[Federal Register: October 7, 2008 (Volume 73, Number 195)]
[Rules and Regulations]
[Page 58450-58459]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07oc08-8]
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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: Final rule.
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SUMMARY: This document contains a 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 No. 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 final rule
affects employee benefit plans, investment managers, plan fiduciaries
and plan participants and beneficiaries.
DATES: Effective Date: This final rule is effective February 4, 2009.
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
No. 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)(2) 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
[[Page 58451]]
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. In accordance with section 611(g)(3) of the PPA, the
Department of Labor (the Department) published an interim final rule on
Monday, February 12, 2007 (72 FR 6473) in the Federal Register for
public comment. The Department received 4 comment letters in response
to its request for comments. Submissions are available for review under
Public Comments on the Laws & Regulations page of the Department's
Employee Benefits Security Administration Web site at http://
www.dol.gov/ebsa.
Set forth below is an overview of the final rule, along with a
discussion of the public comments submitted on the interim final rule.
B. Overview of Final Rule and Comments
1. General
Paragraph (a) of the final rule describes the general requirement
of section 408(b)(19)(H) of the Act, which requires investment managers
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. The policies and
procedures must 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.
Paragraph (a)(3) of the interim final rule stated that 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 in a document that is separate from any other agreement
or disclosure involving the asset management relationship. The interim
final rule required that the disclosure 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. In the interest of
clarity, the Department has determined to delete this statement from
the interim final rule and to amend the policies and procedures under
paragraph (b)(3)(i)(D) of the final rule to require that the policies
and procedures contain a statement regarding a manager's conflicting
loyalties and responsibilities to the parties to the cross-trade
transaction and a description of how the investment manager will
mitigate such conflicts.\2\
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\2\ The policies and procedures containing the disclosure
statement must be provided to the plan fiduciary that authorized the
plan to participate in the investment manager's cross-trading
program in advance of any cross-trade. For a further explanation of
this amendment, see the discussion of paragraph (b)(3)(i)(D) under
the heading 2. Content of Policies and Procedures--Sec.
2550.408(b)-19(b)(3)(i), below.
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Paragraph (a)(4) of the final rule, like paragraph (a)(4) of the
interim final rule, states that the standards set forth in the 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 for relief
under section 408(b)(19) of the Act.\3\
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\3\ In this regard, the Department notes that the investment
manager's cross-trading program may also be subject to the
requirements of applicable Federal securities laws.
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2. Content of Policies and Procedures--Sec. 2550.408(b)-19(b)(3)(i)
Paragraph (b)(3) of the final rule, like the interim final rule,
sets forth 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 authorizing cross-trading
in order for transactions to qualify for relief under section
408(b)(19) of the Act. Paragraph (b)(3)(i) provides that 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.
Several commenters requested additional clarification and guidance
concerning the policies and procedures to be followed by investment
managers in connection with cross-trades under Sec. 2550.408b-
19(b)(3)(i) of the interim final rule. One commenter recommended that
the interim final rule be revised to ensure that investment managers
will not be subject to cross-trading disclosure requirements that are
more extensive than those currently applicable to registered investment
advisers to mutual funds under SEC Rule 17a-7, issued under the
Investment Company Act of 1940.\4\ The commenter argued that many of
the provisions of the PPA regarding cross-trading are substantially
similar to the provisions of Rule 17a-7, and that the Department and
SEC share the same underlying policy considerations regarding cross-
trade transactions. Therefore, the commenter concluded that the final
rule should be consistent with, and comparable to, the Rule 17a-7
cross-trading provisions and any inconsistencies and additional
disclosure obligations should be eliminated from the interim final rule
to the extent possible. One commenter opined that, to the extent that
some investment managers execute cross-trades on behalf of both mutual
funds and pension plans, the imposition of this requirement would prove
administratively burdensome insofar as it would require managers to
adopt different cross-trading policies and procedures for different
clients.
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\4\ 17 CFR 270.17a-7.
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Another commenter suggested that the Department establish a ``safe
harbor'' provision in the final rule whereby the adoption of a fair
allocation rule for cross-trades that meets the requirements of the
Investment Company Act of 1940 would automatically satisfy the
requirements of the statutory exemption.
The Department has not adopted the commenters' suggestions in light
of the significant differences between Rule 17a-7 and the statutory
exemption. The Department recognizes that Congress modeled certain
aspects of the cross-trading statutory exemption on Rule 17a-7. For
example, both Rule 17a-7 and ERISA section 408(b)(19) limit cross-
trades to purchases or sales for cash of securities for which market
quotations are readily available. In addition, the transactions must be
effected at the independent current market price of the security as
described in Rule 17a-7(b) and no brokerage commissions or fees (except
for customary transfer fees) may be paid in connection with the
transactions.
