognized U.S. securities exchange (as 
described herein) so long as the broker is acting on an agency basis;
    (f) No transactions by a Fund will involve purchases from or sales 
to MetLife (including officers, directors or employees thereof), or any 
party in interest that is a fiduciary with discretion to invest plan 
assets into the Fund (unless the transaction by the Fund with such 
party in interest would otherwise be subject to an exemption);
    (g) No more than 5 percent of the total amount of MetLife Stock 
that is issued and outstanding at any time will be held, in the 
aggregate, by Index or Model-Driven Funds managed by MetLife;
    (h) MetLife Stock will constitute no more than 5 percent of the 
value of any independent third party index on which investments of an 
Index or Model-Driven Fund are based;
    (i) A plan fiduciary independent of MetLife will authorize the 
investment of such plan's assets in an Index or Model-Driven Fund which 
purchases and/or holds MetLife Stock, pursuant to the procedures 
described herein; and
    (j) A fiduciary independent of MetLife will direct the voting of 
MetLife Stock held by an Index or Model-Driven Fund on any matter in 
which shareholders of MetLife Stock are required or permitted to vote.

Notice to Interested Persons

    Notice of the proposed exemption will be mailed by first-class mail 
to interested persons, including the appropriate fiduciaries of 
employee benefit plans currently invested in the Index and/or Model-
Driven Funds that acquire and hold MetLife Stock. The notice will 
include a copy of the notice of proposed exemption, as published in the 
Federal Register, and a supplemental statement, as required under 29 
CFR 2570.43(b)(2), which shall inform interested persons of their right 
to comment and/or to request a hearing with respect to the proposed 
exemption. All notices will be sent to interested persons within 30 
days of the publication of the proposed exemption in the Federal 
Register. Any written comments and/or requests for a hearing are due 
within 60 days after the date of publication of the pendency notice in 
the Federal Register.
    In addition, MetLife will provide, upon request, a copy of the 
proposed exemption and, if granted, a copy of the final exemption to 
all ERISA-covered plans which invest in any Index or Model-Driven Fund 
containing MetLife Stock in their respective portfolios after the date 
the final exemption is published in the Federal Register.

FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady of the Department, 
telephone (202) 219-8881. (This is not a toll-free number.)

[[Page 49408]]

The Prudential Insurance Company of America; (Prudential 
Insurance), Located in Newark, NJ

[Application No. D-10984]

Proposed Exemption

    Based on the facts and representations set forth in the 
application, the Department is considering granting an exemption under 
the authority of section 408(a) of the Act (or ERISA) and section 
4975(c)(2) of the Code and in accordance with the procedures set forth 
in 29 CFR part 2570, subpart B (55 FR 32836, 32847, August 10, 
1990).\13\
---------------------------------------------------------------------------

    \13\ For purposes of this proposed exemption, references to 
provisions of Title I of the Act, unless otherwise specified, refer 
also to corresponding provisions of the Code.
---------------------------------------------------------------------------

Section I. Covered Transactions
    If the exemption is granted, the restrictions of section 406(a) of 
the Act and the sanctions resulting from the application of section 
4975 of the Code, by reason of section 4975(c)(1)(A) through (D) of the 
Code, shall not apply, effective September 27, 2001, to (1) the receipt 
of shares of common stock (Common Stock) issued by Prudential 
Financial, Inc. (Prudential Financial or the Holding Company) or (2) 
the receipt of cash (Cash) or policy credits (Policy Credits) by any 
eligible policyholder (the Eligible Policyholder) of Prudential 
Insurance, which is an employee benefit plan (the Plan), including 
Plans sponsored by Prudential Insurance and/or its affiliates for the 
benefit of their own employees (collectively, the Prudential 
InsurancePlans),\14\ in exchange for such Eligible Policyholder's 
mutual membership interest in Prudential Insurance, pursuant to a plan 
of conversion (the Plan of Reorganization) adopted by Prudential 
Insurance and implemented in accordance with section 17:17C-2 of the 
New Jersey Insurance Law.
---------------------------------------------------------------------------

    \14\ Unless otherwise noted, references to the term ``Plan'' are 
meant to include ``outside'' Plan policyholders of Prudential 
Insurance as well as the Prudential Welfare Plan.
---------------------------------------------------------------------------

    In addition, if the exemption is granted, the restrictions of 
section 406(a)(1)(E) and (a)(2) and section 407(a)(2) of the Act shall 
not apply, effective September 27, 2001, to the receipt and holding, by 
the Prudential Welfare Benefits Plan (the Prudential Welfare Plan), of 
Common Stock, whose fair market value exceeds 10 percent of the value 
of the total assets held by such Plan.
    The proposed exemption is subject to the general conditions set 
forth below in Section II.
Section II. General Conditions
    (a) The Plan of Reorganization is implemented in accordance with 
procedural and substantive safeguards that are imposed under New Jersey 
Insurance Law and is subject to review and supervision by the New 
Jersey Commissioner of Banking and Insurance (the Commissioner).
    (b) The Commissioner reviews the terms of any options that are 
provided to Eligible Policyholders of Prudential Insurance as part of 
such Commissioner's review of the Plan of Reorganization, and the 
Commissioner only approves the Plan of Reorganization following a 
determination that the Plan of Reorganization is fair and equitable to 
all Eligible Policyholders.
    (c) Except as provided below, each Eligible Policyholder has an 
opportunity to comment on and vote to approve the Plan of 
Reorganization after full written disclosure of the terms of the Plan 
of Reorganization is given to such policyholder by Prudential 
Insurance. As provided under the Plan of Reorganization and approved by 
the Commissioner,
    (1) Eligible Policyholders of policies issued by designated 
subsidiaries (the Designated Subsidiaries) of Prudential Insurance will 
not have the opportunity to comment and vote on the Plan of 
Reorganization, and
    (2) Prudential Insurance will be precluded from voting on the Plan 
of Reorganization where a group policy is issued to Prudential 
Insurance as trustee for a multiple employer, or similar, trust (the 
MET) which is not a plan described in section 3(3) of the Act or 
section 4975(e)(1) of the Code.
    (d) Any election by an Eligible Policyholder which is a Plan to 
receive Common Stock pursuant to the terms of the Plan of 
Reorganization, or any decision by such Eligible Policyholder to 
participate in the commission-free purchase and sale program (the 
Program), is made by one or more fiduciaries of such Plan that are 
independent of Prudential Insurance and neither Prudential Insurance 
nor any of its affiliates exercises any discretion or provides 
``investment advice,'' within the meaning of 29 CFR 2510.3-21(c) with 
respect to such election or decision-making.
    (e) In the case of the Prudential Insurance Plans, the independent 
fiduciary--
    (1) Conducts a due diligence review of the subject transactions; 
and
    (2) Votes whether to approve or disapprove the Plan of 
Reorganization, on behalf of such Plan.
    (f) In the case of the Prudential Welfare Plan, the independent 
fiduciary--
    (1) Votes shares of Common Stock that are held by such Plan, which 
exceed the limitation of section 407(a) of the Act;
    (2) Disposes of Common Stock in excess of the limitation set forth 
under section 407(a)(2) of the Act as soon as reasonably practicable, 
but in no event later than six months after the effective date of the 
Plan of Reorganization;
    (3) Provides the Department with a complete and detailed final 
report as it relates to such Plan prior to the effective date of the 
Plan of Reorganization; and
    (4) Takes all actions that are necessary and appropriate to 
safeguard the interests of such Plan.
    (g) After each Eligible Policyholder entitled to receive Common 
Stock is allocated at least 8 shares (or the equivalent value of 10 
shares of Common Stock for Eligible Policyholders receiving Cash or 
Policy Credits), additional consideration is allocated to Eligible 
Policyholders who own eligible policies based on a methodology that 
takes into account each eligible policy's contribution to Prudential 
Insurance's surplus, which methodology has been reviewed by the 
Commissioner.
    (h) All Eligible Policyholders that are Plans participate in the 
transactions on the same basis within their class groupings as other 
Eligible Policyholders that are not Plans.
    (i) No Eligible Policyholder pays any brokerage commissions or fees 
in connection with the receipt of Common Stock or in connection with 
the implementation of the Program.
    (j) All of Prudential Insurance's policyholder obligations remain 
in force and are not affected by the Plan of Reorganization.
    (k) The terms of the transactions are at least as favorable to the 
Plans as an arm's length transaction with an unrelated party.
Section III. Definitions
    For purposes of this proposed exemption:
    (a) The term ``Prudential Insurance'' means The Prudential 
Insurance Company of America and any affiliate of Prudential Insurance 
as defined in paragraph (b) of this Section III.
    (b) An ``affiliate'' of Prudential Insurance includes--
    (1) Any person directly or indirectly through one or more 
intermediaries, controlling, controlled by, or under common control 
with Prudential Insurance. (For purposes of this paragraph, the term 
``control'' means the

