Notice of Proposed Exemptions, 3647-3654 [E9-962]

Agencies

• Employee Benefits Security Administration
• DEPARTMENT OF LABOR

[Federal Register Volume 74, Number 12 (Wednesday, January 21, 2009)]
[Notices]
[Pages 3647-3654]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-962]



[[Page 3647]]

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DEPARTMENT OF LABOR

Employee Benefits Security Administration

[Application Nos. and Proposed Exemptions; D-11477, D-11478, and D-
11479, Respectively, UBS AG (UBS) and Its Affiliates UBS Financial 
Services Inc. (UBS Financial), and UBS Financial Services Inc. of 
Puerto Rico (PR Financial) (Collectively, the Applicants); and D-11488, 
Robert W. Baird & Co. Incorporated, et al.]


Notice of Proposed Exemptions

AGENCY: Employee Benefits Security Administration, Labor.

ACTION: Notice of Proposed Exemptions.

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SUMMARY: This document contains notices of pendency before the 
Department of Labor (the Department) of proposed exemptions from 
certain of the prohibited transaction restrictions of the Employee 
Retirement Income Security Act of 1974 (ERISA or the Act) and/or the 
Internal Revenue Code of 1986 (the Code).

Written Comments and Hearing Requests

    All interested persons are invited to submit written comments or 
requests for a hearing on the pending exemptions, unless otherwise 
stated in the Notice of Proposed Exemption, within 45 days from the 
date of publication of this Federal Register Notice. Comments and 
requests for a hearing should state: (1) The name, address, and 
telephone number of the person making the comment or request, and (2) 
the nature of the person's interest in the exemption and the manner in 
which the person would be adversely affected by the exemption. A 
request for a hearing must also state the issues to be addressed and 
include a general description of the evidence to be presented at the 
hearing.

ADDRESSES: All written comments and requests for a hearing (at least 
three copies) should be sent to the Employee Benefits Security 
Administration (EBSA), Office of Exemption Determinations, Room N-5700, 
U.S. Department of Labor, 200 Constitution Avenue, NW., Washington, DC 
20210. Attention: Application No. ----, stated in each Notice of 
Proposed Exemption. Interested persons are also invited to submit 
comments and/or hearing requests to EBSA via e-mail or FAX. Any such 
comments or requests should be sent either by e-mail to: 
``moffitt.betty@dol.gov'', or by FAX to (202) 219-0204 by the end of 
the scheduled comment period. The applications for exemption and the 
comments received will be available for public inspection in the Public 
Documents Room of the Employee Benefits Security Administration, U.S. 
Department of Labor, Room N-1513, 200 Constitution Avenue, NW., 
Washington, DC 20210.

Notice to Interested Persons

    Notice of the proposed exemptions will be provided to all 
interested persons in the manner agreed upon by the applicant and the 
Department within 15 days of the date of publication in the Federal 
Register. Such notice shall include a copy of the notice of proposed 
exemption as published in the Federal Register and shall inform 
interested persons of their right to comment and to request a hearing 
(where appropriate).

SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in 
applications filed pursuant to section 408(a) of the Act and/or section 
4975(c)(2) of the Code, and in accordance with procedures set forth in 
29 CFR part 2570, subpart B (55 FR 32836, 32847, August 10, 1990). 
Effective December 31, 1978, section 102 of Reorganization Plan No. 4 
of 1978, 5 U.S.C. App. 1 (1996), transferred the authority of the 
Secretary of the Treasury to issue exemptions of the type requested to 
the Secretary of Labor. Therefore, these notices of proposed exemption 
are issued solely by the Department.
    The applications contain representations with regard to the 
proposed exemptions which are summarized below. Interested persons are 
referred to the applications on file with the Department for a complete 
statement of the facts and representations.

UBS AG (UBS), and Its Affiliates UBS Financial Services Inc. (UBS 
Financial), and UBS Financial Services Inc. of Puerto Rico (PR 
Financial) (Collectively, the Applicants), Located in Zurich, 
Switzerland; New York, New York; and San Juan, Puerto Rico, 
Respectively

[Exemption Application Numbers D-11477, D-11478, and D-11479, 
Respectively]

Proposed Exemption
    The Department is considering granting an exemption under the 
authority of section 408(a) of the Employee Retirement Income Security 
Act of 1974, as amended (the Act) and section 4975(c)(2) of the 
Internal Revenue Code of 1986 (the Code) and in accordance with the 
procedures set forth in 29 CFR part 2570, subpart B (55 FR 32836, 
32847, August 10, 1990). If the proposed exemption is granted, the 
restrictions of sections 406(a), 406(b)(1), 406(b)(2), and 407(a) of 
the Act and the sanctions resulting from the application of section 
4975 of the Code, by reason of section 4975(c)(1)(A) through (E) of the 
Code, shall not apply to: (1) The acquisition by the UBS Savings and 
Investment Plan, the UBS Financial Services Inc. 401(k) Plus Plan, and 
the UBS Financial Services Inc. of Puerto Rico Savings Plus Plan 
(collectively, the Plans) of certain entitlements (each, an 
Entitlement) and certain subscription rights (each, a Right) issued by 
UBS, a party in interest with respect to the Plans; (2) the holding of 
the Entitlements by the Plans between April 28, 2008 and May 9, 2008, 
inclusive, pending the automatic conversion of the Entitlements into 
shares of UBS common stock; and (3) the holding of the Rights by the 
Plans between May 27, 2008 and June 9, 2008, inclusive, provided that 
the following conditions were satisfied:
    (a) All decisions regarding the acquisition and holding of the 
Rights and Entitlements by the Plans were made by U.S. Trust, Bank of 
America Private Wealth Management (U.S. Trust), a qualified, 
independent fiduciary;
    (b) The Plans' acquisition of the Rights and Entitlements resulted 
from an independent act of UBS as a corporate entity, and without any 
participation on the part of the Plans;
    (c) The acquisition and holding of the Rights and Entitlements by 
the Plans occurred in connection with a capital improvement plan 
approved by the board of directors of UBS, in which all holders of UBS 
common stock, including the Plans, were treated exactly the same;
    (d) All holders of UBS common stock, including the Plans, were 
issued the same proportionate number of Rights based on the number of 
shares of UBS common stock held by such Plans;
    (e) All holders of UBS common stock, including the Plans, were 
issued the same proportionate number of Entitlements based on the 
number of shares of UBS common stock held by such Plans;
    (f) The acquisition of the Rights and Entitlements by the Plans 
occurred on the same terms made available to other holders of UBS 
common stock;
    (g) The acquisition of the Rights and Entitlements by the Plans was 
made pursuant to provisions of each such Plan for the individually-
directed investment of participant accounts; and
    (h) The Plans did not pay any fees or commissions in connection 
with the

