[Federal Register Volume 63, Number 168 (Monday, August 31, 1998)]
[Notices]
[Pages 46238-46241]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-23283]
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Prohibited Transaction Exemption 98-41; Exemption Application No. D-
10372, et al.]
Grant of Individual Exemptions; Lehman Brothers Inc. (Lehman) and
Lehman Brothers Trust Company and Affiliates (LBTC), et al.
AGENCY: Pension and Welfare Benefits Administration, Labor.
ACTION: Grant of individual exemptions.
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SUMMARY: This document contains exemptions issued by the Department of
Labor (the Department) from certain of the prohibited transaction
restrictions of the Employee Retirement Income Security Act of 1974
(the Act) and/or the Internal Revenue Code of 1986 (the Code).
Notices were published in the Federal Register of the pendency
before the Department of proposals to grant such exemptions. The
notices set forth a summary of facts and representations contained in
each application for exemption and referred interested persons to the
respective applications for a complete statement of the facts and
representations. The applications have been available for public
inspection at the Department in Washington, D.C. The notices also
invited interested persons to submit comments on the requested
exemptions to the Department. In addition the notices stated that any
interested person might submit a written request that a public hearing
be held (where appropriate). The applicants have represented that they
have complied with the requirements of the notification to interested
persons. No public comments and no requests for a hearing, unless
otherwise stated, were received by the Department.
The notices of proposed exemption were issued and the exemptions
are being granted solely by the Department because, effective December
31, 1978, section 102 of Reorganization Plan No. 4 of 1978 (43 FR
47713, October 17, 1978) transferred the authority of the Secretary of
the Treasury to issue exemptions of the type proposed to the Secretary
of Labor.
Statutory Findings
In accordance with section 408(a) of the Act and/or section
4975(c)(2) of the Code and the procedures set forth in 29 CFR Part
2570, Subpart B (55 FR 32836, 32847, August 10, 1990) and based upon
the entire record, the Department makes the following findings:
(a) The exemptions are administratively feasible;
(b) They are in the interests of the plans and their participants
and beneficiaries; and
(c) They are protective of the rights of the participants and
beneficiaries of the plans.
Lehman Brothers Inc. (Lehman) and Lehman Brothers Trust Company and
Affiliates (LBTC), Located in New York, New York
[Prohibited Transaction Exemption 98-41; Exemption Application No. D-
10327]
Exemption
The restrictions of sections 406(a), 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 to: (1) the lending of securities to Lehman or to any
other U.S. registered broker-dealer who is an affiliate of Lehman
(collectively, Lehman Broker-Dealers) by employee benefit plans,
including commingled investment funds holding plan assets (the Client
Plans), with respect to which the Lehman Broker-Dealer is a party in
interest, or for which LBTC or any other affiliate of Lehman, acts as
directed trustee or custodian and/or securities lending agent (or sub-
agent) for such Client Plan; and (2) the receipt of compensation by
LBTC in connection with these transactions, provided that the following
conditions are met:
1. Neither the Lehman Broker-Dealers nor LBTC has or exercises
discretionary authority or control with respect to the investment of
the assets of Client Plans involved in the transaction (other than with
respect to the investment of cash collateral after the securities have
been loaned and collateral received), or renders investment advise
(within the meaning of 29 CFR 2510.3-21(c)) with respect to those
assets, including decisions concerning a Client Plan's acquisition or
disposition of securities available for loan;
2. Before a Client Plan participates in a securities lending
program and before any loan of securities to the Lehman Broker-Dealers
is affected, a Client Plan fiduciary who is independent of LBTC and the
Lehman Broker-Dealers must have:
(a) Authorized and approved a securities lending authorization
agreement with LBTC (the Agency Agreement), where LBTC is acting as the
direct securities lending agent;
(b) Authorized and approved the primary securities lending
authorization agreement (the Primary Lending Agreement) with the
primary lending agent, where LBTC is lending securities under a sub-
agency arrangement with the primary lending agent;1
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\1\ When LBTC acts as sub-agent, rather than the primary lending
agent, the primary lending agent is receiving no section 406(b) of
the Act relief herein. In such situations, the primary lending agent
may be provided relief by Prohibited Transaction Class Exemption
(PTE) 81-6 and PTE 82-63. PTE 81-6 was published at 46 FR 7527,
January 23, 1981, as amended at 52 FR 18754, May 19, 1987, and PTE
82-63 was published at 47 FR 14804, April 6, 1982.
