Federal Register / Vol. 65, No. 26 / Tuesday, February 8, 2000 / Notices 6229

1The term ‘‘Proposed Exemptions’’ refers to the

following individual exemption applications:

Application Nos. D–10119 and D–10120, Morgan

Guaranty Trust Company of New York and J.P.

Morgan Investment Management Inc.; Application

No. D–10587, Goldman, Sachs & Co.; Application

No. D–10779, The Chase Manhattan Bank;

Application No. D–10820, Citigroup Inc; and

Application No. D–10832, Morgan Stanley Dean

Witter & Co.

2All references in the remainder of the preamble

to specific provisions of Title I of the Act shall refer

also to the corresponding provisions of the Code (if

any).

3To the extent that the Applicant has more than

one asset management affiliate, all references to the

Asset Manager herein shall refer also to the other

asset management entity or entities.

4To the extent that the Applicant has more than

one registered broker-dealer affiliate that

participates in underwriting or selling syndicates,

all references to the Affiliated Broker-Dealer herein

shall refer also to the other broker-dealer entity or

entities.

would allow the assets of certain

employee benefit plans to be invested in

synthetic guaranteed investment

contracts (the Buy & Hold Synthetic

GICs) that would be offered by Deutsche

Bank. Due to a printing error, appearing

on page 4846 of the proposed exemption

in Representation 7, the formula for

computing the Crediting Rate for each

Buy & Hold Synthetic GIC, was stated as

follows:

 N

flow IRR

k = n.

BV k

k = ∑((net cash )/(( )) 1

The Department notes that the correct

formula for calculating the Crediting

Rate is

 N

flow

k = n

BV IRR k

k n = + − ∑((net cash )/(( )) 1

and it hereby amends the proposal.

FOR FURTHER INFORMATION CONTACT: Ms.

Jan D. Broady of the Department at (202)

219–8881. (This is not a toll-free

number.)

Signed at Washington, DC this 3rd day of

February, 2000.

Ivan L. Strasfeld,

Director of Exemption Determinations,

Pension and Welfare Benefits Administration,

Department of Labor.

[FR Doc. 00–2857 Filed 2–7–00; 8:45 am]

BILLING CODE 4510–29–P

DEPARTMENT OF LABOR

Pension and Welfare Benefits

Administration

[Application Nos. D–10119 and D–10120, et

al.]

Morgan Guaranty Trust Company of

New York, et al.

AGENCY: Pension and Welfare Benefits

Administration, Department of Labor.

ACTION: Notice of proposed

exemptions.1

SUMMARY: This document contains

notices of pendency before the

Department of Labor (the Department) of

proposed exemptions from the

prohibited transaction restrictions of the

Employee Retirement Income Security

Act of 1974 (the Act) and from the taxes

imposed by the Internal Revenue Code

of 1986 (the Code).

The exemptions, if granted, would

permit purchases of securities by the

applicants’ asset management affiliate

on behalf of employee benefit plans for

which such asset management affiliate

is a fiduciary, from underwriting or

selling syndicates where the applicants’

broker-dealer affiliate participates as a

manager or syndicate member. The

exemptions, if granted, would affect

participants and beneficiaries of the

plans investing in such securities.

EFFECTIVE DATE: The exemptions, if

granted, would be effective as of the

date of publication of this notice in the

Federal Register.

DATES: Written comments and/or

requests for a public hearing must be

received by the Department by March

24, 2000.

ADDRESSES: All written comments and/

or requests for a public hearing

(preferably, three copies) should be sent

to the Office of Exemption

Determinations, Pension and Welfare

Benefits Administration, Room N–5649,

U.S. Department of Labor, 200

Constitution Avenue, N.W.,

Washington, D.C. 20210, Attention:

Application Nos. D–10119 and D–

10120, et al. The applications pertaining

to the proposed exemptions and the

comments received will be available for

public inspection in the Public

Documents Room of the Pension and

Welfare Benefits Administration, U.S.

Department of Labor, Room N–5638,

200 Constitution Avenue, N.W.,

Washington, D.C. 20210.

FOR FURTHER INFORMATION CONTACT:

Andrea W. Selvaggio, Janet L. Schmidt,

or Karin Weng of the Department,

telephone (202) 219–8194. (This is not

a toll-free number.)

SUPPLEMENTARY INFORMATION: Notice is

hereby given of the pendency before the

Department of five applications for

exemption from the restrictions of

section 406 of the Act and the sanctions

resulting from the application of section

4975 of the Code, by reason of section

4975(c)(1) of the Code. The exemptions

were requested in separate applications

filed pursuant to 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, August 10, 1990), by

the following entities: Morgan Guaranty

Trust Company of New York and J.P.

Morgan Investment Management Inc.,

Goldman, Sachs & Co., The Chase

Manhattan Bank, Citigroup Inc., and

Morgan Stanley Dean Witter & Co.

Effective December 31, 1978, section

102 of Reorganization Plan No. 4 of

1978, 5 U.S.C. App. 1 (1996), generally

transferred the authority of the Secretary

of the Treasury to issue exemptions of

the type requested to the Secretary of

Labor. Accordingly, this notice of

pendency is being issued solely by the

Department.2

Summary of Facts and Representations

The facts and representations

contained in the applications are

summarized below. Interested persons

are referred to the applications on file

with the Department for the complete

representations of the applicants.

The Applicants

The five applicants, diversified

financial services firms, have requested

similar exemptive relief. It is

represented that the applicants and their

various affiliates are all regulated by

other federal government agencies such

as the Securities and Exchange

Commission (the SEC), as well as state

government agencies, and securities

regulatory organizations. For

convenience, following the initial

description of each of the applicants,

below, the applicants and their affiliates

shall be referred to in the remainder of

the notice in generic terms that denote

certain roles, namely, ‘‘the Applicant,’’

‘‘the Asset Manager, ‘‘3 or ‘‘the Affiliated

Broker-Dealer.’’ 4

1. Morgan Guaranty Trust Company of

New York (MGT) is a New York Trust

Company. J.P. Morgan Investment

Management Inc. (JPMIM), is a

registered investment adviser. Both

MGT and JPMIM are wholly owned

subsidiaries of J.P. Morgan & Co. (JPM),

a Delaware corporation. MGT and

JPMIM (together, the Applicant) provide

investment management and investment

advisory services. Hereinafter, the

Applicant shall be referred to as ‘‘the

Asset Manager’’ when discussing the

Applicant’s activities relating to

investment management or investment

advisory services. J.P. Morgan Securities

Inc., a wholly owned indirect subsidiary

of JPM, is a registered broker-dealer

(hereinafter, the Affiliated BrokerDealer). It is represented that, as of

December 31, 1998, the last day of the

6230 Federal Register / Vol. 65, No. 26 / Tuesday, February 8, 2000 / Notices

5For further background, see ‘‘The Costs Imposed

on Pension Plans by ERISA’s Prohibited

Transactions Provisions,’’ December 1998, Anthony

Saunders and Ingo Walter. This study, by Professors

Saunders and Walter of the Stern School of

Business of New York University, discusses the

consolidation of the financial services industry. It

was privately commissioned by J.P. Morgan (see

Application Nos. D–10119 and D–10120). The study

estimates the economic loss to plans resulting from

their investment managers’ inability to purchase

securities from affiliated underwritings by

examining the one-day, one-week, and one-month

investment returns on various initial public

offerings (IPOs) during the years 1991 through 1996.

In response to the Department’s request for

most recent fiscal year for which

information is available, JPMIM and

MGT had $316 billion in total client

assets under management. As of that

date, approximately 40 percent of client

assets under management were

attributable to employee benefit plans

(Client Plans) subject to the fiduciary

responsibility provisions of the Act,

including Client Plans investing in a

pooled fund (Pooled Fund).

2. Goldman, Sachs & Co. (Goldman),

a New York limited partnership, is a

wholly owned subsidiary and the

principal operating subsidiary of The

Goldman Sachs Group, Inc. Goldman is

a registered broker-dealer and

investment adviser. Hereinafter,

Goldman shall be referred to, generally,

as ‘‘the Applicant’’ and, specifically, as

‘‘the Affiliated Broker-Dealer’’ when

discussing Goldman’s activities as an

underwriter. Goldman, Sachs Asset

Management (hereinafter, the Asset

Manager) is a separate operating

division of the Applicant and is engaged

in the investment management and

investment advisory business. It is

represented that, as of November 26,

1999, the last day of the Applicant’s

most recent fiscal year, the Asset

Manager had total client assets under

management of $241.4 billion. As of that

date, approximately 12.7 percent of

client assets under management were

attributable to Client Plans, including

those investing in a Pooled Fund.

3. The Chase Manhattan Bank (CMB),

a New York State bank, is a subsidiary

of The Chase Manhattan Corporation

(CMC). Chase Asset Management

(CAM), a registered investment adviser,

is a subsidiary of CMB. CMB and CAM

(together, the Applicant) provide

investment management and investment

advisory services. Hereinafter, the

Applicant shall be referred to as ‘‘the

Asset Manager’’ when discussing the

Applicant’s activities relating to

investment management or investment

advisory services. Chase Securities Inc.,

a subsidiary of CMC, is a registered

broker-dealer (hereinafter, the Affiliated

Broker-Dealer). It is represented that, as

of December 31, 1998, the last day of its

most recent fiscal year for which

information is available, CMB had total

client assets under management of

approximately $31 billion. As of that

date, CAM had total client assets under

management of approximately $48

billion. As of December 31, 1998,

approximately 1.0 percent of client

assets of CMB, and approximately 9.6

percent of client assets of CAM, were

attributable to Client Plans, including

those investing in a Pooled Fund.

4. Citigroup, Inc. (Citigroup or the

Applicant) is a Delaware corporation

and a diversified holding company.

