[Federal Register Volume 63, Number 219 (Friday, November 13, 1998)]
[Notices]
[Pages 63503-63510]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-30291]
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Prohibited Transaction Exemption 98-54; Application Number D-09643]
Class Exemption Relating to Certain Employee Benefit Plan;
Foreign Exchange Transactions Executed Pursuant to Standing
Instructions
AGENCY: Pension and Welfare Benefits Administration, Labor.
ACTION: Grant of class exemption.
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SUMMARY: This document contains a final exemption from certain
prohibited transaction restrictions of the Employee Retirement Income
Security Act of 1974
[[Page 63504]]
(ERISA or the Act) and from certain taxes imposed by the Internal
Revenue Code of 1986 (the Code). The class exemption permits certain
foreign exchange transactions between employee benefit plans and
certain banks and broker-dealers which are parties in interest with
respect to such plans, pursuant to standing instructions. The exemption
affects participants and beneficiaries of employee benefit plans
involved in such transactions, as well as banks and broker-dealers
which act as dealers in foreign exchange.
EFFECTIVE DATES: Section II is effective for transactions occurring
from June 18, 1991 to January 12, 1999. Section III is effective for
transactions occurring after January 12, 1999.
FOR FURTHER INFORMATION CONTACT: Lyssa E. Hall, Office of Exemption
Determinations, Pension and Welfare Benefits Administration, U.S.
Department of Labor, Washington, DC 20210 (202) 219-8971 (not a toll-
free number) or Susan E. Rees, Plan Benefits Security Division, Office
of the Solicitor, (202) 219-4600, ext. 105 (not a toll-free number).
Paperwork Reduction Act Analysis: Pursuant to the Paperwork
Reduction Act of 1995, Pub. L. 104-13, 44 U.S.C. Chapter 35 and 5 CFR
Part 1320, the information collection request (ICR) in this class
exemption was published for public comment on February 3, 1997 (62 FR
5051). Based upon information received by the Department of Labor (the
Department), the estimated information collection burden has been
adjusted (see Respondents and Proposed Frequency of Response and
Estimated Annual Burden, below). The Office of Management and Budget
(OMB) has approved this ICR with the control number OMB 1210-0111,
which expires on November 30, 2001. Persons are not required to respond
to this ICR unless it displays a currently valid OMB control number.
Respondents and Proposed Frequency of Response: The Department
staff estimates that approximately 35 parties will seek to take
advantage of the class exemption in any given year. The respondents
will be banks and broker-dealers acting as fiduciaries of plans which
engage in foreign exchange transactions with such plans.
Estimated Annual Burden: The Department staff estimates the annual
burden hours for preparing disclosure materials and maintaining records
required under the class exemption to be 4,200 hours.
Supplementary Information
The proposed exemption was initially requested in an application
dated July 18, 1984 (Application No. D-5700), submitted by the American
Bankers Association (ABA) pursuant to section 408(a) of ERISA and
section 4975(c)(2) of the Code, and in accordance with the procedures
set forth in ERISA Procedure 75-1 (40 FR 18471, April 28, 1975).
Pursuant to the foregoing authority, the Department proposed additional
conditions with respect to the relief requested by the Applicant.
On February 17, 1994, the Department granted PTE 94-20 (59 FR
8022), a class exemption which permits purchases and sales of foreign
currencies between employee benefit plans and certain banks or broker-
dealers which are parties in interest with respect to such plans
provided that such transactions are directed by a plan fiduciary who is
independent of the bank or broker-dealer and the other conditions of
the exemption are met. PTE 94-20 provides an exemption from the
prohibited transaction restrictions of section 406(a)(1)(A) through (D)
of the Act and from the sanctions resulting from section 4975(a) and
(b) of the Code by reason of section 4975(c)(1)(A) through (D) of the
Code. PTE 94-20 did not provide relief for all of the transactions
described in the 1984 ABA exemption request.
In response to the notice of proposed exemption for PTE 94-20, a
number of commenters (the Commenters) expressed concern regarding the
lack of relief for foreign exchange transactions executed pursuant to
standing instructions. As explained in greater detail in the preamble
to PTE 94-20, the Commenters requested that the Department expand the
exemption to include retroactive and prospective relief for foreign
exchange transactions entered into pursuant to a ``standing
authorization'' (hereinafter standing instruction). Many of the
Commenters also requested that the Department amend the definition of
the term ``directed transaction'' by modifying the requirement that the
independent plan fiduciary effect the foreign exchange transaction at a
specific exchange rate.
The Commenters represented that the utilization of standing
instructions is an integral component in foreign exchange transactions
involving employee benefit plans. In this regard, the Commenters
indicated that, without the ability to execute foreign exchange
transactions with plans pursuant to standing instructions, plans would
lose investment income and incur higher exchange rates on small
transactions.
