Statutory Exemption for Cross-Trading of Securities
[02/12/2007]
Volume 72, Number 28, Page 6473-6480
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
29 CFR Part 2550
RIN 1210-AB17
Statutory Exemption for Cross-Trading of Securities
AGENCY: Employee Benefits Security Administration, Labor.
ACTION: Interim final rule with request for comments.
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SUMMARY: This document contains an interim final rule that implements
the content requirements for the written cross-trading policies and
procedures required under section 408(b)(19)(H) of the Employee
Retirement Income Security Act of 1974 (ERISA or the Act). Section
611(g) of the Pension Protection Act of 2006, Public Law 109-280, 120
Stat. 780, 972, amended section 408(b) of ERISA by adding a new
subsection (19) that exempts the purchase and sale of a security
between a plan and any other account managed by the same investment
manager if certain conditions are satisfied. Among other requirements,
section 408(b)(19)(H) stipulates that the investment manager must
adopt, and effect cross-trades in accordance with, written cross-
trading policies and procedures that are fair and equitable to all
accounts participating in the cross-trading program. This interim final
rule would affect employee benefit plans, investment managers, plan
fiduciaries and plan participants and beneficiaries.
DATES: Effective Date: This interim final rule is effective April 13,
2007.
Comment Date: Written comments on this interim final rule should be
received by the Department of Labor on or before April 13, 2007.
ADDRESSES: Written comments (preferably, at least three copies) should
be addressed to the Office of Exemption Determinations, Employee
Benefits Security Administration, Room N-5700, U.S. Department of
Labor, Washington, DC 20210, Attention: Cross-Trading Policies and
Procedures Interim Final Rule. Commenters are encouraged to submit
responses electronically by e-mail to e-OED@dol.gov, or by using the
Federal eRulemaking portal at http://www.regulations.gov. Persons
submitting responses electronically should not submit paper copies. All
responses will be available to the public at the Public Disclosure
Room, N-1513, Employee Benefits Security Administration, U.S.
Department of Labor, 200 Constitution Avenue, NW., Washington, DC
20210, and online at http://www.regulations.gov and http://www.dol.gov/
ebsa.
FOR FURTHER INFORMATION CONTACT: G. Christopher Cosby or Brian
Buyniski, Office of Exemption Determinations, Employee Benefits
Security Administration, Room N-5700, U.S. Department of Labor,
Washington, DC 20210, telephone (202) 693-8540. This is not a toll-free
number.
SUPPLEMENTARY INFORMATION:
A. Background
Section 611(g)(1) of the Pension Protection Act of 2006, Public Law
109-280, 120 Stat. 780, 972 (PPA), which was enacted on August 17,
2006, amended ERISA by adding a new section 408(b)(19), which exempts
from the prohibitions of sections 406(a)(1)(A) and 406(b)(2) of the Act
those transactions involving the purchase and sale of a security
between a plan and any other account managed by the same investment
manager, provided that certain conditions are satisfied.\1\ Among other
requirements, an investment manager must adopt, and cross-trades must
be effected in accordance with, written cross-trading policies and
procedures that are fair and equitable to all accounts participating in
the cross-trading program. The policies and procedures must include
descriptions of (i) the investment manager's policies and procedures
relating to pricing, and (ii) the investment manager's policies and
procedures for allocating cross-trades in an objective manner among
accounts participating in the cross-trading program.
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\1\ Section 611(g)92) of the PPA added a parallel provision
under the Internal Revenue Code of 1986 (Code), section 4975(d)(22),
which provides relief from the prohibitions described in section
4975(c) of the Code in connection with the cross-trading of
securities. Under Reorganization Plan No. 4 of 1978, effective
December 31, 1978 (5 U.S.C. App. 214 (2000)), the authority of the
Secretary of the Treasury to issue interpretations regarding section
4975 of the Code has been transferred, with certain exceptions not
here relevant, to the Secretary of Labor, and the Secretary of the
Treasury is bound by the interpretations of the Secretary of Labor
pursuant to such authority.
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The investment manager also must designate an individual (a
compliance officer) who is responsible for periodically reviewing
purchases and sales of securities made pursuant to the exemption to
ensure compliance with the foregoing policies and procedures. Following
such review, the compliance officer must provide, on an annual basis, a
written report describing the steps performed during the course of the
review, the level of compliance with the foregoing policies and
procedures, and any specific instances of noncompliance. The report
must be provided to the plan fiduciary who authorized the cross-trading
no later than 90 days following the period to which it relates.
Additionally, the written report must notify the plan fiduciary of the
plan's right to terminate participation in the investment manager's
cross-trading program at any time and must be signed by the compliance
officer under penalty of perjury.
Section 611(g)(3) of the PPA provides that the Secretary of Labor,
after consultation with the Securities and Exchange Commission (SEC),
shall, no later than 180 days after the date of the enactment of the
PPA, issue regulations regarding the content of the written policies
and procedures required to be adopted by an investment manager in order
for such manager to qualify for relief under section 408(b)(19) of the
Act. Section 611(h) of the PPA provides that the amendments made by
section 611 of the PPA shall apply to transactions occurring after the
date of enactment of the PPA.