[[Page 3648]]

acquisition or holding of the Rights or Entitlements.
Summary of Facts and Representations
    1. UBS is one of the world's largest financial firms and is a 
global wealth manager, an investment banking and securities firm, and a 
global asset manager. UBS is headquartered in Zurich, Switzerland and 
currently operates in over fifty countries and throughout the United 
States, including Puerto Rico and the Virgin Islands. Among the wholly-
owned subsidiaries of UBS are UBS Financial and PR Financial. UBS 
Financial is headquartered in New York, New York, and PR Financial is 
headquartered in San Juan, Puerto Rico.
    2. UBS sponsors the UBS Savings and Investment Plan (the Savings 
Plan), a defined contribution, profit-sharing plan with a Code section 
401(k) feature. The Savings Plan provides for participant-directed 
individual accounts that are intended to comply with the provisions of 
section 404(c) of the Act and the corresponding regulations located at 
29 CFR 2550.404c-1. The Applicants represent that the trustee of the 
Savings Plan is State Street Bank and Trust Company of Boston, 
Massachusetts. The Applicants further represent that UBS is a party in 
interest with respect to the Savings Plan because, under section 
3(14)(C) of the Act, it constitutes an employer whose employees are 
covered under the Savings Plan. As of December 31, 2007, the Applicants 
represent that the Savings Plan had approximately 14,719 participants 
and total assets of $1,416,402,131. The Applicants state that the 
Savings Plan allows participants to direct investments into various 
investment funds, including the UBS Common Stock Fund (the Fund). The 
Applicants represent that the Fund is not diversified, and consists 
primarily of UBS common stock (each whole share of the Fund comprising 
one UBS Share) plus cash for liquidity purposes. According to the 
Applicants, the UBS Shares held by the Savings Plan were valued at 
$87,773,382 as of December 31, 2007, and comprised approximately 6.2% 
of the total assets in the Savings Plan.
    3. UBS Financial sponsors the UBS Financial Services Inc. 401(k) 
Plus Plan (the Plus Plan), a defined contribution, profit-sharing plan 
with a Code section 401(k) feature. The Plus Plan provides for 
participant-directed individual accounts that are intended to comply 
with the provisions of section 404(c) of the Act and the corresponding 
regulations located at 29 CFR 2550.404c-1. The Applicants represent 
that the trustee of the Plus Plan is the Northern Trust Company of 
Chicago, Illinois. The Applicants further represent that UBS is a party 
in interest with respect to the Plus Plan under section 3(14)(H) of the 
Act because it owns, directly or indirectly, 100% of UBS Financial. The 
Applicants state that, as of December 31, 2007, the Plus Plan had 
approximately 23,471 participants and total assets of $2,531,642,183. 
Like the Savings Plan, the Plus Plan allows participants to direct 
investments into the Fund, along with other investments. The Applicants 
represent that the UBS Shares held by the Plus Plan were valued at 
$547,605,850 as of December 31, 2007, and comprised approximately 21.6% 
of the total assets in the Plus Plan.
    4. PR Financial sponsors the UBS Financial Services Inc. of Puerto 
Rico Savings Plus Plan (the PR Plan), which provides for participant-
directed individual accounts that are intended to comply with the 
provisions of section 404(c) of the Act and the corresponding 
regulations located at 29 CFR 2550.404c-1. The Applicants represent 
that the trustee of the PR Plan is the Northern Trust Company of 
Chicago, Illinois. The Applicants state that the PR Plan utilizes the 
same trust as the Plus Plan, and allows participants to direct 
investments into the Fund, along with other investments. The Applicants 
also represent that UBS is a party in interest with respect to the PR 
Plan under section 3(14)(H) of the Act because it owns, directly or 
indirectly, 100% of PR Financial. The Applicants state that, as of 
December 31, 2007, the PR Plan had approximately 368 participants and 
total assets of $39,050,978. The Applicants also represent that the UBS 
Shares held by the PR Plan were valued at $14,197,762 as of December 
31, 2007, and comprised approximately 36.4% of the total assets in the 
PR Plan.
    5. The Applicants represent that the trustees of each of the Plans 
have the authority to invest and reinvest all amounts in each 
participant's account, as elected by the participant. Generally, in the 
absence of any such election, the trustee shall invest the amounts as 
specified by the appropriate investment committee of each of the Plans. 
The Applicants further represent that the Savings Plan's trust 
agreement provides that its trustee has the authority to exercise the 
voting rights of any stocks; to exercise any conversion privileges, 
subscription rights, or other options; to consent to or otherwise 
participate in changes affecting corporate securities; and generally to 
exercise any of the powers of an owner with respect to stocks, bonds, 
or other property held in the commingled fund or in the trust. The 
Applicants also represent that the Plus Plan's and the PR Plan's trust 
agreement provides that rights, options, or warrants offered to 
purchase UBS Shares shall be exercised by its trustee to the extent 
that there is cash available.
    The Applicants state that the Savings Plan's trust agreement 
provides that cash dividends and earnings attributable to UBS Shares in 
the Fund shall be reinvested in the Fund and allocated in whole shares 
and fractions thereof to the account of each participant with respect 
to whom directed investments in the Fund are maintained on the date 
such allocation is made. The Applicants represent that cash dividends 
and earnings received by the Plus Plan and the PR Plan's trust are 
reinvested by purchasing additional UBS Shares.

