EBSA
Notices
[Application No. D-11035, et al.] Proposed Exemptions; Smart Chevrolet Co. Employees' Profit Sharing Retirement Plan et al.
[ 1/18/2002]
[ PDF]
[Federal Register: January 18, 2002 (Volume 67, Number 13)]
[Notices]
[Page 2689-2699]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr18ja02-93]
-----------------------------------------------------------------------
DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-11035, et al.]
Proposed Exemptions; Smart Chevrolet Co. Employees' Profit
Sharing Retirement Plan et al.
AGENCY: Pension and Welfare Benefits Administration, Labor.
ACTION: Notice of proposed exemptions.
-----------------------------------------------------------------------
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
requests for a hearing on the pending exemptions, unless otherwise
stated in the Notice of Proposed Exemption, within 45 days from the
date of publication of this Federal Register Notice. Comments and
requests for a hearing should state: (1) The name, address, and
telephone number of the person making the comment or request, and (2)
the nature of the person's interest in the exemption and the manner in
which the person would be adversely affected by the exemption. A
request for a hearing must also state the issues to be addressed and
include a general description of the evidence to be presented at the
hearing.
ADDRESSES: All written comments and requests for a hearing (at least
three copies) should be sent to the Pension and Welfare Benefits
Administration (PWBA), Office of Exemption Determinations, Room N-5649,
U.S. Department of Labor, 200 Constitution Avenue, NW., Washington, DC
20210. Attention: Application No.______, stated
[[Page 2690]]
in each Notice of Proposed Exemption. Interested persons are also
invited to submit comments and/or hearing requests to PWBA via e-mail
or FAX. Any such comments or requests should be sent either by e-mail
to: ``moffittb@pwba.dol.gov'', or by FAX to (202) 219-0204 by the end
of the scheduled comment period. The applications for exemption and the
comments received will be available for public inspection in the Public
Documents Room of the 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.
Smart Chevrolet Co. Employees' Profit Sharing Retirement Plan (the
Plan) Located in Pine Bluff, Arkansas
[Application No. D-11035]
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR part
2570, subpart B (55 FR 32836, 32847, August 10, 1990). If the exemption
is granted, the restrictions of sections 406(a), 406(b)(1) and
406(b)(2) of the Act and the sanctions resulting from the application
of section 4975 of the Code, by reason of section 4975(c)(1)(A) through
(E) of the Code, shall not apply to: (1) The proposed secured loans
(the Loans) by the Plan to Motors Finance Company (Motors), a party in
interest with respect to the Plan, and (2) the guaranty of such Loans
(the Guaranty) by the individual partners of Motors; provided that the
following conditions are met: (a) The terms and conditions of the Loans
are at least as favorable as those which the Plan could have received
in similar transactions with an unrelated third party; (b) an
independent fiduciary negotiates, reviews, approves, and monitors the
Loans and the Guaranty under the terms and conditions, as set forth in
paragraph #6 below; and (c) the balance of all Loans will at no time
exceed 15% of the assets of the Plan.\1\
---------------------------------------------------------------------------
\1\ For purposes of this proposed exemption, references to
specific provisions of Title I of the Act, unless otherwise
specified, refer also to the corresponding provisions of the Code.
---------------------------------------------------------------------------
Temporary Nature of Exemption
The proposed exemption is temporary and, if granted, will expire
September 16, 2007. However, the exemption will extend until the
maturity of any of the 90 day Loans made prior to September 16, 2007.
Summary of Facts and Representations
1. The Plan is a defined contribution profit sharing plan which, as
of December 31, 2000, had assets totaling $3,261,663. As of the same
date, the Plan had forty-one (41) participants. Richard L. Smart (Mr.
Smart), S. Ray West, Jr. (Mr. West), Lee Smart (Lee) and Roger Smart
(Roger) are participants in and are the Advisory Committee of the Plan.
Smart Chevrolet Company (the Employer) is the sponsor of the Plan. The
Employer sells new and used automobiles in the Pine Bluff, Arkansas
area. As of December 31, 2000, the Employer had a net worth of
$5,260,199. Mr. Smart is the president of and a shareholder in the
Employer.
2. Motors is engaged in financing the purchase of new and used
automobiles sold by the Employer to its customers. The net worth of
Motors, as of December 31, 2000, was $300,000. Certain of the principal
owners of the Employer are also partners in Motors. Mr. Smart is a five
percent (5%) managing partner in Motors. Meredith S. Maxwell, Felix
Smart, Lee, Roger and Mr. West each own a fifteen percent (15%)
partnership interest in Motors. The collective net worth of the
partners of Motors, as of December 31, 2000, was $11,700,000. The net
worth of the partners of Motors includes their respective interests in
Motors, in the Employer, and in certain notes payable to its partners
by Motors.
3. The current trustee of the Plan is Pine Bluff National Trust
Department (the Trustee), successor in interest to Boatmen's Trust
Company of Arkansas (Boatmen's), the trustee at the time Prohibited
Transaction Exemption (PTE) 97-52 (see rep. 4, below) was granted. Pine
Bluff National Bank (PBNB) is the parent corporation of the Trustee,
and participates in a line of credit to supply Motors with operating
funds of from $100,000 to $200,000 daily.
