Prohibited Transaction Exemption (PTE) 2006-16; Class Exemption To Permit Certain Loans of Securities by Employee Benefit Plans, 63786-63799 [E6-18238]

Agencies

• Employee Benefits Security Administration
• DEPARTMENT OF LABOR

[Federal Register Volume 71, Number 210 (Tuesday, October 31, 2006)]
[Notices]
[Pages 63786-63799]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-18238]


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DEPARTMENT OF LABOR

Employee Benefits Security Administration

[Application Nos. D-08295 and D-10365]
RIN 1210-ZA10


Prohibited Transaction Exemption (PTE) 2006-16; Class Exemption 
To Permit Certain Loans of Securities by Employee Benefit Plans

AGENCY: Employee Benefits Security Administration, Department of Labor.

ACTION: Adoption of Amendment and Revocation of PTEs 81-6 and 82-63.

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SUMMARY: This document amends and replaces Prohibited Transaction 
Exemption (PTE) 81-6 (46 FR 7527, January 23, 1981) and PTE 82-63 (47 
FR 14804, April 6, 1982). PTE 81-6 exempts the lending of securities by 
employee benefit plans to certain banks and broker-dealers, and PTE 82-
63 exempts certain compensation arrangements for the provision of 
securities lending services by a plan fiduciary to an employee benefit 
plan. The final amendment incorporates the exemptions into one 
renumbered exemption, and expands the relief that was provided in PTEs 
81-6 and 82-63 to include additional parties and additional forms of 
collateral subject to the specified conditions. The exemption affects 
participants and beneficiaries of employee benefit plans, persons who 
lend securities on behalf of such plans, and parties in interest who 
engage in securities lending transactions with such plans.

DATES: The effective date of this amendment is January 2, 2007. The 
revocation of PTEs 81-6 and 82-63 is effective on January 2, 2007.

FOR FURTHER INFORMATION CONTACT: Allison Padams Lavigne, Office of 
Exemption Determinations, Employee Benefits Security Administration, 
U.S. Department of Labor, (202) 693-8540 (This is not a toll-free 
number.)

SUPPLEMENTARY INFORMATION: On October 23, 2003, the Department proposed 
a notice in the Federal Register of a proposed class exemption to amend 
PTEs 81-6 and 82-63 by incorporating PTEs 81-6 and 82-63 into a new 
class exemption and expanding the existing relief from the restrictions 
of sections 406(a)(1)(A) through (D) and 406(b)(1) of ERISA and the 
taxes imposed by section 4975(a) and (b) of the Code by reason of 
section 4975(c)(1)(A) through (E) of the Code to additional parties 
under modified conditions.\1\ The notice also proposed the revocation 
of PTEs 81-6 and 82-63. The proposal was published in response to two 
exemption applications. One application was submitted by the American 
Bankers Association (ABA) (D-08295), and the second application was 
submitted by the Robert Morris Associates, now known as the Risk 
Management Association (RMA) (D-10365). The applications were filed 
pursuant to section 408(a) of ERISA and section 4975(c)(2) of the Code 
and in accordance with the procedures set forth in 29 CFR 2570, subpart 
B (55 FR 32836, August 10, 1990).
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    \1\ 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 under Code section 4975(c)(2) to 
the Secretary of Labor.
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    The notice of pendency gave interested persons an opportunity to 
comment or request a public hearing on the proposal. The Department 
received six public comments. No request for a hearing was received. 
Upon

[[Page 63787]]

consideration of the comments received, the Department has determined 
to grant the proposed class exemption, subject to certain 
modifications. These modifications and the comments are discussed 
below.

Executive Order 12866

    Under Executive Order 12866, the Department must determine whether 
the regulatory action is ``significant'' and therefore subject to the 
requirements of the Executive Order and subject to review by the Office 
of Management and Budget (OMB). Under section 3(f), the order defines a 
``significant regulatory action'' as an action that is likely to result 
in a rule (1) having an annual effect on the economy of $100 million or 
more, or adversely and materially affecting a sector of the economy, 
productivity, competition, jobs, the environment, public health or 
safety, or State, local or tribal governments or communities (also 
referred to as ``economically significant''); (2) creating serious 
inconsistency or otherwise interfering with an action taken or planned 
by another agency; (3) materially altering the budgetary impacts of 
entitlement grants, user fees, or loan programs or the rights and 
obligations of recipients thereof; or (4) raising novel legal or policy 
issues arising out of legal mandates, the President's priorities, or 
the principles set forth in the Executive Order.
    This class exemption has been drafted and reviewed in accordance 
with Executive Order 12866, section 1(b), Principles of Regulation. The 
Department has determined that this exemption is not a ``significant 
regulatory action'' under section 3(f) of the Executive Order. 
Accordingly, it does not require an assessment of potential costs and 
benefits under section 6(a)(3) of that Order.

