Proposed Amendments to Class Prohibited Transaction Exemptions To Remove Credit Ratings Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, 37572-37583 [2013-14790]
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Federal Register / Vol. 78, No. 120 / Friday, June 21, 2013 / Notices
filed written notifications
simultaneously with the Attorney
General and the Federal Trade
Commission disclosing changes in its
membership. The notifications were
filed for the purpose of extending the
Act’s provisions limiting the recovery of
antitrust plaintiffs to actual damages
under specified circumstances.
Specifically, American Institutes for
Research, Washington, DC; Gwinnett
County Public Schools, Suwanee GA;
Instructure, Salt Lake City, UT; Kaltura
Inc., New York, NY; and LearningMate
Solutions, Inc., New York, NY, have
been added as parties to this venture.
Also, IVIMEDS, Dundee, UNITED
KINGDOM; Florida State College at
Jacksonville, Jacksonville, FL; and
Turning Technologies, Youngstown,
OH, have withdrawn as parties to this
venture.
No other changes have been made in
either the membership or planned
activity of the group research project.
Membership in this group research
project remains open, and IMS Global
intends to file additional written
notifications disclosing all changes in
membership.
On April 7, 2000, IMS Global filed its
original notification pursuant to Section
6(a) of the Act. The Department of
Justice published a notice in the Federal
Register pursuant to Section 6(b) of the
Act on September 13, 2000 (65 FR
55283).
The last notification was filed with
the Department on March 19, 2013. A
notice was published in the Federal
Register pursuant to Section 6(b) of the
Act on April 15, 2013 (78 FR 22297).
Patricia A. Brink,
Director of Civil Enforcement, Antitrust
Division.
[FR Doc. 2013–14777 Filed 6–20–13; 8:45 am]
BILLING CODE P
DEPARTMENT OF JUSTICE
Antitrust Division
TKELLEY on DSK3SPTVN1PROD with NOTICES
Notice Pursuant to the National
Cooperative Research and Production
Act of 1993—U.S. Photovoltaic
Manufacturing Consortium, Inc.
Notice is hereby given that, on May
21, 2013, pursuant to Section 6(a) of the
National Cooperative Research and
Production Act of 1993, 15 U.S.C. 4301
et seq. (‘‘the Act’’), U.S. Photovoltaic
Manufacturing Consortium, Inc.
(‘‘USPVMC’’) has filed written
notifications simultaneously with the
Attorney General and the Federal Trade
Commission disclosing changes in its
membership. The notifications were
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filed for the purpose of extending the
Act’s provisions limiting the recovery of
antitrust plaintiffs to actual damages
under specified circumstances.
Specifically, Esgee Technologies, Inc.,
Austin, TX; and Magnolia Solar,
Albany, NY, have been added as parties
to this venture.
No other changes have been made in
either the membership or planned
activity of the group research project.
Membership in this group research
project remains open, and USPVMC
intends to file additional written
notifications disclosing all changes in
membership.
On November 14, 2011, USPVMC
filed its original notification pursuant to
Section 6(a) of the Act. The Department
of Justice published a notice in the
Federal Register pursuant to Section
6(b) of the Act on December 21, 2011
(76 FR 79218).
The last notification was filed with
the Department on January 15, 2013. A
notice was published in the Federal
Register pursuant to Section 6(b) of the
Act on February 12, 2013 (78 FR 9939).
Also, 4DS, Fremont, CA; NEXX
¨
Systems, Billerica, MA; and SUSS
MicroTec, Garching, GERMANY, have
withdrawn as parties to this venture.
No other changes have been made in
either the membership or planned
activity of the group research project.
Membership in this group research
project remains open, and SEMATECH
intends to file additional written
notifications disclosing all changes in
membership.
On April 22, 1988, SEMATECH filed
its original notification pursuant to
Section 6(a) of the Act. The Department
of Justice published a notice in the
Federal Register pursuant to Section
6(b) of the Act on May 19, 1988 (53 FR
17987).
The last notification was filed with
the Department on March 7, 2013. A
notice was published in the Federal
Register pursuant to Section 6(b) of the
Act on March 28, 2013 (78 FR 19009).
Patricia A. Brink,
Director of Civil Enforcement, Antitrust
Division.
[FR Doc. 2013–14776 Filed 6–20–13; 8:45 am]
Patricia A. Brink,
Director of Civil Enforcement, Antitrust
Division.
BILLING CODE 4410–11–P
[FR Doc. 2013–14780 Filed 6–20–13; 8:45 am]
DEPARTMENT OF LABOR
BILLING CODE P
Employee Benefits Security
Administration
DEPARTMENT OF JUSTICE
RIN 1210–ZA18
Antitrust Division
[Application Number: D–11681]
Notice Pursuant to the National
Cooperative Research and Production
Act of 1993—Sematech, Inc. D/B/A
International Sematech
Proposed Amendments to Class
Prohibited Transaction Exemptions To
Remove Credit Ratings Pursuant to the
Dodd-Frank Wall Street Reform and
Consumer Protection Act
Notice is hereby given that, on May
21, 2013, pursuant to Section 6(a) of the
National Cooperative Research and
Production Act of 1993, 15 U.S.C. 4301
et seq. (‘‘the Act’’), Sematech, Inc. d/b/
a International Sematech
(‘‘SEMATECH’’) has filed written
notifications simultaneously with the
Attorney General and the Federal Trade
Commission disclosing changes in its
membership. The notifications were
filed for the purpose of extending the
Act’s provisions limiting the recovery of
antitrust plaintiffs to actual damages
under specified circumstances.
Specifically, Intermolecular, Inc., San
Jose, CA; United Microelectronics Corp.,
Hsinchu, TAIWAN; Morgan Advanced
Materials, Windsor, Berkshire, UNITED
KINGDOM; Freescale Semiconductor,
Inc., Austin, TX; and TriQuint
Semiconductors, Inc., Richardson, TX,
have been added as parties to this
venture.
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Employee Benefits Security
Administration, U.S. Department of
Labor.
ACTION: Notice of Proposed
Amendments to Certain Class
Exemptions.
AGENCY:
This document contains a
notice of pendency before the
Department of Labor (the Department) of
Proposed Amendments to Prohibited
Transaction Exemption (PTE) 75–1 (40
FR 50845, October 31, 1975, as amended
by 71 FR 5883, February 3, 2006); PTE
80–83 (45 FR 73189, November 4, 1980);
PTE 81–8 (46 FR 7511, January 23, 1981,
as amended by 50 FR 14043, April 9,
1985); PTE 95–60 (60 FR 35925, July 12,
1995); PTE 97–41 (62 FR 42830, August
8, 1997); and PTE 2006–16 (71 FR
63786, October 31, 2006). The proposed
amendments relate to the use of credit
ratings as standards of credit-worthiness
SUMMARY:
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Federal Register / Vol. 78, No. 120 / Friday, June 21, 2013 / Notices
in such class exemptions. Section 939A
of the Dodd-Frank Wall Street Reform
and Consumer Protection Act (DoddFrank) requires the Department to
remove any references to or
requirements of reliance on credit
ratings from its class exemptions and to
substitute such standards of creditworthiness as the Department
determines to be appropriate. If
adopted, the proposed amendments
would affect participants and
beneficiaries of employee benefit plans,
fiduciaries of such plans, and the
financial institutions that engage in
transactions with, or provide services or
products to, the plans.
Written comments and requests
for a public hearing should be received
by the Department on or before August
20, 2013. If adopted, the amendments
would be effective 60 days after the date
of publication of the final amendments
with respect to PTE 75–1; PTE 80–83;
PTE 81–8; PTE 95–60; PTE 97–41; and
PTE 2006–16.
DATES:
All written comments and
requests for a public hearing concerning
the proposed amendments should be
sent to the Office of Exemption
Determinations via email to: eOED@dol.gov, or via the Federal
eRulemaking Portal: https://
www.regulations.gov at Docket ID
number: EBSA–2012–0013 (follow the
instructions for submitting comments).
Interested persons may also submit
written comments and hearing requests
by letter addressed to: Employee
Benefits Security Administration, Room
N–5700, (Attention: Application No. D–
11681), U.S. Department of Labor, 200
Constitution Avenue NW., Washington,
DC 20210, or by fax to (202) 219–0204.
All comments and hearing requests
must be received by the end of the
comment period. The comments
received will be available for public
inspection in the Public Disclosure
Room of the Employee Benefits Security
Administration, Room N–1513, U.S.
Department of Labor, 200 Constitution
Avenue NW., Washington, DC 20210.
Comments and hearing requests will
also be available online at
www.regulations.gov, at Docket ID
number: EBSA–2012–0013 and
www.dol.gov/ebsa, at no charge. All
comments will be made available to the
public.
Warning: Do not include any
personally identifiable information
(such as name, address, or other contact
information) or confidential business
information that you do not want to be
publicly disclosed. All comments may
be posted on the Internet and can be
TKELLEY on DSK3SPTVN1PROD with NOTICES
ADDRESSES:
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retrieved by most Internet search
engines.
FOR FURTHER INFORMATION CONTACT:
Warren M. Blinder, Office of Exemption
Determinations, Employee Benefits
Security Administration, U.S.
Department of Labor, Room N–5700,
200 Constitution Avenue NW.,
Washington, DC 20210, (202) 693–8553
(this is not a toll-free number).
SUPPLEMENTARY INFORMATION: Notice is
hereby given of the pendency before the
Department of proposed amendments
to: PTE 75–1, Exemptions From
Prohibitions Respecting Certain Classes
of Transactions Involving Employee
Benefit Plans and Certain BrokerDealers, Reporting Dealers and Banks;
PTE 80–83, Class Exemption for Certain
Transactions Involving Purchases of
Securities Where Issuer May Use
Proceeds to Reduce or Retire
Indebtedness to Parties in Interest; PTE
81–8, Class Exemption Covering Certain
Short-term Investments; PTE 95–60,
Class Exemption for Certain
Transactions Involving Insurance
Company General Accounts; PTE 97–41,
Class Exemption for Collective
Investment Fund Conversion
Transactions; and PTE 2006–16, Class
Exemption To Permit Certain Loans of
Securities by Employee Benefit Plans
(collectively, the Class Exemptions).
The Class Exemptions provide relief
from certain of the restrictions described
in section 406 of the Employee
Retirement Income Security Act of 1974
(ERISA), and the taxes imposed by
sections 4975(a) and (b) of the Code, by
reason of a parallel provision described
in section 4975(c)(1)(A) through (F) of
the Code, provided that the conditions
of the relevant exemption have been
met. The Department is proposing to
amend each of the Class Exemptions on
its own motion, 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 part
2570, subpart B (55 FR 32836, August
10, 1990).1
A. Background
Dodd-Frank,2 enacted in the wake of
the financial crisis of 2008, was
intended to, among other things,
promote the financial stability of the
United States by improving
accountability and transparency in the
1 Section 102 of the Reorganization Plan No. 4 of
1978, 5 U.S.C. App. 1 (1996), generally transferred
the authority of the Secretary of Treasury to issue
administrative exemptions under section 4975(c)(2)
of the Code to the Secretary of Labor. For purposes
of this exemption, references to specific provisions
of Title I of ERISA, unless otherwise specified, refer
also to the corresponding provisions of the Code.
2 See Public Law 111–203, 124 Stat. 1376 (2010).
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financial system. Title IX, Subtitle C, of
Dodd-Frank includes provisions
regarding statutory and regulatory
references to credit ratings in rules and
regulations promulgated by Federal
agencies, including the Department,
which are designed ‘‘[t]o reduce the
reliance on ratings.’’ 3
Congress recognized the ‘‘systemic
importance of credit ratings and the
reliance placed on credit ratings by
individual and institutional investors
and financial regulators.’’ 4 Because
credit rating agencies perform
evaluative and analytical services on
behalf of clients, much the same as
auditors, securities analysts, and
investment bankers do, Congress noted
that ‘‘the activities of credit rating
agencies are fundamentally commercial
in character and should be subject to the
same standards of liability and
oversight.’’ 5 Furthermore, Congress
observed that, in the recent financial
crisis precipitating Dodd-Frank, credit
ratings of certain financial products
proved to be inaccurate, which
‘‘contributed significantly to the
mismanagement of risks by financial
institutions and investors, which in turn
adversely impacted the health of the
economy in the United States and
around the world.’’ 6 As a result,
Congress determined that ‘‘[s]uch
inaccuracy necessitates increased
accountability on the part of credit
rating agencies.’’ 7
Specifically, in section 939A of DoddFrank, Congress requires that the
Department ‘‘review any regulation
issued by [the Department] that requires
the use of an assessment of the creditworthiness of a security or money
market instrument and any references to
or requirements in such regulations
regarding credit ratings.’’ 8 Once the
Department has completed that review,
the statute provides that the Department
‘‘remove any reference to or requirement
of reliance on credit ratings, and to
substitute in such regulations such
standard of credit-worthiness’’ as the
Department determines to be
appropriate.9
Based on the Department’s
consideration of section 939A of DoddFrank, the Department believes that the
Class Exemptions are ‘‘regulations’’ for
purposes of section 939A and, therefore,
3 See Joint Explanatory Statement of the
Committee of Conference, Conference Committee
Report No. 111–517, to accompany H.R. 4173, 864–
879, 870 (Jun. 29, 2010).
4 Public Law 111–203, Section 931(1).
5 Public Law 111–203, Section 931(3).
6 Public Law 111–203, Section 931(5).
7 Id.
8 Public Law 111–203, Section 939A(a)(1)–(2).
9 Public Law 111–203, Section 939A(b).
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are subject to its requirement to remove
references to credit ratings. The process
for proposing and granting class
exemptions is similar to the regulatory
process, and class exemptions generally
apply to broad classes of transactions
and/or parties.
Accordingly, the Department has
conducted a review of its class
exemptions as required by section
939A(a) of Dodd-Frank and identified
the Class Exemptions as those including
references to, or requiring reliance on,
credit ratings. In this regard, in each of
the Class Exemptions, the Department
has conditioned relief on the financial
instruments which are the subject of
such exemptions, or an issuer of such a
financial instrument, receiving a
specified credit rating, issued by a credit
rating agency. Credit ratings have been
considered useful for fiduciaries of
employee benefit plans in evaluating the
credit quality of a particular financial
instrument or issuer, as plan fiduciaries
frequently do not possess the expertise
or resources to engage in an analysis of
the credit quality of a financial
instrument or its issuer. This credit
rating condition is one component of
the safeguards established in each Class
Exemption to protect the interests of
plans, and their participants and
beneficiaries, which enter into
transactions covered by the Class
Exemptions.
The credit ratings requirements found
in the Class Exemptions range from a
rating in one of the highest four generic
categories of credit ratings to a rating in
one of the highest two categories of
credit ratings, from a nationally
recognized statistical rating organization
(NRSRO). In this regard, PTE 75–1 and
PTE 80–83 require credit ratings in one
of the four highest rating categories for
non-convertible debt securities. PTE
2006–16 requires a credit rating of
‘‘investment grade’’ 10 or better for
certain issuers of irrevocable letters of
credit and a credit rating in one of the
two highest rating categories for
collateral which consists of foreign
sovereign debt securities. PTE 81–8
utilizes a credit rating in one of the
three highest rating categories for
commercial paper. PTE 95–60 and PTE
97–41 do not require specific credit
ratings, but instead refer generally to the
credit ratings of certain financial
instruments. Pursuant to Dodd-Frank,
the Department is proposing herein to
amend the Class Exemptions listed
above to remove such references to
10 The Department understands that ‘‘investment
grade’’ is the common term for a credit rating in the
highest four rating categories issued by a credit
rating agency.
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credit ratings, and where applicable,
substitute in their place alternative
methods for determining credit quality
which take into account the purpose
and characteristics of each such Class
Exemption.
B. Securities and Exchange Commission
(SEC) Alternatives to Credit Ratings
In proposing these amendments to the
Class Exemptions, the Department has
considered alternatives to credit ratings
set forth in three recent SEC releases
(the SEC Releases). The first is a recent
proposal (the Investment Company
Proposal) released by the SEC in
response to section 939A and section
939(c) of Dodd-Frank that relates to the
use of credit ratings in rules and forms
under the Investment Company Act of
1940 (the Investment Company Act).11
The second is the adoption of a new
rule 6a-5 implementing section 939(c) of
Dodd-Frank.12 Rule 6a-5 was initially
proposed in the Investment Company
Proposal and relates to the use of credit
ratings in rules under the Investment
Company Act (the Investment Company
Final Rule, and together with the
Investment Company Proposal, the
Investment Company Releases). The
third is the adoption of rule
amendments (the 2009 NRSRO Rule
Adopting Release) released by the SEC
in 2009 on its own initiative regarding
references to credit ratings of nationally
recognized statistical rating
organizations in certain rules under the
Securities Exchange Act of 1934 (the
Exchange Act) and the Investment
Company Act.13
In the Investment Company Proposal,
the SEC proposed alternatives to credit
ratings in amendments to rules 2a–7,
5b–3, and in the Investment Company
Final Rule, the SEC adopted an
alternative to credit ratings in new rule
6a–5, each such rule under the
Investment Company Act. In the 2009
NRSRO Rule Adopting Release, the SEC
adopted an alternative to credit ratings
in amendments to rule 10f–3 under the
Investment Company Act. Among other
provisions, the Investment Company
Act regulates conflicts of interest in
investment companies, requiring
disclosure of material details about an
11 See References to Credit Ratings in Certain
Investment Company Act Rules and Forms, Release
Nos. 33–9193, IC–29592; 76 FR 12896 (March 9,
2011).
12 See Purchase of Certain Debt Securities by
Business and Industrial Development Companies
Relying on an Investment Company Act Exemption,
Release No. IC–30268; 77 FR 70117 (November 23,
2012).
13 See References to Ratings of Nationally
Recognized Statistical Rating Organizations, Release
Nos. 34–60789, IC–28939; 74 FR 52358 (October 9,
2009).