The Entitlements

    6. On February 27, 2008, as part of UBS's capital improvement 
program, the Applicants represent that the UBS board of directors 
proposed, and its shareholders approved, a change to the capital 
structure of the company that permitted the replacement of the UBS 2007 
cash dividend with an award to existing shareholders (including 
participants in the Plans who were invested in UBS Shares) of the 
Entitlements. The Applicants represent that, with respect to the 
awarding of the Entitlements by UBS, the Plans were treated exactly the 
same as the other holders of UBS Shares.
    On April 28, 2008, UBS awarded a total of 14,440,531 Entitlements 
to existing UBS shareholders on the date of record. According to the 
Applicants, the award stipulated that, at any time from April 28, 2008 
to May 9, 2008, inclusive (the Entitlements Trading Period), 
shareholders in general were permitted to buy or sell the Entitlements 
on SWX Europe Limited (SWX), a securities exchange based in London, 
England.\1\ The Applicants state that at the end of the Entitlements 
Trading Period, any Entitlements held by a shareholder were to be 
aggregated and automatically converted into an appropriate whole number 
of UBS Shares. In this regard, the Applicants represent that under the 
terms of the award, no fewer than twenty (20) Entitlements enabled a

[[Page 3649]]

shareholder the right to receive one UBS Share. For example, if an 
individual held 23 Entitlements at the conclusion of the Entitlements 
Trading Period, he or she would have received a single UBS Share, and 
the remaining three Entitlements would have lapsed without any right of 
compensation from UBS.
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    \1\ The Applicants represent that SWX Europe Limited is a 
wholly-owned subsidiary of SWX Swiss Exchange, the securities 
exchange of Switzerland, and provides cross-border trading of 
primarily Swiss blue-chip securities. The Applicants also state that 
SWX Europe Limited (formerly known as virt-x Exchange Limited) has 
been in operation since 2001 and is a recognized investment exchange 
that is supervised by the United Kingdom's Financial Services 
Authority. The Applicants represent that UBS holds no interest in 
any of the foregoing financial exchanges.
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The Rights

    7. The Applicants represent that, under the foregoing capital 
improvement program, UBS decided to effect an ordinary capital increase 
by allotting subscription rights (the Rights Offering) to existing 
holders of UBS common stock (including participants in the Plans who 
were invested in UBS Shares). At its annual general meeting on April 
23, 2008, the UBS board of directors proposed, and UBS shareholders 
approved, a change to the UBS's capital structure to accommodate the 
Rights Offering. The Applicants represent that the Rights Offering 
provided for a public offering of approximately 760 million additional 
UBS Shares, which would result in approximately $15.5 billion in 
additional capital for UBS. The Applicants further represent that the 
right to vote on whether to permit the Rights Offering was passed 
through under the plans to those participants who held UBS Shares. The 
Applicants also represent that, with respect to the awarding of the 
Rights by UBS, the Plans were treated exactly the same as the other 
holders of UBS Shares. On May 21, 2008, the UBS board of directors 
determined the final terms of the Rights Offering, setting the 
subscription price at 21.00 Swiss Francs (CHF) per UBS Share (or $20.16 
per UBS Share).
    On May 27, 2008, UBS awarded one Right for each UBS Share on the 
date of record. According to the Applicants, the award stipulated that, 
upon receiving the Rights, shareholders in general were permitted to 
(i) Exercise their Rights, which entitled them to purchase additional 
UBS Shares; (ii) purchase more Rights on the SWX or the New York Stock 
Exchange (NYSE); or (iii) sell their Rights on the SWX or the NYSE. The 
exercise of twenty (20) Rights allowed the holder to purchase seven (7) 
UBS Shares at a price of $20.16 per share. The Applicant states that 
the trading period for the Rights ran from May 27, 2008 through June 9, 
2008, inclusive (the Rights Trading Period). According to the 
Applicant, any Rights that remained unexercised at the end of the 
Rights Trading Period lapsed without any right of compensation from 
UBS.
    8. The Applicants represent that neither the Rights nor the 
Entitlements constitute qualifying employer securities as defined in 
section 407(d)(5) of the Act. Accordingly, in connection with the 
awarding of the Rights and Entitlements by UBS, the applicable 
investment provisions of each of the Plans and of the Plans' respective 
trust agreements were amended effective April 1, 2008 to expressly 
permit the acquisition of the Rights and Entitlements by the Plans 
pending the submission of an application for an administrative 
exemption with the Department. The Plans and the Plans' respective 
trust agreements were further amended as of April 1, 2008 to provide 
for the appointment of a designated independent fiduciary possessing 
discretionary authority with respect to the holding, exercise, 
conversion, sale, or other disposition of the Rights and Entitlements. 
In this connection, the provisions of the Plans and of the Plans' 
respective trust agreements concerning participant investment elections 
were also amended as of April 1, 2008 to permit the designated 
independent fiduciary, rather than participants in the Plans, to direct 
the disposition of the Rights and Entitlements.
    9. On April 28, 2008, each of the Plans contracted with U.S. Trust 
to serve both as an investment manager (within the meaning of section 
3(38) of the Act) for the Plans and as the designated independent 
fiduciary of the Plans with respect to transactions involving the 
Rights and Entitlements. The Applicants represent that U.S. Trust is an 
experienced and qualified fiduciary with extensive trust and management 
capabilities such as discretionary asset management, asset allocation 
and diversification, investment advice, securities trading, and the 
performance of independent fiduciary assignments for plans covered by 
the Act.
    At the time of its engagement, U.S. Trust determined that it was in 
the interests of the Plans to accept the Rights and Entitlements. In 
addition, the Plans' April 28, 2008 engagement agreement with U.S. 
Trust specifically charged the independent fiduciary with 
responsibility for conducting a due diligence review of the Rights and 
Entitlements, as well as developing a prudent strategy for the 
disposition of the Rights and Entitlements on behalf of the Plans. In 
this connection, the Applicants further represent that they, and not 
the Plans, have borne the cost of any fees payable to U.S. Trust for 
its investment management and independent fiduciary services.
    10. Under the terms of the relevant master trust agreements, the 
assets held by each of the trusts in the employer's stock fund must be 
invested in UBS Shares. For example, section 3(h) of the master trust 
for the Savings Plan states that ``the UBS Stock Fund shall be invested 
primarily in UBS Shares,'' and that it ``may be invested in short-term 
liquid investments pending investment in UBS Shares.'' In addition, 
article 7.5(d) of the UBS Financial Services Inc. Master Investment 
Trust Agreement for the Plus Plan and the PR Plan provides that, 
``except for short-term investment of cash, [UBS] has limited the 
investment power of the Trustee in the Company Stock Investment Fund to 
the purchase of [UBS] Stock.'' Accordingly, U.S. Trust decided that 
each of the Plans should hold the Entitlements until their automatic 
conversion into UBS Shares, rather than permitting the Plans to sell 
the Entitlements during the Entitlements Trading Period. U.S. Trust 
determined that, absent short-term cash needs, the trustees for the 
Plans must invest assets in the Fund in UBS common stock. U.S. Trust 
further determined that the Plans would receive substantially the same 
value (be it in UBS Shares or in cash) whether the Entitlements were 
sold or converted into UBS Shares. In addition, U.S. Trust represents 
that selling the Entitlements would have exposed the Plans to market 
risk (during the time required to sell the Entitlements and reinvest 
the proceeds in UBS common stock), foreign exchange risk (in that the 
cash proceeds generated from the sale of the Entitlements on the SWX 
would have necessitated a currency conversion to U.S. dollars prior to 
reinvestment into UBS common stock), and trading costs associated with 
the foregoing transactions.
    11. Following the acquisition of the Rights by the Plans, U.S. 
Trust determined that the Plans lacked sufficient funds in allocated 
accounts to exercise the Rights, and U.S. Trust had no authority to 
utilize other assets of the Plans for this purpose. Accordingly, U.S. 
Trust decided on behalf of the Plans to sell the Rights on either the 
SWX or the NYSE, and also determined the appropriate time during the 
Rights Trading Period that each of the Plans should sell the Rights on 
one of the exchanges. The Applicants further represent that U.S. Trust 
has confirmed that, prior to June 9, 2008 (the expiration of the Rights 
Trading Period), all of the Rights held by each of the Plans were sold 
in arm's length transactions with third parties on the SWX or the NYSE.

