Tuesday, 

January 19, 2010 

Part III 

Department of Labor 

Employee Benefits Security 

Administration 

Application Numbers and Proposed 

Exemptions; Notice 


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DEPARTMENT OF LABOR 

Employee Benefits Security 

Administration 

[D–11502, D–11518, D–11521, D–11425, D– 

11448, D–11495] 

Application Numbers and Proposed 

Exemptions 

AGENCY: Employee Benefits Security 

Administration, Labor. 

ACTION: Notice of Proposed Exemptions. 

[Application Nos. and Proposed Exemptions; 

Putnam Fiduciary Trust Company (PFTC), 

The PNC Financial Services Group, Inc.; 

Deutsche Asset Management (UK) Limited 

(the Applicant); UBS Financial Services Inc. 

and Its Affiliates; Deutsche Bank AG and Its 

Affiliates (together, Deutsche Bank of the 

Applicant); Morgan Stanley & Co. Inc. and its 

current and future affiliates and subsidiaries 

(Morgan Stanley) and Union bank, N.A. and 

its affiliates (Union Bank), et al.] 

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 (ERISA or the Act) and/or 

the Internal Revenue Code of 1986 (the 

Code). 

Written Comments and Hearing 

Requests 

All interested persons are invited to 

submit written comments or requests for 

a hearing on the pending exemptions, 

unless otherwise stated in the Notice of 

Proposed Exemption, within 45 days 

from the date of publication of this 

Federal Register Notice. Comments and 

requests for a hearing should state: (1) 

The name, address, and telephone 

number of the person making the 

comment or request, and (2) the nature 

of the person’s interest in the exemption 

and the manner in which the person 

would be adversely affected by the 

exemption. A request for a hearing must 

also state the issues to be addressed and 

include a general description of the 

evidence to be presented at the hearing. 

ADDRESSES: All written comments and 

requests for a hearing (at least three 

copies) should be sent to the Employee 

Benefits Security Administration 

(EBSA), Office of Exemption 

Determinations, Room N–5700, U.S. 

Department of Labor, 200 Constitution 

Avenue, NW., Washington, DC 20210. 

Attention: Application No. ll, stated 

in each Notice of Proposed Exemption. 

Interested persons are also invited to 

submit comments and/or hearing 

requests to EBSA via e-mail or Fax. Any 

such comments or requests should be 

sent either by e-mail to: 

‘‘moffitt.betty@dol.gov’’, or by Fax to 

(202) 219–0204 by the end of the 

scheduled comment period. The 

applications for exemption and the 

comments received will be available for 

public inspection in the Public 

Documents Room of the Employee 

Benefits Security Administration, U.S. 

Department of Labor, Room N–1513, 

200 Constitution Avenue, NW., 

Washington, DC 20210. 

Warning: If you submit written 

comments or hearing requests, do not 

include any personally-identifiable or 

confidential business information that 

you do not want to be publiclydisclosed. All comments and hearing 

requests are posted on the Internet 

exactly as they are received, and they 

can be retrieved by most Internet search 

engines. The Department will make no 

deletions, modifications or redactions to 

the comments or hearing requests 

received, as they are public records. 

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 

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, 5 U.S.C. App. 1 (1996), 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. 

Putnam Fiduciary Trust Company (PFTC), 

Located in Boston, Massachusetts, 

[Application No. D–11425]. 

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 2570, subpart B (55 FR 

32836, 32847, August 10, 1990). 

Section I—Proposed Exemption 

Effective as of January 19, 2010, the 

restrictions of section 406(a) and (b) of 

the Act, and the taxes imposed by 

section 4975(a) and (b) of the Code, by 

reason of section 4975(c)(1)(A) through 

(F) of the Code, shall not apply to either 

(a) the purchase or sale by a Collective 

Fund (as defined in Section III(b) below) 

of shares of a Mutual Fund (as defined 

in Section III(d) below) where Putnam 

Fiduciary Trust Company (‘‘PFTC’’ or 

the ‘‘Applicant’’) or its affiliate (PFTC 

and its affiliates are referred to herein as 

‘‘Putnam’’) is the investment advisor of 

the Mutual Fund as well as a fiduciary 

with respect to the Collective Fund (or 

an affiliate of such fiduciary) or (b) the 

receipt of fees by Putnam from a Mutual 

Fund for acting as an investment 

advisor for the Mutual Fund and/or for 

providing other services to the Mutual 

Fund which are Secondary Services (as 

defined in Section III(g) below) in 

connection with the investment by the 

Collective Fund in shares of the Mutual 

Fund, provided that the following 

conditions and the general conditions of 

Section II are met: (a) Each Collective 

Fund satisfies either (but not both) of 

the following: 

(1) The Collective Fund receives a 

cash credit equal to such Collective 

Fund’s proportionate share of all fees 

charged to the Mutual Fund by Putnam 

for investment advisory services. Such 

credit shall be paid to the Collective 

Fund no later than the same day on 

which such investment advisory fees are 

paid to Putnam. The crediting of all 

such fees to the Collective Funds by 

Putnam is audited by an independent 

accounting firm on at least an annual 

basis to verify the proper crediting of 

the fees to each Collective Fund. The 

audit report shall be completed not later 

than six months after the period to 

which it relates; or 

(2) No management fees, investment 

advisory fees, or similar fees are paid to 

Putnam with respect to any of the assets 

of such Collective Fund that are 

invested in shares of the Mutual Fund. 

This condition does not preclude the 

payment of investment advisory or 

similar fees by the Mutual Fund to 

Putnam under the terms of an 

investment management agreement 

adopted in accordance with section 15 


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of the Investment Company Act of 1940 

(the 1940 Act), nor does it preclude the 

payment of fees for Secondary Services 

to Putnam pursuant to a duly adopted 

agreement between Putnam and the 

Mutual Fund if the conditions of this 

proposed exemption are otherwise met. 

(b) The price paid or received by a 

Collective Fund for shares in the Mutual 

Fund is the net asset value (NAV) per 

share (as defined in Section III (h)) and 

is the same price that would have been 

paid or received for the shares by any 

other investor in the Mutual Fund at 

that time, and all other dealings 

between the Collective Funds and the 

Mutual Fund will be on a basis no less 

favorable to the Collective Fund than 

such dealings will be with the other 

shareholders of the Mutual Fund. 

(c) Putnam, including any officer or 

director of Putnam, does not purchase 

or sell shares of the Mutual Fund from 

or to any Collective Fund; provided that 

this condition shall not preclude the 

purchase or redemption of such shares 

between a Collective Fund and an 

affiliate of PFTC acting solely in its 

capacity as underwriter for the Mutual 

Fund, if such affiliate acts as a riskless 

principal, the purchase or redemption is 

at NAV at the time of the transaction, 

and the affiliate does not receive any 

direct or indirect compensation, spread 

or other consideration in connection 

with such purchase or redemption. 

(d) No sales commissions, redemption 

fees, or other similar fees are paid by the 

Collective Funds in connection with the 

purchase or sale of shares of the Mutual 

Fund. 

(e) For each Collective Fund, the 

combined total of all fees received by 

Putnam for the provision of services to 

the Collective Fund, and in connection 

with the provision of services to the 

Mutual Fund in which the Collective 

Fund may invest, are not in excess of 

‘‘reasonable compensation’’ within the 

meaning of section 408(b)(2) of the Act. 

(f) Putnam does not receive any fees 

payable pursuant to Rule 12b–1 under 

the 1940 Act in connection with the 

transactions covered by this proposed 

exemption. 

(g) The Second Fiduciary (as defined 

in Section III (f) below) with respect to 

each plan having an interest in a 

Collective Fund (a ‘‘Client Plan’’) 

receives in writing, in advance of any 

investment by the Collective Fund in 

the Mutual Fund, full and detailed 

disclosure of information concerning 

the Mutual Fund, including but not 

limited to: (1) A current prospectus 

issued by the Mutual Fund; (2) a 

statement describing the fees for 

investment advisory or similar services, 

any Secondary Services and all other 

fees to be charged to or paid by (or with 

respect to) the Collective Fund and by 

the Mutual Fund, including the nature 

and extent of any differential between 

the rates of such fees; (3) the reasons 

why PFTC may consider such 

investment to be appropriate for the 

Collective Fund; (4) a statement 

describing whether there are any 

limitations applicable to PFTC with 

respect to which Collective Fund assets 

may be invested in shares of the Mutual 

Fund and, if so, the nature of such 

limitations; and (5) upon request of the 

Second Fiduciary, a copy of both the 

notice of proposed exemption and a 

copy of the final exemption once it is 

published in the Federal Register, and 

any other reasonably available 

information regarding the transactions 

covered by this proposed exemption. 

(h) On the basis of the information 

described in paragraph (g) above, the 

Second Fiduciary authorizes in writing 

the investment of assets of the 

Collective Fund in the Mutual Fund and 

the fees to be paid by the Mutual Fund 

to Putnam. 

(i) On an annual basis, Putnam will 

provide to the Second Fiduciary of each 

Client Plan having an interest in the 

Collective Fund: (1) A current 

prospectus issued by the Mutual Fund 

in which the Collective Fund invests, 

and, upon the Second Fiduciary’s 

request, a copy of the Statement of 

Additional Information for such Mutual 

Fund that contains a description of all 

fees paid by the Mutual Fund to 

Putnam; (2) a copy of the annual 

financial disclosure report prepared by 

Putnam that includes information about 

the Mutual Fund portfolios, as well as 

audit findings of an independent 

auditor, within 60 days of the 

preparation of the report; (3) oral or 

written responses to inquiries of the 

Second Fiduciary as they arise; (4) a 

statement (i) of the approximate 

percentage (which may be in the form 

of a range) of the assets of the Collective 

Fund that were invested in the Mutual 

Fund during the year and (ii) that, if the 

Second Fiduciary objects to the 

continued investment by the Collective 

Fund in the Mutual Fund, the Client 

Plan should withdraw from the 

Collective Fund; and (5) a form 

(Termination Form) expressly providing 

an election to withdraw from the 

Collective Fund, together with 

instructions on the use of such form. 

The instructions will inform the Second 

Fiduciary that: (i) The prior written 

authorization is terminable at will by 

the Plan, without penalty to the Plan, 

upon receipt by Putnam of written 

notice from the Second Fiduciary, and 

(ii) failure to return the form will result 

in continued authorization of Putnam to 

engage in the transactions described 

above on behalf of the Plan. 

However, if the Termination Form has 

been provided to the Second Fiduciary 

pursuant to Section I(j), the Termination 

Form need not be provided again for an 

annual reauthorization pursuant to this 

Section I(i) unless at least six months 

has elapsed since the form was 

previously provided. 

(j) Except as provided in Section 

I(j)(E), paragraph (h) of this Section I 

does not apply if: 

(A) The purchase, holding and sale of 

Mutual Fund shares by the Collective 

Fund is performed subject to the prior 

and continuing authorization, in the 

manner described in this paragraph (j), 

of a Second Fiduciary with respect to 

each Client Plan whose assets are 

invested in the Collective Fund. 

(B)(1) For each Collective Fund using 

the fee structure described in paragraph 

(a)(2) above with respect to investments 

in the Mutual Fund, in the event of an 

increase in the rate of fees paid by the 

Mutual Fund to Putnam regarding any 

investment management services, 

investment advisory services, or similar 

services that Putnam provides to the 

Mutual Fund over an existing rate for 

such services that had been authorized 

by a Second Fiduciary in accordance 

with paragraph (h) above or this 

paragraph (j); or 

(2) For each Collective Fund under 

this exemption (regardless of whether 

the fee structure described in paragraph 

(a)(1) or (a)(2) is used), in the event an 

additional Secondary Service is 

provided by Putnam to the Mutual Fund 

for which a fee is charged, or an 

increase in the rate of any fee paid by 

the Mutual Fund to Putnam for any 

Secondary Service that results either 

from an increase in the rate of such fee 

or from a decrease in the number or 

kind of services performed by Putnam 

for such fee over an existing rate for 

such Secondary Service that had been 

authorized by a Second Fiduciary in 

accordance with paragraph (h) above or 

this paragraph (j): 

Putnam will, at least 30 days in 

advance of the implementation of such 

additional service for which a fee is 

charged or for which there is a fee 

increase, provide a written notice 

(which may take the form of a letter or 

similar communication that is separate 

from the prospectus of the Fund and 

that explains the nature and amount of 

the additional service for which a fee is 

charged or of the increase in the rate of 

fee) to the Second Fiduciary of each 

Client Plan having an interest in the 

Collective Fund. Such written notice 

will include a Termination Form 


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1Putnam will pay interest on any such amounts 

from the date it receives such incremental amounts 

to the date it makes the rebate payment to the 

Collective Fund. 

expressly providing an election to 

withdraw from the Collective Fund, 

together with instructions on the use of 

such form. 

(C) In the event a Second Fiduciary 

submits a notice in writing to PFTC 

objecting to the initial investment by the 

Collective Fund in the Mutual Fund or 

the implementation of such additional 

service for which a fee is charged or 

such rate of fee increase, whichever is 

applicable, the Client Plan on whose 

behalf the objection was intended is 

given the opportunity to terminate its 

investment in the Collective Fund, 

without penalty to such Client Plan, 

within such time as may be necessary to 

effect the withdrawal in an orderly 

manner that is equitable to all 

withdrawing Client Plans and to the 

non-withdrawing Client Plans. In the 

case of a Client Plan that elects to 

withdraw under this subparagraph (C), 

the withdrawal shall be effected prior to 

the initial investment by the Collective 

Fund in the Mutual Fund or the 

implementation of such additional 

service for which a fee is charged or 

such rate of fee increase, whichever is 

applicable. 

(D) Notwithstanding the foregoing 

subparagraphs (B) and (C), Putnam may 

commence providing an additional 

Secondary Service for a fee or 

implement any increase in the rate of 

fee paid by the Mutual Fund to Putnam 

prior to providing the notice referred to 

in subparagraph (B) above or prior to the 

withdrawal of an objecting Client Plan, 

whichever is applicable, provided that, 

in either such event, the Collective 

Fund receives a cash credit equal to the 

Collective Fund’s proportionate share of 

the fee for the additional Secondary 

Service or such fee increase charged to 

the Mutual Fund by Putnam, whichever 

is applicable, for the period from the 

date of such commencement or 

implementation to the later of the date 

that is 30 days after the notice referred 

to in subparagraph (B) above has been 

provided or, if applicable, the date on 

which any Client Plan that objects to the 

provision of such additional Secondary 

Service or to such fee increase has 

withdrawn from the Collective Fund 

pursuant to subparagraph (C) above. 

Any such cash credits shall be paid to 

the Collective Fund, with interest 

thereon at the prevailing Federal funds 

rate plus two percent (2%), no later than 

the fifth business day following the 

receipt of the increased fee by Putnam.1

The crediting of all such fees to the 

Collective Fund by Putnam will be 

audited by an independent accounting 

firm on at least an annual basis to verify 

the proper crediting of the fees and 

interest to the Collective Fund. The 

audit report shall be completed not later 

than six months after the period to 

which it relates. 

(E) In the case of a Client Plan whose 

assets are proposed to be invested in the 

Collective Fund subsequent to the 

implementation of the arrangement and 

that has not authorized the investment 

of assets of the Collective Fund in the 

Mutual Fund, the Client Plan’s 

investment in the Collective Fund is 

subject to: (1) The receipt by a Second 

Fiduciary of the full and detailed 

disclosures concerning the Mutual Fund 

pursuant to Section I(g), above, and (2) 

the prior written authorization of a 

Second Fiduciary pursuant to Section 

I(h), above (i.e., the authorization must 

be provided by such new Client Plan 

investor in advance of the initial 

investment). 

(k) For each Collective Fund using the 

fee structure described in paragraph 

(a)(1) above with respect to investments 

in the Mutual Fund, the Second 

Fiduciary of the Client Plan receives full 

written disclosure in a Fund prospectus 

or otherwise of any increases in the 

rates of fees charged by Putnam to the 

Mutual Fund for investment advisory 

services, or of a decrease in the number 

or kind of services performed by 

Putnam. 

Section II—General Conditions 

(a) PFTC maintains for a period of six 

years the records necessary to enable the 

persons described in paragraph (b) 

below to determine whether the 

conditions of this exemption have been 

met, except that: 

(1) A separate prohibited transaction 

will not be considered to have occurred 

if, solely because of circumstances 

beyond the control of PFTC, the records 

are lost or destroyed prior to the end of 

the six-year period; and 

(2) No party in interest other than 

Putnam 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 

(b) below. 

(b)(1) Except as provided in paragraph 

(b)(2) below and notwithstanding any 

provisions of Section 504(a)(2) of the 

Act, the records referred to in paragraph 

(a) above are unconditionally available 

at their customary location for 

examination during normal business 

hours by: 

(i) Any duly authorized employee or 

representative of the Department, the 

Internal Revenue Service, or the 

Securities & Exchange Commission, 

(ii) Any fiduciary of a Client Plan who 

has authority to acquire or dispose of 

the interest in the Collective Fund 

owned by such Client Plan, or any duly 

authorized employee or representative 

of such fiduciary, and 

(iii) Any participant or beneficiary of 

a Client Plan having an interest in the 

Collective Fund or duly authorized 

employee or representative of such 

participant or beneficiary. 

(2) None of the persons described in 

paragraph (b)(1)(ii) or (iii) above shall be 

authorized to examine trade secrets of 

Putnam, or commercial or financial 

information that is privileged or 

confidential. 

Section III—Definitions 

(a) An ‘‘affiliate’’ of a person includes: 

(1) Any person directly or indirectly 

through one or more intermediaries, 

controlling, controlled by, or under 

common control with the person; 

(2) Any officer, director, employee, 

relative, or partner in any such person; 

and 

(3) Any corporation or partnership of 

which such person is an officer, 

director, partner, or employee. 

(b) The term ‘‘Collective Fund’’ means 

any common or collective trust fund 

maintained by PFTC. 

(c) The term ‘‘control’’ means the 

power to exercise a controlling 

influence over the management or 

policies of a person other than an 

individual. 

(d) The term ‘‘Mutual Fund’’ means 

the Putnam Prime Money Market Fund 

and any other money market fund that 

is a diversified open-end investment 

company registered under the 1940 Act 

and operated in accordance with Rule 

2a–7 under the 1940 Act as to which 

Putnam serves as an investment adviser. 

Putnam may also serve as a custodian, 

dividend disbursing agent, shareholder 

servicing agent, transfer agent, fund 

accountant, or provider of some other 

‘‘Secondary Service’’ (as defined below 

in paragraph (g) below). 

(e) The term ‘‘relative’’ means a 

‘‘relative’’ as that term is defined in 

section 3(15) of the Act (or a ‘‘member 

of the family’’) as that term is defined in 

section 4975(e)(6) of the Code), or a 

brother, a sister, or a spouse of a brother 

or a sister. 

(f) The term ‘‘Second Fiduciary’’ 

means a fiduciary of a Client Plan who 

is independent of, and unrelated to, 

Putnam. For purposes of this 

exemption, the Second Fiduciary will 


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2 In order to achieve the benefits of this higher 

yield as soon as practicable, PFTC requests that the 

exemption, if granted, be retroactive to the date the 

proposed exemption is published in the Federal 

Register. 

3References to the Mutual Fund in this Summary 

of Facts and Representations should be read to 

include such other money market mutual funds 

where the context so requires. 

not be deemed to be independent of an 

unrelated to Putnam if: 

(1) Such fiduciary directly or 

indirectly controls, is controlled by, or 

is under common control with Putnam; 

(2) Such fiduciary, or any officer, 

director, partner, employee, or relative 

of the fiduciary is an officer, director, 

partner or employee of Putnam (or is a 

relative of such persons); or 

(3) Such fiduciary directly or 

indirectly receives any compensation or 

other consideration for his or her own 

personal account in connection with 

any transaction described in this 

exemption. 

If an officer, director, partner or 

employee of Putnam (or a relative of 

such a person), is a director of such 

Second Fiduciary, and if he or she 

abstains from participation in (i) the 

decision of the Client Plan to invest in, 

and remain invested in, the Collective 

Fund and (ii) the granting of any 

authorization contemplated by Section 

I(h) or any deemed authorization 

contemplated by Section I(i) and (j) with 

respect to the Collective Fund, then 

paragraph (f)(2) above shall not apply. 

(g) The term ‘‘Secondary Service’’ 

means a service other than an 

investment management, investment 

advisory, or similar service, which is 

provided by Putnam to the Mutual 

Fund, including but not limited to 

custodial, accounting, administrative, or 

any other service. 

(h) The term ‘‘net asset value (i.e., 

NAV)’’ means the amount for purposes 

of pricing all purchases and sales, 

calculated by dividing the value of all 

securities, determined by a method as 

set forth in a Fund’s prospectus and 

statement of additional information, and 

other assets belonging to the Fund or 

portfolio of the Fund, less the liabilities 

charged to each such portfolio or Fund, 

by the number of outstanding shares. 

Summary of Facts and Representations 

1. The applicant is Putnam Fiduciary 

Trust Company (PFTC), a Massachusetts 

trust company subject to supervision by 

the Massachusetts Division of Banks. 

PFTC is a wholly-owned subsidiary of 

Putnam, LLC (together with PFTC and 

its other wholly-owned subsidiaries, 

collectively referred to herein as 

‘‘Putnam’’). Putnam is a majority-owned 

subsidiary of Great-West Lifeco U.S. Inc. 

Putnam is a global financial services 

firm primarily involved in the 

investment management business 

including the management of registered, 

open-end investment companies 

(‘‘mutual funds’’), other collective 

investment vehicles and single-client 

separate accounts. As of May 31, 2009, 

Putnam’s total assets under management 

were approximately $102 billion. 

2. PFTC manages assets held in both 

collective investment vehicles (other 

than mutual funds) and single-client 

separate accounts. As of May 31, 2009, 

2006, PFTC managed approximately $9 

billion in assets. 

3. In particular, PFTC maintains a 

number of collective investment funds, 

the assets of which are managed by 

PFTC on a discretionary basis (the 

‘‘Collective Funds’’). The Collective 

Funds are common or collective trust 

funds of a bank within the meaning of 

DOL Regulation 2510.3–101(h)(1)(ii) 

and, as such, the assets of the Collective 

Funds are ‘‘plan assets’’ subject to Title 

I of the Act to the extent of the interests 

of ERISA Plans therein. 

4. Each of the Collective Funds 

generally has some level of cash 

balances and/or other assets to be 

invested in short-term, money market 

instruments. In the past, PFTC has 

typically invested such amounts in the 

short-term investment fund (the ‘‘STIF’’) 

made available by the custodian of the 

particular Collective Fund’s assets or 

some other similar money market 

instrument or vehicle unrelated to 

Putnam. 

5. Putnam acts as the advisor of the 

Putnam Prime Money Market Fund (the 

‘‘Mutual Fund’’), a money market mutual 

fund designed to serve as a short-term 

investment vehicle. The Mutual Fund is 

registered under the Investment 

Company Act of 1940 and is operated in 

accordance with the Securities & 

Exchange Commission (SEC) rules 

relating to money market funds (see, 

Rule 2a–7 under the Investment 

Company Act of 1940, as amended). The 

Applicant represents that since January 

2006, the yield generated by the Mutual 

Fund has generally been superior to the 

yield generated by the STIF. 

Accordingly, PFTC believes it would be 

desirable for the Collective Funds to 

have the flexibility to invest in the 

Mutual Fund when such investment is 

prudent and in the best interest of the 

Collective Funds.2 Putnam further 

believes that it would be desirable to 

have the same flexibility to invest the 

assets of the Collective Funds in other 

money market mutual funds managed 

by Putnam when it is in the interest of 

the Collective Funds to do so.3

6. Given that an affiliate of PFTC 

receives investment management or 

advisory fees from the Mutual Fund, a 

decision by PFTC to cause assets of a 

Collective Fund to be invested in the 

Mutual Fund could constitute a selfdealing prohibited transaction under 

Section 406(b)(1) of ERISA, absent an 

available exemption. Putnam may also 

receive fees from the Mutual Fund for 

services provided to the Mutual Fund 

other than investment management, 

investment advisory or similar services 

(‘‘Secondary Services’’) in which event 

any increase in such fees as a result of 

PFTC’s decision to invest assets of the 

Collective Funds in the Mutual Fund or 

the engagement of Putnam to perform an 

additional Secondary Service for which 

a fee is charged could constitute 

prohibited self-dealing, absent an 

exemption. Prohibited Transaction 

Exemption 77–4 (PTE 77–4, 42 FR 

18732, April 8, 1977) is designed to 

provide exemptive relief in such 

situations. However, one of the 

conditions of PTE 77–4 is that an 

independent plan fiduciary approve in 

writing the investment of plan assets in 

the affiliated mutual fund. 

7. In the case at hand, PFTC has not 

sought, and the relevant independent 

fiduciaries of existing ERISA Plan 

investors in the Collective Funds have 

not provided, any such written 

approval. Since the Collective Funds 

generally have numerous ERISA Plan 

investors (in many cases, a very large 

number of ERISA Plan investors), PFTC 

does not believe it is feasible, as a 

practical matter, to obtain the 

affirmative written approval of the 

relevant independent fiduciary of each 

and every ERISA Plan investor in the 

Collective Funds. Without such 

unanimous written approval, the 

exemption provided by PTE 77–4 will 

not be available and the Collective 

Funds will be precluded from investing 

in the Mutual Fund. 

8. Similarly, in the event that Putnam 

is engaged to render an additional 

Secondary Service or any of the fees 

paid by the Mutual Fund is changed, 

PTE 77–4 would require PFTC to obtain 

the affirmative written approval of the 

relevant independent fiduciary of each 

ERISA Plan having an interest in the 

Collective Funds at the time of such 

engagement or change. Again, given the 

large number of ERISA Plans involved 

and the practical difficulty of obtaining 

an affirmative written approval from 

each and every one of them, it is 

unlikely that the requirements of PTE 

77–4 would be able to be satisfied in the 

context of such an engagement or 

change. 


jlentini on DSKJ8SOYB1PROD with NOTICES2
3058 Federal Register / Vol. 75, No. 11 / Tuesday, January 19, 2010 / Notices 

4As an example, assume the Mutual Fund fee 

increase becomes effective on June 1, Putnam 

provides notice of the fee increase on May 16 and 

one (and only one) participating Plan objects to the 

fee increase on June 10, and the sole objecting Plan 

withdraws from the Collective Fund on June 20. In 

this case, Putnam will pay a rebate to the Collective 

Fund equal to the allocable portion of the fee 

increase for the period from June 1 (i.e., the 

effective date of the fee increase) to June 20 (i.e., 

the date that one objecting Plan withdrew, (with 

interest at the Applicable Interest Rate) because that 

date is later than the expiration of the 30-day notice 

period). 

5The requested exemption would not apply to 

any plans maintained by Putnam or any of its 

affiliates for their own employees. The Applicant 

represents that to the extent any such plans have 

an interest in a Collective Fund, the investment of 

such Collective Fund’s assets attributable to such 

plans in the Mutual Fund would be covered by 

Prohibited Transaction Exemption 77–3 (42 FR 

18734, April 8, 1977). The Department expresses no 

opinion herein on whether such transactions would 

qualify for exemptive relief under PTE 77–3. 

9. No sales commissions are charged 

in connection with the purchase of any 

shares of the Mutual Fund. In addition, 

no 12b–1 fees are charged by the Mutual 

Fund with respect to any class of shares 

of the Mutual Fund to be purchased by 

the Collective Funds pursuant to the 

exemption transactions, nor will any 

redemption fees be charged in 

connection with any sale of shares of 

the Mutual Fund by the Collective 

Funds. Putnam, including any officer or 

director of Putnam, will not purchase or 

sell shares of the Mutual Fund from or 

to any Collective Fund. However, there 

may be purchases or redemptions of 

such shares between a Collective Fund 

and an affiliate of PFTC acting solely in 

its capacity as underwriter for the 

Mutual Fund, if the sale is at NAV, and 

such affiliate acts as a riskless principal 

and does not receive any compensation, 

spread or other consideration in 

connection with such purchase or 

redemption. 

10. The Applicant represents that 

Putnam will not be providing any 

brokerage services for the acquisition or 

sale of securities by any Mutual Fund 

involved in this proposed exemption. 

11. Prior to investing the assets of any 

Collective Fund in shares of the Mutual 

Fund, PFTC will provide advance notice 

to the relevant independent fiduciary of 

each ERISA Plan then having an interest 

in such Collective Fund. Such notice 

will include a current prospectus for the 

Fund and a written statement giving full 

disclosure of the fee structure under 

which either Putnam’s investment 

advisory fees will be credited back to 

the Collective Fund or the investment 

management fees applicable to the 

Collective Fund with respect to the 

assets invested in the Mutual Fund will 

be waived. The notice will also describe 

why PFTC believes the investment of 

the Collective Fund’s assets in the 

Mutual Fund may be appropriate. In the 

case of a Client Plan whose assets are 

proposed to be invested in the 

Collective Fund subsequent to the 

implementation of the arrangement and 

that has not authorized the investment 

of assets of the Collective Fund in the 

Mutual Fund, the Client Plan’s 

investment in the Collective Fund is 

subject to the prior written 

authorization of a Second Fiduciary. 

12. In the event the fee credit 

approach is utilized, the credit will not 

include any fees received by Putnam for 

Secondary Services rendered to the 

Mutual Fund because any such 

Secondary Services will not be 

duplicative of any services being 

provided by PFTC to the Collective 

Funds. 

13. PFTC represents that, for each 

ERISA Plan having an interest in a 

Collective Fund that engages in 

transactions described in this proposed 

exemption, the combined total of all 

fees that Putnam will receive, directly or 

indirectly, with respect to such ERISA 

Plan’s interest in the Collective Fund for 

the provision of services to the 

Collective Fund and/or to the Mutual 

Fund will not be in excess of 

‘‘reasonable compensation’’ within the 

meaning of Section 408(b)(2) of the Act. 

