Proposed Exemptions; VECO Corporation (VECO)
Federal RegisterMar 4, 1999
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-10622, et al.]
Proposed Exemptions; VECO Corporation (VECO)
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
Unless otherwise stated in the Notice of Proposed Exemption, all
interested persons are invited to submit written comments, and with
respect to exemptions involving the fiduciary prohibitions of section
406(b) of the Act, requests for hearing 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, NW., Washington, DC
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, NW., Washington, DC 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
Register. Such notice
[[Page 10492]]
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 (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
statement of the facts and representations.
VECO Corporation (VECO), Located in Anchorage, Alaska
[Exemption Application Number D-10622]
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 32826, 32847, August 10, 1990). If the exemption
is granted, the restrictions of sections 406(a), 406(b)(1) and (2) of
the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1)(A) through (E) of the
Code, shall not apply to the proposed sale (the Sale) of a certain
parcel of unimproved real property (the Property) from the VECO
Corporation Profit Sharing Plan and Trust (the Plan) to Norcon, Inc.
(Norcon), a party in interest with respect to the Plan, provided that
the following conditions are met:
(a) The terms and conditions of the Sale will be at least as
favorable to the Plan as those obtainable in an arm's length
transaction with an unrelated party;
(b) Norcon will pay the greater of $2,940,000 or the fair market
value of the Property on the date of the Sale as established by a
qualified, independent appraiser;
(c) The Sale will be a one-time transaction for cash;
(d) The Plan will pay no fees or commissions with respect to the
Sale; and
(e) An independent fiduciary acting on behalf of the Plan has
reviewed the terms of the Sale and has represented that the transaction
is in the best interest of the Plan and protective of the Plan's
participants and beneficiaries.
Summary of Facts and Representations
1. VECO is an engineering, procurement, management, and
construction company which is located in Anchorage, Alaska and
incorporated in Delaware. Norcon is a wholly-owned subsidiary of VECO
and is an electrical contracting company. Norcon is also located in
Anchorage, Alaska.
2. VECO is the sponsor of the Plan. The Plan is a frozen profit
sharing plan having 1,866 participants and approximately $2,959,432 in
total assets, as of June 15, 1998. The trustees of the Plan (the
Trustees) are all employees of VECO or an affiliate thereof. On January
1, 1992, VECO discontinued contributions to the Plan and the Plan
received a favorable termination letter from the Internal Revenue
Service on February 25, 1997.
3. The Property, which accounts for approximately 99% of the Plan's
total assets, is comprised of approximately 40 acres of unimproved real
property located at the southwest corner of King Street and 100th
Avenue in Anchorage, Alaska. The Property has not been used by, or
generated income for, the Plan. The Property was acquired by the Plan
for investment purposes on February 6, 1981 for $1,917,363 from the
Ninth Anchorage Limited Partnership (Ninth Anchorage), an unrelated
party. Of this amount, the Plan paid Ninth Anchorage $288,219 in cash
and obtained a promissary note (the Note) from Ninth Anchorage for the
balance of $1,629,144.
4. The Plan has incurred certain holding costs as a result of its
ownership of the Property. The applicant represents that the Plan has
incurred certain interest expenses (the Interest Expenses) as a result
of the Note. The applicant represents that, from 1981 until the Note
was paid off in 1989, the Plan incurred a total of $1,213,646 in
Interest Expenses.
The applicant represents that VECO has paid all of the Interest
Expenses (the Interest Expense Payments) on behalf of the Plan. The
applicant represents that VECO made the Interest Expense Payments
directly to Ninth Anchorage and treated the Interest Expense Payments
as contributions by VECO to the Plan.1 The applicant
additionally represents that VECO did not take any additional
deductions with respect to the Interest Expenses Payments.
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\1\ The Department expresses no opinion as to the
appropriateness of VECO's treatment of these payments as
contributions under Internal Revenue Code sections 162 and 404.
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The Plan has additionally incurred certain real estate taxes (the
Real Estate Taxes) with respect to its ownership of the Property. The
applicant represents that the Plan has incurred a total of $497,599 in
Real Estate Taxes as a result of its ownership of the Property.
The applicant represents that from 1981 to present, VECO has paid,
and continues to pay, all of the Real Estate Taxes on behalf of the
Plan (the Real Estate Tax Payments). The applicant represents that the
Real Estate Tax Payments were made directly by VECO to the taxing
authority. The Applicant represents that, from 1981 to 1991, VECO
treated the Real Estate Tax Payments as a contribution by VECO to the
Plan with no further deductions taken by VECO with respect to the Real
Estate Tax Payments.2
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\2\ See footnote 1.
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5. In 1995, the Trustees were informed by the Department of Labor's
Seattle District Office (the District Office) that a sale of the
Property by the Plan was necessary to diversify the Plan's assets in
accordance with the requirements of the Act. As a result, the District
Office and the Trustees reached a settlement agreement pursuant to PTE
94-71 (59 FR 51216, October 7, 1994) whereby VECO would purchase the
Property from the Plan provided that VECO was able to meet certain
conditions.
In a letter dated April 8, 1996, the District Office stated that it
had decided not to authorize the proposed sale of the property to VECO.
This decision was the result of the receipt by the District Office of
negative comments from the Plan's participants in response to the
proposed transaction. The District Office notified VECO that a sale of
the Property was still necessary and any future sale of the Property
would require the oversight of an independent fiduciary acting on
behalf of the Plan. As a result of the District Office's decision, the
proposed sale of the Property to VECO was abandoned.
6. The applicant now seeks an exemption for the sale of the
Property by the Plan to VECO's subsidiary, Norcon. The Sale will
involve the oversight of an independent fiduciary. Pursuant to this,
Norcon and the Plan entered into a purchase and sale agreement for the
Property (the Sale
[[Page 10493]]
Agreement) on March 13, 1998. The Sale Agreement involves Norcon's
purchase of the Property for the greater of $2,940,000 or the fair
market value of the Property at the time of the Sale, as determined by
a qualified, independent appraiser. The Sale Agreement is contingent on
the grant of an exemption by the Department.
The applicant represents that in addition to the proposed sale of
the Property by the Plan to VECO, the Plan is still trying to sell the
Property on the open market. The applicant represents that in the event
the Plan receives an offer for the Property in excess of the amount in
the Sale Agreement, the Sale Agreement has reserved to Norcon the right
to meet or exceed the amount that was offered. Thus, the applicant
represents that, at a minimum, any sale of the Property by the Plan to
Norcon will occur at the greater of $2,940,000 or the fair market value
of the Property as of the date of the Sale.
7. The Property was appraised on June 5, 1997 by Jerry Smith (Mr.
Smith) for the ACCUVAL-RESCO Appraisal Company (ACCUVAL-RESCO), an
appraisal company independent of both Norcon and VECO. Mr. Smith, an
appraiser certified in the State of Alaska, used the sales comparison
approach in his valuation of the Property and compared the Property to
five parcels of land located near the Property and the subject of
recent sales. Based on these comparisons, Mr. Smith concluded that the
value of the Property, as of June 3, 1997, was $2,940,000.3
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\3\ Several unsuccessful attempts mere made by the Trustees to
sell the Property on the open market for $3,223,440. The Trustees
marketed the Property at this price in order for the Plan to receive
a net amount, after real estate commissions were taken into
consideration, which was approximate to the Property's appraised
value.
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8. The Plan hired an independent fiduciary, Al Tamagni (Mr.
Tamagni) of Pension Services International, Inc. (PSI) to act on the
Plan's behalf during any sale of the Property. Mr. Tamagni, who is the
President of PSI, represents that he is independent of both Norcon and
VECO. Mr. Tamagni additionally represents that he has several years of
experience in matters involving qualified pension plans, including
investment transactions similar to the Sale and the Sale Agreement. Mr.
Tamagni represents further that he understands his duties and
responsibilities as a fiduciary under ERISA and has accepted them.
Mr. Tamagni represents that he has reviewed the terms of both the
Sale and the Sale Agreement. Mr. Tamagni represent that, based on his
analysis of the Sale Agreement, he believes that the terms of the Sale
and the Sale Agreement are protective of the rights of the participants
and beneficiaries of the Plan. Mr. Tamagni additionally represents
that, based on his analysis of the terms of the Sale, he believes that
the Sale is in the best interests of the Plan's participants and
beneficiaries.
9. In summary, the applicant represent that the proposed
transaction satisfies the criteria of section 408(a) of the Act
because:
(a) The terms and conditions of the Sale will be at least as
favorable to the Plan as those obtainable in an arm's length
transaction with an unrelated party;
(b) Norcon will pay the greater of $2,940,000 or the fair market
value of the Property on the date of Sale as established by a
qualified, independent appraiser;
(c) The Sale will be a one-time transaction for cash;
(d) The Plan will pay no fees or commissions with respect to the
Sale; and
(e) An independent fiduciary acting on behalf of the Plan, Mr.
Tamagni, has reviewed the terms of the Sale and has represented that
the transaction is in the best interest of the Plan and protective of
the Plan's participants and beneficiaries.
FOR FURTHER INFORMATION CONTACT: Christopher J. Motta of the
Department, telephone (202) 219-8883 (this is not a toll free number).
Citibank, N.A. (Citibank) and Salomon Smith Barney Inc. (SSB),
Located in New York, NY
[Application No. D-10674]
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)(1)(A) through (D) and
406(b)(1) and (2) of the Act and the sanctions resulting from the
application of section 4975 of the Code, by reason of section
4975(c)(1)(A) through (E) of the Code, shall not apply, effective
October 8, 1998 to (1) the past and continued lending of securities to
SSB and affiliated U.S. registered broker-dealers of SSB or Citibank
(together, SSB/U.S.) and certain foreign affiliates (the Foreign
Affiliates) of SSB and Citibank which are broker-dealers or banks based
in the United Kingdom (SB/U.K.), Japan (SSB/Asia), Germany (SSB/
Germany), Canada (SSB/Canada) and Australia (SSB/Australia), including
their affiliates or successors,4 by employee benefit plans
(the Client Plans) or commingled investment funds holding Client Plan
assets, for which Citibank or any U.S. affiliate of Citibank, acts as
securities lending agent (or sub-agent), including those Client Plans
for which Citibank also acts as directed trustee or custodian of the
securities being lent; and (2) to the receipt of compensation by
Citibank or any U.S. affiliate of Citibank in connection with these
transactions, provided that the following conditions are met:
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\4\ Unless otherwise noted, SSB/U.S. and the Foreign Affiliates
are collectively referred to as SSB.
