Grant of Individual Exemptions; Bankers Trust Company

DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

[Prohibited Transaction Exemption 98-23; Exemption Application No. D-

10213, et al.]

Grant of Individual Exemptions; Bankers Trust Company

AGENCY: Pension and Welfare Benefits Administration, Labor.

ACTION: Grant of individual exemptions.

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

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, DC. 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.

Bankers Trust Company (Bankers Trust) Located in New York, New York

[Prohibited Transaction Exemption 98-23; Exemption Application No. D-

10213]

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, effective February 16, 1996, to the: (1) lending of

certain securities to BT Alex. Brown Incorporated, Bankers Trust

International PLC, and Bankers Trust (Australia) Limited (and their

corporate successors), which are affiliates of Bankers Trust,

(collectively; the Affiliated Borrowers), by certain employee benefit

plans (including commingled investment funds holding plan assets) (the

Client Plans), for which Bankers Trust and certain other affiliates

(the BT Group) act as the directed trustee or custodian or securities

lending agent or sub-agent; 1 and (2) receipt of

compensation by the BT Group in connection with these transactions;

provided that the following conditions are satisfied:

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

\1\ The applicant represents that because Bankers Trust may add

new affiliates, the entities comprising the BT Group may change.

However, the Affiliated Borrowers will always be BT Alex. Brown

Incorporated, Bankers Trust International PLC and Bankers Trust

(Australia) Limited (and their corporate successors) for purposes of

this exemption.

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

1. Neither the Affiliated Borrowers nor the BT Group has or

exercises discretionary authority or control with respect to the

investment of the assets of the Client Plans involved in the

transaction (other than with respect to the investment of cash

collateral after securities have been loaned and collateral received),

or renders investment advice (within the meaning of 29 CFR 2510.3-

21(c)) with respect to those assets, including decisions concerning a

Client Plan's acquisition and 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 Affiliated Borrowers

is affected, a Client Plan fiduciary who is independent of the BT Group

and the Affiliated Borrowers must have:

(a) Authorized and approved a securities lending authorization

agreement with the BT Group, where the BT Group is acting as the

securities lending agent;

(b) Authorized and approved the primary securities lending

authorization agreement with the primary lending agent, where BT Group

is lending securities under a sub-agency arrangement with the primary

lending agent; 2 and

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

\2\ When the BT Group 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.

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

(c) Approved the general terms of the securities loan agreement

(the Loan Agreement) between such Client Plan and the Affiliated

Borrowers, the specific terms of which are negotiated and entered into

by BT Group.

3. The Client Plan may terminate the agency or sub-agency agreement

at any time without penalty to such plan on five (5) business days

notice, whereupon the Affiliated Borrowers shall deliver 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 Affiliated

Borrowers, whichever is less.

4. The Client Plan will receive from the Affiliated Borrowers

(either by physical delivery or by 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 on which the

loaned securities are delivered to the Affiliated Borrowers, collateral

consisting of U.S. currency, securities issued or guaranteed by the

U.S. Government or its agencies or instrumentalities, or an irrevocable

bank letter of credit issued by a U.S. bank, which is a person other

than the Affiliated Borrowers or an affiliate thereof, or any

combination thereof, 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),

having, as of the close of business on the preceding business day, a

market value (or, in the case of a letter of credit, a stated amount)

initially equal to at least 102 percent of the market value of the

loaned securities.

[[Page 29436]]

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

borrowed securities at the close of business on that day, the

Affiliated Borrowers will deliver additional collateral on the

following day such that the market value of the collateral in the

aggregate will again equal 102 percent. The Loan Agreement will give

the Client Plan a continuing security interest in, title to, or the

rights of a secured creditor with respect to the collateral and a lien

on the collateral. The BT Group will monitor the level of the

collateral daily.

5. When the BT Group lends securities to the Affiliated Borrowers,

the following conditions must be met: (a) the collateral will be

maintained in U.S. dollars, U.S. dollar-denominated securities or

letters of credit of U.S. Banks, or any combination thereof, or other

collateral permitted under 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);

3 (b) all collateral will be held in the United States; (c)

the situs of the loan agreement will be maintained in the United

States; (d) the lending Client Plans will be indemnified by Bankers

Trust in the United States for any transactions covered by this

exemption with the foreign Affiliated Borrowers so that the Client

Plans will not have to litigate in a foreign jurisdiction nor sue the

foreign Affiliated Borrowers to realize on the indemnification; (e)

prior to the transaction, the foreign Affiliated Borrowers will enter

into a written agreement with the Client Plan whereby the Affiliated

Borrowers consent to the service of process in the United States and to

the jurisdiction of the courts of the United States with respect to the

transactions described herein; and (f)(1) Bankers Trust International

PLC is a deposit taking institution supervised by the Bank of England;

and (2) Bankers Trust (Australia) Limited is a merchant bank which is

under the jurisdiction of the Federal Reserve Bank of Australia.