The rule contained in this document is being issued on an interim
final basis to provide immediate guidance regarding the contents of the
written cross-trading policies and procedures that must be adopted by
investment managers in order to comply with the requirements of the
statutory exemption. ERISA section 408(b)(19) is effective for
transactions occurring after August 17, 2006, and Congress directed the
Secretary of Labor to issue regulations by February 13, 2007. Given the
current need for regulations and the short period in which the
regulations are to be issued, the Department finds for good cause that
notice and public procedure before issuance of this regulation is
impracticable. Nevertheless, the Department will carefully review the
comments received on this regulation and will thereafter issue a final
regulation that takes them into consideration.
B. Overview of Interim Final Rule
The interim final rule amends 29 CFR part 2550 by adding a new
section, 2550.408b-19. Paragraph (a) of the interim final rule states
that the standards set forth in this interim final rule apply solely
for purposes of determining whether an investment manager's written
policies and procedures satisfy the content requirements of section
408(b)(19)(H) of the Act. Accordingly, such standards shall not apply
in determining whether, or to what extent, the investment manager
satisfies the other requirements
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for relief under section 408(b)(19) of the Act.
Paragraph (b)(2) requires the content of the written cross-trading
policies and procedures to be clear, concise, and written in a manner
calculated to be understood by the plan fiduciary authorizing a plan's
participation in the manager's cross-trading program. Although no
specific format is required for the investment manager's written cross-
trading policies and procedures, the information contained in the
policies and procedures must be sufficiently detailed to facilitate a
periodic review by the compliance officer of the cross-trades.
As discussed below, paragraph (b)(3) of the interim final rule
describes the content requirements of the written cross-trading
policies and procedures that must be adopted by the investment manager,
and provided to the plan fiduciary, prior to the investment manager
engaging in any cross-trades under section 408(b)(19) of the Act. The
Department of Labor (Department) expects that, following disclosure of
the written policies and procedures adopted by the investment manager
and any other disclosures required by the exemption,\2\ the plan
fiduciary will be able to determine whether it is appropriate to
authorize the plan's participation in the investment manager's cross-
trading program. The definitions of certain terms used in the interim
final rule are contained in paragraph (c).
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\2\ Under section 408(b)(19)(D) of the Act, the authorizing plan
fiduciary must receive disclosures regarding the conditions under
which cross-trades may take place in a document that is separate
from any other agreement or disclosure involving the asset
management relationship. Such disclosure must contain a statement
that any investment manager participating in a cross-trading program
will have a potentially conflicting division of loyalties and
responsibilities to the parties involved in any cross-trade
transaction. The written cross-trading policies and procedures must
explain how the investment manager will mitigate such conflicts.
Further, section 408(b)(19)(F) of the Act requires the investment
manager to provide the plan fiduciary who authorized cross-trading a
quarterly report detailing all the cross-trades executed by the
investment manager in which the plan participated during such
quarter.
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C. Content of Written Cross-Trading Policies and Procedures
Section 408(b)(19)(H) of the Act requires the investment manager to
adopt, and effect cross-trades in accordance with, written cross-
trading policies and procedures that are fair and equitable to all
accounts participating in the cross-trading program, and that include a
description of the manager's pricing policies and procedures, and the
manager's policies and procedures for allocating cross-trades in an
objective manner among accounts participating in the cross-trading
program.
Paragraph (b)(3) of the interim final rule sets forth the content
requirements for the written cross-trading policies and procedures to
be adopted by the investment manager. The Department believes that the
policies and procedures must provide sufficient information to enable a
plan fiduciary to assess the investment manager's cross-trading
program. In this regard, the relief provided by section 408(b)(19) of
the Act is subject to satisfaction of a number of conditions by the
investment manager, including the designation of a compliance officer
to periodically review purchases and sales and prepare an annual
report. A number of the content requirements mandated by the interim
final rule require the investment manager to describe the method or
process that will be employed by the manager to satisfy section
408(b)(19)(H) of the exemption. This information will enable the
compliance officer to review securities purchases and sales to ensure
compliance with the written policies and procedures. Since the
compliance officer's annual report must be issued to plan fiduciaries
responsible for authorizing a plan's participation in the investment
manager's cross-trading program, it will assist the plan fiduciary in
making an informed decision regarding the plan's continued
participation in the cross-trading program.
The interim final rule requires the compliance officer to determine
whether an investment manager's cross-trading program meets the
requirements of section 408(b)(19) (H) of the Act. The Department
specifically requests comments from interested persons regarding
whether the scope of the compliance officer's responsibilities under
the regulation should be expanded to encompass compliance with all of
the requirements of the statutory exemption. In this regard, the
Department is interested in any information regarding the current
practices of compliance officers in determining compliance with
applicable statutory or administrative exemptions under ERISA.
In order to assure that plan fiduciaries recognize the scope of
compliance reviews conducted under these rules, paragraph (b)(3)(vii)
requires the policies and procedures to contain a statement describing
whether such review is limited to compliance with the policies and
procedures required pursuant to 408(b)(19)(H).
Section 408(b)(19)(H) of the Act specifies that the written cross-
trading policies and procedures adopted by the investment manager must
include a description of the manager's policies and procedures for
determining the price at which securities are cross-traded. The
Department expects that the pricing policies and procedures will be
described in sufficient detail to enable the compliance officer to
independently determine that the cross-trade transaction was effected
at the ``independent current market price'' of the security (within the
meaning of Sec. 270.17a-7(b) of Title 17, Code of Federal Regulations)
as required by section 408(b)(19)(B) of the Act.\3\
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\3\ The Department notes that the SEC has issued several no-
action and interpretive letters under 17 CFR 270.17a-7(b). The
Department is of the view that investment managers who comply with
17 CFR 270.17a-7(b) and SEC no-action and interpretative letters
thereunder will satisfy the requirements of section 408(b)(19)(B) of
the Act.
