[Federal Register Volume 64, Number 240 (Wednesday, December 15, 1999)]
[Notices]
[Pages 70057-70070]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-32404]
[[Page 70057]]
-----------------------------------------------------------------------
DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
Proposed Class Exemption for Cross-Trades of Securities by Index
and Model-Driven Funds
AGENCY: Pension and Welfare Benefits Administration, Department of
Labor.
ACTION: Notice of proposed class exemption.
-----------------------------------------------------------------------
SUMMARY: This document contains a notice of pendency before the
Department of Labor (the Department) of a proposed class exemption from
certain prohibited transaction restrictions of the Employee Retirement
Income Security Act of 1974 (the Act or ERISA), the Federal Employees'
Retirement System Act (FERSA), and from certain taxes imposed by the
Internal Revenue Code of 1986 (the Code). If granted, the proposed
exemption would permit cross-trades of securities among Index and
Model-Driven Funds (Funds) managed by investment managers and among
such Funds and certain large accounts to which such investment managers
act as a ``trading adviser'' in connection with a specific portfolio
restructuring program. The proposed exemption, if granted, would affect
participants and beneficiaries of employee benefit plans whose assets
are invested in Index or Model-Driven Funds, large pension plans
involved in portfolio restructuring programs, as well as the Funds and
the investment managers.
DATES: Written comments and requests for a public hearing must be
received by the Department on or before February 14, 2000.
ADDRESSES: All written comments and requests for a public hearing
(preferably 3 copies) should be sent to: Office of Exemption
Determinations, Pension and Welfare Benefits Administration, Room N-
5649, 200 Constitution Avenue N.W., Washington, DC 20210, (Attention:
``Class Exemption for Securities Cross-Traded by Index/Model-Driven
Funds''). All comments received from interested persons will be
available for public inspection in the Public Documents Room, Pension
and Welfare Benefits Administration, U.S. Department of Labor, Room N-
5638, 200 Constitution Avenue N.W., Washington, DC 20210.
FOR FURTHER INFORMATION CONTACT: Mr. Louis J. Campagna, or Mr. E. F.
Williams, of the Office of Exemption Determinations, Pension and
Welfare Benefits Administration, U.S. Department of Labor, Washington,
DC 20210 at (202) 219-8883 or 219-8194, respectively, or Mr. Michael
Schloss, Plan Benefits Security Division, Office of the Solicitor, U.S.
Department of Labor, Washington, DC 20210, at (202) 219-4600, ext. 105.
(These are not toll-free numbers.)
SUPPLEMENTARY INFORMATION: This document contains a notice of pendency
before the Department of a proposed class exemption from the
restrictions of sections 406(a)(1)(A) and 406(b)(2) of the Act, section
8477(c)(2)(B) of FERSA, 1 and from the taxes imposed by
section 4975(a) and (b) of the Code, by reason of section 4975(c)(1)(A)
of the Code. The Department is proposing the class exemption on its own
motion pursuant to section 408(a) of the Act and section 4975(c)(2) of
the Code, and in accordance with the procedures set forth in 29 CFR
Part 2570, Subpart B (55 FR 32836, August 10, 1990).2
---------------------------------------------------------------------------
\1\ The Department has responsibility for the administration and
enforcement of section 8477 of FERSA. Section 8477 establishes the
standards of fiduciary responsibility and requirements relating to
the activities of fiduciaries with respect to the Federal Thrift
Savings Fund. All references herein to the fiduciary responsibility
provisions of Part 4 of Title I of ERISA also apply to the
corresponding provisions of FERSA. Accordingly, any relief that
would be provided under this proposed class exemption, if granted,
would also apply to cross-trades of securities by the Federal Thrift
Savings Fund.
\2\ Section 102 of Reorganization Plan No. 4 of 1978, 5 U.S.C.
App. 1 (1996) generally transferred the authority of the Secretary
of the Treasury to issue exemptions under section 4975(c)(2) of the
Code to the Secretary of Labor.
In the discussion of the exemption, references to specific
provisions of the Act should be read to refer as well to the
corresponding provisions of section 4975 of the Code.
---------------------------------------------------------------------------
I. Paperwork Reduction Act Analysis
The Department, as part of its continuing effort to reduce
paperwork and respondent burden, conducts a pre-clearance consultation
program to provide the general public and Federal agencies with an
opportunity to comment on proposed and continuing collections of
information in accordance with the Paperwork Reduction Act of 1995 (PRA
95), 44 U.S.C. 3506(c)(2)(A). This helps to ensure that requested data
can be provided in the desired format, reporting burden (time and
financial resources) is minimized, collection instruments are clearly
understood, and the impact of collection requirements on respondents
can be properly assessed.
Currently, the Pension and Welfare Benefits Administration (PWBA)
is soliciting comments concerning the proposed information collection
request (ICR) included in the Proposed Class Exemption for Cross-Trades
of Securities by Index and Model-Driven Funds. A copy of the ICR may be
obtained by contacting the PWBA official identified below in this
Notice of Proposed Class Exemption.
The Department has submitted a copy of the proposed information
collection to the Office of Management and Budget (OMB) for its review
in accordance with 44 U.S.C. 3507(d) of PRA 95. The Department and OMB
are particularly interested in comments that:
Evaluate whether the proposed collection of information is
necessary for the proper performance of the functions of the agency,
including whether the information will have practical utility;
Evaluate the accuracy of the agency's estimate of the
burden of the proposed collection of information, including the
validity of the methodology and assumptions used;
Enhance the quality, utility, and clarity of the
information to be collected; and
Minimize the burden of the collection of information on
those who are to respond, including through the use of appropriate
automated, electronic, mechanical, or other technological collection
techniques or other forms of information technology, e.g., permitting
electronic submission of the responses.
Dates: Written comments concerning the proposed collection of
information should be sent to the Office of Information and Regulatory
Affairs, Office of Management and Budget, Room 10235, New Executive
Office Building, Washington DC 20503; Attention: Desk Officer for the
Pension and Welfare Benefits Administration. Although comments may be
submitted through February 14, 2000, OMB requests the comments be
received within 30 days of the publication of the Notice of Proposed
Class Exemption to ensure their consideration.
Requests for copies of the ICR may be addressed to: Gerald B.
Lindrew, Office of Policy and Research, U.S. Department of Labor,
Pension and Welfare Benefits Administration, 200 Constitution Avenue,
NW, Room N-5647, Washington, D.C. 20210. Telephone: (202) 219-4782
(this is not a toll-free number); Fax: (202) 219-4745.
Title: Notice of Proposed Class Exemption for Cross-Trades of
Securities by Index and Model-Driven Funds.
Type of Review: New.
AGENCY: Department of Labor, Pension and Welfare Benefits
Administration.
Affected Entities: Business or other for-profit.
SUMMARY: The proposed class exemption would permit cross-trades by
Funds in which plans invest and among
[[Page 70058]]
such Funds and Large Accounts pursuant to portfolio restructuring
programs which, in absence of the exemption, would be prohibited by
ERISA. The information collection requirements incorporated within the
proposed class exemption are designed as appropriate safeguards to
ensure, among other things, prior approval by a plan of its
participation in a cross-trading program, proper disclosures of
information about a cross-trading program to plan investors, fair
pricing procedures for securities cross-traded between the Funds or
between such Funds and other Large Accounts managed by the investment
manager, and the absence of a significant degree of investment
discretion by the investment manager in the selection of particular
securities for the Funds.
Needs and Uses: In order for the Department to grant an exemption
for a transaction that would otherwise be impermissible under ERISA,
the statute requires that the Department make a finding that the
proposed exemption meets the statutory requirements of section 408(a).
Section 408(a) requires a finding that the exemption is
administratively feasible, in the interest of the plan and its
participants and beneficiaries, and protective of the rights of the
participants and beneficiaries. In order to ensure that this exemption
meets the statutory requirements, the Department finds it necessary
that certain information be provided to an independent fiduciary of
each plan that invests in an Index or Model-Driven Fund, and that the
independent fiduciary approve the plan's participation in a cross-
trading program.