Salomon Smith Barney Inc. (SSB or the

Applicant), a New York corporation, is

an indirect subsidiary of Citigroup. SSB

is a registered broker-dealer and

investment adviser. Hereinafter, SSB

shall be referred to, generally, as the

‘‘the Applicant’’ and, specifically, as

‘‘the Affiliated Broker-Dealer’’ when

discussing SSB’s activities as an

underwriter. Salomon Smith Barney

Asset Management (hereinafter, the

Asset Manager) is a separate operating

division of SSB and is engaged in the

investment management and investment

advisory business. It is represented that,

as of September 30, 1999, the last day

of its most recent fiscal year, all of

Citigroup’s asset management affiliates

had, in the aggregate, client assets under

management of approximately $351

billion. As of that date, approximately

3.7 percent of client asset under

management were attributable to Client

Plans, including those investing in a

Pooled Fund.

5. Morgan Stanley Dean Witter & Co.

(hereinafter, the Applicant) is a publicly

traded Delaware corporation. The

Applicant is a registered investment

adviser. Morgan Stanley Dean Witter

Investment Management Inc.

(hereinafter, the Asset Manager) is a

wholly owned subsidiary of the

Applicant. The Asset Manager is a

registered investment adviser. Morgan

Stanley & Co. Incorporated (hereinafter,

the Affiliated Broker-Dealer) is another

wholly owned subsidiary of the

Applicant. The Affiliated Broker-Dealer

is a registered investment adviser and

broker-dealer. It is represented that all

of the Applicant’s asset management

affiliates had, in the aggregate, client

assets under management of

approximately $425 billion, as of

November 30, 1999, the last day of their

most recent fiscal year. As of that date,

approximately 20 percent of client

assets under management were

attributable to Client Plans, including

those investing in a Pooled Fund.

Requested Exemption

6. Each Applicant requests exemptive

relief permitting purchases of securities

by the Asset Manager, for the Asset

Manager’s Client Plans, including

Pooled Funds, from underwriting or

selling syndicates in which the

Affiliated Broker-Dealer participates as a

manager or member. Each Applicant

states that such purchases would be

made from an underwriter or brokerdealer other than the Affiliated BrokerDealer and that the Affiliated BrokerDealer would not receive any selling

concessions with respect to the

securities sold to Client Plans.

7. Each Applicant represents that

where the Affiliated Broker-Dealer is a

member of an underwriting or selling

syndicate, the Asset Manager makes

purchases of securities for its Client

Plans in compliance with Prohibited

Transaction Exemption (PTE) 75–1 (40

FR 50845, October 31, 1975), Part III.

PTE 75–1, Part III, provides a class

exemption, under certain conditions, for

a plan fiduciary to purchase securities

from an underwriting or selling

syndicate of which the fiduciary or an

affiliate is a member. However, relief

under PTE 75–1 is unavailable if the

fiduciary or its affiliate is a manager of

the underwriting or selling syndicate.

8. Regardless of whether the fiduciary

or its affiliate is a manager or member

of the underwriting or selling syndicate,

PTE 75–1 is also unavailable for the

purchase of unregistered securities,

including securities that have been

purchased by an underwriter for resale

to ‘‘qualified institutional buyers’’

(QIBs), pursuant to SEC Rule 144A (17

CFR 230.144A) under the Securities Act

of 1933 (the 1933 Act)(Rule 144A

Securities). Rule 144A is frequently

used for sales of securities of foreign

issuers to U.S. investors who are QIBs.

Each Applicant states that syndicates

selling securities pursuant to Rule 144A

are functionally equivalent to syndicates

selling securities in registered offerings.

9. Each Applicant represents that the

Affiliated Broker-Dealer is frequently

involved in securities offerings as a

manager of underwriting or selling

syndicates, or as a manager or member

of a syndicate selling Rule 144A

Securities. Each Applicant further

asserts that the inability of the Asset

Manager to purchase securities for its

Client Plans from such syndicates can

be detrimental to those accounts

because the accounts can lose important

investment opportunities.

10. According to each Applicant,

there has been considerable

consolidation in the nation’s financial

services industry since 1975, resulting

in more situations where a plan

fiduciary may be affiliated with the

manager of an underwriting syndicate.5

Federal Register / Vol. 65, No. 26 / Tuesday, February 8, 2000 / Notices 6231

additional information, Professor Walter explained,

in a letter dated August 20, 1999, why short periods

were selected for calculating the hypothetical

returns: ‘‘The fact that IPOs do not have significant

excess performance over the long run is well

documented in finance and is known to all mutual

and pension fund managers. Indeed, long-term

relative performance of IPOs (i.e., those held for a

period over 3 years) is significantly below market

performance as measured by standard indices such

as the S&P 500 . . .’’

6Under the Gramm-Leach-Bliley Act, signed into

law by the President on November 12, 1999, certain

provisions of the Glass-Steagall Act and the Bank

Holding Company Act of 1956, as amended, are

repealed. The Department notes that the effect of

such law will likely be further consolidation of the

financial services industry. The new law will

facilitate cross-ownership and control among bank

holding companies and securities firms through the

creation of ‘‘financial holding companies’’ that will

be permitted to engage in a broad range of financial

and related activities, including underwriting and

dealing activities.

In addition, many plans have expanded

their investment portfolios in recent

years to include foreign securities. As a

result, the exemption provided in PTE

75–1, Part III, is often unavailable for

purchases of certain securities that may

be appropriate plan investments.6

Investments in Offered Securities

11. Each Applicant represents that the

Asset Manager makes investment

decisions on behalf of, or renders

investment advice to, its Client Plans in

accordance with the governing

document of the particular Client Plan

or Pooled Fund and the guidelines and

objectives established in the investment

management or advisory agreement.

Since the Client Plans are covered by

Title I of the Act, such investment

decisions are also subject to the

fiduciary responsibility provisions of

the Act.

12. Each Applicant states, therefore,

that a decision to invest in particular

securities is made on the basis of price,

value, and a Client Plan’s investment

criteria, not on whether the securities

are currently being sold through an

underwriting or selling syndicate. Each

Applicant further asserts that the Asset

Manager has little incentive to make

purchases from offerings for which the

Affiliated Broker-Dealer is an

underwriter that are not in the interests

of the Client Plans because the Asset

Manager’s compensation for its services

is generally based upon assets under

management. If the assets under its

management do not perform well, the

Asset Manager will receive less

compensation and could lose clients.

13. Each Applicant states that the

Asset Manager generally purchases

securities in large blocks because the

same investments will be made across

several of its accounts. If there is a new

offering of an equity or fixed income

security that the Asset Manager had

otherwise intended to purchase, it may

be able to purchase the security through

the offering syndicate at a lower price

than it would pay in the open market,

without transaction costs and with a

reduced market impact if it is buying a

relatively large quantity. This is because

a large purchase in the open market can

cause an increase in the market price

and, consequently, in the cost of the

securities. Purchasing from an offering

syndicate can thus reduce the costs to

the Asset Manager’s Client Plans.

14. However, absent an individual

exemption, if the Affiliated BrokerDealer is a manager of the syndicate

underwriting the offering, the Asset

Manager is currently foreclosed from

purchasing any securities from that

underwriting syndicate. If the Asset

Manager then purchases the same

securities in the secondary market, the

Client Plans may incur greater costs

because the market price is often higher

than the offering price, and because of

transaction and market impact costs.

Alternatively, the Asset Manager may

have foregone other investment

opportunities because of its decision to

purchase in the offering, and these

opportunities, if still available, may

have become more expensive.

Underwriting of Securities Offerings

15. Each Applicant represents that the

Affiliated Broker-Dealer manages and

participates in firm commitment

underwriting syndicates for registered

offerings of both equity and debt

securities. While equity and debt

underwritings may operate differently

with regard to the actual sales process,

the basic structures are the same. In a

firm commitment underwriting, the

underwriting syndicate acquires the

securities from the issuer and then sells

the securities to investors.

16. Each Applicant represents that

while, as a legal matter, the syndicate

assumes the risk that the securities

might not be distributable, as a practical

matter, this risk is reduced, in marketed

deals, through ‘‘building a book’’ (i.e.,

taking indications of interest) prior to

pricing the securities. Each Applicant

asserts that, consequently, there is little

incentive for the underwriters to use

their discretionary accounts (or the

discretionary accounts of their affiliates)

to buy up the securities as a way to

avoid underwriting liabilities.

17. Each syndicate has a lead

manager, who is the principal contact

between the syndicate and the issuer

and who is responsible for organizing

and coordinating the syndicate. The

syndicate may also have co-managers,

who generally assist the lead manager in

working with the issuer to prepare the

registration statement to be filed with

the SEC and in distributing the

underwritten securities. While equity

syndicates typically include additional

members that are not managers, more

recently, membership in many debt

syndicates has been limited to lead and

co-managers.

18. Where more than one underwriter

is involved, the lead manager, who has

been selected by the issuer, contacts

other underwriters, and the

underwriters enter into an Agreement

Among Underwriters. Most lead

managers have a form of agreement.

This document is then supplemented

for the particular deal by sending an

‘‘invitation telex’’ setting forth

particular terms to the other

underwriters.

19. The arrangement between the

syndicate and the issuer is embodied in

an underwriting agreement, which is

signed on behalf of the underwriters by

one or more of the managers. The

underwriting agreement provides,

subject to certain closing conditions,

that the underwriters are obligated to

purchase the underwritten securities

from the issuer in accordance with their

respective commitments. This

obligation is met by using the proceeds

received from the buyers of the

securities in the offering, although there

is a risk that the underwriters will have

to pay for a portion of the securities, in

the event that not all of the securities

are sold.

20. However, each Applicant

represents that, generally, the risk that

the securities will not be sold is small

because the underwriting agreement is

not executed until after the underwriters

have obtained indications of interest in

purchasing the securities from a

sufficient number of investors to acquire

all the securities being offered. Once the

underwriting agreement is executed, the

underwriters immediately begin

contacting the investors to confirm the

sales, first orally and then by written

confirmation, and sales are finalized

within hours and sometimes minutes.

The underwriters are anxious to

complete the sales as soon as possible

because until they ‘‘break syndicate,’’

they cannot enter the market. In many

cases, the underwriters will act as

market-markers for the security. A

market-maker holds itself out as willing

to buy or sell the security for its own

account on a regular basis.