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Section 408(b)(19)(H) further specifies that such policies and
procedures must include the policies and procedures for allocating
cross-trades in an objective manner among accounts participating in the
cross-trading program. In this regard, the Department notes that
frequently the demand for a particular security among the accounts of
an investment manager may exceed the supply available to cross-trade.
Section 408(b)(19)(D) of the Act requires that the basis for any
objective allocation to be used must be disclosed to each plan
fiduciary prior to obtaining the required authorization. It is the
Department's understanding that managers have relied on different
systems, e.g., a pro rata or queue system, to allocate cross-trade
opportunities on an objective basis. The Department recognizes that
there may be a number of objective systems that are appropriate for the
allocation of securities.
Paragraph (b)(3) of the interim final rule specifies that the
investment manager's written cross-trading policies and procedures must
include:
A statement of policy which describes the criteria that
will be applied by the investment manager in determining that execution
of a securities transaction as a cross-trade will be beneficial to both
parties to the transaction; \4\
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\4\ Notwithstanding the relief provided in section 408(b)(19) of
the Act, the Department notes that the Act's general standards of
fiduciary conduct also would apply to the investment manager's
determination to cross-trade securities on behalf of a plan. In this
regard, section 404 of the Act requires, among other things, a
fiduciary to discharge his duties respecting the plan solely in the
interests of the participants and beneficiaries and in a prudent
manner. Accordingly, an investment manager must act prudently and
solely in the interest of the participants and beneficiaries of the
plans on whose behalf they are acting with respect to: (1) The
decision to enter into a cross-trade; and (2) the terms of such
cross-trade.
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A description of how the investment manager will determine
that cross-trades are effected at the ``independent current market
price'' of the security (within the meaning of section 270.17a-7(b) of
Title 17, Code of Federal Regulations and SEC no-action and
interpretative letters thereunder) as required by section 408(b)(19)(B)
of the Act, including the identity of sources used to establish such
price;
A description of the procedures for ensuring compliance
with the $100,000,000 minimum asset size requirement of section
408(b)(19); \5\
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\5\ A plan or mater trust will satisfy this minimum asset size
requirement as to a transaction if it satisfies the requirement upon
its initial participation in the cross-trading program and on a
quarterly basis thereafter.
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A description of how the investment manager will mitigate
any potentially conflicting division of loyalties and responsibilities
to the parties involved in any cross-trade transaction;
A requirement that the investment manager allocate cross-
trades among accounts participating in the cross-trading program in an
objective and equitable manner and a description of the allocation
method(s) that will be available to and used by the investment manager;
The identity of the compliance officer responsible for
reviewing the investment manager's compliance with its written cross-
trading policies and procedures, and the compliance officer's
qualifications for this position; and
A statement which describes the scope of the review
conducted by the compliance officer, specifically noting whether such
review is limited to compliance with the policies and procedures
required by 408(b)(19)(H), or whether such review extends to any
determinations regarding the overall level of compliance with the other
requirements of section 408(b)(19) of ERISA.
D. Request for Comments
The Department invites comments from interested persons on all
aspects of the interim final rule. Comments should be addressed to the
Office of Exemption Determinations, Employee Benefits Security
Administration, Room N-5700, U.S. Department of Labor, Washington, DC
20210, Attention: Cross-Trading Policies and Procedures Interim Final
Rule. All responses will be available for public inspection at the
Public Disclosure Room, Employee Benefits Security Administration, Room
N-1513, U.S. Department of Labor, Washington, DC 20210. Electronic
responses should contain ``Cross-Trading Policies and Procedures
Interim Final Rule'' in the subject line and be addressed to
e-OED@dol.gov.
E. Good Cause Finding That Proposed Rulemaking Unnecessary
Rulemaking under section 553 of the Administrative Procedure Act
(APA) ordinarily involves publication of a notice of proposed
rulemaking in the Federal Register and the public is given an
opportunity to comment on the proposed rule. The APA authorizes
agencies to dispense with proposed rulemaking procedures, however, if
they find both good cause that such procedures are impracticable,
unnecessary, or contrary to the public interest, and incorporate a
statement of the finding with the underlying reasons in the interim
final rule issued.
In this case, the Department finds that it is impracticable to
undertake proposed rulemaking with regard to the content of the cross-
trading policies and procedures. The Department believes such
rulemaking is impracticable because, prior to the issuance of the
Department's regulation, investment managers who engage in cross-
trading on behalf of plans do so are at risk that their cross-trading
programs will run afoul of the statutory exemption if their policies
and procedures do not meet the requirements of the Department's
regulation. The Department understands that the lack of guidance has
had a ``chilling effect'' on the willingness of investment managers and
plans to take advantage of the statutory exemption. Therefore, the
Department made a policy determination to issue the regulation as an
interim final regulation to allow plans to take advantage of the cost-
savings derived from cross-trades as soon as possible. The Department
therefore finds that notice and public procedure is impracticable and
is publishing the rule as an interim final rule and is including a
request for comment.