[[Page 49409]]

power to exercise a controlling influence over the management or 
policies of a person other than an individual.); and
    (2) Any officer, director or partner in such person.
    (c) The term ``Eligible Policyholder'' means a policyholder who is 
eligible to receive compensation under Prudential Insurance's Plan of 
Reorganization. Eligible Policyholders are policyholders of Prudential 
Insurance on the day the Plan of Reorganization is adopted by the Board 
of Directors of Prudential Insurance.
    (d) The term ``Designated Subsidiary'' means stock life insurance 
company subsidiaries of Prudential Insurance whose policyholders, 
pursuant to section 17:17C-1 of New Jersey Insurance Law, have been 
deemed eligible under the Plan of Reorganization to receive 
compensation, but which are not qualified to vote on the Plan of 
Reorganization.
    (e) The term ``Holding Company'' refers to a New Jersey stock 
business corporation which will be named ``Prudential Financial, Inc.'' 
Under the Plan of Reorganization, Prudential Insurance will become an 
indirect, wholly owned stock life insurance company subsidiary of the 
Holding Company.
    (f) The term ``Policy Credit'' means a dividend accumulation, an 
additional dividend, an increase in the policy's account value, an 
extension of the policy's expiration date, or an additional payment 
under an annuity contract.
    (g) The term ``Plan'' refers to employee benefit plans covered by 
ERISA or section 4975(e) of the Code.
    (h) The term ``demutualization'' refers to the process of an 
insurance company's reorganizing or converting from a mutual life 
insurance company to a stock life insurance company.'' As used herein, 
``reorganization'' and ``conversion'' also refer to a demutualization.

Effective Date: If granted, this proposed exemption will be effective 
as of September 27, 2001.

Summary of Facts and Representations

Description of the Parties
    1. Prudential Insurance is a mutual life insurance company 
organized under the laws of the state of New Jersey. Its principal 
place of business is located at Prudential Plaza, Newark, New Jersey. 
The company is licensed to conduct insurance business in all 50 states 
and the District of Columbia. As of December 31, 1999, Prudential 
Insurance and its subsidiaries had total assets of about $285 billion, 
total liabilities of about $266 billion, and equity of about $19 
billion. Also as of December 31, 1999, Prudential Insurance had 
approximately 1 million individual and group insurance contracts in 
force which were issued to, or on behalf of, employee benefit plans. 
Currently, Prudential Insurance's financial strength ratings are as 
follows: ``A-1,'' Moody's; ``A+,'' Standard & Poor's; and ``A,'' A.M. 
Best.
    Prudential Insurance's principal products include individual and 
group life insurance contracts, endowment contracts, insurance 
contracts, annuities, including tax deferred annuities described in 
section 403(b) of the Code (TDAs), and individual retirement annuities 
described in section 408(b) of the Code (IRAs), and a variety of 
pension contracts. Additionally, Prudential Insurance has a number of 
affiliates and subsidiaries that provide financial services and 
products, including investment management, brokerage, and mutual funds, 
as well as real estate services.
    As a mutual life insurance company, Prudential Insurance has no 
authorized, issued, or outstanding stock. Instead, its policyholders 
are both customers and owners of the company. In this regard, the life 
insurance, endowment, annuity, and certain other insurance and pension 
plan contracts issued by Prudential Insurance combine both insurance 
coverage with proprietary rights, which are referred to as ``membership 
interests.'' These membership interests entitle Prudential Insurance 
policyholders to vote for the Board of Directors and on other matters 
at annual and special meetings, as well as on the conversion of the 
company from a mutual life insurance company to a stock life insurance 
company. Further, the membership interests accord most policyholders of 
Prudential Insurance the right to share in the annual, divisible 
surplus of the company that is distributed in the form of policyholder 
dividends. A membership interest cannot be sold separately from the 
underlying insurance policy and it is extinguished automatically when 
the policy ends.
    2. Prudential Insurance and its affiliates provide fiduciary and 
other services to Plans described in section 3(3) of ERISA and to other 
plans described in section 4975(e)(1) of the Code, many of which are 
Prudential Insurance policyholders. As a result, Prudential Insurance 
may be considered a party in interest or a disqualified person with 
respect to such Plans under section 3(14)(A) and (B) of the Act as well 
as the related derivative provisions of section 3(14) of the Act. At 
present, approximately 800,000 policyholders of Prudential Insurance 
are Plans.
    3. Although Prudential and its affiliates sponsor a number of in-
house Plans (i.e., the Prudential Insurance Plans) for the benefit of 
their employees, the only Plan that will be covered by the subject 
exemption is the Prudential Welfare Plan.\15\ This Plan provides 
medical, dental and insurance benefits to its employees. Benefits under 
the Plan are paid either through a combination of employer and employee 
contributions, or they consist entirely of employee contributions. As 
of December 31, 1999, the Prudential Welfare Plan had total assets of 
$1.97 billion and approximately 63,170 participants.
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    \15\ As discussed later in this proposed exemption, Prudential 
Insurance states that exemptive relief under section 408(e) of the 
Act is available with respect to distributions of Common Stock to 
its in-house, ERISA-covered plans, namely, the Prudential Merged 
Retirement Plan, the Prudential Employee Savings Plan, the PSI Long 
Term Care Plan, the PSI Life/Disability Plan and the PSI Dental 
Plan. Nevertheless, the Department has decided to extend the 
exemption to cover all Prudential Insurance Plans in order to 
mitigate inadvertent prohibited transactions that may arise in 
connection with the demutualization.
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    Benefits under the Prudential Welfare Plan are funded through group 
insurance policies issued by Prudential Insurance, through insurance 
contracts issued by unaffiliated insurers, or on a self-insured basis. 
In addition, Prudential Insurance has established a number of voluntary 
employee beneficiary associations (VEBAs) to hold assets of the 
Prudential Welfare Plan, including Prudential Insurance group and 
individual policies and individual securities, such as equities or 
bonds. Prudential Insurance or its affiliates generally manage assets 
held by the VEBAs that are not insurance contracts.
Reasons for the Reorganization
    4. Prudential Insurance represents that it has grown from a company 
primarily focused on selling life insurance to a financial services 
institution that provides a wide range of insurance, asset management, 
securities and other financial products and services. Although the 
mutual company structure has worked well in the past, Prudential 
Insurance explains that its Board of Directors has had to reexamine 
retaining this structure in light of changes occurring in the global 
financial services market, such as increased competition from companies 
outside the United States and from non-insurance companies, changes in 
distribution channels for financial services products, and the 
reorganization into stock companies (through demutualization) of

[[Page 49410]]