Paperwork Reduction Act

    As part of its continuing effort to reduce paperwork and respondent 
burden, the Department of Labor conducts a preclearance consultation 
program to provide the general public and Federal agencies with an 
opportunity to comment on proposed and continuing collections of 
information in accordance with the Paperwork Reduction Act of 1995 (PRA 
95) (44 U.S.C. 3506(c)(2)(A)). This helps to ensure that requested data 
will be provided in the desired format, that the reporting burden (time 
and financial resources) imposed on respondents is minimized, that the 
public can clearly understand the Department's collection instruments, 
and that the Department can properly assess the impact of its 
collection requirements on respondents.
    The Department previously solicited comments concerning the 
information collection request (ICR) included in the Proposed Amendment 
to PTE 81-6 and Proposed Restatement and Redesignation of PTE 82-63 
(the Proposal) when that document was published in the Federal Register 
on October 23, 2003 (68 FR 60715). The ICR re-stated and combined then-
existing ICRs previously approved under OMB Control Numbers 1210-0065 
(PTE 81-6) and 1210-0062 (PTE-82-63) and requested approval for the 
program changes set forth in the Proposal, as well as an adjustment in 
the burden estimates based on updated information. The ICR was reviewed 
by OMB and approved on April 11, 2004, under the control number 1210-
0065, and that approval is currently scheduled to expire on December 
31, 2006.
    The class exemption published in this notice has been revised from 
the Proposal in two basic ways. First, the categories of eligible 
foreign banks and broker dealers have been broadened to include foreign 
banks and broker dealers located in additional specified foreign 
countries, provided that such entities meet the additional specified 
conditions. Second, the permitted types of collateral for loans of 
securities by plans to eligible banks and broker dealers have been 
enlarged to include additional types of collateral. Currently, the 
Department is soliciting comments concerning revisions in the burden 
estimates for the ICR resulting from these modifications and from 
further changes in the Department's assumptions and estimation 
methodology, which are due to better understanding of the existing 
market for foreign and domestic securities lending. After consideration 
of any public comments received in response to this solicitation, the 
Department intends to submit an ICR to OMB for review of the paperwork 
burden modifications and changes described in this section. Under 5 CFR 
1320.5(b), an Agency may not conduct or sponsor, and a person is not 
required to respond to, a collection of information unless the 
collection displays a valid control number. The Department will publish 
notice in the Federal Register of OMB's decision upon review of the 
Department's ICR.
    A copy of the ICR may be obtained by contacting Susan G. Lahne, 
Office of Policy and Research, U.S. Department of Labor, Employee 
Benefits Security Administration, 200 Constitution Avenue, NW., Room N-
5647, Washington, DC 20210. Telephone: (202) 693-8410; Fax: (202) 219-
5333. These are not toll-free numbers. The ICR also may be viewed via 
the internet at https://www.reginfo.gov/public/do/PRAMain. The 
Department and OMB are particularly interested in comments that:
     Evaluate whether the collection of information is 
necessary for the proper performance of the functions of the agency, 
including whether the information will have practical utility;
     Evaluate the accuracy of the agency's estimate of the 
burden of the collection of information, including the validity of the 
methodology and assumptions used;
     Enhance the quality, utility, and clarity of the 
information to be collected; and
     Minimize the burden of the collection of information on 
those who are to respond, including through the use of appropriate 
automated, electronic, mechanical, or other technological collection 
techniques or other forms of information technology, e.g., by 
permitting electronic submission of responses.
    Comments should be sent to the Office of Information and Regulatory 
Affairs, Office of Management and Budget, Room 10235, New Executive 
Office Building, Washington, DC 20503; Attention: Desk Officer for the 
Employee Benefits Security Administration. Although comments may be 
submitted through January 2, 2007, OMB requests that comments be 
received within 30 days of publication of this class exemption to 
ensure their consideration.
    The Department has consulted with industry experts and has received 
additional information on the nature and operation of the foreign and 
domestic securities lending markets. Based on this new information, the 
Department is revising its prior paperwork burden analysis to reflect 
its better understanding of the likely impact of the exemption.
    In its prior paperwork burden analysis, the Department based its 
estimates conservatively on the assumption that all domestic broker 
dealers and banks with trust powers would take advantage of the 
exemption. This led to an estimate of 13,900 domestic entities that 
would be respondents to the information collections of the Proposal. 
Given the highly sophisticated nature of the securities lending market 
in general and the specific limitations of the exemption in particular, 
including the required indemnification agreements, equity capital 
minimums, and levels of collateralization, the Department believes that 
its original estimate

[[Page 63788]]

overstated the likely incidence of reliance. The Department now assumes 
that the exemption will be relied upon only by the limited group of 
large, sophisticated domestic broker dealers and banks currently active 
in the securities lending market, which the Department estimates at 
approximately 140 separate entities. In addition, the Department 
estimates that in total 60 foreign broker dealers and banks will begin 
to rely upon the exemption in its final form, including the 13 entities 
located in the United Kingdom that were previously included in the 
Department's paperwork burden analysis for the Proposal. This produces 
a total estimate of 200 respondents.
    Given the nature of securities lending practices, which require 
expert knowledge, efficient and sophisticated communications systems, 
and careful monitoring and control of the timing of securities loan 
transactions, the Department further believes that each of the 
borrowing entities will establish securities lending relationships with 
only a limited number of plans. For purposes of this estimate, the 
Department has assumed that each borrower will sign a contract with no 
more than 10 employee benefit plans.
    The specific information collections of this exemption have not 
changed from the Proposal. As described in the prior ICR, the exemption 
provides that, before a plan can lend securities, the borrower must 
provide the plan with a financial statement. In addition, the 
agreements regarding the loan transaction or series of transactions and 
the compensation arrangement for the Lending Fiduciary must be 
described in a written document. The Department continues to assume 
that these documents are routinely prepared by the respondent entities 
in-house as part of usual and customary business practice. The 
Department has therefore treated the preparation and review of these 
documents as an hour burden for purposes of this analysis; the cost 
burden derives solely from material and postage costs for distribution. 
These costs were estimated at $4.00 per priority or overnight domestic 
mailing of the documents. Discussions with industry experts indicated 
that nearly all of the foreign-based institutions likely to rely on the 
exemption have established domestic branches. The Department assumes, 
therefore, that all mailings will be handled by the domestic-based 
operations and that there will be few, if any, respondents using 
foreign mail services.
    The Department has also assumed that the respondents, all of which 
are large, sophisticated financial entities, will generally communicate 
by electronic means. Because electronic communications will be 
undertaken through existing electronic systems and databases, the 
Department has not added any additional burden for documents that are 
assumed to be distributed by electronic means.
    Financial statements. The Department assumes that each of the 200 
respondents will provide each plan with which it has a master lending 
agreement (10 plans each) with a new financial statement on a quarterly 
basis, resulting in an estimate of 8,000 financial statements 
distributed annually (200 respondents x 10 plans x 4 quarterly 
financial statements). No preparation burden for these statements is 
assumed, however, since the financial statements will have been 
prepared for other purposes. The Department has assumed that only 10 
percent of the respondents will distribute the financial statements in 
paper by mail. For the 800 financial statements that are therefore 
assumed to be distributed annually by mail (10 percent of 8,000 = 800), 
the Department assumes an hour burden of 5 minutes per statement, 
consisting of the preparation of an overnight or priority delivery 
package, resulting in an annual hour burden of 67 hours of clerical 
time (800 mailings x 5 min./60 min.). For these purposes, each 
statement is assumed, based on financial statements filed with the 
Securities and Exchange Commission, to consist of 10 pages. For the 800 
financial statements delivered via mail, the Department further assumes 
a total annual cost of $3,200 (800 mailings x $4.00 per mailing).
    For the remaining 90 percent of the financial statements 
distributed annually, or 7,200 statements (8,000 - 800 = 7,200), the 
Department has assumed electronic distribution and has not estimated 
any additional distribution burden.
    Lending and compensation agreements. The Department assumes that 
each respondent will use master agreements for both the lending 
agreement and the lending fiduciary compensation agreement and will 
review and distribute them on an annual basis. For purposes of burden 
analysis, the Department has assumed that each respondent will annually 
require 30 minutes to review each of these two agreements for 
compliance (1 hour total per respondent), resulting in an annual hour 
burden of 200 hours (200 respondents x 1 hour per respondent).
    The respondents are further assumed to require 5 minutes to package 
and mail the agreements. Because of the nature of these agreements, the 
Department assumes that the respondents will provide each of their plan 
partners with a single mailing annually containing both the lending 
agreement and the compensation agreement for that partner and that all 
agreements will be distributed in paper form by priority or overnight 
mail. The total time for preparation is 167 hours (200 respondents x 10 
lending partners x 5 minutes per agreement)/60). The cost for the 
distribution of these 2,000 documents (2,000 = 200 respondents x 10 
lending partners each) by overnight or priority mail is estimated at 
$8,000.
    The total annual hour burden for this information collection, based 
on these assumptions, is therefore 434 hours (67 hours + 200 hours + 
167 hours). The equivalent cost of the annual hour burden is estimated 
at $21,514, based on $16,600 for legal staff review of the agreements 
(200 hours x $83 per hour = $16,600) and $4,914 for clerical time to 
prepare and distribute the documents (234 hours x $21 per hour = 
$4,914).
    The total annual cost burden for this information collection is 
estimated at $11,200 ($8,000 for the agreements + $3,200 for the 
financial statements = $11,200).
    The following summarizes the Department's paperwork burden 
estimates for this information collection:
    Type of Review: Revision of a currently approved collection.
    Agency: Employee Benefits Security Administration, Department of 
Labor.
    Title: Securities Lending Prohibited Transaction Exemption.
    OMB Number: 1210-0065.
    Affected Public: Business or other for-profit, Not-for-profit 
institutions.
    Total Respondents: 200.
    Frequency: On occasion.
    Total Responses: 2,000.
    Estimated Total Burden Hours: 434.
    Estimated Burden Cost: $11,200.