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(a) For each Client Plan, neither Citibank, SSB nor any of their
affiliates either has or exercises discretionary authority or control
with respect to the investment of the Client Plan assets involved in
the transaction, or renders investment advice (within the meaning of 29
CFR 2510.3-21(c)) with respect to those assets.
(b) Any arrangement for Citibank to lend Client Plan securities to
SSB in either an agency or sub-agency capacity is approved in advance
by a Client Plan fiduciary who is independent of SSB and
Citibank.5 In this regard, the independent Client Plan
fiduciary also approves the general terms of the securities loan
agreement (the Loan Agreement) between the Client Plan and SSB,
although the specific terms of the Loan Agreement are negotiated and
entered into by Citibank and Citibank acts as a liaison between the
lender and the borrower to facilitate the lending transaction.
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\5\ The Department, herein, is not providing exemptive relief
for securities lending transactions engaged in by primary lending
agents, other than Citibank and its affiliates, beyond that provided
pursuant to Prohibited Transaction Exemption (PTE) 81-6 (46 FR 7527,
January 23, 1981, as amended at 52 FR 18754, May 19, 1987) and PTE
82-63 (47 FR 14804, April 6, 1982).
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(c) The terms of each loan of securities by a Client Plan to SSB is
at least as favorable to such Client Plans as those of a comparable
arm's length transaction between unrelated parties.
(d) A Client Plan may terminate the agency or sub-agency
arrangement at any time without penalty to such Client Plan on five
business days notice.
(e) The Client Plan receives from SSB (either by physical delivery
or by book entry in a securities depository located in the United
States, wire transfer or similar means) by the close of business on or
before the day the loaned securities are delivered to SSB, collateral
consisting of cash, securities issued or guaranteed by the United
[[Page 10494]]
States Government or its agencies or instrumentalities, or irrevocable
United States bank letters of credit issued by a person other than
Citibank, SSB or an affiliate thereof, or any combination thereof, or
other collateral permitted under PTE 81-6, as it may be amended or
superseded.
(f) As of the close of business on the preceding business day, the
fair market value of the collateral initially equals at least 102
percent of the market value of the loaned securities and, if the market
value of the collateral falls below 100 percent, SSB delivers
additional collateral on the following day such that the market value
of the collateral again equals at least 102 percent.
(g) Prior to entering into the Loan Agreement, SSB furnishes
Citibank its most recently available audited and unaudited statements,
which is, in turn, provided to a Client Plan, as well as a
representation by SSB, that as of each time it borrows securities,
there has been no material adverse change in its financial condition
since the date of the most recently-furnished statement that has not
been disclosed to such Client Plan; provided, however, that in the
event of a material adverse change, Citibank does not make any further
loans to SSB unless an independent fiduciary of the Client Plan is
provided notice of any material adverse change and approves the loan in
view of the changed financial condition.
(h) In return for lending securities, the Client Plan either--
(1) Receives a reasonable fee, which is related to the value of the
borrowed securities and the duration of the loan; or
(2) Has the opportunity to derive compensation through the
investment of cash collateral. (Under such circumstances, the Client
Plan may pay a loan rebate or similar fee to SSB, if such fee is not
greater than the fee the Client Plan would pay in a comparable arm's
length transaction with an unrelated party.)
(i) All procedures regarding the securities lending activities
conform to the applicable provisions of Prohibited Transaction
Exemptions PTE 81-6 and PTE 82-63 as such class exemptions may be
amended or superseded as well as to applicable securities laws of the
United States, the United Kingdom, Japan, Germany, Canada or Australia.
(j) Each SSB borrower indemnifies and holds harmless each lending
Client Plan in the United States against any and all losses, damages,
liabilities, costs and expenses (including attorney's fees) which the
Client Plan may incur or suffer directly arising out of the use of
securities of such Client Plan by such SSB borrower or the failure of
such borrower to return such securities to the Client Plan. In the
event that the Foreign Affiliate defaults on a loan, Citibank, as agent
for the lending Client Plan, will liquidate the loan collateral to
purchase identical securities for the Client Plan. With respect to a
default by a Foreign Affiliate, if the collateral is insufficient to
accomplish such purchase, Citibank will indemnify the Client Plan for
any shortfall in the collateral plus interest on such amount and any
transaction costs incurred. Alternatively, with respect to a default by
the Foreign Affiliate, if such identical securities are not available
on the market, Citibank will pay the Client Plan cash equal to (1) the
market value of the borrowed securities as of the date they should have
been returned to the Client Plan, plus (2) all the accrued financial
benefits derived from the beneficial ownership of such loaned
securities as of such date, plus (3) interest from such date to the
date of payment. (The amounts paid shall include the cash collateral or
other collateral that is liquidated and held by Citibank on behalf of
the Client Plan.)
(k) The Client Plan receives the equivalent of all distributions
made to holders of the borrowed securities during the term of the loan,
including, but not limited to, cash dividends, interest payments,
shares of stock as a result of stock splits and rights to purchase
additional securities, or other distributions.
(l) Prior to the approval of the lending of its securities to SSB
by a new Client Plan, copies of the notice of proposed exemption (the
Notice) and the final exemption are provided to such Client Plan.
(m) Each Client Plan receives monthly reports with respect to its
securities lending transactions, including, but not limited to the
information described in Representation 28 of the Notice so that an
independent fiduciary of the Client Plan may monitor such transactions
with SSB.
(n) Only Client Plans with total assets having an aggregate market
value of at least $50 million are permitted to lend securities to SSB;
provided, however, that--
(1) In the case of two or more Client Plans which are maintained by
the same employer, controlled group of corporations or employee
organization (the Related Client Plans), whose assets are commingled
for investment purposes in a single master trust or any other entity
the assets of which are ``plan assets'' under 29 CFR 2510.3-101 (the
Plan Asset Regulation), which entity is engaged in securities lending
arrangements with SSB, the foregoing $50 million requirement shall be
deemed satisfied if such trust or other entity has aggregate assets
which are in excess of $50 million; provided that if the fiduciary
responsible for making the investment decision on behalf of such master
trust or other entity is not the employer or an affiliate of the
employer, such fiduciary has total assets under its management and
control, exclusive of the $50 million threshold amount attributable to
plan investment in the commingled entity, which are in excess of $100
million.
(2) In the case of two or more Client Plans which are not
maintained by the same employer, controlled group of corporations or
employee organization (the Unrelated Client Plans), whose assets are
commingled for investment purposes in a group trust or any other form
of entity the assets of which are ``plan assets'' under the Plan Asset
Regulation, which entity is engaged in securities lending arrangements
with SSB, the foregoing $50 million requirement is satisfied if such
trust or other entity has aggregate assets which are in excess of $50
million (excluding the assets of any Client Plan with respect to which
the fiduciary responsible for making the investment decision on behalf
of such group trust or other entity or any member of the controlled
group of corporations including such fiduciary is the employer
maintaining such Client Plan or an employee organization whose members
are covered by such Client Plan). However, the fiduciary responsible
for making the investment decision on behalf of such group trust or
other entity--
(i) Has full investment responsibility with respect to plan assets
invested therein; and
(ii) Has total assets under its management and control, exclusive
of the $50 million threshold amount attributable to plan investment in
the commingled entity, which are in excess of $100 million.
(In addition, none of the entities described above are formed for the
sole purpose of making loans of securities.)
(o) With respect to each successive two-week period, on average, at
least 50 percent or more of the outstanding dollar value of securities
loans negotiated on behalf of Client Plans will be to unrelated
borrowers.
(p) In addition to the above, all loans involving the Foreign
Affiliates have the following supplemental requirements:
(1) Such Foreign Affiliate is registered as a broker-dealer or bank
with--
(i) The Securities and Futures Authority of the United Kingdom (the
[[Page 10495]]
Securities and Futures Authority) in the case of SB/U.K.;
(ii) The Ministry of Finance and the Tokyo Stock Exchange in the
case of SSB/Asia;
(iii) The Deutsche Bundesbank and the Federal Banking Supervisory
Authority (Bundesaufsichtsamt fuer das Kreditwesen, hereinafter
referred to as the BAK) in the case of SSB/Germany;
(iv) The Ontario Securities Commission and the Investment Dealers
Association in the case of SSB/Canada; and
(v) The Australian Securities & Investments Commission and the
Australian Stock Exchange Limited in the case of SSB/Australia.
(2) Such broker-dealer or bank is in compliance with all applicable
rules and regulations thereof as well as with all requirements of Rule
15a-6 (17 CFR 240.15a-6) under the Securities Exchange Act of 1934 (the
1934 Act) which provides foreign broker-dealers and banks a limited
exemption from United States registration requirements and
interpretations and amendments thereof to Rule 15a-6 by the Securities
and Exchange Commission (the SEC), to the extent applicable;
(3) All collateral is maintained in United States dollars or
dollar-denominated securities or letters of credit;
(4) All collateral is held in the United States and Citibank
maintains the situs of the securities Loan Agreements in the United
States under an arrangement that complies with the indicia of ownership
requirements under section 404(b) of the Act and the regulations
promulgated under 29 CFR 2550.404(b)-1; and
(5) The Foreign Affiliate provides SSB (i.e., Salomon Smith Barney
Inc.) a written consent to service of process in the United States for
any civil action or proceeding brought in respect of the securities
lending transaction, which consent provides that process may be served
on such borrower by service on SSB (i.e., Salomon Smith Barney Inc.).
(q) Citibank and its affiliates maintain, or cause to be maintained
within the United States for a period of six years from the date of
such transaction, in a manner that is convenient and accessible for
audit and examination, such records as are necessary to enable the
persons described in paragraph (r)(1) to determine whether the
conditions of the exemption have been met, except that--
(1) A prohibited transaction will not be considered to have
occurred if, due to circumstances beyond the control of Citibank and/or
its affiliates, the records are lost or destroyed prior to the end of
the six year period; and
(2) No party in interest other than Citibank shall be subject to
the civil penalty that may be assessed under section 502(i) of the Act,
or to the taxes imposed by section 4975(a) and (b) of the Code, if the
records are not maintained, or are not available for examination as
required below by paragraph (r)(1).