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

\3\ See limitations discussed in Item I.5 of the Written

Comments.

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

6. Before entering into the Loan Agreement and before a Client Plan

lends any securities to the Affiliated Borrowers, the Affiliated

Borrowers shall have furnished the following items to the Client Plan

fiduciary: (a) the most recent available audited and unaudited

statement of the Affiliated Borrowers' financial condition; (b) at the

time of the loan, the Affiliated Borrowers must give prompt notice to

the Client Plan fiduciary of any material adverse changes in the

Affiliated Borrowers' financial condition since the date of the most

recently financial statement furnished to the Client Plan; and (c) in

the event of any such changes, the BT Group will request approval of

the Client Plan to continue lending to the Affiliated Borrowers before

making any such additional loans. No such new loans will be made until

approval is received. Each loan shall constitute a representation by

the Affiliated Borrower that there has been no such material adverse

change.

7. 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 Affiliated

Borrower, if such fee is not greater than the fee Client Plan would pay

an unrelated party in an arm's length transaction.

8. All procedures regarding the securities lending activities will

at a minimum conform to the applicable provisions of PTEs 81-6 and 82-

63 (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).

9. In the event Bankers Trust International PLC and/or Bankers

Trust (Australia) Limited default on a loan, Bankers Trust will

liquidate the loan collateral to purchase identical securities for the

Client Plan. If the collateral is insufficient to accomplish such

purchase, Bankers Trust will indemnify the Client Plan for any

shortfall in the collateral plus interest on such amount and any

transaction costs incurred (including attorney's fees of the Client

Plan for legal actions arising out of the default on the loans or

failure to properly indemnify under this provision). Alternatively, if

such identical securities are not available on the market, Bankers

Trust will pay the Client Plan cash equal to the market value of the

borrowed securities as of the date they should have been returned to

the Client Plan plus all the accrued financial benefits derived from

the beneficial ownership of such loaned securities. The lending Client

Plans will be indemnified by Bankers Trust in the United States for any

loans to the foreign Affiliated Borrowers.

10. In the event BT Alex. Brown Incorporated, a U.S. registered

broker-dealer, defaults on a loan, Bankers Trust will liquidate the

loan collateral to purchase identical securities for the Client Plan.

If the collateral is insufficient to accomplish such purchase, BT Alex.

Brown Incorporated will indemnify the Client Plan for any shortfall in

the collateral plus interest on such amount and any transaction costs

incurred (including attorney's fees of the Client Plan for legal

actions arising out of the default on the loans or failure to properly

indemnify under this provision).

11. If the Affiliated Borrowers' default on the securities loan or

enter bankruptcy, the collateral will not be available to the

Affiliated Borrowers or their creditors, but is used to make the Client

Plan whole.

12. The Client Plans will be entitled to the equivalent of all

distributions made to holders of the borrowed securities, including all

interest, dividends and distributions on the loaned securities during

the loan period.

13. 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--

(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 Affiliated Borrowers, 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 Affiliated Borrowers, the foregoing $50 million requirement is

satisfied if such trust or other entity has aggregate assets which are

in excess of $50

[[Page 29437]]

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.)

14. For purposes of this exemption, the Affiliated Borrowers will

consist only of BT Alex. Brown Incorporated, Bankers Trust

International PLC and Bankers Trust (Australia) Limited, and their

corporate successors.

15. In any calendar quarter, on average 50 percent or more of the

outstanding dollar value of securities loans negotiated on behalf of

the Client Plans by the BT Group in the aggregate will be to borrowers

who are not affiliated with the BT Group.

16. The terms of each loan of securities by the Client Plans to any

of the Affiliated Borrowers will be at market rates and at terms as

favorable to such plans as if made at the same time and under the same

circumstances to an unaffiliated party.