many of Prudential Insurance's competitors.
    After considering these changes and evaluating other possible 
courses of action, Prudential Insurance states that its Board of 
Directors concluded that a stock company structure would have many 
business and organizational advantages. Accordingly, on February 10, 
1998, Prudential Insurance's Board of Directors initiated the process 
of reorganizing into a stock company by authorizing the officers of 
Prudential Insurance to study the feasibility of a reorganization and 
to prepare a Plan of Reorganization for the Board's consideration. On 
December 15, 2000, the Board of Directors unanimously approved and 
adopted the Plan of Reorganization (which was subsequently amended and 
restated as of the December 15, 2000 date) to effect the change in 
Prudential Insurance's business structure through demutualization. The 
Board's reasons were as follows:
     First, it was believed that a publicly-traded stock 
company could compete more effectively in the global financial services 
industry. Access to capital through sales of Common Stock would 
facilitate the funding of new products, services and sales channels 
that are consistent with Prudential Insurance's overall business 
strategy. Also, in lieu of using cash, Common Stock would be available 
to acquire other companies for future growth.
     Second, the demutualization would enable Prudential 
Insurance to distribute the total value of the company to Eligible 
Policyholders pursuant to the Plan of Reorganization, thereby affording 
Eligible Policyholders the opportunity to realize economic value, in 
the form of Common Stock, Cash or Policy Credits, in exchange for such 
policyholders' illiquid membership interests. Eligible Policyholders 
receiving Common Stock would be able to retain their shares of Common 
Stock or sell it for cash at market value.
     Third, the Holding Company would be able to use stock-
based compensation programs to recruit and retain high-quality 
employees and to align their long-term interests with shareholders' 
interests.
     Fourth, having publicly-traded Common Stock would require 
that Prudential Insurance report its financial performance to the 
financial markets periodically and be compared with similar 
institutions by financial analysts.
    5. Accordingly, Prudential Insurance requests an administrative 
exemption from the Department that will permit certain of its Plan 
policyholders to engage in transactions related to the implementation 
of the Plan of Reorganization.\16\ Specifically, Prudential Insurance 
requests a prospective exemption that will cover the receipt of Common 
Stock issued by the Holding Company, Cash or Policy Credits by Eligible 
Policyholders that are Plans, including the Prudential Welfare Plan, in 
exchange for such Eligible Member's membership interest in Prudential 
Insurance.\17\ Prudential Insurance represents that the receipt of 
Common Stock, Cash, or Policy Credits by the Plan can viewed as a 
prohibited sale or exchange of property between it and a Plan, or as a 
transfer or use of the Plan's assets by or for the benefit of 
Prudential Insurance in violation of section 406(a)(1)(A) and (D) of 
the Act.
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    \16\ In connection with its demutualization, it should be noted 
that Prudential Insurance has received advisory opinions from the 
Department regarding (a) whether it would be deemed to be a 
fiduciary when implementing policyholder decisions to allocate 
compensation among plan participants or among plans where the policy 
funds more than one plan (ERISA Advisory Opinion 2001-02A (Feb. 15, 
2001)); and (b) whether the exercise of certain, limited 
policyholder duties in connection with the receipt of compensation 
by TDA and IRA policyholders would affect the availability of the 
Department's ``safe harbor'' regulations for TDAs and IRAs (ERISA 
Advisory Opinion 2001-03A (Feb. 15, 2001)). In addition, in a letter 
dated February 15, 2001, which responded to a request for guidance 
on behalf of Prudential Insurance, the Department noted that it 
would not assert a violation of the Act in any enforcement 
proceeding solely because of a failure to hold demutualization 
proceeds in trust, provided that the plan fiduciary took specific 
steps to safeguard that asset. In this regard, (a) such assets would 
consist solely of proceeds received by the policyholder in 
connection with the demutualization; (b) such assets, and any 
earnings thereon would be placed in the name of the plan in an 
interest-bearing account, in the case of cash, or a custodial 
account, in the case of stock, as soon as reasonably possible 
following receipt, and such proceeds would be applied for the 
payment of participant premiums or applied to plan benefit 
enhancements or distributed to plan participants as soon as 
reasonably possible but no later than twelve months following 
receipt; (c) such assets would be subject to the control of a 
designated plan fiduciary; (d) the plan would not otherwise be 
required to maintain a trust under section 403 of the Act; and (e) 
the designated fiduciary would be required to maintain such 
documents and records as deemed necessary under the Act with respect 
to the foregoing.
    \17\ Prudential Insurance represents that the shares of Common 
Stock that will be issued to the Prudential Insurance Plans, other 
than the Prudential Welfare Plan, will constitute ``qualifying 
employer securities'' within the meaning of section 407(d)(5) of the 
Act and that section 408(e) of the Act will apply to such 
distributions. As such, Prudential Insurance explains that there 
will be no violation of section 407(a) of the Act with respect to 
the acquisition of Common Stock by these Plans. The Department 
however, expresses no opinion herein, on whether the Common Stock 
will constitute qualifying employer securities and whether such 
distributions will satisfy the terms and conditions of section 
408(e) of the Act.
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    In addition, Prudential Insurance has requested that the exemption 
apply to distributions of Common Stock to the Prudential Welfare Plan. 
Prudential Insurance recognizes that there may be an ``excess'' holding 
problem with respect employer stock that is received and held by this 
Plan which would be in violation of section 406(a)(1)(E) and (a)(2) of 
the Act and section 407(a)(2) of the Act, in addition to section 
406(a)(1)(A) and (D) of the Act.\18\ Prudential Insurance states that, 
if the Prudential Welfare Plan were to accept Common Stock as 
demutualization consideration, the fair market value of such stock 
would cause the aforementioned violations of the Act. To avoid this 
problem, Prudential Insurance represents that U.S. Trust Company, N.A. 
(U.S. Trust) will serve on behalf of the Prudential Welfare Plan as the 
independent fiduciary and it will represent the interests of such Plan 
with respect to the Plan's acquisition, holding and disposition of 
shares of Common Stock.\19\ Finally, Prudential Insurance has confirmed 
that the shares of Common Stock that are issued to the Prudential 
Welfare Plan will not violate the provisions of section 407(f) of the 
Act.\20\ Therefore, no further exemptive relief is required.
Procedural Requirements for Demutualization
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    \18\ Section 406(a)(1)(E) of the Act prohibits the acquisition 
by a plan of any employer security which would be in violation 
section 407(a) of the Act. Section 406(a)(2) of the Act states that 
no fiduciary who has authority or discretion to control the assets 
of a plan shall permit the plan to hold any employer security if he 
[or she] knows that holding such security would violate section 
407(a) of the Act. Section 407(a)(1) of the Act prohibits the 
acquisition by a plan of any employer security which is not a 
qualifying employer security. Section 407(a)(2) of the Act provides 
that a plan may not acquire any qualifying employer security, if 
immediately after such acquisition, the aggregate fair market value 
of such securities exceeds 10 percent of the fair market value of 
the plan's assets.
    \19\ As noted in Representation 18, U.S. Trust has also agreed 
to serve, in a limited capacity, as independent fiduciary for the 
Prudential Merged Retirement Plan, the Prudential Employee Savings 
Plan, the PSI Long Term Care Plan, the PSI Life/Disability Plan and 
the PSI Dental Plan, which are also Prudential Insurance Plans. In 
this regard, U.S. Trust is required to conduct a due diligence 
review of the demutualization and vote whether to approve or 
disapprove the Plan of Reorganization on behalf of such Plans, 
including the Prudential Welfare Plan.
    \20\ Section 407(f) of the Act, which is applicable to the 
holding of a qualifying employer security by a plan other than an 
eligible individual account plan, requires that (a) immediately 
following its acquisition by a plan, no more than 25 percent of the 
aggregate amount of stock of the same class issued and outstanding 
at the time of acquisition is held by the plan; and (b) at least 50 
percent of the stock be held by persons who are independent of the 
issuer.
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    6. Prudential Insurance proposes to reorganize under section 
17:17C-2 of New Jersey Insurance Law. In this

[[Page 49411]]

regard, Prudential Insurance's Board of Directors adopted the Plan of 
Reorganization on December 15, 2000 under which Prudential Insurance 
will, subject to the approval of its policyholders and the Commissioner 
(who was provided with a copy of the Plan of Reorganization on March 
14, 2001), and after satisfying certain other conditions set forth in 
the Plan of Reorganization, be reorganized as a stock life insurance 
company. Simultaneously with this corporate reorganization, the shares 
of Prudential Insurance will be issued to the Holding Company, in 
exchange for Holding Company Common Stock, thereby making Prudential 
Insurance an indirect, wholly owned subsidiary of the Holding Company. 
The Common Stock will be distributed to Eligible Policyholders of 
Prudential Insurance and such stock will be offered to the public 
through a concurrent Initial Public Offering (IPO). The Common Stock 
will also be listed on the New York Stock Exchange (the NYSE).
    New Jersey Insurance Law establishes an approval process for the 
conversion of a mutual life insurance company to a stock life insurance 
company. Such conversion must be initiated by the board of directors of 
the mutual company, which must adopt a plan of reorganization by a vote 
of at least three-fourths of the members of the insurer's entire board 
of directors upon an express finding that the plan is fair and 
equitable to policyholders. Once adopted by the company's board of 
directors, the plan of reorganization must be submitted to the 
Commissioner for review and approval. In reviewing the plan of 
reorganization, the Commissioner is required to appoint one or more 
qualified and independent actuaries to provide a certification 
regarding the reasonableness of the allocation methodology. The 
Commissioner is also permitted to engage the services of other advisors 
to advise him or her on matters relating to the reorganization. In the 
Prudential Insurance demutualization, the Commissioner has retained the 
law firm of Saul Ewing LLP to provide legal services; Fox-Pitt, Kelton, 
Inc. and Townsend & Shupp Co. to provide investment banking services; 
and Ernst & Young and Arthur Andersen to provide actuarial and 
accounting services.
    7. Under New Jersey Insurance Law, the Commissioner is required to 
hold a public hearing on a plan of reorganization no later than 90 days 
after the Commissioner determines the application for reorganization is 
complete. Notice of the public hearing must be provided to each 
policyholder of the insurance company within 45 days of the hearing. 
The notice must be in the form, and provided in the manner, that was 
submitted in the company's application materials and approved by the 
Commissioner. The purpose of a public hearing is to allow interested 
persons to comment on the fairness of the terms of the plan of 
reorganization, and to consider whether the reorganization is in the 
best interest of the insurer and its policyholders.
    The policyholders of the mutual life insurance company generally 
must also approve the plan of reorganization. New Jersey Insurance Law 
provides that the policyholders who may qualify to vote on the plan are 
the ``qualified voters'' of the mutual life insurance company.\21\ Each 
qualified voter is entitled to one vote and the plan must be approved 
by a vote of not less than two-thirds of all the votes cast by the 
mutual insurer's qualified voters. The qualified voters of the mutual 
life insurance company must be provided with notice of their 
opportunity to vote on the plan of reorganization, which notice must be 
approved by the Commissioner and accompanied by a copy of the plan of 
reorganization or a summary thereof. Such notice may also be combined 
with a notice of the hearing.
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    \21\ As further described herein, New Jersey Insurance Law 
provides that certain policyholders who otherwise may not be 
eligible to receive compensation in connection with Prudential 
Insurance's reorganization may be ``deemed'' eligible to receive 
such compensation. However, the New Jersey demutualization statute 
does not grant Prudential Insurance or the Commissioner similar 
authority to ``deem'' certain policyholders qualified to vote on the 
Plan of Reorganization. As such, ``deemed'' eligible policyholders 
will be eligible to receive compensation but will not be qualified 
to vote on the Plan of Reorganization. The ``deemed'' eligible 
policyholders represent a small percentage of all eligible 
policyholders.
---------------------------------------------------------------------------