Based upon the comments and additional information received
following publication of the proposal to PTE 94-20, the Department
concluded that it might be appropriate, under limited circumstances, to
provide relief from section 406(b)(1)and (b)(2) of the Act for foreign
exchange transactions entered into pursuant to standing instructions.
However, pursuant to the requirements of section 408(a) of the Act, the
Department is required to offer interested persons an opportunity to
present their views and an opportunity to request a hearing before
granting an exemption from section 406(b) of the Act. Therefore, in
order not to have delayed the publication of PTE 94-20, the Department
determined to separately consider exemptive relief from sections
406(a)(1)(A) through (D), 406(b)(1) and (b)(2) of the Act for foreign
exchange transactions between a plan and a party in interest bank or,
broker-dealer where such transactions are engaged in pursuant to a
standing instruction.
During the Department's consideration of the standing instruction
issue, the ABA made a supplemental submission on September 1, 1992, in
which they limited their request for relief for standing instruction
transactions and suggested additional conditions regarding such
transactions. Over the course of the following two years, the
Department solicited further information from the ABA and other
interested parties. As a result of the suggestions and comments
received from those parties, as well as the imposition of additional
conditions by the Department, the Department believed that a number of
its concerns regarding standing instruction 1 transactions
have been addressed.
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\1\ For a discussion of those Comments, see the proposed
exemption at 62 FR 5052-54.
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On February 3, 1997, the Department published a notice in the
Federal Register (62 FR 5051) of the pendency of a proposed class
exemption from the restrictions of sections 406(a)(1)(A) through (D),
406(b)(1) and (b)(2) of ERISA and from the taxes imposed by section
4975(a) and (b) of the Code, by reason of section 4975 (c)(1)(A)
through (E) of the Code for foreign exchange transactions, between a
bank or broker-dealer and an employee benefit plan with respect to
which the bank or broker-dealer is a trustee, custodian, fiduciary or
other party in interest, pursuant to a standing instruction.
The notice of pendency gave all interested persons an opportunity
to submit written comments or request a public hearing on the proposed
class exemption by April 4, 1997. The Department received three public
comment letters and no requests for a public hearing in response to the
notice.
[[Page 63505]]
Upon consideration of the record as a whole, the Department has
determined to grant the proposed class exemption, subject to certain
modifications. These modifications and the comments are discussed
below.
Discussion of the Comments
Section III(i) of the proposed exemption contains a condition which
requires that a bank or broker-dealer which engaged in a covered
transaction, furnish the authorizing plan fiduciary with a confirmation
statement for each covered transaction. The confirmation statement must
disclose the time of the exchange.2 All of the Commenters
objected to this requirement. According to the Commenters, time
stamping confirmation statements is not a current industry practice,
nor a practice which could be easily implemented. The Commenters
indicated that the cost of disclosing the time of the transaction on
the confirmation statements would far outweigh any benefits to be
gained.
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\2\ Under the proposal, this requirement would be deemed
satisfied if the bank or broker-dealer engaged in the covered
transactions only once a day and the time of such conversions is set
forth in the bank's or broker-dealer's written policies and
procedures which are provided to the independent plan fiduciary.
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One Commenter explained in greater detail why the inclusion of the
time on the confirmation statement was not only impractical but also
unresponsive to our concern that a plan fiduciary be able to monitor
the rates charged in foreign exchange transactions. According to the
Commenter, a time-stamp enables a plan to look at the rates available
at the time stamped, without regard to whether those rates would have
been available for transactions the size of that particular plan's
transaction. In addition, the information may be misleading because the
trade may or may not have been batched with other trades to achieve a
better rate for the client plan. Where trades are aggregated prior to
conversion, it may take several hours before the investment manager
desegregates the trades and allocates pieces to each of its clients.
The trade is not time-stamped until it has been allocated to each
client and booked into the trade entry system. The trade entry system
uses a current time-stamp and cannot be manipulated to reflect the time
when the actual transaction occurred. Thus, the rate at the time that
the order is stamped may have nothing to do with the rate at which the
trade was executed.
In addressing the Department's concern regarding the ability of
plan fiduciaries to monitor the rates charged in foreign exchange
transactions, the Commenter noted that there are a variety of sources
from which foreign exchange price quotes are available. These include
Reuters, electronic brokerage systems and the Internet. The Commenter
indicated that the foreign exchange market is very transparent as a
result of new technologies and that any plan which engages in foreign
exchange trading can easily access at least one of the sources of
foreign currency rates. Thus, plan fiduciaries have the ability to
monitor prices for trades by reviewing the highs and lows of the day as
displayed on one of the reporting services. In addition, the Commenter
noted that in order to comply with banking safety and soundness
requirements, banks must have a system for detecting trades which are
off market i.e., whose currency spreads deviate significantly from
other trades in the same currency. These internal safeguards enable a
bank to monitor its own traders to maintain the integrity of their
foreign currency pricing systems.
The Department has considered the comments regarding the
requirement for inclusion of the time of the transaction on the
confirmation statement and has determined to delete this requirement
from the final exemption.
