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Secretary of Labor Hilda L. Solis
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EBSA Notices

Notice of Proposed Exemptions   [11/7/2008]
[PDF]
FR Doc E8-26565
[Federal Register: November 7, 2008 (Volume 73, Number 217)]
[Notices]               
[Page 66260-66271]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07no08-76]                         

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DEPARTMENT OF LABOR

Employee Benefits Security Administration

[Application Nos. and Proposed Exemptions; D-11481, Citigroup, Inc.; D-
11484; Robert W. Baird & Co. Incorporated; D-11490, Raymond James & 
Associates, Inc.; D-11505, Northwestern Mutual Investment Services, 
LLC, et al.]

 
Notice of Proposed Exemptions

AGENCY: Employee Benefits Security 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 (ERISA or 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 Employee Benefits Security 
Administration (EBSA), Office of Exemption Determinations, Room N-5700, 
U.S. Department of Labor, 200 Constitution Avenue, NW., Washington, DC 
20210. Attention: Application No. --------, stated in each Notice of 
Proposed Exemption. Interested persons are also invited to submit 
comments and/or hearing requests to EBSA via e-mail or FAX. Any such 
comments or requests should be sent either by e-mail to: 
moffitt.betty@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 Employee Benefits Security 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.
    Citigroup, Inc., Located in New York, New York, Exemption 
Application Number D-11481.

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Employee Retirement Income Security 
Act of 1974 (ERISA or the Act) and section 4975(c)(2) of the Internal 
Revenue Code of 1986, as amended (the Code), and in accordance with the 
procedures set forth in 29 CFR Part 2570, Subpart B (55 FR 32836, 
32847, August 10, 1990).\1\
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    \1\ For purposes of this proposed exemption, references to 
section 406 of ERISA should be read to refer as well to the 
corresponding provisions of section 4975 of the Code.
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Section I. Transactions Involving Plans Described In Both Title I and 
Title II of ERISA

    If the proposed exemption is granted, the restrictions of section 
406(a)(1)(A) through (D) and section 406(b) of ERISA, and the taxes 
imposed by section 4975(a) and (b) of the Code, by reason of section 
4975(c)(1) of the Code, shall not apply, effective February 1, 2008, to 
the following transactions, if the conditions set forth in section III 
have been met:
    (a) The sale or exchange of an Auction Rate Security (as defined in 
section IV(b)) by a Plan (as defined in section IV(h)) to the Sponsor 
(as defined in section IV(g)) of such Plan; or
    (b) A lending of money or other extension of credit to a Plan in 
connection with the holding of an Auction Rate Security by the Plan, 
from: (1) Citigroup, Inc. or an affiliate (Citigroup); (2) an 
Introducing Broker (as defined in section IV(f)); or (3) a Clearing 
Broker (as defined in section IV(d)); where the loan is: (i) Repaid in 
accordance with its terms; and (ii) guaranteed by the Plan Sponsor.

II. Transactions Involving Plans Described In Title II of ERISA Only

    If the proposed exemption is granted, the sanctions resulting from 
the application of section 4975(a) and (b) of the Code, by reason of 
section 4975(c)(1) of the Code, shall not apply, effective February 1, 
2008, to the following transactions, if the conditions set forth in 
section III have been met:
    (a) The sale or exchange of an Auction Rate Security by a Title II 
Only Plan (as defined in section IV(i)) to the Beneficial Owner (as 
defined in section IV(c)) of such Plan; or
    (b) A lending of money or other extension of credit to a Title II 
Only Plan in connection with the holding of

[[Page 66261]]

an Auction Rate Security by the Title II Only Plan, from: (1) 
Citigroup; (2) an Introducing Broker; or (3) a Clearing Broker; where 
the loan is: (i) Repaid in accordance with its terms and; (ii) 
guaranteed by the Beneficial Owner.

III. Conditions

    (a) Citigroup acted as a broker or dealer, non-bank custodian, or 
fiduciary in connection with the acquisition or holding of the Auction 
Rate Security that is the subject of the transaction;
    (b) For transactions involving a Plan (including a Title II Only 
Plan) not sponsored by Citigroup for its own employees, the decision to 
enter into the transaction is made by a Plan fiduciary who is 
Independent (as defined in section IV(e)) of Citigroup. Notwithstanding 
the foregoing, an employee of Citigroup who is the Beneficial Owner of 
a Title II Only Plan may direct such Plan to engage in a transaction 
described in section II, if all of the other conditions of this section 
III have been met;
    (c) The last auction for the Auction Rate Security was 
unsuccessful;
    (d) The Plan does not waive any rights or claims in connection with 
the loan or sale as a condition of engaging in the above-described 
transaction;
    (e) The Plan does not pay any fees or commissions in connection 
with the transaction;
    (f) The transaction is not part of an arrangement, agreement or 
understanding designed to benefit a party in interest;
    (g) With respect to any sale described in section I(a) or section 
II(a):
    (1) The sale is for no consideration other than cash payment 
against prompt delivery of the Auction Rate Security; and
    (2) For purposes of the sale, the Auction Rate Security is valued 
at par, plus any accrued but unpaid interest; \2\
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    \2\ This proposed exemption does not address tax issues. The 
Department has been informed by the Internal Revenue Service and the 
Department of the Treasury that they are considering providing 
limited relief from the requirements of sections 72(t)(4), 
401(a)(9), and 4974 of the Code with respect to retirement plans 
that hold Auction Rate Securities. The Department has also been 
informed by the Internal Revenue Service that if Auction Rate 
Securities are purchased from a Plan in a transaction described in 
sections I and II at a price that exceeds the fair market value of 
those securities, then the excess value would be treated as a 
contribution for purposes of applying applicable contribution and 
deduction limits under sections 219, 404, 408, and 415 of the Code.
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    (h) With respect to an in-kind exchange described in section (I)(a) 
or section II(a), the exchange involves the transfer by a Plan of an 
Auction Rate Security in return for a Delivered Security, as such term 
is defined in section IV(j), where:
    (1) The exchange is unconditional;
    (2) For purposes of the exchange, the Auction Rate Security is 
valued at par, plus any accrued but unpaid interest;
    (3) The Delivered Security is valued at fair market value, as 
determined at the time of the in-kind exchange by a third party pricing 
service or other objective source;
    (4) The Delivered Security is appropriate for the Plan and a 
security that the Plan is otherwise permitted to hold under applicable 
law; \3\ and
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    \3\ The Department notes that the Act's general standards of 
fiduciary conduct also would apply to the transactions described 
herein. In this regard, section 404 requires, among other things, 
that a fiduciary discharge his duties respecting a plan solely in 
the interest of the plan's participants and beneficiaries and in a 
prudent manner. Accordingly, a plan fiduciary must act prudently 
with respect to, among other things: (1) The decision to exchange an 
Auction Rate Security for a Delivery Security; and (2) the 
negotiation of the terms of such exchange (or a cash sale or loan 
described above), including the pricing of such securities. The 
Department further emphasizes that it expects plan fiduciaries, 
prior to entering into any of the proposed transactions, to fully 
understand the risks associated with these types of transactions 
following disclosure by Citigroup of all relevant information.
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    (5) The total value of the Auction Rate Security (i.e., par plus 
any accrued but unpaid interest) is equal to the fair market value of 
the Delivered Security;
    (i) With respect to a loan described in section I(b) or II(b):
    (1) The loan is documented in a written agreement containing all of 
the material terms of the loan, including the consequences of default;
    (2) The Plan does not pay an interest rate that exceeds one of the 
following three rates as of the commencement of the loan:
    (A) The coupon rate for the Auction Rate Security;
    (B) The Federal Funds Rate; or
    (C) The Prime Rate;
    (3) The loan is unsecured; and
    (4) The amount of the loan is not more than the total par value of 
the Auction Rate Securities held by the Plan.