(r)(1) Except as provided in subparagraph (r)(2) of this paragraph
and notwithstanding any provisions of subsections (a)(2) and (b) of
section 504 of the Act, the records referred to in paragraph (q) are
unconditionally available at their customary location during normal
business hours by:
(i) Any duly authorized employee or representative of the
Department, the Internal Revenue Service or the SEC;
(ii) Any fiduciary of a participating Client Plan or any duly
authorized representative of such fiduciary;
(iii) Any contributing employer to any participating Client Plan or
any duly authorized employee representative of such employer; and
(iv) Any participant or beneficiary of any participating Client
Plan, or any duly authorized representative of such participant or
beneficiary.
(r)(2) None of the persons described above in paragraphs
(r)(1)(ii)-(r)(1)(iv) of this paragraph (r)(1) are authorized to
examine the trade secrets of SSB or commercial or financial information
which is privileged or confidential.
EFFECTIVE DATE: If granted, this proposed exemption will be effective
as of October 8, 1998.
Preamble
In April 1998, the Travelers Group (Travelers) and Citicorp
announced a proposed merger (the Merger) whereby Citicorp would be
merged into a subsidiary of Travelers and Travelers would become a bank
holding company and change its name to ``Citigroup Inc.'' The Merger,
which was subject to approval by shareholders of each company and
various regulatory entities, occurred on October 8, 1998.
Following the Merger, some of the borrowers with which Citibank may
have transacted business as securities lending agent included certain
broker-dealers affiliated with Travelers and other entities which were
not affiliated with Citibank prior to the Merger. Also included in this
group were certain affiliates with which Citibank, as securities
lending agent, had not previously engaged in securities loans on behalf
of Client Plans. Although Citibank does not lend Client Plan securities
to any of its current affiliates, upon consummation of the Merger,
loans to SSB entity borrowers made on behalf of employee benefit plans
for which Citibank acts as securities lending agent would then
constitute loans to affiliates of Citibank which would be in violation
of the Act.
Rather than unwind the securities loans prior to the Merger,
Citibank and SSB have requested an individual exemption to continue the
pre-existing lending arrangement. If granted, the proposed exemption
would be effective as of the date of the Merger. In addition, the
exemption would apply to successors in interest to U.S.-based
affiliates and Foreign Affiliates of SSB or Citibank, provided the
successors remain affiliates of such entities.
Summary of Facts and Representations
1. The parties to the transactions are described as follows:
(a) SSB, a Delaware corporation, is a subsidiary of Salomon Smith
Barney Holdings, Inc., a Delaware Corporation, which in turn, is a
subsidiary of Travelers and an affiliate of Citibank since the Merger
of October 8, 1998. SSB is one of the largest full-line investment
service firms in the United States. It is registered with and regulated
by the SEC as a broker-dealer and as a futures commission merchant with
the Commodities Futures Trading Commission. It is a member of the New
York Stock Exchange and other principal securities exchanges in the
United States. It is also a member of the National Association of
Securities Dealers, Inc. As of December 31, 1997, Travelers had
approximately $387 billion in assets and approximately $21 billion in
shareholders' equity.
Acting as principal, SSB actively engages in the borrowing and
lending of securities, with daily outstanding loan volume averaging
several billion dollars. SSB utilizes borrowed securities to satisfy
its trading requirements or to re-lend to other broker-dealers and
others who need a particular security for various periods of time. All
borrowings by SSB conform to the Federal Reserve Board's Regulation T.
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 other similar
situations.
(b) Citibank is a wholly owned subsidiary of the Citicorp, a bank
holding company organized in 1967 under the laws of the State of
Delaware and also an affiliate of Travelers since the Merger of October
8, 1998. Originally organized on June 16, 1812, Citibank is a national
banking association organized under the National Bank Act of 1864. As a
member
[[Page 10496]]
of the Federal Reserve System, Citibank is a ``bank'' as defined in
both section 202(a)(2) of the Investment Advisers Act of 1940 (the
Advisers Act) and section 581 of the Code.6 Citibank is the
second largest commercial bank in the United States and it maintains
its principal place of business at 399 Park Avenue, New York, New York.
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\6\ In relevant part, section 202(a)(2) of the Advisers Act and
section 581 of the Code state that a ``bank'' is a banking
institution, bank or trust company incorporated and doing business
under the laws of the United States.
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Citibank, a major provider of trustee and related fiduciary
services, is one of the largest providers of custodial services in the
United States, with more than $700 billion of assets under custody in
the U.S. Such assets include those held by Citibank as a global
custodian for U.S. pension plans, governmental plans and other tax-
exempt investors.
In addition, Citibank provides securities lending services to many
of its institutional clients. On behalf of such clients, Citibank
negotiates the terms of loans with borrowers and otherwise acts as a
liaison between the lender and the borrower to facilitate the lending
transaction. Further, Citibank has responsibility for monitoring
receipt of all required collateral and marking such collateral to
market daily so that adequate levels of collateral are maintained and
evaluating, on a continuous basis, the performance and creditworthiness
of the borrowers of securities.
From time to time, Citibank may be retained by other securities
lending agents to provide securities lending services in a sub-agent
capacity with respect to portfolio securities of clients of such other
lending agents. As securities lending agent, Citibank's role in the
lending transactions parallels those under lending transactions for
which it acts as primary lending agent on behalf of its clients.
(c) SSB/U.S. currently consists of SSB, Citicorp Investment
Services Inc. (CISI) and Citicorp Securities Services, Inc. (CSSI).
CISI is a wholly owned subsidiary of Citibank. CSSI is an indirect
subsidiary of Citicorp. Both CISI and CSSI, which are located in New
York, are U.S. registered broker-dealers. CSSI is also a member of the
New York Stock Exchange as well as certain other principal exchanges in
the United States.
(d) The Foreign Affiliates of SSB and Citibank include SB/U.K.,
SSB/Asia, SSB/Germany, SSB/Canada and SSB/Australia.
(i) SB/U.K. currently consists of Salomon Brothers U.K. Limited,
Salomon Brothers U.K. Equity Limited and Salomon Brothers
International. These broker-dealers, which are indirect subsidiaries of
Travelers, are located in the United Kingdom and are subject to
regulation by the Securities and Futures Authority. In the future, SB/
U.K. also will include any other SSB or Citibank affiliate that is
based in the United Kingdom.
(ii) SSB/Asia currently consists of Salomon Smith Barney Asia
Limited, an indirect subsidiary of Travelers and a broker-dealer. SSB/
Asia is located in Japan and is subject to regulation by the Ministry
of Finance and the Tokyo Stock Exchange. In the future, SSB/Asia also
will include any other SSB or Citibank affiliate that is based in
Japan.
(iii) SSB/Germany, which currently consists of Salomon Brothers AG,
a bank, is subject to regulation in Germany by the Deutsche Bundesbank
and the BAK. In the future, SSB/Germany also will include any other SSB
or Citibank affiliate that is based in Germany.
(iv) SSB/Canada, which currently consists of Salomon Smith Barney
Canada Inc., a broker-dealer, is subject to regulation in Canada by the
Ontario Securities Commission and the Investment Dealers Association.
In the future, SSB/Canada also will include any other SSB or Citibank
affiliate that is based in Canada.
(v) SSB/Australia, which currently consists of Salomon Smith Barney
Australia Securities Pty Limited, a broker-dealer, is subject to
regulation in Australia by the Australian Securities & Investments
Commission and the Australian Stock Exchange Limited. In the future,
SSB/Australia also will include or any other SSB or Citibank affiliate
that is based in Australia.
2. Although not registered with the United States SEC as broker-
dealers, the Foreign Affiliates of SSB that are broker-dealers are
subject to the rules, regulations and membership requirements of their
respective regulatory entities (the Foreign Broker-Dealer Regulatory
Entities). For example, SB/U.K. is subject to the rules and regulatory
requirements of the Securities and Futures Authority. SSB/Asia subject
to the rules and regulatory requirements of the Ministry of Finance and
the Tokyo Stock Exchange. SSB/Canada is subject to regulation by the
Ontario Securities Commission and the Investment Dealers Association, a
self-regulatory organization. SSB/Australia is subject to regulation
primarily by the Australian Stock Exchange Limited and, on a more
limited basis, by the Australian Securities and Investment Commission.
Each of the aforementioned Foreign Affiliates is subject to rules
relating to minimum capitalization, reporting requirements, periodic
examinations, client money and safe custody rules and books and records
requirements with respect to client accounts. These rules and
regulations promulgated by the Foreign Broker-Dealer Regulatory
Entities and the SEC share a common objective: the protection of the
investor by the regulation of the securities industry. The rules of the
Foreign Broker-Dealer Regulatory Entities (the Australian Stock
Exchange Limited in the case of SSB/Australia) require each firm which
employs registered representatives or registered traders to have a
positive tangible net worth and be able to meet its obligations as they
may fall due. In addition, the rules of the Foreign Broker-Dealer
Regulatory Entities (the Australian Stock Exchange Limited in the case
of SSB/Australia) set forth comprehensive financial resource and
reporting/disclosure rules regarding capital adequacy. Further, to
demonstrate capital adequacy, the rules of the Foreign Broker-Dealer
Regulatory Entities (the Australian Stock Exchange Limited in the case
of SSB/Australia) impose reporting/disclosure requirements on broker-
dealers with respect to risk management, internal controls, and
transaction reporting and recordkeeping requirements to the effect that
required records must be produced at the request of the Foreign Broker-
Dealer Regulatory Entities. Finally, the rules and regulations of the
Foreign Broker-Dealer Regulatory Entities impose potential fines and
penalties on broker-dealers which establish a comprehensive
disciplinary system.
