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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]                         

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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.

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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 
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\
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    \1\ For purposes of this proposed exemption, references to 
specific provisions of Title I of the Act, unless otherwise 
specified, refer also to the corresponding provisions of the Code.
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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.
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    \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.
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    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.
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    \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.
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    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\
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    \4\ 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. 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\
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    \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\
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    \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.
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    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.
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    \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.
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    \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.
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    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\
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    \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\
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    \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