Class Exemption 81-8 for Investment of Plan Assets in Certain Types of Short-Term Investments

DEPARTMENT OF LABOR

Class Exemption Covering Certain
Short-term investments
AOENCY:
ACTION:

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Department of Labor.
Grant of class exemption.

eiermine whether a tr& action is
lmhibited under section fDBlal of

takhg into account all the relevant facts
,
and ~ircums!ances.
With respect to unrated i s ~ u e of
s
commercial paper that,are sold [n a
private offering, the extent to whiqh
commerdal paper is issued in the
ordinary course of business without
being rated by an independent rating
agency is unclear, and the comments
received did not provide theDepartmenl
witha basis for concluding that unrated
private offerings of commercial paper
have such protective characteristics that
affected plans would not need the
independent safeguards that the rating
cqndition-bJnteIlLded to p rside. - .C. fie section rsfilng r quirement.
Several commentators obj cted to the
requirement contained in condition of
the proposed exemption that
comnlercial paper be issued-by a
company required to file reports under
section 13 of the Securities Exchange
Act of 1934 (the 1934 Act]. These
commentators note that many insurance
companies do not file periodic reports
under section 13(a) of the 1934 Act
because they are specifically exempt
under section 12(g)(Z)LG) of the 1934 Act
from the registration requirements of
section 12 of that act, and ere not
otherwise required to file such reports.'
In addition these commentators noted
that the filing requirements of other
paragraphs of section 13 of the 1934
Act-i.e. sections 13(d) and 13(g)
(Ge~ierallyapplicable to purchasers and
*ho!ders of more than five percent of a
class of equity securities re~istered
under sectioa 12 of the 1934 Act). 13(e)
(rehting to registered issuern that
purchase their own shapes): and 13[f)
(relating to institutional investment

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;ohtc$qJlated by the exemptioh and. if
the e emDtion is not modified to clearlv

n. hulding or disposition
per that is guaranteed

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'Section 12[g](2)[C).oi the l
w Act s t a t e r
I21 The pmvislona [requir@ rrgiatratioul shall

. . .

not app!y in tespecl of-

(GIany security issued by an Insurance company
if all of the following conditions are met:
[i) Such Insurance company is required to and
does file an annual statement with the.
Comsnlsaioner of Insurance [or olher officer or
agency performing a slmllar function) of its
domiciliary State. and such annual statement
conforms to that prescribed by the National
Aesoc~alionof hburance ~o&issioners or in the
determlnetion of such Strite commi~sloner,officer oc
agency substantially conforms to that so prescribed.
(O) Such Fnsurance company IS subject to
regulation by its domiclllary State of pmxlea,
conskta, or authorizations fn respeck to securities
issued by such company snd sush regulation
conforms la that prescribed by the National
Association of Insurance Con~m!ssloners. !
liii) After July 1, l
a the purchase and sales of
swurilias issued by such insurance company by
beneficial o m e m , dtrectom. or officers of su&
company dm subject to lado on !Including
reporhg) by its domfdllary State subatantially in
the manaer provided in sdon 18 of this title
Irelaling to securftiea transactions by certain
diredom. &cenr andprincip61 nhareholdry of the
Issuer of such senvitltsk

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xempllon. the appllcents lor thb ex;mption staled
spulication that in view of the nature of the

investment for bmploy~ebenefit plans
and t$at because the rating of an issue
of co m e d a l fiper reflects the relative
MInenl8 received by the ~ e p a r t & k a h made
&is wint. See commenla c f IHe American Bankers
saociatian. datedlune 2 1 . 1 h and &ments
r d e on behalf of six llfe insurance can panies and
e American Caundl o l Life Inwrancp. dated June

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Federal Ragisbr / ~ o l 46,
. No. 15 1 Friday,. January 23, 1881 1 Notioss

7510

managers who exercise Investment
discretion over at least $100 million in
publicly traded equity securities)relate to specific occurrences or are only
applicable in certain circumstances.
and. therefore, many issuers of
commercial paper may have no
obligation to file under these
requirements. The com&entators also
noted that application of the section 13
filing requirement would prevent plans
from acquiring commercial paper issued
by many privately-held companies and
subsidiaries of other companies because
such companies also are not required to

which does not appear in the candition
several of the Londitions of the propose4
to the e x e m p t i ~ n . ~ T hcommentator
b
exemption relating to repurchase
suggested that the condition be revised
agreements. These objections to the j
to conform to the definition in the 1933
conditions and the Departuterrt's
Act. The Department agrees with this
respoqses to the comments are
discilssed below.
comment and has revised the condition
A. The rq.quirement of a wriling.,Four
accordingly.
of the compentators suggested that the I
E. Employer Securities. One
\Department eliminate ~r modify the
commentator suggested that the
condition of the exemption that would
Department expand the exemption to
include commercial paper issued by an
require that a repurchase agreement ,
employer of participants in a plan, or an covered by the exemption be embodied,
affiliate of such an employer, provided it in, or pursuant to, a writteri agreement.
These commentators noted that a
is a "marketable obligationwas defined
repurchase agreement transaction, like 1
in section 407(e) of EFUSA and

employee benefit plan or whether the

provides an exemption for certain

behalf of the plan.

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interest rate on the' transaction. Ln
addition, these commentators indated

securities or instrumentsother than Unlted States
obligations, u plan fiduciary, in addition to

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different ways of modifying the

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suggested that the requirement be

price. Still other commentators
suggested that thia requtrement be
deleted in its entirety but that the

benefit of its bargain. However, the
Department also believes that plan
officials should be perinitted the
maximum discretion in choosing
repurchase agreement oppott~nitieathat
is coneistent with the protection of plan
participants and beneficiaries.