14. Prior to either the addition of any 

Secondary Service that will result in the 

payment of a fee by the Mutual Fund to 

Putnam or any increase in the rate of 

any fee paid to Putnam by the Mutual 

Fund, PFTC will provide advance notice 

to the relevant independent fiduciary of 

each ERISA Plan then having an interest 

in a Collective Fund as to which the 

utilization of the Mutual Fund has been 

approved. Such notice will include a 

description, as applicable, of the (i) 

additional Secondary Service to be 

provided by Putnam and the resultant 

fee payable to Putnam or (ii) increase in 

the rate of any such fee payable to 

Putnam by the Mutual Fund or from a 

decrease in the number or kind of 

services performed by Putnam. Such 

written notice will also include a form 

(the Termination Form) expressly 

providing an election to withdraw from 

the Collective Fund, together with 

instructions on the use of such form. 

The advance notice described in this 

representation 13 need not be furnished 

30 days in advance of the effective date 

for a fee increase provided an amount 

equal to the Collective Fund’s 

proportionate share of the fee for such 

additional Secondary Service or the fee 

increase, whichever is applicable, for 

the period from the date of 

commencement of the additional 

Secondary Service or implementation of 

the fee increase, whichever is 

applicable, to the date that is 30 days 

after the delivery of the required notice 

or the date of the withdrawal of any 

objecting Client Plan, whichever is later, 

is credited to the Collective Fund with 

interest thereon at the prevailing 

Federal funds rate plus two percent 

(2%) (‘‘the Applicable Interest Rate’’).4

15. PFTC will maintain a system of 

internal accounting controls for the 

crediting or waiving of all relevant fees. 

In addition, PFTC proposes to retain 

Ernst & Young or another independent 

accounting firm to audit annually the 

crediting of such fees. Such audits will 

provide independent verification of the 

proper crediting of such fees. In the 

event an error is identified, it will be 

promptly corrected. If the correction 

requires a payment by PFTC, such 

payment shall include interest at the 

money market rate earned by the Mutual 

Fund. An independent accounting firm 

will also audit the crediting of fees and 

interest at the Applicable Interest Rate 

for the scenario described in paragraph 

13, above. 

16. The information described above 

(including (a) the information to be 

provided prior to the initial utilization 

of the Mutual Fund and (b) the 

information to be provided in 

connection with any additional 

Secondary Service or any increase in the 

rate of any fee payable by the Mutual 

Fund to Putnam (unless an amount 

equal to the Collective Fund’s 

proportionate share of the fee for such 

additional Secondary Service or fee 

increase, whichever is applicable, is 

credited to the Collective Fund with 

interest at the Applicable Interest Rate 

thereon)), will be furnished to the 

relevant independent fiduciary of each 

ERISA Plan then investing in the 

Collective Fund not less than 30 days 

prior to the initiation of investment in 

the Mutual Fund by such Collective 

Fund or the implementation of the 

additional Secondary Service or the 

increase in the rate of any such fee 

payable to Putnam.5

17. In the event any such independent 

fiduciary submits a notice in writing to 

PFTC objecting to the initial utilization, 

additional Secondary Service or 

increased rate of fee, including a 

decrease in the number or kind of 

services performed by Putnam (unless 

an amount equal to the Collective 

Fund’s share of the fee for such 

additional service or fee increase, 

whichever is applicable, is credited to 

the Collective Fund with interest at the 

Applicable Interest Rate thereon), the 


jlentini on DSKJ8SOYB1PROD with NOTICES2
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6As an example, assume the mutual fund fee 

increase is effective on June 1, Putnam provides 

notice of the fee increase to the participating Plans 

on May 31, one (and only one) participating Plan 

objects to the fee increase on June 25, and the sole 

objecting Plan withdraws from the Collective Fund 

on July 10. In this case, the aggregate rebate amount 

would be equal to the allocable portion of the fee 

increase for the period from June 1 (i.e., the 

effective date of the fee increase) to July 10 (i.e., the 

date that the sole objecting Plan withdraws, given 

that it is later than the expiration of the 30-day 

notice period). Further, assuming that Putnam 

receives payments of the increased fee from the 

Mutual Fund on the fifth day of each month, 

Putnam would receive a payment that includes the 

fee increase for the month of June on July 5 and 

would rebate the entire allocable portion of that fee 

increase to the Collective Fund within 5 business 

days of July 5, with interest at the Applicable 

Interest Rate. Moreover, on August 5, Putnam 

would receive another payment from the Mutual 

Fund that includes the fee increase for the month 

of July. The allocable portion of the fee increase for 

the period from July 1 to July 10 (i.e., the date that 

the sole objecting Plan withdrew) would be rebated 

to the Collective Fund within 5 business days of 

August 5, with interest at the Applicable Interest 

Rate. 

7However, if the Termination Form has been 

provided to the Second Fiduciary pursuant to 

Section I(j), the Termination Form need not be 

provided again for an annual reauthorization 

pursuant to this Section I(i) unless at least six 

months has elapsed since the form was previously 

provided. 

ERISA Plan on whose behalf the 

objection was tendered will be given the 

opportunity to withdraw its investment 

in the Collective Fund, without penalty 

to such ERISA Plan, within such time as 

may be necessary to effect such 

withdrawal in an orderly manner that is 

equitable to all withdrawing ERISA 

Plans and all non-withdrawing ERISA 

Plans. In the case of an ERISA Plan that 

elects to withdraw pursuant to the 

preceding sentence, such withdrawal 

shall be effected prior to (a) the initial 

utilization of the Mutual Fund, or (b) 

the implementation of the additional 

Secondary Service or the increase in the 

rate of fee (unless an amount equal to 

the fee for such additional Secondary 

Service or fee increase, whichever is 

applicable, for the period from the date 

of such implementation to the date on 

which the objecting Client Plan has 

withdrawn from the Collective Fund is 

credited to the Collective Fund with 

interest at the Applicable Interest Rate 

thereon); provided, however, that the 

Collective Fund’s existing investment in 

the Mutual Fund need not be 

discontinued by reason of an ERISA 

Plan electing to withdraw. Putnam 

confirms that it will not receive any 

‘‘float’’ with respect to its receipt of 

incremental fees for Secondary Services 

that become effective before the 

requisite negative consent has been 

obtained and that, as a result, must be 

credited to the Collective Fund. This is 

because Putnam will credit interest on 

any such amounts from the date it 

receives such incremental amounts to 

the date they are actually credited to the 

Collective Fund. Putnam emphasizes 

that the amount credited to the 

Collective Fund would not be limited to 

the portion of the fee increase that is 

allocable to the objecting Client Plan(s), 

but rather will be equal to the portion 

of the fee increase that is allocable to the 

Collective Fund’s entire position in the 

Mutual Fund. Putnam represents that 

any such cash credits will be paid to the 

Collective Fund, with interest thereon at 

the Applicable Interest Rate, no later 

than the fifth business day following the 

receipt of the increased fee by Putnam.6

Putnam further confirms that if a Client 

Plan objects to a Mutual Fund fee 

increase at a time when, due to 

extraordinary circumstances, 

withdrawals from the Collective Fund 

are suspended, then Putnam would 

continue to credit the allocable amount 

of the fee increase to the Collective 

Fund, with interest, until the objecting 

Client Plan is able to withdraw. To 

summarize, if Putnam were to 

implement an additional Secondary 

Service or increase the rate of fee for any 

Secondary Service before the expiration 

of the 30-day period after notice has 

been given to Plans, and a Plan objects 

and wishes to withdraw from the 

Collective Fund, Putnam will pay a 

rebate to the Collective Fund, with 

interest at the Applicable Interest Rate 

thereon, from the effective date of the 

fee increase to the later of the expiration 

of the 30-day period or the date on 

which the objecting Plan withdraws 

from the Collective Fund. Such rebate 

will be paid by Putnam within five 

business days of the date that Putnam 

actually receives the increased fee from 

the Mutual Fund. 

18. On an annual basis, Putnam will 

provide notice to the relevant 

independent fiduciary of each ERISA 

Plan having an interest in the Collective 

Fund, which notice will include: (a) The 

approximate percentage (which may be 

in the form of a range) of the Collective 

Fund’s assets that were invested in the 

Mutual Fund during the year; and (b) a 

statement that, if the fiduciary objects to 

the continued investment by the 

Collective Fund in the Mutual Fund, the 

ERISA Plan should withdraw from the 

Collective Fund, and (c) a Termination 

Form 7 expressly providing an election 

to withdraw from the Collective Fund, 

together with instructions on the use of 

such form. Specifically, the instructions 

will explain that the Client Plan has the 

opportunity to withdraw from the 

Collective Fund by submitting the 

completed Termination Form to PFTC. 

Further, the instructions will provide 

the PFTC address to which the form 

must be submitted. The form will 

further provide that upon receipt 

thereof, the Client Plan’s interest in the 

Collective Fund that is the subject of 

such withdrawal election will be 

redeemed as of the next regularly 

scheduled withdrawal date of the 

Collective Fund, following whatever 

advance notice period is applicable to 

the particular Collective Fund 

(assuming, of course, that such 

Collective Fund is not subject to a 

suspension of withdrawals due to 

extraordinary events). PFTC represents 

that, consistent with standard practice 

in the industry with respect to collective 

funds, the governing documents of 

Putnam’s Collective Funds contain 

provisions that allow for the suspension 

of withdrawals in extraordinary and 

unusual circumstances, such as market 

shutdowns, etc. 

19. All other dealings between the 

Collective Funds and the Mutual Fund 

will be on a basis no less favorable to 

the Collective Fund than such dealings 

will be with the other shareholders of 

the Mutual Fund. 

20. In summary, PFTC represents that 

the exemption transactions described 

herein will satisfy the statutory criteria 

of Section 408(a) of the Act because (a) 

the ability to invest in the Mutual Fund 

will provide the Collective Funds the 

opportunity to enhance the yield on 

their cash balances and other short-term 

investments; (b) PFTC will require 

annual audits by an independent 

accounting firm to verify the proper 

crediting of the relevant fees and 

interest due, if applicable; (c) PFTC will 

provide written notice to the relevant 

independent fiduciary of each affected 

ERISA Plan in advance of (i) the initial 

utilization by the Collective Fund of the 

Mutual Fund, (ii) the commencement of 

an additional Secondary Service by 

Putnam (unless an amount equal to the 

Collective Fund’s proportionate share of 

the fee for such additional Secondary 

Service is credited to the Collective 

Fund with interest at the Applicable 

Interest Rate thereon) or (iii) the 

effective date of any increase in the rate 

of any fee payable to Putnam by the 

Mutual Fund (unless an amount equal 

to the Collective Fund’s proportionate 

share of the fee increase is credited to 

the Collective Fund with interest at the 

Applicable Interest Rate thereon); (d) 

prior to any such initial utilization, 

commencement or increase, such 

independent fiduciary will have an 

opportunity to express an objection and 

to cause the Client Plan to withdraw 

from the Collective Fund, provided that 

Putnam may commence providing an 


jlentini on DSKJ8SOYB1PROD with NOTICES2
3060 Federal Register / Vol. 75, No. 11 / Tuesday, January 19, 2010 / Notices 

8For purposes of this proposed exemption, 

references to specific provisions of Title I of the 

Act, unless otherwise specified, refer also to the 

corresponding provisions of the Code. 

additional Secondary Service for a fee or 

implement an increase in the rate of fee 

paid by the Mutual Fund to Putnam 

prior to the withdrawal of the objecting 

Client Plan as long as the amount 

described in (c) above is credited to the 

Collective Fund; (e) no commissions or 

redemption fees will be paid by an 

ERISA Plan in connection with either 

the purchase or sale of shares of the 

Mutual Fund; (f) Putnam will not 

receive any 12b–1 fees as a result of the 

Collective Fund’s purchase or holding 

of shares of the Mutual Fund; and (g) all 

dealings between the Collective Funds 

and the Mutual Fund will be on a basis 

that is at least as favorable to the ERISA 

Plans as such dealings are with other 

shareholders of the Mutual Fund. 

FOR FURTHER INFORMATION CONTACT: Mr. 

Gary H. Lefkowitz of the Department, 

telephone (202) 693–8546. (This is not 

a toll-free number.) 

The PNC Financial Services Group, Inc., 

Located in Pittsburgh, Pennsylvania, 

[Application No. D–11448]. 

Proposed Exemption 

Section I—Exemption for In-Kind 

Redemption of Assets 

The Department is considering 

granting an exemption under the 

authority of section 408(a) of the Act 

and 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 proposed exemption is granted, the 

restrictions in sections 406(a)(1)(A) 

through (D) and 406(b)(1) and (b)(2) of 

the Act, and the sanctions resulting 

from the application of section 4975 of 

the Code, by reason of section 

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

shall not apply 8 to certain in-kind 

redemptions (the Redemption(s)) by The 

Employees’ Thrift Plan of Mercantile 

Bankshares Corporation and 

Participating Affiliates (the Mercantile 

Plan) that occurred overnight on 

October 31, 2007, of shares (the Shares) 

of proprietary mutual funds (the Funds) 

for which The PNC Financial Services 

Group, Inc. (PNC) or an affiliate thereof 

provides investment advisory and other 

services, provided that the following 

conditions were satisfied: 

(A) No sales commissions, 

redemption fees, or other similar fees 

were paid in connection with the 

Redemptions (other than customary 

transfer charges paid to parties other 

than PNC and any affiliates of PNC 

(PNC Affiliates)); 

(B) The assets transferred to the 

Mercantile Plan pursuant to the 

Redemptions consisted entirely of cash 

and Transferable Securities, as such 

term is defined in Section II, below; 

(C) In each Redemption, the 

Mercantile Plan received its pro rata 

portion of the securities with respect to 

the Capital Opportunities Fund, and 

certain securities, selected pursuant to a 

verifiable methodology, that were 

approved by an independent fiduciary 

(Independent Fiduciary, as such term is 

defined in Section II) with respect to the 

other four Funds covered by this 

proposed exemption, such that the 

securities received were equal in value 

to that of the number of Shares 

redeemed, as determined in a single 

valuation (using sources independent of 

PNC and PNC Affiliates) performed in 

the same manner and as of the close of 

business on the same day, in accordance 

with Rule 2a–4 under the Investment 

Company Act of 1940, as amended (the 

1940 Act) and the then-existing 

procedures adopted by the Board of 

Directors of PNC Funds, Inc., which 

were in compliance with all applicable 

securities laws; 

(D) Neither PNC nor any PNC Affiliate 

received any direct or indirect 

compensation or any fees, including any 

fees payable pursuant to Rule 12b–1 

under the 1940 Act, in connection with 

any Redemption of the Shares; 

(E) Prior to a Redemption, the 

Independent Fiduciary received a full 

written disclosure of information 

regarding the Redemption; 

(F) Prior to a Redemption, the 

Independent Fiduciary communicated 

its approval for such Redemption to 

PNC; 

(G) Prior to a Redemption, based on 

the disclosures provided to the 

Independent Fiduciary, the Independent 

Fiduciary determined that the terms of 

the Redemption were fair to the 

Mercantile Plan, and comparable to and 

no less favorable than terms obtainable 

at arm’s length between unaffiliated 

parties, and that the Redemption was in 

the best interests of the Mercantile Plan 

and its participants and beneficiaries; 

(H) Not later than thirty (30) business 

days after the completion of a 

Redemption, the Independent Fiduciary 

received a written confirmation 

regarding such Redemption containing: 

(i) The number of Shares held by the 

Mercantile Plan immediately before the 

Redemption (and the related per Share 

net asset value and the total dollar value 

of the Shares held) for each Fund; 

(ii) The identity (and related aggregate 

dollar value) of each security provided 

to the Mercantile Plan pursuant to the 

Redemption, including each security 

valued in accordance with Rule 2a–4 

under the 1940 Act and procedures 

adopted by the Board of Directors of 

PNC Funds, Inc. (using sources 

independent of PNC and PNC 

Affiliates); 

(iii) The current market price of each 

security received by the Mercantile Plan 

pursuant to the Redemption; and 

(iv) If applicable, the identity of each 

pricing service or market maker 

consulted in determining the value of 

such securities; 

(I) The value of the securities received 

by the Mercantile Plan for each 

redeemed Share equaled the net asset 

value of such Share at the time of the 

transaction, and such value equaled the 

value that would have been received by 

any other investor for shares of the same 

class of the Fund at that time; 

(J) Subsequent to a Redemption, the 

Independent Fiduciary performed a 

post-transaction review that included, 

among other things, a random sampling 

of the pricing information it received; 

(K) Each of the Mercantile Plan’s 

dealings with the Funds, the investment 

advisors to the Funds, the principal 

underwriter for the Funds, or any 

affiliated person thereof, were on a basis 

no less favorable to the Mercantile Plan 

than dealings between the Funds and 

other shareholders holding shares of the 

same class as the Shares; 

(L) Within sixty (60) days of the date 

of publication of this notice of proposed 

exemption, PNC reimburses The PNC 

Financial Services Group, Inc. Incentive 

Savings Plan (the PNC Plan), into which 

the Mercantile Plan was merged on 

November 1, 2007, for all brokerage 

costs incurred by the Mercantile Plan on 

November 1, 2007 to liquidate the 

securities that the Mercantile Plan 

received in kind pursuant to a 

Redemption; 

(M) PNC maintains, or causes to be 

maintained, for a period of six years 

from the date of any covered transaction 

such records as are necessary to enable 

the persons described in paragraph (N) 

below to determine whether the 

conditions of this exemption have been 

met, except that (i) a separate prohibited 

transaction will not be considered to 

have occurred if, due to circumstances 

beyond the control of PNC, the records 

are lost or destroyed prior to the end of 

the six-year period and (ii) no party in 

interest with respect to the Mercantile 

Plan other than PNC 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 such records are not 

maintained or are not available for 

examination as required by paragraph 

(N) below; 


jlentini on DSKJ8SOYB1PROD with NOTICES2
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9As a general matter, it is the Department’s view 

that the model practice to effect an in-kind 

redemption by a mutual fund to a shareholderpension plan, subject to Title I of ERISA, is through 

a pro rata distribution because the adoption of such 

a method ensures that the individual stocks 

selected for the in-kind redemption are objectively 

determined. The Department recognizes that the inkind redemption described in this notice of 

proposed exemption involves unique circumstances 

because, among other things, it facilitated the 

transfer of plan assets and the merger of The 

Employees’ Thrift Plan of Mercantile Bankshares 

Corporation and Participating Affiliates (the 

Mercantile Plan) with The PNC Financial Services 

Group, Inc. Incentive Savings Plan (the PNC Plan). 

See also Facts and Representations #12, which 

summarizes the basis for satisfying the section 

408(a) statutory criteria for providing exemptive 

relief. In this regard, an important condition 

contained in this notice of proposed exemption is 

that PNC will pay all brokerage commissions 

associated with the Mercantile Plan’s sale of the 

securities received in the Redemptions. Further, the 

Department encourages applicants, their advisers 

and counsel to confer, in advance, with EBSA’s 

Office of Exemption Determinations as to whether 

a contemplated non-pro rata in-kind redemption 

involving plan assets may qualify for prohibited 

transaction exemptive relief. Although the 

applicant requested both retroactive and 

prospective exemptive relief, the Department is 

proposing only retroactive exemptive relief relating 

to the October 31, 2007 Redemptions. 

(N)(1) Except as provided in 

subparagraph (2) of this paragraph (N), 

and notwithstanding any provisions of 

section 504(a)(2) and (b) of the Act, the 

records referred to in paragraph (M) 

above are unconditionally available at 

their customary locations for 

examination during normal business 

hours by (i) any duly authorized 

employee or representative of the 

Department, the Internal Revenue 

Service, or the Securities and Exchange 

Commission (SEC), (ii) any fiduciary of 

the PNC Plan as the successor to the 

Mercantile Plan or any duly authorized 

representative of such fiduciary, (iii) 

any participant or beneficiary of the 

PNC Plan as the successor to the 

Mercantile Plan or duly authorized 

representative of such participant or 

beneficiary, and (iv) any employer 

whose employees are covered by the 

PNC Plan as the successor to the 

Mercantile Plan and any employee 

organization whose members are 

covered by such plan; 

(2) None of the persons described in 

paragraphs (N)(1)(ii), (iii) and (iv) shall 

be authorized to examine trade secrets 

of PNC or the Funds, or commercial or 

financial information which is 

privileged or confidential; 

(3) Should PNC or the Funds refuse to 

disclose information on the basis that 

such information is exempt from 

disclosure pursuant to paragraph (N)(2) 

above, PNC or the Funds shall, by the 

close of the thirtieth (30th) day 

following the request, provide a written 

notice advising that person of the 

reasons for the refusal and that the 

Department may request such 

information. 

Section II—Definitions 

For purposes of this exemption— 

(A) The term ‘‘affiliate’’ means: 

(1) Any person (including corporation 

or partnership) directly or indirectly 

through one or more intermediaries, 

controlling, controlled by, or under 

common control with the person; 

(2) Any officer, director, employee, 

relative, or partner in any such person; 

and 

(3) Any corporation or partnership of 

which such person is an officer, 

director, partner, or employee. 

(B) The term ‘‘control’’ means the 

power to exercise a controlling 

influence over the management or 

policies of a person other than an 

individual. 

(C) The term ‘‘net asset value’’ means 

the amount for purposes of pricing all 

purchases and sales calculated by 

dividing the value of all securities, 

determined by a method as set forth in 

the Fund’s prospectus and statement of 

additional information, and other assets 

belonging to the Fund, less the 

liabilities charged to each such Fund, by 

the number of outstanding shares. 

(D) The term ‘‘Independent Fiduciary’’ 

means a fiduciary who is: (i) 

Independent of and unrelated to PNC 

and its affiliates, and (ii) appointed to 

act on behalf of the Mercantile Plan 

with respect to the in-kind transfer of 

assets from one or more Funds to, or for 

the benefit of, the Mercantile Plan. For 

purposes of this exemption, a fiduciary 

will not be deemed to be independent 

of and unrelated to PNC if: (i) Such 

fiduciary directly or indirectly controls, 

is controlled by, or is under common 

control with, PNC; (ii) such fiduciary 

directly or indirectly receives any 

compensation or other consideration in 

connection with any transaction 

described in this exemption (except that 

an independent fiduciary may receive 

compensation from PNC in connection 

with the transactions contemplated 

herein if the amount or payment of such 

compensation is not contingent upon, or 

in any way affected by, the independent 

fiduciary’s decision); and (iii) an 

amount equal to more than one percent 

(1%) of such fiduciary’s gross income 

(for federal income tax purposes, in its 

prior tax year), is paid by PNC and its 

affiliates to the fiduciary in 2007, the tax 

year at issue. 

(E) The term ‘‘Transferable Securities’’ 

means securities (1) for which market 

quotations are readily available (as 

determined under Rule 2a–4 of the 1940 

Act) from persons independent of PNC 

and (2) which are not: 

(i) Securities that, if publicly offered 

or sold, would require registration 

under the Securities Act of 1933; 

(ii) Securities issued by entities in 

countries which (a) restrict or prohibit 

the holding of securities by nonnationals other than through qualified 

investment vehicles, such as the Funds, 

or (b) permit transfers of ownership of 

securities to be effected only by 

transactions conducted on a local stock 

exchange; 

(iii) Certain portfolio positions (such 

as forward foreign currency contracts, 

futures and options contracts, swap 

transactions, certificates of deposit, and 

repurchase agreements) that, although 

liquid and marketable, involve the 

assumption of contractual obligations, 

require special trading facilities, or can 

only be traded with the counter-party to 

the transaction to effect a change in 

beneficial ownership; 

(iv) Cash equivalents (such as 

certificates of deposit, commercial 

paper, and repurchase agreements); 

(v) Other assets that are not readily 

distributable (including receivables and 

prepaid expenses), net of all liabilities 

(including accounts payable); and 

(vi) Securities subject to ‘‘stop 

transfer’’ instructions or similar 

contractual restrictions on transfer. 

(F) The term ‘‘relative’’ means a 

‘‘relative’’ as that term is defined in 

section 3(15) of the Act (or a ‘‘member 

of the family’’ as that term is defined in 

section 4975(e)(6) of the Code), or a 

brother, sister, or a spouse of a brother 

or a sister. 

Effective Date: The exemption, if 

granted, will be effective as of October 

31, 2007.9

Summary of Facts and Representations 

1. The PNC Financial Services Group, 

Inc. (PNC) is a bank holding company 

that owns or controls two principal 

banks, (i) PNC Bank, National 

Association (PNC Bank, N.A.) and (ii) 

PNC Bank, Delaware, as well as a 

number of non-bank subsidiaries. In 

addition, on March 2, 2007, PNC 

acquired Mercantile Bankshares 

Corporation (Mercantile), the parent 

company of eleven subsidiary banks. 

PNC merged the Mercantile subsidiary 

banks with, and into, PNC Bank, N.A. 

on September 14, 2007, pursuant to an 

application filed with, and approved by, 

the Office of the Comptroller of the 

Currency. Immediately after 

consummation of that merger, PNC 

Bank, N.A. transferred to PNC Bank, 

Delaware nine Delaware branches 

previously held by two of the 

Mercantile subsidiary banks, pursuant 

to a Bank Merger Act application filed 


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10Prior to October 1, 2007, the name of the Fund 

family was ‘‘Mercantile Funds, Inc.’’ 

11 It is represented that the Mercantile Plan’s 

assets were invested in the Funds in accordance 

with Prohibited Transaction Exemption (PTE) 77– 

3. PTE 77–3 (42 FR 18734, April 8, 1977) is a class 

exemption that permits, under certain conditions, 

the acquisition or sale of shares of a registered, 

open-end investment company by an employee 

benefit plan covering only employees of such 

investment company, employees of the investment 

adviser or principal underwriter for such 

investment company, or employees of any affiliated 

person (as defined therein) of such investment 

adviser or principal underwriter. The Department 

expresses no opinion herein as to whether the terms 

and conditions of PTE 77–3 were satisfied. 

12The applicant has disclosed that several of 

these third-party mutual funds included among the 

PNC Plan investment options are advised by 

BlackRock, Inc., in which PNC has a significant 

minority interest (approximately 34%). 

13Prior to September 17, 2007, PCA was named 

‘‘Mercantile Capital Advisors, Inc.’’ 

14The most recent examples are PTE 2008–4 (73 

FR 13585, March 13, 2008) granted to GE Asset 

Management Incorporated and 2007–04 (72 FR 

13126, March 20, 2007) granted to Mellon Financial 

Corporation. 

with, and approved by, the Federal 

Reserve Bank of Cleveland. 

PNC provides, through its 

subsidiaries, a wide variety of trust and 

banking services to individuals, 

corporations, and institutions. Through 

its banking subsidiaries, PNC provides 

investment management, fiduciary, and 

trustee services to employee benefit 

plans and charitable and endowment 

assets, as well as non-discretionary 

services and investment options for 

defined contribution plans. PNC also 

provides a range of tailored investment, 

trust, and private banking products to 

affluent individuals and families. 

PNC, through its affiliates, also 

provides various types of administrative 

services to mutual funds, including 

acting as transfer and disbursing agent 

and providing custodial and accounting 

services. 

2. In connection with PNC’s 

acquisition of Mercantile, PNC assumed 

sponsorship of The Employees’ Thrift 

Plan of Mercantile Bankshares 

Corporation and Participating Affiliates 

(the Mercantile Plan), a qualified 

defined contribution retirement plan, 

and PNC Bank, N.A. became the 

Mercantile Plan’s trustee. PNC Bank, 

N.A. is also the trustee of The PNC 

Financial Services Group, Inc. Incentive 

Savings Plan (the PNC Plan), a qualified 

defined contribution plan sponsored by 

PNC. 

The applicant represents that the 

Administrative Committee of PNC (the 

Committee), the named fiduciary for 

plan investments for the PNC Plan, 

acting in its fiduciary capacity, initiated 

a study of how best to integrate the 

investment options under the two Plans, 

which had different investment 

platforms. The Mercantile Plan used 

eight proprietary mutual funds, each of 

which is a series of PNC Funds, Inc.10

(i.e., the Funds),11 while the PNC Plan 

used an ‘‘open’’ platform that includes 

non-proprietary funds.12

The Committee was advised by its 

investment consultant Wilshire 

Associates (Wilshire), who is also the 

Independent Fiduciary for the 

Mercantile Plan in the subject 

Redemptions, to transition the 

Mercantile Plan participants to the PNC 

Plan investment platform as soon as it 

would be prudent to do so. Wilshire’s 

recommendation considered, among 

other things, the additional costs to the 

PNC Plan to maintain two separate 

investment platforms, the 

appropriateness of the funds on the PNC 

Plan investment platform, and the 

upcoming administrative costs 

associated with the transition of 

Mercantile employees to the PNC 

payroll. On this basis, the Committee 

determined that it would be prudent, 

and in the best interests of the 

Mercantile Plan participants and 

beneficiaries, to transfer out of such 

plan’s investment options as soon as 

possible. 

Effective November 1, 2007, the 

Mercantile Plan was merged into the 

PNC Plan. In connection therewith, 

Mercantile Plan assets invested in 

shares of the Funds (the Shares) were 

redeemed in order to acquire shares of 

mutual funds available as investment 

options under the PNC Plan. 

3. According to the applicant, each of 

the eight Funds is a registered 

investment company subject to the 1940 

Act and constitutes a distinct 

investment vehicle, which has a joint 

prospectus with the other Funds. The 

overall management of the Funds, 

including the negotiation of investment 

advisory contracts, rests with the Board 

of Directors of the Funds (the Fund 

Board); the Fund Board is elected by the 

shareholders of the Funds and includes 

a majority of individuals who are not 

‘‘interested persons’’ (as defined in the 

1940 Act) of the Funds and are 

represented to be independent directors. 

PNC, through its affiliate PNC Capital 

Advisors, Inc. (PCA),13 serves as the 

investment adviser, within the meaning 

of section 2(20) of the 1940 Act, to each 

Fund. In certain instances, the 

investment adviser may pay fees to subadvisers, which may also be PNC 

affiliates. 

