Proposed Exemptions; Bankers Trust Company

Federal RegisterFeb 19, 1998

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DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

[Application No. D-10213, et al.]

Proposed Exemptions; Bankers Trust Company

AGENCY: Pension and Welfare Benefits Administration, Labor.

ACTION: Notice of proposed exemptions.

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SUMMARY: This document contains notices of pendency before the

Department of Labor (the Department) of proposed exemptions from

certain of the prohibited transaction restrictions of the Employee

Retirement Income Security Act of 1974 (the Act) and/or the Internal

Revenue Code of 1986 (the Code).

Written Comments and Hearing Requests

All interested persons are invited to submit written comments or

request for a hearing on the pending exemptions, unless otherwise

stated in the Notice of Proposed Exemption, within 45 days from the

date of publication of this Federal Register Notice. Comments and

requests for a hearing should state: (1) The name, address, and

telephone number of the person making the comment or request, and (2)

the nature of the person's interest in the exemption and the manner in

which the person would be adversely affected by the exemption. A

request for a hearing must also state the issues to be addressed and

include a general description of the evidence to be presented at the

hearing.

ADDRESSES: All written comments and request for a hearing (at least

three copies) should be sent to the Pension and Welfare Benefits

Administration, Office of Exemption Determinations, Room N-5649, U.S.

Department of Labor, 200 Constitution Avenue, N.W., Washington, D.C.

20210. Attention: Application No. ____________, stated in each Notice

of Proposed Exemption. The applications for exemption and the comments

received will be available for public inspection in the Public

Documents Room of Pension and Welfare Benefits Administration, U.S.

Department of Labor, Room N-5507, 200 Constitution Avenue, N.W.,

Washington, D.C. 20210.

Notice to Interested Persons

Notice of the proposed exemptions will be provided to all

interested persons in the manner agreed upon by the applicant and the

Department within 15 days of the date of publication in the Federal

exemption as published in the Federal Register and shall inform

interested persons of their right to comment and to request a hearing

(where appropriate).

SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in

applications filed pursuant to section 408(a) of the Act and/or section

4975(c)(2) of the Code, and in accordance with procedures set forth in

29 CFR Part 2570, Subpart B (55 FR 32836, 32847, August 10, 1990).

Effective December 31, 1978, section 102 of Reorganization Plan No. 4

of 1978 (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. Therefore, these notices of proposed

exemption are issued solely by the Department.

The applications contain representations with regard to the

proposed exemptions which are summarized below. Interested persons are

referred to the applications on file with the Department for a complete

[[Page 8482]]

statement of the facts and representations.

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

[Application No. D-10213]

Proposed Exemption

The Department is considering granting an exemption under the

authority of section 408(a) of the Act and section 4975(c)(2) of the

Code and in accordance with the procedures set forth in 29 CFR Part

2570, Subpart B (55 FR 32836, 32847, August 10, 1990.) If the exemption

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

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

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

Code, shall not apply, effective February 16, 1996, to the: (1) lending

of certain securities to BT Securities Corporation, Bankers Trust

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

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\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 Securities

Corporation, Bankers Trust International PLC and Bankers Trust

(Australia) Limited for purposes of this exemption, if granted.

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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 (the Lending Authorization), where the BT

Group is acting as the securities lending agent;

(b) Authorized and approved the primary securities lending

authorization agreement (the Primary Lending Agreement) with the

primary lending agent, where BT Group is lending securities under a

sub-agency arrangement with the primary lending agent 2;

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\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.

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(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 certificates

for 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 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.

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;

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

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.

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

[[Page 8483]]

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 Prohibited

Transaction Exemptions (PTEs) 81-6 and 82-63.

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 Securities Corporation, 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

Securities Corporation 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 will be permitted to lend securities to

the Affiliated Borrowers.

14. For purposes of this proposed exemption, the Affiliated

Borrowers will consist only of BT Securities Corporation, Bankers Trust

International PLC and Bankers Trust (Australia) Limited.

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 summary of facts and representations below, 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

current Client Plans will receive a copy of the notice of pendency. If

the Department grants the final exemption, current Client Plans will

receive a copy of the final exemption. Also, Bankers Trust is prepared

to 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,

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: If granted this exemption will be effective as of

February 16, 1996.