The Department has limited the comment period to 60 days in order
to enable the Department to adopt changes to the interim final rule at
the earliest possible date, taking into account Congress' expectation
that regulations would be issued not later than 180 days from enactment
of the PPA on August 17, 2006. The Department believes that, in light
of the limited number of issues presented for consideration by the
interim final rule, the provided 60-day comment period affords
interested persons an adequate amount of time to analyze the rule and
submit comments.
F. Regulatory Impact Analysis
Executive Order 12866 Statement
Under Executive Order 12866 (58 FR 51735), the Department must
determine whether a regulatory action is ``significant'' and therefore
subject to review by the Office of Management and Budget (OMB). Section
3(f) of the Executive Order defines a ``significant regulatory action''
as an action that is likely to result in a rule (1) having an annual
effect on the economy of $100 million or more, or adversely and
materially affecting a sector of the economy, productivity,
competition, jobs, the environment, public health or safety, or State,
local or tribal governments or communities (also referred to as
``economically significant''); (2) creating serious inconsistency or
otherwise interfering with an action taken or planned by another
agency; (3) materially altering the budgetary impacts of entitlement
grants, user fees, or loan programs or the rights and obligations of
recipients thereof; or (4) raising novel legal or policy issues arising
out of legal mandates, the President's priorities, or the principles
set forth in the Executive Order. Although the Department believes that
this regulatory action is not economically significant within the
meaning of section 3(f)(1) the Executive Order, the action has been
determined to be significant within the meaning of section 3(f)(4) of
the Executive Order, and the Department accordingly provides the
following assessment of its potential costs and benefits. As elaborated
below, the Department believes that the benefits of the interim final
rule will be substantial and will justify its costs.
In assessing the costs and benefits of the interim final rule and
associated provisions of the Act, the Department endeavored to consider
all of the major activities that will be carried out pursuant to them.
For example, investment managers will adopt, and effect cross-trades in
accordance with, policies and procedures that clearly describe the
criteria governing fair and equitable cross-trading, including the
pricing of securities when cross-traded and the methods for allocating
cross-trades among accounts. Investment managers will also appoint
compliance officers responsible for determining and notifying
participating plans' fiduciaries whether the applicable policies and
procedures have been followed. These activities will help equip plan
fiduciaries to evaluate cross-trading programs, and will help ensure
that the cross-trades executed under such programs benefit all parties
whose
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assets are cross-traded, including participating plans.
These activities will entail some cost (a part of which is
quantified later in this preamble in connection with the Department's
information collection request). The Department believes that many of
these activities are already common practice among investment managers
that operate high-quality, successful cross-trading programs. As such,
much of the cost of these activities is not properly classified as a
cost of the interim final rule or associated provisions of the Act.
The Department also believes that all of these activities are a
necessary and efficient means of safeguarding plan assets invested in
accounts subject to cross-trading programs.
The activities are necessary because plans' investments, and the
retirement benefits they will provide for participants and
beneficiaries, might otherwise be at avoidable risk. Investment
managers operating cross-trading programs owe loyalty to both parties
to any cross-trade (as well as to all prospective parties to any cross-
trade). Such parties' interests in relation to the cross-trades often
conflict. Accordingly, the Department believes that the transparency
and protections provided by the interim final rule and associated
provisions of the Act are essential to reducing the risks to the
security of pension plan investments that are inherent in allowing
cross-trading involving plans.
The activities are efficient insofar as they exploit investment
managers' and compliance officers' comparative advantage at performing
certain functions that help fiduciaries protect participants'
interests. Investment managers, as the designers and operators of
cross-trading programs, are well positioned to evaluate the economic
merits of alternative permissible approaches. Compliance officers are
well situated to monitor programs' adherence to established policies
and procedures. The interim final rule and associated provisions of the
Act exploit these efficiencies to protect participants' interests both
directly (by creating better conditions for cross-trading) and
indirectly (by more efficiently delivering relevant information to
participating plans' fiduciaries). By assigning duties of designing,
operating, and monitoring cross-trading programs to investment managers
and compliance officers, and by ensuring that plan fiduciaries will
receive timely and relevant information on adherence to established
policies and procedures, the interim final rule will improve the
ability of plan fiduciaries to satisfy their fiduciary duties in
determining the appropriateness of a plan's investment in an account
subject to cross-trading.
On this basis of this assessment, the Department concludes that the
benefits of the interim final rule justify its cost. The Department
invites comments on this assessment and conclusion.
The Department is considering whether in the future to pursue
additional regulatory action under section 408(b)(19) of the Act. For
example, should cross-trading programs' policies and procedures be
required to include elements that would ensure the programs' compliance
with all of the conditions of the exemption enumerated under section
408(b)(19) of the Act? Should compliance officers be responsible for
reviewing and reporting on compliance with all such conditions?
Expanding the content requirements might add to the cost of developing,
distributing, and adhering to them. Expanding compliance officers'
responsibilities might increase their costs to carry out those
responsibilities. But, as with the requirements of the interim final
rule and associated provisions of the Act, such expanded requirements
also might favorably leverage investment managers' and compliance
officers' comparative advantage at performing certain functions that
help fiduciaries protect participants' interests. The Department
invites comment on the desirability of additional regulatory action in
this area.