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(c) Approved the general terms of the securities loan agreement
(the Basic Loan Agreement) between such Client Plan and the borrower,
the Lehman Broker-Dealers, the specific terms of which are negotiated
and entered into by LBTC;
3. A Client Plan may terminate the securities lending agency
agreement at any time without penalty on five (5) business days notice,
whereupon the Lehman Broker-Dealers shall deliver
[[Page 46239]]
securities identical to the borrowed securities (or the equivalent in
the event of reorganization, recapitalization or merger of the issuer
of the borrowed securities) to the plan within (a) the customary
delivery period for such securities, (b) five (5) business days, or (c)
the time negotiated for such delivery by the Client Plan and the Lehman
Broker-Dealers, whichever is less;
4. LBTC (or another custodian on behalf of the Client Plan) will
receive from the Lehman Broker-Dealers either by physical delivery,
book entry in a securities depository, wire transfer or similar means
collateral consisting of U.S. dollars, securities issued or guaranteed
by the U.S. Government or its agencies or irrevocable U.S. bank letters
of credit (issued by an entity other than the Lehman Broker-Dealers) or
other collateral permitted under Prohibited Transaction Exemption (PTE)
81-6 (as amended from time to time or, alternatively, any additional or
superceding class exemption that may be issued to cover securities
lending by employee benefit plans) by the close of business on or
before the day the loaned securities are delivered to the Lehman
Broker-Dealers;
5. The market value of the collateral will initially equal at least
102 percent of the market value of the loaned securities. If the market
value of the collateral on the close of trading on a business day falls
below 100 percent of the market value of the borrowed securities at the
close of business on that day, the Lehman Broker-Dealers will deliver
additional collateral on the following day such that the market value
of the collateral will again equal 102 percent. The Basic Loan
Agreement will give the Client Plans a continuing security interest in,
and a lien on, the collateral. LBTC will monitor the level of the
collateral daily;
6. All the procedures regarding the securities lending activities
will at a minimum conform to the applicable provisions of PTE 81-6 and
PTE 82-63;
7. In the event the Lehman Broker-Dealer fails to return securities
within a designated time, the Client Plan will have the right under the
Basic Loan Agreement to purchase securities identical to the borrowed
securities and apply the collateral to payment of the purchase price.
If the collateral is insufficient to satisfy the Lehman Broker-Dealer's
obligation to return the Client Plan's securities, the Lehman Broker-
Dealer will indemnify the Client Plan 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 any attorneys fees incurred by the Client
Plan for legal action arising out of default on the loans, or failure
by the Lehman Broker-Dealer to properly indemnify the Client Plan;
8. The Client Plan will receive the equivalent of all distributions
made to the holders of the borrowed securities during the term of the
loan, including, but not limited to, cash dividends, interest payments,
shares of stock as a result of stock splits and rights to purchase
additional securities, or other distributions;
9. Only Client Plans with total assets having an aggregate market
value of at least $50 million are permitted to lend securities to the
Lehman Broker-Dealers; provided, however, that--
(a) In the case of two or more Client Plans which are maintained by
the same employer, controlled group of corporations or employee
organization (the Related Client Plans), 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
arrangements with the Lehman Broker-Dealers, 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.
(b) In the case of two or more Client Plans which are not
maintained by the same employer, controlled group of corporations or
employee organization (the Unrelated Client Plans), 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 Lehman Broker-Dealers, 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 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--
(i) Has full investment responsibility with respect to plan assets
invested therein; and
(ii) 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.)
10. With respect to any calendar quarter, at least 50 percent or
more of the outstanding dollar value of securities loans negotiated on
behalf of Client Plans will be to unrelated borrowers.