[[Page 3650]]

    The Applicants represent that U.S. Trust's in-house trade executing 
group executed the sales with brokers Cantor Fitzgerald, Knight 
Trading, Merrill Lynch, and JP Morgan, based on the group's independent 
evaluation of relevant factors such as price, trading volume, trade 
flow, and best execution. The Applicants represent that none of the 
foregoing brokers were affiliates of either U.S. Trust or of UBS at the 
time that the Rights were sold. The Applicants state that the trades 
involving the Rights took place at brokerage commission rates ranging 
from $0.01 per Right to $0.015 per Right; collectively, the commissions 
represented less than 1% of the total sales proceeds from the Plans' 
sales of the Rights. The Applicants represent that all trading 
commissions were paid to the respective brokers, and that neither U.S. 
Trust nor UBS (nor any affiliates of U.S. Trust or UBS) received any 
trading commissions in connection with the sale of the Rights.
    12. The Applicants represent that an administrative exemption 
providing relief for the acquisition and holding of both the Rights and 
Entitlements by the Plans would be administratively feasible because an 
independent fiduciary was appointed by the Plans to approve the 
acquisition, holding, and disposition of the Rights and Entitlements. 
In this connection, U.S. Trust subsequently provided, in writing, a 
comprehensive, reasoned rationale concerning its determinations with 
respect to the Rights and Entitlements. Accordingly, the Applicants 
represent, there is no need for monitoring by the Department of the 
transactions that are the subject of this exemption request.
    The Applicants represent that, with respect to the Entitlements, an 
exemption would be in the interests of the Plans and of their 
participants and beneficiaries because it would allow the Plans to 
acquire additional UBS Shares, which the independent fiduciary believed 
to be beneficial to the Plans. The Applicants represent that, with 
respect to the Entitlements, an exemption would be protective of the 
rights of participants and beneficiaries because it would ensure that 
such participants have the same opportunity as other holders of UBS 
Shares to receive additional UBS Shares.
    With respect to the Rights, the Applicants represent that an 
exemption would be in the interests of the Plans, and protective of the 
Plans and of their participants and beneficiaries, because it would 
ensure that such individuals have the same opportunity as other holders 
of UBS Shares to sell the Rights on an exchange and receive the 
proceeds from any such sale.
    13. In summary, the Applicants represent that the past transactions 
for which exemptive relief is sought meet the statutory criteria of 
section 408(a) of the Act because: (a) All decisions regarding the 
acquisition and holding of the Rights and Entitlements by the Plans 
were made by U.S. Trust, Bank of America Private Wealth Management 
(U.S. Trust), a qualified, independent fiduciary; (b) the Plans' 
acquisition of the Rights and Entitlements resulted from an independent 
act of UBS as a corporate entity, and without any participation on the 
part of the Plans; (c) the acquisition and holding of the Rights and 
Entitlements by the Plans occurred in connection with a capital 
improvement plan approved by the board of directors of UBS, in which 
all holders of UBS common stock, including the Plans, were treated 
exactly the same; (d) all holders of UBS common stock, including the 
Plans, were issued the same proportionate number of Rights based on the 
number of shares of UBS common stock held by such Plans; (e) all 
holders of UBS common stock, including the Plans, were issued the same 
proportionate number of Entitlements based on the number of shares of 
UBS common stock held by such Plans; (f) the acquisition of the Rights 
and Entitlements by the Plans occurred on the same terms made available 
to other holders of UBS common stock; (g) the acquisition of the Rights 
and Entitlements by the Plans was made pursuant to provisions of each 
such Plan for individually-directed investment of participant accounts; 
and (h) the Plans did not pay any fees or commissions in connection 
with the acquisition or holding of the Rights or Entitlements.
    Notice to Interested Persons: Notice of the proposed exemption 
shall be given to all interested persons in the manner agreed upon by 
the Applicants and the Department within 15 days of the date of 
publication in the Federal Register. Comments and requests for a 
hearing are due forty-five (45) days after publication of the notice in 
the Federal Register.

