[Federal Register Volume 65, Number 114 (Tuesday, June 13, 2000)]
[Notices]
[Pages 37175-37183]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-14808]
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-10758, et al.]
Proposed Exemptions; Goldman, Sachs & Co.
AGENCY: Pension and Welfare Benefits Administration, Labor.
ACTION: Notice of proposed exemptions.
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SUMMARY: This document contains notices of pendency before the
Department of Labor (the Department) of proposed exemptions from
certain of the prohibited transaction restrictions of the Employee
Retirement Income Security Act of 1974 (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
request 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 request for a hearing (at least
three copies) should be sent to the Pension and Welfare Benefits
Administration, Office of Exemption Determinations, Room N-5649, U.S.
Department of Labor, 200 Constitution Avenue, NW., Washington, DC
20210. Attention: Application No. ____, stated in each Notice of
Proposed Exemption. The applications for exemption and the comments
received will be available for public inspection in the Public
Documents Room of the Pension and Welfare Benefits Administration, U.S.
Department of Labor, Room N-5638,
[[Page 37176]]
200 Constitution Avenue, NW., Washington, DC 20210.
Notice to Interested Persons
Notice of the proposed exemptions will be provided to all
interested persons in the manner agreed upon by the applicant and the
Department within 15 days of the date of publication in the Federal
Register. Such notice shall include a copy of the notice of proposed
exemption as published in the Federal Register and shall inform
interested persons of their right to comment and to request a hearing
(where appropriate).
SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in
applications filed pursuant to section 408(a) of the Act and/or section
4975(c)(2) of the Code, and in accordance with procedures set forth in
29 CFR part 2570, subpart B (55 FR 32836, 32847, August 10, 1990).
Effective December 31, 1978, section 102 of Reorganization Plan No. 4
of 1978, 5 U.S.C. App. 1 (1996), transferred the authority of the
Secretary of the Treasury to issue exemptions of the type requested to
the Secretary of Labor. Therefore, these notices of proposed exemption
are issued solely by the Department.
The applications contain representations with regard to the
proposed exemptions which are summarized below. Interested persons are
referred to the applications on file with the Department for a complete
statement of the facts and representations.
Goldman, Sachs & Co., Located in New York, New York
[Application No. D-10758]
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
A. The restrictions of section 406(a)(1)(A) through (D) of the Act
and the sanctions resulting from the application of section 4975 of the
Code, by reason of section 4975(c)(1)(A) through (D) of the Code, shall
not apply to any purchase or sale of securities between certain
affiliates of Goldman, Sachs & Co. (Goldman) which are foreign broker-
dealers or banks (the Foreign Affiliates, as defined below) and
employee benefit plans (the Plans) with respect to which the Foreign
Affiliates are parties in interest, including options written by a
Plan, Goldman, or a Foreign Affiliate, provided that the following
conditions, and the General Conditions of Section II, are satisfied:
(1) The Foreign Affiliate customarily purchases and sells
securities for its own account in the ordinary course of its business
as a broker-dealer or bank;
(2) The terms of any transaction are at least as favorable to the
Plan as those the Plan could obtain in a comparable arm's length
transaction with an unrelated party; and
(3) Neither the Foreign Affiliate nor an affiliate thereof has
discretionary authority or control with respect to the investment of
the Plan assets involved in the transaction, or renders investment
advice (within the meaning of 29 CFR 2510.3-21(c)) with respect to
those assets, and the Foreign Affiliate is a party in interest or
disqualified person with respect to the Plan assets involved in the
transaction solely by reason of section 3(14)(B) of the Act or section
4975(e)(2)(B) of the Code, or by reason of a relationship to a person
described in such sections. For purposes of this paragraph, the Foreign
Affiliate shall not be deemed to be a fiduciary with respect to a Plan
solely by reason of providing securities custodial services for a Plan.
B. The restrictions of sections 406(a)(1)(A) through (D) and
406(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
(D) of the Code, shall not apply to any extension of credit to the
Plans by the Foreign Affiliates to permit the settlement of securities
transactions, regardless of whether they are effected on an agency or a
principal basis, or in connection with the writing of options
contracts, provided that the following conditions and the General
Conditions of Section II, are satisfied:
(1) The Foreign Affiliate is not a fiduciary with respect to the
Plan assets involved in the transaction, unless no interest or other
consideration is received by the Foreign Affiliate or an affiliate
thereof, in connection with such extension of credit; and
(2) Any extension of credit would be lawful under the Securities
Exchange Act of 1934 (the 1934 Act) and any rules or regulations
thereunder, if the 1934 Act, rules, or regulations were applicable.