Discussion of Comments Received

    The Department received six comments regarding the proposed class 
exemption. The commenters requested specific modifications to the 
proposal in the following areas:

1. Definition of ``Foreign Broker-Dealer'' and ``Foreign Bank''

    One commenter asked the Department to expand the definition of 
Foreign Broker-Dealers and Foreign Banks to include those foreign 
broker-dealers or foreign banks that are located in a foreign country 
in which a foreign broker-dealer or a foreign bank has received an 
individual exemption involving the lending of securities by plans. The 
commenter notes that, in each of these exemptions, the foreign

[[Page 63789]]

banks and foreign broker-dealers were under their country's 
governmental regulation and oversight, which provided a sufficient 
level of protection for plans. Another commenter asked the Department 
to expand relief to include broker-dealers and banks of Germany and the 
Netherlands within the definitions of Foreign Bank and Foreign Broker-
Dealer. In the alternative, the commenter requested that relief be 
extended to broker-dealers and banks of Germany and the Netherlands, 
provided that the Lending Fiduciary is a U.S. Broker-Dealer or U.S. 
Bank and such fiduciary indemnifies the plan against losses that arise 
from a borrower's default. This commenter states that this type of 
indemnification agreement is present in most securities lending 
transactions.
    The Department notes that the terms and conditions of the 
individual exemptions generally require that the foreign borrower be 
affiliated with a U.S. Bank or a U.S. Broker-Dealer that indemnifies 
the plan in the United States against potential loss resulting from a 
borrower's default. In addition, those exemptions require that the 
collateral be maintained in the United States in U.S. dollars or U.S. 
denominated securities. The Department notes that while these 
conditions were appropriate and protective of the plan in the context 
of an individual exemption, they may not be feasible in the context of 
a class exemption.\2\ Thus, for purposes of the class exemption, it may 
be difficult for a plan to readily assess the risk of lending 
securities to broker-dealers and banks located in the various foreign 
jurisdictions. The Department believes that the presence of 
governmental regulation and oversight by the foreign countries that 
were involved in the individual exemptions, and an indemnification by a 
U.S. regulated entity, provide a significant degree of protection for 
plans. Accordingly, the Department has determined to expand the 
definition of Foreign Broker-Dealer (as defined in section V(c)) and 
Foreign Bank (as defined in section V(d)) under limited circumstances.
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    \2\ The terms and conditions of the individual exemptions 
generally involve the lending of securities by a plan to a foreign 
affiliate of a U.S. broker-dealer or U.S. bank and require the U.S. 
affiliate to indemnify the plan in the United States against any 
potential losses arising from a default. In addition, these 
exemptions require that the collateral be maintained in U.S. dollars 
or U.S. denominated securities and be held in the U.S. The proposed 
class exemption did not contain an affiliate requirement and 
permitted non-U.S. forms of collateral that may be maintained 
outside the U.S.
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    Under the final exemption, the definition of Foreign Broker-Dealer 
has been expanded to include those broker-dealers registered and 
regulated under the relevant securities laws of a governmental entity 
of a country other than the United States where such securities laws 
were applicable to a broker-dealer that received: (i) An individual 
exemption, granted by the Department under section 408(a) of ERISA, 
involving the loan of securities by a plan to a broker-dealer or (ii) a 
final authorization by the Department to engage in an otherwise 
prohibited transaction pursuant to PTE 96-62, as amended, (61 FR 39988 
(July 31, 1996); 67 FR 44622 (July 3, 2002)) involving the loan of 
securities by a plan to a broker-dealer. The term ``Foreign Bank'' has 
been expanded to include those banks subject to regulation by the 
relevant governmental banking agency(ies) of a country other than the 
United States, where the regulation and oversight of these banking 
agencies were applicable to a bank that received: (i) An individual 
exemption, granted by the Department under section 408(a) of ERISA, 
involving the loan of securities by a plan to a bank or (ii) a final 
authorization by the Department to engage in an otherwise prohibited 
transaction pursuant to PTE 96-62, as amended, (61 FR 39988 (July 31, 
1996); 67 FR 44622 (July 3, 2002)) involving the loan of securities by 
a plan to a bank.\3\
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    \3\ To date, individual exemptions have been granted and 
transactions have received final authorization under PTE 96-62, as 
amended, that involve securities loans by plans to broker-dealers 
and banks regulated under the applicable laws of Japan, Germany, the 
Netherlands, Sweden, Switzerland, France, Australia, Canada and the 
United Kingdom. Thus, any broker-dealer or bank that is subject to 
government regulation in any one of these countries would be able to 
utilize the relief provided in this exemption, if all applicable 
conditions are met. In this regard, if in the future, the Department 
grants individual exemptions or final authorizations under PTE 96-62 
for transactions involving securities loans by plans to broker-
dealers or banks regulated under the applicable laws of additional 
foreign countries, broker-dealers and banks subject to such 
government regulation would be able to utilize the final exemption 
provided all applicable conditions are met.
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    However, to further protect the plans from any unnecessary costs 
and risks associated with the lending of securities in the different 
foreign jurisdictions, a new condition has been added to section III(c) 
of the exemption. This condition requires, in the case of a securities 
lending transaction involving a Foreign Broker-Dealer or a Foreign Bank 
that is described above (as defined in section V(c)(2) and V(d)(2) of 
the exemption), the Lending Fiduciary to be a U.S. Bank or U.S. Broker-
Dealer that indemnifies the plan with respect to the difference, if 
any, between the replacement cost of the borrowed securities and the 
market value of the collateral on the date of a borrower default plus 
interest and any transaction costs incurred (including attorney's fees 
of such plan arising out of the default on the loans or the failure to 
indemnify properly under this provision) which the plan may incur or 
suffer directly arising out of a borrower default. In this regard, it 
is the Department's understanding that in a default situation, the plan 
will be able to recover the money it is owed under this indemnification 
agreement from the lending fiduciary in the United States.
    Another commenter asked the Department to expand the definition of 
borrower to include Canadian broker-dealers and Canadian banks. The 
commenter described a strong similarity in the type of government 
oversight between broker-dealers and banks in Canada and the United 
States. In particular, the commenter described the regulation of 
Canadian broker-dealers. In Canada, securities regulation is within the 
jurisdiction of the Provinces. In Ontario, the Ontario Securities 
Commission (OSC) is responsible for regulating the securities markets 
with the purpose of protecting investors, ensuring optimal allocation 
of financial resources and maintaining public confidence in the 
markets. The OSC regulates market participants by notices and orders. 
It has an enforcement role in the market. It has the power to ensure 
that trading activities are carried out in accordance with applicable 
regulations. It can investigate, prosecute and impose penalties on 
individuals who do not comply with such regulations. Other provincial 
securities commissions operate similarly. All powers of all the 
commissions are subject to the oversight of the Ministers of Finance in 
each Province.
    In addition, the commenter notes that the Canadian Securities 
Administration (CSA) reviews the activities of the provincial 
securities commissions to ensure consistency in the regulatory 
framework among the Provinces. The commenter adds that Canadian broker-
dealers are subject to oversight by self-regulatory organizations 
(SRO's), which are subject to the supervision of the provincial 
commissions. According to the commenter, the Market Regulation Services 
is the independent regulation services provider for Canadian equity 
markets and is a recognized SRO by the CSA. Its mandate is to foster 
and protect investor confidence and market integrity through the 
administration, interpretation and enforcement of a