FOR FURTHER INFORMATION CONTACT: Mr. Mark Judge of the Department, 
telephone (202) 693-8339. (This is not a toll-free number).
    Robert W. Baird & Co. Incorporated, Located in Milwaukee, 
Wisconsin.

Exemption Application Number D-11488

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Employee Retirement Income Security 
Act of 1974 (ERISA or the Act) and section 4975(c)(2) of the Internal 
Revenue Code of 1986, as amended (the Code), and in accordance with the 
procedures set forth in 29 CFR Part 2570, Subpart B (55 FR 32836, 
32847, August 10, 1990).\2\
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    \2\ For purposes of this proposed exemption, references to 
section 406 of ERISA should be read to refer as well to the 
corresponding provisions of section 4975 of the Code.
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Section I. Loans Involving Auction Rate Securities
    If the proposed exemption is granted, the restrictions of section 
406(a)(1)(A) through (D) and section 406(b)(1) and (2) 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, shall not apply, 
effective February 1, 2008, to the lending of Auction Rate Securities 
(as defined in section III(b)) by a Plan (as defined in section III(e)) 
to Robert W. Baird & Co. Incorporated or any of its affiliates (Baird), 
provided that the conditions set forth in section II have been met.
Section II. Conditions
    (a) The last auction for the loaned Auction Rate Security was 
unsuccessful;
    (b) The Plan does not waive any rights or claims in connection with 
the Auction Rate Security as a condition of engaging in the loan (the 
Loan);
    (c) The transaction is not part of an arrangement, agreement or 
understanding designed to benefit a party in interest;
    (d) Baird is and remains a broker-dealer registered under the 
Securities Exchange Act of 1934 (the Exchange Act) or is exempt from 
registration under section 15(a)(1) of the Exchange Act as a dealer in 
exempted government securities (as defined in section 3(a)(12) of the 
Exchange Act);
    (e) The decision to enter into a Loan is made by a Plan fiduciary 
who is Independent (as defined in section III(d)) of Baird. 
Notwithstanding the foregoing, an employee of Baird who is the 
Beneficial Owner (as defined in section III(c)) of a Title II Only Plan 
(as defined in section III(f)) may direct the Title II Only Plan to 
engage in a Loan if all of the other applicable conditions of this 
exemption, if granted, have been met;
    (f) Prior to any Loan, Baird shall have furnished the Plan 
fiduciary described in paragraph (e) with:
    (1) The most recently available audited statement of Baird's 
financial condition, as audited by a United States certified public 
accounting firm;

[[Page 3651]]

    (2) The most recently available unaudited statement of Baird's 
financial condition (if the unaudited statement is more recent than the 
audited statement described above); and
    (3) A representation that, at the time the Loan is negotiated, 
there has been no material adverse change in its financial condition 
since the date of the most recent financial statement furnished to the 
Plan. Such representations may be made by Baird's agreement that each 
Loan shall constitute a representation by Baird that there has been no 
such material adverse change. Notwithstanding the foregoing, an 
employee of Baird who is the Beneficial Owner of a Title II Only Plan 
may receive the information described in this paragraph (f) if all of 
the other applicable conditions of this exemption, if granted, have 
been met;
    (g) The Loan is made pursuant to a written loan agreement (the 
Lending Agreement), the terms of which are at least as favorable to the 
Plan as an arm's-length transaction with an unrelated party would be. 
The Lending Agreement must contain all of the material terms of the 
Loan and cover only the lending of Auction Rate Securities by the Plan 
to Baird. Such Lending Agreement may be in the form of a master 
agreement covering a series of Loans;
    (h) With respect to any Loan, Baird credits the lending Plan's 
account with Baird (the Account) with an amount of cash equal to 100 
percent of the total par value of the loaned Auction Rate Securities. 
Baird must credit the Account by the close of business on the day on 
which Baird receives the Auction Rate Securities from the Plan;
    (i) The Plan has the opportunity to derive compensation through the 
investment of the cash collateral described in paragraph (h);
    (j) The Plan pays Baird a rebate fee negotiated in advance of the 
Loan that does not exceed the interest and/or dividends the Plan 
receives in connection with its ownership of the loaned Auction Rate 
Securities;
    (k) The Plan may terminate the Loan at any time and for any reason;
    (l) Baird may terminate the Loan if:
    (1) The Plan closes its Account or reduces the balance thereof to 
less than 100 percent of the total par value of the Auction Rate 
Securities that are the subject of the Loan;
    (2) The Plan is an individual retirement account described in 
section 4975(e)(1)(B)-(F) of the Code (an IRA) and the Beneficial Owner 
of the IRA dies or divides the IRA pursuant to a divorce, annulment or 
marital settlement;
    (3) The Auction Rate Security associated with the Loan is redeemed 
by its issuer or may be sold at auction for its par value, or;
    (4) Baird identifies a secondary market for the Auction Rate 
Security which Baird has a reasonable basis to believe will permit the 
lending Plan to receive no less than 90% of the Security's par value if 
the Auction Rate Security is promptly offered for sale on such market;
    (m) Following any Loan termination as set forth in (k) or (l), 
Baird shall deliver Auction Rate Securities to the Plan which are 
identical (or the equivalent thereof (in the event of a reorganization, 
recapitalization or merger of the issuer of the Auction Rate 
Securities)) to the Auction Rate Securities borrowed by Baird within 
the lesser of:
    (1) The customary delivery period for such securities;
    (2) Five business days; or
    (3) The time negotiated for such delivery by the Plan and Baird;
    (n) Following any Loan termination as set forth in (k) or (l), if 
Baird fails to return all the borrowed Auction Rate Securities (or the 
equivalent thereof (in the event of a reorganization, recapitalization 
or merger of the issuer of the Auction Rate Securities)) within the 
timeframe set forth in paragraph (m), the Plan may keep the full amount 
of cash collateral provided by Baird in connection with the Loan;
    (o) Following any Loan termination as set forth in (k) or (l), if 
the Plan fails to return the full amount of cash collateral:
    (1) Baird may liquidate the borrowed Auction Rate Securities, in 
which case the Plan's obligation to return the cash collateral shall 
terminate. If the amount received by Baird from the liquidation (after 
deducting brokerage commissions and other transaction costs) exceeds 
the amount of cash collateral provided by Baird in connection with the 
Loan, then Baird shall pay such excess to the Plan. If the amount 
received by Baird from the liquidation (after deducting brokerage 
commissions and other transaction costs) is less than the amount of 
cash collateral provided by Baird in connection with the Loan, then the 
Plan shall pay such deficiency to Baird; or
    (2) If Baird is unable to liquidate the ARS, Baird will retain the 
ARS and reserve its right to sue the Plan;
    (p)(1) Where the Plan, as lender, does not return the full amount 
of cash collateral in connection with a Loan termination, Baird, as 
borrower, can seek interest at the prime rate on the amount of cash 
collateral owed by the Plan;
    (2) Where Baird, as borrower, does not return the excess described 
in (o)(1), if any, the Plan, as lender, can seek interest at the prime 
rate on the amount of excess owed by Baird; and
    (q) If Baird fails to comply with any provision of a loan agreement 
which requires compliance with this exemption, if granted, the Plan 
fiduciary who caused the Plan to engage in such transaction shall not 
be deemed to have caused the Plan to engage in a transaction prohibited 
by section 406(a)(1)(A) through (D) of ERISA solely by reason of 
Baird's failure to comply with the conditions of the exemption.
Section III. Definitions
    (a) The term ``affiliate'' means any person directly or indirectly, 
through one or more intermediaries, controlling, controlled by, or 
under common control with such other person;
    (b) The term ``Auction Rate Security'' or ``ARS'' means a security:
    (1) that is either a debt instrument (generally with a long-term 
nominal maturity) or preferred stock; and
    (2) with an interest rate or dividend that is reset at specific 
intervals through a Dutch auction process;
    (c) The term ``Beneficial Owner'' means: The individual for whose 
benefit a Title II Only Plan is established and includes a relative or 
family trust with respect to such individual;
    (d) The term ``Independent'' means a person who is: (1) Not Baird 
or an affiliate; and (2) not a relative (as defined in ERISA section 
3(15)) of the party engaging in the transaction;
    (e) The term ``Plan'' means: Any plan described in section 3(3) of 
the Act and/or section 4975(e)(1)(B)-(F) of the Code; and
    (f) The term ``Title II Only Plan'' means: Any plan described in 
section 4975(e)(1) of the Code which is not an employee benefit plan 
covered by Title I of ERISA.