C. The restrictions of section 406(a)(1)(A) through (D) of the Act
and the sanctions resulting from the application of section 4975 of the
Code, by reason of section 4975(c)(1)(A) through (D) of the Code, shall
not apply to the lending of securities to the Foreign Affiliates by the
Plans, provided that the following conditions, and the General
Conditions of Section II, are satisfied:
(1) Neither the Foreign Affiliate nor an affiliate thereof has
discretionary authority or control with respect to the investment of
the Plan assets involved in the transaction, or renders investment
advice (within the meaning of 29 CFR 2510.3-21(c)) with respect to
those assets;
(2) The Plan receives from the Foreign Affiliate (by physical
delivery, by book entry in a securities depository, wire transfer, or
similar means) by the close of business on the day the loaned
securities are delivered to the Foreign Affiliate, collateral
consisting of cash, securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities, irrevocable U.S. bank
letters of credit issued by persons other than the Foreign Affiliate or
an affiliate of the Foreign Affiliate, or any combination thereof. All
collateral shall be in U.S. dollars, or dollar-denominated securities
or bank letters of credit, and shall be held in the United States;
(3) The collateral has, as of the close of business on the
preceding business day, a market value equal to at least 100 percent of
the then market value of the loaned securities (or, in the case of
letters of credit, a stated amount equal to same);
(4) The loan is made pursuant to a written loan agreement (the Loan
Agreement), which may be in the form of a master agreement covering a
series of securities lending transactions, and which contains terms at
least as favorable to the Plan as those the Plan could obtain in a
comparable arm's length transaction with an unrelated party;
(5) In return for lending securities, the Plan either (a) receives
a reasonable fee, which 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
latter case, the Plan may pay a loan rebate or similar fee to the
Foreign Affiliate, if such fee is not greater than what the Plan would
pay in a comparable arm's length transaction with an unrelated party;
(6) The Plan receives at least the equivalent of all distributions
on the borrowed securities made 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, that the Plan would have received (net of applicable
[[Page 37177]]
tax withholdings) \1\ had it remained the record owner of such
securities;
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\1\ The Department notes the applicant's representation that
dividends and other distributions on foreign securities payable to a
lending Plan may be subject to foreign tax withholdings and that the
Foreign Affiliate will always put the Plan back in at least as good
a position as it would have been in had it not loaned the
securities.
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(7) If the market value of the collateral as of the close of
trading on a business day falls below 100 percent of the market value
of the borrowed securities as of the close of trading on that day, the
Foreign Affiliate delivers additional collateral, by the close of
business on the following business day, to bring the level of the
collateral back to at least 100 percent. However, if the market value
of the collateral exceeds 100 percent of the market value of the
borrowed securities, the Foreign Affiliate may require the Plan to
return part of the collateral to reduce the level of the collateral to
100 percent;
(8) Before entering into a Loan Agreement, the Foreign Affiliate
furnishes to the independent Plan fiduciary (a) the most recent
available audited statement of the Foreign Affiliate's financial
condition, (b) the most recent available unaudited statement of its
financial condition (if more recent than the audited statement), and
(c) a representation that, at the time the loan is negotiated, there
has been no material adverse change in its financial condition that has
not been disclosed since the date of the most recent financial
statement furnished to the independent Plan fiduciary. Such
representation may be made by the Foreign Affiliate's agreeing that
each loan of securities shall constitute a representation that there
has been no such material adverse change;
(9) The Loan Agreement and/or any securities loan outstanding may
be terminated by the Plan at any time, whereupon the Foreign Affiliate
shall deliver certificates for 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 Plan within (a) the customary delivery period for such
securities, (b) five business days, or (c) the time negotiated for such
delivery by the Plan and the Foreign Affiliate, whichever is least, or,
alternatively, such period as permitted by Prohibited Transaction Class
Exemption (PTE) 81-6 (46 FR 7527, January 23, 1981, as amended at 52 FR
18754, May 19, 1987), as it may be amended or superseded; \2\
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\2\ PTE 81-6 provides an exemption under certain conditions from
section 406(a)(1)(A) through (D) of the Act and the corresponding
provisions of section 4975(c) of the Code for the lending of
securities that are assets of an employee benefit plan to a U.S.
broker-dealer registered under the 1934 Act (or exempted from
registration under the 1934 Act as a dealer in exempt Government
securities, as defined therein) or to a U.S. bank, that is a party
in interest with respect to such plan.
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(10) In the event that the loan is terminated and the Foreign
Affiliate fails to return the borrowed securities, or the equivalent
thereof, within the time described in paragraph 9, the Plan may
purchase securities identical to the borrowed securities (or their
equivalent as described above) and may apply the collateral to the
payment of the purchase price, any other obligations of the Foreign
Affiliate under the Loan Agreement, and any expenses associated with
the sale and/or purchase. The Foreign Affiliate is obligated to pay,
under the terms of the Loan Agreement, and does pay, to the Plan the
amount of any remaining obligations and expenses not covered by the
collateral, plus interest at a reasonable rate. Notwithstanding the
foregoing, the Foreign Affiliate may, in the event it fails to return
borrowed securities as described above, replace non-cash collateral
with an amount of cash not less than the then current market value of
the collateral, provided that such replacement is approved by the
independent Plan fiduciary; and
(11) The independent Plan fiduciary maintains the situs of the Loan
Agreement in accordance with the indicia of ownership requirements
under section 404(b) of the Act and the regulations promulgated under
29 CFR 2550.404(b)-1. However, in the event that the independent Plan
fiduciary does not maintain the situs of the Loan Agreement in
accordance with the indicia of ownership requirements of Section 404(b)
of the Act, the Foreign Affiliate shall not be subject to the civil
penalty which may be assessed under section 502(i) of the Act, or the
taxes imposed by section 4975(a) and (b) of the Code.
If the Foreign Affiliate fails to comply with any condition of the
exemption in the course of engaging in a securities lending
transaction, the Plan fiduciary who caused the Plan to engage in such
transaction shall not be deemed to have caused the Plan to engage in a
transaction prohibited by section 406(a)(1)(A) through (D) of the Act
solely by reason of the Foreign Affiliate's failure to comply with the
conditions of the exemption.