"coUaterabzation"and "marking-tpmerket"
aefinandal 3
and, d~pendln8
condillon of the seller and thechaqcter of the
underlying securltiea a Bduciory may be obllgsted
to obtain a~ temome w m i n Ule
m n a a c t i ~ ns,,,tion q a ) O ~ E R ~ ~ A
'=a
CF'R 2510.3-n(c).

desctibed in the appliccafibn and in the
comments recelved~shcyldhave no
difficultyin establishing Ms compliance
with t h e , p i d i t l d as it'was proposed.
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in the transaction. The commentator

that those portions of the .
dealing with banker's
s and commercial paper be
to include relief from sections

t

h

guarantees a short-term obligation that
is acquired by a plan, and such fiduciary
is a fiduciary aolely because he is an
investment manager or provides

Federal Regieter

1 Vol.

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No. 1 5

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rid&.‘ January 23. 1981 /

Notices

7517

the trustee with respect Yo the
8: h e exemption set dorth k r e i n is
q n s i d e r a t i o n for his own personal
investment. The commentator alsolnoted supplemental to,,and not In derogation
account from a party dealing with the
that although the Department's
of, m y other provisions oi the Act,
plan in a transaction involving the
regulations under section 408(b](4)
including etaiutory exemptions and
assets of the plarPin violation of section
describe what will constitute sufficient
. 4061b1131
trybsitiona1rules. Furthermore. the fact
. -. . of ERISA [and section
,
authorization of a plan's investnient in a €hat a transaction is subject to'an
4975[c)[l)[F) of the code] even though
bank or other financial institution that
administratide,or statutory exemption is
.the fiduciarv used none of his authoritv.
not dispositive of whether the
control or responsibility a s a fiduciaiito makes the investments in its own
deposits or in deposits of an affiliate, the ,transaction is in fact a prohibited
cause the plan to acquire the obligation.
regulation provides no guidance with
, transaction.
In the Department's view, the mere
4. The cldss exemptiqn js applicable '
respect to authorization of transactions
receipt by a fiduciary of a fee for
occurring after November 1,1977, where 'to a particular transaction only if the
guaranteeing a short-term investment
transaction satisfies the c o n d i t i o s ,
the deposit is with a party in interest
that is offered iin an open market and is
bank or other financial institution other
epecified in the class exemption.
ultimately acquired by a plan does not
5. Ln accordance with section 408(a) of
than the institution making the deposit
constitute a violation of section 4 0 ~ ( b ) w
the Act and section 4975[c)[2) of the
or an affiliate of that institution).
of ERISA [or a transaction described in
%herefore, the commentator stfggested, it Code, and based upon the entire record,
section 4975[c](l)(F) of the Code)
including the written comments.
would be appropriate for the
because the fiduciary received the fee
submitted in response to the notice of
for guaranteeing the investment and not
Department to include such certificates
April 25,1980, the De~artmentmakes
of deposit in the scope of the exemption
in connection with the transaction that
the follawing determinations: *
in. order to make it clear that they are
Involved the assets of the plan [i.e. thea
li1 The class exern~tionset forth
plan's acquisition of the investment). l5
permitted.
herein is aye-l
feasible:
The Department has, in general,
Therefore, no revisions have beeri made
(ii)lt is in e interests of plans and of
adopted the commentator's suggestion
to the exemption in response to the
their participantsand beneficiaries; and
and has revised the exemption
request.
(iii) It is protective of the rights of
accordingly. However, the Department
B. Retroactivity. Several
participants and beneficiaries of plans.
has not adopted a portion of the
commentators, while agreeing with the
commentator's suggested revision to the
roposed January 1,1975, effective date
exemption which merely reiterates the
f the exemption, urged the Department
A'ccordingly, the following exemption
requirements of the Department's
to apply various conditions to the
/isahereby granted under the authority of
regulations under section W[b)[4).
exemption only prospectively#As
section 408(a) of the Act and section I
D. Other Matters. One commentator
discussed above, the Department has
4975[c)@ of the Code end in accordance
made several revisions to the exemption urged the Department to expand the
exemution to include investments in.
. with the pmceduriis set forth in ERISA
in response to these comments.
Procedure 75-1 (40FR 18471, April 28.
among other things, loans for
C. Certificates of Deposit. One
1975).
development of alternative energy
commentator suggested that the
Effective January 1.>975. ihe
sources, and loans that would promote
Department revise the exemption to
restrictiohs of sections 408[a)(l)[A), (B)
employee ownership of corporations.
permit the acquisition of a certificate of
and [D) f the Act, and,the taxes
deposit that is issued by a bank which is These matters are outside the scope of
impose by reason of section
the exemption.
supervised by the United States or a
4975[c)\l)(~].(E) and (D) of the Code
State if neither the bank nor any affiliate General Information
shall ngt apply to an investment of
of the bank has discretionay authority or
Theattention of interested persons is -employe--fit
plan assets which
control with respect to the investment of
directed to the following:
involves the purchase or other
plan assets involved in the transaction
1.The fact that a transaction is the
acquisition, holding, sale, exchange or
or renders investment advice with
subject of an exemption granted under
redemption by or on behalf of an
respect to the assets. In regard to this
section -(a) of the Act and section
employee benefit plan ok the following:
suggestion, the commentator noted that
4975[c)(2) of the Code does not relievda
1. Bankerb Aaceptances. A banker's
section 408(b)(4) of ERISA (and section
fiduciary
of
a
plan
to
which
the
acceptance that is issued by a bank if:
4975[d)[4] of the Code) provides an
exemption is applicable from certain
A. The banker's acceptance has a
exemption from the prohibited
other provisions of the Act, including
stated mahirity date of one year or less
transaction provisions of ERISA for the
investment of a plan's assets in deposits any prohibited transaction provisions to from date of issue or.has a maturity-date
of a bank or similar financial institution , which the exemption does not apply and of one year or less from the date of I
the general fiduciary responsibility
purchase on behalf-of the plan:
that is a fiduciary of the plan if the plan
B. Neither the bank nor any affiliate of
provisions of section 404 of the Act
covers only employees of the bank or
which, among other things, require a
the bbnk has' discretionary authority or
financial institution or if the investment
control with respect to the investment of
is.ex~resslvauthorized bv a ~rovisionof fiduciary to discharge his duties with
.
the $an o;by a fiduciary"(other than the respect to the plan solely in the interest * the plan assets involved in the
of the plan's participants and
transaction or renders investment
bank or similar financial institution or
beneficiaries and in a prudent fashion in advice [within the meaning of 29CFR
affiliate thereofj who is expressly
accorda,me with section 4W[a)[l)(B) of
2510.3-21[c)) with respect to those
,
empowered by the plan to so instruct
the Act.
as$ets:
2.
The
exemption
granted
here
daes,
C
The
terms
of
the
transaction
are
at
"However. receipt of such a fee could constitute
not extend to transactions prohibited
least as favorable to the plan a s those 'of
a violation of section 408(b)(3)in certain
circumstances: for example. a violation of s e c t i ~ ~ n
an arm's length transactionwith a n
d d e r section 406[b] of the Act a'nd
408@)(3) might occur where it in specificelly
sections 4975(c)(l) (E) and (F)of the
w e l a t e d p a r t y would be: and.
contemplated by the parties at the time the
D. With respect to transactions
Code.
fiduciary raceIvea the fee for guaranteelrq the
occurring on o r after April 23.3981 the'
obligation. that the plan wlU squire the stidrt-tenn
investment.
bank issuing the banker's $ccept?nce is