21. Each Applicant represents that the

process of ‘‘building a book’’ or

soliciting interest occurs as follows. In

an equity offering, after a registration

statement is filed with the SEC and

while it is under review by the SEC

6232 Federal Register / Vol. 65, No. 26 / Tuesday, February 8, 2000 / Notices

7Rule 415 permits an issuer to sell debt as well

as equity securities under an effective registration

statement previously filed with the SEC by filing a

post-effective amendment or supplemental

prospectus.

8The Insider Trading and Securities Fraud

Enforcement Act of 1988 required brokers and

dealers to maintain and enforce written policies and

procedures that are ‘‘reasonably designed . . . to

prevent the misuse in violation of [the federal

securities laws] . . . of material, nonpublic

information by such broker or dealer or any person

associated with such broker or dealer.’’ (Section

15(f) of the 1934 Act (15 U.S.C. 780(f)); see also

Rules 342 and 351 of the NYSE and SEC Regulation

M (17 CFR 242.100(a)(3)).

staff, representatives of the issuer and

the managers conduct meetings with

potential investors, who learn about the

company and the securities and receive

a preliminary prospectus. The

underwriters cannot make any firm

sales until the registration statement is

declared effective by the SEC. Prior to

the effective date, while the investors

thus cannot become legally obligated to

make a purchase, they indicate whether

they have an interest in buying, and the

managers compile a ‘‘book’’ of investors

who are willing to ‘‘circle’’ a particular

portion of the issue. These indications

of interest are sometimes referred to as

a ‘‘soft circle’’ because investors cannot

be legally bound to buy the securities

until the registration statement is

effective. However, each Applicant

represents that investors generally

follow through on their indications of

interest, and would be expected to do

so, barring any sudden adverse

developments (in which case it is likely

that the offering would be withdrawn),

because if they do not follow through,

the underwriters will be reluctant to sell

to them in future offerings.

22. Assuming that the meetings have

produced sufficient indications of

interest, each Applicant represents that

the issuer and the managers together

will set the price of the securities and

ask the SEC to declare the registration

effective. After the registration

statement becomes effective and the

underwriting agreement is executed, the

underwriters contact those investors

who have indicated an interest in

purchasing securities in the offering to

execute the sales. Each Applicant

represents that offerings are often

oversubscribed, and many have an overallotment option that the underwriters

can exercise to acquire additional shares

from the issuer. Where an offering is

oversubscribed, the underwriters decide

how to allocate the securities among the

potential purchasers. However, if an

issue is a ‘‘hot issue,’’ i.e., it is selling

in the market at a premium above its

offering price, the underwriters may not

hold this hot issue in their own

accounts, nor sell it to their officers and

directors. A hot issue may also not be

sold to the personal accounts of those

responsible for investing for others,

such as officers of banks, insurance

companies, mutual funds, and

investment advisers. (NASD Manual &

Notices to Members, IM–2110–1)

23. Each Applicant represents that

debt offerings may be ‘‘negotiated’’

offerings, ‘‘competitive bid’’ offerings, or

‘‘bought deals.’’ ‘‘Negotiated’’ offerings,

which often involve non-investment

grade securities, are conducted in the

same manner as an equity offering with

regard to when the underwriting

agreement is executed and how the

securities are offered. ‘‘Competitive bid’’

offerings, in which the issuer

determines the price for the securities

through competitive bidding rather than

negotiating the price with the

underwriting syndicate, are performed

under ‘‘shelf’’ registration statements

pursuant to SEC Rule 415 under the

1933 Act (17 CFR 230.415).7

24. In a competitive bid offering,

prospective lead underwriters will bid

against one another to purchase debt

securities, based upon their

determinations of the degree of investor

interest in the securities. Depending on

the level of investor interest and the size

of the offering, a bidding lead

underwriter may bring in co-managers

to assist in the sales process. Most of the

securities are frequently sold within

hours, or sometimes even less than an

hour, after the securities are made

available for purchase.

25. Because of market forces and the

requirements of Rule 415, the

competitive bid process is generally

available only to issuers of investmentgrade securities who have been subject

to the reporting requirements of the

Securities Exchange Act of 1934 (the

1934 Act) for at least one year.

26. Occasionally, in highly-rated debt

issues, underwriters ‘‘buy’’ the entire

deal off of a ‘‘shelf registration’’ before

obtaining indications of interest. These

‘‘bought’’ deals involve issuers whose

securities enjoy a deep and liquid

secondary market, such that an

underwriter has confidence without premarketing that it can identify purchasers

for the bonds.

Structure of Diversified Financial

Services Firms

27. Each Applicant represents that

there are internal policies in place that

restrict contact and the flow of

information between investment

management personnel and noninvestment management personnel.

These policies are designed to protect

against ‘‘insider trading,’’ i.e., trading on

information not available to the general

public that may affect the market price

of the securities. Diversified financial

services firms must be concerned about

insider trading problems because one

part of the firm—e.g., the mergers and

acquisitions group—could come into

possession of non-public information

regarding an upcoming transaction

involving a particular issuer, while

another part of the firm—e.g., the

investment management group—could

be trading in the securities of that issuer

for its clients.8

28. Each Applicant states that its

business separation policies and

procedures are also designed to restrict

the flow of any information to or from

the Asset Manager that could limit its

flexibility in managing client assets, and

of information obtained or developed by

the Asset Manager that could be used by

other parts of the organization, to the

detriment of the Asset Manager’s

clients.

29. Each Applicant states that major

clients of the Affiliated Broker-Dealer

include investment management firms

that are competitors of the Asset

Manager. Similarly, the Asset Manager

deals on a regular basis with brokerdealers that compete with the Affiliated

Broker-Dealer. If special consideration

were shown to an affiliate, such conduct

would likely adversely affect the

relationships of the Affiliated BrokerDealer and of the Asset Manager with

firms that compete with that affiliate.

Therefore, a goal of each Applicant’s

business separation policy is to avoid

any possible perception of improper

flows of information between the

Affiliated Broker-Dealer and the Asset

Manager, in order to prevent any

adverse impact on client and business

relationships.

Underwriting Compensation

30. Each Applicant represents that the

underwriters are compensated through

the ‘‘spread,’’ or difference, between the

price at which the underwriters buy the

securities from the issuer and the price

at which the securities are sold to the

public. The spread is divided into three

components.

31. The first component includes the

management fee, which generally

represents an agreed upon percentage of

the overall spread and is allocated

among the lead manager and comanagers. Where there is more than one

managing underwriter, the way the

management fee will be allocated among

the managers is generally agreed upon

prior to soliciting indications of interest

(the process of ‘‘building a book’’).

Thus, according to each Applicant, such

management fee allocations are not

Federal Register / Vol. 65, No. 26 / Tuesday, February 8, 2000 / Notices 6233

9A fixed designation is sometimes referred to as

an ‘‘auto pot split.’’

reflective of the amount of securities

that particular managers sell in an

offering.

32. The second component is the

underwriting fee, which represents

compensation to the underwriters

(including the non-managers, if any) for

the risks they assume in connection

with the offering and for the use of their

capital. This component of the spread is

also used to cover the expenses of the

underwriting that are not otherwise

reimbursed by the issuer.

33. The first and second components

are received without regard to how the

underwritten securities are allocated for

sales purposes or to whom the securities

are sold. The third component of the

spread is the selling concession, which

generally constitutes 60 percent or more

of the spread. The selling concession

compensates the underwriters for their

actual selling efforts. The allocation of

selling concessions among the

underwriters follows the allocation of

the securities for sales purposes, except

to the extent that buyers designate other

broker-dealers (who may be other

underwriters as well as broker-dealers

outside the syndicate) to receive the

selling concessions from the securities

they purchase.

34. Securities are allocated for sales

purposes into two categories. The first

and larger category is the ‘‘institutional

pot,’’ which is the pool of securities

from which sales are made to

institutional investors. Selling

concessions for securities sold from the

institutional pot are generally

designated by the purchaser to go to

particular underwriters or brokerdealers. When securities are sold from

the institutional pot, the managers

sometimes receive a portion of the

selling concessions, referred to as a

‘‘fixed designation,’’ 9 attributable to

securities sold in this category, without

regard to who sold the securities or to

whom they were sold. For securities

covered by this proposed exemption,

however, the Affiliated Broker-Dealer

may not receive, either directly or

indirectly, any compensation that is

attributable to the fixed designation

generated by purchases of securities by

the Asset Manager on behalf of its Client

Plans.

35. The second category of allocated

securities is ‘‘retail,’’ which are the

securities retained by the underwriters

for sale to their retail customers. The

underwriters receive the selling

concessions from their respective retail

retention allocations. Securities may be

shifted between the two categories

based upon whether either category is

oversold or undersold during the course

of the offering.

36. Each Applicant asserts that the

Affiliated Broker-Dealer’s inability to

receive any selling concessions, or any

compensation attributable to the fixed

designations generated by purchases of

securities by the Asset Manager’s Client

Plans, removes the primary economic

incentive for the Asset Manager to make

purchases that are not in the interests of

its Client Plans from offerings for which

the Affiliated Broker-Dealer is an

underwriter. The reason is that the

Affiliated Broker-Dealer will not receive

any additional fees as a result of such

purchases by the Asset Manager.

Rule 144A Securities

37. Each Applicant represents that a

number of the offerings of Rule 144A

Securities in which the Affiliated

Broker-Dealer participates represent

good investment opportunities for the

Asset Manager’s Client Plans.

Particularly with respect to foreign

securities, a Rule 144A offering may

provide the least expensive and most

accessible means for obtaining the

securities. However, PTE 75–1, Part III,

does not include a category for Rule

144A Securities, regardless of whether

the Affiliated Broker-Dealer is a

manager or member of the underwriting

or selling syndicate. Therefore, absent

an individual exemption, the Asset

Manager is foreclosed from purchasing

such securities for its Client Plans in

offerings in which the Affiliated BrokerDealer participates.

38. Each Applicant states that Rule

144A, which was adopted in 1990, acts

as a ‘‘safe harbor’’ exemption from the

registration provisions of the 1933 Act

for sales of certain types of securities to

QIBs. QIBs include several types of

institutional entities, such as employee

benefit plans and commingled trust

funds holding assets of such plans,

which own and invest on a

discretionary basis at least $100 million

in securities of unaffiliated issuers.