Section II--General Conditions
A. The Foreign Affiliate is a registered broker-dealer or bank
subject to regulation by a governmental agency, as described in Section
III.B, and is in compliance with all applicable rules and regulations
thereof in connection with any transactions covered by this exemption;
B. The Foreign Affiliate, in connection with any transactions
covered by this exemption, is in compliance with the requirements of
Rule 15a-6 (17 CFR 240.15a-6) of the 1934 Act, and Securities and
Exchange Commission (SEC) interpretations thereof, providing for
foreign affiliates a limited exemption from U.S. broker-dealer
registration requirements;
C. Prior to any transaction, the Foreign Affiliate enters into a
written agreement with the Plan in which the Foreign Affiliate consents
to the jurisdiction of the courts of the United States for any civil
action or proceeding brought in respect of the subject transactions;
D. The Foreign Affiliate maintains, or causes to be maintained,
within the United States for a period of six years from the date of any
transaction such records as are necessary to enable the persons
described in paragraph E. to determine whether the conditions of the
exemption have been met, except that--
(1) a party in interest with respect to a Plan, other than the
Foreign Affiliate, shall not 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 by paragraph E; and
(2) a prohibited transaction shall not be deemed to have occurred
if, due to circumstances beyond the Foreign Affiliate's control, such
records are lost or destroyed prior to the end of the six year period;
and
E. Notwithstanding any provisions of subsections (a)(2) and (b) of
section 504 of the Act, the Foreign Affiliate makes the records
referred to in paragraph D. unconditionally available during normal
business hours at their customary location to the following persons or
a duly authorized representative thereof: (1) the Department, the
Internal Revenue Service, or the SEC; (2) any fiduciary of a Plan; (3)
any contributing employer to a Plan; (4) any employee organization any
of whose members are covered by a Plan; and (5) any participant or
beneficiary of a Plan. However, none of the persons described in (2)
through (5) of this subsection are authorized to examine the trade
secrets of the Foreign Affiliate or commercial or financial information
which is privileged or confidential.
[[Page 37178]]
Section III--Definitions
A. The term ``affiliate'' of another person shall include: (1) any
person directly or indirectly, through one or more intermediaries,
controlling, controlled by, or under common control with such other
person; (2) any officer, director, or partner, employee or relative (as
defined in section 3(15) of the Act) of such other person; and (3) any
corporation or partnership of which such other person is an officer,
director or partner. For purposes of this definition, the term
``control'' means the power to exercise a controlling influence over
the management or policies of a person other than an individual;
B. The term ``Foreign Affiliate'' shall mean an affiliate of
Goldman, Sachs & Co. that is subject to regulation as a broker-dealer
or bank by (1) the Ontario Securities Commission and the Investment
Dealers Association in Canada; (2) the Securities and Futures Authority
in the United Kingdom; (3) the Deutsche Bundesbank and the Federal
Banking Supervisory Authority, i.e., der Bundesaufsichtsamt fuer das
Kreditwesen (the BAK) in Germany; (4) the Ministry of Finance and the
Tokyo Stock Exchange in Japan; (5) the Australian Securities &
Investments Commission (the ASIC) in Australia; or (6) the Swiss
Federal Banking Commission in Switzerland.
C. The term ``security'' shall include equities, fixed income
securities, options on equity and on fixed income securities,
government obligations, and any other instrument that constitutes a
security under U.S. securities laws. The term ``security'' does not
include swap agreements or other notional principal contracts.
Effective Date: This proposed exemption, if granted, will be
effective as of April 15, 1999.
Summary of Facts and Representations
1. Goldman, Sachs & Co. (i.e., Goldman), a New York limited
partnership, is a wholly owned subsidiary and the principal operating
subsidiary of The Goldman Sachs Group, Inc. (the GS Group), a Delaware
corporation. Goldman, one of the largest full-line investment services
firms in the United States, is registered with and regulated by the SEC
as a broker-dealer and as an investment adviser, is registered with and
regulated by the Commodity Futures Trading Commission (the CFTC) as a
futures commission merchant, is a member of the New York Stock Exchange
(the NYSE) and other principal securities exchanges in the United
States, and is also a member of the National Association of Securities
Dealers, Inc. (the NASD). As of August 27, 1999, the GS Group had
$236.3 billion in assets and $8.6 billion in equity.
Goldman has several foreign affiliates which are broker-dealers or
banks. Those covered by the proposed exemption (i.e., the Foreign
Affiliates), and their respective regulating entities, are as follows:
(a) Goldman Sachs Canada, located in Toronto, is subject to
regulation in Canada by the Ontario Securities Commission, as well as
the Investment Dealers Association, a self-regulatory organization;
(b) Goldman Sachs International and Goldman Sachs Equity Securities
(U.K.), both located in London, are subject to regulation in the United
Kingdom by the Securities and Futures Authority;
(c) Goldman, Sachs & Co. oHG, located in Frankfurt, is subject to
regulation in Germany by the Deutsche Bundesbank and the
Bundesaufsichtsamt fuer das Kreditwesen (i.e., the BAK);
(d) Goldman Sachs (Japan) Ltd., located in Tokyo, is subject to
regulation in Japan by the Ministry of Finance and the Tokyo Stock
Exchange;
(e) Goldman Sachs Australia, LLC (GS Australia), located in Sydney,
is subject to regulation in Australia by the Australian Securities &
Investments Commission (i.e., the ASIC); and
(f) Goldman, Sachs & Co. Bank, located in Zurich, is subject to
regulation by the Swiss Federal Banking Commission.
Goldman requests an individual exemption to permit the Foreign
Affiliates identified above, as well as those others who, in the
future, may be subject to governmental regulation in Canada, the United
Kingdom, Germany, Japan, Australia, or Switzerland, to engage in the
securities transactions described below with employee benefit plans
(i.e., the Plans). The proposed exemption is necessary because the
Foreign Affiliates may be parties in interest with respect to the Plans
under the Act, by virtue of being a fiduciary (for assets of the Plans
other than those involved in the transactions) or a service provider to
such Plans, or by virtue of a relationship to such fiduciary or service
provider.