Respondents and Total Responses: The Department estimates that
approximately 10 entities will seek to take advantage of the class
exemption in a given year. The respondents will be banks and other
investment managers acting as fiduciaries of plans investing in Index
and Model-Driven Funds managed by such entities. There are expected to
be 61,800 responses per year or 6,180 responses per entity per year.
Estimated Annual Burdens: The Department staff estimates the annual
burden for preparing the materials required under the proposed class
exemption to be a total of 68,150 hours or 6,815 hours per entity. The
total annual burden cost (operating/maintenance) is estimated to be
$116,184 or $11,618 per entity.
Comments submitted in response to this Notice of Proposed Class
Exemption will be summarized and/or included in the request for OMB
approval of the information collection request; they will also become a
matter of public record.
II. Background
On March 20, 1998, a Notice was published in the Federal Register
[63 FR 13696] to announce that the Department has under consideration
certain applications for exemptions relating to cross-trades of
securities by investment managers with respect to any account,
portfolio or fund holding ``plan assets'' 3 subject to the
fiduciary responsibility provisions of Part 4 of Title I of ERISA. The
Department published the Notice to request information which would
assist it in determining what standards and safeguards are appropriate
for future exemptions for cross-trades of securities.
---------------------------------------------------------------------------
\3\ See 29 CFR Part 2510.3-101, Definition of ``plan assets''--
plan investments.
---------------------------------------------------------------------------
The Department understands that securities cross-trading is a
common practice among investment managers and advisers as a means for
executing securities transactions for client accounts that are not
subject to the fiduciary responsibility provisions of
ERISA.4 Such cross-trades could be either direct cross-
trades or brokered cross-trades.
---------------------------------------------------------------------------
\4\ The Department is expressing no opinion herein as to whether
such cross-trade practices are in compliance with the relevant
federal securities laws regulating securities transactions and/or
the provision of investment advisory or management services by an
investment manager. For example, cross-trading of securities between
mutual funds and other accounts that use the same or affiliated
investment advisers is permitted if the transactions are
accomplished in accordance with SEC Rule 17a-7, an exemption from
the prohibited transaction provisions of section 17(a) of the
Investment Company Act of 1940 (see 17 CFR 270.17a-7). For a
discussion of the issues relating to the use of SEC Rule 17a-7 for
ERISA plan accounts, see the Notice published on March 20, 1998 (63
FR 13696, 13698-13700).
---------------------------------------------------------------------------
Direct cross-trades occur whenever an investment manager causes the
purchase and sale of a particular security to be made directly between
two or more accounts under its management without a broker acting as
intermediary. Under this practice, the manager executes a securities
transaction between its managed accounts without going into the ``open
market''--such as a national securities exchange (e.g. the New York
Stock Exchange--``NYSE'') or an automated broker-dealer quotation
system (e.g. the National Association of Securities Dealers Automated
Quotation National Market System--``NASDAQ'').
Brokered cross-trades occur whenever an investment manager places
simultaneous purchase and sale orders for the same security with an
independent broker-dealer under an arrangement whereby such broker-
dealer's normal commission costs are reduced. In such instances,
brokers are often willing to accept a lower commission because the
transaction will be easier to execute where there are shares already
available to complete the order for both the buyer and the seller.
In the Notice published on March 20, 1998, the Department noted
that cross-trading transactions could result in violations of one or
more provisions of Part 4 of Title I of ERISA. For example, section
406(b)(2) provides that an ERISA fiduciary may not act in any
transaction involving a plan on behalf of a party (or represent a
party) whose interests are adverse to the interests of the plan or the
interests of its participants or beneficiaries. 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, the Department has previously taken the position that a
violation of section 406(b)(2) of ERISA would occur.5 The
Department has taken the position that by representing the buyer on one
side and the seller on the other in a cross-trade, a fiduciary acts on
behalf of parties that have adverse interests to each
other.6 Moreover, the prohibitions embodied in section
406(b)(2) of ERISA are per se in nature. Merely representing both sides
of a transaction presents an adversity of interests that violates
section 406(b)(2) even absent fiduciary misconduct reflecting harm to a
plan's beneficiaries.7
---------------------------------------------------------------------------
\5\ Reich v. Strong Capital Management Inc., No. 96-C-0669, USDC
E.D. Wis. (June 6, 1996).
\6\ See Strong Capital Management Inc., supra.
\7\ See, Cutaiar v. Marshall, 590 F.2d 523 (3d Cir. 1979). In
Cutaiar, the court held that, ``[W]hen identical trustees of two
employee benefit plans whose participants and beneficiaries are not
identical effect a loan between the plans without a section 408
exemption, a per se violation of ERISA exists.'' Cutaiar, 590 F.2d
at 529.
---------------------------------------------------------------------------
In addition, violations of section 406(b)(1) or (b)(3) of ERISA may
occur when an investment manager has discretion for both sides of a
cross-trade. Section 406(b)(1) of ERISA prohibits a plan fiduciary from
dealing with the assets of the plan in his own interest or for his own
account. Section 406(b)(3) prohibits a plan fiduciary from receiving
any consideration for his own personal account from any party dealing
with such plan in connection with a transaction involving the assets of
the plan.
It should also be noted that violations of section 403 and 404
could arise where the investment manager represents both sides in a
cross-trade.
[[Page 70059]]
Section 404(a)(1)(A) of ERISA requires, in part, that a plan fiduciary
must discharge its duties solely in the interests of the participants
and beneficiaries of that plan and ``for the exclusive purpose'' of
providing benefits to participants and beneficiaries and defraying
reasonable plan expenses. Similarly, section 403(c)(1) of ERISA
requires, in part, that the assets of a plan must be ``[H]eld for the
exclusive purposes of providing benefits to participants in the plan
and their beneficiaries and defraying reasonable expenses of
administering the plan.''
In the Department's view, conflicts of interest in cross-trading
occur because a manager is exercising investment and trading discretion
over both sides to the same transaction and making decisions as to:
which securities to buy or sell; how much of each security to buy or
sell; when to execute a sale or purchase of each security; where to
conduct a trade (i.e., on a market or through a cross-trade); and at
what price to conduct a trade.
In the Notice published on March 20, 1998, the Department discussed
the types of individual exemptions previously granted for cross-trades
of securities.8 As noted therein, these past exemptions fall
generally into two categories: (1) Those for Index and Model-Driven
Funds; and (2) those for actively-managed or discretionary asset
management arrangements.9
---------------------------------------------------------------------------
\8\ The individual exemptions generally have focused on direct
cross-trading transactions. These exemptions have provided relief
from the prohibitions of section 406(b)(2) of ERISA, but have not
provided relief for any violations of section 406(b)(1) or (b)(3) of
ERISA. It should also be noted that the Department does not have
authority under section 408(a) of ERISA to exempt a plan fiduciary
from any violations of sections 403 and 404 of ERISA. Thus, even
when proceeding under an individual exemption, an investment manager
remains fully liable under sections 403 and 404 of ERISA for the
investment decisions relating to cross-trades.
\9\ In this regard, see the following Prohibited Transaction
Exemptions (PTEs): PTE 95-83, Mercury Asset Management (60 FR 47610,
September 13, 1995); PTE 95-66, BlackRock Financial Management L.P.,
(60 FR 39012, July 31, 1995); PTE 95-56, Mellon Bank, N.A. (60 FR
35933, July 12, 1995); PTE 94-61, Batterymarch Financial Management
(59 FR 42309, August 17, 1994); PTE 94-47, Bank of America National
Trust and Savings Association (59 FR 32021, June 21, 1994); PTE 94-
43, Fidelity Management Trust Company (59 FR 30041, June 10, 1994);
PTE 94-36, The Northern Trust Company (59 FR 19249, April 22, 1994);
PTE 92-11, Wells Fargo Bank, N.A. (57 FR 7801, March 4, 1992)--which
replaced PTE 87-51 noted below; PTE 89-116, Capital Guardian Trust
Company (54 FR 53397, December 28, 1989); PTE 89-9, State Street
Bank and Trust Company (54 FR 8018, February 24, 1989); PTE 87-51,
Wells Fargo Bank, N.A. (52 FR 22558, June 12, 1987); and PTE 82-133,
Chase Manhattan Bank, N.A. (47 FR 35375, August 13, 1982).
