[Federal Register: January 19, 2010 (Volume 75, Number 11)]
[Notices]
[Page 3053-3089]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr19ja10-134]
[[Page 3053]]
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Part III
Department of Labor
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Employee Benefits Security Administration
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Application Numbers and Proposed Exemptions; Notice
[[Page 3054]]
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
[D-11502, D-11518, D-11521, D-11425, D-11448, D-11495]
Application Numbers and Proposed Exemptions
AGENCY: Employee Benefits Security Administration, Labor.
ACTION: Notice of Proposed Exemptions.
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[Application Nos. and Proposed Exemptions; Putnam Fiduciary Trust
Company (PFTC), The PNC Financial Services Group, Inc.; Deutsche
Asset Management (UK) Limited (the Applicant); UBS Financial
Services Inc. and Its Affiliates; Deutsche Bank AG and Its
Affiliates (together, Deutsche Bank of the Applicant); Morgan
Stanley & Co. Inc. and its current and future affiliates and
subsidiaries (Morgan Stanley) and Union bank, N.A. and its
affiliates (Union Bank), et al.]
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.
Warning: If you submit written comments or hearing requests, do not
include any personally-identifiable or confidential business
information that you do not want to be publicly-disclosed. All comments
and hearing requests are posted on the Internet exactly as they are
received, and they can be retrieved by most Internet search engines.
The Department will make no deletions, modifications or redactions to
the comments or hearing requests received, as they are public records.
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.
Putnam Fiduciary Trust Company (PFTC), Located in Boston,
Massachusetts, [Application No. D-11425].
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code and in accordance with the procedures set forth in 29 CFR 2570,
subpart B (55 FR 32836, 32847, August 10, 1990).
Section I--Proposed Exemption
Effective as of January 19, 2010, the restrictions of section
406(a) and (b) of the Act, and the taxes imposed by section 4975(a) and
(b) of the Code, by reason of section 4975(c)(1)(A) through (F) of the
Code, shall not apply to either (a) the purchase or sale by a
Collective Fund (as defined in Section III(b) below) of shares of a
Mutual Fund (as defined in Section III(d) below) where Putnam Fiduciary
Trust Company (``PFTC'' or the ``Applicant'') or its affiliate (PFTC
and its affiliates are referred to herein as ``Putnam'') is the
investment advisor of the Mutual Fund as well as a fiduciary with
respect to the Collective Fund (or an affiliate of such fiduciary) or
(b) the receipt of fees by Putnam from a Mutual Fund for acting as an
investment advisor for the Mutual Fund and/or for providing other
services to the Mutual Fund which are Secondary Services (as defined in
Section III(g) below) in connection with the investment by the
Collective Fund in shares of the Mutual Fund, provided that the
following conditions and the general conditions of Section II are met:
(a) Each Collective Fund satisfies either (but not both) of the
following:
(1) The Collective Fund receives a cash credit equal to such
Collective Fund's proportionate share of all fees charged to the Mutual
Fund by Putnam for investment advisory services. Such credit shall be
paid to the Collective Fund no later than the same day on which such
investment advisory fees are paid to Putnam. The crediting of all such
fees to the Collective Funds by Putnam is audited by an independent
accounting firm on at least an annual basis to verify the proper
crediting of the fees to each Collective Fund. The audit report shall
be completed not later than six months after the period to which it
relates; or
(2) No management fees, investment advisory fees, or similar fees
are paid to Putnam with respect to any of the assets of such Collective
Fund that are invested in shares of the Mutual Fund. This condition
does not preclude the payment of investment advisory or similar fees by
the Mutual Fund to Putnam under the terms of an investment management
agreement adopted in accordance with section 15
[[Page 3055]]
of the Investment Company Act of 1940 (the 1940 Act), nor does it
preclude the payment of fees for Secondary Services to Putnam pursuant
to a duly adopted agreement between Putnam and the Mutual Fund if the
conditions of this proposed exemption are otherwise met.
(b) The price paid or received by a Collective Fund for shares in
the Mutual Fund is the net asset value (NAV) per share (as defined in
Section III (h)) and is the same price that would have been paid or
received for the shares by any other investor in the Mutual Fund at
that time, and all other dealings between the Collective Funds and the
Mutual Fund will be on a basis no less favorable to the Collective Fund
than such dealings will be with the other shareholders of the Mutual
Fund.
(c) Putnam, including any officer or director of Putnam, does not
purchase or sell shares of the Mutual Fund from or to any Collective
Fund; provided that this condition shall not preclude the purchase or
redemption of such shares between a Collective Fund and an affiliate of
PFTC acting solely in its capacity as underwriter for the Mutual Fund,
if such affiliate acts as a riskless principal, the purchase or
redemption is at NAV at the time of the transaction, and the affiliate
does not receive any direct or indirect compensation, spread or other
consideration in connection with such purchase or redemption.
(d) No sales commissions, redemption fees, or other similar fees
are paid by the Collective Funds in connection with the purchase or
sale of shares of the Mutual Fund.
(e) For each Collective Fund, the combined total of all fees
received by Putnam for the provision of services to the Collective
Fund, and in connection with the provision of services to the Mutual
Fund in which the Collective Fund may invest, are not in excess of
``reasonable compensation'' within the meaning of section 408(b)(2) of
the Act.
(f) Putnam does not receive any fees payable pursuant to Rule 12b-1
under the 1940 Act in connection with the transactions covered by this
proposed exemption.
(g) The Second Fiduciary (as defined in Section III (f) below) with
respect to each plan having an interest in a Collective Fund (a
``Client Plan'') receives in writing, in advance of any investment by
the Collective Fund in the Mutual Fund, full and detailed disclosure of
information concerning the Mutual Fund, including but not limited to:
(1) A current prospectus issued by the Mutual Fund; (2) a statement
describing the fees for investment advisory or similar services, any
Secondary Services and all other fees to be charged to or paid by (or
with respect to) the Collective Fund and by the Mutual Fund, including
the nature and extent of any differential between the rates of such
fees; (3) the reasons why PFTC may consider such investment to be
appropriate for the Collective Fund; (4) a statement describing whether
there are any limitations applicable to PFTC with respect to which
Collective Fund assets may be invested in shares of the Mutual Fund
and, if so, the nature of such limitations; and (5) upon request of the
Second Fiduciary, a copy of both the notice of proposed exemption and a
copy of the final exemption once it is published in the Federal
Register, and any other reasonably available information regarding the
transactions covered by this proposed exemption.
(h) On the basis of the information described in paragraph (g)
above, the Second Fiduciary authorizes in writing the investment of
assets of the Collective Fund in the Mutual Fund and the fees to be
paid by the Mutual Fund to Putnam.
(i) On an annual basis, Putnam will provide to the Second Fiduciary
of each Client Plan having an interest in the Collective Fund: (1) A
current prospectus issued by the Mutual Fund in which the Collective
Fund invests, and, upon the Second Fiduciary's request, a copy of the
Statement of Additional Information for such Mutual Fund that contains
a description of all fees paid by the Mutual Fund to Putnam; (2) a copy
of the annual financial disclosure report prepared by Putnam that
includes information about the Mutual Fund portfolios, as well as audit
findings of an independent auditor, within 60 days of the preparation
of the report; (3) oral or written responses to inquiries of the Second
Fiduciary as they arise; (4) a statement (i) of the approximate
percentage (which may be in the form of a range) of the assets of the
Collective Fund that were invested in the Mutual Fund during the year
and (ii) that, if the Second Fiduciary objects to the continued
investment by the Collective Fund in the Mutual Fund, the Client Plan
should withdraw from the Collective Fund; and (5) a form (Termination
Form) expressly providing an election to withdraw from the Collective
Fund, together with instructions on the use of such form. The
instructions will inform the Second Fiduciary that: (i) The prior
written authorization is terminable at will by the Plan, without
penalty to the Plan, upon receipt by Putnam of written notice from the
Second Fiduciary, and (ii) failure to return the form will result in
continued authorization of Putnam to engage in the transactions
described above on behalf of the Plan.
However, if the Termination Form has been provided to the Second
Fiduciary pursuant to Section I(j), the Termination Form need not be
provided again for an annual reauthorization pursuant to this Section
I(i) unless at least six months has elapsed since the form was
previously provided.
(j) Except as provided in Section I(j)(E), paragraph (h) of this
Section I does not apply if:
(A) The purchase, holding and sale of Mutual Fund shares by the
Collective Fund is performed subject to the prior and continuing
authorization, in the manner described in this paragraph (j), of a
Second Fiduciary with respect to each Client Plan whose assets are
invested in the Collective Fund.
(B)(1) For each Collective Fund using the fee structure described
in paragraph (a)(2) above with respect to investments in the Mutual
Fund, in the event of an increase in the rate of fees paid by the
Mutual Fund to Putnam regarding any investment management services,
investment advisory services, or similar services that Putnam provides
to the Mutual Fund over an existing rate for such services that had
been authorized by a Second Fiduciary in accordance with paragraph (h)
above or this paragraph (j); or
(2) For each Collective Fund under this exemption (regardless of
whether the fee structure described in paragraph (a)(1) or (a)(2) is
used), in the event an additional Secondary Service is provided by
Putnam to the Mutual Fund for which a fee is charged, or an increase in
the rate of any fee paid by the Mutual Fund to Putnam for any Secondary
Service that results either from an increase in the rate of such fee or
from a decrease in the number or kind of services performed by Putnam
for such fee over an existing rate for such Secondary Service that had
been authorized by a Second Fiduciary in accordance with paragraph (h)
above or this paragraph (j):
Putnam will, at least 30 days in advance of the implementation of
such additional service for which a fee is charged or for which there
is a fee increase, provide a written notice (which may take the form of
a letter or similar communication that is separate from the prospectus
of the Fund and that explains the nature and amount of the additional
service for which a fee is charged or of the increase in the rate of
fee) to the Second Fiduciary of each Client Plan having an interest in
the Collective Fund. Such written notice will include a Termination
Form
[[Page 3056]]
expressly providing an election to withdraw from the Collective Fund,
together with instructions on the use of such form.
(C) In the event a Second Fiduciary submits a notice in writing to
PFTC objecting to the initial investment by the Collective Fund in the
Mutual Fund or the implementation of such additional service for which
a fee is charged or such rate of fee increase, whichever is applicable,
the Client Plan on whose behalf the objection was intended is given the
opportunity to terminate its investment in the Collective Fund, without
penalty to such Client Plan, within such time as may be necessary to
effect the withdrawal in an orderly manner that is equitable to all
withdrawing Client Plans and to the non-withdrawing Client Plans. In
the case of a Client Plan that elects to withdraw under this
subparagraph (C), the withdrawal shall be effected prior to the initial
investment by the Collective Fund in the Mutual Fund or the
implementation of such additional service for which a fee is charged or
such rate of fee increase, whichever is applicable.
(D) Notwithstanding the foregoing subparagraphs (B) and (C), Putnam
may commence providing an additional Secondary Service for a fee or
implement any increase in the rate of fee paid by the Mutual Fund to
Putnam prior to providing the notice referred to in subparagraph (B)
above or prior to the withdrawal of an objecting Client Plan, whichever
is applicable, provided that, in either such event, the Collective Fund
receives a cash credit equal to the Collective Fund's proportionate
share of the fee for the additional Secondary Service or such fee
increase charged to the Mutual Fund by Putnam, whichever is applicable,
for the period from the date of such commencement or implementation to
the later of the date that is 30 days after the notice referred to in
subparagraph (B) above has been provided or, if applicable, the date on
which any Client Plan that objects to the provision of such additional
Secondary Service or to such fee increase has withdrawn from the
Collective Fund pursuant to subparagraph (C) above. Any such cash
credits shall be paid to the Collective Fund, with interest thereon at
the prevailing Federal funds rate plus two percent (2%), no later than
the fifth business day following the receipt of the increased fee by
Putnam.\1\ The crediting of all such fees to the Collective Fund by
Putnam will be audited by an independent accounting firm on at least an
annual basis to verify the proper crediting of the fees and interest to
the Collective Fund. The audit report shall be completed not later than
six months after the period to which it relates.
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\1\ Putnam will pay interest on any such amounts from the date
it receives such incremental amounts to the date it makes the rebate
payment to the Collective Fund.
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(E) In the case of a Client Plan whose assets are proposed to be
invested in the Collective Fund subsequent to the implementation of the
arrangement and that has not authorized the investment of assets of the
Collective Fund in the Mutual Fund, the Client Plan's investment in the
Collective Fund is subject to: (1) The receipt by a Second Fiduciary of
the full and detailed disclosures concerning the Mutual Fund pursuant
to Section I(g), above, and (2) the prior written authorization of a
Second Fiduciary pursuant to Section I(h), above (i.e., the
authorization must be provided by such new Client Plan investor in
advance of the initial investment).
(k) For each Collective Fund using the fee structure described in
paragraph (a)(1) above with respect to investments in the Mutual Fund,
the Second Fiduciary of the Client Plan receives full written
disclosure in a Fund prospectus or otherwise of any increases in the
rates of fees charged by Putnam to the Mutual Fund for investment
advisory services, or of a decrease in the number or kind of services
performed by Putnam.
Section II--General Conditions
(a) PFTC maintains for a period of six years the records necessary
to enable the persons described in paragraph (b) below to determine
whether the conditions of this exemption have been met, except that:
(1) A separate prohibited transaction will not be considered to
have occurred if, solely because of circumstances beyond the control of
PFTC, the records are lost or destroyed prior to the end of the six-
year period; and
(2) No party in interest other than Putnam shall be subject to the
civil penalty that may be assessed under Section 502(i) of the Act or
to the taxes imposed by Section 4975(a) and (b) of the Code, if the
records are not maintained or are not available for examination as
required by paragraph (b) below.
(b)(1) Except as provided in paragraph (b)(2) below and
notwithstanding any provisions of Section 504(a)(2) of the Act, the
records referred to in paragraph (a) above are unconditionally
available at their customary location for examination during normal
business hours by:
(i) Any duly authorized employee or representative of the
Department, the Internal Revenue Service, or the Securities & Exchange
Commission,
(ii) Any fiduciary of a Client Plan who has authority to acquire or
dispose of the interest in the Collective Fund owned by such Client
Plan, or any duly authorized employee or representative of such
fiduciary, and
(iii) Any participant or beneficiary of a Client Plan having an
interest in the Collective Fund or duly authorized employee or
representative of such participant or beneficiary.
(2) None of the persons described in paragraph (b)(1)(ii) or (iii)
above shall be authorized to examine trade secrets of Putnam, or
commercial or financial information that is privileged or confidential.
Section III--Definitions
(a) An ``affiliate'' of a person includes:
(1) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with the person;
(2) Any officer, director, employee, relative, or partner in any
such person; and
(3) Any corporation or partnership of which such person is an
officer, director, partner, or employee.
(b) The term ``Collective Fund'' means any common or collective
trust fund maintained by PFTC.
(c) The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
(d) The term ``Mutual Fund'' means the Putnam Prime Money Market
Fund and any other money market fund that is a diversified open-end
investment company registered under the 1940 Act and operated in
accordance with Rule 2a-7 under the 1940 Act as to which Putnam serves
as an investment adviser. Putnam may also serve as a custodian,
dividend disbursing agent, shareholder servicing agent, transfer agent,
fund accountant, or provider of some other ``Secondary Service'' (as
defined below in paragraph (g) below).
(e) The term ``relative'' means a ``relative'' as that term is
defined in section 3(15) of the Act (or a ``member of the family'') as
that term is defined in section 4975(e)(6) of the Code), or a brother,
a sister, or a spouse of a brother or a sister.
(f) The term ``Second Fiduciary'' means a fiduciary of a Client
Plan who is independent of, and unrelated to, Putnam. For purposes of
this exemption, the Second Fiduciary will
[[Page 3057]]
not be deemed to be independent of an unrelated to Putnam if:
(1) Such fiduciary directly or indirectly controls, is controlled
by, or is under common control with Putnam;
(2) Such fiduciary, or any officer, director, partner, employee, or
relative of the fiduciary is an officer, director, partner or employee
of Putnam (or is a relative of such persons); or
(3) Such fiduciary directly or indirectly receives any compensation
or other consideration for his or her own personal account in
connection with any transaction described in this exemption.
If an officer, director, partner or employee of Putnam (or a
relative of such a person), is a director of such Second Fiduciary, and
if he or she abstains from participation in (i) the decision of the
Client Plan to invest in, and remain invested in, the Collective Fund
and (ii) the granting of any authorization contemplated by Section I(h)
or any deemed authorization contemplated by Section I(i) and (j) with
respect to the Collective Fund, then paragraph (f)(2) above shall not
apply.
(g) The term ``Secondary Service'' means a service other than an
investment management, investment advisory, or similar service, which
is provided by Putnam to the Mutual Fund, including but not limited to
custodial, accounting, administrative, or any other service.
(h) The term ``net asset value (i.e., NAV)'' means the amount for
purposes of pricing all purchases and sales, calculated by dividing the
value of all securities, determined by a method as set forth in a
Fund's prospectus and statement of additional information, and other
assets belonging to the Fund or portfolio of the Fund, less the
liabilities charged to each such portfolio or Fund, by the number of
outstanding shares.
Summary of Facts and Representations
1. The applicant is Putnam Fiduciary Trust Company (PFTC), a
Massachusetts trust company subject to supervision by the Massachusetts
Division of Banks. PFTC is a wholly-owned subsidiary of Putnam, LLC
(together with PFTC and its other wholly-owned subsidiaries,
collectively referred to herein as ``Putnam''). Putnam is a majority-
owned subsidiary of Great-West Lifeco U.S. Inc. Putnam is a global
financial services firm primarily involved in the investment management
business including the management of registered, open-end investment
companies (``mutual funds''), other collective investment vehicles and
single-client separate accounts. As of May 31, 2009, Putnam's total
assets under management were approximately $102 billion.
2. PFTC manages assets held in both collective investment vehicles
(other than mutual funds) and single-client separate accounts. As of
May 31, 2009, 2006, PFTC managed approximately $9 billion in assets.
3. In particular, PFTC maintains a number of collective investment
funds, the assets of which are managed by PFTC on a discretionary basis
(the ``Collective Funds''). The Collective Funds are common or
collective trust funds of a bank within the meaning of DOL Regulation
2510.3-101(h)(1)(ii) and, as such, the assets of the Collective Funds
are ``plan assets'' subject to Title I of the Act to the extent of the
interests of ERISA Plans therein.
4. Each of the Collective Funds generally has some level of cash
balances and/or other assets to be invested in short-term, money market
instruments. In the past, PFTC has typically invested such amounts in
the short-term investment fund (the ``STIF'') made available by the
custodian of the particular Collective Fund's assets or some other
similar money market instrument or vehicle unrelated to Putnam.
5. Putnam acts as the advisor of the Putnam Prime Money Market Fund
(the ``Mutual Fund''), a money market mutual fund designed to serve as
a short-term investment vehicle. The Mutual Fund is registered under
the Investment Company Act of 1940 and is operated in accordance with
the Securities & Exchange Commission (SEC) rules relating to money
market funds (see, Rule 2a-7 under the Investment Company Act of 1940,
as amended). The Applicant represents that since January 2006, the
yield generated by the Mutual Fund has generally been superior to the
yield generated by the STIF. Accordingly, PFTC believes it would be
desirable for the Collective Funds to have the flexibility to invest in
the Mutual Fund when such investment is prudent and in the best
interest of the Collective Funds.\2\ Putnam further believes that it
would be desirable to have the same flexibility to invest the assets of
the Collective Funds in other money market mutual funds managed by
Putnam when it is in the interest of the Collective Funds to do so.\3\
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\2\ In order to achieve the benefits of this higher yield as
soon as practicable, PFTC requests that the exemption, if granted,
be retroactive to the date the proposed exemption is published in
the Federal Register.
\3\ References to the Mutual Fund in this Summary of Facts and
Representations should be read to include such other money market
mutual funds where the context so requires.
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6. Given that an affiliate of PFTC receives investment management
or advisory fees from the Mutual Fund, a decision by PFTC to cause
assets of a Collective Fund to be invested in the Mutual Fund could
constitute a self-dealing prohibited transaction under Section
406(b)(1) of ERISA, absent an available exemption. Putnam may also
receive fees from the Mutual Fund for services provided to the Mutual
Fund other than investment management, investment advisory or similar
services (``Secondary Services'') in which event any increase in such
fees as a result of PFTC's decision to invest assets of the Collective
Funds in the Mutual Fund or the engagement of Putnam to perform an
additional Secondary Service for which a fee is charged could
constitute prohibited self-dealing, absent an exemption. Prohibited
Transaction Exemption 77-4 (PTE 77-4, 42 FR 18732, April 8, 1977) is
designed to provide exemptive relief in such situations. However, one
of the conditions of PTE 77-4 is that an independent plan fiduciary
approve in writing the investment of plan assets in the affiliated
mutual fund.
7. In the case at hand, PFTC has not sought, and the relevant
independent fiduciaries of existing ERISA Plan investors in the
Collective Funds have not provided, any such written approval. Since
the Collective Funds generally have numerous ERISA Plan investors (in
many cases, a very large number of ERISA Plan investors), PFTC does not
believe it is feasible, as a practical matter, to obtain the
affirmative written approval of the relevant independent fiduciary of
each and every ERISA Plan investor in the Collective Funds. Without
such unanimous written approval, the exemption provided by PTE 77-4
will not be available and the Collective Funds will be precluded from
investing in the Mutual Fund.
8. Similarly, in the event that Putnam is engaged to render an
additional Secondary Service or any of the fees paid by the Mutual Fund
is changed, PTE 77-4 would require PFTC to obtain the affirmative
written approval of the relevant independent fiduciary of each ERISA
Plan having an interest in the Collective Funds at the time of such
engagement or change. Again, given the large number of ERISA Plans
involved and the practical difficulty of obtaining an affirmative
written approval from each and every one of them, it is unlikely that
the requirements of PTE 77-4 would be able to be satisfied in the
context of such an engagement or change.
[[Page 3058]]
9. No sales commissions are charged in connection with the purchase
of any shares of the Mutual Fund. In addition, no 12b-1 fees are
charged by the Mutual Fund with respect to any class of shares of the
Mutual Fund to be purchased by the Collective Funds pursuant to the
exemption transactions, nor will any redemption fees be charged in
connection with any sale of shares of the Mutual Fund by the Collective
Funds. Putnam, including any officer or director of Putnam, will not
purchase or sell shares of the Mutual Fund from or to any Collective
Fund. However, there may be purchases or redemptions of such shares
between a Collective Fund and an affiliate of PFTC acting solely in its
capacity as underwriter for the Mutual Fund, if the sale is at NAV, and
such affiliate acts as a riskless principal and does not receive any
compensation, spread or other consideration in connection with such
purchase or redemption.
10. The Applicant represents that Putnam will not be providing any
brokerage services for the acquisition or sale of securities by any
Mutual Fund involved in this proposed exemption.
11. Prior to investing the assets of any Collective Fund in shares
of the Mutual Fund, PFTC will provide advance notice to the relevant
independent fiduciary of each ERISA Plan then having an interest in
such Collective Fund. Such notice will include a current prospectus for
the Fund and a written statement giving full disclosure of the fee
structure under which either Putnam's investment advisory fees will be
credited back to the Collective Fund or the investment management fees
applicable to the Collective Fund with respect to the assets invested
in the Mutual Fund will be waived. The notice will also describe why
PFTC believes the investment of the Collective Fund's assets in the
Mutual Fund may be appropriate. In the case of a Client Plan whose
assets are proposed to be invested in the Collective Fund subsequent to
the implementation of the arrangement and that has not authorized the
investment of assets of the Collective Fund in the Mutual Fund, the
Client Plan's investment in the Collective Fund is subject to the prior
written authorization of a Second Fiduciary.
12. In the event the fee credit approach is utilized, the credit
will not include any fees received by Putnam for Secondary Services
rendered to the Mutual Fund because any such Secondary Services will
not be duplicative of any services being provided by PFTC to the
Collective Funds.
13. PFTC represents that, for each ERISA Plan having an interest in
a Collective Fund that engages in transactions described in this
proposed exemption, the combined total of all fees that Putnam will
receive, directly or indirectly, with respect to such ERISA Plan's
interest in the Collective Fund for the provision of services to the
Collective Fund and/or to the Mutual Fund will not be in excess of
``reasonable compensation'' within the meaning of Section 408(b)(2) of
the Act.
14. Prior to either the addition of any Secondary Service that will
result in the payment of a fee by the Mutual Fund to Putnam or any
increase in the rate of any fee paid to Putnam by the Mutual Fund, PFTC
will provide advance notice to the relevant independent fiduciary of
each ERISA Plan then having an interest in a Collective Fund as to
which the utilization of the Mutual Fund has been approved. Such notice
will include a description, as applicable, of the (i) additional
Secondary Service to be provided by Putnam and the resultant fee
payable to Putnam or (ii) increase in the rate of any such fee payable
to Putnam by the Mutual Fund or from a decrease in the number or kind
of services performed by Putnam. Such written notice will also include
a form (the Termination Form) expressly providing an election to
withdraw from the Collective Fund, together with instructions on the
use of such form.