    8. Once a plan of reorganization has been adopted by the company's 
board of directors, and after any public hearing and policyholder vote 
on the plan of reorganization, the Commissioner is required to approve 
the plan if he or she finds that: (a) the plan is fair and equitable to 
policyholders; (b) the plan promotes the best interest of the mutual 
insurer and its policyholders; (c) the plan provides for the 
enhancement of the operations of the reorganized insurer; (d) the plan 
is not contrary to law; (e) the plan is not detrimental to the public; 
and (f) after giving effect to the reorganization, the reorganized 
insurer will have an amount of capital and surplus the Commissioner 
deems to be reasonably necessary for its future solvency. A decision by 
the Commissioner to approve a reorganization plan is subject to 
judicial review in the New Jersey courts.
The Reorganization
    9. Prudential Insurance anticipates that the Plan of Reorganization 
will be approved or disapproved by the Commissioner and Prudential 
Insurance's policyholders by the end of 2001. However, the main 
features of the Plan of Reorganization require the formation of the 
Holding Company, i.e., Prudential Financial, which has been organized 
initially as a subsidiary of Prudential Insurance with Prudential 
Insurance owning all of the formation shares of the Holding Company. On 
the effective date of the reorganization, Prudential Insurance will be 
become a stock life insurance company, and issue common stock to the 
Holding Company in exchange for the Common Stock, which will be 
distributed by Prudential Insurance in accordance with the Plan of 
Reorganization. At that time, Prudential Insurance will surrender to 
the Holding Company, which will cancel, all of the formation shares of 
the Holding Company initially held by Prudential Insurance. A second 
holding company, Prudential Holdings, LLC (Prudential Holdings), has 
been formed as a subsidiary of the Holding Company. As part of the 
reorganization, the Holding Company will contribute shares of 
Prudential Insurance to Prudential Holdings and Prudential Insurance 
will become an indirect wholly owned subsidiary of the Holding Company.
    As a result of the reorganization, Prudential Insurance will, by 
operation of New Jersey Insurance Law, become a stock life insurance 
company. Prudential Insurance's charter and by-laws will be amended and 
restated, and all membership interests in Prudential Insurance will be 
extinguished in accordance with New Jersey Insurance Law. Following the 
reorganization, none of Prudential Insurance's insurance policies will 
be terminated. All policies then in force will remain in force, and all 
policyholders will be entitled to receive all of the benefits under 
their policies and contracts to which they would have been entitled if 
the Plan of Reorganization had not been adopted. In this regard, no 
actual exchange of contracts will take place as a result of the 
reorganization. The contractual terms and benefits of Prudential 
Insurance's life insurance, endowment, annuity, pension plan, and other 
insurance contracts, including the face values, insurance in force, 
borrowing terms, amount or pattern of death benefit, premium pattern, 
dividend eligibility, interest rate or rates guaranteed on issuance of 
the contract,

[[Page 49412]]

and guaranteed mortality and expense charges, will be unchanged by the 
reorganization.
Allocation and Distribution of Consideration to Eligible Policyholders
    10. Prudential Insurance's Plan of Reorganization provides for 
``Eligible Policyholders'' to receive compensation in exchange for the 
surrender of membership interests in the mutual life insurance company. 
Under the Plan of Reorganization, Eligible Policyholders are those 
policyholders whose Prudential Insurance policies were in force on the 
date of adoption of the Plan of Reorganization by Prudential 
Insurance's Board of Directors, i.e., December 15, 2000.\22\ Prudential 
Insurance's Plan of Reorganization generally provides that the Eligible 
Policyholder is the person whose name is on the insurer's record as 
owner of the policy.\23\
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    \22\ Certain policyholders are ``deemed'' eligible under the 
Plan of Reorganization as provided under New Jersey Insurance Law.
    \23\ Under the Plan of Reorganization and New Jersey Insurance 
Law, the general rule is that the group contract holder or group 
insurance policy owner of an Eligible Policy, and not the 
individuals or entities covered under the eligible contract or 
policy, is entitled to vote on the Plan of Reorganization and to 
receive any demutualization compensation payable with respect to 
that contract or policy. However, there are special rules under the 
Plan of Reorganization concerning Prudential Insurance's ability to 
vote on the Plan of Reorganization and to receive demutualization 
compensation on contracts or policies that it, or an affiliate, may 
hold. In this regard, where Prudential Insurance or an affiliate is 
the trustee of a MET, it is precluded under New Jersey Insurance Law 
from actually voting on the Plan of Reorganization. Similarly, New 
Jersey Insurance Law precludes voting on the Plan of Reorganization 
by employers and individuals participating in the MET. However, the 
statute requires that the demutualization consideration received on 
behalf of the MET by Prudential Insurance be passed through to such 
participating employers and individuals.
---------------------------------------------------------------------------

    Prudential Insurance anticipates that it will distribute 
compensation to Eligible Policyholders within 45 days after the 
effective date of the reorganization (or within 45 days after the 
expiration of the top-up period for Eligible Policyholders receiving 
cash or policy credits). (The effective date is the date of the closing 
of the planned IPO, which will occur after the Plan of Reorganization 
is approved by the Commissioner and Prudential Insurance's 
policyholders, and the other conditions set forth in the Plan of 
Reorganization are satisfied.)
    11. Under the Plan of Reorganization, the total value of Prudential 
Insurance (currently estimated to be between $18 and $20 billion) will 
be allocated among Eligible Policyholders as follows:
     First, each Eligible Policyholder that holds one or more 
policies in the same legal capacity will receive one basic fixed 
component of compensation that is equal to 8 shares of Common Stock (or 
the equivalent of 10 shares of Common Stock to Eligible Policyholders 
receiving Cash or Policy Credits). Each Eligible Policyholder will be 
allocated this basic fixed component, and only one basic fixed 
component, regardless of the number of eligible policies the Eligible 
Policyholder owns (in the same legal capacity) or their value.
     Second, each Eligible Policyholder may receive a basic 
variable component of compensation that will be allocated to Eligible 
Policyholders to reflect their policy's or policies' contribution to 
Prudential Insurance's surplus, in the past, compared to all other 
eligible policies, and how much their policy or policies are expected 
to contribute to Prudential Insurance's surplus in the future, compared 
to all other eligible policies. (If the policy or policies have made, 
and are expected to make, no contribution to Prudential Insurance's 
surplus, then the basic variable component will be zero).
    As noted above, the allocation methodology developed by Prudential 
Insurance's actuaries must be fair and equitable, a finding that the 
Commissioner is also required to make before approving the Plan of 
Reorganization. To assist in making this finding, the Commissioner has 
retained Ernst & Young to evaluate and provide an opinion on the 
fairness of the allocation methodology developed by Prudential 
Insurance. In addition, Prudential Insurance has retained the actuarial 
firm of Milliman & Robertson, Inc. to assist it in developing an 
equitable allocation methodology.
    12. Under the Plan of Reorganization, Eligible Policyholders, 
except for certain Eligible Policyholders, who may elect, or are 
required to receive Cash or Policy Credits, will receive Common Stock 
as compensation for their membership interests in the mutual life 
insurance company, which interests will be extinguished.\24\ Any 
election by a plan policyholder to choose stock pursuant to the terms 
of the Plan of Reorganization will be made by one or more independent 
fiduciaries of the plan policyholder, and neither Prudential Insurance 
nor any of its affiliates will exercise any discretion with respect to 
a plan policyholder's election or provide ``investment advice,'' as 
that term is defined in 29 CFR 2510.3-21(c), with respect to the 
election.
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    \24\ ``The proceeds of the demutualization will belong to the 
plan if they would be deemed to be owned by the plan under ordinary 
notions of property rights. See ERISA Advisory Opinion 92-02A, Jan. 
17, 1992 (assets of plan generally are to be identified on the basis 
of ordinary notions of property rights under non-ERISA law). It is 
the view of the Department that, in the case of an employee welfare 
benefit plan with respect to which participants pay a portion of the 
premiums, the appropriate plan fiduciary must treat as plan assets 
the portion of the demutualization proceeds attributable to 
participant contributions. In determining what portion of the 
proceeds are attributable to participant contributions, the plan 
fiduciary should give appropriate consideration to those facts and 
circumstances that the fiduciary knows or should know are relevant 
to the determination, including the documents and instruments 
governing the plan and the proportion of total participant 
contributions to the total premiums paid over an appropriate time 
period. In the case of an employee pension benefit plan, or where 
any type of plan or trust is the policyholder, or where the policy 
is paid for out of trust assets, it is the view of the Department 
that all of the proceeds received by the policyholder in connection 
with a demutualization would constitute plan assets.'' See ERISA 
Advisory Opinion 2001-02A, Feb. 15, 2001.
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    In addition to shares issued to Eligible Policyholders, the Holding 
Company will offer to the public its Common Stock in an IPO. At such 
time that the Holding Company sells shares in the IPO, the Common Stock 
will be listed on the NYSE. Under the Plan of Reorganization, Eligible 
Policyholders will not pay any brokerage commissions or similar fees in 
connection with their receipt of Common Stock.
    13. Under the Plan of Reorganization, certain policyholders who are 
otherwise Eligible Policyholders, will receive Cash or Policy credits 
in lieu of Common Stock. Eligible Policyholders who may or must receive 
Cash or Policy Credits typically are policyholders who have been 
allocated 50 or fewer \25\ shares of Common Stock, whose mailing 
address is outside the United States or unknown, whose policies are 
subject to a judgment lien, creditor lien (other than a policy loan 
made by Prudential Insurance) or bankruptcy proceedings; or who hold 
TDA or IRA contracts.
---------------------------------------------------------------------------