Summary of Facts and Representations

1. Bankers Trust is a New York banking corporation and a leading

commercial bank. Bankers Trust is wholly owned by Bankers Trust New

York Corporation (BTNY), a bank holding company established in 1965

under the laws of the State of New York. As of December 31, 1995, BTNY

and its affiliates had consolidated assets of $104,002,000,000 and

total stockholders equity of $4,984,000,000.

The BT Group consists of Bankers Trust and certain of its

affiliates who act as a directed trustee, custodian and securities

lending agent or sub-agent for clients. The BT Group engages in

securities lending activities for its own accounts and as an agent for

Bankers

[[Page 8484]]

Trust Company of California and for Bankers Trust Company of the

Southwest. The BT Group also provides a wide range of banking,

fiduciary, recordkeeping, custodial, brokerage and investment services

to corporations, institutions, governments, employee benefit plans,

governmental retirement plans and private investors.

2. The Affiliated Borrowers consist of BT Securities Corporation,

Bankers Trust International PLC and Bankers Trust (Australia) Limited.

The exemption, if granted, will be limited to these three entities as

the Affiliated Borrowers. BT Securities Corporation is a U.S. broker-

dealer affiliated with Bankers Trust with $834 million in capital as of

December 31, 1995. BT Securities Corporation is registered under the

1934 Act and its activities are under the jurisdiction of the Federal

Reserve Board, the Securities and Exchange Commission and the National

Association of Securities Dealers.

Bankers Trust International PLC is a wholly owned subsidiary of

Bankers Trust established under English law and located in England.

Bankers Trust International PLC is a deposit taking institution

supervised by the Bank of England.

Bankers Trust (Australia) Limited is a merchant bank which conducts

commercial banking business in Australia and is under the jurisdiction

of the Federal Reserve Bank of Australia. Bankers Trust (Australia)

Limited is an indirect subsidiary of Bankers Trust.

3. The Affiliated Borrowers will borrow securities from

institutions to satisfy their own needs, or they may re-lend these

securities to brokerage firms and other entities which need a

particular security for a certain period of time. Bankers Trust

requests an exemption for the lending of securities owned by the Client

Plans, for which the BT Group serves as the directed trustee or

custodian and securities lending agent or sub-agent, 3 to

the Affiliated Borrowers, following disclosure of its affiliation with

the Affiliated Borrowers to the Independent Fiduciaries of the Client

Plans, and for the receipt of compensation by the BT Group in

connection with such transactions.

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\3\ For the sake of simplicity, future references to the BT

Group's performance of services as securities lending agent should

be deemed to include its parallel performance as securities lending

sub-agent and references to the Client Plans should be deemed to

refer to plans for which the BT Group is acting as sub-agent with

respect to securities lending activities, unless otherwise indicated

specifically or by the context of the reference.

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Because the BT Group, under the securities lending program, would

have discretion to lend plan securities to the Affiliated Borrowers,

and because the Affiliated Borrowers are affiliates of the BT Group,

the lending of securities to the Affiliated Borrowers by the Client

Plans for which the BT Group serves as directed trustee or custodian

and securities lending agent (or sub-agent) may be outside the scope of

relief provided by Prohibited Transaction Exemption (PTE) 81-6 and PTE

82-63.4

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\4\ PTE 81-6 (46 FR 7527, January 23, 1981, as amended at 52 FR

18754, May 19, 1987) provides an exemption under certain conditions

from section 406(a)(1)(A) through (D) of the Act and the

corresponding provisions of section 4975(c) of the Code for the

lending of securities that are assets of an employee benefit plan to

certain broker-dealers or banks which are parties in interest.

Condition 1 of PTE 81-6 requires, in part, that neither the

borrower nor an affiliate of the borrower has discretionary

authority or control with respect to the investment of the plan

assets involved in the transaction.

PTE 82-63 (47 FR 14804, April 6, 1982) provides an exemption

under specified conditions from section 406(b)(1) of the Act and

section 4975(c)(1)(E) of the Code for the payment of compensation to

a plan fiduciary for services rendered in connection with loans of

plan assets that are securities. PTE 82-63 permits the payment of

compensation to a plan fiduciary for the provision of securities

lending services only if the loan of securities itself is not

prohibited under section 406(a) of the Act.