The advance notice described in this representation 13 need not be
furnished 30 days in advance of the effective date for a fee increase
provided an amount equal to the Collective Fund's proportionate share
of the fee for such additional Secondary Service or the fee increase,
whichever is applicable, for the period from the date of commencement
of the additional Secondary Service or implementation of the fee
increase, whichever is applicable, to the date that is 30 days after
the delivery of the required notice or the date of the withdrawal of
any objecting Client Plan, whichever is later, is credited to the
Collective Fund with interest thereon at the prevailing Federal funds
rate plus two percent (2%) (``the Applicable Interest Rate'').\4\
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\4\ As an example, assume the Mutual Fund fee increase becomes
effective on June 1, Putnam provides notice of the fee increase on
May 16 and one (and only one) participating Plan objects to the fee
increase on June 10, and the sole objecting Plan withdraws from the
Collective Fund on June 20. In this case, Putnam will pay a rebate
to the Collective Fund equal to the allocable portion of the fee
increase for the period from June 1 (i.e., the effective date of the
fee increase) to June 20 (i.e., the date that one objecting Plan
withdrew, (with interest at the Applicable Interest Rate) because
that date is later than the expiration of the 30-day notice period).
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15. PFTC will maintain a system of internal accounting controls for
the crediting or waiving of all relevant fees. In addition, PFTC
proposes to retain Ernst & Young or another independent accounting firm
to audit annually the crediting of such fees. Such audits will provide
independent verification of the proper crediting of such fees. In the
event an error is identified, it will be promptly corrected. If the
correction requires a payment by PFTC, such payment shall include
interest at the money market rate earned by the Mutual Fund. An
independent accounting firm will also audit the crediting of fees and
interest at the Applicable Interest Rate for the scenario described in
paragraph 13, above.
16. The information described above (including (a) the information
to be provided prior to the initial utilization of the Mutual Fund and
(b) the information to be provided in connection with any additional
Secondary Service or any increase in the rate of any fee payable by the
Mutual Fund to Putnam (unless an amount equal to the Collective Fund's
proportionate share of the fee for such additional Secondary Service or
fee increase, whichever is applicable, is credited to the Collective
Fund with interest at the Applicable Interest Rate thereon)), will be
furnished to the relevant independent fiduciary of each ERISA Plan then
investing in the Collective Fund not less than 30 days prior to the
initiation of investment in the Mutual Fund by such Collective Fund or
the implementation of the additional Secondary Service or the increase
in the rate of any such fee payable to Putnam.\5\
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\5\ The requested exemption would not apply to any plans
maintained by Putnam or any of its affiliates for their own
employees. The Applicant represents that to the extent any such
plans have an interest in a Collective Fund, the investment of such
Collective Fund's assets attributable to such plans in the Mutual
Fund would be covered by Prohibited Transaction Exemption 77-3 (42
FR 18734, April 8, 1977). The Department expresses no opinion herein
on whether such transactions would qualify for exemptive relief
under PTE 77-3.
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17. In the event any such independent fiduciary submits a notice in
writing to PFTC objecting to the initial utilization, additional
Secondary Service or increased rate of fee, including a decrease in the
number or kind of services performed by Putnam (unless an amount equal
to the Collective Fund's share of the fee for such additional service
or fee increase, whichever is applicable, is credited to the Collective
Fund with interest at the Applicable Interest Rate thereon), the
[[Page 3059]]
ERISA Plan on whose behalf the objection was tendered will be given the
opportunity to withdraw its investment in the Collective Fund, without
penalty to such ERISA Plan, within such time as may be necessary to
effect such withdrawal in an orderly manner that is equitable to all
withdrawing ERISA Plans and all non-withdrawing ERISA Plans. In the
case of an ERISA Plan that elects to withdraw pursuant to the preceding
sentence, such withdrawal shall be effected prior to (a) the initial
utilization of the Mutual Fund, or (b) the implementation of the
additional Secondary Service or the increase in the rate of fee (unless
an amount equal to the fee for such additional Secondary Service or fee
increase, whichever is applicable, for the period from the date of such
implementation to the date on which the objecting Client Plan has
withdrawn from the Collective Fund is credited to the Collective Fund
with interest at the Applicable Interest Rate thereon); provided,
however, that the Collective Fund's existing investment in the Mutual
Fund need not be discontinued by reason of an ERISA Plan electing to
withdraw. Putnam confirms that it will not receive any ``float'' with
respect to its receipt of incremental fees for Secondary Services that
become effective before the requisite negative consent has been
obtained and that, as a result, must be credited to the Collective
Fund. This is because Putnam will credit interest on any such amounts
from the date it receives such incremental amounts to the date they are
actually credited to the Collective Fund. Putnam emphasizes that the
amount credited to the Collective Fund would not be limited to the
portion of the fee increase that is allocable to the objecting Client
Plan(s), but rather will be equal to the portion of the fee increase
that is allocable to the Collective Fund's entire position in the
Mutual Fund. Putnam represents that any such cash credits will be paid
to the Collective Fund, with interest thereon at the Applicable
Interest Rate, no later than the fifth business day following the
receipt of the increased fee by Putnam.\6\ Putnam further confirms that
if a Client Plan objects to a Mutual Fund fee increase at a time when,
due to extraordinary circumstances, withdrawals from the Collective
Fund are suspended, then Putnam would continue to credit the allocable
amount of the fee increase to the Collective Fund, with interest, until
the objecting Client Plan is able to withdraw. To summarize, if Putnam
were to implement an additional Secondary Service or increase the rate
of fee for any Secondary Service before the expiration of the 30-day
period after notice has been given to Plans, and a Plan objects and
wishes to withdraw from the Collective Fund, Putnam will pay a rebate
to the Collective Fund, with interest at the Applicable Interest Rate
thereon, from the effective date of the fee increase to the later of
the expiration of the 30-day period or the date on which the objecting
Plan withdraws from the Collective Fund. Such rebate will be paid by
Putnam within five business days of the date that Putnam actually
receives the increased fee from the Mutual Fund.
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\6\ As an example, assume the mutual fund fee increase is
effective on June 1, Putnam provides notice of the fee increase to
the participating Plans on May 31, one (and only one) participating
Plan objects to the fee increase on June 25, and the sole objecting
Plan withdraws from the Collective Fund on July 10. In this case,
the aggregate rebate amount would be equal to the allocable portion
of the fee increase for the period from June 1 (i.e., the effective
date of the fee increase) to July 10 (i.e., the date that the sole
objecting Plan withdraws, given that it is later than the expiration
of the 30-day notice period). Further, assuming that Putnam receives
payments of the increased fee from the Mutual Fund on the fifth day
of each month, Putnam would receive a payment that includes the fee
increase for the month of June on July 5 and would rebate the entire
allocable portion of that fee increase to the Collective Fund within
5 business days of July 5, with interest at the Applicable Interest
Rate. Moreover, on August 5, Putnam would receive another payment
from the Mutual Fund that includes the fee increase for the month of
July. The allocable portion of the fee increase for the period from
July 1 to July 10 (i.e., the date that the sole objecting Plan
withdrew) would be rebated to the Collective Fund within 5 business
days of August 5, with interest at the Applicable Interest Rate.
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18. On an annual basis, Putnam will provide notice to the relevant
independent fiduciary of each ERISA Plan having an interest in the
Collective Fund, which notice will include: (a) The approximate
percentage (which may be in the form of a range) of the Collective
Fund's assets that were invested in the Mutual Fund during the year;
and (b) a statement that, if the fiduciary objects to the continued
investment by the Collective Fund in the Mutual Fund, the ERISA Plan
should withdraw from the Collective Fund, and (c) a Termination Form
\7\ expressly providing an election to withdraw from the Collective
Fund, together with instructions on the use of such form. Specifically,
the instructions will explain that the Client Plan has the opportunity
to withdraw from the Collective Fund by submitting the completed
Termination Form to PFTC. Further, the instructions will provide the
PFTC address to which the form must be submitted. The form will further
provide that upon receipt thereof, the Client Plan's interest in the
Collective Fund that is the subject of such withdrawal election will be
redeemed as of the next regularly scheduled withdrawal date of the
Collective Fund, following whatever advance notice period is applicable
to the particular Collective Fund (assuming, of course, that such
Collective Fund is not subject to a suspension of withdrawals due to
extraordinary events). PFTC represents that, consistent with standard
practice in the industry with respect to collective funds, the
governing documents of Putnam's Collective Funds contain provisions
that allow for the suspension of withdrawals in extraordinary and
unusual circumstances, such as market shutdowns, etc.
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\7\ However, if the Termination Form has been provided to the
Second Fiduciary pursuant to Section I(j), the Termination Form need
not be provided again for an annual reauthorization pursuant to this
Section I(i) unless at least six months has elapsed since the form
was previously provided.
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19. All other dealings between the Collective Funds and the Mutual
Fund will be on a basis no less favorable to the Collective Fund than
such dealings will be with the other shareholders of the Mutual Fund.
20. In summary, PFTC represents that the exemption transactions
described herein will satisfy the statutory criteria of Section 408(a)
of the Act because (a) the ability to invest in the Mutual Fund will
provide the Collective Funds the opportunity to enhance the yield on
their cash balances and other short-term investments; (b) PFTC will
require annual audits by an independent accounting firm to verify the
proper crediting of the relevant fees and interest due, if applicable;
(c) PFTC will provide written notice to the relevant independent
fiduciary of each affected ERISA Plan in advance of (i) the initial
utilization by the Collective Fund of the Mutual Fund, (ii) the
commencement of an additional Secondary Service by Putnam (unless an
amount equal to the Collective Fund's proportionate share of the fee
for such additional Secondary Service is credited to the Collective
Fund with interest at the Applicable Interest Rate thereon) or (iii)
the effective date of any increase in the rate of any fee payable to
Putnam by the Mutual Fund (unless an amount equal to the Collective
Fund's proportionate share of the fee increase is credited to the
Collective Fund with interest at the Applicable Interest Rate thereon);
(d) prior to any such initial utilization, commencement or increase,
such independent fiduciary will have an opportunity to express an
objection and to cause the Client Plan to withdraw from the Collective
Fund, provided that Putnam may commence providing an
[[Page 3060]]
additional Secondary Service for a fee or implement an increase in the
rate of fee paid by the Mutual Fund to Putnam prior to the withdrawal
of the objecting Client Plan as long as the amount described in (c)
above is credited to the Collective Fund; (e) no commissions or
redemption fees will be paid by an ERISA Plan in connection with either
the purchase or sale of shares of the Mutual Fund; (f) Putnam will not
receive any 12b-1 fees as a result of the Collective Fund's purchase or
holding of shares of the Mutual Fund; and (g) all dealings between the
Collective Funds and the Mutual Fund will be on a basis that is at
least as favorable to the ERISA Plans as such dealings are with other
shareholders of the Mutual Fund.
FOR FURTHER INFORMATION CONTACT: Mr. Gary H. Lefkowitz of the
Department, telephone (202) 693-8546. (This is not a toll-free number.)
The PNC Financial Services Group, Inc., Located in Pittsburgh,
Pennsylvania, [Application No. D-11448].
Proposed Exemption
Section I--Exemption for In-Kind Redemption of Assets
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and 4975(c)(2) of the Code, and
in accordance with the procedures set forth in 29 CFR Part 2570 Subpart
B (55 FR 32836, 32847, August 10, 1990). If the proposed exemption is
granted, the restrictions in sections 406(a)(1)(A) through (D) and
406(b)(1) and (b)(2) of the Act, and the sanctions resulting from the
application of section 4975 of the Code, by reason of section
4975(c)(1)(A) through (E) of the Code, shall not apply \8\ to certain
in-kind redemptions (the Redemption(s)) by The Employees' Thrift Plan
of Mercantile Bankshares Corporation and Participating Affiliates (the
Mercantile Plan) that occurred overnight on October 31, 2007, of shares
(the Shares) of proprietary mutual funds (the Funds) for which The PNC
Financial Services Group, Inc. (PNC) or an affiliate thereof provides
investment advisory and other services, provided that the following
conditions were satisfied:
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\8\ For purposes of this proposed exemption, references to
specific provisions of Title I of the Act, unless otherwise
specified, refer also to the corresponding provisions of the Code.
---------------------------------------------------------------------------
(A) No sales commissions, redemption fees, or other similar fees
were paid in connection with the Redemptions (other than customary
transfer charges paid to parties other than PNC and any affiliates of
PNC (PNC Affiliates));
(B) The assets transferred to the Mercantile Plan pursuant to the
Redemptions consisted entirely of cash and Transferable Securities, as
such term is defined in Section II, below;
(C) In each Redemption, the Mercantile Plan received its pro rata
portion of the securities with respect to the Capital Opportunities
Fund, and certain securities, selected pursuant to a verifiable
methodology, that were approved by an independent fiduciary
(Independent Fiduciary, as such term is defined in Section II) with
respect to the other four Funds covered by this proposed exemption,
such that the securities received were equal in value to that of the
number of Shares redeemed, as determined in a single valuation (using
sources independent of PNC and PNC Affiliates) performed in the same
manner and as of the close of business on the same day, in accordance
with Rule 2a-4 under the Investment Company Act of 1940, as amended
(the 1940 Act) and the then-existing procedures adopted by the Board of
Directors of PNC Funds, Inc., which were in compliance with all
applicable securities laws;
(D) Neither PNC nor any PNC Affiliate received any direct or
indirect compensation or any fees, including any fees payable pursuant
to Rule 12b-1 under the 1940 Act, in connection with any Redemption of
the Shares;
(E) Prior to a Redemption, the Independent Fiduciary received a
full written disclosure of information regarding the Redemption;
(F) Prior to a Redemption, the Independent Fiduciary communicated
its approval for such Redemption to PNC;
(G) Prior to a Redemption, based on the disclosures provided to the
Independent Fiduciary, the Independent Fiduciary determined that the
terms of the Redemption were fair to the Mercantile Plan, and
comparable to and no less favorable than terms obtainable at arm's
length between unaffiliated parties, and that the Redemption was in the
best interests of the Mercantile Plan and its participants and
beneficiaries;
(H) Not later than thirty (30) business days after the completion
of a Redemption, the Independent Fiduciary received a written
confirmation regarding such Redemption containing:
(i) The number of Shares held by the Mercantile Plan immediately
before the Redemption (and the related per Share net asset value and
the total dollar value of the Shares held) for each Fund;
(ii) The identity (and related aggregate dollar value) of each
security provided to the Mercantile Plan pursuant to the Redemption,
including each security valued in accordance with Rule 2a-4 under the
1940 Act and procedures adopted by the Board of Directors of PNC Funds,
Inc. (using sources independent of PNC and PNC Affiliates);
(iii) The current market price of each security received by the
Mercantile Plan pursuant to the Redemption; and
(iv) If applicable, the identity of each pricing service or market
maker consulted in determining the value of such securities;
(I) The value of the securities received by the Mercantile Plan for
each redeemed Share equaled the net asset value of such Share at the
time of the transaction, and such value equaled the value that would
have been received by any other investor for shares of the same class
of the Fund at that time;
(J) Subsequent to a Redemption, the Independent Fiduciary performed
a post-transaction review that included, among other things, a random
sampling of the pricing information it received;
(K) Each of the Mercantile Plan's dealings with the Funds, the
investment advisors to the Funds, the principal underwriter for the
Funds, or any affiliated person thereof, were on a basis no less
favorable to the Mercantile Plan than dealings between the Funds and
other shareholders holding shares of the same class as the Shares;
(L) Within sixty (60) days of the date of publication of this
notice of proposed exemption, PNC reimburses The PNC Financial Services
Group, Inc. Incentive Savings Plan (the PNC Plan), into which the
Mercantile Plan was merged on November 1, 2007, for all brokerage costs
incurred by the Mercantile Plan on November 1, 2007 to liquidate the
securities that the Mercantile Plan received in kind pursuant to a
Redemption;
(M) PNC maintains, or causes to be maintained, for a period of six
years from the date of any covered transaction such records as are
necessary to enable the persons described in paragraph (N) below to
determine whether the conditions of this exemption have been met,
except that (i) a separate prohibited transaction will not be
considered to have occurred if, due to circumstances beyond the control
of PNC, the records are lost or destroyed prior to the end of the six-
year period and (ii) no party in interest with respect to the
Mercantile Plan other than PNC shall be subject to the civil penalty
that may be assessed under section 502(i) of the Act or to the taxes
imposed by section 4975(a) and (b) of the Code if such records are not
maintained or are not available for examination as required by
paragraph (N) below;
[[Page 3061]]
(N)(1) Except as provided in subparagraph (2) of this paragraph
(N), and notwithstanding any provisions of section 504(a)(2) and (b) of
the Act, the records referred to in paragraph (M) above are
unconditionally available at their customary locations for examination
during normal business hours by (i) any duly authorized employee or
representative of the Department, the Internal Revenue Service, or the
Securities and Exchange Commission (SEC), (ii) any fiduciary of the PNC
Plan as the successor to the Mercantile Plan or any duly authorized
representative of such fiduciary, (iii) any participant or beneficiary
of the PNC Plan as the successor to the Mercantile Plan or duly
authorized representative of such participant or beneficiary, and (iv)
any employer whose employees are covered by the PNC Plan as the
successor to the Mercantile Plan and any employee organization whose
members are covered by such plan;
(2) None of the persons described in paragraphs (N)(1)(ii), (iii)
and (iv) shall be authorized to examine trade secrets of PNC or the
Funds, or commercial or financial information which is privileged or
confidential;
(3) Should PNC or the Funds refuse to disclose information on the
basis that such information is exempt from disclosure pursuant to
paragraph (N)(2) above, PNC or the Funds 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
For purposes of this exemption--
(A) The term ``affiliate'' means:
(1) Any person (including corporation or partnership) directly or
indirectly through one or more intermediaries, controlling, controlled
by, or under common control with the person;
(2) Any officer, director, employee, relative, or partner in any
such person; and
(3) Any corporation or partnership of which such person is an
officer, director, partner, or employee.
(B) The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
(C) The term ``net asset value'' means the amount for purposes of
pricing all purchases and sales calculated by dividing the value of all
securities, determined by a method as set forth in the Fund's
prospectus and statement of additional information, and other assets
belonging to the Fund, less the liabilities charged to each such Fund,
by the number of outstanding shares.
(D) The term ``Independent Fiduciary'' means a fiduciary who is:
(i) Independent of and unrelated to PNC and its affiliates, and (ii)
appointed to act on behalf of the Mercantile Plan with respect to the
in-kind transfer of assets from one or more Funds to, or for the
benefit of, the Mercantile Plan. For purposes of this exemption, a
fiduciary will not be deemed to be independent of and unrelated to PNC
if: (i) Such fiduciary directly or indirectly controls, is controlled
by, or is under common control with, PNC; (ii) such fiduciary directly
or indirectly receives any compensation or other consideration in
connection with any transaction described in this exemption (except
that an independent fiduciary may receive compensation from PNC in
connection with the transactions contemplated herein if the amount or
payment of such compensation is not contingent upon, or in any way
affected by, the independent fiduciary's decision); and (iii) an amount
equal to more than one percent (1%) of such fiduciary's gross income
(for federal income tax purposes, in its prior tax year), is paid by
PNC and its affiliates to the fiduciary in 2007, the tax year at issue.
(E) The term ``Transferable Securities'' means securities (1) for
which market quotations are readily available (as determined under Rule
2a-4 of the 1940 Act) from persons independent of PNC and (2) which are
not:
(i) Securities that, if publicly offered or sold, would require
registration under the Securities Act of 1933;
(ii) Securities issued by entities in countries which (a) restrict
or prohibit the holding of securities by non-nationals other than
through qualified investment vehicles, such as the Funds, or (b) permit
transfers of ownership of securities to be effected only by
transactions conducted on a local stock exchange;
(iii) Certain portfolio positions (such as forward foreign currency
contracts, futures and options contracts, swap transactions,
certificates of deposit, and repurchase agreements) that, although
liquid and marketable, involve the assumption of contractual
obligations, require special trading facilities, or can only be traded
with the counter-party to the transaction to effect a change in
beneficial ownership;
(iv) Cash equivalents (such as certificates of deposit, commercial
paper, and repurchase agreements);
(v) Other assets that are not readily distributable (including
receivables and prepaid expenses), net of all liabilities (including
accounts payable); and
(vi) Securities subject to ``stop transfer'' instructions or
similar contractual restrictions on transfer.
(F) The term ``relative'' means a ``relative'' as that term is
defined in section 3(15) of the Act (or a ``member of the family'' as
that term is defined in section 4975(e)(6) of the Code), or a brother,
sister, or a spouse of a brother or a sister.
Effective Date: The exemption, if granted, will be effective as of
October 31, 2007.\9\
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\9\ As a general matter, it is the Department's view that the
model practice to effect an in-kind redemption by a mutual fund to a
shareholder-pension plan, subject to Title I of ERISA, is through a
pro rata distribution because the adoption of such a method ensures
that the individual stocks selected for the in-kind redemption are
objectively determined. The Department recognizes that the in-kind
redemption described in this notice of proposed exemption involves
unique circumstances because, among other things, it facilitated the
transfer of plan assets and the merger of The Employees' Thrift Plan
of Mercantile Bankshares Corporation and Participating Affiliates
(the Mercantile Plan) with The PNC Financial Services Group, Inc.
Incentive Savings Plan (the PNC Plan). See also Facts and
Representations 12, which summarizes the basis for
satisfying the section 408(a) statutory criteria for providing
exemptive relief. In this regard, an important condition contained
in this notice of proposed exemption is that PNC will pay all
brokerage commissions associated with the Mercantile Plan's sale of
the securities received in the Redemptions. Further, the Department
encourages applicants, their advisers and counsel to confer, in
advance, with EBSA's Office of Exemption Determinations as to
whether a contemplated non-pro rata in-kind redemption involving
plan assets may qualify for prohibited transaction exemptive relief.
Although the applicant requested both retroactive and prospective
exemptive relief, the Department is proposing only retroactive
exemptive relief relating to the October 31, 2007 Redemptions.
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Summary of Facts and Representations
1. The PNC Financial Services Group, Inc. (PNC) is a bank holding
company that owns or controls two principal banks, (i) PNC Bank,
National Association (PNC Bank, N.A.) and (ii) PNC Bank, Delaware, as
well as a number of non-bank subsidiaries. In addition, on March 2,
2007, PNC acquired Mercantile Bankshares Corporation (Mercantile), the
parent company of eleven subsidiary banks. PNC merged the Mercantile
subsidiary banks with, and into, PNC Bank, N.A. on September 14, 2007,
pursuant to an application filed with, and approved by, the Office of
the Comptroller of the Currency. Immediately after consummation of that
merger, PNC Bank, N.A. transferred to PNC Bank, Delaware nine Delaware
branches previously held by two of the Mercantile subsidiary banks,
pursuant to a Bank Merger Act application filed
[[Page 3062]]
with, and approved by, the Federal Reserve Bank of Cleveland.
PNC provides, through its subsidiaries, a wide variety of trust and
banking services to individuals, corporations, and institutions.
Through its banking subsidiaries, PNC provides investment management,
fiduciary, and trustee services to employee benefit plans and
charitable and endowment assets, as well as non-discretionary services
and investment options for defined contribution plans. PNC also
provides a range of tailored investment, trust, and private banking
products to affluent individuals and families.
PNC, through its affiliates, also provides various types of
administrative services to mutual funds, including acting as transfer
and disbursing agent and providing custodial and accounting services.
2. In connection with PNC's acquisition of Mercantile, PNC assumed
sponsorship of The Employees' Thrift Plan of Mercantile Bankshares
Corporation and Participating Affiliates (the Mercantile Plan), a
qualified defined contribution retirement plan, and PNC Bank, N.A.
became the Mercantile Plan's trustee. PNC Bank, N.A. is also the
trustee of The PNC Financial Services Group, Inc. Incentive Savings
Plan (the PNC Plan), a qualified defined contribution plan sponsored by
PNC.
The applicant represents that the Administrative Committee of PNC
(the Committee), the named fiduciary for plan investments for the PNC
Plan, acting in its fiduciary capacity, initiated a study of how best
to integrate the investment options under the two Plans, which had
different investment platforms. The Mercantile Plan used eight
proprietary mutual funds, each of which is a series of PNC Funds,
Inc.\10\ (i.e., the Funds),\11\ while the PNC Plan used an ``open''
platform that includes non-proprietary funds.\12\
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\10\ Prior to October 1, 2007, the name of the Fund family was
``Mercantile Funds, Inc.''
\11\ It is represented that the Mercantile Plan's assets were
invested in the Funds in accordance with Prohibited Transaction
Exemption (PTE) 77-3. PTE 77-3 (42 FR 18734, April 8, 1977) is a
class exemption that permits, under certain conditions, the
acquisition or sale of shares of a registered, open-end investment
company by an employee benefit plan covering only employees of such
investment company, employees of the investment adviser or principal
underwriter for such investment company, or employees of any
affiliated person (as defined therein) of such investment adviser or
principal underwriter. The Department expresses no opinion herein as
to whether the terms and conditions of PTE 77-3 were satisfied.
\12\ The applicant has disclosed that several of these third-
party mutual funds included among the PNC Plan investment options
are advised by BlackRock, Inc., in which PNC has a significant
minority interest (approximately 34%).
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The Committee was advised by its investment consultant Wilshire
Associates (Wilshire), who is also the Independent Fiduciary for the
Mercantile Plan in the subject Redemptions, to transition the
Mercantile Plan participants to the PNC Plan investment platform as
soon as it would be prudent to do so. Wilshire's recommendation
considered, among other things, the additional costs to the PNC Plan to
maintain two separate investment platforms, the appropriateness of the
funds on the PNC Plan investment platform, and the upcoming
administrative costs associated with the transition of Mercantile
employees to the PNC payroll. On this basis, the Committee determined
that it would be prudent, and in the best interests of the Mercantile
Plan participants and beneficiaries, to transfer out of such plan's
investment options as soon as possible.