PCA also serves as administrator for 

the Funds. As administrator, PCA 

maintains the Fund’s offices, 

coordinates preparation of reports to 

shareholders, prepares filings with state 

securities commissions, and coordinates 

federal and state tax returns, among 

other administrative functions. 

The other service providers to the 

Funds, including the additional subadvisers, the distributor, the fund 

accountant, the transfer agent, and the 

custodian, are all independent of, and 

unaffiliated with, PNC. 

The Funds charge a Rule 12b–1 

distribution fee that is between 0.50% 

and 1.00% with respect to their Class A 

and Class C shares. However, 

Institutional Shares, the class offered to 

plan investors, are not subject to 

12b–1 fees. 

4. In accordance with the procedures 

of the Funds, the Fund Board, including 

a majority of the directors who are 

represented to be unaffiliated and 

independent of PNC and Mercantile, 

determined that the redemption of 

Shares by the Mercantile Plan with 

respect to five of the eight Funds should 

be effected in kind and in cash. The 

Funds elected to be governed by the 

provisions of Rule 18f–1 under the 1940 

Act. This election committed each 

Fund, during any ninety-day period for 

any one shareholder, to redeem its 

shares solely in cash up to the lesser of 

$250,000 or 1% of the Fund’s net asset 

value at the beginning of such period. 

Accordingly, the redemption with 

respect to each Fund included a cash 

redemption of $250,000. 

The applicant notes that PTE 77–3 

provides exemptive relief for the sale of 

shares of a mutual fund by an employee 

benefit plan covering employees of the 

investment adviser for the mutual fund 

and its affiliates, subject to certain 

conditions. However, in previous 

published exemptions involving the inkind redemption of shares by plans 

sponsored by the investment advisers of 

mutual funds, the notices describe PTE 

77–3 as being available for a redemption 

of shares for cash, implying that PTE 

77–3 would not be available for an inkind redemption. See, e.g., PTE 2003–01 

(68 FR 6194, February 6, 2003) granted 

to the Northern Trust Company and 

Affiliates; PTE 2002–20 (67 FR 4986, 

March 28, 2002) granted to the Union 

Bank of California; and PTE 2001–46 (66 

FR 64280, December 12, 2001) granted 

to Bank of America Corporation.14

The Redemptions commenced after 

the close of the financial markets on 

October 31, 2007. In its application 

dated November 1, 2007, PNC requests 

retroactive exemptive relief for the inkind Redemption of the Mercantile 

Plan’s investments in the Funds. PNC 

asserts that it meets the standards for a 

retroactive exemption set forth in ERISA 


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15According to the applicant, the Signature letter 

(Dec. 28, 1999) permits in-kind redemptions by an 

affiliated shareholder under certain conditions set 

forth in the letter. Those conditions are designed to 

address the fact that, in many instances, the affiliate 

may have the ability and pecuniary incentive to 

influence the actions of the mutual fund, which 

presents the affiliate with an opportunity to 

inappropriately influence the mutual fund. To this 

end, the Signature letter requires a mutual fund’s 

Board of Directors to adopt procedures designed to 

ensure that the affiliated shareholder does not 

influence the selection of the securities to be 

redeemed in kind. The SEC staff made clear its view 

that a pro rata security selection process essentially 

eliminated the affiliated shareholder’s ability to 

influence or control the security selection process 

and, therefore, the SEC staff would not recommend 

enforcement action under the 1940 Act with respect 

to a pro rata in-kind redemption to an affiliate. 

However, also according to the applicant, the SEC 

staff also made clear that a mutual fund’s Board of 

Directors could use any other method for selecting 

the securities to be redeemed in kind, provided that 

such selection process addressed the affiliate’s 

ability to influence or control the security selection 

process. 

Technical Release 85–1 because it acted 

in good faith, i.e., PNC identified the 

potential prohibited transactions, sought 

legal counsel prior to the execution of 

the Redemptions, and structured the 

Redemption transactions in a manner to 

ensure that the necessary safeguards 

were in place, including review and 

approval by a qualified, independent 

fiduciary (as described further in Item 

10, below). 

The five of the eight Funds involved 

in the in-kind Redemption transactions 

were: the Growth & Income Fund, the 

Equity Growth Fund, the Equity Income 

Fund, the Capital Opportunities Fund, 

and the International Equity Fund. It is 

represented that, as of October 30, 2007, 

the Mercantile Plan’s approximate 

percentages of ownership for each of 

these Funds were as follows. 

Fund 

Estimated 

mercantile 

plan assets 

Approximate 

percentage of 

fund held by mercantile plan 

Growth & Income Fund ............................................................................................................................... $87,622,519.81 21.22 

Equity Growth Fund ..................................................................................................................................... 12,285,590.58 23.43 

Equity Income Fund ..................................................................................................................................... 11,246,725.44 12.52 

Capital Opportunities Fund .......................................................................................................................... 11,154,446.73 5.39 

International Equity Fund ............................................................................................................................. 29,540,576.94 3.58 

5. Fund Redemption Procedures. The 

applicant represents that neither the 

Mercantile Plan nor the Committee had 

any control over the manner in which 

the Redemptions were consummated. 

The Fund Board had the authority, 

pursuant to the Funds’ procedures, to 

decide the manner in which the 

Redemptions were effected, and the 

counsel to the Funds has represented 

that the Redemptions were effected in 

compliance with federal securities laws. 

Because the Mercantile Plan’s 

investment in some of the Funds 

exceeded 5% of Fund assets, the Fund’s 

pre-established redemption procedures 

required a determination by the Fund 

Board whether the redemption should 

be made in kind rather than in cash. The 

Funds’ ‘‘Procedures for Redemptions In 

Kind to Affiliated Shareholders’’ 

(adopted by the Fund Board on May 19, 

2006) were designed to comply with the 

1940 Act rules governing transactions 

with affiliated entities and, in 

particular, with the SEC no-action letter 

issued to Signature Financial Group, 

Inc. (the Signature letter).15 These 

redemption procedures require the 

Fund Board to consider the following 

factors: 

(b) The percentage of the Fund’s 

shares that are being redeemed and over 

what time period the transactions will 

occur; 

(c) The tax impact to remaining 

shareholders; 

(d) Portfolio transaction costs, 

including associated commission and 

transfer fees, and potential market 

impact; 

(e) Other direct expenses, including 

custody transaction charges and fund 

accounting charges; and 

e. Effect on the Fund’s investment 

policies. For example, would the Fund 

temporarily be out of compliance with 

stated investment objectives due to the 

need to increase cash holdings, and if so 

for what period of time? 

Further, the pre-established 

redemption procedures require that the 

Fund Board, including a majority of its 

members who are not ‘‘interested 

persons’’ (as defined in the 1940 Act), 

determine that (1) the redemption will 

not favor the redeeming shareholder to 

the detriment of any other shareholder; 

and (2) the redemption will be in the 

best interests of the Fund. If the 

distribution of securities from the Fund 

in the redemption is pro rata – i.e., of 

each security in the Fund’s portfolio in 

proportion to the redeeming 

shareholder’s interest in the overall 

Fund—prior approval of the Fund Board 

is not required; however, if the 

distribution is not pro rata, then the 

Fund Board must approve the 

redemption in advance of the 

redemption date, in conformity with the 

conditions of the Signature letter. 

In late July 2007, the Fund Board, 

including a majority of its independent 

Directors, determined, in accordance 

with the Fund procedures, not only that 

the Redemptions should be effected in 

kind for five of the eight Funds but also 

that the distribution of securities from 

four of those five Funds (all except the 

Capital Opportunities Fund) would be 

made on a non-pro rata basis, and 

approved conducting the Redemptions 

in this manner. The distribution of 

securities from the Capital 

Opportunities Fund would be made on 

a pro rata basis, except for those not 

meeting the definition of ‘‘Transferable 

Securities’’ as defined in Section II(E) of 

this notice. The Fund Board’s 

determinations regarding the 

Redemptions were based upon the 

conclusions reached by the Chief 

Compliance Officer (CCO) of the Funds. 

6. Non-pro rata Exemptions. The 

applicant acknowledges that similar 

individual exemptions involving inkind redemptions previously granted by 

the Department contained a condition 

requiring that the distribution of 

securities be pro rata. The applicant 

distinguishes the instant exemption 

request—involving the in-kind 

Redemption of shares from five Funds, 

four on a non-pro rata basis—by noting 

that the prior cases involved an in-kind 

transfer of the distributed securities to 

another proprietary fund of the 

fiduciary or an affiliate or to a separate 

account managed by the fiduciary or an 

affiliate, with a similar portfolio of 

investments. The applicant points out 

that, as a general matter, the Mercantile 

Plan had no intention of holding the 

securities received. Thus, the focus was 

on the ability of the Mercantile Plan to 

immediately sell the securities received 

rather than to continue to manage those 

securities, based upon Wilshire’s advice 

for the Mercantile Plan to replace its 

investment platform. The Redemptions 

in the instant case were immediately 

followed by liquidation of the vast 

majority of the distributed securities 


jlentini on DSKJ8SOYB1PROD with NOTICES2
3064 Federal Register / Vol. 75, No. 11 / Tuesday, January 19, 2010 / Notices 

16According to the applicant, the only securities 

not liquidated were those accepted in kind by two 

of the third-party receiving funds; those securities 

were immediately transferred to the new funds 

within one business day from the date of the 

Mercantile Plan’s receipt. 

17Morgan Stanley was one of two sub-advisers for 

the International Equity Fund, managing 

approximately 80% of the Fund’s assets. The 

Mercantile Plan’s proportionate interest in the 

portfolio of the other sub-adviser was distributed in 

cash. 

and reinvestment of the sale proceeds in 

third-party mutual funds available 

under the PNC Plan.16 The Committee, 

in consultation with Wilshire, 

determined that it was in the Mercantile 

Plan’s best interests to receive a smaller 

number of highly liquid securities in 

larger blocks in order to facilitate an 

easier and less costly liquidation, a goal 

that could be achieved only by means of 

a non-pro rata redemption. For 

example, in the case of the International 

Equity Fund, the implementation of a 

pro rata redemption would have 

resulted in the receipt of over 480 

different securities. 

7. Security Selection Criteria. The 

applicant represents that the selection of 

the particular securities to be 

distributed was made in accordance 

with the established procedures of the 

Funds, pursuant to the methodology 

described below, and was reviewed and 

approved in advance by the CCO, who 

is represented by the applicant to be 

‘‘independent’’ of, and not affiliated 

with, PNC. The CCO reviewed the 

securities selected for the Redemptions 

and the method of selection. The CCO 

concluded in his report of October 29, 

2007 to the Fund Board that the 

selection of the securities was made so 

as not to harm either the Mercantile 

Plan or the shareholders remaining in 

the Funds. 

When the Committee learned that the 

Funds planned to make several of the 

distributions in kind, it communicated 

to the Funds the Mercantile Plan’s 

preference for large blocks of highly 

liquid securities. It is represented that 

the Funds took the Mercantile Plan’s 

preferences into consideration in 

determining the security selection 

criteria used for the Redemptions. 

Ultimately, following review of the 

proposed selection methodology by the 

Funds’ CCO, the Funds used three 

criteria for the selection of the securities 

to be distributed in the Redemptions. As 

memorialized in an October 29, 2007 

memorandum by the CCO, who was 

required to review the methodology to 

assure that Fund procedures were 

satisfied and that there was no 

overreaching in favor of either the 

redeeming shareholder or the nonredeeming shareholder, those criteria 

were: 

• A minimum detriment to the 

remaining shareholders in the fund (i.e. 

tax and other expenses). 

• A minimum number of securities 

transferred and, therefore, a minimum 

in associated transaction costs [i.e., for 

the Mercantile Plan as the redeeming 

shareholder receiving the securities]. 

• A preference for liquid securities. 

Large Cap Domestic Funds. For the 

three domestic equity Funds involved in 

the non-pro rata Redemptions—the 

Equity Income Fund, the Equity Growth 

Fund and the Growth and Income 

Fund—liquidity was not an issue, as all 

of their security holdings were liquid. It 

was decided that the other two criteria 

could best be met by delivering those 

tax lots in each fund that represented 

the greatest percentage appreciation 

over their cost, because that would 

minimize the tax impact on the 

remaining shareholders while reducing 

the number of securities distributed to 

the redeeming shareholder. The CCO 

noted in his report that the Funds’ 

investment adviser, and Citi Fund 

Services, Inc., the Funds’ subadministrator and an independent party, 

both verified that the selection 

methodology properly identified the tax 

lots with the greatest increases and 

ranked the tax lots accordingly. 

The applicant represents that the 

Funds would have used the same 

approach of allocating by tax lot even in 

conducting an in-kind redemption with 

a taxable shareholder because the 

redeeming shareholder is indifferent to 

the tax basis of the received securities. 

According to the applicant, the reason is 

that the shareholder, if subject to tax, 

recognizes gain or loss equal to the 

difference between the fair market value 

of the assets distributed and the 

shareholder’s adjusted tax basis in its 

fund shares—the tax basis of the 

distributed assets is not a factor. At the 

same time, a mutual fund that qualifies 

as a regulated investment company (a 

RIC) under the Code does not recognize 

gain on the distribution of securities to 

a redeeming shareholder. 

International Equity Fund. For the 

International Equity Fund, the Fund’s 

independent sub-adviser, Morgan 

Stanley,17 consistent with the criteria 

described in the CCO’s memorandum, 

followed the objective of selecting as 

small a number of securities as possible 

and limiting the selections to tradable 

issues in tradable volumes, as preferred 

by the Committee, while also avoiding 

an adverse effect on the remaining 

shareholders. The Fund Board had 

concerns about the transferability of 

many of the securities in the 

International Equity Fund and, if 

transferable, the associated transfer 

costs, as some foreign jurisdictions 

require that their domestic securities be 

held under special custody 

arrangements within the respective 

jurisdiction. On this basis, it 

recommended redeeming out the 

securities of ten large companies whose 

highly liquid securities were freely 

traded on European stock exchanges. In 

addition to avoiding the issue of 

custody costs and delays on transfer 

noted above, this also avoided the 

problem of trying to allocate multiple 

small positions, as the Fund held 

approximately 482 different investment 

securities at the time. 

While the CCO was concerned that 

this approach would not encompass the 

tax lots with the most profit, as under 

the equity fund methodology, he found 

that 72 of the 91 most profitable tax lots 

would be included. Because of changes 

in the Fund’s portfolio and market 

values during the period between the 

initial selection date (in August or 

September 2007) and the Redemption 

date, Morgan Stanley determined that 

the Redemption amount could be 

satisfied using only eight of the ten 

securities on the list. The applicant 

represents that many of the 

International Equity Fund’s other freely 

transferable foreign securities were 

relatively less liquid, and including 

those securities in the Redemption 

would have taken a longer time to sell 

them. 

8. According to the applicant, the 

procedures utilized in the valuation of 

securities in the in-kind Redemptions 

were protective of the rights of the 

Mercantile Plan and its participants and 

beneficiaries. The Redemptions were 

accomplished by transferring, in 

exchange for Shares of the Funds held 

by the Mercantile Plan, a selection of 

the securities held by each Fund as 

determined by the Funds in accordance 

with the Funds’ redemption policies. 

The Fund assets transferred to the 

Mercantile Plan consisted entirely of 

cash and securities for which market 

quotations were readily available. 

Securities not meeting the definition of 

‘‘Transferable Securities’’ as defined in 

Section II(E) of this notice were 

excluded, i.e., (i) Securities that, if 

publicly offered or sold, would require 

registration under the Securities Act of 

1933; (ii) Securities issued by entities in 

countries which (a) restrict or prohibit 

the holding of securities by nonnationals other than through qualified 

investment vehicles, such as the Funds, 

or (b) permit transfers of ownership of 

securities to be effected only by 


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18 In the Signature letter, the Division of 

Investment Management of the SEC states that it 

will not recommend enforcement action pursuant to 

section 17(a) of the 1940 Act for certain in-kind 

distributions of portfolio securities to an affiliate of 

a mutual fund. Funds seeking to use this ‘‘safe 

harbor’’ must value the securities to be distributed 

to an affiliate in an in-kind distribution ‘‘in the same 

manner as they are valued for purposes of 

computing the distributing fund’s net asset value.’’ 

As explained in Item 5, ‘‘Fund Redemption 

Procedures,’’ the Funds had pre-established 

procedures for conducting affiliated transactions in 

accordance with the Signature letter. 

The Signature letter does not address the 

marketability of the securities distributed in kind. 

The range of securities distributed pursuant to this 

‘‘safe harbor’’ may therefore be broader than the 

range of securities covered by SEC Rule 17a–7, 17 

CFR 270.17a–7. In granting past exemptive relief 

with respect to in-kind transactions involving 

mutual funds, the Department has required that the 

securities being distributed in-kind fall within Rule 

17a–7. One of the requirements of Rule 17a–7 is 

that the securities are those for which ‘‘market 

quotations are readily available.’’ SEC Rule 17a– 

7(a). Under this exemption request, exemptive relief 

also would be limited to in-kind distribution of 

securities for which market quotations are readily 

available. 

19Securities of non-U.S. issuers may be traded on 

U.S. exchanges or NASDAQ, directly or in the form 

of ADRs, or may be acquired on foreign exchanges 

or foreign over-the-counter markets. In the latter 

case, valuation is in accordance with (iv). 

20 In accordance with the provisions of Rule 18f– 

1 under the 1940 Act, the Funds were obligated to 

redeem in cash the lesser of $250,000 or 1% of their 

net asset value. Consequently, each of the non-pro 

rata Funds distributed $250,000 in cash, and the 

pro rata distribution from the Capital Opportunities 

Fund included a pro rata portion of the Fund’s cash 

holdings and the cash value of any non-transferable 

securities, in an amount that exceeded $250,000. 

21According to the applicant, this arrangement 

created an additional benefit for the Mercantile Plan 

participants. Because there was a market decline on 

November 1, 2007, the participants were able to 

receive the higher October 31, 2007 closing prices 

on the liquidation of the distributed securities, and 

were able to reinvest those proceeds at the lower 

November 1, 2007 share prices of the receiving 

funds. The overall benefit to the participants was 

approximately $3 million. 

transactions conducted on a local stock 

exchange; (iii) Certain portfolio 

positions (such as forward foreign 

currency contracts, futures and options 

contracts, swap transactions, certificates 

of deposit, and repurchase agreements) 

that, although liquid and marketable, 

involve the assumption of contractual 

obligations, require special trading 

facilities, or can only be traded with the 

counter-party to the transaction to effect 

a change in beneficial ownership; (iv) 

Cash equivalents (such as certificates of 

deposit, commercial paper, and 

repurchase agreements); (v) Other assets 

that are not readily distributable 

(including receivables and prepaid 

expenses), net of all liabilities 

(including accounts payable); and (vi) 

Securities subject to ‘‘stop transfer’’ 

instructions or similar contractual 

restrictions on transfer. 

In addition, the Redemptions did not 

include securities that were odd lots, 

fractional shares, and accruals on such 

securities. The applicant also represents 

that no Rule 144A securities were 

involved in the Redemptions. 

For purposes of the in-kind 

Redemptions, the value of the securities 

in the Funds generally were determined 

based on their market value as of the 

close of business on the Redemption 

date (using sources independent of PNC 

and PNC Affiliates), in accordance with 

the requirements of the 1940 Act and 

the procedures adopted by the Fund 

Board, in conformity with the Signature 

letter.18 The pricing methodology to be 

applied with respect to an in-kind 

redemption under these procedures 

complies with Rule 2a–4 under the 1940 

Act, the general rule that governs the 

valuation process for purposes of 

determining the current price of mutual 

fund shares. The value for the types of 

securities held by the Funds was 

determined as follows. 

(i) Securities primarily traded on a 

domestic securities exchange are valued 

at the last price on that exchange or, if 

there were no sales during the day, at 

the current quoted bid price. Securities 

traded through the National Association 

of Securities Dealers Automated 

Quotations (NASDAQ) National Market 

System are valued at the NASDAQ 

Official Closing Price; 

(ii) Securities primarily traded on 

foreign exchanges are valued at the 

closing values of such securities on their 

respective exchanges, provided that if 

such securities are not traded on the 

valuation date, they will be valued at 

the preceding closing values; 

(iii) Over-the-counter domestic 

securities and securities listed or traded 

on foreign exchanges with operations 

similar to the U.S. over-the-counter 

market are valued at the closing price of 

the primary exchange for which the 

security is traded; or 

(iv) With respect to the International 

Equity Fund, the Fund Board 

determined that movements in relevant 

indices or other appropriate market 

indicators, after the close of the foreign 

securities exchanges, may demonstrate 

that market quotations no longer 

represent the fair value of the foreign 

securities held by the International 

Equity Fund and may require fair value 

pricing. Therefore, the Fund Board 

adopted written policies and procedures 

requiring that, when there is a market 

movement greater than 50 basis points 

in the Russell 1000 Index from the open 

and close of the U.S. market, the 

securities in the International Equity 

Fund are priced utilizing a fair value 

determined by an independent pricing 

service, Investment Technology Group, 

Inc. (ITG).19

9. The Redemptions occurred after the 

close of the markets on Wednesday, 

October 31, 2007, at which time the five 

Funds distributed to the Mercantile Plan 

a combination of securities and a small 

amount of cash.20 The securities 

previously identified as acceptable by 

two of the receiving funds in the PNC 

Plan were transferred to those funds in 

kind, and the remaining securities that 

were received pursuant to the 

Redemptions were liquidated to cash on 

November 1, 2007. 

The Committee had arranged for the 

liquidation of the securities with two 

brokers (the Liquidation 

Arrangements)—one for the domestic 

securities and one for the foreign 

securities. To help minimize the time 

during which the Mercantile Plan 

participants’ accounts would remain 

uninvested, the Liquidation 

Arrangements provided for the brokers 

to accept the securities at the close of 

the markets on October 31, 2007 at their 

closing prices so that the brokers 

assumed the market risk involved in 

liquidating the securities. In the view of 

the Committee, a factor in the brokers’ 

willingness to accept this risk was the 

limited number of securities involved, 

because it would be more difficult for 

the brokers to arrange buyers for a 

significantly larger number of positions. 

According to the applicant, it is unlikely 

the Committee could have secured such 

a commitment if the larger number of 

securities resulting from a pro rata 

Redemption of all five Funds had been 

involved. The Committee further 

entered into agreements with the 

receiving funds to accept the new 

investments on the next business day, 

November 1, 2007, with an extended 

settlement date (up to three days later in 

most instances) to cover the possibility 

of a delay in payment of the liquidation 

proceeds, at no additional cost to the 

Mercantile Plan so that the Mercantile 

Plan participants would not lose the 

benefit of being fully invested in their 

chosen investment options (through the 

respective successor options on the PNC 

Plan platform) for more than one day.21

10. No brokerage commissions or 

other fees or expenses (other than 

customary transfer charges paid to 

parties other than PNC’s affiliates) were 

charged to the Mercantile Plan as part 

of the Redemptions. Third-party 

brokerage costs, however, were incurred 

in connection with the liquidation of 

the securities that the Mercantile Plan 

received in kind pursuant to the 

Redemptions. The liquidation of all 

such securities was completed on 


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22The Department is not opining herein as to 

whether this use of the forfeiture account is 

permitted under Title I of ERISA. 

23 It is noted that the condition in Section I(L) of 

this notice was not contained therein. 

November 1, 2007, and those brokerage 

costs were paid from the PNC Plan’s 

forfeiture account, which held 

forfeitures accumulated from prior plan 

mergers. As a condition of this proposed 

exemption, PNC will reimburse the PNC 

Plan, into which the Mercantile Plan 

was merged on November 1, 2007, for 

all brokerage costs that the Mercantile 

Plan incurred on November 1, 2007. 

During the process leading up to the 

Redemption date, the Funds provided 

the Mercantile Plan trustee with lists of 

the securities that were likely to be 

included in the Redemptions, to permit 

the Mercantile Plan fiduciaries to 

determine in advance how best to 

dispose of the securities. The Mercantile 

Plan trustee passed those lists along to 

the funds on the PNC Plan investment 

platform that were to receive the 

proceeds of the respective Redemptions. 

Two of the receiving funds—a Vanguard 

fund and a Harbor Capital fund (neither 

affiliated with PNC)—informed the 

Mercantile Plan trustee that they would 

be willing to accept certain securities 

from the lists in kind. As a result, on the 

Redemption date, those securities were 

not liquidated, but rather were 

transferred in kind to the receiving 

funds. 

Because the Committee was not able 

to lock in the October 31, 2007 values 

of the securities that were transferred in 

kind to the new funds, the shares 

acquired with those securities on 

November 1st were less in value than 

the value of the distributed securities 

the previous day. The applicant 

represents that the Plan participants 

were in the same financial position that 

they would have been in had they 

remained invested in the Funds, 

because their investments in the Funds 

would have suffered a corresponding 

decrease. Nevertheless, the Committee 

decided that it would be appropriate 

under the unique circumstances of the 

Redemptions to insulate the 

participants’ accounts from the impact 

of this brief period of negative 

investment performance, by making up 

the difference from the PNC Plan’s 

forfeiture account.22

11. As previously noted in Item 2, the 

applicant appointed Wilshire, also 

located in Pittsburgh, Pennsylvania, to 

serve as the Independent Fiduciary on 

behalf of the Mercantile Plan in regard 

to the subject Redemptions. It is 

represented that, as of the end of 2007, 

all fees paid by PNC to Wilshire equaled 

less than 1% of Wilshire’s annual gross 

income. 

Prior to the Redemptions, Wilshire 

received a full written disclosure of 

information regarding the Redemptions 

and communicated in writing its 

approval of the Mercantile Plan’s 

participation in such Redemptions. In a 

letter dated November 1, 2007, Wilshire 

opined, 

Based on our review of the proposed 

procedure and methodology for the in-kind 

redemption, and discussions with members 

of The Administrative Committee, PNC staff, 

and legal counsel for the [Mercantile] Plan, 

it is Wilshire’s opinion that an in-kind 

redemption of Mercantile Plan participants’ 

assets in certain funds is in their best 

interests. As you know, a redemption of fund 

interests is necessary to transition participant 

assets from the funds currently available in 

the Mercantile Plan into the funds available 

in the PNC Incentive Savings Plan. * * * 

Based on the process set forth, participants 

in funds for which redemption is completed 

in kind are not exposed to greater market 

risk, security specific risk, investment 

management or other costs, than they would 

be in any other arms-length transaction 

between unaffiliated parties. 

No later than thirty (30) business days 

after the completion of the 

Redemptions, Wilshire received a 

written confirmation regarding such 

Redemptions containing: (i) The number 

of Shares held by the Mercantile Plan 

immediately before the Redemption 

(and the related per Share net asset 

value and the total dollar value of the 

Shares held); (ii) The identity (and 

related aggregate dollar value) of each 

security provided to the Mercantile Plan 

pursuant to the Redemption, including 

each security valued in accordance with 

Rule 2a–4 under the 1940 Act and 

procedures adopted by the Board of 

Directors of PNC Funds, Inc. (using 

sources independent of PNC and PNC 

Affiliates); (iii) The current market price 

of each security received by the 

Mercantile Plan pursuant to the 

Redemption; and (iv) The identity of 

each pricing service or market maker 

consulted in determining the value of 

such securities. 

Subsequent to the Redemptions, 

Wilshire performed a post-transaction 

review, which is summarized in its 

letter dated December 21, 2007, to 

determine whether or not the 

Redemptions were effected at a fair 

market price. In the letter, Wilshire 

confirmed that the Redemptions were 

conducted in accordance with the 

conditions of this proposed exemption 

as described in PNC’s exemption 

application of November 1, 2007.23

Wilshire downloaded the ‘‘Committee 

on Uniform Security Identification 

Procedures’’ of each individual security 

from the Funds (totaling nearly 300 

equity securities) into Atlas, Wilshire’s 

proprietary security database to 

independently review the prices for 

securities received by the Mercantile 

Plan from the Funds. Wilshire wrote: 

The prices received by Mercantile Plan 

participants for their investments in these 

funds were equal to the closing market price 

as of October 31, 2007, with the exception of 

the investments in the International Equity 

Fund. According to the policies utilized by 

the Board of Directors of PNC Funds, a fair 

value pricing methodology is employed if, 

subsequent to the closing of foreign securities 

exchanges, the U.S. equity market, as 

measured by the Russell 1000 stock index, 

closes at a value that differs from its opening 

value by more than 0.5%. On October 31, 

2007, the Russell 1000 Index increased by 

1.22% from its opening price. This increase 

was large enough to trigger the fair value 

pricing policy employed by the Funds. 

Investors in the International Equity Fund 

received prices through the in-kind 

redemption that were higher than the closing 

prices of these securities on their local 

exchanges. The use of prices that were 

greater than the closing prices on the local 

exchanges indicates that the fair value 

adjustment was made in the International 

Equity Fund. 

At the Department’s request, Wilshire 

provided a supplemental letter dated 

August 28, 2009, which addressed the 

methodologies for selecting the 

securities to be distributed on a non-pro 

rata basis and the securities liquidation 

process. 

First, Wilshire noted: 

Because the [Mercantile] Plan did not 

intend to continue to hold the securities it 

received in the redemptions, but rather 

immediately to reinvest the proceeds of their 

sale in other mutual funds, * * * it was in 

the Mercantile Plan’s best interest to receive 

a limited number of investment positions 

that were highly liquid, to facilitate an easier 

and less costly sale and liquidation to cash. 

Wilshire also stated, ‘‘[W]e reviewed the 

securities selected for the redemptions, 

based on lists provided in advance of 

the redemption date, to confirm that 

they were highly liquid.’’ 

Regarding the International Equity 

Fund, Wilshire stated: 

By contrast, a pro rata redemption from 

this fund would have caused the [Mercantile] 

Plan to receive a much larger number of 

smaller investment positions (the fund held 

over 480 different securities at the time), 

which would have required a more difficult, 

costly and time consuming liquidation 

process—particularly for those foreign 

jurisdictions that would have required the 

[Mercantile] Plan to set up special custody 

arrangements to hold the securities pending 

their disposition. 