IV. Definitions

    (a) The term ``affiliate'' means: Any person directly or 
indirectly, through one or more intermediaries, controlling, controlled 
by, or under common control with such other person;
    (b) The term ``Auction Rate Security'' or ``ARS'' means a security:
    (1) That is either a debt instrument (generally with a long-term 
nominal maturity) or preferred stock; and
    (2) With an interest rate or dividend that is reset at specific 
intervals through a Dutch auction process;
    (c) The term ``Beneficial Owner'' means: The individual for whose 
benefit the Title II Only Plan is established and includes a relative 
or family trust with respect to such individual;
    (d) The term ``Clearing Broker'' means: A member of a securities 
exchange that acts as a liaison between an investor and a clearing 
corporation and that helps to ensure that a trade is settled 
appropriately, that the transaction is successfully completed and that 
is responsible for maintaining the paper work associated with the 
clearing and executing of a transaction;
    (e) The term ``Independent'' means a person who is: (1) Not 
Citigroup or an affiliate; and (2) not a relative (as defined in ERISA 
section 3(15)) of the party engaging in the transaction;
    (f) The term ``Introducing Broker'' means: A registered broker that 
is able to perform all the functions of a broker except for the ability 
to accept money, securities, or property from a customer;
    (g) The term ``Sponsor'' means: A plan sponsor as described in 
section 3(16)(B) of the Act and any Affiliates;
    (h) The term ``Plan'' means: Any plan described in section 3(3) of 
the Act and/or section 4975(e)(1) of the Code;
    (i) The term ``Title II Only Plan'' means: Any plan described in 
section 4975(e)(1) of the Code which is not an employee benefit plan 
covered by Title I of ERISA;
    (j) The term ``Delivered Security'' means a security that is: (1) 
Listed on a national securities exchange (excluding OTC Bulletin Board-
eligible securities and Pink Sheets-quoted securities); or (2) a U.S. 
Treasury obligation; or (3) A fixed income security that has a rating 
at the time of the exchange that is in one of the two highest generic 
rating categories from an independent nationally recognized statistical 
rating organization (e.g., a highly rated municipal bond or a highly 
rated corporate bond); or (4) A certificate of deposit insured by the 
Federal Deposit Insurance Corporation. Notwithstanding the above, the 
term ``Delivered Security'' shall not include any Auction Rate 
Security, or any related Auction Rate Security, including derivatives 
or securities materially comprised of Auction Rate Securities or any 
illiquid securities.

Summary of Facts and Representations

    1. The Applicant is Citigroup, Inc. and its affiliates 
(hereinafter, either Citigroup or the Applicant). Citigroup is a 
holding company whose businesses include the provision of investment 
advisory and other services to IRAs and pension, profit sharing, and 
401(k) plans qualified under section 401(a) of the Code. Among other 
things, Citigroup acts as a broker and dealer with respect

[[Page 66262]]

to the purchase and sale of securities, including Auction Rate 
Securities. The Applicant describes Auction Rate Securities and the 
arrangement by which ARS are bought and sold as follows. Auction Rate 
Securities (or ARS) are securities (issued as debt or preferred stock) 
with an interest rate or dividend that is reset at periodic intervals 
pursuant to a process called a Dutch Auction. Investors submit orders 
to buy, hold, or sell a specific ARS to a broker-dealer selected by the 
entity that issued the ARS. The broker-dealers, in turn, submit all of 
these orders to an auction agent. The auction agent's functions include 
collecting orders from all participating broker-dealers by the auction 
deadline, determining the amount of securities available for sale, and 
organizing the bids to determine the winning bid. If there are any buy 
orders placed into the auction at a specific rate, the auction agent 
accepts bids with the lowest rate above any applicable minimum rate and 
then successively higher rates up to the maximum applicable rate, until 
all sell orders and orders that are treated as sell orders are filled. 
Bids below any applicable minimum rate or above the applicable maximum 
rate are rejected. After determining the clearing rate for all of the 
securities at auction, the auction agent allocates the ARS available 
for sale to the participating broker-dealers based on the orders they 
submitted. If there are multiple bids at the clearing rate, the auction 
agent will allocate securities among the bidders at such rate on a pro-
rata basis.
    2. The Applicant states that Citigroup is permitted, but not 
obligated, to submit orders in auctions for its own account either as a 
bidder or a seller and routinely does so in the auction rate securities 
market in its sole discretion. Citigroup may routinely place one or 
more bids in an auction for its own account to acquire ARS for its 
inventory, to prevent: (1) A failed auction (i.e., an event where there 
are insufficient clearing bids which would result in the auction rate 
being set at a specified rate); or (2) an auction from clearing at a 
rate that Citigroup believes does not reflect the market for the 
particular ARS being auctioned.
    3. The Applicant states that for many ARS, Citigroup has been 
appointed by the issuer of the securities to serve as a dealer in the 
auction and is paid by the issuer for its services. Citigroup is 
typically appointed to serve as a dealer in the auctions pursuant to an 
agreement between the issuer and Citigroup. That agreement provides 
that Citigroup will receive from the issuer auction dealer fees based 
on the principal amount of the securities placed through Citigroup.
    4. The Applicant states further that Citigroup may share a portion 
of the auction rate dealer fees it receives from the issuer with other 
broker-dealers that submit orders through Citigroup, for those orders 
that Citigroup successfully places in the auctions. Similarly, with 
respect to ARS for which broker-dealers other than Citigroup act as 
dealer, such other broker-dealers may share auction dealer fees with 
Citigroup for orders submitted by Citigroup.
    5. According to the Applicant, since February 2008, a minority of 
auctions have cleared, particularly involving municipalities. As a 
result, Plans holding Auction Rate Securities may not have sufficient 
liquidity to make benefit payments, mandatory payments and withdrawals 
and expense payments when due.\4\
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    \4\ The Department notes that Class Exemption 80-26 (45 FR 28545 
(Apr. 29, 1980), as amended at 71 FR 17917 (Apr. 7, 2006)) permits 
interest-free loans or other extensions of credit from a party in 
interest to a Plan if, among other things, the proceeds of the loan 
or extension of credit are used only--(1) for the payment of 
ordinary operating expenses of the Plan, including the payment of 
benefits in accordance with the terms of the Plan and periodic 
premiums under an insurance or annuity contract, or (2) for a 
purpose incidental to the ordinary operation of the Plan.
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    6. The Applicant represents that, in certain instances, Citigroup 
may have previously advised or otherwise caused a Plan to acquire and 
hold an Auction Rate Security and thus may be considered a fiduciary to 
the Plan so that a loan to the Plan by Citigroup may violate section 
406(a) and (b) of ERISA; in addition, a sale between a Plan and its 
sponsor or an IRA and its Beneficial Owner violates section ERISA 
section 406 and/or section 4975(c)(1) of the Code.\5\ The Applicant is 
therefore requesting relief for the following transactions, involving 
all employee benefit plans: (1) The sale or exchange of an Auction Rate 
Security from a Plan to the Plan's Sponsor; and (2) a lending of money 
or other extension of credit to a Plan in connection with the holding 
of an Auction Rate Security from: Citigroup, an Introducing Broker, or 
a Clearing Broker, where the subsequent repayment of the loan is made 
in accordance with its terms and is guaranteed by the Plan Sponsor.
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    \5\ The relief contained in this proposed exemption does not 
extend to the fiduciary provisions of section 404 of the Act.
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    7. The Applicant is requesting similar relief for plans covered 
only by Title II of ERISA. In this regard, the Applicant is requesting 
relief for: (1) The sale or exchange of an Auction Rate Security from a 
Title II Only Plan to the Beneficial Owner of such Plan; and (2) a 
lending of money or other extension of credit to a Title II Only Plan 
in connection with the holding of an Auction Rate Security from: 
Citigroup; an Introducing Broker; or a Clearing Broker; where the 
subsequent repayment of the loan is made in accordance with its terms 
and is guaranteed by the Beneficial Owner.
    8. The Applicant represents that the proposed transactions are in 
the interests of the Plans. In this regard, the Applicant states that 
the exemption, if granted, will provide Plan fiduciaries with liquidity 
notwithstanding changes that occurred in the Auction Rate Securities 
markets. The Applicant also notes that, other than for Plans sponsored 
by the Applicant, the decision to enter into a transaction described 
herein will be made by a Plan fiduciary who is independent of 
Citigroup.
    9. The proposed exemption contains a number of safeguards designed 
to protect the interests of each Plan. With respect to the sale of an 
Auction Rate Security by a Plan, the Plan must receive cash equal to 
the par value of the Security, plus any accrued interest. The sale must 
also be unconditional, other than being for payment against prompt 
delivery. For in-kind exchanges covered by the proposed exemption, the 
security delivered to the Plan (i.e., the Delivered Security) must be: 
(1) Listed on a national securities exchange (excluding OTC Bulletin 
Board-eligible securities and Pink Sheets-quoted securities); or (2) a 
U.S. Treasury obligation; or (3) a fixed income security that has a 
rating at the time of the exchange that is in one of the two highest 
generic rating categories from an independent nationally recognized 
statistical rating organization (e.g., a highly rated municipal bond or 
a highly rated corporate bond); or (4) a certificate of deposit insured 
by the Federal Deposit Insurance Corporation. The Delivered Security 
must also be appropriate for the Plan, and a security that the Plan is 
permitted to hold under applicable law. The proposed exemption further 
requires that the Delivered Security be valued at its fair market 
value, as determined at the time of the exchange from a third party 
pricing service or other objective source, and must equal the total 
value of the Auction Rate Security being exchanged (i.e., par value, 
plus any accrued interest).
    10. With respect to a loan to a Plan holding an Auction Rate 
Security, such loan must be documented in a written agreement 
containing all of the material terms of the loan, including the