---------------------------------------------------------------------------
The trading decisions made for the Index and Model-Driven Funds
involved are ``passive'' or ``process-driven.'' In the case of an Index
Fund, the investment manager has been hired to invest money according
to a formula that, for example, tracks the rate of return, risk
profile, and other characteristics of an independently maintained index
by either replicating the entire portfolio of the index or by investing
in a representative sample of such portfolio designed to match the
projected risk/return profile of that index. Model-Driven Funds are
based upon formulae by which an ``optimal'' portfolio is created to
implement some specific investment strategy that is either based upon
or measured by an independently maintained index of securities. These
``process driven'' programs are implemented only by investment in an
index replicating portfolio (in the case of index funds) or a set
``optimum'' portfolio (in the case of model-driven funds). In granting
these exemptions, the Department did not believe, based on the
representations made by the applicants requesting the prior exemptions,
that the selection of individual securities for Index and Model-Driven
Funds using such ``process-driven'' strategies would involve any
significant exercise of investment discretion by the investment manager
managing the Funds. In actively-managed programs, trading decisions are
made by individuals hired to select particular securities as
professional investment managers.
In the exemption applications, the applicants have represented to
the Department that cross-trading provides certain benefits to employee
benefit plans as Fund investors. For example, when one Fund needs to
sell the same securities that another Fund needs to buy on the same
day, a cross-trade saves both the selling Fund and the buying Fund the
transaction costs (e.g., brokerage commissions or the bid-offer spread)
that would otherwise have been paid to a broker-dealer for executing
the transaction on the open market.
While recognizing the advantages of cross-trading to plans, the
Department has particular concerns where managers have investment
discretion over both sides of a cross-trade transaction. The conditions
contained in the Department's prior individual exemptions for cross-
trades by Index and Model-Driven Funds and actively-managed funds were
intended to address these concerns and to safeguard plans against the
inherent conflict of interest which exists when there is a common
investment manager for both sides of a transaction. In this regard, the
conditions incorporated into these exemptions were designed to protect
plans against the potential that an investment manager may exercise
discretion to favor one account over another; e.g., in the pricing of a
particular cross-trade, in the decision to either buy and/or sell
particular securities for an ERISA account, or to allocate securities
among accounts, including ERISA accounts.
The Department recognizes that its concerns are more apparent in
situations involving actively-managed accounts or funds, where an
investment manager has total investment discretion to choose particular
securities for such accounts or funds at any time, subject only to
general investment guidelines or objectives established by the client
plan fiduciaries. As a result, the Department is not proposing relief
for transactions involving actively-managed cross-trading at this time.
Information obtained by the Department in response to the Notice with
respect to cross-trades of securities by actively-managed funds is
currently under consideration by the Department.10
Publication of the proposed exemption does not foreclose future
consideration of additional exemptive relief for actively-managed
programs. However, the Department believes that it has developed a
sufficient record, through consideration of past individual exemptions
and comments to the Notice, to propose relief for passive and process-
driven cross-trading, subject to certain restrictions and limitations
regarding the exercise of fiduciary discretion.
---------------------------------------------------------------------------
\10\ In this regard, the Department directs interested persons
to a notice of public hearing which the Department is also
publishing in today's Federal Register.
---------------------------------------------------------------------------
With respect to this exemptive relief for cross-trades by Index and
Model-Driven Funds, it should be noted that, through the development of
past cross-trading exemptions and enforcement proceedings, the
Department became aware of issues that have caused it to reexamine its
exemption policy for such transactions. As a result, certain of the
conditions and definitions contained in this proposal differ from a
number of the conditions and definitions developed over time for the
previously granted passive and process-driven individual exemptions.
These proposed modifications reflect the importance to the Department
of retaining flexibility to review its exemption policy in the context
of changed circumstances or new facts brought to its attention.
For example, in the ``process-driven'' context, it was represented
to the Department in past exemption applications that investment
managers who manage accounts or pooled funds
[[Page 70060]]
often attempt to track the rate of return, risk profile and other
characteristics of an independently maintained third party index (e.g.,
the Standard & Poors 500 Composite Stock Price Index a/k/a the S&P 500
Index, the Wilshire 5000 Index, the Russell 2000 Index). These pooled
funds are usually collective investment funds established and trusteed
by large banks that manage money for institutional investors, including
employee benefit plans. Under the Department's past exemptions, such
funds may cross-trade pursuant to certain narrowly-defined ``triggering
events'' which involve little, if any, discretion on the part of the
investment manager.
In the past, various applicants represented to the Department that
the investment strategy of most Index Funds merely involved replicating
the capitalization-weighted composition of a particular index. In this
regard, FERSA itself requires that the Common Stock Index Investment
Fund (an S&P 500 Fund) be invested in a portfolio that is ``* * *
designed such that, to the extent practicable, the percentage of the
Common Stock Index Investment Fund that is invested in each stock is
the same as the percentage determined by dividing the aggregate market
value of all shares of that stock by the aggregate market value of all
shares of all stocks included in such index.'' 5 U.S.C.
Sec. 8438(b)(2)(B).11 Consequently, in the past, the
Department generally focused on issues relating to Index Funds which
simply replicated the capitalization-weighted composition of a
particular index.
---------------------------------------------------------------------------
\11\ In addition, section 8438 (b)(3)(B) and (b)(4)(B) of FERSA
contain similar requirements for the Small Capitalization Stock
Index Investment Fund and International Stock Index Investment Fund.
---------------------------------------------------------------------------
However, the Department now understands that the process that Index
Funds use to replicate the returns of an index may not be limited to
replicating the exact composition of the index and that many, if not
most, Index Funds do not totally replicate the exact composition of the
index that is being tracked. In many instances, the manager maintains
some discretion to select particular securities to track the rate of
return, risk profile and other characteristics of the overall index
without actually holding all of the securities included in the index.
Some Index Funds are designed to exceed the rate of return and/or
deviate from the risk profile of the index by altering the composition
or weighting of securities within the index as designated by the
organization that maintains the index. These ``enhanced'' Index Funds
often have strategies that resemble actively-managed accounts.
Therefore, the Department believes that the definition of an ``Index
Fund'' that is permitted to cross-trade pursuant to certain narrowly-
defined ``triggering events'' needs to be modified under the proposal
from that contained in prior individual exemptions.
In addition, Model-Driven Funds are portfolios that apply specific
investment philosophies and criteria in formulaic fashion to create a
specialized portfolio. Model-Driven Funds may come in many different
forms. Some Model-Driven Funds seek to transform the capitalization-
weighted or other specified composition of an index in order to
accomplish certain goals. Such goals may include client-initiated
instructions to delete certain stocks from an index that is otherwise
being tracked, or investment management styles which incorporate
mathematical formulae designed to focus on certain investment criteria
(e.g., price-earnings ratios) at certain times in order to achieve a
rate of return for the model-driven portfolio that exceeds that of the
underlying index. Thus, some Model-Driven Funds appear to be a more
sophisticated type of ``enhanced'' Index Fund.
The Department notes that the proposed exemption would not be
available to a Fund if the manager has modified the index or design of
the model to produce cross-trade opportunities. For example, the
exemption would not be available to a Fund if the manager has modified
the index or design of the model to generate buy or sell orders based
on the availability of a security within the control of the manager.
Such a modification or design would cause a Fund to engage in cross-
trades solely for the purpose of providing matching trades suited to
another Fund's needs rather than for the investment purposes of the
Fund whose trading criteria have been modified.
The Department believes that the definition of a ``Model-Driven
Fund'' that cross-trades pursuant to ``triggering events'' also needs
to be modified from that contained in prior exemptions. Further, the
Department is of the view that the definition of a ``triggering event''
should be modified to reduce the amount of discretion that an
investment manager may exercise in connection with a cross-trading
decision on behalf of a Model-Driven Fund.
III. Discussion of the Comments on the Notice
The Department received a total of twenty-nine (29) comment letters
on the Notice, approximately half of which addressed cross-trades by
Index and Model-Driven Funds. Some of these comments were from major
industry groups, such as associations representing investment managers
that act as fiduciaries for employee benefit plans.
