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Secretary of Labor Thomas E. Perez
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EBSA Notices

Application Numbers and Proposed Exemptions   [1/19/2010]
[PDF]
FR Doc 2010-593
[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]                         


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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


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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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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:
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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%).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \13\ Prior to September 17, 2007, PCA was named ``Mercantile 
Capital Advisors, Inc.''
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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:
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    (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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    (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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \35\ The relief contained in this proposed exemption does not 
extend to the fiduciary provisions of section 404 of the Act.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    (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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    \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.''
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

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

    \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