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investment company, and placing
restrictions on certain mutual fund
activities. The Department believes that
the alternatives described in the SEC
Releases referenced above are
instructive in developing appropriate
alternatives for credit ratings referenced
in the Class Exemptions, in part because
of the similar manner in which the
SEC’s rules and the Class Exemptions
make use of such ratings, and also
because of the similar standards of
credit quality currently required in the
rules and the Class Exemptions, or in
the case of new rule 6a–5 and final rule
10f–3, required prior to their adoption.
In this regard, the Department
considered new rule 6a–5 and final rule
10f–3 for purposes of proposing to
amend PTE 75–1 and PTE 80–83, and
considered new rule 6a–5 with respect
to its proposed amendment of PTE
2006–16, in developing an alternative to
a credit rating in one of the highest four
rating categories, or ‘‘investment grade.’’
The Department also considered final
rule 10f–3 and the proposed amendment
to rule 2a–7 for purposes of proposing
to amend PTE 81–8, in developing an
alternative to a credit rating in one of
the highest three rating categories.
Finally, the Department also considered
the proposed amendments to rules 2a–
7 and 5b–3 for purposes of proposing to
amend PTE 2006–16, in developing an
alternative to a credit rating in one of
the highest two rating categories.
1. New Rule 6a–5 and Final Rule 10f–
3: Standard for Highest Four Ratings
Categories or ‘‘Investment Grade’’;
Standard for Highest Three Ratings
Categories
Section 6(a)(5) of the Investment
Company Act provides an exemption
from certain of its provisions for
business and industrial development
companies (BIDCOs).14 Under section
6(a)(5)(A)(iv) prior to its amendment by
Dodd-Frank, BIDCOs seeking to rely on
the exemption were limited in their
purchases of securities issued by
investment companies and private
funds to:
(I) any debt security that is rated
investment grade by not less than 1
nationally recognized statistical rating
organization; or (II) any security issued by a
registered open-end investment company
that is required by its investment policies to
14 See 15 U.S.C. 80a–6(a)(5)(A). BIDCOs are
companies that operate under state statute that
provide direct investment and loan financing, as
well as managerial assistance to state and local
enterprises. Because BIDCOs invest in securities,
they frequently meet the definition of ‘‘investment
compan[ies]’’ under the Investment Company Act
and would otherwise be required to register and be
regulated under the Act in the absence of an
exemption.
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invest not less than 65 percent of its total
assets in securities described in subclause (I)
or securities that are determined by such
registered open-end investment company to
be comparable in quality to securities
described in subclause (I).
The Department understands that an
‘‘investment grade’’ rating is a common
term for a rating in one of the highest
four rating categories by a credit rating
agency.
Section 939(c) of Dodd-Frank
amended section 6(a)(5)(A)(iv) of the
Investment Company Act, effective July
21, 2012, to eliminate the reference to
‘‘investment grade.’’ As amended, the
section references debt securities that
meet ‘‘such standards of creditworthiness as the Commission shall
adopt.’’ Rule 6a-5 sets forth a creditworthiness standard to replace the
credit rating reference to ‘‘investment
grade’’ that Dodd-Frank eliminated from
section 6(a)(5)(A)(iv).
Under rule 6a–5, the requirements for
creditworthiness under section
6(a)(5)(A)(iv)(I) would be satisfied if the
board of directors or members of the
BIDCO (or a delegate thereof)
determines that the debt security is:
(a) subject to no greater than moderate
credit risk and (b) sufficiently liquid that the
security can be sold at or near its carrying
value within a reasonably short period of
time.
The determination is made at the time
of the purchase.15
In the Investment Company Final
Rule, the SEC stated that this standard
is designed to limit purchases of
securities to those of ‘‘sufficiently high
credit quality that they are likely to
maintain a fairly stable market value
and may be liquidated easily . . ..’’ The
SEC provided the following explanation
of moderate credit risk:
TKELLEY on DSK3SPTVN1PROD with NOTICES
Debt securities (or their issuers) subject to
a moderate level of credit risk would
demonstrate at least average creditworthiness relative to other similar debt
issues (or issuers of similar debt). Moderate
credit risk would denote current low
expectations of default risk associated with
the security, with an adequate capacity for
payment by the issuer of principal and
interest.
The SEC noted further that in making
such determinations, ‘‘a BIDCO’s board
of directors or members (or its or their
delegate) can also consider credit
quality reports prepared by outside
sources, including NRSRO ratings, that
the BIDCO board or members conclude
are credible and reliable for this
purpose.’’
15 For purposes of the amendments to the Class
Exemptions, the Department has interpreted
carrying value as equivalent to fair market value.
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In the Investment Company Final
Rule, the SEC noted that the standard of
credit-worthiness in rule 6a–5 is similar
to that previously adopted for rule 10f–
3 under the Investment Company Act,
amended effective November 12, 2009,
to remove references to NRSRO ratings.
Section 10(f) of the Investment
Company Act prohibits a registered
investment company from knowingly
purchasing or otherwise acquiring,
during the existence of any
underwriting or selling syndicate, any
security for which a principal
underwriter of the security has certain
relationships with the registered
investment company, such as an officer,
director, or investment adviser. Rule
10f–3 contains a definition of ‘‘eligible
municipal securities’’ with respect to
securities that may be purchased during
an affiliated underwriting under certain
conditions. Prior to the amendment of
the rule, such eligible municipal
securities were required to have:
an investment grade rating from at least one
NRSRO; provided, that if the issuer of the
municipal securities, or the entity supplying
the revenues or other payments from which
the issue is to be paid, has been in
continuous operation for less than three
years, including the operation of any
predecessors, the securities shall have
received one of the three highest ratings from
an NRSRO.
As amended, the definition of eligible
municipal securities in rule 10f-3
requires that the securities:
are sufficiently liquid that they can be sold
at or near their carrying value within a
reasonably short period of time and either: i.
Are subject to no greater than moderate credit
risk; or ii. If the issuer of the municipal
securities, or the entity supplying the
revenues or other payments from which the
issue is to be paid, has been in continuous
operation for less than three years, including
the operation of any predecessors, the
securities are subject to a minimal or low
amount of credit risk.
In the 2009 NRSRO Rule Adopting
Release, the SEC noted that securities
with a minimal or low credit risk
‘‘would be less susceptible to default
risk (i.e., have a low risk of default) than
those with moderate credit risk. These
securities (or their issuers) also would
demonstrate a strong capacity for
principal and interest payments and
present above average creditworthiness
relative to other municipal or tax
exempt issues (or issuers).’’
Thus, in both new rule 6a–5 and final
rule 10f–3, the SEC set forth a standard
to replace ‘‘investment grade’’ that
requires that the security be:
• Sufficiently liquid that it can be
sold at or near its carrying value within
a reasonably short period of time, and
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• subject to no greater than moderate
credit risk.
Additionally, with respect to a
requirement that a security be rated in
one of the three highest rating
categories, the SEC in final rule 10f–3
created a standard of credit-worthiness
that would require the security to be:
• Sufficiently liquid that it can be
sold at or near its carrying value within
a reasonably short period of time, and
• subject to a minimal or low amount
of credit risk.
The Department likewise proposes
herein to adopt similar standards to
replace references in the Class
Exemptions to the highest four rating
categories or ‘‘investment grade,’’ and
the highest three rating categories.
2. Proposed Rule 2a–7: Standard for
Highest Two Rating Categories
Investment Company Act rule 2a–7,
which governs the operation of money
market funds, exempts money market
funds from certain of its provisions
regarding the calculation of current net
asset value per share.16 A fund that
relies on rule 2a–7 may use special
valuation and pricing procedures that
help the fund maintain a stable net asset
value per share (typically $1.00). To
facilitate maintaining a stable net asset
value, among other conditions, rule 2a–
7 limits money market funds to
investing in debt obligations that are at
the time of acquisition, ‘‘eligible
securities,’’ meaning they have:
received a rating from the Requisite
NRSROs 17 in one of the two highest shortterm rating categories.18
Rule 2a–7 further requires that
securities purchased by money market
16 17
CFR 270.2a–7.
NRSROs’’ are defined as any two
nationally recognized statistical rating organizations
that have issued a rating with respect to a security
or class of debt obligations of an issuer or, if only
one such organization has issued a rating with
respect to such security or class of debt obligations
of an issuer at the time the investment company
acquires the security, that nationally recognized
statistical rating organization. A Requisite NRSRO
must also be a ‘‘Designated NRSRO,’’ which is
generally any one of at least four nationally
recognized statistical rating organizations that a
money market fund’s board of directors has
designated for use, and determines at least annually
issues credit ratings that are sufficiently reliable for
the fund to use in determining whether a security
is an eligible security. After enactment of DoddFrank, money market funds received SEC staff
assurances that the staff would not recommend
enforcement action if a money market fund board
did not designate NRSROs (and did not make
certain related disclosures) before the SEC made
any modifications to rule 2a–7 as mandated by
section 939A of Dodd-Frank. See Investment
Company Institute, SEC No-Action Letter (Aug. 19,
2010).
18 Eligible securities also must have a remaining
maturity of 397 calendar days or less. Unrated
securities of comparable credit quality can also
meet the definition of ‘‘eligible security.’’
17 ‘‘Requisite
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funds are those ‘‘that the fund’s board
of directors determines present minimal
credit risks (which determination must
be based on factors pertaining to credit
quality in addition to any rating
assigned to such securities by a
Designated NRSRO).’’ 19
In order to implement Section 939A
of Dodd-Frank, the SEC proposed to
amend rule 2a–7 of the Investment
Company Act to remove the references
to credit ratings discussed above and
replace them with alternative standards
of credit worthiness that are designed to
achieve the same degree of credit
quality as the ratings requirement
currently in use. Under the proposed
amendment, the requirement of rule 2a–
7 regarding minimal credit risks would
be moved into the definition of ‘‘eligible
security.’’ Thus, an eligible security
would be a security that:
the fund’s board of directors determines
presents minimal credit risks (which
determination must be based on factors
pertaining to credit quality and the issuer’s
ability to meet its short-term financial
obligations).
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In the Investment Company Proposal,
the SEC explained that an issuer that
would satisfy the credit-worthiness
requirement associated with an eligible
security should have ‘‘a very strong
ability to repay its short-term debt
obligations, and a very low vulnerability
to default.’’
Furthermore, in the Investment
Company Proposal, the SEC noted that
money market fund boards of directors
‘‘would still be able to consider quality
determinations prepared by outside
sources, including NRSRO ratings, that
fund advisers conclude are credible and
reliable, in making credit risk
determinations.’’ However, the SEC
observed further that fund advisers
would be expected ‘‘to understand the
method for determining the rating and
make an independent judgment of credit
risks, and to consider an outside
source’s record with respect to
evaluating the types of securities in
which the fund invests.’’
19 Under rule 2a–7(a), an eligible security is
generally either a ‘‘first tier security’’ or a ‘‘second
tier security.’’ First tier securities are defined as (a)
securities possessing a short-term rating from the
requisite NRSROs in the highest short-term rating
category for debt obligations, (b) comparable
unrated securities, (c) securities issued by money
market funds, or (d) government securities, as
defined in the Investment Company Act. Second
tier securities, in turn, are defined as any eligible
securities that are not first tier securities. The
Department has determined not to adopt the ‘‘first
tier’’ and ‘‘second tier’’ labels utilized in Rule 2a–
7 to describe securities rated in the highest and
second highest rating categories, respectively,
because such labels are unnecessary in the context
of the Class Exemptions.
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Thus, the SEC proposed to amend the
requirement in rule 2a–7 that an
‘‘eligible security’’ has received a rating
from certain NRSROs in one of the
highest two rating categories with a
standard of credit-worthiness that
would require that the security:
• Present minimal credit risks based
on factors pertaining to credit quality
and the issuer’s ability to meet its shortterm financial obligations.
The Department likewise proposes
herein to adopt a similar standard in
order to replace references in the Class
Exemptions to credit ratings in one of
the highest two rating categories.
3. Proposed Rule 5b–3: Standard for
Highest Two Rating Categories
Rule 5b–3 under the Investment
Company Act permits funds to treat the
acquisition of a repurchase agreement as
an acquisition of securities
collateralizing the repurchase agreement
in determining whether the fund is in
compliance with certain provisions of
the Investment Company Act, if the
obligation of the seller to repurchase the
securities from the fund is
‘‘collateralized fully.’’ 20 In order for a
repurchase agreement to be
collateralized fully under rule 5b–
3(c)(1), among other things, the
collateral for the repurchase agreement
must consist entirely of:
(A) cash items; (B) government securities;
(C) securities that at the time the repurchase
agreement is entered into are rated in the
highest rating category by the [r]equisite
NRSROs; or (D) certain comparable unrated
securities.
In response to section 939A of DoddFrank, the SEC has proposed to
eliminate the credit ratings requirement
in rule 5b–3(c)(1) and set forth a new
standard of credit-worthiness applicable
to collateral other than cash or
government securities. Under the
proposed amendment to rule 5b–3, the
requirements for credit-worthiness
under rule 5b–3(c)(1) would be satisfied
if the fund’s board of directors (or its
delegate) determines that the purchased
securities are:
(i) Issued by an issuer that has the highest
capacity to meet its financial obligations; and
20 The SEC explains in the Investment Company
Proposal that a repurchase agreement functions
economically as ‘‘a loan from the fund to the
counterparty, in which the securities purchased by
the fund serve as collateral for the loan and are
placed in the possession or under the control of the
fund’s custodian during the term of the agreement.’’
Accordingly, the SEC notes that ‘‘a fund investing
in a repurchase agreement looks to the value and
liquidity of the securities collateralizing the
repurchase agreement rather than the credit quality
of the counterparty for satisfaction of the
repurchase agreement.’’
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(ii) sufficiently liquid that they can be sold
at approximately their carrying value in the
ordinary course of business within seven
calendar days.
The determination is made at the time
the repurchase agreement is entered
into.
In the Investment Company Proposal,
the SEC stated that it designed ‘‘the
proposed amendments to retain a degree
of credit quality similar to that under
the current rule.’’ The SEC provided the
following description of an issuer with
the ‘‘highest capacity’’ to meet its
financial obligations:
[an issuer with] an exceptionally strong
capacity to repay its short or long-term debt
obligations, as appropriate, the lowest
expectation of default, and a capacity for
repayment of its financial commitments that
is the least susceptible to adverse effects of
changes in circumstances.
The SEC further noted that in making
such determinations, ‘‘fund boards (or
their delegates) would still be able to
consider analysis provided by outside
sources, including credit agency ratings,
that they conclude are credible and
reliable, for purposes of making these
credit quality evaluations.’’
The SEC observed in the Investment
Company Proposal that, securities
trading in a secondary market at the
time of the acquisition of the repurchase
agreement would satisfy the proposed
liquidity standard.
In the Investment Company Proposal,
the SEC explained that the proposed
amendments were designed:
to be clear enough to permit a fund board or
fund investment adviser to make a
determination regarding credit quality and
liquidity that would achieve the same
objectives that the credit rating requirement
was designed to achieve, i.e., to limit
collateral securities to those that are likely to
retain a fairly stable market value and that,
under ordinary circumstances, the fund
would be able to liquidate quickly in the
event of a counterparty default.
Thus, in the proposed amendment to
rule 5b–3, the SEC proposed a new
standard of credit-worthiness to replace
the reference to a credit rating in the
highest rating category that would
require a security to be:
• Issued by an issuer that has the
highest capacity to meet its financial
obligations, and
• sufficiently liquid that it can be
sold at approximately its carrying value
in the ordinary course of business
within seven calendar days.
The Department proposes herein to
make use of certain portions of the
standard set forth above, including that
pertaining to the liquidity of the
securities, to replace references in the
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Class Exemption to a credit rating in the
highest rating category.
C. Class Exemptions
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These proposed amendments to the
Class Exemptions are designed to
implement the mandate of section
939A(b) of Dodd-Frank to ‘‘remove any
reference to or requirement of reliance
on credit ratings and to substitute in
such regulations such standard of
credit-worthiness as each respective
agency shall determine as appropriate
for such regulations.’’ In this regard, the
Department has designed the proposed
amendments to retain the same degree
of credit quality required under the
Class Exemptions prior to the
amendments, but without referencing or
relying on credit ratings. The
Department does not consider the
changes proposed herein to be
substantive in nature. Thus, for
example, although the proposed
amendment to PTE 75–1, Part III and
Part IV, no longer refers to securities
rated in one of the four highest rating
categories, it is meant to capture
securities that should generally qualify
for that designation without relying on
third-party credit ratings.
The Department recognizes that,
where a fiduciary has neither the
expertise nor the time to make an
informed determination of credit
quality, it may be appropriate as a
matter of prudence for such fiduciary to
seek out the advice and counsel of third
parties. Furthermore, it should be noted
that, while credit ratings may no longer
serve as a basis, or threshold, of credit
quality, section 939A of Dodd-Frank
does not prohibit a fiduciary from using
credit ratings as an element, or data
point, in that analysis.
The Department notes that, in
conducting an analysis of the credit
quality of a particular financial
instrument or person, a fiduciary should
consider a variety of factors that may be
applicable in making such
determination. The following factors,
derived from a recent SEC release
regarding proposed changes to certain
rules under the Securities Exchange Act
of 1934 (the Exchange Act Proposal),
may be considered relevant in assessing
credit risk: 21
21 The factors listed below were published in the
SEC’s proposing release entitled, Removal of
Certain References to Credit Ratings Under the
Securities Exchange Act of 1934, Release No. 34–
64352; 76 FR 26550, at 26552–26553 (May 6, 2011).