4. On July 8, 1985, the Department granted an exemption (PTE 85-
121, 50 FR 27863) which permitted for a period of seven (7) years
beginning July 8, 1985, certain Loans to Motors by two employee benefit
plans (the Plans) then sponsored by the Employer, and to the guaranty
of such Loans by the Employer and the individual partners of Motors.
Subsequent to the grant of PTE 85-121, the Smart Chevrolet Employees
Retirement Plan, one of the Plans which participated in the exemption
for PTE 85-121, was merged into the Plan.\2\ On June 17, 1992, the
Department granted an exemption (PTE 92-43, 57 FR 27073) which
permitted, for a period of five (5) years, certain Loans by the Plan to
Motors. On September 16, 1997, the Department granted an exemption (PTE
97-52, 62 FR 48673) extending PTE 92-43 for a period of five years,
thus permitting certain Loans by the Plan to Motors for an additional
five-year period.
---------------------------------------------------------------------------
\2\ All references in this Summary of Fact and Representations
to the Plan will, if applicable, include both Plans prior to the
merger unless the context clearly dictates otherwise.
---------------------------------------------------------------------------
It is represented that under the three prior exemptions Motors has
made all payments on the Loans in a timely manner and has never
defaulted on any of the Loans made by the Plans. As a result of such
Loans made pursuant to PTE 97-52, the Plan received an interest rate of
between 6.50% to 8.00%, depending on the Federal Discount Rate in
effect at the time such Loans were executed. Further, though the
principal balance of these Loans has varied from time to time, the
terms and conditions of each of the Loans complied with the
requirements set forth in the exemptions. The aggregate fair market
value of these Loans by the Plan to Motors, as of the most recent
annual report, was $486,224, which represented 14.91% of the fair
market value of the total assets of the Plan. The applicant,
[[Page 2691]]
herein, is requesting another exemption which will permit the
continuation of such Loans for a period of five (5) years beginning on
the date of the grant of this proposed exemption. The applicant has
represented that with respect to Loans made pursuant to the exemption
proposed herein, the Loans will not exceed 15% of aggregate Plan
assets.
5. Jess P. Walt (Mr. Walt), who served as the Plan's independent
fiduciary for purposes of the transactions exempted by PTE 97-52, has
agreed to continue to serve as the independent fiduciary. Mr. Walt, who
is a banker, represents that he is independent in that none of the
partners of Motors, or the stockholders, officers, or directors of the
Employer are officers or directors of the bank where Mr. Walt is
employed, the First National Bank of Altheimer, Arkansas (the Bank). In
addition, Mr. Walt represents that none of these persons are
stockholders of the Bank, except Felix Smart, who owns 35 of the 7,500
outstanding shares, which represent a .47% ownership percentage of the
Bank. It is represented that the partners of Motors, the Employer and
its officers, directors, and shareholders do not have any loans or
accounts outstanding at the Bank. Further, the Bank represents that it
does not participate in the line of credit extended to Motors by PBNB.
Mr. Walt represents that he is qualified to act on behalf of the
Plan in that he, as a Bank officer, has been involved for many years in
making automobile installment loans and evaluating credit and
collateral considerations related to such loans. Mr. Walt also
represents that he is knowledgeable in selecting appropriate rates of
return on short term investments and will be continuously aware of the
fluctuations in short term interest rates and the alternative low risk
short term investments that would be available to the Plan.
6. Mr. Walt will accept fiduciary responsibility with respect to
the proposed transactions. In this regard, Mr. Walt will be responsible
for determining whether it is advisable for the Plan to enter into the
Loans and the Guaranty which are the subject of this proposed exemption
and to continue to participate in such transactions, taking into
account the rate of return of such investment and the liquidity and
diversification of the Plan.
It is represented that Mr. Walt will approve Loans in an amount not
to exceed fifteen percent (15%) of the assets of the Plan, provided
that all of the terms and conditions described herein are met.\3\ All
Loans will have a maturity of ninety (90) days and will bear interest
at a rate which is two percentage points above the Federal Discount
Rate. Mr. Walt represents that such interest rate reflects the
prevailing fair market interest rate on comparable short-term
investments. Mr. Walt represents that he will receive copies of all the
promissory notes evidencing the Loans in order to insure that the
interest rate is two percent (2%) above the Federal Discount Rate. If
at any time a rate of two percentage points above the Federal Discount
Rate is not reflective of the prevailing fair market rate of return on
comparable ninety (90) day investments, Mr. Walt indicates that the
Loans should be liquidated at the next maturity date, or the yield on
such Loans be increased to the then prevailing fair market rate.
---------------------------------------------------------------------------
\3\ PTE's 85-121 and 92-43 permitted the Plan to invest up to
25% of its assets in these Loans. PTE 97-52 limited the Plan's
investment in these Loans to no more than 15% of the Plan's assets.
The applicant has represented that no more than 15% of the Plan's
assets will be invested in the Loans under the exemption proposed
herein.