Summary of Facts and Representations

    1. The applicant is Baird (hereinafter, either the Applicant or 
Baird), an employee-owned wealth management, capital markets, asset 
management and private equity firm headquartered in Milwaukee, 
Wisconsin. Baird is a registered broker-dealer and a member of the 
Financial Industry Regulatory Authority. Baird is also a registered 
investment advisor, providing investment advice and asset management 
services to clients that include the Plans, which are plans described 
in section 3(3) of the Act and/or section 4975(e)(1) of the Code.
    2. The Applicant describes Auction Rate Securities (ARS), and the

[[Page 3652]]

arrangement by which ARS are bought and sold, as follows. Auction Rate 
Securities are securities (issued as debt or preferred stock) with an 
interest rate or dividend that is reset at periodic intervals pursuant 
to a process called a Dutch Auction. Investors submit orders to buy, 
hold, or sell a specific ARS to a broker-dealer selected by the entity 
that issued the ARS. The broker-dealers, in turn, submit all of these 
orders to an auction agent. The auction agent's functions include 
collecting orders from all participating broker-dealers by the auction 
deadline, determining the amount of securities available for sale, and 
organizing the bids to determine the winning bid. If there are any buy 
orders placed into the auction at a specific rate, the auction agent 
accepts bids with the lowest rate above any applicable minimum rate and 
then successively higher rates up to the maximum applicable rate, until 
all sell orders and orders that are treated as sell orders are filled. 
Bids below any applicable minimum rate or above the applicable maximum 
rate are rejected. After determining the clearing rate for all of the 
securities at auction, the auction agent allocates the ARS available 
for sale to the participating broker-dealers based on the orders they 
submitted. If there are multiple bids at the clearing rate, the auction 
agent will allocate securities among the bidders at such rate on a pro-
rata basis.
    3. The Applicant states that Baird is permitted, but not obligated, 
to submit orders in auctions for its own account either as a bidder or 
a seller and routinely does so in the auction rate securities market in 
its sole discretion. In this regard, Baird may routinely place one or 
more bids in an auction for its own account to acquire ARS for its 
inventory, to prevent: (1) A failed auction (i.e., an event where there 
are insufficient clearing bids which would result in the auction rate 
being set at a specified rate); or (2) an auction from clearing at a 
rate that Baird believes does not reflect the market for the particular 
ARS being auctioned.
    4. The Applicant states that for many ARS, Baird has been appointed 
by the issuer of the securities to serve as a dealer in the auction and 
is paid by the issuer for its services. Baird is typically appointed to 
serve as a dealer in the auctions pursuant to an agreement between the 
issuer and Baird. That agreement provides that Baird will receive from 
the issuer auction dealer fees based on the principal amount of the 
securities placed through Baird.
    5. The Applicant states further that Baird may share a portion of 
the auction rate dealer fees it receives from the issuer with other 
broker-dealers that submit orders through Baird, for those orders that 
Baird successfully places in the auctions. Similarly, with respect to 
ARS for which broker-dealers other than Baird act as dealer, such other 
broker-dealers may share auction dealer fees with Baird for orders 
submitted by Baird.
    6. According to the Applicant, since February 2008, a minority of 
auctions have cleared, particularly involving municipalities. The 
Applicant represents that, in certain instances, when an auction fails, 
the affected Auction Rate Security may pay little or no interest and/or 
dividends to the holder of the Security. The Applicant states that, 
when this happens, the owner of the Auction Rate Security may benefit 
from lending such low-paying Security as part of a securities lending 
transaction that: (1) Is collateralized with cash; and (2) limits the 
loan rebate fee (described below) to the interest and/or dividends 
attributable to the loaned Auction Rate Security. The Applicant 
describes the loan rebate fee as the fee paid by the lender of the 
Auction Rate Security (i.e., a Plan) to the borrower of the Auction 
Rate Security (i.e., Baird). Under the methodology described above, if, 
for example, a Plan lends an Auction Rate Security paying a one percent 
rate of interest to Baird, the Plan would pay Baird a loan rebate fee 
of one percent, leaving the Plan free to invest and receive interest on 
the cash collateral. The Applicant notes that a Plan receiving cash 
collateral for its loaned Auction Rate Securities benefits to the 
extent it is able to derive a greater rate of return (through the 
investment of such cash collateral) than the Plan would otherwise have 
received, as interest and/or dividends, from the issuer of the Auction 
Rate Security. However, the Applicant points out that lending Auction 
Rate Securities pursuant to this methodology may not always be 
advisable.\3\ In this regard, the Applicant represents that, in certain 
instances, when an auction fails, the affected Auction Rate Security 
may default to a high rate of interest or dividends. To the extent a 
Plan lends an Auction Rate Security bearing a high rate of interest, 
and, under the terms of the loan agreement, the Plan is required to pay 
a loan rebate fee equal to the interest or dividends attributable to 
the loaned Security, the Plan may be foregoing a greater rate of return 
than the Plan is likely to receive from its investment of the cash 
collateral. The Applicant explains this detrimental result with the 
following example: (1) A Plan earning 10% on an Auction Rate Security 
would be paying that 10% to Baird in the form of a loan rebate fee; (2) 
the Plan is not likely to receive more than 10% on the investment of 
the cash collateral provided by Baird in connection with the loan.
---------------------------------------------------------------------------