39. Any securities may be sold

pursuant to Rule 144A except for those

of the same class or similar to a class

that is publicly traded in the United

States, or certain types of investment

company securities. This limitation is

designed to prevent side-by-side public

and private markets developing for the

same class of securities.

40. Buyers of Rule 144A Securities

must be able to obtain, upon request,

basic information concerning the

business of the issuer and the issuer’s

financial statements, much of the same

information as would be furnished if the

offering were registered. This condition

does not apply, however, to an issuer

filing reports with the SEC under the

1934 Act, for which reports are publicly

available. The condition also does not

apply to a ‘‘foreign private issuer’’ for

whom reports are furnished to the SEC

under Rule 12g3–2(b) of the 1934 Act

(17 CFR 240.12g3–2(b)), or to issuers

who are foreign governments or political

subdivisions thereof and are eligible to

use Schedule B under the 1933 Act

(which describes the information and

documents required to be contained in

a registration statement filed by such

issuers).

41. Sales under Rule 144A, like sales

in a registered offering, remain subject

to the protections of the anti-fraud rules

of federal and state securities laws.

These rules include Section 10(b) of the

1934 Act and Rule 10b–5 thereunder (17

CFR 240.10b–5) and Section 17(a) of the

1933 Act (15 U.S.C. 77a). Through these

and other provisions, the SEC may use

its full range of enforcement powers to

exercise its regulatory authority over the

market for Rule 144A Securities, in the

event that it detects improper practices.

42. Each Applicant asserts that this

potential liability for fraud provides a

considerable incentive to the issuer and

offering syndicate to insure that the

information contained in a Rule 144A

offering memorandum is complete and

accurate in all material respects. Among

other things, the lead manager typically

obtains an opinion from a law firm,

commonly referred to as a ‘‘10b–5’’

opinion, stating that the law firm has no

reason to believe that the offering

memorandum contains any untrue

statement of material fact or omits to

state a material fact necessary in order

to make the statements made, in light of

the circumstances under which they

were made, are not misleading.

43. Each Applicant represents that

Rule 144A offerings generally are

structured in the same manner as

underwritten registered offerings. The

major difference is that a Rule 144A

offering uses an offering memorandum

rather than a prospectus that is filed

with the SEC. The marketing process is

the same in most respects, except that

the selling efforts are generally limited

to contacting QIBs and that there are no

general solicitations for buyers (e.g., no

general advertising). In addition, the

Affiliated Broker-Dealer’s role in these

offerings has been as a lead or comanager. While, generally, there are no

non-manager members in the syndicate,

each Applicant also requests relief for

situations where the Affiliated BrokerDealer acts only as a syndicate member,

not as a manager.

44. According to each Applicant, one

of the policy objectives of Rule 144A

6234 Federal Register / Vol. 65, No. 26 / Tuesday, February 8, 2000 / Notices

10SEC Rule 10f–3(a)(4) (17 CFR 270.10f–3(a)(4))

states that the term ‘‘Eligible Rule 144A Offering’’

means an offering of securities that meets the

following conditions:

(i) The securities are offered or sold in

transactions exempt from registration under section

4(2) of the Securities Act of 1933 [15 U.S.C. 77d(2)],

rule 144A thereunder [Sec. 230.144A of this

chapter], or rules 501–508 thereunder [Secs.

230.501–230.508 of this chapter];

(ii) The securities are sold to persons that the

seller and any person acting on behalf of the seller

reasonably believe to include qualified institutional

buyers, as defined in Sec. 230.144A(a)(1) of this

chapter; and

(iii) The seller and any person acting on behalf

of the seller reasonably believe that the securities

are eligible for resale to other qualified institutional

buyers pursuant to Sec. 230.144A of this chapter.

11 In restricting the scope of PTE 75–1, Part III,

to exclude transactions where the plan fiduciary is

affiliated with the syndicate manager, the

Department was concerned that the syndicate

manager, as distinguished from a mere member of

a syndicate, has a greater interest in the success of

the sale of the new securities. If an affiliate of the

managing underwriter is an investment manager for

plans, those plans could provide a potential market

for the less attractive offerings of underwritten

securities. This proposed exemption contains

certain safeguards and conditions that are designed

to address these potential conflict of interest

situations.

12The Department notes that the provisions of the

Act do not preclude plans from investing in any

securities sold by an underwriting or offering

syndicate, including those securities sold pursuant

to Rule 144A. The exemptive relief provided by

PTE 75–1, Part III, and the additional relief sought

here are required because of the affiliation between

the plan fiduciary and a member of the

underwriting or selling syndicate.

13With respect to any purchase of asset-backed

securities by a Client Plan, the Department notes

that this proposed exemption provides relief only

for the transactions described herein and does not

cover any additional prohibited transactions that

may occur as a result of a purchase of such

securities. For example, additional prohibited

transactions may occur by operation of the ‘‘lookthrough rule’’ contained in the Department’s

regulation defining ‘‘plan assets’’ for purposes of

plan investments (see 29 CFR 2510.3–101). Such

additional prohibited transactions may be covered

by one of the Department’s existing individual

exemptions for asset-backed securities. A listing of

such exemptions is provided in the text of the

operative language of PTE 97–34 (62 FR 39021, July

21, 1997), which granted an amendment to these

exemptions.

Further, the Department notes that, under the

Department’s plan asset regulation, if a plan invests

in a publicly-offered security, the plan’s assets will

not include, solely by reason of such investment,

any of the underlying assets of the entity issuing the

security (i.e., the ‘‘look-through rule’’ will not apply

and the operations of the entity will not be subject

to scrutiny under the prohibited transaction

provisions of the Act). The regulation defines a

‘‘publicly-offered’’ security as one that is freely

transferable, widely-held, and registered under the

federal securities laws. For this purpose, a class of

securities is considered ‘‘widely held’’ if it is owned

by 100 or more investors who are independent of

the issuer and of one another (see 29 CFR 2510.3–

101(b)(3)).

was to attract more foreign issuers to the

United States, and Rule 144A has been

achieving this objective—from April

1990 through December 1993, the first

three years of Rule 144A, over $25.6

billion in foreign securities was sold

under Rule 144A, representing more

than one-fourth of Rule 144A

placements. See SEC Staff Report on

Rule 144A (August 18, 1994), [1994–95

Transfer Binder] Fed. Sec. L. Rep.

¶ 85,428 (Question 1). This figure

continued to hold in 1998, at 30.4

percent, so that foreign issuer Rule 144A

offerings have kept pace with the rapid

growth of Rule 144A offerings overall.

(Securities Data Company, Inc.)

Summary

In summary, the proposed

transactions will satisfy the statutory

criteria for an exemption under section

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

Plans will gain access to desirable

investment opportunities; (b) in each

offering, the Asset Manager will

purchase the securities for its Client

Plans from an underwriter or brokerdealer other than the Affiliated BrokerDealer; (c) conditions similar to those of

PTE 75–1, Part III, will restrict the types

of securities that may be purchased, the

types of underwriting or selling

syndicates and issuers involved, and the

price and timing of the purchases; (d)

the amount of securities that the Asset

Manager may purchase on behalf of

Client Plans will be subject to

percentage limitations; (e) the Affiliated

Broker-Dealer will not be permitted to

receive, either directly, indirectly, or

through designation, any selling

concessions with respect to the

securities sold to the Asset Manager; (f)

prior to any purchase of securities, the

Asset Manager will make the required

disclosures to an independent fiduciary

(Independent Fiduciary) of each Client

Plan and obtain written authorization;

(g) the Asset Manager will provide

regular reporting to an Independent

Fiduciary of each Client Plan with

respect to all securities purchased

pursuant to the exemption, if granted;

(h) each Client Plan will be subject to a

minimum size requirement of at least

$50 million ($100 million for ‘‘Eligible

Rule 144A Offerings’’),10 with certain

exceptions for Pooled Funds; and (i) the

Asset Manager must have total assets

under management in excess of $5

billion and shareholders’ or partners’

equity in excess of $1 million.

Discussion of Proposed Exemption

1. The exemptive relief for

underwritings proposed herein is

similar to that provided in PTE 75–1,

Part III. Under PTE 75–1, exemptive

relief is subject to a number of

conditions and limitations, including

the following: (1) The plan fiduciary or

its affiliate may not be a manager of the

underwriting or selling syndicate; (2)

the purchase must be from a person

other than the plan fiduciary or its

affiliate; (3) the types of securities that

may be purchased and the price and

timing of the purchases are

circumscribed; (4) the amount of

securities purchased on behalf of each

plan may not exceed three percent of

the offering; and (5) the consideration

paid may not exceed three percent of

the plan’s total net assets (one percent,

if the consideration involved exceeds $1

million).

2. The exemptive relief proposed

herein differs from that provided by PTE

75–1 in the following respects: (1) The

proposed exemption covers transactions

where the plan fiduciary is affiliated

with a manager, as well as a member, of

the underwriting or selling syndicate; 11

(2) the proposed exemption covers

purchases of Rule 144A Securities; 12 (3)

percentage limitations on the amount of

securities that may be purchased have

been modified to provide an aggregate

limitation on a fiduciary’s purchases for

all Client Plans from a particular

offering; and (4) the proposed

exemption provides additional

conditions, including: (a) The

transaction is not part of an agreement,

arrangement, or understanding designed

to benefit the plan fiduciary or its

affiliate; (b) neither a manager nor a

member of the underwriting or selling

syndicate may receive any selling

concessions with respect to the

securities purchased for Client Plans by

its affiliate; (c) prior to any purchase of

securities on behalf of a Client Plan,

certain disclosures are provided to an

Independent Fiduciary of each such

Client Plan and written authorization is

obtained; (d) periodic reporting

regarding the covered transactions is

provided to an Independent Fiduciary

of each Client Plan; and (e) investing

plans and their investment managers

must meet certain minimum size

requirements.