Finally, Wilshire noted: 


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24 In the interests of clarity, Wilshire is referring 

here to the Mercantile Plan’s broker agreements 

regarding the distributed securities that were 

liquidated; however, as previously noted in Item 9, 

the receiving funds agreed to accept a small 

percentage of the distributed securities in kind. 

The [Mercantile] Plan entered into 

arrangements for brokers to acquire the 

distributed securities from the [Mercantile] 

Plan at their closing prices on October 31, 

2007, and to assume the risk of future price 

changes. In addition, the [Mercantile] Plan 

arranged for the receiving funds to accept the 

proceeds from the sale of the securities on 

November 1.24 These arrangements were in 

the best interests of the [Mercantile] Plan 

because they (1) locked in the values at 

which the securities were distributed to the 

[Mercantile] Plan and (2) reduced the time 

during which the [Mercantile] Plan 

participants were out of the market to one 

day. In our view, a positive factor in the 

brokers’ willingness to accept the risk of 

selling the securities was the limited number 

of securities involved, because it would be 

more difficult for the brokers to arrange 

buyers for a significantly larger number of 

positions. 

12. In summary, the applicant 

represents that the Redemptions 

satisfied the statutory criteria for an 

exemption under section 408(a) of the 

Act for the following reasons: (i) The 

Mercantile Plan received its pro rata 

portion of the securities with respect to 

the Capital Opportunities Fund; (ii) the 

absence of a pro rata distribution for 

four of the other Funds benefited the 

Mercantile Plan by permitting the 

distribution of securities that could be 

more easily and quickly liquidated to 

cash, consistent with the Mercantile 

Plan’s objective to reinvest the proceeds 

as soon as possible in the PNC Plan’s 

‘‘open’’ investment platform that 

included non-proprietary funds; (iii) the 

security selection criteria used were 

determined by parties independent of 

PNC, namely, the Fund Board, the Fund 

CCO and (in the case of the 

International Equity Fund) an 

unaffiliated sub-adviser; (iv) the 

transaction was overseen by an 

Independent Fiduciary and written 

authorization was provided by the 

Independent Fiduciary based on its 

determination, following full and 

detailed disclosure of information 

regarding the transaction, that the terms 

of the Redemptions were fair and 

reasonable to the Mercantile Plan, and 

comparable to and no less favorable 

than terms obtainable at arm’s length 

between unaffiliated parties, and that 

the Redemptions were in the best 

interests of the Mercantile Plan and its 

participants and beneficiaries; and (v) 

the Independent Fiduciary conducted a 

post-transaction analysis of the 

securities selected for the Redemptions 

based upon the lists provided in 

advance of the Redemption date and 

confirmed that the in-kind Redemptions 

were effected at a fair market value 

price. It is also noted that condition I(L) 

requires PNC to reimburse the PNC Plan 

for all brokerage costs incurred to 

liquidate the securities that the 

Mercantile Plan received in kind 

pursuant to the Redemptions so that, in 

combination with the methodology used 

in the selection of stocks for the non-pro 

rata Redemptions, the distribution of 

such stocks was economically 

equivalent to a cash Redemption. 

Notice to Interested Persons 

The applicant represents that notice 

to interested persons shall be furnished 

to the Independent Fiduciary, inactive 

participants and beneficiaries of the 

Mercantile Plan by first-class mail, and 

by e-mail to Mercantile Plan 

participants who are actively employed 

(provided that such active participants 

have effective access to electronic 

documents at work—otherwise, the 

active participants must receive such 

notice by first-class mail), within 30 

days of the date of publication of this 

notice of pendency in the Federal 

Register. The notice shall inform 

interested persons of their right to 

comment and/or request a hearing with 

respect to the proposed exemption. 

Comments and requests for a hearing are 

due within 30 days following 

completion of notice to interested 

persons. 

FOR FURTHER INFORMATION CONTACT: Ms. 

Karin Weng of the Department, 

telephone (202) 693–8557. (This is not 

a toll-free number.) 

Deutsche Asset Management (UK) Limited 

(the Applicant), Located in London, England, 

a Wholly-Owned Subsidiary of Deutsche 

Bank AG, Located in Frankfurt, Germany, 

and Throughout the World, [Exemption 

Application Number D–11495]. 

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). 

Section I—Covered Transactions 

If the proposed exemption is granted, 

the restrictions of sections 406(a)(1)(A), 

406(a)(1)(B), 406(a)(1)(D), 406(b)(1), and 

406(b)(2) of the Act and the sanctions 

resulting from the application of section 

4975 of the Code, by reason of sections 

4975(c)(1)(A), (B), (D), and (E) of the 

Code, shall not apply to certain foreign 

exchange hedging transactions that 

occurred between November 30, 2007 

and May 30, 2008, inclusive, between 

the DB Torus Japan Master Portfolio (the 

Master Fund), in which the assets of 

certain client employee benefit plans 

(the Client Plans) were invested, and 

Deutsche Asset Management (UK) Ltd. 

or its affiliates (collectively, Deutsche 

Bank), a party in interest with respect to 

the Client Plans, provided that the 

conditions contained herein are 

satisfied. 

Section II—General Conditions 

(a) The foreign exchange transactions 

were executed solely in connection with 

the Master Fund’s hedging of the 

Japanese yen currency risk for its share 

classes denominated in U.S. dollars 

(USD); 

(b) At the time that the foreign 

exchange transactions were entered 

into, the terms of the foreign exchange 

transactions were not less favorable to 

the Fund than the terms generally 

available in comparable arm’s length 

foreign exchange transactions between 

unrelated parties; 

(c) Any foreign exchange transactions 

authorized or executed by Deutsche 

Bank or its affiliates were not part of any 

agreement, arrangement, or 

understanding, written or otherwise, 

designed to benefit Deutsche Bank, its 

affiliates, or any other party in interest; 

(d) Prior to investing in the Master 

Fund, the fiduciary of each Client Plan 

received the offering memorandum for 

the DB Torus Japan Fund Ltd., the 

feeder fund (Feeder Fund) through 

which investments in the Master Fund 

are effected; 

(e) The exchange rate used for a 

particular foreign exchange transaction 

did not deviate by more than three 

percent (above or below) the interbank 

bid and ask rate for such currency at the 

time of the foreign exchange transaction, 

as displayed on an independent, 

nationally-recognized service that 

reports rates of exchange in the foreign 

currency market for such currency; 

(f) Prior to the granting of an 

exemption concerning the subject 

foreign exchange transactions, Deutsche 

Bank shall reimburse each such Client 

Plan for its pro-rata share of: (1) The 

spread on each foreign exchange 

transaction subject to this proposed 

exemption; and (2) Any fees charged by 

financial institutions for executing the 

subject foreign exchange transaction(s), 

plus interest at the applicable Internal 

Revenue Service underpayment penalty 

rate, up to the date of reimbursement; 

(g) Within 30 days of taking the 

corrective action described in Section 

II(f) above, Deutsche Bank provides the 

independent fiduciaries of each Client 


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Plan whose assets were involved in the 

foreign exchange transactions with: (1) 

Written information, formulas, and/or 

other documentation sufficient to enable 

such fiduciaries to independently verify 

that the Plans have been reimbursed in 

accordance with the requirements of 

Section II(f) above; and (2) a copy of this 

notice of proposed exemption (the 

Notice); 

(h) Within 30 days of taking the 

corrective action described in Section 

II(f) above, Deutsche Bank provides the 

Department with written documentation 

demonstrating that the foregoing 

reimbursements to each Client Plan 

were correctly computed and paid; 

(i) Effective May 31, 2008, Deutsche 

Bank, in conjunction with the 

administrator of both the Master Fund 

and the Feeder Fund (together, the 

Funds), continuously monitors the 

percentage of total assets invested by 

benefit plan investors in the Funds so 

that, as of each acquisition or 

redemption of equity interests, Deutsche 

Bank and the administrator of the Funds 

are able to verify whether equity 

participation in the Funds by benefit 

plan investors is not significant 

pursuant to section 3(42) of the Act and 

29 CFR 2510.3–101; 

(j) Deutsche Bank maintains, or causes 

to be maintained, for a period of six 

years from the date of the transactions 

that are the subject of this proposed 

exemption, the following records, as 

well as any other records necessary to 

enable the persons described in Section 

II(l) of this exemption, to determine 

whether the conditions of this 

exemption have been met: 

(1) The account name; 

(2) The trade and settlement dates of 

the subject foreign exchange hedging 

transactions; 

(3) The USD/Japanese yen currency 

exchange rates on the trade and 

settlement dates; 

(4) The high and low currency prices 

on Bloomberg or similar independent 

service on the dates of the subject 

transactions; 

(5) The identification of the type of 

currency trade undertaken (whether 

spot or forward); 

(6) The amount of Japanese yen sold 

or purchased in the hedging 

transactions; and 

(7) The amount of U.S. dollars 

exchanged for Japanese yen in the 

hedging transactions. 

(k) The following are exceptions to 

the requirements of Section II(j): 

(1) A separate prohibited transaction 

shall not be considered to have occurred 

solely because, due to circumstances 

beyond the control of Deutsche Bank or 

its affiliates, the records necessary to 

enable the persons described in Section 

II(l) to determine whether the 

conditions of the exemption have been 

met or lost or destroyed prior to the end 

of the six-year period; and 

(2) No party in interest, other than 

Deutsche Bank and its affiliates, shall be 

subject to the civil penalty that may be 

assessed under section 502(i) of the Act 

or to the excise taxes imposed by 

section 4975(a) and (b) of the Code if the 

records are not maintained for 

examination as required by Section II(l) 

below. 

(l)(1) Except as provided in paragraph 

(2) of this Section II(l) and 

notwithstanding the provisions of 

subsections (a)(2) and (b) of section 504 

of the Act, the records referred to above 

in Section II(j) are unconditionally 

available for examination during normal 

business hours at their customary 

location to the following persons or an 

authorized representative thereof: 

(i) Any duly authorized employee or 

representative of the Department or of 

the Internal Revenue Service (the 

Service); 

(ii) The independent fiduciary of each 

Client Plan (or a duly authorized 

employee or representative of such 

fiduciary), or 

(iii) Any participant or beneficiary of 

such Client Plans or any duly 

authorized employee or representative 

of a participant or beneficiary in such 

Client Plans. 

(2) None of the persons described 

above in paragraphs (ii) and (iii) of 

Section II(l)(1) shall be authorized to 

examine trade secrets of Deutsche Bank 

or its affiliates, or any commercial or 

financial information, which is 

privileged or confidential. 

Section III—Definitions 

For purposes of this proposed 

exemption: 

(a) An ‘‘affiliate’’ of the Applicant 

means: (1) Any person or entity directly 

or indirectly, through one or more 

intermediaries, controlling, controlled 

by, or under common control with such 

person or entity; (2) Any officer, 

director, partner, employee, or relative 

(as defined in section 3(15) of the Act) 

of such other person or entity; and (3) 

Any corporation or partnership of 

which such other person or entity is an 

officer, director, partner, or employee. 

(b) The term ‘‘control’’ means the 

power to exercise a controlling 

influence over the management or 

policies of a person other than an 

individual. 

(c) The term ‘‘client plan’’ means an 

employee benefit plan, other than a plan 

sponsored by the Applicant and its 

affiliates, as described in section 3(3) of 

the Act or section 4975(e)(1) of the Code 

that invested in the Master Fund and 

the Feeder Fund, and for which the 

Applicant or its affiliate served as an 

investment advisor 

(d) The term ‘‘foreign exchange 

transaction’’ means the exchange of the 

currency of one nation for the currency 

of another nation. 

(e) The term ‘‘hedging’’ means a 

strategy used to offset the investment 

risk of future gains or losses resulting 

from anticipated fluctuations in the 

value of currency, such as an investor’s 

decision to exchange foreign currency in 

anticipation of upward or downward 

movement in the value of that currency. 

Summary of Facts and Representations 

1. Deutsche Asset Management (UK) 

Limited (DeAM UK) is a wholly-owned 

subsidiary of Deutsche Bank AG. DeAM 

UK (the Applicant) is an investment 

adviser domiciled in the United 

Kingdom with approximately $2.2 

billion is assets under management, and 

is registered in the United States under 

the Investment Advisers Act of 1940. 

The Applicant also represents that it is 

regulated by the Financial Services 

Authority (FSA), an independent nongovernmental body, which was granted 

statutory powers by the United 

Kingdom Financial Services and 

Markets Act 2000. 

The Applicant is a sub-advisor to both 

the DB Torus Japan Master Portfolio (the 

Master Fund), a Cayman Islands 

exempted company, and the DB Torus 

Japan Master Portfolio Ltd. (the Feeder 

Fund), also a Cayman Islands exempted 

company. The adviser to both the 

Master Fund and the Feeder Fund is 

Deutsche Bank Trust Company 

Americas (DBTCA), a New York banking 

corporation, which also is whollyowned by Deutsche Bank AG. 

2. Deutsche Bank AG (together with 

its affiliates, Deutsche Bank), a German 

banking corporation and a leading 

commercial bank, provides a wide range 

of global banking, fiduciary, record 

keeping, custodial, brokerage, and 

investment services to corporations, 

institutions, employee benefit plans, 

and private investors. Through its 

numerous affiliates, subsidiaries, and 

branches, Deutsche Bank has a 

worldwide physical presence. As of 

December 31, 2007, Deutsche Bank had 

approximately $1.19 trillion in assets 

under management and had 

approximately $54.09 billion in 

shareholder equity. 

The Applicant represents that 

Deutsche Bank is subject to a 

comprehensive system of regulatory 

oversight and a mandatory insurance 

program. The Applicant also represents 


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25The Applicant represents that the U.S. 

Department of the Treasury has accorded national 

treatment to German bank branches, and the 

German Ministry of Finance has granted relief to 

branches of U.S. banks in Germany, in particular 

with respect to ‘‘dotation’’ or endowment capital 

requirements and capital adequacy standards. 

26A foreign exchange ‘‘forward’’ is an agreement 

to purchase or sell a fixed amount of foreign 

currency at a fixed price and on a predetermined 

future date (or within a predetermined range of 

dates). 

27A foreign exchange ‘‘spot’’ trade is a purchase 

of one currency with a different currency for 

immediate delivery. These trades typically settle 

within two days from the date of execution. See 

also the Notice of Proposed Exemption preceding 

the final grant of PTE 94–20 at 56 FR 11757, 11759, 

n.3 (March 20, 1991). 

28 ‘‘High water mark’’ is a reference point by 

which a hedge fund manager’s performance 

compensation is calculated. When a high water 

mark formula applies, the manager receives 

performance compensation only if the value of the 

fund is greater than its previous greatest value (i.e., 

the high water mark). If the value of the fund falls 

below the high water mark, the manager receives no 

performance fees until the value rises above the 

high water mark. 

29This regulation generally defines what 

constitutes assets of a plan with respect to a plan’s 

investment in another entity for purposes of 

Subtitle A, and Parts 1 and 4 of Subtitle B, of Title 

I of the Act and section 4975 of the Code. Generally, 

the plan asset regulation states that when a plan 

invests in another entity, the plan’s assets include 

its investment, but do not, solely by reason of such 

investment, include any of the underlying assets of 

the entity. However, in the case of a plan’s 

investment in an equity interest that is neither a 

publicly-offered security nor a security issued by an 

investment company registered under the 

Investment Company Act of 1940, its assets include 

both the equity interest and an undivided interest 

in each of the underlying assets of the entity, unless 

it is established that, among other things, equity 

participation in the entity by benefit plan investors 

is not significant. 

According to 29 CFR 2510.3–101(f)(1), ‘‘[e]quity 

participation in an entity by benefit plan investors 

is ‘significant’ on any date if, immediately after the 

most recent acquisition of any equity interest in the 

entity, 25 percent or more of the value of any class 

of equity interests in the entity is held by benefit 

plan investors.’’ A ‘‘benefit plan investor’’ is defined 

in section 3(42) of the Act as ‘‘an employee benefit 

plan subject to part 4 [of the Act], any plan to which 

section 4975 of the [Code] applies, and any entity 

whose underlying assets include plan assets by 

reason of a plan’s investment in such entity.’’ For 

a discussion of the general scope and construction 

of the term ‘‘acquisition’’ as referenced in 29 CFR 

2510.3–101(f)(1), including a benefit plan investor’s 

redemption of an equity interest in an investment 

entity, see Advisory Opinion 89–05 (Apr. 6, 1989). 

that Deutsche Bank, its branches, and its 

subsidiary banks worldwide are subject 

to regulatory requirements and 

protections that are, qualitatively, at 

least equal to those imposed on U.S.- 

domiciled banks.25 Within the United 

States, the Applicant represents that 

both the New York branch of Deutsche 

Bank and DBTCA are regulated and 

supervised by the New York State 

Banking Department. In addition, the 

Applicant represents that certain 

activities of Deutsche Bank’s New York 

branch and DBTCA are regulated and 

supervised by the Federal Reserve Bank 

of New York. 

3. The Applicant represents that the 

Master Fund invests in Japanese equity 

and equity-related securities. Client 

investment is effected through the 

Feeder Fund. The Feeder Fund, in turn, 

has invested all of its assets in the 

Master Fund, with the exception of cash 

reserves maintained, for example, for 

the payment of fees and expenses. The 

‘‘base’’ currency in which both the 

Master Fund and the Feeder Fund 

maintain their books, records, and 

financial statements (and in which they 

charge applicable fees) is the Japanese 

yen. The Feeder Fund offers distinct 

share classes denominated in U.S. 

dollars (USD) for the convenience of 

investors wishing to invest with USD 

(USD Investors). Among the investors in 

the USD share class of the Feeder Fund 

are client employee benefit plans (the 

Client Plans). 

4. As disclosed in the Feeder Fund’s 

offering memorandum, which is 

distributed to all potential investors 

(including potential Client Plan 

investors) prior to investment, the 

managing member of the Master Fund is 

charged with maintaining a continuous 

dollar/yen hedge with respect to 

investments in its USD share class in 

order to disaggregate the impact of 

currency fluctuations on the 

performance of a USD Investor’s 

investment. The currency hedge offers 

USD Investors exposure to the portfolio 

of the Master Fund while reducing 

exposure to fluctuations in relative 

value of yen to the USD. Thus, the 

Applicant represents that an investor 

investing in the USD share class of the 

Feeder Fund necessarily expects that its 

investments will, as fully as possible, 

hedge the USD against the yen. The 

Applicant represents that it has 

investment discretion over the assets 

involved in the exemption transactions 

described herein. In addition, the 

Applicant represents that it is affiliated 

with the counterparty to those 

transactions. 

The Applicant represents that the 

currency hedging activity was fully 

disclosed to Client Plans and other 

investors in the Feeder Fund’s offering 

memorandum, and it would have 

occurred regardless of the identity of the 

counterparty. The Applicant further 

represents that, by investing in the USD 

share class of the Feeder Fund, the 

independent fiduciaries of the investing 

employee benefit plans consented to the 

hedging transactions. The Applicant 

also states that, in investing in the 

Feeder Fund, each Client Plan’s 

independent fiduciary necessarily 

approved the execution of currency 

trades through DeAM UK as principal. 

5. The foregoing hedge is effected 

each month through the following 

transactions: (1) A foreign exchange 

‘‘forward trade’’ 26 that settles on the last 

business day of the month; (2) A foreign 

exchange spot trade 27 that settles on the 

last business day of the month (which 

closes out the forward trade); and (3) 

Another foreign exchange forward trade. 

The Applicant represents that this 

currency hedging activity is largely 

automatic and ministerial in nature. 

Since the inception of the Master Fund, 

the Applicant represents, hedging 

transactions have been consistently 

effected each month at particular times 

and in mechanically determined 

amounts, which are specified in the 

operating procedures of the Master 

Fund. The Applicant further represents 

that, since all gains and losses resulting 

from the currency hedging activity are 

‘‘reversed out’’ from the performance of 

the USD share classes prior to 

calculation of the performance fee and 

the ‘‘high water mark’’ 28, the hedging 

transactions are canceled out for 

purposes of the performance fees paid to 

the investment manager. 

6. From their inception, both the 

Master Fund and the Feeder Fund were 

intended to operate as ‘‘non-plan asset’’ 

vehicles. In particular, the Applicant 

represents that the Master Fund 

intended to limit the aggregate 

investment by benefit plan investors in 

each class of its equity to less than 25%, 

so that the quantity of assets in each 

class would not be deemed to constitute 

significant equity participation by 

benefit plan investors within the 

meaning of the Department’s ‘‘plan asset 

regulation’’ at 29 CFR 2510.3–101.29

7. Effective May 1, 2006, the Master 

Fund and the Feeder Fund (together, the 

Funds) entered into an administrative 

services agreement with International 

Fund Services (Ireland) Limited 

(hereinafter IFS or the Administrator). 

The Applicant represents that IFS is not 

related to or affiliated with Deutsche 

Bank, and provides fund accounting, 

fund administration, and risk services to 

asset management groups with trading 

operations throughout the world. Under 

the agreement, IFS was responsible for, 

among other things, monitoring the 

percentage investment by benefit plan 

investors in each share class of the 

Funds and reporting such percentage on 

a monthly basis to the Funds. The 

agreement also required IFS to report 

the percentage of investment by benefit 

plan investors ‘‘on such other dates as 

[a] Fund accepts subscriptions and/or 

effects redemptions and delivering such 


jlentini on DSKJ8SOYB1PROD with NOTICES2
3070 Federal Register / Vol. 75, No. 11 / Tuesday, January 19, 2010 / Notices 

30 In its exemption application, the Applicant 

represents that the Master Fund may have held plan 

assets during the period between November 30, 

2007 and May 30, 2008, inclusive, as a consequence 

of net redemptions involving Class A of the Feeder 

Fund. 

calculation to the Fund or to the Fund’s 

counsel for approval.’’ The agreement 

also states that, ‘‘[f]or the avoidance of 

doubt, each Fund shall instruct IFS [as 

to] the method of determining class of 

shares for the purpose of the calculation 

of percentages contemplated in this 

clause.’’ 

The Applicant represents that in 

December of 2007, IFS, through an error 

in its recordkeeping, failed to notify 

DeAM UK that the percentage of plan 

assets in one of the USD-denominated 

share classes may have exceeded 25% of 

the assets maintained in that corporate 

class. The Applicant has specifically 

identified the U.S. dollar-denominated 

nominal share class with respect to 

which the subject hedging transaction 

occurred (and in which redemptions 

may have caused benefit plan investor 

participation to equal or exceed the 25% 

limitation) as Class A of the Feeder 

Fund.30 For a period of time after the 

redemptions, the Applicant represents, 

the Master Fund continued to execute 

hedging transactions with its DeAM UKaffiliated counterparty, the London 

branch of Deutsche Bank AG. The 

Applicant further represents that DeAM 

UK was not aware that redemptions 

associated with the foregoing currency 

hedging transactions caused a breach of 

the 25% limitation until approximately 

April 15, 2008. In this connection, the 

Applicant initiated communication with 

the Department with respect to the 

foregoing hedging transactions shortly 

after DeAM UK became aware of the 

problem, and has met with 

representatives from the Department 

concerning this matter. 

8. The Applicant additionally 

represents that Bloomberg screen prints 

of the currency prices at the time of the 

subject currency hedging transactions 

demonstrate that the trades did not 

deviate by more than three percent 

(above or below) the interbank bid and 

ask rate for such currencies at the time 

of the foreign exchange transaction. In 

this connection, the Applicant 

represents that Bloomberg is an 

independent, nationally-recognized 

quotation service that reports rates of 

exchange in the foreign currency market 

for widely-traded currencies, including 

the Japanese yen. The Applicant further 

represents that, because it knows both 

the precise rate at which the Master 

Fund executed each of the subject 

currency hedging transactions and the 

best rate available on these trades based 

on the aforementioned Bloomberg 

screen prints, it will calculate the 

difference between these rates and give 

any positive difference to the Client 

Plan, based on its ownership percentage 

in the Feeder Fund. 

The Applicant also represents that, 

with respect to the assessment of fees, 

commissions, and related transactional 

expenses, any Client Plan whose assets 

were involved in the foreign exchange 

transactions that are the subject of this 

proposed exemption were treated the 

same as all other investors with assets 

invested in the Master Fund and the 

Feeder Fund that engaged in the subject 

hedging transactions. 

9. The Applicant represents that, after 

discovering the foreign exchange 

hedging transactions that gave rise to 

the current exemption application, it 

revised its compliance procedures in 

May of 2008 to minimize the risk that 

such a situation may recur. These 

updated procedures include, among 

other things, the following elements: (i) 

On a monthly basis, the Deutsche Bank 

sales team will notify the Deutsche Bank 

shareholder services team of any 

prospective Client Plan who will be 

making an investment in the Master 

Fund or the Feeder Fund in the coming 

month(s); (ii) All Client Plan 

investments must be approved by the 

Office of the Chief Operating Officer 

(COO) of the DB Advisors Hedge Fund 

Group before the investment is 

accepted; (iii) The Administrator of the 

Master Fund and the Feeder Fund will 

provide the Deutsche Bank shareholder 

services team a copy of all subscription 

agreements for those flagged 

investments upon receipt for review. 

The Administrator also will provide to 

the Deutsche Bank shareholder services 

team copies of the subscription 

documents of all incoming U.S. taxexempt investors, to perform a duplicate 

check to ensure that none are in fact 

plan assets (for example, to identify any 

incorrectly completed documents); (iv) 

The Administrator of the Master Fund 

and the Feeder Fund will add to its 

monthly ‘‘ERISA Executive Summary’’ (a 

report of the current plan asset totals in 

each Deutsche Bank Advisors Hedge 

Fund through the most recent dealing 

date for subscriptions and redemptions) 

a column which calculates the monthto-month change in plan asset 

percentages for both the Master Fund 

and the Feeder Fund; and (v) When the 

total plan assets percentage of either the 

Master Fund or the Feeder Fund reaches 

10%, it is placed on a ‘‘watch list.’’ 

Investments by benefit plan investors 

into any funds on the watch list require 

additional approval by the office of the 

COO before they can be accepted. The 

office of the COO may decide to close 

a Fund to any future investments by a 

benefit plan investor when the Fund’s 

total plan assets percentage exceeds 

10%. 

According to the offering 

memorandum of the Feeder Fund, an 

investor generally may redeem all or a 

portion of its shares in the Fund at the 

close of business on the last business 

day of any calendar month by 

submitting to the administrator of the 

Fund a redemption request at least 

thirty days prior to the end of such 

month. An investor redeeming all or a 

portion of its shares will receive an 

amount equal to the net asset value per 

share for the relevant series of shares at 

the close of business on the redemption 

date. The Fund also may, upon five days 

notice, cause the involuntary 

redemption of any or all of an investor’s 

shares at the end of any calendar month. 

In addition, the offering memorandum 

of the Feeder Fund states that, in 

general, the directors of the Fund intend 

to restrict, through utilization of a ‘‘test’’ 

that is ‘‘ongoing’’, the aggregate 

investment by benefit plan investors to 

under 25% of the total capital of each 

class of shares in order to achieve 

compliance with the requirements of 

section 3(42) of the Act and 29 CFR 

§ 2510.3–101. As a consequence of this 

ongoing test, not only may additional 

investments by benefit plan investors be 

restricted, but existing benefit plan 

investors may be required by the 

directors of the Fund to redeem their 

shares from the Fund in the event that 

other investors redeem. 

10. The Applicant represents that the 

requested exemption is administratively 

feasible because correction of the 

prohibited transaction would occur 

pursuant to an objective, independently 

verifiable pricing mechanism (namely, 

the Bloomberg currency exchange data 

for the time period described in this 

proposed exemption). The Applicant 

also represents that the exemption 

would be in the interest of the 

participants and beneficiaries of each of 

the affected Plans because the correction 

will place each affected Plan in a better 

position than it would have been in had 

the currency hedging been executed 

through an unrelated third party in the 

first instance. The Applicant further 

represents that the exemption would be 

protective of the rights of participants 

and beneficiaries of the affected Plans 

because: (i) The correction will negate 

any benefit received by the Applicant 

(or its affiliate) in connection with the 

subject transactions; and (ii) The 

proposed conditions for exemptive 

relief are consistent with the safeguards 

generally required by the Department 


jlentini on DSKJ8SOYB1PROD with NOTICES2
Federal Register / Vol. 75, No. 11 / Tuesday, January 19, 2010 / Notices 3071 

31For purposes of this proposed exemption, 

references to section 406 of the Act should be read 

to refer as well to the corresponding provisions of 

section 4975 of the Code. 

for foreign exchange transactions of this 

nature. 