[[Page 63790]]

common set of market integrity principles.
    The commenter also described the regulation of Canadian banks. The 
commenter noted that the Office of Superintendent of Financial 
Institutions (OSFI) regulates Canadian banks. OSFI is an independent 
agency of the Government of Canada and reports to the Minister of 
Finance. Its principal role is to safeguard depositors and other 
banking clients. OSFI imposes capital requirements to ensure that 
Canadian banks are able to meet their financial obligations as well as 
strict reporting, managing, accounting and auditing requirements.
    Lastly, the commenter represented that under Canadian law, 
counterparties may agree to submit to the jurisdiction of the courts of 
the United States and the judgments of the courts in the United States 
are readily enforceable in Canada. Based on the representations of the 
commenter regarding the regulatory supervision of Canadian broker-
dealers and banks, the Department has expanded the definition of 
``Foreign Broker-Dealer'' to include any broker-dealer that: (i) Is 
regulated by a securities commission of a Province of Canada that is a 
``member'' of the Canadian Securities Administration, and (ii) is 
subject to the oversight of a Canadian SRO; and has expanded the 
definition of ``Foreign Bank'' to include any bank that is regulated by 
the Office of the Superintendent of Financial Institutions in Canada.
    Finally, one commenter requested that plans be permitted to loan 
securities to entities other than those permitted under the proposed 
exemption, provided that all obligations of the borrower are fully 
guaranteed by an entity that could have borrowed the securities itself. 
To the extent the commenter is referring to entities other than broker-
dealers and banks for which the Department has previously granted 
relief, this comment raises issues that are beyond the scope of our 
original consideration, and the commenter has not provided sufficient 
information for the Department to consider this request. Accordingly, 
the Department has determined not to adopt this comment.

2. Level of Foreign Collateral That Must Be Pledged

    One commenter expressed support for the collateral requirements 
found in the proposed exemption. Three commenters (including the 
Applicant) requested that the collateralization requirements (described 
in section II(b) of the proposed exemption) be made consistent with 
those in SEC Rule 15c3-3 (17 CFR 240.15c3-3).\4\ The Applicant states 
that regulatory and market developments have occurred since the 
Applicant first filed its exemption application. The Applicant 
expressed concern that, if the exemption requires different 
collateralization levels for plans than what is required for other 
investors by Rule 15c3-3, plans would be placed at a competitive 
disadvantage. Another commenter suggested that the level of 
collateralization required in SEC Rule 15c3-3 be required for those 
transactions in which the lending fiduciary is a U.S. Bank and such 
lending fiduciary indemnifies the plan against losses resulting from 
the borrower's default. According to the commenter, most securities 
lending transactions include these types of indemnification 
arrangements. Lastly, a commenter suggested that the collateralization 
requirements stated in the proposed exemption only be modified for 
those transactions involving plans with total assets in excess of $500 
million.
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    \4\ On April 16, 2003, the SEC issued the Order Regarding the 
Collateral Broker-Dealers Must Pledge When Borrowing Customer 
Securities (Release No. 47683). Rule 15c3-3 specifies the types and 
amount of collateral that may be offered by broker-dealers who 
borrow fully paid and excess margin securities from customers. For 
purposes of this exemption, the term ``Rule 15c3-3'' shall also 
refer to the SEC Order contained in Release No. 47683.
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    Rule 15c3-3 requires 100% collateralization if the collateral and 
securities are denominated in the same currency; 101% if the collateral 
and securities are denominated in a different currency (i.e., Euros, 
British pounds, Swiss francs, Canadian dollars, and Japanese yen); and 
105% if the collateral and securities are denominated in a different 
currency and such currency is other than those specified above.
    On the basis of the comments, the Department has determined to 
adopt the collateralization requirements in Rule 15c3-3 for certain 
transactions where the lending fiduciary is a U.S. Broker-Dealer or 
U.S. Bank, and such fiduciary indemnifies the plan against loss in the 
event of borrower default.
    Specifically, the Department has expanded section II(b) of the 
exemption to provide that: In the case of a securities lending 
transaction in which the Lending Fiduciary is a U.S. Bank or U.S. 
Broker-Dealer, and such Lending Fiduciary indemnifies the plan with 
respect to the difference, if any, between the replacement cost of the 
borrowed securities and the market value of the collateral on the date 
of a borrower default, the plan receives from the borrower by the close 
of the Lending Fiduciary's business on the day in which the securities 
lent are delivered to the borrower: ``Foreign Collateral'' having, as 
of the close of business on the preceding business day, a market value 
or, in the case of bank letters of credit, a stated amount, equal to 
not less than: (i) 100 percent of the then market value of the 
securities lent as valued on a recognized securities exchange (as 
defined in section V(j)) or an automated trading system (as defined in 
section V(k)) on which the securities are primarily traded if the 
collateral posted is denominated in the same currency as the securities 
lent; or (ii) 101 percent of the then market value of the securities 
lent as valued on a recognized securities exchange (as defined in 
section V(j)) or an automated trading system (as defined in section 
V(k)) on which the securities are primarily traded if the collateral 
posted is in a different currency than the securities lent and such 
currency is denominated in Euros, British pounds, Japanese yen, Swiss 
francs or Canadian dollars; or (iii) 105 percent of the then market 
value of the securities lent as valued on a recognized securities 
exchange (as defined in section V(j)) or an automated trading system 
(as defined in section V(k)) if the collateral posted is in a different 
currency than the securities lent and is denominated in a currency 
other than those specified above.
    Lastly, the Department believes that the Lending Fiduciary 
indemnification requirement discussed above provides a sufficient 
safeguard to protect a plan's interest under the revised 
collateralization levels making the $500 million plan asset test 
unnecessary. Accordingly, the Department has not modified the exemption 
in this respect.