---------------------------------------------------------------------------
The Loans will be secured by all of the installment sale contracts
(the Contracts) of Motors. As of December 31, 2000, Motors had 1,098
outstanding Contracts totaling $10,530,000, with an average balance of
$9,590 per Contract. Mr. Walt has represented that he will examine the
security agreement and financing statements with regard to the
Contracts and will ascertain that the Plan's security interest in all
of the Contracts is properly executed, and that such security interest
is perfected by properly filed financing statements in conformity with
the applicable Uniform Commercial Code (UCC) provisions, as adopted in
Arkansas. It is represented that Mr. Walt, through a combination of
monthly reports from PBNB and monthly Certification of Compliance
Statements signed by Mr. Smart, will insure that at all times the
aggregate face value of the Contracts equals at least 200% of the total
outstanding balance of the Loans. It is further represented that if at
the end of any month the report from the Trustee indicates that the
aggregate face value of the Contracts does not equal at least 200% of
the total outstanding balance of the Loans, Mr. Walt will direct Motors
to pay the Plan an amount sufficient to bring the Loans into compliance
with the 200% collateral requirement.
Mr. Walt, on behalf of the Plan, has accepted the commitment of the
Employer and Motors that the Contracts will conform to the following
loan policy guidelines: (a) A complete credit history will be performed
for each customer; (b) a customer's credit history will be analyzed
together with the customer's equity and the terms of the Loan; (c)
depending on the use of the vehicle, a customer equity of from 10% to
30% will be required; (d) with an extension of six months available in
circumstances of minimal vehicle use, the maximum term of any of the
Contracts will be 60 months on new and current year used vehicles, 54
months, 42 months, 42 months, 36 months, and 24 months, respectively,
on one, two, three, four, and five-year old vehicles; (e) prior to
closing on any Contracts, a written certificate of insurance from an
insurance agent will be required showing that the automobile is covered
for physical damage with no more than a $250 deductible; (f) such
insurance coverage includes fire, theft, and other perils and shows
Motors as loss payee; and (g) Motors will employ a full time collector
and strict management supervision will be maintained daily over
collections.
Motors has represented that if, at any time, it changes the above-
described loan policy guidelines it will notify Mr. Walt. Therefore, it
is the responsibility of Mr. Walt to determine whether such changes
materially affect the value of the Contracts. Mr. Walt represents that
if the value of the Contracts is materially affected, such Contracts
will be excluded from the collateral which secures the Loans by the
Plan to Motors.
The Loans will also be secured by the Guaranty of the partners of
Motors. In this regard, the partners of Motors have executed a blanket
Guaranty in order to satisfy the requirements of PTE's 92-43 and 97-52.
Mr. Walt is responsible for ascertaining that any Loans entered by the
Plan pursuant to this proposed exemption are also covered by this
blanket Guaranty or, if necessary, a new Guaranty will be executed. In
addition, it is represented that all of the partners in Motors are
jointly and severally liable for the debts of the partnership,
specifically including the Loans.
It is represented that from time to time in order to secure its
line of credit to Motors, PBNB may take a security interest in the
Contracts. However, it is represented that such security interest will
be at all times subordinated to 200% of the indebtedness of Motors to
the Plan. Further, it is represented that other notes payable from
Motors to its partners will be subordinated to the Loans. As of
December 31, 2000, a total amount of $4,994,560 was due to the partners
of Motors under the terms of the notes, but such amount was
subordinated to the indebtedness of Motors to the Plans.
[[Page 2692]]
In addition, it is represented that all of the Contracts provide
Motors with recourse against the Employer for the amount of any
defaulted Contracts. In this regard, should there be defaults on any of
the Contracts, it is represented that the Employer will repurchase such
Contracts from Motors after giving legal notice to the customer under
Arkansas law. Once the Employer repurchases any defaulted Contracts,
the Employer, not Motors, will repossess the vehicles. The Employer has
informed the Department that for 1999 and 2000, the average number of
Contracts equaled 1,100. Of these Contracts, twenty-one (21) vehicles
were repossessed in 1999 and forty-six (46) vehicles were repossessed
in 2000. The Employer maintains that defaults and repossessions
constitute a very small percentage of the total number of Contracts
outstanding at any time.
In addition to the responsibilities outlined above, Mr. Walt is
responsible for monitoring Motors' compliance with the terms of the
Loans and the Guaranty. In this regard, Mr. Walt has reviewed certain
monthly reports (the Monthly Reports) which have been furnished by PBNB
and by Boatmen's, the trustee at the time PTE 97-52 was granted. Mr.
Walt represents that such Monthly Reports are appropriate for the
purposes of monitoring the proposed transactions. If this proposed
exemption is granted, it is represented that similar Monthly Reports
will be provided to Mr. Walt and will be reviewed monthly by Mr. Walt,
or more frequently as Mr. Walt determines is necessary.
In addition, Mr. Walt is responsible for receiving and reviewing
the monthly financial statements for Motors and for the Employer and
annual financial statements of the partners of Motors. Mr. Walt
represents that this information will assist him in monitoring the
credit-worthiness of the Employer and Motors. If there are any material
decreases in the net worth of any of the parties involved, it is
represented that Mr. Walt will liquidate the Loans at the next maturity
date. In this regard, Mr. Walt represents that he places the most
significance on the ability of the Employer to repurchase any of the
Contracts that are in default and considers the net worth of the
partners of Motors to be a secondary source of protection for the Plan.