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7518

F&B~

Register

I \ ~ o l .I&

No. 15, / Friday; J-anuacy.23. 1981

sed by the United States or a
merciol Paper. Commercial

r instruments to the bank, broker-

6(a](l)(E]. 406[a)(2) or 407(a) of the

eement, the plan may, under the
tten agreement required by

aqditional securities or other
in$truments as required above, the plan
m y terminate the agreement, and, if .
u%on termination or ex~irationof the

a

/ Notices

condition a s they are issued'and either:
[A] agrees that each repurchase
agreement traneaction pursuant to the
agreement shall constitute a
-.
representation by ths seller that t h e r d
has been no material adverse change in
its financial condition since the date of
the last statement furnished that has not
been disclosed to the $an fiduciary with
whom such written agreement is made:
or (B] prior to each repurchase
agreement transaction, the seller
represents that, as of the time the
transaction is negotiated, there has been
no material adverse change in its
financial condition since the date of the
.last statement furnished that has not
been disclosed to the plan fiduciary with
whom such written agreement is made.
(4) In the event of termination and
sale as described in [21 above, the seller
pays to the plan the amount of any
remaining obligations and expenses not
covered bv the sale of the securities or
other inskments, plus interest at a
reasonable rate.
If a sellerinvolved in a repurchase
agreement covered by this exemption
fails to comply with any condition of
this exemption in the course of engaging
in the repurchase agreement, the plan
fiduciary who caused the plan to engage
in such repurchase agreement shall not
be deemed to have caused the plan to
engage in a transaction prohibited by
section 406(a](l)[A) through (Dl of the
Act solely by reason of the seller's
failure to comply with the conditions of
the exemption.
%
IV. Certificates of Deposil A
certificatg of deposit that is issued by a
bank which is supervised by the United
States or a State if neither the bank nor
any affiliate of the bank has
discretionary authority or control with
respect to the investment of the plan
assets involved in the transaction or
renders investment advice (within the
meaning of 29 CFR 2510.3-21(c]] with
respect to those assets.
Far purposes of this exemption the
lerm "affiliate" ig defined in 29 CFR
2510.3-21(e].
Signed at Washington, D.C., this 16th day
of ~anuary.
Ian D. Laaoff,
Administrator, Pension and Welfare Benefit
Progmms, Labor-Manogement Services
Administration. U s Department of Labor.
IFR Doc

n that which it would receive
aragle transaction with an
of one year or less.

81-2583

Plled 1-'22-8X

L 4 6 am]

BILLING CODE 4610-Z9-M

Proposed Class Exemption To Permit
Payment of Cotwensatton To Plan
~lduclariestor the Provtslon of
Securltles Lending Services
AQENCY: Department of Labor.

&Noticeto Interested Fenions
Because all plan participants and
give rise to a violation of section

services by a plan fiduciary to an

(1) The fact that a transac!ion is the
subject to an exemptipn under section

compensation for the provision of

Welfare Benefit Programs. U.S.

406(b) (2) and (3) of the Act and section

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applications for a complete statement of

ashiwton.
D.C. this 16th day of

hearing with regard to the proposed
class exemption were received pursuant
to sdction 408(a)of the Act andsection

d e t e e e d to grant the-proposed class
exenlption, subject to certain
modifications. These modifications and
the major comments are discussed
Description of the Proposal
The proposed class exemption
contained in the notice of pendency
provided conditional relief prospectively

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Federal Register

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Vol. 46, No. 15

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Friday, January 23, 1981

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Notices

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affiliate of the pool sponsor. Condition 4
specific conditions pertaining to each
listed transaction were also taken from
provided that the sum of all paytnents,
made to and retained bv the w o l
the representations of the applicants.
sponsor in connection Gith amortgage
Section I@) of the proposal would
pool, and all funds inuring to the benefit
provide conditional relief from section
of the pool sponsor a s a result of the
406(b) (1) and (21 of the Act and section
administration of the mortgage pool.
4975(c][l](E) of the Code for the sale
must represent not more than adequate
exchange or transfer of certificates
consideration for selling the mortgage
between h plan and a pool sponsor
loans plus reasonable compensation for
when the pool sponsor or pool trustee is
services provided by the pool sponsor to
a fiduciary with respect to such plan.
the pool.
Such relief would be available provided
that: (1) a fiduciary who is independent
Section 111 of the proposal contained
of the pool sponsor and pool trustee and
definitions of the terms "pool sponsor,"
who has the authoiity to manage and
"mortgage pool." "mortgage pool passcontrol the assets of the plan approves
through certificate." and "affiliate."
the purchase of certificates; (2) the plan
These defhtions generally reflected the
pays no more for the certificates than
representations of the applicants..
would be paid by an unrelated third
Discussion
of the Comments
party in an arm's-length transaction; (3)
the plan pays no investment
A. Structure of the Exemption
management, investment advisory, sales
As noted above. the proposed class
commission or similar fee to the pool
exemption would provide detailed relief
sponsor with regard to such sale or
in response to the applicants' requests.
acquisition; and (4) the total value of
This was esoeciallv true in section I of
certificates purchased by all plans with
the proposai. which listed the individual
respect to which the pool sponsor or
transactions exempted along with the
pool trustee is a fiduciary shall not
specific conditions apblicable to each
exceed 10% of the amount of the
transaction. It was the Department's
offering.
intention that this specificity provide the
Section UC) of the proposed
exemption would provide relief from the basis for a detailed analysis of the ways
in which the provisions of the Act
restrictions of section 408(b](l) of the
Act and section 4975(c)[l)(E) of the Code affected investments in mortgage pools.
While praising the thoroughness of the
for the collection, holding and
Department's proposal, many
investment of individual mortgage
commentators noted serious problems
payments by the pool sponsor prior to
with this specific transaction-based
the date of disbursement to certificate
approach. Most indicated that the
holders, and the retention of a specified
mortgage pool investrnent.industry is
portion of the interest by the pool
still relatively young and is c o n s i a n t l ~
sponsor as part of its compensation for
WeveIopSng new methods of operation.
organizing and servicing the mortgage
The commentators argued that the
pool. Relief for the retention of
Department's proposal would if
prepayment late payment and
finalized in the same form, require rigid
assumption fees by the po61 sponsor
would be provided by section 1(D] of the adherence to the present modes of .
operation. thus prekenting possibly
proposal.
beneficial innovation.
Section U of the proposal contained
four general conditions applicable to all
Several commentators also indicated
of the transactions listed in Section I.
the difficulties inherent in drafting and
Condition 1provided that the
administering an exemption in the form
~ e r t ~ c a tmust
e s have been issued in a
proposed. In order to demonstrate the
public offering registered under the
problems in basing a class exemption on
Securities Act of 1933 pursuant to a - f i
a supposedly comprehensive list of
commitment underwriting. Conditios 2
transactions, the commentators b&t
required the maintenance of a system
to the Department's attention a number
for insuring or otherwise protecting the
of transactions omitted from the list. The
pooled mortgage loans and the property
commentators further noted that
securing such loans up to an amount not
mortgage pools maintained by sponsors
less than the greater of one percent of
other than the applicants may vary, in
the aggregate principal value of the
certain minor ways from the applicants'
pooled loans, or the principal value of
pools. While these variations may not
the largest pooled loan The condition
be sufficient to undermine the basis for
went on to specify the ways in which
granting class relief. the effect of such \
such a system must be structured. These differences could render a specific.
specifications were based on the
transaction-based exemption,
applicants' representations. Condition 3
inapplicable to transactions posing no
required that the pool trustee not be an
greater'pdssibility for abuse than those

