Grant of Individual Exemptions; Lehman Brothers Inc. (Lehman) and Lehman Brothers Trust Company and Affiliates (LBTC), et al.

DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

[Prohibited Transaction Exemption 98-41; Exemption Application No. D-

10372, et al.]

Grant of Individual Exemptions; Lehman Brothers Inc. (Lehman) and

Lehman Brothers Trust Company and Affiliates (LBTC), et al.

AGENCY: Pension and Welfare Benefits Administration, Labor.

ACTION: Grant of individual exemptions.

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SUMMARY: This document contains exemptions issued by the Department of

Labor (the Department) from certain of the prohibited transaction

restrictions of the Employee Retirement Income Security Act of 1974

(the Act) and/or the Internal Revenue Code of 1986 (the Code).

Notices were published in the Federal Register of the pendency

before the Department of proposals to grant such exemptions. The

notices set forth a summary of facts and representations contained in

each application for exemption and referred interested persons to the

respective applications for a complete statement of the facts and

representations. The applications have been available for public

inspection at the Department in Washington, D.C. The notices also

invited interested persons to submit comments on the requested

exemptions to the Department. In addition the notices stated that any

interested person might submit a written request that a public hearing

be held (where appropriate). The applicants have represented that they

have complied with the requirements of the notification to interested

persons. No public comments and no requests for a hearing, unless

otherwise stated, were received by the Department.

The notices of proposed exemption were issued and the exemptions

are being granted solely by the Department because, effective December

31, 1978, section 102 of Reorganization Plan No. 4 of 1978 (43 FR

47713, October 17, 1978) transferred the authority of the Secretary of

the Treasury to issue exemptions of the type proposed to the Secretary

of Labor.

Statutory Findings

In accordance with section 408(a) of the Act and/or section

4975(c)(2) of the Code and the procedures set forth in 29 CFR Part

2570, Subpart B (55 FR 32836, 32847, August 10, 1990) and based upon

the entire record, the Department makes the following findings:

(a) The exemptions are administratively feasible;

(b) They are in the interests of the plans and their participants

and beneficiaries; and

(c) They are protective of the rights of the participants and

beneficiaries of the plans.

Lehman Brothers Inc. (Lehman) and Lehman Brothers Trust Company and

Affiliates (LBTC), Located in New York, New York

[Prohibited Transaction Exemption 98-41; Exemption Application No. D-

10327]

Exemption

The restrictions of sections 406(a), 406(b)(1) and (b)(2) of the

Act and the sanctions resulting from the application of section 4975 of

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

shall not apply to: (1) the lending of securities to Lehman or to any

other U.S. registered broker-dealer who is an affiliate of Lehman

(collectively, Lehman Broker-Dealers) by employee benefit plans,

including commingled investment funds holding plan assets (the Client

Plans), with respect to which the Lehman Broker-Dealer is a party in

interest, or for which LBTC or any other affiliate of Lehman, acts as

directed trustee or custodian and/or securities lending agent (or sub-

agent) for such Client Plan; and (2) the receipt of compensation by

LBTC in connection with these transactions, provided that the following

conditions are met:

1. Neither the Lehman Broker-Dealers nor LBTC has or exercises

discretionary authority or control with respect to the investment of

the assets of Client Plans involved in the transaction (other than with

respect to the investment of cash collateral after the securities have

been loaned and collateral received), or renders investment advise

(within the meaning of 29 CFR 2510.3-21(c)) with respect to those

assets, including decisions concerning a Client Plan's acquisition or

disposition of securities available for loan;

2. Before a Client Plan participates in a securities lending

program and before any loan of securities to the Lehman Broker-Dealers

is affected, a Client Plan fiduciary who is independent of LBTC and the

Lehman Broker-Dealers must have:

(a) Authorized and approved a securities lending authorization

agreement with LBTC (the Agency Agreement), where LBTC is acting as the

direct securities lending agent;

