Proposed Exemption; Bankers Trust Company, BT Alex Brown Incorporated, and Deutsche Bank AG

DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

[Application No. D-10747]

Proposed Exemption; Bankers Trust Company, BT Alex Brown

Incorporated, and Deutsche Bank AG

AGENCY: Pension and Welfare Benefits Administration, Labor.

ACTION: Notice of proposed exemption.

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SUMMARY: This document contains a notice of pendency before the

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

All interested persons are invited to submit written comments or

request for a hearing on the pending exemption, within 33 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. D-10747. The application 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 exemption will be provided to all interested

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

within 3 days of the date of publication in the Federal Register. Such

notice shall include a copy of the notice of proposed exemption as

published in the Federal Register and shall inform interested persons

of their right to comment and to request a hearing.

SUPPLEMENTARY INFORMATION: The proposed exemption was requested in an

application 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, this notice of proposed exemption

is issued solely by the Department.

The application contains representations with regard to the

proposed exemption which are summarized below. Interested persons are

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

statement of the facts and representations.

Bankers Trust Company, New York, New York; BT Alex. Brown

Incorporated; Deutsche Bank AG

[Application No. D-10747]

The Department is considering granting an exemption under the

authority of section 408(a) of the Act and section 4975 of the Code and

in accordance with the procedures set forth in 29 CFR 2570, subpart B

(55 FR 32836, 32847, August 10, 1990).

Section I. Bankers Trust Company

If the exemption is granted, Bankers Trust Company shall not be

precluded from functioning as a ``qualified professional asset

manager'' pursuant to Prohibited Transaction Exemption 84-14 (49 FR

9494, March 13, 1984) (PTE 84-14) for the period beginning on the date

of sentencing with respect to the charges to which Bankers Trust

Company pled guilty on March 11, 1999 and ending five years

1 from the date of publication of the final exemption in the

Federal Register, solely because of a failure to satisfy section I(g)

of PTE 84-14 as a result of the conviction of Bankers Trust Company for

felonies described in the March 11, 1999 felony information (the

Information) entered in the U.S. District Court for the Southern

District of New York, provided that:

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\1\ If granted, this exemption will extend for a period of

approximately five years. However, Bankers Trust Company may, prior

to its expiration, apply for an extension of the exemption.

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(a) this exemption is not applicable if Bankers Trust Company

becomes affiliated with any person or entity convicted of any of the

crimes described in section I(g) of PTE 84-14; and

(b) this exemption is not applicable if Bankers Trust Company is

convicted of any of the crimes described in section I(g) of PTE 84-14,

other than those felonies discussed in the Information;

(c) the custody operations that were part of Bankers Trust Company

at the time of the March 11, 1999 information, and which have

subsequently been reorganized as part of Global Institutional Services

(GIS), are subject to an annual examination of its abandoned property

and escheatment policies, procedures and practices by an independent

public accounting firm. The examination required by this condition

shall determine whether the written procedures adopted by Bankers Trust

Company are properly designed to assure compliance with the

requirements of ERISA. The annual examination shall specifically

require a determination by the auditor as to whether the Bank has

developed and adopted internal policies and procedures that achieve

appropriate control objectives and shall include a test of a

representative sample of transactions, fifty percent of which must

involve ERISA covered plans, to determine operational compliance with

such policies and procedures. The auditor shall issue a written report

describing the steps performed by the auditor during the course of its

examination. The report shall include the auditor's specific findings

and recommendations. This requirement shall continue to be applicable

to the custody operations that were part of Bankers Trust Company as of

March 11, 1999, notwithstanding any subsequent reorganization of the

custody operation function during the term of the exemption.

(d) With respect to the independent audit report described in

section I(c) above:

(1) Bankers Trust Company shall provide notice to the Department of

any instances of the Bank's noncompliance with the written policies and

procedures reviewed by the auditor within 10 business days after such

noncompliance is determined by the auditor notwithstanding the fact

that the examination may not have been

[[Page 30361]]

completed as of that date. Upon request, the auditor shall provide the

Department with all of the relevant workpapers reflecting the instances

of noncompliance. The workpapers should identify whether and to what

extent the assets of ERISA plans were involved in the instances of

noncompliance, and

(2) Any information relating to the Bank's noncompliance with the

written policies and procedures that is required by Federal and/or

state banking authorities to be reported to the state and/or Federal

banking agencies shall also be reported by Bankers Trust Company to the

Department within the same time frames that such information is

otherwise required to be reported to those agencies.

(e) the annual examination described in section I(c) above will be

provided to the Department not later than 90 days following the 12

month period to which it relates, and will be unconditionally available

for examination by any duly authorized employee or representative of

the Department, Internal Revenue Service, Securities and Exchange

Commission or Department of Justice or other relevant regulators and

any fiduciary of a plan for which Bankers Trust Company performs

services.