The Department wishes to point out that ERISA's general standards
of fiduciary conduct would apply to the standing instruction
arrangements permitted by this class exemption. Section 404 of ERISA
requires, among other things, that a fiduciary discharge his duties
with respect to a plan solely in the interest of the plan's
participants and beneficiaries and in a prudent fashion.3
Specifically, the investment manager or independent plan fiduciary must
be capable of periodically monitoring the actions taken by the bank or
broker-dealer in the course of its execution of foreign exchange
transactions pursuant to standing instructions. In considering whether
to authorize a bank or broker-dealer to execute foreign exchange
transactions pursuant to standing instructions, a fiduciary should take
into account its ability to provide adequate oversight of the bank or
broker-dealer.
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\3\ The investment manager or other independent plan fiduciary
must act prudently with respect to the decision to enter into such
an arrangement, such as considering the effect of restrictions on
funds transfers by foreign governments, as well as to the
negotiation of the specific terms under which the bank or broker-
dealer will engage in foreign exchange transactions on behalf of the
plan including whether the bank or broker-dealer may use non-
affiliated foreign custodians. In addition, the investment manager
or other independent plan fiduciary must fully understand the
benefits and risks associated with engaging in foreign exchange
transactions pursuant to standing instructions, following disclosure
by the bank or broker-dealer of all relevant information.
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Under section I of the proposed exemption, relief was provided for
transactions involving income item conversions, as well as for de
minimis purchase or sale transactions. The definition of ``income item
conversion'' under section IV(g) was limited to transactions involving
the exchange of income conversion items into U.S. dollars. The
Department imposed this limitation because of concerns regarding the
ability of a bank to maintain converted funds in an interest bearing
account. The ABA requested that the Department expand the scope of the
final exemption to include the conversion of foreign denominated income
receipts into another foreign currency pursuant to standing
instructions. The Commenter represents that plans benefit from foreign
exchange conversions under standing instructions because the foreign
exchange trades can be done quickly and the plans can begin to earn
interest on the funds as soon as possible. The ABA further represents
that some financial institutions have interest bearing investments or
investment pools that will accept currencies that are not U.S. dollars.
Accordingly, the ABA suggested that the Department modify the final
exemption to permit the conversion of income items into non-U.S.
dollars under any of the following circumstances: (1) Income items
which are received in a foreign currency are exchanged into another
foreign currency and the exchanged funds are held in an interest
bearing investment vehicle pending further investment instruction; (2)
the conversion is executed pursuant to a standing instruction and the
reinvestment of the exchanged foreign currency occurs within a
prescribed period of time, such as 24 hours; and (3) the standing
instruction directs that an income item be converted from one foreign
currency into another foreign currency. According to the ABA, plans
will receive the benefit of only going through one conversion instead
of two, thus, saving the cost of one foreign exchange transaction. In
this regard, the Department is unable to conclude that income item
conversions into non-U.S. dollars should be permitted under the final
exemption if the plan is not able to earn interest on the conversion
amounts which are held by the bank for more than 24 hours after
conversion. We note, however, that such conversions may be appropriate
where interest is earned on amounts held for more than 24 hours after
conversion as long as the bank does not determine the non-U.S.
[[Page 63506]]
currency into which the income item is converted. Accordingly, the
Department has determined to modify the definition of the term income
item conversion in the final exemption to provide relief for
transactions in which the bank has a standing instruction that requires
the conversion of income items from one foreign currency into another
foreign currency and either the converted funds are transferred to an
interest bearing account within 24 hours of the conversion and held
therein pending further investment direction from the plan or the bank
reinvests such proceeds within 24 hours of the conversion at the
direction of the plan. In response to the Commenter's third suggestion,
the Department does not believe that the Commenter has adequately
demonstrated that such further relief is warranted. Therefore, the
Department has determined not to adopt the Commenter's last suggestion.
Section IV (g) and (h) of the proposed exemption define the terms
``income item conversion'' and ``de minimis purchase or sale
transaction'' to limit relief to transactions involving no more than
100,000 in U.S. dollars or the equivalent thereof for each transaction.
Two Commenters urged the Department to reconsider the $100,000
limitation for such transactions. The ABA stated that the $100,000
limitation may add costs to employee benefit plan foreign exchange
transactions. It was explained, for example, that banks may hold
foreign securities through a global custody network of affiliated and
non-affiliated subcustodians. Under these circumstances, securities
issued in a foreign country are commingled with the securities of a
number of the bank's clients and held in omnibus accounts at the bank's
subcustodians in that foreign country. For tax reasons, omnibus
accounts may be further divided into several subaccounts maintained at
the subcustodians. According to the Commenter, foreign exchange
conversions are transacted at either the omnibus account level or the
subaccount level to expedite the conversion and to enable the
conversion to be bundled. Since the process of allocating income items
to individual accounts is not done until after the conversion takes
place, a bank would not know the amount of any particular plan's assets
that are involved at the time of the foreign exchange transaction.