3. Similarly, SSB/Germany is subject to regulation in Germany by
the Deutsche Bundesbank and the BAK. The Deutsche Bundesbank is the
central bank of the German banking system and is responsible for the
regulation of the money supply and credit supply to the economy, aimed
at safeguarding the Deutsche Mark. The Bundesbank also provides for
bank-based execution of domestic and foreign payments. The BAK is an
independent federal institution with ultimate responsibility to the
German Ministry of Finance. The BAK supervises the operations of banks,
banking groups, financial holding groups and branches of foreign banks
in Germany, and has the authority to (a) issue and withdraw banking
licenses, (b) issue regulations on capital and liquidity requirements
of banks, (c) request information and conduct investigations, (d)
intervene in cases of inadequate capital or liquidity or in
[[Page 10497]]
cases of endangered deposits or risk of bankruptcy by means of
temporarily prohibiting certain banking transactions.
The BAK ensures that SSB/Germany has procedures for monitoring and
controlling its world-wide activities through various statutory and
regulatory standards. Among these standards are requirements for
adequate internal controls, oversight, administration and financial
resources. The BAK reviews compliance with these limitations on
operations and internal control requirements through an annual audit
performed by the year-end auditor and through special audits as ordered
by the BAK and the respective State Central Bank auditors.
The BAK obtains information on the condition of SSB/Germany and its
branches in Tokyo and Milan by requiring the submission of periodic,
consolidated financial reports and through a mandatory annual report
prepared by the auditor. The BAK also receives information regarding
capital adequacy, country risk exposure and foreign exchange exposures
from SSB/Germany.
German banking law mandates penalties to ensure correct reporting
to the BAK. The auditors face penalties for gross violation of their
auditing duties.
4. Aside from the protections afforded by the Foreign Broker-Dealer
Regulatory Entities and, in the case of SSB/Germany, the Deutsche
Bundesbank and the BAK, SSB represents that the Foreign Affiliates will
comply with all applicable provisions of Rule 15a-6 of the 1934
Act.7 Rule 15a-6 provides foreign broker-dealers with a
limited exemption from SEC registration requirements and, as described
below, offers additional protections. Specifically, Rule 15a-6 provides
an exemption from U.S. broker-dealer registration for a foreign broker-
dealer that induces or attempts to induce the purchase or sale of any
security (including over-the-counter equity and debt options) by a
``U.S. institutional investor'' or a ``U.S. major institutional
investor,'' provided that the foreign broker-dealer, among other
things, enters into these transactions through a U.S. registered
broker-dealer intermediary. The term ``U.S. institutional investor,''
as defined in Rule 15a-6(b)(7), includes an employee benefit plan
within the meaning of the Act if (a) the investment decision is made by
a plan fiduciary, as defined in section 3(21) of the Act, which is
either a bank, savings and loan association, insurance company or
registered investment adviser, or (b) the employee benefit plan has
total assets in excess of $5 million, or (c) the employee benefit plan
is a self-directed plan with investment decisions made solely by
persons that are ``accredited investors'' as defined in Rule 501(a)(1)
of Regulation D of the Securities Exchange Act of 1933, as amended. The
term ``U.S. major institutional investor'' is defined in Rule 15a-
6(b)(4) as a person that is a U.S. institutional investor that has
total assets in excess of $100 million or an investment adviser
registered under Section 203 of the Advisers Act that has total assets
under management in excess of $100 million.8
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\7\ According to the applicants, section 3(a)(4) of the 1934 Act
defines ``broker'' to mean ``any person engaged in the business of
effecting transactions in securities for the account of others, but
it does not include a bank. Section 3(a)(5) of the 1934 Act provides
a similar exclusion for ``banks'' in the definition of the term
``dealer.'' However, section 3(a)(6) of the 1934 Act defines
``bank'' to mean a banking institution organized under the laws of
the United States or a State of the United States. Further, Rule
15(a)(6)(b)(2) provides that the term ``foreign broker or dealer''
means ``any non-U.S. resident person * * *. whose securities
activities, if conducted in the United States, would be described by
the definition of ``broker'' or ``dealer'' in sections 3(a)(4) or
3(a)(5) of the (1934) Act.'' Therefore, the test of whether an
entity is a ``foreign broker'' or ``dealer'' is based on the nature
of such foreign entity's activities and, with certain exceptions,
only banks that are regulated by either the United States or a State
of the United States are excluded from the definition of the term
``broker'' or ``dealer.'' Thus, for purposes of this exemption
request, the applicants are willing to represent that they will
comply with the applicable provisions and relevant SEC
interpretations and amendments of Rule 15a-6.
\8\ See also SEC No-Action Letter issued to Cleary, Gottlieb,
Steen & Hamilton on April 9, 1997 (hereinafter, the April 9, No-
Action Letter), expanding the definition of the term ``U.S. Major
Institutional Investor.''
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5. SSB represents that under Rule 15a-6, a foreign broker-dealer
that induces or attempts to induce the purchase or sale of any security
by a U.S. institutional or major institutional investor must, among
other things--
(a) Consent to service of process for any civil action brought by,
or proceeding before, the SEC or any self-regulatory organization;
(b) Provide the SEC (upon request or pursuant to agreements reached
between any foreign securities authority, including any foreign
government, and the SEC or the U.S. Government) with any information or
documents within the possession, custody or control of the foreign
broker-dealer, any testimony of any such foreign associated persons,
and any assistance in taking the evidence of other persons, wherever
located, that the SEC requests and that relates to transactions
effected pursuant to the Rule;
(c) Rely on the U.S. registered broker-dealer 9 through
which the transactions with the U.S. institutional and major
institutional investors are effected to (among other things):
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\9\ The Foreign Affiliates, in lieu of relying on a U.S. broker-
dealer and to the extent permitted by applicable U.S. securities
law, may rely on a U.S. bank or trust company, including Citibank,
to perform this role.
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(1) Effect the transactions, other than negotiating their terms;
(2) Issue all required confirmations and statements;
(3) As between the foreign broker-dealer and the U.S. registered
broker-dealer, extend or arrange for the extension of credit in
connection with the transactions;
(4) Maintain required books and records relating to the
transactions, including those required by Rules
17a-3 (Records to be Made by Certain Exchange Members) and 17a-4
(Records to be Preserved by Certain Exchange Members, Brokers and
Dealers) of the 1934 Act;
(5) Receive, deliver and safeguard funds and securities in
connection with the transactions on behalf of the U.S. institutional
investor or U.S. major institutional investor in compliance with Rule
15c3-3 of the 1934 Act (Customer Protection--Reserves and Custody of
Securities); 10 and
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\10\ Under certain circumstances described in the April 9, 1997
No-Action Letter (e.g., clearance and settlement transactions),
there may be direct transfers of funds and securities between the
Client Plan and a Foreign Affiliate. SSB notes that in such
situations, the U.S. registered broker-dealer will not be acting as
a principal with respect to any duties it is required to undertake
pursuant to Rule
15a-6.
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(6) Participate in certain oral communications (e.g., telephone
calls) between the foreign associated person and the U.S. institutional
investor (not the U.S. major institutional investor), and accompany the
foreign associated person on certain visits with both U.S.
institutional and major institutional investors. By virtue of this
participation, the U.S. registered broker-dealer would become
responsible for the content of all these communications.11
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\11\ Under certain circumstances, the foreign associated person
may have direct communications and contact with the U.S.
Institutional Investor. See April 9 SEC No-Action Letter.
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6. Citibank, as securities lending agent, pursuant to authorization
from its client, will negotiate the terms of loans with borrowers
pursuant to a client-approved form of Loan Agreement and will act as a
liaison between the lender (and its custodian) and the borrower to
facilitate the lending transaction. No loans of futures contracts will
be involved. Citibank will have responsibility for monitoring receipt
of
[[Page 10498]]
all required collateral and marking such collateral to market daily so
that adequate levels of collateral are maintained. Citibank also will
monitor and evaluate on a continuing basis the performance and
creditworthiness of the borrowers. Citibank may also act as a custodian
or directed trustee with respect to the client's portfolio of
securities being loaned.12 Citibank may be authorized from
time to time by a client to receive and hold pledged collateral and
invest cash collateral pursuant to guidelines established by the
client. All of Citibank's procedures for lending securities will be
designed to comply with the applicable conditions of PTE 81-6 and PTE
82-63 (as such PTEs may be amended or superseded).13
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\12\ Citibank wishes to clarify the fact that an independent
fiduciary of a Client Plan may also appoint Citibank or an affiliate
of Citibank to manage cash collateral and to receive a reasonable
and customary investment management fee, provided that the Client
Plan fiduciary, after receiving full disclosure, approves the
compensation arrangement, the terms of which will be described in a
written agreement.
\13\ PTE 81-6 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.
PTE 82-63 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.
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7. Citibank may be retained occasionally by other securities
lending agents to provide securities lending services in a sub-agent
capacity with respect to portfolio securities of clients of such other
lending agents. As securities lending sub-agent, Citibank's role under
the lending transactions (i.e., negotiating the terms of loans with
borrowers pursuant to a client-approved form of Loan Agreement and
monitoring receipt of, and marking to market, required collateral)
parallels those under lending transactions for which Citibank acts as
primary lending agent on behalf of its clients.14
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\14\ As noted previously, the Department is not providing
exemptive relief herein for securities lending transactions that are
engaged in by primary lending agents, other than Citibank and its
affiliates, beyond that provided by PTEs 81-6 and 82-63.
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8. When a loan is collateralized with cash, the cash will be
invested for the benefit and at the risk of the Client Plan, and
resulting earnings (net of a rebate to the borrower) comprise the
compensation to the Client Plan in respect of such loan. Where
collateral consists of obligations other than cash, the borrower pays a
fee (loan premium) directly to the lending Client Plan.