(b) Authorized and approved the primary securities lending

authorization agreement (the Primary Lending Agreement) with the

primary lending agent, where LBTC is lending securities under a sub-

agency arrangement with the primary lending agent;1

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\1\ When LBTC acts as sub-agent, rather than the primary lending

agent, the primary lending agent is receiving no section 406(b) of

the Act relief herein. In such situations, the primary lending agent

may be provided relief by Prohibited Transaction Class Exemption

(PTE) 81-6 and PTE 82-63. PTE 81-6 was published at 46 FR 7527,

January 23, 1981, as amended at 52 FR 18754, May 19, 1987, and PTE

82-63 was published at 47 FR 14804, April 6, 1982.

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

(the Basic Loan Agreement) between such Client Plan and the borrower,

the Lehman Broker-Dealers, the specific terms of which are negotiated

and entered into by LBTC;

3. A Client Plan may terminate the securities lending agency

agreement at any time without penalty on five (5) business days notice,

whereupon the Lehman Broker-Dealers shall deliver

[[Page 46239]]

securities identical to the borrowed securities (or the equivalent in

the event of reorganization, recapitalization or merger of the issuer

of the borrowed securities) to the plan within (a) the customary

delivery period for such securities, (b) five (5) business days, or (c)

the time negotiated for such delivery by the Client Plan and the Lehman

Broker-Dealers, whichever is less;

4. LBTC (or another custodian on behalf of the Client Plan) will

receive from the Lehman Broker-Dealers either by physical delivery,

book entry in a securities depository, wire transfer or similar means

collateral consisting of U.S. dollars, securities issued or guaranteed

by the U.S. Government or its agencies or irrevocable U.S. bank letters

of credit (issued by an entity other than the Lehman Broker-Dealers) or

other collateral permitted under Prohibited Transaction Exemption (PTE)

81-6 (as amended from time to time or, alternatively, any additional or

superceding class exemption that may be issued to cover securities

lending by employee benefit plans) by the close of business on or

before the day the loaned securities are delivered to the Lehman

Broker-Dealers;

5. The market value of the collateral will initially equal at least

102 percent of the market value of the loaned securities. If the market

value of the collateral on the close of trading on a business day falls

below 100 percent of the market value of the borrowed securities at the

close of business on that day, the Lehman Broker-Dealers will deliver

additional collateral on the following day such that the market value

of the collateral will again equal 102 percent. The Basic Loan

Agreement will give the Client Plans a continuing security interest in,

and a lien on, the collateral. LBTC will monitor the level of the

collateral daily;

6. All the procedures regarding the securities lending activities

will at a minimum conform to the applicable provisions of PTE 81-6 and

PTE 82-63;

7. In the event the Lehman Broker-Dealer fails to return securities

within a designated time, the Client Plan will have the right under the

Basic Loan Agreement to purchase securities identical to the borrowed

securities and apply the collateral to payment of the purchase price.

If the collateral is insufficient to satisfy the Lehman Broker-Dealer's

obligation to return the Client Plan's securities, the Lehman Broker-

Dealer will indemnify the Client Plan with respect to the difference

between the replacement cost of securities and the market value of the

collateral on the date the loan is declared in default, together with

expenses incurred by the Client Plan plus applicable interest at a

reasonable rate, including any attorneys fees incurred by the Client

Plan for legal action arising out of default on the loans, or failure

by the Lehman Broker-Dealer to properly indemnify the Client Plan;

8. The Client Plan will receive the equivalent of all distributions

made to the holders of the borrowed securities during the term of the

loan, including, but not limited to, cash dividends, interest payments,

shares of stock as a result of stock splits and rights to purchase

additional securities, or other distributions;

9. Only Client Plans with total assets having an aggregate market

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

Lehman Broker-Dealers; provided, however, that--

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

the same employer, controlled group of corporations or employee

organization (the Related Client Plans), whose assets are commingled

for investment purposes in a single master trust or any other entity

the assets of which are ``plan assets'' under 29 CFR 2510.3-101 (the

Plan Asset Regulation), which entity is engaged in securities lending

arrangements with the Lehman Broker-Dealers, the foregoing $50 million

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

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

the fiduciary responsible for making the investment decision on behalf

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

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

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

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

excess of $100 million.