    \25\ Prudential Insurance represents that its Board of Directors 
may adjust this number downward on or before the effective date.
---------------------------------------------------------------------------

    Eligible Policyholders who hold TDA or IRA contracts will receive 
Policy Credits in exchange for their mutual membership interests 
because such policyholders usually are not able to hold Common Stock 
under the applicable tax laws. In addition, certain individual life 
insurance or annuity contracts held in connection with qualified plans 
(i.e., section 401(a) or 403(a) of the Code) will receive Policy 
Credits.
    Eligible Policyholders who are allocated 50 or fewer shares of 
Common Stock (the specific number of which will be determined by 
Prudential Insurance's Board of Directors on or

[[Page 49413]]

prior to the effective date) will receive Cash unless the policyholder 
elects to receive Common Stock. Such election must be indicated on a 
form provided by Prudential Insurance to the policyholder and returned 
to Prudential Insurance prior to a date established by the Board of 
Directors and approved by the Commissioner. The election can also be 
made by telephonically or over the Internet.
    14. Eligible Policyholders who receive all of their compensation 
with respect to one or more policies held in the same legal capacity in 
the form of Cash and/or Policy Credits will receive one additional 
fixed component that is equal to two shares of Common Stock and an 
additional variable component if the sum of their basic fixed and basic 
variable components is equal to 26 or more shares of Common Stock. The 
amount of the additional variable component is based on the sum of the 
policyholder's basic fixed and basic variable component. As a result, 
Eligible Policyholders receiving the additional fixed and additional 
variable component will be provided approximately a 10 percent increase 
in the number of shares of Common Stock allocated to them. The purpose 
of the additional components is to distribute to Eligible Policyholders 
that do not receive Common Stock the value that Prudential Insurance 
anticipates will result from additional savings inherent in having a 
smaller shareholder base.
    15. The Plan of Reorganization also includes a ``top-up'' 
provision. The top-up is designed to provide Eligible Policyholders who 
will receive any portion of their compensation in the form of Cash and/
or Policy Credits with a possible upward adjustment to their 
compensation depending on the performance of Common Stock during the 
top-up period. If the average of the closing prices of the Common Stock 
during the first 20 trading days that the stock is traded on the NYSE 
exceeds 110 percent of the IPO price, the excess, up to 120 percent of 
the IPO share price, will be added to the IPO price and reflected in 
the Cash and/or Policy Credits provided to Eligible Policyholders. The 
top-up feature provides Eligible Policyholders who are receiving any 
portion of their demutualization compensation in Cash or Policy Credits 
with their full share of the aggregate value that is being distributed 
to all Eligible Policyholders.
    16. In addition to the owners of mutual insurance policies it has 
issued, Prudential Insurance has determined that persons who owned in 
force policies on December 15, 2000 that have been issued by certain of 
its stock life insurance company subsidiaries (i.e., the Designated 
Subsidiaries), namely, Pruco Life Insurance Company, Pruco Life 
Insurance Company of New Jersey and Prudential Select Life Insurance 
Company of America, will be ``deemed'' Eligible Policyholders under the 
Plan of Reorganization for purposes of receiving compensation in the 
reorganization.\26\ Prudential Insurance has concluded that ``special 
circumstances'' exist with respect to these policyholders and has 
determined that it would be fair and equitable to its policyholders and 
in the best interest of Prudential Insurance and its policyholders to 
include these policyholders as Eligible Policyholders.
---------------------------------------------------------------------------

    \26\ New Jersey Insurance Law provides, in pertinent part, that 
an ``eligible policyholder'' is a ``policyholder who owns, or is 
deemed by the plan of reorganization to own, a policy that is, or 
that is deemed by the plan of reorganization to be, in force on the 
adoption date, or a policyholder who is deemed eligible by the plan 
of reorganization, including as a result of reinstatement in 
accordance with the terms of the policy or the plan of 
reorganization, or otherwise.'' (emphasis added)
---------------------------------------------------------------------------

    As required under New Jersey Insurance Law, the Commissioner will 
have to find that inclusion of the Designated Subsidiary policyholders 
is fair and equitable to all Prudential Insurance policyholders as a 
whole. Moreover, all of the Eligible Policyholders of the Designated 
Subsidiaries which are Plans will be treated in the same manner as any 
other Eligible Policyholder that is not a Plan under the Plan of 
Reorganization.
    Although the policyholders of the Designated Subsidiaries will 
receive compensation in connection with Prudential Insurance's 
reorganization, none will be permitted to vote on the Plan of 
Reorganization.\27\ Nevertheless, Prudential Insurance believes the 
interests of the policyholders of the Designated Subsidiaries will be 
protected because the Commissioner, with the assistance of outside 
consultants, is required to find that the Plan of Reorganization is 
fair and equitable. Any Plan policyholder of a Designated Subsidiary 
will be treated the same under the Plan of Reorganization as any other 
Designated Subsidiary policyholder. Moreover, as a condition of the 
reorganization, a qualified and independent actuary appointed by 
Prudential Insurance must certify that the methodology and underlying 
assumptions used to allocate compensation among Eligible Policyholders 
are fair and equitable to all policyholders.
---------------------------------------------------------------------------

    \27\ Although New Jersey Insurance Law permits these 
policyholders to be ``deemed'' eligible for compensation pursuant to 
the Plan of Reorganization, there is no similar flexibility to 
``deem'' such policyholders to be qualified to vote on the Plan of 
Reorganization. In this regard, the New Jersey demutualization 
statute provides that only ``qualified voters'' may vote on a plan 
of reorganization, and makes no provision for ``deemed'' qualified 
voters. A ``qualified voter'' is defined as ``every policyholder who 
is 18 years of age or more and whose policy has been in force for at 
least 1 year.'' Because the owners of policies issued by Designated 
Subsidiaries do not qualify as ``policyholders'' of Prudential 
Insurance, they do not meet the statutory definition of ``qualified 
voter'' and are not, therefore, entitled to vote on the Plan of 
Reorganization, according to Prudential Insurance.
---------------------------------------------------------------------------

    17. The Plan of Reorganization also provides for the establishment 
of a commission-free sales and purchase program under which Eligible 
Policyholders who receive 99 or fewer shares of Common Stock will be 
permitted to sell, on a commission-free basis, all of the stock they 
have received pursuant to the Plan of Reorganization, or purchase the 
additional amount of shares necessary to increase their holdings to 100 
shares. The Program will commence prior to the second anniversary of 
the effective date of the Plan of Reorganization. Neither Prudential 
Insurance nor its affiliates will provide ``investment advice,'' as 
described in 29 CFR 2510.3-21(c), or exercise investment discretion 
with respect to those policyholders eligible to participate in the 
Program.

Role of the Independent Fiduciary

    18. Pursuant to an agreement dated January 22, 2001 (the 
Agreement), Prudential Insurance appointed U.S. Trust to conduct a due 
diligence review of the proposed demutualization of Prudential 
Insurance and to vote on whether to approve or disapprove of the Plan 
of Reorganization on behalf of all of the Prudential Insurance Plans. 
Under the Agreement, U.S. Trust has acknowledged and accepted the 
duties, responsibilities and liabilities of an independent fiduciary 
and has agreed to act on behalf of such Prudential Insurance Plans. In 
return for services rendered, Prudential Insurance will compensate U.S. 
Trust. The Agreement further provides that if Prudential Insurance 
requests U.S. Trust to manage the compensation received by the 
Prudential Insurance Plans, such responsibilities will be the subject 
of a separate engagement letter (the Supplemental Agreement).
    Under the Supplemental Agreement dated July 30, 2001, Prudential 
Insurance has engaged U.S. Trust as an independent fiduciary 
specifically for the Prudential Welfare Plan, to take all actions that 
are necessary and appropriate to safeguard the interests of this Plan, 
including the management and disposition of Common Stock to be received 
by the Plan as demutualization consideration, to the extent such