17. Each Client Plan will receive a monthly transaction report,

including but not limited to the information described in paragraph 24

of the notice of proposed exemption (the Notice), so that the

independent fiduciary of such plan may monitor the securities lending

transactions with the Affiliated Borrowers.

18. During the notification of interested persons period, all

Client Plans (that were Client Plans during this period) received a

copy of the notice of pendency of the proposed exemption. In addition,

current Client Plans will receive a copy of the final exemption and

Bankers Trust will provide a copy of the final exemption to any new

Client Plans.

19. Bankers Trust or the Affiliated Borrowers maintain or cause 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 Bankers

Trust or the Affiliated Borrowers, 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 Bankers Trust or the Affiliated

Borrowers, 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 Bankers

Trust or the Affiliated Borrowers, or commercial or financial

information which is privileged or confidential.

Effective Date: This exemption is effective as of February 16,

1996.

For a more complete statement of the facts and representations

supporting the Department's decision to grant this exemption, refer to

the Notice published on February 19, 1998 at 63 FR 8482.

Written Comments

The Department received one written comment (the Comment) with

respect to the Notice and no requests for a public hearing. The Comment

was filed by Bankers Trust and generally requests clarifications and

modifications to the Notice. Set forth below in section I is a

discussion of those aspects of the Comment which relate to the language

of the final exemption (the Exemption). In addition, section II below

discusses the aspects of the Comment which relate to the Summary of

Facts and Representations (the Summary) contained in the Notice.

I. Discussion of the Comment Regarding the Exemption

1. The introductory paragraph of the Notice proposes to exempt, in

relevant part, the lending of securities to certain affiliates of

Bankers Trust. Bankers Trust states that BT Securities Corporation has

merged with Alex. Brown and Sons, Incorporated. Accordingly, Bankers

Trust requests that the term ``BT Alex. Brown Incorporated'' be

substituted for ``BT Securities Corporation'' in the relevant sections

of the Notice.

The Department acknowledges the applicant's request and has

modified the Exemption to reflect this substitution.

2. Bankers Trust states that it would like to avoid the need to

request a clarification of the Exemption from the Department in the

future should another change occur in the names of the entities that

comprise the BT Group. Thus, the applicant suggests that the term

``Affiliated Borrowers'' be defined in the Exemption as BT Alex. Brown

Incorporated, Bankers Trust International PLC, and Bankers Trust

(Australia) Limited and their corporate successors [emphasis added].

Bankers Trust requests that this modification be made in the

introductory paragraph of the operative language of the Exemption, in

the last sentence of footnote 1, and elsewhere in the Exemption, as

relevant.

The Department concurs with the applicant's suggestion and has

modified the Exemption accordingly. However, with respect to corporate

successors, the Department notes that the Exemption would not be

effective for any new entities created by the sale of the underlying

assets of an Affiliated Borrower to an unrelated third party.

3. Bankers Trust comments that the Affiliated Borrowers are

sometimes only the securities lending agent and not the custodian or

directed trustee of the Client Plan. Therefore, Bankers Trust requests

that the word ``or'' should be substituted for the word ``and'' in the

relevant places of the Exemption to clarify that an Affiliated Borrower

may be only the securities agent for the Client Plan.

The Department acknowledges the applicant's clarification and has

modified the Exemption accordingly.

4. Condition 3 of the Notice provides, among other things, that the

Client Plan may terminate the agency or sub-agency

[[Page 29438]]

agreement on five (5) days notice whereupon the Affiliated Borrowers

shall deliver certificates for securities identical to the borrowed

securities to the Client Plan within a specified time period (as stated

therein). Bankers Trust states that because the certificates of

securities are not physically delivered to the Client Plan in every

instance, the words ``* * * certificates for'' as used in this

Condition should be deleted.

The Department acknowledges the applicant's clarification and has

modified Condition 3 of the Exemption accordingly.

5. Condition 5(a) of the Notice requires that when the BT Group

lends securities to the Affiliated Borrowers, the collateral will be

maintained in U.S. dollars, U.S. dollar-denominated securities or

letters of credit of U.S. Banks. The applicant states that when Bankers

Trust lends securities to the Affiliated Borrowers under the Exemption,

it should be able to use as collateral any property or other

arrangement which may be permitted by the Department in a future class

exemption for securities lending. Therefore, Bankers Trust suggests

adding the following language as an insert at the end of the language

contained in Condition 5(a):

* * * or any combination thereof, 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).