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Several safeguards, described more fully below, are incorporated

into the application to ensure the protection of the Client Plans'

assets involved in the transactions. In addition, the applicants

represent that the lending program described herein incorporates the

relevant conditions contained in PTE 81-6 and PTE 82-63.

4. BT Securities Corporation, a U.S. registered broker-dealer, will

comply with Federal Reserve Board's Regulation T in its securities

lending activities. Pursuant to Regulation T, permitted borrowing

purposes include making delivery of securities in the case of short

sales, failures of a broker to receive securities it is required to

deliver or similar situations.

The Client Plans will also lend securities to the foreign

Affiliated Borrowers (Foreign Lending) which are Bankers Trust

International PLC and Bankers Trust (Australia) Limited. The applicant

represents that Foreign Lending will not expose the Client Plans to

greater risk. In Foreign Lending, Bankers Trust will comply with the

following safeguards: (a) The collateral will be maintained in U.S.

dollars, U.S. dollar-denominated securities or letters of credit of

U.S. Banks; (b) all collateral will be held in the United States;

5 (c) the situs of the loan agreement will be maintained in

the United States; (d) Bankers Trust will indemnify the lending Client

Plans in the United States for any loans to 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 enter into a written agreement with the

Client Plan whereby the Affiliated Borrowers consent 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.

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\5\ Under U.K. law, the securities lending agreement between

Bankers Trust and Bankers Trust International PLC provides, among

other things, that all rights, title and interest in the loaned

securities passes to the borrower, and all rights, title and

interest in the collateral passes to the lending Client Plan.

The Australian securities lending agreement contains, among

other things, the following provisions. Specifically, clause 3.4 of

such agreement states: ``Property in and title to the securities

delivered under clause 3.1, passes absolutely to the borrower free

from all liens and encumbrances, and the borrower is not obligated

to re-deliver the same securities to the lender.'' Clause 3.5 of

this agreement states: ``Property in and title to all the collateral

delivered under clause 3.2, passes absolutely to the lender free

from all liens and encumbrances, and the lender is not obligated

under the loan to re-deliver the same cash, bonds or securities to

the borrower (all or part) of the collateral.'' However, as a

condition of this exemption if granted, and by agreement of the

parties, the Client Plans will be entitled to the equivalent of all

interest, dividends and distributions on the loaned securities

during the loan period.

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5. Where the BT Group acts as a securities lending agent for the

Client Plans its essential functions are identifying appropriate

borrowers of securities and negotiating the terms of the loans to these

borrowers. As a securities lending agent for the Client Plans, the BT

Group also provides ancillary services such as monitoring the level of

collateral and the value of the loaned securities and, when directed by

a Client Plan, investing the cash collateral received with respect to

such loans. To protect the Client Plans' assets in these transactions,

the BT Group's procedures for lending securities comply with the

applicable conditions of PTE 81-6 and PTE 82-63 (including with respect

to any commingled funds that may participate in the securities lending

program).

6. Under the BT Group's lending program, when a loan is

collateralized with cash, the BT Group will transfer such cash to a

trust or other investment vehicle selected by the Client Plan in

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advance.6 The BT Group will rebate a portion of the earnings

on the cash collateral to the Affiliated Borrowers as agreed to in the

loan agreement between the BT Group and the Affiliated Borrowers (the

Loan Agreement). The applicant represents that through its

authorization of the lending program, the independent fiduciary of the

Client Plan will approve the terms of the Loan Agreement. The

Affiliated Borrowers will pay a fee to the Client Plans based on the

value of the loaned securities where the collateral consists of

obligations other than cash.

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\6\ When the Client Plan approves securities lending, it is

required to designate a short-term investment fund for the

investment of cash collateral it receives in connection with the

loaned securities. For example, when the Client Plan selects BT

Pyramid Funds, which are bank collective funds under IRS Revenue

Ruling 81-100, as a vehicle for investment of cash collateral, the

fees for investment management are embedded in that fund. However,

the applicant represents that selecting a vehicle managed by Bankers

Trust is strictly optional and within the total discretion of the

Client Plan. Alternatively, the independent fiduciary of the Client

Plan may select his own manager, an unrelated mutual or collective

fund, or another vehicle of his choice. The selected investment

vehicle must be acceptable to Bankers Trust. Bankers Trust neither

selects the collateral investment vehicle, nor has any authority or

responsibility to do so.