Types of Securities and Offerings

3. Paragraphs (a) and (b) of the

proposed exemption are derived from

PTE 75–1, Part III, and provide the

following: (1) The securities 13 are part

of an issue registered under the 1933

Act, or if exempt from registration under

such Act, fall within specified

categories: issued or guaranteed by the

United States; issued by a bank; exempt

from registration under a federal statute

other than the 1933 Act; registered

under the 1934 Act; or are part of an

Eligible Rule 144A Offering—a change

from PTE 75–1, Part III, as noted

Federal Register / Vol. 65, No. 26 / Tuesday, February 8, 2000 / Notices 6235

14Paragraph (a)(1)(ii) of the proposed exemption

requires that if the securities are equity securities

in an Eligible Rule 144A Offering, the offering

syndicate shall obtain a legal opinion regarding the

adequacy of the disclosure in the offering

memorandum. This condition may be satisfied by

the type of ‘‘10b–5’’ opinion customarily obtained

in connection with such offerings. The Department

believes that requiring such review by a law firm

will help insure that the offering memorandum

meets federal securities law standards. The

Department notes that paragraph (c) of the proposed

exemption requires debt securities to be rated by at

least one independent nationally recognized

statistical rating organization, thus insuring that

sufficient information about those securities and

their issuer will be available to investors.

15The language regarding the timing of the

purchase differs slightly from PTE 75–1, Part III.

This language is based upon Rule 10f–3, as

amended in 1997 (17 CFR 270.10f–3; 62 FR 42401,

August 7, 1997).

16Paragraph (a)(2)(ii) of the proposed exemption

permits certain purchases of debt after the first day

of the offering. Should the debt be downgraded after

the offering commences and prior to being

purchased for a Client Plan, the Department expects

that the Asset Manager would consider whether,

prior to purchase, the price was adjusted to reflect

the downgrade.

17Paragraph (c)(4) of the proposed exemption

requires that when calculating the percentages of

securities purchased in an Eligible Rule 144A

Offering, one must consider any concurrent public

offering. The Department notes that any concurrent

offering will necessarily be in a foreign securities

market, since Rule 144A is unavailable where there

is a concurrent domestic offering.

18The Department notes that the intent of the

condition in paragraph (e) of the proposed

exemption was not to deny direct benefits to other

parties to a transaction but, rather, to exclude relief

for transactions that are part of a broader overall

agreement, arrangement, or understanding designed

to benefit parties in interest.

19The certification required in paragraph (g)(2) of

the proposed exemption is necessary because the

Asset Manager and its Client Plans must monitor

compliance with all the conditions of the

exemption, if granted. However, the Asset Manager

would not normally have access to the Affiliated

Broker-Dealer’s records detailing each underwriter’s

share of the compensation from a particular

underwriting, as those records are considered

confidential. Such records are required to be

maintained pursuant to SEC and NASD rules and

would, of course, be made available to the

Department pursuant to the terms of the exemption,

if granted.

20 In this regard, the Department notes that the

fiduciary responsibility provisions of the Act apply

to the decision of an Independent Fiduciary to

authorize the Asset Manager to invest in securities

covered by this proposed exemption (Covered

Securities) and to the decision to continue such

authorization. Section 404(a)(1) of the Act requires,

among other things, that a fiduciary of a plan must

act prudently, solely in the interest of the plan’s

participants and beneficiaries, and for the exclusive

purpose of providing benefits to participants and

beneficiaries. Accordingly, the Independent

Fiduciary must act ‘‘prudently’’ with respect to the

decision to authorize investment in these Covered

Securities and the decision to continue such

authorization.

The Department wishes to emphasize that it

expects that the Independent Fiduciary, prior to

authorizing investment in these Covered Securities,

will fully understand the potential risks and

rewards associated with investing in the initial

offering of a security, following disclosure by the

Asset Manager of all relevant information

pertaining to the proposed transactions. Such

consideration must necessarily include the fact that

the Asset Manager’s affiliate may be the managing

underwriter. In addition, the Independent Fiduciary

must be capable of periodically monitoring the

actions taken by the Asset Manager in the

performance of its duties. Thus, in considering

whether to enter into transactions of the kind

described herein, the Independent Fiduciary should

take into account its ability to provide adequate

oversight of the Asset Manager.

The Department further notes that, under section

405(a) of the Act, any plan fiduciary (including an

investment manager) will have co-fiduciary liability

Continued

above; 14 (2) the securities are purchased

for not more than the offering price

within a specific time period,15 subject

to certain specified exceptions for rights

offerings and debt offerings; 16 (3) the

securities are sold pursuant to a firmcommitment offering, in which the

syndicate members are committed to

purchasing all the securities being

offered, subject to certain exceptions for

rights offerings and over-allotment

options; and (4) the issuer of the

securities has been in continuous

operation for not less than three years,

with certain exceptions.

Percentage Limitations on the Amount

of Purchased Securities

4. Paragraphs (c) and (d) of the

proposed exemption contain percentage

limitations applicable to the amount of

purchased securities. The first

percentage test in paragraph (c) provides

that the amount of securities to be

purchased by the Asset Manager on

behalf of a particular Client Plan or

Pooled Fund may not exceed three

percent of the total amount of securities

being offered. Paragraph (c) further

provides percentage limitations on the

aggregate amount of securities that the

Asset Manager may purchase for all its

Client Plans, including Pooled Funds,

from the total amount of securities being

offered: 10 percent for equity securities;

35 percent for debt securities rated in

one of the four highest rating categories

by at least one nationally recognized

statistical rating organization, i.e.,

Standard & Poor’s Rating Services,

Moody’s Investors Service, Inc., Duff &

Phelps Credit Rating Co., or Fitch IBCA,

Inc., or their successors (collectively,

the Rating Organizations); and 25

percent for debt securities rated in the

fifth or sixth highest rating categories by

at least one of the Rating

Organizations.17

5. Paragraph (d) provides that the

consideration to be paid by the Client

Plan or Pooled Fund in purchasing the

offered securities may not exceed three

percent of the fair market value of such

Client Plan’s or Pooled Fund’s total net

assets. However, paragraph (d)

eliminates the requirement contained in

PTE 75–1, Part III, that, if the

consideration involved exceeds $1

million, it may not exceed one percent

of the fair market value of the plan’s

total assets. This modification by the

Department parallels the amendment in

1997 of SEC Rule 10f–3.

Underwriting Compensation

6. The proposed exemption requires

in paragraph (e) that any purchase of

securities by the Asset Manager

pursuant to the exemption may not be

part of an agreement, arrangement, or

understanding designed to benefit the

Asset Manager or an affiliate.18

Paragraph (f) further provides that the

Affiliated Broker-Dealer may not

receive, either directly, indirectly, or

through designation, any selling

concession, or other consideration that

is based upon the amount of securities

purchased by the Asset Manager’s Client

Plans pursuant to the exemption. Those

selling concessions would be allocated

to members of the syndicate who are not

affiliated with the Asset Manager. The

Affiliated Broker-Dealer may also not

receive, either directly or indirectly, that

portion of the fixed designation that is

attributable to securities purchased

pursuant to the exemption. The

Affiliated Broker-Dealer is not

precluded from receiving management

fees, underwriting fees, or other

consideration that is not based upon the

amount of securities actually sold to the

Asset Manager’s Client Plans.

7. Paragraph (g) provides that the

amount the Affiliated Broker-Dealer

receives in management fees,

underwriting fees, or other

consideration may not be increased for

the purpose of offsetting the reduction

of the Affiliated Broker-Dealer’s

compensation from selling concessions.

Further, the Affiliated Broker-Dealer

must provide the Asset Manager with a

written certification that the Affiliated

Broker-Dealer complied with the

underwriting compensation

requirements found in paragraphs (e),

(f), and (g) of the proposed exemption,

in any offering where the Asset Manager

purchased securities for its Client Plans.

This certification will also be part of the

quarterly report which the Asset

Manager provides to the Independent

Fiduciaries of the Client Plans.19

Disclosures

8. The proposed exemption requires

in paragraphs (h) and (l) that the Asset

Manager obtain written authorization

from an Independent Fiduciary of each

Client Plan, including each fiduciary of

a plan that invests in a Pooled Fund,

before engaging in the covered

transactions.20 Prior to, and subsequent

6236 Federal Register / Vol. 65, No. 26 / Tuesday, February 8, 2000 / Notices

for any breach of fiduciary responsibility of another

plan fiduciary: (1) if he knowingly participates in

or conceals such breach; (2) if, by his failure to

comply with section 404(a)(1) of the Act, he enables

another fiduciary to commit such a breach; or (3)

if he has knowledge of the breach of another

fiduciary and he fails to make a reasonable effort,

under the circumstances, to remedy the breach.

Finally, the granting of the exemption proposed

herein should not be viewed as an endorsement by

the Department of any plans’ participation in the

covered transactions.

21PTE 75–1, Part III, was based, in part, on a prior

version of Rule 10f–3.

22 62 FR 42401, Aug. 7, 1997.

23 Id.

24The information that the Board of Directors

uses to monitor compliance must be included as an

exhibit to the fund’s semi-annual publicly available

reports to the SEC, known as the Form N–SAR.

25See paragraph (n) of the proposed exemption.

26With respect to the directors’ duty, the SEC

stated in the preamble to Rule 10f–3:

A fund’s board should be vigilant in reviewing

the procedures and transactions required by 10f–3

as well as in conducting any additional reviews that

it determines are needed to protect the interests of

investors, particularly if the fund purchases

significant amounts of securities in reliance on 10f–

3. For example, the board should consider

monitoring how the performance of securities

purchased in reliance on rule 10f–3 compares to

securities not purchased in reliance on the rule, or

to a benchmark such as a comparable market index.

Such monitoring would enable the board to

determine not only whether existing procedures are

being followed, but whether the procedures are

effective in fulfilling the policies underlying section

10(f). (62 FR at 42406) (See also footnote 52, 62 FR

at 42406.)

27The Department notes that this proposed

exemption would provide relief from the selfdealing and conflict of interest provisions of Part 4

of Title I of the Act for purchases of securities by

the Asset Manager from an underwriting or selling

syndicate in which an affiliate of the Asset Manager

participates as a manager or member of such

syndicate. It would not provide relief from any acts

of self-dealing not directly arising from a purchase

of the Covered Securities. Thus, no relief would be

available for any violation of section 406(b) of the

Act that may arise after the purchase. For example,

because it is well-documented that securities

purchased in IPOs may not perform well in the long

term (see footnote 4), a violation of the Act could

occur if the Asset Manager’s decision regarding the

holding or sale of the Covered Securities by the

Client Plan was influenced by the interests of the

Affiliated Broker-Dealer.