Mr. Walt further represents that if, in reviewing the monthly financial
statements of the Employer, he determines that a decrease in the net
worth of the Employer has impaired the Employer's ability to repurchase
any of the Contracts, he will carefully review the aggregate net worth
of the partners of Motors. After such review, if he determines, based
on his banking experience, judgment, and other factors, that the Plan
is not properly protected, Mr. Walt will instruct the Trustee to
liquidate the Loans at the next maturity date. In the event of a
default by Motors on the Loans, Mr. Walt will be responsible for taking
all necessary steps to protect the Plan and for enforcing all of the
rights of the Plan, including pursuing the partners of Motors under the
terms of the Guaranty.
In the opinion of Mr. Walt, the terms and conditions of the Loans
and Guaranty are based on arm's-length considerations. After reviewing
the proposed transactions, Mr. Walt represents that he would make the
Loans, on behalf of the Bank, under the same terms to Motors. In
conclusion, Mr. Walt has determined that the proposed transactions are
in the best interest of the Plan and its participants and beneficiaries
for the following reasons: (a) The Loans by the Plan to Motors are well
collateralized; (b) the risk of loss to the Plan is almost non-
existent; (c) the ninety (90) day maturity of the Loans will enable the
Plan to shift its investments from the Loans in a short period of time,
if necessary, to provide liquidity to the Plan; (d) the yield to the
Plan is expected to be approximately 200 basis points greater than that
of a ninety (90) day bank certificate of deposit; (e) the rate of
return, which will be at all times two percentage points above the
Federal Discount Rate, prevents the Plan from becoming locked into a
below market interest rate and insures a favorable rate on a continuing
basis; and (f) administration of the proposed transactions should
generate less expense than that of other investments.
7. The applicant maintains that the wide diversity of customers
executing the Contracts significantly spreads the risk to the Plan.
Further, the Employer will bear all costs of filing the application for
exemption, providing notice to interested persons, and paying for the
services rendered by Mr. Walt, as independent fiduciary to the Plan. In
the event that it becomes necessary to appoint a successor independent
fiduciary (the Successor) to replace Mr. Walt, the applicant will
notify the Department at least sixty (60) days in advance of such
appointment. The applicant states that the successor will be
independent and will possess comparable experience and responsibilities
as those of Mr. Walt. In addition, it is represented that throughout
the five (5) year duration of this proposed exemption, the Plan will
not pay any fees or other expenses in connection with the proposed
transactions.
8. In summary, the applicant represents that the Loans will satisfy
the criteria of section 408(a) of the Act because, among other things:
(a) Mr. Walt, the independent fiduciary of the Plan, has agreed to
review, approve, and monitor the terms and conditions of the Loans and
the Guaranty; (b) Mr. Walt has represented that the Loans will be in
the best interest of the participants and beneficiaries of the Plan;
(c) the Loans will be short-term loans limited to no more than 15% of
the total assets of the Plan; (d) the Loans will be adequately secured
by a perfected security interest in the Contracts, through properly
filed financing statements in conformity with the UCC provisions
adopted in Arkansas; (f) the face amount of the Contracts will at all
times exceed 200% of the total amount of the Loans; (g) the Loans are
guaranteed by the partners of Motors; (h) the terms of the Contracts
provide Motors with recourse to the Employer in the event of a default
on any of the Contracts; and (i) the Plan will receive a return on the
Loans of at least two percentage points above the Federal Discount Rate
which is represented to be the prevailing fair market rate of return on
comparable short-term investments.
FOR FURTHER INFORMATION CONTACT: Mr. Gary H. Lefkowitz of the
Department, telephone (202) 219-8881. (This is not a toll free number.)
Prudential Insurance Company of America (Prudential Insurance) and
Its Affiliates (collectively, Prudential) Located in Newark, NJ
[Application No. D-11051]
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 2570, subpart B (55 FR 32836, 32847, August 10,
1990).\4\
---------------------------------------------------------------------------
\4\ For purposes of this proposed exemption, references to
provisions of the Act refer also to corresponding provisions of the
Code.
---------------------------------------------------------------------------
Section I. Exemption for the Acquisition, Holding and Disposition of
Prudential 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
[[Page 2693]]
(E) of the Code, shall not apply, effective December 13, 2001, to the
acquisition, holding and disposition of common stock issued by
Prudential Financial, Inc. (the Prudential Financial Stock) and/or
common stock issued by a Prudential affiliate (the Prudential Affiliate
Stock; together, the Prudential Stock), by Index and Model-Driven Funds
that are managed by Prudential, in which client plans of Prudential
invest, provided that the following conditions and the General
Conditions of Section II are met:
(a) The acquisition or disposition of Prudential 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 Prudential Stock which is
intended to benefit Prudential or any party in which Prudential may
have an interest.
(b) Whenever Prudential 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
Prudential 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 Prudential Stock occur either (i) on
a recognized U.S. securities exchange (as defined in Section III(k)
below), (ii) through an automated trading system (as defined in Section
III(j) below) operated by a broker-dealer independent of Prudential
that is registered under the Securities Exchange Act of 1934 (the 1934
Act), and thereby subject to regulation by the Securities and Exchange
Commission (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 III(j) below) that is operated by a recognized U.S. securities
exchange (as defined in Section III(k) 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 Prudential Stock cannot be
acquired within 10 business days from the date of the event which
causes the particular Fund to require Prudential Stock, Prudential
appoints a fiduciary which is independent of Prudential to design
acquisition procedures and monitor compliance with such procedures.