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The fee arrangements between the Client Plan and the BT Group with

respect to the securities lending program are approved in advance by

the independent fiduciary of the Client Plan. This fee is calculated as

a percentage of the income earned on the investment of the cash

collateral, and will compensate the BT Group for providing lending

services to the Client Plans. This fee will reduce the income earned by

the Client Plans from the lending of the securities.

7. Where BT Group is the securities lending agent, an independent

fiduciary of the Client Plan who is independent of the BT Group and the

Affiliated Borrowers, will authorize securities lending (the Lending

Authorization) before the Client Plan participates in the BT Group's

securities lending program. The Lending Authorization will include the

authorization to lend securities, including lending to the Affiliated

Borrowers, investment direction by the Client Plans of cash collateral,

and fee arrangements. The Lending Authorization and the enclosed

additional explanatory materials will describe, among other things, the

operation of the securities lending program and allow the BT Group to

lend securities held by the Client Plan to borrowers, including the

Affiliated Borrowers, as selected by the BT Group, subject to any

specific restrictions imposed by the Client Plan. The Lending

Authorization and the explanatory materials also describe the

securities available for lending, minimum required margin, daily

marking to market procedures, a list of the affiliates who are

permissible borrowers under the securities lending program, and the

basis of the BT Group's compensation for performing the securities

lending services.

8. The Lending Authorization and the explanatory materials will

provide that if one of the Affiliated Borrower's is an approved

borrower, the BT Group, as agent of the Client Plan, will represent to

the Client Plan that each loan made to its affiliate on behalf of the

Client Plan will be at market rates and at terms as favorable to the

Client Plan as if made at the same time and under the same

circumstances, to an unaffiliated borrower.

9. The Lending Authorization will set forth a fee arrangement

agreed upon by the Client Plan and the BT Group, whereby the BT Group

will be compensated for its services as the lending agent prior to the

commencement of any lending activity. The Client Plan will be provided

with any reasonably available information necessary for the independent

fiduciary of the Client Plan to determine whether to enter into, or

continue to participate under the Lending Authorization (or the Primary

Lending Agreement) and other reasonably available information which the

independent fiduciary may reasonably request. A Client Plan may

terminate either the Lending Authorization or the Primary Lending

Agreement at any time, without penalty, on five business days notice.

10. Where the BT Group is the securities lending agent, the BT

Group will enter into the Loan Agreement with the Affiliated Borrower

on behalf of the Client Plans. The form of the Loan Agreement will be

substantially similar to loan agreements negotiated with other

similarly situated borrowers.7 The form of the Loan

Agreement will also be the industry or the market standard for loans to

the borrowers in the country (U.S., U.K. and Australia) where the

borrower is domiciled. It will describe the lenders's rights against

the borrower in the country of the borrower's domicile (U.S., U.K., and

Australia), and represent that these rights will be equivalent to those

under U.S. law. The independent fiduciary for each Client Plan will

approve the terms of the Loan Agreement through its authorization of

the lending program, and such fiduciary will be provided a copy of the

applicable Loan Agreement from the BT Group upon request. The Loan

Agreement will specify, among other things, the right of the BT Group

as the lending agent on behalf of the Client Plan to terminate a loan

at any time on not more than five business days notice, and the lending

agent's rights in the event of any default by the borrower. The Loan

Agreement will also require that the Affiliated Borrowers pay all

transfer fees and transfer taxes related to the security loans. The

Loan Agreement will describe the basis for compensation to the Client

Plan for lending securities to the Affiliated Borrowers under each

category of collateral.

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\7\ The form of the Loan Agreement between a securities lending

agent and a foreign Affiliated Borrower differs from the standard

U.S. loan agreement. Under the U.K. and Australian Loan Agreements,

the Client Plan receives title to (rather than a pledge of, or a

security interest in) the collateral.

Furthermore, the Loan Agreement with the Client plans will

include specific indemnification provisions as described herein.