11. In summary, the past transactions 

for which exemptive relief is sought 

meet the statutory criteria of section 

408(a) of the Act because: (a) The 

foreign exchange transactions were 

executed solely in connection with the 

Master Fund’s hedging of the Japanese 

yen currency risk for its share classes 

denominated in U.S. dollars (USD); (b) 

At the time that the foreign exchange 

transactions were entered into, the 

terms of the foreign exchange 

transactions were not less favorable to 

the Fund than the terms generally 

available in comparable arm’s length 

foreign exchange transactions between 

unrelated parties; (c) Any foreign 

exchange transactions authorized or 

executed by Deutsche Bank or its 

affiliates were not part of any 

agreement, arrangement, or 

understanding, written or otherwise, 

designed to benefit Deutsche Bank, its 

affiliates, or any other party in interest; 

(d) Prior to investing in the Master 

Fund, the fiduciary of each Client Plan 

received the offering memorandum for 

the DB Torus Japan Fund Ltd., the 

feeder fund (Feeder Fund) through 

which investments in the Master Fund 

are effected; (e) The exchange rate used 

for a particular foreign exchange 

transaction did not deviate by more than 

three percent (above or below) the 

interbank bid and ask rate for such 

currency at the time of the foreign 

exchange transaction, as displayed on 

an independent, nationally-recognized 

service that reports rates of exchange in 

the foreign currency market for such 

currency; (f) Prior to the granting of an 

exemption concerning the subject 

foreign exchange transactions, Deutsche 

Bank shall reimburse each such Client 

Plan for its pro-rata share of: (1) The 

spread on each foreign exchange 

transaction subject to this proposed 

exemption; and (2) Any fees charged by 

financial institutions for executing the 

subject foreign exchange transaction(s), 

plus interest at the applicable Internal 

Revenue Service underpayment penalty 

rate; (g) Within 30 days of taking the 

corrective action described in Section 

II(f) above, Deutsche Bank provides the 

independent fiduciaries of each Client 

Plan whose assets were involved in the 

foreign exchange transactions with: (1) 

Written information, formulas, and/or 

other documentation sufficient to enable 

such fiduciaries to independently verify 

that the Plans have been reimbursed in 

accordance with the requirements of 

Section II(f) above; and (2) a copy of this 

notice of proposed exemption (the 

Notice); (h) Within 30 days of taking the 

corrective action described in Section 

II(f) above, Deutsche Bank provides the 

Department with written documentation 

demonstrating that the foregoing 

reimbursements to each Client Plan 

were correctly computed and paid; (i) 

Effective May 31, 2008, Deutsche Bank, 

in conjunction with the administrator of 

both the Master Fund and the Feeder 

Fund (together, the Funds), 

continuously monitors the percentage of 

total assets invested by benefit plan 

investors in the Funds so that, as of each 

acquisition or redemption of equity 

interests, Deutsche Bank and the 

administrator of the Funds are able to 

verify whether equity participation in 

the Funds by benefit plan investors is 

not significant pursuant to section 3(42) 

of the Act and 29 CFR 2510.3–101; and 

(j) Deutsche Bank generally maintains 

records that are sufficient for regulatory 

authorities and independent third 

parties to determine whether the 

conditions of this exemption have been 

met. 

FOR FURTHER INFORMATION CONTACT: Mr. 

Mark Judge of the Department, 

telephone (202) 693–8550. (This is not 

a toll-free number.) 

UBS Financial Services Inc. and Its 

Affiliates (UBS), Located in Weehawken, 

New Jersey, [Application No. D–11502]. 

Proposed Exemption 

The Department is considering 

granting an exemption under the 

authority of section 408(a) of the Act (or 

ERISA), 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).31

Section I. Transactions Involving Plans 

Described in Both Title I and Title II of 

ERISA 

If the proposed exemption is granted, 

the restrictions of sections 406(a)(1)(A) 

through (D) and section 406(b) of the 

Act, and the taxes imposed by sections 

4975(a) and (b) of the Code, by reason 

of section 4975(c)(1) of the Code, shall 

not apply, effective February 1, 2008, to 

the following transactions, if the 

conditions set forth in Section III have 

been met: 

(a) The sale or exchange of an Auction 

Rate Security (as defined in Section 

IV(b)) by a Plan (as defined in Section 

IV(h)) to the Sponsor (as defined in 

Section IV(g)) of such Plan; or 

(b) A lending of money or other 

extension of credit to a Plan in 

connection with the holding of an 

Auction Rate Security by the Plan, from: 

(1) UBS; (2) an Introducing Broker (as 

defined in Section IV(f)); or (3) a 

Clearing Broker (as defined in Section 

IV(d)); where the loan is: (i) repaid in 

accordance with its terms; and (ii) 

guaranteed by the Sponsor. 

Section II. Transactions Involving Plans 

Described in Title II of ERISA Only 

If the proposed exemption is granted, 

the sanctions resulting from the 

application of sections 4975(a) and (b) 

of the Code, by reason of section 

4975(c)(1) of the Code, shall not apply, 

effective February 1, 2008, to the 

following transactions, if the conditions 

set forth in Section III have been met: 

(a) The sale or exchange of an Auction 

Rate Security by a Title II Only Plan (as 

defined in Section IV(i)) to the 

Beneficial Owner (as defined in Section 

IV(c)) of such Plan; or 

(b) A lending of money or other 

extension of credit to a Title II Only 

Plan in connection with the holding of 

an Auction Rate Security by the Title II 

Only Plan, from: (1) UBS; (2) an 

Introducing Broker; or (3) a Clearing 

Broker; where the loan is: (i) repaid in 

accordance with its terms and; (ii) 

guaranteed by the Beneficial Owner. 

Section III. Conditions 

(a) UBS acted as a broker or dealer, 

non-bank custodian, or fiduciary in 

connection with the acquisition or 

holding of the Auction Rate Security 

that is the subject of the transaction; 

(b) For transactions involving a Plan 

(including a Title II Only Plan) not 

sponsored by UBS for its own 

employees, the decision to enter into the 

transaction is made by a Plan fiduciary 

who is independent (as defined in 

Section IV(e)). For transactions 

involving a Plan sponsored by UBS for 

its own employees, UBS may direct 

such Plan to engage in a transaction 

described in Section I if all of the other 

conditions of this Section III have been 

met. Notwithstanding the foregoing, an 

employee of UBS who is the Beneficial 

Owner of a Title II Only Plan may direct 

such Plan to engage in a transaction 

described in Section II, if all of the other 

conditions of this Section III have been 

met; 

(c) The last auction for the Auction 

Rate Security was unsuccessful; 

(d) The Plan does not waive any rights 

or claims in connection with the loan or 

sale as a condition of engaging in the 

above-described transaction; 

(e) The Plan does not pay any fees or 

commissions in connection with the 

transaction; 


jlentini on DSKJ8SOYB1PROD with NOTICES2
3072 Federal Register / Vol. 75, No. 11 / Tuesday, January 19, 2010 / Notices 

32This proposed exemption does not address tax 

issues. The Department has been informed by the 

Internal Revenue Service (the Service) and the 

Department of the Treasury that they are 

considering providing limited relief from the 

requirements of sections 72(t)(4), 401(a)(9), and 

4974 of the Code with respect to retirement plans 

that hold Auction Rate Securities. The Department 

has also been informed by the Service that if 

Auction Rate Securities are purchased from a Plan 

in a transaction described in Sections I and II at a 

price that exceeds the fair market value of those 

securities, then the excess value would be treated 

as a contribution for purposes of applying 

applicable contribution and deduction limits under 

sections 219, 404, 408, and 415 of the Code. 

33The Department notes that the Act’s general 

standards of fiduciary conduct also would apply to 

the transactions described herein. In this regard, 

section 404 of the Act requires, among other things, 

that a fiduciary discharge his duties respecting a 

plan solely in the interest of the plan’s participants 

and beneficiaries and in a prudent manner. 

Accordingly, a Plan fiduciary must act prudently 

with respect to, among other things: (1) The 

decision to exchange an Auction Rate Security for 

a Delivered Security; and (2) the negotiation of the 

terms of such exchange (or a cash sale or loan 

described above), including the pricing of such 

securities. The Department further emphasizes that 

it expects Plan fiduciaries, prior to entering into any 

of the proposed transactions, to fully understand 

the risks associated with these types of transactions 

following disclosure by UBS of all relevant 

information. 

(f) The transaction is not part of an 

arrangement, agreement or 

understanding designed to benefit a 

party in interest; 

(g) With respect to any sale described 

in Section I(a) or Section II(a): 

(1) The sale is for no consideration 

other than cash payment against prompt 

delivery of the Auction Rate Security; 

and 

(2) For purposes of the sale, the 

Auction Rate Security is valued at par, 

plus any accrued but unpaid interest; 32

(h) With respect to an in-kind 

exchange described in Section I(a) or 

Section II(a), the exchange involves the 

transfer by a Plan of an Auction Rate 

Security in return for a Delivered 

Security, as such term is defined in 

Section IV(j), where: 

(1) The exchange is unconditional; 

(2) For purposes of the exchange, the 

Auction Rate Security is valued at par, 

plus any accrued but unpaid interest; 

(3) The Delivered Security is valued at 

fair market value, as determined at the 

time of the in-kind exchange by a third 

party pricing service or other objective 

source; 

(4) The Delivered Security is 

appropriate for the Plan and is a 

security that the Plan is otherwise 

permitted to hold under applicable 

law; 33 and 

(5) The total value of the Auction Rate 

Security (i.e., par plus any accrued but 

unpaid interest) is equal to the fair 

market value of the Delivered Security; 

(i) With respect to a loan described in 

Sections I(b) or II(b): 

(1) The loan is documented in a 

written agreement that contains all of 

the material terms of the loan, including 

the consequences of default; 

(2) The Plan does not pay an interest 

rate that exceeds one of the following 

three rates as of the commencement of 

the loan: 

(A) The coupon rate for the Auction 

Rate Security; 

(B) The Federal Funds Rate; or 

(C) The Prime Rate; 

(3) The loan is unsecured; and 

(4) The amount of the loan is not more 

than the total par value of the Auction 

Rate Securities held by the Plan. 

Section IV. Definitions 

(a) The term ‘‘affiliate’’ means: any 

person directly or indirectly, through 

one or more intermediaries, controlling, 

controlled by, or under common control 

with such other person; 

(b) The term ‘‘Auction Rate Security’’ 

or ‘‘ARS’’ means a security: 

(1) That is either a debt instrument 

(generally with a long-term nominal 

maturity) or preferred stock; and 

(2) With an interest rate or dividend 

that is reset at specific intervals through 

a Dutch auction process; 

(c) The term ‘‘Beneficial Owner’’ 

means: the individual for whose benefit 

the Title II Only Plan is established and 

includes a relative or family trust with 

respect to such individual; 

(d) The term ‘‘Clearing Broker’’ means: 

a member of a securities exchange that 

acts as a liaison between an investor and 

a clearing corporation and that helps to 

ensure that a trade is settled 

appropriately, that the transaction is 

successfully completed and that is 

responsible for maintaining the paper 

work associated with the clearing and 

executing of a transaction; 

(e) The term ‘‘independent’’ means a 

person who is: (1) Not UBS or an 

affiliate; and (2) not a relative (as 

defined in section 3(15) of the Act) of 

the party engaging in the transaction; 

(f) The term ‘‘Introducing Broker’’ 

means: a registered broker that is able to 

perform all the functions of a broker 

except for the ability to accept money, 

securities, or property from a customer; 

(g) The term ‘‘Sponsor’’ means: a plan 

sponsor as described in section 3(16)(B) 

of the Act and any affiliates; 

(h) The term ‘‘Plan’’ means: any plan 

described in section 3(3) of the Act and/ 

or section 4975(e)(1) of the Code; 

(i) The term ‘‘Title II Only Plan’’ 

means: any plan described in section 

4975(e)(1) of the Code which is not an 

employee benefit plan covered by Title 

I of the Act; 

(j) The term ‘‘Delivered Security’’ 

means a security that is: (1) Listed on a 

national securities exchange (excluding 

OTC Bulletin Board-eligible securities 

and Pink Sheets-quoted securities); (2) a 

US Treasury obligation; (3) a fixed 

income security that has a rating at the 

time of the exchange that is in one of the 

two highest generic rating categories 

from an independent nationally 

recognized statistical rating organization 

(e.g., a highly rated municipal bond or 

a highly rated corporate bond); or (4) a 

certificate of deposit insured by the 

Federal Deposit Insurance Corporation. 

Notwithstanding the above, the term 

‘‘Delivered Security’’ shall not include 

any Auction Rate Security, or any 

related Auction Rate Security, including 

derivatives or securities materially 

comprised of Auction Rate Securities or 

any illiquid securities. 

Effective Date: If granted, this 

proposed exemption will be effective as 

of February 1, 2008. 

Summary of Facts and Representations 

1. The Applicant is UBS Financial 

Services Inc. and its affiliates 

(hereinafter, either ‘‘UBS’’ or the 

‘‘Applicant’’). UBS is a financial 

institution whose businesses provide a 

wide range of financial services to both 

consumer and corporate customers 

around the world. As of December 31, 

2007, UBS Wealth Management US and 

its subsidiaries had total consolidated 

assets of approximately $741 billion. 

UBS has approximately 8,220 financial 

advisors, located in approximately 484 

offices across the United States, who 

serve approximately 2 million client 

relationships. In the ordinary course of 

its business, UBS provides a range of 

financial services to Title II Only Plans 

and pension, profit sharing, and 401(k) 

plans qualified under section 401(a) of 

the Code under which some or all of the 

participants are employees described in 

section 401(c) of the Code. Among other 

things, UBS acts as a broker and dealer 

with respect to the purchase and sale of 

securities, including Auction Rate 

Securities. The Applicant describes 

Auction Rate Securities and the 

arrangement by which ARS are bought 

and sold as follows. Auction Rate 

Securities are securities (issued as debt 

or preferred stock) with an interest rate 

or dividend that is reset at periodic 

intervals pursuant to a process called a 

Dutch Auction. Investors submit orders 

to buy, hold, or sell a specific ARS to 

a broker-dealer selected by the entity 

that issued the ARS. The broker-dealers, 

in turn, submit all of these orders to an 

auction agent. The auction agent’s 

functions include collecting orders from 

all participating broker-dealers by the 

auction deadline, determining the 

amount of securities available for sale, 


jlentini on DSKJ8SOYB1PROD with NOTICES2
Federal Register / Vol. 75, No. 11 / Tuesday, January 19, 2010 / Notices 3073 

34The Department notes that Prohibited 

Transaction Exemption 80–26 (45 FR 28545 (April 

29, 1980), as amended at 71 FR 17917 (April 7, 

2006)) permits interest-free loans or other 

extensions of credit from a party in interest to a 

Plan if, among other things, the proceeds of the loan 

or extension of credit are used only: (1) For the 

payment of ordinary operating expenses of the Plan, 

including the payment of benefits in accordance 

with the terms of the Plan and periodic premiums 

under an insurance or annuity contract, or (2) for 

a purpose incidental to the ordinary operation of 

the Plan. 

35The relief contained in this proposed 

exemption does not extend to the fiduciary 

provisions of section 404 of the Act. 

and organizing the bids to determine the 

winning bid. If there are any buy orders 

placed into the auction at a specific rate, 

the auction agent accepts bids with the 

lowest rate above any applicable 

minimum rate and then successively 

higher rates up to the maximum 

applicable rate, until all sell orders and 

orders that are treated as sell orders are 

filled. Bids below any applicable 

minimum rate or above the applicable 

maximum rate are rejected. After 

determining the clearing rate for all of 

the securities at auction, the auction 

agent allocates the ARS available for 

sale to the participating broker-dealers 

based on the orders they submitted. If 

there are multiple bids at the clearing 

rate, the auction agent will allocate 

securities among the bidders at such 

rate on a pro-rata basis. 

2. The Applicant states that UBS is 

permitted, but not obligated, to submit 

orders in auctions for its own account 

either as a bidder or a seller and 

routinely does so in the auction rate 

securities market in its sole discretion. 

UBS may routinely place one or more 

bids in an auction for its own account 

to acquire ARS for its inventory, to 

prevent: (a) A failed auction (i.e., an 

event where there are insufficient 

clearing bids which would result in the 

auction rate being set at a specified 

rate); or (b) an auction from clearing at 

a rate that UBS believes does not reflect 

the market for the particular ARS being 

auctioned. 

3. The Applicant states that for many 

ARS, UBS has been appointed by the 

issuer of the securities to serve as a 

dealer in the auction and is paid by the 

issuer for its services. UBS is typically 

appointed to serve as a dealer in the 

auctions pursuant to an agreement 

between the issuer and UBS. That 

agreement provides that UBS will 

receive from the issuer auction dealer 

fees based on the principal amount of 

the securities placed through UBS. 

4. The Applicant states further that 

UBS may share a portion of the auction 

rate dealer fees it receives from the 

issuer with other broker-dealers that 

submit orders through UBS, for those 

orders that UBS successfully places in 

the auctions. Similarly, with respect to 

ARS for which broker-dealers other than 

UBS act as dealer, such other brokerdealers may share auction dealer fees 

with UBS for orders submitted by UBS. 

5. According to the Applicant, since 

February 2008, a minority of auctions 

have cleared, particularly involving 

municipalities. As a result, Plans 

holding Auction Rate Securities may not 

have sufficient liquidity to make benefit 

payments, mandatory payments and 

withdrawals and expense payments 

when due.34

6. The Applicant represents that, in 

certain instances, UBS may have 

previously advised or otherwise caused 

a Plan to acquire and hold an Auction 

Rate Security and thus may be 

considered a fiduciary to the Plan so 

that a loan to the Plan by UBS may 

violate sections 406(a) and (b) of the 

Act; in addition, a sale between a Plan 

and its sponsor or a Title II Only Plan 

and its Beneficial Owner violates 

section 406 of the Act and/or section 

4975(c)(1) of the Code.35 The Applicant 

is therefore requesting relief for the 

following transactions, involving all 

Plans, effective February 1, 2008: (a) 

The sale or exchange of an Auction Rate 

Security from a Plan to the Plan’s 

Sponsor; and (b) a lending of money or 

other extension of credit to a Plan in 

connection with the holding of an 

Auction Rate Security from: UBS, an 

Introducing Broker, or a Clearing 

Broker, where the subsequent 

repayment of the loan is made in 

accordance with its terms and is 

guaranteed by the Sponsor. 

7. The Applicant is requesting similar 

relief for Title II Only Plans, also 

effective February 1, 2008. In this 

regard, the Applicant is requesting relief 

for: (a) The sale or exchange of an 

Auction Rate Security from a Title II 

Only Plan to the Beneficial Owner of 

such Plan; and (b) a lending of money 

or other extension of credit to a Title II 

Only Plan in connection with the 

holding of an Auction Rate Security 

from: UBS; an Introducing Broker; or a 

Clearing Broker; where the subsequent 

repayment of the loan is made in 

accordance with its terms and is 

guaranteed by the Beneficial Owner. 

8. The Applicant represents that the 

transactions have been or will be in the 

interests of the Plans. In this regard, the 

Applicant states that the exemption, if 

granted, will provide Plan fiduciaries 

with liquidity notwithstanding changes 

that occurred in the Auction Rate 

Securities markets. The Applicant also 

notes that, other than for Plans 

sponsored by the Applicant, the 

decision to enter into a transaction 

described herein has been made or will 

be made by a Plan fiduciary which is 

independent of UBS. 

9. The proposed exemption contains a 

number of safeguards designed to 

protect the interests of each Plan. With 

respect to the sale of an Auction Rate 

Security by a Plan, the Plan must 

receive cash equal to the par value of 

the Security, plus any accrued interest. 

The sale must also be unconditional, 

other than being for payment against 

prompt delivery. For in-kind exchanges 

covered by the proposed exemption, the 

security delivered to the Plan (i.e., the 

Delivered Security) must be: (a) Listed 

on a national securities exchange 

(excluding OTC Bulletin Board-eligible 

securities and Pink Sheets-quoted 

securities); (b) a US Treasury obligation; 

(c) a fixed income security that has a 

rating at the time of the exchange that 

is in one of the two highest generic 

rating categories from an independent 

nationally recognized statistical rating 

organization (e.g., a highly rated 

municipal bond or a highly rated 

corporate bond); or (d) a certificate of 

deposit insured by the Federal Deposit 

Insurance Corporation. The Delivered 

Security must also be appropriate for 

the Plan, and a security that the Plan is 

permitted to hold under applicable law. 

The proposed exemption further 

requires that the Delivered Security be 

valued at its fair market value, as 

determined at the time of the exchange 

from a third party pricing service or 

other objective source, and must equal 

the total value of the Auction Rate 

Security being exchanged (i.e., par 

value, plus any accrued interest). 

10. With respect to a loan to a Plan 

holding an Auction Rate Security, such 

loan must be documented in a written 

agreement containing all of the material 

terms of the loan, including the 

consequences of default. Further, the 

Plan may not pay an interest rate that 

exceeds one of the following three rates 

as of the commencement of the loan: 

The coupon rate for the Auction Rate 

Security; the Federal Funds Rate; or the 

Prime Rate. Additionally, such loan 

must be unsecured and for an amount 

that is no more than the total par value 

of Auction Rate Securities held by the 

affected Plan. 

11. Additional conditions apply to 

each transaction covered by the 

exemption, if granted. Among other 

things, the Plan may not pay any fees or 

commissions in connection with the 

transaction and the transaction may not 

be part of an arrangement, agreement, or 

understanding designed to benefit a 

party in interest. The exemption 

expressly prohibits any waiver of rights 


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36For purposes of this proposed exemption, 

references to section 406 of ERISA should be read, 

unless otherwise specified, to refer to the 

corresponding provisions of ection 4975 of the 

Code. 

37The Department notes that the Act’s general 

standards of fiduciary conduct also would apply to 

the transactions described herein. In this regard, 

section 404 requires, among other things, that a 

fiduciary discharge his duties respecting a plan 

solely in the interest of the plan’s participants and 

beneficiaries and in a prudent manner. 

Accordingly, a plan fiduciary must act prudently 

with respect to, among other things, the decision to 

sell the Auction Rate Security to Deutsche Bank for 

the par value of the Auction Rate Security, plus any 

accrued but unpaid interest or dividends. The 

Department further emphasizes that it expects Plan 

fiduciaries, prior to entering into any of the 

proposed transactions, to fully understand the risks 

associated with this type of transaction following 

disclosure by Deutsche Bank of all relevant 

information. 

or claims by a Plan in connection with 

the sale or exchange of an Auction Rate 

Security by such Plan, or a lending of 

money or other extension of credit to a 

Plan holding an Auction Rate Security. 

12. In summary, the Applicant 

represents that the transactions 

described herein have satisfied or will 

satisfy the statutory criteria for an 

exemption set forth in section 408(a) of 

the Act and section 4975(c)(2) of the 

Code because: 

(a) Any sale has been or will be: 

(1) For no consideration other than 

cash payment against prompt delivery 

of the Auction Rate Security; and 

(2) At par, plus any accrued but 

unpaid interest; 

(b) Any in-kind exchange has been or 

will be unconditional, other than being 

for payment against prompt delivery, 

and has involved or will involve 

Delivered Securities that are: 

(1) Appropriate for the Plan; 

(2) Listed on a national securities 

exchange (but not OTC Bulletin Boardeligible securities and Pink Sheetsquoted securities); U.S. Treasury 

obligations; fixed income securities; or 

certificates of deposit; and 

(3) Securities that the Plan is 

permitted to hold under applicable law; 

and, 

(c) Any loan has been or will be: 

(1) Documented in a written 

agreement containing all of the material 

terms of the loan, including the 

consequences of default; 

(2) At an interest rate not in excess of: 

The coupon rate for the Auction Rate 

Security, the Federal Funds Rate, or the 

Prime Rate; 

(3) Unsecured; and 

(4) For an amount that is not more 

than the total par value of Auction Rate 

Securities held by the affected Plan. 

Notice to Interested Persons 

The Applicant represents that the 

potentially interested participants and 

beneficiaries cannot all be identified, 

and, therefore, the only practical means 

of notifying such participants and 

beneficiaries of this proposed 

exemption is by the publication of this 

notice in the Federal Register. 

Comments and requests for a hearing 

must be received by the Department not 

later than 30 days from the date of 

publication of this notice of proposed 

exemption in the Federal Register. 

FOR FURTHER INFORMATION CONTACT: 

Brian Shiker of the Department, 

telephone (202) 693–8552. (This is not 

a toll-free number.) 

Deutsche Bank AG and Its Affiliates 

(together, Deutsche Bank or the Applicant), 

Located in New York, New York, 

[Application Number D–11518]. 

Proposed Exemption 

The Department is considering 

granting an exemption under the 

authority of section 408(a) of the Act (or 

ERISA) 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).36

Section I. Sales of Auction Rate 

Securities From Plans to Deutsche Bank: 

Unrelated to a Settlement Agreement 

If the proposed exemption is granted, 

the restrictions of section 406(a)(1)(A) 

and (D) and section 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), 

(D), and (E) of the Code, shall not apply, 

effective February 1, 2008, to the sale by 

a Plan (as defined in Section V(e)) of an 

Auction Rate Security (as defined in 

Section V(c)) to Deutsche Bank, where 

such sale (an Unrelated Sale) is 

unrelated to, and not made in 

connection with, a Settlement 

Agreement (as defined in Section V(f)), 

provided that the conditions set forth in 

Section II have been met. 

Section II. Conditions Applicable to 

Transactions Described in Section I 

(a) The Plan acquired the Auction 

Rate Security in connection with 

brokerage or advisory services provided 

by Deutsche Bank; 

(b) The last auction for the Auction 

Rate Security was unsuccessful; 

(c) Except in the case of a Plan 

sponsored by Deutsche Bank for its own 

employees (a Deutsche Bank Plan), the 

Unrelated Sale is made pursuant to a 

written offer by Deutsche Bank (the 

Offer) containing all of the material 

terms of the Unrelated Sale, including, 

but not limited to the most recent rate 

information for the Auction Rate 

Security (if reliable information is 

available). Either the Offer or other 

materials available to the Plan provide 

the identity and par value of the 

Auction Rate Security. Notwithstanding 

the foregoing, in the case of a pooled 

fund maintained or advised by Deutsche 

Bank, this condition shall be deemed 

met to the extent each Plan invested in 

the pooled fund (other than a Deutsche 

Bank Plan) receives written notice 

regarding the Unrelated Sale, where 

such notice contains the material terms 

of the Unrelated Sale (including, but not 

limited to, the material terms described 

in the preceding sentence); 

(d) The Unrelated Sale is for no 

consideration other than cash payment 

against prompt delivery of the Auction 

Rate Security; 

(e) The sales price for the Auction 

Rate Security is equal to the par value 

of the Auction Rate Security, plus any 

accrued but unpaid interest or 

dividends; 

(f) The Plan does not waive any rights 

or claims in connection with the 

Unrelated Sale; 

(g) The decision to accept the Offer or 

retain the Auction Rate Security is made 

by a Plan fiduciary or Plan participant 

or IRA owner who is independent (as 

defined in Section V(d)) of Deutsche 

Bank. Notwithstanding the foregoing: (1) 

In the case of an individual retirement 

account (an IRA, as described in Section 

V(e) below) which is beneficially owned 

by an employee, officer, director or 

partner of Deutsche Bank, the decision 

to accept the Offer or retain the Auction 

Rate Security may be made by such 

employee, officer, director or partner; or 

(2) in the case of a Deutsche Bank Plan 

or a pooled fund maintained or advised 

by Deutsche Bank, the decision to 

accept the Offer may be made by 

Deutsche Bank after Deutsche Bank has 

determined that such purchase is in the 

best interest of the Deutsche Bank Plan 

or pooled fund; 37

(h) Except in the case of a Deutsche 

Bank Plan or a pooled fund maintained 

or advised by Deutsche Bank, neither 

Deutsche Bank nor any affiliate 

exercises investment discretion or 

renders investment advice within the 

meaning of 29 CFR 2510.3–21(c) with 

respect to the decision to accept the 

Offer or retain the Auction Rate 

Security; 

(i) The Plan does not pay any 

commissions or transaction costs with 

respect to the Unrelated Sale; 

(j) The Unrelated Sale is not part of an 

arrangement, agreement or 

understanding designed to benefit a 

party in interest to the Plan; 

(k) Deutsche Bank and its affiliates, as 

applicable, maintain, or cause to be 


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maintained, for a period of six (6) years 

from the date of the Unrelated Sale, 

such records as are necessary to enable 

the persons described below in 

paragraph (l)(1), to determine whether 

the conditions of this exemption, if 

granted, have been met, except that— 

(1) No party in interest with respect 

to a Plan which engages in an Unrelated 

Sale, other than Deutsche Bank and its 

affiliates, as applicable, shall be subject 

to a civil penalty under section 502(i) of 

the Act or the taxes imposed by section 

4975(a) and (b) of the Code, if such 

records are not maintained, or not 

available for examination, as required, 

below, by paragraph (l)(1); and 

(2) A separate prohibited transaction 

shall not be considered to have occurred 

solely because, due to circumstances 

beyond the control of Deutsche Bank or 

its affiliates, as applicable, such records 

are lost or destroyed prior to the end of 

the six-year period; 

(l)(1) Except as provided below in 

paragraph (l)(2), and notwithstanding 

any provisions of subsections (a)(2) and 

(b) of section 504 of the Act, the records 

referred to above in paragraph (k) are 

unconditionally available at their 

customary location for examination 

during normal business hours by— 

(A) Any duly authorized employee or 

representative of the Department, the 

Internal Revenue Service, or the U.S. 

Securities and Exchange Commission; 

or 

(B) Any fiduciary of any Plan, 

including any IRA owner, that engages 

in a Sale, or any duly authorized 

employee or representative of such 

fiduciary; or 

(C) Any employer of participants and 

beneficiaries and any employee 

organization whose members are 

covered by a Plan that engages in the 

Unrelated Sale, or any authorized 

employee or representative of these 

entities; 

(2) None of the persons described 

above in paragraph (l)(1)(B)–(C) shall be 

authorized to examine trade secrets of 

Deutsche Bank, or commercial or 

financial information which is 

privileged or confidential; and 

(3) Should Deutsche Bank refuse to 

disclose information on the basis that 

such information is exempt from 

disclosure, Deutsche Bank shall, by the 

close of the thirtieth (30th) day 

following the request, provide a written 

notice advising that person of the 

reasons for the refusal and that the 

Department may request such 

information. 

Section III. Sales of Auction Rate 

Securities From Plans to Deutsche Bank: 

Related to a Settlement Agreement 

If the proposed exemption is granted, 

the restrictions of section 406(a)(1)(A) 

and (D) and section 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), 

(D), and (E) of the Code, shall not apply, 

effective February 1, 2008, to the sale by 

a Plan of an Auction Rate Security to 

Deutsche Bank, where such sale (a 

Settlement Sale) is related to, and made 

in connection with, a Settlement 

Agreement, provided that the conditions 

set forth in Section IV have been met. 