3. Expand The Types of Collateral Permitted Under The Exemption

    Several commenters requested that the class exemption permit plans 
to accept the types of collateral permitted under SEC Rule 15c3-3. 
Another commenter requested that the definition of foreign collateral 
be broadened to include equity securities and fixed income securities.

    Rule 15c3-3 permits the following forms of collateral:
    1. Government securities as defined in section 3(42)(A) and (B) 
of the Securities Exchange Act of 1934 (the Exchange Act) (15 U.S.C. 
78c(42)(A) and (B)) may be pledged when borrowing any securities.
    2. Government securities as defined in section 3(42)(C) of the 
Exchange Act (15 U.S.C. 78c(42)(C)) and issued or guaranteed as to 
principal or interest by the following corporations may be pledged 
when borrowing any securities: (i) Federal Home Loan Mortgage 
Corporation, (ii) the Federal

[[Page 63791]]

National Mortgage Corporation, (iii) the Student Loan Marketing 
Association and (iv) the Financing Corporation.
    3. Securities issued by, or guaranteed as to principal and 
interest by, the following Multinational Banks--the obligations of 
which are backed by participating countries, including the United 
States--may be pledged when borrowing any securities: (i) 
International Bank for Reconstruction and Development, (ii) the 
Inter-American Development Bank, (iii) the Asian Development Bank, 
(iv) the African Development Bank, (v) the European Bank for 
Reconstruction and Development, and (vi) the International Finance 
Corporation.
    4. Mortgage-backed securities that meet the definition of a 
``mortgage related security'' as defined by section 3(a)(41) of the 
Exchange Act (15 U.S.C. 78c(a)(41)) may be pledged when borrowing 
any securities.
    5. Negotiable certificates of deposit and bankers acceptances 
issued by a ``bank'' as that term is defined in section 3(a)(6) of 
the Exchange Act (15 U.S.C. 78c(a)(6)), and which are payable in the 
United States and deemed to have a ``ready market'' as that term is 
defined in 17 CFR 240.15c3-1, may be pledged when borrowing any 
securities.
    6. Foreign sovereign debt securities may be pledged when 
borrowing any securities, provided that: (i) At least one nationally 
recognized statistical rating agency (NRSRO) has rated in one of its 
two highest rating categories either the issue, the issuer or 
guarantor, or other outstanding unsecured long-term debt securities 
issued or guaranteed by the issuer or guarantor; and (ii) if the 
securities pledged are denominated in a different currency than 
those borrowed, the broker-dealer shall provide collateral in an 
amount that exceeds the minimum collateralization requirements in 
paragraph (b)(3) of Rule 15c3-3 (100%) by 1% when the collateral is 
denominated in the Euro, British pound, Swiss franc, Canadian dollar 
or Japanese yen, or by 5% when it is denominated in another 
currency.
    7. Foreign sovereign debt securities that do not meet the NRSRO 
rating condition set forth in Item 6 above may be pledged only when 
borrowing non-equity securities issued by a person organized or 
incorporated in the same jurisdiction (including other debt 
securities issued by the foreign sovereign); provided that, if such 
foreign sovereign debt securities have been assigned a rating lower 
than the securities borrowed, such foreign sovereign debt securities 
must be rated in one of the four highest rating categories by at 
least one NRSRO. If the securities pledged are denominated in a 
different currency than those borrowed, the broker-dealer shall 
provide collateral in an amount that exceeds the minimum 
collateralization requirement in paragraph (b)(3) of Rule 15c3-3 by 
1% when the collateral is denominated in the Euro, British pound, 
Swiss franc, Canadian dollar or Japanese yen, or by 5% when it is 
denominated in another currency.
    8. The Euro, British pound, Swiss franc, Canadian dollar or 
Japanese yen may be pledged when borrowing any securities, provided 
that, when the securities borrowed are denominated in a different 
currency than that pledged, the broker-dealer shall provide 
collateral in an amount that exceeds the minimum collateralization 
requirement in paragraph (b)(3) of Rule 15c3-3 by 1%. Any other 
foreign currency may be pledged when borrowing any non-equity 
securities denominated in the same currency.
    9. Non-governmental debt securities may be pledged when 
borrowing any securities, provided that, in the relevant cash market 
they are not traded flat or in default as to principal or interest, 
and are rated in one of the two highest rating categories by at 
least one NRSRO. If such securities are not denominated in U.S. 
dollars or in the currency of the securities being borrowed, the 
broker-dealer shall provide collateral in an amount that exceeds the 
minimum collateralization requirement in paragraph (b)(3) of Rule 
15c3-3 by 1% when the securities pledged are denominated in the 
Euro, British pound, Swiss franc, Canadian dollar or Japanese yen, 
or by 5% when they are denominated in any other currency.