[[Page 66263]]

consequences of default. Further, the Plan may not pay an interest rate 
that exceeds one of the following three rates as of the commencement of 
the loan: The coupon rate for the Auction Rate Security; the Federal 
Funds Rate; or the Prime Rate. Additionally, such loan must be 
unsecured and for an amount that is no more than the total par value of 
Auction Rate Securities held by the affected Plan.
    11. Additional conditions apply to each transaction covered by the 
exemption, if granted. Among other things, the Plan may not pay any 
fees or commissions in connection with the transaction and the 
transaction may not part of an arrangement, agreement, or understanding 
designed to benefit a party in interest. The exemption expressly 
prohibits any waiver of rights or claims by a Plan in connection with 
the sale or exchange of an Auction Rate Security by a Plan, or a 
lending of money or other extension of credit to a Plan holding an 
Auction Rate Security.
    12. In summary, the Applicant represents that the transactions 
described herein satisfy the statutory criteria set forth in section 
408(a) of the Act and section 4975(c)(2) of the Code because:
    (1) Any sale will be:
    (A) For no consideration other than cash payment against prompt 
delivery of the Auction Rate Security; and
    (B) At par, plus any accrued but unpaid interest;
    (2) Any in-kind exchange will be unconditional, other than being 
for payment against prompt delivery, and will involve Delivered 
Securities that are:
    (A) Appropriate for the Plan;
    (B) Listed on a national securities exchange (but not OTC Bulletin 
Board-eligible securities and Pink Sheets-quoted securities); U.S. 
Treasury obligations; fixed income securities; or certificates of 
deposit; and
    (C) Securities that the Plan is permitted to hold under applicable 
law; and,
    (3) Any loan will be:
    (A) Documented in a written agreement containing all of the 
material terms of the loan, including the consequences of default;
    (B) At an interest rate not in excess of: the coupon rate for the 
Auction Rate Security, the Federal Funds Rate, or the Prime Rate;
    (C) Unsecured; and
    (D) For an amount that is not more than the total par value of 
Auction Rate Securities held by the affected Plan.

Notice to Interested Persons

    The Applicant represents that the potentially interested 
participants and beneficiaries cannot all be identified and therefore 
the only practical means of notifying such participants and 
beneficiaries of this proposed exemption is by the publication of this 
notice in the Federal Register. Comments and requests for a hearing 
must be received by the Department not later than 45 days from the date 
of publication of this notice of proposed exemption in the Federal 
Register.

For Further Information Contact: Chris Motta of the Department, 
telephone (202) 693-8540. (This is not a toll-free number.)

    Robert W. Baird & Co. Incorporated, Located in Milwaukie, 
Wisconsin, Exemption Application Number D-11484.

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Employee Retirement Income Security 
Act of 1974 (ERISA or the Act) and section 4975(c)(2) of the Internal 
Revenue Code of 1986, as amended (the Code), and in accordance with the 
procedures set forth in 29 CFR Part 2570, Subpart B (55 FR 32836, 
32847, August 10, 1990).\6\
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    \6\ For purposes of this proposed exemption, references to 
section 406 of ERISA should be read to refer as well to the 
corresponding provisions of section 4975 of the Code.
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Section I. Transactions Involving Plans Described in Both Title I and 
Title II of ERISA

    If the proposed exemption is granted, the restrictions of section 
406(a)(1)(A) through (D) and section 406(b) of ERISA, and the taxes 
imposed by section 4975(a) and (b) of the Code, by reason of section 
4975(c)(1) of the Code, shall not apply, effective February 1, 2008, to 
the following transactions, if the conditions set forth in section III 
have been met:
    (a) The sale or exchange of an Auction Rate Security (as defined in 
section IV (b)) by a Plan (as defined in section IV(h)) to the Sponsor 
(as defined in section IV (g)) of such Plan; or
    (b) A lending of money or other extension of credit to a Plan in 
connection with the Plan's holding of an Auction Rate Security, from: 
(1) Robert W. Baird & Co. Incorporated or any of its current or future 
affiliates or subsidiaries (Baird); (2) an Introducing Broker (as 
defined in section IV (f)); or (3) a Clearing Broker (as defined in 
section IV (d)); where the loan is: (i) Repaid in accordance with its 
terms; and (ii) guaranteed by the Plan Sponsor.

II. Transactions Involving Plans Described in Title II of ERISA Only

    If the proposed exemption is granted, the sanctions resulting from 
the application of section 4975(a) and (b) of the Code, by reason of 
section 4975(c)(1) of the Code, shall not apply, effective February 1, 
2008, to the following transactions, if the conditions set forth in 
section III have been met:
    (a) The sale or exchange of an Auction Rate Security by a Title II 
Only Plan (as defined in section IV(i)) to the Beneficial Owner (as 
defined in section IV(c)) of such Plan; or
    (b) A lending of money or other extension of credit to a Title II 
Only Plan in connection with the Plan's holding of an Auction Rate 
Security, from: (1) Baird; (2) an Introducing Broker; or (3) a Clearing 
Broker; where the loan is: (i) Repaid in accordance with its terms and; 
(ii) guaranteed by the Beneficial Owner.

III. Conditions

    (a) Baird acted as a broker or dealer, non-bank custodian, or 
fiduciary in connection with the acquisition or holding of the Auction 
Rate Security that is the subject of the transaction;
    (b) For transactions involving a Plan (including a Title II Only 
Plan) not sponsored by Baird for its own employees, the decision to 
enter into the transaction is made by a Plan fiduciary who is 
Independent (as defined in section IV (e)) of Baird. Notwithstanding 
the foregoing, an employee of Baird who is the Beneficial Owner of a 
Title II Only Plan may direct such Plan to engage in a transaction 
described in section II, if all of the other conditions of this section 
III have been met;
    (c) The last auction for the Auction Rate Security was 
unsuccessful;
    (d) The Plan does not waive any rights or claims in connection with 
the loan or sale as a condition of engaging in the transaction;
    (e) The Plan does not pay any fees or commissions in connection 
with the transaction;
    (f) The transaction is not part of an arrangement, agreement or 
understanding designed to benefit a party in interest;
    (g) With respect to any sale described in section I (a) or section 
II (a):
    (1) The sale is for no consideration other than cash payment 
against prompt delivery of the Auction Rate Security; and

[[Page 66264]]

    (2) For purposes of the sale, the Auction Rate Security is valued 
at par, plus any accrued but unpaid interest; \7\
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    \7\ This proposed exemption does not address tax issues. The 
Department has been informed by the Internal Revenue Service and the 
Department of the Treasury that they are considering providing 
limited relief from the requirements of sections 72(t)(4), 
401(a)(9), and 4974 of the Code with respect to retirement plans 
that hold Auction Rate Securities. The Department has also been 
informed by the Internal Revenue Service that if Auction Rate 
Securities are purchased from a Plan in a transaction described in 
sections I and II at a price that exceeds the fair market value of 
those securities, then the excess value would be treated as a 
contribution for purposes of applying applicable contribution and 
deduction limits under sections 219, 404, 408, and 415 of the Code.
---------------------------------------------------------------------------

    (h) With respect to an in-kind exchange described in section (I)(a) 
or section II(a), the exchange involves the transfer by a Plan of an 
Auction Rate Security in return for a Delivered Security, as such term 
is defined in section IV(j), where:
    (1) The exchange is unconditional;
    (2) For purposes of the exchange, the Auction Rate Security is 
valued at par, plus any accrued but unpaid interest;
    (3) The Delivered Security is valued at fair market value, as 
determined at the time of the in-kind exchange by a third party pricing 
service or other objective source;
    (4) The Delivered Security is appropriate for the Plan and a 
security that the Plan is otherwise permitted to hold under applicable 
law; \8\ and
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    \8\ The Department notes that the Act's general standards of 
fiduciary conduct also would apply to the transactions described 
herein. In this regard, section 404 requires, among other things, 
that a fiduciary discharge his duties respecting a plan solely in 
the interest of the plan's participants and beneficiaries and in a 
prudent manner. Accordingly, a plan fiduciary must act prudently 
with respect to, among other things, (1) The decision to exchange an 
Auction Rate Security for a Delivered Security; and (2) the 
negotiation of the terms of such exchange (or a cash sale or loan 
described above), including the pricing of such securities. The 
Department further emphasizes that it expects plan fiduciaries, 
prior to entering into any of the proposed transactions, to fully 
understand the risks associated with these types of transactions 
following disclosure by Baird of all relevant information.
---------------------------------------------------------------------------

    (5) The total value of the Auction Rate Security (i.e., par plus 
any accrued but unpaid interest) is equal to the fair market value of 
the Delivered Security;
    (i) With respect to a loan described in section I(b) or II(b):
    (1) The loan is documented in a written agreement containing all of 
the material terms of the loan, including the consequences of default;
    (2) The Plan does not pay an interest rate that exceeds one of the 
following three rates as of the commencement of the loan:
    (A) The coupon rate for the Auction Rate Security;
    (B) The Federal Funds Rate; or
    (C) The Prime Rate;
    (3) The loan is unsecured; and
    (4) The amount of the loan is not more than the total par value of 
the Auction Rate Securities held by the Plan.