The Department concurs with the applicant's suggested modification

and has added the above-referenced language to Condition 5(a) of the

Exemption. However, the Department notes that the Exemption provides

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 Exemption to the extent that the transactions

covered by this Exemption would require relief from section 406(b) of

the Act.

6. Condition 8 of the Notice requires that all procedures regarding

the securities lending activities will at a minimum conform to the

applicable provisions of PTEs 81-6 and 82-63. Bankers Trust comments

that the following language should be added at the end of Condition 8

of the Notice.

* * * (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).

3The Department concurs with the applicant's suggested modification

and has added the above-referenced language to Condition 8 of the

Exemption.

7. Condition 13 of the Notice requires that 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.

Bankers Trust requests that the Client Plans be permitted to aggregate

their assets for purposes of meeting the minimum Plan size requirement

for lending securities to the Affiliated Borrowers under the Exemption.

Therefore, Bankers Trust recommends that the following language be

substituted for Condition 13 of the Notice:

``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--

(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 Affiliated Borrowers, 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 Affiliated Borrowers, 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.)'' [emphasis added]

The Department concurs with this change to the language of

Condition 13 of the Notice and has modified the Exemption accordingly.

II. Discussion of the Comment Regarding the Summary

1. Paragraph 4 of the Summary in the Notice contains a discussion

regarding Federal Reserve Board's Regulation T. Bankers Trust comments

that the Regulation T provision that limited the situations for which

securities may be borrowed or lent (the ``purpose test'') has been

amended to reflect recent legislation, and now may not apply to Bankers

Trust securities lending activities in every instance. Thus, the

representation previously made by Bankers Trust, as stated in the first

sentence of Paragraph 4 of the Summary, should be modified to read as

follows:

BT Alex. Brown Incorporated, a U.S. registered broker-dealer,

will comply with the Federal Reserve Board's Regulation T in its

securities lending activities to the extent that Regulation T

applies.

The Department concurs with this modification.

2. Paragraph 17 of the Summary discusses the written schedule of

lending fees and rebate rates established by the BT Group. In this

regard, in order to clarify how these rates may relate to the rates for

a particular securities lending transaction with a Client Plan, Bankers

Trust requests that the third sentence in Paragraph 17 of the Summary

be changed as follows:

In no case will loans be made to the Affiliated Borrowers at

rates less favorable to the Client Plans than those on the schedule.

[emphasis added]

The Department concurs with this modification.

3. Bankers Trust comments that the BT Group will provide notice of

a change in the lending fee formula or

[[Page 29439]]

rebate rate formula, as discussed in paragraph 21 of the Summary.

However, because the formula rates are designed to vary based on the

operation of the formula, the BT Group will provide notice only of the

formula change (unless such formula change would always be beneficial

to the Client Plans), and not of a decrease or increase in the lending

fee or rebate rate itself. Therefore, Bankers Trust states that its

previous representations, which are contained in first and second

sentences of Paragraph 21 of the Summary, should be clarified as

follows:

Should the BT Group recognize prior to the end of a business day

that, with respect to new and/or existing loans, it must change the

rebate rate formula or lending fee formula in the best interest of

Client Plans, it may do so with respect to the Affiliated Borrowers.

If the BT Group changes the lending fee formula or the rebate

rate formula on any outstanding loan to the Affiliated Borrower

(except for any change resulting from a change in the value of any

third party independent index with respect to which the fee or

rebate is calculated, or if the formula will always be beneficial to

the Client Plan), the BT Group, by the close of business on the date

of such adjustment, shall provide the independent fiduciary of the

Client Plan with notice that it has changed such fee formula or

rebate rate formula with respect to such Affiliated Borrower and

that the Client Plan may terminate such loan at any time. [emphasis

added]

The Department acknowledges Bankers Trust's request for

clarification to the representations contained in Paragraph 21 of the

Summary as well as the other clarifications to the current record

provided by the applicant.

Therefore, after giving full consideration to the entire record,

including the Comment, the Department has decided to grant the

exemption, subject to the modifications and clarifications described

above. The Comment has been included as part of the public record of

the exemption application. The complete exemption file is available for

public inspection in the Public Disclosure Room of the Pension and

Benefits Administration, Room N-5638, U.S. Department of Labor, 200

Constitution Avenue, NW., Washington, DC 20210.

For Further Information Contact: Ekaterina A. Uzlyan, U.S.

Department of Labor, telephone (202) 219-8883. (This is not a toll-free

number.)