Thus, the Commenter noted that a bank could not determine whether a
transaction met the $100,000 limitation proposed by the Department for
income conversions. The Commenter argues that, if a plan was unable to
take advantage of the omnibus or subaccount system, the plan would be
precluded from receiving the benefit of bundling its income conversion
items with the bank's other customers to get a more favorable foreign
exchange rate. In addition, the Commenters represent that plans would
incur increased custody costs if the omnibus or subaccounts system was
not available for plan foreign exchange transactions.
Both Commenters urged the Department to raise the dollar limitation
for de minimis purchases and sales and income conversions. According to
the Commenters, $100,000 is no longer an adequate limitation for either
purchase and sale transactions or income conversions. The ABA suggested
that the Department adopt a floating cap based on the size of a plan's
total assets. Under this approach, a plan with $50 million or more in
total assets would be limited to $500,000 under the exemption. Plans
with total assets of less than $50 million would be limited to $100,000
for each foreign exchange transaction. As an alternative suggestion,
the Commenter urged the Department to raise the dollar limitation to
$500,000 and inform small plans in the preamble to the final class
exemption that it may be prudent to utilize standing instructions with
a lower dollar limit.
One of the major reasons cited by the ABA for the utilization of
standing instructions by plans was that obtaining specific directions
from plans for relatively small transactions was time consuming and not
in the best interests of plans because of increased transaction costs.
At the time the Department proposed relief for income item conversions
and de minimis purchases and sales, such relief was based on the
premise that the exemption would only cover transactions involving the
receipt of relatively small amounts of foreign currency. In this
regard, the conditions proposed by the Department were specifically
designed to address foreign exchange transactions in the context of
small transactions. Although the ABA initially suggested a $500,000
limitation, the Department believed at the time that a limitation of
$100,000 was a more appropriate measure for transactions which are
intended to be relatively small. The Department recognizes that, over
the past several years, plans have increased foreign investments so
that $100,000 may no longer be an appropriate limitation for income
item conversions or de minimis purchases and sales. However, the
Department is not persuaded by the argument that a foreign exchange
transaction involving $500,000 should be properly viewed as a small
transaction for purposes of this exemption. After considering the
issue, the Department has decided to modify the final exemption to
increase the limitation to $300,000. The Department believes that
increasing the dollar limitation to $300,000 will make it easier for
those banks which use the omnibus/subaccount system to monitor the
amount of a plan's assets which are involved in a foreign exchange
transaction. In addition, a $300,000 limitation will ensure that the
transactions that a plan is permitted to engage in pursuant to this
exemption will only be those which are relatively small. Accordingly,
the Department has modified the definitions of the terms ``income item
conversion'' and ``de minimis purchase or sale transaction'' to
increase the dollar limitation to no more than 300,000 in U.S. dollars
or the equivalent thereof.\4\
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\4\ Although the Department believes that the $300,000
limitation is appropriate for large plans that purchase and sell
foreign securities, it further notes that such dollar limitation may
not be appropriate for smaller plans (e.g., plans with aggregate
plan assets of less than $50 million). It is the responsibility of
the investment manager or other plan fiduciary, consistent with its
duties under section 404 of ERISA, to utilize standing instructions
with a dollar limitation that is prudent under the particular
circumstances.
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Sections II(d) and III(d) of the proposed class exemption require
banks and broker-dealers to maintain written policies and procedures
regarding the handling of foreign exchange transactions for plans which
assure that the person acting for the bank or broker-dealer knows that
he or she is dealing with a plan. A Commenter represents that, since a
subaccount typically holds the securities of a number of customers
which are not ERISA covered plans, foreign exchange traders would not
always know whether the funds involved in a specific foreign exchange
transaction contain plan assets. It is the view of the Department that
sections II(d) and III(d) will be deemed satisfied if bank policies and
procedures for handling foreign exchange transactions require the bank
or broker-dealer to always assume that foreign exchange trades of
amounts held in subaccounts involve plan assets.
Section III(h) of the proposed exemption required that the written
policies and procedures provided to the authorizing fiduciary disclose
the time(s) each day that the bank or broker-dealer will establish the
specific rate of exchange or the range of exchange rates, as well as
the time(s) that the conversions will take place. The ABA requested
that the Department clarify whether this condition requires that a
[[Page 63507]]
bank with several locations in different time zones engage in foreign
exchange transactions at all locations at the same time period based on
a specific time zone (i.e., 10:00 a.m. New York and 4 p.m. London).
The Department notes that the purpose of this condition is to
provide the authorizing fiduciary with the information necessary to
effectively monitor the rates that the plans are charged. The
Department does not interpret this condition to require that a bank's
foreign exchange desks located in different time zones establish
foreign exchange rates simultaneously with their U.S. affiliate.
Accordingly, nothing contained in section III(h) would preclude a bank
or broker-dealer from setting exchange rate(s) at different times if
the bank or broker-dealer engages in foreign exchange transactions at
locations in different time zones, provided that this information is
provided to the authorizing fiduciary.