Rule 17a-7, however, places primary responsibility on the mutual
fund's board of directors (a majority of whom must be independent of
the mutual fund) to adopt the mutual fund's cross-trading policies and
procedures, to make and approve changes as the board deems necessary,
and to determine no less frequently than quarterly that all purchases
and sales during the preceding quarter were effected in
[[Page 58452]]
compliance with the policies and procedures. In contrast, ERISA section
408(b)(19) requires the investment manager to adopt the written cross-
trading policies and procedures and to effect cross-trades in
accordance with such procedures.
In recognition of the differences between mutual funds and ERISA-
covered employee benefit plans, the statutory exemption requires the
investment manager to appoint a compliance officer to periodically
review purchases and sales to ensure compliance with the cross-trading
policies and procedures adopted by the manager. The statutory exemption
also adds the requirement that the investment manager and compliance
officer provide detailed, advance and periodic disclosures to the plan
fiduciary responsible for authorizing the investment manager to engage
in cross-trading on the plan's behalf. In effect, the expanded role of
the compliance officer under ERISA section 408(b)(19), coupled with
more detailed disclosures to the independent fiduciary, functions in a
manner similar to the mutual fund's board of directors under Rule 17a-
7. Accordingly, the Department has not adopted the commenters'
suggestions.
Another commenter suggested that the language of subsection
(b)(3)(i) be revised to read as follows:
(i) An investment manager's policies and procedures must be
reasonably designed (1) to ensure that the transactions entered into
pursuant to the policies and procedures are fair and equitable to
all accounts participating in its cross-trading program and (2) to
ensure compliance with the requirements of section 408(b)(19)(H) of
the Act and the requirements of this regulation.
The commenter stated that such a modification would be desirable
because the fairness and equity of the policies and procedures would be
evaluated, not on the basis of their written terms, but rather on the
basis of the results of the cross-trades executed pursuant to such
terms. After consideration of the comment, the Department has
determined not to adopt the commenter's suggestion. In the Department's
view, the suggested modification is inconsistent with section
408(b)(19)(H) of the Act, which requires an 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.
Paragraph (b)(3)(i)(D) of the interim final rule required an
investment manager's cross-trading policies and procedures to contain a
description of how the investment manager will mitigate any conflicting
loyalties and responsibilities to the parties involved in any cross-
trade transaction. Several commenters recommended the deletion of this
provision. They suggested that, taken together, the remaining
requirements in the interim final rule under Sec. 2550.408b-
19(b)(3)(i)--such as the statement of policy describing the criteria
that will be applied by the investment manager in determining that the
transaction is beneficial to both parties to the cross-trade, the
requirement that cross-trades be effected at the independent current
market price of the security, and the requirement that cross-trading
opportunities be allocated in an objective and equitable manner--are
sufficient to mitigate such conflicts, thus obviating the need for this
additional procedural requirement.
The Department has not adopted this suggestion. The Department
believes that sole reliance upon an independent current market price
and an objective allocation method will not reduce the potential for
abusive practices such as ``cherry picking'' \5\ or ``dumping'' \6\ of
securities among client accounts in a manner designed to favor one
account over the other. The content requirements in Sec. 2550.408(b)-
19(b)(3)(i)(A) and (D) address these potential abusive practices by
requiring the investment manager to adopt, and adhere to, policies and
criteria that are designed to ensure that conflicts of interest are
mitigated. These provisions also reinforce the general proposition
that, notwithstanding the relief provided in ERISA section 408(b)(19),
the Act's general standards of fiduciary conduct apply to an investment
manager's decision to cross-trade securities on behalf of any plan. In
this regard, the Department has amended paragraph (b)(3)(i)(D) of the
final rule to require that the policies and procedures contain a
statement regarding a manager's conflicting loyalties and
responsibilities \7\ to the parties to the cross-trade transaction in
addition to a description of how the investment manager will mitigate
such conflicts. One commenter suggested that the policies and
procedures should do more than simply describe how conflicts will be
mitigated. The commenter suggested that the rule be revised to require
each proposed transaction to be evaluated by two qualified individuals
employed at the investment manager firm, each acting for only one of
the plans involved, other than the individuals who made the initial
determination to engage in the cross-trade under consideration.
According to the commenter, this additional level of review, even
though not truly independent because the individuals are employees of
the investment manager, would provide additional protection. The
Department has not adopted this suggestion because it would add
significant costs that could obviate the financial advantages of cross-
trading.
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\5\ ``Cherry picking'' of securities refers to a practice where
an investment manager with discretion on both sides of a transaction
utilizes cross-trading to transfer particular securities from less
favored accounts to promote the interests of more favored accounts.
