Notice of Proposed Individual Exemption to Amend and Replace Prohibited Transaction Exemption (PTE) 96-14 Involving Morgan Stanley & Co. Incorporated (MS&Co) and Morgan Stanley Trust Company (MSTC), Located in New York, NY

PENSION AND WELFARE BENEFITS ADMINISTRATION

[Application No. D-10429]

Notice of Proposed Individual Exemption to Amend and Replace

Prohibited Transaction Exemption (PTE) 96-14 Involving Morgan Stanley &

Co. Incorporated (MS&Co) and Morgan Stanley Trust Company (MSTC),

Located in New York, NY

AGENCY: Pension and Welfare Benefits Administration, U.S. Department of

Labor.

ACTION: Notice of proposed individual exemption to modify and replace

PTE 96-14.

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SUMMARY: This document contains a notice of pendency before the

Department of Labor (the Department) of a proposed individual exemption

which, if granted, would amend and replace PTE 96-14 (61 FR 10032,

March 12, 1996). PTE 96-14, as clarified by a Notice of Technical

Correction dated June 4, 1996 (61 FR 28243), permits the lending of

securities to MS&Co and to any other U.S. registered broker-dealers

affiliated with MSTC (the Affiliated Broker-Dealers; collectively, the

MS Broker-Dealers) by employee benefit plans with respect to which the

MS Broker-Dealer who is borrowing such securities is a party in

interest or for which MSTC acts as directed trustee or custodian and

securities lending agent. In addition, PTE 96-14 permits MSTC to

receive compensation in connection with securities lending

transactions. These transactions are described in a notice of pendency

that was published in the Federal Register on August 11, 1995 at 60 FR

41118. PTE 96-14 is effective as of March 12, 1996.

If granted, the proposed exemption would replace PTE 96-14 but

would incorporate by reference the facts, representations and virtually

all of the conditions that are contained in the notice, the final

exemption and the technical correction. However, Condition (9) of PTE

96-14, which has been redesignated herein as Condition (12), would be

amended. Condition (9) of PTE 96-14 provides that--

Only plans whose total assets have a market value of at least $50

million will be permitted to lend securities to the MS Broker-

Dealers. In the case of 2 or more plans maintained by a single

employer or controlled group of employers, the $50 million

requirement may be met by aggregating the assets of such plans if

the assets are commingled for investment purposes in a single master

trust;

The applicants have requested that this condition be modified to

allow two or more plans which are maintained by the same employer,

controlled group of corporations or employee organization (the Related

Plans) as well as two or more plans which are not maintained by the

same employer, controlled group of corporations or employee

organization (the Unrelated Plans), whose assets are invested in a

single, commingled investment vehicle that is managed by a fiduciary

which is independent of the MS Broker-Dealers, to aggregate their

assets within the pooled investment vehicle in order to satisfy the $50

million investment threshold for lending securities to MS Broker-

Dealers. However, the fiduciary exercising investment discretion over

the pooled vehicle, particularly if the fiduciary is an outside

manager, must possess some minimum level of investor sophistication by

satisfying an ``outside business'' test.

In addition, the Department has decided to revise certain of the

conditions contained in PTE 96-14. In this regard, the Department has

added several new conditions to the pendency notice relating to such

matters as disclosures, compensation, outside

[[Page 3768]]

borrowers and recordkeeping. The Department has also modified certain

of the existing conditions and provided definitions of the terms

``affiliate'' and ``control.''

The proposed exemption would affect participants and beneficiaries

of, and fiduciaries with respect to plans engaging in securities

lending transactions with the MS Broker-Dealers.

EFFECTIVE DATE: If granted, the proposed exemption would be effective

as of March 12, 1996.

DATES: Written comments and requests for a public hearing should be

received by the Department on or before March 27, 1998.

ADDRESSES: All written comments and requests for a public hearing

(preferably, three copies) should be sent to the Office of Exemption

Determinations, Pension and Welfare Benefits Administration, Room N-

5649, U.S. Department of Labor, 200 Constitution Avenue, NW.,

Washington, DC 20210, Attention: Application No. D-10429. The

application pertaining to the proposed 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-5507, 200 Constitution Avenue, NW.,

Washington, DC 20210.

FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady, Office of Exemption

Determinations, Pension and Welfare Benefits Administration, U.S.

Department of Labor, telephone (202) 219-8881. (This is not a toll-free

number.)