Two Commenters requested that the Department delete the requirement
under section III(f) of the proposal that a non-affiliated custodian
provide notice to the bank or broker-dealer that good funds have been
received no later than two business days following receipt of such
funds by the foreign custodian. The Commenters noted that, while non-
affiliated subcustodians are generally required to send notice
promptly, the banks do not control the actions of their non-affiliated
subcustodians and thus cannot monitor or control when notice of good
funds will be provided. The Commenters also noted that even absent this
requirement, conversions will still have to be executed by the bank
either at the next scheduled time for such transactions following
receipt of notice from the non-affiliated subcustodian that good funds
have been received or under some circumstances not more than 24 hours
after receipt of such notice.
After considering the comments, the Department has determined to
delete this requirement as it pertains to non-affiliated custodians of
the bank or broker-dealer. In this regard, the Department expects the
bank or broker-dealer to act prudently with respect to the selection
and continued retention of a non-affiliated foreign custodian. Any such
determination should reflect the capability of the foreign affiliate to
promptly notify the bank or broker-dealer of its receipt of good funds.
The prospective conditional relief under the proposal is effective
for covered transactions entered into after May 5, 1997. The ABA urged
the Department to delay application of the prospective conditions of
the exemption for sixty days after publication of the final class
exemption. According to the ABA, the banking industry needs sufficient
time to change their practices to meet the requirements and conditions
of the final exemption. The Department finds merit in this comment and
has modified the final exemption to make the prospective conditions
effective sixty days after publication of this final class exemption.
The proposed exemption provided conditional retroactive relief for
foreign exchange transactions which were executed pursuant to standing
instructions from June 18, 1991, until May 5, 1997. The ABA questioned
why the Department did not provide retroactive relief for transactions
which were executed pursuant to standing instructions prior to June 18,
1991.
The Department does not believe that the Commenter has sufficiently
demonstrated the need for an earlier effective date. Therefore, the
Department cannot conclude that an earlier effective date is warranted.
One Commenter expressed concern regarding the provision in section
III(g)(1) of the proposed class exemption which limits the number of
times per day that a bank or broker-dealer could establish a rate of
exchange or a range of rates to be used for transactions covered by the
exemption. The Commenter stated that they could see no purpose in this
limitation. Moreover, the Commenter believes that in highly active
markets it would not be in the best interests of plans to set an
arbitrary limit.
The Department finds merit in the Commenter's argument and has
determined to delete this limitation from the final exemption. We note,
however, that the written policies and procedures provided to the
authorizing fiduciary must disclose, among other things, the time(s)
each day that the rate(s) will be established.
One Commenter requested that the final exemption be expanded to
include relief for ``a limited standing instruction,'' in order to
permit transactions to occur at market prices within one business day
after the instruction is given without the requirement that a specific
amount of foreign currency and a specific exchange rate be directed,
provided that a fiduciary independent of the broker-dealer specifies a
price range and a quantity range in which the transaction should be
conducted. The Department does not believe that it has sufficient
information on the record at this time to make the findings necessary
to provide further exemptive relief. Moreover, the Department does not
believe that a sufficient showing has been made that the conditions
suggested by the Commenter would adequately protect the interests of
participants and beneficiaries of plans which engage in transactions
pursuant to the limited standing instructions. Finally, we note that
while the class exemption is only available to banks, broker-dealers
and their domestic affiliates, many of the conditions in the exemption
apply to both domestic and foreign affiliates. Accordingly, we have
added a new paragraph (l) which defines the term ``foreign affiliate'',
to the final class exemption to clarify this distinction.
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and section 4975(c)(2) of the Code does
not relieve a fiduciary or other party in interest or disqualified
person from certain other provisions of the Act and the Code, including
any prohibited transaction provisions to which the exemption does not
apply and the general fiduciary responsibility provisions of section
404 of the Act which require, among other things, that a fiduciary
discharge his duties with respect to the plan solely in the interests
of the participants and beneficiaries of the plan and in a prudent
fashion in accordance with section 404(a)(1)(B) of the Act; nor does it
affect the requirement of section 401(a) of the Code that the plan must
operate for the exclusive benefit of the employees of the employer
maintaining the plan and their beneficiaries;
(2) In accordance with section 408(a) of ERISA and section
4975(c)(2) of the Code, the Department finds that the exemption is
administratively feasible, in the interests of plans and their
participants and beneficiaries and protective of the rights of
participants and beneficiaries of the plans.
(3) The class exemption is applicable to a transaction only if the
conditions specified in the class exemption are met; and
(4) The class exemption is supplemental to, and not in derogation
of, any other provisions of ERISA and the Code, including statutory or
administrative exemptions and transitional rules. Furthermore, the fact
that a transaction is subject to an administrative or statutory
exemption is not dispositive of whether the transaction is in fact a
prohibited transaction.