Regulatory Flexibility Act
The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) imposes
certain requirements with respect to federal rules that are subject to
the notice and comment requirements of section 553(b) of the
Administrative Procedure Act (5 U.S.C 551 et seq.) and that are likely
to have a significant economic impact on a substantial number of small
entities. Unless an agency certifies that a proposed rule will not have
a significant economic impact on a substantial number of small
entities, section 603 of the RFA requires that the agency present an
initial regulatory flexibility analysis at the time of the publication
of the notice of proposed rule-making describing the impact of the rule
on small entities and seeking public comment on such impact. Because
this rule is being issued as an interim final rule, the RFA does not
apply and the Department is not required to either certify that the
rule will not have a significant impact on a substantial number of
small businesses or conduct an initial regulatory flexibility analysis.
Nevertheless, the Department has considered the likely impact of the
interim rule on small entities in connection with its assessment under
Executive Order 12866, described above, and believes this rule will not
have a significant impact on a substantial number of small entities.
For purposes of this discussion, the Department deemed a small entity
to be an employee benefit plan with fewer than 100 participants. The
basis of this definition is found in section 104(a)(2) of ERISA, which
permits the Secretary of Labor to prescribe simplified annual reports
for pension plans which cover fewer than 100 participants.
Paperwork Reduction Act
As part of its continuing effort to reduce paperwork and respondent
burden, the Department of Labor conducts a preclearance consultation
program to provide the general public and Federal agencies with an
opportunity to comment on proposed and continuing collections of
information in accordance with the Paperwork Reduction Act of 1995 (PRA
95) (44 U.S.C. 3506(c)(2)(A)). This helps to ensure that the public
understands the Department's collection instructions, respondents can
provide the requested data in the desired format, the reporting burden
(time and financial resources) is minimized, and the Department can
properly assess the impact of collection requirements on respondents.
Currently, the Department is soliciting comments concerning the
information collection request (ICR) included in the Interim Final
Regulation on Statutory Exemption for Cross-Trading. A copy of the ICR
may be obtained by contacting the person listed in the PRA Addressee
section below.
The Department has submitted a copy of the interim final regulation
to OMB in accordance with 44 U.S.C. 3507(d) for review of its
information collections. The Department and OMB are particularly
interested in comments that:
Evaluate whether the collection of information is
necessary for the proper performance of the functions of the agency,
including whether the information will have practical utility;
Evaluate the accuracy of the agency's estimate of the
burden of the collection of information, including the validity of the
methodology and assumptions used;
Enhance the quality, utility, and clarity of the
information to be collected; and
Minimize the burden of the collection of information on
those who are to respond, including through the
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use of appropriate automated, electronic, mechanical, or other
technological collection techniques or other forms of information
technology, e.g., by permitting electronic submission of responses.
Comments should be sent to the Office of Information and Regulatory
Affairs, Office of Management and Budget, Room 10235, New Executive
Office Building, Washington, DC 20503; Attention: Desk Officer for the
Employee Benefits Security Administration. Although comments may be
submitted through April 13, 2007, OMB requests that comments be
received within 30 days of publication of the Notice of Interim Final
Rulemaking to ensure their consideration.
PRA Addressee: Address requests for copies of the ICR to Susan G.
Lahne, Office of Policy and Research, U.S. Department of Labor,
Employee Benefits Security Administration, 200 Constitution Avenue,
NW., Room N-5718, Washington, DC 20210. Telephone: (202) 693-8410; Fax:
(202) 219-5333. These are not toll-free numbers.
This regulation implements the content requirements for the written
cross-trading policies and procedures required under section
408(b)(19)(H) of ERISA, as added by section 611(g) of the PPA. As
described earlier in this preamble, section 611(g)(1) of the PPA
created a new statutory exemption, added to section 408(b) of ERISA as
subsection 408(b)(19), that exempts from the prohibitions of sections
406(a)(1)(A) and 406(b)(2) of ERISA cross-trading transactions
involving the purchase and sale of a security between an account
holding assets of a pension plan and any other account managed by the
same investment manager, provided that certain conditions are
satisfied.
The information collection provisions of the regulation safeguard
plan assets by ensuring that important information about an investment
manager's cross-trading program is provided to plan fiduciaries prior
to their decision whether to begin or continue participation in the
cross-trading program. The information collections also assist in
ensuring that investment managers relying on the statutory exemption
effect cross-trades in accordance with the criteria described in the
policies and procedures.
Under the interim final regulation, an investment manager would be
required to develop written cross-trading policies and procedures that
meet the regulation's content requirements and to disclose them to plan
fiduciaries prior to their deciding whether to invest plan assets in an
account managed under the cross-trading program. The regulation would
provide that the policies and procedures for cross-trading under the
new statutory exemption must include detailed explanations and
descriptions of certain aspects of the investment manager's cross-
trading program, as explained earlier in this preamble. These
information collections, therefore, constitute third-party disclosures
between an investment manager and plan fiduciaries.
Annual Hour Burden
Based on data derived primarily from the Form 5500 Series filings
for the 2001 to 2003 plan years, which is the most recent reliable data
available, the Department estimates that approximately 2,100 \6\ plans
would be eligible to, and would likely, participate in cross-trading
programs.\7\ Further, the Department estimates that approximately 1,600
investment managers would serve as investment managers for the assets
of such eligible plans.\8\ On average, the Department estimates that
each of the 1,600 investment managers will manage assets of nine plans.