2. Goldman represents that the Foreign Affiliates are subject to
regulation by a governmental agency in the foreign country in which
they are located. Goldman further represents that registration of a
foreign broker-dealer or bank with the governmental agency in these
cases addresses regulatory concerns similar to those concerns addressed
by registration of a broker-dealer with the SEC under the 1934 Act. The
rules and regulations set forth by the above-referenced agencies and
the SEC share a common objective: the protection of the investor by the
regulation of securities markets.
With respect to Canada, the United Kingdom, Japan, and Australia,
all these countries have comprehensive financial resource and
reporting/disclosure rules concerning broker-dealers. Broker-dealers
are required to demonstrate their capital adequacy. The reporting/
disclosure rules impose requirements on broker-dealers with respect to
risk management, internal controls, and records relating to
counterparties. All such records must be produced at the request of the
agency at any time. The agencies' registration requirements for broker-
dealers are enforced by fines and penalties and thus constitute a
comprehensive disciplinary system for the violation of such rules.
With respect to Germany, the BAK, an independent federal
institution with ultimate responsibility to the Ministry of Finance, in
cooperation with the Deutsche Bundesbank, the central bank of the
German banking system, provides extensive regulation of the banking
sector. The BAK insures that Goldman, Sachs & Co. oHG has procedures
for monitoring and controlling its worldwide activities through various
statutory and regulatory standards, such as requirements regarding
adequate internal controls, oversight, administration and financial
resources. The BAK reviews compliance with these limitations on
operations and internal control requirements through an annual audit
performed by the year-end auditor and through special audits, e.g., on
specific sections of the Banking Act, as ordered by the BAK and the
respective State Central Bank auditors. The BAK obtains information on
the condition of Goldman, Sachs & Co. oHG by requiring submission of
periodic, consolidated financial reports and through a mandatory annual
report prepared by the auditor. The BAK also receives information
regarding capital adequacy, country risk exposure, and foreign exchange
exposure from Goldman, Sachs & Co. oHG. German banking law mandates
penalties to insure correct reporting to the BAK. The auditors face
penalties for gross violation of their duties in auditing, for
reporting misleading information, omitting essential information from
the audit report, failing to request pertinent information, or failing
to report to the BAK.
With respect to Switzerland, the powers of the Swiss Federal
Banking
[[Page 37179]]
Commission include licensing banks, issuing directives to address
violations by or irregularities involving banks, requiring information
from a bank or its auditor regarding supervisory matters and revoking
bank licenses. The Swiss Federal Banking Commission exercises oversight
over Swiss banks, such as Goldman, Sachs & Co. Bank, through
independent auditors known as ``Recognized Auditors,'' which act on
behalf of the Commission under detailed statutory provisions. Each
Swiss bank, including Goldman, Sachs & Co. Bank, must appoint a
recognized Auditor and notify the Swiss Federal Banking Commission of
an intent to change its auditor. The Recognized Auditor may take action
within a bank as deemed necessary or as instructed by the Swiss Federal
Banking Commission and must inform the Commission of supervisory
matters. The Swiss Federal Banking Commission insures that Goldman,
Sachs & Co. Bank has procedures for monitoring and controlling its
worldwide activities through various statutory and regulatory
standards. Among these standards are requirements for adequate internal
controls, oversight, administration, and financial resources. The Swiss
Federal Banking Commission reviews compliance with these limitations on
operations and internal control requirements through an annual audit
performed by the Recognized Auditor.
The Swiss Federal Banking Commission obtains information on the
condition of Goldman, Sachs & Co. Bank and its foreign offices and
subsidiaries by requiring submission of periodic, consolidated
financial reports and through a mandatory annual report prepared by the
Recognized Auditor. The Swiss Federal Banking Commission also receives
information regarding capital adequacy, country risk exposure, and
foreign exchange exposures from Goldman, Sachs & Co. Bank.
Swiss banking law mandates penalties to insure correct reporting to
the Swiss Federal Banking Commission. Recognized Auditors face
penalties for gross violations of their duties in auditing, or
reporting misleading information, omitting essential information from
the audit report, failing to request pertinent information or failing
to report to the Swiss Federal Banking Commission.
With respect to Australia, GS Australia is subject to regulation
primarily by the ASIC, and upon being recognized as a participating
organization, by the Australian Securities Exchange Limited (the ASX).
Until being recognized as a participating organization by the ASX, GS
Australia will be subject to ASX regulation by the ASIC. The rules of
the ASX require each firm that employs registered representatives or
registered traders to have a positive tangible net worth and be able to
meet its obligations as they may fall due. In addition, the rules of
the ASX set forth comprehensive financial resource and reporting/
disclosure rules regarding capital adequacy. Further, to demonstrate
capital adequacy, the rules of the ASX impose reporting/disclosure
requirements on broker-dealers with respect to risk management,
internal controls, and transaction reporting, and recordkeeping
requirements, to the effect that required records must be produced at
the request of the ASIC. Finally, the rules and regulations of the ASX
and the ASIC impose potential fines and penalties on broker-dealers,
establishing a comprehensive disciplinary system.
Goldman represents that, in connection with the transactions
covered by this proposed exemption, the Foreign Affiliates' compliance
with any applicable requirements of Rule 15a-6 (17 CFR 240.15a-6) of
the 1934 Act (as discussed further in Paragraph 6, below), and SEC
interpretations thereof, providing for foreign affiliates a limited
exemption from U.S. registration requirements, will offer additional
protections to the Plans.
Principal Transactions
3. Goldman represents that the Foreign Affiliates operate as
traders in dealers' markets wherein they customarily purchase and sell
securities for their own account in the ordinary course of their
business as broker-dealers or banks and engage in purchases and sales
of securities, including options on securities, with their clients.