(c) Subsequent to acquisitions necessary to bring a Fund's holdings
of Prudential Stock to its specified weighting in the index or model
pursuant to the restrictions described in Section I(b) above, all
aggregate daily purchases of Prudential Stock by the Funds do not
exceed on any particular day the greater of:
(1) 15 percent of the average daily trading volume for Prudential
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 Prudential 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 Prudential Stock not otherwise described
above in Section I(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 Prudential 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 III(j) below) operated by a
broker-dealer independent of Prudential 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 III(k) 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
III(k) below), so long as the broker is acting on an agency basis.
(e) No transactions by a Fund involve purchases from, or sales to,
Prudential (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 Prudential Stock,
that is issued and outstanding at any time, is held in the aggregate by
Index and Model-Driven Funds managed by Prudential.
(g) Prudential 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 Prudential
authorizes the investment of such plan's assets in an Index or Model-
Driven Fund which purchases and/or holds Prudential Stock, pursuant to
the procedures described herein.
(i) A fiduciary independent of the Prudential directs the voting of
Prudential Stock held by an Index or Model-Driven Fund on any matter in
which shareholders of Prudential are required or permitted to vote.
Section II. General Conditions
(a) Prudential 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 II to
determine whether the conditions of this exemption have been met,
except that (1) a prohibited transaction will not be considered to have
occurred if, due to circumstances beyond the control of Prudential, the
records are lost or destroyed prior to the end of the six year period,
and (2) no party in interest other than Prudential shall be subject to
the civil penalty that may be assessed under section 502(i) of the Act
or to the taxes imposed by
[[Page 2694]]
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 II
and notwithstanding any provisions of section 504(a)(2) and (b) of the
Act, the records referred to in paragraph (a) of this Section II 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 II(b)(1) shall be authorized to examine trade secrets
of Prudential or commercial or financial information which is
considered confidential.
Section III. Definitions
(a) The term ``Index Fund'' means any investment fund, account or
portfolio sponsored, maintained, trusteed, or managed by Prudential, 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 III(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 Prudential 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 Prudential or any party in which Prudential may have an
interest.
(b) The term ``Model-Driven Fund'' means any investment fund,
account or portfolio sponsored, maintained, trusteed, or managed by
Prudential, 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 Prudential, to transform an independently
maintained Index, as described in Section III(c) below;
(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 Prudential or
any party in which Prudential 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 Prudential; and,
(3) The index is a generally-accepted standardized index of
securities which is not specifically tailored for the use of
Prudential.
(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 Prudential 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 ``Prudential'' refers to Prudential Insurance Company
of America, its indirect parent and holding company, Prudential
Financial, and any current or future affiliates, as defined below in
paragraph (h).
(g) The term ``Prudential Financial'' refers to Prudential
Financial, Inc., the indirect parent and holding company of Prudential
Insurance Company of America.
(h) An ``affiliate'' of Prudential 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.
(i) The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
(j) 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 USC 8c(a)(51)(A) (ii)].
(k) 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 USC 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 13, 2001.
Summary of Facts and Representations
1. Prudential Insurance is a stock life insurance company, which
converted from a mutual life insurance company on December 18, 2001.
Prudential Insurance is organized under the laws of the State of New
Jersey. Its principal place of business is located at Prudential Plaza,
Newark, New Jersey. Prudential Insurance is licensed to conduct the
insurance business in all 50 states comprising the United States, as
well as in the District of Columbia.
As of June 30, 2001, Prudential Insurance had $21.7 billion in
total equity and $303.1 billion in total assets.
[[Page 2695]]
Also as of that date, Prudential Insurance had--
Total assets under management and administration of $605.8
billion, consisting of total assets under management (including assets
in general and separate accounts) of approximately $393.5 billion, and
additional assets in securities brokerage and bank custodial accounts
and other assets under administration of $212.3 billion.
Total gross life insurance in force in the United States
of $1.3 trillion (including individual and group insurance), and
Total gross life insurance in force in Japan and other
countries outside the United States of $508.2 billion (including
individual and group insurance).
As of December 31, 2000 (the latest date for which such information
is available), Prudential Insurance had the third largest individual
life insurance business in the United States in terms of statutory in
force premiums and in terms of total gross life insurance in force in
the United States according to A.M. Best.
2. 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 and individual retirement annuities
described in section 408(b) of the Code, and a wide variety of pension
contracts. Additionally, Prudential Insurance has a number of
affiliates that provide financial services and products, including
investment management, brokerage, and mutual funds, as well as real
estate services. Prudential Insurance and its affiliates (together,
Prudential) provide fiduciary and other services to ``employee benefit
plans'' described in section 3(3) of the Act and to other plans
described in section 4975(e)(1) of the Code.
As a mutual life insurance company, Prudential Insurance had no
authorized, issued, or outstanding stock. Instead, policyholders of a
mutual insurance company are both customers and owners of the company.
Specifically, the life insurance, endowment, annuity, and certain other
insurance and pension plan contracts issued by Prudential Insurance
combined both insurance coverage and proprietary rights, so-called
``membership interests.''