IV. Definitions

    (a) The term ``affiliate'' means any person directly or indirectly, 
through one or more intermediaries, controlling, controlled by, or 
under common control with such other person;
    (b) The term ``Auction Rate Security'' or ``ARS'' means a security:
    (1) That is either a debt instrument (generally with a long-term 
nominal maturity) or preferred stock; and
    (2) with an interest rate or dividend that is reset at specific 
intervals through a Dutch auction process;
    (c) The term ``Beneficial Owner'' means: The individual for whose 
benefit the Title II Only Plan is established and includes a relative 
or family trust with respect to such individual;
    (d) The term ``Clearing Broker'' means: A member of a securities 
exchange that acts as a liaison between an investor and a clearing 
corporation and that helps to ensure that a trade is settled 
appropriately, that the transaction is successfully completed and that 
is responsible for maintaining the paper work associated with the 
clearing and executing of a transaction;
    (e) The term ``Independent'' means a person who is: (1) Not Baird 
or an affiliate; and (2) not a relative (as defined in ERISA section 
3(15)) of the party engaging in the transaction;
    (f) The term ``Introducing Broker'' means: A registered broker that 
is able to perform all the functions of a broker except for the ability 
to accept money, securities, or property from a customer;
    (g) The term ``Sponsor'' means: A plan sponsor as described in 
section 3(16)(B) of the Act and any Affiliates;
    (h) The term ``Plan'' means: Any plan described in section 3(3) of 
the Act and/or section 4975(e)(1) of the Code;
    (i) The term ``Title II Only Plan'' means: Any plan described in 
section 4975(e)(1) of the Code which is not an employee benefit plan 
covered by Title I of ERISA;
    (j) The term ``Delivered Security'' means a security that is: (1) 
Listed on a national securities exchange (excluding OTC Bulletin Board-
eligible securities and Pink Sheets-quoted securities); or (2) a U.S. 
Treasury obligation; or (3) A fixed income security that has a rating 
at the time of the exchange that is in one of the two highest generic 
rating categories from an independent nationally recognized statistical 
rating organization (e.g., a highly rated municipal bond or a highly 
rated corporate bond); or (4) A certificate of deposit insured by the 
Federal Deposit Insurance Corporation. Notwithstanding the above, the 
term ``Delivered Security'' shall not include any Auction Rate 
Security, or any related Auction Rate Security, including derivatives 
or securities materially comprised of Auction Rate Securities or any 
illiquid securities.

Summary of Facts and Representations

    1. The applicant is Baird (hereinafter, either the Applicant or 
Baird), an employee-owned wealth management, capital markets, asset 
management and private equity firm headquartered in Milwaukie, 
Wisconsin. Baird is a registered broker-dealer and a member of the 
Financial Industry Regulatory Authority. Baird is also a registered 
investment advisor, providing investment advice and asset management 
services to clients that include plans described in section 3(3) of the 
Act and/or section 4975(e)(1) of the Code.
    2. The Applicant describes Auction Rate Securities (ARS), and the 
arrangement by which ARS are bought and sold, as follows. Auction Rate 
Securities are securities (issued as debt or preferred stock) with an 
interest rate or dividend that is reset at periodic intervals pursuant 
to a process called a Dutch Auction. Investors submit orders to buy, 
hold, or sell a specific ARS to a broker-dealer selected by the entity 
that issued the ARS. The broker-dealers, in turn, submit all of these 
orders to an auction agent. The auction agent's functions include 
collecting orders from all participating broker-dealers by the auction 
deadline, determining the amount of securities available for sale, and 
organizing the bids to determine the winning bid. If there are any buy 
orders placed into the auction at a specific rate, the auction agent 
accepts bids with the lowest rate above any applicable minimum rate and 
then successively higher rates up to the maximum applicable rate, until 
all sell orders and orders that are treated as sell orders are filled. 
Bids below any applicable minimum rate or above the applicable maximum 
rate are rejected. After determining the clearing rate for all of the 
securities at auction, the auction agent allocates the ARS available 
for sale to the participating broker-dealers based on the orders they 
submitted. If there are multiple bids at the clearing rate, the auction 
agent will allocate securities among the bidders at such rate on a pro-
rata basis.
    3. The Applicant states that Baird is permitted, but not obligated, 
to submit

[[Page 66265]]

orders in auctions for its own account either as a bidder or a seller 
and routinely does so in the auction rate securities market in its sole 
discretion. In this regard, Baird may routinely place one or more bids 
in an auction for its own account to acquire ARS for its inventory, to 
prevent: (1) a failed auction (i.e., an event where there are 
insufficient clearing bids which would result in the auction rate being 
set at a specified rate); or (2) an auction from clearing at a rate 
that Baird believes does not reflect the market for the particular ARS 
being auctioned.
    4. The Applicant states that for many ARS, Baird has been appointed 
by the issuer of the securities to serve as a dealer in the auction and 
is paid by the issuer for its services. Baird is typically appointed to 
serve as a dealer in the auctions pursuant to an agreement between the 
issuer and Baird. That agreement provides that Baird will receive from 
the issuer auction dealer fees based on the principal amount of the 
securities placed through Baird.
    5. The Applicant states further that Baird may share a portion of 
the auction rate dealer fees it receives from the issuer with other 
broker-dealers that submit orders through Baird, for those orders that 
Baird successfully places in the auctions. Similarly, with respect to 
ARS for which broker-dealers other than Baird act as dealer, such other 
broker-dealers may share auction dealer fees with Baird for orders 
submitted by Baird.
    6. According to the Applicant, since February 2008, a minority of 
auctions have cleared, particularly involving municipalities. As a 
result, Plans holding Auction Rate Securities may not have sufficient 
liquidity to make benefit payments, mandatory payments and withdrawals 
and expense payments when due.\9\ The Applicant is therefore requesting 
relief for the following transactions, involving all employee benefit 
plans: (1) The sale or exchange of an Auction Rate Security from a Plan 
to the Plan's Sponsor; and (2) a lending of money or other extension of 
credit to a Plan in connection with the holding of an Auction Rate 
Security from: Baird, an Introducing Broker, or a Clearing Broker, 
where the subsequent repayment of the loan is made in accordance with 
its terms and is guaranteed by the Plan Sponsor.
---------------------------------------------------------------------------

    \9\ The Department notes that Class Exemption 80-26 (45 FR 28545 
(Apr. 29, 1980), as amended at 71 FR 17917 (Apr. 7, 2006)) permits 
interest-free loans or other extensions of credit from a party in 
interest to a Plan if, among other things, the proceeds of the loan 
or extension of credit are used only--(1) for the payment of 
ordinary operating expenses of the Plan, including the payment of 
benefits in accordance with the terms of the Plan and periodic 
premiums under an insurance or annuity contract, or (2) for a 
purpose incidental to the ordinary operation of the Plan.
---------------------------------------------------------------------------

    7. The Applicant is requesting similar relief for plans covered 
only by Title II of ERISA. In this regard, the Applicant is requesting 
relief for: (1) The sale or exchange of an Auction Rate Security from a 
Title II Only Plan to the Beneficial Owner of such Plan; and (2) a 
lending of money or other extension of credit to a Title II Only Plan 
in connection with the holding of an Auction Rate Security from: Baird; 
an Introducing Broker; or a Clearing Broker; where the subsequent 
repayment of the loan is made in accordance with its terms and is 
guaranteed by the Beneficial Owner.
    8. The Applicant states that relief from section 406(a) and (b) of 
ERISA is necessary since: (1) Baird may have previously advised or 
otherwise caused a Plan to acquire and hold the Auction Rate Security 
that is the subject of the transaction; \10\ and (2) the sale of an 
Auction Rate Security from a Plan to its sponsor (or from an IRA to its 
Beneficial Owner) violates section ERISA section 406 and/or section 
4975(c)(1) of the Code.
---------------------------------------------------------------------------

    \10\ The relief contained in this proposed exemption does not 
extend to the fiduciary provisions of section 404 of the Act.
---------------------------------------------------------------------------