Many of these comments responded directly to the specific questions
posed by the Department in the Notice. These comments, as they relate
to cross-trades by Index and Model-Driven Funds, are summarized below.
The comments almost universally endorsed the idea of the Department
proposing additional exemptive relief for cross-trades of securities by
Index and Model-Driven Funds. All of the comments noted that, under
appropriate conditions, cross-trading can provide numerous benefits to
client accounts and funds, including the avoidance of brokerage
commissions and bid-offer spreads that would otherwise be incurred, and
the avoidance of adverse market impact costs if such trades were
transacted on the open market. In addition, many of the commenters
noted that in international markets there are benefits from cross-
trading associated with avoiding other related transaction costs, such
as settlement charges, registration fees, and certain taxes. As noted
above, the Department questions whether avoiding adverse market impact
costs is favorable to the party that would have received a better price
had the market price moved in its favor prior to engaging in the
transaction. The Department invites comments regarding this concern.
A commenter stated that the advantages provided by cross-trading
securities are magnified in the case of ``passively'' managed accounts
or funds, primarily because of the relatively large account sizes and
overlap in portfolio composition. For example, because Index and Model-
Driven Funds must maintain certain weighting and parameters, cash
inflows into one Fund essentially mandate the acquisition of an array
of securities, while cash outflows in another Fund may require the
simultaneous disposition of many of the same securities.
With respect to the size of the market attributable to assets of
employee benefit plans that cross-trade, one comment from a large
investment manager estimated that over $700 billion of pension and
retirement funds are invested in ``passive'' strategies (e.g., Index
and Model-Driven Funds) which rely heavily on cross-trading to minimize
transaction costs. Another comment from a major bank that manages Index
and Model-Driven Funds
[[Page 70061]]
stated that the bank estimates that cross-trading saves its clients
hundreds of millions of dollars each year by substantially reducing
transaction costs. Other comments from major corporations with large
pension plans that invest in Index and Model-Driven Funds also noted
transaction cost savings of over $1,000,000 for each of their plans
over a two-year period. Similar comments were made by other
institutional investors, such as governmental plans.
The Department is concerned that the savings mentioned by the
commenters may not only be reflective of transaction cost savings, but
may also reflect ``savings'' attributable to the avoidance of market
impact by cross-trading securities rather than engaging in open market
transactions. The Department seeks further comments and data regarding
the savings which may be expected from cross-trades and the basis for
such savings.
Some commenters further asserted that clients demand cross-trading
capabilities as a condition for the investment manager to handle their
accounts. With ``passive'' investment management strategies that seek
to replicate the rate of return, risk profile and other characteristics
of a designated index (e.g., the S&P 500 Index), the success of an
investment manager is often measured by the tracking error of the
managed portfolio vis-a-vis the index. Cross-trades of securities help
reduce an investment manager's overall transaction costs, which are
otherwise a major source of tracking error in relation to the index
because the index is valued without taking into consideration
transaction costs. Thus, it is virtually impossible for an investment
manager to replicate the rate of return, risk profile and other
characteristics of an index, or to accurately track the designated
composition and weighting of the securities contained therein, when the
organization maintaining such index establishes the value of the index
exclusive of such transaction costs. In addition, the comments note
that every dollar a portfolio spends on transaction costs (either as
spreads or commissions) detracts from the investment strategy guideline
that has been mandated by the independent plan fiduciary--i.e., to come
as close as possible to the rate of return, risk profile and other
characteristics of the designated index.
Moreover, cross-trades of securities by Model-Driven Funds that are
designed to exceed the rate of return of a designated index also
achieve better results by reducing transaction costs. A commenter noted
that the computer models, which create the portfolios for a Model-
Driven Fund by transforming an index, dictate the securities to be
purchased and sold in precise quantities. Thus, the commenter stated
that the types of passive strategies used by these Funds do not work as
effectively if an investment manager must make decisions with respect
to purchases or sales of individual securities which override the
selections made by the computer model.
In this regard, one commenter asserted that cross-trading enables
an investment manager to obtain, or dispose of, the necessary amounts
of such securities without having to alter a model's investment
strategy because of transaction costs associated with achieving the
desired goal. Other comments asserted that cross-trading is merely
another method of executing the purchase or sale of a security that has
already been included on the trade list of a Model-Driven Fund for a
particular day. Thus, the decision to buy or sell a security through
cross-trades, rather than on the open market, is made after the trade
list for the purchase or sale of that security has been prepared. Such
trade lists are developed by computer models which use prescribed
objective factors and external data to automatically generate a model-
prescribed portfolio, or use a client's instructions to buy or sell
particular securities to facilitate a client-initiated portfolio
restructuring.
Still other commenters noted that the computer models or
optimization programs that drive a Model-Driven Fund are designed to
keep the Fund's portfolio of securities balanced with the projected
return, risk profile and other characteristics of the appropriate model
or index. One major bank that manages such Funds commented that these
models are not designed to increase the frequency of cross-trades, but
rather to apply quantitative techniques to achieve a predetermined
investment strategy. This comment stated that investment managers do
not let the ``tail wag the dog'' by weighting or manipulating the
investment models to produce more cross-trades.
With respect to the degree of investment discretion exercised by an
investment manager in creating and operating a Model-Driven Fund, one
comment asserted that, while the creation of a computer model may
require human intervention, the operation of a Model-Driven Fund in
accordance with the dictates of the model involves the same type of
``passive'' investment strategy and human intervention as an Index
Fund. In addition, the comments state that these computer models are
rarely changed and their operations are free of any overt or subtle
discretion exercised by the investment manager. When such models are
changed, clients are often provided with prior notice of the change and
objective criteria are used to design the new ``passive'' investment
strategy. The comments maintain that the mere ability to change the
model, exercised infrequently, does not change a strategy from passive
to active. In this regard, some of the comments state that an
investment manager for an Index or Model-Driven Fund is not hired by
its clients to subjectively analyze individual securities or a range of
securities, and that the compensation paid to the investment manager
for implementing a ``passive'' investment strategy is much less than
that required for active management. Thus, these comments note that the
level of compensation paid to a ``passive'' investment manager reflects
the role that such manager has in operating a Model-Driven Fund.
In any event, all of the comments state that the benefits of cross-
trading override any concerns the Department may have regarding the
degree of discretion a particular investment manager may exercise in
the design and implementation of a computer model used for a Model-
Driven Fund. The comments assert that these concerns are further
mitigated by the conditions of the Department's past exemptions which
require, among other things, that: (1) cross-trades by the Funds can
occur only in response to various ``triggering events'' which are not
within the manager's control or discretion; (2) a large plan or other
large account can only engage in cross-trades with an Index or Model-
Driven Fund where the investment decisions relating to a particular
portfolio restructuring program for the large plan/account are made by
a fiduciary or other appropriate decision-maker who is independent of
the investment manager; (3) all cross-trade transactions will occur
within three business days of the ``triggering event'' necessitating
the purchase or sale; (4) all cross-traded securities must be
securities for which there is a generally recognized market; (5) the
price for all securities involved in the cross-trade will be the
current market value for the securities on the close of the trading day
in which the transaction occurs; and (6) the investment manager may not
receive additional compensation as a result of the cross-trade.
After consideration of the information contained in the comments
relating to cross-trades of securities by Index and Model-Driven Funds
and the current
[[Page 70062]]
cross-trade practices utilized by investment managers that manage such
Funds, the Department has determined to propose this class exemption.
As discussed in further detail below, this proposed class exemption for
cross-trades of securities by Index and Model-Driven Funds contains
many of the same conditions that appear in the individual exemptions
previously granted by the Department, with certain modifications. In
addition, the proposal contains a number of new conditions and
definitions which attempt to address concerns that have been raised
since those exemptions were granted.
IV. Description of the Proposed Exemption
A. Scope and General Rule
The proposed exemption consists of four parts. Section I sets forth
the general exemption and describes the transactions covered by the
exemption. Sections II and III contain specific and general conditions
applicable to transactions described in section I. Section IV contains
definitions for certain terms used in the proposed exemption.