    The Department agrees with the commenters that the types of the 
collateral allowed under the class exemption should be expanded. 
Although the SEC concluded that the designation of additional 
categories of permissible collateral will add liquidity to the 
securities lending market and lower borrowing costs for broker-dealers, 
the Department does not believe that the commenters have made a 
sufficient showing that adopting all the categories of collateral 
described in Rule 15c3-3 would be protective of the interests of 
participants and beneficiaries if a borrower were to default.
    In this regard, the Department notes that the collateral described 
in categories 1 and 2 of Rule 15c3-3 satisfies the definition of ``U.S. 
Collateral'' under the proposed exemption. For the sake of clarity, the 
Department has revised the definition of ``U.S. Collateral'' to 
specifically include: Government securities as defined in section 
3(42)(A) and (B) of the Securities Exchange Act of 1934 (the Exchange 
Act); and Government securities as defined in section 3(42)(C) of the 
Exchange Act and issued or guaranteed as to principal or interest by 
the following corporations: (i) Federal Home Loan Mortgage Corporation, 
(ii) the Federal National Mortgage Corporation, (iii) the Student Loan 
Marketing Association and (iv) the Financing Corporation.
    Additionally, the Department believes that it would be appropriate 
to expand the definition of ``U.S. Collateral'' to include: ``Mortgage-
backed securities'' as described in category 4 of Rule 15c3-3, and 
``negotiable certificates of deposit and banker acceptances'' as 
described in category 5 of Rule 15c3-3.
    Further, the Department has determined that it would be appropriate 
to expand the definition of ``Foreign Collateral'' to include all other 
types of collateral that are specified under Rule 15c3-3, as amended by 
the SEC from time to time, provided the Lending Fiduciary is a U.S. 
Broker-Dealer or U.S. Bank, and such entity provides the plan with an 
indemnification with respect to the difference, if any, between the 
replacement cost of the borrowed securities and the market value of the 
collateral on the date of a borrower default plus interest and any 
transaction costs which a plan may incur or suffer directly arising out 
of a borrower default. In the absence of an indemnification by a U.S. 
Broker-Dealer or U.S. Bank, the definition of ``Foreign Collateral'' in 
the final exemption has been revised to include the types of collateral 
described in categories 3 of Rule 15c3-3, rated foreign sovereign debt 
described in category 6, and the British pound, the Canadian dollar, 
the Swiss franc, the Japanese yen or the Euro.
    In response to a comment, the Department has determined not to 
revise the exemption to include equity securities and fixed-income 
securities as these items appear to be outside the scope of Rule 15c3-
3, and the Department has insufficient information about how these 
items would function as collateral.

4. Issues Relating to the Lending Fiduciary's Indemnification of the 
Plan From Loss Upon a Borrower's Default

    Two commenters requested that the Department revise the 
indemnification provision of section III(b) to limit the lending 
fiduciary's indemnification obligation to losses resulting from a 
borrower's default, and not from any shortfall in the earnings on the 
collateral. The Department notes that the indemnification by the 
Lending Fiduciary is only applicable when the borrower defaults and 
there is a difference, if any, between the replacement cost of the 
borrowed securities and the market value of the collateral on the date 
of a borrower default plus interest and any transaction costs incurred 
(including attorney's fees of such plan arising out of the default on 
the loans or the failure to indemnify properly under this provision) 
which the plan may incur or suffer directly arising out of a borrower 
default. The indemnification requirement, under the proposal, was never 
intended to encompass losses arising out of the investment of the 
collateral by a Lending Fiduciary or other party. Accordingly, the 
Department has clarified section III(b)(2) of the exemption to reflect 
this intent.

[[Page 63792]]

    Another commenter asked the Department to expand section III(b)(2) 
of the proposed exemption to permit a parent corporation (which may or 
may not be domiciled in the United States) of a U.S. subsidiary acting 
as a Lending Fiduciary to provide the indemnity in lieu of the Lending 
Fiduciary itself. The Department believes that this request raises 
issues that are beyond the scope of the proposed exemption and has 
determined not to modify the exemption as requested by the commenter.
    One commenter requested clarification regarding the scope of the 
indemnification provisions under the exemption. Specifically, the 
commenter questioned whether, in accordance with the provisions in an 
indemnification agreement, a Lending Fiduciary can stand in the shoes 
of the plan, and seek recovery from the borrower. Nothing in the final 
exemption would preclude a Lending Fiduciary from entering into an 
indemnification agreement that permits the Lending Fiduciary to seek 
recovery against a defaulting borrower after the Lending Fiduciary has 
made the plan whole pursuant to the indemnification agreement.

5. Miscellaneous Comments

    Another commenter questioned whether the exemption would apply to 
repurchase agreements (repos). The commenter states that in the context 
of securities loans that are structured and documented as repos, a 
Master Repurchase Agreement is utilized instead of a Master Securities 
Lending Agreement. Except for the difference in the form of the 
arrangement, such an agreement contains all of the same information and 
substantive requirements that would be found in a typical Master 
Securities Lending Agreement. The commenter indicates that the Master 
Repurchase Agreement contains terms and conditions that satisfy all of 
the substantive requirements of the exemption, including the 
requirement that the securities be returned at termination of the loan 
(i.e., repurchase transaction) in consideration for the return of the 
cash, the requirement that any interest or dividends on the securities 
lent (i.e., sold) be paid by the securities borrower (i.e., the 
purchaser) to the securities lender (i.e., the seller) as and when 
paid, and the requirement that the securities lender (i.e., the seller) 
receive reasonable compensation for the loan of the securities (which 
may consist of the ability to retain investment earnings on the cash 
collateral in excess of a pre-specified rebate amount).
    The Department notes that the exemption permits securities loans 
that are structured as repos, provided that all of the other terms and 
conditions of the exemption are otherwise met. For the sake of clarity, 
the Department has added a definition of the terms ``lending of 
securities'' or ``loan of securities'' to include securities loans that 
are structured as repurchase agreements, provided that all terms of the 
exemption are otherwise met (section V(l) of the exemption).
    Another commenter expressed concern that the exemption prevents 
plans from lending certain fixed income securities when a plan accepts 
foreign collateral by requiring the collateralization level for foreign 
collateral to be determined by reference to the market value of the 
securities lent on a ``recognized securities exchange,'' or an 
``automated trading system.'' (See section II(b)(1)(B) and 
II(b)(2)(B))) The commenter requests that market value be determined in 
the same manner as set out under the 2000 version of the Master 
Securities Loan Agreement which was jointly published by the commenter 
and the Securities Industry Association. The Department believes that 
the objective standard contained in the proposal is an important 
safeguard, and is not persuaded by the comment.
    One commenter requested that the Department clarify section IV(c) 
of the proposal. Section IV(c) of the proposal requires that the 
compensation be reasonable and be paid to the Lending Fiduciary in 
accordance with the terms of a written instrument, which may be in the 
form of a master agreement covering a series of securities lending 
transactions. The commenter was concerned that this provision could 
require that the aggregate compensation for all loans be reasonable. 
Thus, if one loan's compensation failed, then all loans would fail this 
condition. The Department intended that this condition apply on a loan-
by-loan basis. Thus, the failure of one loan to meet this requirement 
would not cause all loans entered into pursuant to a master agreement 
to fail such requirement.
    A commenter requested clarification on whether the exemption covers 
``fee-for-hold'' arrangements. The commenter describes ``fee-for-
holds'' as the following. The borrower pays a fee in exchange for the 
guaranteed availability of a particular security for a specified period 
of time or until the arrangement is terminated by either party. If a 
fee-for-hold arrangement is in place and the holding borrower chooses 
to borrow any such held securities, the fee-for-hold arrangement with 
respect to such securities terminates and the borrower will enter into 
a securities loan arrangement. These arrangements may take two forms: 
(1) The plan may grant the borrower the right of first refusal 
essentially giving the borrower an option to borrow the securities if 
the lending plan is approached by another party seeking to borrow the 
same held securities; or (2) the plan may grant the borrower the 
exclusive right to borrow the securities. The commenter stated that 
title to the securities does not transfer until securities are actually 
delivered. The borrower pays a fee related to the type, quantity and 
duration of the fee-for-hold arrangement. Once loaned, the lending fee 
paid is based on market conditions at the time of the loan. The plan 
may terminate the arrangement at any time so that it may dispose of the 
securities at any time. The Department is of the view that these 
arrangements are within the scope of the exemption, provided that all 
terms and conditions are otherwise met.
    One commenter requested that relief be extended to transactions 
covered by the Federal Employee's Retirement System Act of 1986 
(FERSA). The Department notes that relief from the prohibited 
transaction provisions of FERSA is provided for transactions described 
in section I(c) of the final amendment by reason of PTE T88-1, as 
amended (53 FR 52838 (December 29, 1988), 57 FR 8689 (March 11, 1992).) 
No additional exemptive relief is necessary under the final amendment 
for those prohibited transactions described in FERSA which parallel 
those described in section 406(a) of ERISA, if the plan receives no 
less than adequate consideration.
    In this regard, PTE T88-1, as amended, adopted six prohibited 
transaction class exemptions (including PTE 82-63) for purposes of 
section 8477(c)(2) of FERSA. The amendment to PTE T88-1 extended such 
relief to any amendments of these class exemptions which are granted by 
the Department pursuant to section 408(a) of ERISA unless the 
Department determines that PTE T88-1, as amended does not apply to such 
amendment. Accordingly, the Department determines that PTE T88-1, as 
amended shall apply to this final amendment for purposes of FERSA.
    One commenter noted that the requirements in section II(d) that the 
loan agreement identify the currency in which payment of any fees will 
be made to the plan would be burdensome. The commenter noted that, in 
the context of securities loans secured by cash collateral, it is 
industry practice that the lender pays a rebate to the borrower rather 
than receiving a fee. Secondly, it is industry practice that the 
borrower's rebate will be in the same currency as