9. Accordingly, SSB and Citibank request an exemption that would be
effective on October 8, 1998, the date of the Merger, with respect to
(a) the lending of securities owned by employee benefit plans for which
Citibank serves or will serve as securities lending agent or sub-agent
(referred to herein as the Client Plans) 15 to SSB/U.S., SB/
U.K., SSB/Asia, SSB/Canada, SSB/Germany and SSB/Australia, following
disclosure of its affiliation with SSB, and (b) for the receipt of
compensation by Citibank in connection with such
transactions.16 For each Client Plan, neither Citibank, SSB
nor any affiliate will have discretionary authority or control or
render investment advice over Client Plans' decisions concerning the
acquisition or disposition of securities available for loan. Citibank's
discretion will be limited to activities such as negotiating the terms
of the securities loans with SSB and (to the extent granted by the
Client Plan fiduciary) investing any cash collateral received in
respect of the loans. Because Citibank, under the proposed arrangement,
would have discretion to lend Client Plan securities to SSB, and
because SSB is an affiliate of Citibank, the lending of securities to
SSB by Client Plans for which Citibank serves as securities lending
agent (or sub-agent) may be outside the scope of relief provided by PTE
81-6 and PTE 82-63. Further, loans to the Foreign Affiliates would be
outside of the relief granted in PTE 81-6. Therefore, several
safeguards, described more fully below, are incorporated in the
application in order to ensure the protection of the Client Plan assets
involved in the transactions. In addition, the applicants represent
that the proposed lending program incorporates the conditions contained
in PTE 81-6 and PTE 82-63 and will be in compliance with all applicable
securities laws of the United States.
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\15\ For the sake of simplicity, future references to Citibank's
performance of services as securities lending agent should be deemed
to include its parallel performance as securities lending sub-agent
and references to Client Plans should be deemed to refer to plans
for which Citibank is acting as sub-agent with respect to securities
lending activities, unless otherwise indicated specifically or by
the context of the reference.
\16\ As noted above, the proposed exemption will also apply to
successors in interest to U.S-based affiliates and Foreign
Affiliates of SSB or Citibank, provided the successors remain
affiliates of such entities.
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10. Where Citibank is the direct securities lending agent, a
fiduciary of a Client Plan who is independent of Citibank and SSB will
sign a securities lending agency agreement with Citibank (the Agency
Agreement) before the Client Plan participates in a securities lending
program. The Agency Agreement will, among other things, describe the
operation of the lending program, prescribe the form of securities Loan
Agreement to be entered into on behalf of the Client Plan with
borrowers, specify the securities which are available to be lent,
required margin and daily marking-to-market, and provide a list of
permissible borrowers, including SSB. The Agency Agreement will also
set forth the basis and rate for Citibank's compensation from the
Client Plan for the performance of securities lending services.
11. The Agency Agreement will contain provisions to the effect that
if SSB is designated by the Client Plan as an approved borrower (a) the
Client Plan will acknowledge that SSB is an affiliate of Citibank and
(b) Citibank will represent to the Client Plan that each and every loan
made to SSB on behalf of the Client Plan will be at market rates which
are no less favorable to the Client Plan than a loan of such
securities, made at the same time and under the same circumstances, to
an unaffiliated borrower.
12. When Citibank is lending securities under a sub-agency
arrangement, the primary lending agent will enter into a securities
lending agency agreement (the Primary Lending Agreement) with a
fiduciary of a Client Plan who is independent of such primary lending
agent, Citibank or SSB, before the Client Plan participates in the
securities lending program. The primary lending agent will be
unaffiliated with Citibank or SSB. Citibank will not enter into a sub-
agent arrangement unless the Primary Lending Agreement contains
substantive provisions akin to those in the Agency Agreement relating
to the description of the operation of the lending program, use of an
approved form of Loan Agreement, specification of securities which are
available to be lent, required margin and daily marking-to-market, and
provision of a list of approved borrowers (which will include SSB). The
Primary Lending Agreement will specifically authorize the primary
lending agent to appoint sub-agents, to facilitate its performance of
securities lending agency functions. Where Citibank is to act as such a
sub-agent, the Primary Lending Agreement will expressly disclose that
Citibank is to so act. The Primary Lending Agreement will also set
forth the basis and rate for the primary lending agent's compensation
from the Client Plan for the performance of securities lending services
and will authorize the primary lending agent to pay a portion of its
fee, as the primary lending agent determines
[[Page 10499]]
in its sole discretion, to any sub-agent(s) it retains pursuant to the
authority granted under such agreement.
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 Citibank under which the primary
lending agent will retain and authorize Citibank, as sub-agent, to lend
securities of the primary lending agent's Client Plans, subject to the
same terms and conditions as are specified in the Primary Lending
Agreement. Thus, for example, the form of Loan Agreement will be the
same as that approved by the Client Plan fiduciary in the Primary
Lending Agreement and the list of permissible borrowers under the Sub-
Agency Agreement (which will include SSB) will be limited to those
approved borrowers listed as such under the Primary Lending Agreement.
Citibank states that the Sub-Agency Agreement will contain
provisions which are in substance comparable to those described in
Representations 10 and 11 above, which would appear in an Agency
Agreement in situations where Citibank is the primary lending agent. In
this regard, Citibank will make the same representation in the Sub-
Agency Agreement as described in Representation 10 above with respect
to arm's length dealing with SSB. The Sub-Agency Agreement will also
set forth the basis and rate for Citibank's compensation to be paid by
the primary lending agent.
13. In all cases, Citibank will maintain transactional and market
records sufficient to assure compliance with its representation that
all loans to SSB are effectively at arm's length terms. Such records
will be provided to the appropriate Client Plan fiduciary in the manner
and format agreed to with the lending fiduciary, without charge to the
Client Plan. A Client Plan may terminate the Agency Agreement (or the
Primary Lending Agreement) at any time, without penalty to the Plan, on
five business days notice.
14. Citibank will negotiate the Loan Agreement with SSB on behalf
of Client Plans as it does with all other borrowers. An independent
fiduciary of the Client Plan will approve the terms of the Loan
Agreement. The Loan Agreement will specify, among other things, the
right of the Client Plan to terminate a loan at any time and the Plan's
rights in the event of any default by SSB. The Loan Agreement will
explain the basis for compensation to the Client Plan for lending
securities to SSB under each category of collateral. The Loan Agreement
also will contain a requirement that SSB must pay all transfer fees and
transfer taxes related to the security loans.
15. Before entering into the Loan Agreement, SSB will furnish its
most recently available audited and unaudited financial statements to
Citibank, and in turn, such statements will be provided to a Client
Plan before the Client Plan is asked to approve the terms of the Loan
Agreement. The Loan Agreement will contain a requirement that SSB must
give prompt notice at the time of a loan of any material adverse
changes in its financial condition since the date of the most recently
furnished financial statements.17 If any such changes have
taken place, Citibank will not make any further loans to SSB unless an
independent fiduciary of the Client Plan has approved the loan in view
of the changed financial condition. Conversely, if SSB fails to provide
notice of such a change in its financial condition, such failure will
trigger an event of default under the Loan Agreement.
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\17\ With respect to capital adequacy rules for brokerage firms
domiciled in the United States, including SSB, it is represented
that such firms are subject to the capital adequacy rules of their
respective regulatory agencies, i.e., the SEC, the New York Stock
Exchange, the National Association of Securities Dealers and other
self-regulatory authorities. If these brokerage firms fail to meet
such requirements, they are subject to fines, penalties and possibly
more stringent sanctions.
As for SB/U.K., SSB/Asia, SSB/Canada and SSB/Canada, which are
subject to the capital adequacy provisions of their respective
regulatory authorities, it is represented that such rules require
the Foreign Affiliates to maintain, at all times, financial
resources in excess of its financial resources requirement (the
Financial Resources Requirement). For this purpose, financial
resources include equity capital, approved subordinated debt and
retained earnings, less deductions for illiquid assets. The
Financial Resources Requirement includes capital requirements for
market risk, credit risk, foreign exchange risk and large exposures.
The rules of each applicable Foreign Broker-Dealer Regulatory
Entity, require that if a firm's financial resources fall below a
certain percentage (e.g., 120 percent with respect to the United
Kingdom's Securities and Futures Authority and 150 percent with
respect to the Ministry of Finance and the Tokyo Stock Exchange) of
its Financial Resources Requirement, the such Foreign Broker-Dealer
Regulatory Entity must be notified so that it can examine the terms
of the firm's financial position and require an infusion of more
capital, if needed. In addition, a breach of the requirement to
maintain financial resources in excess of the Financial Resources
Requirement may lead to sanctions by the applicable Foreign Broker-
Dealer Regulatory Entity. If the breach is not promptly resolved,
such Foreign Broker-Dealer Regulatory Entity may restrict the firm's
activities.
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16. As noted above, the agreement by Citibank to provide securities
lending services, as agent, to a Client Plan will be embodied in the
Agency Agreement. The Client Plan and Citibank will agree to the
arrangement under which Citibank will be compensated for its services
as lending agent, including services as custodian and manager of the
cash collateral received, prior to the commencement of any lending
activity. Such agreed upon fee arrangement will be set forth in the
Agency Agreement and thereby will be subject to the prior written
approval of a fiduciary of the Client Plan who is independent of SSB
and Citbank. Similarly, with respect to arrangements under which
Citibank is acting as securities lending sub-agent, the agreed upon fee
arrangement of the primary lending agent will be set forth in the
Primary Lending Agreement, and such agreement will specifically
authorize the primary lending agent to pay a portion of such fee, as
the primary lending agent determines in its sole discretion, to any
sub-agent, including Citibank, which is to provide securities lending
services to the Client Plan.18 The Client Plan will be
provided with any reasonably available information which is necessary
for the Client Plan fiduciary to make a determination whether to enter
into or continue to participate under the Agency Agreement (or the
Primary Lending Agreement) and any other reasonably available
information which the Client Plan fiduciary may reasonably request.
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\18\ 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 condition (f) of PTE 82-63 will be satisfied.
---------------------------------------------------------------------------
17. Each time a Client Plan lends securities to SSB pursuant to the
Loan Agreement, Citibank will reflect in its records the material terms
of the loan, including the securities to be loaned, the required level
of collateral, and the fee or rebate payable. The terms of the fee or
rebate payable for each loan will be at least as favorable to the
Client Plan as those of a comparable arm's length transaction between
unrelated parties.
18. The Client Plan will be entitled to the equivalent of all
interest, dividends and distributions on the loaned securities during
the loan period. The Loan Agreement will provide that the Client Plan
may terminate any loan at any time. Upon a termination, SSB will be
contractually obligated to return the loaned securities to the Client
Plan within five business days of notification or the customary
settlement period in the respective jurisdiction, whichever is less (or
such longer period of time permitted pursuant to a class exemption). If
SSB fails to return the securities within the designated time, the
Client Plan will have the right under
[[Page 10500]]
the Loan Agreement to purchase securities identical to the borrowed
securities and apply the collateral to payment of the purchase price
and any other expenses of the Client Plan associated with the sale and/
or purchase.