SUPPLEMENTARY INFORMATION: Notice is hereby given of the pendency

before the Department of a proposed exemption that would amend and

replace PTE 96-14. PTE 96-14 provides an exemption from certain

prohibited transaction restrictions of section 406 of the Employee

Retirement Income Security Act of 1974 (the Act) and from the sanctions

resulting from the application of section 4975 of the Internal Revenue

Code of 1986 (the Code), as amended, by reason of section 4975(c)(1) of

the Code. The proposed exemption was requested in an application filed

on behalf of MS&Co and MSTC (collectively, the Applicants) pursuant to

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, August 10, 1990). 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 requested to the Secretary of Labor.

Accordingly, this proposed exemption is being issued solely by the

Department.

Specifically, PTE 96-14 provides exemptive relief from sections

406(a)(1)(A) through (D) and 406(b)(1) and (b)(2) of the Act and the

sanctions resulting from the application of section 4975 of the Code,

by reason of section 4975(c)(1)(A) through (E) of the Code, with

respect to the lending of securities to MS&Co and to any other MS

Broker-Dealers by employee benefit plans with respect to which the MS

Broker-Dealer who is borrowing such securities is a party in interest

or for which MSTC acts as a directed trustee or custodian and

securities lending agent and to the receipt of compensation by MSTC in

connection with these transactions, provided certain enumerated

conditions are met.

Subsequent to the granting of PTE 96-14, the Applicants informed

the Department that the specific wording of Condition (9) of the

exemption would preclude master trusts, group trusts, bank collective

investment funds, insurance company pooled separate accounts and other

commingled investment vehicles from lending securities to the MS

Broker-Dealers unless each plan participating therein had assets with

an aggregate fair market value of at least $50 million. However, the

Applicants note that Representation 25 of the Summary of Facts and

Representations of the proposed exemption states that the intent of the

$50 million restriction is to ensure that any lending to the MS Broker-

Dealers will be monitored by an independent fiduciary of above average

experience and sophistication in matters relating to securities

lending. To the extent that the purpose of this restriction is to

ensure the sophistication of the fiduciary who is making the lending

decision on behalf of plans, the Applicants believe that the commingled

investment vehicles whose total assets have an aggregate market value

of at least $50 million and which are managed by a fiduciary who is

independent of the MS Broker-Dealers should also be permitted to lend

securities to such broker-dealers, provided that such commingled

entities have not been formed for the sole purpose of making loans of

securities. Although the Department agrees with the Applicant, it has

proposed certain additional requirements for pooled arrangements

involving the assets of either Related Plans or Unrelated Plans. These

additional requirements are as follows:

A. Related Plans

With respect to two or more plans, which are maintained by the same

employer, controlled group of corporations or employee organization,

whose assets are invested in a master trust or any other form of plan

asset look-through entity, which entity is engaged in securities

lending arrangements with the MS Broker-Dealers, the Department notes

that the $50 million threshold may be satisfied by aggregating the

assets of the investing plans within the pooled vehicle. In this

regard, the Department also notes that an employer may retain an

independent investment manager to manage all or a portion of plan

assets invested in a master trust. Under these circumstances, the

fiduciary must have total assets under its management and control,

exclusive of the $50 million threshold amount attributable to plan

investment in the commingled entity, which are in excess of $100

million.

B. Unrelated Plans

For two or more plans which are not maintained by the same

employer, controlled group of corporations or employee organization,

whose assets are invested in a group trust or other plan asset look-

through entity, which entity is engaged in securities lending

arrangements with the MS Broker-Dealers, the $50 million threshold will

apply to the aggregate assets of such entity so long as the fiduciary

responsible for making the investment decision on behalf of the group

trust or other plan assets look-through entity is not the sponsoring

employer, a member of the controlled group of corporations, the

employee organization, or an affiliate, and has full investment

responsibility 1 with respect to the plan assets invested

therein. Also, the fiduciary must have total assets under its

management and control, exclusive of the $50 million threshold amount

attributable to plan investment in the commingled entity, which are in

excess of $100 million.

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\1\ For purposes of this exemption, the term ``full investment

responsibility'' means that the fiduciary responsible for making the

investment decision has and exercises discretionary management

authority over all of the assets of the group trust or other plan

assets look-through entity.