[[Page 63793]]

the currency of the cash collateral. In addition, many loans are 
covered by a master agreement and, in the context of a securities loan 
secured by non-cash collateral, parties may need to offer different 
forms of collateral on a loan-by-loan basis. Thus, the commenter 
requests that the parties be permitted to specify the currency of the 
fees in the loan confirmation. The Department concurs with the comment, 
and has modified the final exemption accordingly.
    A commenter asked the Department to clarify how the final exemption 
would apply to securities loans that were entered into pursuant to PTEs 
81-6 and 82-63 prior to the effective date of the final exemption. The 
Department notes that loan transactions entered into prior to the 
effective date of this exemption would be covered by PTE 81-6 and PTE 
82-63, provided all conditions of the exemption are met. Transactions 
entered into on or after the effective date of the final exemption 
would be covered by this exemption, provided that the conditions 
therein are met. The Department notes that the conditions of PTE 81-6 
and PTE 82-63 have been incorporated into this class exemption.

Description of the Exemption

    Section I of the exemption describes the transactions that are 
covered by the exemption. Section I(a) tracks the language of PTE 81-6 
by permitting the lending of securities that are assets of an employee 
benefit plan to a U.S. Broker-Dealer or U.S. Bank, if the general 
conditions set forth in section II are met. However, the conditions 
contained in PTE 81-6 have been amended to permit additional types of 
collateral to be used for the securities loan. Section I(b) of the 
exemption expands PTE 81-6 by permitting the lending of securities that 
are assets of an employee benefit plan to a Foreign Broker-Dealer or a 
Foreign Bank. A Foreign Broker-Dealer or a Foreign Bank must meet both 
the general conditions set forth in section II of the proposed 
exemption, as well as the specific conditions described in section III.
    Under the final exemption, a Foreign Broker-Dealer is defined in 
section V(c) as a broker-dealer that has, as of the last day of its 
most recent fiscal year, equity capital that is the equivalent of no 
less than $200 million and is: (1)(i) Registered and regulated under 
the laws of the Financial Services Authority in the United Kingdom, or 
(ii)(a) registered and regulated under the laws of a securities 
commission of a Province of Canada that is a member of the Canadian 
Securities Administration, and (b) is subject to the oversight of a 
Canadian self-regulatory authority; or (2) registered and regulated, 
under the relevant securities laws of a governmental entity of a 
country other than the United States, and such securities laws and 
regulation were applicable to a broker-dealer that received: (i) An 
individual exemption, granted by the Department under section 408(a) of 
ERISA, involving the loan of securities by a plan to a broker-dealer or 
(ii) a final authorization by the Department to engage in an otherwise 
prohibited transaction pursuant to PTE 96-62, as amended involving the 
loan of securities by a plan to a broker-dealer.
    Section V(d) of the final exemption defines the term ``Foreign 
Bank'' to mean: An institution that has, substantially similar powers 
to a bank as defined in section 202(a)(2) of the Investment Advisers 
Act, has as of the last day of its most recent fiscal year, equity 
capital which is the equivalent of no less than $200 million, and is 
subject to: (1) Regulation by the Financial Services Authority in the 
United Kingdom or the Office of the Superintendent of Financial 
Institutions in Canada, or (2) regulation by the relevant governmental 
banking agency(ies) of a country other than the United States, and the 
regulation and oversight of these banking agencies were applicable to a 
bank that received: (i) An individual exemption, granted by the 
Department under section 408(a) of ERISA, involving the loan of 
securities by a plan to a bank or (ii) a final authorization by the 
Department to engage in an otherwise prohibited transaction pursuant to 
PTE 96-62, as amended involving the loan of securities by a plan to a 
bank.
    Section I(c) permits the payment to a lending fiduciary of 
compensation for services rendered in connection with loans of plan 
assets that are securities, provided that the conditions set forth in 
section IV are met. The conditions found in section IV mirror the 
conditions that were found in PTE 82-63. Although the relief provided 
by section I(c) would apply to a broader range of lending activities, 
no changes have been made with respect to any of the conditions that 
are contained in PTE 82-63.
    Section II(a) of the final exemption remains as proposed and 
requires that neither the borrower nor any affiliate of the borrower 
have or exercise discretionary authority or control with respect to the 
investment of the plan assets involved in the transaction, or render 
investment advice (within the meaning of 29 CFR 2510.3-21(c)) with 
respect to those assets.
    Under the final exemption, section II(b)requires that the plan 
receive from the borrower by the close of the Lending Fiduciary's 
business on the day in which the securities lent are delivered to the 
borrower, (1) ``U.S. Collateral'' having, as of the close of business 
on the preceding business day, a market value or, in the case of bank 
letters of credit, a stated amount, equal to not less than 100 percent 
of the then market value of the securities lent; or (2) ``Foreign 
Collateral'' having as of the close of business on the preceding 
business day, a market value or, in the case of bank letters of credit, 
a stated amount, equal to not less than: (i) 102 percent of the then 
market value of the securities lent as valued on a recognized 
securities exchange (as defined in section V(j)) or an automated 
trading system (as defined in section V(k)) on which the securities are 
primarily traded if the collateral posted is denominated in the same 
currency as the securities lent, or(ii) 105 percent of the then market 
value of the securities lent as valued on a recognized securities 
exchange (as defined in section V(j)) or an automated trading system 
(as defined in V(k)) on which the securities are primarily traded if 
the collateral posted is denominated in a different currency than the 
securities.
    In addition, section II(b) has been expanded to include new 
collateralization requirements in the case of a securities lending 
transaction in which the Lending Fiduciary is a U.S. Bank or U.S. 
Broker-Dealer, and such Lending Fiduciary indemnifies the plan with 
respect to the difference, if any, between the replacement cost of the 
borrowed securities and the market value of the collateral on the date 
of a borrower default. For those securities transactions involving such 
an indemnification, the plan may receive from the borrower by the close 
of the Lending Fiduciary's business on the day in which the securities 
lent are delivered to the borrower: Foreign Collateral having, as of 
the close of business on the preceding day, a market value or in the 
case of bank letters of credit, a stated amount, equal to not less 
than:
    (i) 100 percent of the then market value of the securities lent as 
valued on a recognized securities exchange (as defined in section V(j)) 
or an automated trading system (as defined in section V(k)) on which 
the securities are primarily traded if the collateral posted is 
denominated in the same currency as the securities lent; or (ii) 101 
percent of the then market value of the securities lent as valued on a 
recognized securities exchange (as defined in section V(j)) or an 
automated trading system (as defined