Such trades are referred to as principal transactions. Goldman
represents that the role of a broker-dealer in a principal transaction
in the subject foreign countries is virtually identical to that of a
broker-dealer in a principal transaction in the United States.
Goldman requests an individual exemption to permit the Foreign
Affiliates to engage in principal transactions with the Plans under
terms and conditions equivalent to those required in Prohibited
Transaction Class Exemption 75-1 (PTE 75-1, 40 FR 50845, October 31,
1975), Part II.\3\ Goldman states that because PTE 75-1 provides an
exemption only for U.S. registered broker-dealers and U.S. banks, the
principal transactions at issue would fall outside the scope of relief
provided by PTE 75-1.\4\
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\3\ The Department notes that the proposed principal
transactions are subject to the general fiduciary responsibility
provisions of Part 4 of Title I of the Act. Section 404(a) of the
Act requires, among other things, that a fiduciary of a plan act
prudently and solely in the interest of the plan and its
participants and beneficiaries, when making investment decisions on
behalf of the plan.
\4\ PTE 75-1, Part II, provides an exemption, under certain
conditions, from section 406(a) of the Act and section 4975(c)(1)(A)
through (D) of the Code, for principal transactions between employee
benefit plans and U.S. registered broker-dealers or U.S. banks that
are parties in interest with respect to such plans.
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4. Goldman represents that like the U.S. dealer markets,
international equity and debt markets, including the options markets,
are no less dependent on a willingness of dealers to trade as
principals. Over the past decade, Plans have increasingly invested in
foreign equity and debt securities, including debt securities issued by
foreign governments. Thus, Plans seeking to enter into such investments
may wish to increase the number of trading partners available to them
by trading with the Foreign Affiliates.
5. Under the conditions of this proposed exemption, as in PTE 75-1,
Part II, the Foreign Affiliate must customarily purchase and sell
securities for its own account in the ordinary course of its business
as a broker-dealer or bank. The terms of any principal transaction will
be at least as favorable to the Plan as those the Plan could obtain in
a comparable arm's length transaction with an unrelated party. Neither
the Foreign Affiliate nor an affiliate thereof will have discretionary
authority or control with respect to the investment of the Plan assets
involved in the principal transaction, or render investment advice
(within the meaning of 29 CFR 2510.3-21(c)) with respect to those
assets. In addition, the Foreign Affiliate will be a party in interest
or disqualified person with respect to the Plan assets involved in the
principal transaction solely by reason of section 3(14)(B) of the Act
or section 4975(e)(2)(B) of the Code (i.e., a service provider to the
Plan), or by reason of a relationship to such a person as described in
such sections.
6. Goldman represents that Rule 15a-6 of the 1934 Act provides an
exemption from U.S. registration requirements 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 principal
[[Page 37180]]
transactions through a U.S. registered broker or 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 adviser, or
(b) the employee benefit plan has total assets in excess of $5
million, 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,'' as defined in Rule
15a-6(b)(4), includes a U.S. institutional investor that has total
assets in excess of $100 million.\5\ Goldman represents that the
intermediation of the U.S. registered broker or 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.
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\5\ Note that the categories of entities that qualify as ``major
U.S. institutional investors'' has been expanded by an SEC No-Action
letter. See No-Action Letter issued to Cleary, Gottlieb, Steen &
Hamilton on April 9, 1997 (the April 9, 1997 No-Action Letter).
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Goldman 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) provide written consent to service of process for any civil
action brought by or proceeding before the SEC or a self-regulatory
organization;
(b) provide the SEC with any information or documents within its
possession, custody or control, any testimony of foreign associated
persons, and any assistance in taking the evidence of other persons,
wherever located, that the SEC requests and that relates to
transactions effected pursuant to the Rule;
(c) rely on the U.S. registered broker or dealer through which the
principal transactions with the U.S. institutional and major U.S.
institutional investors are effected, among other things, for:
(1) effecting the transactions, other than negotiating their terms;
(2) issuing all required confirmations and statements;
(3) as between the foreign broker-dealer and the U.S. registered
broker or dealer, extending or arranging for the extension of any
credit in connection with the transactions;
(4) maintaining 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; \6\
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\6\ Goldman represents that all such requirements relating to
record-keeping of principal transactions would be applicable in
respect of any Foreign Affiliate in a transaction that would be
covered by this proposed exemption.
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(5) receiving, delivering, and safeguarding 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 (Customer Protection--Reserves and Custody of Securities) of the
1934 Act; \7\ and
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\7\ Under certain circumstances described in the April 9, 1997
No-Action Letter (e.g., clearance and settlement transactions),
there may be direct transfers of funds and securities between a Plan
and a Foreign Affiliate. Please note that in such situations (as in
the other situations covered by Rule 15a-6), the U.S. broker-dealer
will not be acting as a principal with respect to any duties it is
required to undertake pursuant to Rule 15a-6.
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(6) Participating in all oral communications (e.g., telephone
calls) between the foreign associated person and the U.S. institutional
investor, other than a major U.S. institutional investor. Under certain
circumstances, the foreign associated person may have direct
communications and contact with the U.S. institutional investor. (See
April 9, 1997 No-Action Letter.)
Extensions of Credit
7. Goldman represents that a normal part of the execution of
securities transactions by broker-dealers on behalf of clients,
including employee benefit plans, is the extension of credit to clients
so as to permit the settlement of transactions in the customary three-
day settlement period. Such extensions of credit are also customary in
connection with the writing of option contracts.