    9. The Applicant represents that the proposed transactions are in 
the interests of the Plans. In this regard, the Applicant states that 
the exemption, if granted, will provide Plan fiduciaries with liquidity 
notwithstanding changes that occurred in the Auction Rate Securities 
markets. The Applicant also notes that, other than for Plans sponsored 
by the Applicant, the decision to enter into a transaction described 
herein will be made by a Plan fiduciary who is independent of Baird.
    10. The proposed exemption contains a number of safeguards designed 
to protect the interests of each Plan. With respect to the sale of an 
Auction Rate Security by a Plan, the Plan must receive cash equal to 
the par value of the Security, plus any accrued interest. The sale must 
also be unconditional, other than being for payment against prompt 
delivery. For in-kind exchanges covered by the proposed exemption, the 
security delivered to the Plan (i.e., the Delivered Security) must be: 
(1) Listed on a national securities exchange (excluding OTC Bulletin 
Board-eligible securities and Pink Sheets-quoted securities); or (2) a 
U.S. Treasury obligation; or (3) a fixed income security that has a 
rating at the time of the exchange that is in one of the two highest 
generic rating categories from an independent nationally recognized 
statistical rating organization (e.g., a highly rated municipal bond or 
a highly rated corporate bond); or (4) a certificate of deposit insured 
by the Federal Deposit Insurance Corporation. The Delivered Security 
must also be appropriate for the Plan, and a security that the Plan is 
permitted to hold under applicable law. The proposed exemption further 
requires that the Delivered Security be valued at its fair market 
value, as determined at the time of the exchange from a third party 
pricing service or other objective source, and must equal the total 
value of the Auction Rate Security being exchanged (i.e., par value, 
plus any accrued interest).
    11. With respect to a loan to a Plan holding an Auction Rate 
Security, such loan must be documented in a written agreement 
containing all of the material terms of the loan, including the 
consequences of default. Further, the Plan may not pay an interest rate 
that exceeds one of the following three rates as of the commencement of 
the loan: The coupon rate for the Auction Rate Security; the Federal 
Funds Rate; or the Prime Rate. Additionally, such loan must be 
unsecured and for an amount that is no more than the total par value of 
Auction Rate Securities held by the affected Plan.
    12. Additional conditions apply to each transaction covered by the 
exemption, if granted. Among other things, the Plan may not pay any 
fees or commissions in connection with the transaction and the 
transaction may not part of an arrangement, agreement, or understanding 
designed to benefit a party in interest. The exemption also expressly 
prohibits any waiver of rights or claims by a Plan in connection with 
the sale or exchange of an Auction Rate Security by a Plan, or a 
lending of money or other extension of credit to a Plan holding an 
Auction Rate Security.
    13. In summary, the Applicant represents that the transactions 
described herein satisfy the statutory criteria set forth in section 
408(a) of the Act and section 4975(c)(2) of the Code because:
    (1) Any sale will be:
    (A) For no consideration other than cash payment against prompt 
delivery of the Auction Rate Security; and
    (B) At par, plus any accrued but unpaid interest;
    (2) Any in-kind exchange will be unconditional and will involve 
Delivered Securities that are:
    (A) Appropriate for the Plan;
    (B) Listed on a national securities exchange (but not OTC Bulletin 
Board-eligible securities and Pink Sheets-

[[Page 66266]]

quoted securities); U.S. Treasury obligations; fixed income securities; 
or certificates of deposit; and
    (C) Securities that the Plan is permitted to hold under applicable 
law; and,
    (3) Any loan will be:
    (A) Documented in a written agreement containing all of the 
material terms of the loan, including the consequences of default;
    (B) At an interest rate not in excess of: The coupon rate for the 
Auction Rate Security, the Federal Funds Rate, or the Prime Rate;
    (C) Unsecured; and
    (D) For an amount that is not more than the total par value of 
Auction Rate Securities held by the affected Plan.

Notice to Interested Persons

    The Applicant represents that the potentially interested 
participants and beneficiaries cannot all be identified and therefore 
the only practical means of notifying such participants and 
beneficiaries of this proposed exemption is by the publication of this 
notice in the Federal Register. Comments and requests for a hearing 
must be received by the Department not later than 45 days from the date 
of publication of this notice of proposed exemption in the Federal 
Register.

FOR FURTHER INFORMATION CONTACT: Chris Motta of the Department, 
telephone (202) 693-8540. (This is not a toll-free number.)
    Raymond James & Associates, Inc., Located in St. Petersburg, 
Florida, Exemption Application Number D-11490.

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Employee Retirement Income Security 
Act of 1974 (ERISA or the Act) and section 4975(c)(2) of the Internal 
Revenue Code of 1986, as amended (the Code), and in accordance with the 
procedures set forth in 29 CFR Part 2570, Subpart B (55 FR 32836, 
32847, August 10, 1990).\11\
---------------------------------------------------------------------------

    \11\ For purposes of this proposed exemption, references to 
section 406 of ERISA should be read to refer as well to the 
corresponding provisions of section 4975 of the Code.
---------------------------------------------------------------------------

Section I. Transactions Involving Plans Described In Both Title I and 
Title II of ERISA

    If the proposed exemption is granted, the restrictions of section 
406(a)(1)(A) through (D) and section 406(b) of ERISA, and the taxes 
imposed by section 4975(a) and (b) of the Code, by reason of section 
4975(c)(1) of the Code, shall not apply, effective February 1, 2008, to 
the following transactions, if the conditions set forth in section III 
have been met:
    (a) The sale or exchange of an Auction Rate Security (as defined in 
section IV(b)) by a Plan (as defined in section IV(h)) to the Sponsor 
(as defined in section IV(g)) of such Plan; or
    (b) A lending of money or other extension of credit to a Plan in 
connection with the Plan's holding of an Auction Rate Security, from: 
(1) Raymond James & Associates, Inc. or any of its current or future 
affiliates or subsidiaries (Raymond James); (2) an Introducing Broker 
(as defined in section IV(f)); or (3) a Clearing Broker (as defined in 
section IV(d)); where the loan is: (i) repaid in accordance with its 
terms; and (ii) guaranteed by the Plan Sponsor.

II. Transactions Involving Plans Described In Title II of ERISA Only

    If the proposed exemption is granted, the sanctions resulting from 
the application of section 4975(a) and (b) of the Code, by reason of 
section 4975(c)(1) of the Code, shall not apply, effective February 1, 
2008, to the following transactions, if the conditions set forth in 
section III have been met:
    (a) The sale or exchange of an Auction Rate Security by a Title II 
Only Plan (as defined in section IV(i)) to the Beneficial Owner (as 
defined in section IV(c)) of such Plan; or
    (b) A lending of money or other extension of credit to a Title II 
Only Plan in connection with the Plan's holding of an Auction Rate 
Security, from: (1) Raymond James; (2) an Introducing Broker; or (3) a 
Clearing Broker; where the loan is: (i) repaid in accordance with its 
terms and; (ii) guaranteed by the Beneficial Owner.

III. Conditions

    (a) Raymond James acted as a broker or dealer, non-bank custodian, 
or fiduciary in connection with the acquisition or holding of the 
Auction Rate Security that is the subject of the transaction;
    (b) For transactions involving a Plan (including a Title II Only 
Plan) not sponsored by Raymond James for its own employees, the 
decision to enter into the transaction is made by a Plan fiduciary who 
is Independent (as defined in section IV(e)) of Raymond James. 
Notwithstanding the foregoing, an employee of Raymond James who is the 
Beneficial Owner of a Title II Only Plan may direct such Plan to engage 
in a transaction described in section II, if all of the other 
conditions of this section III have been met;
    (c) The last auction for the Auction Rate Security was 
unsuccessful;
    (d) The Plan does not waive any rights or claims in connection with 
the loan or sale as a condition of engaging in the transaction;
    (e) The Plan does not pay any fees or commissions in connection 
with the transaction;
    (f) The transaction is not part of an arrangement, agreement or 
understanding designed to benefit a party in interest;
    (g) With respect to any sale described in section I(a) or section 
II(a):
    (1) The Sale is for no consideration other than cash payment 
against prompt delivery of the Auction Rate Security; and
    (2) For purposes of the sale, the Auction Rate Security is valued 
at par, plus any accrued but unpaid interest; \12\
---------------------------------------------------------------------------

    \12\ This proposed exemption does not address tax issues. The 
Department has been informed by the Internal Revenue Service and the 
Department of the Treasury that they are considering providing 
limited relief from the requirements of sections 72(t)(4), 
401(a)(9), and 4974 of the Code with respect to retirement plans 
that hold Auction Rate Securities. The Department has also been 
informed by the Internal Revenue Service that if Auction Rate 
Securities are purchased from a Plan in a transaction described in 
sections I and II at a price that exceeds the fair market value of 
those securities, then the excess value would be treated as a 
contribution for purposes of applying applicable contribution and 
deduction limits under sections 219, 404, 408, and 415 of the Code.
---------------------------------------------------------------------------

    (h) With respect to an in-kind exchange described in section (I)(a) 
or section II(a), the exchange involves the transfer by a Plan of an 
Auction Rate Security in return for a Delivered Security, as such term 
is defined in section IV(j), where:
    (1) The exchange is unconditional;
    (2) For purposes of the exchange, the Auction Rate Security is 
valued at par, plus any accrued but unpaid interest;
    (3) The Delivered Security is valued at fair market value, as 
determined at the time of the in-kind exchange by a third party pricing 
service or other objective source;
    (4) The Delivered Security is appropriate for the Plan and a 
security that the Plan is otherwise permitted to hold under applicable 
law; \13\ and
---------------------------------------------------------------------------

    \13\ The Department notes that the Act's general standards of 
fiduciary conduct also would apply to the transactions described 
herein. In this regard, section 404 requires, among other things, 
that a fiduciary discharge his duties respecting a plan solely in 
the interest of the plan's participants and beneficiaries and in a 
prudent manner. Accordingly, a plan fiduciary must act prudently 
with respect to, among other things: (1) The decision to exchange an 
Auction Rate Security for a Delivered Security; and (2) the 
negotiation of the terms of such exchange (or a cash sale or loan 
described above), including the pricing of such securities. The 
Department further emphasizes that it expects plan fiduciaries, 
prior to entering into any of the proposed transactions, to fully 
understand the risks associated with these types of transactions 
following disclosure by Raymond James of all relevant information.