Section IV. Conditions Applicable to 

Transactions Described in Section III 

(a) The terms and delivery of the Offer 

are consistent with the requirements set 

forth in the Settlement Agreement; 

(b) The Offer or other documents 

available to the Plan specifically 

describe, among other things: 

(1) How a Plan may determine: The 

Auction Rate Securities held by the Plan 

with Deutsche Bank, the purchase dates 

for the Auction Rate Securities, and (if 

reliable information is available) the 

most recent rate information for the 

Auction Rate Securities; 

(2) The number of shares and par 

value of the Auction Rate Securities 

available for purchase under the Offer; 

(3) The background of the Offer; 

(4) That participating in the Offer will 

not result in or constitute a waiver of 

any claim of the tendering Plan; 

(5) The methods and timing by which 

Plans may accept the Offer; 

(6) The purchase dates, or the manner 

of determining the purchase dates, for 

Auction Rate Securities tendered 

pursuant to the Offer; 

(7) The timing for acceptance by 

Deutsche Bank of tendered Auction Rate 

Securities; 

(8) The timing of payment for Auction 

Rate Securities accepted by Deutsche 

Bank for payment; 

(9) The methods and timing by which 

a Plan may elect to withdraw tendered 

Auction Rate Securities from the Offer; 

(10) The expiration date of the Offer; 

(11) The fact that Deutsche Bank may 

make purchases of Auction Rate 

Securities outside of the Offer and may 

otherwise buy, sell, hold or seek to 

restructure, redeem or otherwise 

dispose of the Auction Rate Securities; 

(12) A description of the risk factors 

relating to the Offer as Deutsche Bank 

deems appropriate; 

(13) How to obtain additional 

information concerning the Offer; and 

(14) The manner in which 

information concerning material 

amendments or changes to the Offer will 

be communicated to affected Plans. 

(c) The terms of the Settlement Sale 

are consistent with the requirements set 

forth in the Settlement Agreement; and 

(d) All of the conditions in Section II 

have been met. 

Section V. Definitions 

For purposes of this proposed 

exemption: 

(a) The term ‘‘affiliate’’ means: Any 

person directly or indirectly, through 

one or more intermediaries, controlling, 

controlled by, or under common control 

with such other person; 

(b) The term ‘‘control’’ means: The 

power to exercise a controlling 

influence over the management or 

policies of a person other than an 

individual; 

(c) The term ‘‘Auction Rate Security’’ 

means a security that: 

(1) Is either a debt instrument 

(generally with a long-term nominal 

maturity) or preferred stock; and 

(2) Has an interest rate or dividend 

that is reset at specific intervals through 

a Dutch auction process; 

(d) A person is ‘‘independent’’ of 

Deutsche Bank if the person is: (1) Not 

Deutsche Bank or an affiliate; and (2) 

not a relative (as defined in ERISA 

section 3(15)) of the party engaging in 

the transaction; 

(e) The term ‘‘Plan’’ means: An 

individual retirement account or similar 

account described in section 

4975(e)(1)(B) through (F) of the Code (an 

IRA); an employee benefit plan as 

defined in section 3(3) of ERISA; or an 

entity holding plan assets within the 

meaning of 29 CFR 2510.3–101, as 

modified by ERISA section 3(42); and 

(f) The term ‘‘Settlement Agreement’’ 

means: A legal settlement involving 

Deutsche Bank and a U.S. state or 

federal authority that provides for the 

purchase of an Auction Rate Security by 

Deutsche Bank from a Plan. 

Effective Date: If granted, this 

proposed exemption will be effective as 

of February 1, 2008. 

Summary of Facts and Representations 

1. Deutsche Bank AG is a German 

banking corporation and commercial 

bank that provides a wide range of 

services to various types of entities 

worldwide. Deutsche Bank AG’s clients 

include a number of employee benefit 

plans. As of June 30, 2008, Deutsche 

Bank AG had 1.991 trillion euros ($2.95 

trillion) in assets and 31.9 billion euros 

($17.3 billion) in stockholder’s equity. 

Deutsche Bank AG is subject to a 

comprehensive system of regulatory 

oversight and a mandatory insurance 

program. With respect to regulatory and 


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38The Department notes that Prohibited 

Transaction Exemption 80–26 (45 FR 28545 (April 

29, 1980), as amended at 71 FR 17917 (April 7, 

2006)) permits interest-free loans or other 

extensions of credit from a party in interest to a 

plan if, among other things, the proceeds of the loan 

or extension of credit are used only: (1) For the 

payment of ordinary operating expenses of the plan, 

including the payment of benefits in accordance 

with the terms of the plan and periodic premiums 

under an insurance or annuity contract, or (2) for 

a purpose incidental to the ordinary operation of 

the plan. 

39The relief contained in this proposed 

exemption does not extend to the fiduciary 

provisions of section 404 of the Act. 

supervisory requirements, Deutsche 

Bank AG, its branches, and its 

subsidiary banks worldwide are subject 

to regulatory requirements and 

protections that are, qualitatively, at 

least equal to those imposed on U.S.- 

domiciled banks. Within the United 

States, the New York branch of 

Deutsche Bank AG and Deutsche Bank 

Trust Company Americas are regulated 

and supervised by the New York State 

Banking Department. In addition, 

certain activities of Deutsche Bank AG’s 

New York branch and Deutsche Bank 

Trust Company Americas (the trustee of 

ERISA-covered bank collective trusts) 

are regulated and supervised by the 

Federal Reserve Bank of New York. 

With respect to Deutsche Bank AG 

itself, globally, the bank is regulated and 

supervised by the BaFin, in cooperation 

with the Bundesbank. The BaFin is a 

federal institution with ultimate 

responsibility to the German Ministry of 

Finance. The Bundesbank, in turn, is 

the central bank of the Federal Republic 

of Germany and a part of the European 

System of Central Banks. The applicant 

notes that the U.S. Department of 

Treasury has accorded national 

treatment to German bank branches, and 

the German Ministry of finance has 

granted relief to branches of U.S. banks 

in Germany, in particular with respect 

to ‘‘dotation’’ or endowment capital 

requirements and capital adequacy 

standards. 

2. The Applicant describes Auction 

Rate Securities (ARS) and the 

arrangement by which ARS are bought 

and sold as follows. ARS are securities 

(issued as debt or preferred stock) with 

an interest rate or dividend that is reset 

at periodic intervals pursuant to a 

process called a Dutch Auction. 

Investors submit orders to buy, hold, or 

sell a specific ARS to a broker-dealer 

selected by the entity that issued the 

ARS. The broker-dealers, in turn, submit 

all of these orders to an auction agent. 

The auction agent’s functions include 

collecting orders from all participating 

broker-dealers by the auction deadline, 

determining the amount of securities 

available for sale, and organizing the 

bids to determine the winning bid. If 

there are any buy orders placed into the 

auction at a specific rate, the auction 

agent accepts bids with the lowest rate 

above any applicable minimum rate and 

then successively higher rates up to the 

maximum applicable rate, until all sell 

orders and orders that are treated as sell 

orders are filled. Bids below any 

applicable minimum rate or above the 

applicable maximum rate are rejected. 

After determining the clearing rate for 

all of the securities at auction, the 

auction agent allocates the ARS 

available for sale to the participating 

broker-dealers based on the orders they 

submitted. If there are multiple bids at 

the clearing rate, the auction agent will 

allocate securities among the bidders at 

such rate on a pro-rata basis. 

3. The Applicant states that, under a 

typical Dutch Auction process, 

Deutsche Bank AG is permitted, but not 

obligated, to submit orders in auctions 

for its own account either as a bidder or 

a seller and routinely does so in the 

auction rate securities market in its sole 

discretion. Deutsche Bank AG may 

place one or more bids in an auction for 

its own account to acquire ARS for its 

inventory, to prevent: (a) A failed 

auction (i.e., an event where there are 

insufficient clearing bids which would 

result in the auction rate being set at a 

specified rate, resulting in no ARS being 

sold through the auction process); or (b) 

an auction from clearing at a rate that 

Deutsche Bank AG believes does not 

reflect the market for the particular ARS 

being auctioned. 

4. The Applicant states that for many 

ARS, Deutsche Bank AG has been 

appointed by the issuer of the securities 

to serve as a dealer in the auction and 

is paid by the issuer for its services. 

Deutsche Bank AG is typically 

appointed to serve as a dealer in the 

auctions pursuant to an agreement 

between the issuer and Deutsche Bank 

AG. That agreement provides that 

Deutsche Bank AG will receive from the 

issuer auction dealer fees based on the 

principal amount of the securities 

placed through Deutsche Bank AG. 

5. The Applicant states further that 

Deutsche Bank AG may share a portion 

of the auction rate dealer fees it receives 

from the issuer with other brokerdealers that submit orders through 

Deutsche Bank AG, for those orders that 

Deutsche Bank AG successfully places 

in the auctions. Similarly, with respect 

to ARS for which broker-dealers other 

than Deutsche Bank AG act as dealer, 

such other broker-dealers may share 

auction dealer fees with Deutsche Bank 

AG for orders submitted by Deutsche 

Bank AG. 

6. Since February 2008, the Applicant 

knows of no auctions that have been 

successful. According to the Applicant, 

the current state of the ARS market is 

virtually nonexistent. As a result, Plans 

holding ARS may not have sufficient 

liquidity to make benefit payments, 

mandatory payments and withdrawals 

and expense payments when due.38

7. The Applicant represents that, in 

certain instances, Deutsche Bank AG 

may have previously advised or 

otherwise caused a Plan to acquire and 

hold an ARS.39 In connection with 

Deutsche Bank AG’s role in the 

acquisition and holding of ARS by 

various Deutsche Bank AG clients, 

including the Plans, Deutsche Bank AG 

entered into Settlement Agreements 

with certain U.S. states and federal 

authorities. Pursuant to these Settlement 

Agreements, among other things, 

Deutsche Bank AG was required to send 

a written offer to certain Plans that held 

ARS in connection with the advice and/ 

or brokerage services provided by 

Deutsche Bank AG. As described in 

further detail below, eligible Plans that 

accepted the Offer were permitted to 

sell the ARS to Deutsche Bank AG for 

cash equal to the par value of such 

securities, plus any accrued interest 

and/or dividends. According to the 

Applicant, as of Monday, October 26, 

2009, in connection with Offers issued 

by Deutsche Bank AG pursuant to the 

Settlement Agreement, Deutsche Bank 

AG has purchased approximately 

$4,750,000 dollars in ARS from IRAs 

and $725,000 in ARS from Plans subject 

to Title I of ERISA. The Applicant states 

that, prospectively, additional shares of 

ARS may be tendered by Plans to 

Deutsche Bank AG pursuant to an Offer 

issued by Deutsche Bank AG pursuant 

to a Settlement Agreement. 

Accordingly, the Applicant is 

requesting retroactive and prospective 

relief for the Settlement Sales. With 

respect to Unrelated Sales, the 

Applicant states that to the best of its 

knowledge, as of June 30, 2009, no 

Unrelated Sale has occurred. However, 

the Applicant is requesting retroactive 

relief (and prospective relief) for 

Unrelated Sales in the event that a sale 

of ARS by a Plan to Deutsche Bank AG 

has occurred outside the Settlement 

process. If granted, the exemption 

would be effective as of February 1, 

2008. 

8. Specifically, the Applicant is 

requesting exemptive relief for the sale 

of ARS under two different 

circumstances: (a) Where Deutsche Bank 

AG initiates the sale by sending to a 

Plan a written Offer to acquire the ARS, 


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40The Applicant states that while there may be 

communication between a Plan and Deutsche Bank 

subsequent to an Offer, such communication will 

not involve advice regarding whether the Plan 

should accept the Offer. 

notwithstanding that such Offer is not 

required under a Settlement Agreement 

(i.e., an Unrelated Sale); and (b) where 

Deutsche Bank AG is required under a 

Settlement Agreement to send to Plans 

a written Offer to acquire the ARS (i.e., 

a Settlement Sale). The Applicant states 

that the Unrelated Sales and Settlement 

Sales (hereinafter, either, a Covered 

Sale) are in the interests of Plans. In this 

regard, the Applicant states that the 

Covered Sales would permit Plans to 

normalize Plan investments. The 

Applicant represents that each Covered 

Sale will be for no consideration other 

than cash payment against prompt 

delivery of the ARS, and such cash will 

equal the par value of the ARS, plus any 

accrued but unpaid interest or 

dividends. The Applicant represents 

further that Plans will not pay any 

commissions or transaction costs with 

respect to any Covered Sale. 

9. The Applicant represents that the 

proposed exemption is protective of the 

Plans. The Applicant states that, except 

in the case of a Plan sponsored by 

Deutsche Bank AG for its own 

employees (a Deutsche Bank AG Plan): 

Each Covered Sale will be made 

pursuant to a written Offer; and the 

decision to accept the Offer or retain the 

ARS will be made by a Plan fiduciary 

or Plan participant or IRA owner who is 

independent of Deutsche Bank AG. 

Additionally, each Offer will be 

delivered in a manner designed to alert 

a Plan fiduciary that Deutsche Bank AG 

intends to purchase ARS from the Plan. 

In connection with an Unrelated Sale, 

the Offer will describe the material 

terms of the Unrelated Sale, including 

the most recent rate information for the 

ARS (if reliable information is 

available). Either the Offer or other 

materials available to the Plan will 

provide the identity and par value of the 

ARS. Offers made in connection with a 

Settlement Agreement will specifically 

include, among other things: the 

background of the Offer; the method and 

timing by which a Plan may accept the 

Offer; the expiration date of the Offer; a 

description of certain risk factors 

relating to the Offer; how to obtain 

additional information concerning the 

Offer; and the manner in which 

information concerning material 

amendments or changes to the Offer will 

be communicated to affected Plans. The 

Applicant states that, except in the case 

of a Deutsche Bank AG Plan or a pooled 

fund maintained or advised by Deutsche 

Bank AG, neither Deutsche Bank AG nor 

any affiliate will exercise investment 

discretion or render investment advice 

with respect to a Plan’s decision to 

accept the Offer or retain the ARS.40 In 

the case of a Deutsche Bank AG Plan or 

a pooled fund maintained or advised by 

Deutsche Bank AG, the decision to 

engage in a Covered Sale may be made 

by Deutsche Bank AG after Deutsche 

Bank AG has determined that such 

purchase is in the best interest of the 

Deutsche Bank AG Plan or pooled fund. 

The Applicant represents further that 

Plans will not waive any rights or 

claims in connection with any Covered 

Sale. 

10. The Applicant represents that the 

proposed exemption, if granted, would 

be administratively feasible. In this 

regard, the Applicant notes that each 

Covered Sale will occur at the par value 

of the affected ARS, plus any accrued 

but unpaid interest or dividends, and 

such value is readily ascertainable. The 

Applicant represents further that 

Deutsche Bank AG will maintain the 

records necessary to enable the 

Department and Plan fiduciaries, among 

others, to determine whether the 

conditions of this exemption, if granted, 

have been met. 

11. In summary, the Applicant 

represents that the transactions 

described herein satisfy the statutory 

criteria of section 408(a) of the Act 

because, among other things: 

(a) Except in the case of a Deutsche 

Bank AG Plan, each Covered Sale shall 

be made pursuant to a written Offer; 

(b) Each Covered Sale shall be for no 

consideration other than cash payment 

against prompt delivery of the ARS; 

(c) The amount of each Covered Sale 

shall equal the par value of the ARS, 

plus any accrued but unpaid interest or 

dividends; 

(d) Plans will not waive any rights or 

claims in connection with any Covered 

Sale; 

(e) Except in the case of a Deutsche 

Bank AG Plan or a pooled fund 

maintained or advised by Deutsche 

Bank AG: 

(1) The decision to accept an Offer or 

retain the ARS shall be made by a Plan 

fiduciary or Plan participant or IRA 

owner who is independent of Deutsche 

Bank AG; and 

(2) Neither Deutsche Bank AG nor any 

affiliate shall exercise investment 

discretion or render investment advice 

within the meaning of 29 CFR 2510.3– 

21(c) with respect to the decision to 

accept the Offer or retain the ARS; 

(f) Plans shall not pay any 

commissions or transaction costs with 

respect to any Covered Sale; 

(g) A Covered Sale shall not be part 

of an arrangement, agreement or 

understanding designed to benefit a 

party in interest to the affected Plan; 

(h) With respect to any Settlement 

Sale, the terms and delivery of the Offer, 

and the terms of Settlement Sale, shall 

be consistent with the requirements set 

forth in the Settlement Agreement; 

(i) Deutsche Bank AG shall make 

available in connection with an 

Unrelated Sale the material terms of the 

Unrelated Sale, including the most 

recent rate information for the ARS (if 

reliable information is available), and 

the identity and par value of the ARS; 

(j) Each Offer made in connection 

with a Settlement Agreement shall 

describe the material terms of the 

Settlement Sale, including the 

following: 

(1) Information regarding how the 

Plan can determine: The ARS held by 

the Plan with Deutsche Bank AG, the 

number of shares and par value of the 

ARS, purchase dates for such ARS, and 

(if reliable information is available) the 

most recent rate information for the 

ARS; 

(2) The background of the Offer; 

(3) That participating in the Offer will 

not result in or constitute a waiver of 

any claim of the tendering Plan; 

(4) The methods and timing by which 

the Plan may accept the Offer; 

(5) The purchase dates, or the manner 

of determining the purchase dates, for 

ARS pursuant to the Offer; 

(6) The timing for acceptance by 

Deutsche Bank AG of tendered ARS; 

(7) The timing of payment for ARS 

accepted by Deutsche Bank AG for 

payment; 

(8) The methods and timing by which 

a Plan may elect to withdraw tendered 

ARS from the Offer; 

(9) The expiration date of the Offer; 

(10) The fact that Deutsche Bank AG 

may make purchases of ARS outside of 

the Offer and may otherwise buy, sell, 

hold or seek to restructure, redeem or 

otherwise dispose of the ARS; 

(11) A description of the risk factors 

relating to the Offer as Deutsche Bank 

AG deems appropriate; 

(12) How to obtain additional 

information concerning the Offer; and 

(13) The manner in which 

information concerning material 

amendments or changes to the Offer will 

be communicated to affected Plans. 

Notice to Interested Persons 

The Applicant represents that the 

potentially interested participants and 

beneficiaries cannot all be identified 

and therefore the only practical means 

of notifying such participants and 

beneficiaries of this proposed 


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41Any reference to MS&Co. or UB shall be 

deemed to include any successors thereto. 

42The common and collective trust funds for 

which MS&Co., UB or an affiliate act as directed 

trustee or custodian, and in which Client Plans 

invest, are referred to herein as ‘‘Commingled 

Funds.’’ The Client Plan separate accounts for 

which MS&Co., UB or an affiliate act as directed 

trustee or custodian are referred to herein as 

‘‘Separate Accounts.’’ Commingled Funds and 

Separate Accounts are collectively referred to 

herein as ‘‘Lender’’ or ‘‘Lenders.’’ 

43MS&Co., UB or an affiliate may be retained by 

primary securities lending agents to provide 

securities lending services in a sub-agent capacity 

with respect to portfolio securities of clients of such 

primary securities lending agents. As a securities 

lending sub-agent, MS&Co.’s or UB’s role parallels 

that under the lending transactions for which 

MS&Co., UB or an affiliate acts as a primary 

securities lending agent on behalf of its clients. 

References to MS&Co.’s or UB’s performance of 

services as securities lending agent should be 

deemed to include its parallel performance as a 

securities lending sub-agent and references to the 

Client Plans should be deemed to include those 

plans for which the Lending Agent is acting as a 

sub-agent with respect to securities lending, unless 

otherwise specifically indicated or by the context of 

the reference. 

exemption is by the publication of this 

notice in the Federal Register. 

Comments and requests for a hearing 

must be received by the Department not 

later than 30 days from the date of 

publication of this notice of proposed 

exemption in the Federal Register. 

FOR FURTHER INFORMATION CONTACT: 

Warren Blinder of the Department, 

telephone (202) 693–8553. (This is not 

a toll-free number.) 

Morgan Stanley & Co. Inc. and its current 

and future affiliates and subsidiaries (Morgan 

Stanley) and Union Bank, N.A. and its 

affiliates (Union Bank), located in New York, 

NY and San Francisco, CA., [Application No. 

D–11521]. 

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). 

Section I—Transactions 

If the exemption is granted, effective 

October 1, 2008, the restrictions of 

section 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 to: 

(a) The lending of securities to: 

(1) Morgan Stanley & Co. 

Incorporated, and its successors 

(MS&Co.) and Union Bank, N.A., and its 

successors (UB); 

(2) Any current or future affiliate of 

MS&Co. or UB,41 that is a bank, as 

defined in section 202(a)(2) of the 

Investment Advisers Act of 1940, that is 

supervised by the U.S. or a state, any 

broker-dealer registered under the 

Securities Exchange Act of 1934 (the 

‘‘1934 Act’’), or any foreign affiliate that 

is a bank or broker-dealer that is 

supervised by (i) the Securities and 

Futures Authority (‘‘SFA’’) in the United 

Kingdom; (ii) the Bundesanstalt fur 

Finanzdienstleistungsaufsicht (the 

‘‘BAFin’’) in Germany; (iii) the Ministry 

of Finance (‘‘MOF’’) and/or the Tokyo 

Stock Exchange in Japan; (iv) the 

Ontario Securities Commission, the 

Investment Dealers Association and/or 

the Office of Superintendent of 

Financial Institutions in Canada; (v) the 

Swiss Federal Banking Commission in 

Switzerland; (vi) the Reserve Bank of 

Australia or the Australian Securities 

and Investments Commission and/or 

Australian Stock Exchange Limited in 

Australia; (vii) the Commission Bancaire 

(‘‘CB’’), the Comite des Establissements 

de Credit et des Enterprises 

d’Investissement (CECEI) and the 

Autorite des Marches Financiers 

(‘‘AMF’’) in France; and (viii) the 

Swedish Financial Supervisory 

Authority (‘‘SFSA’’) in Sweden (the 

branches and/or affiliates in the 

enumerated foreign countries 

hereinafter referred to as the ‘‘Foreign 

Affiliates’’) and together with their U.S. 

branches or U.S. affiliates (individually, 

‘‘Affiliated Borrower’’ and collectively, 

‘‘Affiliated Borrowers’’), by employee 

benefit plans, including commingled 

investment funds holding plan assets 

(the Client Plans or Plans),42 for which 

MS&Co., UB or an affiliate of either acts 

as securities lending agent or subagent 

(the ‘‘Lending Agent’’),43 and also may 

serve as directed trustee or custodian of 

securities being lent, or for which a 

subagent is appointed by the Lending 

Agent, which subagent is either (I) a 

bank, as defined in section 202(a)(2) of 

the Investment Advisers Act of 1940 or 

a broker-dealer registered under the 

1934 Act, (i) which has, as of the last 

day of its most recent fiscal year, equity 

capital in excess of $100 million and (ii) 

which annually exercises discretionary 

authority to lend securities on behalf of 

clients equal to at least $1 billion; or (II) 

an investment adviser registered under 

the Investment Advisers Act of 1940, (i) 

which has, as of the last day of its most 

recent fiscal year, equity capital in 

excess of $1 million and (ii) which 

annually exercises discretionary 

authority to lend securities on behalf of 

clients equal to at least $1 billion (each, 

a ‘‘Lending Subagent’’); and 

(b) The receipt of compensation by 

the Lending Agent and the Lending 

Subagent in connection with these 

transactions. 

Section II—Conditions 

Section I of this exemption applies 

only if the conditions of Section II are 

satisfied. For purposes of this 

exemption, any requirement that the 

approving fiduciary be independent of 

MS&Co., UB, and their affiliates shall 

not apply in the case of an employee 

benefit plan sponsored and maintained 

by the Lending Agent and/or an affiliate 

for its own employees (an Affiliated 

Plan) invested in a Commingled Fund, 

provided that at all times the holdings 

of all Affiliated Plans in the aggregate 

comprise less than 10% of the assets of 

the Commingled Fund. 

(a) For each Client Plan, neither 

MS&Co., UB, nor any of their affiliates 

has or exercises discretionary authority 

or control with respect to the 

investment of the assets of Client Plans 

involved in the transaction or renders 

investment advice (within the meaning 

of 29 CFR 2510.3–21(c)) with respect to 

such assets, including decisions 

concerning a Client Plan’s acquisition or 

disposition of securities available for 

loan. 

(b) Any arrangement for the Lending 

Agent to lend securities is approved in 

advance by a Plan fiduciary who is 

independent of MS&Co., UB, and their 

affiliates (the Independent Fiduciary). 

Notwithstanding the foregoing, section 

II(b) shall be deemed satisfied with 

respect to loans of securities by Client 

Plans to MS&Co. or a U.S. affiliate 

(Morgan Stanley Affiliated Borrower) by 

UB as Lending Agent or Lending 

Subagent that were outstanding as of 

October 1, 2008 (the Existing Loans), 

provided (i) no later than April 1, 2009, 

UB provided to Client Plans with 

Existing Loans a description of the 

general terms of the securities loan 

agreements between such Client Plans 

and the Morgan Stanley Affiliated 

Borrowers, and (ii) at the time of 

providing such information, UB notified 

each such Client Plan that if the Client 

Plan did not approve the continued 

lending of securities to Morgan Stanley 

by May 11, 2009, UB would terminate 

the loans and cease to make any new 

securities loans on behalf of that Client 

Plan to Morgan Stanley. 

(c) The specific terms of the securities 

loan agreement (the Loan Agreement) 

are negotiated by the Lending Agent 

which acts as a liaison between the 

Lender and the Affiliated Borrower to 

facilitate the securities lending 

transaction. In the case of a Separate 

Account, the Independent Fiduciary of 

a Client Plan approves the general terms 

of the Loan Agreement between the 


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44PTE 2006–16 permits the use of certain types 

of foreign collateral if the lending fiduciary is a U.S. 

Bank or U.S. Broker-Dealer (as defined in the 

exemption) and such fiduciary indemnifies the plan 

with respect to the difference, if any, between the 

replacement cost of the borrowed securities and the 

market value of the collateral on the date of a 

borrower default plus interest and any transaction 

costs which a plan may incur or suffer directly 

arising out of a borrower default. See PTE 2006–16, 

Section V(f)(5). The Department notes that the 

requirements of Section V(f)(5) of PTE 2006–16 

must be satisfied in order for those types of 

collateral to be used in connection with this 

proposed exemption, if granted. 

Client Plan and the Affiliated Borrower 

as well as any material change in such 

Loan Agreement. In the case of a 

Commingled Fund, approval is pursuant 

to the procedure described in paragraph 

(i), below. 

(d) The terms of each loan of 

securities by a Lender to an Affiliated 

Borrower are at least as favorable to 

such Separate Account or Commingled 

Fund as those of a comparable arm’slength transaction between unrelated 

parties. 

(e) A Client Plan, in the case of a 

Separate Account, may terminate the 

lending agency or sub-agency 

arrangement at any time, without 

penalty, on five business days notice. A 

Client Plan in the case of a Commingled 

Fund may terminate its participation in 

the lending arrangement by terminating 

its investment in the Commingled Fund 

no later than 35 days after the notice of 

termination of participation is received, 

without penalty to the Plan, in 

accordance with the terms of the 

Commingled Fund. Upon termination, 

the Affiliated Borrowers will transfer 

securities identical to the borrowed 

securities (or the equivalent thereof in 

the event of reorganization, 

recapitalization or merger of the issuer 

of the borrowed securities) to the 

Separate Account or, if the Plan’s 

withdrawal necessitates a return of 

securities, to the Commingled Fund 

within: 

(1) The customary delivery period for 

such securities; 

(2) Five business days; or 

(3) The time negotiated for such 

delivery by the Client Plan, in a 

Separate Account, or by the Lending 

Agent, as lending agent to a 

Commingled Fund, and the Affiliated 

Borrowers, whichever is least. 

(f) The Separate Account, 

Commingled Fund or another custodian 

designated to act on behalf of the Client 

Plan, receives from each Affiliated 

Borrower (either by physical delivery, 

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 the 

Affiliated Borrower, collateral 

consisting of U.S. currency, securities 

issued or guaranteed by the United 

States Government or its agencies or 

instrumentalities, irrevocable bank 

letters of credit issued by a U.S. bank, 

other than Morgan Stanley or Union 

Bank (or any subsequent parent 

corporation of the Lending Agent) or an 

affiliate thereof, or any combination 

thereof, or other collateral permitted 

under Prohibited Transaction 

Exemption (PTE) 2006–16 (71 FR 63786, 

October 31, 2006) (as it may be amended 

or superseded) (collectively, the 

Collateral).44 The Collateral will be held 

on behalf of a Client Plan in a 

depository account separate from the 

Affiliated Borrower. 

(g) The market value (or in the case 

of a letter of credit, a stated amount) of 

the Collateral on the close of business 

on the day preceding the day of the loan 

is initially equal at least to the 

percentage required by PTE 2006–16 (as 

amended or superseded) but in no case 

less than 102 percent of the market 

value of the loaned securities. The 

applicable Loan Agreement gives the 

Separate Account or the Commingled 

Fund in which the Client Plan has 

invested a continuing security interest 

in, and a lien on or title to, the 

Collateral. The level of the Collateral is 

monitored daily by the Lending Agent. 

If the market value of the Collateral, on 

the close of trading on a business day, 

is less than 100 percent of the market 

value of the loaned securities at the 

close of business on that day, the 

Affiliated Borrower is required to 

deliver, by the close of business on the 

next day, sufficient additional Collateral 

such that the market value of the 

Collateral will again equal 102 percent 

or the percentage otherwise required by 

PTE 2006–16 (as amended or 

superseded). 

(h)(1) For a Lender that is a Separate 

Account, prior to entering into a Loan 

Agreement, the applicable Affiliated 

Borrower furnishes its most recently 

available audited and unaudited 

financial statements to the Lending 

Agent which will, in turn, provide such 

statements to the Client Plan before the 

Client Plan approves the terms of the 

Loan Agreement. The Loan Agreement 

contains a requirement that the 

applicable Affiliated Borrower 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. If any such changes have 

taken place, the Lending Agent will not 

make any further loans to the Affiliated 

Borrower unless an Independent 

Fiduciary of the Client Plan in a 

Separate Account is provided notice of 

any material change and approves the 

continuation of the lending arrangement 

in view of the changed financial 

condition. 