(b) In the case of two or more Client Plans which are not

maintained by the same employer, controlled group of corporations or

employee organization (the Unrelated Client Plans), whose assets are

commingled for investment purposes in a group trust or any other form

of entity the assets of which are ``plan assets'' under the Plan Asset

Regulation, which entity is engaged in securities lending arrangements

with the Lehman Broker-Dealers, the foregoing $50 million requirement

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

are in excess of $50 million (excluding the assets of any Plan with

respect to which the fiduciary responsible for making the investment

decision on behalf of such group trust or other entity or any member of

the controlled group of corporations including such fiduciary is the

employer maintaining such Plan or an employee organization whose

members are covered by such Plan). However, the fiduciary responsible

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

other entity--

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

invested therein; and

(ii) Has total assets under its management and control, exclusive

of the $50 million threshold amount attributable to plan investment in

the commingled entity, which are in excess of $100 million. (In

addition, none of the entities described above are formed for the sole

purpose of making loans of securities.)

10. With respect to any calendar quarter, at least 50 percent or

more of the outstanding dollar value of securities loans negotiated on

behalf of Client Plans will be to unrelated borrowers.

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

Lehman Broker-Dealer will be at least as favorable to such plans as

those terms which would exist in a comparable arm's-length transaction

between unrelated parties;

12. Each Client Plan will receive monthly reports on the

transactions, so that an independent fiduciary of such plan may monitor

the securities lending transactions with the Lehman Broker-Dealer;

13. Before entering into the Basic Loan Agreement and before a

Client Plan lends any securities to the Lehman Broker-Dealer, an

independent fiduciary of such Client Plan will receive sufficient

information, concerning the financial condition of the Lehman Broker-

Dealer, including the audited and unaudited financial statements of the

Lehman Broker-Dealer;

14. The Lehman Broker-Dealer will provide to a Client Plan prompt

notice at the time of each loan by such plan of any material adverse

changes in the Lehman Broker-Dealer's financial condition, since the

date of the most recently furnished financial statements;

15. With regard to the ``exclusive borrowing'' agreement (as

described below), the Lehman Broker-Dealer will directly negotiate the

agreement with a Client Plan fiduciary who is independent of the Lehman

Broker-Dealers and LBTC, and such agreement may be terminated by either

party to the agreement at any time; 2

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\2\ The termination will be without penalty to the Client Plan,

except for the return to the Lehman Broker-Dealers of a part of any

flat fee paid by the Lehman Broker-Dealers to the Client Plan, if

the Client Plan has terminated its exclusive borrowing agreement

with the Lehman Broker-Dealers.

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[[Page 46240]]

16. The Client Plan: (a) receives a reasonable fee that is related

to the value of the borrowed securities and the duration of the loan,

or (b) has the opportunity to derive compensation through the

investment of cash collateral. In the case of cash collateral, the

Client Plan may pay a loan rebate or similar fee to the Lehman Broker-

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

pay an unrelated party in an arm's length transaction;

17. In the event that a Lehman Broker-Dealer is also the securities

lending agent for a Client Plan, LBTC shall act as securities lending

sub-agent in connection with any loan of securities to the Lehman

Broker-Dealer;