The exemption set forth in section I would provide relief from the
restrictions of sections 406(a)(1)(A) and 406(b)(2) of ERISA and
section 8477(c)(2)(B) of FERSA for: (a) the purchase and sale of
securities between an Index or Model-Driven Fund and another such Fund,
at least one of which holds ``plan assets'' subject to the Act; and (b)
the purchase and sale of securities between such Funds and certain
large accounts (Large Accounts) pursuant to portfolio restructuring
programs of the Large Accounts.
The proposed exemption under section I(a) applies to cross-trades
of securities among Index or Model-Driven Funds managed by the same
investment manager where both Funds contain plan assets. However, as
stated above, a violation of section 406(b)(2) occurs when an
investment manager has investment discretion with respect to both sides
of a cross-trade of securities and at least one side is an entity which
contains plan assets. As a result, the proposed exemption is also
applicable to situations where the investment manager has investment
discretion for both Funds involved in a cross-trade but one Fund does
not contain plan assets because, for example, it is registered as an
investment company under the Investment Company Act of 1940 (e.g., a
mutual fund). Any mutual fund or other institutional investor covered
by the proposed exemption under section I(a) must meet the definition
of an Index Fund or a Model-Driven Fund, contained in section IV(a) and
(b). Institutional investors which meet the definition contained in
section IV(a) and (b) may include, but are not limited to, entities
such as insurance company separate accounts or general accounts,
governmental plans, university endowment funds, charitable foundation
funds, trusts or other funds exempt from taxation under section 501(a)
of the Code.
The proposed exemption under section I(b) would apply to the
purchase and sale of securities between a Fund and a Large Account, at
least one of which holds ``plan assets'' subject to ERISA or FERSA,
pursuant to portfolio restructuring programs initiated on behalf of
certain Large Accounts. The term ``Large Accounts'' is defined in
section IV(e) as certain large employee benefit plans or other large
institutional investors with at least $50 million in total assets,
including certain insurance company separate and general accounts and
registered investment companies. A portfolio restructuring program, as
defined in section IV(f), involves the buying and selling of securities
on behalf of a Large Account in order to produce a portfolio of
securities which either becomes an Index Fund or a Model-Driven Fund or
resembles such a Fund, or to carry out a liquidation of a specified
portfolio of securities for a Large Account. The definition of a Large
Account requires that an independent fiduciary authorize an investment
manager (i.e., a Manager, as defined in section IV(i)) to restructure
all or part of the portfolio or to act as a ``trading adviser'' as
defined in section IV(g) with respect to the restructuring of such
portfolio. The trading adviser's role is limited under the proposed
exemption to the disposition within a stated period of time of a
securities portfolio of a Large Account and the creation of the
required portfolio. Under this definition, the manager may not have any
discretionary authority for any asset allocation, security selection,
restructuring or liquidation decisions or otherwise provide investment
advice with respect to such transactions. It has been represented to
the Department that, in such restructuring transactions, commissions
and other costs are saved by not having to liquidate all of the
securities contained in the Large Account's portfolio on the open
market. In this regard, the Department notes that it expects the
investment manager to comply with the applicable securities laws in
connection with any portfolio restructuring program.
Section IV(a) and (b) require that the Index or Model-Driven Fund
be based upon an index which represents the investment performance of a
specific segment of the public market for equity or debt securities.
Section IV(c) requires that the index be established and maintained by
an independent organization which is: in the business of providing
financial information or brokerage services to institutional clients; a
publisher of financial news or information; or a public stock exchange
or association of securities dealers. The index must be a standardized
index of securities which is not specifically tailored for the use of
the manager. The Department seeks comments directed to the proposed
definition of an index.
Section IV(a) and (b) specifically define Index and Model-Driven
Funds for purposes of the proposed exemption. These definitions are
designed to limit the amount of discretion the manager can exercise to
affect the identity or amount of securities to be purchased or sold and
to assure that the purchase or sale of any security is not part of an
arrangement, agreement or understanding designed to benefit the
manager. Under the definition of ``Index Fund'' contained in section
IV(a), the investment manager must track the rate of return of an
independently maintained securities index by either replicating the
same combination of securities which compose such index or by investing
in a representative sample of such portfolio based on objective
criteria and data designed to recreate the projected return, risk
profile and other characteristics of the index. Under the definition of
``Model-Driven Fund'' contained in section IV(b), trading decisions are
passive or process-driven since the identity and the amount of the
securities contained in the Fund must be selected by a computer model.
Although the manager can use its discretion to design the computer
model, the model must be based on prescribed objective criteria using
third party data, not within the control of the manager, to transform
an independently maintained index. Thus, for example, no exemptive
relief would be available if the manager designed the computer model to
consider the liquidity or the availability of a security based on
information that was solely within the control of the manager. In such
instances, the computer model would be considering data that was not
from a third party source, and that was within the control of the
manager.
B. Price and Securities
Section II(a) requires that the cross-trade must be executed at the
closing price for that security. ``Closing price'' is defined in
section IV(h) as the price
[[Page 70063]]
for the security on the date of the transaction, as determined by
objective procedures disclosed to Fund investors in advance and
consistently applied with respect to securities traded in the same
market. The procedures shall indicate the independent pricing source
(and alternates, if the designated pricing source is unavailable) used
to establish the closing price and the time frame after the close of
the market in which the closing price will be determined. The pricing
source must be independent of the manager and must be engaged in the
ordinary course of business of providing financial news and pricing
information to institutional investors and/or the general public, and
must be widely recognized as an accurate and reliable source for such
information. In this regard, some managers use one pricing service for
pricing domestic securities and another pricing service for pricing
foreign securities. With respect to foreign securities, the applicable
independent pricing source should provide the price in local currency
rates and, if that currency is other than U.S. dollars, also provide
the U.S. dollar exchange rate. Thus, securities would be cross-traded
in all cases at the closing prices received by the manager from the
relevant independent pricing source.
The Department has adopted this definition in an effort to be
consistent with the methods for determining the price of cross-traded
securities currently utilized by Index and Model-Driven Fund investment
managers, according to the comments to the Notice published on March
20, 1998. In addition, the Department believes that this pricing
approach will ensure that the pricing procedures utilized are objective
and not subject to the discretion or manipulation of any of the
involved parties. The comments received indicated that passive managers
generally utilize independent pricing services which collect
information on closing prices of securities. However, the Department
realizes that passive fund managers have an ever present need to retain
the flexibility to consider advanced trading or pricing techniques
which could reduce costs that generate tracking error or which reflect
a more refined view of the market behavior of a specific security.
Comments are invited as to whether the definition of the price for a
cross-traded security contained in this proposal is responsive to that
need.
Section II(f) requires that the cross-trades of either equity
securities or fixed income securities involve only securities for which
market quotations are readily available from independent sources that
are engaged in the ordinary course of business of providing financial
news and pricing information to institutional investors and/or the
general public, and are widely recognized as accurate and reliable
sources for such information. Section II(f)(1) further requires that
cross-trades of equity securities only involve securities which are
widely-held and actively-traded. In this regard, the Department notes
that equity securities will be deemed to be ``widely-held'' and
``actively-traded'' under this proposed exemption if such securities
are included in an independently maintained index, as defined in
section IV(c) herein. The Department invites comments from interested
persons regarding the definitions of the types of allowable securities
permitted to be cross-traded under the exemption. The Department's
intent is to exclude those securities which are thinly-traded. This
intent is based upon the underlying notion that the cross-trading of a
security may avoid the market impact on the price of the security that
a similar trade on the market would produce. This avoidance of market
impact through cross-trading would be more dramatic with thinly-traded
securities. The Department expects that managers, in making their
determinations regarding the types of securities included within the
scope of this condition, would consider information about the average
daily trading volume for U.S. equities traded on a nationally
recognized securities exchange or NASDAQ which would be readily
available from independent pricing sources or other independent sources
which publish financial news and information.
The Department also invites comments from interested persons as to
whether Index Funds and Model-Driven Funds may hold significant amounts
of the outstanding shares of a particular security which is included in
an index used by a manager to design and operate a portfolio for its
Funds. In addition, the Department invites comments as to whether
cross-trades of securities by a manager's Funds, which may represent a
high percentage of the average daily trading volume for the securities
on the open market, avoids the market impact that the same trades would
have if executed on the open market.