Effective November 1, 2007, the Mercantile Plan was merged into the
PNC Plan. In connection therewith, Mercantile Plan assets invested in
shares of the Funds (the Shares) were redeemed in order to acquire
shares of mutual funds available as investment options under the PNC
Plan.
3. According to the applicant, each of the eight Funds is a
registered investment company subject to the 1940 Act and constitutes a
distinct investment vehicle, which has a joint prospectus with the
other Funds. The overall management of the Funds, including the
negotiation of investment advisory contracts, rests with the Board of
Directors of the Funds (the Fund Board); the Fund Board is elected by
the shareholders of the Funds and includes a majority of individuals
who are not ``interested persons'' (as defined in the 1940 Act) of the
Funds and are represented to be independent directors.
PNC, through its affiliate PNC Capital Advisors, Inc. (PCA),\13\
serves as the investment adviser, within the meaning of section 2(20)
of the 1940 Act, to each Fund. In certain instances, the investment
adviser may pay fees to sub-advisers, which may also be PNC affiliates.
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\13\ Prior to September 17, 2007, PCA was named ``Mercantile
Capital Advisors, Inc.''
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PCA also serves as administrator for the Funds. As administrator,
PCA maintains the Fund's offices, coordinates preparation of reports to
shareholders, prepares filings with state securities commissions, and
coordinates federal and state tax returns, among other administrative
functions.
The other service providers to the Funds, including the additional
sub-advisers, the distributor, the fund accountant, the transfer agent,
and the custodian, are all independent of, and unaffiliated with, PNC.
The Funds charge a Rule 12b-1 distribution fee that is between
0.50% and 1.00% with respect to their Class A and Class C shares.
However, Institutional Shares, the class offered to plan investors, are
not subject to 12b-1 fees.
4. In accordance with the procedures of the Funds, the Fund Board,
including a majority of the directors who are represented to be
unaffiliated and independent of PNC and Mercantile, determined that the
redemption of Shares by the Mercantile Plan with respect to five of the
eight Funds should be effected in kind and in cash. The Funds elected
to be governed by the provisions of Rule 18f-1 under the 1940 Act. This
election committed each Fund, during any ninety-day period for any one
shareholder, to redeem its shares solely in cash up to the lesser of
$250,000 or 1% of the Fund's net asset value at the beginning of such
period. Accordingly, the redemption with respect to each Fund included
a cash redemption of $250,000.
The applicant notes that PTE 77-3 provides exemptive relief for the
sale of shares of a mutual fund by an employee benefit plan covering
employees of the investment adviser for the mutual fund and its
affiliates, subject to certain conditions. However, in previous
published exemptions involving the in-kind redemption of shares by
plans sponsored by the investment advisers of mutual funds, the notices
describe PTE 77-3 as being available for a redemption of shares for
cash, implying that PTE 77-3 would not be available for an in-kind
redemption. See, e.g., PTE 2003-01 (68 FR 6194, February 6, 2003)
granted to the Northern Trust Company and Affiliates; PTE 2002-20 (67
FR 4986, March 28, 2002) granted to the Union Bank of California; and
PTE 2001-46 (66 FR 64280, December 12, 2001) granted to Bank of America
Corporation.\14\
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\14\ The most recent examples are PTE 2008-4 (73 FR 13585, March
13, 2008) granted to GE Asset Management Incorporated and 2007-04
(72 FR 13126, March 20, 2007) granted to Mellon Financial
Corporation.
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The Redemptions commenced after the close of the financial markets
on October 31, 2007. In its application dated November 1, 2007, PNC
requests retroactive exemptive relief for the in-kind Redemption of the
Mercantile Plan's investments in the Funds. PNC asserts that it meets
the standards for a retroactive exemption set forth in ERISA
[[Page 3063]]
Technical Release 85-1 because it acted in good faith, i.e., PNC
identified the potential prohibited transactions, sought legal counsel
prior to the execution of the Redemptions, and structured the
Redemption transactions in a manner to ensure that the necessary
safeguards were in place, including review and approval by a qualified,
independent fiduciary (as described further in Item 10, below).
The five of the eight Funds involved in the in-kind Redemption
transactions were: the Growth & Income Fund, the Equity Growth Fund,
the Equity Income Fund, the Capital Opportunities Fund, and the
International Equity Fund. It is represented that, as of October 30,
2007, the Mercantile Plan's approximate percentages of ownership for
each of these Funds were as follows.
------------------------------------------------------------------------
Approximate
Estimated percentage of
Fund mercantile plan fund held by
assets mercantile plan
------------------------------------------------------------------------
Growth & Income Fund.............. $87,622,519.81 21.22
Equity Growth Fund................ 12,285,590.58 23.43
Equity Income Fund................ 11,246,725.44 12.52
Capital Opportunities Fund........ 11,154,446.73 5.39
International Equity Fund......... 29,540,576.94 3.58
------------------------------------------------------------------------
5. Fund Redemption Procedures. The applicant represents that
neither the Mercantile Plan nor the Committee had any control over the
manner in which the Redemptions were consummated. The Fund Board had
the authority, pursuant to the Funds' procedures, to decide the manner
in which the Redemptions were effected, and the counsel to the Funds
has represented that the Redemptions were effected in compliance with
federal securities laws.
Because the Mercantile Plan's investment in some of the Funds
exceeded 5% of Fund assets, the Fund's pre-established redemption
procedures required a determination by the Fund Board whether the
redemption should be made in kind rather than in cash. The Funds'
``Procedures for Redemptions In Kind to Affiliated Shareholders''
(adopted by the Fund Board on May 19, 2006) were designed to comply
with the 1940 Act rules governing transactions with affiliated entities
and, in particular, with the SEC no-action letter issued to Signature
Financial Group, Inc. (the Signature letter).\15\ These redemption
procedures require the Fund Board to consider the following factors:
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\15\ According to the applicant, the Signature letter (Dec. 28,
1999) permits in-kind redemptions by an affiliated shareholder under
certain conditions set forth in the letter. Those conditions are
designed to address the fact that, in many instances, the affiliate
may have the ability and pecuniary incentive to influence the
actions of the mutual fund, which presents the affiliate with an
opportunity to inappropriately influence the mutual fund. To this
end, the Signature letter requires a mutual fund's Board of
Directors to adopt procedures designed to ensure that the affiliated
shareholder does not influence the selection of the securities to be
redeemed in kind. The SEC staff made clear its view that a pro rata
security selection process essentially eliminated the affiliated
shareholder's ability to influence or control the security selection
process and, therefore, the SEC staff would not recommend
enforcement action under the 1940 Act with respect to a pro rata in-
kind redemption to an affiliate. However, also according to the
applicant, the SEC staff also made clear that a mutual fund's Board
of Directors could use any other method for selecting the securities
to be redeemed in kind, provided that such selection process
addressed the affiliate's ability to influence or control the
security selection process.
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(b) The percentage of the Fund's shares that are being redeemed and
over what time period the transactions will occur;
(c) The tax impact to remaining shareholders;
(d) Portfolio transaction costs, including associated commission
and transfer fees, and potential market impact;
(e) Other direct expenses, including custody transaction charges
and fund accounting charges; and
e. Effect on the Fund's investment policies. For example, would the
Fund temporarily be out of compliance with stated investment objectives
due to the need to increase cash holdings, and if so for what period of
time?
Further, the pre-established redemption procedures require that the
Fund Board, including a majority of its members who are not
``interested persons'' (as defined in the 1940 Act), determine that (1)
the redemption will not favor the redeeming shareholder to the
detriment of any other shareholder; and (2) the redemption will be in
the best interests of the Fund. If the distribution of securities from
the Fund in the redemption is pro rata - i.e., of each security in the
Fund's portfolio in proportion to the redeeming shareholder's interest
in the overall Fund--prior approval of the Fund Board is not required;
however, if the distribution is not pro rata, then the Fund Board must
approve the redemption in advance of the redemption date, in conformity
with the conditions of the Signature letter.
In late July 2007, the Fund Board, including a majority of its
independent Directors, determined, in accordance with the Fund
procedures, not only that the Redemptions should be effected in kind
for five of the eight Funds but also that the distribution of
securities from four of those five Funds (all except the Capital
Opportunities Fund) would be made on a non-pro rata basis, and approved
conducting the Redemptions in this manner. The distribution of
securities from the Capital Opportunities Fund would be made on a pro
rata basis, except for those not meeting the definition of
``Transferable Securities'' as defined in Section II(E) of this notice.
The Fund Board's determinations regarding the Redemptions were based
upon the conclusions reached by the Chief Compliance Officer (CCO) of
the Funds.
6. Non-pro rata Exemptions. The applicant acknowledges that similar
individual exemptions involving in-kind redemptions previously granted
by the Department contained a condition requiring that the distribution
of securities be pro rata. The applicant distinguishes the instant
exemption request--involving the in-kind Redemption of shares from five
Funds, four on a non-pro rata basis--by noting that the prior cases
involved an in-kind transfer of the distributed securities to another
proprietary fund of the fiduciary or an affiliate or to a separate
account managed by the fiduciary or an affiliate, with a similar
portfolio of investments. The applicant points out that, as a general
matter, the Mercantile Plan had no intention of holding the securities
received. Thus, the focus was on the ability of the Mercantile Plan to
immediately sell the securities received rather than to continue to
manage those securities, based upon Wilshire's advice for the
Mercantile Plan to replace its investment platform. The Redemptions in
the instant case were immediately followed by liquidation of the vast
majority of the distributed securities
[[Page 3064]]
and reinvestment of the sale proceeds in third-party mutual funds
available under the PNC Plan.\16\ The Committee, in consultation with
Wilshire, determined that it was in the Mercantile Plan's best
interests to receive a smaller number of highly liquid securities in
larger blocks in order to facilitate an easier and less costly
liquidation, a goal that could be achieved only by means of a non-pro
rata redemption. For example, in the case of the International Equity
Fund, the implementation of a pro rata redemption would have resulted
in the receipt of over 480 different securities.
---------------------------------------------------------------------------
\16\ According to the applicant, the only securities not
liquidated were those accepted in kind by two of the third-party
receiving funds; those securities were immediately transferred to
the new funds within one business day from the date of the
Mercantile Plan's receipt.
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7. Security Selection Criteria. The applicant represents that the
selection of the particular securities to be distributed was made in
accordance with the established procedures of the Funds, pursuant to
the methodology described below, and was reviewed and approved in
advance by the CCO, who is represented by the applicant to be
``independent'' of, and not affiliated with, PNC. The CCO reviewed the
securities selected for the Redemptions and the method of selection.
The CCO concluded in his report of October 29, 2007 to the Fund Board
that the selection of the securities was made so as not to harm either
the Mercantile Plan or the shareholders remaining in the Funds.
When the Committee learned that the Funds planned to make several
of the distributions in kind, it communicated to the Funds the
Mercantile Plan's preference for large blocks of highly liquid
securities. It is represented that the Funds took the Mercantile Plan's
preferences into consideration in determining the security selection
criteria used for the Redemptions.
Ultimately, following review of the proposed selection methodology
by the Funds' CCO, the Funds used three criteria for the selection of
the securities to be distributed in the Redemptions. As memorialized in
an October 29, 2007 memorandum by the CCO, who was required to review
the methodology to assure that Fund procedures were satisfied and that
there was no overreaching in favor of either the redeeming shareholder
or the non-redeeming shareholder, those criteria were:
A minimum detriment to the remaining shareholders in the
fund (i.e. tax and other expenses).
A minimum number of securities transferred and, therefore,
a minimum in associated transaction costs [i.e., for the Mercantile
Plan as the redeeming shareholder receiving the securities].
A preference for liquid securities.
Large Cap Domestic Funds. For the three domestic equity Funds
involved in the non-pro rata Redemptions--the Equity Income Fund, the
Equity Growth Fund and the Growth and Income Fund--liquidity was not an
issue, as all of their security holdings were liquid. It was decided
that the other two criteria could best be met by delivering those tax
lots in each fund that represented the greatest percentage appreciation
over their cost, because that would minimize the tax impact on the
remaining shareholders while reducing the number of securities
distributed to the redeeming shareholder. The CCO noted in his report
that the Funds' investment adviser, and Citi Fund Services, Inc., the
Funds' sub-administrator and an independent party, both verified that
the selection methodology properly identified the tax lots with the
greatest increases and ranked the tax lots accordingly.
The applicant represents that the Funds would have used the same
approach of allocating by tax lot even in conducting an in-kind
redemption with a taxable shareholder because the redeeming shareholder
is indifferent to the tax basis of the received securities. According
to the applicant, the reason is that the shareholder, if subject to
tax, recognizes gain or loss equal to the difference between the fair
market value of the assets distributed and the shareholder's adjusted
tax basis in its fund shares--the tax basis of the distributed assets
is not a factor. At the same time, a mutual fund that qualifies as a
regulated investment company (a RIC) under the Code does not recognize
gain on the distribution of securities to a redeeming shareholder.
International Equity Fund. For the International Equity Fund, the
Fund's independent sub-adviser, Morgan Stanley,\17\ consistent with the
criteria described in the CCO's memorandum, followed the objective of
selecting as small a number of securities as possible and limiting the
selections to tradable issues in tradable volumes, as preferred by the
Committee, while also avoiding an adverse effect on the remaining
shareholders. The Fund Board had concerns about the transferability of
many of the securities in the International Equity Fund and, if
transferable, the associated transfer costs, as some foreign
jurisdictions require that their domestic securities be held under
special custody arrangements within the respective jurisdiction. On
this basis, it recommended redeeming out the securities of ten large
companies whose highly liquid securities were freely traded on European
stock exchanges. In addition to avoiding the issue of custody costs and
delays on transfer noted above, this also avoided the problem of trying
to allocate multiple small positions, as the Fund held approximately
482 different investment securities at the time.
---------------------------------------------------------------------------
\17\ Morgan Stanley was one of two sub-advisers for the
International Equity Fund, managing approximately 80% of the Fund's
assets. The Mercantile Plan's proportionate interest in the
portfolio of the other sub-adviser was distributed in cash.
---------------------------------------------------------------------------
While the CCO was concerned that this approach would not encompass
the tax lots with the most profit, as under the equity fund
methodology, he found that 72 of the 91 most profitable tax lots would
be included. Because of changes in the Fund's portfolio and market
values during the period between the initial selection date (in August
or September 2007) and the Redemption date, Morgan Stanley determined
that the Redemption amount could be satisfied using only eight of the
ten securities on the list. The applicant represents that many of the
International Equity Fund's other freely transferable foreign
securities were relatively less liquid, and including those securities
in the Redemption would have taken a longer time to sell them.
8. According to the applicant, the procedures utilized in the
valuation of securities in the in-kind Redemptions were protective of
the rights of the Mercantile Plan and its participants and
beneficiaries. The Redemptions were accomplished by transferring, in
exchange for Shares of the Funds held by the Mercantile Plan, a
selection of the securities held by each Fund as determined by the
Funds in accordance with the Funds' redemption policies. The Fund
assets transferred to the Mercantile Plan consisted entirely of cash
and securities for which market quotations were readily available.
Securities not meeting the definition of ``Transferable Securities'' as
defined in Section II(E) of this notice were excluded, i.e., (i)
Securities that, if publicly offered or sold, would require
registration under the Securities Act of 1933; (ii) Securities issued
by entities in countries which (a) restrict or prohibit the holding of
securities by non-nationals other than through qualified investment
vehicles, such as the Funds, or (b) permit transfers of ownership of
securities to be effected only by
[[Page 3065]]
transactions conducted on a local stock exchange; (iii) Certain
portfolio positions (such as forward foreign currency contracts,
futures and options contracts, swap transactions, certificates of
deposit, and repurchase agreements) that, although liquid and
marketable, involve the assumption of contractual obligations, require
special trading facilities, or can only be traded with the counter-
party to the transaction to effect a change in beneficial ownership;
(iv) Cash equivalents (such as certificates of deposit, commercial
paper, and repurchase agreements); (v) Other assets that are not
readily distributable (including receivables and prepaid expenses), net
of all liabilities (including accounts payable); and (vi) Securities
subject to ``stop transfer'' instructions or similar contractual
restrictions on transfer.
In addition, the Redemptions did not include securities that were
odd lots, fractional shares, and accruals on such securities. The
applicant also represents that no Rule 144A securities were involved in
the Redemptions.
For purposes of the in-kind Redemptions, the value of the
securities in the Funds generally were determined based on their market
value as of the close of business on the Redemption date (using sources
independent of PNC and PNC Affiliates), in accordance with the
requirements of the 1940 Act and the procedures adopted by the Fund
Board, in conformity with the Signature letter.\18\ The pricing
methodology to be applied with respect to an in-kind redemption under
these procedures complies with Rule 2a-4 under the 1940 Act, the
general rule that governs the valuation process for purposes of
determining the current price of mutual fund shares. The value for the
types of securities held by the Funds was determined as follows.
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\18\ In the Signature letter, the Division of Investment
Management of the SEC states that it will not recommend enforcement
action pursuant to section 17(a) of the 1940 Act for certain in-kind
distributions of portfolio securities to an affiliate of a mutual
fund. Funds seeking to use this ``safe harbor'' must value the
securities to be distributed to an affiliate in an in-kind
distribution ``in the same manner as they are valued for purposes of
computing the distributing fund's net asset value.'' As explained in
Item 5, ``Fund Redemption Procedures,'' the Funds had pre-
established procedures for conducting affiliated transactions in
accordance with the Signature letter.
The Signature letter does not address the marketability of the
securities distributed in kind. The range of securities distributed
pursuant to this ``safe harbor'' may therefore be broader than the
range of securities covered by SEC Rule 17a-7, 17 CFR 270.17a-7. In
granting past exemptive relief with respect to in-kind transactions
involving mutual funds, the Department has required that the
securities being distributed in-kind fall within Rule 17a-7. One of
the requirements of Rule 17a-7 is that the securities are those for
which ``market quotations are readily available.'' SEC Rule 17a-
7(a). Under this exemption request, exemptive relief also would be
limited to in-kind distribution of securities for which market
quotations are readily available.
---------------------------------------------------------------------------
(i) Securities primarily traded on a domestic securities exchange
are valued at the last price on that exchange or, if there were no
sales during the day, at the current quoted bid price. Securities
traded through the National Association of Securities Dealers Automated
Quotations (NASDAQ) National Market System are valued at the NASDAQ
Official Closing Price;
(ii) Securities primarily traded on foreign exchanges are valued at
the closing values of such securities on their respective exchanges,
provided that if such securities are not traded on the valuation date,
they will be valued at the preceding closing values;
(iii) Over-the-counter domestic securities and securities listed or
traded on foreign exchanges with operations similar to the U.S. over-
the-counter market are valued at the closing price of the primary
exchange for which the security is traded; or
(iv) With respect to the International Equity Fund, the Fund Board
determined that movements in relevant indices or other appropriate
market indicators, after the close of the foreign securities exchanges,
may demonstrate that market quotations no longer represent the fair
value of the foreign securities held by the International Equity Fund
and may require fair value pricing. Therefore, the Fund Board adopted
written policies and procedures requiring that, when there is a market
movement greater than 50 basis points in the Russell 1000 Index from
the open and close of the U.S. market, the securities in the
International Equity Fund are priced utilizing a fair value determined
by an independent pricing service, Investment Technology Group, Inc.
(ITG).\19\
---------------------------------------------------------------------------
\19\ Securities of non-U.S. issuers may be traded on U.S.
exchanges or NASDAQ, directly or in the form of ADRs, or may be
acquired on foreign exchanges or foreign over-the-counter markets.
In the latter case, valuation is in accordance with (iv).
---------------------------------------------------------------------------
9. The Redemptions occurred after the close of the markets on
Wednesday, October 31, 2007, at which time the five Funds distributed
to the Mercantile Plan a combination of securities and a small amount
of cash.\20\ The securities previously identified as acceptable by two
of the receiving funds in the PNC Plan were transferred to those funds
in kind, and the remaining securities that were received pursuant to
the Redemptions were liquidated to cash on November 1, 2007.
---------------------------------------------------------------------------
\20\ In accordance with the provisions of Rule 18f-1 under the
1940 Act, the Funds were obligated to redeem in cash the lesser of
$250,000 or 1% of their net asset value. Consequently, each of the
non-pro rata Funds distributed $250,000 in cash, and the pro rata
distribution from the Capital Opportunities Fund included a pro rata
portion of the Fund's cash holdings and the cash value of any non-
transferable securities, in an amount that exceeded $250,000.
---------------------------------------------------------------------------
The Committee had arranged for the liquidation of the securities
with two brokers (the Liquidation Arrangements)--one for the domestic
securities and one for the foreign securities. To help minimize the
time during which the Mercantile Plan participants' accounts would
remain uninvested, the Liquidation Arrangements provided for the
brokers to accept the securities at the close of the markets on October
31, 2007 at their closing prices so that the brokers assumed the market
risk involved in liquidating the securities. In the view of the
Committee, a factor in the brokers' willingness to accept this risk was
the limited number of securities involved, because it would be more
difficult for the brokers to arrange buyers for a significantly larger
number of positions. According to the applicant, it is unlikely the
Committee could have secured such a commitment if the larger number of
securities resulting from a pro rata Redemption of all five Funds had
been involved. The Committee further entered into agreements with the
receiving funds to accept the new investments on the next business day,
November 1, 2007, with an extended settlement date (up to three days
later in most instances) to cover the possibility of a delay in payment
of the liquidation proceeds, at no additional cost to the Mercantile
Plan so that the Mercantile Plan participants would not lose the
benefit of being fully invested in their chosen investment options
(through the respective successor options on the PNC Plan platform) for
more than one day.\21\
---------------------------------------------------------------------------
\21\ According to the applicant, this arrangement created an
additional benefit for the Mercantile Plan participants. Because
there was a market decline on November 1, 2007, the participants
were able to receive the higher October 31, 2007 closing prices on
the liquidation of the distributed securities, and were able to
reinvest those proceeds at the lower November 1, 2007 share prices
of the receiving funds. The overall benefit to the participants was
approximately $3 million.
---------------------------------------------------------------------------
10. No brokerage commissions or other fees or expenses (other than
customary transfer charges paid to parties other than PNC's affiliates)
were charged to the Mercantile Plan as part of the Redemptions. Third-
party brokerage costs, however, were incurred in connection with the
liquidation of the securities that the Mercantile Plan received in kind
pursuant to the Redemptions. The liquidation of all such securities was
completed on
[[Page 3066]]
November 1, 2007, and those brokerage costs were paid from the PNC
Plan's forfeiture account, which held forfeitures accumulated from
prior plan mergers. As a condition of this proposed exemption, PNC will
reimburse the PNC Plan, into which the Mercantile Plan was merged on
November 1, 2007, for all brokerage costs that the Mercantile Plan
incurred on November 1, 2007.
During the process leading up to the Redemption date, the Funds
provided the Mercantile Plan trustee with lists of the securities that
were likely to be included in the Redemptions, to permit the Mercantile
Plan fiduciaries to determine in advance how best to dispose of the
securities. The Mercantile Plan trustee passed those lists along to the
funds on the PNC Plan investment platform that were to receive the
proceeds of the respective Redemptions. Two of the receiving funds--a
Vanguard fund and a Harbor Capital fund (neither affiliated with PNC)--
informed the Mercantile Plan trustee that they would be willing to
accept certain securities from the lists in kind. As a result, on the
Redemption date, those securities were not liquidated, but rather were
transferred in kind to the receiving funds.
Because the Committee was not able to lock in the October 31, 2007
values of the securities that were transferred in kind to the new
funds, the shares acquired with those securities on November 1st were
less in value than the value of the distributed securities the previous
day. The applicant represents that the Plan participants were in the
same financial position that they would have been in had they remained
invested in the Funds, because their investments in the Funds would
have suffered a corresponding decrease. Nevertheless, the Committee
decided that it would be appropriate under the unique circumstances of
the Redemptions to insulate the participants' accounts from the impact
of this brief period of negative investment performance, by making up
the difference from the PNC Plan's forfeiture account.\22\
---------------------------------------------------------------------------
\22\ The Department is not opining herein as to whether this use
of the forfeiture account is permitted under Title I of ERISA.
---------------------------------------------------------------------------
11. As previously noted in Item 2, the applicant appointed
Wilshire, also located in Pittsburgh, Pennsylvania, to serve as the
Independent Fiduciary on behalf of the Mercantile Plan in regard to the
subject Redemptions. It is represented that, as of the end of 2007, all
fees paid by PNC to Wilshire equaled less than 1% of Wilshire's annual
gross income.
Prior to the Redemptions, Wilshire received a full written
disclosure of information regarding the Redemptions and communicated in
writing its approval of the Mercantile Plan's participation in such
Redemptions. In a letter dated November 1, 2007, Wilshire opined,
Based on our review of the proposed procedure and methodology
for the in-kind redemption, and discussions with members of The
Administrative Committee, PNC staff, and legal counsel for the
[Mercantile] Plan, it is Wilshire's opinion that an in-kind
redemption of Mercantile Plan participants' assets in certain funds
is in their best interests. As you know, a redemption of fund
interests is necessary to transition participant assets from the
funds currently available in the Mercantile Plan into the funds
available in the PNC Incentive Savings Plan. * * * Based on the
process set forth, participants in funds for which redemption is
completed in kind are not exposed to greater market risk, security
specific risk, investment management or other costs, than they would
be in any other arms-length transaction between unaffiliated
parties.