18. Prior to the Client Plan's approval of the lending of its

securities to the Lehman Broker-Dealers, a copy of this exemption (and

a copy of the notice of proposed exemption as published in the Federal

Register on June 19, 1998 at 63 FR 33717) will be provided to the

Client Plan; and

19. Lehman maintains or causes to be maintained within the United

States for a period of six years from the date of such transaction such

records as are necessary to enable the persons described in paragraph

(20) below to determine whether the conditions of this exemption have

been met; except that a party in interest with respect to an employee

benefit plan, other than Lehman or the Lehman Broker-Dealers, shall not

be subject to a civil penalty under section 502(i) of the Act or the

taxes imposed by section 4975(a) or (b) of the Code, if such records

are not maintained, or are not available for examination as required by

this section, and a prohibited transaction will not be deemed to have

occurred if, due to circumstances beyond the control of Lehman or the

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

end of such six year period;

20. (i) Except as provided in subparagraph (ii) of this paragraph

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

of section 504 of the Act, the records referred to in paragraph (19)

are unconditionally available at their customary location for

examination during normal business hours by--

(a) Any duly authorized employee or representative of the

Department, the Internal Revenue Service, or the Securities and

Exchange Commission,

(b) Any fiduciary of a Client Plan or any duly authorized

representative of such fiduciary,

(c) Any contributing employer to any Client Plan, or any duly

authorized employee or representative of such employer, and

(d) Any participant or beneficiary of any Client Plan, or any duly

authorized representative of such participant or beneficiary.

(ii) None of the persons described in subparagraphs (b)-(d) of this

paragraph (20) shall be authorized to examine trade secrets of Lehman

or the Lehman Broker-Dealers, or commercial or financial information

which is privileged or confidential.

For a more complete statement of the facts and representations

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

the notice of proposed exemption (the Notice) published on June 19,

1998 at 63 FR 33717.

Written Comments

The Department received one written comment with respect to the

Notice and no requests for a public hearing. The comment was filed by

Lehman. The comment concerns footnote 2 of the Notice, which stated

that:

The Department notes that this proposed exemption would provide

relief from the restrictions of section 406(a) as well as section

406(b)(1) and (b)(2) of the Act, whereas PTE 81-6 provides relief

only for securities lending transactions which would violate section

406(a) of the Act. Thus, any amendments that may be made by the

Department to PTE 81-6 which would permit different types of assets

to be used as collateral for a securities loan would not allow the

use of such assets as collateral under this proposed exemption to

the extent that the transactions covered by this exemption (if

granted) would require relief from section 406(b) of the Act.

Lehman requests that this footnote be deleted from the final

exemption.

Footnote 2 of the Notice was also included by the Department in the

written comments contained in PTE 98-23 (63 FR 29435), an individual

exemption for securities lending transactions by Bankers Trust Company

and its affiliates (Bankers Trust) published in the Federal Register on

May 29, 1998.

However, subsequent comments made to the Department by Bankers

Trust also requested that the Department withdraw its comments on this

matter with respect to PTE 98-23. The requests by Bankers Trust and

Lehman were made with the intent of avoiding possible confusion and

preserving the availability of relief under the Bankers Trust and

Lehman individual exemptions when different types of assets are

permitted to be used as collateral under an amended version of PTE 81-6

or a superceding class exemption. In this regard, Lehman (and Bankers

Trust) state that nothing in the record suggests that the type of

collateral available under the individual exemptions should be

different in any manner from the collateral requirements of PTE 81-6.

Upon consideration of these comments, the Department has modified

the final exemption for Lehman by deleting Footnote 2, as it appeared

in the Notice. In addition, the Department has indicated to Bankers

Trust that it should consider the Department's comments on this issue

withdrawn with respect to PTE 98-23.

Accordingly, the Department has determined to grant the proposed

exemption as modified.

FOR FURTHER INFORMATION CONTACT: Ekaterina A. Uzlyan of the Department,

telephone (202) 219-8883. (This is not a toll-free number.)