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11. The BT group may also be retained by independent primary

securities lending agents to render securities lending services in a

sub-agent capacity. Under these circumstances, the primary lending

agent, an entity independent of the BT Group and the Affiliated

Borrower, will enter into a securities lending agency agreement (the

Primary Lending Agreement) with an independent fiduciary of the Client

Plan who is independent of the primary lending agent, the BT Group and

the Affiliated Borrowers, before the Client Plan participates in the

securities lending program. The BT Group will not enter into a sub-

agent arrangement unless the Primary Lending Agreement contains

provisions which correspond to those in the Loan Agreement where the BT

Group is the primary securities lending agent, including a description

of the lending program's operation, the use of an approved form of the

loan agreement, the specification of securities which are available to

be lent, the required margin and daily marking to market, and a list of

the approved borrowers (including, the Affiliated Borrowers). The

Primary Lending Agreement will authorize the primary lending agent to

appoint sub-agents in order to facilitate its performance of securities

lending agency functions.

The Primary Lending Agreement will expressly disclose where the BT

Group will be acting as the securities lending sub-agent. The Primary

Lending Agreement will also set forth the basis and rate for the

primary lending agent's compensation from the Client Plan for

performing securities lending services, and will authorize the primary

lending agent to pay a portion of its fee, as

[[Page 8486]]

determined by the primary lending agent in its sole discretion, to any

sub-agent(s) it retains pursuant to the authority granted under such

Primary Lending Agreement.8

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\8\ The foregoing provisions describe arrangements comparable to

conditions (c) and (d) of PTE 82-63 which require that the payment

of compensation to a ``lending fiduciary'' is made under a written

instrument and is subject to prior written authorization of an

independent ``authorizing fiduciary.'' In the event that a

commingled investment fund will participate in the securities

lending program, the special rule applicable to such funds

concerning the authorization of the compensation arrangement set

forth in paragraph (f) of PTE 82-63 will be satisfied.

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Pursuant to its authority to appoint sub-agents, the primary

lending agent will enter into a securities lending sub-agency agreement

(the Sub-Agency Agreement) with the BT Group, under which the primary

lending agent will retain and authorize the BT Group, as the sub-agent,

to lend securities of the primary lending agent's Client Plans, subject

to the same terms and conditions of the Primary Lending Agreement.

Thus, the form of the Loan Agreement will be the same as that approved

by the independent fiduciary in the Primary Lending Agreement, and the

list of permissible borrowers under the Sub-Agency Agreement (including

the Affiliated Borrowers), will be limited to those approved borrowers

listed as such under the Primary Lending Agreement. The Sub-Agency

Agreement will also contain provisions comparable to those in a Loan

Agreement where the BT Group is the primary lending agent. The Sub-

Agency Agreement will provide that the BT Group comply with the same

standard regarding arms-length dealing with the Affiliated Borrowers,

as when the BT Group is the primary lending agent. The Sub-Agency

Agreement will also set forth the basis and the rate for the BT Group's

compensation to be paid by the primary lending agent.

12. In all cases, the BT Group will maintain transactional and

market records sufficient to assure compliance with its representations

that all loans to the Affiliated Borrowers are at arm's-length terms.

Information will be provided to the independent fiduciary of the Client

Plan in the manner and format agreed to with the lending agent, without

charge to the Client Plan.

13. Before entering into the Loan Agreement, the Affiliated

Borrowers will furnish its most recent available audited and unaudited

financial statements to the Client Plan Fiduciary, and each Client Plan

will be advised in the Lending Authorization that it will be provided

copies of such statements upon request, and before the Client Plan is

asked to authorize such lending. The Loan Agreement will contain a

requirement that the Affiliated Borrowers must give prompt notice at

the time of the loan, of any material adverse changes in their

financial condition since the date of the most recently furnished

financial statements. 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.

14. Each time that a Client Plan loans securities to the Affiliated

Borrower pursuant to the Loan Agreement, the BT Group will reflect in

its records the material terms of the loan, including the securities

loaned, the required level of the collateral, and the fee or rebate

payable. The terms of each loan will be at least as favorable to the

Client Plan as those of a comparable arm's-length transaction between

unrelated parties.