\6\ ``Dumping'' of securities refers to a practice where an
investment manager with discretion on both sides of a transaction
utilizes cross-trading to transfer particular securities to less
favored accounts to promote the interests of more favored accounts.
\7\ The Department notes the deletion of the word
``potentially'' from the operative language of the interim final
rule in the phrase ``potentially conflicting loyalties and
responsibilities''. The Department believes that there is an
inherent conflict of interests when there is a common investment
manager for both sides of a transaction. The Department has taken
the position that, where an investment manager has investment
discretion with respect to both sides of a cross-trade of securities
and at least one side is an employee benefit plan account, a
violation of section 406(b)(2) would occur. (See Complaint, Reich v.
Strong Capital Management, Inc., No. 96-C-0669, E.D. Wis., June 6,
1996). The Department has also taken the position that by
representing the buyer on one side and the seller on the other in a
cross-trade, a plan fiduciary acts on behalf of parties that have
interests adverse to each other. (See Complaint, Strong Capital
Management, Inc., supra).
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The same commenter suggested that the rule should be modified to
require that the statement about potential conflicts be prominently
displayed in a bold font sufficiently large (at least 14 point) to be
distinguishable from the rest of the text included in the disclosure to
the independent fiduciary. In addition, the commenter suggested that
the Department consider requiring the font size for the entire
disclosure statement to be no less than 12 point. The final regulation
does not include this suggestion. The Department does not believe that
it is necessary to provide a specific format for this statement.
Although the Department believes that these statements in the policies
and procedures should be prominently displayed in a manner that will
bring it to the attention of the independent fiduciary, it does not
believe it is necessary to require a specific font size.
3. Role and Responsibility of the Compliance Officer--Sec. 2550.408b-
19(b)(3)(i)(F)
Paragraph (b)(3)(i)(F) of the final rule, like the interim final
rule, requires an investment manager's cross-trading policies and
procedures to identify the compliance officer responsible for
[[Page 58453]]
periodically reviewing the investment manager's compliance with section
408(b)(19)(H) of the Act and to include a statement of the compliance
officer's qualifications for this position.
Several commenters disagreed with the interim final rule's
requirement that each investment manager identify, by name, the
compliance officer who will review the cross-trading program and
specify that individual's qualifications for the position. One
commenter stated that notifying all ERISA clients each time the person
with compliance responsibilities changes is burdensome and expensive,
given that the individuals performing these compliance duties are
replaced from time to time. Such compliance responsibilities, the
commenter further stated, are typically a matter of corporate, rather
that individual, responsibility.
Another commenter agreed with the Department's position that the
compliance officer should be identified and recommended that the
compensation paid to the compliance officer should not be materially
affected by any trading resulting from the transactions that are
reviewed to ensure the compliance officer's independence.
The Department has determined not to amend the regulation to adopt
these suggestions. In the Department's view, it is important for the
plan fiduciary authorizing a plan to engage in cross-trading to know
the identity and qualifications of the compliance officer, since this
information could impact the fiduciary's decision to participate in an
investment manager's cross-trading program. Moreover, it may be useful
for the approving plan fiduciary to know the extent of compliance
officer turnover in an investment manager's cross-trading program. The
Department believes that the benefits of providing these disclosures to
the authorizing plan fiduciary outweigh any associated burdens.
The Department has determined not to amend the rule to provide that
the compensation paid to the compliance officer should not be
materially affected by any trading resulting from the transactions that
are reviewed. In the Department's view, limitations on the compliance
officer's compensation are beyond the scope of this regulatory
proceeding. The Department believes that section 408(b)(19)(I) of the
Act, which requires that the compliance officer sign the annual report
to the authorizing plan fiduciary under penalty of perjury, provides a
sufficient deterrent to ensure that the compliance officer will act
independently in periodically reviewing purchases and sales under the
investment manager's cross-trading program.
Most of the commenters requested that the Department clarify the
role and responsibilities of the compliance officer under the rule. One
commenter suggested that the Department modify the interim final rule
to stipulate that, in reviewing the cross-trading transactions of an
investment manager who is also registered as an investment adviser with
the SEC, the compliance officer may perform his or her duties in a
manner consistent with the SEC rules regarding the role of a chief
compliance officer under the Investment Advisers Act of 1940 and the
Investment Company Act of 1940. According to the commenter, these rules
permit a chief compliance officer to rely upon others (including
independent third parties, such as independent certified public
accounting firms) to carry out the review of the adequacy and
effectiveness of the policies and procedures, and do not require a
review of every cross-trade. The commenter further suggested that the
compliance review mandated by ERISA section 408(b)(19)(I) should be
subject to the oversight of the designated compliance officer, who, in
turn, would be permitted to delegate responsibility for certain aspects
of the review.
The Department has not adopted these suggestions in the final rule.