---------------------------------------------------------------------------

[[Page 66267]]

    (5) The total value of the Auction Rate Security (i.e., par plus 
any accrued but unpaid interest) is equal to the fair market value of 
the Delivered Security;
    (i) With respect to a loan described in section I(b) or II(b):
    (1) The loan is documented in a written agreement containing all of 
the material terms of the loan, including the consequences of default;
    (2) The Plan does not pay an interest rate that exceeds one of the 
following three rates as of the commencement of the loan:
    (A) The coupon rate for the Auction Rate Security;
    (B) The Federal Funds Rate; or
    (C) The Prime Rate;
    (3) The loan is unsecured; and
    (4) The amount of the loan is not more than the total par value of 
the Auction Rate Securities held by the Plan.

IV. Definitions

    (a) The term ``affiliate'' means any person directly or indirectly, 
through one or more intermediaries, controlling, controlled by, or 
under common control with such other person;
    (b) The term ``Auction Rate Security'' or ``ARS'' means a security:
    (1) That is either a debt instrument (generally with a long-term 
nominal maturity) or preferred stock; and
    (2) with an interest rate or dividend that is reset at specific 
intervals through a Dutch auction process;
    (c) The term ``Beneficial Owner'' means: The individual for whose 
benefit the Title II Only Plan is established and includes a relative 
or family trust with respect to such individual;
    (d) The term ``Clearing Broker'' means: A member of a securities 
exchange that acts as a liaison between an investor and a clearing 
corporation and that helps to ensure that a trade is settled 
appropriately, that the transaction is successfully completed and that 
is responsible for maintaining the paper work associated with the 
clearing and executing of a transaction;
    (e) The term ``Independent'' means a person who is: (1) Not Raymond 
James or an affiliate; and (2) not a relative (as defined in ERISA 
section 3(15)) of the party engaging in the transaction;
    (f) The term ``Introducing Broker'' means: A registered broker that 
is able to perform all the functions of a broker except for the ability 
to accept money, securities, or property from a customer;
    (g) The term ``Sponsor'' means: A plan sponsor as described in 
section 3(16)(B) of the Act and any Affiliates;
    (h) The term ``Plan'' means: Any plan described in section 3(3) of 
the Act and/or section 4975(e)(1) of the Code;
    (i) The term ``Title II Only Plan'' means: Any plan described in 
section 4975(e)(1) of the Code which is not an employee benefit plan 
covered by Title I of ERISA;
    (j) The term ``Delivered Security means a security that is: (1) 
Listed on a national securities exchange (excluding OTC Bulletin Board-
eligible securities and Pink Sheets-quoted securities); or (2) a U.S. 
Treasury obligation; or (3) a fixed income security that has a rating 
at the time of the exchange that is in one of the two highest generic 
rating categories from an independent nationally recognized statistical 
rating organization (e.g., a highly rated municipal bond or a highly 
rated corporate bond); or (4) a certificate of deposit insured by the 
Federal Deposit Insurance Corporation. Notwithstanding the above, the 
term ``Delivered Security'' shall not include any Auction Rate 
Security, or any related Auction Rate Security, including derivatives 
or securities materially comprised of Auction Rate Securities or any 
illiquid securities.

Summary of Facts and Representations

    1. The applicant is Raymond James (hereinafter, either the 
Applicant or Raymond James), a Florida-based entity that provides a 
range of financial services to clients that include plans described in 
section 3(3) of the Act and/or section 4975(e)(1) of the Code. Raymond 
James additionally acts as a broker and dealer with respect to the 
purchase and sale of securities, including Auction Rate Securities.
    2. The Applicant describes Auction Rate Securities (ARS), and the 
arrangement by which ARS are bought and sold, as follows. Auction Rate 
Securities are securities (issued as debt or preferred stock) with an 
interest rate or dividend that is reset at periodic intervals pursuant 
to a process called a Dutch Auction. Investors submit orders to buy, 
hold, or sell a specific ARS to a broker-dealer selected by the entity 
that issued the ARS. The broker-dealers, in turn, submit all of these 
orders to an auction agent. The auction agent's functions include 
collecting orders from all participating broker-dealers by the auction 
deadline, determining the amount of securities available for sale, and 
organizing the bids to determine the winning bid. If there are any buy 
orders placed into the auction at a specific rate, the auction agent 
accepts bids with the lowest rate above any applicable minimum rate and 
then successively higher rates up to the maximum applicable rate, until 
all sell orders and orders that are treated as sell orders are filled. 
Bids below any applicable minimum rate or above the applicable maximum 
rate are rejected. After determining the clearing rate for all of the 
securities at auction, the auction agent allocates the ARS available 
for sale to the participating broker-dealers based on the orders they 
submitted. If there are multiple bids at the clearing rate, the auction 
agent will allocate securities among the bidders at such rate on a pro-
rata basis.
    3. The Applicant states that Raymond James is permitted, but not 
obligated, to submit orders in auctions for its own account either as a 
bidder or a seller and routinely does so in the auction rate securities 
market in its sole discretion. In this regard, Raymond James may 
routinely place one or more bids in an auction for its own account to 
acquire ARS for its inventory, to prevent: (1) A failed auction (i.e., 
an event where there are insufficient clearing bids which would result 
in the auction rate being set at a specified rate); or (2) an auction 
from clearing at a rate that Raymond James believes does not reflect 
the market for the particular ARS being auctioned.
    4. The Applicant states that for many ARS, Raymond James has been 
appointed by the issuer of the securities to serve as a dealer in the 
auction and is paid by the issuer for its services. Raymond James is 
typically appointed to serve as a dealer in the auctions pursuant to an 
agreement between the issuer and Raymond James. That agreement provides 
that Raymond James will receive from the issuer auction dealer fees 
based on the principal amount of the securities placed through Raymond 
James.
    5. The Applicant states further that Raymond James may share a 
portion of the auction rate dealer fees it receives from the issuer 
with other broker-dealers that submit orders through Raymond James, for 
those orders that Raymond James successfully places in the auctions. 
Similarly, with respect to ARS for which broker-dealers other than 
Raymond James act as dealer, such other broker-dealers may share 
auction dealer fees with Raymond James for orders submitted by Raymond 
James.
    6. According to the Applicant, since February 2008, a minority of 
auctions have cleared, particularly involving municipalities. As a 
result, Plans holding Auction Rate Securities may not have sufficient 
liquidity to make benefit payments, mandatory payments and withdrawals 
and expense payments

[[Page 66268]]

when due.\14\ The Applicant is therefore requesting relief for the 
following transactions, involving all employee benefit plans: (1) The 
sale or exchange of an Auction Rate Security from a Plan to the Plan's 
Sponsor; and (2) a lending of money or other extension of credit to a 
Plan in connection with the holding of an Auction Rate Security from: 
Raymond James, an Introducing Broker, or a Clearing Broker, where the 
subsequent repayment of the loan is made in accordance with its terms 
and is guaranteed by the Plan Sponsor.
---------------------------------------------------------------------------

    \14\ The Department notes that Class Exemption 80-26 (45 FR 
28545 (Apr. 29, 1980), as amended at 71 FR 17917 (Apr. 7, 2006)) 
permits interest-free loans or other extensions of credit from a 
party in interest to a Plan if, among other things, the proceeds of 
the loan or extension of credit are used only--(1) for the payment 
of ordinary operating expenses of the Plan, including the payment of 
benefits in accordance with the terms of the Plan and periodic 
premiums under an insurance or annuity contract, or (2) for a 
purpose incidental to the ordinary operation of the Plan.
---------------------------------------------------------------------------

    7. The Applicant is requesting similar relief for plans covered 
only by Title II of ERISA. In this regard, the Applicant is requesting 
relief for: (1) The sale or exchange of an Auction Rate Security from a 
Title II Only Plan to the Beneficial Owner of such Plan; and (2) a 
lending of money or other extension of credit to a Title II Only Plan 
in connection with the holding of an Auction Rate Security from: 
Raymond James; an Introducing Broker; or a Clearing Broker; where the 
subsequent repayment of the loan is made in accordance with its terms 
and is guaranteed by the Beneficial Owner.
    8. The Applicant states that relief from section 406(a) and (b) of 
ERISA is necessary since: (1) Raymond James may have previously advised 
or otherwise caused a Plan to acquire and hold the Auction Rate 
Security that is the subject of the transaction;\15\ and (2) the sale 
of an Auction Rate Security from a Plan to its sponsor (or from an IRA 
to its Beneficial Owner) violates section ERISA section 406 and/or 
section 4975(c)(1) of the Code.
---------------------------------------------------------------------------