Prudential Insurance demutualized on December 18, 2001. The
company's Board of Directors, its policyholders, and the New Jersey
Department of Banking and Insurance approved the proposed Plan of
Reorganization prior to the demutualization. Following the
demutualization of Prudential Insurance and the simultaneous corporate
reorganizations of its affiliates, Prudential Insurance and its
affiliates are now owned indirectly by Prudential Financial, a holding
company, the common stock of which (i.e., Prudential Financial Stock)
is publicly traded, as is or may be certain of its debt or other
securities. In connection with the demutualization, Prudential
Insurance is distributing Prudential Financial Stock, cash and policy
credits to eligible policyholders in exchange for their membership
interests. Demutualization, registration of the Prudential Financial
Stock and other Prudential securities under federal securities laws, an
initial public offering of Prudential Financial Stock and its listing
on the New York Stock Exchange took place during December 2001.\5\
---------------------------------------------------------------------------
\5\ With respect to the demutualization, Prudential Insurance
has requested an administrative exemption from the Department. On
September 27, 2001, a notice of proposed exemption was published in
the Federal Register at 66 FR 49408.
---------------------------------------------------------------------------
3. Prudential Insurance and certain of its affiliates, including
Prudential Investment Management, Inc., and Jennison Associates Capital
Corporation, offer asset management and investment advisory services,
insurance, securities brokerage and other types of financial services,
as well as trust services, to ERISA-covered plans. Among the services
offered are investment management or advisory services for investment
accounts of ERISA-covered plans. These investment accounts may be
structured as pooled and single client insurance company separate
accounts, single client bank trust accounts and bank collective
investment trust accounts in which employee benefit plans have
invested. In some cases, the trust accounts will be maintained with a
Prudential Insurance affiliate as trustee, while in other cases, the
Prudential Insurance affiliated investment manager will direct
investment of assets held by an unrelated trustee.
4. Prudential Insurance and its affiliates act as investment
managers of institutional accounts, including those of employee benefit
plans. As of June 30, 2001, the asset management units of Prudential
managed approximately $300 billion of Prudential's $394 billion of
total assets under management, as follows:
$100 billion of retail customer assets, including mutual
funds and variable insurance and variable annuity products;
$91 billion of institutional customer assets; and
$109 billion of insurance company general account assets.
In providing investment management services with respect to the
assets of plans, Prudential is a ``fiduciary'' of plans, as defined in
section 3(21) of the Act and a ``party in interest,'' as defined in
section 3(14)(A) and (B). Although it acts as an investment manager for
the accounts, amounts invested in Prudential accounts are made at the
direction of an independent plan fiduciary or by plan participants who
have the ability to direct investments for their own plan accounts.\6\
---------------------------------------------------------------------------
\6\ For a relatively few plan clients, Prudential has
discretionary asset management authority to allocate a plan's assets
among several approved investment accounts, subject to investment
guidelines. In those cases, the plan's fiduciary, who is independent
of Prudential, decides whether or not the plan will be permitted to
invest in a particular account, including the Index or Model-Driven
Funds described herein, and agrees to the particular investment
guidelines used for the allocation among the approved accounts.
---------------------------------------------------------------------------
5. Among the types of investment products and services Prudential
provides to plans are Index and Model-Driven Funds. An Index Fund is an
investment portfolio which may be, or form part of,\7\ a single client
trust account, a pooled or single client insurance company separate
account, or a bank collective trust, with the investment objective of
replicating 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
decisionmaking on the basis of fundamental research on the valuation
and prospects of the securities in which the portfolio invests. Plan
fiduciaries often favor Index Funds because (a) their risks and returns
tend to mirror an established market index, (b) they offer broad
diversification within the asset class and strategy represented by the
index, and (c) they are extremely competitive in fees and expenses.
---------------------------------------------------------------------------
\7\ In some cases, an Index or Model-Driven Fund may be a
discrete portfolio of equity securities that is part of a larger
investment fund. For example, an Index Fund may be a component of a
balanced investment fund that includes both a portfolio of equities
and a portfolio of debt securities and the entire balanced fund
constitutes one insurance company separate account or bank trust
account. Financial institutions commonly offer balanced investment
funds because they offer plan fiduciaries and participants the
advantage of diversifying investments across equities and bonds
through a single investment.
---------------------------------------------------------------------------
A Model-Driven Fund is an investment portfolio which may be, or
[[Page 2696]]
form part of, a single client trust account, a pooled or single client
insurance company separate account, or a bank collective trust, 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 individual securities in which a portfolio may
invest. An example of a Model-Driven Fund would include a fund which
transforms an index, making investments according to a computer model
which uses quantitative data as earnings, dividends and price to
earnings ratios for common stocks included in the index with the goal
of exceeding the investment returns achieved by the index.
Prudential represents that the process it uses for the
establishment and operation of all Model-Driven Funds is disciplined
and consistent with the quantitative nature of such funds. In this
regard, objective rules are established for each model as part of the
computer programming for the model. Once established, these computer
programs are rarely changed. The data used by the programs are updated
regularly by the electronic feeds of the quantitative information
(e.g., changes in corporate earnings) necessary for analysis. The
computer models generally cannot be overriden in the management of the
portfolios except in the event of errors or questionable data from the
usual sources of data input. For example, errors in data transmission
may cause an unwarranted direction by the model to sell a security due
to an erroneously low valuation for the security on a given day, or
public notice of the SEC. In addition, allegations of accounting
improprieties in the issuer's financial statements may cause a
portfolio manager to override the model with respect to a direction by
the model to buy that security, because the issuer's quantitative data
used for the model may be drawn from the financial statements of the
issuer of the security. Such exceptions are rare and must be justified
on a case-by-case basis. Prudential represents, however, that it will
not exercise any discretion to override the computer model with respect
to the acquisition, holding or disposition of Prudential Stock. Such
transactions will always follow the output of the relevant computer
model.