    \3\ The Department notes that the Act's general standards of 
fiduciary conduct applies to the transactions described herein. In 
this regard, section 404 requires, among other things, that a 
fiduciary discharge his duties respecting a plan solely in the 
interest of the plan's participants and beneficiaries and in a 
prudent manner. Accordingly, a fiduciary with respect to a Plan must 
act prudently with respect to, among other things, the decision to 
lend Auction Rate Securities to Baird. The Department further 
emphasizes that it expects Plan fiduciaries, prior to entering into 
any transaction proposed herein, to fully understand the risks 
associated with this type of transaction following disclosure by 
Baird of all relevant information. Plan fiduciaries are cautioned to 
carefully consider their particular facts and circumstances before 
determining whether a Loan transaction with Baird would satisfy 
section 404 of ERISA.
---------------------------------------------------------------------------

    7. The Applicant states that several Plans holding Auction Rate 
Securities with failed auctions previously expressed an interest in 
lending such Auction Rate Securities to Baird and, in response, Baird 
sent the Lending Agreement to such Plans. Each Lending Agreement 
required, among other things as described in further detail below: (1) 
That Baird, as borrower, pay cash collateral to the Plan lending the 
Auction Rate Securities; and (2) the Plan, as lender, to pay Baird a 
rebate fee equal to the interest or dividends the Plan would otherwise 
have received in connection with its ownership of the Auction Rate 
Security. The Applicant states that certain of these loans have already 
occurred. In this regard, the Applicant represents that, as of December 
23, 2008, 6 Plans have lent a total (par value) of $1,175,000 in 
Auction Rate Securities to Baird: The first Loan was entered into on 
August 22, 2008, and the most recent Loan was entered into on November 
24, 2008.
    8. In connection with the above Loans, and to permit additional 
future Loans, the Applicant is requesting this proposed exemption. 
According to the Applicant, all Loans covered by the exemption, if 
granted, have been (and will be) structured in a manner that is 
protective of lending Plans. In this regard, the Applicant represents 
that, prior to entering into a Loan, a Plan fiduciary who is 
independent of Baird (with very narrow exceptions) will receive a 
written Lending Agreement. Among other things, the Agreement will alert 
such fiduciary that lending Auction Rate Securities paying an above-
market rate of interest may not be advisable. The Plan fiduciary will 
further receive timely audited information from Baird regarding the 
financial condition of Baird; and must

[[Page 3653]]