No later than thirty (30) business days after the completion of the
Redemptions, Wilshire received a written confirmation regarding such
Redemptions containing: (i) The number of Shares held by the Mercantile
Plan immediately before the Redemption (and the related per Share net
asset value and the total dollar value of the Shares held); (ii) The
identity (and related aggregate dollar value) of each security provided
to the Mercantile Plan pursuant to the Redemption, including each
security valued in accordance with Rule 2a-4 under the 1940 Act and
procedures adopted by the Board of Directors of PNC Funds, Inc. (using
sources independent of PNC and PNC Affiliates); (iii) The current
market price of each security received by the Mercantile Plan pursuant
to the Redemption; and (iv) The identity of each pricing service or
market maker consulted in determining the value of such securities.
Subsequent to the Redemptions, Wilshire performed a post-
transaction review, which is summarized in its letter dated December
21, 2007, to determine whether or not the Redemptions were effected at
a fair market price. In the letter, Wilshire confirmed that the
Redemptions were conducted in accordance with the conditions of this
proposed exemption as described in PNC's exemption application of
November 1, 2007.\23\ Wilshire downloaded the ``Committee on Uniform
Security Identification Procedures'' of each individual security from
the Funds (totaling nearly 300 equity securities) into Atlas,
Wilshire's proprietary security database to independently review the
prices for securities received by the Mercantile Plan from the Funds.
Wilshire wrote:
\23\ It is noted that the condition in Section I(L) of this
notice was not contained therein.
The prices received by Mercantile Plan participants for their
investments in these funds were equal to the closing market price as
of October 31, 2007, with the exception of the investments in the
International Equity Fund. According to the policies utilized by the
Board of Directors of PNC Funds, a fair value pricing methodology is
employed if, subsequent to the closing of foreign securities
exchanges, the U.S. equity market, as measured by the Russell 1000
stock index, closes at a value that differs from its opening value
by more than 0.5%. On October 31, 2007, the Russell 1000 Index
increased by 1.22% from its opening price. This increase was large
enough to trigger the fair value pricing policy employed by the
Funds. Investors in the International Equity Fund received prices
through the in-kind redemption that were higher than the closing
prices of these securities on their local exchanges. The use of
prices that were greater than the closing prices on the local
exchanges indicates that the fair value adjustment was made in the
---------------------------------------------------------------------------
International Equity Fund.
At the Department's request, Wilshire provided a supplemental
letter dated August 28, 2009, which addressed the methodologies for
selecting the securities to be distributed on a non-pro rata basis and
the securities liquidation process.
First, Wilshire noted:
Because the [Mercantile] Plan did not intend to continue to hold
the securities it received in the redemptions, but rather
immediately to reinvest the proceeds of their sale in other mutual
funds, * * * it was in the Mercantile Plan's best interest to
receive a limited number of investment positions that were highly
liquid, to facilitate an easier and less costly sale and liquidation
to cash.
Wilshire also stated, ``[W]e reviewed the securities selected for the
redemptions, based on lists provided in advance of the redemption date,
to confirm that they were highly liquid.''
Regarding the International Equity Fund, Wilshire stated:
By contrast, a pro rata redemption from this fund would have
caused the [Mercantile] Plan to receive a much larger number of
smaller investment positions (the fund held over 480 different
securities at the time), which would have required a more difficult,
costly and time consuming liquidation process--particularly for
those foreign jurisdictions that would have required the
[Mercantile] Plan to set up special custody arrangements to hold the
securities pending their disposition.
Finally, Wilshire noted:
[[Page 3067]]
The [Mercantile] Plan entered into arrangements for brokers to
acquire the distributed securities from the [Mercantile] Plan at
their closing prices on October 31, 2007, and to assume the risk of
future price changes. In addition, the [Mercantile] Plan arranged
for the receiving funds to accept the proceeds from the sale of the
securities on November 1.\24\ These arrangements were in the best
interests of the [Mercantile] Plan because they (1) locked in the
values at which the securities were distributed to the [Mercantile]
Plan and (2) reduced the time during which the [Mercantile] Plan
participants were out of the market to one day. In our view, a
positive factor in the brokers' willingness to accept the risk of
selling the securities was the limited number of securities
involved, because it would be more difficult for the brokers to
arrange buyers for a significantly larger number of positions.
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\24\ In the interests of clarity, Wilshire is referring here to
the Mercantile Plan's broker agreements regarding the distributed
securities that were liquidated; however, as previously noted in
Item 9, the receiving funds agreed to accept a small percentage of
the distributed securities in kind.
12. In summary, the applicant represents that the Redemptions
satisfied the statutory criteria for an exemption under section 408(a)
of the Act for the following reasons: (i) The Mercantile Plan received
its pro rata portion of the securities with respect to the Capital
Opportunities Fund; (ii) the absence of a pro rata distribution for
four of the other Funds benefited the Mercantile Plan by permitting the
distribution of securities that could be more easily and quickly
liquidated to cash, consistent with the Mercantile Plan's objective to
reinvest the proceeds as soon as possible in the PNC Plan's ``open''
investment platform that included non-proprietary funds; (iii) the
security selection criteria used were determined by parties independent
of PNC, namely, the Fund Board, the Fund CCO and (in the case of the
International Equity Fund) an unaffiliated sub-adviser; (iv) the
transaction was overseen by an Independent Fiduciary and written
authorization was provided by the Independent Fiduciary based on its
determination, following full and detailed disclosure of information
regarding the transaction, that the terms of the Redemptions were fair
and reasonable to the Mercantile Plan, and comparable to and no less
favorable than terms obtainable at arm's length between unaffiliated
parties, and that the Redemptions were in the best interests of the
Mercantile Plan and its participants and beneficiaries; and (v) the
Independent Fiduciary conducted a post-transaction analysis of the
securities selected for the Redemptions based upon the lists provided
in advance of the Redemption date and confirmed that the in-kind
Redemptions were effected at a fair market value price. It is also
noted that condition I(L) requires PNC to reimburse the PNC Plan for
all brokerage costs incurred to liquidate the securities that the
Mercantile Plan received in kind pursuant to the Redemptions so that,
in combination with the methodology used in the selection of stocks for
the non-pro rata Redemptions, the distribution of such stocks was
economically equivalent to a cash Redemption.
Notice to Interested Persons
The applicant represents that notice to interested persons shall be
furnished to the Independent Fiduciary, inactive participants and
beneficiaries of the Mercantile Plan by first-class mail, and by e-mail
to Mercantile Plan participants who are actively employed (provided
that such active participants have effective access to electronic
documents at work--otherwise, the active participants must receive such
notice by first-class mail), within 30 days of the date of publication
of this notice of pendency in the Federal Register. The notice shall
inform interested persons of their right to comment and/or request a
hearing with respect to the proposed exemption. Comments and requests
for a hearing are due within 30 days following completion of notice to
interested persons.
FOR FURTHER INFORMATION CONTACT: Ms. Karin Weng of the Department,
telephone (202) 693-8557. (This is not a toll-free number.)
Deutsche Asset Management (UK) Limited (the Applicant), Located
in London, England, a Wholly-Owned Subsidiary of Deutsche Bank AG,
Located in Frankfurt, Germany, and Throughout the World, [Exemption
Application Number D-11495].
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code, and in accordance with the procedures set forth in 29 CFR part
2570, subpart B (55 FR 32836, 32847, August 10, 1990).
Section I--Covered Transactions
If the proposed exemption is granted, the restrictions of sections
406(a)(1)(A), 406(a)(1)(B), 406(a)(1)(D), 406(b)(1), and 406(b)(2) of
the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of sections 4975(c)(1)(A), (B), (D), and
(E) of the Code, shall not apply to certain foreign exchange hedging
transactions that occurred between November 30, 2007 and May 30, 2008,
inclusive, between the DB Torus Japan Master Portfolio (the Master
Fund), in which the assets of certain client employee benefit plans
(the Client Plans) were invested, and Deutsche Asset Management (UK)
Ltd. or its affiliates (collectively, Deutsche Bank), a party in
interest with respect to the Client Plans, provided that the conditions
contained herein are satisfied.
Section II--General Conditions
(a) The foreign exchange transactions were executed solely in
connection with the Master Fund's hedging of the Japanese yen currency
risk for its share classes denominated in U.S. dollars (USD);
(b) At the time that the foreign exchange transactions were entered
into, the terms of the foreign exchange transactions were not less
favorable to the Fund than the terms generally available in comparable
arm's length foreign exchange transactions between unrelated parties;
(c) Any foreign exchange transactions authorized or executed by
Deutsche Bank or its affiliates were not part of any agreement,
arrangement, or understanding, written or otherwise, designed to
benefit Deutsche Bank, its affiliates, or any other party in interest;
(d) Prior to investing in the Master Fund, the fiduciary of each
Client Plan received the offering memorandum for the DB Torus Japan
Fund Ltd., the feeder fund (Feeder Fund) through which investments in
the Master Fund are effected;
(e) The exchange rate used for a particular foreign exchange
transaction did not deviate by more than three percent (above or below)
the interbank bid and ask rate for such currency at the time of the
foreign exchange transaction, as displayed on an independent,
nationally-recognized service that reports rates of exchange in the
foreign currency market for such currency;
(f) Prior to the granting of an exemption concerning the subject
foreign exchange transactions, Deutsche Bank shall reimburse each such
Client Plan for its pro-rata share of: (1) The spread on each foreign
exchange transaction subject to this proposed exemption; and (2) Any
fees charged by financial institutions for executing the subject
foreign exchange transaction(s), plus interest at the applicable
Internal Revenue Service underpayment penalty rate, up to the date of
reimbursement;
(g) Within 30 days of taking the corrective action described in
Section II(f) above, Deutsche Bank provides the independent fiduciaries
of each Client
[[Page 3068]]
Plan whose assets were involved in the foreign exchange transactions
with: (1) Written information, formulas, and/or other documentation
sufficient to enable such fiduciaries to independently verify that the
Plans have been reimbursed in accordance with the requirements of
Section II(f) above; and (2) a copy of this notice of proposed
exemption (the Notice);
(h) Within 30 days of taking the corrective action described in
Section II(f) above, Deutsche Bank provides the Department with written
documentation demonstrating that the foregoing reimbursements to each
Client Plan were correctly computed and paid;
(i) Effective May 31, 2008, Deutsche Bank, in conjunction with the
administrator of both the Master Fund and the Feeder Fund (together,
the Funds), continuously monitors the percentage of total assets
invested by benefit plan investors in the Funds so that, as of each
acquisition or redemption of equity interests, Deutsche Bank and the
administrator of the Funds are able to verify whether equity
participation in the Funds by benefit plan investors is not significant
pursuant to section 3(42) of the Act and 29 CFR 2510.3-101;
(j) Deutsche Bank maintains, or causes to be maintained, for a
period of six years from the date of the transactions that are the
subject of this proposed exemption, the following records, as well as
any other records necessary to enable the persons described in Section
II(l) of this exemption, to determine whether the conditions of this
exemption have been met:
(1) The account name;
(2) The trade and settlement dates of the subject foreign exchange
hedging transactions;
(3) The USD/Japanese yen currency exchange rates on the trade and
settlement dates;
(4) The high and low currency prices on Bloomberg or similar
independent service on the dates of the subject transactions;
(5) The identification of the type of currency trade undertaken
(whether spot or forward);
(6) The amount of Japanese yen sold or purchased in the hedging
transactions; and
(7) The amount of U.S. dollars exchanged for Japanese yen in the
hedging transactions.
(k) The following are exceptions to the requirements of Section
II(j):
(1) A separate prohibited transaction shall not be considered to
have occurred solely because, due to circumstances beyond the control
of Deutsche Bank or its affiliates, the records necessary to enable the
persons described in Section II(l) to determine whether the conditions
of the exemption have been met or lost or destroyed prior to the end of
the six-year period; and
(2) No party in interest, other than Deutsche Bank and its
affiliates, shall be subject to the civil penalty that may be assessed
under section 502(i) of the Act or to the excise taxes imposed by
section 4975(a) and (b) of the Code if the records are not maintained
for examination as required by Section II(l) below.
(l)(1) Except as provided in paragraph (2) of this Section II(l)
and notwithstanding the provisions of subsections (a)(2) and (b) of
section 504 of the Act, the records referred to above in Section II(j)
are unconditionally available for examination during normal business
hours at their customary location to the following persons or an
authorized representative thereof:
(i) Any duly authorized employee or representative of the
Department or of the Internal Revenue Service (the Service);
(ii) The independent fiduciary of each Client Plan (or a duly
authorized employee or representative of such fiduciary), or
(iii) Any participant or beneficiary of such Client Plans or any
duly authorized employee or representative of a participant or
beneficiary in such Client Plans.
(2) None of the persons described above in paragraphs (ii) and
(iii) of Section II(l)(1) shall be authorized to examine trade secrets
of Deutsche Bank or its affiliates, or any commercial or financial
information, which is privileged or confidential.
Section III--Definitions
For purposes of this proposed exemption:
(a) An ``affiliate'' of the Applicant means: (1) Any person or
entity directly or indirectly, through one or more intermediaries,
controlling, controlled by, or under common control with such person or
entity; (2) Any officer, director, partner, employee, or relative (as
defined in section 3(15) of the Act) of such other person or entity;
and (3) Any corporation or partnership of which such other person or
entity is an officer, director, partner, or employee.
(b) The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
(c) The term ``client plan'' means an employee benefit plan, other
than a plan sponsored by the Applicant and its affiliates, as described
in section 3(3) of the Act or section 4975(e)(1) of the Code that
invested in the Master Fund and the Feeder Fund, and for which the
Applicant or its affiliate served as an investment advisor
(d) The term ``foreign exchange transaction'' means the exchange of
the currency of one nation for the currency of another nation.
(e) The term ``hedging'' means a strategy used to offset the
investment risk of future gains or losses resulting from anticipated
fluctuations in the value of currency, such as an investor's decision
to exchange foreign currency in anticipation of upward or downward
movement in the value of that currency.
Summary of Facts and Representations
1. Deutsche Asset Management (UK) Limited (DeAM UK) is a wholly-
owned subsidiary of Deutsche Bank AG. DeAM UK (the Applicant) is an
investment adviser domiciled in the United Kingdom with approximately
$2.2 billion is assets under management, and is registered in the
United States under the Investment Advisers Act of 1940. The Applicant
also represents that it is regulated by the Financial Services
Authority (FSA), an independent non-governmental body, which was
granted statutory powers by the United Kingdom Financial Services and
Markets Act 2000.
The Applicant is a sub-advisor to both the DB Torus Japan Master
Portfolio (the Master Fund), a Cayman Islands exempted company, and the
DB Torus Japan Master Portfolio Ltd. (the Feeder Fund), also a Cayman
Islands exempted company. The adviser to both the Master Fund and the
Feeder Fund is Deutsche Bank Trust Company Americas (DBTCA), a New York
banking corporation, which also is wholly-owned by Deutsche Bank AG.
2. Deutsche Bank AG (together with its affiliates, Deutsche Bank),
a German banking corporation and a leading commercial bank, provides a
wide range of global banking, fiduciary, record keeping, custodial,
brokerage, and investment services to corporations, institutions,
employee benefit plans, and private investors. Through its numerous
affiliates, subsidiaries, and branches, Deutsche Bank has a worldwide
physical presence. As of December 31, 2007, Deutsche Bank had
approximately $1.19 trillion in assets under management and had
approximately $54.09 billion in shareholder equity.
The Applicant represents that Deutsche Bank is subject to a
comprehensive system of regulatory oversight and a mandatory insurance
program. The Applicant also represents
[[Page 3069]]
that Deutsche Bank, its branches, and its subsidiary banks worldwide
are subject to regulatory requirements and protections that are,
qualitatively, at least equal to those imposed on U.S.-domiciled
banks.\25\ Within the United States, the Applicant represents that both
the New York branch of Deutsche Bank and DBTCA are regulated and
supervised by the New York State Banking Department. In addition, the
Applicant represents that certain activities of Deutsche Bank's New
York branch and DBTCA are regulated and supervised by the Federal
Reserve Bank of New York.
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\25\ The Applicant represents that the U.S. Department of the
Treasury has accorded national treatment to German bank branches,
and the German Ministry of Finance has granted relief to branches of
U.S. banks in Germany, in particular with respect to ``dotation'' or
endowment capital requirements and capital adequacy standards.
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3. The Applicant represents that the Master Fund invests in
Japanese equity and equity-related securities. Client investment is
effected through the Feeder Fund. The Feeder Fund, in turn, has
invested all of its assets in the Master Fund, with the exception of
cash reserves maintained, for example, for the payment of fees and
expenses. The ``base'' currency in which both the Master Fund and the
Feeder Fund maintain their books, records, and financial statements
(and in which they charge applicable fees) is the Japanese yen. The
Feeder Fund offers distinct share classes denominated in U.S. dollars
(USD) for the convenience of investors wishing to invest with USD (USD
Investors). Among the investors in the USD share class of the Feeder
Fund are client employee benefit plans (the Client Plans).
4. As disclosed in the Feeder Fund's offering memorandum, which is
distributed to all potential investors (including potential Client Plan
investors) prior to investment, the managing member of the Master Fund
is charged with maintaining a continuous dollar/yen hedge with respect
to investments in its USD share class in order to disaggregate the
impact of currency fluctuations on the performance of a USD Investor's
investment. The currency hedge offers USD Investors exposure to the
portfolio of the Master Fund while reducing exposure to fluctuations in
relative value of yen to the USD. Thus, the Applicant represents that
an investor investing in the USD share class of the Feeder Fund
necessarily expects that its investments will, as fully as possible,
hedge the USD against the yen. The Applicant represents that it has
investment discretion over the assets involved in the exemption
transactions described herein. In addition, the Applicant represents
that it is affiliated with the counterparty to those transactions.
The Applicant represents that the currency hedging activity was
fully disclosed to Client Plans and other investors in the Feeder
Fund's offering memorandum, and it would have occurred regardless of
the identity of the counterparty. The Applicant further represents
that, by investing in the USD share class of the Feeder Fund, the
independent fiduciaries of the investing employee benefit plans
consented to the hedging transactions. The Applicant also states that,
in investing in the Feeder Fund, each Client Plan's independent
fiduciary necessarily approved the execution of currency trades through
DeAM UK as principal.
5. The foregoing hedge is effected each month through the following
transactions: (1) A foreign exchange ``forward trade'' \26\ that
settles on the last business day of the month; (2) A foreign exchange
spot trade \27\ that settles on the last business day of the month
(which closes out the forward trade); and (3) Another foreign exchange
forward trade. The Applicant represents that this currency hedging
activity is largely automatic and ministerial in nature. Since the
inception of the Master Fund, the Applicant represents, hedging
transactions have been consistently effected each month at particular
times and in mechanically determined amounts, which are specified in
the operating procedures of the Master Fund. The Applicant further
represents that, since all gains and losses resulting from the currency
hedging activity are ``reversed out'' from the performance of the USD
share classes prior to calculation of the performance fee and the
``high water mark'' \28\, the hedging transactions are canceled out for
purposes of the performance fees paid to the investment manager.
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\26\ A foreign exchange ``forward'' is an agreement to purchase
or sell a fixed amount of foreign currency at a fixed price and on a
predetermined future date (or within a predetermined range of
dates).
\27\ A foreign exchange ``spot'' trade is a purchase of one
currency with a different currency for immediate delivery. These
trades typically settle within two days from the date of execution.
See also the Notice of Proposed Exemption preceding the final grant
of PTE 94-20 at 56 FR 11757, 11759, n.3 (March 20, 1991).
\28\ ``High water mark'' is a reference point by which a hedge
fund manager's performance compensation is calculated. When a high
water mark formula applies, the manager receives performance
compensation only if the value of the fund is greater than its
previous greatest value (i.e., the high water mark). If the value of
the fund falls below the high water mark, the manager receives no
performance fees until the value rises above the high water mark.
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6. From their inception, both the Master Fund and the Feeder Fund
were intended to operate as ``non-plan asset'' vehicles. In particular,
the Applicant represents that the Master Fund intended to limit the
aggregate investment by benefit plan investors in each class of its
equity to less than 25%, so that the quantity of assets in each class
would not be deemed to constitute significant equity participation by
benefit plan investors within the meaning of the Department's ``plan
asset regulation'' at 29 CFR 2510.3-101.\29\
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\29\ This regulation generally defines what constitutes assets
of a plan with respect to a plan's investment in another entity for
purposes of Subtitle A, and Parts 1 and 4 of Subtitle B, of Title I
of the Act and section 4975 of the Code. Generally, the plan asset
regulation states that when a plan invests in another entity, the
plan's assets include its investment, but do not, solely by reason
of such investment, include any of the underlying assets of the
entity. However, in the case of a plan's investment in an equity
interest that is neither a publicly-offered security nor a security
issued by an investment company registered under the Investment
Company Act of 1940, its assets include both the equity interest and
an undivided interest in each of the underlying assets of the
entity, unless it is established that, among other things, equity
participation in the entity by benefit plan investors is not
significant.
According to 29 CFR 2510.3-101(f)(1), ``[e]quity participation
in an entity by benefit plan investors is `significant' on any date
if, immediately after the most recent acquisition of any equity
interest in the entity, 25 percent or more of the value of any class
of equity interests in the entity is held by benefit plan
investors.'' A ``benefit plan investor'' is defined in section 3(42)
of the Act as ``an employee benefit plan subject to part 4 [of the
Act], any plan to which section 4975 of the [Code] applies, and any
entity whose underlying assets include plan assets by reason of a
plan's investment in such entity.'' For a discussion of the general
scope and construction of the term ``acquisition'' as referenced in
29 CFR 2510.3-101(f)(1), including a benefit plan investor's
redemption of an equity interest in an investment entity, see
Advisory Opinion 89-05 (Apr. 6, 1989).
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7. Effective May 1, 2006, the Master Fund and the Feeder Fund
(together, the Funds) entered into an administrative services agreement
with International Fund Services (Ireland) Limited (hereinafter IFS or
the Administrator). The Applicant represents that IFS is not related to
or affiliated with Deutsche Bank, and provides fund accounting, fund
administration, and risk services to asset management groups with
trading operations throughout the world. Under the agreement, IFS was
responsible for, among other things, monitoring the percentage
investment by benefit plan investors in each share class of the Funds
and reporting such percentage on a monthly basis to the Funds. The
agreement also required IFS to report the percentage of investment by
benefit plan investors ``on such other dates as [a] Fund accepts
subscriptions and/or effects redemptions and delivering such
[[Page 3070]]
calculation to the Fund or to the Fund's counsel for approval.'' The
agreement also states that, ``[f]or the avoidance of doubt, each Fund
shall instruct IFS [as to] the method of determining class of shares
for the purpose of the calculation of percentages contemplated in this
clause.''
The Applicant represents that in December of 2007, IFS, through an
error in its recordkeeping, failed to notify DeAM UK that the
percentage of plan assets in one of the USD-denominated share classes
may have exceeded 25% of the assets maintained in that corporate class.
The Applicant has specifically identified the U.S. dollar-denominated
nominal share class with respect to which the subject hedging
transaction occurred (and in which redemptions may have caused benefit
plan investor participation to equal or exceed the 25% limitation) as
Class A of the Feeder Fund.\30\ For a period of time after the
redemptions, the Applicant represents, the Master Fund continued to
execute hedging transactions with its DeAM UK-affiliated counterparty,
the London branch of Deutsche Bank AG. The Applicant further represents
that DeAM UK was not aware that redemptions associated with the
foregoing currency hedging transactions caused a breach of the 25%
limitation until approximately April 15, 2008. In this connection, the
Applicant initiated communication with the Department with respect to
the foregoing hedging transactions shortly after DeAM UK became aware
of the problem, and has met with representatives from the Department
concerning this matter.
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\30\ In its exemption application, the Applicant represents that
the Master Fund may have held plan assets during the period between
November 30, 2007 and May 30, 2008, inclusive, as a consequence of
net redemptions involving Class A of the Feeder Fund.
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8. The Applicant additionally represents that Bloomberg screen
prints of the currency prices at the time of the subject currency
hedging transactions demonstrate that the trades did not deviate by
more than three percent (above or below) the interbank bid and ask rate
for such currencies at the time of the foreign exchange transaction. In
this connection, the Applicant represents that Bloomberg is an
independent, nationally-recognized quotation service that reports rates
of exchange in the foreign currency market for widely-traded
currencies, including the Japanese yen. The Applicant further
represents that, because it knows both the precise rate at which the
Master Fund executed each of the subject currency hedging transactions
and the best rate available on these trades based on the aforementioned
Bloomberg screen prints, it will calculate the difference between these
rates and give any positive difference to the Client Plan, based on its
ownership percentage in the Feeder Fund.
The Applicant also represents that, with respect to the assessment
of fees, commissions, and related transactional expenses, any Client
Plan whose assets were involved in the foreign exchange transactions
that are the subject of this proposed exemption were treated the same
as all other investors with assets invested in the Master Fund and the
Feeder Fund that engaged in the subject hedging transactions.
