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Trust Examination Manual
US
Department of Labor
Cross
Trading Statutory Exemption
29
CFR Part 2550
RIN 1210–AB17
Statutory
Exemption for Cross-Trading of Securities
AGENCY:
Employee Benefits Security Administration, Department of Labor
ACTION:
Interim final rule with request for comments.
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.
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
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.
2.
Add § 2550.408b–19 to read as follows:
§ 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 crosstrading 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 crosstrades in an objective manner
among accounts participating in the crosstrading 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
crosstrades 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§ 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 crosstrading 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 crosstrades 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 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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