Goldman Sachs & Co. (Goldman Sachs) and The Goldman Sachs Trust Company

(GSTC) Located in New York, NY

[Prohibited Transaction Exemption 98-24; Exemption Application No. D-

10306]

Exemption

The restrictions of sections 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, effective July 31, 1996, to the past

and continued lending of securities to Goldman Sachs International or

any other Goldman Sachs affiliate based in the United Kingdom

(together, GSI), Goldman Sachs, affiliated U.S. registered broker-

dealers of Goldman Sachs, or Goldman Sachs (Japan), Ltd., including any

of its affiliates (together, Goldman Sachs (Japan),4 by

employee benefit plans (the Client Plans), including commingled

investment funds holding Plan assets, for which Goldman Sachs Trust

Company (GSTC), an affiliate of Goldman Sachs, acts as securities

lending agent (or sub-agent) and to the receipt of compensation by GSTC

in connection with these transactions, provided that the following

conditions are met:

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

\4\ Unless otherwise noted, for purposes of this exemption,

Goldman Sachs, the affiliated U.S. registered broker-dealers of

Goldman Sachs, GSI and Goldman Sachs (Japan) are collectively

referred to herein as Goldman Sachs.

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

(a) For each Client Plan, neither GSTC, Goldman Sachs nor an

affiliate of either has or exercises 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.

(b) Any arrangement for GSTC to lend Plan securities to Goldman

Sachs in either an agency or sub-agency capacity is approved in advance

by a Plan fiduciary who is independent of Goldman Sachs and

GSTC.5 In this regard, the independent Plan fiduciary also

approves the general terms of the securities loan agreement (the Loan

Agreement) between the Client Plan and Goldman Sachs, although the

specific terms of the Loan Agreement are negotiated and entered into by

GSTC and GSTC acts as a liaison between the lender and the borrower to

facilitate the lending transaction.

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

\5\ The Department, herein, is not providing exemptive relief

for securities lending transactions engaged in by primary lending

agents, other than GSTC, beyond that provided pursuant to Prohibited

Transaction Exemption (PTE) 81-6 (46 FR 7527, January 23, 1981, as

amended at 52 FR 18754, May 19, 1987) and PTE 82-63 (47 FR 14804,

April 6, 1982).

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

(c) The terms of each loan of securities by a Client Plan to

Goldman Sachs is at least as favorable to such Plans as those of a

comparable arm's length transaction between unrelated parties.

(d) A Client Plan may terminate the agency or sub-agency

arrangement at any time without penalty to such Plan on five business

days notice.

(e) The Client Plan receives from Goldman Sachs (either by physical

delivery or by 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 Goldman

Sachs, collateral consisting of cash, securities issued or guaranteed

by the United States Government or its agencies or instrumentalities,

or irrevocable United States bank letters of credit issued by a person

other than Goldman Sachs or an affiliate thereof, or any combination

thereof, or other collateral permitted under PTE 81-6, as it may be

amended or superseded.

(f) As of the close of business on the preceding business day, the

fair market value of the collateral initially equals at least 102

percent of the market value of the loaned securities and, if the market

value of the collateral falls below 100 percent, Goldman Sachs delivers

additional collateral on the following day such that the market value

of the collateral again equals 102 percent.

(g) Prior to entering into the Loan Agreement, Goldman Sachs

furnishes GSTC its most recently available audited and unaudited

statements, which is, in turn, provided to a Client Plan, as well as a

representation by Goldman Sachs, that as of each time it borrows

securities, there has been no material adverse change in its financial

condition since the date of the most recently-furnished statement that

has not been disclosed to such Client Plan; provided, however, that in

the event of a material adverse change, GSTC does not make any further

loans to Goldman Sachs unless an independent fiduciary of the Client

Plan is provided notice of any material adverse change and approves the

loan in view of the changed financial condition.

(h) In return for lending securities, the Client Plan 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

[[Page 29440]]

circumstances, the Client Plan may pay a loan rebate or similar fee to

Goldman Sachs, if such fee is not greater than the fee the Client Plan

would pay in a comparable arm's length transaction with an unrelated

party.)

(i) All procedures regarding the securities lending activities

conform to the applicable provisions of Prohibited Transaction

Exemptions PTE 81-6 and PTE 82-63 as well as to applicable securities

laws of the United States, the United Kingdom or Japan.