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Accordingly, Condition (9) of PTE 96-14, which has been

redesignated herein as Condition (12), has been revised to read as

follows:

(12) Only plans with total assets having an aggregate market

value of at least $50 million will be permitted to lend securities

to the MS Broker-Dealers; provided however that--

(a) In the case of two or more plans which are maintained by the

same employer,

[[Page 3769]]

controlled group of corporations or employee organization (the

Related 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

MS Broker-Dealers, the foregoing $50 million requirement shall be

deemed satisfied if such trust or other entity has aggregate assets

which are in excess of $50 million; provided that, if the fiduciary

responsible for making the investment decision on behalf of such

master trust or other entity is not the employer or an affiliate of

the employer, such fiduciary has total assets under its management

and control, exclusive of the $50 million threshold amount

attributable to plan investment in the commingled entity, which are

in excess of $100 million, or

(b) In the case of two or more plans which are not maintained by

the same employer, controlled group of corporations or employee

organization (the Unrelated 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

MS Broker-Dealers, the foregoing $50 million requirement shall be

deemed satisfied if such trust or other entity has aggregate assets

which are in excess of $50 million; provided that the fiduciary

responsible for making the investment decision on behalf of such

group trust or other entity--

(i) Is neither the sponsoring employer, a member of the

controlled group of corporations, the employee organization, nor an

affiliate,

(ii) Has full investment responsibility with respect to plan

assets invested therein, and

(iii) 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 must be

formed for the sole purpose of making loans of securities.)

As previously noted, in addition to the foregoing modifications,

the Department has determined to revise certain of the conditions

contained in PTE 96-14. In this regard, the Department has revised or

added new conditions in Section I of the proposal pertaining to (a) The

arm's length nature of each loan of securities by a client-plan to an

MS Broker-Dealer (Condition 2); (b) approval of the general terms of

the securities loan agreement by an independent fiduciary (Condition

3); (c) disclosures concerning the financial condition of the MS

Broker-Dealer (Condition 7); (d) the compensation paid to a client-plan

for lending securities (Condition 8); (e) indemnification and holding

harmless of the client-plan by the MS Broker-Dealer against all losses,

damages, liabilities, costs and expenses (Condition 10); (f) a

requirement that MSTC will not make a securities loan to any MS Broker-

Dealer on any day on which the market value of the securities proposed

to be loaned, when added to the market value of all client-plan

securities subject to outstanding loans to MS Broker-Dealers, exceeds

50 percent of the market value of all client-plan securities that are

subject to securities loans, including the market value of securities

proposed to be loaned to the MS Broker-Dealer (Condition 13); (g) the

receipt of monthly reports by a client-plan's independent fiduciary

relating to securities lending transactions engaged in by the client-

plan (Condition 16); and (h) a general recordkeeping requirement that

is to be complied with by MS&Co and its affiliates (Section II). In

addition, the Department has defined the terms ``affiliate'' and

``control'' in Section III.

The new or revised language, which has been incorporated herein,

appears in the Summary of Facts and Representations underlying PTE 96-

14 as well as in the original exemption application. For language that

did not appear in these documents, the Department consulted with the

Applicants before making the revisions. This new or modified language

is set forth as follows:

Section I. Covered Transactions

(New or Revised Conditions)

(2) The terms of each loan of securities by a client-plan to the

MS Broker-Dealer will be at least as favorable to such plan as those

of a comparable arm's length transaction between unrelated parties;

(3) Any arrangement for MSTC to lend plan securities to the MS

Broker-Dealers will be approved in advance by a plan fiduciary who

is independent of MSTC and the MS Broker-Dealers; (In this regard,

the independent fiduciary also will approve the general terms of the

securities loan agreement between the client-plan and the MS Broker-

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

by MSTC which will act as a liaison between the lender and the

borrower to facilitate the lending transaction.)

(7) Prior to entering into a loan agreement, the MS Broker-

Dealer will furnish its most recent publicly-available audited and

unaudited financial statements to MSTC, which, in turn, will provide

the statements to the client-plan before the plan is asked to

approve the terms of the loan agreement. The loan agreement will

contain a requirement that the MS Broker-Dealer must promptly notify

lenders at the time of a loan of any material adverse changes in its

financial condition since the date of the most recently furnished

financial statements. If any such changes have taken place, MSTC

will not make any further loans to the MS Broker-Dealer unless an

independent fiduciary of the client-plan approves the loan in view

of the changed financial condition;

(8) In return for lending securities, the client-plan either

will --

(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; (Under such circumstances, the

client-plan may pay a loan rebate or similar fee to the borrowing MS

Broker-Dealer, 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.)