7521'

associated &it$ the pools described in
the applications.
The aepartment has catef4ly P
reviewed these coxhments and has
decided to resbucture the final class
exemption in the more generalized
maniier suggested by the commentators.
Thus. section I of the final exemption
provides relief for several tvpes of
iransactions, but.does not Git tho e
.,
-transactionsZndividuallv. ~ e c t i m h
contains several conditibns ap& able
to the relief provided in sestion I These
conditions are designed to assure
certain levels of protection for investing
plans, rather than to require strict
conformange to a qpecifically described
program. Section IlI contains definitions
designed to provide exemptive relief for
a broader spectrum of entities involved
'
in the moreage pool igvestment
industry. The provisions-of these
sections. and b e ways in which they
reflect modifications made in response
to comments receivedfregarding the
proposal, are discussed below,
B. Section I(Aj
Section I(A) of the final exemption
provides relief from sections 406(a] and
407 of the Act and section 4975[c)(1) (A)
through @) of the Code for the direct or
indirect sale. exchapge or trpnsfer of
mortgage pool certificates between the
sponsor of the mortgage pool and an
employee benefit plafi when the
sponsor, trustee or insurer of the pool is
a party in interest with respect to such
plan. Such relief is available provided
the plan pays no more thawfair market
value for ~uskseFtiffsates,and the rights
and interests evidenced by such
certificatss are not subordinated to the
rights and interests evidenced by other
certificates of the same mortgage pool.
Section I(A) of the final exemption also
provides-relief for the continued holding
by a plan of such certificates.
This section of the final exen~ptionis
essentially similar to paragraph I(A)(l)
of the proposal. However. the
Department has received several
comments regarding this provision FiFst
certain commentators questioned
whet he^ the relief would extend totransaction+in the secondary market. In
response. the Department notes that it
intended the relief provided in this
section to apply only to the initial s h e
of certificates. h o r d e r to clarify this.
the Department has modifi-ed @is
paragraph to apply only to the sale.
exchange or transfer of ceeficates in
the initial i s s u m of certificates. Also,
in this regard, the Deparhnent notes that
several other cogunentators have
indicated that they anticipate that
transactions in the secondary market
1.
would be so-called "blind tra,nsactions."

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on

,ity
the

provisions of section 407[e][2) of the
Act, which define, in part. the, term
''marketable obligation." One of the
commentatore suggested this approach

plan must not exceed 25% of the amount
of the issue. Condition (e) requires that
at least 50% of the issue is eccquired by
persons independent of the pool
sponsor, trustee or insurer. (The term
"persons independent of the pool
sponsor, trustee or insurer" is difined in
section III(FJ, discussed below.] The

management fee from the plan or its

services. To the extent that a pool

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Federal Register / Vol. 46. No. 15 / Fridav. larmarv 23. 1981 / Notices

m)

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C.