9. The Applicant represents that, after discovering the foreign
exchange hedging transactions that gave rise to the current exemption
application, it revised its compliance procedures in May of 2008 to
minimize the risk that such a situation may recur. These updated
procedures include, among other things, the following elements: (i) On
a monthly basis, the Deutsche Bank sales team will notify the Deutsche
Bank shareholder services team of any prospective Client Plan who will
be making an investment in the Master Fund or the Feeder Fund in the
coming month(s); (ii) All Client Plan investments must be approved by
the Office of the Chief Operating Officer (COO) of the DB Advisors
Hedge Fund Group before the investment is accepted; (iii) The
Administrator of the Master Fund and the Feeder Fund will provide the
Deutsche Bank shareholder services team a copy of all subscription
agreements for those flagged investments upon receipt for review. The
Administrator also will provide to the Deutsche Bank shareholder
services team copies of the subscription documents of all incoming U.S.
tax-exempt investors, to perform a duplicate check to ensure that none
are in fact plan assets (for example, to identify any incorrectly
completed documents); (iv) The Administrator of the Master Fund and the
Feeder Fund will add to its monthly ``ERISA Executive Summary'' (a
report of the current plan asset totals in each Deutsche Bank Advisors
Hedge Fund through the most recent dealing date for subscriptions and
redemptions) a column which calculates the month-to-month change in
plan asset percentages for both the Master Fund and the Feeder Fund;
and (v) When the total plan assets percentage of either the Master Fund
or the Feeder Fund reaches 10%, it is placed on a ``watch list.''
Investments by benefit plan investors into any funds on the watch list
require additional approval by the office of the COO before they can be
accepted. The office of the COO may decide to close a Fund to any
future investments by a benefit plan investor when the Fund's total
plan assets percentage exceeds 10%.
According to the offering memorandum of the Feeder Fund, an
investor generally may redeem all or a portion of its shares in the
Fund at the close of business on the last business day of any calendar
month by submitting to the administrator of the Fund a redemption
request at least thirty days prior to the end of such month. An
investor redeeming all or a portion of its shares will receive an
amount equal to the net asset value per share for the relevant series
of shares at the close of business on the redemption date. The Fund
also may, upon five days notice, cause the involuntary redemption of
any or all of an investor's shares at the end of any calendar month.
In addition, the offering memorandum of the Feeder Fund states
that, in general, the directors of the Fund intend to restrict, through
utilization of a ``test'' that is ``ongoing'', the aggregate investment
by benefit plan investors to under 25% of the total capital of each
class of shares in order to achieve compliance with the requirements of
section 3(42) of the Act and 29 CFR Sec. 2510.3-101. As a consequence
of this ongoing test, not only may additional investments by benefit
plan investors be restricted, but existing benefit plan investors may
be required by the directors of the Fund to redeem their shares from
the Fund in the event that other investors redeem.
10. The Applicant represents that the requested exemption is
administratively feasible because correction of the prohibited
transaction would occur pursuant to an objective, independently
verifiable pricing mechanism (namely, the Bloomberg currency exchange
data for the time period described in this proposed exemption). The
Applicant also represents that the exemption would be in the interest
of the participants and beneficiaries of each of the affected Plans
because the correction will place each affected Plan in a better
position than it would have been in had the currency hedging been
executed through an unrelated third party in the first instance. The
Applicant further represents that the exemption would be protective of
the rights of participants and beneficiaries of the affected Plans
because: (i) The correction will negate any benefit received by the
Applicant (or its affiliate) in connection with the subject
transactions; and (ii) The proposed conditions for exemptive relief are
consistent with the safeguards generally required by the Department
[[Page 3071]]
for foreign exchange transactions of this nature.
11. In summary, the past transactions for which exemptive relief is
sought meet the statutory criteria of section 408(a) of the Act
because: (a) The foreign exchange transactions were executed solely in
connection with the Master Fund's hedging of the Japanese yen currency
risk for its share classes denominated in U.S. dollars (USD); (b) At
the time that the foreign exchange transactions were entered into, the
terms of the foreign exchange transactions were not less favorable to
the Fund than the terms generally available in comparable arm's length
foreign exchange transactions between unrelated parties; (c) Any
foreign exchange transactions authorized or executed by Deutsche Bank
or its affiliates were not part of any agreement, arrangement, or
understanding, written or otherwise, designed to benefit Deutsche Bank,
its affiliates, or any other party in interest; (d) Prior to investing
in the Master Fund, the fiduciary of each Client Plan received the
offering memorandum for the DB Torus Japan Fund Ltd., the feeder fund
(Feeder Fund) through which investments in the Master Fund are
effected; (e) The exchange rate used for a particular foreign exchange
transaction did not deviate by more than three percent (above or below)
the interbank bid and ask rate for such currency at the time of the
foreign exchange transaction, as displayed on an independent,
nationally-recognized service that reports rates of exchange in the
foreign currency market for such currency; (f) Prior to the granting of
an exemption concerning the subject foreign exchange transactions,
Deutsche Bank shall reimburse each such Client Plan for its pro-rata
share of: (1) The spread on each foreign exchange transaction subject
to this proposed exemption; and (2) Any fees charged by financial
institutions for executing the subject foreign exchange transaction(s),
plus interest at the applicable Internal Revenue Service underpayment
penalty rate; (g) Within 30 days of taking the corrective action
described in Section II(f) above, Deutsche Bank provides the
independent fiduciaries of each Client Plan whose assets were involved
in the foreign exchange transactions with: (1) Written information,
formulas, and/or other documentation sufficient to enable such
fiduciaries to independently verify that the Plans have been reimbursed
in accordance with the requirements of Section II(f) above; and (2) a
copy of this notice of proposed exemption (the Notice); (h) Within 30
days of taking the corrective action described in Section II(f) above,
Deutsche Bank provides the Department with written documentation
demonstrating that the foregoing reimbursements to each Client Plan
were correctly computed and paid; (i) Effective May 31, 2008, Deutsche
Bank, in conjunction with the administrator of both the Master Fund and
the Feeder Fund (together, the Funds), continuously monitors the
percentage of total assets invested by benefit plan investors in the
Funds so that, as of each acquisition or redemption of equity
interests, Deutsche Bank and the administrator of the Funds are able to
verify whether equity participation in the Funds by benefit plan
investors is not significant pursuant to section 3(42) of the Act and
29 CFR 2510.3-101; and (j) Deutsche Bank generally maintains records
that are sufficient for regulatory authorities and independent third
parties to determine whether the conditions of this exemption have been
met.
FOR FURTHER INFORMATION CONTACT: Mr. Mark Judge of the Department,
telephone (202) 693-8550. (This is not a toll-free number.)
UBS Financial Services Inc. and Its Affiliates (UBS), Located in
Weehawken, New Jersey, [Application No. D-11502].
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act (or ERISA), and section
4975(c)(2) of the Code, and in accordance with the procedures set forth
in 29 CFR Part 2570, Subpart B (55 FR 32836, 32847, August 10,
1990).\31\
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\31\ For purposes of this proposed exemption, references to
section 406 of the Act 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 sections
406(a)(1)(A) through (D) and section 406(b) of the Act, and the taxes
imposed by sections 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) UBS; (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
Sponsor.
Section II. Transactions Involving Plans Described in Title II of ERISA
Only
If the proposed exemption is granted, the sanctions resulting from
the application of sections 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 an Auction Rate Security by
the Title II Only Plan, from: (1) UBS; (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.
Section III. Conditions
(a) UBS 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 UBS 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)). For transactions involving a Plan sponsored
by UBS for its own employees, UBS may direct such Plan to engage in a
transaction described in Section I if all of the other conditions of
this Section III have been met. Notwithstanding the foregoing, an
employee of UBS 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;
[[Page 3072]]
(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; \32\
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\32\ This proposed exemption does not address tax issues. The
Department has been informed by the Internal Revenue Service (the
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 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 is a
security that the Plan is otherwise permitted to hold under applicable
law; \33\ and
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\33\ 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 of the Act 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 UBS of all relevant information.[REMOVED
ADVANCE FIELD]
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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 Sections I(b) or II(b):
(1) The loan is documented in a written agreement that contains 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.
Section 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 UBS or
an affiliate; and (2) not a relative (as defined in section 3(15) of
the Act) 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 the Act;
(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); (2) a US
Treasury obligation; (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.
Effective Date: If granted, this proposed exemption will be
effective as of February 1, 2008.
Summary of Facts and Representations
1. The Applicant is UBS Financial Services Inc. and its affiliates
(hereinafter, either ``UBS'' or the ``Applicant''). UBS is a financial
institution whose businesses provide a wide range of financial services
to both consumer and corporate customers around the world. As of
December 31, 2007, UBS Wealth Management US and its subsidiaries had
total consolidated assets of approximately $741 billion. UBS has
approximately 8,220 financial advisors, located in approximately 484
offices across the United States, who serve approximately 2 million
client relationships. In the ordinary course of its business, UBS
provides a range of financial services to Title II Only Plans and
pension, profit sharing, and 401(k) plans qualified under section
401(a) of the Code under which some or all of the participants are
employees described in section 401(c) of the Code. Among other things,
UBS acts as a broker and dealer with respect 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 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,
[[Page 3073]]
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 UBS 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. UBS may routinely place one or more bids in an
auction for its own account to acquire ARS for its inventory, to
prevent: (a) 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 (b) an auction from clearing at a rate
that UBS believes does not reflect the market for the particular ARS
being auctioned.
3. The Applicant states that for many ARS, UBS 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. UBS is typically appointed to
serve as a dealer in the auctions pursuant to an agreement between the
issuer and UBS. That agreement provides that UBS will receive from the
issuer auction dealer fees based on the principal amount of the
securities placed through UBS.
4. The Applicant states further that UBS may share a portion of the
auction rate dealer fees it receives from the issuer with other broker-
dealers that submit orders through UBS, for those orders that UBS
successfully places in the auctions. Similarly, with respect to ARS for
which broker-dealers other than UBS act as dealer, such other broker-
dealers may share auction dealer fees with UBS for orders submitted by
UBS.
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.\34\
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\34\ The Department notes that Prohibited Transaction Exemption
80-26 (45 FR 28545 (April 29, 1980), as amended at 71 FR 17917
(April 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, UBS 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 UBS may violate sections 406(a) and
(b) of the Act; in addition, a sale between a Plan and its sponsor or a
Title II Only Plan and its Beneficial Owner violates section 406 of the
Act and/or section 4975(c)(1) of the Code.\35\ The Applicant is
therefore requesting relief for the following transactions, involving
all Plans, effective February 1, 2008: (a) The sale or exchange of an
Auction Rate Security from a Plan to the Plan's Sponsor; and (b) a
lending of money or other extension of credit to a Plan in connection
with the holding of an Auction Rate Security from: UBS, 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
Sponsor.
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\35\ 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 Title II Only
Plans, also effective February 1, 2008. In this regard, the Applicant
is requesting relief for: (a) The sale or exchange of an Auction Rate
Security from a Title II Only Plan to the Beneficial Owner of such
Plan; and (b) 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: UBS; 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 transactions have been or will
be 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 has been made or will be made by a Plan fiduciary
which is independent of UBS.
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:
(a) Listed on a national securities exchange (excluding OTC Bulletin
Board-eligible securities and Pink Sheets-quoted securities); (b) a US
Treasury obligation; (c) 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 (d) 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
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 be part of an arrangement, agreement, or
understanding designed to benefit a party in interest. The exemption
expressly prohibits any waiver of rights
[[Page 3074]]
or claims by a Plan in connection with the sale or exchange of an
Auction Rate Security by such 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 have satisfied or will satisfy the statutory criteria
for an exemption set forth in section 408(a) of the Act and section
4975(c)(2) of the Code because:
(a) Any sale has been or will be:
(1) For no consideration other than cash payment against prompt
delivery of the Auction Rate Security; and
(2) At par, plus any accrued but unpaid interest;
(b) Any in-kind exchange has been or will be unconditional, other
than being for payment against prompt delivery, and has involved or
will involve Delivered Securities that are:
(1) Appropriate for the Plan;
(2) 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
(3) Securities that the Plan is permitted to hold under applicable
law; and,
(c) Any loan has been or will be:
(1) Documented in a written agreement containing all of the
material terms of the loan, including the consequences of default;
(2) At an interest rate not in excess of: The coupon rate for the
Auction Rate Security, the Federal Funds Rate, or the Prime Rate;
(3) Unsecured; and
(4) 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 30 days from the date
of publication of this notice of proposed exemption in the Federal
Register.
FOR FURTHER INFORMATION CONTACT: Brian Shiker of the Department,
telephone (202) 693-8552. (This is not a toll-free number.)
Deutsche Bank AG and Its Affiliates (together, Deutsche Bank or
the Applicant), Located in New York, New York, [Application Number
D-11518].
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act (or ERISA) and section
4975(c)(2) of the Code, and in accordance with the procedures set forth
in 29 CFR Part 2570, Subpart B (55 FR 32836, 32847, August 10,
1990).\36\
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\36\ For purposes of this proposed exemption, references to
section 406 of ERISA should be read, unless otherwise specified, to
refer to the corresponding provisions of ection 4975 of the Code.
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Section I. Sales of Auction Rate Securities From Plans to Deutsche
Bank: Unrelated to a Settlement Agreement
If the proposed exemption is granted, the restrictions of section
406(a)(1)(A) and (D) and section 406(b)(1) and (2) of the Act and the
sanctions resulting from the application of section 4975 of the Code,
by reason of section 4975(c)(1)(A), (D), and (E) of the Code, shall not
apply, effective February 1, 2008, to the sale by a Plan (as defined in
Section V(e)) of an Auction Rate Security (as defined in Section V(c))
to Deutsche Bank, where such sale (an Unrelated Sale) is unrelated to,
and not made in connection with, a Settlement Agreement (as defined in
Section V(f)), provided that the conditions set forth in Section II
have been met.
Section II. Conditions Applicable to Transactions Described in Section
I
(a) The Plan acquired the Auction Rate Security in connection with
brokerage or advisory services provided by Deutsche Bank;
(b) The last auction for the Auction Rate Security was
unsuccessful;
(c) Except in the case of a Plan sponsored by Deutsche Bank for its
own employees (a Deutsche Bank Plan), the Unrelated Sale is made
pursuant to a written offer by Deutsche Bank (the Offer) containing all
of the material terms of the Unrelated Sale, including, but not limited
to the most recent rate information for the Auction Rate Security (if
reliable information is available). Either the Offer or other materials
available to the Plan provide the identity and par value of the Auction
Rate Security. Notwithstanding the foregoing, in the case of a pooled
fund maintained or advised by Deutsche Bank, this condition shall be
deemed met to the extent each Plan invested in the pooled fund (other
than a Deutsche Bank Plan) receives written notice regarding the
Unrelated Sale, where such notice contains the material terms of the
Unrelated Sale (including, but not limited to, the material terms
described in the preceding sentence);
(d) The Unrelated Sale is for no consideration other than cash
payment against prompt delivery of the Auction Rate Security;
(e) The sales price for the Auction Rate Security is equal to the
par value of the Auction Rate Security, plus any accrued but unpaid
interest or dividends;
(f) The Plan does not waive any rights or claims in connection with
the Unrelated Sale;
(g) The decision to accept the Offer or retain the Auction Rate
Security is made by a Plan fiduciary or Plan participant or IRA owner
who is independent (as defined in Section V(d)) of Deutsche Bank.
Notwithstanding the foregoing: (1) In the case of an individual
retirement account (an IRA, as described in Section V(e) below) which
is beneficially owned by an employee, officer, director or partner of
Deutsche Bank, the decision to accept the Offer or retain the Auction
Rate Security may be made by such employee, officer, director or
partner; or (2) in the case of a Deutsche Bank Plan or a pooled fund
maintained or advised by Deutsche Bank, the decision to accept the
Offer may be made by Deutsche Bank after Deutsche Bank has determined
that such purchase is in the best interest of the Deutsche Bank Plan or
pooled fund; \37\
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\37\ 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 sell the
Auction Rate Security to Deutsche Bank for the par value of the
Auction Rate Security, plus any accrued but unpaid interest or
dividends. 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 this
type of transaction following disclosure by Deutsche Bank of all
relevant information.
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(h) Except in the case of a Deutsche Bank Plan or a pooled fund
maintained or advised by Deutsche Bank, neither Deutsche Bank 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 Auction Rate Security;
(i) The Plan does not pay any commissions or transaction costs with
respect to the Unrelated Sale;
(j) The Unrelated Sale is not part of an arrangement, agreement or
understanding designed to benefit a party in interest to the Plan;
(k) Deutsche Bank and its affiliates, as applicable, maintain, or
cause to be
[[Page 3075]]
maintained, for a period of six (6) years from the date of the
Unrelated Sale, such records as are necessary to enable the persons
described below in paragraph (l)(1), to determine whether the
conditions of this exemption, if granted, have been met, except that--
(1) No party in interest with respect to a Plan which engages in an
Unrelated Sale, other than Deutsche Bank 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)(1); and
(2) A separate prohibited transaction shall not be considered to
have occurred solely because, due to circumstances beyond the control
of Deutsche Bank or its affiliates, as applicable, such records are
lost or destroyed prior to the end of the six-year period;
(l)(1) Except as provided below in paragraph (l)(2), 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, including any IRA owner, 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
Unrelated Sale, or any authorized employee or representative of these
entities;
(2) None of the persons described above in paragraph (l)(1)(B)-(C)
shall be authorized to examine trade secrets of Deutsche Bank, or
commercial or financial information which is privileged or
confidential; and
(3) Should Deutsche Bank refuse to disclose information on the
basis that such information is exempt from disclosure, Deutsche Bank
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 III. Sales of Auction Rate Securities From Plans to Deutsche
Bank: Related to a Settlement Agreement
If the proposed exemption is granted, the restrictions of section
406(a)(1)(A) and (D) and section 406(b)(1) and (2) of the Act and the
sanctions resulting from the application of section 4975 of the Code,
by reason of section 4975(c)(1)(A), (D), and (E) of the Code, shall not
apply, effective February 1, 2008, to the sale by a Plan of an Auction
Rate Security to Deutsche Bank, where such sale (a Settlement Sale) is
related to, and made in connection with, a Settlement Agreement,
provided that the conditions set forth in Section IV have been met.
Section IV. Conditions Applicable to Transactions Described in Section
III
(a) The terms and delivery of the Offer are consistent with the
requirements set forth in the Settlement Agreement;
(b) The Offer or other documents available to the Plan specifically
describe, among other things:
(1) How a Plan may determine: The Auction Rate Securities held by
the Plan with Deutsche Bank, the purchase dates for the Auction Rate
Securities, and (if reliable information is available) the most recent
rate information for the Auction Rate Securities;
(2) The number of shares and par value of the Auction Rate
Securities available for purchase under the Offer;
(3) The background of the Offer;
(4) That participating in the Offer will not result in or
constitute a waiver of any claim of the tendering Plan;
(5) The methods and timing by which Plans may accept the Offer;
(6) The purchase dates, or the manner of determining the purchase
dates, for Auction Rate Securities tendered pursuant to the Offer;
(7) The timing for acceptance by Deutsche Bank of tendered Auction
Rate Securities;
(8) The timing of payment for Auction Rate Securities accepted by
Deutsche Bank for payment;
(9) The methods and timing by which a Plan may elect to withdraw
tendered Auction Rate Securities from the Offer;
(10) The expiration date of the Offer;
(11) The fact that Deutsche Bank may make purchases of Auction Rate
Securities outside of the Offer and may otherwise buy, sell, hold or
seek to restructure, redeem or otherwise dispose of the Auction Rate
Securities;
(12) A description of the risk factors relating to the Offer as
Deutsche Bank deems appropriate;
(13) How to obtain additional information concerning the Offer; and
(14) The manner in which information concerning material amendments
or changes to the Offer will be communicated to affected Plans.
(c) The terms of the Settlement Sale are consistent with the
requirements set forth in the Settlement Agreement; and
(d) All of the conditions in Section II have been met.
Section V. Definitions
For purposes of this proposed exemption:
(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 ``control'' means: The power to exercise a controlling
influence over the management or policies of a person other than an
individual;
(c) The term ``Auction Rate Security'' means a security that:
(1) Is either a debt instrument (generally with a long-term nominal
maturity) or preferred stock; and
(2) Has an interest rate or dividend that is reset at specific
intervals through a Dutch auction process;
(d) A person is ``independent'' of Deutsche Bank if the person is:
(1) Not Deutsche Bank or an affiliate; and (2) not a relative (as
defined in ERISA section 3(15)) of the party engaging in the
transaction;
(e) The term ``Plan'' means: An individual retirement account or
similar account described in section 4975(e)(1)(B) through (F) of the
Code (an IRA); an employee benefit plan as defined in section 3(3) of
ERISA; or an entity holding plan assets within the meaning of 29 CFR
2510.3-101, as modified by ERISA section 3(42); and
(f) The term ``Settlement Agreement'' means: A legal settlement
involving Deutsche Bank and a U.S. state or federal authority that
provides for the purchase of an Auction Rate Security by Deutsche Bank
from a Plan.
Effective Date: If granted, this proposed exemption will be
effective as of February 1, 2008.
Summary of Facts and Representations
1. Deutsche Bank AG is a German banking corporation and commercial
bank that provides a wide range of services to various types of
entities worldwide. Deutsche Bank AG's clients include a number of
employee benefit plans. As of June 30, 2008, Deutsche Bank AG had 1.991
trillion euros ($2.95 trillion) in assets and 31.9 billion euros ($17.3
billion) in stockholder's equity.
Deutsche Bank AG is subject to a comprehensive system of regulatory
oversight and a mandatory insurance program. With respect to regulatory
and
[[Page 3076]]
supervisory requirements, Deutsche Bank AG, its branches, and its
subsidiary banks worldwide are subject to regulatory requirements and
protections that are, qualitatively, at least equal to those imposed on
U.S.-domiciled banks. Within the United States, the New York branch of
Deutsche Bank AG and Deutsche Bank Trust Company Americas are regulated
and supervised by the New York State Banking Department. In addition,
certain activities of Deutsche Bank AG's New York branch and Deutsche
Bank Trust Company Americas (the trustee of ERISA-covered bank
collective trusts) are regulated and supervised by the Federal Reserve
Bank of New York. With respect to Deutsche Bank AG itself, globally,
the bank is regulated and supervised by the BaFin, in cooperation with
the Bundesbank. The BaFin is a federal institution with ultimate
responsibility to the German Ministry of Finance. The Bundesbank, in
turn, is the central bank of the Federal Republic of Germany and a part
of the European System of Central Banks. The applicant notes that the
U.S. Department of Treasury has accorded national treatment to German
bank branches, and the German Ministry of finance has granted relief to
branches of U.S. banks in Germany, in particular with respect to
``dotation'' or endowment capital requirements and capital adequacy
standards.
2. The Applicant describes Auction Rate Securities (ARS) and the
arrangement by which ARS are bought and sold as follows. 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.
3. The Applicant states that, under a typical Dutch Auction
process, Deutsche Bank AG 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. Deutsche Bank AG may place one or more bids in an auction
for its own account to acquire ARS for its inventory, to prevent: (a) 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, resulting in no ARS being sold through the auction process); or
(b) an auction from clearing at a rate that Deutsche Bank AG believes
does not reflect the market for the particular ARS being auctioned.
4. The Applicant states that for many ARS, Deutsche Bank AG 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. Deutsche Bank
AG is typically appointed to serve as a dealer in the auctions pursuant
to an agreement between the issuer and Deutsche Bank AG. That agreement
provides that Deutsche Bank AG will receive from the issuer auction
dealer fees based on the principal amount of the securities placed
through Deutsche Bank AG.
5. The Applicant states further that Deutsche Bank AG may share a
portion of the auction rate dealer fees it receives from the issuer
with other broker-dealers that submit orders through Deutsche Bank AG,
for those orders that Deutsche Bank AG successfully places in the
auctions. Similarly, with respect to ARS for which broker-dealers other
than Deutsche Bank AG act as dealer, such other broker-dealers may
share auction dealer fees with Deutsche Bank AG for orders submitted by
Deutsche Bank AG.
6. Since February 2008, the Applicant knows of no auctions that
have been successful. According to the Applicant, the current state of
the ARS market is virtually nonexistent. As a result, Plans holding ARS
may not have sufficient liquidity to make benefit payments, mandatory
payments and withdrawals and expense payments when due.\38\
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\38\ The Department notes that Prohibited Transaction Exemption
80-26 (45 FR 28545 (April 29, 1980), as amended at 71 FR 17917
(April 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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7. The Applicant represents that, in certain instances, Deutsche
Bank AG may have previously advised or otherwise caused a Plan to
acquire and hold an ARS.\39\ In connection with Deutsche Bank AG's role
in the acquisition and holding of ARS by various Deutsche Bank AG
clients, including the Plans, Deutsche Bank AG entered into Settlement
Agreements with certain U.S. states and federal authorities. Pursuant
to these Settlement Agreements, among other things, Deutsche Bank AG
was required to send a written offer to certain Plans that held ARS in
connection with the advice and/or brokerage services provided by
Deutsche Bank AG. As described in further detail below, eligible Plans
that accepted the Offer were permitted to sell the ARS to Deutsche Bank
AG for cash equal to the par value of such securities, plus any accrued
interest and/or dividends. According to the Applicant, as of Monday,
October 26, 2009, in connection with Offers issued by Deutsche Bank AG
pursuant to the Settlement Agreement, Deutsche Bank AG has purchased
approximately $4,750,000 dollars in ARS from IRAs and $725,000 in ARS
from Plans subject to Title I of ERISA. The Applicant states that,
prospectively, additional shares of ARS may be tendered by Plans to
Deutsche Bank AG pursuant to an Offer issued by Deutsche Bank AG
pursuant to a Settlement Agreement.
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\39\ The relief contained in this proposed exemption does not
extend to the fiduciary provisions of section 404 of the Act.
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Accordingly, the Applicant is requesting retroactive and
prospective relief for the Settlement Sales. With respect to Unrelated
Sales, the Applicant states that to the best of its knowledge, as of
June 30, 2009, no Unrelated Sale has occurred. However, the Applicant
is requesting retroactive relief (and prospective relief) for Unrelated
Sales in the event that a sale of ARS by a Plan to Deutsche Bank AG has
occurred outside the Settlement process. If granted, the exemption
would be effective as of February 1, 2008.