Section II

If the exemption is granted, BT Alex. Brown Incorporated and its

subsidiaries and Deutsche Bank AG shall not be precluded from

functioning as a ``qualified professional asset manager'' pursuant to

PTE 84-14 for the period beginning on the date of sentencing with

respect to the charges to which Bankers Trust Company pled guilty on

March 11, 1999 and ending ten years from the date of publication of the

final exemption in the Federal Register, solely because of a failure to

satisfy section I(g) of PTE 84-14 as a result of an affiliation with

Bankers Trust Company, provided that:

(a) this exemption is not applicable if BT Alex. Brown

Incorporated, its subsidiaries or Deutsche Bank AG becomes affiliated

with any person or entity convicted of any of the crimes described in

section I(g) of PTE 84-14; and

(b) this exemption is not applicable if BT Alex. Brown

Incorporated, its subsidiaries or Deutsche Bank AG is convicted of any

of the crimes described in section I(g) of PTE 84-14.

Section III. Definitions

(a) For purposes of this exemption, the term ``Bankers Trust

Company'' includes Bankers Trust Company and any entity that was

affiliated with Bankers Trust Company prior to the date of the

acquisition of Bankers Trust Corporation by Deutsche Bank AG, other

than BT Alex. Brown Incorporated and its subsidiaries.

(b) For purposes of this exemption, ``Deutsche Bank AG'' includes

Deutsche Bank AG and any entity that was affiliated with Deutsche Bank

AG prior to the date of the acquisition of Bankers Trust Corporation by

Deutsche Bank AG, and any future affiliates, other than Bankers Trust

Company, as defined in subsection (a).

(c) The term ``affiliate'' of a person means--

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

intermediaries, controlling, controlled by, or under common control

with the person,

(2) Any director of, relative of, or partner in, any such person,

(3) Any corporation, partnership, trust or unincorporated

enterprise of which such person is an officer, director, or a 5 percent

or more partner or owner, and,

(4) Any employee or officer of the person who--

(A) is a highly compensated employee (as defined in section

4975(e)(2)(H) of the Code) or officer (earning 10 percent or more of

the yearly wages of such person) or,

(B) has direct or indirect authority, responsibility or control

regarding the custody, management or disposition of plan assets.

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

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

individual.

Summary of Facts and Representations

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

commercial bank which 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 worldwide. Bankers

Trust Company is wholly owned by Bankers Trust Corporation, a bank

holding company established in 1965 under the laws of the State of New

York. As of December 31, 1997, Bankers Trust Corporation and its

affiliates had consolidated assets of $140,102,000,000 and total

stockholders' equity of $5,708,000,000.

2. The corporate entity known as BT Alex. Brown Incorporated

resulted from the September 1, 1997 merger of Alex. Brown Incorporated

with a Bankers Trust Corporation subsidiary (the new entity was renamed

BT Alex. Brown Holdings Incorporated). Alex. Brown & Sons Incorporated,

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

was merged into BT Securities Corporation (the new entity was renamed

BT Alex. Brown Incorporated). The merged broker-dealer, BT Alex. Brown

Incorporated, is a wholly-owned subsidiary of Bankers Trust

Corporation. Its predecessor, Alex. Brown & Sons Incorporated was not

affiliated with Bankers Trust Corporation when the conduct which

resulted in the Plea Agreement took place. BT Securities Corporation

has never been a subsidiary of Bankers Trust Company.

3. In the second quarter of 1999, Bankers Trust Company expects

that Bankers Trust Corporation will be acquired by Deutsche Bank AG, a

bank organized under the laws of Germany.

4. On March 11, 1999, the United States Attorney for the Southern

District of New York filed a three-count felony information (the

``Information'') in the United States District Court for the Southern

District of New York (the ``Court'') alleging violations of 18 U.S.C.

Sec. 1005. The Information charges Bankers Trust Company with making

false entries on its books and records as a result of the conduct of

certain employees in 1994-6 in Bankers Trust's processing services

businesses. The conduct involved the transfer to reserve accounts and

to income of aged credit items that should have been paid to customers

or other third parties, or paid to state abandoned property

authorities. Some of these aged credit items represented assets of

ERISA covered employee benefit plans. On the same day, Bankers Trust

Company entered a plea of guilty to the charges in the Information

pursuant to a written plea agreement (the ``Plea Agreement''). In the

Plea Agreement, Bankers Trust Company agreed to pay a fine of $60

million and placed that amount in escrow pending sentencing. The Plea

Agreement provides that sentencing will be postponed to a date on or

before June 21, 1999. Bankers Trust Company has cooperated with the

appropriate authorities in the investigation.

5. Bankers Trust Company represents that although none of the

unlawful conduct involved its (or its affiliates) investment management

activities, the criminal conduct described above would preclude each

component of Bankers Trust Company, BT Alex. Brown, Bankers Trust

Australia Funds Limited, and other affiliated investment managers from

serving as a ``qualified professional asset manager'' (QPAM) pursuant

to PTE 84-14. PTE 84-14 provides broad relief from the prohibited

transaction provisions of ERISA and the Code for transactions

[[Page 30362]]

between parties in interest with respect to a plan and an investment

fund in which the plan has an interest when such fund is managed by a

QPAM, the QPAM makes the decision to enter into the transaction, and

the other conditions of the exemption are met. Section I(g) of PTE 84-

14 precludes a person who otherwise qualifies as a QPAM from serving as

a QPAM if such person or an affiliate \2\ thereof has, within the ten

years immediately preceding the transaction been either convicted or

released from imprisonment, whichever is later, as a result of certain

specified criminal activity.