The Department believes that the respective roles of the chief
compliance officer under Rule 38a-1 of the Investment Company Act of
1940 (17 CFR 270.38a-1) and the compliance officer under the cross-
trading statutory exemption differ in a number of respects. Under the
Investment Company Act, the chief compliance officer is approved by,
and serves at the pleasure of, the mutual fund's board of directors
(including a majority of independent directors) and can be removed by
the board at any time. The chief compliance officer also must meet with
the independent directors at least once each year. On the other hand,
the compliance officer under ERISA section 408(b)(19) is designated by
the investment manager, and there is no direct parallel under ERISA to
the board of directors' oversight. Moreover, the ERISA compliance
officer is responsible for the periodic review of the cross-trades and
the preparation of the annual report that must be furnished to the
independent fiduciary of each plan participating in the cross-trading
program. Although nothing in the final rule prohibits a compliance
officer from delegating certain aspects of its responsibilities under
ERISA section 408(b)(19)(I), the compliance officer is ultimately
responsible for the review under penalty of perjury.
Several of the commenters also proposed that, rather than
conducting a review of each individual cross-trade, the compliance
officer should be permitted to periodically assess the overall
effectiveness of the policies and procedures through a representative
sampling of cross-trades. Although the Department did not specifically
address this issue in the interim final rule, the Department notes that
nothing in the final rule would preclude cross-trades from being
reviewed using an appropriate sampling methodology based upon the
universe of cross-trades effected by the investment manager under the
exemption, provided that the sample methodology is disclosed in the
investment manager's policies and procedures. The Department expects
auditors to ensure that the sample selected is an appropriate
representation of the total universe of transactions engaged in over
the entire test period.
4. Compliance Officer's Review--Sec. 2550.408b-19(b)(3)(i)(G)
In order to inform plan fiduciaries regarding the scope of
compliance reviews conducted by the compliance officer, paragraph
(b)(3)(i)(G) of the final rule, like the interim final rule, 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 ERISA section 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.
Two commenters expressed concern about this provision. One
commenter stated that a compliance officer's performance of any review
responsibilities beyond assessing compliance with the requirements of
ERISA section 408(b)(19)(H) would be inconsistent with the extent of a
compliance officer's duties under the Investment Advisers Act of 1940.
Accordingly, the commenter recommended that the interim final rule be
revised to limit the scope of the officer's review to the narrower
statutory provision. Another commenter noted that the provision
permitting the compliance officer to review adherence to the totality
of the requirements contained in section 408(b)(19) is unnecessary and
should be deleted. According to the commenter, the requirement that the
policies and procedures include a statement that the review does not
cover more than is
[[Page 58454]]
required implies that the scope of the review is somehow deficient.
The Department continues to believe that disclosure of the scope of
the compliance officer's review is an important consideration that may
influence an authorizing fiduciary's determination of whether to
participate, or continue participation, in the investment manager's
cross-trading program. It also places the approving plan fiduciary on
notice of the extent to which it may rely on the compliance officer's
review in performing its monitoring duties. Nonetheless, the Department
did not intend for such a statement to imply that a review only for
compliance with the policies and procedures described in section
408(b)(19)(H), as opposed to all requirements of the statutory
exemption, would be deficient. Therefore, the Department has modified
the final rule to require that the policies and procedures only provide
a statement regarding the scope of the compliance officer's review. In
order to ensure that authorizing plan fiduciaries are aware that the
other conditions of the statutory exemption also must be satisfied, the
final rule has been modified further to require that the policies and
procedures include a statement that the ERISA cross-trading statutory
exemption requires satisfaction by the investment manager of a number
of objective conditions in addition to the requirements that the
investment manager adopt and effect cross-trades in accordance with
written cross-trading policies and procedures.
5. Definition of Investment Manager--Sec. 2550.408b-19(c)(4)
Like the interim final rule, paragraph (c)(4) of the final rule
defines the term ``investment manager'' by cross-referencing the
definition of such term in section 3(38) of the Act. One commenter
stated that the final rule would be a suitable regulatory vehicle for
the Department to clarify the term ``investment manager,'' noting that
the definition in section 3(38) of the Act excludes trustees. This
commenter maintained that the Department has taken the view that the
exclusion of trustees generally from the section 3(38) definition was
not intended to exclude bank trustees, such as collective trust
trustees or an institutional bank trustee managing assets on a separate
account basis. Accordingly, the commenter requested guidance from the
Department that would enable trustees of bank collective trusts to use
the cross-trading exemption if the other conditions of the statutory
exemption are met.
The Department reiterates that the term ``investment manager,'' as
used in Title I of ERISA,\8\ is defined in ERISA section 3(38) to mean,
in pertinent part, any fiduciary (other than a trustee or named
fiduciary, as defined in section 402(a)(2))--
(A) Who has the power to manage, acquire, or dispose of any
asset of a plan;
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\8\ See ERISA sections 402(c)(3) and 403(a)(2) regarding the
appointment of an investment manager.