approve the Plan's participation in the Loan. Upon such approval, Baird 
will credit the lending Plan's Account with an amount of cash equal to 
100 percent of the par value of loaned Auction Rate Securities. This 
crediting must be accomplished by the close of business on the day on 
which Baird receives the Auction Rate Securities from the Plan, and the 
lending Plan will thereafter have the opportunity to derive 
compensation through the investment of the cash collateral. The 
Applicant states any rebate fee paid by a lending Plan to Baird 
pursuant to a Loan has not (and will not) exceed the interest and/or 
dividends the Plan receives in connection with its ownership of the 
loaned Auction Rate Securities. The Applicant states also that each 
Loan will involve only Auction Rate Securities for which the last 
auction was unsuccessful, and that lending Plans will not waive any 
rights or claims in connection with the Auction Rate Security as a 
condition of engaging in the Loan. The Applicant represents further 
that the Loans will not be part of an arrangement, agreement or 
understanding designed to benefit a party in interest.
    9. That Applicant represents also that a Plan may terminate a Loan 
at any time and for any reason. Baird, however, may terminate a Loan 
only in certain limited and specified instances. In this latter regard, 
pursuant to the terms of each Lending Agreement, Baird may only 
terminate a Loan if: (1) The Plan closes its Account or reduces the 
balance thereof to less than 100 percent of the par value of the loaned 
Auction Rate Securities; (2) the Plan is an IRA and the Beneficial 
Owner of the IRA dies or divides the IRA pursuant to a divorce, 
annulment or marital settlement; (3) the Auction Rate Security 
associated with the Loan is redeemed by its issuer or may be sold at 
auction for its par value; or (4) Baird identifies a secondary market 
for the Auction Rate Security which Baird has a reasonable basis to 
believe will permit the lending Plan to receive no less than 90% of the 
Security's par value if the Auction Rate Security is promptly offered 
for sale on such market.
    10. The Applicant states that each Lending Agreement contains 
several provisions designed to ensure that any Loan termination, as 
described above, will be carried out in a manner that is fair and 
equitable to lending Plans. In this regard, the Applicant represents 
that if a Loan is properly terminated and Baird fails to return all the 
borrowed Auction Rate Securities within the timeframe specified in the 
Lending Agreement, the Plan may keep the full amount of cash collateral 
provided by Baird in connection with the Loan. If the Plan fails to 
return the full amount of cash collateral, Baird may liquidate the 
borrowed Auction Rate Securities. In this last regard, if the net 
amount received by Baird from the liquidation: (1) exceeds the amount 
of cash collateral provided by Baird in connection with the Loan, then 
Baird shall pay such excess to the Plan; (2) is less than the amount of 
cash collateral provided by Baird in connection with the Loan, then the 
Plan shall pay such deficiency to Baird. The Applicant notes that, if 
Baird is unable to liquidate the Auction Rate Securities, Baird will 
retain the ARS and reserve its right to sue the Plan. The Applicant 
notes also that, under the Lending Agreement, if one party to the Loan 
does not return the full amount due its counterparty (e.g., if Baird 
does not return all the borrowed Auction Rate Securities to a Plan), 
the Loan counterparty will be entitled to interest equal to the prime 
rate.
    10. In summary, the Applicant represents that the transactions 
described herein satisfy the statutory criteria set forth in section 
408(a) of the Act and section 4975(c)(2) of the Code because, among 
other things:
    (a) Lending Plans will not waive any rights or claims in connection 
with the Auction Rate Security as a condition of engaging in the Loan;
    (b) Prior to any Loan, Baird shall have furnished a Plan fiduciary 
with, at a minimum, the most recently available audited statement of 
Baird's financial condition, as audited by a United States certified 
public accounting firm;
    (c) Each Loan will be made pursuant to a written Lending Agreement, 
the terms of which will be at least as favorable to the Plan as an 
arm's-length transaction with an unrelated party would be;
    (d) With respect to any Loan, Baird will credit the lending Plan's 
Account with an amount of cash equal to 100 percent of the par value of 
loaned Auction Rate Securities, and such crediting will occur by the 
close of business on the day on which Baird receives the Auction Rate 
Securities from the Plan;
    (e) The Plan will have the opportunity to derive compensation 
through the investment of the cash collateral;
    (f) The Plan will pay Baird a rebate fee negotiated in advance of 
the Loan that does not exceed the interest or dividends the Plan 
receives in connection with its ownership of the loaned Auction Rate 
Securities;
    (g) The Plan may terminate the Loan at any time and for any reason;
    (h) Baird may terminate the Loan in narrow circumstances described 
in the Lending Agreement; and
    (i) Any termination of the Loan will be fair and equitable to the 
lending Plan.

Notice to Interested Persons

    The Applicant represents that the potentially interested 
participants and beneficiaries cannot all be identified and therefore 
the only practical means of notifying such participants and 
beneficiaries of this proposed exemption is by the publication of this 
notice in the Federal Register. However, written notice will be 
provided to a representative of each Plan that has engaged in a Loan as 
of the date this notice is published in the Federal Register. The 
notice shall contain a copy of the proposed exemption as published in 
the Federal Register and an explanation of the rights of interested 
parties to comment regarding the proposed exemption. Such notice will 
be provided by personal or express delivery within 15 days of the 
issuance of the proposed exemption. Comments and requests for a hearing 
must be received by the Department not later than 45 days from the date 
of publication of this notice of proposed exemption in the Federal 
Register.

FOR FURTHER INFORMATION CONTACT: Chris Motta of the Department, 
telephone (202) 693-8540. (This is not a toll-free number.)

General Information

    The attention of interested persons is directed to the following:
    (1) The fact that a transaction is the subject of an exemption 
under section 408(a) of the Act and/or section 4975(c)(2) of the Code 
does not relieve a fiduciary or other party in interest or disqualified 
person from certain other provisions of the Act and/or the Code, 
including any prohibited transaction provisions to which the exemption 
does not apply and the general fiduciary responsibility provisions of 
section 404 of the Act, which, among other things, require a fiduciary 
to discharge his duties respecting the plan solely in the interest of 
the participants and beneficiaries of the plan and in a prudent fashion 
in accordance with section 404(a)(1)(b) of the Act; nor does it affect 
the requirement of section 401(a) of the Code that the plan must 
operate for the exclusive benefit of the employees of the employer 
maintaining the plan and their beneficiaries;
    (2) Before an exemption may be granted under section 408(a) of the 
Act and/or section 4975(c)(2) of the Code, the Department must find 
that the exemption is administratively feasible,

[[Page 3654]]

in the interests of the plan and of its participants and beneficiaries, 
and protective of the rights of participants and beneficiaries of the 
plan;
    (3) The proposed exemptions, if granted, will be supplemental to, 
and not in derogation of, any other provisions of the Act and/or the 
Code, including statutory or administrative exemptions and transitional 
rules. Furthermore, the fact that a transaction is subject to an 
administrative or statutory exemption is not dispositive of whether the 
transaction is in fact a prohibited transaction; and
    (4) The proposed exemptions, if granted, will be subject to the 
express condition that the material facts and representations contained 
in each application are true and complete, and that each application 
accurately describes all material terms of the transaction which is the 
subject of the exemption.

    Signed at Washington, DC, this 13th day of January 2009.
Ivan Strasfeld,
Director of Exemption Determinations, Employee Benefits Security 
Administration, U.S. Department of Labor.
 [FR Doc. E9-962 Filed 1-16-09; 8:45 am]
BILLING CODE 4510-29-P