Assuming that 90 percent of the 1,600 investment managers have cross-
trading programs, investment managers would be required to provide
about 13,000 initial disclosures of cross-trading policies and
procedures to plan fiduciaries (1,600 investment managers x 9 plans
each x 90 percent = 13,000 initial disclosures). The Department assumes
that each investment manager would require 10 hours of a financial
analyst's time to develop written policies and procedures in the first
year.\9\ For the 90 percent of the 1,600 investment managers that
develop cross-trading programs, the Department estimates an initial
annual hour burden of a little over 14,000 hours.
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\6\ All numbers in this burden analysis, apart from the hourly
wage rates, have been rounded either to the nearest thousand or the
nearest hundred, as appropriate.
\7\ Under the statutory exemption, ``each plan participating in
a cross-trading transaction must have assets of at least
$100,000,000, except that if the assets of a plan are invested in a
master trust containing the assets of plans maintained by employers
in the same controlled group (as defined in section 407(d)(7)), the
master trust has assets of at least $100,000,000.''
\8\ Because of a plan of this size likely to use the services of
more than one investment manager to invest its assets, the
Department has assumed that some of the eligible plans will have
assets invested under more than one cross-trading program.
\9\ The Department assumed that investment managers, which are
large, sophisticated financial institutions, will use existing in-
house resources to prepare the information and disclosures.
---------------------------------------------------------------------------
Each investment manager would be required to provide the cross-
trading policies and procedures as an initial disclosure to each plan.
The Department assumes that the initial disclosure will be provided in
writing to provide a desired formality of compliance. Thus, the
Department estimates that investment managers will be required to
provide about 13,000 initial plan disclosures to plan fiduciaries (90
percent of 1,600 investment managers, times nine plans) in the first
year in which the exemption is effective. The Department assumes that 3
(three) minutes of clerical time per plan disclosure will be needed to
gather the required information, collate and package the information
for distribution, and ensure that the information is distributed, for a
total of 650 hours of clerical time.
In years subsequent to the first year of applicability, the
Department estimates that new policies and procedures will be written
by investment managers whose policies and procedures have changed and
by investment managers that inaugurate new cross-trading programs. For
purposes of burden analysis, the Department has assumed that the number
of investment managers that either change or newly adopt cross-trading
policies and procedures in a subsequent year will equal 14 percent of
the investment managers that currently have cross-trading policies and
procedures, or about 200 managers. These 200 investment managers will
each spend 10 hours of a financial analyst's time to develop new
written policies and procedures, for a total of about 2,000 hours each
year. These investment managers are also estimated to distribute their
new written policies and procedures to 1,800 plan fiduciaries. This
would require 90 hours of clerical time.
In total, the initial disclosure of cross-trading policies and
procedures is estimated to require about 15,000 hours in the first year
(14,000 hours of financial analysts' time + 650 hours of clerical time
= 14,650 hours total) and about 2,100 hours in each subsequent year
(2,000 hours of financial analysts' time + 90 hours of clerical time =
2,090 hours total). The equivalent costs of these hours are $779,000
and $109,000, respectively.\10\
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\10\ Hourly wage estimates, for purposes of deriving cost
equivalents, were based on data from the Bureau of Labor Statistics
Occupational Employment Survey (November 30, 2004) and the 2005
Employment Cost Trends. Clerical wage and benefits estimates were
based on metropolitan wage rates for Executive Secretaries and
Administrative Assistants. Professional wage and benefits estimates
were based on metropolitan wage estimates for Financial Analysis.
The resulting hourly wage rates were $53, including both wages and
benefits, for professional financial analysts and $25, similarly
including both wages and benefits, for clerical personnel.
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[[Page 6478]]
Annual Cost Burden
The only additional costs arising from this information collection
derive from the direct costs of distribution.
The Department believes that initial disclosure of the investment
manager's written policies and procedures to plan fiduciaries eligible
to participate in the investment manager's cross-trading program will
be prepared in paper form and distributed by mail delivery service,
courier or some other means of distribution that will create a record
of delivery. For the initial disclosures to the plan fiduciaries
assumed to receive such disclosure, the Department assumes a
distribution cost of $4.00 per plan. This includes the actual cost of
distribution, plus any overhead costs associated with printing the
documentation. Given that about 90% of the approximately 1,600
investment managers are estimated to engage in cross-trading and that
each of them manages on average nine plans, investment managers would
have to prepare about 13,000 disclosures to plan fiduciaries. The total
initial annual cost burden for distributing the required notice amounts
to $52,000.
In years subsequent to the first year of applicability, policies
and procedures will only have to be distributed by investment managers
that develop new policies and procedures. For purposes of burden
analysis, the Department has assumed that the number of investment
managers that will do so in a subsequent year will be equal to 14
percent of existing investment managers with cross-trading programs, or
about 200 managers.
The distribution of these new written policies and procedures in a
subsequent year to plan fiduciaries will require material and postage
costs of $4.00 per plan. Assuming that, on average, the assets of about
nine plans are managed by each investment manager, this would require a
little more than 1,800 disclosures annually and about $7,300 annually
in materials and postage costs.
In total, the initial disclosure of policies and procedures is
estimated to require about $52,000 for materials and postage in the
first year and about $7,300 in each subsequent year.
These paperwork burden estimates are summarized as follows:
Type of Review: New collection.
Agency: Employee Benefits Security Administration, Department of
Labor.
Title: Statutory Exemption for Cross-Trading of Securities.
OMB Number: 1210-NEW.
Affected Public: Business or other for-profit; not-for-profit
institutions.