19. Citibank will establish each day a written schedule of lending
fees 19 and rebate rates 20 in order to assure
uniformity of treatment among borrowing brokers and to limit the
discretion Citibank would have in negotiating securities loans to SSB.
Loans to all borrowers of a given security on that day will be made at
rates or lending fees on the relevant daily schedules or at rates or
lending fees which may be more advantageous to the Client Plans. It is
represented that in no case will loans be made to SSB at rates or
lending fees that are less advantageous to the Client Plans than those
on the schedule. The daily schedule of rebate rates will be based on
the current value of the clients' reinvestment vehicles and on market
conditions, as reflected by demand for securities by borrowers other
than SSB. As with rebate rates, the daily schedule of lending fees will
also be based on market conditions, as reflected by demand for
securities by borrowers other than SSB, and will generally track the
rebate rates with respect to the same security or class of security.
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\19\ Citibank will adopt minimum daily lending fees for non-cash
collateral payable by SSB to Citibank on behalf of a Client Plan.
Citibank will submit the method for determining such minimum daily
lending fees to an independent fiduciary of the Client Plan for
approval before initially lending any securities to SSB on behalf of
such Client Plan.
\20\ Citibank will adopt separate maximum daily rebate rates
with respect to securities loans collateralized with cash
collateral. Such rebate rates will be based upon an objective
methodology which takes into account several factors, including
potential demand for loaned securities, the applicable benchmark
cost of fund indices, and anticipated investment return on overnight
investments permitted by the Client Plan's independent fiduciary.
Citibank will submit the method for determining such maximum daily
rebate rates to such fiduciary before initially lending any
securities to SSB on behalf of the Client Plan.
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20. The rebate rates (in respect of cash-collateralized loans made
by Client Plans) which are established will also take into account the
potential demand for loaned securities, the applicable benchmark cost
of funds indices (typically, Federal Funds, overnight repo rate or the
like) and anticipated investment return on overnight investments which
are permitted by the relevant Client Plan fiduciary. Further, 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.
21. Citibank will negotiate rebate rates for cash collateral
payable to each borrower, including SSB, on behalf of a Client Plan.
Where, for example, cash collateral derived from an overnight loan is
intended to be invested in a generic repurchase agreement, any rebate
fee determined with respect to an overnight repurchase agreement
benchmark will be set below the applicable ``ask'' quotation therefor.
Where cash collateral is derived from a loan with an expected maturity
date (term loan) and is intended to be invested in instruments with
similar maturities, the maximum rebate fee will be less than the
expected investment return (assuming no investment default). With
respect to any loan to SSB, Citibank will never negotiate a rebate rate
with respect to such loan which would be expected to produce a zero or
negative return to the Client Plan (assuming no default on the
investments related to the cash collateral from such loan where
Citibank has investment discretion over the cash collateral). Citibank
represents that the written rebate rate established daily for cash
collateral under loans negotiated with SSB will not exceed the rebate
rate which would be paid to a similarly situated unrelated borrower
with respect to a comparable securities lending transaction. Citibank
will disclose the method for determining the maximum daily rebate rate
as described above to an independent fiduciary of a Client Plan for
approval before lending any securities to SSB on behalf of the Client
Plan.
22. For collateral other than cash, the applicable loan fee in
respect of any outstanding loan is reviewed daily for competitiveness
and adjusted, where necessary, to reflect market terms and conditions
(see Representation 24). With respect to each successive two-week
period, on average, at least 50 percent or more of the outstanding
dollar value of securities loans negotiated on behalf of Client Plans
will be to unrelated borrowers so the competitiveness of the loan fee
will be tested in the marketplace. Accordingly, loans to SSB should
result in competitive rate income to the lending Client Plan. At all
times, Citibank will effect loans in a prudent and diversified manner.
While Citibank will normally lend securities to requesting borrowers on
a ``first come, first served'' basis, as a means of assuring uniformity
of treatment among borrowers, it should be recognized that in some
cases it may not be possible to adhere to a ``first come, first
served'' allocation. This can occur, for instance where (a) the credit
limit established for such borrower by Citibank and/or the Client Plan
has already been satisfied; (b) the ``first in line'' borrower is not
approved as a borrower by the particular Client Plan whose securities
are sought to be borrowed; and (c) the ``first in line'' borrower
cannot be ascertained, as an operational matter, because several
borrowers spoke to different Citibank representatives at or about the
same time with respect to the same security.21 In situations
(a) and (b), loans would normally be effected with the ``second in
line.'' In situation (c), securities would be allocated equitably among
all eligible borrowers.
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\21\ It is represented that the ``first come, first served''
allocation would not apply where Citibank is not acting as a
securities lending agent, but rather is acting as, for example, a
custodian to a Client Plan that has entered into an exclusive
arrangement with the borrower. See PTE 96-56 (61 FR 37933, July 22,
1996) issued to Smith Barney, Inc.
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23. The method of determining the daily securities lending rates
(fees and rebates), the minimum lending fees payable by SSB and the
maximum rebate payable to SSB will be specified in an exhibit attached
to the Agency Agreement to be executed between the independent
fiduciary of the Client Plan and Citibank in cases where Citibank is
the direct securities lending agent.
24. If Citibank reduces the lending fee or increases the rebate
rate on any outstanding loan to an 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), Citibank, by the close of business on the date of such
adjustment, will provide 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. In addition, Citibank will provide the independent
fiduciary of the Client Plan with such information as the fiduciary may
reasonably request regarding such adjustment.
25. Under the Loan Agreement, each SSB borrower will agree to
indemnify and hold harmless the applicable Client Plan (including the
sponsor and fiduciaries of such Client Plan) from any and all
reasonably foreseeable damages, losses, liabilities, costs and expenses
(including attorney's fees) which the Client Plan may incur or suffer
arising in any way from the use by such borrower of the loaned
securities or any failure of such borrower to deliver loaned securities
in accordance with the provisions of the Loan Agreement or to otherwise
comply with the terms of the Loan Agreement except to the extent
[[Page 10501]]
that such losses or damages are caused by the Client Plan's negligence.
In the event the Foreign Affiliate defaults on a loan, Citibank
will liquidate the loan collateral to purchase identical securities for
the Client Plan. If the collateral is insufficient to accomplish such
purchase,22 Citibank will indemnify the Client Plan for any
shortfall in the collateral plus interest on such amount and any
transaction costs incurred. Alternatively, if such identical securities
are not available on the market, Citibank will pay the Client Plan cash
equal to the market value 23 of the borrowed securities as
of the date they should have been returned to the Client Plan plus all
interest and accrued financial benefits derived from the beneficial
ownership of such loaned securities. Under such circumstances, Citibank
will pay the Client Plan an amount equal to (a) the value of the
securities as of the date such securities should have been returned to
the Client Plan plus (b) all of the accrued financial benefits derived
from the beneficial ownership of such loan securities as of such date,
plus (c) interest from such date through the date of payment. (The
amounts paid shall include the cash collateral or other collateral that
is liquidated and held by Citibank on behalf of the Client Plan.)
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\22\ Of course, Citibank will not be responsible for any loss
with respect to cash collateral caused by the Client Plan's
investment thereof directed by or pursuant to guidelines set by the
Client Plan unless it expressly agrees to such liability with the
Client Plan.
\23\ For purposes of this proposed exemption, the ``market
value'' of securities, as of any date, shall be determined on the
basis of the closing prices therefor as of the trading date (for the
principal market in which the securities are traded) immediately
preceding the day of valuation, such determination to be made by the
independent pricing source identified to SSB by the Client Plan upon
the request of SSB. Market value shall include accrued interest in
the case of debt securities.
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26. The Client Plan will receive collateral from SSB by physical
delivery, book entry in a U.S. securities depository, wire transfer or
similar means by the close of business on or before the day the loaned
securities are delivered to SSB. The collateral will consist of cash,
securities issued or guaranteed by the U.S. Government or its agencies
or irrevocable U.S. bank letters of credit (issued by a person other
than Citibank, SSB or their affiliates) or such other types of
collateral which might be permitted by the Department under a class
exemption. The market value of the collateral on the close of business
on the day preceding the day of the loan will be at least 102 percent
of the market value of the loaned securities. The Loan Agreement will
give the Client Plan a continuing security interest in and a lien on
the collateral. Citibank 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 that of the
loaned securities, Citibank will require SSB to deliver by the close of
business the next day sufficient additional collateral to bring the
level back to at least 102 percent.
27. With respect to loans involving the Foreign Affiliates, the
following additional conditions will be applicable: (a) All collateral
will be maintained in United States dollars or dollar-denominated
securities or letters of credit; (b) all collateral is held in the
United States and Citibank maintains the situs of the securities loan
agreements in the United States under an arrangement that complies with
the indicia of ownership requirements under section 404(b) of the Act
and the regulations promulgated under 29 CFR 2550.404(b)-1; and (c) the
Foreign Affiliate provides SSB (i.e., Salomon Smith Barney Inc.) a
written consent to service of process in the United States for any
civil action or proceeding brought in respect of the securities lending
transaction, which consent provides that process may be served on such
borrower by service on SSB (i.e., Salomon Smith Barney Inc.).
28. Each Client Plan participating in the lending program will be
sent a monthly transaction report. The monthly report will provide a
list of all security loans outstanding and closed for a specified
period. The report will identify for each open loan position, the
securities involved, the value of the security for collateralization
purposes, the current value of the collateral, the rebate or loan
premium (as the case may be) at which the security is loaned, and the
number of days the security has been on loan. In addition, if requested
by the lending customer, Citibank will provide daily confirmations of
securities lending transactions, and, with respect to monthly reports,
if requested by the customer, Citibank will compare weekly or daily
reports, setting forth for each transaction made or outstanding during
the relevant reporting period, the loaned securities, the related
collateral, rebates and loan premiums and such other information in
such format as shall be agreed to by the parties. Further, prior to the
approval by a new Client Plan of a securities lending program, SSB will
provide a Client Plan fiduciary with copies of the proposed exemption
and notice granting the exemption.