11. The terms of each loan of securities by the Client Plans to the
Lehman Broker-Dealer will be at least as favorable to such plans as
those terms which would exist in a comparable arm's-length transaction
between unrelated parties;
12. Each Client Plan will receive monthly reports on the
transactions, so that an independent fiduciary of such plan may monitor
the securities lending transactions with the Lehman Broker-Dealer;
13. Before entering into the Basic Loan Agreement and before a
Client Plan lends any securities to the Lehman Broker-Dealer, an
independent fiduciary of such Client Plan will receive sufficient
information, concerning the financial condition of the Lehman Broker-
Dealer, including the audited and unaudited financial statements of the
Lehman Broker-Dealer;
14. The Lehman Broker-Dealer will provide to a Client Plan prompt
notice at the time of each loan by such plan of any material adverse
changes in the Lehman Broker-Dealer's financial condition, since the
date of the most recently furnished financial statements;
15. With regard to the ``exclusive borrowing'' agreement (as
described below), the Lehman Broker-Dealer will directly negotiate the
agreement with a Client Plan fiduciary who is independent of the Lehman
Broker-Dealers and LBTC, and such agreement may be terminated by either
party to the agreement at any time; 2
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\2\ The termination will be without penalty to the Client Plan,
except for the return to the Lehman Broker-Dealers of a part of any
flat fee paid by the Lehman Broker-Dealers to the Client Plan, if
the Client Plan has terminated its exclusive borrowing agreement
with the Lehman Broker-Dealers.
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[[Page 46240]]
16. The Client Plan: (a) receives a reasonable fee that is related
to the value of the borrowed securities and the duration of the loan,
or (b) has the opportunity to derive compensation through the
investment of cash collateral. In the case of cash collateral, the
Client Plan may pay a loan rebate or similar fee to the Lehman Broker-
Dealer, if such fee is not greater than the fee the Client Plan would
pay an unrelated party in an arm's length transaction;
17. In the event that a Lehman Broker-Dealer is also the securities
lending agent for a Client Plan, LBTC shall act as securities lending
sub-agent in connection with any loan of securities to the Lehman
Broker-Dealer;
18. Prior to the Client Plan's approval of the lending of its
securities to the Lehman Broker-Dealers, a copy of this exemption (and
a copy of the notice of proposed exemption as published in the Federal
Register on June 19, 1998 at 63 FR 33717) will be provided to the
Client Plan; and
19. Lehman maintains or causes to be maintained within the United
States for a period of six years from the date of such transaction such
records as are necessary to enable the persons described in paragraph
(20) below to determine whether the conditions of this exemption have
been met; except that a party in interest with respect to an employee
benefit plan, other than Lehman or the Lehman Broker-Dealers, shall not
be subject to a civil penalty under section 502(i) of the Act or the
taxes imposed by section 4975(a) or (b) of the Code, if such records
are not maintained, or are not available for examination as required by
this section, and a prohibited transaction will not be deemed to have
occurred if, due to circumstances beyond the control of Lehman or the
Lehman Broker-Dealers, such records are lost or destroyed prior to the
end of such six year period;
20. (i) Except as provided in subparagraph (ii) of this paragraph
(20) and notwithstanding any provisions of subsections (a)(2) and (b)
of section 504 of the Act, the records referred to in paragraph (19)
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 Client Plan or any duly authorized
representative of such fiduciary,
(c) Any contributing employer to any Client Plan, or any duly
authorized employee or representative of such employer, and
(d) Any participant or beneficiary of any Client Plan, or any duly
authorized representative of such participant or beneficiary.
(ii) None of the persons described in subparagraphs (b)-(d) of this
paragraph (20) shall be authorized to examine trade secrets of Lehman
or the Lehman Broker-Dealers, or commercial or financial information
which is privileged or confidential.
For a more complete statement of the facts and representations
supporting the Department's decision to grant this exemption refer to
the notice of proposed exemption (the Notice) published on June 19,
1998 at 63 FR 33717.
Written Comments
The Department received one written comment with respect to the
Notice and no requests for a public hearing. The comment was filed by
Lehman. The comment concerns footnote 2 of the Notice, which stated
that:
The Department notes that this proposed exemption would provide
relief from the restrictions of section 406(a) as well as section
406(b)(1) and (b)(2) of the Act, whereas PTE 81-6 provides relief
only for securities lending transactions which would violate section
406(a) of the Act. Thus, any amendments that may be made by the
Department to PTE 81-6 which would permit different types of assets
to be used as collateral for a securities loan would not allow the
use of such assets as collateral under this proposed exemption to
the extent that the transactions covered by this exemption (if
granted) would require relief from section 406(b) of the Act.
Lehman requests that this footnote be deleted from the final
exemption.
Footnote 2 of the Notice was also included by the Department in the
written comments contained in PTE 98-23 (63 FR 29435), an individual
exemption for securities lending transactions by Bankers Trust Company
and its affiliates (Bankers Trust) published in the Federal Register on
May 29, 1998.