[[Page 49414]]

securities exceed the 10 percent limitation of section 407(a)(2) of the 
Act.\28\ In addition to its previous commitments set forth under the 
Agreement, U.S. Trust agrees: (a) To serve as an independent fiduciary 
for the Prudential Welfare Plan (including, but not limited to, being 
custodian of the compensation received on behalf of such Plan and/or 
serving as investment manager of any one of the VEBAs holding Common 
Stock on behalf of the Prudential Welfare Plan); and (b) to be 
represented as such under any prohibited transaction filing made by 
Prudential Insurance with respect to the Prudential Welfare Plan. As 
independent fiduciary for the Prudential Welfare Plan, U.S. Trust will 
also be required dispose of any shares of Common Stock that are in 
excess of the 10 percent limitation set forth under section 407(a)(2) 
of the Act as soon as reasonably practicable, but in no event later 
than 6 months from the effective date of the Plan of the 
Reorganization. Further, U.S. Trust will be required to prepare reports 
and documentation for the Department that may be required for purposes 
of the examination process, including, but not limited to, reports 
evaluating the Plan of Reorganization as it relates to the Prudential 
Welfare Plan's holding and disposition of Common Stock in a timely 
fashion. Finally, U.S. Trust will be required to vote on shares of 
Common Stock that are held by the Prudential Welfare Plan which exceed 
the limitation of section 407(a)(2) of the Act.
---------------------------------------------------------------------------

    \28\ It is anticipated that the Prudential Welfare Plan will 
receive between 6.4 million to 7.2 million shares of Common Stock, 
having an initial value of ranging from $22 and $38 per share. It is 
expected that such consideration will be passed on to eligible 
participants in the Prudential Welfare Plan, except for a small 
portion that will be used by the Plan to defray expenses 
attributable to distributing compensation to participants. 
Prudential Insurance states that the price at which the shares of 
Common Stock will actually trade, or for that matter, whether the 
Prudential Welfare Plan has exceeded the 10 percent limitation of 
section 407(a) of the Act will be known at the time of the IPO.
---------------------------------------------------------------------------

    U.S. Trust represents that it is qualified to act as an independent 
fiduciary for the Prudential Welfare Plan in connection with the Plan 
of Reorganization. Its parent, U.S. Trust Corporation, was founded in 
1853 and is subject to regulation as a trust company by the State of 
New York. U.S. Trust is the principal subsidiary of U.S. Trust 
Corporation, a member of the Federal Reserve System and the Federal 
Deposit Insurance Corporation, and an entity having approximately $5 
billion in assets as December 31, 1999. In addition, U.S. Trust 
Corporation is a wholly-owned subsidiary of the Charles Schwab 
Corporation and has over $73 billion in assets under management, a 
significant percentage of which consists of ERISA retirement plan 
assets. U.S. Trust has served as an independent fiduciary for numerous 
employee benefit plans that acquire or hold employer securities and has 
managed, at various times, over $18 billion in employer securities held 
by various such plans. In managing such investments, U.S. Trust has 
exercised discretionary authority over many transactions involving the 
acquisition, retention and disposition of employer securities.
    U.S. Trust represents that it is independent of Prudential 
Insurance and its affiliates and has no business ownership or control 
relationship, nor is it otherwise affiliated with Prudential Insurance. 
U.S. Trust further represents that it derives less than one percent of 
its annual income from Prudential Insurance or its affiliates.
    U.S. Trust has conducted a preliminary review of the Plan and has 
determined that nothing in the Plan of Reorganization should preclude 
the Department from proposing the requested exemption. As noted above, 
U.S. Trust will provide the Department with a final report evaluating 
the Plan of Reorganization prior to its effective date.
    19. In summary, it is represented that the transactions will 
satisfy the statutory criteria for an exemption under section 408(a) of 
the Act because:
    (a) The Plan of Reorganization will be implemented pursuant to 
stringent procedural and substantive safeguards imposed under New 
Jersey Insurance Law and supervised by the Commissioner.
    (b) The Commissioner will only approve the Plan of Reorganization 
following a determination that, among other things, such Plan is fair 
and equitable to all Eligible Policyholders.
    (c) One or more independent fiduciaries of each Plan, including the 
Prudential Insurance Plans, will have an opportunity to determine 
whether to vote to approve and comment on the terms of the Plan of 
Reorganization, and will also be solely responsible for any decisions 
that may be permitted under the Plan of Reorganization regarding the 
form of consideration to be received in return for their respective 
membership interests.
    (d) Because of all of the protections afforded to Plans under New 
Jersey law, no ongoing involvement by the Department will be required 
in order to safeguard the interests of Plan policyholders.
    (e) The Plan of Reorganization will enable Plans to convert their 
illiquid membership interests in Prudential Insurance into shares of 
Common Stock, Cash, or Policy Credits.
    (f) The insurance and annuity contracts affected by the Plan of 
Reorganization will remain in force and there will be no changing of 
premiums or compromising any of the benefits, values, guarantees, or 
other policy obligations of Prudential Insurance to its policyholders 
and contractholders.

Notice to Interested Persons

    Pursuant to the requirements of New Jersey Insurance Law, during 
May 2001, Prudential Insurance provided policyholders, including Plan 
policyholders, with an advance disclosure document relating to its 
conversion to a stock company. The document, known as ``The 
Policyholder Information Booklet'' (or PIB) included, among other 
things, (a) a notice of the date, time, and place for voting on the 
Plan of Reorganization; (b) a notice of the time, place, and purpose of 
a public hearing on the Plan of Reorganization, at which policyholders 
could express their views on the Plan of Reorganization; and (c) 
general information regarding Prudential Insurance's Plan of 
Reorganization. The PIB was provided in a form and manner approved by 
the Commissioner and was sent to over 11 million Prudential Insurance 
policyholders, of which approximately 800,000 policyholders were Plans. 
Prudential Insurance has deemed these Plan policyholders to be 
``interested persons'' for purposes of this exemption.
    In connection with the exemption request, Prudential Insurance 
wishes to provide notice of the proposed exemption in a manner which 
takes into account (a) the costs and administrative burden of providing 
copies of the proposed exemption to 800,000 Plan policyholders; (b) the 
notices required, and policyholder protections accorded, under state 
law, and (c) the limited scope of exemptive relief that it has 
requested. In this regard, Prudential Insurance has incorporated the 
Department's required supplemental statement describing the exemption 
proceeding (see 29 CFR 2570.43) in a slightly modified form in the PIB 
under the special heading ``Notice of Application by The Prudential 
Insurance Company of America for Prohibited Transaction Exemption'' 
(hereinafter, the ``PIB Notice''). The PIB Notice is intended to inform 
Plan policyholders of the anticipated publication the proposed 
exemption in the Federal Register and their right to

[[Page 49415]]

comment on the proposal. The PIB Notice states that a Plan policyholder 
may call a toll-free number maintained by Prudential Insurance (1-877-
264-1163) or write to Prudential Insurance if such policyholder wishes 
to be provided with a copy of the proposed exemption when it is 
published in the Federal Register. In addition, the PIB Notice 
indicates that the proposed exemption will be posted on Prudential 
Insurance's Web site (www.prudential.com) after publication.
    Any Plan policyholder requesting that Prudential Insurance provide 
a copy of the proposed exemption will be sent such copy within 30 days 
of its publication in the Federal Register. The copy of the proposed 
exemption will be accompanied by another version of the supplemental 
statement, as required under the Department's regulations. In addition, 
the proposed exemption, together with a copy of the supplemental 
statement, will be posted on Prudential Insurance's website within 15 
days of publication.
    Prudential Insurance will give Plan policyholders 90 days to file 
comments with the Department. The 90 day comment period will commence 
on the date the proposed exemption is published in the Federal 
Register. During the comment period, Prudential Insurance will send 
copies of the proposed exemption to interested persons who have 
requested receiving such copies, no later than 30 days after the 
publication date of the proposal in the Federal Register. Interested 
persons will then have no less than 60 days from the proposal's 
dissemination date in which to file comments with the Department.

FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady of the Department, 
telephone (202) 219-8881. (This is not a toll-free number.)

Ford Motor Company (Ford), Located in Dearborn, Michigan

[Application No. L-10937]

Proposed Exemption

    If the exemption is granted, the restrictions of sections 406(a) 
and 406(b) of the Employee Retirement Income Security Act of 1974 
(ERISA) shall not apply, effective August 4, 2000, to: (1) The receipt 
by the Ford-UAW Benefits Trust (the VEBA) of approximately $2.9 billion 
of certain securities (the Partnership Securities) pursuant to the 
redemption (the Redemption) by the VEBA of its interest in the Ford 
Enhanced Investment Partnership and the Ford Super-Enhanced Investment 
Partnership (collectively, the Partnerships); and (2) the transfer of 
the Partnership Securities by the VEBA to Ford in exchange for the 
transfer of approximately $2.9 billion of certain securities (the Ford-
Owned Securities) to the VEBA (the Exchange), provided that the 
following conditions were met:
    (a) The terms of the Redemption and the terms of the Exchange were 
at least as favorable to the VEBA as the terms that would have been 
available in arm's-length transactions between unrelated parties;
    (b) The total value of the Partnership Securities received by the 
VEBA pursuant to the Redemption equaled the value of the VEBA's pro 
rata interest in the Partnerships on the date of the Redemption;
    (c) The net asset value of the VEBA's interest in the Partnerships 
and each Partnership Security received by the VEBA pursuant to the 
Redemption were valued in the same manner using August 4, 2000 close-
of-market bid prices as determined by an independent, recognized 
pricing service;
    (d) In the case of the Exchange, the VEBA received Ford-Owned 
Securities equal in value to the Partnership Securities transferred to 
Ford;
    (e) Each Partnership Security transferred to Ford by the VEBA 
pursuant to the Exchange was valued according to its August 4, 2000 
close-of-market bid price as determined by an independent, recognized 
pricing service;
    (f) Each Ford-Owned Security transferred to the VEBA by Ford 
pursuant to the Exchange was valued according to its August 4, 2000 
close-of-market bid price as determined by an independent, recognized 
pricing service, or to the extent that a price could not be obtained in 
this manner, such security was priced according to the average of three 
(or a minimum of two) August 4, 2000 close-of-market bid prices 
obtained from independent market-makers;
    (g) The Ford-Owned Securities transferred to the VEBA pursuant to 
the Exchange were not issued by Ford and were comprised solely of cash 
and marketable short-term debt securities under the management of 
unrelated, independent investment managers;
    (h) The Partnership Securities transferred to Ford pursuant to the 
Exchange were comprised solely of cash and marketable short-term debt 
securities;
    (i) Upon the completion of the Exchange, no single issue of Ford-
Owned Securities accounted for more than 25% of the assets of the VEBA;
    (j) State Street Bank and Trust Company (SSBT), acting as an 
independent fiduciary on behalf the VEBA, monitored the Redemption and 
the Exchange; and
    (k) SSBT, as independent fiduciary, approved the Redemption and the 
Exchange upon determining that the Redemption and the Exchange were in 
the best interests of the VEBA and its participants.
    Effective Date: The exemption is effective August 4, 2000.