Notwithstanding the foregoing, 

section II(h)(1) shall be deemed satisfied 

with respect to the Existing Loans 

provided (i) UB provided to such Client 

Plans no later than April 1, 2009, the 

most recently available audited and 

unaudited financial statements of the 

Morgan Stanley Affiliated Borrower and 

notice of any material adverse change in 

financial condition since the date of the 

most recent financial statement being 

furnished to the Client Plans, and (ii) at 

the time of providing such information, 

UB notified each Client Plan that if the 

Client Plan did not approve the 

continued lending of securities to 

Morgan Stanley by May 11, 2009, UB 

would terminate the loans and cease to 

make any new securities loans on behalf 

of that Client Plan to Morgan Stanley. 

(h)(2) For a Lender that is a 

Commingled Fund, the Lending Agent 

will furnish upon reasonable request to 

an Independent Fiduciary of each Client 

Plan invested in the Commingled Fund 

the most recently available audited and 

unaudited financial statements of the 

applicable Affiliated Borrower prior to 

authorization of lending, and annually 

thereafter. 

(i) In the case of Commingled Funds, 

the information described in paragraph 

(c) (including any information with 

respect to any material change in the 

arrangement) shall be furnished by the 

Lending Agent as lending fiduciary to 

the Independent Fiduciary of each 

Client Plan whose assets are invested in 

the Commingled Fund, not less than 30 

days prior to implementation of the 

arrangement or material change to the 

lending arrangement as previously 

described to the Client Plan, and 

thereafter, upon the reasonable request 

of the Client Plan’s Independent 

Fiduciary. In the event of a material 

adverse change in the financial 

condition of an Affiliated Borrower, the 

Lending Agent will make a decision, 

using the same standards of credit 

analysis the Lending Agent would use 

in evaluating unrelated borrowers, 

whether to terminate existing loans and 

whether to continue making additional 

loans to the Affiliated Borrower. 

In the event any such Independent 

Fiduciary submits a notice in writing 

within the 30-day period provided in 

the preceding paragraph to the Lending 

Agent, as lending fiduciary, objecting to 

the implementation of, material change 

in, or continuation of the arrangement, 

the Plan on whose behalf the objection 

was tendered is given the opportunity to 


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terminate its investment in the 

Commingled Fund, without penalty to 

the Plan, no later than 35 days after the 

notice of withdrawal is received. In the 

case of a Plan that elects to withdraw 

pursuant to the foregoing, such 

withdrawal shall be effected prior to the 

implementation of, or material change 

in, the arrangement; but an existing 

arrangement need not be discontinued 

by reason of a Plan electing to 

withdraw. In the case of a Plan whose 

assets are proposed to be invested in the 

Commingled Fund subsequent to the 

implementation of the arrangement, the 

Plan’s investment in the Commingled 

Fund shall be authorized in the manner 

described in paragraph (c). 

(j) In return for lending securities, the 

Lender 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 Lender may pay a 

loan rebate or similar fee to the 

Affiliated Borrowers, if such fee is not 

greater than the fee the Lender would 

pay in a comparable arm’s-length 

transaction with an unrelated party.) 

(k) Except as otherwise expressly 

provided herein, all procedures 

regarding the securities lending 

activities will, at a minimum, conform 

to the applicable provisions of PTE 

2006–16, as amended or superseded, as 

well as to applicable securities laws of 

the United States, the United Kingdom, 

Canada, Australia, Switzerland, Japan, 

France, Sweden and Germany. 

(l) If any event of default occurs, to 

the extent that (i) liquidation of the 

pledged Collateral or (ii) additional cash 

received from the Affiliated Borrower 

does not provide sufficient funds on a 

timely basis, the Client Plan will have 

the right to purchase securities identical 

to the borrowed securities (or their 

equivalent as discussed in paragraph (e) 

above) and apply the Collateral to the 

payment of the purchase price. If the 

Collateral is insufficient to accomplish 

such purchase, the Affiliated Borrower 

will indemnify the Client Plan invested 

in a Separate Account or Commingled 

Fund in the United States with respect 

to the difference between the 

replacement cost of the borrowed 

securities and the market value of the 

Collateral on the date the loan is 

declared in default, together with 

expenses incurred by the Client Plan 

plus applicable interest at a reasonable 

rate, including reasonable attorney’s 

fees incurred by the Client Plan for legal 

action arising out of default on the 

loans, or failure by the Affiliated 

Borrower to properly indemnify the 

Client Plan. The Affiliated Borrower’s 

indemnification will enable the Client 

Plan to collect on any indemnification 

from a U.S.-domiciled affiliate of the 

Affiliated Borrower. 

(m) The Lender receives the 

equivalent of all distributions made to 

holders of the borrowed securities 

during the term of the loan, including 

but not limited to all interest and 

dividends on the loaned securities, 

shares of stock as a result of stock splits 

and rights to purchase additional 

securities, or other distributions. 

(n) Prior to any Client Plan’s approval 

of the lending of its securities to any 

Affiliated Borrower, a copy of the final 

exemption (if granted) and this notice of 

proposed exemption is provided to the 

Client Plan. 

Notwithstanding the foregoing, 

effective October 1, 2008, through the 

publication date of the grant of this 

exemption in the Federal Register, 

section II(n) shall be deemed satisfied 

with respect to the Existing Loans, 

provided (i) UB provides to such Client 

Plans that have consented to securities 

lending prior to such publication date, 

a copy of the requested exemption and 

(ii) UB advises each such Client Plan 

that unless the Client Plan notifies UB 

to the contrary within 30 days, its 

consent to make loans to Morgan 

Stanley will be presumed. 

(o) The Independent Fiduciary of each 

Client Plan that is invested in a Separate 

Account is provided with (including by 

electronic means) quarterly reports with 

respect to the securities lending 

transactions, including, but not limited 

to, the information described in 

Representation 40 of the Summary of 

Facts and Representations, so that the 

Independent Fiduciary may monitor 

such transactions with the Affiliated 

Borrower. The Independent Fiduciary 

invested in a Commingled Fund is 

provided with (including by electronic 

means) quarterly reports with respect to 

the securities lending transactions, 

including, but not limited to, the 

information described in Representation 

40 of the Summary of Facts and 

Representations, so that the 

Independent Fiduciary may monitor 

such transactions with the Affiliated 

Borrower. The Lending Agent may, in 

lieu of providing the quarterly reports 

described in this paragraph (o) to each 

Independent Fiduciary of a Client Plan 

invested in a Commingled Fund, 

provide such Independent Fiduciary 

with the certification of an auditor 

selected by the Lending Agent who is 

independent of MS&Co, UB and their 

affiliates (but who may or may not be 

independent of the Client Plan) that the 

loans appear no less favorable to the 

Lender than the pricing established in 

the schedule described in the paragraph 

29 of the Summary of Facts and 

Representations. Where the 

Independent Fiduciary of a Client Plan 

invested in a Commingled Fund is 

provided the certification of an auditor, 

such Independent Fiduciary shall be 

entitled to receive the quarterly reports 

upon request. 

Notwithstanding the foregoing, 

section II(o) shall be deemed satisfied 

with respect to the Existing Loans 

provided UB provides to such Client 

Plans no later than July 31, 2009, the 

material described in section II(o) with 

respect to the period from October 1, 

2008, through June 30, 2009. 

(p) Only Client Plans with total assets 

having an aggregate market value of at 

least $50 million are permitted to lend 

securities to the Affiliated Borrowers; 

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, 

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 arrangement with the Lending 

Agent, 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, 

whose assets are commingled for 

investment purposes in a group trust or 

any other form of entity the assets of 

which are ‘‘plan assets’’ under the Plan 

Asset Regulation, which entity is 

engaged in securities lending 

arrangements with the Lending Agent, 

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 


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corporations including such fiduciary is 

the employer maintaining such Plan or 

an employee organization whose 

members are covered by such Plan). 

However, the fiduciary responsible for 

making the investment decision on 

behalf of such group trust or other 

entity— 

(A) Has full investment responsibility 

with respect to plan assets invested 

therein; and 

(B) 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. 

(q) With respect to any calendar 

quarter, at least 50 percent or more of 

the outstanding dollar value of 

securities loans negotiated on behalf of 

Lenders will be to borrowers unrelated 

to MS&Co., UB and their affiliates. 

(r) In addition to the above, all loans 

involving foreign Affiliated Borrowers 

have the following requirements: 

(1) The foreign Affiliated Borrower is 

a bank, supervised either by a state or 

the United States, a broker-dealer 

registered under the Securities 

Exchange Act of 1934 or a bank or 

broker-dealer that is supervised by (i) 

the SFA in the United Kingdom; (ii) the 

BAFin in Germany; (iii) the MOF and/ 

or the Tokyo Stock Exchange in Japan; 

(iv) the Ontario Securities Commission, 

the Investment Dealers Association and/ 

or the Office of Superintendent of 

Financial Institutions in Canada; (v) the 

Swiss Federal Banking Commission in 

Switzerland; and (vi) the Reserve Bank 

of Australia or the Australian Securities 

and Investments Commission and/or 

Australian Stock Exchange Limited in 

Australia; (vii) the CB, the CECEI, and 

the AMF in France; and (viii) the SFSA 

in Sweden; 

(2) The foreign Affiliated Borrower is 

in compliance with all applicable 

provisions of Rule 15a–6 under the 

Securities Exchange Act of 1934 (17 

CFR 240.15a–6) (Rule 15a–6) which 

provides foreign broker-dealers a 

limited exemption from United States 

registration requirements; 

(3) All Collateral is maintained in 

United States dollars or U.S. dollardenominated securities or letters of 

credit (unless an applicable exemption 

provides otherwise); 

(4) All Collateral is held in the United 

States and the situs of the securities 

lending agreements is maintained 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 related to 

the lending of securities; and 

(5) Prior to a transaction involving a 

foreign Affiliated Borrower, the foreign 

Affiliated Borrower— 

(A) Agrees to submit to the 

jurisdiction of the United States; 

(B) Agrees to appoint an agent for 

service of process in the United States, 

which may be an affiliate (the Process 

Agent); 

(C) Consents to service of process on 

the Process Agent; and 

(D) Agrees that enforcement by a 

Client Plan of the indemnity provided 

by the Affiliated Borrower will, at the 

option of the Client Plan, occur 

exclusively in the United States courts. 

(s) The Lending Agent maintains, or 

causes 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 (t)(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 the Lending Agent and/or its 

affiliates, the records are lost or 

destroyed prior to the end of the sixyear period; and (2) No party in interest 

other than the Lending Agent or its 

affiliates 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 (t)(1). 

(t)(1) Except as provided in 

subparagraph (t)(2) of this paragraph 

and notwithstanding any provisions of 

sections (a)(2) and (b) of section 504 of 

the Act, the records referred to in 

paragraph (s) are unconditionally 

available at their customary location for 

examination during normal business 

hours by: 

(A) Any duly authorized employee or 

representative of the Department, the 

Internal Revenue Service or the 

Securities and Exchange Commission; 

(B) Any fiduciary of a participating 

Client Plan or any duly authorized 

representative of such fiduciary; 

(C) Any contributing employer to any 

participating Client Plan or any duly 

authorized employee or representative 

of such employer; and 

(D) Any participant or beneficiary of 

any participating Client Plan, or any 

duly authorized representative of such 

participant or beneficiary. 

(t)(2) None of the persons described 

above in paragraphs (t)(1)(B)–(t)(1)(D) 

are authorized to examine the trade 

secrets of the Lending Agent or its 

affiliates or commercial or financial 

information which is privileged or 

confidential. 

(t)(3) Should the Lending Agent refuse 

to disclose information on the basis that 

such information is exempt from 

disclosure, the Lender shall, by the 

close of the thirtieth (30th) day 

following the request, provide written 

notice advising that person of the reason 

for the refusal and that the Department 

may request such information. 

Summary of Facts and Representations 

1. Morgan Stanley is a global financial 

services firm headquartered in New 

York. Its corporate parent is a bank 

holding company. Morgan Stanley, with 

its affiliates, serves a large and 

diversified group of clients and 

customers, including corporations, 

governments, financial institutions and 

individuals around the world. Morgan 

Stanley offers investment-related 

services, including securities research, 

brokerage, execution, asset allocation, 

financial planning, investment advice, 

discretionary asset management 

services, sweep and trust/custody 

services. In its Institutional Securities 

business segment, Morgan Stanley 

provides financial advisory and capitalraising services to a diverse group of 

institutional clients globally, primarily 

through wholly owned subsidiaries that 

include Morgan Stanley & Co. 

Incorporated (MS&Co.), Morgan Stanley 

& Co. International plc, Morgan Stanley 

Japan Securities Co., Ltd. and Morgan 

Stanley Asia Limited. These and other 

subsidiaries also conduct sales and 

trading activities worldwide, as 

principal and agent, and provide related 

financing services on behalf of 

institutional investors. MS&Co. is both a 

registered investment adviser subject to 

the Investment Advisers Act of 1940 

and an SEC-registered broker dealer 

subject to the supervision of various 

governmental and self-regulatory 

bodies. As of November 30, 2007, 

Morgan Stanley employed over 48,000 

employees in over 600 offices operating 

in 33 countries. In the ordinary course 

of its business, Morgan Stanley provides 

a range of financial services to IRAs and 

pension, profit sharing and 401(k) plans 

qualified under section 401(a) of the 

Code under which some or all of the 

participants are employees described in 

section 401(c) of the Code. 

2. Mitsubishi UFJ Financial Group, 

Inc. (‘‘MUFG’’), Japan’s largest financial 

group and the world’s second largest 

bank holding company with $1.1 trillion 


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45An affiliate is defined in 29 CFR 2510.3–21(e) 

as including: ‘‘(i) Any person directly or indirectly, 

through one or more intermediaries, controlling, 

controlled by, or under common control with such 

person; (ii) Any officer, director, partner, employee 

or relative (as defined in section 3(15) of the Act) 

of such person; and (iii) Any corporation or 

partnership of which such person is an officer, 

director or partner.’’ The term control is defined 

therein as ‘‘the power to exercise a controlling 

influence over the management or policies of a 

person other than an individual.’’ 

in bank deposits, on October 13, 2008, 

made a $9 billion equity investment in 

Morgan Stanley that gives MUFG 

approximately a 21 percent ownership 

interest in Morgan Stanley on a fully 

diluted basis. The investment is part of 

a previously announced global strategic 

alliance. Under the terms of the 

transaction, MUFG has acquired $7.8 

billion of perpetual non-cumulative 

convertible preferred stock with a 10 

percent dividend and a conversion price 

of $25.25 per share, and $1.2 billion of 

perpetual non-cumulative nonconvertible preferred stock with a 10 

percent dividend. Half of the 

convertible preferred stock 

automatically converts after one year 

into common stock when Morgan 

Stanley’s stock trades above 150 percent 

of the conversion price for a certain 

period and the other half converts on 

the same basis after year two. The nonconvertible preferred stock is callable 

after year three at 110 percent of the 

purchase price. MUFG is entitled to 

nominate one member of Morgan 

Stanley’s twelve-member board of 

directors and to have an additional 

‘‘observer’’ present at meetings of 

Morgan Stanley’s board. 

3. UnionBanCal Corporation, 

headquartered in San Francisco, CA, is 

a financial holding company with assets 

of $70.1 billion as of December 31, 2008. 

Its primary subsidiary, Union Bank, 

N.A. (UB), is a full-service commercial 

bank providing an array of financial 

services to individuals, small 

businesses, middle-market companies 

and major corporations. UB is 

California’s fifth largest bank by 

deposits. The bank has 335 banking 

offices in California, Oregon and 

Washington, and two international 

offices. Effective November 4, 2008, 

UnionBanCal Corp. became a wholly 

owned subsidiary of The Bank of TokyoMitsubishi UFJ, Ltd., which is a 

subsidiary of MUFG. 

4. To the best of Morgan Stanley’s 

knowledge and belief, the current status 

of the investment in Morgan Stanley by 

Union Bank’s indirect, ultimate 

corporate parent, MUFG, does not make, 

as of the date of the application, Union 

Bank and Morgan Stanley affiliates of 

each other under the definition of 

affiliate in 29 CFR 2510.3–21(e) for 

purposes of ERISA.45 However, Morgan 

Stanley filed this exemption request 

because (a) Union Bank might be 

viewed currently as having an interest 

in Morgan Stanley that could affect each 

entity’s judgment as lending agent for 

Client Plans by reason of Union Bank’s 

indirect parent’s ownership interest in 

Morgan Stanley and (b) Morgan Stanley 

and Union Bank both believe that, at 

some future date, the status of MUFG’s 

investment and future joint business 

initiatives may ultimately deem Union 

Bank and Morgan Stanley to be 

‘‘affiliates’’ for purposes of 29 CFR 

2510.3–21(e). 

5. Morgan Stanley seeks an exemption 

to permit a securities lending agent 

affiliated with MS&Co. or UB (the 

Lending Agent) to lend securities of an 

account covered by ERISA or the Code 

to a broker-dealer or bank affiliated with 

MS&Co. or UB, including foreign 

broker-dealers and banks in Canada, 

Germany, Japan, the United Kingdom, 

Switzerland, France, Sweden and 

Australia (each, an Affiliated Borrower). 

The exemption would amend and 

supersede PTE 98–40, granted to 

MS&Co. and Morgan Stanley Trust 

Company, and EXPRO 99–01E, granted 

to MS&Co. 

6. As of the closing of the MUFG/ 

Morgan Stanley transaction, eight Client 

Plans for which UB served as securities 

lending agent or sub agent had loans 

outstanding to MS&Co. or a U.S. affiliate 

(the Existing Loans). As of March 9, 

2009, the total amount of the Existing 

Loans from these Plans totaled 

$8,196,460.29, compared to the amount 

outstanding to all borrowers from these 

funds which exceeded $1.005 billion. 

Thus the total Existing Loans to Morgan 

Stanley affiliates were approximately 

1% of the total loans for these Plans. 

The range of percentages for the eight 

plans was between .5% and 3.7% of 

plan assets. The Applicant requests that 

the exemption, if granted, apply 

retroactively to the Existing Loans. The 

Applicant has proposed certain 

conditions applicable to the Existing 

Loans, as described herein. 

7. The Applicant represents that, for 

each Client Plan, neither MS&Co., UB, 

nor any affiliate will have or exercise 

discretionary authority or control with 

respect to the investment of the assets 

of Client Plans involved in the 

transaction, or render investment advice 

(within the meaning of 29 CFR 2510.3– 

21(c)) with respect to such assets, 

including decisions concerning a Client 

Plan’s acquisitions or dispositions of 

securities available for loan. 

8. Any arrangement for the Lending 

Agent to lend securities will be 

approved in advance by a Client Plan 

fiduciary who is independent of 

MS&Co, UB, and their affiliates (other 

than in the case of a Plan sponsored by 

MS&Co., UB, or any of their affiliates 

(Affiliated Plan) invested in a 

commingled fund, provided that at all 

times holdings of all Affiliated Plans in 

the aggregate comprise less than 10% of 

the assets of the commingled fund). 

Notwithstanding the foregoing, this 

condition will be deemed satisfied with 

respect to the Existing Loans provided 

(i) UB provided to Client Plans with 

Existing Loans no later than April 1, 

2009, a description of the general terms 

of the securities loan agreements 

between such Client Plans and 

borrowers, including any conditions 

with respect to MS that differ from other 

borrowers, and (ii) at the time of 

providing such information, UB notified 

each such Client Plan that if the Client 

Plan did not approve the continued 

lending of securities to Morgan Stanley 

by May 11, 2009, UB would terminate 

the loans and cease to make any new 

securities loans on behalf of the Client 

Plan to Morgan Stanley. 

9. When acting as a securities lending 

agent, the Lending Agent, pursuant to 

approval by the independent Plan 

fiduciary, will negotiate the terms of 

loans to Affiliated Borrowers and 

otherwise act as a liaison between the 

Lender and the Affiliated Borrower. The 

Lending Agent will have the 

responsibility for monitoring receipt of 

all collateral required under the 

exemption, marking such collateral to 

market daily to ensure adequate levels 

of collateral can be maintained, 

monitoring and evaluating the 

performance and creditworthiness of 

borrowers, and, if authorized by a 

lending plan, holding and investing 

cash collateral pursuant to given 

investment guidelines. The Lending 

Agent may also act as directed trustee or 

custodian for the Client Plan. 

10. The Lending Agent, as securities 

lending agent for the Lenders, will 

negotiate a master securities borrowing 

agreement with a schedule of 

modifications attached thereto (‘‘Loan 

Agreement’’) with the Affiliated 

Borrowers, as is the case with all 

borrowers. The Loan Agreement will 

specify, among other things, the right of 

the Lender to terminate a loan at any 

time and the Lender’s rights in the event 

of any default by the Affiliated 

Borrowers. The Loan Agreement will set 

forth the basis for compensation to the 

Lender for lending securities to the 

Affiliated Borrowers under each 

category of collateral. The Loan 


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46The Lending Agent may make transmittals 

required by the exemption to Client Plan fiduciaries 

via authorized recordkeepers. The Lending Agent 

represents that all decisions reserved to Client Plan 

fiduciaries under the terms of the exemption will 

be made by such fiduciaries and not by the 

recordkeeper on behalf of the Client Plan fiduciary. 

Agreement will also contain a 

requirement that the Affiliated 

Borrowers must pay all transfer fees and 

transfer taxes related to the securities 

loans. 

11. With respect to Lenders that are 

Separate Accounts, as direct lending 

agent, the Lending Agent will, prior to 

lending the Client Plan’s securities, 

enter into an agreement (‘‘Client 

Agreement’’) with the Client Plan, 

signed by a fiduciary of the Client Plan 

who is independent of MS&Co., UB, and 

their affiliates (other than in the case of 

an Affiliated Plan, as discussed above in 

paragraph 8). The Client Agreement 

will, among other things, describe the 

operation of the lending program, 

disclose the form of the securities loan 

agreement to be entered into on behalf 

of the Client Plan with borrowers, 

identify generally the securities which 

are available to be lent, and identify the 

required collateral guidelines and the 

required daily marking-to-market of the 

loaned securities. The Client Agreement 

will also set forth the basis and rate of 

the Lending Agent’s compensation for 

the performance of securities lending 

and cash collateral investment services. 

The Client Plan may terminate the 

Client Agreement with respect to any or 

all Affiliated Borrowers at any time, 

without penalty, on no more than five 

business days notice. 

12. The Client Agreement will contain 

provisions to the effect that if any 

Affiliated Borrower is designated by the 

Client Plan as an approved borrower, 

the Client Plan will acknowledge the 

relationship between the Affiliated 

Borrower and the Lending Agent. The 

Lending Agent will represent to the 

Client Plan that each and every loan 

made to the Affiliated Borrower on 

behalf of the Client Plan will be effected 

at arm’s-length terms, and such terms 

will be in no case less favorable to the 

Client Plan than the pricing established 

according to the schedule described in 

paragraph 29. 

13. When the Lending Agent is 

lending agent with respect to a 

Commingled Fund, the Lending Agent 

will, prior to the investment of a Client 

Plan’s assets in such Commingled Fund 

or prior to the first use of this 

exemption, obtain from the Client Plan 

approval to lend any securities held by 

the Commingled Fund to brokers and 

other approved borrowers, including the 

Affiliated Borrowers. Prior to obtaining 

such approval, the Lending Agent will 

provide a written description of the 

operation of the lending program 

(including the basis and rate of the 

Lending Agent’s compensation for the 

performance of securities lending and 

cash collateral investment services), 

disclose the form of the securities loan 

agreement to be entered into on behalf 

of the Commingled Fund with the 

borrowers, generally identify the 

securities which are available to be lent, 

and identify the required collateral and 

the required daily marking-to-market of 

loaned securities.46 If the Client Plan is 

already invested in the Commingled 

Fund and objects to the arrangement, it 

will be permitted to withdraw from the 

Commingled Fund, without penalty, no 

later than 35 days after the notice of 

withdrawal is received in accordance 

with the terms of the Commingled 

Fund. 

14. In addition, the Client Plan will be 

advised of the relationship between the 

Lending Agent and the Affiliated 

Borrowers, and the Lending Agent will 

represent that each and every loan made 

to the Affiliated Borrowers by the 

Commingled Fund will be effected at 

arm’s-length terms, and such terms will 

be in no case less favorable to the Client 

Plan than the pricing established 

according to the schedule described in 

paragraph 29. 

15. When the Lending Agent is 

lending securities under a sub-agency 

arrangement, before the Client Plan 

participates in the securities lending 

program, the primary lending agent will 

enter into a securities lending agency 

agreement (Primary Lending Agreement) 

with a fiduciary of the Client Plan who 

is independent of such primary lending 

agent, MS&Co., UB and their affiliates 

(other than in the case of an Affiliated 

Plan, as described in paragraph 8). The 

primary lending agent also will be 

unrelated to MS&Co., UB, and their 

affiliates. The Primary Lending 

Agreement will contain provisions 

substantially similar to those in the 

Client Agreement relating to: The 

description of the lending program, use 

of an approved form of securities loan 

agreement, specification of the 

securities to be lent, specification of the 

required collateral margin and the 

requirement of daily marking-to-market, 

and provision of a list of approved 

borrowers (which will include one or 

more of the Affiliated Borrowers). The 

Primary Lending Agreement will 

specifically authorize the primary 

lending agent to appoint sub-agents 

(including the Lending Agent) to 

facilitate performance of securities 

lending agency functions. The Primary 

Lending Agreement will expressly 

disclose that the Lending Agent is to act 

in a sub-agency capacity. 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/or cash 

collateral investment services and will 

authorize the primary lending agent to 

pay a portion of its fee, as the primary 

lending agent determines in its sole 

discretion, to any sub-agent(s) it retains 

(including the Lending Agent) pursuant 

to the authority granted under such 

agreement. 

16. Pursuant to its authority to 

appoint sub-agents, the primary lending 

agent will enter into a securities lending 

sub-agency agreement (Sub-Agency 

Agreement) with the Lending Agent 

under which the primary lending agent 

will retain and authorize the Lending 

Agent, as sub-agent, to lend securities of 

the primary lending agent’s Client 

Plans, subject to the same terms and 

conditions specified in the Primary 

Lending Agreement. The Lending Agent 

represents that the Sub-Agency 

Agreement will contain provisions that 

are in substance comparable to those 

described above in connection with a 

Client Agreement in situations where 

the Lending Agent is the primary 

lending agent. The Lending Agent will 

make in the Sub-Agency Agreement the 

same representations described above in 

paragraph 12 with respect to arm’slength dealing with the Affiliated 

Borrowers. The Sub-Agency Agreement 

will also set forth the basis and rate for 

the Lending Agent’s compensation to be 

paid by the primary lending agent. 

17. In all cases, the Lending Agent 

will maintain transactional and market 

records sufficient to assure compliance 

with its representation that all loans to 

the Affiliated Borrowers are effected at 

arm’s-length terms, and in no case less 

favorable to the Client Plan than the 

pricing established according to the 

schedule described in paragraph 29. 

Such records will be made available 

upon reasonable request and without 

charge to the Client Plan fiduciary, who 

(other than in the case of an Affiliated 

Plan as described in paragraph 8) is 

independent of MS&Co., UB, and their 

affiliates, in the manner and format 

agreed to by the Client Plan fiduciary 

and the Lending Agent. 

18. A Lender, in the case of a Separate 

Account, will be permitted to terminate 

the lending agency or sub-agency 

arrangement with respect to any or all 

Affiliated Borrowers at any time without 

penalty, on five business days notice. A 

Client Plan in the case of a Commingled 

Fund will be permitted to terminate its 

participation in the lending arrangement 


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by terminating its investment in the 

Commingled Fund no later than 35 days 

after the notice of termination of 

participation is received, without 

penalty to the Plan, in accordance with 

the terms of the Commingled Fund. 

Upon a termination, the Affiliated 

Borrower will be contractually obligated 

to return securities identical to the 

borrowed securities (or the equivalent 

thereof in the event of reorganization, 

recapitalization or merger of the issuer 

of the borrowed securities) to the Lender 

within one of the following time 

periods, whichever is least: the 

customary delivery period for such 

securities, five business days of written 

notification of termination, or the time 

negotiated for such delivery by the 

Client Plan, in a Separate Account, or by 

the Lending Agent, as lending agent to 

a Commingled Fund, and the Affiliated 

Borrowers. 

19. The Lender, or another custodian 

designated to act on its behalf, will 

receive collateral from each Affiliated 

Borrower 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 the 

Affiliated Borrower. All collateral will 

be received by the Lender or other 

custodian in the United States. The 

collateral will consist of U.S. currency, 

securities issued or guaranteed by the 

U.S. Government or its agencies or 

instrumentalities, irrevocable bank 

letters of credit issued by a U.S. bank 

other than Morgan Stanley, Union Bank 

(or any subsequent parent corporation of 

the Lending Agent) or an affiliate 

thereof, or any combination thereof, or 

other collateral permitted under PTE 

2006–16 (as amended or superseded). 

The collateral will be held on behalf of 

a Client Plan in a depository account or 

other investment account or vehicle 

separate from the Affiliated Borrower. 

20. The market value (or, in the case 

of a letter of credit, a stated amount) of 

the posted 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 unless required to be at a 

higher level under PTE 2006–16. The 

Loan Agreement will give the Lender a 

continuing security interest in and a 

lien on or title to the collateral. The 

Lending Agent will monitor the level of 

the collateral daily. If the market value 

of the collateral, on the close of trading 

on a business day, is less than 100 

percent (or such greater percentage as 

agreed to by the parties) of the market 

value of the loaned securities at the 

close of business on that day, the 

Lending Agent will require the 

Affiliated Borrowers to deliver by the 

close of business on the next day 

sufficient additional collateral to bring 

the level back to at least 102 percent or 

such higher percentage as is required 

under PTE 2006–16. 