(10) The MS Broker-Dealer will indemnify and hold harmless each

lending client-plan against any and all losses, damages,

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

by such plan in connection with the lending of securities to the MS

Broker-Dealers;

(13) No loan of securities will be made by MSTC as securities

lending agent to any MS Broker-Dealer on any day on which the market

value of the securities proposed to be loaned, when added to the

market value of all client-plan securities subject to outstanding

loans to MS Broker-Dealers, exceeds 50 percent of the market value

of all client-plan securities subject to securities loans, including

the market value of securities proposed to be loaned to the MS

Broker-Dealer. (For purposes of this paragraph, market value shall

be determined in U.S. dollars, based on the last preceding business

day's closing prices of the securities and the last preceding

business day's closing foreign exchange rates, if applicable.);

(16) Each client-plan will receive monthly reports with respect

to securities lending transactions so that an independent fiduciary

of a client-plan may monitor such transactions with the MS Broker-

Dealer;

Section II. General Conditions

(1) The MS Broker-Dealers will maintain, or cause to be

maintained, for a period of six years from the date of such

transactions, in a manner that is convenient and accessible for

audit and examination, such records as are necessary to enable the

persons described in paragraph (2) to determine whether the

conditions of the exemption have been met, except that--

(a) A prohibited transaction will not be considered to have

occurred if, due to circumstances beyond the control of the MS

Broker-Dealers, the records are lost or destroyed prior to the end

of the six year period, and

(b) No party in interest other than the MS Broker-Dealers 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 (2);

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

of section 504 of the Act, the records referred to in paragraph (1)

are unconditionally available at their customary location 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 (the SEC),

[[Page 3770]]

(b) Any fiduciary of a participating client-plan or any duly

authorized representative of such fiduciary, and

(c) Any contributing employer to any participating client-plan

or any duly authorized employee representative of such employer;

(3) None of the persons described above in paragraphs (b)-(c) of

paragraph (2) are authorized to examine the trade secrets of MS&Co

or its affiliates or commercial or financial information which is

privileged or confidential.

Section III. Definitions.

For purposes of this proposed exemption,

(1) An ``affiliate'' of a person includes--

(a) Any person directly or indirectly through one or more

intermediaries, controlling, controlled by, or under common control

with such other person;

(b) Any officer, director, or partner, employee or relative (as

defined in section 3(15) of the Act) of such other person; and

(c) Any corporation or partnership of which such other person is

an officer, director or partner.

(2) The term ``control'' means the power to exercise a

controlling influence over the management or policies of a person

other than an individual.

Notice To Interested Persons

Notice of the proposed exemption will be mailed by first class mail

to each plan participating in securities lending arrangements with the

MS Broker-Dealers within 30 days of the publication of the notice of

pendency in the Federal Register. The notice will contain a copy of the

notice of proposed exemption as published in the Federal Register and a

supplemental statement, as required pursuant to 29 CFR 2570.43(b)(2).

The supplemental statement will inform interested persons of their

right to comment on and/or to request a hearing with respect to the

pending exemption. Written comments and hearing requests are due within

60 days of the publication of the proposed exemption the Federal

Register.

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 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 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 require, among other things, a fiduciary to

discharge his or her 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 requirements of section 401(a) of the Code that the plan

operate for the exclusive benefit of the employees of the employer

maintaining the plan and their beneficiaries;

(2) The proposed exemption, if granted, will not extend to

transactions prohibited under section 406(b)(3) of the Act and section

4975(c)(1)(F) of the Code;

(3) Before an exemption can be granted under section 408(a) of the

Act and section 4975(c)(2) of the Code, the Department must find that

the exemption is administratively feasible, in the interest of the plan

and of its participants and beneficiaries and protective of the rights

of participants and beneficiaries of the plan;

(4) This proposed exemption, if granted, will be supplemental to,

and not in derogation of, any other provisions of the Act and the Code,

including statutory or administrative exemptions. 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

(5) This proposed exemption, if granted, is subject to the express

condition that the Summary of Facts and Representations set forth in

the notice of proposed exemption relating to PTE 96-14, as amended by

this notice, accurately describe, where relevant, the material terms of

the transactions to be consummated pursuant to this exemption.

Written Comments and Hearing Requests

All interested persons are invited to submit written comments or

requests for a hearing on the pending exemption to the address above,

within 30 days after the publication of this proposed exemption in the

Federal Register. All comments will be made a part of the record.

Comments received will be available for public inspection with the

referenced applications at the address set forth above.

Proposed Exemption

Based on the facts and representations set forth in the

application, the Department is considering granting the requested

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, August 10, 1990).