    \15\ The relief contained in this proposed exemption does not 
extend to the fiduciary provisions of section 404 of the Act.
---------------------------------------------------------------------------

    9. The Applicant represents that the proposed transactions are in 
the interests of the Plans. In this regard, the Applicant states that 
the exemption, if granted, will provide Plan fiduciaries with liquidity 
notwithstanding changes that occurred in the Auction Rate Securities 
markets. The Applicant also notes that, other than for Plans sponsored 
by the Applicant, the decision to enter into a transaction described 
herein will be made by a Plan fiduciary who is independent of Raymond 
James.
    10. The proposed exemption contains a number of safeguards designed 
to protect the interests of each Plan. With respect to the sale of an 
Auction Rate Security by a Plan, the Plan must receive cash equal to 
the par value of the Security, plus any accrued interest. The sale must 
also be unconditional, other than being for payment against prompt 
delivery. For in-kind exchanges covered by the proposed exemption, the 
security delivered to the Plan (i.e., the Delivered Security) must be: 
(1) Listed on a national securities exchange (excluding OTC Bulletin 
Board-eligible securities and Pink Sheets-quoted securities); or (2) a 
U.S. Treasury obligation; or (3) a fixed income security that has a 
rating at the time of the exchange that is in one of the two highest 
generic rating categories from an independent nationally recognized 
statistical rating organization (e.g., a highly rated municipal bond or 
a highly rated corporate bond); or (4) a certificate of deposit insured 
by the Federal Deposit Insurance Corporation. The Delivered Security 
must also be appropriate for the Plan, and a security that the Plan is 
permitted to hold under applicable law. The proposed exemption further 
requires that the Delivered Security be valued at its fair market 
value, as determined at the time of the exchange from a third party 
pricing service or other objective source, and must equal the total 
value of the Auction Rate Security being exchanged (i.e., par value, 
plus any accrued interest).
    11. With respect to a loan to a Plan holding an Auction Rate 
Security, such loan must be documented in a written agreement 
containing all of the material terms of the loan, including the 
consequences of default. Further, the Plan may not pay an interest rate 
that exceeds one of the following three rates as of the commencement of 
the loan: The coupon rate for the Auction Rate Security; the Federal 
Funds Rate; or the Prime Rate. Additionally, such loan must be 
unsecured and for an amount that is no more than the total par value of 
Auction Rate Securities held by the affected Plan.
    12. Additional conditions apply to each transaction covered by the 
exemption, if granted. Among other things, the Plan may not pay any 
fees or commissions in connection with the transaction and the 
transaction may not be part of an arrangement, agreement, or 
understanding designed to benefit a party in interest. The exemption 
also expressly prohibits any waiver of rights or claims by a Plan in 
connection with the sale or exchange of an Auction Rate Security by a 
Plan, or a lending of money or other extension of credit to a Plan 
holding an Auction Rate Security.
    13. In summary, the Applicant represents that the transactions 
described herein satisfy the statutory criteria set forth in section 
408(a) of the Act and section 4975(c)(2) of the Code because:
    (1) Any sale will be:
    (A) For no consideration other than cash payment against prompt 
delivery of the Auction Rate Security; and
    (B) At par, plus any accrued but unpaid interest;
    (2) Any in-kind exchange will be unconditional and will involve 
Delivered Securities that are:
    (A) Appropriate for the Plan;
    (B) Listed on a national securities exchange (but not OTC Bulletin 
Board-eligible securities and Pink Sheets-quoted securities); U.S. 
Treasury obligations; fixed income securities; or certificates of 
deposit; and
    (C) Securities that the Plan is permitted to hold under applicable 
law; and,
    (3) Any loan will be:
    (A) Documented in a written agreement containing all of the 
material terms of the loan, including the consequences of default;
    (B) At an interest rate that is not in excess of: The coupon rate 
for the Auction Rate Security, the Federal Funds Rate, or the Prime 
Rate;
    (C) Unsecured; and
    (D) For an amount that is not more than the total par value of 
Auction Rate Securities held by the affected Plan.

Notice to Interested Persons

    The Applicant represents that the potentially interested 
participants and beneficiaries cannot all be identified and therefore 
the only practical means of notifying such participants and 
beneficiaries of this proposed exemption is by the publication of this 
notice in the Federal Register. Comments and requests for a hearing 
must be received by the Department not later than 45 days from the date 
of publication of this notice of proposed exemption in the Federal 
Register.

FOR FURTHER INFORMATION CONTACT: Chris Motta of the Department, 
telephone (202) 693-8540. (This is not a toll-free number.)

    Northwestern Mutual Investment Services, LLC, Located in 
Milwaukee, Wisconsin, Exemption Application Number D-11505.

[[Page 66269]]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Employee Retirement Income Security 
Act of 1974 (ERISA or the Act) and section 4975(c)(2) of the Internal 
Revenue Code of 1986, as amended (the Code), and in accordance with the 
procedures set forth in 29 CFR Part 2570, Subpart B (55 FR 32836, 
32847, August 10, 1990).\16\
---------------------------------------------------------------------------

    \16\ For purposes of this proposed exemption, references to 
section 406 of ERISA should be read to refer as well to the 
corresponding provisions of section 4975 of the Code.
---------------------------------------------------------------------------

Section I. Transactions

    If the proposed exemption is granted, the restrictions of section 
406(a) of the Act and the sanctions resulting from the application of 
section 4975 of the Code, by reason of section 4975(c)(1)(A) through 
(D) of the Code, shall not apply, effective September 30, 2008, to the 
sale (the Sale) by a Plan (as defined in section II(d)) of an Auction 
Rate Security (as defined in section II(b) to Northwestern Mutual 
Investment Services, LLC (NMIS), provided that the following conditions 
are met:
    (a) The Plan acquired the Auction Rate Security (ARS) in connection 
with brokerage services provided by NMIS;
    (b) The last auction for the ARS was unsuccessful;
    (c) The Sale is made in connection with a written offer by NMIS 
(the Offer) containing all of the material terms of the Sale;
    (d) The Sale is for no consideration other than cash payment 
against prompt delivery of the ARS;
    (e) The amount of the Sale is equal to the greater of:
    (1) The fair market value of the ARS as of the date of the Sale, as 
determined by a qualified, independent appraiser; or
    (2) The sum of the price paid by the Plan for the ARS and any 
accrued but unpaid interest; \17\
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    \17\ In the event that the fair market value of an ARS exceeds 
the sum of its par value plus any accrued, but unpaid, interest as 
of the date of the Sale, NMIS will credit the difference to the 
Plan, with interest equal to the Federal Funds rate plus 125 basis 
points.
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    (f) The Plan does not waive any rights or claims in connection with 
the Sale;
    (g) The decision to accept the Offer or retain the ARS is made by a 
Plan fiduciary or Plan participant or IRA owner, who (in all cases) is 
Independent (as defined in section II(c)) of NMIS; \18\
---------------------------------------------------------------------------

    \18\ The Department notes that the Act's general standards of 
fiduciary conduct also would apply to the transactions described 
herein. In this regard, section 404 requires, among other things, 
that a fiduciary discharge his duties respecting a plan solely in 
the interest of the plan's participants and beneficiaries and in a 
prudent manner. Accordingly, a plan fiduciary must act prudently 
with respect to, among other things, the decision to engage (or to 
not engage) in a Sale. The Department further emphasizes that it 
expects a plan fiduciary, prior to entering into a Sale (or, 
alternately, prior to deciding to retain an ARS), to fully 
understand the risks associated with such a decision, following 
disclosure by NMIS of all relevant information.
---------------------------------------------------------------------------