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\2\ For purposes of section I(g) of PTE 84-14, an ``affiliate''

of a person is defined, in relevant part, as ``any person directly

or indirectly, through one or more intermediaries, controlling,

controlled by, or under common control with the person . . .'' (PTE

84-14, section V(d)). Bankers Trust Corporation, Bankers Trust

Company, its sister companies, and its subsidiaries would be treated

as affiliates under this definition. Deutsche Bank AG, and its

affiliates, will be treated as affiliates under this definition as

of the effective date of its acquisition of Bankers Trust

Corporation, the parent of Bankers Trust Company.

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6. Bankers Trust Company represents that the clientele it serves

includes large employee benefit plans subject to the Act. They maintain

that, given the size and number of the plans which Bankers Trust

Company represents, the large number of financial service providers

engaged by such plans, the breadth of the definition of party in

interest under the Act, and the array of services offered by Bankers

Trust Company, it would not be uncommon for a plan for which Bankers

Trust Company currently serves as a QPAM to engage in a transaction

which may involve a party in interest.

7. Bankers Trust Company states that other statutory and class

exemptions exist which cover purchases and sales of securities from

U.S. banks or broker-dealers; securities lending to U.S. banks or

broker-dealers; mortgage pool investment trusts; investment in short-

term instruments such as repurchase agreements (with a bank supervised

by a State or by the United States or a broker-dealer registered under

the Securities Exchange Act of 1934 or a dealer in government

securities who reports daily to the Federal Reserve Bank of New York),

bankers' acceptances in banks supervised by a State or by the United

States, commercial paper or deposits of a bank supervised by a State or

by the United States. Bankers Trust notes, however, that without the

relief provided by PTE 84-14, a plan advised by Bankers Trust Company

or its affiliates would be unable to invest in real estate, mortgages,

or commodities, to engage in purchases and sales of securities from and

to foreign banks or broker-dealers, to lend securities to foreign banks

and broker-dealers, or to invest in deposits of foreign banks, if such

transactions involve a party in interest.

8. Bankers Trust Company requests an exemption to enable it and its

current and future affiliates, to function as QPAMs despite their

failure to satisfy section I(g) of PTE 84-14 as a result of the

judgment of conviction to be entered against Bankers Trust Company.\3\

The proposed exemption is requested on behalf of Bankers Trust Company

and its affiliates. The proposed exemption is also requested on behalf

of such entities that may become affiliated with Bankers Trust Company

or its corporate successor(s), including but not limited to Deutsche

Bank AG and its affiliates. The transactions covered by the proposed

exemption would include the full range of transactions that can be

executed by investment managers who qualify as QPAMs pursuant to PTE

84-14 and satisfy the conditions contained therein. Deutsche Bank AG

represents that, subsequent to the acquisition of Bankers Trust

Corporation, it will assume responsibility on behalf of Bankers Trust

Company for compliance with all of the conditions of the proposed

exemption and all of the commitments contained in the Bankers Trust

Company exemption application, notwithstanding any subsequent

reorganization of Bankers Trust Company or Bankers Trust Corporation.

Thus, for example, Deutsche Bank AG has agreed to ongoing

responsibility for the annual examination of the custody operations

that were part of Bankers Trust Company at the time of the March 11,

1999 information and for any reporting to the Department in connection

with that examination.

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\3\ Section I(g) provides that for purposes of that subsection,

``a person shall be deemed to have been `convicted' from the date of

the judgement of the trial court, regardless of whether that

judgement remains under appeal.'' Until an appealable order is

entered, there is no judgement of conviction under section I(g).

Bankers Trust represents that an appealable order will be entered at

sentencing, which is scheduled for June 21, 1999.

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9. According to Bankers Trust Company, the conduct relating to the

Plea Agreement was discovered by the Bank itself and brought to the

attention of the U.S. Attorney and the banking regulators. Bankers

Trust Company, on its own initiative, engaged Arthur Andersen & Co.,

one of the largest independent accounting firms in the world, with

substantial experience and expertise with banking and financial

institutions, to undertake a review of the Client Processing Services

unit, which has been now reorganized as part of Global Institutional

Services (``GIS''). Arthur Andersen spent over 100,000 hours on the

investigation. Arthur Andersen identified transactions which had been

recorded to income. These transactions have since been reversed.

Bankers Trust has substantially completed the process of compensating

any clients or third parties affected by these transactions or

escheating unidentified funds to the appropriate state as abandoned

property.

10. In addition, Bankers Trust Company represents that the law firm

of Sullivan & Cromwell was engaged to aid in the investigation. The

Senior Control Officer Group (SCOG) \4\ in consultation with Sullivan &

Cromwell determined the individuals that would be evaluated for

potential discipline. This determination was made as a result of a

review of hundreds of thousands of e-mail messages and transaction

records and interviews of dozens of Bankers Trust Company employees.

SCOG and Sullivan and Cromwell met to discuss the issues raised by the

interviews and documents for each employee and jointly reached a

recommendation regarding the appropriate discipline for each employee.

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\4\ Bankers Trust Company states that SCOG is comprised of

individuals who operate completely independent of any business line,

including CPS, and had no involvement with the transactions under

investigation.