[[Page 63508]]
Exemption
Accordingly, the following exemption is granted under the authority
of section 408(a) of the Act and section 4975(c)(2) of the Code, and in
accordance with the procedures set forth in 29 ERISA Procedure 75-1 (40
FR 18471, April 28, 1975).
Section I Covered Transactions
(a) For the period from June 18, 1991 to January 12, 1999, the
restrictions of sections 406(a)(1)(A) through (D) and 406(b)(1) and
(b)(2) of the Employee Retirement Security Act of 1974 (ERISA or the
Act) and the taxes imposed by section 4975(a) and (b) of the Internal
Revenue Code of 1986 (the Code), by reason of Code section
4975(c)(1)(A) through (E), shall not apply to the following foreign
exchange transactions, between a bank or broker-dealer and an employee
benefit plan with respect to which the bank or broker-dealer is a
trustee, custodian, fiduciary or other party in interest, pursuant to a
standing instruction, if the conditions set forth in section II below
are met:
(1) An income item conversion; or
(2) A de minimis purchase or sale transaction.
(b) Effective after January 12, 1999, the restrictions of sections
406(a)(1)(A) through (D) and 406(b)(1) and (b)(2) of the Act and the
taxes imposed by section 4975(a) and (b) of Code, by reason of Code
section 4975(c)(1)(A) through (E), shall not apply to the following
foreign exchange transactions, between a bank or broker-dealer, and an
employee benefit plan with respect to which the bank or broker-dealer
is a trustee, custodian, fiduciary or other party in interest, pursuant
to a standing instruction, if the conditions set forth in section III
below are met:
(1) An income item conversion; or
(2) A de minimis purchase or sale transaction.
Section II Retroactive Conditions
(a) At the time the foreign exchange transaction is entered into,
the terms of the transaction are not less favorable to the plan than
the terms generally available in comparable arm's length foreign
exchange transactions between unrelated parties.
(b) At the time the foreign exchange transaction is entered into,
the terms of the transaction are not less favorable to the plan than
the terms afforded by the bank or the broker-dealer in comparable arm's
length foreign exchange transactions involving unrelated parties.
(c) Neither the bank, the broker-dealer nor any foreign affiliate
thereof, has any discretionary authority or control with respect to the
investment of the plan assets involved in the transaction or renders
investment advice (within the meaning of 29 CFR 2510.3-21(c)) with
respect to the investment of those assets.
(d) The bank or broker-dealer maintains at all times written
policies and procedures regarding the handling of foreign exchange
transactions for plans with respect to which the bank or broker-dealer
is a trustee, custodian, fiduciary or other party in interest or
disqualified person which assure that the person acting for the bank or
broker-dealer knows that he or she is dealing with a plan.
(e) The exchange rate used by the bank or broker-dealer for a
particular foreign exchange transaction did not deviate by more than
10% (above or below) the interbank bid and asked rates at the time of
the transaction as displayed on Reuters or another independent service
in the foreign currency market for such currency; provided, however,
that a prohibited transaction shall not be deemed to have occurred
solely because records demonstrating compliance with this section with
respect to specific transactions have been lost, destroyed or are not
available to the bank or broker-dealer. Nothing in this section shall
be deemed to relieve the bank or broker-dealer of its responsibility to
demonstrate compliance with the conditions of this exemption.
(f) A written confirmation statement is furnished with respect to
each covered transaction to the independent plan fiduciary that
authorized the standing instruction. The confirmation statement shall
include:
(A) Account name;
(B) Transaction date;
(C) Exchange rates;
(D) Settlement date;
(E) Currencies exchanged;
(i) Identity of foreign currency sold;
(ii) Amount sold;
(iii) Identity of currency purchased; and
(iv) Amount purchased.
The confirmation shall be issued in no event more than 5 business
days after execution of the transaction.
Section III Prospective Conditions
(a) At the time the foreign exchange transaction is entered into,
the terms of the transaction are not less favorable to the plan than
the terms generally available in comparable arm's-length foreign
exchange transactions between unrelated parties.
(b) At the time the foreign exchange transaction is entered into,
the terms of the transaction are not less favorable to the plan than
the terms afforded by the bank or broker-dealer in comparable arm's-
length foreign exchange transactions involving unrelated parties.
(c) Neither the bank, the broker-dealer, nor any foreign affiliate
thereof has any discretionary authority or control with respect to the
investment of the plan assets involved in the transaction or renders
investment advice (within the meaning of 29 CFR 2510.3-21(c)) with
respect to the investment of those assets.
(d) The bank or broker-dealer maintains at all times written
policies and procedures regarding the handling of foreign exchange
transactions for plans with respect to which the bank or broker-dealer
is a trustee, custodian, fiduciary or other party in interest or
disqualified person which assure that the person acting for the bank or
broker-dealer knows that he or she is dealing with a plan.