While such factors derive from the SEC’s proposed
amendment to Rule 15c3–1, which requires a
broker-dealer to determine whether a security
satisfies a ‘‘minimal amount of credit risk,’’ the
Department believes that they may, where
appropriate, be helpful in connection with a
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• Credit spreads (i.e., the amount of
credit risk a position in commercial
paper and/or nonconvertible debt is
subject to, based on the spread between
the security’s yield and the yield of
Treasury or other securities, or based on
credit default swap spreads that
reference the security);
• Securities-related research (i.e., to
what extent providers of securitiesrelated research believe the issuer of the
security will be able to meet its financial
commitments, generally, or specifically,
with respect to securities held);
• Internal or external credit risk
assessments (i.e., whether credit
assessments developed internally by a
broker-dealer or externally by a credit
rating agency, express a view as to the
credit risk associated with a particular
security);
• Default statistics (i.e., whether
providers of credit information relating
to securities express a view that specific
securities have a probability of default
consistent with other securities with a
determined amount of credit risk);
• Inclusion on an index (i.e., whether
a security, or issuer of the security, is
included as a component of a
recognized index of instruments that are
subject to a determined amount of credit
risk);
• Priorities and enhancements (i.e.,
the extent to which a security is covered
by credit enhancements, such as
overcollateralization and reserve
accounts, or has priority under
applicable bankruptcy or creditors’
rights provisions);
• Price, yield and/or volume (i.e.,
whether the price and yield of a security
or a credit default swap that references
the security are consistent with other
securities that the broker-dealer has
determined are subject to a certain
amount of credit risk and whether the
price resulted from active trading); and
• Asset class-specific factors (e.g., in
the case of structured finance products,
the quality of the underlying assets).
The Department observes that the
SEC’s list above was not meant to be
exhaustive or mutually exclusive, and
that the range and type of specific
factors considered would vary
depending on the particular securities
that are reviewed.
The Department notes further that in
making a determination of the relative
credit quality of a particular financial
instrument or entity, as well as in
assigning a relative value to a third
party’s advice or a credit rating, a plan
fiduciary would continue to be subject
to section 404 of ERISA. Moreover, such
fiduciary’s determination of credit quality under the
amendments proposed herein.
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fiduciary would remain subject to the
other conditions of relief as set forth in
the Class Exemptions, including, but not
limited to, any requirements regarding
the maintenance of records which are
necessary to enable the persons
described therein to determine whether
the conditions of such Class Exemption
have been met.
1. PTE 75–1
PTE 75–1, granted soon after the
enactment of ERISA, provides relief for
certain transactions that were customary
at the time between plans and brokerdealers or banks, including a plan’s
acquisition of securities from a member
of an underwriting syndicate of which
a plan fiduciary or its affiliate is a
member, and an employee benefit plan’s
purchase or sale of securities for which
the plan’s fiduciary is a ‘‘market
maker,’’ to or from such fiduciary or its
affiliate.
Specifically, PTE 75–1, Part III,
provides relief from the restrictions of
section 406 of ERISA and the taxes
imposed by section 4975(a) and (b) of
the Code, by reason of section 4975(c)(1)
of the Code, for an employee benefit
plan’s acquisition of securities during
the existence of an underwriting
syndicate, from a person other than a
fiduciary with respect to the plan,
where a fiduciary of such employee
benefit plan is a member of the
underwriting syndicate. Section III(a)
provides further that no fiduciary who
is involved in any way in causing the
plan to make such purchase may be a
manager of such underwriting or selling
syndicate. In this regard, section (a)
defines a manager as any member of an
underwriting or selling syndicate who,
either alone or together with other
members of the syndicate, is authorized
to act on behalf of the members of the
syndicate in connection with the sale
and distribution of the securities being
offered or who receives compensation
from the members of the syndicate for
its services as a manager of the
syndicate.
Part IV of PTE 75–1 provides relief
from the restrictions of section 406 of
ERISA and the taxes imposed by section
4975(a) and (b) of the Code, by reason
of section 4975(c)(1) of the Code, for a
plan’s purchase or sale of securities
from or to a ‘‘market maker’’ with
respect to such security who is also a
fiduciary with respect to the plan or an
affiliate of such fiduciary. Part IV
provides further that at least one person
other than the fiduciary must be a
market-maker in such securities, and the
transaction must be executed at a net
price to the plan for the number of
shares or other units to be purchased or
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sold in the transaction which is more
favorable to the plan than that which
such fiduciary, acting in good faith,
reasonably believes to be available at the
time of such transaction from all other
market makers in such securities.
The relief afforded in Part III and Part
IV of PTE 75–1 is also conditioned
upon, among other things, the issuer of
the securities having been in continuous
operation for not less than three years,
including the operations of any
predecessors. However, several
exceptions to this condition exist with
respect to each exemption, including an
exception for securities that are ‘‘nonconvertible debt securities rated in one
of the four highest rating categories by
at least one nationally recognized
statistical rating organization.’’
The condition requiring the issuer of
securities in an underwriting to have
been in continuous operation for at least
three years bolsters the quality of the
underwritten securities, by ensuring
that the issuer is an established entity
that has been operating as a business for
a continuous period of time. Securities
issued by such an issuer should be more
predictable in terms of price and trading
volume stability than securities issued
by unproven entities with shorter
operating histories. Ostensibly, debt
securities rated as investment grade or
higher, by an unrelated third party in
the business of evaluating credit quality,
possess attributes of credit quality that
provide more predictability in terms of
price, volatility, and ultimate payment
of principal. Thus, the Department is
cognizant that any substitute for credit
ratings must provide the same level of
protection for plans entering into the
transactions.
The Department is proposing to
replace the references to credit ratings
in Part III and Part IV of PTE 75–1 with
the requirement that, ‘‘[a]t the time of
acquisition, such securities are nonconvertible debt securities (i) subject to
no greater than moderate credit risk and
(ii) sufficiently liquid that such
securities can be sold at or near their
fair market value within a reasonably
short period of time.’’ Thus, as
amended, condition (c)(1) of Part III and
condition (a)(1) of Part IV, of PTE 75–
1, would require securities to be issued
by a person that has been in continuous
operation for not less than three years,
including the operations of any
predecessors, unless, among other
exceptions, the fiduciary directing the
plan in such transaction has made a
determination that, at the time they are
acquired, such securities satisfy the new
standard described above.
For purposes of this amendment, debt
securities subject to a moderate level of
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credit risk should possess at least
average credit-worthiness relative to
other similar debt issues. Moderate
credit risk would denote current low
expectations of default risk, with an
adequate capacity for payment of
principal and interest.
The Department views the new
proposed standard as reflecting the
same level of credit quality as required
prior to this amendment. The alternative
standard described above is modeled on
the SEC’s new rule 6a–5 and final rule
10f–3 of the Investment Company Act.
New rule 6a-5 and one element of the
final amendments to rule 10f–3 each set
forth a standard that replaced a
reference to an ‘‘investment grade’’
rating, which the Department
understands is the same as a reference
to one of the four highest rating
categories issued by at least one
nationally recognized statistical rating
organization. Furthermore, because PTE
75–1, Part III, and final rule 10f–3
involve the acquisition of securities in
an underwriting where there is a
relationship between the acquiring fund
or entity and a member of the
underwriting syndicate, it is relevant
that the standard of credit quality
required under each rule is similar.
The proposed standard is also
appropriate for PTE 75–1, because it
addresses concerns that an acquirer of
securities might be harmed by a
purchase of illiquid securities. In this
regard, the proposed standard preserves
the purpose of the original condition in
paragraphs (c)(1) of Part III and (a)(1) of
Part IV of PTE 75–1, by restricting
fiduciaries’ acquisitions to purchases of
securities of sufficiently high credit
quality. As stated above, in making
these determinations, a fiduciary would
not be precluded from considering
credit quality reports prepared by
outside sources, including credit ratings
prepared by credit rating agencies, that
they conclude are credible and reliable
for this purpose.
2. PTE 80–83
PTE 80–83 generally provides relief
for the purchase or acquisition in a
public offering of securities by a
fiduciary, on behalf of an employee
benefit plan, solely because the
proceeds from the sale may be used by
the issuer of the securities to retire or
reduce indebtedness owed to a party in
interest with respect to the plan. Part C
of the exemption provides relief from
the restrictions of sections 406(a)(1)(A)
through (D) and 406(b)(1) and (2) of
ERISA and the taxes imposed by reason
of section 4975(c)(1)(A) through (E) of
the Code, for the purchase or acquisition
in a public offering of securities, by a
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fiduciary which is a bank or affiliate
thereof, on behalf of a plan solely
because the proceeds of the sale may be
used by the issuer of the securities to
retire or reduce indebtedness owed to
such fiduciary or an affiliate thereof. In
the event that such fiduciary of the plan
‘‘knows’’ that the proceeds of the issue
will be used in whole or in part by the
issuer of the securities to reduce or
retire indebtedness owed to such
fiduciary or affiliate thereof, the relief in
Part C is conditioned upon, among other
things, the issuer of such securities
having been in continuous operation for
not less than three years, including the
operations of any predecessors, unless
such securities are non-convertible debt
securities rated in one of the four
highest rating categories by at least one
nationally recognized statistical rating
organization.
As in PTE 75–1, Part III and Part IV,
the three years continuous operation
condition bolsters the quality of the
underwritten securities by ensuring that
the issuer is an established entity that
has been operating as a business for a
continuous period of time. In crafting an
alternative to credit ratings to be used as
an exception to the three years
continuous operation condition, the
Department has likewise employed an
alternative that provides similar
protection for plans entering into the
transactions.
The Department is proposing to
amend condition 3 of Part C of PTE 80–
83 to replace the reference to credit
ratings with a requirement that, ‘‘at the
time of acquisition, such securities are
non-convertible debt securities (i)
subject to no greater than moderate
credit risk and (ii) sufficiently liquid
that such securities can be sold at or
near their fair market value within a
reasonably short period of time.’’ For
purposes of this amendment, debt
securities subject to a moderate level of
credit risk should possess at least
average credit-worthiness relative to
other similar debt issues. Moderate
credit risk would denote current low
expectations of default risk, with an
adequate capacity for payment of
principal and interest.
The Department views the new
proposed standard as reflecting the
same level of credit quality as required
prior to this amendment. It is
appropriate that the proposed
alternative is modeled on the SEC’s new
rule 6a–5 and final rule 10f–3 of the
Investment Company Act. New rule 6a–
5 and one element of the final
amendments to rule 10f–3 each
supplied a standard that replaced the
reference to an ‘‘investment grade’’
rating, which the Department
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understands is the same as a reference
to a rating in one of the four highest
rating categories by at least one
nationally recognized statistical rating
organization. The alternative standard
in the proposed amendment to PTE 80–
83 also addresses concerns that an
acquirer of securities might be harmed
by such person’s purchase of illiquid
securities. The alternative preserves the
level of protection afforded by the
original standard, by requiring a
fiduciary to make a prudent
determination that a security acquired
in an underwriting is of a sufficiently
high credit quality. In making the
proposed determination of credit
quality, a fiduciary may consider
information provided by third parties,
including credit ratings issued by credit
rating agencies.
3. PTE 81–8
PTE 81–8 provides exemptive relief
from the restrictions of section
406(a)(1)(A), (B), and (D) of ERISA and
the taxes imposed by reason of section
4975(c)(1)(A), (B), and (D) of the Code,
for the investment of employee benefit
plan assets which involve the purchase
or other acquisition, holding, sale,
exchange or redemption by or on behalf
of an employee benefit plan of certain
short-term investments issued by a party
in interest, including commercial paper.
As a condition of exemptive relief,
paragraph II(D) requires that, with
respect to an acquisition or holding of
commercial paper, at the time it is
acquired, such commercial paper must
be ranked in one of the three highest
rating categories by at least one
nationally recognized statistical rating
service. The original condition was
incorporated into PTE 81–8 to allow
fiduciaries who make investment
decisions regarding the short-term
investments of a plan to choose from a
broad range of issues of commercial
paper while assuring that the quality of
the issue had been assessed by an
independent third party.
The Department proposes to amend
paragraph II(D) to delete the reference to
the credit rating of commercial paper
and replace it with the requirement that,
‘‘at the time of acquisition, the
commercial paper is (i) subject to a
minimal or low amount of credit risk
based on factors pertaining to credit
quality and the issuer’s ability to meet
its short-term financial obligations, and
(ii) sufficiently liquid that such
securities can be sold at or near their
fair market value within a reasonably
short period of time.’’ Commercial paper
subject to a minimal or low credit risk
would be less susceptible to default risk
(i.e., have a low risk of default) than
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those with moderate credit risk. These
instruments also would demonstrate a
strong capacity for principal and
interest payments and present aboveaverage credit-worthiness relative to
other issues of commercial paper.
The Department views the new
proposed standard as reflecting the
same level of credit quality required
prior to this amendment. The ‘‘minimal
or low amount of credit risk’’ standard
in the proposed alternative is modeled
on one element of the SEC’s final rule
10f–3 of the Investment Company Act,
described above, which was developed
as an alternative to a credit rating in one
of the highest three rating categories. In
developing the alternative standard for
PTE 81–8, as amended, the Department
found it relevant that final rule 10f–3
provides an alternative to the same
credit rating category that is currently in
PTE 81–8.
In addition, the Department
considered the language ‘‘based on
factors pertaining to credit quality and
the issuer’s ability to meet its short-term
financial obligations’’ from the SEC’s
proposed amendment to rule 2a–7. The
Department understands rule 2a–7 to
apply to mutual funds (more
specifically, money market funds) that
invest in high quality, short-term debt
instruments. As commercial paper is a
short-term debt instrument as well, the
Department determined that it would be
appropriate to include such language in
its alternative credit standard to reflect
an increased focus on the issuer’s ability
to meet its short-term obligations.
The Department notes that the
preamble to PTE 81–8 (46 FR 7511 at
7512, January 23, 1981) states that,
based on the record, the Department
was unable to conclude that unrated
issues of commercial paper sold in a
private offering ‘‘have such protective
characteristics that affected plans would
not need the independent safeguards
that the rating condition is intended to
provide,’’ which may suggest that a
credit rating by an independent third
party is an important condition of the
relief provided. Under section 939A of
Dodd-Frank, the Department cannot
continue to mandate that commercial
paper acquired by a plan pursuant to
PTE 81–8 must receive a specified credit
rating. However, the Department also
noted in PTE 81–8, that a determination
whether an investment in commercial
paper is appropriate for a plan should
be determined ‘‘by the responsible plan
fiduciaries, taking into account all the
relevant facts and circumstances.’’ For
purposes of this amendment, the
Department believes that a fiduciary’s
determination of the credit quality of
commercial paper according to the
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proposed standard should, as a matter of
prudence, include the reports or advice
of independent third parties, including
where appropriate, such commercial
paper’s credit rating.
4. PTE 95–60
PTE 95–60 was granted in response to
the Supreme Court’s decision in John
Hancock Mutual Life Insurance Co. v.
Harris Trust & Savings Bank (Harris
Trust),22 holding that those funds
allocated to an insurer’s general account
pursuant to a contract with a plan that
vary with the investment experience of
the insurance company are ‘‘plan
assets’’ under ERISA. Harris Trust
created uncertainty with respect to a
number of exemptions previously
granted by the Department in
connection with the operation of asset
pool investment trusts that issue assetbacked, pass-through certificates to
plans. Specifically, the Department had
previously granted PTE 83–1 (48 FR
895, January 7, 1983) 23 and the
‘‘Underwriter Exemptions,’’ 24 which
were conditioned, among other things,
upon the certificates that were
purchased by plans not being
subordinated to other classes of
certificates issued by the same trust.
Because, in a typical asset pool
investment trust, one or more classes of
subordinated certificates are often
purchased by life insurance companies,
in holding that insurance company
general accounts may be considered
‘‘plan assets,’’ Harris Trust raised the
potential for servicers and trustees of
pools to be engaging in prohibited
transactions for the same acts involving
the operation of trusts which would be
exempt if the certificates were not
subordinated.
PTE 95–60 provides exemptive relief
for certain transactions engaged in by
insurance company general accounts in
which an employee benefit plan has an
interest, if certain specified conditions
are met. Under Section III, additional
relief is provided from the restrictions of
sections 406(a), 406(b) and 407(a) of
ERISA and the taxes imposed by section
4975(a) and (b) of the Code by reason of
section 4975(c) of the Code for certain
22 510
US 86 (1993).
83–1 provides relief for the operation of
certain mortgage pool investment trusts and the
acquisition and holding by plans of certain
mortgage-backed pass-through certificates
evidencing interests therein.
24 The Underwriter Exemptions are comprised of
a number of individual exemptions in which credit
ratings have been used extensively (e.g., PTE 2009–
31 (74 FR 59003, November 16, 2009)), which
provide relief for the operation of certain asset pool
investment trusts and the acquisition and holding
by plans of certain asset-based pass-through
certificates representing interests in those trusts.
23 PTE
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transactions entered into in connection
with the servicing, management, and
operation of a trust (a Trust), described
in PTE 83–1 or in one of the
Underwriter Exemptions, in which an
insurance company general account has
an interest as a result of its acquisition
of certificates issued by the Trust.
Section III(a)(2) of PTE 95–60 requires
that the conditions of either PTE 83–1
or an applicable Underwriter Exemption
be met other than the requirements that
the certificates acquired by the general
account (A) not be subordinated to the
rights and interests evidenced by other
certificates of the same trust and (B)
receive a rating that is in one of the
three highest generic rating categories
from an independent rating agency.
Because PTE 83–1 only requires nonsubordination with respect to the
acquired certificates, and does not have
a credit rating reference or requirement,
the exception from the ratings
requirement applies only to the
Underwriter Exemptions.
The Department proposes to delete
the reference in Section III(a)(2)(B)
pertaining to the credit ratings of
certificates acquired by a general
account and replace it with a general
reference to the credit quality of such
certificates. Thus, Section III(a)(2) of
PTE 95–60, as amended, would provide
that ‘‘[t]he conditions of either PTE 83–
1 or the relevant Underwriter
Exemption are met, except for the
requirements that: (A) The rights and
interests evidenced by the certificates
acquired by the general account are not
subordinated to the rights and interests
evidenced by other certificates of the
same Trust, and (B) the certificates
acquired by the general account have
the credit quality required under the
relevant Underwriter Exemption at the
time of such acquisition.’’