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11. Bankers Trust Company represents that by the end of the

investigation, 13 employees who were in various ways related to the

events that were the subject of the Information had resigned and 27

other employees received other forms of disciplinary action. None of

the individuals responsible for the action upon which the Information

is based are currently employed by Bankers Trust Company. In addition

to asking employees to resign, the disciplinary actions taken were,

reassignment out of the fiduciary business, compensation penalties,

reprimand or mandatory retraining. Bankers Trust Company determined the

level of discipline that was appropriate based on the following

criteria: the employee's position during the relevant conduct; the

employee's relevant educational and professional background; the

employee's degree of involvement with the transaction, and the nature

of the transaction. Bankers Trust Company believes that it has

identified and considered all individuals who should have been

disciplined in this matter.

Bankers Trust Company represents that it has undertaken to

appropriately identify and discipline all individuals involved in the

conduct which gave rise

[[Page 30363]]

to the guilty plea by Bankers Trust Company, and similar conduct not

covered by the plea, all of which was investigated by Bankers Trust

Company in 1996 and 1997. This conduct was found by Bankers Trust

Company to involve taking unclaimed funds into income of Bankers Trust

Company without adequate documentation that such funds belonged to

Bankers Trust Company, as well as other accounting practices designed

to misstate revenue or expenses of Bankers Trust Company for a

particular time period. In addition to steps already taken, Bankers

Trust Company agrees that it will, upon request of the Pension and

Welfare Benefits Administration (PWBA), appoint and compensate a

Special Master acceptable to PWBA to review the behavior of those

individuals (and any discipline which has already been imposed on them)

who remain at the Bankers Trust Company (its successors or assigns),

when the proceeding by the Special Master commences who fall into any

of the following categories:

(1) Persons with respect to whom a presentation was made to a

disciplinary review committee of Bankers Trust Company based on any

allegation that an individual was, directly or indirectly, involved in

claiming funds for Bankers Trust Company without adequate documentation

that such funds belonged to Bankers Trust Company;

(2) Persons selected by PWBA who were involved, directly or

indirectly, in any of the above described misconduct, whether or not

specifically investigated by Bankers Trust Company;

(3) Persons selected by PWBA who were involved in conducting,

implementing, supervising, or overseeing the investigative and

disciplinary process on behalf of Bankers Trust Company designed: (a)

to assure that all improper accounting was appropriately corrected; and

(b) to discipline individuals involved in claiming funds for Bankers

Trust Company without adequate documentation that such funds belonged

to Bankers Trust Company or misstating income or expenses of Bankers

Trust Company; and

(4) Persons selected by PWBA who were involved in responding to

inquiries from any governmental agency regarding allegations that

Bankers Trust Company claimed funds without adequate documentation that

such funds belonged to Bankers Trust Company, failed to appropriately

escheat abandoned funds, or misstated income or expenses of Bankers

Trust Company.

If a Special Master is requested by PWBA, the Bankers Trust Company

will submit to PWBA for its approval a proposed engagement letter

relating to the scope of the review which shall include, at a minimum,

the following requirements:

(a) The Special Master shall determine conclusively on behalf of

Bankers Trust Company, what discipline for each such individual would

be appropriate, up to and including dismissal to assure that their

discipline was adequate to deter future misconduct by the individual

and others in similar positions, and to assure that no such individual,

found by the Special Master to be untrustworthy, would be involved,

directly or indirectly, in handling assets subject to the Employee

Retirement Income Security Act;

(b) The Special Master shall report to PWBA regarding any

information that comes to the attention of the Special Master, in the

course of performing his other duties, which suggests that the

continued presence of any person as an employee or contractor of

Bankers Trust Company might imperil the safekeeping or appropriate

investment of employee benefit plan assets covered by the Act, or any

other such information which the Special Master, in his discretion,

believes would be useful to PWBA in performing its mission;

(c) The Special Master shall, in addition, provide to PWBA, upon

request, any materials submitted by or on behalf of Bankers Trust

Company to the Special Master or by the Special Master to Bankers Trust

Company;

(d) To the extent permitted by law, Bankers Trust Company shall

provide the Special Master with all documents concerning the behavior

of such individuals as the Special Master, in his sole discretion,

shall deem relevant, and shall require all employees and contractors to

respond fully and completely to all inquiries by the Special Master as

a condition of their employment by Bankers Trust Company;

(e) Bankers Trust Company further will promptly impose any

discipline found appropriate by the Special Master; and

(f) The Special Master will use best efforts to complete his

assignment within a specified period of time, but his failure to do so

may not be grounds for dismissal or failure by Bankers Trust Company to

honor all terms of the engagement letter, unless PWBA agrees in writing

to such dismissal or failure to comply. Bankers Trust Company further

agrees that any individual who has resigned, been dismissed, or

transferred following involvement in claiming funds for Bankers Trust

Company without adequate documentation that such funds belonged to

Bankers Trust Company or misstating income or expenses of Bankers Trust

Company, so that they are not presently involved in the handling of

ERISA covered employee benefit plan assets on behalf of Bankers Trust

Company, will not in the future be permitted by Bankers Trust Company

to handle such assets on its behalf as an employee or contractor.