Respondents: 1,440.
Responses: 13,000.
Frequency of Response: Occasionally.
Estimated Total Annual Burden Hours: 15,000 (first year); 2,100
(subsequent years).
Estimated Total Annual Burden Cost: $52,000 (first year); $7,300
(subsequent years).
Congressional Review Act
The interim final rule being issued here is subject to the
provisions of the Congressional Review Act provisions of the Small
Business Regulatory Enforcement Fairness Act of 1996 (5 U.S.C. 801 et
seq.) and will be transmitted to Congress and the Comptroller General
for review. The interim final rule is not a ``major rule'' as that term
is defined in 5 U.S.C. 804, because it does not result in (1) an annual
effect on the economy of $100 million or more; (2) a major increase in
costs or prices for consumers, individual industries, or Federal,
State, or local government agencies, or geographic regions; or (3)
significant adverse effects on competition, employment, investment,
productivity, innovation, or on the ability of United States-based
enterprises to compete with foreign-based enterprises in domestic and
export markets.
Unfunded Mandates Reform Act
For purposes of the Unfunded Mandates Reform Act of 1995 (Pub. L.
104-4), the interim final rule does not include any Federal mandate
that may result in expenditures by State, local, or tribal governments,
or impose an annual burden exceeding $100 million on the private
sector.
Federalism Statement
Executive Order 13132 (August 4, 1999) outlines fundamental
principles of federalism and requires Federal agencies to adhere to
specific criteria in the process of their formulation and
implementation of policies that have substantial direct effects on the
States, the relationship between the national government and the
States, or on the distribution of power and responsibilities among the
various levels of government. This interim final rule does not have
federalism implications because it has no substantial direct effect on
the States, on the relationship between the national government and the
States, or on the distribution of power and responsibilities among the
various levels of government. Section 514 of ERISA provides, with
certain exceptions specifically enumerated, that the provisions of
Titles I and IV of ERISA supersede any and all laws of the States as
they relate to any employee benefit plan covered under ERISA. The
requirements implemented in the interim rule do not alter the
fundamental provisions of the statute with respect to employee benefit
plans, and as such would have no implications for the States or the
relationship or distribution of power between the national government
and the States.
List of Subjects in 29 CFR Part 2550
Employee benefit plans, Employee Retirement Income Security Act,
Employee stock ownership plans, Exemptions, Fiduciaries, Investments,
Investments foreign, Party in interest, Pensions, Pension and Welfare
Benefit Programs Office, Prohibited transactions, Real estate,
Securities, Surety bonds, Trusts and trustees.
Cross-Trading Policies and Procedures Regulation
0
For the reasons set forth in the preamble, subchapter F, part 2550 of
title 29 of the Code of Federal Regulations is amended as follows:
SUBCHAPTER F--FIDUCIARY RESPONSIBILITY UNDER THE EMPLOYEE RETIREMENT
INCOME SECURITY ACT OF 1974
PART 2550--RULES AND REGULATIONS FOR FIDUCIARY RESPONSIBILITY
0
1. The authority citation for part 2550 is revised to read as follows:
Authority: 29 U.S.C. 1135; sec. 657, Pub. L. 107-16, 115 Stat.
38; sec. 611, Pub. L. 109-280, 120 Stat. 780; and Secretary of
Labor's Order No. 1-2003, 68 FR 5374 (Feb. 3, 2003). Sec. 2550.401c-
1 also issued under 29 U.S.C. 1101. Sec. 2550.404c-1 also issued
under 29 U.S.C. 1104. Sec. 2550.407c-3 also issued under 29 U.S.C.
1107. Sec. 2550.408b-1 also issued under 29 U.S.C. 1108(b)(1) and
sec. 102, Reorganization Plan No. 4 of 1978, 3 CFR, 1978 Comp., p.
332, effective Dec. 31, 1978, 44 FR 1065 (Jan. 3, 1978), and 3 CFR,
1978 Comp., p. 332. Sec. 2550.408b-19 also issued under sec. 611,
Pub. L. 109-280, 120 Stat. 780, 972, and sec. 102, Reorganization
Plan No. 4 of 1978, 3 CFR, 1978 Comp., p. 332, effective Dec. 31,
1978, 44 FR 1065 (Jan. 3, 1979), and 3 CFR, 1978 Comp., p. 332. Sec.
2550.412-1 also issued under 29 U.S.C. 1112.
0
2. Add Sec. 2550.408b-19 to read as follows:
Sec. 2550.408b-19 Statutory exemption for cross-trading of
securities.
(a) In General. (1) Section 408(b)(19) of the Employee Retirement
Income Security Act of 1974 (the Act) exempts from the prohibitions of
section
[[Page 6479]]
406(a)(1)(A) and 406(b)(2) of the Act any cross-trade of securities if
certain conditions are satisfied. Among other conditions, the exemption
requires that the investment manager adopt, and effect cross-trades in
accordance with, written cross-trading policies and procedures that are
fair and equitable to all accounts participating in the cross-trading
program, and that include:
(i) A description of the investment manager's pricing policies and
procedures, and
(ii) The investment manager's policies and procedures for
allocating cross-trades in an objective manner among accounts
participating in the cross-trading program.
(2) Section 4975(d)(22) of the Internal Revenue Code of 1986 (the
Code) contains parallel provisions to section 408(b)(19) of the Act.