E. Section
difficult to list comprehensively aH of
the transactions which may occur
Serveral comkentators noted that the
purseant to such agreement and ~ h i c h proposed exemption
no =nief
may ;be eligible for exemptive relief.
for situations In which prohibited
Ae a result, the Department has
transactions may arise solely because a
decided to dispense with the technique
plan arms a pool certificate. qese
,
that, subsequent to
of listing individual transactions in this r colhmentabrs
case and to provide more general relief.
a ceftificate, a plan may, for
example, have dealings with the pool
It should be understood that relief
contained in section I[C) of the final
sponsor
matters having
exemption ia intended to extend to all
nothing to do with the mortgage p o o ~
thsoe transactions listed in sections
The co-entators
Indicated that, under
(151,!(C), and I(D1 of the
lfAl(2)
such circumstances, a large number of
proposal. However. this relief is not
inadvertant, technical prohibited
limited to transactions so listed.'
transactions conld result when no
Further, the only conditions applicable
potential for abuse existed. n e s e
to such relief are those actually listed in comeotators have therefore requested
the final exemption. and not those
general exemptive relief for such
indicated only in the proposal.
"external" transactions.
The relief contained in section I(C) of
Deparbent has carefi,lly
the final classexemption is provided *
comment in light of its
subject to two conditions. First, the
past practice regarding similar requests.
transactions must be carried out in
In Class Exemption 80-51 (6FR 49709,
accordance with the terms of a binding
J ~ 25,1980)
Y
for Certain
pooling and servicing agreement which
Involving Bank Collectiv
. governs the operation of the pool.
Funds, the Department provided, among
Second, the pooling and servicing
other things, broad relief for certificate
agreement must be made available to
b,actions
between a collective
investors before they purchase pool
investment fund-and a service provider
certificates. These conditions are simply with respect to a plan investing in such
corollaries of the representations of the
a b d . Similar relief was provided in
applicants and C~n~mentators
that'the
Class Exemption 78-19 (43 FR 59815,
terms of the pooling and servicing
December 22,1978) for Certain
agreement afford adequate protection
~
~
involving
~
~ insurance
i
~
~
for all certificate-holders and that the
Company pooled Separate ~ccounts,
terms of the agreement generally are
The present request would extend
disclosed prior to the time certificates
beyond relief for s e d c e providers and
are purchased. These conditions assure
apply to a potentially large
that an investment plan will be aware of numbe; of unspecified transactions.
the terms of the pooling and servicing
It has been represented and the
agreement, and that those terms will in
Depament believes that an investment
fact govern the operation of the pool.
in a mortgage pool is fundamentally
It should, of course, be. noted that
different from an invebtment in a bank
these conditions must be read in light of collective investment fundor an
the conditions contained in sections I[A) insurance.~ompanyseparate
and I(B) of the final exemption. Since
~ C C O , ~ A mortgage pool is a fixed pool
the price of a certificate should reflect.
of loans; these asseb generally are not
,@mouWother things. the quality of the
subject to change onoe the certificates
protections afforded investors under the have been sold, ucept n.mortsageesare
pool@ and Servicin~agreement*then
paid off and the principal and interest
the fair market
am's-length*
passed through to certificate-holders. percentage limitations in section I(A) . ~lthoughthe pooled loans are heldsin
and I(B) will operate along with the
trust for the benefit of certificateholders.
conditions in section I(C) to provide &I
included investing
the
acceptable level of protection for
Department does not believe that the
investing plans.
mere existence of such an arrangement,
or the pmvision of the services , ,
For example. among the transanttons not listed
attendent upon an investment in a
in the proposal but covered by (hie final dass
mor18age pool, would. f&LSent other .
exemption E& Lransactions peculiar to variable rate
mortgages. Aa noted in the preamble to the
factors. pose such a potential for abuse
proposal. IS FR at 29939. n.0. the Department '
as to preclude exemptive relief.
intended to provide relief far pools composed in
the ~
~
~notes~ that~
whole or In part of variable rate mor(gagea
Nevertheleaa some commentaton questioned
wheUtar the exemption would cover suchpoola The
Department beheves that the provinions of the final
exemphon are broad enough lo deal with the
specific buea raiaed by variatde rate mortgago
poola, and that no sjwcial proviaio~for 6ese pool*
are necessary.

abu8e- The p o o h ad

potential for

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a8~eementrequires that cert n services
regard to the pool

must e provided with

P

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regardieseQ)l& ideutity ofjndividual
certifi8dih'ho1ders*
a plan '
comtemplates invedting an an issue .of
pool certicates, this exemption requires
'
that the poolingarid servtw
aweme*
be maile available to the plan prior to
the purchase of certificates. When the
.
pool sponsor h d s o a fiduciary with
rePect to an inve~tingplan, this
.
exemption requires that an independent
fiduciary decide whether to purchase
~ 0 0 certificates
1
upon consideration of
the pooling and servicing agreement and
other relevant information. Thua, the
'
relationship established by the purchase
of a pool certScatee'i8 far more
attenuafed than the m a L direct
relationship established by the purchase
of a pool certificate is far more
attenuated than the usual, direct
relationship b e h e m a plan and a
serHceprovider.
Therefore, the Department has
decided to adopt this comment and has
added sectionJO] to the exemption.
Section I[D) provides relief from the
restrictions of section 408.a) and 407 of
th Act and the taxes imposed by
s e h n 4Q751a) and (bl of the Code by
reason d section 4975[5][1) (A1
(d) of the Code for any transactions to. .
which such restrictions ~ b t a x e would
s
otherwise apply lilerely because a
person
t is deemed
i
~ to be ~a party~in
interest (including a fiduciary) with,
repect to a plan who provides services
to the plan, or who has a relationship to
a service provider described'in section
S(14) [F). (G (H)or m o f the Act. solely
by reason o the ownership of a
certificate by such plan. The Department *
notes, however, that this exemption
would not be avaqble if such person
were a party in interest with respect to
the planbecause of any other preexisting or subsequent relationship with
the pian. '
~eciion
u*neml
t2onditions
I
Section 11 of the'final class exemption
contains three conditions applicable to
the relief prodded in Section I. Each of
these conditions is based on one of the
conditions contained in the pr~posal.
s

#

?It should be noted that Wr commentator also
requested relief 6um the provisions ofaection
W b ) of the Act and w o n 4975(c)[l)(B) and W of
the Code QI
transadionrbetween a plan and perwn
deemded to be a fidudarg with respect to that plan
solely be reasonofa the plan's ownership d a
certificate.Neither the applicants nor the
cohentatmr
have identified -Y Gan-don
t ofmthe mortgeee
~
~ nlationship
t
outside
pool
whieb
would be prohibited under these%ectionsmerely
because the pool sponsor exenised fiduciary
arrthorilg oo@farred$olelyby mason of the plan's
ownenh? o p l cerufimtea A. a mull section
I@) of the ex&ption pmvidea no relief ft6m section
~
bof the
j ~d or -aon*91s(~jp)pq add [P)~z