Similarly, Bankers Trust Company agrees that any individual who was

disciplined in connection with the conduct described above, but who was

not, at the time of their discipline, involved in handling employee

benefit plan assets subject to the Act, will not in the future be

permitted to handle such assets on behalf of Bankers Trust Company.

Notwithstanding the agreements in this paragraph, Bankers Trust Company

may, within 60 days of retaining the Special Master, with notice to

PWBA, request that the Special Master review the conduct of any

individual whose involvement with employee benefit plan assets is

proscribed by this paragraph. Upon request for such review, the Special

Master shall determine whether the limitations imposed by this

paragraph should be modified, using the same standards which he would

use in determining appropriate discipline for an individual described

in numbered paragraphs (1)-(4). In performing this duty, the Special

Master shall be given the same cooperation as he would receive in

reviewing the discipline of an individual described in numbered

paragraphs (1)-(4).

12. Bankers Trust Company further represents that substantial

training has been provided to 2000 employees thus far. The training is

in the process of being provided to the remainder of GIS employees and

will be given monthly thereafter for new employees. As part of its

enhanced process to establish and maintain a proper control

environment, Bankers Trust represents that it developed a training plan

to ensure that employees are aware of the important responsibilities

for the proper handling of client funds. The ``Business Practices''

course was developed with Arthur Andersen and taught jointly with them.

The full day's course presents the legal and regulatory issues and

responsible business practices for everyday operations, including

fiduciary requirements of ERISA and the appropriate method for dealing

with suspected misconduct.

13. Bankers Trust Company represents that various corrective

measures have been taken by it to help ensure that conduct such as that

[[Page 30364]]

involved in the Plea Agreement will not recur. New controls have been

implemented, and a risk management infrastructure has been developed

with risk managers assigned to each business area reporting directly to

the Corporate Controller.

14. Arthur Andersen provided recommendations to the Bank for its

consideration in augmenting the controls applicable to its processing

business. In the area of organization, Arthur Andersen recommended that

controllers for each product line in GIS report to a corporate

controller, who reports directly to the Chief Financial Officer of the

Bank. In Arthur Andersen's view, segregation of the accounting control

function from operations is paramount to a strong control environment.

Bankers Trust Company agreed, creating controllers for each business in

GIS, who report to the CFO.

15. Arthur Andersen also recommended that the Bank adopt a

centralized escheatment process. In response to this recommendation, a

separate unit of Arthur Andersen with expertise in abandoned property

was engaged to assist in assessing the existing control processes

affecting abandoned property and escheatment. Bankers Trust Company

represents that as a result of this assessment, controls over aged

credit items and escheatment procedures have been enhanced.

Specifically, Bankers Trust Company has created an Abandoned Property

Officer, who is responsible for the Bank's escheatment filings. The

Abandoned Property Officer coordinates with the Legal and Compliance

Department of the Bank to provide guidance to the business lines and to

provide clear guidelines for administering the escheatment process.

Arthur Andersen also recommended that each business unit assign an

individual to be responsible for the escheatment process in their

respective areas and detail their responsibilities and reporting lines

with formal procedures established for escheating aged items. Arthur

Andersen further recommended that enhanced standards be established for

documenting escheated items and that managers and operations employees

be trained on internal policy and procedures. Finally, in the area of

organization, Arthur Andersen recommended that procedures providing for

proper accounting and disposition of credits be established and that

training be provided in the accounting for those items. Bankers Trust

Company represents that it has created an entire manual on escheatment

policies and procedures, and all employees responsible for making

decisions on accounting and escheatment have been trained in these

procedures and will continue to be trained periodically in these areas.

16. In the area of internal audit, Arthur Andersen recommended that

audit procedures be revised to ensure that aged items will be formally

tracked and followed until any of the issues concerning the items are

resolved properly. Arthur Andersen recommended that internal audit

employees be formally trained regarding escheatment laws and

regulations and that internal audit personnel focus on the operational

controls and proper procedures relating to abandoned property. Bankers

Trust Company represents that it has created new audit procedures for

internal audit staff in these areas. Internal audit staff have received

Certified Trust Audit training from an outside organization and will be

trained in Bankers Trust Company's abandoned property procedures.

17. In the area of in-house legal services, Arthur Andersen

recommended that there be a corporate policy for the escheatment of

abandoned property which is approved by business operations, corporate

controllers and the Legal Department before adoption, with procedures

to provide clear guidance on referral of issues to the Legal Department

respecting proper treatment and escheatment of aged items. Since these

recommendations were made, an official ``Abandoned Property Policy''

has been adopted, and procedures have been developed on escheatment

which focus on proper referrals to the Legal Department.

18. Arthur Andersen also made recommendations regarding the

function of the controllers group, including the development of a

reporting mechanism for the aging of debits and credits; the prompt

return of property to the rightful owners, once identified; and the

development of more formal procedures for researching debits and

credits. Bankers Trust Company represents that management information

systems have been developed in response to these recommendations, which

allow both the controllers and the business line operations management

to track the research and identification of debits and credits and

evaluate the process in terms of age, size and other relevant factors.