The Department believes that this
modification will bring PTE 95–60 into
compliance with the mandate in section
939A of Dodd-Frank that any reference
to or requirement of reliance on credit
ratings be removed from the
Department’s rules and regulations.
Because the Department has not
proposed to amend the Underwriter
Exemptions, this proposed amendment
cannot refer to a specific alternative to
credit ratings in such exemptions.
Nevertheless, because Section III(a)(2),
as amended, would state that the
certificates are not required to meet the
standard of credit quality referred to in
the conditions of the Underwriter
Exemptions, the Department believes
that the amended requirement would be
consistent with section 939A(b) of
Dodd-Frank. Additionally, in the
Department’s view, there should not be
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any substantive distinction between a
person’s compliance with the condition
in paragraph III(a)(2)(B) prior to or after
this amendment takes effect.
5. PTE 97–41
Section II of PTE 97–41 provides
relief from sections 406(a) and 406(b)(1)
and (2) of ERISA and the taxes imposed
by section 4975 of the Code, by reason
of section 4975(c)(1)(A) through (E) of
the Code, for the purchase, by an
employee benefit plan, of shares of one
or more mutual funds in exchange for
the assets of the plan, transferred inkind to the mutual fund from a
collective investment fund (CIF)
maintained by a bank or plan adviser
where such bank or plan adviser is the
investment adviser to the mutual fund
and also a fiduciary of the plan, in
connection with a complete withdrawal
of the plan’s assets from the CIF.
Exemptive relief is conditioned upon,
inter alia, Section II(c), the ‘‘pro rata
division rule,’’ which provides that the
transferred assets must constitute the
plan’s pro rata portion of the assets that
were held by the CIF immediately prior
to the transfer. However, Section II(c)
provides further that, notwithstanding
the foregoing, the allocation of fixed
income securities held by a CIF among
plans on the basis of each plan’s pro rata
share of the aggregate value of such
securities will not fail to meet the
requirements of the pro rata division
rule if (1) the aggregate value of such
securities does not exceed one percent
of the total value of the assets held by
the CIF immediately prior to the
transfer, and (2) such securities have the
same coupon rate and maturity, and at
the time of transfer, the same credit
ratings from nationally recognized
statistical rating organizations.
The exception to the general pro rata
division rule in Section II(c) ensures
that plans can avoid the transaction
costs involved in liquidating small
positions in fixed-income securities that
are not divisible, or that can be divided
only at substantial cost, prior to their
maturity. In these situations, equivalent,
small investments of fixed-income
securities are treated as fungible for
allocation purposes if such securities
have the same coupon rates, maturities
and credit ratings at the time of the
transaction. This requirement ensures
that all plans receive securities that
have equivalent terms and features and
that such fixed-income securities will be
allocated among the plans in a manner
such that each plan receives its pro rata
share of the value of such securities.
The Department is proposing to
amend the exception found in Section
II(c) by deleting the requirement found
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in subsection (2) that the securities
transferred in-kind from a CIF to the
mutual fund have the same credit
ratings and replacing it with a
requirement that such securities are of
the same credit quality. Section II(c)(1)
and (2), as amended, would provide that
the allocation of fixed-income securities
held by a CIF among the plans on the
basis of each plan’s pro rata share of the
aggregate value of such securities will
not fail to meet the requirements of
Section II(c) if ‘‘(1) the aggregate value
of such securities does not exceed one
percent of the total value of the assets
held by the CIF immediately prior to the
transfer, and (2) such securities have the
same coupon rate and maturity, and at
the time of transfer, the same credit
quality.’’
In making the determination as to the
credit quality of fixed income securities
for purposes of this condition, the
Department notes that a fiduciary
should, to the extent possible, engage in
credit quality comparisons of securities
using the same standards (e.g.,
employing the same metrics) for each
set of securities. The Department
believes that an ‘‘apples to apples’’
comparison of the credit quality of each
security taking into account the same
variables would comply with the
proposed amendment to the condition
set forth in Section II(c)(2). Furthermore,
the Department notes that a fiduciary
may rely on reports and advice given by
independent third parties, including
ratings issued by rating agencies.
6. PTE 2006–16
Sections I(a) and (b) of PTE 2006–16
provide exemptive relief from section
406(a)(1)(A) through (D) of ERISA and
the taxes imposed by section 4975(a)
and (b) of the Code by reason of section
4975(c)(1)(A) through (D) of the Code for
the lending of securities that are assets
of an employee benefit plan to certain
banks and broker-dealers that are parties
in interest with respect to the plan.
Section I(c) of PTE 2006–16 provides
exemptive relief from section 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)(E) of the
Code for the payment to a fiduciary of
compensation for services rendered in
connection with loans of plan assets
that are securities.
Section II(b) of PTE 2006–16
conditions the relief provided under
Sections I(a) and (b) upon the plans’
receipt 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, of either
‘‘U.S. Collateral,’’ or ‘‘Foreign
Collateral,’’ as such terms are defined in
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Section V of the exemption. Section
V(f)(2) defines ‘‘Foreign Collateral’’ to
include ‘‘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.’’ Section V(f)(4)
defines ‘‘Foreign Collateral’’ to include
‘‘irrevocable letters of credit issued by a
[f]oreign [b]ank, 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.’’
The Department is proposing to
amend Section V(f)(2) to delete the
reference to credit ratings and provide
that ‘‘Foreign Collateral’’ will include
‘‘foreign sovereign debt securities that
are (i) subject to a minimal amount of
credit risk, and (ii) sufficiently liquid
that such securities can be sold at or
near their fair market value in the
ordinary course of business within
seven calendar days.’’
The credit risk associated with
securities that present ‘‘minimal credit
risks’’ would differ from that of the
highest credit quality securities only to
a small degree. Thus, an issuer that
would satisfy the credit-worthiness
requirement associated with foreign
sovereign debt securities should have a
very strong ability to repay its debt
obligations, and a very low vulnerability
to default. In addition, the SEC has
indicated its expectation that securities
that trade in a secondary market at the
time of their acquisition would satisfy
the ‘‘seven calendar day’’ liquidity
standard.25
The Department views the new
standard as reflecting the same level of
credit quality required prior to this
amendment. The alternative standard of
credit quality proposed for Section
V(f)(2) of PTE 2006–16 takes a similar
approach to the SEC’s proposed
amendments to rule 2a–7, which
governs the securities that certain
money market funds may hold as
investments, and proposed amendments
to rule 5b–3, which relates to funds
entering into repurchase agreements
that are collateralized with certain high
credit-quality securities, as described
above.
The Department believes that the
‘‘minimal’’ credit risk standard in the
proposed alternative to credit ratings in
rule 2a–7 is an appropriate model for
the alternative standard of credit quality
proposed in Section V(f)(2) of PTE
2006–16, as the current level of credit
25 See Investment Company Proposal, supra note
11, at text following n.54.
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worthiness required under both
provisions reflects credit ratings in one
of the two highest rating categories.
However, the Department understands
that, whereas rule 2a–7 currently
utilizes a short-term rating, foreign
sovereign debt securities described in
Section V(f)(2) could comprise either
long-term or short-term securities.
Therefore, in formulating the proposed
alternative standard of credit quality in
Section V(f)(2), the Department did not
include in its proposed standard the
language ‘‘based on factors pertaining to
credit quality and the issuer’s ability to
meet its short-term financial
obligations.’’ However, in the case of a
short-term foreign sovereign debt
security used as collateral, fiduciaries
may wish to include the issuer’s ability
to meet its short term obligations as a
factor in its evaluation of the security’s
credit quality.
In addition to the ‘‘minimal’’ credit
risk standard of the proposed
amendment, the Department believes
that the liquidity requirement proposed
in rule 5b–3 (‘‘sufficiently liquid that
such securities can be sold at or near
their fair market value in the ordinary
course of business within seven
calendar days’’) is appropriate for
inclusion in the alternative standard of
credit quality proposed in Section
V(f)(2) of PTE 2006–16, because the
economic considerations and regulatory
framework underpinning securities
repurchase agreements is similar to that
supporting securities lending
transactions.
The Department is also proposing to
amend Section V(f)(4) to delete the
reference to credit ratings and provide
that ‘‘Foreign Collateral’’ will include
‘‘irrevocable letters of credit issued by a
Foreign Bank, other than the borrower
or an affiliate thereof, provided that, at
the time the letters of credit are issued,
the Foreign Bank’s ability to honor its
commitments thereunder is subject to
no greater than moderate credit risk.’’
The Department notes that, where a
Foreign Bank’s ability to honor its
commitment under a letter of credit is
subject to a moderate level of credit risk,
such bank would demonstrate at least
average credit-worthiness relative to
other issuers of similar debt. Moderate
credit risk would denote current low
expectations of default risk, with an
adequate capacity for payment of
principal and interest.
The Department views the new
standard as reflecting the same level of
credit quality required prior to this
amendment. The proposed alternative
described for Section V(f)(4) is modeled
after the SEC’s new rule 6a–5 of the
Investment Company Act, described
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above, which adopts an alternative to a
credit rating of investment grade, or a
credit rating in one the four highest
rating categories.26 In particular, the
Department has modeled the new
standard of credit quality for PTE 2006–
16 on the credit quality element of the
standard in rule 6a–5; as such, the
proposed amendment focuses on the
issuing bank’s ability to honor its
commitment under the letter of credit.
Furthermore, in developing the
alternative standard for Section V(f)(4)
of PTE 2006–16, as amended, the
Department found it relevant that the
standards adopted in new rule 6a–5 and
proposed in amendments to Section
V(f)(4) of PTE 2006–16 are designed to
reflect the same level of credit quality as
the credit ratings they replaced in
section 6(a)(5)(A)(iv) of the Investment
Company Act and would replace in
Section V(f)(4), respectively.
Finally, Lending Fiduciaries making
determinations of credit quality under
Sections V(f)(2) and V(f)(4) of PTE
2006–16 would still be able to consider
credit quality determinations prepared
by outside sources, including credit
ratings issued by rating organizations,
that such fiduciaries conclude are
credible and reliable, in making
determinations of credit worthiness.
7. Request for Comment Regarding
Modifications to Class Exemptions
The Department is requesting
comments regarding all aspects of these
proposed amendments. In this regard,
the Department specifically requests
comments regarding whether the
alternatives for credit ratings described
herein represent adequate substitutes for
credit ratings by rating organizations,
taking into account the different Class
Exemptions making use of such ratings,
and the costs to comply with the
alternatives, and invites comments on
additional or alternative credit
standards for consideration by the
Department. As stated above, any
suggested alternative to a credit rating
should retain as close as possible the
original intent of the standard in its
related Class Exemption. Furthermore,
the Department will consider the SEC’s
treatment of comments received in
response to its proposals modifying the
use of credit ratings as part of its
compliance with section 939A and
939(c) of Dodd-Frank.
26 As noted above, the SEC adopted rule 6a–5
under the Investment Company Act as directed by
section 939(c) of Dodd-Frank, which eliminates a
statutory condition requiring that certain securities
have received a credit rating of investment grade,
and instead requires that the securities ‘‘meet such
standards of creditworthiness as the Commission
shall adopt.’’
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In addition to the comments
requested above, the Department
requests comments on guidance
provided in connection with the term
‘‘moderate credit risk’’ as used in the
proposed amendments to PTEs 75–1,
80–83, and 2006–16. Specifically, the
Department solicits input on whether
average credit-worthiness relative to
other similar issues or issuers is an
appropriate point of reference to
associate with a moderate level of credit
risk, as used in the Class Exemptions.
The Department also requests comments
regarding the inclusion of a liquidity
requirement as part of its standard of
credit-worthiness proposed for use in
the Class Exemptions. In this regard, the
Department is interested in commenters’
views as to whether a liquidity
requirement contributes to the
protective characteristics of the relevant
standard of credit-worthiness proposed
for use in the applicable Class
Exemptions, and invites comments on
alternative liquidity requirements for
consideration by the Department or
whether the absence of such a
requirement is more appropriate. Any
comment received in this regard should
explain in detail the commenter’s
rationale, including how the presence or
absence of a liquidity requirement
would be protective of plans,
participants and their beneficiaries.
Finally, the Department requests
comments regarding its use of ‘‘fair
market value’’ for purposes of
establishing a liquidity requirement in
the proposed alternatives to credit
ratings. Specifically, the Department
requests comments concerning whether
a different measure of value, such as
‘‘carrying value’’ or ‘‘fair value,’’ 27
would be more appropriate for the
proposed alternatives to credit ratings
and offer greater protections for
employee benefit plans and their
participants and beneficiaries engaging
in the covered transactions. Any
comment received in this regard should
explain in detail the suggested measure
of value, including how it is determined
and why it is appropriate for use in a
Class Exemption.
8. Underwriter Exemptions
The Underwriter Exemptions are
comprised of a number of individual
exemptions in which credit ratings have
been used extensively (e.g., PTE 2009–
31 (74 FR 59003, November 16, 2009)),
which provide relief for the operation of
certain asset pool investment trusts and
the acquisition and holding by plans of
27 As stated in FASB Accounting Standards
Codification Topic 820, Fair Value Measurements
and Disclosures (ASC Topic 820).
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certain asset-based pass-through
certificates representing interests in
those trusts. It is the Department’s view
that the Underwriter Exemptions, as
individual prohibited transaction
exemptions, are not federal regulations,
and therefore section 939A of DoddFrank does not require their review and
modification.
Accordingly, notwithstanding the
deadline for compliance with section
939A, the Underwriter Exemptions will
remain in force with no modifications to
their credit rating requirements.28 The
Department is cognizant, however, of
the Congressional intent to reduce
reliance on credit ratings and is
considering alternative standards for use
instead of, or in addition to, existing
requirements for credit ratings in
granted individual prohibited
transaction exemptions. Thus, the
Department is requesting comments
regarding such alternatives in addition
to any comments regarding the Class
Exemptions.
9. Executive Order 12866 Statement
Under Executive Order 12866 (the
Executive Order), the Department must
determine whether a 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) of the Executive Order, a
‘‘significant regulatory action’’ is an
action that is likely to result in a rule
(1) having an effect on the economy of
$100 million or more in any one year,
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
28 The Department notes that it recently proposed
an amendment to the Underwriter Exemptions (the
Underwriter Proposal) that modified the definition
of ‘‘Rating Agency’’ to eliminate specific references
to named credit rating agencies. Pursuant to the
Underwriter Proposal, the term ‘‘Rating Agency’’
would be defined using a general framework of selfexecuting criteria based on both (i) SEC rules
applicable to NRSROs and (ii) the Department’s
own ‘‘seasoning’’ requirement for credit rating
agencies. The Underwriter Proposal makes no
modifications to the use of credit ratings in the
Underwriter Exemptions, including the requirement
that securities available for purchase by Plans
generally must be rated in one of the three highest
rating categories (or four in the case of certain
‘‘Designated Transactions’’). See Notice of Proposed
Amendment to Prohibited Transaction Exemption
2007–05, 72 FR 13130 (March 20, 2007), Involving
Prudential Securities Incorporated, et al., To
Amend the Definition of ‘‘Rating Agency,’’ 77 FR
76773 (December 28, 2012).
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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. OMB has determined that this
action is significant within the meaning
of section 3(f)(4) of the Executive Order,
and accordingly, OMB has reviewed
these proposed amendments to PTE 75–
1, PTE 80–83, PTE 81–8, PTE 95–60,
PTE 97–41, and PTE 2006–16 pursuant
to the Executive Order.
10. Paperwork Reduction Act
According to the Paperwork
Reduction Act of 1995 (Pub. L. 104–13)
(the PRA), no persons are required to
respond to a collection of information
unless such collection displays a valid
OMB control number. The Department
notes that a Federal agency cannot
conduct or sponsor a collection of
information unless it is approved by
OMB under the PRA, and displays a
currently valid OMB control number,
and the public is not required to
respond to a collection of information
unless it displays a currently valid OMB
control number. See 44 U.S.C. 3507.
Also, notwithstanding any other
provisions of law, no person shall be
subject to penalty for failing to comply
with a collection of information if the
collection of information does not
display a currently valid OMB control
number. See 44 U.S.C. 3512.
The Department has not made a
submission to OMB at this time, because
the proposed amendments do not revise
the information collection requests
contained in the following PTEs: PTE
75–1, which is approved by OMB under
OMB Control Number 1210–0092; PTE
80–83, which is approved by OMB
under OMB Control Number 1210–0064;
PTE 81–8, which is approved by OMB
under OMB Control Number 1210–0061;
PTE 95–60, which is approved by OMB
under OMB Control Number 1210–0114;
PTE 97–41, which is approved by OMB
under OMB Control Number 1210–0104;
and PTE 2006–16, which is approved by
OMB under OMB Control Number
1210–0065.
GENERAL INFORMATION
The attention of interested persons is
directed to the following:
(1) Before an exemption may be
granted under section 408(a) of ERISA
and section 4975(c)(2) of the Code, the
Department must find that the
exemption is administratively feasible,
in the interests of the plan and of its
participants and beneficiaries and
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protective of the rights of participants
and beneficiaries of such plan;
(2) The proposed amendments, if
granted, will be supplemental to, and
not in derogation of, any other
provisions of ERISA and 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
(3) If granted, the proposed
amendments will be applicable to a
particular transaction only if the
conditions specified in the class
exemption are met.
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WRITTEN COMMENTS
All interested persons are invited to
submit written comments or requests for
a hearing on the proposed exemption to
the address and within the time period
set forth above. All comments and
requests for a hearing will be made a
part of the record. Comments and
requests for a hearing should state the
reasons for the writer’s interest in the
proposed exemption. Comments
received will be available for public
inspection at the address set forth
above.
PROPOSED AMENDMENT
Under the authority of 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), the Department proposes to
amend the following class exemptions
as set forth below:
1. PTE 75–1 is amended by making
the following modifications:
(a) Part III, Paragraph (c)(1) is deleted
in its entirety and replaced with the
following: ‘‘(1) At the time of
acquisition, such securities are nonconvertible debt securities (i) subject to
no greater than moderate credit risk and
(ii) sufficiently liquid that such
securities can be sold at or near their
fair market value within a reasonably
short period of time.’’