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a

into the control of an independent
trustee. Th8 Department, ih recognition
of the public policy expressed%y such
statutory provisions and of the
additional safeguards usually present
when a public entity is the pool sponsor,
has adopted this comment and'made the
independent trustee requirement
inap~licable~in-the
case of a
govkrnm6ntal or quasi-govenunenttll
entitv such as the Federal National
~ o r i ~ Association.
a ~ e
(3) Fun& retained b y the pool
sponsor. The third condition listed in
section 11 provides that the sum of all
a-v m e n t made
s
to and retained bv the
.~pool
sponsor, and all funds inuring to
the benefit of the pool sponsor a s a
result of the administration of a
mortgage pool, must represent not mare
than adequate consideration for selling
,
the mortgage loans plus reahonable
compensation for servicea provided by
the pool sponsor to the pool. This
condition is identical to paragraph
II(A)(4)of the proposal. One
commentator criticized this condition a s
unnecessary, and said that th8
Department should let the marketplace
determine the pool sponsor's
remuneration. However, a s the
Department explained in the preamble
to the proposal (45 FR $9937,29939 n.
lo), this condition does nothing more
than repeat the requirement for the
continued applicability of the exemptive
relief accorded the provision of certain ,
services under section 408(b](2) of the
Act and section 4975(d1(2) of the Code
when no more than reasonable
compensation is paid b the plan for
' gly, the
such ser~ices.~Accor
Department is adoptin this condition a s
proposed.
(4) Public Offerjngs. e proposal
contained a general co dition requiring
that all certificates pur~hasedby plane
pursuant to a final exemption be issued
in a public offering registered under the
Securities Act of 1933 pursuant to a firm
commitment underwriting. All of the
commentators addressing this provision
opposed its adoption. Many noted that
public offerings must b'e fairly large in
order to be profitable. $nd this :
requirement would eliminate all but the
largest entitiep a s potential pool
sponsors due o the increased cost.
Other comme&tdra contended that
public offerings are inflexible
investment vehicles and would not
allow sponsdrs and investors alike to
take advantage of market trends. Other
commentators noted that private
placements offer no siqnificant
1

rtgage loans andthe property
such loans, and for indemnifing

$

'For a fuller dlscusaion of thls point see the
Preamble to the proposed exgmption. 45 PR 28837,
28842 n. 17-18.

additional risk far investors. These
entators made similar statemnts
regard to the firm commitment
un erwriting requirement.
lj%e Department notes that the
apPlications upon which the proposal
web based focused,primarily on publicly
offered pools distributed through firm
commitment underwritinxs. Although
mention was made of othier marketing
methods, there wes insufficient
information In the record upon which to
base relief for private placements even
if such relief had been requested. In the
case of any exemption application, the
applicants bear the burden of bringing
before the Department the information
necessary to make the findings required
by section 408(a) of the Act.
In responsexto the propnsal, the
commentators have supplied the
Department with c o ~ i o u information
s
re&ding the advisibility of private
placements of pool certificates. They
have indicated that the mortgage
industry has traditionally used private
placementq, although the applicants
have not consistently used this method
for offering pool certificates. The
commentators have also made a number
of helpful suggestions for additional
safeguards if the Department believed
such extra protection to be necessary in
the case of private placements. As
explained above, the Department has
adopted several of these suggestions.
As a result, the Department has
deleted the publicoffering, firm
commitment underwriting provision. The
Department believes that the conditions
contained in the final exemption provide
sufficient protections for plan
participants.'
G.Section III, Definitions
Section In of the final exemption
contains definitions of terms used
elsewhere in the exemption, These

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.As a related matter, one of the applicants had
requested that the Department grant relief for the
use of amalfiliated underniter to market pool
certificates. In the preamble to the pmposal, 45 FR
28937.28841 11.15,the Department refused to
propose such relief. The Department did not believe
at that time It had sufficieni Information upon whlch
to bane such relief. A number of comrnent~torshave
fundshed the Department with addltion~l
information in support of this request for relief.
However. due to the changes made in the fmal
exemption which provide relief regardlase of the
method in which the certificates are marketed.
.
apeclflc rel~afIn this area Is no longer necessary.
The exempllon has bean revihed. In view of the
relief whlch will now be available for transactions
Involving fiduciarles, to provide that no
underwriting fee or sirnllar cornpen8at1oncan be
paid to the pool sponsor or its afflliateregardlng the
acquisition of pool certificates when such persons
am fiduclades-with respect to the assets involved in
the transasdon. In these clrcwn~tances.the
Department does not believe the commentators
have demonstrated that there Is lwtlflcation for
such compensation.

definitions are based on those contained
in the proposal, with several changes
and additions in response to comments.

time. They indicated that it was their
belief that a pool of junior lien loans
would be a higher quality investment

stlch Fe~tificated'provi&monthly,passthrough payments, Several
commentators noted that some pools
provide quarterly or other periodic
payments. Upon consideration of these
comments, the Department has decided

purchased the pooled loans. These

.

Second, the proposal limited the
definition of pool sponsor to thosd

4

insurer, nor any affiliate thereof, is a

provisions of this section. First the

industry, or to determine what, if a n 5

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eporieor, trustee or ineurer;
C. Effective January1,1975. the

the Act and the taxes impoeed by

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pooled mortgage loans and the property
securing such loans, and for
indemnifying certificateholders against
reductions in pass-through payments
due to defaults in loan payments or .
property damage. This system must
provide sucbprotection and ,
indemnification up to an amount not
less than the greater of one percent of
the aggregate principal balance of all
covered pooled mortgages, or the
principal balance of the largest covered
mortgage;
(2) Except in the case of a governmental or quasi-governmental
entity such as the Federal National
Mortgage Association, the trustee for
each mortgage pool must not be an
affiliate of the sponsor of such pool,
provided, however, that the trustee shall not be considered to be an affiliate of
the pool sponsor solely because the
trustee has succeeded to the rights and
responsibilities of the pool sponsor
pursuant to the terms of the pooling and
servicing agreement providing for such
succession upon the occurrence of one
or more events of default by the pool
sponsor; and
(3) The sum of all payments made to
and retained by the pool sponsorPn
connection with a mortgage pool, and all
funds inuring to the benefit of the pool
sponsor as a result of the administration
of the mortgage pool, must represent not
more than adequate consideration for
selling the mortgage loans plus
feasonable compensation for services
provided by the pool sponsor to the
pool. +
111. Definitions
the purposes this
the terms "sponsor" or "pool sponsor"
mean:
and
('1 the entity which
either continues to service or supervises
/the provision of services to, a moktgage
pool comprised of mortgage loans either
made or purchased by such entity; and
@).any successor thereto.
B. For the purposes of this exemption.
the term "mortgage pool" means an *
investment pool the corpus of which .
(1) is held in trust; and
(2) consists solely of
(a) interest bearing obligations
&cured by first mortgages or deeds of
trust on single-family, residential
Propem
[b) property which had secured such
obligations and which has been
acquired by foreclosure: and
(c) undistributed cash.
C. For the purposes of this exemption,
the terms "mortgage pool pass-through
certificate," or "certificate" means a
certificate representing a beneficial
undivided fractional interest in a