Section I. Covered Transactions

If the exemption is granted, the restrictions of sections

406(a)(1)(A) through (D) and 406(b)(1) and (b)(2) of the Act and the

sanctions resulting from the application of section 4975 of the Code,

by reason of section 4975(c)(1)(A) through (E) of the Code, shall not

apply, effective March 12, 1996, to the lending of securities to Morgan

Stanley & Co. Incorporated (MS&Co) and to any other U.S. registered

broker-dealers affiliated with Morgan Stanley Trust Company (the

Affiliated Broker-Dealer; collectively, the MS Broker-Dealers) by

employee benefit plans with respect to which the MS Broker-Dealer who

is borrowing such securities is a party in interest or for which Morgan

Stanley Trust Company (MSTC) acts as directed trustee or custodian and

securities lending agent and to the receipt of compensation by MSTC in

connection with these transactions, provided that the following

conditions are met:

(1) Neither MS&Co nor MSTC will have any discretionary authority or

control over a client-plan's 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 terms of each loan of securities by a client-plan to the MS

Broker-Dealer will be at least as favorable to such plan as those of a

comparable arm's length transaction between unrelated parties;

(3) Any arrangement for MSTC to lend plan securities to the MS

Broker-Dealers will be approved in advance by a plan fiduciary who is

independent of MSTC and the MS Broker-Dealers; \2\ (In this regard, the

independent fiduciary also will approve the general terms of the

securities loan agreement between the client-plan and the MS Broker-

Dealer, the specific terms of which will be negotiated and entered into

by MSTC which will act as a liaison between the lender and the borrower

to facilitate the lending transaction.)

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\2\ The Department, herein, is not providing exemptive relief

for securities lending transactions engaged in by primary lending

agents, other than MSTC, 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).

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(4) A client-plan may terminate the arrangement at any time without

penalty on five business days notice;

(5) The client-plans will receive collateral consisting of cash,

securities issued or guaranteed by the U.S. Government or its agencies

or instrumentalities, bank letters of credit or other collateral

permitted under PTE

[[Page 3771]]

81-6 (46 FR 7527, January 23, 1981) or any successor, from the MS

Broker-Dealers by physical delivery, book entry in a securities

depository, wire transfer or similar means by the close of business on

or before the day the loaned securities are delivered to the MS Broker-

Dealers;

(6) The market value of the collateral will initially equal at

least 102 percent of the market value of the loaned securities and, if

the market value of the collateral falls below 100 percent, the MS

Broker-Dealers will deliver additional collateral on the following day

such that the market value of the collateral will again equal 102

percent;

(7) Prior to entering into a loan agreement, the MS Broker-Dealer

will furnish its most recent publicly-available audited and unaudited

financial statements to MSTC, which, in turn, will provide the

statements to the client-plan before the plan is asked to approve the

terms of the loan agreement. The loan agreement will contain a

requirement that the MS Broker-Dealer must promptly notify lenders at

the time of a loan of any material adverse changes in its financial

condition since the date of the most recently furnished financial

statements. If any such changes have taken place, MSTC will not make

any further loans to the MS Broker-Dealer unless an independent

fiduciary of the client-plan approves the loan in view of the changed

financial condition;

(8) In return for lending securities, the client-plan either will--

(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. (Under such circumstances, the client-

plan may pay a loan rebate or similar fee to the borrowing MS Broker-

Dealer, 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.)

(9) All procedures regarding the securities lending activities

will, at a minimum, conform to the applicable provisions of Prohibited

Transaction Exemption (PTE) 81-6 and PTE 82-63 (47 FR 14804, April 6,

1992);

(10) The MS Broker-Dealer will indemnify and hold harmless each

lending client-plan against any and all losses, damages, liabilities,

costs and expenses (including attorney's fees) incurred by such plan in

connection with the lending of securities to the MS Broker-Dealers;

(11) The client-plan will receive 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;

(12) Only plans with total assets having an aggregate market value

of at least $50 million will be permitted to lend securities to the MS

Broker-Dealers; provided, however that--

(a) In the case of two or more plans which are maintained by the

same employer, controlled group of corporations or employee

organization (the Related 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 MS Broker-Dealers, the foregoing $50 million

requirement shall be deemed satisfied if such trust or other entity has

aggregate assets which are in excess of $50 million; provided that, if

the fiduciary responsible for making the investment decision on behalf

of such master trust or other entity is not the employer or an

affiliate of the employer, such fiduciary has total assets under its

management and control, exclusive of the $50 million threshold amount

attributable to plan investment in the commingled entity, which are in

excess of $100 million, or

(b) In the case of two or more plans which are not maintained by

the same employer, controlled group of corporations or employee

organization (the Unrelated 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 MS