The Affiliated Broker-Dealer’s interest in the

security may extend beyond the sale of the security.

As the SEC noted in its preamble to Regulation M,

addressing Regulation M’s protections against price

manipulation: ‘‘[I]mmediately following an offering

* * * underwriters now engage in substantial

syndicate-related market activity, and enforce

penalty bids in order to reduce volatility in the

market for the offering security.’’ 62 FR 519, 521

(January 3, 1997). The SEC defines penalty bid as

‘‘an arrangement that permits the managing

underwriter to reclaim a selling concession from a

syndicate member in connection with an offering

when the securities originally sold by the syndicate

member are purchased in syndicate covering

transactions.’’ SEC Regulation M (17 CFR

242.100(b)). For further background on the role of

underwriters, see ‘‘Corporate Finance and the

Securities Laws, (2d ed. 1997),’’ Charles J. Johnson,

Jr. and Joseph McLaughlin, Aspen Publishers;

‘‘Securities Industry Association: Capital Markets

Handbook,’’ edited by Bruce S. Foester, Aspen

Publishers (1999). Recent Developments in

Underwriting of IPO’s: Spinning and Penalty Bids,

Meredith B. Cross and Christine Sarudy Roberts,

1084 PLI/Corp 595 (Nov. 1998).

28A security might be put on a restricted list, for

example, if the offering was not completely sold

before the security began trading in the market. In

this instance, the restricted period for purposes of

Regulation M (17 CFR 242.101(a)) continues until

all securities are sold. See, generally, ‘‘Corporate

Finance and the Securities Laws, (2d ed. 1997),’’

Charles J. Johnson, Jr. and Joseph McLaughlin,

Aspen Publishers; ‘‘Securities Industry Association:

Capital Markets Handbook,’’ edited by Bruce S.

Foester, Aspen Publishers (1999).

29These rules include Section 17(a) of the 1933

Act (15 U.S.C. 77q(a)) and Sections 9, 10(b), and

15(c) of the 1934 Act (15 U.S.C. 78i, 78j(b) and

78o(c)).

to, execution of the written

authorization, the Asset Manager must

provide certain disclosures described in

paragraphs (i), (j), (k), and (m) to an

Independent Fiduciary of each Client

Plan. In addition, the Asset Manager

must provide a termination form, at

least annually, that enables the

Independent Fiduciary to terminate the

authorization without penalty.

Periodic Reporting

9. Paragraph (n) of the proposed

exemption requires that at least once

every three months, the Asset Manager

provide a report to an Independent

Fiduciary of each Client Plan containing

information about the Covered

Securities purchased during the

previous quarter. The Department

modeled paragraph (n), in part, on the

reporting provisions of Rule 10f–3 (17

CFR 270.10f–3).21 The preamble to the

1997 amendments to Rule 10f–3 states

that this rule ‘‘permits an investment

company that is related to certain

participants in an underwriting to

purchase securities during an offering, if

certain conditions are met.’’ 22 The SEC

explained the origin of its rule as

follows:

Section 10(f) of the Investment Company

Act was designed to address one of the major

abuses noted in the period before enactment

of the Investment Company Act—the use of

funds by underwriters that controlled these

funds as a ‘‘dumping ground’’ for

unmarketable securities. 23

Under Rule 10f–3, the Board of

Directors of the investment company

(including the directors who are not

‘‘interested persons’’ of the investment

company) is responsible for monitoring

compliance.24

10. Because the transactions covered

by this proposed exemption are similar

in nature to those covered by Rule 10f–

3, the Department has determined that

it is appropriate to adopt similar

reporting requirements as in that rule. In

addition to the items required to be

reported by investment companies

under Rule 10f–3, the proposed

exemption requires that the Asset

Manager report to the Independent

Fiduciary the price at which any

securities purchased during the

reporting period were sold and the

market value at the end of the reporting

period of each security purchased

during such period.25

11. The additional information should

help the Independent Fiduciary monitor

compliance with the exemption, if

granted. The Independent Fiduciaries of

the Client Plans would play a similar

role to that of the Board of Directors of

an investment company, i.e., they have

a fiduciary duty to monitor the activities

of the Asset Manager.26 In monitoring

compliance, the Independent Fiduciary

should bear in mind that the Asset

Manager’s subsequent decision to hold

or sell a security purchased pursuant to

the exemption, would not be covered by

the exemption, if granted.27

12. Further, the Asset Manager must

report any instance during the past

quarter where the Asset Manager was

precluded from trading in any security

purchased under the exemption for any

period of time because of its status as an

affiliate of the Affiliated Broker-Dealer.

For example, the security could be

placed on a watch or restricted list due

to activities of the Affiliated BrokerDealer, and these restrictions could

prevent the Asset Manager from trading

the security. Such a situation could

arise where a security was purchased by

the Asset Manager pursuant to this

proposed exemption on the first day of

the offering and the rest of the offering

was not selling well. In this situation,

SEC Regulation M, 28 or the general antifraud or anti-manipulation provisions of

the securities laws, 29 may limit the

Asset Manager’s ability to subsequently

trade in that security, although these

restrictions will generally not apply to

the Asset Manager if the proper business

separations are in place between the

Affiliated Broker-Dealer and the Asset

Manager (see, e.g., Regulation M, 17

CFR 242.100(b)(3)). Should the Asset

Manager’s ability to trade a security

purchased on behalf of a Client Plan be

restricted, this information may be

relevant to the decision whether or not

to continue to permit purchases under

the exemption.

Minimum Size Requirements

13. The proposed exemption applies

only to Client Plans with total net assets

of at least $50 million, as provided in

paragraph (o). In the case of a Pooled

Fund, however, the $50 million

requirement will be met if 50 percent or

more of the units of beneficial interest

in such Pooled Fund are held by plans

having total net assets of at least $50

Federal Register / Vol. 65, No. 26 / Tuesday, February 8, 2000 / Notices 6237

30PTE 84–14 provides a class exemption, under

certain conditions, for transactions between a party

in interest with respect to an employee benefit plan

and an investment fund (including a single

customer or pooled separate account) in which the

plan has an interest and which is managed by a

QPAM.

million. In the case of an Eligible Rule

144A Offering, each Client Plan must

have at least $100 million in securities.

For a Pooled Fund, the $100 million

requirement will be met if 50 percent or

more of the units of beneficial interest

in such Pooled Fund are held by plans

having at least $100 million in assets

and the Pooled Fund itself qualifies as

a QIB, as determined pursuant to Rule

144A (17 CFR 230.144A(a)(F)). The

Department believes that these

minimum size requirements will help

insure that the Client Plans have the

resources and investment sophistication

needed in order to monitor the Asset

Manager’s investment performance with

respect to the covered transactions.

14. Further, the proposed exemption

applies only if the Asset Manager is a

‘‘qualified professional asset manager’’

(QPAM), as defined under Part V(a) of

PTE 84–14, (49 FR 9494, 9506, March

13, 1984),30 subject to the following

modifications: The Asset Manager has

as of the last day of its most recent fiscal

year, total client assets under its

management and control in excess of $5

billion and shareholders’ or partners’

equity in excess of $1 million.

General Information

The attention of interested persons is

directed to the following:

(1) The fact that a transaction is the

subject of an exemption under section

408(a) of the Act and 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 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 require, among other things, that

a fiduciary discharge his or her duties

respecting a plan solely in the interest

of the participants and beneficiaries of

such plan and in a prudent manner in

accordance with section 404(a)(1)(B) of

the Act; nor does it affect the

requirements of section 401(a) of the

Code that the plan 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 section 4975(c)(2) of the Code, the

Department must find that the

exemption is administratively feasible,

in the interests of the affected plans and

their participants and beneficiaries, and

protective of the rights of those

participants and beneficiaries; and

(3) The proposed exemptions, if

granted, will be supplemental to, and

not in derogation of, any other

provisions of the Act and the Code,

including statutory or administrative

exemptions. 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.

(4) The proposed exemptions, if

granted, will be subject to the express

condition that the material facts and

representations contained in the

applications accurately describe all

material terms of the transactions that

are the subject of the exemptions.

Proposed Exemption

The Department is considering

granting an exemption under the

authority of section 408(a) of the

Employee Retirement Income Security

Act of 1974 (the Act) and section

4975(c)(2) of the Internal Revenue Code

of 1986 (the Code) and in accordance

with the procedures set forth in 29 CFR

Part 2570, Subpart B (55 FR 32836,

August 10, 1990).

Section I—Transactions

If the exemption is granted, the

restrictions of section 406 of the Act and

the sanctions resulting from the

application of section 4975 of the Code,

by reason of section 4975(c)(1) of the

Code, shall not apply to the purchase of

any securities by the Asset Manager on

behalf of employee benefit plans (Client

Plans), including Client Plans investing

in a pooled fund (Pooled Fund), for

which the Asset Manager acts as a

fiduciary, from any person other than

the Asset Manager or an affiliate thereof,

during the existence of an underwriting

or selling syndicate with respect to such

securities, where the Affiliated BrokerDealer is a manager or member of such

syndicate, provided that the following

conditions are satisfied:

(a) The securities to be purchased

are—

(1) either:

(i) part of an issue registered under

the Securities Act of 1933 (the 1933 Act)

(15 U.S.C. 77a et. seq.) or, if exempt

from such registration requirement, are

(A) issued or guaranteed by the United

States or by any person controlled or

supervised by and acting as an

instrumentality of the United States

pursuant to authority granted by the

Congress of the United States, (B) issued

by a bank, (C) exempt from such

registration requirement pursuant to a

federal statute other than the 1933 Act,

or (D) are the subject of a distribution

and are of a class which is required to

be registered under section 12 of the

Securities Exchange Act of 1934 (the

1934 Act) (15 U.S.C. 781), and the issuer

of which has been subject to the

reporting requirements of section 13 of

that Act (15 U.S.C. 78m) for a period of

at least 90 days immediately preceding

the sale of securities and has filed all

reports required to be filed thereunder

with the Securities and Exchange

Commission (SEC) during the preceding

12 months; or

(ii) part of an issue that is an ‘‘Eligible

Rule 144A Offering,’’ as defined in SEC

Rule 10f–3 (17 CFR 270.10f–3(a)(4)).