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Vol. 46, No. 15

1 Friday,

January 23, 1981 / Notices

\

7527

mortgage pool and entitling tke holder of plans. and parties in interest wh; might,
such certificate to pass-through payment engage in securities lending transaction8
of principal and i n t e r e s t h m the pooled witksuch plans. b the absence of this
mortgage loans, less any fees retained
exemption, securities lending
by the pool sponsor.
transactions between a plan and a party
D.For the purposes of this exemption, in interest would be prohibited by the
the term "affiliate" of another Person
Employee Retirement Income Security ,I
means:
.Act of 1974 (the Act) and the InternaI
(i) Any Person directly or indirectly,
Revenue Code of 1954 (theso&).
through one or more intermediaries,
EFFECTIVE D A ~ January
.
23,1981. For
controllin , controlled by, or under
of
common a n t r o l with such other person; p q o s e s
(ii) Any officer, director, partner,
Transaction Exemption 79-23 (the
G r w m a n Corp. Pension Trust. 44 FR
employee or relative (as defined in
June 1 1 lg79). the fine1 disposition
section 3(15) of the Act) of such'other
of this class exemption will be deemed
person; and
to occur on February 23,1981.
(iii) Any corporation or partner$hip of
which such other person is a n officer.
FOR ~
E INFORMAnON
R
&mACt:
director or partner.
Roger Thomas. Esq., Office of the
For purposes ofsthisparagraph. the
Solicitor, U.S, ~
~o f ~ a b o r ~,
term "control" means the power to
(202) 523-8602. (This is.not a toll-free
exercise a controlling influence over the
number.)
management or policies of a person
QUPPLEMENTARY INFORMATION: On April
othet than an individual.
11.19** notice was published in the
E. For the purposes of this exeLption.
F d e d Register I+S& 24946) of the
the term "single-family, residential
pendency before the Department of
property" means non-farm property
, aho or (the Deparhdent) of a proposed
comprising one to four dwelling units,
clas9 c~emptionfmm the restrictions
and also includes condominiums.
section 406(a)(l)(A) t h ~ (Dl
h the
F:For the purposes of this exemption,
Act and the taxes imposed by section
a person wi!l be "independent of the
pool sponsor, trustee, or insurer" only if: 49751abd fi)of the Code by reason of
section 4975(c3(~)(Although (D) of tbe
(11 such person is not an affiliate (as
Code. ' Four applications 'were filed
defined in paragraph Ill@) of this
exemption) of the pool sponsor, trustee, , reqwsting individual e~emptions
concerning the lending of securities by
or insurer, and
employee benefit plans. These
(2) neither the pool sponsor, trustee,
applications were B e d by Gmmman '
insurer. nor any affiliate thereof, is a
~ o r ~ o r a t i Pension
og
Trust (D-1762).
fiduciary who has investment
management authority or renders
Morgan Guaranty Trust Company (Dinvestment advice with respect to any of
the assets of such person.
Signed.at Washington,'~.C. this 16th day of

.

31750p

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lamuary, 1 ~ 8 1 .
Ian D. Lanoff.
Administrator, Pension and WelfareBenefit
pmgmm8, ~ b o p ~ a , , ~ e m e n l ~ N j o e s
Adn,jnjstmtion, V.S. DepamentofL~bop.
Lm
n,d
s4sami

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,
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Cprohibtted Transaction E x m ~ U o n
81-61

Class ExempHonTo Permit Certain

Loans of Securities by Employee
Benefit Plans
I
AGENCY:Department of Labor.
AmON: Grant of class exemption.

exemption will allow the
lending of securities by employee
benefit plans to banks and brokerwho are pariies ininterest
respect to such plans, if &e conditions
specified in the exemption are met. The
exemption affects partidpants and
benefit plan%
of such
SUMMARY: This

above applications were filed pursuant
to sbctim -(a) of the Act and in
accordance with procedures set forth inERISA Procedure 75-1 (40 FR 18471.
April 28,1975).
AS stated in ERISAProcedure 75-1. an
application for a n individual exemption
is not ordinarily considered separately if
a class exemption which might
encompass the transaction described in
the individual application is d e r
consideration by the Deparment.
~
~
~the Departmeot
~
d notified
~
~
each individual applicant'of the fact that
its application would not be considered
separately bmthe proposed class
with
exemption, and thatits

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LHere&k, relemncas to pmvisions of the Aa
provision. ol the
code.
r

shall indude references to *allel

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Federal Register
advisers would require for the same or
similar securities].
The Department is not persuaded to
permit transactions with
collateralization of less than 100
percent However. i t does find
persuasive the agumenta of the
commentaton that a two.percent margin
[or some other margin) may be in the
interests of aBthe parties to a securities
lending transaction. The Department has
decided, therefore, to revise this
condition to require that a securities
loan maintain a minimum
collateralization or 100 percent
throughout the term of the-loan. This
revision should provide adequate
protection to plans while offering the
parties the flexibility to negotiate
whatever marigin is appropriate under
the circumstances.
C,Former Pamgmph&
~
~ T ~
Purposes
The proposed exemption
a
condition that would require that
securities borzowed are used solely for:
purposes described in section 601)of
Regulation T of the Federal Reserve
Board (12CFR g220.6IhII. This condition
was based upon the submivsions of the
applicants, some of which described the
reasons why brokerdealers would
customarily borrow securities from
others (includi% plans with respect to
which they are parties in interest).
Under section 6(h] of Regulation T,
borrowing of securities is permitted for
"* ' the purpose of making delivery of
securities in the case of short sales.
failure to receive securities [the brokerdealer] is required to deliver, or other
similar cases ' "'
A few commentators indicated that
they objected to limiting the purposes
for which securities could be
to ,hose encompassed by ~
~T.
One commentator suggested that plans
which lend securities are not affected b y ,
:'how those securities are used by
borrowers, and that the plan is
protected by the borrower's Fmancial
resources (as evidenced by the required
financial disclosures) and the
requirement that the loan be fully "
collateralized. Another commentator .
indicated that the language in paragraph
3 could result in liability to an
intermediary broker-dealer or bank who
borrows securities from a plan and
subsequently lends the securities to a
third party for Regulation T purposes. if
the third party, in fact. uses them for
another purpose.
The Department has considered these
comments and has decided that a
specific condition in the exemption
regarding the purposes for which
securities are borrowed is not necessary