8. Specifically, the Applicant is requesting exemptive relief for
the sale of ARS under two different circumstances: (a) Where Deutsche
Bank AG initiates the sale by sending to a Plan a written Offer to
acquire the ARS,
[[Page 3077]]
notwithstanding that such Offer is not required under a Settlement
Agreement (i.e., an Unrelated Sale); and (b) where Deutsche Bank AG is
required under a Settlement Agreement to send to Plans a written Offer
to acquire the ARS (i.e., a Settlement Sale). The Applicant states that
the Unrelated Sales and Settlement Sales (hereinafter, either, a
Covered Sale) are in the interests of Plans. In this regard, the
Applicant states that the Covered Sales would permit Plans to normalize
Plan investments. The Applicant represents that each Covered Sale will
be for no consideration other than cash payment against prompt delivery
of the ARS, and such cash will equal the par value of the ARS, plus any
accrued but unpaid interest or dividends. The Applicant represents
further that Plans will not pay any commissions or transaction costs
with respect to any Covered Sale.
9. The Applicant represents that the proposed exemption is
protective of the Plans. The Applicant states that, except in the case
of a Plan sponsored by Deutsche Bank AG for its own employees (a
Deutsche Bank AG Plan): Each Covered Sale will be made pursuant to a
written Offer; and the decision to accept the Offer or retain the ARS
will be made by a Plan fiduciary or Plan participant or IRA owner who
is independent of Deutsche Bank AG.
Additionally, each Offer will be delivered in a manner designed to
alert a Plan fiduciary that Deutsche Bank AG intends to purchase ARS
from the Plan. In connection with an Unrelated Sale, the Offer will
describe the material terms of the Unrelated Sale, including the most
recent rate information for the ARS (if reliable information is
available). Either the Offer or other materials available to the Plan
will provide the identity and par value of the ARS. Offers made in
connection with a Settlement Agreement will specifically include, among
other things: the background of the Offer; the method and timing by
which a Plan may accept the Offer; the expiration date of the Offer; a
description of certain risk factors relating to the Offer; how to
obtain additional information concerning the Offer; and the manner in
which information concerning material amendments or changes to the
Offer will be communicated to affected Plans. The Applicant states
that, except in the case of a Deutsche Bank AG Plan or a pooled fund
maintained or advised by Deutsche Bank AG, neither Deutsche Bank AG nor
any affiliate will exercise investment discretion or render investment
advice with respect to a Plan's decision to accept the Offer or retain
the ARS.\40\ In the case of a Deutsche Bank AG Plan or a pooled fund
maintained or advised by Deutsche Bank AG, the decision to engage in a
Covered Sale may be made by Deutsche Bank AG after Deutsche Bank AG has
determined that such purchase is in the best interest of the Deutsche
Bank AG Plan or pooled fund. The Applicant represents further that
Plans will not waive any rights or claims in connection with any
Covered Sale.
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\40\ The Applicant states that while there may be communication
between a Plan and Deutsche Bank subsequent to an Offer, such
communication will not involve advice regarding whether the Plan
should accept the Offer.
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10. The Applicant represents that the proposed exemption, if
granted, would be administratively feasible. In this regard, the
Applicant notes that each Covered Sale will occur at the par value of
the affected ARS, plus any accrued but unpaid interest or dividends,
and such value is readily ascertainable. The Applicant represents
further that Deutsche Bank AG will maintain the records necessary to
enable the Department and Plan fiduciaries, among others, to determine
whether the conditions of this exemption, if granted, have been met.
11. In summary, the Applicant represents that the transactions
described herein satisfy the statutory criteria of section 408(a) of
the Act because, among other things:
(a) Except in the case of a Deutsche Bank AG Plan, each Covered
Sale shall be made pursuant to a written Offer;
(b) Each Covered Sale shall be for no consideration other than cash
payment against prompt delivery of the ARS;
(c) The amount of each Covered Sale shall equal the par value of
the ARS, plus any accrued but unpaid interest or dividends;
(d) Plans will not waive any rights or claims in connection with
any Covered Sale;
(e) Except in the case of a Deutsche Bank AG Plan or a pooled fund
maintained or advised by Deutsche Bank AG:
(1) The decision to accept an Offer or retain the ARS shall be made
by a Plan fiduciary or Plan participant or IRA owner who is independent
of Deutsche Bank AG; and
(2) Neither Deutsche Bank AG nor any affiliate shall exercise
investment discretion or render 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;
(f) Plans shall not pay any commissions or transaction costs with
respect to any Covered Sale;
(g) A Covered Sale shall not be part of an arrangement, agreement
or understanding designed to benefit a party in interest to the
affected Plan;
(h) With respect to any Settlement Sale, the terms and delivery of
the Offer, and the terms of Settlement Sale, shall be consistent with
the requirements set forth in the Settlement Agreement;
(i) Deutsche Bank AG shall make available in connection with an
Unrelated Sale the material terms of the Unrelated Sale, including the
most recent rate information for the ARS (if reliable information is
available), and the identity and par value of the ARS;
(j) Each Offer made in connection with a Settlement Agreement shall
describe the material terms of the Settlement Sale, including the
following:
(1) Information regarding how the Plan can determine: The ARS held
by the Plan with Deutsche Bank AG, the number of shares and par value
of the ARS, purchase dates for such ARS, and (if reliable information
is available) the most recent rate information for the ARS;
(2) The background of the Offer;
(3) That participating in the Offer will not result in or
constitute a waiver of any claim of the tendering Plan;
(4) The methods and timing by which the Plan may accept the Offer;
(5) The purchase dates, or the manner of determining the purchase
dates, for ARS pursuant to the Offer;
(6) The timing for acceptance by Deutsche Bank AG of tendered ARS;
(7) The timing of payment for ARS accepted by Deutsche Bank AG for
payment;
(8) The methods and timing by which a Plan may elect to withdraw
tendered ARS from the Offer;
(9) The expiration date of the Offer;
(10) The fact that Deutsche Bank AG may make purchases of ARS
outside of the Offer and may otherwise buy, sell, hold or seek to
restructure, redeem or otherwise dispose of the ARS;
(11) A description of the risk factors relating to the Offer as
Deutsche Bank AG deems appropriate;
(12) How to obtain additional information concerning the Offer; and
(13) The manner in which information concerning material amendments
or changes to the Offer will be communicated to affected Plans.
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
[[Page 3078]]
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 30 days from the date of publication of this notice of
proposed exemption in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Warren Blinder of the Department,
telephone (202) 693-8553. (This is not a toll-free number.)
Morgan Stanley & Co. Inc. and its current and future affiliates
and subsidiaries (Morgan Stanley) and Union Bank, N.A. and its
affiliates (Union Bank), located in New York, NY and San Francisco,
CA., [Application No. D-11521].
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Act and section 4975(c)(2) of the
Code, and in accordance with the procedures set forth in 29 CFR part
2570, subpart B (55 FR 32836, 32847, August 10, 1990).
Section I--Transactions
If the exemption is granted, effective October 1, 2008, the
restrictions of section 406(a)(1)(A) through (D) and 406(b)(1) and (2)
of the Act, and the sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1)(A) through (E) of the
Code, shall not apply to:
(a) The lending of securities to:
(1) Morgan Stanley & Co. Incorporated, and its successors (MS&Co.)
and Union Bank, N.A., and its successors (UB);
(2) Any current or future affiliate of MS&Co. or UB,\41\ that is a
bank, as defined in section 202(a)(2) of the Investment Advisers Act of
1940, that is supervised by the U.S. or a state, any broker-dealer
registered under the Securities Exchange Act of 1934 (the ``1934
Act''), or any foreign affiliate that is a bank or broker-dealer that
is supervised by (i) the Securities and Futures Authority (``SFA'') in
the United Kingdom; (ii) the Bundesanstalt fur
Finanzdienstleistungsaufsicht (the ``BAFin'') in Germany; (iii) the
Ministry of Finance (``MOF'') and/or the Tokyo Stock Exchange in Japan;
(iv) the Ontario Securities Commission, the Investment Dealers
Association and/or the Office of Superintendent of Financial
Institutions in Canada; (v) the Swiss Federal Banking Commission in
Switzerland; (vi) the Reserve Bank of Australia or the Australian
Securities and Investments Commission and/or Australian Stock Exchange
Limited in Australia; (vii) the Commission Bancaire (``CB''), the
Comite des Establissements de Credit et des Enterprises
d'Investissement (CECEI) and the Autorite des Marches Financiers
(``AMF'') in France; and (viii) the Swedish Financial Supervisory
Authority (``SFSA'') in Sweden (the branches and/or affiliates in the
enumerated foreign countries hereinafter referred to as the ``Foreign
Affiliates'') and together with their U.S. branches or U.S. affiliates
(individually, ``Affiliated Borrower'' and collectively, ``Affiliated
Borrowers''), by employee benefit plans, including commingled
investment funds holding plan assets (the Client Plans or Plans),\42\
for which MS&Co., UB or an affiliate of either acts as securities
lending agent or subagent (the ``Lending Agent''),\43\ and also may
serve as directed trustee or custodian of securities being lent, or for
which a subagent is appointed by the Lending Agent, which subagent is
either (I) a bank, as defined in section 202(a)(2) of the Investment
Advisers Act of 1940 or a broker-dealer registered under the 1934 Act,
(i) which has, as of the last day of its most recent fiscal year,
equity capital in excess of $100 million and (ii) which annually
exercises discretionary authority to lend securities on behalf of
clients equal to at least $1 billion; or (II) an investment adviser
registered under the Investment Advisers Act of 1940, (i) which has, as
of the last day of its most recent fiscal year, equity capital in
excess of $1 million and (ii) which annually exercises discretionary
authority to lend securities on behalf of clients equal to at least $1
billion (each, a ``Lending Subagent''); and
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\41\ Any reference to MS&Co. or UB shall be deemed to include
any successors thereto.
\42\ The common and collective trust funds for which MS&Co., UB
or an affiliate act as directed trustee or custodian, and in which
Client Plans invest, are referred to herein as ``Commingled Funds.''
The Client Plan separate accounts for which MS&Co., UB or an
affiliate act as directed trustee or custodian are referred to
herein as ``Separate Accounts.'' Commingled Funds and Separate
Accounts are collectively referred to herein as ``Lender'' or
``Lenders.''
\43\ MS&Co., UB or an affiliate may be retained by primary
securities lending agents to provide securities lending services in
a sub-agent capacity with respect to portfolio securities of clients
of such primary securities lending agents. As a securities lending
sub-agent, MS&Co.'s or UB's role parallels that under the lending
transactions for which MS&Co., UB or an affiliate acts as a primary
securities lending agent on behalf of its clients. References to
MS&Co.'s or UB's performance of services as securities lending agent
should be deemed to include its parallel performance as a securities
lending sub-agent and references to the Client Plans should be
deemed to include those plans for which the Lending Agent is acting
as a sub-agent with respect to securities lending, unless otherwise
specifically indicated or by the context of the reference.
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(b) The receipt of compensation by the Lending Agent and the
Lending Subagent in connection with these transactions.
Section II--Conditions
Section I of this exemption applies only if the conditions of
Section II are satisfied. For purposes of this exemption, any
requirement that the approving fiduciary be independent of MS&Co., UB,
and their affiliates shall not apply in the case of an employee benefit
plan sponsored and maintained by the Lending Agent and/or an affiliate
for its own employees (an Affiliated Plan) invested in a Commingled
Fund, provided that at all times the holdings of all Affiliated Plans
in the aggregate comprise less than 10% of the assets of the Commingled
Fund.
(a) For each Client Plan, neither MS&Co., UB, nor any of their
affiliates has or exercises discretionary authority or control with
respect to the investment of the assets of Client Plans involved in the
transaction or renders investment advice (within the meaning of 29 CFR
2510.3-21(c)) with respect to such assets, including decisions
concerning a Client Plan's acquisition or disposition of securities
available for loan.
(b) Any arrangement for the Lending Agent to lend securities is
approved in advance by a Plan fiduciary who is independent of MS&Co.,
UB, and their affiliates (the Independent Fiduciary). Notwithstanding
the foregoing, section II(b) shall be deemed satisfied with respect to
loans of securities by Client Plans to MS&Co. or a U.S. affiliate
(Morgan Stanley Affiliated Borrower) by UB as Lending Agent or Lending
Subagent that were outstanding as of October 1, 2008 (the Existing
Loans), provided (i) no later than April 1, 2009, UB provided to Client
Plans with Existing Loans a description of the general terms of the
securities loan agreements between such Client Plans and the Morgan
Stanley Affiliated Borrowers, and (ii) at the time of providing such
information, UB notified each such Client Plan that if the Client Plan
did not approve the continued lending of securities to Morgan Stanley
by May 11, 2009, UB would terminate the loans and cease to make any new
securities loans on behalf of that Client Plan to Morgan Stanley.
(c) The specific terms of the securities loan agreement (the Loan
Agreement) are negotiated by the Lending Agent which acts as a liaison
between the Lender and the Affiliated Borrower to facilitate the
securities lending transaction. In the case of a Separate Account, the
Independent Fiduciary of a Client Plan approves the general terms of
the Loan Agreement between the
[[Page 3079]]
Client Plan and the Affiliated Borrower as well as any material change
in such Loan Agreement. In the case of a Commingled Fund, approval is
pursuant to the procedure described in paragraph (i), below.
(d) The terms of each loan of securities by a Lender to an
Affiliated Borrower are at least as favorable to such Separate Account
or Commingled Fund as those of a comparable arm's-length transaction
between unrelated parties.
(e) A Client Plan, in the case of a Separate Account, may terminate
the lending agency or sub-agency arrangement at any time, without
penalty, on five business days notice. A Client Plan in the case of a
Commingled Fund may terminate its participation in the lending
arrangement by terminating its investment in the Commingled Fund no
later than 35 days after the notice of termination of participation is
received, without penalty to the Plan, in accordance with the terms of
the Commingled Fund. Upon termination, the Affiliated Borrowers will
transfer securities identical to the borrowed securities (or the
equivalent thereof in the event of reorganization, recapitalization or
merger of the issuer of the borrowed securities) to the Separate
Account or, if the Plan's withdrawal necessitates a return of
securities, to the Commingled Fund within:
(1) The customary delivery period for such securities;
(2) Five business days; or
(3) The time negotiated for such delivery by the Client Plan, in a
Separate Account, or by the Lending Agent, as lending agent to a
Commingled Fund, and the Affiliated Borrowers, whichever is least.
(f) The Separate Account, Commingled Fund or another custodian
designated to act on behalf of the Client Plan, receives from each
Affiliated Borrower (either by physical delivery, book entry in a
securities depository located in the United States, wire transfer or
similar means) by the close of business on or before the day the loaned
securities are delivered to the Affiliated Borrower, collateral
consisting of U.S. currency, securities issued or guaranteed by the
United States Government or its agencies or instrumentalities,
irrevocable bank letters of credit issued by a U.S. bank, other than
Morgan Stanley or Union Bank (or any subsequent parent corporation of
the Lending Agent) or an affiliate thereof, or any combination thereof,
or other collateral permitted under Prohibited Transaction Exemption
(PTE) 2006-16 (71 FR 63786, October 31, 2006) (as it may be amended or
superseded) (collectively, the Collateral).\44\ The Collateral will be
held on behalf of a Client Plan in a depository account separate from
the Affiliated Borrower.
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\44\ PTE 2006-16 permits the use of certain types of foreign
collateral if the lending fiduciary is a U.S. Bank or U.S. Broker-
Dealer (as defined in the exemption) and such fiduciary indemnifies
the plan with respect to the difference, if any, between the
replacement cost of the borrowed securities and the market value of
the collateral on the date of a borrower default plus interest and
any transaction costs which a plan may incur or suffer directly
arising out of a borrower default. See PTE 2006-16, Section V(f)(5).
The Department notes that the requirements of Section V(f)(5) of PTE
2006-16 must be satisfied in order for those types of collateral to
be used in connection with this proposed exemption, if granted.
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(g) The market value (or in the case of a letter of credit, a
stated amount) of the Collateral on the close of business on the day
preceding the day of the loan is initially equal at least to the
percentage required by PTE 2006-16 (as amended or superseded) but in no
case less than 102 percent of the market value of the loaned
securities. The applicable Loan Agreement gives the Separate Account or
the Commingled Fund in which the Client Plan has invested a continuing
security interest in, and a lien on or title to, the Collateral. The
level of the Collateral is monitored daily by the Lending Agent. If the
market value of the Collateral, on the close of trading on a business
day, is less than 100 percent of the market value of the loaned
securities at the close of business on that day, the Affiliated
Borrower is required to deliver, by the close of business on the next
day, sufficient additional Collateral such that the market value of the
Collateral will again equal 102 percent or the percentage otherwise
required by PTE 2006-16 (as amended or superseded).
(h)(1) For a Lender that is a Separate Account, prior to entering
into a Loan Agreement, the applicable Affiliated Borrower furnishes its
most recently available audited and unaudited financial statements to
the Lending Agent which will, in turn, provide such statements to the
Client Plan before the Client Plan approves the terms of the Loan
Agreement. The Loan Agreement contains a requirement that the
applicable Affiliated Borrower must give prompt notice at the time of a
loan of any material adverse changes in its financial condition since
the date of the most recently furnished financial statements. If any
such changes have taken place, the Lending Agent will not make any
further loans to the Affiliated Borrower unless an Independent
Fiduciary of the Client Plan in a Separate Account is provided notice
of any material change and approves the continuation of the lending
arrangement in view of the changed financial condition.
Notwithstanding the foregoing, section II(h)(1) shall be deemed
satisfied with respect to the Existing Loans provided (i) UB provided
to such Client Plans no later than April 1, 2009, the most recently
available audited and unaudited financial statements of the Morgan
Stanley Affiliated Borrower and notice of any material adverse change
in financial condition since the date of the most recent financial
statement being furnished to the Client Plans, and (ii) at the time of
providing such information, UB notified each Client Plan that if the
Client Plan did not approve the continued lending of securities to
Morgan Stanley by May 11, 2009, UB would terminate the loans and cease
to make any new securities loans on behalf of that Client Plan to
Morgan Stanley.
(h)(2) For a Lender that is a Commingled Fund, the Lending Agent
will furnish upon reasonable request to an Independent Fiduciary of
each Client Plan invested in the Commingled Fund the most recently
available audited and unaudited financial statements of the applicable
Affiliated Borrower prior to authorization of lending, and annually
thereafter.
(i) In the case of Commingled Funds, the information described in
paragraph (c) (including any information with respect to any material
change in the arrangement) shall be furnished by the Lending Agent as
lending fiduciary to the Independent Fiduciary of each Client Plan
whose assets are invested in the Commingled Fund, not less than 30 days
prior to implementation of the arrangement or material change to the
lending arrangement as previously described to the Client Plan, and
thereafter, upon the reasonable request of the Client Plan's
Independent Fiduciary. In the event of a material adverse change in the
financial condition of an Affiliated Borrower, the Lending Agent will
make a decision, using the same standards of credit analysis the
Lending Agent would use in evaluating unrelated borrowers, whether to
terminate existing loans and whether to continue making additional
loans to the Affiliated Borrower.
In the event any such Independent Fiduciary submits a notice in
writing within the 30-day period provided in the preceding paragraph to
the Lending Agent, as lending fiduciary, objecting to the
implementation of, material change in, or continuation of the
arrangement, the Plan on whose behalf the objection was tendered is
given the opportunity to
[[Page 3080]]
terminate its investment in the Commingled Fund, without penalty to the
Plan, no later than 35 days after the notice of withdrawal is received.
In the case of a Plan that elects to withdraw pursuant to the
foregoing, such withdrawal shall be effected prior to the
implementation of, or material change in, the arrangement; but an
existing arrangement need not be discontinued by reason of a Plan
electing to withdraw. In the case of a Plan whose assets are proposed
to be invested in the Commingled Fund subsequent to the implementation
of the arrangement, the Plan's investment in the Commingled Fund shall
be authorized in the manner described in paragraph (c).
(j) In return for lending securities, the Lender either--(1)
Receives a reasonable fee, which is related to the value of the
borrowed securities and the duration of the loan; or
(2) Has the opportunity to derive compensation through the
investment of cash Collateral. (Under such circumstances, the Lender
may pay a loan rebate or similar fee to the Affiliated Borrowers, if
such fee is not greater than the fee the Lender would pay in a
comparable arm's-length transaction with an unrelated party.)
(k) Except as otherwise expressly provided herein, all procedures
regarding the securities lending activities will, at a minimum, conform
to the applicable provisions of PTE 2006-16, as amended or superseded,
as well as to applicable securities laws of the United States, the
United Kingdom, Canada, Australia, Switzerland, Japan, France, Sweden
and Germany.
(l) If any event of default occurs, to the extent that (i)
liquidation of the pledged Collateral or (ii) additional cash received
from the Affiliated Borrower does not provide sufficient funds on a
timely basis, the Client Plan will have the right to purchase
securities identical to the borrowed securities (or their equivalent as
discussed in paragraph (e) above) and apply the Collateral to the
payment of the purchase price. If the Collateral is insufficient to
accomplish such purchase, the Affiliated Borrower will indemnify the
Client Plan invested in a Separate Account or Commingled Fund in the
United States with respect to the difference between the replacement
cost of the borrowed securities and the market value of the Collateral
on the date the loan is declared in default, together with expenses
incurred by the Client Plan plus applicable interest at a reasonable
rate, including reasonable attorney's fees incurred by the Client Plan
for legal action arising out of default on the loans, or failure by the
Affiliated Borrower to properly indemnify the Client Plan. The
Affiliated Borrower's indemnification will enable the Client Plan to
collect on any indemnification from a U.S.-domiciled affiliate of the
Affiliated Borrower.
(m) The Lender receives the equivalent of all distributions made to
holders of the borrowed securities during the term of the loan,
including but not limited to all interest and dividends on the loaned
securities, shares of stock as a result of stock splits and rights to
purchase additional securities, or other distributions.
(n) Prior to any Client Plan's approval of the lending of its
securities to any Affiliated Borrower, a copy of the final exemption
(if granted) and this notice of proposed exemption is provided to the
Client Plan.
Notwithstanding the foregoing, effective October 1, 2008, through
the publication date of the grant of this exemption in the Federal
Register, section II(n) shall be deemed satisfied with respect to the
Existing Loans, provided (i) UB provides to such Client Plans that have
consented to securities lending prior to such publication date, a copy
of the requested exemption and (ii) UB advises each such Client Plan
that unless the Client Plan notifies UB to the contrary within 30 days,
its consent to make loans to Morgan Stanley will be presumed.
(o) The Independent Fiduciary of each Client Plan that is invested
in a Separate Account is provided with (including by electronic means)
quarterly reports with respect to the securities lending transactions,
including, but not limited to, the information described in
Representation 40 of the Summary of Facts and Representations, so that
the Independent Fiduciary may monitor such transactions with the
Affiliated Borrower. The Independent Fiduciary invested in a Commingled
Fund is provided with (including by electronic means) quarterly reports
with respect to the securities lending transactions, including, but not
limited to, the information described in Representation 40 of the
Summary of Facts and Representations, so that the Independent Fiduciary
may monitor such transactions with the Affiliated Borrower. The Lending
Agent may, in lieu of providing the quarterly reports described in this
paragraph (o) to each Independent Fiduciary of a Client Plan invested
in a Commingled Fund, provide such Independent Fiduciary with the
certification of an auditor selected by the Lending Agent who is
independent of MS&Co, UB and their affiliates (but who may or may not
be independent of the Client Plan) that the loans appear no less
favorable to the Lender than the pricing established in the schedule
described in the paragraph 29 of the Summary of Facts and
Representations. Where the Independent Fiduciary of a Client Plan
invested in a Commingled Fund is provided the certification of an
auditor, such Independent Fiduciary shall be entitled to receive the
quarterly reports upon request.
Notwithstanding the foregoing, section II(o) shall be deemed
satisfied with respect to the Existing Loans provided UB provides to
such Client Plans no later than July 31, 2009, the material described
in section II(o) with respect to the period from October 1, 2008,
through June 30, 2009.
(p) Only Client Plans with total assets having an aggregate market
value of at least $50 million are permitted to lend securities to the
Affiliated Borrowers; provided, however, that--
(1) In the case of two or more Client Plans which are maintained by
the same employer, controlled group of corporations or employee
organization, whose assets are commingled for investment purposes in a
single master trust or any other entity the assets of which are ``plan
assets'' under 29 CFR 2510.3-101 (the Plan Asset Regulation), which
entity is engaged in securities lending arrangement with the Lending
Agent, the foregoing $50 million requirement shall be deemed satisfied
if such trust or other entity has aggregate assets which are in excess
of $50 million; provided that if the fiduciary responsible for making
the investment decision on behalf of such master trust or other entity
is not the employer or an affiliate of the employer, such fiduciary has
total assets under its management and control, exclusive of the $50
million threshold amount attributable to plan investment in the
commingled entity, which are in excess of $100 million.