Also in the controllers' area, Arthur Andersen recommended that the

level of suspense items be reduced and procedures developed to research

outstanding items. In this connection, Arthur Andersen recommended that

the Bank improve its tracking and promptness of reconciling items, with

better descriptions of such items and clear responsibility for

reconciling these items. In response to this recommendation, Bankers

Trust Company represents that it has significantly upgraded the level

and review of operational control indicators. Specifically, key control

indicators have been defined and developed across all business areas.

Monthly control management information systems (MIS) packages have been

developed in each business unit which are reviewed at a monthly control

meeting chaired by the GIS Business head and attended by business unit

heads, controllers, compliance and legal personnel and internal audit

staff.

19. With respect to ERISA plans, Arthur Andersen recommended that

procedures and policies be developed concerning checks paid to plan

participants that have not been cashed by the participant and that an

independent group, such as compliance, be established to monitor all

customer complaints on a centralized basis, with a follow-up audit to

determine whether various aspects of client agreements in connection

with billing, return of excess funds, etc. are being complied with.

Bankers Trust Company represents that it has instituted policies to

insure that assets belonging to employee benefit plans do not reach the

point of being treated as abandoned property to be escheated. In this

connection, Bankers Trust Company has promulgated policies and

procedures for the Retirement Services Group within GIS which, among

other things, require that plan sponsors receive a monthly list of

uncashed checks older than 45 days; that plan sponsors are reminded

that it is the plan sponsor's obligation and responsibility to find

missing participants, and that plan sponsors are specifically requested

to provide directions on amounts outstanding for more than one year.

Check ledgers and class action records are retained by the Bank for 15

years. Plans which terminate their relationship with Bankers Trust

Company will have any amounts still outstanding after six months

forwarded to their successor trustees. With respect to terminated

plans, Bankers Trust Company will forward any amounts still outstanding

after six months to the responsible plan fiduciary. In addition,

Bankers Trust Company represents that it has established policies which

require complaints to be brought to the attention of a supervisor

immediately and tracked in an MIS system so that

[[Page 30365]]

management can evaluate the aging and resolution of complaints. The

policies further require that, if not resolved promptly, the complaint

must be elevated to a more senior manager, or to Compliance and the

Legal Department if the issue is out of the ordinary course of daily

operations.

20. In the area of ownership and accountability of customer

accounts, Arthur Andersen recommended that each business area develop a

chart of accounts, identifying the responsible officer, the proof

schedule, approval levels for account openings, closings and changes,

with procedures for maintenance of proper documentation for customer

and beneficiary amounts and controls on unclaimed amounts. Bankers

Trust Company represents that it has undergone a comprehensive account

review. Over 25,000 general ledger accounts have been closed, and new

procedures and control reports were developed to identify inactive,

obsolete and erroneous accounts. In addition, a chart of accounts was

established through the use of a centralized account database. All

accounts have clear ownership, purpose, and account descriptions. With

respect to each account, an administrator is responsible for verifying

on a monthly basis that the account is being used according to its

official purpose, is being reconciled on a regular basis and is still

active. On a going-forward basis, senior management receives regular

MIS reports regarding account activity. In addition, Bankers Trust

Company represents that procedures are in place to close inactive or

dormant accounts on a regular basis.

21. Arthur Andersen recommended better procedures for handling

class actions and tax refunds, and Bankers Trust Company represents

that it is enhancing its current policies to establish additional

procedures for preservation of the names of beneficial holders of

securities that may result in class action payments, both for existing

plans and for terminated plan relationships. In addition, Bankers Trust

Company has revised its procedures to maintain canceled check reports

and ledgers for 15 years. Bankers Trust Company further represents that

escheatment records are kept indefinitely.

22. In addition to the review conducted by Arthur Anderson, Bankers

Trust Company engaged KPMG, an international accounting firm, who are

the Bank's auditors, to perform an independent risk assessment and

controls review across GIS. Bankers Trust Company represents that this

review had several objectives: (1) to provide an examination of the

various control enhancement initiatives that were underway (e.g.

account usage); (2) to provide an assessment of the risk identification

and control mechanisms across GIS business with, as necessary, control

improvement recommendations; and to evaluate the control environment

and risk management strategies including recommendations on risk

management, legal and compliance structure.

23. Following this review, several control improvements were

recommended throughout the various business units. Bankers Trust

Company represents that detailed plans were established to implement

the improvements with critical/mandatory improvements implemented by

year-end 1998. In addition, recommendations to establish a GIS risk

management function were implemented by the appointment of a GIS risk

manager. In order to provide for an ongoing self-assessment of the

control environment, Bankers Trust Company notes that a GIS-wide risk

database was created. This database houses all key GIS operational

processes and control points and is maintained and updated by the

business unit risk managers as operational processes and control points

are altered or changed.

24. KPMG has confirmed that based on its involvement over the past

two years with respect to the GIS business, Bankers Trust Company has

implemented policies and procedures to address the mandatory gaps

identified in the risk assessment review performed by KPMG, as well as

the recommendations made by Arthur Anderson at the conclusion of their

forensic investigation. KPMG also represents that Bankers Trust Company

continues to make substantial progress working toward a ``best

practices'' control environment and that progress regarding remaining

control enhancement initiatives continues to be closely monitored at

the monthly control review meetings conducted since October, 1997 which

all senior management in the GIS business.