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(B) who (i) is registered as an investment adviser under the
Investment Advisers Act of 1940[, 15 U.S.C. 80b-1 et seq.]; (ii) is
not registered as an investment adviser under such Act by reason of
paragraph (1) of section 203A(a) of such Act[, 15 U.S.C. 80b-3a(a)],
is registered as an investment adviser under the laws of the State
(referred to in such paragraph (1)) in which it maintains its
principal office and place of business, and, at the time the
fiduciary last filed the registration form most recently filed by
the fiduciary with such State in order to maintain the fiduciary's
registration under the laws of such State, also filed a copy of such
form with the Secretary; (iii) is a bank, as defined in that Act; or
(iv) is an insurance company qualified to perform services described
in subparagraph (A) under the laws of more than one State; and
(C) has acknowledged in writing that he is a fiduciary with
respect to the plan.
The Department has not adopted this suggestion in the final rule
because it is inconsistent with the statutory definition. However, the
Department notes that the parenthetical expression ``other than a
trustee or named fiduciary'' in ERISA section 3(38) does not preclude a
trustee from serving as an investment manager, so long as the trustee
meets the requirements set forth in subsections (A), (B), and (C) of
ERISA section 3(38) and is formally appointed as an investment manager
by a named fiduciary. (See DOL Advisory Opinion 77-69/70).
6. Additional Comments
Cross-Trades With Investment Manager's Affiliates
Several commenters requested that the Department clarify the rule
by expressly permitting cross-trades between the account of an
investment manager and the account of an investment manager's
affiliate. One commenter noted that many cross-trading programs cover
trades between accounts of affiliated managers. For example, a
financial institution may have separate investment adviser subsidiaries
managing mutual funds and separate account investments, and a trust
company subsidiary managing collective investment funds. To facilitate
cross-trading with client plans, the commenter urged the Department to
clarify that the purchase and sale of a security between accounts
managed by the ``same investment manager'' in ERISA section 408(b)(19)
includes both a single investment manager, as well as affiliated
investment managers, and that the term ``affiliate'' encompasses an
entity controlling, controlled by, or under common control with, the
investment manager. Another commenter stated that, absent such
clarification, cross-trades involving plan assets executed between the
accounts of an investment manager and its affiliate could be construed
to violate ERISA section 406(b)(2).
In the Department's view, securities trades executed between an
account managed by an investment manager and an account managed by an
affiliate of such manager are beyond the scope of the statutory
exemption. The Department believes that the language of ERISA section
408(b)(19), which provides relief for any transaction described in
ERISA sections 406(a)(1)(A) and 406(b)(2) ``involving the purchase and
sale of a security between accounts managed by the same investment
manager,'' only applies to the purchase and sale of a security between
accounts managed by the same investment management entity. In this
regard, the Department notes that an investment manager's exercise of
discretionary authority, on behalf of an account it manages, to effect
a purchase or sale of a security with another account over which an
affiliate of the manager exercises discretionary authority would not,
in itself, constitute a violation of 406(b)(2) of ERISA. However, a
violation of ERISA's prohibited transaction provisions could arise in
operation if, in fact, there was an agreement or understanding between
the affiliated entities to favor one managed account at the expense of
the other account in connection with the transaction. Finally, the
Department notes that individual portfolio managers employed by the
same investment management entity may execute cross-trades in
accordance with the relief provided by the statutory exemption.
Quarterly Report Under ERISA Section 408(b)(19)(F) and Annual Report
Under ERISA Section 408(b)(19)(I)
One commenter noted that the regulation did not discuss the
investment manager's quarterly report required under ERISA section
408(b)(19)(F). The commenter requested that the Department include a
provision in the final rule clarifying that the actual names of the
counterparties do not have to be provided in the quarterly report,
[[Page 58455]]
but that such parties could be identified by type, i.e., endowment,
insurance company account, mutual fund, or other institutional account.
This commenter expressed concern that without this clarification,
investment managers may violate confidentiality provisions in client
contracts. The Department notes that the interim final rule addressed
the content of the written cross-trading policies and procedures that
must be adopted by the investment manager in order to comply with the
requirements of the statutory exemption. However, the interim final
rule did not address any issues related to the quarterly report. In
this regard, the Department notes that the quarterly report described
in section 408(b)(19)(F) of the Act requires detailed disclosures of
all cross-trades executed by the manager during the quarter, including
the parties involved in the cross-trade. In light of the language in
the statutory exemption, the Department does not concur with the
commenter's suggested clarification.