Where the Eligible Rule 144A Offering

is of equity securities, the offering

syndicate shall obtain a legal opinion

regarding the adequacy of the disclosure

in the offering memorandum;

(2) purchased prior to the end of the

first day on which any sales are made,

at a price that is not more than the price

paid by each other purchaser of

securities in that offering or in any

concurrent offering of the securities,

except that—

(i) if such securities are offered for

subscription upon exercise of rights,

they may be purchased on or before the

fourth day preceding the day on which

the rights offering terminates; or

(ii) if such securities are debt

securities, they may be purchased at a

price that is not more than the price

paid by each other purchaser of

securities in that offering or in any

concurrent offering of the securities and

may be purchased on a day subsequent

to the end of the first day on which any

sales are made, provided that the

interest rates on comparable debt

securities offered to the public

subsequent to the first day and prior to

the purchase are less than the interest

rate of the debt securities being

purchased; and

(3) offered pursuant to an

underwriting or selling agreement under

which the members of the syndicate are

committed to purchase all of the

securities being offered, except if—

(i) such securities are purchased by

others pursuant to a rights offering; or

(ii) such securities are offered

pursuant to an over-allotment option.

(b) The issuer of such securities has

been in continuous operation for not

less than three years, including the

operation of any predecessors, unless—

(1) such securities are non-convertible

debt securities rated in one of the four

highest rating categories by at least one

nationally recognized statistical rating

organization, i.e., Standard & Poor’s

6238 Federal Register / Vol. 65, No. 26 / Tuesday, February 8, 2000 / Notices

Rating Services, Moody’s Investors

Service, Inc., Duff & Phelps Credit

Rating Co., or Fitch IBCA, Inc., or their

successors (collectively, the Rating

Organizations); or

(2) such securities are issued or fully

guaranteed by a person described in

paragraph (a)(1)(i)(A) of this exemption;

or

(3) such securities are fully

guaranteed by a person who has issued

securities described in (a)(1)(i)(B), (C),

or (D) and this paragraph (b).

(c) The amount of such securities to

be purchased by the Asset Manager on

behalf of any single Client Plan or any

Pooled Fund, does not exceed three

percent of the total amount of the

securities being offered.

Notwithstanding the foregoing, the

aggregate amount of any securities

purchased with assets of all Client Plans

(including Pooled Funds) managed by

the Asset Manager (or with respect to

which the Asset Manager renders

investment advice within the meaning

of 29 CFR 2510.3–21(c)) does not

exceed:

(1) 10 percent of the total amount of

any equity securities being offered;

(2) 35 percent of the total amount of

any debt securities being offered that are

rated in one of the four highest rating

categories by at least one of the Rating

Organizations; or

(3) 25 percent of the total amount of

any debt securities being offered that are

rated in the fifth or sixth highest rating

categories by at least one of the Rating

Organizations; and

(4) if purchased in an Eligible Rule

144A Offering, the total amount of the

securities being offered for purposes of

determining the percentages for (1)–(3)

above is the total of:

(i) the principal amount of the

offering of such class sold by

underwriters or members of the selling

syndicate to ‘‘qualified institutional

buyers’’ (QIBs), as defined in SEC Rule

144A (17 CFR 230.144A(a)(1)); plus

(ii) the principal amount of the

offering of such class in any concurrent

public offering.

(d) The consideration to be paid by

the Client Plan or Pooled Fund in

purchasing such securities does not

exceed three percent of the fair market

value of the total net assets of the Client

Plan or Pooled Fund, as of the last day

of the most recent fiscal quarter of the

Client Plan prior to such transaction.

(e) The transaction is not part of an

agreement, arrangement, or

understanding designed to benefit the

Asset Manager or an affiliate.

(f) The Affiliated Broker-Dealer does

not receive, either directly, indirectly, or

through designation, any selling

concession or other consideration that is

based upon the amount of securities

purchased by Client Plans pursuant to

this exemption. In this regard, the

Affiliated Broker-Dealer may not

receive, either directly or indirectly, any

compensation that is attributable to the

fixed designations generated by

purchases of securities by the Asset

Manager on behalf of its Client Plans.

(g)(1) The amount the Affiliated

Broker-Dealer receives in management,

underwriting or other compensation is

not increased through an agreement,

arrangement, or understanding for the

purpose of compensating the Affiliated

Broker-Dealer for foregoing any selling

concessions for those securities sold

pursuant to this exemption. Except as

described above, nothing in this

paragraph shall be construed as

precluding the Affiliated Broker-Dealer

from receiving management fees for

serving as manager of the underwriting

or selling syndicate, underwriting fees

for assuming the responsibilities of an

underwriter in the underwriting or

selling syndicate, or other consideration

that is not based upon the amount of

securities purchased by the Asset

Manager on behalf of Client Plans

pursuant to this exemption; and

(2) The Affiliated Broker-Dealer shall

provide to the Asset Manager a written

certification, signed by an officer of the

Affiliated Broker-Dealer, stating the

amount that the Affiliated Broker-Dealer

received in compensation during the

past quarter, in connection with any

offerings covered by this exemption,

was not adjusted in a manner

inconsistent with Section I, paragraphs

(e), (f), or (g), of this exemption.

(h) In the case of a single Client Plan,

the covered transaction is performed

under a written authorization executed

in advance by an independent fiduciary

(Independent Fiduciary) of the Client

Plan.

(i) Prior to the execution of the

written authorization described in

paragraph (h) above, the following

information and materials must be

provided by the Asset Manager to the

Independent Fiduciary of each single

Client Plan:

(1) a copy of this notice of proposed

exemption and of the final exemption,

if granted, as published in the Federal

Register;

(2) any other reasonably available

information regarding the covered

transactions that the Independent

Fiduciary requests; and

(3) a termination form, with

instructions specifying how to use the

form, expressly providing that the

authorization described in paragraph (h)

may be terminated without penalty by

the Independent Fiduciary on no more

than five days’ notice.

(j) Subsequent to an Independent

Fiduciary’s initial authorization

permitting the Asset Manager to engage

in the covered transactions on behalf of

a single Client Plan, the Asset Manager

will, at least annually, provide the

Independent Fiduciary with another

termination form and the information

specified in subparagraph (i)(2) and (3)

above.

(k) In the case of existing plan

investors in a Pooled Fund, such Pooled

Fund may not engage in any covered

transactions pursuant to this exemption,

unless the Asset Manager has provided

the written information described below

to the Independent Fiduciary of each

plan participating in the Pooled Fund.

The following information and materials

shall be provided not less than 45 days

prior to the Asset Manager’s engaging in

the covered transactions on behalf of the

Pooled Fund pursuant to the exemption:

(1) a notice of the Pooled Fund’s

intent to purchase securities pursuant to

this exemption and a copy of this notice

of proposed exemption and of the final

exemption, if granted, as published in

the Federal Register;

(2) any other reasonably available

information regarding the covered

transactions that the Independent

Fiduciary requests; and

(3) a termination form expressly

providing an election for the

Independent Fiduciary to terminate the

plan’s investment in the Pooled Fund

without penalty to the plan. Such form

shall include instructions specifying

how to use the form. Specifically, the

instructions will explain that the plan

has an opportunity to withdraw its

assets from the Pooled Fund for a period

at least 30 days after the plan’s receipt

of the initial notice described in

subparagraph (1) above and that the

failure of the Independent Fiduciary to

return the termination form by the

specified date shall be deemed to be an

approval by the plan of its continued

participation in covered transactions as

a Pooled Fund investor.

For purposes of this paragraph, the

requirement that the authorizing

fiduciary be independent of the Asset

Manager shall not apply in the case of

an in-house plan sponsored by the

Applicant or an affiliate thereof.

(l) In the case of a plan whose assets

are proposed to be invested in a Pooled

Fund subsequent to implementation of

the procedures to engage in the covered

transactions, the plan’s investment in

the Pooled Fund is subject to the prior

written authorization of an Independent

Fiduciary, following the receipt by the

Independent Fiduciary of the materials

Federal Register / Vol. 65, No. 26 / Tuesday, February 8, 2000 / Notices 6239

described in subsections (1), (2), and (3)

of paragraph (k) and an explanation of

the plan’s ability to terminate its

investment in the Pooled Fund. For

purposes of this paragraph, the

requirement that the authorizing

fiduciary be independent of the Asset

Manager shall not apply in the case of

an in-house plan sponsored by the

Applicant or an affiliate thereof.

(m) Subsequent to an Independent

Fiduciary’s initial authorization of a

plan’s investment in a Pooled Fund that

engages in the covered transactions, the

Asset Manager will, at least annually,

provide the Independent Fiduciary with

a termination form and the information

specified in subparagraph (k)(3) above.

(n) At least once every three months,

and not later than 45 days following the

period to which such information

relates, the Asset Manager shall:

(1) furnish the Independent Fiduciary

of each single Client Plan, and of each

plan investing in a Pooled Fund, with

a report (which may be provided

electronically) disclosing all securities

purchased on behalf of that Client Plan

or Pooled Fund pursuant to the

exemption during the period to which

such report relates, and the terms of the

transactions, including:

(i) the type of security (including the

rating of any debt security);

(ii) the price at which the securities

were purchased;

(iii) the first day on which any sale

was made during this offering;

(iv) the size of the issue;

(v) the number of securities purchased

by the Asset Manager for the specific

Client Plan or Pooled Fund;

(vi) the identity of the underwriter

from whom the securities were

purchased;

(vii) the spread on the underwriting;

(ix) the price at which any securities

purchased during the period were sold;

and

(x) the market value at the end of such

period of each security purchased

during the period and not sold;

(2) provide to the Independent

Fiduciary written certifications signed

by an officer of the Affiliated BrokerDealer, as described in paragraph (g)(2),

affirming that, as to each offering

covered by this exemption during the

past quarter, the Affiliated BrokerDealer acted in compliance with Section

I, paragraphs (e), (f), and (g) of this

exemption;

(3) disclose to the Independent

Fiduciary that, upon request, any other

reasonably available information

regarding the covered transactions that

the Independent Fiduciary requests will

be provided, including, but not limited

to:

(i) the date on which the securities

were purchased on behalf of the plan;

(ii) the percentage of the offering

purchased on behalf of all Client Plans

and Pooled Funds; and

(iii) the identity of all members of the

underwriting syndicate; and

(4) disclose to the Independent

Fiduciary in the next quarterly report,

whether at any time during the

preceding quarter, the Asset Manager

was precluded from trading in a security

purchased under this exemption for any

period of time because of its status as an

affiliate of the Affiliated Broker-Dealer

and the reason for this restriction.