Goldman requests that the proposed exemption include relief for
extensions of credit to the Plans by the Foreign Affiliates in the
ordinary course of their purchases or sales of securities, regardless
of whether they are effected on an agency or a principal basis, or in
connection with the writing of options contracts. In this regard, an
exemption for such extensions of credit is provided under PTE 75-1,
Part V, only for transactions between plans and U.S. registered brokers
or dealers.\8\
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\8\ PTE 75-1, Part V, provides an exemption, under certain
conditions, from section 406 of the Act and section 4975(c)(1) of
the Code, for extensions of credit, in connection with the purchase
or sale of securities, between employee benefit plans and U.S.
registered brokers or dealers that are parties in interest with
respect to such plans.
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8. Under the conditions of this proposed exemption, as in PTE 75-1,
Part V, the Foreign Affiliate may not be a fiduciary with respect to
the Plan assets involved in the transaction. However, an exception to
such condition would be provided herein, as in PTE 75-1, if no interest
or other consideration is received by the Foreign Affiliate or an
affiliate thereof, in connection with any such extension of credit. In
addition, the extension of credit must be lawful under the 1934 Act and
any rules or regulations thereunder, if the 1934 Act rules or
regulations were applicable. If the 1934 Act would not be applicable,
the extension of credit must still be lawful under applicable foreign
law, in the country where the particular Foreign Affiliate is
domiciled.
Securities Lending
9. The Foreign Affiliates, acting as principals, actively engage in
the borrowing and lending of securities, typically foreign securities,
from various institutional investors, including employee benefit plans.
Goldman requests an exemption for securities lending transactions
between the Foreign Affiliates and the Plans under terms and conditions
equivalent to those required in PTE 81-6 (see Footnote 2). Because PTE
81-6 provides an exemption only for U.S. registered broker-dealers and
U.S. banks, the securities lending transactions at issue would fall
outside the scope of relief provided by PTE 81-6.
10. The Foreign Affiliates utilize borrowed securities either to
satisfy their own trading requirements or to re-lend to other broker-
dealers and entities which need a particular security for a certain
period of time. As described in the Federal Reserve Board's Regulation
T, borrowed securities are often used to meet delivery obligations in
the case of short sales or the failure to receive securities that a
broker-dealer is required to deliver. Goldman represents that foreign
broker-dealers are those broker-dealers most likely to seek to borrow
foreign securities. Thus, the requested exemption will increase the
lending demand for such securities, providing the Plans with increased
securities lending opportunities, which will earn such Plans additional
rates of
[[Page 37181]]
return on the borrowed securities (as discussed below).
11. An institutional investor, such as a pension fund, lends
securities in its portfolio to a broker-dealer or bank in order to earn
a fee while continuing to enjoy the benefits of owning the securities,
(e.g., from the receipt of any interest, dividends, or other
distributions due on those securities and from any appreciation in the
value of the securities). The lender generally requires that the
securities loan be fully collateralized, and the collateral usually is
in the form of cash, irrevocable bank letters of credit, or high
quality liquid securities, such as U.S. Government or Federal Agency
obligations.
12. With respect to the subject securities lending transactions,
neither the Foreign Affiliate nor an affiliate of the Foreign Affiliate
will have discretionary authority or control with respect to the
investment of the Plan assets involved in the transaction, or render
investment advice (within the meaning of 29 CFR 2510.3-21(c)) with
respect to those assets.
13. By the close of business on the day the loaned securities are
delivered, the Plan will receive from the Foreign Affiliate (by
physical delivery, book entry in a securities depository, wire
transfer, or similar means) collateral consisting of cash, securities
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, irrevocable U.S. bank letters of credit issued by
persons other than the Foreign Affiliate or an affiliate of the Foreign
Affiliate, or any combination thereof. All collateral will be in U.S.
dollars, or dollar-denominated securities or bank letters of credit,
and will be held in the United States. The collateral will have, as of
the close of business on the business day preceding the day it is
posted by the Foreign Affiliate, a market value equal to at least 100
percent of the then market value of the loaned securities (or, in the
case of letters of credit, a stated amount equal to same).
14. The loan will be made pursuant to a written Loan Agreement,
which may be in the form of a master agreement covering a series of
securities lending transactions between the Plan and the Foreign
Affiliate. The terms of the Loan Agreement will be at least as
favorable to the Plan as those the Plan could obtain in a comparable
arm's length transaction with an unrelated party. The Loan Agreement
will also contain a requirement that the Foreign Affiliate pay all
transfer fees and transfer taxes relating to the securities loans.
15. In return for lending securities, the Plan will either (a)
receive a reasonable fee, which is related to the value of the borrowed
securities and the duration of the loan, or (b) have the opportunity to
derive compensation through the investment of cash collateral. In the
latter case, the Plan may pay a loan rebate or similar fee to the
Foreign Affiliate, if such fee is not greater than what the Plan would
pay in a comparable arm's length transaction with an unrelated party.
Earnings generated by non-cash collateral will be returned to the
Foreign Affiliate. The Plan will be entitled to at least the equivalent
of all distributions on the borrowed securities made during the term of
the loan. Such distributions will include cash dividends, interest
payments, shares of stock as a result of stock splits, and rights to
purchase additional securities, that the Plan would have received (net
of any applicable tax withholdings) had it remained the record owner of
such securities.
16. If the market value of the collateral as of the close of
trading on a business day falls below 100 percent of the market value
of the borrowed securities as of the close of trading on that day, the
Foreign Affiliate will deliver additional collateral, by the close of
business on the following business day, to bring the level of the
collateral back to at least 100 percent. However, if the market value
of the collateral exceeds 100 percent of the market value of the
borrowed securities, the Foreign Affiliate may require the Plan to
return part of the collateral to reduce the level of the collateral to
100 percent.