15. The Loan Agreement will provide that the lending agent may

terminate any loan at any time. Upon a termination, the Affiliated

Borrowers will be contractually obligated to return the loaned

securities to the lending agent within the lesser of: (a) The customary

delivery period for such securities; (b) five business days of

notification (or such longer period of time permitted pursuant to a

class exemption); or (c) the time negotiated for such delivery by the

lending agent and the borrower. If the Affiliated Borrowers fail to

return the securities within the designated time, the lending agent

will have the right under the Loan Agreement to purchase securities

identical to the borrowed securities, and apply the collateral to the

payment of the purchase price and any other costs and expenses

reasonably incurred as a result of such sale and/or purchase.

16. Further, the Client Plans will be indemnified by Bankers Trust

or BT Securities Corporation in the event the Affiliated Borrowers fail

to return the borrowed securities. 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. In the event 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.

When the Affiliated Borrower is BT Securities Corporation, a U.S.

registered broker-dealer, BT Securities Corporation will indemnify the

Client Plan against losses.9 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

Securities Corporation 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).

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\9\ It is represented that under applicable banking laws BT

Securities Corporation may not be indemnified by Bankers Trust.

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17. The BT Group will establish each day a written schedule of

lending fees and rebate rates in order to assure uniformity of

treatment among borrowing brokers and to limit the discretion the BT

Group would have in negotiating securities loans to the Affiliated

Borrowers. Loans to the Affiliated Borrowers on any day will be made at

rates on the daily schedule or at rates which may be more advantageous

to the Client Plans. In no case will loans be made to the Affiliated

Borrowers at rates below those on the schedule. The rebate rates which

are established with respect to cash-collateralized loans, will take

into account the potential demand for loaned securities, the applicable

bench-mark cost of funds indices (typically, Federal Funds, overnight

repo rate or the like) and anticipated investment return on investments

of cash collateral. The lending fees (in respect of loans made by

Client Plans collateralized by other than cash) which are established

will be set daily to reflect conditions as influenced by potential

market demand.

18. BT Group will adopt maximum daily rebate rates for cash

collateral payable to the Affiliated Borrowers on behalf of a lending

Client Plan. Separate

[[Page 8487]]

maximum daily rebate rates will be established with respect to loans of

designated classes of securities such as U.S. government securities,

U.S. equities and corporate bonds, international fixed income

securities, and international equities. The BT Group will submit the

terms for determining the maximum daily rebate rates to an independent

fiduciary of the Client Plan for approval before lending any securities

to the Affiliated Borrowers on behalf of such plan. With respect to

each designated class of securities, the maximum daily rebate rate will

generally be the lower of: (i) The overnight repo rate or Federal Funds

rate, minus a stated percentage, and (ii) the actual investment rate

for the relevant cash collateral, minus a stated percentage. Thus, when

cash is used as collateral, the daily rebate rate should always be

lower than the rate of return to the Client Plans from authorized

investments of cash collateral.

19. BT Group will also adopt minimum daily lending fees for non-

cash collateral payable by the Affiliated Borrowers to the BT Group on

behalf of the Client Plan. Separate minimum daily lending fees will be

established with respect to loans of designated classes of securities,

such as U.S. government securities, U.S. equities and corporate bonds,

international fixed income securities, and international equities. The

BT Group will submit the terms for determining such fees to an

independent fiduciary of the Client Plan for approval before lending

securities to the Affiliated Borrowers on behalf of such plan. With

respect to each designated class of securities, the minimum lending fee

will be a percentage of the principal value of the loaned securities.

20. For collateral other than cash, the lending fees charged the

previous day will be reviewed by the BT Group for competitiveness.

Because 50 percent (50%) or more of securities loans by Client Plans

will be to unrelated parties, regardless of the type of collateral used

to secure the loans, the competitiveness of the BT Group's fee schedule

will be continuously tested in the marketplace. Accordingly, loans to

the Affiliated Borrowers should result in a competitive rate of income

to the lending Client Plans. At all times, the BT Group will effect

loans in a prudent and diversified manner.

21. 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 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 reduces the lending fee or increases the rebate

rate 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), the BT Group, by the close of business on the date of such

adjustment, shall provide to the independent fiduciary of the Client

Plan with notice that it has reduced such fee or increased the rebate

rate to such Affiliated Borrower and that the Client Plan may terminate

such loan at any time. The BT Group shall provide the independent

fiduciary with such information as the independent fiduciary may

reasonably request regarding the adjustment.