Another commenter stated that the rule should be expanded to
address the compliance officer's annual report. The commenter noted
that the statutory language requiring the report to provide
notification to the plan fiduciary of its right to terminate
participation in the cross-trading program at any time is very
important. Therefore, the commenter suggested that the opt out language
should be prominent and in a bold font sufficiently large (at least 14
point) to be distinguishable from the rest of the text included in the
disclosure. Although the Department believes that the language in the
annual report regarding a fiduciary's right to terminate its
participation in the cross-trading program at any time should be
prominently displayed in a manner that will bring it to the attention
of the independent fiduciary, it does not believe that it is necessary
to require a specific font size.
Consequences of Non-Compliance With Policies and Procedures
One commenter asked the Department to clarify that non-compliance
with the policies and procedures mandated by the interim final rule
would not, in itself, invalidate the applicability of the statutory
exemption to either a specific cross-trade transaction or to any cross-
trades undertaken by a particular investment manager. The commenter
expressed the view that Congress did not intend that non-compliance
with the policies and procedures, in itself, would cause the exemption
not to be available for cross-trades by a particular manager, provided
that the non-compliance did not result in a failure to conform with the
conditions stipulated in ERISA section 408(b)(19)(A) through (G). To
support this view, the commenter noted that the annual compliance
report mandated in ERISA section 408(b)(19)(I) requires only that
instances of non-compliance with the investment manager's policies and
procedures be reported to the plan fiduciary authorizing the cross-
trades. Following receipt of this report, the authorizing fiduciary
would then make a determination as to whether the non-compliance
warrants further action (such as termination of the authorization).
In response to the commenter's suggestion, the Department notes
that ERISA section 408(b)(19)(H) requires that, in order for the
exemption to apply, the investment manager must adopt, and cross-trades
must be effected in accordance with, written cross-trading policies and
procedures. It is the Department's view that the exemption would be
unavailable for any transaction that was not effected in accordance
with cross-trading policies and procedures that satisfy the
requirements of section 408(b)(19)(H) and the regulations issued
thereunder. The Department is of the further view that reporting
instances of non-compliance serves as a notice to the plan fiduciary
but does not relieve the investment manager from the responsibility to
comply with the requirements of the statutory exemption. However,
individual instances of non-compliance with the policies and procedures
by the investment manager would not, in itself, render the statutory
exemption inapplicable to the investment manager's entire cross-trading
program, provided that the other cross-trading transactions met all of
the requirements of section 408(b)(19) of the Act.
Application of Final Rule to Pooled Investment Vehicles
Several commenters suggested modification of the minimum plan asset
size required for participation in the manager's cross-trading program
by clarifying that the cross-trading exemption is available to a common
or collective trust or other pooled investment vehicle where at least
one participating plan has assets of at least $100 million. One
commenter stated that this clarification should also extend to master-
feeder trust arrangements, where the only investors in the ``master''
collective trust (i.e., the entity that would engage in cross-trades)
are other collective trusts. Under this approach, subject to the
requirement that one of the participating ``feeder'' trusts includes a
plan with assets of at least $100 million, the entire master trust
would be permitted to cross-trade with the consent of an authorizing
fiduciary of the $100 million plan. According to the commenter, absent
such clarification, a plan that meets the $100 million minimum asset
requirement may not be able to utilize the cross-trading exemption
where it participates in such a collective trust or other pooled
investment vehicle.
Another commenter suggested that the final regulation should
clarify that a pooled fund is eligible to use the statutory exemption
if ERISA-covered plans with more than $100 million in assets hold 50
percent or more of the units of such pooled investment fund. Plans
would have the option not to invest in pooled investment funds that
intend to engage in cross-trading or to withdraw from the fund if the
cross-trading program begins after the plan's initial investment. This
commenter stated that it believes the Department has sufficient
regulatory authority to create a pooled fund rule.
Another commenter suggested that cross-trades should be allowed (i)
by plans meeting a $50 million threshold and (ii) between plans
maintained by employers in the same controlled group, as long as ERISA
plans within the same controlled group meet the minimum threshold
requirements in the aggregate.
The Department has not adopted the commenters' suggestions, because
it believes that the proposed changes are inconsistent with ERISA
section 408(b)(19)(E), which requires ``each plan participating in the
transaction [to have] assets of at least $100,000,000.'' The only
exception to this requirement is for master trusts containing the
assets of plans maintained by employers in the same controlled group,
in which case the master trust must have assets of at least
$100,000,000. In this regard, the Department notes that pooled
investment vehicles comprised solely of plans with assets of at least
$100 million may take advantage of the statutory exemption.
Minimum Asset Size Test
Several commenters requested that the Department modify the
procedure contained in the interim final rule for verifying that any
plan (or master trust containing the assets of plans maintained by
employers in the same controlled group) participating in a manager's
cross-trading program has assets of at least $100 million.