Summary of Facts and Representations

    1. Ford is the named fiduciary and the plan administrator of the 
Ford-UAW Health Care Plan (the Health Care Plan). The Health Care Plan 
had approximately 265,562 participants and beneficiaries as of January 
1, 2000, and is funded through the VEBA, a voluntary employees' 
beneficiary association described in section 501(c)(9) the Internal 
Revenue Code of 1986 (the Code). The VEBA was established by Ford in 
June of 1997 and, as of August 1, 2000, had assets totaling 
approximately $3.1 billion.\29\
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    \29\ The applicant states that, prior to the Redemption and 
Exchange, the assets of the VEBA included approximately $800 million 
in cash. This was the result, the applicant represents, of an 
investment strategy implemented by the Ford Managers (see Footnote 
2) in the second half of 2000 aimed at shortening the duration of 
the VEBA's investments. As part of this strategy, the VEBA invested 
in the Partnerships, whose assets included large holdings of cash 
invested on a daily basis in euro time deposits, commercial paper, 
agency discount notes, or repurchase agreements all of which earned 
interest at approximately the federal funds rate.
---------------------------------------------------------------------------

    2. The applicant states that Ford customarily administers cash 
investments on behalf of the employee benefit plans it maintains. Such 
administration, the applicant represents, is typically accomplished in 
one of two ways: (1) through the use of Ford investment managers (the 
Ford Managers); \30\ or (2) through the use of certain external 
investment managers (the External Managers).\31\ Prior to August 4, 
2000, the applicant states, the assets of the VEBA were managed by the 
Ford Managers. At the direction of the Ford Managers, the assets of the 
VEBA were invested through the Partnerships. The Partnerships are two 
short-term investment vehicles maintained on

[[Page 49416]]

behalf of the Health Care Plan and certain other investors. At the time 
of the Redemption and Exchange, the other investors were Ford, Ford 
Global Technologies, Ford Fund and Ford Holdings. The applicant states 
that the Health Care Plan was the only employee benefit plan 
participating in the Partnerships at the time of the Redemption and 
Exchange. In addition, the applicant represents that, during the period 
in which the Health Care Plan invested in the Partnerships, the 
Partnerships were managed in accordance with ERISA.
---------------------------------------------------------------------------

    \30\ The applicant states that, pursuant to the terms of the 
VEBA trust, Ford may direct the trustee to establish investment 
accounts, and Ford may also direct the trustee to segregate all or a 
portion of the VEBA trust into an account with respect to which Ford 
has investment discretion.
    \31\ Specifically, the External Managers are State Street 
Research, Blackrock Financial Management, Inc., and Pacific 
Investment Management Company. The applicant represents that the 
External Managers are each independent of, and unrelated to, SSBT.
---------------------------------------------------------------------------

    3. The applicant states that, in addition to administering 
investments on behalf of the employee benefit plans it maintains, Ford 
also administers investments on its own behalf. In this regard, the 
applicant represents that Ford maintains an investment portfolio (the 
Ford Portfolio) to meet the needs of its automobile manufacturing 
business. Prior to August 4, 2000, the Ford Portfolio was managed by 
the External Managers. At the direction of the External Managers, the 
Ford Portfolio held the Ford-Owned Securities, which were marketable 
short-term debt securities (none of which were issued by Ford) and 
cash.\32\
---------------------------------------------------------------------------

    \32\ The applicant represents that although certain Ford-Owned 
Securities have nominal terms of up to 30 years, Ford views such 
securities as being ``short-term'' since the weighted average life 
of such securities is much shorter than their nominal term. In this 
regard, Ford represents that the weighted average duration of these 
types of securities is approximately one year or less.
---------------------------------------------------------------------------

    4. The applicant represents that by July of 2000, Ford decided to 
shift certain investment management responsibilities with respect to 
approximately $2.9 billion of the VEBA's assets. The shift involved 
reassigning investment management duties from the Ford Managers to the 
External Managers and was based, in part, on certain characteristics of 
the VEBA. In this regard, Ford believed that given certain liquidity 
characteristics historically exhibited by the VEBA, the investment 
strategy implemented by the External Managers would likely provide a 
greater rate of return to the VEBA than the rate of return achieved by 
the Ford Managers. Specifically, Ford estimated that, to the extent the 
External Managers managed $2.9 billion of the VEBA's assets, the VEBA 
would receive, over time, an increased return on such assets amounting 
to an incremental 30 to 50 basis points.\33\
---------------------------------------------------------------------------

    \33\ SSBT, the independent fiduciary, has represented that from 
April, 1998 until February 13, 2001, the Ford Portfolio outperformed 
the VEBA portfolio by eight basis points annually.
---------------------------------------------------------------------------

    5. The applicant represents that, contemporaneous with Ford's 
decision to have the External Managers manage the assets of the VEBA, 
Ford decided to reduce the amount of Ford Portfolio assets managed by 
the External Managers. This decision was based, the applicant states, 
on Ford's determination that the high-yield investment strategy 
implemented by the External Managers was inappropriate as applied to 
the Ford Portfolio. In this regard, Ford determined that given the 
unpredictable nature of its automobile business, the investment 
strategy implemented by the Ford Managers was better suited for the 
Ford Portfolio's liquidity needs than the investment strategy 
implemented by the External Managers. According to the applicant, Ford 
thus decided to shift investment management responsibilities with 
respect to the assets of the Ford Portfolio from the External Managers 
to the Ford Managers.\34\
---------------------------------------------------------------------------

    \34\ The applicant represents that the Redemption and Exchange 
were unrelated to Ford's decision to replace certain Firestone tires 
on Ford-manufactured vehicles.
---------------------------------------------------------------------------

    6. The applicant represents that, upon deciding to shift investment 
responsibilities with respect to the assets of the VEBA from the Ford 
Managers to the External Managers, Ford considered the costs associated 
with reallocating the assets of the VEBA. In this regard, the applicant 
represents that, typically, transferring the assets of a portfolio to a 
different investment manager involves: (1) The liquidation of certain 
assets in a portfolio's asset selection; and (2) the acquisition of new 
assets which are consistent with the investment strategies of the new 
investment manager. The External Managers and SSBT, therefore, 
investigated the cost of: (1) Liquidating the Partnership Securities on 
the open market; and (2) acquiring securities similar to the Ford-Owned 
Securities on the open market. Upon doing so, the applicant represents, 
the External Managers determined that reallocating the VEBA's assets to 
the External Managers through open-market transactions would result in 
approximately $3.5 million in aggregate transaction costs. Of this 
amount, the applicant represents, $1.75 million would have been 
incurred by the VEBA and $1.75 million would have been incurred by 
Ford. SSBT, meanwhile, determined that such transaction costs 
approximated $2.5 million. Of this amount, the applicant represents, 
$1.25 million would have been incurred by the VEBA and $1.25 million 
would have been incurred by Ford.
    The applicant represents that Ford, in consideration of these 
estimated transaction costs, determined that transferring investment 
management responsibilities with respect to the assets of the VEBA from 
the Ford Managers to the External Managers through the Exchange would 
benefit the VEBA. In this regard, the applicant represents that the 
Exchange would enable the VEBA to avoid the substantial transaction 
costs associated with such a transfer of responsibilities. The 
applicant represents further that although certain transfer costs and 
legal fees did arise with respect to the Redemption and Exchange, such 
costs and fees were paid for solely by Ford.
    7. Prior to effectuating the Exchange, Ford initiated the 
Redemption. In this regard, after August 4, 2000, the VEBA received the 
Partnership Securities and cash in return for the redemption by the 
VEBA of a proportional interest in the Partnerships. The applicant 
represents that the Partnership Securities received by the VEBA 
pursuant to the Redemption were comprised solely of readily marketable 
short-term debt securities.
    The applicant represents that SSBT, acting on behalf of the VEBA, 
monitored the pricing of the Partnership Securities for purposes of the 
Redemption. The applicant represents that SSBT received less than 1% of 
its annual revenue from any of the relevant parties to the transactions 
described herein. SSBT, in turn, represents that it manages over $220 
billion in fixed income assets, primarily for ERISA plans, and has 
acted as an independent fiduciary in a wide variety of transactions 
including those which are the subject of this proposal.
    For purposes of the Redemption, the Partnership Securities were 
priced as follows: (1) Wherever possible, a preselected recognized, 
independent pricing service \35\ provided the August 4, 2000 close-of-
market bid price for each Partnership Security; (2) to the extent the 
bid price could not be determined by the initial pricing service, a 
second preselected recognized, independent pricing service provided the 
August 4, 2000 close-of-market bid price for each such Partnership 
Security. SSBT represents that this pricing methodology was fair to the 
participants of the VEBA. In this regard, SSBT represents that the 
assets received by the VEBA pursuant to the Redemption were equal in 
value to the proportional interest the VEBA had