(2) In the case of two or more Client Plans which are not
maintained by the same employer, controlled group of corporations or
employee organization, whose assets are commingled for investment
purposes in a group trust or any other form of entity the assets of
which are ``plan assets'' under the Plan Asset Regulation, which entity
is engaged in securities lending arrangements with the Lending Agent,
the foregoing $50 million requirement is satisfied if such trust or
other entity has aggregate assets which are in excess of $50 million
(excluding the assets of any Client Plan with respect to which the
fiduciary responsible for making the investment decision on behalf of
such group trust or other entity or any member of the controlled group
of
[[Page 3081]]
corporations including such fiduciary is the employer maintaining such
Plan or an employee organization whose members are covered by such
Plan). However, the fiduciary responsible for making the investment
decision on behalf of such group trust or other entity--
(A) Has full investment responsibility with respect to plan assets
invested therein; and
(B) Has total assets under its management and control, exclusive of
the $50 million threshold amount attributable to plan investment in the
commingled entity, which are in excess of $100 million.
In addition, none of the entities described above are formed for
the sole purpose of making loans of securities.
(q) With respect to any calendar quarter, at least 50 percent or
more of the outstanding dollar value of securities loans negotiated on
behalf of Lenders will be to borrowers unrelated to MS&Co., UB and
their affiliates.
(r) In addition to the above, all loans involving foreign
Affiliated Borrowers have the following requirements:
(1) The foreign Affiliated Borrower is a bank, supervised either by
a state or the United States, a broker-dealer registered under the
Securities Exchange Act of 1934 or a bank or broker-dealer that is
supervised by (i) the SFA in the United Kingdom; (ii) the BAFin in
Germany; (iii) the MOF and/or the Tokyo Stock Exchange in Japan; (iv)
the Ontario Securities Commission, the Investment Dealers Association
and/or the Office of Superintendent of Financial Institutions in
Canada; (v) the Swiss Federal Banking Commission in Switzerland; and
(vi) the Reserve Bank of Australia or the Australian Securities and
Investments Commission and/or Australian Stock Exchange Limited in
Australia; (vii) the CB, the CECEI, and the AMF in France; and (viii)
the SFSA in Sweden;
(2) The foreign Affiliated Borrower is in compliance with all
applicable provisions of Rule 15a-6 under the Securities Exchange Act
of 1934 (17 CFR 240.15a-6) (Rule 15a-6) which provides foreign broker-
dealers a limited exemption from United States registration
requirements;
(3) All Collateral is maintained in United States dollars or U.S.
dollar-denominated securities or letters of credit (unless an
applicable exemption provides otherwise);
(4) All Collateral is held in the United States and the situs of
the securities lending agreements is maintained in the United States
under an arrangement that complies with the indicia of ownership
requirements under section 404(b) of the Act and the regulations
promulgated under 29 CFR 2550.404(b)-1 related to the lending of
securities; and
(5) Prior to a transaction involving a foreign Affiliated Borrower,
the foreign Affiliated Borrower--
(A) Agrees to submit to the jurisdiction of the United States;
(B) Agrees to appoint an agent for service of process in the United
States, which may be an affiliate (the Process Agent);
(C) Consents to service of process on the Process Agent; and
(D) Agrees that enforcement by a Client Plan of the indemnity
provided by the Affiliated Borrower will, at the option of the Client
Plan, occur exclusively in the United States courts.
(s) The Lending Agent maintains, or causes to be maintained, within
the United States for a period of six years from the date of such
transaction, in a manner that is convenient and accessible for audit
and examination, such records as are necessary to enable the persons
described in paragraph (t)(1) to determine whether the conditions of
the exemption have been met, except that--(1) A prohibited transaction
will not be considered to have occurred if, due to circumstances beyond
the control of the Lending Agent and/or its affiliates, the records are
lost or destroyed prior to the end of the six-year period; and (2) No
party in interest other than the Lending Agent or its affiliates shall
be subject to the civil penalty that may be assessed under section
502(i) of the Act, or to the taxes imposed by section 4975(a) and (b)
of the Code, if the records are not maintained, or are not available
for examination as required below by paragraph (t)(1).
(t)(1) Except as provided in subparagraph (t)(2) of this paragraph
and notwithstanding any provisions of sections (a)(2) and (b) of
section 504 of the Act, the records referred to in paragraph (s) 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 Securities and Exchange
Commission;
(B) Any fiduciary of a participating Client Plan or any duly
authorized representative of such fiduciary;
(C) Any contributing employer to any participating Client Plan or
any duly authorized employee or representative of such employer; and
(D) Any participant or beneficiary of any participating Client
Plan, or any duly authorized representative of such participant or
beneficiary.
(t)(2) None of the persons described above in paragraphs (t)(1)(B)-
(t)(1)(D) are authorized to examine the trade secrets of the Lending
Agent or its affiliates or commercial or financial information which is
privileged or confidential.
(t)(3) Should the Lending Agent refuse to disclose information on
the basis that such information is exempt from disclosure, the Lender
shall, by the close of the thirtieth (30th) day following the request,
provide written notice advising that person of the reason for the
refusal and that the Department may request such information.
Summary of Facts and Representations
1. Morgan Stanley is a global financial services firm headquartered
in New York. Its corporate parent is a bank holding company. Morgan
Stanley, with its affiliates, serves a large and diversified group of
clients and customers, including corporations, governments, financial
institutions and individuals around the world. Morgan Stanley offers
investment-related services, including securities research, brokerage,
execution, asset allocation, financial planning, investment advice,
discretionary asset management services, sweep and trust/custody
services. In its Institutional Securities business segment, Morgan
Stanley provides financial advisory and capital-raising services to a
diverse group of institutional clients globally, primarily through
wholly owned subsidiaries that include Morgan Stanley & Co.
Incorporated (MS&Co.), Morgan Stanley & Co. International plc, Morgan
Stanley Japan Securities Co., Ltd. and Morgan Stanley Asia Limited.
These and other subsidiaries also conduct sales and trading activities
worldwide, as principal and agent, and provide related financing
services on behalf of institutional investors. MS&Co. is both a
registered investment adviser subject to the Investment Advisers Act of
1940 and an SEC-registered broker dealer subject to the supervision of
various governmental and self-regulatory bodies. As of November 30,
2007, Morgan Stanley employed over 48,000 employees in over 600 offices
operating in 33 countries. In the ordinary course of its business,
Morgan Stanley provides a range of financial services to IRAs and
pension, profit sharing and 401(k) plans qualified under section 401(a)
of the Code under which some or all of the participants are employees
described in section 401(c) of the Code.
2. Mitsubishi UFJ Financial Group, Inc. (``MUFG''), Japan's largest
financial group and the world's second largest bank holding company
with $1.1 trillion
[[Page 3082]]
in bank deposits, on October 13, 2008, made a $9 billion equity
investment in Morgan Stanley that gives MUFG approximately a 21 percent
ownership interest in Morgan Stanley on a fully diluted basis. The
investment is part of a previously announced global strategic alliance.
Under the terms of the transaction, MUFG has acquired $7.8 billion of
perpetual non-cumulative convertible preferred stock with a 10 percent
dividend and a conversion price of $25.25 per share, and $1.2 billion
of perpetual non-cumulative non-convertible preferred stock with a 10
percent dividend. Half of the convertible preferred stock automatically
converts after one year into common stock when Morgan Stanley's stock
trades above 150 percent of the conversion price for a certain period
and the other half converts on the same basis after year two. The non-
convertible preferred stock is callable after year three at 110 percent
of the purchase price. MUFG is entitled to nominate one member of
Morgan Stanley's twelve-member board of directors and to have an
additional ``observer'' present at meetings of Morgan Stanley's board.
3. UnionBanCal Corporation, headquartered in San Francisco, CA, is
a financial holding company with assets of $70.1 billion as of December
31, 2008. Its primary subsidiary, Union Bank, N.A. (UB), is a full-
service commercial bank providing an array of financial services to
individuals, small businesses, middle-market companies and major
corporations. UB is California's fifth largest bank by deposits. The
bank has 335 banking offices in California, Oregon and Washington, and
two international offices. Effective November 4, 2008, UnionBanCal
Corp. became a wholly owned subsidiary of The Bank of Tokyo-Mitsubishi
UFJ, Ltd., which is a subsidiary of MUFG.
4. To the best of Morgan Stanley's knowledge and belief, the
current status of the investment in Morgan Stanley by Union Bank's
indirect, ultimate corporate parent, MUFG, does not make, as of the
date of the application, Union Bank and Morgan Stanley affiliates of
each other under the definition of affiliate in 29 CFR 2510.3-21(e) for
purposes of ERISA.\45\ However, Morgan Stanley filed this exemption
request because (a) Union Bank might be viewed currently as having an
interest in Morgan Stanley that could affect each entity's judgment as
lending agent for Client Plans by reason of Union Bank's indirect
parent's ownership interest in Morgan Stanley and (b) Morgan Stanley
and Union Bank both believe that, at some future date, the status of
MUFG's investment and future joint business initiatives may ultimately
deem Union Bank and Morgan Stanley to be ``affiliates'' for purposes of
29 CFR 2510.3-21(e).
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\45\ An affiliate is defined in 29 CFR 2510.3-21(e) as
including: ``(i) Any person directly or indirectly, through one or
more intermediaries, controlling, controlled by, or under common
control with such person; (ii) Any officer, director, partner,
employee or relative (as defined in section 3(15) of the Act) of
such person; and (iii) Any corporation or partnership of which such
person is an officer, director or partner.'' The term control is
defined therein as ``the power to exercise a controlling influence
over the management or policies of a person other than an
individual.''
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5. Morgan Stanley seeks an exemption to permit a securities lending
agent affiliated with MS&Co. or UB (the Lending Agent) to lend
securities of an account covered by ERISA or the Code to a broker-
dealer or bank affiliated with MS&Co. or UB, including foreign broker-
dealers and banks in Canada, Germany, Japan, the United Kingdom,
Switzerland, France, Sweden and Australia (each, an Affiliated
Borrower). The exemption would amend and supersede PTE 98-40, granted
to MS&Co. and Morgan Stanley Trust Company, and EXPRO 99-01E, granted
to MS&Co.
6. As of the closing of the MUFG/Morgan Stanley transaction, eight
Client Plans for which UB served as securities lending agent or sub
agent had loans outstanding to MS&Co. or a U.S. affiliate (the Existing
Loans). As of March 9, 2009, the total amount of the Existing Loans
from these Plans totaled $8,196,460.29, compared to the amount
outstanding to all borrowers from these funds which exceeded $1.005
billion. Thus the total Existing Loans to Morgan Stanley affiliates
were approximately 1% of the total loans for these Plans. The range of
percentages for the eight plans was between .5% and 3.7% of plan
assets. The Applicant requests that the exemption, if granted, apply
retroactively to the Existing Loans. The Applicant has proposed certain
conditions applicable to the Existing Loans, as described herein.
7. The Applicant represents that, for each Client Plan, neither
MS&Co., UB, nor any affiliate will have or exercise discretionary
authority or control with respect to the investment of the assets of
Client Plans involved in the transaction, or render investment advice
(within the meaning of 29 CFR 2510.3-21(c)) with respect to such
assets, including decisions concerning a Client Plan's acquisitions or
dispositions of securities available for loan.
8. Any arrangement for the Lending Agent to lend securities will be
approved in advance by a Client Plan fiduciary who is independent of
MS&Co, UB, and their affiliates (other than in the case of a Plan
sponsored by MS&Co., UB, or any of their affiliates (Affiliated Plan)
invested in a commingled fund, provided that at all times holdings of
all Affiliated Plans in the aggregate comprise less than 10% of the
assets of the commingled fund). Notwithstanding the foregoing, this
condition will be deemed satisfied with respect to the Existing Loans
provided (i) UB provided to Client Plans with Existing Loans no later
than April 1, 2009, a description of the general terms of the
securities loan agreements between such Client Plans and borrowers,
including any conditions with respect to MS that differ from other
borrowers, and (ii) at the time of providing such information, UB
notified each such Client Plan that if the Client Plan did not approve
the continued lending of securities to Morgan Stanley by May 11, 2009,
UB would terminate the loans and cease to make any new securities loans
on behalf of the Client Plan to Morgan Stanley.
9. When acting as a securities lending agent, the Lending Agent,
pursuant to approval by the independent Plan fiduciary, will negotiate
the terms of loans to Affiliated Borrowers and otherwise act as a
liaison between the Lender and the Affiliated Borrower. The Lending
Agent will have the responsibility for monitoring receipt of all
collateral required under the exemption, marking such collateral to
market daily to ensure adequate levels of collateral can be maintained,
monitoring and evaluating the performance and creditworthiness of
borrowers, and, if authorized by a lending plan, holding and investing
cash collateral pursuant to given investment guidelines. The Lending
Agent may also act as directed trustee or custodian for the Client
Plan.
10. The Lending Agent, as securities lending agent for the Lenders,
will negotiate a master securities borrowing agreement with a schedule
of modifications attached thereto (``Loan Agreement'') with the
Affiliated Borrowers, as is the case with all borrowers. The Loan
Agreement will specify, among other things, the right of the Lender to
terminate a loan at any time and the Lender's rights in the event of
any default by the Affiliated Borrowers. The Loan Agreement will set
forth the basis for compensation to the Lender for lending securities
to the Affiliated Borrowers under each category of collateral. The Loan
[[Page 3083]]
Agreement will also contain a requirement that the Affiliated Borrowers
must pay all transfer fees and transfer taxes related to the securities
loans.
11. With respect to Lenders that are Separate Accounts, as direct
lending agent, the Lending Agent will, prior to lending the Client
Plan's securities, enter into an agreement (``Client Agreement'') with
the Client Plan, signed by a fiduciary of the Client Plan who is
independent of MS&Co., UB, and their affiliates (other than in the case
of an Affiliated Plan, as discussed above in paragraph 8). The Client
Agreement will, among other things, describe the operation of the
lending program, disclose the form of the securities loan agreement to
be entered into on behalf of the Client Plan with borrowers, identify
generally the securities which are available to be lent, and identify
the required collateral guidelines and the required daily marking-to-
market of the loaned securities. The Client Agreement will also set
forth the basis and rate of the Lending Agent's compensation for the
performance of securities lending and cash collateral investment
services. The Client Plan may terminate the Client Agreement with
respect to any or all Affiliated Borrowers at any time, without
penalty, on no more than five business days notice.
12. The Client Agreement will contain provisions to the effect that
if any Affiliated Borrower is designated by the Client Plan as an
approved borrower, the Client Plan will acknowledge the relationship
between the Affiliated Borrower and the Lending Agent. The Lending
Agent will represent to the Client Plan that each and every loan made
to the Affiliated Borrower on behalf of the Client Plan will be
effected at arm's-length terms, and such terms will be in no case less
favorable to the Client Plan than the pricing established according to
the schedule described in paragraph 29.
13. When the Lending Agent is lending agent with respect to a
Commingled Fund, the Lending Agent will, prior to the investment of a
Client Plan's assets in such Commingled Fund or prior to the first use
of this exemption, obtain from the Client Plan approval to lend any
securities held by the Commingled Fund to brokers and other approved
borrowers, including the Affiliated Borrowers. Prior to obtaining such
approval, the Lending Agent will provide a written description of the
operation of the lending program (including the basis and rate of the
Lending Agent's compensation for the performance of securities lending
and cash collateral investment services), disclose the form of the
securities loan agreement to be entered into on behalf of the
Commingled Fund with the borrowers, generally identify the securities
which are available to be lent, and identify the required collateral
and the required daily marking-to-market of loaned securities.\46\ If
the Client Plan is already invested in the Commingled Fund and objects
to the arrangement, it will be permitted to withdraw from the
Commingled Fund, without penalty, no later than 35 days after the
notice of withdrawal is received in accordance with the terms of the
Commingled Fund.
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\46\ The Lending Agent may make transmittals required by the
exemption to Client Plan fiduciaries via authorized recordkeepers.
The Lending Agent represents that all decisions reserved to Client
Plan fiduciaries under the terms of the exemption will be made by
such fiduciaries and not by the recordkeeper on behalf of the Client
Plan fiduciary.
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14. In addition, the Client Plan will be advised of the
relationship between the Lending Agent and the Affiliated Borrowers,
and the Lending Agent will represent that each and every loan made to
the Affiliated Borrowers by the Commingled Fund will be effected at
arm's-length terms, and such terms will be in no case less favorable to
the Client Plan than the pricing established according to the schedule
described in paragraph 29.
15. When the Lending Agent is lending securities under a sub-agency
arrangement, before the Client Plan participates in the securities
lending program, the primary lending agent will enter into a securities
lending agency agreement (Primary Lending Agreement) with a fiduciary
of the Client Plan who is independent of such primary lending agent,
MS&Co., UB and their affiliates (other than in the case of an
Affiliated Plan, as described in paragraph 8). The primary lending
agent also will be unrelated to MS&Co., UB, and their affiliates. The
Primary Lending Agreement will contain provisions substantially similar
to those in the Client Agreement relating to: The description of the
lending program, use of an approved form of securities loan agreement,
specification of the securities to be lent, specification of the
required collateral margin and the requirement of daily marking-to-
market, and provision of a list of approved borrowers (which will
include one or more of the Affiliated Borrowers). The Primary Lending
Agreement will specifically authorize the primary lending agent to
appoint sub-agents (including the Lending Agent) to facilitate
performance of securities lending agency functions. The Primary Lending
Agreement will expressly disclose that the Lending Agent is to act in a
sub-agency capacity. The Primary Lending Agreement will also set forth
the basis and rate for the primary lending agent's compensation from
the Client Plan for the performance of securities lending services and/
or cash collateral investment services and will authorize the primary
lending agent to pay a portion of its fee, as the primary lending agent
determines in its sole discretion, to any sub-agent(s) it retains
(including the Lending Agent) pursuant to the authority granted under
such agreement.
16. Pursuant to its authority to appoint sub-agents, the primary
lending agent will enter into a securities lending sub-agency agreement
(Sub-Agency Agreement) with the Lending Agent under which the primary
lending agent will retain and authorize the Lending Agent, as sub-
agent, to lend securities of the primary lending agent's Client Plans,
subject to the same terms and conditions specified in the Primary
Lending Agreement. The Lending Agent represents that the Sub-Agency
Agreement will contain provisions that are in substance comparable to
those described above in connection with a Client Agreement in
situations where the Lending Agent is the primary lending agent. The
Lending Agent will make in the Sub-Agency Agreement the same
representations described above in paragraph 12 with respect to arm's-
length dealing with the Affiliated Borrowers. The Sub-Agency Agreement
will also set forth the basis and rate for the Lending Agent's
compensation to be paid by the primary lending agent.
17. In all cases, the Lending Agent will maintain transactional and
market records sufficient to assure compliance with its representation
that all loans to the Affiliated Borrowers are effected at arm's-length
terms, and in no case less favorable to the Client Plan than the
pricing established according to the schedule described in paragraph
29. Such records will be made available upon reasonable request and
without charge to the Client Plan fiduciary, who (other than in the
case of an Affiliated Plan as described in paragraph 8) is independent
of MS&Co., UB, and their affiliates, in the manner and format agreed to
by the Client Plan fiduciary and the Lending Agent.
18. A Lender, in the case of a Separate Account, will be permitted
to terminate the lending agency or sub-agency arrangement with respect
to any or all Affiliated Borrowers at any time without penalty, on five
business days notice. A Client Plan in the case of a Commingled Fund
will be permitted to terminate its participation in the lending
arrangement
[[Page 3084]]
by terminating its investment in the Commingled Fund no later than 35
days after the notice of termination of participation is received,
without penalty to the Plan, in accordance with the terms of the
Commingled Fund. Upon a termination, the Affiliated Borrower will be
contractually obligated to return securities identical to the borrowed
securities (or the equivalent thereof in the event of reorganization,
recapitalization or merger of the issuer of the borrowed securities) to
the Lender within one of the following time periods, whichever is
least: the customary delivery period for such securities, five business
days of written notification of termination, or the time negotiated for
such delivery by the Client Plan, in a Separate Account, or by the
Lending Agent, as lending agent to a Commingled Fund, and the
Affiliated Borrowers.
19. The Lender, or another custodian designated to act on its
behalf, will receive collateral from each Affiliated Borrower by
physical delivery, book entry in a U.S. securities depository, wire
transfer or similar means by the close of business on or before the day
the loaned securities are delivered to the Affiliated Borrower. All
collateral will be received by the Lender or other custodian in the
United States. The collateral will consist of U.S. currency, securities
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, irrevocable bank letters of credit issued by a U.S.
bank other than Morgan Stanley, Union Bank (or any subsequent parent
corporation of the Lending Agent) or an affiliate thereof, or any
combination thereof, or other collateral permitted under PTE 2006-16
(as amended or superseded). The collateral will be held on behalf of a
Client Plan in a depository account or other investment account or
vehicle separate from the Affiliated Borrower.
20. The market value (or, in the case of a letter of credit, a
stated amount) of the posted collateral on the close of business on the
day preceding the day of the loan will be at least 102 percent of the
market value of the loaned securities unless required to be at a higher
level under PTE 2006-16. The Loan Agreement will give the Lender a
continuing security interest in and a lien on or title to the
collateral. The Lending Agent will monitor the level of the collateral
daily. If the market value of the collateral, on the close of trading
on a business day, is less than 100 percent (or such greater percentage
as agreed to by the parties) of the market value of the loaned
securities at the close of business on that day, the Lending Agent will
require the Affiliated Borrowers to deliver by the close of business on
the next day sufficient additional collateral to bring the level back
to at least 102 percent or such higher percentage as is required under
PTE 2006-16.
21. Prior to making any loans under the Loan Agreement from
Separate Accounts, the Affiliated Borrowers will furnish their most
recent available audited and unaudited financial statements to the
Lending Agent, which will provide such statements to the Client Plan
invested in such Separate Account before the authorizing fiduciary of
the Client Plan is asked to approve the proposed lending to the
Affiliated Borrowers. The terms of the Loan Agreement will contain a
requirement that the Affiliated Borrowers must give prompt notice to
the Lending Agent at the time of any loan, of any material adverse
change in their financial condition since the date of the most recently
furnished financial statements. If any such material adverse change has
taken place, the Lending Agent will request that the independent
fiduciary of the Client Plan, if invested in a Separate Account,
approve continuation of the lending arrangement in view of the changed
financial conditions.
22. Notwithstanding the foregoing, this condition will be satisfied
with respect to the Existing Loans provided (i) UB provided to such
Client Plans no later than April 1, 2009, the most recently available
audited and unaudited financial statements of the Affiliated Borrower
and notice of any material adverse change in financial condition since
the date of the most recent financial statement being furnished to the
Client Plan, and (ii) at the time of providing such information, UB
notified each Client Plan that if the Client Plan did not approve the
continued lending of securities to Morgan Stanley by May 11, 2009, UB
would terminate the loan and cease to make any new securities loans on
behalf of that Client Plan to Morgan Stanley.
23. In addition, upon request, the Lending Agent will provide the
audited financial statements of the applicable Affiliated Borrowers to
Client Plans invested in Commingled Funds on an annual basis.
24. In the case of Client Plans currently invested in Commingled
Funds, approval of lending to the Affiliated Borrowers will be
accomplished by the following special procedure for Commingled Funds.
The information described in paragraph 13 will be furnished by the
Lending Agent as lending fiduciary to an independent fiduciary of each
Client Plan invested in Commingled Funds not less than 30 days prior to
implementation of the lending arrangement, and thereafter, upon the
reasonable request of the authorizing fiduciary. In the event any such
authorizing fiduciary submits a notice in writing within the 30-day
period to the Lending Agent, in its capacity as the lending fiduciary,
objecting to the implementation of or continuation of the lending
arrangement with the Affiliated Borrowers, the Plan on whose behalf the
objection was tendered will be given the opportunity to terminate its
investment in the Commingled Fund, without penalty to the Plan, no
later than 35 days after the notice of withdrawal is received in
accordance with the terms of the Commingled Fund. In the case of a Plan
that elects to withdraw pursuant to the foregoing, such withdrawal
shall be effected prior to the implementation of the arrangement; but
an existing arrangement need not be discontinued by reason of a Plan
electing to withdraw. In the case of a Plan whose assets are proposed
to be invested in a Commingled Fund subsequent to the implementation of
the arrangement, the Plan's investment in the Commingled Fund shall be
authorized in the manner described in paragraph 13.
25. In the case of loans made by Commingled Funds, upon notice by
the Affiliated Borrower to the Lending Agent of a material adverse
change in its financial conditions, the Lending Agent will make a
decision whether to terminate existing loans and whether to continue
making additional loans to the Affiliated Borrower, using the same
standards of credit analysis the Lending Agent would use in evaluating
unrelated borrowers. In the event the Plan invested in a Commingled
Fund has any objection to the continuation of lending to an Affiliated
Borrower, it may withdraw from the fund as described above.
26. With respect to material changes in the lending arrangement
with the Affiliated Borrowers after approval by Client Plans, the
Lending Agent will obtain approval from Client Plans (whether in
Separate Accounts or Commingled Funds) prior to implementation of any
such change. For those Client Plans invested in Commingled Funds,
approval of the proposed material change will be by the procedure
described in paragraph 24.
27. In return for lending securities, the Lender either will
receive a reasonable fee which is related to the value of the borrowed
securities and the duration of the loan, or will have the opportunity
to derive compensation through the investment of cash
[[Page 3085]]
collateral or a combination of both. In the case of a Lender investing
the cash collateral, the Lender may pay a loan rebate or similar fee to
the Affiliated Borrowers, if such fee is not greater than the fee the
Lender would pay in a comparable arm's-length transaction with an
unrelated party.