29. In order to provide the means for monitoring lending activity,
the monthly report will compare rates on loans by the Client Plans to
SSB and rates on loans to other brokers as well as the level of
collateral on the loans. In this regard, the monthly report will show,
on a daily basis, the market value of all outstanding security loans to
SSB and to other borrowers. In addition, 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
SSB and the rates at which securities are loaned to other brokers. This
statement will give an independent fiduciary information which can be
compared to that contained in the daily rate schedule.
30. Only Client Plans with total assets having an aggregate market
value of at least $50 million are permitted to lend securities to SSB.
In the case of two or more Client Plans which are maintained by the
same employer, controlled group of corporations or employee
organization (i.e., the Related Client Plans), whose assets are
commingled for investment purposes in a single master trust or any
other entity the assets of which are ``plan assets'' under the Plan
Asset Regulation), which entity is engaged in securities lending
arrangements with SSB, the foregoing $50 million requirement will be
satisfied if such trust or other entity has aggregate assets which are
in excess of $50 million. However, if the fiduciary responsible for
making the investment decision on behalf of such master trust or other
entity is not the employer or an affiliate of the employer, such
fiduciary must have total assets under its management and control,
exclusive of the $50 million threshold amount attributable to plan
investment in the commingled entity, which are in excess of $100
million.
In the case of two or more Client Plans which are not maintained by
the same employer, controlled group of corporations or employee
organization (i.e., the Unrelated Client Plans), whose assets are
commingled for investment purposes in a group trust or any other form
of entity the assets of which are ``plan assets'' under the Plan Asset
Regulation, which entity is engaged in securities lending arrangements
with SSB, the foregoing $50 million requirement will be satisfied if
such trust or other entity has aggregate assets which are in excess of
$50 million (excluding the assets of any Client Plan with respect to
which the fiduciary responsible for making the investment decision on
behalf of such group trust
[[Page 10502]]
or other entity or any including such fiduciary is the employer
maintaining such Client Plan or an employee organization whose members
are covered by such Client Plan). However, the fiduciary responsible
for making the investment decision on behalf of such group trust or
other entity (a) must have full investment responsibility with respect
to plan assets invested therein; 24 and (b) must have total
assets under its management and control, exclusive of the $50 million
threshold amount attributable to plan investment in the commingled
entity, which are in excess of $100 million.
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\24\ For purposes of this proposed exemption, the term ``full
investment responsibility'' means that the fiduciary responsible for
making investment decisions on behalf of the group trust or other
form of entity, has and exercises discretionary management authority
over all of the assets of the group trust or other plan assets
entity.
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In addition, none of the entities described above must be formed
for the sole purpose of making loans of securities.
31. In summary, the applicants represent that the described
transactions have satisfied or will satisfy the statutory criteria for
an exemption under section 408(a) of the Act because:
(a) The form of the Loan Agreement pursuant to which any loan is
effected has been or will be approved by a fiduciary of the Client Plan
who is independent of SSB and Citibank before a Client Plan lends any
securities to SSB.
(b) The lending arrangements (1) will permit the Client Plans to
lend to SSB and (2) will enable the Client Plans to diversify the list
of eligible borrowers and earn additional income from the loaned
securities on a secured basis, while continuing to receive any
dividends, interest payments and other distributions due on those
securities.
(c) The Client Plans have received or will receive sufficient
information concerning SSB's financial condition before the Plan lends
any securities to SSB.
(d) The collateral on each loan to SSB initially has been and will
be at least 102 percent of the market value of the loaned securities,
which is in excess of the 100 percent collateral required under PTE 81-
6, and has been and will be monitored daily by Citibank.
(e) The Client Plans have received and will receive a monthly
report which provides an independent fiduciary of the Client Plans with
information on loan activity, fees, loan return/yield and the rates on
loans to SSB as compared with loans to other brokers and the level of
collateral on the loans.
(f) Citibank, SSB nor any affiliate has or will have discretionary
authority or control over the Client Plan's acquisition or disposition
of securities available for loan.
(g) The terms of the fee or rebate payable for each loan have been
and will be at least as favorable to the Client Plans as those of a
comparable arm's length transaction between unrelated parties.
(h) All of the procedures under the transactions have conformed or
will conform to the applicable provisions of PTE 81-6 and PTE 82-63 and
also have been and will be in compliance with the applicable securities
laws of the United States, the United Kingdom, Japan, Germany, Canada
and Australia.
Notice to Interested Persons
Notice of the proposed exemption will be provided to interested
persons within 5 days of the publication of the notice of proposed
exemption in the Federal Register. Such notice will be given to Client
Plans that have outstanding securities loans with SSB. The notice will
include a copy of the notice of proposed exemption as published in the
Federal Register and a supplemental statement, as required pursuant to
29 CFR 2570.43(b)(2). The supplemental statement will inform interested
persons of their right to comment on and/or to request a hearing with
respect to the proposed exemption. Written comments and hearing
requests are due within 35 days of the publication of the proposed
exemption in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
State Bankshares Inc. 401(k) Profit Sharing Plan (the Plan) Located
in Fargo, North Dakota
[Application No. D-10703]
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 to the proposed sale by the Plan of certain
limited partnership interests (the Interests) to Northern Capital Trust
Company (Northern), the Plan's trustee and a party in interest with
respect to the Plan, for $93,552.93 in cash, provided the following
conditions are satisfied: (a) The sale is a one-time transaction for
cash; (b) no commissions are charged in connection with the
transaction; (c) the Plan receives not less than the fair market value
of the Interests at the time of the transaction; and (d) the fair
market value of the Interests is determined by a qualified entity
independent of the Plan and of Northern.
Summary of Facts and Representations
1. The Plan is a 401(k) profit sharing plan which is sponsored by
State Bankshares Inc. (the Employer) of Fargo, North Dakota. The Plan
currently has 144 participants and had assets of $5,637,308 as of
September 30, 1998. The trustee of the Plan is Northern, a trust
company located at 203 North 10th Street, Fargo, North Dakota. Northern
has investment discretion for the Plan's assets.
2. In August 1993, the Plan purchased the Interests as an
investment from an unrelated party (as discussed below). The Interests
consist of a 4.2337% interest in the Courtyard Limited Partnership (the
Partnership). The Partnership's sole asset is an apartment building
known as ``Courtyard Apartments'' in St. Louis Park, Minnesota. The
Plan paid $54,233.70 for the Interests in the Partnership. The
investment was presented to Northern, as Plan trustee, by Regan Wieland
Investment Co., whose name was later changed to Goldmark Investment
Company (Goldmark), on behalf of the Partnership. Goldmark and the
Partnership are independent of, and unrelated to, the Employer and
Northern.
3. The Employer would like to permit employee directed investments
and the use of a 24-hour telephone service to accommodate daily
transfers by Plan participants of assets held in their individual
accounts in the Plan. In order to be able to participate in the new
daily valuation and transfer system, the Plan needs to divest itself of
the Interests to ensure proper liquidity for all of the Plan's assets.
In this regard, the applicant represents that it is necessary to
transfer the Interests out of the Plan because the Interests cannot be
valued on a daily basis.
4. Northern as Plan trustee has contacted Goldmark, the Managing
Partner of the Partnership, to inform them that the Plan wishes to sell
its Interests. Mr. Kenneth P. Regan of Goldmark has represented that
the fair market value of the Plan's Interests would be approximately
$93,000, if all
[[Page 10503]]
of the partners were to sell their Partnership interests at the present
time. However, in the event only one partner, such as the Plan, were to
dispose its Interests, there would be discounts from the $93,000 value
to reflect the lack of marketability and minority ownership in addition
to sales costs. Goldmark estimates that these expenses would be in
excess of $11,000. Thus, Goldmark states that the value of the Plan's
Interests, if it were to sell such Interests alone, would be
approximately $81,795. Goldmark based its valuation of the Partnership
on a January 12, 1998 appraisal of the Courtyard Apartments that was
conducted by Robert L. Fransen (Fransen), an independent real estate
broker in Minneapolis, Minnesota. Fransen specializes in the brokerage
of apartment properties.
5. The applicant has requested an exemption that would permit the
Plan to sell the Interests to Northern for cash. No commissions or
other fees would be charged in connection with the sale. Northern has
represented that they are willing to pay the Plan $93,552.93 for the
Interests, an amount which reflects the book value of the Interests
(based on the current net value of the Courtyard Apartments as the
Partnership's only asset).25 This amount is more than the
current fair market value of the Interests (i.e., $81,795) as
determined by Goldmark.
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\25\ The current net value of the Courtyard Apartments is
$2,209,722, based on Fransen's appraisal of the gross value less
outstanding liabilities and other costs. Thus, since the Interests
represent a 4.2337% interest in the Partnership, the Interests have
a book value of approximately $93,553 (i.e., $2,209,722 x .042337
= $93,553).
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6. In summary, the applicant represents that the proposed
transaction satisfies the criteria contained in section 408(a) of the
Act because: (a) The sale is a one-time transaction for cash; (b) No
commissions or other fees will be charged in connection with the
transaction; (c) The sales price for the Interests will be an amount,
based on the book value of the Interests, which reflects more than the
fair market value of the Interests as determined by Goldmark, the
Managing Partner for the Partnership; and (d) Goldmark based its
valuation of the Partnership on an appraisal of the Courtyard
Apartments performed by Fransen, an independent real estate expert.