(j) Each Goldman Sachs entity indemnifies and holds harmless each

lending Client Plan in the United States against any and all losses,

damages, liabilities, costs and expenses (including attorney's fees)

which the Client Plan may incur or suffer directly arising out of the

lending of securities of such Client Plan to such Goldman Sachs entity.

In the event that GSI or Goldman Sachs (Japan) defaults on a loan, GSTC

will liquidate the loan collateral to purchase identical securities for

the Client Plan. If the collateral is insufficient to accomplish such

purchase, GSTC will indemnify the Client Plan for any shortfall in the

collateral plus interest on such amount and any transaction costs

incurred (including attorney's fees of the Client Plan for legal

actions arising out of the default on the loans or failure to properly

indemnify under such provisions). Alternatively, if such identical

securities are not available on the market, GSTC will pay the Client

Plan cash equal to (1) the market value of the borrowed securities as

of the date they should have been returned to the Client Plan, plus (2)

all the accrued financial benefits derived from the beneficial

ownership of such loaned securities as of such date, plus (3) interest

from such date to the date of payment.

(k) The Client Plan receives the equivalent of all distributions

made to 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.

(l) Except for Client Plans which have or had outstanding

securities loans to Goldman Sachs before February 19, 1998, Goldman

Sachs provides, prior to any Client Plan's approval of the lending of

its securities to Goldman Sachs, copies of the notice of proposed

exemption (the Notice) and the final exemption. With respect to Client

Plans which have or had outstanding securities loans to Goldman Sachs

through GSTC prior to February 19, 1998, GSTC provides such Plans with

copies of the Notice.

(m) Each Client Plan receives monthly reports with respect to its

securities lending transactions, including, but not limited to the

information described in Representation 31 of the Notice, so that an

independent fiduciary of the Client Plan may monitor such transactions

with Goldman Sachs.

(n) Only Client Plans with total assets having an aggregate market

value of at least $50 million are permitted to lend securities to

Goldman Sachs; 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 (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 Goldman Sachs, 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 (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 Goldman Sachs, 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.)

(o) 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.

(p) In addition to the above, all loans involving GSI and Goldman

Sachs (Japan), have the following supplemental requirements:

(1) Such broker-dealer is registered as a broker-dealer with the

Securities and Futures Authority of the United Kingdom or with the

Ministry of Finance and the Tokyo Stock Exchange;

(2) Such broker-dealer is in compliance with all applicable

provisions of Rule 15a-6 (17 CFR 240.15a-6) under the Securities

Exchange Act of 1934 which provides for foreign broker-dealers a

limited exemption from United States registration requirements;

(3) All collateral is maintained in United States dollars or

dollar-denominated securities or letters of credit;

(4) All collateral is held in the United States and GSTC maintains

the situs of the securities Loan Agreements 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; and

(5) GSI or Goldman Sachs (Japan) provides Goldman Sachs a written

consent to service of process in the United States for any civil action

or proceeding brought in respect of the securities lending transaction,

which consent provides that process may be served on such borrower by

service on Goldman Sachs.

(q) Goldman Sachs and its affiliates maintain, or cause to maintain

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 (r)(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

[[Page 29441]]

to circumstances beyond the control of Goldman Sachs 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 Goldman Sachs 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 (r)(1).

(r)(1) Except as provided in subparagraph (r)(2) of this paragraph

and notwithstanding any provisions of subsections (a)(2) and (b) of

section 504 of the Act, the records referred to in paragraph (q) are

unconditionally available at their customary location 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 (the SEC);

(ii) Any fiduciary of a participating Client Plan or any duly

authorized representative of such fiduciary;

(iii) Any contributing employer to any participating Client Plan or

any duly authorized employee representative of such employer; and

(iv) Any participant or beneficiary of any participating Client

Plan, or any duly authorized representative of such participant or

beneficiary.

(r)(2) None of the persons described above in paragraphs

(r)(1)(ii)-(r)(1)(iv) of this paragraph (r)(1) are authorized to

examine the trade secrets of Goldman Sachs or commercial or financial

information which is privileged or confidential.

Effective date: This exemption is effective as of July 31, 1996.

For a more complete statement of the facts and representations

supporting the Department's decision to grant this exemption, refer to

the Notice published on February 19, 1998 at 63 FR 8489.