17. Before entering into a Loan Agreement, the Foreign Affiliate
will furnish to the independent Plan fiduciary (a) the most recent
available audited statement of the Foreign Affiliate's financial
condition, (b) the most recent available unaudited statement of its
financial condition (if more recent than the audited statement), and
(c) a representation that, at the time the loan is negotiated, there
has been no material adverse change in its financial condition that has
not been disclosed since the date of the most recent financial
statement furnished to the independent Plan fiduciary. Such
representation may be made by the Foreign Affiliate's agreeing that
each loan of securities shall constitute a representation that there
has been no such material adverse change.
18. The Loan Agreement and/or any securities loan outstanding may
be terminated by the Plan at any time, whereupon the Foreign Affiliate
will deliver certificates for 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 Plan within (a) the customary delivery period for such
securities, (b) five business days, or (c) the time negotiated for such
delivery by the Plan and the Foreign Affiliate, whichever is least, or,
alternatively, such period as permitted by PTE 81-6, as it may be
amended or superseded. In the event that the Foreign Affiliate fails to
return the securities, or the equivalent thereof, within the designated
time, the Plan will have certain rights under the Loan Agreement to
realize upon the collateral. The Plan may purchase securities identical
to the borrowed securities, or the equivalent thereof, and may apply
the collateral to the payment of the purchase price, any other
obligations of the Foreign Affiliate under the Loan Agreement, and any
expenses associated with replacing the borrowed securities. The Foreign
Affiliate is obligated to pay to the Plan the amount of any remaining
obligations and expenses not covered by the collateral (the value of
which shall be determined as of the date the borrowed securities should
have been returned to the Plan), plus interest at a reasonable rate as
determined in accordance with an independent market source. If
replacement securities are not available, the Foreign Affiliate will
pay the Plan an amount equal to (a) the value of the securities as of
the date such securities should have been returned to the Plan, plus
(b) all the accrued financial benefits derived from the beneficial
ownership of such borrowed securities as of such date, plus (c)
interest at a reasonable rate determined in accordance with an
independent market source from such date to the date of payment. The
amounts paid shall be reduced by the amount or value of the collateral
determined as of the date the borrowed securities should have been
returned to the Plan. Notwithstanding the foregoing, the Foreign
Affiliate may, in the event it fails to return borrowed securities as
described above, replace non-cash collateral with an amount of cash not
less than the then current market value of the collateral, provided
that such replacement is approved by the independent Plan fiduciary.
19. The independent Plan fiduciary will maintain the situs of the
Loan Agreement in accordance with the indicia of ownership requirements
under section 404(b) of the Act \9\ and the
[[Page 37182]]
regulations promulgated under 29 CFR 2550.404(b)-1.
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\9\ Section 404(b) of the Act states that no fiduciary may
maintain the indicia of ownership of any assets of a plan outside
the jurisdiction of the district courts of the United States, except
as authorized by regulation by the Secretary of Labor.
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20. In summary, the applicant represents that the subject
transactions will satisfy the statutory criteria for an exemption under
section 408(a) of the Act for the following reasons:
(a) With respect to the principal transactions effected by the
Foreign Affiliates, the proposed exemption will enable the Plans to
realize the same benefits of efficiency and convenience which such
Plans could derive from principal transactions with U.S. registered
broker-dealers or U.S. banks, pursuant to PTE 75-1, Part II;
(b) With respect to extensions of credit in connection with
purchases or sales of securities, the proposed exemption will enable
the Foreign Affiliates and the Plans to extend credit in the ordinary
course of the Foreign Affiliate's business to effect agency or
principal transactions within the customary three-day settlement
period, or in connection with the writing of option contracts, for
transactions between plans and U.S. registered brokers or dealers,
pursuant to PTE 75-1, Part V;
(c) With respect to securities lending transactions effected by the
Foreign Affiliates, the proposed exemption will enable the Plans to
realize a low-risk return on securities that otherwise would remain
idle, as in securities lending transactions between plans and U.S.
registered broker-dealers or U.S. banks, pursuant to PTE 81-6; and
(d) The proposed exemption will provide the Plans with virtually
the same protections as those provided by PTE 75-1 and PTE 81-6.
FOR FURTHER INFORMATION CONTACT: Ms. Karin Weng of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
Washington County Hospital Association Employees' Cash Balance Plan
(the Plan), Located in Hagerstown, Maryland;
[Application No. D-10839]
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). If the exemption
is granted, 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 the past contribution by Washington County
Hospital Association (the Hospital) to the Plan of certain publicly-
traded securities (the Securities), provided: (a) the contribution was
a one-time transaction; (b) the Securities were valued at their fair
market value as of the date of the contribution, as determined by an
independent broker; (c) no commissions were paid in connection with the
transaction; and (d) the Securities represented less than 5% of the
assets of the Plan at the time of the contribution.
Effective Date: If the proposed exemption is granted, the exemption
will be effective June 18, 1998.
Summary of Facts and Representations
1. The Hospital is a tax-exempt hospital described in section
501(c)(3) of the Code. The Plan, which is established and maintained by
the Hospital, is a defined benefit plan that currently has 1,951
participants and had assets of $27,896,007 as of July 31, 1999. The
Plan's assets are held by Hagerstown Trust Company, a Maryland Banking
Corporation, as custodian.
2. Marshfield Associates (Marshfield) is one of four investment
managers that invest assets of the Plan. Marshfield also manages a fund
known as the Washington County Hospital Pension Restricted Fund (the
Fund). The Fund is a non-trusteed, non-qualified corporate internal
fund of the Hospital and was established by the Hospital's Board of
Trustees for the purpose of holding future contributions to the Plan.