Specifically, the interim final rule at section 2550.408b-
19(b)(3)(i)(C) provided that ``[a] plan or master trust will satisfy
the minimum asset size
[[Page 58456]]
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.'' The commenters expressed the view that
annual, rather than quarterly, verification of the minimum asset size
requirement would be more practical for investment managers and plan
sponsors.
One commenter pointed out that many managers obtain updated
information about their clients only on an annual basis. Moreover,
cross-trading managers who oversee only a portion of a plan's assets
may not have continuous access to information on the client plan's
overall asset level.
Another commenter suggested that the Department adopt an
alternative means for satisfying the minimum asset test. Under such an
approach, a plan fiduciary would be required to certify satisfaction of
the $100 million threshold at the inception of its participation in the
cross-trading program, and to inform the investment manager if the
asset level subsequently falls below the minimum asset requirement.
In response to these comments, the Department has modified the rule
to provide that a plan's minimum asset size may be verified on an
annual basis.
Individual Exemptive Relief for Smaller Plans
One commenter requested that the Department issue an administrative
class exemption for plans with assets below $100 million. This
commenter stated that plans below the $100 million requirement may have
less bargaining power to obtain lower commissions from brokers and
potentially could benefit more from cross-trading relative to larger
plans.
The Department wishes to take the opportunity to state that
enactment of the statutory exemption for cross-trading does not
foreclose future consideration of administrative relief if the required
findings under section 408(a) of ERISA can be made.
Effective Date
The Department recognizes that implementation issues may arise
concerning the effect of the final rule on investment managers that
adopted cross-trading policies and procedures and made disclosures to,
and obtained authorizations from, independent fiduciaries in reliance
on the interim final regulation. After considering this issue, the
Department has determined to make the final regulation effective 120
days after publication. Also, it is the view of the Department that an
investment manager that obtained a fiduciary's authorization, in
accordance with section 408(b)(19)(D) of the Act, prior to the
effective date of this final regulation and based on compliance with
the interim final regulation, will not be required to obtain a re-
authorization following disclosures that reflect this final regulation.
C. 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. Pursuant to the terms of the
Executive Order, it has been determined that this action is not
``significant'' within the meaning of section 3(f) of the Executive
Order, and, therefore, is not subject to review by OMB.
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 initially was 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 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
In accordance with the requirements of the Paperwork Reduction Act
of 1995 (PRA) (44 U.S.C. 3506(c)(2)), the interim final rule solicited
comments on the information collection included in the rule. The
Department also submitted an information collection request (ICR) to
OMB in accordance with 44 U.S.C. 3507(d), contemporaneously with the
publication of the interim final rule, for OMB's review. No public
comments were received that specifically addressed the paperwork burden
analysis of the information collection.
OMB approved the ICR on April 27, 2007 under control number 1210-
0130, which expires on April 30, 2010. This final rule does not
implement any substantive or material change to the information
collection; therefore, no change is made to the ICR, and no further
review is requested of OMB at this time. The burden cost and hours were
adjusted to reflect updated wage rates and a small increase in the
estimated number of investment managers who are expected to engage in
cross-trading.
A copy of the ICR may be obtained by contacting the PRA addressee
shown below.
PRA Addressee: Gerald B. Lindrew, 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) 219-4745. These are not toll-free
numbers. ICRs submitted to OMB are
[[Page 58457]]
also available at reginfo.gov (http://www.reginfo.gov/public/do/
PRAMain).
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 collection also assists 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 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 participating in 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. This
information collection, therefore, constitutes third-party disclosures
between an investment manager and plan fiduciaries.
Annual Hour Burden
Based on data derived primarily from the Form 5500 Annual Return/
Report of Employee Benefit Plan filings for the 2001 to 2005 plan
years, which is the most recent reliable data available, the Department
estimates that approximately 2,200 \9\ plans would be eligible to
participate in cross-trading programs. Further, the Department
estimates that approximately 1,800 \10\ investment managers would serve
as investment managers for the assets of such eligible plans.\11\ On
average, the Department estimates that each of the 1,800 investment
managers will manage assets of nine plans. Assuming that 90 percent of
the 1,800 investment managers have cross-trading programs, investment
managers would be required to provide about 15,000 initial disclosures
of cross-trading policies and procedures to plan fiduciaries (1,800
investment managers * 9 plans each * 90 percent = 14,580 initial
disclosures). The Department assumes that each investment manager would
require 10 hours of a legal professional's time to develop written
policies and procedures in the first year.\12\ For the 90 percent of
the 1,800 investment managers that develop cross-trading programs, the
Department estimates an initial annual hour burden of a little over
16,000 hours.
---------------------------------------------------------------------------
\9\ 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.