Written Comments

The Department received one written comment with respect to the

Notice and no requests for a public hearing. The comment, which was

submitted by Goldman Sachs, suggested modifications to the operative

language of the Notice and recommended certain changes to the Summary

of Facts and Representations (the Summary) of the Notice. Presented

below are the modifications requested by Goldman Sachs and the

Department's accompanying responses.

1. Condition (l). Condition (l) of the Notice requires that GSTC

provide a copy of the proposed and final exemption to Client Plans

prior to such plans' approval of loans to Goldman Sachs. Given that the

relief requested is retroactive, Goldman Sachs proposes to amend

Condition (l) by inserting the following phrase at the beginning of

this provision: ``Except for Client Plans which have or had outstanding

securities loans to Goldman through GSTC prior to February 19, 1998.''

In addition, Goldman Sachs suggests adding the following sentence to

the end of Condition (l): ``With respect to Client Plans which have or

had outstanding securities loans to Goldman through GSTC prior to

February 19, 1998, GSTC will provide such Plans with the notice of

pendency as set forth in the Notice to Interested Persons section of

the proposed exemption.'' In response, the Department has modified

Condition (l) of the Notice to read as follows:

(1) Except for Client Plans which have or had outstanding

securities loans to Goldman Sachs before February 19, 1998, Goldman

Sachs provides, prior to any Client Plan's approval of the lending

of its securities to Goldman Sachs, copies of the notice of proposed

exemption (the Notice) and the final exemption. With respect to

Client Plans which have or had outstanding securities loans to

Goldman Sachs through GSTC prior to February 19, 1998, GSTC provides

such Plans with copies of the Notice.

2. Representations 7 and 8. Representations 7 and 8 of the Summary

discuss compliance provisions with Rule 15a-6 of the 1934 Act by

Goldman Sachs, GSI and Goldman Sachs (Japan). As noted in the Summary,

Rule 15a-6 provides foreign broker-dealers with a limited exemption

from SEC registration requirements and offers additional protections.

Goldman Sachs states that some of the provisions of Rule 15a-6 have

been changed or modified as a result of an SEC No-Action Letter

obtained by its counsel on behalf of it and a group of broker-dealers

on April 9, 1997.\6\ Although Goldman Sachs represents that it intends

to comply with any applicable provisions of Rule 15a-6 as it may change

from time to time, for the sake of accuracy, it requests that

Representations 7 and 8 be amended to reflect the rule and the no-

action relief. Accordingly, Goldman Sachs suggests the following

changes which have been made by the Department:

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

\6\ See SEC No-Action Letter dated April 9, 1997 to Giovanni P.

Prezioso, Esq. of Cleary, Gottlieb, Steen & Hamilton regarding

Securities Activities of U.S-Affiliated Foreign Dealers.

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

a. Footnote 14. Footnote 14 of the Summary states that GSI and

Goldman Sachs (Japan) may rely on a U.S. bank or trust company,

including GSTC, instead of relying on a U.S. broker-dealer. Goldman

Sachs requests that Footnote 14 of the Summary be moved to the end of

the third sentence of Representation 7.

b. Addition of Footnote to Representation 7. Goldman Sachs suggests

that a new footnote be inserted at the end of Representation 7 which

would read as follows:

``See also SEC No-Action Letter issued to Cleary, Gottlieb,

Steen & Hamilton on April 9, 1997 (hereinafter, ``the April 9 No-

Action Letter''), expanding the definition of ``Major U.S.

Institutional Investor.''

c. Addition of Footnote to Representation 8(c)(5). Representation

8(c)(5) of the Summary states that a foreign broker-dealer that induces

or attempts to induce the purchase or sale of any security by a U.S.

institutional or major institutional investor must ``receive, deliver

and safeguard funds and securities in connection with transactions on

behalf of the U.S. institutional investor or U.S. major institutional

investor in compliance with Rule 15c3-3 of the 1934 Act (Customer

Protection--Reserves and Custody of Securities).'' To update this

provision, Goldman Sachs requests that the following footnote be placed

at the end of paragraph (c)(5) of Representation 8:

``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 the Client

Plan and GSI and Goldman Sachs (Japan). Goldman Sachs notes that in

such situations, the U.S. registered broker-dealer will not be

acting as a principal with respect to any duties it is required to

undertake pursuant to Rule 15a-6.''

d. Modification of Representation 8(c)(6). Representation 8(c)(6)

of the Summary states that a foreign broker-dealer that induces or

attempts to induce the purchase or sale of any security by a U.S.

institutional or major institutional investor must ``participate in all

oral communications (e.g., telephone calls) between the foreign

associated person and the U.S. institutional investor (not the U.S.

major institutional investor), and accompany the foreign associated

person on all visits with both U.S. institutional and major

institutional investors. By virtue of this participation, the U.S.

registered broker-dealer would become responsible for the content of

all these communications.''