[[Page 63794]]

in section V(k)) on which the securities are primarily traded if the 
collateral posted is in a different currency than the securities lent 
and such currency is denominated in Euros, British pounds, Japanese 
yen, Swiss francs or Canadian dollars; or (iii) 105 percent of the then 
market value of the securities lent as valued on a recognized 
securities exchange or an automated trading system (as defined in 
section V(k)) if the collateral posted is in a different currency than 
the securities lent and is denominated in a currency other than those 
specified above.\5\
---------------------------------------------------------------------------

    \5\ The Department notes that this requirement would not 
preclude the Lending Fiduciary from requiring additional collateral 
should the circumstances so warrant.
---------------------------------------------------------------------------

    The final exemption contains a revised definition of ``U.S. 
Collateral'' that incorporates additional forms of collateral described 
in Rule 15c3-3. The term ``U.S. Collateral'' is defined in section V(e) 
as:
    (1) U.S. currency,
    (2) ``government securities'' as defined in section 3(a)(42)(A) and 
(B) of the Securities Exchange Act of 1934 (the Exchange Act),
    (3) ``government securities'' as defined in section 3(a)(42)(C) of 
the Exchange Act issued or guaranteed as to principal or interest by 
the following corporations: The Federal Home Loan Mortgage Corporation, 
the Federal National Mortgage Association, the Student Loan Marketing 
Association and the Financing Corporation,
    (4) mortgage-backed securities meeting the definition of a 
``mortgage related security'' set forth in section 3(a)(41) of the 
Exchange Act,
    (5) negotiable certificates of deposit and bankers' acceptances 
issued by a ``bank'' as that term is defined in section 3(a)(6) of the 
Exchange Act, and which are payable in the United States and deemed to 
have a ``ready market'' as that term is defined in 17 CFR 240.15c3-1, 
or
    (6) irrevocable letters of credit issued by a U.S. Bank other than 
the borrower or an affiliate thereof, or any combination thereof.
    The final exemption contains a revised definition of ``Foreign 
Collateral'' that permits U.S. Banks, U.S. Broker-Dealers, Foreign 
Banks and Foreign Broker-Dealers to accept a broader range of 
collateral. The term ``Foreign Collateral'' is defined in section V(f) 
as:

    (1) Securities issued by or guaranteed as to principal and 
interest by the following Multilateral Development Banks--the 
obligations of which are backed by the participating countries, 
including the United States: The International Bank for 
Reconstruction and Development, the Inter-American Development Bank, 
the Asian Development Bank, the African Development Bank, the 
European Bank for Reconstruction and Development and the 
International Finance Corporation.
    (2) Foreign sovereign debt securities provided that at least one 
nationally recognized statistical rating organization has rated in 
one of its two highest categories either the issue, the issuer or 
guarantor;
    (3) the British pound, Canadian dollar, Swiss franc, Japanese 
yen or the Euro;
    (4) irrevocable letters of credit issued by a Foreign Bank, 
other than the borrower or an affiliate thereof, which has a 
counterparty rating of investment grade or better as determined by a 
nationally recognized statistical rating organization; or
    (5) any type of collateral described in Rule 15c3-3 of the 
Exchange Act, as amended from time to time, provided that the 
lending fiduciary is a U.S. Bank or U.S. Broker-Dealer and such 
fiduciary indemnifies the plan with respect to the difference, if 
any, between the replacement cost of the borrowed securities and the 
market value of the collateral on the date of a borrower default 
plus interest and any transaction costs which a plan may incur or 
suffer directly arising out of a borrower default.

    The Department notes that section II(c) of the exemption remains 
unchanged from the proposal and requires that plans receive collateral 
from borrowers by physical delivery, by wire transfer or by book entry 
in a securities depository located in the United States. For borrowers 
that are Foreign Banks and Foreign Broker-Dealers, the exemption 
requires that the plan receive either collateral by physical delivery, 
by wire entry or by book entry in a securities depository located in 
the United States or held on behalf of the plan at an Eligible 
Securities Depository as defined in section V(i)of the exemption.
    Section II(d) of the exemption has been modified in light of the 
expanded definition of ``Foreign Broker-Dealer'' and ``Foreign Bank.'' 
That section requires that the borrower furnish the Lending Fiduciary 
with its most recent available audited statement of the borrower's 
financial condition, as audited by a United States certified public 
accounting firm or in the case of a borrower that is a Foreign Broker-
Dealer or Foreign Bank, a firm which is eligible or authorized to issue 
audited financial statements in conformity with accounting principles 
generally accepted in the primary jurisdiction that governs the 
borrowing Foreign Broker-Dealer or Foreign Bank.
    Under section II(e) of the exemption, the loan must be made 
pursuant to a written loan agreement. Section II(e) further requires 
that the securities lending agreement must give the plan a continuing 
security interest in, title to, or the rights of a secured creditor 
with respect to the collateral received by the plan. In section (f) of 
the exemption, the plan may receive a reasonable fee in connection with 
the securities loan or have the opportunity to derive compensation 
through the investment of the currency collateral. The plan may pay a 
loan rebate or similar fee to the borrower where the plan invests the 
currency collateral.
    Section II(g) of the exemption requires that the fees and other 
consideration received by the plan in connection with the loan