\10\ Under the statutory exemption, ``each plan participating in
the 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.'' ERISA section
408(b)(19)(E).
\11\ Because a plan of this size is 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.
\12\ 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 15,000 initial plan disclosures to plan fiduciaries (90
percent of 1,800 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 in a
manner that will create a record of delivery, for a total of about 730
hours of clerical time.
In years subsequent to the first year of applicability, the
Department estimates that modified policies and procedures will be
written by investment managers whose policies and procedures have
changed, and new policies and procedures will be written 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 230 managers. These 230 investment managers will
each spend 10 hours of a legal professional's time to develop new
written policies and procedures, for a total of about 2,300 hours each
year. These investment managers are also estimated to distribute their
new written policies and procedures to 2,000 plan fiduciaries. This
would require about 100 hours of clerical time.
In total, the initial disclosure of cross-trading policies and
procedures is estimated to require about 17,000 hours in the first year
(16,200 hours of legal professional's time + 729 hours of clerical time
= 16,929 hours total) and about 2,400 hours in each subsequent year
(2,268 hours of legal professional's time + 102 hours of clerical time
= 2,370 hours total). The equivalent costs of these hours are
$1,735,000 and $243,000, respectively.\13\
---------------------------------------------------------------------------
\13\ Hourly wage estimates for purposes of deriving cost
equivalents were based on data of the Occupational Employment Survey
(March 2005, Bureau of Labor Statistics) and the Employment Cost
Trends (Sept. 2006, Bureau of Labor Statistics). The resulting
hourly wage rates were $106, including both wages and benefits, for
legal professionals and $25, similarly including both wages and
benefits, for clerical personnel.
---------------------------------------------------------------------------
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 1,800
investment managers are estimated to engage in cross-trading and that
each of them
[[Page 58458]]
manages on average nine plans, investment managers would have to
prepare a little less than 15,000 disclosures to plan fiduciaries. The
total initial annual cost burden for distributing the required notice
amounts to $58,000.
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 230 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 2,000 disclosures annually and about $8,200 annually
in materials and postage costs.
In total, the initial disclosure of policies and procedures is
estimated to require about $58,000 for materials and postage in the
first year and about $8,200 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: 1210-0130.
Affected Public: Business or other for-profit; not-for-profit
institutions.
Respondents: 1,600 (first year); 230 (subsequent years).
Responses: 15,000 (first year); 2,000 (subsequent years).
Frequency of Response: Occasionally.
Estimated Total Annual Burden Hours: 17,000 (first year); 2,400
(subsequent years).
Estimated Total Annual Burden Cost: $58,000 (first year); $8,200
(subsequent years).
Congressional Review Act
The 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 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 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 or more, adjusted for
inflation, 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 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 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 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.
0
For the reasons set forth above, the Department amends 29 CFR part 2550
as follows:
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; 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. 2550.404a-1 also issued under sec. 657, Pub. L.
107-16, 115 Stat. 38. Sections 2550.404c-1 and 2550.404c-5 also
issued under 29 U.S.C. 1104. Sec. 2550.408b-1 also issued under 29
U.S.C. 1108(b)(1) and sec. 102, Reorganization Plan No. 4 of 1978, 5
U.S.C. App. 1. 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, 5 U.S.C. App. 1. Sec. 2550.412-1 also issued under 29
U.S.C. 1112.
0
2. Revise Sec. 2550.408b-19 to part 2550 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 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
[[Page 58459]]
disclosure regarding the conditions under which the cross-trades may
take place, including the written policies and procedures described in
section 408(b)(19)(H) of the Act. This disclosure must be in a document
that is separate from any other agreement or disclosure involving the
asset management relationship. For purposes of section 408(b)(19)(D) of
the Act, the policies and procedures furnished to the authorizing
fiduciary must conform with the requirements of this regulation.
(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.
(1)(b) Policies and Procedures. 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 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;
(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 an annual basis
thereafter;
(D) A statement that any investment manager participating in a
cross-trading program will have conflicting loyalties and
responsibilities to the parties involved in any cross-trade transaction
and a description of how the investment manager will mitigate such
conflicts;
(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;
(G) A statement that the cross-trading statutory exemption under
section 408(b)(19) of the Act requires satisfaction of several
objective conditions in addition to the requirements that the
investment manager adopt and effect cross-trades in accordance with
written cross-trading policies and procedures; and
(H) A statement which specifically describes the scope of the
annual review conducted by the compliance officer.
(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.
Signed at Washington, DC, this 29th day of September, 2008.
Bradford P. Campbell,
Assistant Secretary, Employee Benefits Security Administration,
Department of Labor.
[FR Doc. E8-23434 Filed 10-6-08; 8:45 am]
BILLING CODE 4510-29-P