Given that the relief granted in the April 9, 1997 No-Action Letter

significantly modified the ``chaperoning'' requirements of Rule 15a-6

to provide, under certain

[[Page 29442]]

circumstances, direct communications and contact between the foreign

broker-dealer and the U.S. Institutional Investor, Goldman Sachs

requests that the reference to ``all communications'' and ``all

visits'' be amended to read ``certain communications'' and ``certain

visits.'' In addition, Goldman Sachs requests that the last sentence of

Representation 8(c)(6) be deleted and the following footnote be added

to the end of such section to read:

``Under certain circumstances, the foreign associated person may

have direct communications and contact with the U.S. Institutional

Investor. See April 9 SEC No-Action Letter.''

3. Representation 12. The second sentence of Representation 12

states that ``for each Plan, neither GSTC, Goldman Sachs nor any

affiliate will have no discretionary authority or control or render

investment advice over Client Plans' decisions concerning the

acquisition or disposition of securities available for loan.'' Goldman

Sachs requests that the word ``no,'' which precedes the word

``discretionary'' be deleted from this sentence as it is in error. The

Department concurs with this change and has made the required

modification.

4. Representation 15. The third paragraph of Representation 15

states that the provisions of the Sub-Agency Agreement will be

comparable to those of the Agency Agreement but it erroneously cross-

references the Agency Agreement to Representation 9. Goldman Sachs

wishes to point out that the correct cross-reference should be to

Representation 14 rather than Representation 9. The Department concurs

with this change and has made the required modification.

5. Representation 24. Goldman Sachs states that the fourth sentence

of Representation 24 contains a typographical error in that the

parenthetical should end after the phrase ``from such loan'' instead of

at the end of the sentence. Therefore, the Department has revised this

sentence to read as follows:

With respect to any loan to Goldman Sachs, GSTC will never

negotiate a rebate rate with respect to such loan which would be

expected to produce a zero or negative return to the Client Plan

(assuming no default on the investments related to the cash

collateral from such loan) where GSTC has investment discretion over

the cash collateral.

6. Representation 33 and Condition (n). Representation 22 of the

Summary and Condition (n) of the Notice exclude from the securities

lending program commingled trust funds which contain plan assets of

more than one employer if the fiduciary responsible for making the

investment decision is one of the Client Plan's employers. Goldman

Sachs does not believe this restriction is necessary because it would

preclude the State Street Collective Trust Funds from using GSTC as a

securities lending agent and lending to Goldman Sachs under the

exemption if one of State Street's employee benefit plans were invested

in the fund, even though the fund would otherwise comply with the $50

million in assets requirement and State Street as a fiduciary to the

fund would otherwise satisfy the $100 million under management

requirement. Therefore, Goldman Sachs suggests that the Department

revise paragraph (n)(2) of the Conditions and subclause (a) of the

second paragraph of Representation 33 to read as follows:

(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 (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 Goldman Sachs, 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.

After considering this comment, the Department has made the changes

suggested by Goldman Sachs.

For further information regarding Goldman Sachs's comments or other

matters discussed herein, interested persons are encouraged to obtain

copies of the exemption application file (Exemption Application No. D-

10306) the Department is maintaining in this case. The complete

application file, as well as all supplemental submissions received by

the Department, are made available for public inspection in the Public

Documents Room of the Pension and Welfare Benefits Administration, Room

N-5638, U.S. Department of Labor, 200 Constitution Avenue, NW,

Washington, DC 20210.

Accordingly, after giving full consideration to the entire record,

including the written comments provided by Goldman Sachs, the

Department has made the aforementioned changes to the Notice. In

addition, the Department has decided to grant the exemption subject to

the modifications or clarifications described above.

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 accurately describes all material terms of the transaction

which is the subject of the exemption.

Signed at Washington, D.C., this 22nd day of May, 1998.

Ivan Strasfeld,

Director of Exemption Determinations, Pension and Welfare Benefits

Administration, U.S. Department of Labor.

[FR Doc. 98-14197 Filed 5-28-98; 8:45 am]

BILLING CODE 4510-29-P