(b) Part IV, Paragraph (a)(1), is deleted
in its entirety and replaced with the
following: ‘‘(1) At the time of
acquisition, such securities are nonconvertible debt securities (i) subject to
no greater than moderate credit risk and
(ii) sufficiently liquid that such
securities can be sold at or near their
fair market value within a reasonably
short period of time.’’
2. PTE 80–83 is amended by deleting
Paragraph I(C)(3) in its entirety and
replacing it with the following: ‘‘(3) The
issuer of such securities has been in
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continuous operation for not less than
three years, including the operations of
any predecessors, unless at the time of
acquisition, such securities are nonconvertible debt securities (i) subject to
no greater than moderate credit risk and
(ii) sufficiently liquid that such
securities can be sold at or near their
fair market value within a reasonably
short period of time.’’
3. PTE 81–8 is amended by deleting
Paragraph II(D) in its entirety and
replacing it with the following: ‘‘(D)
With respect to an acquisition or
holding of commercial paper (including
an acquisition by exchange) occurring
on or after the effective date of this
amendment, at the time of acquisition,
the commercial paper is (i) subject to a
minimal or low amount of credit risk
based on factors pertaining to credit
quality and the issuer’s ability to meet
its short-term financial obligations and
(ii) sufficiently liquid that such
securities can be sold at or near their
fair market value within a reasonably
short period of time.’’
4. PTE 95–60 is amended by deleting
Paragraph III(a)(2)(B) in its entirety and
replacing it with the following: ‘‘(B) the
certificates acquired by the general
account have the credit quality required
under the relevant Underwriter
Exemption at the time of such
acquisition.’’
5. PTE 97–41 is amended by deleting
Paragraph (II)(c)(2) in its entirety and
replacing it with the following: ‘‘(2)
such securities have the same coupon
rate and maturity, and at the time of
transfer, the same credit quality.’’
6. PTE 2006–16 is amended by
making the following modifications to
the definition of ‘‘Foreign Collateral’’ in
Section V(f):
(a) Paragraph V(f)(2) is deleted in its
entirety and replaced with the
following: ‘‘(2) foreign sovereign debt
securities that are (i) subject to a
minimal amount of credit risk, and (ii)
sufficiently liquid that such securities
can be sold at or near their fair market
value in the ordinary course of business
within seven calendar days;’’ and
(b) Paragraph V(f)(4) is deleted in its
entirety and replaced with the
following: ‘‘(4) irrevocable letters of
credit issued by a Foreign Bank, other
than the borrower or an affiliate thereof,
provided that, at the time the letters of
credit are issued, the Foreign Bank’s
ability to honor its commitments
PO 00000
Frm 00080
Fmt 4703
Sfmt 4703
37583
thereunder is subject to no greater than
moderate credit risk.’’
Lyssa Hall,
Director of Exemption Determinations,
Employee Benefits Security Administration,
U.S. Department of Labor.
[FR Doc. 2013–14790 Filed 6–20–13; 8:45 am]
BILLING CODE P
DEPARTMENT OF LABOR
Employment and Training
Administration
Request for Certification of
Compliance—Rural Industrialization
Loan and Grant Program
Employment and Training
Administration, Labor.
ACTION: Notice.
AGENCY:
The Employment and
Training Administration is issuing this
notice to announce the receipt of a
‘‘Certification of Non-Relocation and
Market and Capacity Information
Report’’ (Form 4279–2) for the
following:
SUMMARY:
Applicant/Location: Anderson Behavioral
Health, Inc. Marshville, North Carolina.
Principal Product/Purpose: The loan,
guarantee, or grant is for the construction of
a 13,000 sq. ft. administration building, six
residence cottages, water, waste, and road
infrastructure. It will also be used to
purchase furniture and equipment.
The NAICS industry code for this
enterprise is 623220 and comprises
establishments primarily engaged in
providing residential care and treatment for
patients with mental health and substance
abuse illnesses.
All interested parties may submit
comments in writing no later than July
5, 2013. Copies of adverse comments
received will be forwarded to the
applicant noted above.
ADDRESSES: Address all comments
concerning this notice to Anthony D.
Dais, U.S. Department of Labor,
Employment and Training
Administration, 200 Constitution
Avenue NW., Room S–4231,
Washington, DC 20210; or email
Dais.Anthony@dol.gov; or transmit via
fax (202)693–3015 (this is not a toll-free
number).
FOR FURTHER INFORMATION CONTACT:
Anthony D. Dais, at telephone number
(202)693–2784 (this is not a toll-free
number).
SUPPLEMENTARY INFORMATION: Section
188 of the Consolidated Farm and Rural
Development Act of 1972, as established
under 29 CFR Part 75, authorizes the
United States Department of Agriculture
to make or guarantee loans or grants to
DATES:
E:\FR\FM\21JNN1.SGM
21JNN1
Agencies
[Federal Register Volume 78, Number 120 (Friday, June 21, 2013)]
[Notices]
[Pages 37572-37583]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-14790]
=======================================================================
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
RIN 1210-ZA18
[Application Number: D-11681]
Proposed Amendments to Class Prohibited Transaction Exemptions To
Remove Credit Ratings Pursuant to the Dodd-Frank Wall Street Reform and
Consumer Protection Act
AGENCY: Employee Benefits Security Administration, U.S. Department of
Labor.
ACTION: Notice of Proposed Amendments to Certain Class Exemptions.
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SUMMARY: This document contains a notice of pendency before the
Department of Labor (the Department) of Proposed Amendments to
Prohibited Transaction Exemption (PTE) 75-1 (40 FR 50845, October 31,
1975, as amended by 71 FR 5883, February 3, 2006); PTE 80-83 (45 FR
73189, November 4, 1980); PTE 81-8 (46 FR 7511, January 23, 1981, as
amended by 50 FR 14043, April 9, 1985); PTE 95-60 (60 FR 35925, July
12, 1995); PTE 97-41 (62 FR 42830, August 8, 1997); and PTE 2006-16 (71
FR 63786, October 31, 2006). The proposed amendments relate to the use
of credit ratings as standards of credit-worthiness
[[Page 37573]]
in such class exemptions. Section 939A of the Dodd-Frank Wall Street
Reform and Consumer Protection Act (Dodd-Frank) requires the Department
to remove any references to or requirements of reliance on credit
ratings from its class exemptions and to substitute such standards of
credit-worthiness as the Department determines to be appropriate. If
adopted, the proposed amendments would affect participants and
beneficiaries of employee benefit plans, fiduciaries of such plans, and
the financial institutions that engage in transactions with, or provide
services or products to, the plans.
DATES: Written comments and requests for a public hearing should be
received by the Department on or before August 20, 2013. If adopted,
the amendments would be effective 60 days after the date of publication
of the final amendments with respect to PTE 75-1; PTE 80-83; PTE 81-8;
PTE 95-60; PTE 97-41; and PTE 2006-16.
ADDRESSES: All written comments and requests for a public hearing
concerning the proposed amendments should be sent to the Office of
Exemption Determinations via email to: e-OED@dol.gov, or via the
Federal eRulemaking Portal: https://www.regulations.gov at Docket ID
number: EBSA-2012-0013 (follow the instructions for submitting
comments). Interested persons may also submit written comments and
hearing requests by letter addressed to: Employee Benefits Security
Administration, Room N-5700, (Attention: Application No. D-11681), U.S.
Department of Labor, 200 Constitution Avenue NW., Washington, DC 20210,
or by fax to (202) 219-0204. All comments and hearing requests must be
received by the end of the comment period. The comments received will
be available for public inspection in the Public Disclosure Room of the
Employee Benefits Security Administration, Room N-1513, U.S. Department
of Labor, 200 Constitution Avenue NW., Washington, DC 20210. Comments
and hearing requests will also be available online at
www.regulations.gov, at Docket ID number: EBSA-2012-0013 and
www.dol.gov/ebsa, at no charge. All comments will be made available to
the public.
Warning: Do not include any personally identifiable information
(such as name, address, or other contact information) or confidential
business information that you do not want to be publicly disclosed. All
comments may be posted on the Internet and can be retrieved by most
Internet search engines.
FOR FURTHER INFORMATION CONTACT: Warren M. Blinder, Office of Exemption
Determinations, Employee Benefits Security Administration, U.S.
Department of Labor, Room N-5700, 200 Constitution Avenue NW.,
Washington, DC 20210, (202) 693-8553 (this is not a toll-free number).
SUPPLEMENTARY INFORMATION: Notice is hereby given of the pendency
before the Department of proposed amendments to: PTE 75-1, Exemptions
From Prohibitions Respecting Certain Classes of Transactions Involving
Employee Benefit Plans and Certain Broker-Dealers, Reporting Dealers
and Banks; PTE 80-83, Class Exemption for Certain Transactions
Involving Purchases of Securities Where Issuer May Use Proceeds to
Reduce or Retire Indebtedness to Parties in Interest; PTE 81-8, Class
Exemption Covering Certain Short-term Investments; PTE 95-60, Class
Exemption for Certain Transactions Involving Insurance Company General
Accounts; PTE 97-41, Class Exemption for Collective Investment Fund
Conversion Transactions; and PTE 2006-16, Class Exemption To Permit
Certain Loans of Securities by Employee Benefit Plans (collectively,
the Class Exemptions). The Class Exemptions provide relief from certain
of the restrictions described in section 406 of the Employee Retirement
Income Security Act of 1974 (ERISA), and the taxes imposed by sections
4975(a) and (b) of the Code, by reason of a parallel provision
described in section 4975(c)(1)(A) through (F) of the Code, provided
that the conditions of the relevant exemption have been met. The
Department is proposing to amend each of the Class Exemptions on its
own motion, 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
part 2570, subpart B (55 FR 32836, August 10, 1990).\1\
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\1\ Section 102 of the Reorganization Plan No. 4 of 1978, 5
U.S.C. App. 1 (1996), generally transferred the authority of the
Secretary of Treasury to issue administrative exemptions under
section 4975(c)(2) of the Code to the Secretary of Labor. For
purposes of this exemption, references to specific provisions of
Title I of ERISA, unless otherwise specified, refer also to the
corresponding provisions of the Code.
---------------------------------------------------------------------------
A. Background
Dodd-Frank,\2\ enacted in the wake of the financial crisis of 2008,
was intended to, among other things, promote the financial stability of
the United States by improving accountability and transparency in the
financial system. Title IX, Subtitle C, of Dodd-Frank includes
provisions regarding statutory and regulatory references to credit
ratings in rules and regulations promulgated by Federal agencies,
including the Department, which are designed ``[t]o reduce the reliance
on ratings.'' \3\
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\2\ See Public Law 111-203, 124 Stat. 1376 (2010).
\3\ See Joint Explanatory Statement of the Committee of
Conference, Conference Committee Report No. 111-517, to accompany
H.R. 4173, 864-879, 870 (Jun. 29, 2010).
---------------------------------------------------------------------------
Congress recognized the ``systemic importance of credit ratings and
the reliance placed on credit ratings by individual and institutional
investors and financial regulators.'' \4\ Because credit rating
agencies perform evaluative and analytical services on behalf of
clients, much the same as auditors, securities analysts, and investment
bankers do, Congress noted that ``the activities of credit rating
agencies are fundamentally commercial in character and should be
subject to the same standards of liability and oversight.'' \5\
Furthermore, Congress observed that, in the recent financial crisis
precipitating Dodd-Frank, credit ratings of certain financial products
proved to be inaccurate, which ``contributed significantly to the
mismanagement of risks by financial institutions and investors, which
in turn adversely impacted the health of the economy in the United
States and around the world.'' \6\ As a result, Congress determined
that ``[s]uch inaccuracy necessitates increased accountability on the
part of credit rating agencies.'' \7\
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\4\ Public Law 111-203, Section 931(1).
\5\ Public Law 111-203, Section 931(3).
\6\ Public Law 111-203, Section 931(5).
\7\ Id.
---------------------------------------------------------------------------
Specifically, in section 939A of Dodd-Frank, Congress requires that
the Department ``review any regulation issued by [the Department] that
requires the use of an assessment of the credit-worthiness of a
security or money market instrument and any references to or
requirements in such regulations regarding credit ratings.'' \8\ Once
the Department has completed that review, the statute provides that the
Department ``remove any reference to or requirement of reliance on
credit ratings, and to substitute in such regulations such standard of
credit-worthiness'' as the Department determines to be appropriate.\9\
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\8\ Public Law 111-203, Section 939A(a)(1)-(2).
\9\ Public Law 111-203, Section 939A(b).
---------------------------------------------------------------------------
Based on the Department's consideration of section 939A of Dodd-
Frank, the Department believes that the Class Exemptions are
``regulations'' for purposes of section 939A and, therefore,
[[Page 37574]]
are subject to its requirement to remove references to credit ratings.
The process for proposing and granting class exemptions is similar to
the regulatory process, and class exemptions generally apply to broad
classes of transactions and/or parties.
Accordingly, the Department has conducted a review of its class
exemptions as required by section 939A(a) of Dodd-Frank and identified
the Class Exemptions as those including references to, or requiring
reliance on, credit ratings. In this regard, in each of the Class
Exemptions, the Department has conditioned relief on the financial
instruments which are the subject of such exemptions, or an issuer of
such a financial instrument, receiving a specified credit rating,
issued by a credit rating agency. Credit ratings have been considered
useful for fiduciaries of employee benefit plans in evaluating the
credit quality of a particular financial instrument or issuer, as plan
fiduciaries frequently do not possess the expertise or resources to
engage in an analysis of the credit quality of a financial instrument
or its issuer. This credit rating condition is one component of the
safeguards established in each Class Exemption to protect the interests
of plans, and their participants and beneficiaries, which enter into
transactions covered by the Class Exemptions.
The credit ratings requirements found in the Class Exemptions range
from a rating in one of the highest four generic categories of credit
ratings to a rating in one of the highest two categories of credit
ratings, from a nationally recognized statistical rating organization
(NRSRO). In this regard, PTE 75-1 and PTE 80-83 require credit ratings
in one of the four highest rating categories for non-convertible debt
securities. PTE 2006-16 requires a credit rating of ``investment
grade'' \10\ or better for certain issuers of irrevocable letters of
credit and a credit rating in one of the two highest rating categories
for collateral which consists of foreign sovereign debt securities. PTE
81-8 utilizes a credit rating in one of the three highest rating
categories for commercial paper. PTE 95-60 and PTE 97-41 do not require
specific credit ratings, but instead refer generally to the credit
ratings of certain financial instruments. Pursuant to Dodd-Frank, the
Department is proposing herein to amend the Class Exemptions listed
above to remove such references to credit ratings, and where
applicable, substitute in their place alternative methods for
determining credit quality which take into account the purpose and
characteristics of each such Class Exemption.
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\10\ The Department understands that ``investment grade'' is the
common term for a credit rating in the highest four rating
categories issued by a credit rating agency.
---------------------------------------------------------------------------
B. Securities and Exchange Commission (SEC) Alternatives to Credit
Ratings
In proposing these amendments to the Class Exemptions, the
Department has considered alternatives to credit ratings set forth in
three recent SEC releases (the SEC Releases). The first is a recent
proposal (the Investment Company Proposal) released by the SEC in
response to section 939A and section 939(c) of Dodd-Frank that relates
to the use of credit ratings in rules and forms under the Investment
Company Act of 1940 (the Investment Company Act).\11\ The second is the
adoption of a new rule 6a-5 implementing section 939(c) of Dodd-
Frank.\12\ Rule 6a-5 was initially proposed in the Investment Company
Proposal and relates to the use of credit ratings in rules under the
Investment Company Act (the Investment Company Final Rule, and together
with the Investment Company Proposal, the Investment Company Releases).
The third is the adoption of rule amendments (the 2009 NRSRO Rule
Adopting Release) released by the SEC in 2009 on its own initiative
regarding references to credit ratings of nationally recognized
statistical rating organizations in certain rules under the Securities
Exchange Act of 1934 (the Exchange Act) and the Investment Company
Act.\13\
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\11\ See References to Credit Ratings in Certain Investment
Company Act Rules and Forms, Release Nos. 33-9193, IC-29592; 76 FR
12896 (March 9, 2011).
\12\ See Purchase of Certain Debt Securities by Business and
Industrial Development Companies Relying on an Investment Company
Act Exemption, Release No. IC-30268; 77 FR 70117 (November 23,
2012).
\13\ See References to Ratings of Nationally Recognized
Statistical Rating Organizations, Release Nos. 34-60789, IC-28939;
74 FR 52358 (October 9, 2009).
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In the Investment Company Proposal, the SEC proposed alternatives
to credit ratings in amendments to rules 2a-7, 5b-3, and in the
Investment Company Final Rule, the SEC adopted an alternative to credit
ratings in new rule 6a-5, each such rule under the Investment Company
Act. In the 2009 NRSRO Rule Adopting Release, the SEC adopted an
alternative to credit ratings in amendments to rule 10f-3 under the
Investment Company Act. Among other provisions, the Investment Company
Act regulates conflicts of interest in investment companies, requiring
disclosure of material details about an investment company, and placing
restrictions on certain mutual fund activities. The Department believes
that the alternatives described in the SEC Releases referenced above
are instructive in developing appropriate alternatives for credit
ratings referenced in the Class Exemptions, in part because of the
similar manner in which the SEC's rules and the Class Exemptions make
use of such ratings, and also because of the similar standards of
credit quality currently required in the rules and the Class
Exemptions, or in the case of new rule 6a-5 and final rule 10f-3,
required prior to their adoption.
