[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.
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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; \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.
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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 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\
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\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\
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\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.
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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\
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\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.
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(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