1 Vol.

M,

No. 15 1 Friday. January 23. 1981 1 Noticqs

Y529

for the protection of plans in light of the
securities J9nd&transactione. It is in
other safeguards contained in the
the interest of the ie ding plan, for
exemption Accordingly. the condition in example. t o l n o w $ether a bonower is
in weak f i y c i a l condition since the
paragraph 3 of the proposal has been
omitted from the exemption a s adopted.
borr~wer'sinability to produce .
,additi&nal collateral. if required. could
D. Pamgmph 3 (as renumbered)result in adverse consequences for the
fianciolStafemenfs
plan.
The proposed exemption included a
On the basis of the comments
condition that would require the bank or received. the Department is not
broker-dealer who intends to borrow
preparedto conclude that @e furnishing
securities to furnish the plan. prior to $e
of financial statements is unnecessary.
loan, it8 most recent statement of
Nevertheless, the Department does
financial condition h d a representation
believe that the condition. a s proposed,
that there has been no material adverse
might create undue burdens for the
borrower. With regard to the
change in its financial condition since
requirement of furnishing the most
the date of such statement Many
commentaton objected to this condition, recent financial statements. severai
commentators suggested that the
and indicated that since the need for
condition be modified to require the .
securities changes on a daily basis. the
timing of securities lending transactions * borrower to furnish its most recent
financial staFe,ment. The
is ~critical.
l and
~ compliance
~
; with~ tbJs ~
condition would be onerous or
artment accepts this comment.
Howeven since audited financial
impossible for each separate loan. In
addition, some commentators stated
statements may be prepared on a
relatively inhquent basis, the
that it was a common practice fof the
Department has modified the exemption
borrower to supply its most recent
financial statement together with a basic 80 that. prior to the making of the ioan
by the plan*the b ~ m o w e shall
r
have
written toan agreement.g which:would
provided the lending plan fiduciary with
cover a series of loan transactions, and
[I)its most recent available audited
then to furnish additional financial
financial statement (2) its most recent
,tatements on a quarterly basis or,
available unaudited financial statemeht.
alternatively, when available or as
requeskd by the lender. Further, the
if
recent'than the audited
statement and (3) a representation that.
co-entators
indicated that, for
a s of the time the loan is negotiated.
individual security loans under such a
there has been no
adverse
basic agreement. it Is customary for the
change in the borrower's financial
borrower to confirm the
of the
conditio since the dab of Use financial
loan and assure the lender that there
statem'e& k t furnished to the plan
has been no material adverse change in
These changes are intended to allow
its financial condition since its most
persons covered by the exemption to
recent financial statement.
engage in such
One of the commentators suggested
providing separate financial statements
that the requirement furnish the
prior to each transactionlender with the borrower's most recent
statement
of
its
financial
condition
is
E.
~
~
l
~
~Pamgmphi4 Arm 3 length
~
~
generallyunnecessary and would
requirement
in
impose a burden On
Und6r the proposed exemption. in
securities loan transactions without a
order for a securities
transaction
corresponding benefit or protection to
be exempt, the loan is required to be
plan participants and benefidiaries. This to
made pursuant td a written loan
further stated that a
agreeinent the terms of which are at
fiduiciary representing lenders of
least as favorable to theplan as would
Securities
be an arm's length transaction between *
it
be
with
the borrower and air unrelated party. A
and argued that since
few commentators recommended that.
securities loans must be hilly

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plan fiduciary in evaluating possible
1

3Theulillzation of a basic wdtten loan agreement
is -in
more detail, infm. .in
the cnnditiona set forth In pangraph s of the
proposal

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agmement would eliminate the need
taexecute a n agreement
for each i n w d u a l loan transaction
with the saihe borrbwer. which would

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Federal Register
adequately protected during the term of
ofSecurities
Upon Terrnipation
Under the proposed exemption, the
securities loan may be terminated by the
plan at any time. whereupon the
borrower is ngulrad to detlver to the

H.Pamgmph

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Vol. 46, No. 15

/

Friday. January 23, 1981 / Notices

this recommendatidn is to insure that an
accurate record is available to
complement the written loan agreement.
It is the Deparhnent'm belief that this +
sugge?
would not n e c e s s d y be in
the in rests of the plan involved.
because euch a requirement might, in,
some instances, cause an unnecessary
delay in notifying the borrower of the

The Department received one
comment oh this paragraph The
commentator suggested that in the'event
of a termination of the loan and the
failure of the b o m r to return the
b o d e d securities. the borrower be
expressly given the option. as a
condition of the exemption of re lacing
any non-qsh collatenl held.by $e plan
"
with cash collateral'equal to the then
current market value of the securities

collateral at the time of the exchange;

it has the securities necessary to

Securities Upon Termination

i

,.

requirement of section 401(a) of the

is subject to an administrative or
sta*ry
exemption is not diepositive of
whether the transaction is in fact a

K.Effective Date

ecufities

..

.

General Information,

- -,

-

.~.,

.

Federal Register

/ Vol.

46.

No. 15 / Friday, January 23, 1981

1 Notices

United States Government or its

"control" means the power to exercise a

the most recent available unaudited
statement of its financial condition [if
more recent than such audited

securities identical to the borrowed
securities [or the equivalent thereof in

reasonable rate.

would pay in a comparable transaction
with an unrelated party;
(b) The plan receives the equivalent of

-

-

described above, replace noncash
collateral with an amount of cash not
less than the then current market value

--

Signed in Washington, D.C.this 18th day of

JanUawl
lQ8'.
Ian D.Laoff,

'

I

[TA-W-7498,7499,7499Al

Conclusion
After reconsideration, 1 reaffirm the
original Notice of Determinatian
Regarding Eligibility to Apply for
Worker Adjustment Assistance to

On October 17,1980,the Department
issues an Affirmative Determination
Regarding Application for
Reconaideration for workers and former
workem producing souvenir decals at
Americana Glaor Company and for

Slgned at Washington. D.C.this 9th day of
January1981.
James F.T~ylor*
Director, Officeof Mamgemenl
Adminiatration and Phnnfng.

Secretary of Labor.

edat Washfngton, D.C.,

pTl Doe. &-la83 P
U
d I-ZtS;

&+
em]
I!

for Rec~lslderatlon

reconsideration of the Department of
Labor's Negative Determination