In this regard, the Department considered new rule 6a-5 and final
rule 10f-3 for purposes of proposing to amend PTE 75-1 and PTE 80-83,
and considered new rule 6a-5 with respect to its proposed amendment of
PTE 2006-16, in developing an alternative to a credit rating in one of
the highest four rating categories, or ``investment grade.'' The
Department also considered final rule 10f-3 and the proposed amendment
to rule 2a-7 for purposes of proposing to amend PTE 81-8, in developing
an alternative to a credit rating in one of the highest three rating
categories. Finally, the Department also considered the proposed
amendments to rules 2a-7 and 5b-3 for purposes of proposing to amend
PTE 2006-16, in developing an alternative to a credit rating in one of
the highest two rating categories.
1. New Rule 6a-5 and Final Rule 10f-3: Standard for Highest Four
Ratings Categories or ``Investment Grade''; Standard for Highest Three
Ratings Categories
Section 6(a)(5) of the Investment Company Act provides an exemption
from certain of its provisions for business and industrial development
companies (BIDCOs).\14\ Under section 6(a)(5)(A)(iv) prior to its
amendment by Dodd-Frank, BIDCOs seeking to rely on the exemption were
limited in their purchases of securities issued by investment companies
and private funds to:
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\14\ See 15 U.S.C. 80a-6(a)(5)(A). BIDCOs are companies that
operate under state statute that provide direct investment and loan
financing, as well as managerial assistance to state and local
enterprises. Because BIDCOs invest in securities, they frequently
meet the definition of ``investment compan[ies]'' under the
Investment Company Act and would otherwise be required to register
and be regulated under the Act in the absence of an exemption.
(I) any debt security that is rated investment grade by not less
than 1 nationally recognized statistical rating organization; or
(II) any security issued by a registered open-end investment company
that is required by its investment policies to
[[Page 37575]]
invest not less than 65 percent of its total assets in securities
described in subclause (I) or securities that are determined by such
registered open-end investment company to be comparable in quality
---------------------------------------------------------------------------
to securities described in subclause (I).
The Department understands that an ``investment grade'' rating is a
common term for a rating in one of the highest four rating categories
by a credit rating agency.
Section 939(c) of Dodd-Frank amended section 6(a)(5)(A)(iv) of the
Investment Company Act, effective July 21, 2012, to eliminate the
reference to ``investment grade.'' As amended, the section references
debt securities that meet ``such standards of credit-worthiness as the
Commission shall adopt.'' Rule 6a-5 sets forth a credit-worthiness
standard to replace the credit rating reference to ``investment grade''
that Dodd-Frank eliminated from section 6(a)(5)(A)(iv).
Under rule 6a-5, the requirements for creditworthiness under
section 6(a)(5)(A)(iv)(I) would be satisfied if the board of directors
or members of the BIDCO (or a delegate thereof) determines that the
debt security is:
(a) subject to no greater than moderate credit risk and (b)
sufficiently liquid that the security can be sold at or near its
carrying value within a reasonably short period of time.
The determination is made at the time of the purchase.\15\
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\15\ For purposes of the amendments to the Class Exemptions, the
Department has interpreted carrying value as equivalent to fair
market value.
---------------------------------------------------------------------------
In the Investment Company Final Rule, the SEC stated that this
standard is designed to limit purchases of securities to those of
``sufficiently high credit quality that they are likely to maintain a
fairly stable market value and may be liquidated easily . . ..'' The
SEC provided the following explanation of moderate credit risk:
Debt securities (or their issuers) subject to a moderate level
of credit risk would demonstrate at least average credit-worthiness
relative to other similar debt issues (or issuers of similar debt).
Moderate credit risk would denote current low expectations of
default risk associated with the security, with an adequate capacity
for payment by the issuer of principal and interest.
The SEC noted further that in making such determinations, ``a BIDCO's
board of directors or members (or its or their delegate) can also
consider credit quality reports prepared by outside sources, including
NRSRO ratings, that the BIDCO board or members conclude are credible
and reliable for this purpose.''
In the Investment Company Final Rule, the SEC noted that the
standard of credit-worthiness in rule 6a-5 is similar to that
previously adopted for rule 10f-3 under the Investment Company Act,
amended effective November 12, 2009, to remove references to NRSRO
ratings. Section 10(f) of the Investment Company Act prohibits a
registered investment company from knowingly purchasing or otherwise
acquiring, during the existence of any underwriting or selling
syndicate, any security for which a principal underwriter of the
security has certain relationships with the registered investment
company, such as an officer, director, or investment adviser. Rule 10f-
3 contains a definition of ``eligible municipal securities'' with
respect to securities that may be purchased during an affiliated
underwriting under certain conditions. Prior to the amendment of the
rule, such eligible municipal securities were required to have:
an investment grade rating from at least one NRSRO; provided, that
if the issuer of the municipal securities, or the entity supplying
the revenues or other payments from which the issue is to be paid,
has been in continuous operation for less than three years,
including the operation of any predecessors, the securities shall
have received one of the three highest ratings from an NRSRO.
As amended, the definition of eligible municipal securities in rule
10f-3 requires that the securities:
are sufficiently liquid that they can be sold at or near their
carrying value within a reasonably short period of time and either:
i. Are subject to no greater than moderate credit risk; or ii. If
the issuer of the municipal securities, or the entity supplying the
revenues or other payments from which the issue is to be paid, has
been in continuous operation for less than three years, including
the operation of any predecessors, the securities are subject to a
minimal or low amount of credit risk.
In the 2009 NRSRO Rule Adopting Release, the SEC noted that
securities with a minimal or low credit risk ``would be less
susceptible to default risk (i.e., have a low risk of default) than
those with moderate credit risk. These securities (or their issuers)
also would demonstrate a strong capacity for principal and interest
payments and present above average creditworthiness relative to other
municipal or tax exempt issues (or issuers).''
Thus, in both new rule 6a-5 and final rule 10f-3, the SEC set forth
a standard to replace ``investment grade'' that requires that the
security be:
Sufficiently liquid that it can be sold at or near its
carrying value within a reasonably short period of time, and
subject to no greater than moderate credit risk.
Additionally, with respect to a requirement that a security be
rated in one of the three highest rating categories, the SEC in final
rule 10f-3 created a standard of credit-worthiness that would require
the security to be:
Sufficiently liquid that it can be sold at or near its
carrying value within a reasonably short period of time, and
subject to a minimal or low amount of credit risk.
The Department likewise proposes herein to adopt similar standards
to replace references in the Class Exemptions to the highest four
rating categories or ``investment grade,'' and the highest three rating
categories.
2. Proposed Rule 2a-7: Standard for Highest Two Rating Categories
Investment Company Act rule 2a-7, which governs the operation of
money market funds, exempts money market funds from certain of its
provisions regarding the calculation of current net asset value per
share.\16\ A fund that relies on rule 2a-7 may use special valuation
and pricing procedures that help the fund maintain a stable net asset
value per share (typically $1.00). To facilitate maintaining a stable
net asset value, among other conditions, rule 2a-7 limits money market
funds to investing in debt obligations that are at the time of
acquisition, ``eligible securities,'' meaning they have:
\16\ 17 CFR 270.2a-7.
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received a rating from the Requisite NRSROs \17\ in one of the two
highest short-term rating categories.\18\
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\17\ ``Requisite NRSROs'' are defined as any two nationally
recognized statistical rating organizations that have issued a
rating with respect to a security or class of debt obligations of an
issuer or, if only one such organization has issued a rating with
respect to such security or class of debt obligations of an issuer
at the time the investment company acquires the security, that
nationally recognized statistical rating organization. A Requisite
NRSRO must also be a ``Designated NRSRO,'' which is generally any
one of at least four nationally recognized statistical rating
organizations that a money market fund's board of directors has
designated for use, and determines at least annually issues credit
ratings that are sufficiently reliable for the fund to use in
determining whether a security is an eligible security. After
enactment of Dodd-Frank, money market funds received SEC staff
assurances that the staff would not recommend enforcement action if
a money market fund board did not designate NRSROs (and did not make
certain related disclosures) before the SEC made any modifications
to rule 2a-7 as mandated by section 939A of Dodd-Frank. See
Investment Company Institute, SEC No-Action Letter (Aug. 19, 2010).
\18\ Eligible securities also must have a remaining maturity of
397 calendar days or less. Unrated securities of comparable credit
quality can also meet the definition of ``eligible security.''
Rule 2a-7 further requires that securities purchased by money
market
[[Page 37576]]
funds are those ``that the fund's board of directors determines present
minimal credit risks (which determination must be based on factors
pertaining to credit quality in addition to any rating assigned to such
securities by a Designated NRSRO).'' \19\
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\19\ Under rule 2a-7(a), an eligible security is generally
either a ``first tier security'' or a ``second tier security.''
First tier securities are defined as (a) securities possessing a
short-term rating from the requisite NRSROs in the highest short-
term rating category for debt obligations, (b) comparable unrated
securities, (c) securities issued by money market funds, or (d)
government securities, as defined in the Investment Company Act.
Second tier securities, in turn, are defined as any eligible
securities that are not first tier securities. The Department has
determined not to adopt the ``first tier'' and ``second tier''
labels utilized in Rule 2a-7 to describe securities rated in the
highest and second highest rating categories, respectively, because
such labels are unnecessary in the context of the Class Exemptions.
---------------------------------------------------------------------------
In order to implement Section 939A of Dodd-Frank, the SEC proposed
to amend rule 2a-7 of the Investment Company Act to remove the
references to credit ratings discussed above and replace them with
alternative standards of credit worthiness that are designed to achieve
the same degree of credit quality as the ratings requirement currently
in use. Under the proposed amendment, the requirement of rule 2a-7
regarding minimal credit risks would be moved into the definition of
``eligible security.'' Thus, an eligible security would be a security
that:
the fund's board of directors determines presents minimal credit
risks (which determination must be based on factors pertaining to
credit quality and the issuer's ability to meet its short-term
financial obligations).
In the Investment Company Proposal, the SEC explained that an issuer
that would satisfy the credit-worthiness requirement associated with an
eligible security should have ``a very strong ability to repay its
short-term debt obligations, and a very low vulnerability to default.''
Furthermore, in the Investment Company Proposal, the SEC noted that
money market fund boards of directors ``would still be able to consider
quality determinations prepared by outside sources, including NRSRO
ratings, that fund advisers conclude are credible and reliable, in
making credit risk determinations.'' However, the SEC observed further
that fund advisers would be expected ``to understand the method for
determining the rating and make an independent judgment of credit
risks, and to consider an outside source's record with respect to
evaluating the types of securities in which the fund invests.''
Thus, the SEC proposed to amend the requirement in rule 2a-7 that
an ``eligible security'' has received a rating from certain NRSROs in
one of the highest two rating categories with a standard of credit-
worthiness that would require that the security:
Present minimal credit risks based on factors pertaining
to credit quality and the issuer's ability to meet its short-term
financial obligations.
The Department likewise proposes herein to adopt a similar standard in
order to replace references in the Class Exemptions to credit ratings
in one of the highest two rating categories.
3. Proposed Rule 5b-3: Standard for Highest Two Rating Categories
Rule 5b-3 under the Investment Company Act permits funds to treat
the acquisition of a repurchase agreement as an acquisition of
securities collateralizing the repurchase agreement in determining
whether the fund is in compliance with certain provisions of the
Investment Company Act, if the obligation of the seller to repurchase
the securities from the fund is ``collateralized fully.'' \20\ In order
for a repurchase agreement to be collateralized fully under rule 5b-
3(c)(1), among other things, the collateral for the repurchase
agreement must consist entirely of:
---------------------------------------------------------------------------
\20\ The SEC explains in the Investment Company Proposal that a
repurchase agreement functions economically as ``a loan from the
fund to the counterparty, in which the securities purchased by the
fund serve as collateral for the loan and are placed in the
possession or under the control of the fund's custodian during the
term of the agreement.'' Accordingly, the SEC notes that ``a fund
investing in a repurchase agreement looks to the value and liquidity
of the securities collateralizing the repurchase agreement rather
than the credit quality of the counterparty for satisfaction of the
repurchase agreement.''
(A) cash items; (B) government securities; (C) securities that
at the time the repurchase agreement is entered into are rated in
the highest rating category by the [r]equisite NRSROs; or (D)
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certain comparable unrated securities.
In response to section 939A of Dodd-Frank, the SEC has proposed to
eliminate the credit ratings requirement in rule 5b-3(c)(1) and set
forth a new standard of credit-worthiness applicable to collateral
other than cash or government securities. Under the proposed amendment
to rule 5b-3, the requirements for credit-worthiness under rule 5b-
3(c)(1) would be satisfied if the fund's board of directors (or its
delegate) determines that the purchased securities are:
(i) Issued by an issuer that has the highest capacity to meet
its financial obligations; and
(ii) sufficiently liquid that they can be sold at approximately
their carrying value in the ordinary course of business within seven
calendar days.
The determination is made at the time the repurchase agreement is
entered into.
In the Investment Company Proposal, the SEC stated that it designed
``the proposed amendments to retain a degree of credit quality similar
to that under the current rule.'' The SEC provided the following
description of an issuer with the ``highest capacity'' to meet its
financial obligations:
[an issuer with] an exceptionally strong capacity to repay its short
or long-term debt obligations, as appropriate, the lowest
expectation of default, and a capacity for repayment of its
financial commitments that is the least susceptible to adverse
effects of changes in circumstances.
The SEC further noted that in making such determinations, ``fund boards
(or their delegates) would still be able to consider analysis provided
by outside sources, including credit agency ratings, that they conclude
are credible and reliable, for purposes of making these credit quality
evaluations.''
The SEC observed in the Investment Company Proposal that,
securities trading in a secondary market at the time of the acquisition
of the repurchase agreement would satisfy the proposed liquidity
standard.
In the Investment Company Proposal, the SEC explained that the
proposed amendments were designed:
to be clear enough to permit a fund board or fund investment adviser
to make a determination regarding credit quality and liquidity that
would achieve the same objectives that the credit rating requirement
was designed to achieve, i.e., to limit collateral securities to
those that are likely to retain a fairly stable market value and
that, under ordinary circumstances, the fund would be able to
liquidate quickly in the event of a counterparty default.
Thus, in the proposed amendment to rule 5b-3, the SEC proposed a
new standard of credit-worthiness to replace the reference to a credit
rating in the highest rating category that would require a security to
be:
Issued by an issuer that has the highest capacity to meet
its financial obligations, and
sufficiently liquid that it can be sold at approximately
its carrying value in the ordinary course of business within seven
calendar days.
The Department proposes herein to make use of certain portions of
the standard set forth above, including that pertaining to the
liquidity of the securities, to replace references in the
[[Page 37577]]
Class Exemption to a credit rating in the highest rating category.
C. Class Exemptions
These proposed amendments to the Class Exemptions are designed to
implement the mandate of section 939A(b) of Dodd-Frank to ``remove any
reference to or requirement of reliance on credit ratings and to
substitute in such regulations such standard of credit-worthiness as
each respective agency shall determine as appropriate for such
regulations.'' In this regard, the Department has designed the proposed
amendments to retain the same degree of credit quality required under
the Class Exemptions prior to the amendments, but without referencing
or relying on credit ratings. The Department does not consider the
changes proposed herein to be substantive in nature. Thus, for example,
although the proposed amendment to PTE 75-1, Part III and Part IV, no
longer refers to securities rated in one of the four highest rating
categories, it is meant to capture securities that should generally
qualify for that designation without relying on third-party credit
ratings.
The Department recognizes that, where a fiduciary has neither the
expertise nor the time to make an informed determination of credit
quality, it may be appropriate as a matter of prudence for such
fiduciary to seek out the advice and counsel of third parties.
Furthermore, it should be noted that, while credit ratings may no
longer serve as a basis, or threshold, of credit quality, section 939A
of Dodd-Frank does not prohibit a fiduciary from using credit ratings
as an element, or data point, in that analysis.
The Department notes that, in conducting an analysis of the credit
quality of a particular financial instrument or person, a fiduciary
should consider a variety of factors that may be applicable in making
such determination. The following factors, derived from a recent SEC
release regarding proposed changes to certain rules under the
Securities Exchange Act of 1934 (the Exchange Act Proposal), may be
considered relevant in assessing credit risk: \21\
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\21\ The factors listed below were published in the SEC's
proposing release entitled, Removal of Certain References to Credit
Ratings Under the Securities Exchange Act of 1934, Release No. 34-
64352; 76 FR 26550, at 26552-26553 (May 6, 2011). While such factors
derive from the SEC's proposed amendment to Rule 15c3-1, which
requires a broker-dealer to determine whether a security satisfies a
``minimal amount of credit risk,'' the Department believes that they
may, where appropriate, be helpful in connection with a fiduciary's
determination of credit quality under the amendments proposed
herein.
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Credit spreads (i.e., the amount of credit risk a position
in commercial paper and/or nonconvertible debt is subject to, based on
the spread between the security's yield and the yield of Treasury or
other securities, or based on credit default swap spreads that
reference the security);
Securities-related research (i.e., to what extent
providers of securities-related research believe the issuer of the
security will be able to meet its financial commitments, generally, or
specifically, with respect to securities held);
Internal or external credit risk assessments (i.e.,
whether credit assessments developed internally by a broker-dealer or
externally by a credit rating agency, express a view as to the credit
risk associated with a particular security);
Default statistics (i.e., whether providers of credit
information relating to securities express a view that specific
securities have a probability of default consistent with other
securities with a determined amount of credit risk);
Inclusion on an index (i.e., whether a security, or issuer
of the security, is included as a component of a recognized index of
instruments that are subject to a determined amount of credit risk);
Priorities and enhancements (i.e., the extent to which a
security is covered by credit enhancements, such as
overcollateralization and reserve accounts, or has priority under
applicable bankruptcy or creditors' rights provisions);
Price, yield and/or volume (i.e., whether the price and
yield of a security or a credit default swap that references the
security are consistent with other securities that the broker-dealer
has determined are subject to a certain amount of credit risk and
whether the price resulted from active trading); and
Asset class-specific factors (e.g., in the case of
structured finance products, the quality of the underlying assets).