FOR FURTHER INFORMATION CONTACT: Gary H. Lefkowitz of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
vonRoll isola Savings Plan (the Plan) Located in Schenectady, New
York
[Application No. D-10729]
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 to: (1) The making by State Street Bank and Trust
Company (the Bank) of interest-free advances of cash (the Advances) to
the Plan during the period from July 8, 1997 through June 22, 1998, in
the aggregate amount of $824,812.60; and (2) the repayment of the
Advances by the Plan, without interest, on June 22, 1998, provided the
following conditions were satisfied:
(a) No interest or expense was incurred by the Plan in connection
with the Advances;
(b) The proceeds of the Advances were used only to facilitate the
payment of benefits (including participant loans and in-service
withdrawals) to Plan participants, and to facilitate the making of
investment transfers elected by Plan participants;
(c) The Advances were unsecured;
(d) The Plan participants who remained invested in the Plan's
stable value fund, which consisted primarily of a Group Flexible
Annuity Contract (the GIC) from the Travelers Insurance Company
(Travelers), continued to receive the full contract rate on the full
amount of the GIC;
(e) The Plan's sponsor was notified of the Advances;
(f) The repayment of the Advances was made at the direction of the
Plan's sponsor and was restricted to amounts received from the proceeds
of the installment payments made by Travelers under the GIC, and no
other plan assets were used for that purpose;
(g) The Bank will maintain or cause to be maintained for a period
of six years from the date of the granting of the exemption proposed
herein the records necessary to enable the persons described in
paragraph (h) to determine whether the conditions of this exemption
have been met, except that:
(1) A prohibited transaction will not be considered to have
occurred, if due to circumstances beyond the control of the Bank, the
records are lost or destroyed prior to the end of the six year period;
and
(2) No party in interest, other than the Bank, shall be subject to
the civil penalty that may be assessed under section 502(i) of the Act,
or to the taxes imposed by section 4975(a) and (b) of the Code, if the
records are not maintained, or are not available for examination as
required by paragraph (h); and
(h)(1) Except as provided in paragraph (h)(2) and notwithstanding
any provisions of subsections (a)(2) and (b) of section 504 of the Act,
the records referred to in paragraph (g) are unconditionally available
at their customary location for examination during normal business
hours by:
(A) Any duly authorized employee or representative of the
Department or the Internal Revenue Service;
(B) Any fiduciary of the Plan, or any duly authorized employee or
representative of such fiduciary; and
(C) Any participant or beneficiary of the Plan or duly authorized
representative of such participant or beneficiary;
(2) None of the persons described in paragraph (h)(1)(B) and
(h)(1)(C) shall be authorized to examine trade secrets of the Bank or
commercial or financial information which is privileged or
confidential.
EFFECTIVE DATES: If the proposed exemption is granted, the exemption
will be effective from July 8, 1997 through June 22, 1998.
Summary of Facts and Representations
1. The Bank is a Massachusetts trust company that provides trustee,
custodial, investment management, participant recordkeeping and other
related services to employee benefit plans. vonRoll isola USA, Inc.
(VRI),
f/k/a Insulating Materials Incorporated, is a New York corporation that
sponsors the Plan. The Plan is a qualified profit sharing plan under
section 401(a) of the Code which contains a qualified cash or deferred
arrangement as described in Code section 401(k). The Plan was most
recently amended and restated effective April 1, 1997. The Plan
currently has 182 participants and beneficiaries and had assets with a
total fair market value of approximately $8,295,000 as of June 30,
1998.
In March, 1997, the Plan entered into a Benefit Plan Recordkeeping
Services Contract and a Defined Contribution Plans Master Trust
Agreement with the Bank, pursuant to which the Bank was appointed as
trustee and recordkeeper for the Plan, effective July 1, 1997. As a
result, the Plan's interests were transferred to the Bank for the Bank
to
[[Page 10504]]
hold as the Plan's new trustee, as of July 1, 1997. These agreements
between the Plan and the Bank remain effective. The applicant
represents that the Bank's role as Plan trustee and recordkeeper has
made it a service provider and party in interest with respect to the
Plan at all times since July 1, 1997.
2. Prior to July 1, 1997, the Plan offered six investment options
into which Plan participants could direct their investments. One of
these investment options was a so-called ``stable value'' fund which
consisted of the GIC. The Plan had purchased the GIC from Travelers on
June 22, 1993. On and after January 1, 1997, and in anticipation of the
transfer of the Plan's assets to the Bank, no new Plan assets were
allowed to be invested in the GIC. At the time of the transfer of the
Plan's assets to the Bank on July 1, 1997, all assets of the Plan,
except for the assets invested in the GIC (which amounted to
approximately 40% of the total Plan assets at the time), were
transferred to and invested in five new investment options selected by
VRI. These options consisted of five different mutual funds. In
addition, VRI designated, as a sixth investment option, a ``stable
value'' fund to be managed by the Bank (the Stable Value Fund). Despite
the lack of benefit responsiveness of the GIC, it was included in the
Stable Value Fund and, at the outset, represented substantially all of
the assets of that Fund.26 No amounts deposited in the
Stable Value Fund after July 1, 1997 were invested in the GIC; rather,
all such amounts were held in a cash buffer to provide liquidity for
any additional transfers by Plan participants out of that fund.
---------------------------------------------------------------------------
\26\ Although the GIC was included by the Bank in the Stable
Value Fund, VRI retained responsibility for managing this asset.
---------------------------------------------------------------------------
3. The GIC was issued by Travelers on June 22, 1993. It was not a
``benefit responsive contract'' and by its terms severely restricted
transfers out of the contract for benefit payments to, or investment
transfers by, participants.27 The GIC initially was subject
to a surrender charge for a period of ten years. In an attempt to
address the liquidity issues created by the lack of benefit
responsiveness and given the anticipated transfer of the Plan's assets
to the Bank in July, 1997, the GIC was renegotiated by VRI and
Travelers in February, 1997. As a result, the parties agreed that the
contract would be liquidated in a series of annual installment payments
by Travelers to the Plan beginning in June, 1997 and continuing through
June, 2001.
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\27\ During the period prior to January 1, 1997, this lack of
benefit responsiveness was generally offset by the availability of
new cash flow to this option. The applicant represents that as long
as the sum of the contributions and investment transfers flowing
into this investment option exceeded the sum of the benefit
distributions and investment transfers out of this option, there was
no need for any benefit responsiveness under the GIC. The Department
is providing no opinion herein as to whether the acquisition and
holding of the GIC by the Plan was either consistent with, or in
violation of, the fiduciary responsibility provisions contained in
Part 4 of Title I of the Act.
---------------------------------------------------------------------------
4. On July 8, 1997, eight days after the Plan's assets were
transferred to the Bank, the liquidity available under the Stable Value
Fund (including the June, 1997 installment payment made by Travelers to
the Plan pursuant to the liquidation agreement) was depleted. This
rapid and unanticipated depletion of liquidity resulted from the very
high level of investment transfers elected by Plan participants in
conjunction with the transfer of the Plan's assets to the Bank. The
applicant states that these investment transfers were the result of the
new investment options available to Plan participants after the Plan's
assets were transferred to the Bank. To meet the liquidity requirements
created by the Plan participants' elections to make substantial
transfers of their assets out of the Stable Value Fund, the Bank made
the Advances to the Plan on an interest-free and unsecured basis. The
Bank continued to make the Advances to the Plan as needed for these
purposes until June 22, 1998. All of the Advances were made in cash.
The total amount of the Advances was $824,812.60. The existence and
amount of all such Advances was communicated to, and discussed with,
VRI periodically during the period they were made.
5. The Bank did not at any time charge the Plan any interest on the
Advances it made to the Plan. By contrast, the GIC continued to earn
interest at the contract rate, which interest earnings were allocated
to the accounts of those Plan participants who continued to be invested
in the Stable Value Fund. Thus, the Advances made by the Bank
facilitated the ability of the Plan's participants who had an
investment in the Stable Value Fund to receive timely benefit payments
and make investment transfers without being limited by the illiquidity
of the GIC. In addition, the Advances provided Plan participants who
elected to stay in the Stable Value Fund with assurances that the Fund
would remain a viable investment option during this period and that
their Plan accounts would continue to receive all interest payments due
under the GIC.
6. On June 22, 1998, pursuant to further negotiations between VRI
and Travelers, Travelers advanced a payment of $1,073,745.44 to the
Plan. This amount represented 100% of the June 1998 and June 1999
installment payments due to the Plan under the renegotiated GIC. At the
direction of VRI, this cash amount was used by the Plan to repay the
entire amount of the Advances from the Bank, with the remainder
creating a cash buffer for future benefit payments from the Stable
Value Fund. The advance payment on the GIC by Travelers was subject to
an early withdrawal charge equal to $60,398.19. VRI and a Plan service
provider 28 in the aggregate paid Travelers $43,266 of this
early withdrawal charge, with the result that the Plan actually paid
only $17,132.19 or approximately 28% of the early withdrawal charge.
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\28\ The Plan's service provider was GE Investment Retirement
Services, Inc. (GEIRS). GEIRS is a marketing affiliate of the Plan's
mutual fund provider, GE Investment Management Incorporated, the
sponsor of the mutual funds that have been offered to the Plan since
July 1, 1997.
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7. In summary, the applicant represents that the subject
transactions satisfied the criteria contained in section 408(a) of the
Act for the following reasons: (a) No interest or expense was incurred
by the Plan in connection with the Advances; (b) the proceeds of the
Advances were used only to facilitate the payment of benefits
(including participant loans and in-service withdrawals) to Plan
participants, and to facilitate the making of investment transfers
elected by Plan participants; (c) the Advances were unsecured; (d) the
Plan participants who remained invested in the Stable Value Fund, which
consisted primarily of the GIC from Travelers, continued to receive the
full contract interest rate on the GIC; (e) VRI, the Plan's sponsor,
was notified of the Advances; and (f) the repayment of the Advances by
the Plan was made at the direction of VRI and was restricted to amounts
received from the proceeds of the installment payments made by
Travelers under the GIC, and no other Plan assets were used for that
purpose.
FOR FURTHER INFORMATION CONTACT: Gary H. Lefkowitz of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and/or section 4975(c)(2) of the Code
does not relieve a fiduciary or other party in interest of disqualified
person from certain other provisions of the Act and/or the Code,
including any prohibited transaction provisions to which the exemption
does
[[Page 10505]]
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 exemptions, 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 exemptions, if granted, will be subject to the
express condition that the material facts and representations contained
in each application are true and complete and accurately describe all
material terms of the transaction which is the subject of the
exemption. In the case of continuing exemption transactions, if any of
the material facts or representations described in the application
change after the exemption is granted, the exemption will cease to
apply as of the date of such change. In the event of any such change,
application for a new exemption may be made to the Department.
Signed at Washington, DC, this 26th day of February, 1999.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, Department of Labor.
[FR Doc. 99-5323 Filed 3-3-99; 8:45 am]
BILLING CODE 4510-29-P
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.