(e) The covered transaction is performed under a written
authorization executed in advance by a fiduciary of the plan whose
assets are involved in the transaction, which plan fiduciary is
independent of the bank or broker-dealer engaging in the covered
transaction or any foreign affiliate thereof. The written authorization
must specify:
(1) The identities of the currencies in which covered transactions
may be executed; and (2) That the authorization may be terminated by
either party without penalty on no more than ten days notice.
(f)(1) Income item conversions are executed within no more than one
business day from the date of receipt of notice by the bank or broker-
dealer that such items are good funds, and a foreign custodian which is
an affiliate of the bank or broker-dealer, provides such notice to the
bank or broker-dealer within ``one business day'' of its receipt of
good funds;
(2) De minimis purchase and sale transactions are executed within
no more than one business day from the date that either the bank or
broker-dealer receives notice from a foreign custodian that the
proceeds of a sale of foreign securities denominated in foreign
currency are good funds, or the direction to acquire foreign currency
was received by the bank or broker-dealer, and a foreign custodian
which is an affiliate of the bank or broker-dealer, provides such
notice to the bank or broker-dealer within one business day of its
receipt of good funds from a sale.
(g)(1) At least once each day, at the time(s) specified in its
written policies and procedures, the bank or broker-dealer establishes
either a rate of exchange or a range of rates to be used
[[Page 63509]]
for income item conversions and de minimis purchase and sale
transactions covered by this exemption.
(2) Income item conversions are executed at the next scheduled time
for conversions following receipt of notice by the bank or broker-
dealer from the foreign custodian that such funds are good funds. If it
is the policy of the bank or broker-dealer to aggregate small amounts
of foreign currency until a specified minimum threshold amount is
received, then the conversion may take place at a later time but in no
event more than 24 hours after receipt of notice.
(3) De minimis purchase and sale transactions are executed at the
next scheduled time for such transactions following receipt of either
notice that the sales proceeds denominated in foreign currency are good
funds, or a direction to acquire foreign currency. If it is the policy
of the bank or broker-dealer to aggregate small transactions until a
specified threshold amount is received, then the execution may take
place at a later time but in no event more than 24 hours after receipt
of either notice that the sales proceeds have been received by the
foreign custodian as good funds, or a direction to acquire foreign
currency.
For purposes of this paragraph (g), the range of exchange rates
established by the bank or broker-dealer for a particular foreign
currency cannot deviate by more than three percent [above or below] the
interbank bid and asked rates as displayed on Reuters or another
nationally recognized independent service in the foreign exchange
market, for such currency at the time such range of rates is
established by the bank or broker-dealer.
(h) Prior to the execution of the authorization referred to in
paragraph (e), the bank or broker-dealer provides the independent
fiduciary with a copy of the bank's or broker-dealer's written policies
and procedures regarding the handling of foreign exchange transactions
involving income item conversions and de minimis purchase and sale
transactions. The policies and procedures must, at a minimum, contain
the following information:
(1) Disclosure of the time(s) each day that the bank or broker-
dealer will establish the specific rate of exchange or the range of
exchange rates for the covered transactions to be executed and the
time(s) that such covered transactions will take place. The bank or
broker-dealer shall include a description of the methodology that the
bank or broker-dealer uses to determine the specific exchange rate or
range of exchange rates;
(2) Disclosure that income item conversions and de minimis purchase
and sale transactions will be executed at the first scheduled
transaction time after notice that good funds from an income item
conversion or a sale have been received, or a direction to purchase
foreign currency has been received. To the extent that the bank or
broker-dealer aggregates small amounts of foreign currency until a
specified minimum threshold amount is met, a description of this
practice and disclosure of the threshold amount; and
(3) A description of the process by which the bank's or broker-
dealer's foreign exchange policies and procedures for income item
conversions and de minimis purchase and sale transactions may be
amended and disclosed to plans.
(i) The bank or broker-dealer engaging in the covered transaction
furnishes to the independent fiduciary a written confirmation statement
with respect to each covered transaction not more than five business
days after execution of the transaction.
1. With respect to income item conversions, the confirmation shall
disclose the following information:
(A) Account name;
(B) Date of notice that good funds were received;
(C) Transaction date;
(D) Exchange rate;
(E) Settlement date;
(F) Identity of foreign currency;
(G) Amount of foreign currency sold;
(H) Amount of U.S. dollars or other currency credited to the plan;
and
2. With respect to de minimis purchase and sale transactions, the
confirmation shall disclose the following information:
(A) Account name;
(B) Date of notice that sales proceeds denominated in foreign
currency are received as good funds or direction to acquire foreign
currency was received;
(C) Transaction date;
(D) Exchange rates;
(E) Settlement date;
(F) Currencies exchanged:
i. Identity of the currency sold;
ii. The amount sold;
iii. Identity of the currency purchased; and
iv. The amount purchased;
(j) The bank or broker-dealer, maintains, within territories under
the jurisdiction of the United States Government, for a period of six
years from the date of the transaction, the records necessary to enable
the persons described in paragraph (l) of this section to determine
whether the applicable conditions of this exemption have been met,
including a record of the specific exchange rate or range of exchange
rates the bank or broker-dealer established each day for foreign
exchange transactions effected under standing instructions for income
item conversions and de minimis purchase and sale transactions.