C. Triggering Events
Section II(b) of the proposed exemption requires that any purchase
or sale of securities by a Fund in a cross-trade with another Fund or
with a Large Account occur as a direct result of a ``triggering
event,'' as defined in section IV(d), and that such cross-trade be
executed no later than the close of the second business day following
such ``triggering event.'' The Department believes that trading
pursuant to triggering events limits the discretion of the manager to
affect the identity or amount of securities to be purchased or sold.
Triggering events, as defined in section IV(d), are outside the control
of the manager and will ``automatically'' cause the buy or sell
decision to occur.
Triggering events are defined in section IV(d) as:
(1) a change in the composition or weighting of the index
underlying the Fund by the independent organization creating and
maintaining the index;
(2) A specific amount of net change in the overall level of assets
in a Fund, as a result of investments in and withdrawals from the Fund,
provided that: (A) Such specified amount has been disclosed in writing
as a ``triggering event'' to an independent fiduciary of each plan
having assets held in the Fund prior to, or within ten (10) days after,
its inclusion as a ``triggering event'' for such Fund; and (B)
investments or withdrawals as a result of the manager's discretion to
invest or withdraw assets of an employee benefit plan maintained by the
manager for its own employees (a Manager Plan), other than a Manager
Plan which is a defined contribution plan under which participants
direct the investment of their accounts among various investment
options, including such Fund, will not be taken into account in
determining the specified amount of net change;
(3) An accumulation in the Fund of a specified amount of either:
(A) Cash which is attributable to interest or dividends on, and/or
tender offers for, portfolio securities; or (B) stock attributable to
dividends on portfolio securities; provided that such specified amount
has been disclosed in writing as a ``triggering event'' to an
independent fiduciary of each plan having assets held in the Fund prior
to, or within ten (10) days after, its inclusion as a ``triggering
event'' for such Fund; or
(4) A change in the composition of the portfolio of a Model-Driven
Fund mandated solely by operation of the formulae contained in the
computer model underlying the Fund where the basic factors for making
such changes (and any fixed frequency for operating the formulae
contained in the model) have been disclosed in writing to an
independent fiduciary of each plan having assets held in the Fund prior
to, or within ten (10) days after, its inclusion as a ``triggering
event'' for such Fund.
[[Page 70064]]
The first three triggering events have largely been adopted based
upon those triggering events utilized in prior individual exemptions,
with an additional requirement in the second and third triggering
events for the amounts involved to be specified and disclosed to
independent fiduciaries of plans investing in the Funds. In addition,
the last triggering event has been added to the proposal in order to
clarify that a triggering event also occurs as a result of a change in
the composition of a Fund's portfolio mandated solely by operation of
the computer model underlying the Fund. For example, if a model
contained a formula for a Fund requiring only stocks with a certain
price/earnings ratio and some of the originally prescribed stocks now
were above the specified tolerances of the formula relating to that
model, a triggering event would occur requiring that those stocks be
sold by the Fund. The Department has added this triggering event under
this proposed exemption in order to clarify that certain Model-Driven
Funds may need to buy or sell securities to conform to changes to the
portfolio prescribed by the model that differ from changes to a
portfolio necessitated as a result of changes to the underlying index.
The proposed exemption does not require that a computer model be
operated according to any fixed frequency, but, the Department is of
the view that the proposed exemption would not be available unless the
formulae contained in the computer model underlying a Fund are operated
by the manager on an objective basis rather than being used for the
purpose of creating cross-trade opportunities in response to the needs
of other Funds or certain Large Accounts.
The Department further notes that under section II(l), disclosures
must be made to independent plan fiduciaries regarding the triggering
events that would create cross-trading opportunities for Funds under
the manager's cross-trading program. Under the model-driven triggering
event contained in the proposal, the basic factors for making changes
in the composition of the portfolio of a Model-Driven Fund mandated
solely by operation of the formulae contained in the computer model
must be included in these disclosures.
Finally, the Department notes that if a computer model used to
create a portfolio for a Model-Driven Fund is designed to exclude
particular stocks for reasons specified by the plan client or the
plan's investment guidelines, such exclusions would not be considered a
separate triggering event.
D. Modifications to the Computer Model
Section II(c) requires that, if the model or the computer program
used to generate the model underlying the Fund is changed by the
manager, no cross-trades of any securities can be engaged in pursuant
to the proposed exemption for ten (10) business days following the
change. This restriction recognizes the authority of the manager to
change assumptions involving computer models after the model's
activation.
The Department notes that the proposed ten (10) business day
``blackout'' period for cross-trades by a Fund after any change made by
the manager to the model underlying the Fund is intended to prevent
model changes which might be made by managers, in part, to deliberately
create additional cross-trading activity. The 10-day period is based on
a condition contained in a prior individual exemption for cross-trading
by Index and Model-Driven Funds (e.g., Section I(d) of PTE 95-56,
regarding Mellon Bank, 60 FR 35933, July 12, 1995) as well as
representations made by applicants in a number of exemption
applications currently under consideration.12
---------------------------------------------------------------------------
\12\ These exemption applications are: D-9584, Wells Fargo Bank,
N.A.; D-10107, Bankers Trust Company of New York; D-10188, Barclays
Bank PLC and Affiliates; and D-10507, ANB Investment Management and
Trust Company.
---------------------------------------------------------------------------
However, the Department now understands that, in order to keep pace
with the demands of investors in Model-Driven Funds, the industry
changed many of its past practices which may now make a ``10-day
blackout period'' for cross-trades problematic for certain Fund
managers. For example, many Model-Driven Funds have more frequent
opening dates for accepting new contributions from investors than in
the past. In some cases, a Model-Driven Fund may be open for new
contributions every day. In such instances, decisions regarding the
implementation of a model change which would require the 10-day
blackout period for cross-trades may place the manager in a situation
of conflict between investors who wish to make contributions at
different times.
Therefore, the Department specifically requests comments from
interested persons as to whether the proposed 10-day blackout period
for cross-trades would be an acceptable approach to address our
concerns regarding model changes that may be timed to create additional
cross-trading opportunities or whether there are other approaches which
would be equally effective, but less burdensome, to the manager's
operation of the Fund. The Department also requests specific comments
as to how frequently changes to a model are made.
In addition, under section IV(b), a computer model for a Model-
Driven Fund must use independent third party data, not within the
control of the manager, to transform an index.
E. Allocation of Cross-Trade Opportunities
The Department notes that frequently the amount of a security which
all of the Funds need to buy may be less than the amount of such
security which all of the Funds will need to sell, or vice versa. Thus,
section II(d) of the proposed exemption requires that all cross-trade
opportunities be allocated by the manager among potential buyers, or
sellers, on an objective basis. Under section II(d), this basis for
allocation must have been previously disclosed to independent
fiduciaries on behalf of each plan investor, and must not permit the
exercise of any discretion by the manager. In previous individual
exemptions, applicants have relied on different systems (e.g. pro rata
or queue) to objectively allocate cross-trade opportunities. While it
appears to the Department that a pro rata basis of allocation would be
the method least subject to scrutiny, the Department recognizes the
validity of other workable objective systems. However, the Department
cautions that such systems may not permit the exercise of discretion by
the manager.
F. Disclosures and Authorizations
Section II(i) of the proposed exemption requires that a plan's
participation in a cross-trade program of a manager will be subject to
the prior written authorization of a plan fiduciary who is independent
of the manager. This authorization, once given, would apply to all
Funds that comprise the manager's cross-trading program at the time of
the authorization. Thus, a new authorization by an independent plan
fiduciary for investment in a different Fund, in which the plan did not
invest at the time of its initial written authorization, would not be
necessary to the extent that such Funds were part of the program at the
time of the original authorization. However, where a manager makes new
Funds available for plan investors or changes triggering events
relating to Funds subject to the initial authorization, and such Funds
or triggering events were not previously disclosed as being part of the
manager's cross-trading program, section II(l) of the proposal requires
that in such instances the manager furnish
[[Page 70065]]
additional disclosures to an independent plan fiduciary. The Manager
shall provide a notice to each relevant independent plan fiduciary
prior to, or within ten (10) days following, such addition of Funds or
change to, or addition of, triggering events, which contains a
description of such Fund(s) or triggering event(s). Such notice will
also include a statement that the plan has the right to terminate its
participation in the cross-trading program and its investment in any
Index Fund or Model-Driven Fund without penalty at any time, as soon as
is necessary to effectuate the withdrawal in an orderly manner.