The Department observes that the SEC's list above was not meant to
be exhaustive or mutually exclusive, and that the range and type of
specific factors considered would vary depending on the particular
securities that are reviewed.
The Department notes further that in making a determination of the
relative credit quality of a particular financial instrument or entity,
as well as in assigning a relative value to a third party's advice or a
credit rating, a plan fiduciary would continue to be subject to section
404 of ERISA. Moreover, such fiduciary would remain subject to the
other conditions of relief as set forth in the Class Exemptions,
including, but not limited to, any requirements regarding the
maintenance of records which are necessary to enable the persons
described therein to determine whether the conditions of such Class
Exemption have been met.
1. PTE 75-1
PTE 75-1, granted soon after the enactment of ERISA, provides
relief for certain transactions that were customary at the time between
plans and broker-dealers or banks, including a plan's acquisition of
securities from a member of an underwriting syndicate of which a plan
fiduciary or its affiliate is a member, and an employee benefit plan's
purchase or sale of securities for which the plan's fiduciary is a
``market maker,'' to or from such fiduciary or its affiliate.
Specifically, PTE 75-1, Part III, provides relief from the
restrictions of section 406 of ERISA and the taxes imposed by section
4975(a) and (b) of the Code, by reason of section 4975(c)(1) of the
Code, for an employee benefit plan's acquisition of securities during
the existence of an underwriting syndicate, from a person other than a
fiduciary with respect to the plan, where a fiduciary of such employee
benefit plan is a member of the underwriting syndicate. Section III(a)
provides further that no fiduciary who is involved in any way in
causing the plan to make such purchase may be a manager of such
underwriting or selling syndicate. In this regard, section (a) defines
a manager as any member of an underwriting or selling syndicate who,
either alone or together with other members of the syndicate, is
authorized to act on behalf of the members of the syndicate in
connection with the sale and distribution of the securities being
offered or who receives compensation from the members of the syndicate
for its services as a manager of the syndicate.
Part IV of PTE 75-1 provides relief from the restrictions of
section 406 of ERISA and the taxes imposed by section 4975(a) and (b)
of the Code, by reason of section 4975(c)(1) of the Code, for a plan's
purchase or sale of securities from or to a ``market maker'' with
respect to such security who is also a fiduciary with respect to the
plan or an affiliate of such fiduciary. Part IV provides further that
at least one person other than the fiduciary must be a market-maker in
such securities, and the transaction must be executed at a net price to
the plan for the number of shares or other units to be purchased or
[[Page 37578]]
sold in the transaction which is more favorable to the plan than that
which such fiduciary, acting in good faith, reasonably believes to be
available at the time of such transaction from all other market makers
in such securities.
The relief afforded in Part III and Part IV of PTE 75-1 is also
conditioned upon, among other things, the issuer of the securities
having been in continuous operation for not less than three years,
including the operations of any predecessors. However, several
exceptions to this condition exist with respect to each exemption,
including an exception for securities that are ``non-convertible debt
securities rated in one of the four highest rating categories by at
least one nationally recognized statistical rating organization.''
The condition requiring the issuer of securities in an underwriting
to have been in continuous operation for at least three years bolsters
the quality of the underwritten securities, by ensuring that the issuer
is an established entity that has been operating as a business for a
continuous period of time. Securities issued by such an issuer should
be more predictable in terms of price and trading volume stability than
securities issued by unproven entities with shorter operating
histories. Ostensibly, debt securities rated as investment grade or
higher, by an unrelated third party in the business of evaluating
credit quality, possess attributes of credit quality that provide more
predictability in terms of price, volatility, and ultimate payment of
principal. Thus, the Department is cognizant that any substitute for
credit ratings must provide the same level of protection for plans
entering into the transactions.
The Department is proposing to replace the references to credit
ratings in Part III and Part IV of PTE 75-1 with the requirement that,
``[a]t the time of acquisition, such securities are non-convertible
debt securities (i) subject to no greater than moderate credit risk and
(ii) sufficiently liquid that such securities can be sold at or near
their fair market value within a reasonably short period of time.''
Thus, as amended, condition (c)(1) of Part III and condition (a)(1) of
Part IV, of PTE 75-1, would require securities to be issued by a person
that has been in continuous operation for not less than three years,
including the operations of any predecessors, unless, among other
exceptions, the fiduciary directing the plan in such transaction has
made a determination that, at the time they are acquired, such
securities satisfy the new standard described above.
For purposes of this amendment, debt securities subject to a
moderate level of credit risk should possess at least average credit-
worthiness relative to other similar debt issues. Moderate credit risk
would denote current low expectations of default risk, with an adequate
capacity for payment of principal and interest.
The Department views the new proposed standard as reflecting the
same level of credit quality as required prior to this amendment. The
alternative standard described above is modeled on the SEC's new rule
6a-5 and final rule 10f-3 of the Investment Company Act. New rule 6a-5
and one element of the final amendments to rule 10f-3 each set forth a
standard that replaced a reference to an ``investment grade'' rating,
which the Department understands is the same as a reference to one of
the four highest rating categories issued by at least one nationally
recognized statistical rating organization. Furthermore, because PTE
75-1, Part III, and final rule 10f-3 involve the acquisition of
securities in an underwriting where there is a relationship between the
acquiring fund or entity and a member of the underwriting syndicate, it
is relevant that the standard of credit quality required under each
rule is similar.
The proposed standard is also appropriate for PTE 75-1, because it
addresses concerns that an acquirer of securities might be harmed by a
purchase of illiquid securities. In this regard, the proposed standard
preserves the purpose of the original condition in paragraphs (c)(1) of
Part III and (a)(1) of Part IV of PTE 75-1, by restricting fiduciaries'
acquisitions to purchases of securities of sufficiently high credit
quality. As stated above, in making these determinations, a fiduciary
would not be precluded from considering credit quality reports prepared
by outside sources, including credit ratings prepared by credit rating
agencies, that they conclude are credible and reliable for this
purpose.
2. PTE 80-83
PTE 80-83 generally provides relief for the purchase or acquisition
in a public offering of securities by a fiduciary, on behalf of an
employee benefit plan, solely because the proceeds from the sale may be
used by the issuer of the securities to retire or reduce indebtedness
owed to a party in interest with respect to the plan. Part C of the
exemption provides relief from the restrictions of sections
406(a)(1)(A) through (D) and 406(b)(1) and (2) of ERISA and the taxes
imposed by reason of section 4975(c)(1)(A) through (E) of the Code, for
the purchase or acquisition in a public offering of securities, by a
fiduciary which is a bank or affiliate thereof, on behalf of a plan
solely because the proceeds of the sale may be used by the issuer of
the securities to retire or reduce indebtedness owed to such fiduciary
or an affiliate thereof. In the event that such fiduciary of the plan
``knows'' that the proceeds of the issue will be used in whole or in
part by the issuer of the securities to reduce or retire indebtedness
owed to such fiduciary or affiliate thereof, the relief in Part C is
conditioned upon, among other things, the issuer of such securities
having been in continuous operation for not less than three years,
including the operations of any predecessors, unless such securities
are non-convertible debt securities rated in one of the four highest
rating categories by at least one nationally recognized statistical
rating organization.
As in PTE 75-1, Part III and Part IV, the three years continuous
operation condition bolsters the quality of the underwritten securities
by ensuring that the issuer is an established entity that has been
operating as a business for a continuous period of time. In crafting an
alternative to credit ratings to be used as an exception to the three
years continuous operation condition, the Department has likewise
employed an alternative that provides similar protection for plans
entering into the transactions.
The Department is proposing to amend condition 3 of Part C of PTE
80-83 to replace the reference to credit ratings with a requirement
that, ``at the time of acquisition, such securities are non-convertible
debt securities (i) subject to no greater than moderate credit risk and
(ii) sufficiently liquid that such securities can be sold at or near
their fair market value within a reasonably short period of time.'' For
purposes of this amendment, debt securities subject to a moderate level
of credit risk should possess at least average credit-worthiness
relative to other similar debt issues. Moderate credit risk would
denote current low expectations of default risk, with an adequate
capacity for payment of principal and interest.
The Department views the new proposed standard as reflecting the
same level of credit quality as required prior to this amendment. It is
appropriate that the proposed alternative is modeled on the SEC's new
rule 6a-5 and final rule 10f-3 of the Investment Company Act. New rule
6a-5 and one element of the final amendments to rule 10f-3 each
supplied a standard that replaced the reference to an ``investment
grade'' rating, which the Department
[[Page 37579]]
understands is the same as a reference to a rating in one of the four
highest rating categories by at least one nationally recognized
statistical rating organization. The alternative standard in the
proposed amendment to PTE 80-83 also addresses concerns that an
acquirer of securities might be harmed by such person's purchase of
illiquid securities. The alternative preserves the level of protection
afforded by the original standard, by requiring a fiduciary to make a
prudent determination that a security acquired in an underwriting is of
a sufficiently high credit quality. In making the proposed
determination of credit quality, a fiduciary may consider information
provided by third parties, including credit ratings issued by credit
rating agencies.
3. PTE 81-8
PTE 81-8 provides exemptive relief from the restrictions of section
406(a)(1)(A), (B), and (D) of ERISA and the taxes imposed by reason of
section 4975(c)(1)(A), (B), and (D) of the Code, for the investment of
employee benefit plan assets which involve the purchase or other
acquisition, holding, sale, exchange or redemption by or on behalf of
an employee benefit plan of certain short-term investments issued by a
party in interest, including commercial paper. As a condition of
exemptive relief, paragraph II(D) requires that, with respect to an
acquisition or holding of commercial paper, at the time it is acquired,
such commercial paper must be ranked in one of the three highest rating
categories by at least one nationally recognized statistical rating
service. The original condition was incorporated into PTE 81-8 to allow
fiduciaries who make investment decisions regarding the short-term
investments of a plan to choose from a broad range of issues of
commercial paper while assuring that the quality of the issue had been
assessed by an independent third party.
The Department proposes to amend paragraph II(D) to delete the
reference to the credit rating of commercial paper and replace it with
the requirement that, ``at the time of acquisition, the commercial
paper is (i) subject to a minimal or low amount of credit risk based on
factors pertaining to credit quality and the issuer's ability to meet
its short-term financial obligations, and (ii) sufficiently liquid that
such securities can be sold at or near their fair market value within a
reasonably short period of time.'' Commercial paper subject to a
minimal or low credit risk would be less susceptible to default risk
(i.e., have a low risk of default) than those with moderate credit
risk. These instruments also would demonstrate a strong capacity for
principal and interest payments and present above-average credit-
worthiness relative to other issues of commercial paper.
The Department views the new proposed standard as reflecting the
same level of credit quality required prior to this amendment. The
``minimal or low amount of credit risk'' standard in the proposed
alternative is modeled on one element of the SEC's final rule 10f-3 of
the Investment Company Act, described above, which was developed as an
alternative to a credit rating in one of the highest three rating
categories. In developing the alternative standard for PTE 81-8, as
amended, the Department found it relevant that final rule 10f-3
provides an alternative to the same credit rating category that is
currently in PTE 81-8.
In addition, the Department considered the language ``based on
factors pertaining to credit quality and the issuer's ability to meet
its short-term financial obligations'' from the SEC's proposed
amendment to rule 2a-7. The Department understands rule 2a-7 to apply
to mutual funds (more specifically, money market funds) that invest in
high quality, short-term debt instruments. As commercial paper is a
short-term debt instrument as well, the Department determined that it
would be appropriate to include such language in its alternative credit
standard to reflect an increased focus on the issuer's ability to meet
its short-term obligations.
The Department notes that the preamble to PTE 81-8 (46 FR 7511 at
7512, January 23, 1981) states that, based on the record, the
Department was unable to conclude that unrated issues of commercial
paper sold in a private offering ``have such protective characteristics
that affected plans would not need the independent safeguards that the
rating condition is intended to provide,'' which may suggest that a
credit rating by an independent third party is an important condition
of the relief provided. Under section 939A of Dodd-Frank, the
Department cannot continue to mandate that commercial paper acquired by
a plan pursuant to PTE 81-8 must receive a specified credit rating.
However, the Department also noted in PTE 81-8, that a determination
whether an investment in commercial paper is appropriate for a plan
should be determined ``by the responsible plan fiduciaries, taking into
account all the relevant facts and circumstances.'' For purposes of
this amendment, the Department believes that a fiduciary's
determination of the credit quality of commercial paper according to
the proposed standard should, as a matter of prudence, include the
reports or advice of independent third parties, including where
appropriate, such commercial paper's credit rating.
4. PTE 95-60
PTE 95-60 was granted in response to the Supreme Court's decision
in John Hancock Mutual Life Insurance Co. v. Harris Trust & Savings
Bank (Harris Trust),\22\ holding that those funds allocated to an
insurer's general account pursuant to a contract with a plan that vary
with the investment experience of the insurance company are ``plan
assets'' under ERISA. Harris Trust created uncertainty with respect to
a number of exemptions previously granted by the Department in
connection with the operation of asset pool investment trusts that
issue asset-backed, pass-through certificates to plans. Specifically,
the Department had previously granted PTE 83-1 (48 FR 895, January 7,
1983) \23\ and the ``Underwriter Exemptions,'' \24\ which were
conditioned, among other things, upon the certificates that were
purchased by plans not being subordinated to other classes of
certificates issued by the same trust. Because, in a typical asset pool
investment trust, one or more classes of subordinated certificates are
often purchased by life insurance companies, in holding that insurance
company general accounts may be considered ``plan assets,'' Harris
Trust raised the potential for servicers and trustees of pools to be
engaging in prohibited transactions for the same acts involving the
operation of trusts which would be exempt if the certificates were not
subordinated.
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\22\ 510 US 86 (1993).
\23\ PTE 83-1 provides relief for the operation of certain
mortgage pool investment trusts and the acquisition and holding by
plans of certain mortgage-backed pass-through certificates
evidencing interests therein.
\24\ The Underwriter Exemptions are comprised of a number of
individual exemptions in which credit ratings have been used
extensively (e.g., PTE 2009-31 (74 FR 59003, November 16, 2009)),
which provide relief for the operation of certain asset pool
investment trusts and the acquisition and holding by plans of
certain asset-based pass-through certificates representing interests
in those trusts.
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PTE 95-60 provides exemptive relief for certain transactions
engaged in by insurance company general accounts in which an employee
benefit plan has an interest, if certain specified conditions are met.
Under Section III, additional relief is provided from the restrictions
of sections 406(a), 406(b) and 407(a) of ERISA and the taxes imposed by
section 4975(a) and (b) of the Code by reason of section 4975(c) of the
Code for certain
[[Page 37580]]
transactions entered into in connection with the servicing, management,
and operation of a trust (a Trust), described in PTE 83-1 or in one of
the Underwriter Exemptions, in which an insurance company general
account has an interest as a result of its acquisition of certificates
issued by the Trust.
Section III(a)(2) of PTE 95-60 requires that the conditions of
either PTE 83-1 or an applicable Underwriter Exemption be met other
than the requirements that the certificates acquired by the general
account (A) not be subordinated to the rights and interests evidenced
by other certificates of the same trust and (B) receive a rating that
is in one of the three highest generic rating categories from an
independent rating agency. Because PTE 83-1 only requires non-
subordination with respect to the acquired certificates, and does not
have a credit rating reference or requirement, the exception from the
ratings requirement applies only to the Underwriter Exemptions.
The Department proposes to delete the reference in Section
III(a)(2)(B) pertaining to the credit ratings of certificates acquired
by a general account and replace it with a general reference to the
credit quality of such certificates. Thus, Section III(a)(2) of PTE 95-
60, as amended, would provide that ``[t]he conditions of either PTE 83-
1 or the relevant Underwriter Exemption are met, except for the
requirements that: (A) The rights and interests evidenced by the
certificates acquired by the general account are not subordinated to
the rights and interests evidenced by other certificates of the same
Trust, and (B) the certificates acquired by the general account have
the credit quality required under the relevant Underwriter Exemption at
the time of such acquisition.''
The Department believes that this modification will bring PTE 95-60
into compliance with the mandate in section 939A of Dodd-Frank that any
reference to or requirement of reliance on credit ratings be removed
from the Department's rules and regulations. Because the Department has
not proposed to amend the Underwriter Exemptions, this proposed
amendment cannot refer to a specific alternative to credit ratings in
such exemptions. Nevertheless, because Section III(a)(2), as amended,
would state that the certificates are not required to meet the standard
of credit quality referred to in the conditions of the Underwriter
Exemptions, the Department believes that the amended requirement would
be consistent with section 939A(b) of Dodd-Frank. Additionally, in the
Department's view, there should not be any substantive distinction
between a person's compliance with the condition in paragraph
III(a)(2)(B) prior to or after this amendment takes effect.
5. PTE 97-41
Section II of PTE 97-41 provides relief from sections 406(a) and
406(b)(1) and (2) of ERISA and the taxes imposed by section 4975 of the
Code, by reason of section 4975(c)(1)(A) through (E) of the Code, for
the purchase, by an employee benefit plan, of shares of one or more
mutual funds in exchange for the assets of the plan, transferred in-
kind to the mutual fund from a collective investment fund (CIF)
maintained by a bank or plan adviser where such bank or plan adviser is
the investment adviser to the mutual fund and also a fiduciary of the
plan, in connection with a complete withdrawal of the plan's assets
from the CIF. Exemptive relief is conditioned upon, inter alia, Section
II(c), the ``pro rata division rule,'' which provides that the
transferred assets must constitute the plan's pro rata portion of the
assets that were held by the CIF immediately prior to the transfer.
However, Section II(c) provides further that, notwithstanding the
foregoing, the allocation of fixed income securities held by a CIF
among plans on the basis of each plan's pro rata share of the aggregate
value of such securities will not fail to meet the requirements of the
pro rata division rule if (1) the aggregate value of such securities
does not exceed one percent of the total value of the assets held by
the CIF immediately prior to the transfer, and (2) such securities have
the same coupon rate and maturity, and at the time of transfer, the
same credit ratings from nationally recognized statistical rating
organizations.