Effective December 31, 1978, section 102 of Reorganization Plan No. 4
of 1978, 5 U.S.C. App. 214 (2000 ed.), transferred the authority of the
Secretary of the Treasury to promulgate regulations of the type
published herein to the Secretary of Labor. Therefore, all references
herein to section 408(b)(19) of the Act should be read to include
reference to the parallel provisions of section 4975(d)(22) of the
Code.
(3) Section 408(b)(19)(D) of the Act requires that a plan fiduciary
for each plan participating in the cross-trades receive in advance of
any cross-trades disclosure regarding the conditions under which the
cross-trades may take place. This disclosure must be in a document that
is separate from any other agreement or disclosure involving the asset
management relationship. The disclosure must contain a statement that
any investment manager participating in a cross-trading program will
have a potentially conflicting division of loyalties and
responsibilities to the parties involved in any cross-trade
transaction.
(4) The standards set forth in this section apply solely for
purposes of determining whether an investment manager's written
policies and procedures satisfy the content requirements of section
408(b)(19)(H) of the Act. Accordingly, such standards do not determine
whether the investment manager satisfies the other requirements for
relief under section 408(b)(19) of the Act.
(b) Policies and Procedures.
(1) In General. This paragraph specifies the content of the written
policies and procedures required to be adopted by an investment manager
and disclosed to the plan fiduciary prior to authorizing cross-trading
in order for transactions to qualify for relief under section
408(b)(19) of the Act.
(2) Style and Format. The content of the policies and procedures
required by this paragraph must be clear and concise and written in a
manner calculated to be understood by the plan fiduciary authorizing
cross-trading. Although no specific format is required for the
investment manager's written policies and procedures, the information
contained in the policies and procedures must be sufficiently detailed
to facilitate a periodic review by the compliance officer of the cross-
trades and a determination by such compliance officer that the cross-
trades comply with the investment manager's written cross-trading
policies and procedures.
(3) Content. (i) An investment manager's policies and procedures
must be fair and equitable to all accounts participating in its cross-
trading program and reasonably designed to ensure compliance with the
requirements of section 408(b)(19)(H) of the Act. Such policies and
procedures must include:
(A) A statement of policy which describes the criteria that will be
applied by the investment manager in determining that execution of a
securities transaction as a cross-trade will be beneficial to both
parties to the transaction;
(B) A description of how the investment manager will determine that
cross-trades are effected at the ``independent current market price''
of the security (within the meaning of Sec. 270.17a-7(b) of Title 17,
Code of Federal Regulations and SEC no-action and interpretative
letters thereunder) as required by section 408(b)(19)(B) of the Act,
including the identity of sources used to establish such price;
(C) A description of the procedures for ensuring compliance with
the $100,000,000 minimum asset size requirement of section 408(b)(19).
A plan or master trust will satisfy the minimum asset size requirement
as to a transaction if it satisfies the requirement upon its initial
participation in the cross-trading program and on a quarterly basis
thereafter;
(D) A description of how the investment manager will mitigate any
potentially conflicting division of loyalties and responsibilities to
the parties involved in any cross-trade transaction;
(E) A requirement that the investment manager allocate cross-trades
among accounts in an objective and equitable manner and a description
of the allocation method(s) available to and used by the investment
manager for assuring an objective allocation among accounts
participating in the cross-trading program. If more than one allocation
methodology may be used by the investment manager, a description of
what circumstances will dictate the use of a particular methodology;
(F) Identification of the compliance officer responsible for
periodically reviewing the investment manager's compliance with section
408(b)(19)(H) of the Act and a statement of the compliance officer's
qualifications for this position; and
(G) A statement which describes the scope of the review conducted
by the compliance officer, specifically noting whether such review is
limited to compliance with the policies and procedures required by
408(b)(19)(H), or whether such review extends to any determinations
regarding the overall level of compliance with the other requirements
of section 408(b)(19) of the Act.
(ii) Nothing herein is intended to preclude an investment manager
from including such other policies and procedures not required by this
regulation as the investment manager may determine appropriate to
comply with the requirements of section 408(b)(19).
(c) Definitions. For purposes of this section:
(1) The term ``account'' includes any single customer or pooled
fund or account.
(2) The term ``compliance officer'' means an individual designated
by the investment manager who is responsible for periodically reviewing
the cross-trades made for the plan to ensure compliance with the
investment manager's written cross-trading policies and procedures and
the requirements of section 408(b)(19)(H) of the Act.
(3) The term ``plan fiduciary'' means a person described in section
3(21)(A) of the Act with respect to a plan (other than the investment
manager engaging in the cross-trades or an affiliate) who has the
authority to authorize a plan's participation in an investment
manager's cross-trading program.
(4) The term ``investment manager'' means a person described in
section 3(38) of the Act.
(5) The term ``plan'' means any employee benefit plan as described
in section 3(3) of the Act to which Title I of the Act applies or any
plan defined in section 4975(e)(1) of the Code.
(6) The term ``cross-trade'' means the purchase and sale of a
security between a plan and any other account managed by the same
investment manager.
[[Page 6480]]
Signed at Washington, DC, this 6th day of February, 2007.
Bradford P. Campbell,
Acting Assistant Secretary, Employee Benefits Security Administration,
Department of Labor.
[FR Doc. E7-2290 Filed 2-9-07; 8:45 am]
BILLING CODE 4510-29-P
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