    (h) Neither NMIS nor any affiliate exercises investment discretion 
or renders investment advice [within the meaning of 29 CFR 2510.3-
21(c)] with respect to the decision to accept the Offer or retain the 
ARS;
    (i) The Plan does not pay any commissions or transaction costs with 
respect to the Sale;
    (j) The Sale is not part of an arrangement, agreement or 
understanding designed to benefit a party in interest to the Plan;
    (k) NMIS and its affiliates, as applicable, maintain, or cause to 
be maintained, for a period of six (6) years from the date of the Sale 
such records as are necessary to enable the persons described below in 
paragraph (l)(i), to determine whether the conditions of this proposed 
exemption, if granted, have been met, except that--
    (i) No party in interest with respect to a Plan which engages in a 
Sale, other than NMIS and its affiliates, as applicable, shall be 
subject to a civil penalty under section 502(i) of the Act or the taxes 
imposed by section 4975(a) and (b) of the Code, if such records are not 
maintained, or not available for examination, as required, below, by 
paragraph (l)(i); and
    (ii) A separate prohibited transaction shall not be considered to 
have occurred solely because, due to circumstances beyond the control 
of NMIS or its affiliates, as applicable, such records are lost or 
destroyed prior to the end of the six-year period;
    (l)(i) Except as provided below in paragraph (l)(ii), and 
notwithstanding any provisions of subsections (a)(2) and (b) of section 
504 of the Act, the records referred to above in paragraph (k) 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 U.S. Securities and 
Exchange Commission; or
    (B) Any fiduciary of any Plan that engages in a Sale, or any duly 
authorized employee or representative of such fiduciary; or
    (C) Any employer of participants and beneficiaries and any employee 
organization whose members are covered by a Plan that engages in the 
Sale, or any authorized employee or representative of these entities; 
or
    (D) Any IRA owner, participant or beneficiary of a Plan that 
engages in a Sale, or duly authorized employee or representative of 
such IRA owner, participant or beneficiary;
    (ii) None of the persons described above in paragraph (l)(i)(B)-(D) 
shall be authorized to examine trade secrets of NMIS, or commercial or 
financial information which is privileged or confidential; and
    (iii) Should NMIS refuse to disclose information on the basis that 
such information is exempt from disclosure, NMIS shall, by the close of 
the thirtieth (30th) day following the request, provide a written 
notice advising that person of the reasons for the refusal and that the 
Department may request such information.

Section II. Definitions

    (a) The term ``affiliate'' means: Any person directly or 
indirectly, through one or more intermediaries, controlling, controlled 
by, or under common control with such other person;
    (b) The term ``Auction Rate Security'' or ``ARS'' means a security:
    (1) That is either a debt instrument (generally with a long-term 
nominal maturity) or preferred stock; and
    (2) with an interest rate or dividend that is reset at specific 
intervals through a Dutch auction process;
    (c) The term ``Independent'' means a person who is: (1) Not NMIS or 
an affiliate; and (2) not a relative (as defined in ERISA section 
3(15)) of the party engaging in the transaction; and
    (d) The term ``Plan'' means: any plan described in section 3(3) of 
the Act and/or section 4975(e)(1) of the Code.

Summary of Facts and Representations

    1. The applicant is Northwestern Mutual Investment Services, LLC 
(hereinafter, either the Applicant or NMIS), a subsidiary of the 
Northwestern Mutual Life Insurance Company. NMIS is a Wisconsin-based 
securities brokerage company offering investment products and services 
in the United States. NMIS makes available brokerage accounts, mutual 
funds, custodial accounts, individual retirement accounts, money market 
accounts, and insurance products, among others, and offers advisory and 
account services. The Applicant represents that, on September 17, 2008, 
ratings agency Standard & Poor's (S&P) confirmed in a public 
announcement that Northwestern Mutual remains one of the strongest 
companies in the life insurance industry and continues to maintain 
S&P's best

[[Page 66270]]

possible insurance financial strength rating (AAA).
    2. The Applicant states that in early 2006, NMIS began effecting, 
as broker, the purchase and sale of ARS on behalf of clients including 
plans described in section 3(3) of the Act and/or section 4975(e)(1) of 
the Code (i.e., the Plans). In this regard, the Applicant states that, 
as of September 10, 2008, Plans with respect to which NMIS was the 
broker of record collectively held $17.6 million in ARS (IRAs held 
approximately $15.225 million in ARS; qualified pension or profit 
sharing plans held approximately $2.05 million in ARS; and SEP-IRA's 
held approximately $350,000 in ARS). The Applicant describes ARS as 
nominal long-term debt instruments or preferred shares with short-term 
interest or dividend rates regularly reset at periodic Dutch auctions. 
According to the Applicant, NMIS's role in the ARS market has been 
solely as a broker. The Applicant represents that neither NMIS nor its 
affiliates have been an issuer, market-maker, underwriter, dealer or 
auction agent of or for ARS.
    3. The Applicant states that, in February 2008, auctions for ARS 
began to fail as both investors and the investment banks that 
previously had acted as bidders of last resort declined to bid. The 
Applicant represents that, to the best of its information and belief, 
due to the failure of the primary market for ARS as well as the lack of 
any secondary market for the securities, there were no available 
unrelated purchasers for the ARS held by the Plans. In view of the 
foregoing, on September 30, 2008, NMIS made the Offer to the Plans. In 
this regard, on that date, NMIS sent a written communication to the 
Plans outlining its offer to purchase ARS with respect to which NMIS 
was the broker of record. The Offer provides that, if a Plan fiduciary 
(or Plan participant or IRA owner) that is independent of NMIS so 
directs, NMIS will purchase each Plan's ARS for the greater of: (a) The 
fair market value of the ARS as determined by a qualified, independent 
appraiser; or (b) the price at which the ARS was purchased by the Plan, 
plus any accrued but unpaid interest. Plans will be able to accept the 
Offer at any time during the period September 30, 2008 through November 
30, 2008, and Plans will not be compelled to accept the Offer since 
acceptance must occur solely by an independent fiduciary's affirmative 
consent. The Applicant states that neither NMIS nor its affiliates will 
provide investment advice or exercise investment discretion with regard 
to any Sale.
    4. The Applicant states that an independent appraiser will 
determine the fair market value of the ARS for purposes of each Sale. 
The Applicant represents that the independent appraiser will be 
experienced in valuing securities such as ARS and will not have 
received from NMIS, Northwestern Mutual or their affiliates, gross 
income for its most recent fiscal year that exceeds five percent of the 
independent appraiser's annual gross income from all sources for the 
prior fiscal year. That Applicant states that the appraiser's 
determination of the fair market value of the ARS on any Sale date will 
be valid as of the date of such Sale. In the event the appraiser 
determines that the fair market value of an ARS exceeds the sum of its 
par value plus any accrued interest, NMIS will credit the difference to 
the Plan, with interest at the Federal Funds rate plus 125 basis 
points.
    5. The proposed exemption contains a number of additional 
safeguards designed to protect the interests of each Plan. In this 
regard, each Sale will involve an ARS for which the last Dutch auction 
was unsuccessful. Additionally, each Sale will be for no consideration 
other than cash payment against prompt delivery of the ARS. Affected 
Plans will not waive any rights or claims in connection with a Sale, 
and will not bear any commissions or transaction costs with respect to 
such Sale. Each Sale will not be a part of an arrangement, agreement or 
understanding designed to benefit a party in interest to the Plan.
    6. The Applicant states that the Sales are in the interest of the 
Plans. In this regard, that Applicant states that the Sales will 
provide the Plans with liquid funds for reinvestment that may not exist 
if the Plans remain invested in the ARS. The Applicant represents also 
that the requested exemption will be administratively feasible since 
the Sales will be one-time transactions for cash involving specific, 
identifiable securities. The Applicant represents further that the 
transactions will occur during a fixed period at a set price to be 
verified by an independent appraiser, and will not require monitoring 
by the Department.
    7. In summary, the applicant represents that the transaction 
satisfied the statutory criteria of section 408(a) of the Act and 
section 4975(c)(2) of the Code because, among other things:
    (a) Each Sale will be for no consideration other than cash payment 
against prompt delivery of the ARS;
    (b) Each affected Plan will receive the greater of:
    (1) The fair market value of the ARS as of the date of the Sale, as 
determined by a qualified, independent appraiser, or
    (2) The sum of the price at which the ARS was purchased by the 
Plan, plus any accrued but unpaid interest;
    (c) A Plan will not be required to waive any rights or claims in 
connection with any Sale;
    (d) The decision to accept the Offer (or retain the ARS) will be 
made by a Plan fiduciary or Plan participant or IRA owner, who (in all 
cases) is independent of NMIS;
    (e) Plans will not bear any commissions or transaction costs with 
respect to the Sale; and
    (f) In no event will any Sale be part of an arrangement, agreement 
or understanding designed to benefit a party in interest.

Notice to Interested Persons

    Written notice will be provided to a representative of each Plan. 
The notice shall contain a copy of the proposed exemption as published 
in the Federal Register and an explanation of the rights of interested 
parties to comment regarding the proposed exemption. Such notice will 
be provided by personal or express delivery within 15 days of the 
issuance of the proposed exemption. Any written comments must be 
received by the Department from interested persons within 45 days of 
the publication of this proposed exemption in the Federal Register.
    For Further Information Contact: Chris Motta of the Department, 
telephone (202) 693-8554. (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;

[[Page 66271]]

    (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 3rd day of November 2008.
Ivan Strasfeld,
Director of Exemption Determinations, Employee Benefits Security 
Administration, U.S. Department of Labor.
 [FR Doc. E8-26565 Filed 11-6-08; 8:45 am]

BILLING CODE 4510-29-P