As noted below, section II(m) also requires that disclosures
regarding any new Funds or triggering events be made as part of the
notice required for a plan's annual re-authorization of its
participation in the manager's cross-trading program, even though the
plan receiving such notice has not invested in such new Funds.
Section II(j) clarifies the meaning of Section II(i) with respect
to existing plan investors in any of the Funds prior to a manager's
implementation of a cross-trading program. Under section II(j), the
authorizing independent fiduciary must be furnished notice and an
opportunity to object to that plan's participation in the program not
less than forty-five (45) days prior to the implementation of the
cross-trade program. Section II(j) further states that the failure of
the authorizing fiduciary to return a special termination form provided
in the notice within thirty (30) days of receipt shall be deemed to be
approval of the plan's participation in the program. If the authorizing
plan fiduciary objects to the plan's inclusion in the program, the plan
will be given the opportunity to withdraw without penalty prior to the
program's implementation.
Sections II(k) and II(l) describe the type of information that is
required to be disclosed to a plan fiduciary prior to the authorization
defined in sections II(i) and II(j). Important among these disclosures
is a statement describing the conflicts that will exist as a result of
the manager's cross-trading activities. This statement must also detail
and explain how the manager's practices and procedures will mitigate
such conflicts. Such writing must include a statement that:
Investment decisions will not be based in whole or in part by the
manager on the availability of cross-trade opportunities. These
investment decisions include:
Which securities to buy or sell;
How much of each security to buy or sell; and,
When to execute a sale or purchase of each security.
Investment decisions will be made prior to the identification and
determination of any cross-trade opportunities. In addition, all cross-
trades by a Fund will be based solely upon triggering events set forth
in the exemption. Records documenting each cross-trade transaction will
be retained by the manager.
Section II(m) further requires that notice be provided to the
authorizing plan fiduciary at least annually of the plan's right to
terminate its participation in the cross-trading program and its
investment in any of the Funds without penalty. Such notice must be
accompanied by a special termination form. Failure to return the form
(within at least thirty (30) days of the receipt) will be deemed
approval of the plan's continued participation in the cross-trading
program. Such annual re-authorization will contain disclosures
regarding any new Funds that are added to the cross-trading program or
any new ``triggering events'' (as defined in Section IV(d) below) that
may have been added to existing Funds since the time of the initial
authorization described in Section II(i), or the time of the notice
described in Section II(j).
Section II(n) of the proposed exemption details specific
requirements for cross-trades of securities which will occur in
connection with a Large Account restructuring. In particular, section
II(n)(2) requires that the authorization for such cross-trades must be
made in writing prior to the cross-trade transactions by fiduciaries of
the Large Account who are independent of the manager. Such
authorization must follow full written disclosure of information
regarding the cross-trading program. Such authorization may be
terminated at will upon receipt by the manager of written notice of
termination. A termination form must be supplied to the Large Account
fiduciary concurrent with the written description of the cross-trading
program. Under section II(n)(3), the portfolio restructuring program
must be completed within thirty (30) days of the initial authorization
made by the Large Account's fiduciary (or initial receipt of assets
associated with the restructuring, if later), unless the Large
Account's fiduciary agrees in writing to extend this period for another
thirty (30) days. Large Account fiduciaries may utilize the termination
form or any other written instrument at any time within this 30-day
period to terminate their prior written authorization for cross-trading
related to the portfolio restructuring program. Under section II(n)(4),
within thirty (30) days of the completion of the restructuring program,
the Large Account fiduciary must be fully apprised in writing of the
results of the transactions. Such writing may include, upon request by
the Large Account fiduciary, additional information sufficient to allow
the independent fiduciary for the Large Account to verify the need for
each cross-trade and the determination of the above decisions. However,
the manager may refuse to disclose to a Large Account fiduciary or
other person any such information which is deemed confidential or
privileged if the manager is otherwise permitted by law to withhold
such information from such person and, by the close of the thirtieth
(30th) day following the request, the manager gives a written notice to
such person advising that person both the reasons for the refusal and
that the Department may request such information.
G. Recordkeeping
Section III(a) requires that the manager maintain records necessary
to allow a determination of whether the conditions of the proposed
exemption have been met. These records must be maintained for a period
of six (6) years from the date of the transactions. These records must
include records which identify the following:
(1) On a Fund by Fund basis, the specific triggering events which
result in the creation of the model prescribed output or trade list of
specific securities to be cross-traded;
(2) On a Fund by Fund basis, the model prescribed output or trade
list which describes: (A) Which securities to buy or sell; (B) how much
of each security to buy or sell in detail sufficient to allow an
independent plan fiduciary to verify that each of the above decisions
for the Fund was made in response to specific triggering events; and
(3) On a Fund by Fund basis, the actual trades executed by the Fund
on a particular day and which of those trades were associated with
triggering events.
As explained to the Department, the triggering event relating to
net investments in, or withdrawals from, a Fund results in new cash to
invest in the Fund or the need to liquidate securities from a Fund. The
model or index underlying the Fund determines which securities to
purchase or sell based on the amount of net investments or withdrawals.
This process results in the creation of a trade list or a model
prescribed output of securities to be
[[Page 70066]]
purchased or sold. The manager then applies its objective allocation
system to the trade lists or model prescribed outputs used for other
Funds participating in the cross-trade program to determine which
particular cross-trades will occur between Funds. For those securities
which cannot be cross-traded after application of the manager's
allocation system, the necessary purchases and sales are made through
other means.
In the view of the Department, records must be maintained of this
cross-trading activity with enough specificity to allow an independent
plan fiduciary to verify whether the safeguards of this exemption have
been met. Section II(b) requires that any cross-trade of securities by
a Fund occur as a direct result of a ``triggering event'' as defined in
section IV(d) and is executed no later than the close of the second
business day following such ``triggering event.'' Among the records
needed to verify that this condition has been satisfied, section
III(a)(1) requires that, on a Fund by Fund basis, the manager maintain
a record of the specific triggering events which result in the creation
of the list of specific securities for the manager's cross-trading
system. Section III(a)(2) further requires that, on a Fund by Fund
basis, the manager maintain records of the model prescribed output or
trade list, as well as the procedures utilized by the manager to
determine which securities to buy or sell and how much of each security
to buy or sell, in detail sufficient to allow an independent plan
fiduciary to verify that each of the above decisions for the Fund was
made in response to specific triggering events. As provided by section
III(b)(2), if such material is viewed as a trade secret, or privileged
or confidential, the manager may refuse to disclose such information if
reasons for the refusal are given and the person is also notified that
the Department of Labor may request such information.
This recordkeeping requirement is intended to assure that
independent plan fiduciaries will be able to determine whether Funds
and their underlying models or indexes operate consistently in
following the input of triggering event information. The Department
does not intend to prescribe a detailed list of records that are
necessary to enable a determination of compliance with the exemption
because the necessary records will depend on the nature of the Index or
Model-Driven Funds involved and other factors. This information,
however, should be kept in sufficient detail to enable a replication of
specific historical events in order to satisfy an inquiry by persons
identified in section III(b)(1)(A). Section III(a)(3) requires that, on
a Fund by Fund basis, records be maintained of the actual trades
executed by the Fund on a particular day and which of those trades
resulted from triggering events.
The Department recognizes that these requirements may require
adjustments to a manager's record-keeping systems. Therefore, the
Department seeks specific comments on these record-keeping requirements
and any additional burdens that they may impose on Fund managers.
Further, Section III(a) requires that the records must be readily
available to assure accessibility and maintained so that an independent
fiduciary, or other persons identified in section III(b)(1)(A), may
obtain them within a reasonable time. This requirement should permit
the records to be retrieved and assembled quickly, regardless of the
location in which they are maintained. For those records which are not
maintained electronically, the records should be maintained in a
central location to facilitate assembly and examination.