[[Page 49417]]

in the net asset value of the Partnerships.
---------------------------------------------------------------------------

    \35\ For purposes of both the Redemption and Exchange, the 
services that provided the relevant prices for the Partnership 
Securities and the Ford-Owned Securities were chosen by SSBT.
---------------------------------------------------------------------------

    8. The applicant represents that upon the completion of the 
Redemption, Ford initiated the Exchange. In so doing, on August 7, 
2000, Ford caused the VEBA to transfer to Ford the cash and Partnership 
Securities the VEBA received from the Redemption. The applicant 
represents that each such Partnership Security was transferred at a 
price equal to its respective Redemption price.
    In return for the receipt by Ford of the cash and Partnership 
Securities provided pursuant to the Exchange, Ford transferred 
approximately $2.9 billion in Ford-Owned Securities to the VEBA.\36\ 
The applicant represents that SSBT, acting on behalf of the VEBA, 
monitored the pricing of the Partnership Securities for purposes of the 
Exchange. The applicant represents that, with respect to the Ford-Owned 
Securities transferred to the VEBA by Ford, each of the Ford-Owned 
Securities was priced as follows: (1) Wherever possible, an initial 
preselected independent, recognized pricing service provided the August 
4, 2000 close-of-market bid price for each Ford-Owned Security; (2) to 
the extent that the bid price could not be determined by the initial 
pricing service, a second preselected recognized, independent pricing 
service provided the August 4, 2000 close-of-market bid price with 
respect to each such security; (3) to the extent a Ford-Owned Security 
could not be priced according to the initial or secondary pricing 
services, such security was priced according to the average of three 
August 4, 2000 close-of-market bid prices (if available, but in any 
event not less than two such prices were used) as provided by 
independent market-makers (to the extent such securities were under 
their respective management).\37\
---------------------------------------------------------------------------

    \36\ Immediately thereafter, the applicant states, the assets of 
the VEBA were managed by the External Managers and the assets of the 
Ford Portfolio were managed by the Ford Managers.
    \37\ The applicant represents that approximately three percent 
(3%) of the Ford-owned Securities were provided according to bid 
prices provided by independent market-makers.
---------------------------------------------------------------------------

    9. In a letter dated October 3, 2000, SSBT stated that, prior to 
the Redemption and Exchange, certain SSBT analysis regarding the 
Redemption and Exchange was presented to a SSBT fiduciary committee 
(the Committee). This analysis included the following findings: (1) The 
management style of the External Managers was likely to add value to 
the VEBA in terms of enhanced performance and that the Ford Portfolio 
holdings were suitable for the VEBA; (2) the bid side pricing 
convention used by all parties to the Exchange was fair to the 
participants in the VEBA; and (3) the off-market nature of the Exchange 
would result in significant cost savings to the VEBA relative to a 
similar open market exchange. Based on such analysis and findings, the 
Committee determined that: (1) The in-kind exchange was consistent with 
the VEBA's investment guidelines; (2) the VEBA's investment guidelines 
were reasonable; (3) the pricing mechanisms used with respect to the 
Redemption and Exchange were appropriate for establishing the fair 
market value of the Ford-Owned Securities and the Partnership 
Securities; and (4) the Exchange was in the best interests of the 
participants and beneficiaries of the VEBA.
    Additionally, in a letter dated February 13, 2001, SSBT stated 
that, at the time of the Redemption and Exchange, the investment 
guidelines for the VEBA portfolio (the VEBA Portfolio) and the Ford 
portfolio were essentially the same. In this letter, SSBT also stated 
that the VEBA Portfolio and the Ford Portfolio: (1) Were comprised of 
fixed income investments; (2) overlapped in many Treasury and higher 
rated issues; and (3) were both subject to a loss provision which 
mandated that no more than one percent (1%) of asset value may be 
reduced in any one quarter.\38\ SSBT stated that the securities 
acquired by the VEBA pursuant to the Exchange were high quality assets 
comprised primarily of government and government agency bonds, along 
with investment grade corporate bonds, and would serve to position the 
VEBA favorably in relation to its investment objectives.
---------------------------------------------------------------------------

    \38\ The applicant represents that the investment guideline for 
portfolio managers is based on a level of risk tolerance rather than 
managing the total return to a specific benchmark. This risk 
tolerance, the applicant states, is defined as one percent of the 
portfolio value per quarter. Capital losses (including net realized 
and unrealized mark-to-market losses) during any rolling three-month 
period, the applicant states further, should therefore not exceed 
one percent of the portfolio market value. The applicant represents 
that risk tolerance is used to ensure that portfolios are being 
managed consistent with their guidelines and objectives.
---------------------------------------------------------------------------

    10. SSBT represents that since the Exchange was to be executed at 
the bid side price for both the VEBA Portfolio and the Ford Portfolio, 
SSBT determined that the pricing mechanism implemented with respect to 
the Exchange was fair and represented the fair market value of the 
affected securities. In addition, SSBT represents that the terms of the 
Redemption and Exchange were no less favorable to the VEBA than the 
terms of similar arm's-length transactions between unrelated parties. 
SSBT represents that, prior to the Exchange, SSBT approved the 
Exchange, and determined that the Exchange was in the best interests of 
the participants of the VEBA.
    11. In summary, the applicant contends that the transaction met the 
statutory criteria set forth in section 408(a) of ERISA since:
    (a) The terms of the Redemption and the terms of the Exchange were 
at least as favorable to the VEBA as the terms that would have been 
available in arm's-length transactions between unrelated parties;
    (b) The total value of the Partnership Securities received by the 
VEBA pursuant to the Redemption equaled the value of the VEBA's pro 
rata interest in the net asset value of the Partnerships on the date of 
the Redemption;
    (c) The net asset value of the VEBA's interest in the Partnerships 
and each Partnership Security received by the VEBA pursuant to the 
Redemption were valued in the same manner using August 4, 2000 close-
of-market bid prices as determined by an independent, recognized 
pricing service;
    (d) In the case of the Exchange, the VEBA received Ford-Owned 
Securities equal in value to the Partnership Securities transferred to 
Ford;
    (e) Each Partnership Security transferred to Ford by the VEBA 
pursuant to the Exchange was valued according to its August 4, 2000 
close-of-market bid price as determined by an independent, recognized 
pricing service;
    (f) Each Ford-Owned Security transferred to the VEBA by Ford 
pursuant to the Exchange was valued according to its August 4, 2000 
close-of-market bid price as determined by an independent, recognized 
pricing service, or to the extent that a price could not be obtained in 
this manner, such security was priced according to the average of three 
(or a minimum of two) August 4, 2000 close-of-market bid prices 
obtained from independent market-makers;
    (g) The Ford-Owned Securities transferred to the VEBA pursuant to 
the Exchange were not issued by Ford and were comprised solely of cash 
and marketable short-term debt securities under the management of 
unrelated, independent investment managers;
    (h) The Partnership Securities transferred to Ford pursuant to the 
Exchange were comprised solely of cash and marketable short-term debt 
securities;

[[Page 49418]]

    (i) Upon the completion of the Exchange, no single issue of Ford-
Owned Securities accounted for more than 25% of the assets of the VEBA;
    (j) SSBT, acting as an independent fiduciary on behalf of the VEBA, 
monitored the Redemption and the Exchange; and
    (k) SSBT, as independent fiduciary, approved the Redemption and the 
Exchange upon determining that the Redemption and the Exchange were in 
the best interests of the VEBA and its participants.

Notice to Interested Persons

    The applicant represents that notice to interested persons will be 
made within twenty (20) business days following publication of this 
notice in the Federal Register. Comments and requests for a hearing 
must be received by the Department not later than sixty (60) days from 
the date of publication of this notice of proposed exemption in the 
Federal Register.

FOR FURTHER INFORMATION CONTACT: Mr. Christopher J. Motta 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 24th day of September, 2001.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits 
Administration, Department of Labor.
[FR Doc. 01-24151 Filed 9-26-01; 8:45 am]
BILLING CODE 4510-29-P