Broker-Dealers, the foregoing $50 million requirement shall be deemed

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

in excess of $50 million; provided that the fiduciary responsible for

making the investment decision on behalf of such group trust or other

entity--

(i) Is neither the sponsoring employer, a member of the controlled

group of corporations, the employee organization, nor an affiliate,

(ii) Has full investment responsibility with respect to plan assets

invested therein, and

(iii) 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 must be formed for the

sole purpose of making loans of securities.)

(13) No loan of securities will be made by MSTC as securities

lending agent to any MS Broker-Dealer on any day on which the market

value of the securities proposed to be loaned, when added to the market

value of all client-plan securities subject to outstanding loans to MS

Broker-Dealers, exceeds 50 percent of the market value of all client-

plan securities subject to securities loans, including the market value

of securities proposed to be loaned to the MS Broker-Dealer. (For

purposes of this paragraph, market value shall be determined in U.S.

dollars, based on the last preceding business day's closing prices of

the securities and the last preceding business day's closing foreign

exchange rates, if applicable.);

(14) With regard to the ``exclusive borrowing'' agreement, the MS

Broker-Dealer will directly negotiate the agreement with a plan

fiduciary who is independent of the MS Broker-Dealers and MSTC, and

such agreement may be terminated by either party to the agreement at

any time;

(15) Prior to any plan's approval of the lending of its securities

to an MS Broker-Dealer, a copy of this exemption (and the notice of

pendency) will be provided to the client-plan;

(16) Each client-plan will receive monthly reports with respect to

securities lending transactions so that an independent fiduciary of a

client-plan may monitor such transactions with the MS Broker-Dealer;

Section II. General Conditions

(1) MS Broker-Dealers will maintain, or cause to be maintained, for

a period of six years from the date of such transactions, in a manner

that is convenient and accessible for audit and examination, such

records as are necessary to enable the persons described in paragraph

(2) to determine whether the conditions of this exemption have been

met, except that --

(a) A prohibited transaction will not be considered to have

occurred if, due to circumstances beyond the control of the MS Broker-

Dealers, the records are lost or destroyed prior to the end of the six

year period, and

(b) No party in interest other than the MS Broker-Dealers 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

[[Page 3772]]

examination as required below by paragraph (2);

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

section 504 of the Act, the records referred to in paragraph (1) are

unconditionally available at their customary location 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 (the SEC),

(b) Any fiduciary of a participating client-plan or any duly

authorized representative of such fiduciary, and

(c) Any contributing employer to any participating client-plan or

any duly authorized employee representative of such employer;

(3) None of the persons described above in paragraphs (b)-(c) of

paragraph (2) are authorized to examine the trade secrets of MS&Co or

its affiliates or commercial or financial information which is

privileged or confidential.

Section III. Definitions

For purposes of this proposed exemption,

(1) An ``affiliate'' of a person includes--

(a) Any person directly or indirectly through one or more

intermediaries, controlling, controlled by, or under common control

with such other person;

(b) Any officer, director, or partner, employee or relative (as

defined in section 3(15) of the Act) of such other person; and

(c) Any corporation or partnership of which such other person is an

officer, director or partner.

(2) The term ``control'' means the power to exercise a controlling

influence over the management or policies of a person other than an

individual.

EFFECTIVE DATE: If granted, this proposed exemption will be effective

as of March 12, 1996.

The availability of this proposed exemption is subject to the

express condition that the material facts and representations contained

in the application for exemption are true and complete and accurately

describe all material terms of the transactions. In the case of

continuing transactions, if any of the material facts or

representations described in the applications change, the exemption

will cease to apply as of the date of such change. In the event of any

such change, an application for a new exemption must be made to the

Department.

For a more complete statement of the facts and representations

supporting the Department's decision to grant PTE 96-14, refer to the

proposed exemption, grant notice and technical correction notice which

are cited above.

Signed at Washington, D.C., this 21st day of January, 1998.

Ivan L. Strasfeld,

Director of Exemption Determinations, Pension and Welfare Benefits

Administration, Department of Labor.

[FR Doc. 98-1789 Filed 1-23-98; 8:45 am]

BILLING CODE 4510-29-P