6. Prudential currently offers a number of Funds 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, Prudential
offers some Funds that track the Wilshire 5000 Total Market Index,\8\
the Russell 2000 Index,\9\ and the Standard & Poor's 500 Composite
Stock Price Index (the S&P 500 Index).\10\ In each instance, the
indexes are compiled by organizations that are independent of
Prudential and are generally-accepted standardized indexes of
securities that are not tailored for the use of Prudential.
---------------------------------------------------------------------------
\8\ The Wilshire 5000 Total Market Index was established and is
maintained by Wilshire Associates Incorporated, which is not an
affiliate of Prudential. The Wilshire 5000 Total Market Index is a
market weighted index of returns of over 6,500 U.S. stocks with
readily available price data. It is the broadest U.S. equity index
available and reflects the performance of the organized securities
exchanges as well as the Over the Counter markets.
\9\ The Russell 2000 Index was established and is maintained by
the Frank Russell Company, which is not an affiliate of Prudential.
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.
\10\ 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.
---------------------------------------------------------------------------
7. On or after the effective date of Prudential Insurance's
demutualization and initial public offering of Prudential Financial
Stock, Prudential Insurance represents that the indexes employed by
Index and Model-Driven Funds may include Prudential Financial Stock
and/or Prudential Affiliate Stock. Prudential represents that the
ability of all Funds to invest in Prudential Stock, when that stock is
included in an index, is necessary to ensure tracking of the indexes.
In addition, the ability of the Model-Driven Funds to invest in
Prudential Stock, when that stock is included in the index on which the
model is based, avoids disruption to the computer modeling that is
designed to transform the index in the manner approved by plans when
the investment in the Model-Driven Fund is authorized.
8. Accordingly, Prudential Insurance requests an administrative
exemption from the Department. If granted, the exemption will permit
Prudential Insurance and its current and future affiliates to maintain
individual and pooled separate accounts, collective trusts, and single
client trusts that hold Prudential Stock, provided certain conditions
enumerated in the operative language of the exemption are met.
Specifically, the exemption will allow Index and Model-Driven Funds
which are managed by Prudential Insurance or its affiliates, in which
client plans of Prudential participate, to invest in Prudential Stock
if such stock is included among the securities listed in the index
utilized by the Fund. Prudential Insurance is not requesting, nor is
the Department providing, administrative exemptive relief herein for
plans sponsored by Prudential. Prudential 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.\11\ Therefore, the subject
exemption will apply to client plans of Prudential only. With respect
to Prudential client plans, Prudential Insurance states that plan
fiduciaries which are independent of Prudential have authorized or will
authorize the investment of a plan's assets in an Index or Model-Driven
Fund which acquires, holds, or disposes of Prudential Stock pursuant to
procedures described herein.
---------------------------------------------------------------------------
\11\ 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.
---------------------------------------------------------------------------
Prudential Insurance requests that the proposed exemption be made
effective as of December 13, 2001, which is the initial public offering
date for Prudential Financial Stock as well as the date such stock
commenced trading on the New York Stock Exchange. Prudential Insurance
states that any exemptive relief for cross-trades of securities,
including Prudential Stock, by Index and Model-Driven Funds maintained
by it should be considered separately.\12\
---------------------------------------------------------------------------
\12\ 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).
---------------------------------------------------------------------------
9. Prudential Insurance states that the proposed exemption is
necessary to allow Funds holding plan assets to purchase and hold
Prudential Stock in order to replicate, properly, the capitalization-
weighted or other specified composition of Prudential Stock in an
independently-maintained,
[[Page 2697]]
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, Prudential Insurance represents that when Prudential
Stock is added to an index on which a Fund is based, or when Prudential
Stock is added to the portfolio of a Fund which tracks an index that
includes Prudential Stock, all acquisitions necessary, as an initial
matter, to bring the Fund's holdings of Prudential to its
capitalization or other specified weighting in the applicable
index,\13\ 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.\14\
---------------------------------------------------------------------------
\13\ These instances are referred to herein as a ``Buy-up.''
Prudential Insurance believes that acquisitions of Prudential 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 Prudential. Prudential does not believe that the
amounts of Prudential 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
Prudential.
\14\ 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 Prudential Stock are as
follows:
Purchases are from, or through, only one broker or dealer
on a single trading day;
Based on the best available information, purchases are not
the opening transaction for the trading day;
Purchases are not be effected in the last half hour before
the scheduled close of the trading day;
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;
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;
All purchases and sales of Prudential Stock occur either
(i) on a recognized U.S. securities exchange [as defined in Section
III(k)], (ii) through an automated trading system [as defined in
Section III(j)] operated by a broker-dealer independent of Prudential
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 III(j)] that is operated by a recognized U.S. securities
exchange, 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 Prudential Stock
cannot be acquired within 10 business days from the date of the event
which causes the particular Fund to require Prudential Stock,
Prudential appoints an independent fiduciary to design acquisition
procedures and monitor compliance with such procedures.
