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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



 
Last Updated 04/02/2008

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