21. Prior to making any loans under 

the Loan Agreement from Separate 

Accounts, the Affiliated Borrowers will 

furnish their most recent available 

audited and unaudited financial 

statements to the Lending Agent, which 

will provide such statements to the 

Client Plan invested in such Separate 

Account before the authorizing 

fiduciary of the Client Plan is asked to 

approve the proposed lending to the 

Affiliated Borrowers. The terms of the 

Loan Agreement will contain a 

requirement that the Affiliated 

Borrowers must give prompt notice to 

the Lending Agent at the time of any 

loan, of any material adverse change in 

their financial condition since the date 

of the most recently furnished financial 

statements. If any such material adverse 

change has taken place, the Lending 

Agent will request that the independent 

fiduciary of the Client Plan, if invested 

in a Separate Account, approve 

continuation of the lending arrangement 

in view of the changed financial 

conditions. 

22. Notwithstanding the foregoing, 

this condition will be satisfied with 

respect to the Existing Loans provided 

(i) UB provided to such Client Plans no 

later than April 1, 2009, the most 

recently available audited and 

unaudited financial statements of the 

Affiliated Borrower and notice of any 

material adverse change in financial 

condition since the date of the most 

recent financial statement being 

furnished to the Client Plan, and (ii) at 

the time of providing such information, 

UB notified each Client Plan that if the 

Client Plan did not approve the 

continued lending of securities to 

Morgan Stanley by May 11, 2009, UB 

would terminate the loan and cease to 

make any new securities loans on behalf 

of that Client Plan to Morgan Stanley. 

23. In addition, upon request, the 

Lending Agent will provide the audited 

financial statements of the applicable 

Affiliated Borrowers to Client Plans 

invested in Commingled Funds on an 

annual basis. 

24. In the case of Client Plans 

currently invested in Commingled 

Funds, approval of lending to the 

Affiliated Borrowers will be 

accomplished by the following special 

procedure for Commingled Funds. The 

information described in paragraph 13 

will be furnished by the Lending Agent 

as lending fiduciary to an independent 

fiduciary of each Client Plan invested in 

Commingled Funds not less than 30 

days prior to implementation of the 

lending arrangement, and thereafter, 

upon the reasonable request of the 

authorizing fiduciary. In the event any 

such authorizing fiduciary submits a 

notice in writing within the 30-day 

period to the Lending Agent, in its 

capacity as the lending fiduciary, 

objecting to the implementation of or 

continuation of the lending arrangement 

with the Affiliated Borrowers, the Plan 

on whose behalf the objection was 

tendered will be given the opportunity 

to terminate its investment in the 

Commingled Fund, without penalty to 

the Plan, no later than 35 days after the 

notice of withdrawal is received in 

accordance with the terms of the 

Commingled Fund. In the case of a Plan 

that elects to withdraw pursuant to the 

foregoing, such withdrawal shall be 

effected prior to the implementation of 

the arrangement; but an existing 

arrangement need not be discontinued 

by reason of a Plan electing to 

withdraw. In the case of a Plan whose 

assets are proposed to be invested in a 

Commingled Fund subsequent to the 

implementation of the arrangement, the 

Plan’s investment in the Commingled 

Fund shall be authorized in the manner 

described in paragraph 13. 

25. In the case of loans made by 

Commingled Funds, upon notice by the 

Affiliated Borrower to the Lending 

Agent of a material adverse change in its 

financial conditions, the Lending Agent 

will make a decision whether to 

terminate existing loans and whether to 

continue making additional loans to the 

Affiliated Borrower, using the same 

standards of credit analysis the Lending 

Agent would use in evaluating 

unrelated borrowers. In the event the 

Plan invested in a Commingled Fund 

has any objection to the continuation of 

lending to an Affiliated Borrower, it 

may withdraw from the fund as 

described above. 

26. With respect to material changes 

in the lending arrangement with the 

Affiliated Borrowers after approval by 

Client Plans, the Lending Agent will 

obtain approval from Client Plans 

(whether in Separate Accounts or 

Commingled Funds) prior to 

implementation of any such change. For 

those Client Plans invested in 

Commingled Funds, approval of the 

proposed material change will be by the 

procedure described in paragraph 24. 

27. In return for lending securities, 

the Lender either will receive a 

reasonable fee which is related to the 

value of the borrowed securities and the 

duration of the loan, or will have the 

opportunity to derive compensation 

through the investment of cash 


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47The Lending Agent will adopt minimum daily 

lending fees for non-cash collateral payable by 

Affiliated Borrowers to the Lending Agent on behalf 

of a Lender. Separate minimum daily lending fees 

will be established with respect to loans of 

designated classes of securities. With respect to 

each designated class of securities, the minimum 

lending fee will be stated as a percentage of the 

principal value of the loaned securities. The 

Lending Agent will submit the method for 

determining such minimum daily lending fees to an 

authorizing fiduciary of the Client Plan, in the case 

of a Separate Account, for approval before initially 

lending any securities to Affiliated Borrowers on 

behalf of such Client Plan. The Lending Agent will 

submit the method for determining such minimum 

daily lending fees to an authorizing fiduciary of 

each Client Plan involved in or planning to invest 

in a Commingled Fund pursuant to the procedure 

described in paragraph 24, above. 

48Separate maximum daily rebate rates will be 

established with escribed in paragraph 24, above. 

48Separate respect to loans of securities within 

the designated classes identified above. 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. The Lending Agent will 

submit the method for determining such maximum 

daily rebate rates to such fiduciary before initially 

lending any securities to an Affiliated Borrower on 

behalf of the Client Plan. 

collateral or a combination of both. In 

the case of a Lender investing the cash 

collateral, the Lender may pay a loan 

rebate or similar fee to the Affiliated 

Borrowers, if such fee is not greater than 

the fee the Lender would pay in a 

comparable arm’s-length transaction 

with an unrelated party. 

28. In this regard, each time a Lender 

loans securities to an Affiliated 

Borrower pursuant to the Loan 

Agreement, the Lending Agent 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 fee or rebate payable for each loan 

will be effected at arm’s-length terms, 

and such terms will be in no case less 

favorable to the Client Plan than the 

pricing established according to the 

schedule described below. The rebate 

rates, which are established for cash 

collateralized loans made by the Lender, 

will take into account the potential 

demand for the loaned securities, the 

applicable benchmark cost of funds 

(typically the U.S. Federal Funds rate 

established by the Federal Reserve 

System), the overnight ‘‘repo’’ rate, or 

the like and the anticipated investment 

returns on the investment of cash 

collateral. Further, the lending fees with 

respect to loans collateralized by other 

than cash will be set daily to reflect 

conditions as influenced by potential 

market demand. The Applicant 

represents that the securities lending 

agent fee paid to the Lending Agent will 

comply with the requirements of PTE 

2006–16 Part IV or another applicable 

exemption. 

29. The Lending Agent will establish 

each day a written schedule of lending 

fees 47 and rebate rates 48 with respect to 

new loans of designated classes of 

securities, such as U.S. Government 

securities, U.S. equities and corporate 

bonds, international fixed income 

securities and non-U.S. equities, in 

order to assure uniformity of treatment 

among borrowers and to limit the 

discretion the Lending Agent would 

have in negotiating securities loans to 

Affiliated Borrowers. 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 are more 

advantageous to the Lenders. The 

Applicant represents that in no case will 

loans be made to Affiliated Borrowers at 

rates or lending fees that are less 

advantageous to the Lenders than those 

on the relevant schedules. In addition, 

it is represented that the method of 

determining the daily securities lending 

rates (fees and rebates) will be disclosed 

to each Client Plan, whether in Separate 

Accounts or Commingled Funds. For 

those Client Plans invested in 

Commingled Funds, disclosure will be 

by the special procedure described in 

paragraph 24. 

30. When a loan of securities by a 

Lender is collateralized with cash, the 

Lending Agent will transfer such cash to 

an investment vehicle that the Client 

Plan has authorized, and will rebate a 

portion of the earnings on such 

collateral to the appropriate Affiliated 

Borrower as agreed to in the securities 

lending agreement between Lender and 

the Borrower. The Lending Agent will 

share with the Client Plan the income 

earned on the investment of cash 

collateral for the Lending Agent’s 

provision of lending services, which 

will reduce the income earned by the 

Client Plans (whether in a Commingled 

Fund or Separate Account) from the 

lending of securities. The Lending 

Agent may receive a separate 

management fee for providing cash 

collateral investment services. Where 

collateral other than cash is used, the 

Affiliated Borrower will pay a fee to the 

Lender based on the value of the loaned 

securities. These fees will also be shared 

between the Client Plans (whether in a 

Commingled Fund or Separate Account) 

and the Lending Agent. Any income or 

fees shared will be net of cash collateral 

management fees and borrower rebate 

fees. The sharing of income and fees 

will be in accordance with the 

arrangements authorized by the Client 

Plan in advance of commencement of 

the lending program. 

31. The Lending Agent will negotiate 

rebate rates for cash collateral payable to 

each borrower, including Affiliated 

Borrowers, on behalf of a Lender. The 

fees or rebate rates negotiated will be 

effected at arm’s-length terms, and in no 

case will be less favorable to the Client 

Plan than the pricing established 

according to the schedule described in 

paragraph 29. 

32. With respect to any loan to an 

Affiliated Borrower, the Lending Agent, 

at the inception of such loan, will not 

negotiate and agree to a rebate rate with 

respect to such loan which it expects 

would produce a zero or negative return 

to the Lender over the life of the loan 

(assuming no default on the investments 

made by the Lending Agent where it has 

investment discretion over the cash 

collateral or on investments expected to 

be made by the Client Plan’s designee, 

where the Lending Agent does not have 

investment discretion over cash 

collateral). 

33. The Lending Agent may, 

depending on market conditions, reduce 

the lending fee or increase the rebate 

rate on any outstanding loan to an 

Affiliated Borrower, or any other 

borrower. Except in the case of a change 

resulting from a change in the value of 

any third party independent index with 

respect to which the fee or rebate is 

calculated, such reduction in lending 

fee or increase in rebate shall not 

establish a lending fee below the 

minimum or a rebate above the 

maximum set in the schedule of fees 

and rebates described in paragraph 29. 

If the Lending Agent reduces the 

lending fee or increases the rebate rate 

on any outstanding loan from a Separate 

Account to an Affiliated Borrower 

(except in the case of a change resulting 

from a change in the value of any third 

party independent index with respect to 

which the fee or rebate is calculated), 

the Lending Agent, by the close of 

business on the date of such adjustment, 

will provide the independent fiduciary 

of the Client Plan invested in the 

Separate Account with notice (including 

by electronic means) 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. 

34. Except as otherwise expressly 

provided in the exemption, the 

Applicant represents that all procedures 

regarding the securities lending 

activities will, at a minimum, conform 

to the applicable provisions of PTE 

2006–16 or another applicable 

exemption, as amended or superseded. 


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49The Applicant represents that dividends and 

other distributions on foreign securities payable to 

a Lender may be subject to foreign tax 

withholdings. Under the circumstances, the 

applicable Affiliated Borrower, where necessary, 

will gross-up the in-lieu-of-payment (in respect of 

such dividend or distribution it makes) to the 

Lender so that the Lender will receive back what 

it otherwise would have received (by way of 

dividend or distribution) had it not loaned the 

securities. 

35. Under the Loan Agreement, an 

Affiliated Borrower domiciled in the 

U.S. agrees to indemnify and hold 

harmless the Client Plans in the United 

States (including the sponsor and 

fiduciaries of such Client Plans) for any 

transactions covered by this exemption 

with a foreign Affiliated Borrower so 

that the Client Plan may collect on any 

indemnification from a U.S. domiciled 

affiliate of MS&Co or UB. Such 

indemnification will be against any and 

all reasonably foreseeable losses, costs 

and expenses (including reasonable 

attorneys fees, disbursements, transfer 

taxes and stamp duties), excluding any 

indirect or consequential damages 

which the Lender may incur or suffer 

arising from any impermissible use by 

an Affiliated Borrower of the loaned 

securities, from an event of default 

arising from the failure of an Affiliated 

Borrower to deliver loaned securities 

when due in accordance with the 

provisions of the Loan Agreement or 

from an Affiliated Borrower’s other 

failure to comply with the terms of the 

Loan Agreement, except to the extent 

that such losses are caused by the Client 

Plan’s own negligence. 

36. If any event of default occurs, to 

the extent that (i) liquidation of the 

pledged Collateral or (ii) additional cash 

received from the Affiliated Borrower 

does not provide sufficient funds on a 

timely basis, the Client Plan will have 

the right to purchase securities identical 

to the borrowed securities (or their 

equivalent as discussed above) and 

apply the Collateral to the payment of 

the purchase price. If the Collateral is 

insufficient to accomplish such 

purchase, the Affiliated Borrower will 

indemnify the Client Plan invested in a 

Separate Account or Commingled Fund 

in the United States with respect to the 

difference between the replacement cost 

of securities and the market value of the 

Collateral on the date the loan is 

declared in default, together with 

expenses incurred by the Client Plan 

plus applicable interest at a reasonable 

rate, including reasonable attorney’s 

fees incurred by the Client Plan for legal 

action arising out of default on the 

loans, or failure by the Affiliated 

Borrower to properly indemnify the 

Client Plan. The Affiliated Borrower’s 

indemnification will enable the Client 

Plan to collect on any indemnification 

from a U.S.-domiciled affiliate of the 

Affiliated Borrower. 

37. The ‘‘market value’’ of any 

securities listed on a national securities 

exchange in the United States will be 

the last sales price on such exchange on 

the preceding business day or, if there 

is no sale on that day, the last sale price 

on the next preceding business day on 

which there is a sale on such exchange, 

as quoted on the consolidated tape. If 

the principal market for securities to be 

valued is the over-the-counter market, 

the securities’ market value will be the 

closing sale price as quoted on the 

National Association of Securities 

Dealers Automated Quotation System 

(NASDAQ) on the preceding business 

day or the opening price on such 

business day if the securities are issues 

for which last sale prices are not quoted 

on NASDAQ. If the securities to be 

valued are not quoted on NASDAQ, 

their market value shall be the highest 

bid quotation appearing in The Wall 

Street Journal, National Quotation 

Bureau pink sheets, quotation sheets of 

registered market makers and, if 

necessary, independent dealers’ 

telephone quotations on the preceding 

business day. (In each case, if the 

relevant quotation does not exist on 

such day, then the relevant quotation on 

the next preceding business day in 

which there is such a quotation would 

be the market value.) 

38. The Lender will be entitled to 

receive the equivalent of all 

distributions made to holders of the 

borrowed securities during the term of 

the loan, including but not limited to, 

interest and dividends, shares of stock 

as a result of a stock split and rights to 

purchase additional securities, or other 

distributions during the loan period.49

39. Prior to a Client Plan’s 

authorization of a securities lending 

program, the Lending Agent will 

provide a Plan fiduciary with a copy of 

the proposed exemption until the final 

exemption is granted, and then the 

proposed and final exemption. With 

respect to the Existing Loans, prior to 

the publication date of the grant of this 

exemption, this condition will be 

satisfied provided: (i) UB provides to 

such Client Plans that have consented to 

securities lending prior to such 

publication date, a copy of the requested 

exemption and (ii) UB advises each 

such Client Plan that unless the Client 

Plan notifies UB to the contrary within 

30 days, its consent to make loans to 

Morgan Stanley will be presumed. 

40. In order to provide the means for 

monitoring lending activity in Separate 

Accounts and Commingled Funds, a 

quarterly report will be provided to each 

Client Plan. This report will show the 

fees or rebates (as applicable) on loans 

to Affiliated Borrowers compared with 

loans to other borrowers, as well as the 

level of collateral on the loans. The 

Applicant represents that the quarterly 

report will show, on a daily basis, the 

market value of all outstanding security 

loans to Affiliated Borrowers and to 

other borrowers as compared to the total 

collateral held for both categories of 

loans. Further, the quarterly 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 borrowers 

where cash is used as collateral. The 

quarterly report also will state, on a 

daily basis, the rates at which securities 

are loaned to Affiliated Borrowers 

compared with those at which securities 

are loaned to other borrowers. In the 

event an authorizing fiduciary of a Plan 

invested in a Commingled Fund submits 

a notice in writing to the Lending Agent 

objecting to the continuation of the 

lending program to the Affiliated 

Borrowers, the Plan on whose behalf the 

objection was tendered will be given the 

opportunity to terminate its investment 

in the Commingled Fund, without 

penalty to the Plan, no later than 35 

days after the notice of withdrawal is 

received in accordance with the terms of 

the Commingled Fund. 

41. Notwithstanding the foregoing, 

this condition will be satisfied with 

respect to the Existing Loans, provided: 

(i) UB provides to such client Plans no 

later than July 31, 2009, the material 

described in paragraph 40 above with 

respect to the period from October 1, 

2008, through June 30, 2009. 

42. To ensure that any lending of 

securities to an Affiliated Borrower will 

be monitored by an authorizing 

fiduciary of above average experience 

and sophistication in matters of this 

kind, only Client Plans with total assets 

having an aggregate market value of at 

least $50 million will be permitted to 

lend securities to the Affiliated 

Borrowers. However, in the case of two 

or more Client Plans which are 

maintained by the same employer, 

controlled group of corporations or 

employee organization, 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 

arrangement with the Lending Agent, 

the foregoing $50 million requirement 

will 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 


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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, 

whose assets are commingled for 

investment purposes in a group trust or 

any other form of entity the assets of 

which are ‘‘plan assets’’ under the Plan 

Asset Regulation, which entity is 

engaged in securities lending 

arrangements with the Lending Agent, 

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 or other entity 

or any member of the controlled group 

of corporations including such fiduciary 

is the employer maintaining such Plan 

or an employee organization whose 

members are covered by such Plan). 

However, the fiduciary responsible for 

making the investment decision on 

behalf of such group trust or other entity 

must have full investment responsibility 

with respect to plan assets invested 

therein, and 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 addition, 

none of the entities described above 

may be formed for the sole purpose of 

making loans of securities. 

43. With respect to any calendar 

quarter, at least 50 percent or more of 

the outstanding dollar value of 

securities loans negotiated on behalf of 

Lenders by the Lending Agent will be to 

borrowers unrelated to MS&Co., UB, 

and their affiliates. Thus, the 

competitiveness of the loan fee will be 

continuously tested in the marketplace. 

Accordingly, the Applicant believes that 

loans to Affiliated Borrowers should 

result in competitive fee income to the 

Lenders. 

44. With respect to foreign Affiliated 

Borrowers, the Applicant represents that 

each such entity is regulated by the host 

country’s supervisory authority (e.g., the 

UK FSA) and is, therefore, authorized to 

conduct an investment banking business 

in and from the host country (e.g., the 

United Kingdom) as a broker-dealer. 

The proposed exemption will be 

applicable only to transactions effected 

by a Lending Agent with an Affiliated 

Borrower which is registered as a 

broker-dealer with the host country’s 

supervisory authority (the Foreign 

Authority) and in compliance with Rule 

15a–6 under the Securities Exchange 

Act of 1934 (Rule 15a–6). The Applicant 

represents that the role of a brokerdealer in a principal transaction in each 

of the foreign countries is substantially 

identical to that of a broker-dealer in a 

principal transaction in the United 

States. The Applicant further represents 

that registration of a broker-dealer with 

the Foreign Authority is equivalent to 

registration of a broker-dealer with the 

SEC under the 1934 Act. The Applicant 

maintains that the Foreign Authority 

has promulgated rules for broker-dealers 

which are equivalent to SEC rules 

relating to registration requirements, 

minimum capitalization, reporting 

requirements, periodic examinations, 

fund segregation, client protection, and 

enforcement. The Applicant represents 

that the rules and regulations set forth 

by the Foreign Authority and the SEC 

share a common objective: the 

protection of the investor by the 

regulation of securities markets. The 

Applicant explains that under each 

Foreign Authority’s rules, a person who 

manages investments or gives advice 

with respect to investments must be 

registered as a ‘‘registered 

representative’’. If a person is not a 

registered representative and, as part of 

his duties, makes commitments in 

market dealings or transactions, that 

person must be registered as a 

‘‘registered trader’’. The Applicant 

represents that the Foreign Authority’s 

rules require each firm which employs 

registered representatives or registered 

traders to have positive tangible net 

worth and to be able to meet its 

obligations as they fall due, and that the 

Foreign Authority’s rules set forth 

comprehensive financial resource and 

reporting/disclosure rules regarding 

capital adequacy. In addition to 

demonstration of capital adequacy, the 

Applicant states that the Foreign 

Authority’s rules impose reporting/ 

disclosure requirements on brokerdealers with respect to risk 

management, internal controls, and all 

records relating to a counterparty, and 

that all records must be produced at the 

request of the Foreign Authority at any 

time. The Applicant states that Foreign 

Authority’s registration requirements for 

broker-dealers are backed up by 

potential fines and penalties and rules 

which establish a comprehensive 

disciplinary system. 

45. In addition to the protections 

afforded by registration with the Foreign 

Authority, the Applicant represents that 

the Affiliated Borrower will comply 

with the applicable provisions of Rule 

15a–6 (described below). The Applicant 

represents that compliance by the 

Affiliated Borrower with the 

requirements of Rule 15a–6 will offer 

additional protections in lieu of 

registration with the SEC. The 

Applicant represents that 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 ‘‘major U.S. 

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 advisor, (b) the employee 

benefit plan has total assets in excess of 

$5,000,000, 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 Act of 

1933, as amended. The term ‘‘major U.S. 

institutional investor’’ is defined as a 

person that is a U.S. institutional 

investor that has, or has under 

management, total assets in excess of 

$100 million, or is an investment 

adviser registered under section 203 of 

the Investment Advisers Act of 1940 

that has total assets under management 

in excess of $100 million. The 

Applicant represents that the 

intermediation of the U.S. registered 

broker-dealer imposes upon the foreign 

broker-dealer the requirement that the 

securities transaction be effected in 

accordance with a number of U.S. 

securities laws and regulations 

applicable to U.S. registered brokerdealers. 

46. The Applicant represents that, 

under Rule 15a–6, a foreign brokerdealer that induces or attempts to 

induce the purchase or sale of any 

security by a U.S. institutional or major 

U.S. institutional investor in accordance 

with Rule 15a–6 must, among other 

things: 

a. Consent to service of process for 

any civil action brought by, or 


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50A foreign associated person is defined in Rule 

15a–6(b)(2) as any natural person domiciled outside 

the United States who is an associated person, as 

defined in section 3(a)(18) of the 1934 Act, of the 

foreign broker or dealer, and who participates in the 

solicitation of a U.S. institutional investor or a 

major U.S. institutional investor under Rule 15a– 

6(a)(3). 

proceeding before, the SEC or any selfregulatory organization; 

b. Provide the SEC with any 

information or documents within its 

possession, custody or control, any 

testimony of any foreign associated 

persons,50 and any assistance in taking 

the evidence of other persons, wherever 

located, that the SEC requests and that 

relates to transactions effected pursuant 

to Rule 15a–6; and 

c. Rely on the U.S. registered brokerdealer through which the transactions 

with the U.S. institutional and major 

U.S. institutional investors are effected 

to (among other things): 

1. Effect the transactions, other than 

negotiating their terms; 

2. Issue all required confirmations 

and statements; 

3. As between the foreign brokerdealer and the U.S. registered brokerdealer, 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 major U.S. 

institutional investor in compliance 

with Rule 15c3–3 of the 1934 Act 

(Customer Protection-Reserves and 

Custody of Securities); and 

6. Participate in all oral 

communications (e.g., telephone calls) 

between a foreign associated person and 

the U.S. institutional investor (other 

than a major U.S. institutional investor), 

and accompany the foreign associated 

person on all visits with both U.S. 

institutional and major U.S. 

institutional investors. By virtue of this 

participation, the U.S. registered brokerdealer would become responsible for the 

content of all these communications. 

47. All collateral will be maintained 

in United States dollars or U.S. dollardenominated securities or letters of 

credit or other collateral permitted 

under PTE 2006–16 (as amended or 

superseded). All collateral will be held 

in the United States and the Lending 

Agent will maintain the situs of the 

Loan Agreements (evidencing the 

Lender’s right to return of the loaned 

securities and the continuing interest in 

and lien on or title to the collateral) 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. 

48. Prior to a transaction involving a 

foreign Affiliated Borrower, the foreign 

Affiliated Borrower will (a) agree to 

submit to the jurisdiction of the courts 

of the United States; (b) agree to appoint 

a Process Agent for service of process in 

the United States, which may be an 

affiliate; (c) consent to service of process 

on the Process Agent; and (d) agree that 

enforcement by a Client Plan of the 

indemnity provided by U.S. Affiliated 

Borrower may occur in the United 

States Courts. 

49. In summary, the Applicant 

represents that the proposed 

transactions will satisfy the statutory 

criteria for an exemption under section 

408(a) of the Act because: 

a. For each Client Plan, neither the 

MS&Co, UB, nor any affiliate will have 

or exercise discretionary authority or 

control with respect to the investment of 

the assets of Client Plans involved in the 

transaction or will render investment 

advice with respect to such assets, 

including decisions concerning a Client 

Plan’s acquisition or disposition of 

securities available for loan. 

b. Any arrangement for the Lending 

Agent to lend securities will be 

approved in advance by a Plan fiduciary 

who (except in the case of an Affiliated 

Plan as described above in paragraph 8) 

is independent of MS&Co., UB, and 

their affiliates. 

c. The terms of each loan of securities 

by a Lender to an Affiliated Borrower 

will be at least as favorable to such 

Separate Account or Commingled Fund 

as those of a comparable arm’s-length 

transaction between unrelated parties. 

d. Upon termination of a loan, the 

Affiliated Borrowers will transfer 

securities identical to the borrowed 

securities (or the equivalent thereof) to 

the Lender within one of the following 

time periods, whichever is least: (1) The 

customary delivery period for such 

securities; (2) five business days; or (3) 

the time negotiated for such delivery by 

the Client Plan, in a Separate Account, 

or by the Lending Agent, as lending 

agent to a Commingled Fund, and the 

Affiliated Borrowers. 

e. The Lender will receive from each 

Affiliated Borrower collateral consisting 

of U.S. currency, securities issued or 

guaranteed by the United States 

Government or its agencies or 

instrumentalities, irrevocable bank 

letters of credit issued by a U.S. bank 

(other than Morgan Stanley, Union Bank 

or any subsequent parent corporation of 

the Lending Agent, or an affiliate 

thereof, or any combination thereof) or 

other collateral permitted under PTE 

2006–16 (as amended or superseded), 

which will be held in a depository 

account separate from the Affiliated 

Borrower. 

f. In return for lending securities, the 

Lender either will receive a reasonable 

fee, which is related to the value of the 

borrowed securities and the duration of 

the loan, or will have the opportunity to 

derive compensation through the 

investment of cash collateral. 

g. A U.S. Affiliated Borrower agrees to 

indemnify and hold harmless the Client 

Plans in the United States (including the 

sponsor and fiduciaries of such Client 

Plans) for any transactions covered by 

this exemption with an Affiliated 

Borrower so that the Client Plans do not 

have to litigate, in the case of a foreign 

Affiliated Borrower, in a foreign 

jurisdiction nor sue to realize on the 

indemnification. 

h. All loans involving foreign 

Affiliated Borrowers will involve 

Affiliated Borrowers that are registered 

as broker-dealers subject to regulation 

by the Foreign Authority and that are in 

compliance with all applicable 

provisions of Rule 15a–6. 

i. Prior to a transaction involving a 

foreign Affiliated Borrower, the foreign 

Affiliated Borrower will: agree to submit 

to the jurisdiction of the United States; 

agree to appoint a Process Agent in the 

United States; consent to service of 

process on the Process Agent; and agree 

that enforcement by a Client Plan of the 

indemnity provided by Morgan Stanley 

or Union Bank may occur in the United 

States courts. 

Notice to Interested Persons 

Written notice will be provided to all 

interested parties by first class mail 

within 15 calendar days of publication 

of this Notice in the Federal Register. 

Any written comments and/or requests 

for a hearing must be received by the 

Department from interested persons 

within 30 days of the publication of this 

proposed exemption in the Federal 

Register. 

FOR FURTHER INFORMATION CONTACT: 

Karen E. Lloyd of the Department, 202– 

693–8554. (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 


jlentini on DSKJ8SOYB1PROD with NOTICES2
Federal Register / Vol. 75, No. 11 / Tuesday, January 19, 2010 / Notices 3089 

408(a) of the Act and/or section 

4975(c)(2) of the Code does not relieve 

a fiduciary or other party in interest or 

disqualified person from certain other 

provisions of the Act and/or the Code, 

including any prohibited transaction 

provisions to which the exemption does 

not apply and the general fiduciary 

responsibility provisions of section 404 

of the Act, which, among other things, 

require a fiduciary to discharge his 

duties respecting the plan solely in the 

interest of the participants and 

beneficiaries of the plan and in a 

prudent fashion in accordance with 

section 404(a)(1)(b) of the Act; nor does 

it affect the requirement of section 

401(a) of the Code that the plan must 

operate for the exclusive benefit of the 

employees of the employer maintaining 

the plan and their beneficiaries; 

(2) Before an exemption may be 

granted under section 408(a) of the Act 

and/or section 4975(c)(2) of the Code, 

the Department must find that the 

exemption is administratively feasible, 

in the interests of the plan and of its 

participants and beneficiaries, and 

protective of the rights of participants 

and beneficiaries of the plan; 

(3) The proposed 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 

that each application accurately 

describes all material terms of the 

transaction which is the subject of the 

exemption. 

Signed at Washington, DC. 

Ivan Strasfeld, 

Director of Exemption Determinations, 

Employee Benefits Security Administration, 

U.S. Department Of Labor. 

[FR Doc. 2010–593 Filed 1–15–10; 8:45 am] 

BILLING CODE 4510–29–P 


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