However, subsequent comments made to the Department by Bankers
Trust also requested that the Department withdraw its comments on this
matter with respect to PTE 98-23. The requests by Bankers Trust and
Lehman were made with the intent of avoiding possible confusion and
preserving the availability of relief under the Bankers Trust and
Lehman individual exemptions when different types of assets are
permitted to be used as collateral under an amended version of PTE 81-6
or a superceding class exemption. In this regard, Lehman (and Bankers
Trust) state that nothing in the record suggests that the type of
collateral available under the individual exemptions should be
different in any manner from the collateral requirements of PTE 81-6.
Upon consideration of these comments, the Department has modified
the final exemption for Lehman by deleting Footnote 2, as it appeared
in the Notice. In addition, the Department has indicated to Bankers
Trust that it should consider the Department's comments on this issue
withdrawn with respect to PTE 98-23.
Accordingly, the Department has determined to grant the proposed
exemption as modified.
FOR FURTHER INFORMATION CONTACT: Ekaterina A. Uzlyan of the Department,
telephone (202) 219-8883. (This is not a toll-free number.)
Van Ness Plastic Molding Co., Inc., Employees' Money Purchase
Pension Plan (the Plan), Located in Belleville, NJ
[Prohibited Transaction Exemption 98-42; Exemption Application No. D-
10483]
Exemption
The restrictions of sections 406(a), 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 to (1) the making to the Plan of a restoration payment
(the Restoration Payment) with respect to certain defaulted third-party
notes (Note 1, Note 2 and Note 3; collectively, the Notes) by the Van
Ness Plastic Molding Co., Inc. (the Employer), a party in interest with
respect to the Plan; and (2) the potential future receipt by the
Employer of recapture payments (the Recapture Payments) made to the
Plan pursuant to bankruptcy proceedings involving the issuer/assignor
of the Notes.
This exemption is subject to the following conditions:
(a) Mr. William Van Ness, the Plan trustee, agrees to have excluded
from his individual account in the Plan (the Account) any benefit
attributable to the Restoration Payment, such that the total
Restoration Payment is allocated to the Accounts of the other Plan
participants and does not include any portion related to the interest
of Mr. Van Ness's Account in the Notes.
(b) The Restoration Payment, which is calculated based upon the
Account balances in the Plan of participants other than Mr. Van Ness,
covers--
[[Page 46241]]
(1) The aggregate unrecovered principal of the Notes plus accrued,
but unpaid, interest on the Notes as of the dates of default,
calculated through December 31, 1997;
(2) An additional amount representing interest on the unrecovered
principal of Notes 2 and 3, originally scheduled for maturity in 1999,
from January 1998 until the date the Restoration Payment is made; and
(3) Lost opportunity costs associated with Note 1, which was
originally scheduled for maturity in 1997, from January 1998 until the
date the Restoration Payment is made.
(c) Any Recapture Payments are restricted solely to the amounts, if
any, recovered by the Plan with respect to the Notes in litigation or
otherwise.
(d) The Restoration Payment is made to resolve potential claims for
breach of fiduciary duty relating to the management of the Plan.
(e) The Employer receives a favorable ruling from the Internal
Revenue Service that the Restoration Payment does not constitute a
``contribution'' or other payment that will disqualify the Plan.
For a more complete statement of the facts and representations
supporting the Department's decision to grant this exemption, refer to
the notice of proposed exemption published on June 29, 1998 at 63 FR
35281.
FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and/or section 4975(c)(2) of the Code
does not relieve a fiduciary or other party in interest or disqualified
person from certain other provisions to which the exemptions 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) These exemptions are supplemental to and not in derogation of,
any other provisions of the Act and/or the Code, including statutory or
administrative exemptions and transactional 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
(3) The availability of these exemptions is subject to the express
condition that the material facts and representations contained in each
application are true and complete and accurately describe all material
terms of the transaction which is the subject of the exemption. In the
case of continuing exemption transactions, if any of the material facts
or representations described in the application change after the
exemption is granted, the exemption will cease to apply as of the date
of such change. In the event of any such change, application for a new
exemption may be made to the Department.
Signed at Washington, D.C., this 24th day of August, 1998.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, U.S. Department of Labor.
[FR Doc. 98-23283 Filed 8-28-98; 8:45 am]
BILLING CODE 4510-29-P