25. Bankers Trust Company is subject to the continuing supervision

of both the New York State Banking Department and the Federal Reserve

Bank of New York. The Federal Reserve Bank of New York (FRBNY) and the

New York Banking Department conduct joint annual examinations of the

Bank, including its fiduciary operations. As part of its supervision,

the New York State Department of Banking entered into a settlement

agreement with Bankers Trust Company, pursuant to which Banker Trust

Company agreed to pay $3.5 million to the State of New York. It reached

this agreement based on the fact that Bankers Trust Company had

retained outside counsel and an independent accounting firm to assist

the Bank in performing a comprehensive forensic and diagnostic review

of the activities of its custody and processing businesses during the

relevant period and based on that review, had taken the following

remedial steps: (1) the Bank adopted improved policies and procedures

relating to accounting practices, risk assessment, compliance and

internal control procedures, and management information reporting; (2)

the Bank adopted new training programs for its personnel in this area

with respect to business practices and responsible decision making; (3)

the Bank replaced and supplemented personnel in this area, including

the replacement of the head of the business group and the head of the

areas specifically involved in the offending behavior; (4) the Bank

created an independent risk management and control function that

reports outside the business line to the senior management in charge of

corporate risk management and control; (5) the Bank enhanced its

internal audit functions including expansion of the audit scope and

increasing the size of the audit staff; (6) the annual external audit

of the business was extended to include a review of the improved

policies and procedures detailed in paragraph one above; and (7) the

Bank commenced and substantially completed appropriate restitution of

the amounts involved. In addition to the payment to the State of New

York, Bankers Trust Company committed to maintaining the new policies,

procedures and internal audit scope and frequency described above and

to make no material changes therein without the prior approval of the

New York State Banking Superintendent and to provide such periodic

reports to the Superintendent and to the Bank's Board of Directors as

they may request regarding compliance with the new policies and

procedures. The New York State Banking Department concluded, in a

letter dated March 11, 1999 to Frank Newman, Chairman of Board of

Bankers Trust Company, that based on the actions taken by the Bank to

date, ``Bankers Trust has put into place the appropriate controls with

respect to the management of the affected businesses''.

26. The Federal Reserve Bank of New York also provided information

in a written submission to assist the Department in its review of

Bankers Trust Company exemption application. The FRBNY has a statutory

obligation to

[[Page 30366]]

inspect the books and records of Bankers Trust Company and monitor its

internal controls to ensure that adequate policies and procedures are

in place with respect to fiduciary obligations. See 12 U.S.C. 248(a),

325 and 1831m. The FRBNY carries out its responsibility to examine

Bankers Trust Company pursuant to delegated authority from the Board,

and shall continue to do so. Under the Plea Agreement entered in the

matter of United States v. Bankers Trust Company, 99 Cr. 250 (S.D.N.Y

Mar 11, 1999), the Bank has submitted to the FRBNY for review and

approval ``the written internal compliance procedures which the Bank

has already implemented for the strengthening and maintenance of its

records, systems and internal audit and controls, in order to ensure

that such misconduct will not recur in the future.''

27. As a condition of the proposed exemption, Bankers Trust Company

has agreed to an annual examination of its custody operations as it

relates to abandoned property and escheatment matters. The examination

is to be undertaken by an independent public accounting firm

5 and will be designed to assist in determining whether the

written procedures adopted by the Bank are properly designed to assure

compliance with the requirements of ERISA. The examination will

specifically require a determination by the auditor as to whether or

not the Bank has developed adequate internal policies and procedures

relating to abandoned property and escheatment matters and would

include a test of a representative sample of transactions to determine

operational compliance with such policies and procedures, with a

written report describing the steps performed by the auditor during the

course of its examination and the auditor's specific findings and

recommendations. The auditor's report will be delivered to the

Department within 90 days of the close of the 12 month period to which

it relates and will be unconditionally available to other government

regulators and the plan fiduciaries upon request.6 KPMG, an

international accounting firm, who is the Banks auditor, or other

successor independent auditors, will perform this annual audit.

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\5\ In the Department's view, whether an auditor is independent

for purposes of the proposed exemption would depend on the

particular facts and circumstances of each case. However, the

Department would not view an auditor as independent under

circumstances where the auditor has a financial interest, including

an ownership interest, in Bankers Trust Company or Deutsche Bank, or

any affiliates thereof, or otherwise receives more than a de minimis

amount of its compensation from any of those persons.

\6\ Bankers Trust Company represents that because its future

affiliates will have had no affiliation with Bankers Trust Company

during the period that the conduct that was the subject of the Plea

Agreement took place, the audit will focus solely on the operations

that are currently part of the custody operations of Bankers Trust

Company. Similarly, Alex. Brown Incorporated was not affiliated with

Banker's Trust Corporation when the conduct identified in the Plea

Agreement occurred and thus will not be subject to the annual audit

examination.