The assets in both the Plan and the Fund that are managed by Marshfield
are subject to the same investment guidelines and principles. The
applicant represents that at no time have any assets of the Fund been
applied by the Hospital for any purpose other than funding ERISA-
qualified pension benefits for the Hospital's employees. Marshfield
represents that the fees it collected from the accounts it manages for
the Hospital for the second quarter of 1998 through the second quarter
of 2000 represent, in the aggregate, less than one percent of the total
fee revenues collected by Marshfield for that same period.
3. On June 9, 1998, the Hospital sent a letter to Marshfield
directing them to transfer $821,087 from the Fund's account to the
Plan's account. The Hospital had requested the transfer in order to
satisfy its required minimum funding contribution to the Plan for the
fiscal year ending June 30, 1998. Accordingly, on June 18, 1998,
Marshfield transferred Securities valued at approximately $745,100 from
the Fund to the Plan, and on June 23, 1998, transferred $75,987 of cash
from the Fund to the Plan. The total value of assets transferred to the
Plan was $821,087. The Securities consisted of fixed income securities,
e.g., corporate bonds and notes, valued as of June 18, 1998 at
approximately $328,000, and publicly-traded equity securities valued as
of June 18, 1998 at approximately $417,100. The Securities represent
less than 3% of the total assets of the Plan.
4. The Securities consisted of a BankAmerica Corporate Subordinated
Note, paying interest at 9.20%, due May 15, 2003, with a market value
of $112,740, as of June 18, 1998; a Honeywell, Inc. Bond paying 8.625%,
due April 15, 2006, with a market value of $115,100, as of June 18,
1998; and MCI Communications Corporation Notes, paying 6.25%, due March
23, 1999, with a market value of $100,160, as of June 18, 1998. In
addition, the Securities included 1,200 shares of Gannett, Inc., valued
at $79,725, as of June 18, 1998; 4,000 shares of Pepsico, Inc., valued
at $167,500, as of June 18, 1998; and 3,600 shares of Student Loan
Corporation, valued at $169,875, as of June 18, 1998. For purposes of
ascertaining the values of the Securities on June 18, 1998, Marshfield
represents that Susan Neuwirth, its assistant portfolio manager for the
Hospital accounts, consulted Bloomberg, L.P., an independent pricing
service.
5. Ms. Elise Hoffman (Ms. Hoffman), a Principal of Marshfield, has
represented that the Hospital contacted Marshfield on June 9, 1998, to
make the transfer from the Fund to the Plan. Ms. Hoffman represents
that she consulted with Mr. Steven Barnhart, an Executive of the
Hospital, in order to determine whether the Hospital had a preference
as to whether cash or securities should be transferred. Mr. Barnhart
informed Ms. Hoffman that the Hospital was indifferent as to which was
transferred to satisfy the contribution amount. Ms. Hoffman represents
that it was Marshfield's view that transferring the Securities would be
financially better for the Plan than first converting them into cash.
Each of the equity and debt instruments had been identified by
Marshfield's research department as high quality holdings with
potential for future appreciation and/or attractive long-term returns.
But for the need to transfer assets out of the Fund, Marshfield would
have continued to hold the Securities in the Fund as of the date of the
transfer. In addition, transferring the Securities rather than the cash
proceeds of any sale of such Securities would provide the Plan with
immediate investment in the financial markets and result in savings in
[[Page 37183]]
transaction costs associated with a reacquisition of the same or
equivalent securities. Thus, Ms. Hoffman represents that Marshfield
believed it would be a prudent course for the Plan to receive the
Securities from the Fund directly and to continue to hold them.
6. PricewaterhouseCoopers LLP (PWC) in Baltimore, Maryland,
represents that PWC is the certified public accounting firm for the
Plan. Mr. William L. Stulginsky, a Partner with PWC, represents that in
the process of preparing the Plan's audit for 1998, it came to PWC's
attention that the Employer had contributed the Securities to the Plan.
PWC informed the Hospital that an in-kind contribution of the
Securities to the Plan would constitute a prohibited transaction. The
Hospital had believed, based upon conversations with Marshfield as
described in rep. 5, above, that the transfer of the Securities to the
Plan was permitted. To resolve this apparent contradiction, the
Hospital contacted its attorneys, Venable, Baetjer and Howard, LLP
(Venable). Venable reviewed the transaction and informed the Hospital
that the contribution constituted a prohibited transaction under
section 406 of the Act.\10\ The Hospital thereupon established
procedures to prevent future in-kind contributions to the Plan, and
Venable followed up with the Hospital in resolving this issue by filing
a request for the exemption proposed herein.
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\10\ The Department directs interested persons to ERISA Advisory
Opinion 81-69A (dated July 28, 1981) for the principle that
contributions in-kind that relieve an employer of an obligation to
make cash contributions to a plan are prohibited exchanges (unless
otherwise exempt).
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7. In summary, the applicant represents that the subject
transaction satisfied the criteria contained in section 408(a) of the
Act because: (a) The contribution was a one-time transaction; (b) no
commissions were paid by the Plan in connection with the transfer of
the Securities; (c) the Plan's independent investment manager,
Marshfield, determined that the transaction was appropriate for and in
the best interests of the Plan; (d) Marshfield consulted Bloomberg,
L.P., an independent pricing service for purposes of ascertaining the
values of the Securities on June 18, 1998, the date of transaction; and
(e) when the prohibited transaction was discovered by the Plan's
independent C.P.A. firm, the applicant requested the exemption proposed
herein.
FOR FURTHER INFORMATION CONTACT: Gary H. Lefkowitz 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 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, this 7th day of June, 2000.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, U.S. Department of Labor.
[FR Doc. 00-14808 Filed 6-12-00; 8:45 am]
BILLING CODE 4510-29-P