Van Ness Plastic Molding Co., Inc., Employees' Money Purchase

Pension Plan (the Plan), Located in Belleville, NJ

[Prohibited Transaction Exemption 98-42; Exemption Application No. D-

10483]

Exemption

The restrictions of sections 406(a), 406(b)(1) and (b)(2) of the

Act and the sanctions resulting from the application of section 4975 of

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

shall not apply to (1) the making to the Plan of a restoration payment

(the Restoration Payment) with respect to certain defaulted third-party

notes (Note 1, Note 2 and Note 3; collectively, the Notes) by the Van

Ness Plastic Molding Co., Inc. (the Employer), a party in interest with

respect to the Plan; and (2) the potential future receipt by the

Employer of recapture payments (the Recapture Payments) made to the

Plan pursuant to bankruptcy proceedings involving the issuer/assignor

of the Notes.

This exemption is subject to the following conditions:

(a) Mr. William Van Ness, the Plan trustee, agrees to have excluded

from his individual account in the Plan (the Account) any benefit

attributable to the Restoration Payment, such that the total

Restoration Payment is allocated to the Accounts of the other Plan

participants and does not include any portion related to the interest

of Mr. Van Ness's Account in the Notes.

(b) The Restoration Payment, which is calculated based upon the

Account balances in the Plan of participants other than Mr. Van Ness,

covers--

[[Page 46241]]

(1) The aggregate unrecovered principal of the Notes plus accrued,

but unpaid, interest on the Notes as of the dates of default,

calculated through December 31, 1997;

(2) An additional amount representing interest on the unrecovered

principal of Notes 2 and 3, originally scheduled for maturity in 1999,

from January 1998 until the date the Restoration Payment is made; and

(3) Lost opportunity costs associated with Note 1, which was

originally scheduled for maturity in 1997, from January 1998 until the

date the Restoration Payment is made.

(c) Any Recapture Payments are restricted solely to the amounts, if

any, recovered by the Plan with respect to the Notes in litigation or

otherwise.

(d) The Restoration Payment is made to resolve potential claims for

breach of fiduciary duty relating to the management of the Plan.

(e) The Employer receives a favorable ruling from the Internal

Revenue Service that the Restoration Payment does not constitute a

``contribution'' or other payment that will disqualify the Plan.

For a more complete statement of the facts and representations

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

the notice of proposed exemption published on June 29, 1998 at 63 FR

35281.

FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady of the Department,

telephone (202) 219-8881. (This is not a toll-free number.)

General Information

The attention of interested persons is directed to the following:

(1) The fact that a transaction is the subject of an exemption

under section 408(a) of the Act and/or section 4975(c)(2) of the Code

does not relieve a fiduciary or other party in interest or disqualified

person from certain other provisions to which the exemptions does not

apply and the general fiduciary responsibility provisions of section

404 of the Act, which among other things require a fiduciary to

discharge his duties respecting the plan solely in the interest of the

participants and beneficiaries of the plan and in a prudent fashion in

accordance with section 404(a)(1)(B) of the Act; nor does it affect the

requirement of section 401(a) of the Code that the plan must operate

for the exclusive benefit of the employees of the employer maintaining

the plan and their beneficiaries;

(2) These exemptions are supplemental to and not in derogation of,

any other provisions of the Act and/or the Code, including statutory or

administrative exemptions and transactional rules. Furthermore, the

fact that a transaction is subject to an administrative or statutory

exemption is not dispositive of whether the transaction is in fact a

prohibited transaction; and

(3) The availability of these exemptions is subject to the express

condition that the material facts and representations contained in each

application are true and complete and accurately describe all material

terms of the transaction which is the subject of the exemption. In the

case of continuing exemption transactions, if any of the material facts

or representations described in the application change after the

exemption is granted, the exemption will cease to apply as of the date

of such change. In the event of any such change, application for a new

exemption may be made to the Department.

Signed at Washington, D.C., this 24th day of August, 1998.

Ivan Strasfeld,

Director of Exemption Determinations, Pension and Welfare Benefits

Administration, U.S. Department of Labor.

[FR Doc. 98-23283 Filed 8-28-98; 8:45 am]

BILLING CODE 4510-29-P