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28. Bankers Trust Company asserts that failure to grant the

requested exemption will prohibit employee benefit plans for which

Bankers Trust Company affiliates act as investment managers from

engaging in transactions with parties in interest that would otherwise

be permitted under PTE 84-14, and will cause the plans to forego

attractive investment opportunities. Bankers Trust Company notes that

many of its current and future affiliates, as well as the Bank itself,

would be deprived of their abilities to offer and render the full

panoply of specialized investment advisory services demanded by

employee benefit plans covered by the Act. Bankers Trust Company

represents that the conduct referenced in the Plea Agreement did not

involve the investment management functions of the Bank or its

investment management affiliates. Bankers Trust Company further

represents that sufficient changes have been made in the Bank's custody

and processing business management, procedures and supervision to

prevent in the future the conduct which gave rise to the Plea

Agreement, supporting the inclusion of Bankers Trust Company as an

entity permitted to function as a QPAM.

29. In summary, Bankers Trust Company represents that the proposed

exemption satisfies the criteria of section 408(a) of the Act for the

following reasons: (A) Bankers Trust Company has undertaken substantial

reforms and adopted procedures designed to prevent any recurrence of

the criminal activity and escheatment of ERISA funds.; (B) an

independent audit requirement will further protect plans and help

assure plan participants that the conduct that was the subject of the

Plea Agreement will not recur; (C) instances of noncompliance

discovered during the audit will be reported by Bankers Trust

Corporation to the Department within ten days of determination by the

independent auditor; (D) the investment management units that oversee

the transactions covered by QPAM were not the subject of the Plea

Agreement; and (E) the other conditions of PTE 84-14, combined with the

procedures adopted by Bankers Trust Company, afford ample protection of

the interests of participants and beneficiaries of employee benefit

plans.

Section 411 Proceeding

The Department notes that, as a result of Bankers Trust Company's

conviction for violating 18 U.S.C. Sec. 1005, the Pension and Welfare

Benefits Administration's (PWBA) Office of Enforcement has undertaken

an inquiry to determine whether, pursuant to ERISA Sec. 411(a), 29

U.S.C. Sec. 1111(a), a judicial proceeding should be instituted to bar

Bankers Trust Company from acting as an administrator, fiduciary,

officer, trustee, custodian, counsel, agent, or employee of any

employee benefit plan or from acting as a consultant to any employee

benefit plan. Information obtained in this inquiry will not be used by

the Department in its consideration of Bankers Trust Company's

exemption request unless the Director of the Office of Enforcement

submits such information, or any portion thereof, in writing, to PWBA's

Office of Exemption Determinations for inclusion in the public record.

Neither the Department's consideration of Bankers Trust Company's

exemption request nor any final decision on such request shall

foreclose completion of the Department's ERISA Sec. 411 inquiry nor

preclude any proceeding which may result therefrom seeking to bar

Bankers Trust Company from acting as an administrator, fiduciary,

officer, trustee, custodian, counsel, agent, or employee of any

employee benefit plan or from acting as a consultant to any employee

benefit plan.

Notice to Interested Persons

With respect to notification of interested persons, the applicant

will distribute this notice of proposed exemption by first class mail

to an independent plan fiduciary for all ERISA pension plans for which

Bankers Trust Company and its subsidiaries provide fiduciary services,

including trustee services and/or the provision of investment advice

and the owner of all IRA accounts to which Bankers Trust Company and

its subsidiaries provide investment advisory services. The applicant

will distribute the notice to all participants in its own ERISA pension

plans, either by return receipt electronic mail or by first class mail.

All notification will be mailed or electronically mailed within three

business days after publication of the proposed exemption in the

Federal Register. The applicant will also use its best efforts to

notify an independent fiduciary for each former ERISA pension plan

client of Bankers Trust Company

[[Page 30367]]

and its subsidiaries that has received or may receive additional funds

stemming from either the CPS inquiry or the Bank's additional efforts

to find participants with uncashed benefit checks.

FOR FURTHER INFORMATION CONTACT: Ms. Allison Padams LaVigne or James S.

Frazier of the Department, telephone (202) 219-8194. (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 of disqualified

person from certain other provisions of the Act and/or the Code,

including any prohibited transaction provisions to which the exemption

does not apply and the general fiduciary responsibility provisions of

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

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

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

accordance with section 404(a)(1)(b) of the act; nor does it affect the

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

for the exclusive benefit of the employees of the employer maintaining

the plan and their beneficiaries;

(2) Before an exemption may be granted under section 408(a) of the

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

that the exemption is administratively feasible, in the interests of

the plan and of its participants and beneficiaries and protective of

the rights of participants and beneficiaries of the plan;

(3) The proposed exemption, if granted, will be supplemental to,

and not in derogation of, any other provisions of the Act and/or the

Code, including statutory or administrative exemptions and transitional

rules. Furthermore, the fact that a transaction is subject to an

administrative or statutory exemption is not dispositive of whether the

transaction is in fact a prohibited transaction; and

(4) The proposed exemption, if granted, will be subject to the

express condition that the material facts and representations contained

in the application are true and complete, and that the application

accurately describes all material terms of the transaction which is the

subject of the exemption.

Signed at Washington, DC, this 2nd day of June, 1999.

Ivan Strasfeld,

Director of Exemption Determinations, Pension and Welfare Benefits

Administration, U.S. Department of Labor.

[FR Doc. 99-14369 Filed 6-4-99; 8:45 am]

BILLING CODE 4510-29-P