28. In this regard, each time a Lender loans securities to an
Affiliated Borrower pursuant to the Loan Agreement, the Lending Agent
will reflect in its records the material terms of the loan, including
the securities to be loaned, the required level of collateral, and the
fee or rebate payable. The fee or rebate payable for each loan will be
effected at arm's-length terms, and such terms will be in no case less
favorable to the Client Plan than the pricing established according to
the schedule described below. The rebate rates, which are established
for cash collateralized loans made by the Lender, will take into
account the potential demand for the loaned securities, the applicable
benchmark cost of funds (typically the U.S. Federal Funds rate
established by the Federal Reserve System), the overnight ``repo''
rate, or the like and the anticipated investment returns on the
investment of cash collateral. Further, the lending fees with respect
to loans collateralized by other than cash will be set daily to reflect
conditions as influenced by potential market demand. The Applicant
represents that the securities lending agent fee paid to the Lending
Agent will comply with the requirements of PTE 2006-16 Part IV or
another applicable exemption.
29. The Lending Agent will establish each day a written schedule of
lending fees \47\ and rebate rates \48\ with respect to new loans of
designated classes of securities, such as U.S. Government securities,
U.S. equities and corporate bonds, international fixed income
securities and non-U.S. equities, in order to assure uniformity of
treatment among borrowers and to limit the discretion the Lending Agent
would have in negotiating securities loans to Affiliated Borrowers.
Loans to all borrowers of a given security on that day will be made at
rates or lending fees on the relevant daily schedules or at rates or
lending fees which are more advantageous to the Lenders. The Applicant
represents that in no case will loans be made to Affiliated Borrowers
at rates or lending fees that are less advantageous to the Lenders than
those on the relevant schedules. In addition, it is represented that
the method of determining the daily securities lending rates (fees and
rebates) will be disclosed to each Client Plan, whether in Separate
Accounts or Commingled Funds. For those Client Plans invested in
Commingled Funds, disclosure will be by the special procedure described
in paragraph 24.
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\47\ The Lending Agent will adopt minimum daily lending fees for
non-cash collateral payable by Affiliated Borrowers to the Lending
Agent on behalf of a Lender. Separate minimum daily lending fees
will be established with respect to loans of designated classes of
securities. With respect to each designated class of securities, the
minimum lending fee will be stated as a percentage of the principal
value of the loaned securities. The Lending Agent will submit the
method for determining such minimum daily lending fees to an
authorizing fiduciary of the Client Plan, in the case of a Separate
Account, for approval before initially lending any securities to
Affiliated Borrowers on behalf of such Client Plan. The Lending
Agent will submit the method for determining such minimum daily
lending fees to an authorizing fiduciary of each Client Plan
involved in or planning to invest in a Commingled Fund pursuant to
the procedure described in paragraph 24, above.
\48\ Separate maximum daily rebate rates will be established
with escribed in paragraph 24, above.
\48\ Separate respect to loans of securities within the
designated classes identified above. Such rebate rates will be based
upon an objective methodology which takes into account several
factors, including potential demand for loaned securities, the
applicable benchmark cost of fund indices, and anticipated
investment return on overnight investments permitted by the Client
Plan's independent fiduciary. The Lending Agent will submit the
method for determining such maximum daily rebate rates to such
fiduciary before initially lending any securities to an Affiliated
Borrower on behalf of the Client Plan.
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30. When a loan of securities by a Lender is collateralized with
cash, the Lending Agent will transfer such cash to an investment
vehicle that the Client Plan has authorized, and will rebate a portion
of the earnings on such collateral to the appropriate Affiliated
Borrower as agreed to in the securities lending agreement between
Lender and the Borrower. The Lending Agent will share with the Client
Plan the income earned on the investment of cash collateral for the
Lending Agent's provision of lending services, which will reduce the
income earned by the Client Plans (whether in a Commingled Fund or
Separate Account) from the lending of securities. The Lending Agent may
receive a separate management fee for providing cash collateral
investment services. Where collateral other than cash is used, the
Affiliated Borrower will pay a fee to the Lender based on the value of
the loaned securities. These fees will also be shared between the
Client Plans (whether in a Commingled Fund or Separate Account) and the
Lending Agent. Any income or fees shared will be net of cash collateral
management fees and borrower rebate fees. The sharing of income and
fees will be in accordance with the arrangements authorized by the
Client Plan in advance of commencement of the lending program.
31. The Lending Agent will negotiate rebate rates for cash
collateral payable to each borrower, including Affiliated Borrowers, on
behalf of a Lender. The fees or rebate rates negotiated will be
effected at arm's-length terms, and in no case will be less favorable
to the Client Plan than the pricing established according to the
schedule described in paragraph 29.
32. With respect to any loan to an Affiliated Borrower, the Lending
Agent, at the inception of such loan, will not negotiate and agree to a
rebate rate with respect to such loan which it expects would produce a
zero or negative return to the Lender over the life of the loan
(assuming no default on the investments made by the Lending Agent where
it has investment discretion over the cash collateral or on investments
expected to be made by the Client Plan's designee, where the Lending
Agent does not have investment discretion over cash collateral).
33. The Lending Agent may, depending on market conditions, reduce
the lending fee or increase the rebate rate on any outstanding loan to
an Affiliated Borrower, or any other borrower. Except in the case of a
change resulting from a change in the value of any third party
independent index with respect to which the fee or rebate is
calculated, such reduction in lending fee or increase in rebate shall
not establish a lending fee below the minimum or a rebate above the
maximum set in the schedule of fees and rebates described in paragraph
29. If the Lending Agent reduces the lending fee or increases the
rebate rate on any outstanding loan from a Separate Account to an
Affiliated Borrower (except in the case of a change resulting from a
change in the value of any third party independent index with respect
to which the fee or rebate is calculated), the Lending Agent, by the
close of business on the date of such adjustment, will provide the
independent fiduciary of the Client Plan invested in the Separate
Account with notice (including by electronic means) that it has reduced
such fee or increased the rebate rate to such Affiliated Borrower and
that the Client Plan may terminate such loan at any time.
34. Except as otherwise expressly provided in the exemption, the
Applicant represents that all procedures regarding the securities
lending activities will, at a minimum, conform to the applicable
provisions of PTE 2006-16 or another applicable exemption, as amended
or superseded.
[[Page 3086]]
35. Under the Loan Agreement, an Affiliated Borrower domiciled in
the U.S. agrees to indemnify and hold harmless the Client Plans in the
United States (including the sponsor and fiduciaries of such Client
Plans) for any transactions covered by this exemption with a foreign
Affiliated Borrower so that the Client Plan may collect on any
indemnification from a U.S. domiciled affiliate of MS&Co or UB. Such
indemnification will be against any and all reasonably foreseeable
losses, costs and expenses (including reasonable attorneys fees,
disbursements, transfer taxes and stamp duties), excluding any indirect
or consequential damages which the Lender may incur or suffer arising
from any impermissible use by an Affiliated Borrower of the loaned
securities, from an event of default arising from the failure of an
Affiliated Borrower to deliver loaned securities when due in accordance
with the provisions of the Loan Agreement or from an Affiliated
Borrower's other failure to comply with the terms of the Loan
Agreement, except to the extent that such losses are caused by the
Client Plan's own negligence.
36. If any event of default occurs, to the extent that (i)
liquidation of the pledged Collateral or (ii) additional cash received
from the Affiliated Borrower does not provide sufficient funds on a
timely basis, the Client Plan will have the right to purchase
securities identical to the borrowed securities (or their equivalent as
discussed above) and apply the Collateral to the payment of the
purchase price. If the Collateral is insufficient to accomplish such
purchase, the Affiliated Borrower will indemnify the Client Plan
invested in a Separate Account or Commingled Fund in the United States
with respect to the difference between the replacement cost of
securities and the market value of the Collateral on the date the loan
is declared in default, together with expenses incurred by the Client
Plan plus applicable interest at a reasonable rate, including
reasonable attorney's fees incurred by the Client Plan for legal action
arising out of default on the loans, or failure by the Affiliated
Borrower to properly indemnify the Client Plan. The Affiliated
Borrower's indemnification will enable the Client Plan to collect on
any indemnification from a U.S.-domiciled affiliate of the Affiliated
Borrower.
37. The ``market value'' of any securities listed on a national
securities exchange in the United States will be the last sales price
on such exchange on the preceding business day or, if there is no sale
on that day, the last sale price on the next preceding business day on
which there is a sale on such exchange, as quoted on the consolidated
tape. If the principal market for securities to be valued is the over-
the-counter market, the securities' market value will be the closing
sale price as quoted on the National Association of Securities Dealers
Automated Quotation System (NASDAQ) on the preceding business day or
the opening price on such business day if the securities are issues for
which last sale prices are not quoted on NASDAQ. If the securities to
be valued are not quoted on NASDAQ, their market value shall be the
highest bid quotation appearing in The Wall Street Journal, National
Quotation Bureau pink sheets, quotation sheets of registered market
makers and, if necessary, independent dealers' telephone quotations on
the preceding business day. (In each case, if the relevant quotation
does not exist on such day, then the relevant quotation on the next
preceding business day in which there is such a quotation would be the
market value.)
38. The Lender will be entitled to receive the equivalent of all
distributions made to holders of the borrowed securities during the
term of the loan, including but not limited to, interest and dividends,
shares of stock as a result of a stock split and rights to purchase
additional securities, or other distributions during the loan
period.\49\
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\49\ The Applicant represents that dividends and other
distributions on foreign securities payable to a Lender may be
subject to foreign tax withholdings. Under the circumstances, the
applicable Affiliated Borrower, where necessary, will gross-up the
in-lieu-of-payment (in respect of such dividend or distribution it
makes) to the Lender so that the Lender will receive back what it
otherwise would have received (by way of dividend or distribution)
had it not loaned the securities.
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39. Prior to a Client Plan's authorization of a securities lending
program, the Lending Agent will provide a Plan fiduciary with a copy of
the proposed exemption until the final exemption is granted, and then
the proposed and final exemption. With respect to the Existing Loans,
prior to the publication date of the grant of this exemption, this
condition will be satisfied provided: (i) UB provides to such Client
Plans that have consented to securities lending prior to such
publication date, a copy of the requested exemption and (ii) UB advises
each such Client Plan that unless the Client Plan notifies UB to the
contrary within 30 days, its consent to make loans to Morgan Stanley
will be presumed.
40. In order to provide the means for monitoring lending activity
in Separate Accounts and Commingled Funds, a quarterly report will be
provided to each Client Plan. This report will show the fees or rebates
(as applicable) on loans to Affiliated Borrowers compared with loans to
other borrowers, as well as the level of collateral on the loans. The
Applicant represents that the quarterly report will show, on a daily
basis, the market value of all outstanding security loans to Affiliated
Borrowers and to other borrowers as compared to the total collateral
held for both categories of loans. Further, the quarterly report will
state the daily fees where collateral other than cash is utilized and
will specify the details used to establish the daily rebate payable to
all borrowers where cash is used as collateral. The quarterly report
also will state, on a daily basis, the rates at which securities are
loaned to Affiliated Borrowers compared with those at which securities
are loaned to other borrowers. In the event an authorizing fiduciary of
a Plan invested in a Commingled Fund submits a notice in writing to the
Lending Agent objecting to the continuation of the lending program to
the Affiliated Borrowers, the Plan on whose behalf the objection was
tendered will be given the opportunity to terminate its investment in
the Commingled Fund, without penalty to the Plan, no later than 35 days
after the notice of withdrawal is received in accordance with the terms
of the Commingled Fund.
41. Notwithstanding the foregoing, this condition will be satisfied
with respect to the Existing Loans, provided: (i) UB provides to such
client Plans no later than July 31, 2009, the material described in
paragraph 40 above with respect to the period from October 1, 2008,
through June 30, 2009.
42. To ensure that any lending of securities to an Affiliated
Borrower will be monitored by an authorizing fiduciary of above average
experience and sophistication in matters of this kind, only Client
Plans with total assets having an aggregate market value of at least
$50 million will be permitted to lend securities to the Affiliated
Borrowers. However, in the case of two or more Client Plans which are
maintained by the same employer, controlled group of corporations or
employee organization, whose assets are commingled for investment
purposes in a single master trust or any other entity the assets of
which are ``plan assets '' under 29 CFR 2510.3-101 (the Plan Asset
Regulation), which entity is engaged in securities lending arrangement
with the Lending Agent, the foregoing $50 million requirement will be
deemed satisfied if such trust or other entity has aggregate assets
which are in excess of $50 million; provided that if the fiduciary
responsible for
[[Page 3087]]
making the investment decision on behalf of such master trust or other
entity is not the employer or an affiliate of the employer, such
fiduciary must have total assets under its management and control,
exclusive of the $50 million threshold amount attributable to plan
investment in the commingled entity, which are in excess of $100
million. In the case of two or more Client Plans which are not
maintained by the same employer, controlled group of corporations or
employee organization, whose assets are commingled for investment
purposes in a group trust or any other form of entity the assets of
which are ``plan assets'' under the Plan Asset Regulation, which entity
is engaged in securities lending arrangements with the Lending Agent,
the foregoing $50 million requirement will be satisfied if such trust
or other entity has aggregate assets which are in excess of $50 million
(excluding the assets of any Client Plan with respect to which the
fiduciary responsible for making the investment decision on behalf of
such group trust or other entity or any member of the controlled group
of corporations including such fiduciary is the employer maintaining
such Plan or an employee organization whose members are covered by such
Plan). However, the fiduciary responsible for making the investment
decision on behalf of such group trust or other entity must have full
investment responsibility with respect to plan assets invested therein,
and must have total assets under its management and control, exclusive
of the $50 million threshold amount attributable to plan investment in
the commingled entity, which are in excess of $100 million. In
addition, none of the entities described above may be formed for the
sole purpose of making loans of securities.
43. With respect to any calendar quarter, at least 50 percent or
more of the outstanding dollar value of securities loans negotiated on
behalf of Lenders by the Lending Agent will be to borrowers unrelated
to MS&Co., UB, and their affiliates. Thus, the competitiveness of the
loan fee will be continuously tested in the marketplace. Accordingly,
the Applicant believes that loans to Affiliated Borrowers should result
in competitive fee income to the Lenders.
44. With respect to foreign Affiliated Borrowers, the Applicant
represents that each such entity is regulated by the host country's
supervisory authority (e.g., the UK FSA) and is, therefore, authorized
to conduct an investment banking business in and from the host country
(e.g., the United Kingdom) as a broker-dealer. The proposed exemption
will be applicable only to transactions effected by a Lending Agent
with an Affiliated Borrower which is registered as a broker-dealer with
the host country's supervisory authority (the Foreign Authority) and in
compliance with Rule 15a-6 under the Securities Exchange Act of 1934
(Rule 15a-6). The Applicant represents that the role of a broker-dealer
in a principal transaction in each of the foreign countries is
substantially identical to that of a broker-dealer in a principal
transaction in the United States. The Applicant further represents that
registration of a broker-dealer with the Foreign Authority is
equivalent to registration of a broker-dealer with the SEC under the
1934 Act. The Applicant maintains that the Foreign Authority has
promulgated rules for broker-dealers which are equivalent to SEC rules
relating to registration requirements, minimum capitalization,
reporting requirements, periodic examinations, fund segregation, client
protection, and enforcement. The Applicant represents that the rules
and regulations set forth by the Foreign Authority and the SEC share a
common objective: the protection of the investor by the regulation of
securities markets. The Applicant explains that under each Foreign
Authority's rules, a person who manages investments or gives advice
with respect to investments must be registered as a ``registered
representative''. If a person is not a registered representative and,
as part of his duties, makes commitments in market dealings or
transactions, that person must be registered as a ``registered
trader''. The Applicant represents that the Foreign Authority's rules
require each firm which employs registered representatives or
registered traders to have positive tangible net worth and to be able
to meet its obligations as they fall due, and that the Foreign
Authority's rules set forth comprehensive financial resource and
reporting/disclosure rules regarding capital adequacy. In addition to
demonstration of capital adequacy, the Applicant states that the
Foreign Authority's rules impose reporting/disclosure requirements on
broker-dealers with respect to risk management, internal controls, and
all records relating to a counterparty, and that all records must be
produced at the request of the Foreign Authority at any time. The
Applicant states that Foreign Authority's registration requirements for
broker-dealers are backed up by potential fines and penalties and rules
which establish a comprehensive disciplinary system.
45. In addition to the protections afforded by registration with
the Foreign Authority, the Applicant represents that the Affiliated
Borrower will comply with the applicable provisions of Rule 15a-6
(described below). The Applicant represents that compliance by the
Affiliated Borrower with the requirements of Rule 15a-6 will offer
additional protections in lieu of registration with the SEC. The
Applicant represents that Rule 15a-6 provides an exemption from U.S.
broker-dealer registration for a foreign broker-dealer that induces or
attempts to induce the purchase or sale of any security (including
over-the-counter equity and debt options) by a ``U.S. institutional
investor'' or a ``major U.S. institutional investor'', provided that
the foreign broker-dealer, among other things, enters into these
transactions through a U.S. registered broker-dealer intermediary. The
term ``U.S. institutional investor'', as defined in Rule 15a-6(b)(7),
includes an employee benefit plan within the meaning of the Act if (a)
the investment decision is made by a plan fiduciary, as defined in
section 3(21) of the Act, which is either a bank, savings and loan
association, insurance company or registered investment advisor, (b)
the employee benefit plan has total assets in excess of $5,000,000, or
(c) the employee benefit plan is a self-directed plan with investment
decisions made solely by persons that are ``accredited investors'' as
defined in Rule 501(a)(1) of Regulation D of the Securities Act of
1933, as amended. The term ``major U.S. institutional investor'' is
defined as a person that is a U.S. institutional investor that has, or
has under management, total assets in excess of $100 million, or is an
investment adviser registered under section 203 of the Investment
Advisers Act of 1940 that has total assets under management in excess
of $100 million. The Applicant represents that the intermediation of
the U.S. registered broker-dealer imposes upon the foreign broker-
dealer the requirement that the securities transaction be effected in
accordance with a number of U.S. securities laws and regulations
applicable to U.S. registered broker-dealers.
46. The Applicant represents that, under Rule 15a-6, a foreign
broker-dealer that induces or attempts to induce the purchase or sale
of any security by a U.S. institutional or major U.S. institutional
investor in accordance with Rule 15a-6 must, among other things:
a. Consent to service of process for any civil action brought by,
or
[[Page 3088]]
proceeding before, the SEC or any self-regulatory organization;
b. Provide the SEC with any information or documents within its
possession, custody or control, any testimony of any foreign associated
persons,\50\ and any assistance in taking the evidence of other
persons, wherever located, that the SEC requests and that relates to
transactions effected pursuant to Rule 15a-6; and
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\50\ A foreign associated person is defined in Rule 15a-6(b)(2)
as any natural person domiciled outside the United States who is an
associated person, as defined in section 3(a)(18) of the 1934 Act,
of the foreign broker or dealer, and who participates in the
solicitation of a U.S. institutional investor or a major U.S.
institutional investor under Rule 15a-6(a)(3).
---------------------------------------------------------------------------
c. Rely on the U.S. registered broker-dealer through which the
transactions with the U.S. institutional and major U.S. institutional
investors are effected to (among other things):
1. Effect the transactions, other than negotiating their terms;
2. Issue all required confirmations and statements;
3. As between the foreign broker-dealer and the U.S. registered
broker-dealer, extend or arrange for the extension of credit in
connection with the transactions;
4. Maintain required books and records relating to the
transactions, including those required by Rules 17a-3 (Records to be
Made by Certain Exchange Members) and 17a-4 (Records to be Preserved by
Certain Exchange Members, Brokers and Dealers) of the 1934 Act;
5. Receive, deliver and safeguard funds and securities in
connection with the transactions on behalf of the U.S. institutional
investor or major U.S. institutional investor in compliance with Rule
15c3-3 of the 1934 Act (Customer Protection-Reserves and Custody of
Securities); and
6. Participate in all oral communications (e.g., telephone calls)
between a foreign associated person and the U.S. institutional investor
(other than a major U.S. institutional investor), and accompany the
foreign associated person on all visits with both U.S. institutional
and major U.S. institutional investors. By virtue of this
participation, the U.S. registered broker-dealer would become
responsible for the content of all these communications.
47. All collateral will be maintained in United States dollars or
U.S. dollar-denominated securities or letters of credit or other
collateral permitted under PTE 2006-16 (as amended or superseded). All
collateral will be held in the United States and the Lending Agent will
maintain the situs of the Loan Agreements (evidencing the Lender's
right to return of the loaned securities and the continuing interest in
and lien on or title to the collateral) in the United States under an
arrangement that complies with the indicia of ownership requirements
under section 404(b) of the Act and the regulations promulgated under
29 CFR 2550.404(b)-1.
48. Prior to a transaction involving a foreign Affiliated Borrower,
the foreign Affiliated Borrower will (a) agree to submit to the
jurisdiction of the courts of the United States; (b) agree to appoint a
Process Agent for service of process in the United States, which may be
an affiliate; (c) consent to service of process on the Process Agent;
and (d) agree that enforcement by a Client Plan of the indemnity
provided by U.S. Affiliated Borrower may occur in the United States
Courts.
49. In summary, the Applicant represents that the proposed
transactions will satisfy the statutory criteria for an exemption under
section 408(a) of the Act because:
a. For each Client Plan, neither the MS&Co, UB, nor any affiliate
will have or exercise discretionary authority or control with respect
to the investment of the assets of Client Plans involved in the
transaction or will render investment advice with respect to such
assets, including decisions concerning a Client Plan's acquisition or
disposition of securities available for loan.
b. Any arrangement for the Lending Agent to lend securities will be
approved in advance by a Plan fiduciary who (except in the case of an
Affiliated Plan as described above in paragraph 8) is independent of
MS&Co., UB, and their affiliates.
c. The terms of each loan of securities by a Lender to an
Affiliated Borrower will be at least as favorable to such Separate
Account or Commingled Fund as those of a comparable arm's-length
transaction between unrelated parties.
d. Upon termination of a loan, the Affiliated Borrowers will
transfer securities identical to the borrowed securities (or the
equivalent thereof) to the Lender within one of the following time
periods, whichever is least: (1) The customary delivery period for such
securities; (2) five business days; or (3) the time negotiated for such
delivery by the Client Plan, in a Separate Account, or by the Lending
Agent, as lending agent to a Commingled Fund, and the Affiliated
Borrowers.
e. The Lender will receive from each Affiliated Borrower collateral
consisting of U.S. currency, securities issued or guaranteed by the
United States Government or its agencies or instrumentalities,
irrevocable bank letters of credit issued by a U.S. bank (other than
Morgan Stanley, Union Bank or any subsequent parent corporation of the
Lending Agent, or an affiliate thereof, or any combination thereof) or
other collateral permitted under PTE 2006-16 (as amended or
superseded), which will be held in a depository account separate from
the Affiliated Borrower.
f. In return for lending securities, the Lender either will receive
a reasonable fee, which is related to the value of the borrowed
securities and the duration of the loan, or will have the opportunity
to derive compensation through the investment of cash collateral.
g. A U.S. Affiliated Borrower agrees to indemnify and hold harmless
the Client Plans in the United States (including the sponsor and
fiduciaries of such Client Plans) for any transactions covered by this
exemption with an Affiliated Borrower so that the Client Plans do not
have to litigate, in the case of a foreign Affiliated Borrower, in a
foreign jurisdiction nor sue to realize on the indemnification.
h. All loans involving foreign Affiliated Borrowers will involve
Affiliated Borrowers that are registered as broker-dealers subject to
regulation by the Foreign Authority and that are in compliance with all
applicable provisions of Rule 15a-6.
i. Prior to a transaction involving a foreign Affiliated Borrower,
the foreign Affiliated Borrower will: agree to submit to the
jurisdiction of the United States; agree to appoint a Process Agent in
the United States; consent to service of process on the Process Agent;
and agree that enforcement by a Client Plan of the indemnity provided
by Morgan Stanley or Union Bank may occur in the United States courts.
Notice to Interested Persons
Written notice will be provided to all interested parties by first
class mail within 15 calendar days of publication of this Notice in the
Federal Register. Any written comments and/or requests for a hearing
must be received by the Department from interested persons within 30
days of the publication of this proposed exemption in the Federal
Register.
FOR FURTHER INFORMATION CONTACT: Karen E. Lloyd of the Department, 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
[[Page 3089]]
408(a) of the Act and/or section 4975(c)(2) of the Code does not
relieve a fiduciary or other party in interest or disqualified person
from certain other provisions of the Act and/or the Code, including any
prohibited transaction provisions to which the exemption does not apply
and the general fiduciary responsibility provisions of section 404 of
the Act, which, among other things, require a fiduciary to discharge
his duties respecting the plan solely in the interest of the
participants and beneficiaries of the plan and in a prudent fashion in
accordance with section 404(a)(1)(b) of the Act; nor does it affect the
requirement of section 401(a) of the Code that the plan must operate
for the exclusive benefit of the employees of the employer maintaining
the plan and their beneficiaries;
(2) Before an exemption may be granted under section 408(a) of the
Act and/or section 4975(c)(2) of the Code, the Department must find
that the exemption is administratively feasible, in the interests of
the plan and of its participants and beneficiaries, and protective of
the rights of participants and beneficiaries of the plan;
(3) The proposed exemptions, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act and/or the
Code, including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction; and
(4) The proposed exemptions, if granted, will be subject to the
express condition that the material facts and representations contained
in each application are true and complete, and that each application
accurately describes all material terms of the transaction which is the
subject of the exemption.
Signed at Washington, DC.
Ivan Strasfeld,
Director of Exemption Determinations, Employee Benefits Security
Administration, U.S. Department Of Labor.
[FR Doc. 2010-593 Filed 1-15-10; 8:45 am]
BILLING CODE 4510-29-P