10. Prudential Insurance states that, if an independent fiduciary
is required, such independent fiduciary and its principals will be
parties completely unrelated to Prudential. The independent fiduciary
will also be experienced in developing and operating investment
strategies for individual and collective investment vehicles that track
third party indexes. Furthermore, the independent fiduciary will not
act as the broker for any purchases or sales of Prudential 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,
Prudential Insurance believes 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
involve a number of small purchases over the course of each day,
randomly-timed. Prudential Insurance further believes that such a
program will allow Prudential to acquire the necessary shares of
Prudential Stock for the Funds with minimum impact on the market and in
a manner that is 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 Prudential 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 Prudential 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 Prudential and must approve in advance any
alteration of the trading procedures.
11. Subsequent to the initial acquisitions necessary to bring a
Fund's holdings of Prudential Stock to their specified weightings in
the index or model pursuant to the restrictions described above, all
aggregate daily purchases of Prudential Stock by the Funds will not
exceed on any particular day the greater of--
15 percent of the average daily trading volume for
Prudential Stock occurring on the applicable exchange and automated
trading system for the previous 5 business days, or
15 percent of the trading volume for Prudential 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.
12. Prudential Insurance represents that all transactions by the
Funds involving Prudential 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 Prudential 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
III(j) of the proposed exemption) operated by a broker-dealer
independent of Prudential that is either registered under the 1934 Act,
and thereby subject to regulation by the SEC or another applicable
regulatory agency, or an automated trading system operated by a
recognized U.S. securities exchange (as defined in Section III (k))
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 III(k)),
[[Page 2698]]
so long as the broker is acting on an agency basis. \15\
---------------------------------------------------------------------------
\15\ 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.
---------------------------------------------------------------------------
13. Prudential Insurance represents that all acquisitions,
holdings, and dispositions of Prudential Stock by Index or Model-Driven
Funds maintained by Prudential will also not involve purchases from or
sales to Prudential (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 is otherwise subject to an exemption).\16\
---------------------------------------------------------------------------
\16\ In this regard, the Department is providing no opinion
herein on whether such principal transactions would be covered by
any existing exemption.
---------------------------------------------------------------------------
14. Prudential Insurance represents that no more than 5 percent of
the total outstanding shares of Prudential will be held in the
aggregate by the Index or Model-Driven Funds managed by Prudential. In
addition, for purposes of acquisitions, holdings and dispositions of
Prudential Stock by the Funds, Prudential Insurance states that such
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. Therefore, Prudential Insurance requests
that the proposed exemption allow Prudential to design a passive
investment strategy for an Index or Model-Driven Fund which seeks to
track any index that contains Prudential Stock, or which transforms
such an index in a fashion prescribed by the model, as long as the
Prudential 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, Prudential Insurance states that future Funds
may track an index where the selection of a particular stock by the
index and the amount of stock to be included in the index is not 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 Prudential Insurance requests that the exemption allow for
Prudential 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, Prudential
Insurance represents that, in all instances, the acquisition, holding
or disposition of Prudential Stock by a Fund is 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.
15. Prudential Insurance will appoint an independent fiduciary to
direct the voting of any Prudential Stock held by the Funds. The
independent fiduciary will be a 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.
Prudential Insurance will provide the independent fiduciary with
all necessary information regarding the Funds that hold Prudential
Stock on the record date for Prudential's shareholder meetings, and all
proxy and consent materials with respect to Prudential 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 Prudential 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 Prudential 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 Prudential Stock, when voting
such stock.
16. In summary, it is represented that the subject transactions
have met or will meet the statutory criteria for an exemption under
section 408(a) of the Act because:
(a) Each Index or Model-Driven Fund involved has been based or will
be based on an index, as defined in Section III(c) above;
(b) The acquisition, holding and disposition of Prudential Stock by
the Index or Model-Driven Fund has been or 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 Prudential Stock which is intended to benefit Prudential
or any party in which Prudential may have an interest;
(c) Whenever Prudential 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 Prudential 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, has been or 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 Prudential Stock to its specified weighting in the index or model,
pursuant to the restrictions above, all aggregate daily purchases of
Prudential Stock by the Funds have not exceeded nor will exceed the
greater of (i) 15 percent of the average daily trading volume for the
Prudential 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 Prudential 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 Prudential Stock, other than acquisitions
of such stock in a Buy-up described above, have been or 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 Prudential 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 Prudential
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
[[Page 2699]]
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 has involved or will involve
purchases from or sales to Prudential (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 Prudential Stock
that is issued and outstanding at any time has been held or will be
held, in the aggregate, by Index or Model-Driven Funds managed by
Prudential;
(h) Prudential Stock has not constituted nor will 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;
(i) A plan fiduciary independent of Prudential has authorized or
will authorize the investment of such plan's assets in an Index or
Model-Driven Fund which purchases and/or holds Prudential Stock,
pursuant to the procedures described herein; and
(j) A fiduciary independent of Prudential will direct the voting of
Prudential Stock held by an Index or Model-Driven Fund on any matter in
which shareholders of Prudential 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 may acquire and hold Prudential 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, Prudential 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 Prudential 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) 693-8556. (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 15th day of January, 2002.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits,
Administration, U.S. Department of Labor.
[FR Doc. 02-1367 Filed 1-17-02; 8:45 am]
BILLING CODE 4510-29-P
|
|