However, a prohibited transaction will not be considered to have
occurred if, due to circumstances beyond the bank's or broker-dealer's
control, the records are lost or destroyed prior to the end of the six-
year period, and no party in interest other than the bank or broker-
dealer shall be subject to the civil penalty that may be assessed under
section 502(i) of the Act, or the taxes imposed by section 4975(a) and
(b) of the Code, if the records are not maintained by the bank or
broker-dealer, or are not made available for examination by the bank or
broker-dealer, or its affiliate as required by paragraph (k) of this
section.
(k)(1) Except as provided in subparagraph (2) of this paragraph and
notwithstanding any provisions of subsection (a)(2) and (b) of section
504 of the Act, the records referred to in paragraph (j) of this
Section are available at their customary location for examination, upon
reasonable notice, during normal business hours by:
(A) Any duly authorized employee or representative of the
Department of Labor or the Internal Revenue Service.
(B) Any fiduciary of a plan who has authority to acquire or dispose
of the assets of the plan involved in the foreign exchange transaction
or any duly authorized employee or representative of such fiduciary.
(C) Any contributing employer to the plan involved in the foreign
exchange transaction or any duly authorized employee or representative
of such employer.
(2) None of the persons described in subparagraphs (B) and (C)
shall be authorized to examine a bank's or broker-dealer's trade
secrets or commercial or financial information of a bank or broker-
dealer, which is privileged or confidential.
Section IV Definitions and General Rules
For purposes of this exemption,
(a) A foreign exchange transaction means the exchange of the
currency of one nation for the currency of another nation.
(b) The term standing instruction means a written authorization
from a plan fiduciary, who is independent of the bank or broker-dealer
engaging in the foreign exchange transaction and any foreign affiliate
thereof, to the bank or broker-dealer to effect the transactions
specified therein pursuant
[[Page 63510]]
to the instructions provided in such authorization.
(c) A bank means a bank which is supervised by the United States or
a State thereof, or any domestic affiliate thereof.
(d) A broker-dealer means a broker-dealer registered under the
Securities Exchange Act of 1934, or any domestic affiliate thereof.
(e) A domestic affiliate of a bank or broker-dealer means any
entity which is supervised by the United States or a State thereof and
which is directly or indirectly, through one or more intermediaries,
controlling, controlled by, or under common control with such bank or
broker-dealer.
(f) The term control means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
(g) An income item conversion means: (1) The conversion into U.S.
dollars of an amount which is the equivalent of no more than 300,000
U.S. dollars of interest, dividends or other distributions or payments
with respect to a security, tax reclaims, proceeds from dispositions of
rights, fractional shares or other similar items denominated in the
currency of another nation that are received by the bank or broker-
dealer on behalf of the plan from the plan's foreign investment
portfolio; or (2) the conversion into any currency as required and
specified by the standing instruction of an amount which is the
equivalent of no more than 300,000 U.S. dollars of interest, dividends,
or other distributions or payments with respect to a security, tax
reclaims, proceeds from dispositions of rights, fractional shares or
other similar items denominated in the currency of another nation that
are received by the bank or broker-dealer on behalf of the plan from
the plan's foreign investment portfolio, provided that the converted
funds are either transferred to an interest bearing account which
provides a reasonable rate of interest within 24 hours of the
conversion and held therein pending reinvestment by the plan or the
bank reinvests such proceeds within 24 hours of the conversion at the
direction of the plan.
(h) A de minimis purchase or sale transaction means the purchase or
sale of foreign currencies in an amount of no more than 300,000 U.S.
dollars or the equivalent thereof in connection with the purchase or
sale of foreign securities by a plan.
(i) For purposes of this exemption the term employee benefit plan
refers to a pension plan described in 29 CFR Sec. 2510.3-2 and/or a
welfare benefit plan described in 29 CFR Sec. 2510.3-1.
(j) For purposes of this exemption, the term good funds means funds
immediately available in cash with no sovereign or other governmental
impediments or restrictions to the exchange or transfer of such funds.
(k) For purposes of this exemption, the term business day means a
banking day as defined by federal or state banking regulations.
(l) For purposes of this exemption, the term foreign affiliate of a
bank or broker-dealer means any non-U.S. entity which is directly or
indirectly, through one or more intermediaries, controlling, controlled
by, or under common control with such bank or broker-dealer.
Signed at Washington, DC this 6th day of November 1998.
Alan D. Lebowitz,
Deputy Assistant Secretary for Program Operations, Pension and Welfare
Benefits Administration, Department of Labor.
[FR Doc. 98-30291 Filed 11-12-98; 8:45 am]
BILLING CODE 4510-29-P