22. BT Group will usually lend securities to requesting borrowers

on a ``first come, first served'' basis, as a means of assuring

uniformity of treatment among borrowers. However, in some instances,

the borrower's credit limit may be reached, and the first in line

borrower will not be approved as a borrower by the Client Plan. In

other instances, there may be more than one prospective borrower that

seeks to borrow a particular security at approximately the same time.

In these situations, the BT Group will either lend to the next in line

approved borrower, or allocate the loan equitably among competing

borrowers, as applicable.

23. The Client Plan will receive collateral from the Affiliated

Borrowers 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 Affiliated

Borrowers. The collateral will consist of cash, securities issued or

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

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

the Affiliated Borrowers or an affiliate thereof. The market value of

the collateral on the close of business on the day of, or the business

day preceding the day of the loan, will be at least 102 percent of the

market value of the loaned securities. The Loan Agreement involving BT

Securities Corporation will give the Client Plan a continuing security

interest in and a lien on the collateral or the equivalent under local

law. However, under the U.K. and Australian Loan Agreements, the Client

Plan receives title to (rather than a pledge of, or security interest

in) the collateral from Bankers Trust International PLC and Bankers

Trust (Australia) Limited. The BT Group will monitor the level of the

collateral daily. If the market value of the collateral falls below 100

percent (or such greater percentage as agreed to by the parties) of the

loaned securities, the BT Group will require the Affiliated Borrowers

to deliver by the close of business the next business day sufficient

additional collateral to bring the level back to at least 102 percent.

Bankers Trust represents that in the event of the Affiliated

Borrowers' default or bankruptcy, the collateral is used to make the

Client Plan whole, and is not available to the Affiliated Borrowers or

their creditors. The collateral is held for the benefit of the Client

Plan and is not available to the Affiliated Borrowers until the

securities loan is terminated, and the loaned securities plus any

income thereon are returned to the Client Plan. When the Client Plans

lend securities to foreign Affiliated Borrowers, collateral will be

maintained pursuant to the relevant conditions contained in paragraph 4

above.

24. Each Client Plan participating in the lending program will be

sent a monthly 10 transaction report. This monthly report

will provide a list of all securities loans outstanding and closed for

a specified period. The report will identify for each open loan

position, the securities involved, the value of the securities for

collateralization purposes, the current value of the collateral, the

rebate or the loan fee at which the securities are loaned, and the

number of days the securities have been on loan.

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\10\ More frequent reports will be made available at the Client

Plan's request.

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In order to provide the means for monitoring lending activity,

rates on loans to the Affiliated Borrowers compared with loans to other

borrowers, and the level of collateral on the loans, it is represented

that the monthly report will show, on a daily basis, the market value

of all outstanding security loans to the Affiliated Borrowers and to

other borrowers. Further, the BT Group will advise the Client Plans

that upon request, the monthly report will state the daily fees where

collateral other than cash is utilized and will specify the details

used to establish the daily rebate payable to all brokers where cash is

used as collateral. The monthly report also will state, on a daily

basis, the rates at which securities are loaned to the Affiliated

Borrowers and those at which securities are loaned to other borrowers.

25. 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. This restriction is intended

[[Page 8488]]

to assure that any lending to the Affiliated Borrowers will be

monitored by an independent fiduciary who is experienced and

sophisticated in matters of this kind.

26. In summary, the applicant represents that the transaction

satisfies the statutory criteria of section 408(a) of the Act and

section 4975(c)(2) of the Code because:

A. 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.

B. 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:

(1) Authorized and approved the Lending Authorization with the BT

Group, where the BT Group is acting as the securities lending agent;

(2) Authorized and approved the Primary Lending Agreement with the

primary lending agent, where BT Group is lending securities under a

sub-agency arrangement with the primary lending agent; 11

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\11\ See Footnote 2, supra.

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(3) Approved the general terms of the Loan Agreement between such

Client Plan and the Affiliated Borrowers, the specific terms of which

are negotiated and entered into by BT Group.

C. 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 certificates

for 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 (1) the customary

delivery period for such securities, (2) five business days, or (3) the

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

Borrowers, whichever is less.

D. The Client Plan will receive from the Affiliated Borrowers