(o) Each single Client Plan shall have

total net assets with a value of at least

$50 million. In addition, in the case of

a transaction involving an Eligible Rule

144A Offering on behalf of a single

Client Plan, each such Client Plan shall

have at least $100 million in securities,

as determined pursuant to SEC Rule

144A (17 CFR 230.144A). In the case of

a Pooled Fund, the $50 million

requirement will be met if 50 percent or

more of the units of beneficial interest

in such Pooled Fund are held by plans

having total net assets with a value of

at least $50 million. For purchases

involving an Eligible Rule 144A

Offering on behalf of a Pooled Fund, the

$100 million requirement will be met if

50 percent or more of the units of

beneficial interest in such Pooled Fund

are held by plans having at least $100

million in assets and the Pooled Fund

itself qualifies as a QIB, as determined

pursuant to SEC Rule 144A (17 CFR

230.144A(a)(F)).

For purposes of the net asset tests

described above, where a group of

Client Plans is maintained by a single

employer or controlled group of

employers, as defined in section

407(d)(7) of the Act, the $50 million net

asset requirement or the $100 million

net asset requirement may be met by

aggregating the assets of such Client

Plans, if the assets are pooled for

investment purposes in a single master

trust.

(p) The Asset Manager qualifies as a

‘‘qualified professional asset manager’’

(QPAM), as that term is defined under

Part V(a) of Prohibited Transaction

Exemption 84–14 (49 FR 9494, 9506,

March 13, 1984) and, in addition, has,

as of the last day of its most recent fiscal

year, total client assets under its

management and control in excess of $5

billion and shareholders’ or partners’

equity in excess of $1 million.

(q) No more than 10 percent of the

assets of a Pooled Fund, at the time of

a covered transaction, are comprised of

assets of employee benefit plans

maintained by the Asset Manager, the

Affiliated Broker-Dealer, or an affiliate

for their own employees, for which the

Asset Manager, the Affiliated BrokerDealer, or an affiliate exercises

investment discretion.

(r) The Asset Manager and the

Affiliated Broker-Dealer maintain, or

cause 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 (s) of this

exemption to determine whether the

conditions of this exemption have been

met, except that—

(1) no party in interest with respect to

a Client Plan, other than the Asset

Manager and the Affiliated BrokerDealer, 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 by paragraph

(s); and

(2) a prohibited transaction shall not

be considered to have occurred if, due

to circumstances beyond the control of

the Asset Manager or the Affiliated

Broker-Dealer, such records are lost or

destroyed prior to the end of the sixyear period.

(s)(1) Except as provided in

subparagraph (2) of this paragraph (s)

and notwithstanding any provisions of

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

of the Act, the records referred to in

paragraph (r) 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 SEC; or

(ii) any fiduciary of a Client Plan, or

any duly authorized employee or

representative of such fiduciary; or

(iii) any employer of participants and

beneficiaries and any employee

organization whose members are

covered by a Client Plan, or any

authorized employee or representative

of these entities; or

(iv) any participant or beneficiary of

a Client Plan, or duly authorized

employee or representative of such

participant or beneficiary;

(2) none of the persons described in

paragraphs (s)(1)(ii)–(iv) shall be

authorized to examine trade secrets of

the Asset Manager or the Affiliated

Broker-Dealer, or commercial or

financial information which is

privileged or confidential; and

(3) should the Asset Manager or the

Affiliated Broker-Dealer refuse to

disclose information on the basis that

such information is exempt from

disclosure pursuant to paragraph (s)(2)

6240 Federal Register / Vol. 65, No. 26 / Tuesday, February 8, 2000 / Notices

above, the Asset Manager 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

(a) The term ‘‘the Affiliated BrokerDealer’’ means any broker-dealer

affiliate of the Applicant (as ‘‘affiliate’’

is defined in paragraph (c)) that meets

the requirements of this exemption.

(b) The term ‘‘the Asset Manager’’

means any asset management affiliate of

the Applicant (as ‘‘affiliate’’ is defined

in paragraph (c)) that meets the

requirements of this exemption.

(c) The term ‘‘affiliate’’ of a person

includes:

(1) any person directly or indirectly

through one or more intermediaries,

controlling, controlled by, or under

common control with such person;

(2) any officer, director, partner,

employee, or relative (as defined in

section 3(15) of the Act) of such person;

and

(3) any corporation or partnership of

which such person is an officer,

director, partner, or employee.

(d) The term ‘‘control’’ means the

power to exercise a controlling

influence over the management or

policies of a person other than an

individual.

(e) The term ‘‘Client Plan’’ means an

employee benefit plan that is subject to

the fiduciary responsibility provisions

of the Act and whose assets are under

the management of the Asset Manager,

including a plan investing in a Pooled

Fund (as ‘‘Pooled Fund’’ is defined in

paragraph (f) below).

(f) The term ‘‘Pooled Fund’’ means a

common or collective trust fund or

pooled investment fund maintained by

the Asset Manager.

(g) The term ‘‘Independent Fiduciary’’

means a fiduciary of a Client Plan who

is unrelated to, and independent of, the

Asset Manager. For purposes of this

exemption, a Client Plan fiduciary will

not be deemed to be unrelated to, and

independent of, the Asset Manager if:

(1) such fiduciary directly or

indirectly controls, is controlled by, or

is under common control with the Asset

Manager;

(2) such fiduciary, or any officer,

director, partner, employee, or relative

of such fiduciary is an officer, director,

partner, or employee of the Asset

Manager (or is a relative of such

persons); or

(3) such fiduciary directly or

indirectly receives any compensation or

other consideration from the Asset

Manager for his or her own personal

account in connection with any

transaction described in this exemption.

If an officer, director, partner, or

employee of the Asset Manager (or a

relative of such persons), is a director of

such Independent Fiduciary, and if he

or she abstains from participation in (A)

the choice of the Plan’s investment

manager/adviser and (B) the decision to

authorize or terminate authorization for

transactions described in Section I, then

paragraph (g)(2) of this Section II, shall

not apply.

(h) The term ‘‘security’’ shall have the

same meaning as defined in section

2(36) of the Investment Company Act of

1940 (the 1940 Act), as amended (15

U.S.C. 80a–2(36)(1996)).

(i) The term ‘‘Eligible Rule 144A

Offering’’ shall have the same meaning

as defined in SEC Rule 10f–3(a)(4) (17

CFR 270. 10f–3(a)(4)) under the 1940

Act.

(j) The term ‘‘qualified institutional

buyer’’ or ‘‘QIB’’ shall have the same

meaning as defined in SEC Rule 144A

(17 CFR 230.144A(a)(1)) under the 1933

Act.

(k) The term ‘‘Rating Organizations’’

means Standard & Poor’s Rating

Services, Moody’s Investors Service,

Inc., Duff & Phelps Credit Rating Co., or

Fitch IBCA, Inc., or their successors.

Signed at Washington, D.C., this 3rd day of

February, 2000.

Ivan L. Strasfeld,

Director of Exemption Determinations,

Pension and Welfare Benefits Administration,

U.S. Department of Labor.

[FR Doc. 00–2856 Filed 2–7–00; 8:45 am]

BILLING CODE 4510–29–P

EXECUTIVE OFFICE OF THE

PRESIDENT

National Partnership for Reinventing

Government

BEST Communities: Boosting

Education, Skills and Training

AGENCY: National Partnership for

Reinventing Government.

ACTION: Notice of performance partners

with community-based coalitions.

AUTHORITY CITATION: Non-statutory.

BACKGROUND: The number one problem

facing American business today is a

shortage of highly skilled workers.

America’s competitiveness and the

prosperity of the American people will

depend increasingly upon high-skill,

high-wage jobs. Realizing this potential

will require investing in education and

learning so all of our people can

continue to learn throughout their

lifetime and get the skills they need to

succeed in the 21st century.

The BEST Communities initiative was

recommended by the 21st Century

Leadership Group—a forum of leaders

from business, organized labor,

education, and all levels of

government—convened by the Vice

President in January 1999. The Vice

President asked the group to develop a

set of recommendations to their peers

that would help ensure a prepared and

thriving workforce in the next century.

Their report, Skills for a New Century:

A Blueprint for Lifelong Learning,

presented to the Vice President in

November 1999, outlined five broad

recommendations to provide adults the

skills they need and employers the

skilled employees needed to remain

competitive.

(1) Deliver education and training that

is tied to high standards, leads to useful

credentials and meets labor market

needs.

(2) Improve access to financial

resources for lifetime learning for all

adult Americans, including those in

low-wage jobs.

(3) Promote learning at a time, place,

and manner that meets worker needs

and interests, including through the use

of learning technologies to enable

learning at home, the workplace, or

elsewhere.

(4) Encourage and motivate adults to

pursue further education and training

and inform them of resources available

to help them do so.

(5) Form partnerships among a wide

array of organizations and stakeholders

to support workforce development and

lifelong learning for adults.

Based on the Leadership Group’s

recommendation, the Vice President

announced a new initiative to assist

local communities interested in

developing and implementing

community-wide strategies to help

adults get the skills they need to

succeed. This effort would support

community-based partnerships

involving business, labor, education and

government that develop plans focused

on clear, objective, measurable goals for

adult learning and skill development

across a community. Existing web sites

will be used to share key information

and best practices across a broader

network of communities.

Announcement: The National

Partnership for Reinventing Government

is seeking ten performance partners

with community-based coalitions that

want to work with Federal partners to

enhance education, skills, training and

lifelong learning for adults in their

community. Community-based

partnerships that are not selected as one