The exception to the general pro rata division rule in Section
II(c) ensures that plans can avoid the transaction costs involved in
liquidating small positions in fixed-income securities that are not
divisible, or that can be divided only at substantial cost, prior to
their maturity. In these situations, equivalent, small investments of
fixed-income securities are treated as fungible for allocation purposes
if such securities have the same coupon rates, maturities and credit
ratings at the time of the transaction. This requirement ensures that
all plans receive securities that have equivalent terms and features
and that such fixed-income securities will be allocated among the plans
in a manner such that each plan receives its pro rata share of the
value of such securities.
The Department is proposing to amend the exception found in Section
II(c) by deleting the requirement found in subsection (2) that the
securities transferred in-kind from a CIF to the mutual fund have the
same credit ratings and replacing it with a requirement that such
securities are of the same credit quality. Section II(c)(1) and (2), as
amended, would provide that the allocation of fixed-income securities
held by a CIF among the plans on the basis of each plan's pro rata
share of the aggregate value of such securities will not fail to meet
the requirements of Section II(c) if ``(1) the aggregate value of such
securities does not exceed one percent of the total value of the assets
held by the CIF immediately prior to the transfer, and (2) such
securities have the same coupon rate and maturity, and at the time of
transfer, the same credit quality.''
In making the determination as to the credit quality of fixed
income securities for purposes of this condition, the Department notes
that a fiduciary should, to the extent possible, engage in credit
quality comparisons of securities using the same standards (e.g.,
employing the same metrics) for each set of securities. The Department
believes that an ``apples to apples'' comparison of the credit quality
of each security taking into account the same variables would comply
with the proposed amendment to the condition set forth in Section
II(c)(2). Furthermore, the Department notes that a fiduciary may rely
on reports and advice given by independent third parties, including
ratings issued by rating agencies.
6. PTE 2006-16
Sections I(a) and (b) of PTE 2006-16 provide exemptive relief from
section 406(a)(1)(A) through (D) of ERISA and the taxes imposed by
section 4975(a) and (b) of the Code by reason of section 4975(c)(1)(A)
through (D) of the Code for the lending of securities that are assets
of an employee benefit plan to certain banks and broker-dealers that
are parties in interest with respect to the plan. Section I(c) of PTE
2006-16 provides exemptive relief from section 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)(E) of the Code for the payment to a fiduciary of
compensation for services rendered in connection with loans of plan
assets that are securities.
Section II(b) of PTE 2006-16 conditions the relief provided under
Sections I(a) and (b) upon the plans' receipt 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, of either ``U.S.
Collateral,'' or ``Foreign Collateral,'' as such terms are defined in
[[Page 37581]]
Section V of the exemption. Section V(f)(2) defines ``Foreign
Collateral'' to include ``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.'' Section V(f)(4) defines ``Foreign Collateral''
to include ``irrevocable letters of credit issued by a [f]oreign
[b]ank, 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.''
The Department is proposing to amend Section V(f)(2) to delete the
reference to credit ratings and provide that ``Foreign Collateral''
will include ``foreign sovereign debt securities that are (i) subject
to a minimal amount of credit risk, and (ii) sufficiently liquid that
such securities can be sold at or near their fair market value in the
ordinary course of business within seven calendar days.''
The credit risk associated with securities that present ``minimal
credit risks'' would differ from that of the highest credit quality
securities only to a small degree. Thus, an issuer that would satisfy
the credit-worthiness requirement associated with foreign sovereign
debt securities should have a very strong ability to repay its debt
obligations, and a very low vulnerability to default. In addition, the
SEC has indicated its expectation that securities that trade in a
secondary market at the time of their acquisition would satisfy the
``seven calendar day'' liquidity standard.\25\
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\25\ See Investment Company Proposal, supra note 11, at text
following n.54.
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The Department views the new standard as reflecting the same level
of credit quality required prior to this amendment. The alternative
standard of credit quality proposed for Section V(f)(2) of PTE 2006-16
takes a similar approach to the SEC's proposed amendments to rule 2a-7,
which governs the securities that certain money market funds may hold
as investments, and proposed amendments to rule 5b-3, which relates to
funds entering into repurchase agreements that are collateralized with
certain high credit-quality securities, as described above.
The Department believes that the ``minimal'' credit risk standard
in the proposed alternative to credit ratings in rule 2a-7 is an
appropriate model for the alternative standard of credit quality
proposed in Section V(f)(2) of PTE 2006-16, as the current level of
credit worthiness required under both provisions reflects credit
ratings in one of the two highest rating categories. However, the
Department understands that, whereas rule 2a-7 currently utilizes a
short-term rating, foreign sovereign debt securities described in
Section V(f)(2) could comprise either long-term or short-term
securities. Therefore, in formulating the proposed alternative standard
of credit quality in Section V(f)(2), the Department did not include in
its proposed standard the language ``based on factors pertaining to
credit quality and the issuer's ability to meet its short-term
financial obligations.'' However, in the case of a short-term foreign
sovereign debt security used as collateral, fiduciaries may wish to
include the issuer's ability to meet its short term obligations as a
factor in its evaluation of the security's credit quality.
In addition to the ``minimal'' credit risk standard of the proposed
amendment, the Department believes that the liquidity requirement
proposed in rule 5b-3 (``sufficiently liquid that such securities can
be sold at or near their fair market value in the ordinary course of
business within seven calendar days'') is appropriate for inclusion in
the alternative standard of credit quality proposed in Section V(f)(2)
of PTE 2006-16, because the economic considerations and regulatory
framework underpinning securities repurchase agreements is similar to
that supporting securities lending transactions.
The Department is also proposing to amend Section V(f)(4) to delete
the reference to credit ratings and provide that ``Foreign Collateral''
will include ``irrevocable letters of credit issued by a Foreign Bank,
other than the borrower or an affiliate thereof, provided that, at the
time the letters of credit are issued, the Foreign Bank's ability to
honor its commitments thereunder is subject to no greater than moderate
credit risk.'' The Department notes that, where a Foreign Bank's
ability to honor its commitment under a letter of credit is subject to
a moderate level of credit risk, such bank would demonstrate at least
average credit-worthiness relative to other issuers of similar debt.
Moderate credit risk would denote current low expectations of default
risk, with an adequate capacity for payment of principal and interest.
The Department views the new standard as reflecting the same level
of credit quality required prior to this amendment. The proposed
alternative described for Section V(f)(4) is modeled after the SEC's
new rule 6a-5 of the Investment Company Act, described above, which
adopts an alternative to a credit rating of investment grade, or a
credit rating in one the four highest rating categories.\26\ In
particular, the Department has modeled the new standard of credit
quality for PTE 2006-16 on the credit quality element of the standard
in rule 6a-5; as such, the proposed amendment focuses on the issuing
bank's ability to honor its commitment under the letter of credit.
Furthermore, in developing the alternative standard for Section V(f)(4)
of PTE 2006-16, as amended, the Department found it relevant that the
standards adopted in new rule 6a-5 and proposed in amendments to
Section V(f)(4) of PTE 2006-16 are designed to reflect the same level
of credit quality as the credit ratings they replaced in section
6(a)(5)(A)(iv) of the Investment Company Act and would replace in
Section V(f)(4), respectively.
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\26\ As noted above, the SEC adopted rule 6a-5 under the
Investment Company Act as directed by section 939(c) of Dodd-Frank,
which eliminates a statutory condition requiring that certain
securities have received a credit rating of investment grade, and
instead requires that the securities ``meet such standards of
creditworthiness as the Commission shall adopt.''
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Finally, Lending Fiduciaries making determinations of credit
quality under Sections V(f)(2) and V(f)(4) of PTE 2006-16 would still
be able to consider credit quality determinations prepared by outside
sources, including credit ratings issued by rating organizations, that
such fiduciaries conclude are credible and reliable, in making
determinations of credit worthiness.
7. Request for Comment Regarding Modifications to Class Exemptions
The Department is requesting comments regarding all aspects of
these proposed amendments. In this regard, the Department specifically
requests comments regarding whether the alternatives for credit ratings
described herein represent adequate substitutes for credit ratings by
rating organizations, taking into account the different Class
Exemptions making use of such ratings, and the costs to comply with the
alternatives, and invites comments on additional or alternative credit
standards for consideration by the Department. As stated above, any
suggested alternative to a credit rating should retain as close as
possible the original intent of the standard in its related Class
Exemption. Furthermore, the Department will consider the SEC's
treatment of comments received in response to its proposals modifying
the use of credit ratings as part of its compliance with section 939A
and 939(c) of Dodd-Frank.
[[Page 37582]]
In addition to the comments requested above, the Department
requests comments on guidance provided in connection with the term
``moderate credit risk'' as used in the proposed amendments to PTEs 75-
1, 80-83, and 2006-16. Specifically, the Department solicits input on
whether average credit-worthiness relative to other similar issues or
issuers is an appropriate point of reference to associate with a
moderate level of credit risk, as used in the Class Exemptions. The
Department also requests comments regarding the inclusion of a
liquidity requirement as part of its standard of credit-worthiness
proposed for use in the Class Exemptions. In this regard, the
Department is interested in commenters' views as to whether a liquidity
requirement contributes to the protective characteristics of the
relevant standard of credit-worthiness proposed for use in the
applicable Class Exemptions, and invites comments on alternative
liquidity requirements for consideration by the Department or whether
the absence of such a requirement is more appropriate. Any comment
received in this regard should explain in detail the commenter's
rationale, including how the presence or absence of a liquidity
requirement would be protective of plans, participants and their
beneficiaries.
Finally, the Department requests comments regarding its use of
``fair market value'' for purposes of establishing a liquidity
requirement in the proposed alternatives to credit ratings.
Specifically, the Department requests comments concerning whether a
different measure of value, such as ``carrying value'' or ``fair
value,'' \27\ would be more appropriate for the proposed alternatives
to credit ratings and offer greater protections for employee benefit
plans and their participants and beneficiaries engaging in the covered
transactions. Any comment received in this regard should explain in
detail the suggested measure of value, including how it is determined
and why it is appropriate for use in a Class Exemption.
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\27\ As stated in FASB Accounting Standards Codification Topic
820, Fair Value Measurements and Disclosures (ASC Topic 820).
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8. Underwriter Exemptions
The Underwriter Exemptions are comprised of a number of individual
exemptions in which credit ratings have been used extensively (e.g.,
PTE 2009-31 (74 FR 59003, November 16, 2009)), which provide relief for
the operation of certain asset pool investment trusts and the
acquisition and holding by plans of certain asset-based pass-through
certificates representing interests in those trusts. It is the
Department's view that the Underwriter Exemptions, as individual
prohibited transaction exemptions, are not federal regulations, and
therefore section 939A of Dodd-Frank does not require their review and
modification.
Accordingly, notwithstanding the deadline for compliance with
section 939A, the Underwriter Exemptions will remain in force with no
modifications to their credit rating requirements.\28\ The Department
is cognizant, however, of the Congressional intent to reduce reliance
on credit ratings and is considering alternative standards for use
instead of, or in addition to, existing requirements for credit ratings
in granted individual prohibited transaction exemptions. Thus, the
Department is requesting comments regarding such alternatives in
addition to any comments regarding the Class Exemptions.
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\28\ The Department notes that it recently proposed an amendment
to the Underwriter Exemptions (the Underwriter Proposal) that
modified the definition of ``Rating Agency'' to eliminate specific
references to named credit rating agencies. Pursuant to the
Underwriter Proposal, the term ``Rating Agency'' would be defined
using a general framework of self-executing criteria based on both
(i) SEC rules applicable to NRSROs and (ii) the Department's own
``seasoning'' requirement for credit rating agencies. The
Underwriter Proposal makes no modifications to the use of credit
ratings in the Underwriter Exemptions, including the requirement
that securities available for purchase by Plans generally must be
rated in one of the three highest rating categories (or four in the
case of certain ``Designated Transactions''). See Notice of Proposed
Amendment to Prohibited Transaction Exemption 2007-05, 72 FR 13130
(March 20, 2007), Involving Prudential Securities Incorporated, et
al., To Amend the Definition of ``Rating Agency,'' 77 FR 76773
(December 28, 2012).
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9. Executive Order 12866 Statement
Under Executive Order 12866 (the Executive Order), the Department
must determine whether a 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) of the Executive Order, a ``significant regulatory
action'' is an action that is likely to result in a rule (1) having an
effect on the economy of $100 million or more in any one year, 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. OMB has determined
that this action is significant within the meaning of section 3(f)(4)
of the Executive Order, and accordingly, OMB has reviewed these
proposed amendments to PTE 75-1, PTE 80-83, PTE 81-8, PTE 95-60, PTE
97-41, and PTE 2006-16 pursuant to the Executive Order.
10. Paperwork Reduction Act
According to the Paperwork Reduction Act of 1995 (Pub. L. 104-13)
(the PRA), no persons are required to respond to a collection of
information unless such collection displays a valid OMB control number.
The Department notes that a Federal agency cannot conduct or sponsor a
collection of information unless it is approved by OMB under the PRA,
and displays a currently valid OMB control number, and the public is
not required to respond to a collection of information unless it
displays a currently valid OMB control number. See 44 U.S.C. 3507.
Also, notwithstanding any other provisions of law, no person shall be
subject to penalty for failing to comply with a collection of
information if the collection of information does not display a
currently valid OMB control number. See 44 U.S.C. 3512.
The Department has not made a submission to OMB at this time,
because the proposed amendments do not revise the information
collection requests contained in the following PTEs: PTE 75-1, which is
approved by OMB under OMB Control Number 1210-0092; PTE 80-83, which is
approved by OMB under OMB Control Number 1210-0064; PTE 81-8, which is
approved by OMB under OMB Control Number 1210-0061; PTE 95-60, which is
approved by OMB under OMB Control Number 1210-0114; PTE 97-41, which is
approved by OMB under OMB Control Number 1210-0104; and PTE 2006-16,
which is approved by OMB under OMB Control Number 1210-0065.
GENERAL INFORMATION
The attention of interested persons is directed to the following:
(1) Before an exemption may be granted under section 408(a) of
ERISA and section 4975(c)(2) of the Code, the Department must find that
the exemption is administratively feasible, in the interests of the
plan and of its participants and beneficiaries and
[[Page 37583]]
protective of the rights of participants and beneficiaries of such
plan;
(2) The proposed amendments, if granted, will be supplemental to,
and not in derogation of, any other provisions of ERISA and 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
(3) If granted, the proposed amendments will be applicable to a
particular transaction only if the conditions specified in the class
exemption are met.
WRITTEN COMMENTS
All interested persons are invited to submit written comments or
requests for a hearing on the proposed exemption to the address and
within the time period set forth above. All comments and requests for a
hearing will be made a part of the record. Comments and requests for a
hearing should state the reasons for the writer's interest in the
proposed exemption. Comments received will be available for public
inspection at the address set forth above.
PROPOSED AMENDMENT
Under the authority of 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), the
Department proposes to amend the following class exemptions as set
forth below:
1. PTE 75-1 is amended by making the following modifications:
(a) Part III, Paragraph (c)(1) is deleted in its entirety and
replaced with the following: ``(1) At the time of acquisition, such
securities are non-convertible debt securities (i) subject to no
greater than moderate credit risk and (ii) sufficiently liquid that
such securities can be sold at or near their fair market value within a
reasonably short period of time.''
(b) Part IV, Paragraph (a)(1), is deleted in its entirety and
replaced with the following: ``(1) At the time of acquisition, such
securities are non-convertible debt securities (i) subject to no
greater than moderate credit risk and (ii) sufficiently liquid that
such securities can be sold at or near their fair market value within a
reasonably short period of time.''
2. PTE 80-83 is amended by deleting Paragraph I(C)(3) in its
entirety and replacing it with the following: ``(3) The issuer of such
securities has been in continuous operation for not less than three
years, including the operations of any predecessors, unless at the time
of acquisition, such securities are non-convertible debt securities (i)
subject to no greater than moderate credit risk and (ii) sufficiently
liquid that such securities can be sold at or near their fair market
value within a reasonably short period of time.''
3. PTE 81-8 is amended by deleting Paragraph II(D) in its entirety
and replacing it with the following: ``(D) With respect to an
acquisition or holding of commercial paper (including an acquisition by
exchange) occurring on or after the effective date of this amendment,
at the time of acquisition, the commercial paper is (i) subject to a
minimal or low amount of credit risk based on factors pertaining to
credit quality and the issuer's ability to meet its short-term
financial obligations and (ii) sufficiently liquid that such securities
can be sold at or near their fair market value within a reasonably
short period of time.''
4. PTE 95-60 is amended by deleting Paragraph III(a)(2)(B) in its
entirety and replacing it with the following: ``(B) the certificates
acquired by the general account have the credit quality required under
the relevant Underwriter Exemption at the time of such acquisition.''
5. PTE 97-41 is amended by deleting Paragraph (II)(c)(2) in its
entirety and replacing it with the following: ``(2) such securities
have the same coupon rate and maturity, and at the time of transfer,
the same credit quality.''
6. PTE 2006-16 is amended by making the following modifications to
the definition of ``Foreign Collateral'' in Section V(f):
(a) Paragraph V(f)(2) is deleted in its entirety and replaced with
the following: ``(2) foreign sovereign debt securities that are (i)
subject to a minimal amount of credit risk, and (ii) sufficiently
liquid that such securities can be sold at or near their fair market
value in the ordinary course of business within seven calendar days;''
and
(b) Paragraph V(f)(4) is deleted in its entirety and replaced with
the following: ``(4) irrevocable letters of credit issued by a Foreign
Bank, other than the borrower or an affiliate thereof, provided that,
at the time the letters of credit are issued, the Foreign Bank's
ability to honor its commitments thereunder is subject to no greater
than moderate credit risk.''
Lyssa Hall,
Director of Exemption Determinations, Employee Benefits Security
Administration, U.S. Department of Labor.
[FR Doc. 2013-14790 Filed 6-20-13; 8:45 am]
BILLING CODE P