All records must be unconditionally available at their customary
location for examination during normal business hours by the persons
described in section III(b)(1). However, as noted with respect to
information which may be disclosed to a Large Account fiduciary or
other person, the manager may refuse to disclose to a person, other
than a duly authorized employee or representative of the Department or
the Internal Revenue Service, any such information which is deemed
confidential or privileged if the manager is otherwise permitted by law
to withhold such information from such person. In such instances, the
manager shall provide, by the close of the thirtieth (30th) day
following the request, a written notice to such person advising that
person of the reasons for the refusal and that the Department may
request such information.
H. Effect on Existing Exemptions
The proposed exemption is generally similar to a number of
individual exemptions that previously have been granted by the
Department for such transactions.13 However, the operative
language of the proposal differs from that of the individual exemptions
in a number of respects. For example, the proposal under section II(h)
prohibits the cross-trade of any securities issued by the manager,
unless the manager has obtained a separate prohibited transaction
exemption for the acquisition of such securities by its Index and
Model-Driven Funds. A number of prior individual exemptions allow such
transactions in order to eliminate potential tracking error of the Fund
associated with replicating the rate of return, risk profile and other
characteristics of the index containing the manager's securities. The
Department invites comments as to the effect that the continuation of
current Index and Model-Driven Fund individual exemptions would have in
offering an advantage to those investment managers granted such relief
compared to those managers which would utilize this exemption, if
granted. Finally, the Department is aware that a number of individuals
have expressed concern regarding whether the Department would revoke
past individual exemptions involving Index and Model-Driven Fund cross-
trading programs in connection with the granting of this class
exemption. The Department notes that under the Prohibited Transaction
Exemption Procedures, 29 CFR Section 2570.50(b), before revoking or
modifying an exemption, the Department must publish a notice of its
proposed action in the Federal Register and provide interested persons
with an opportunity to comment on the proposed revocation or
modification.
---------------------------------------------------------------------------
\13\ The following individual exemptions involve cross-trades of
securities by Index and Model-Driven Funds: PTE 95-56, Mellon Bank,
N.A. (60 FR 35933, July 12, 1995); PTE 94-47, Bank of America
National Trust and Savings Association (59 FR 32021, June 21, 1994);
PTE 94-43, Fidelity Management Trust Company (59 FR 30041, June 10,
1994); PTE 94-36, The Northern Trust Company (59 FR 19249, April 22,
1994); PTE 92-11, Wells Fargo Bank, N.A. (57 FR 7801, March 4,
1992)--which replaced PTE 87-51 noted below; PTE 89-9, State Street
Bank and Trust Company (54 FR 8018, February 24, 1989); and PTE 87-
51, Wells Fargo Bank, N.A. (52 FR 22558, June 12, 1987).
---------------------------------------------------------------------------
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
[[Page 70067]]
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) Before an exemption may be granted under section 408(a) of the
Act and section 4975(c)(2) of the Code, the Department must find that
the exemption is administratively feasible, in the interests of the
plans and their participants and beneficiaries and protective of the
rights of participants and beneficiaries of such plans;
(3) If granted, the proposed exemption will be applicable to a
transaction only if the conditions specified in the exemption are met;
and
(4) The proposed exemption, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act 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.
Written Comments and Hearing Requests
All interested persons are invited to submit written comments or
requests for a public hearing on the proposed exemption to the address
and within the time period set forth above. All comments will be made a
part of the record. Comments and requests for a hearing should state
the reasons for the writer's interest in the proposed exemption.
Comments received will be available for public inspection with the
referenced application at the above address.
Proposed Exemption
The Department has under consideration the grant of the following
class exemption 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 CFR Part 2570, Subpart B (55 FR 32836, 32847, August
10, 1990).
Section I--Exemption for Cross-Trading of Securities by Index and/or
Model-Driven Funds
Effective [date of publication of final class exemption], the
restrictions of sections 406(a)(1)(A) and 406(b)(2) of the Act, section
8477(c)(2)(B) of FERSA, and the sanctions resulting from the
application of section 4975 of the Code, by reason of section
4975(c)(1)(A) of the Code, shall not apply to:
(a) The purchase and sale of securities between an Index Fund or a
Model-Driven Fund (a ``Fund''), as defined in Sections IV(a) and (b)
below, and another Fund, at least one of which holds ``plan assets''
subject to the Act or FERSA; or
(b) The purchase and sale of securities between a Fund and a Large
Account, as defined in Section IV(e) below, at least one of which holds
``plan assets'' subject to the Act or FERSA, pursuant to a portfolio
restructuring program, as defined in Section IV(f) below, of the Large
Account;
provided that, with respect to all such purchases and sales (referred
to herein as ``cross-trades''), the conditions set forth in Sections II
and III below are met.
Section II--Specific Conditions
(a) The cross-trade is executed at the closing price, as defined in
Section IV(h) below.
(b) Any cross-trade of securities by a Fund occurs as a direct
result of a ``triggering event,'' as defined in Section IV(d) below,
and is executed no later than the close of the second business day
following such ``triggering event.''
(c) If the cross-trade involves a Model-Driven Fund, the cross-
trade does not take place within ten (10) business days following any
change made by the Manager to the model underlying the Fund.
(d) The Manager has allocated the opportunity for all Funds or
Large Accounts to engage in the cross-trade on an objective basis which
has been previously disclosed to the authorizing fiduciaries of plan
investors, and which does not permit the exercise of discretion by the
Manager (e.g., a pro rata allocation system).
(e) No more than ten (10) percent of the assets of the Fund or
Large Account at the time of the cross-trade are comprised of assets of
employee benefit plans maintained by the Manager for its own employees
(Manager Plans) for which the Manager exercises investment discretion.
(f)(1) Cross-trades of equity securities involve only securities
that are widely-held, actively-traded, and for which market quotations
are readily available from independent sources that are engaged in the
ordinary course of business of providing financial news and pricing
information to institutional investors and/or the general public, and
are widely recognized as accurate and reliable sources for such
information. For purposes of this requirement, the terms ``widely-
held'' and ``actively-traded'' shall be deemed to include any security
listed in an Index, as defined in Section IV(c) below; and
(2) Cross-trades of fixed-income securities involve only securities
for which market quotations are readily available from independent
sources that are engaged in the ordinary course of business of
providing financial news and pricing information to institutional
investors and/or the general public, and are widely recognized as
accurate and reliable sources for such information.
(g) The Manager receives no brokerage fees or commissions as a
result of the cross-trade.
(h) The cross-trade does not involve any security issued by the
Manager unless the Manager has obtained a separate prohibited
transaction exemption for the acquisition of such security.
(i) As of the date the proposed exemption is granted, a plan's
participation in the Manager's cross-trading program as a result of
investments made in any Index or Model-Driven Fund that holds plan
assets is subject to a written authorization executed in advance of
such investment by a fiduciary of the plan which is independent of the
Manager engaging in the cross-trade transactions.
(j) With respect to existing plan investors in any Index or Model-
Driven Fund as of the date the proposed exemption is granted, the
independent fiduciary is furnished with a written notice, not less than
forty-five (45) days prior to the implementation of the cross-trading
program, that describes the Fund's participation in the Manager's
cross-trading program, provided that:
(1) Such notice allows each plan an opportunity to object to the
plan's participation in the cross-trading program as a Fund investor by
providing the plan with a special termination form;
(2) The notice instructs the independent plan fiduciary that
failure to return the termination form to the Manager by a specified
date (which shall be at least 30 days following the plan's receipt of
the form) shall be deemed to be an approval by the plan of its
participation in the Manager's cross-trading program as a Fund
investor; and
(3) If the independent plan fiduciary objects to the plan's
participation in the cross-trading program as a Fund investor by
returning the termination form to the Manager by the specified date,
the plan is given the opportunity to withdraw from each Index or Model-
Driven Fund without penalty prior to the implementation of the cross-
trading program, within such time as may be reasonably necessary to
effectuate the withdrawal in an orderly manner.
[[Page 70068]]
(k) Prior to obtaining the authorization described in Section
II(i), and in the notice described in Section II(j), the following
statement must be provided by the Manager to the independent plan
fiduciary:
Investment decisions for the Fund (including decisions regarding
which securities to buy or sell, how much of a security to buy or sell,
and when to execute a sale or purchase of securities for the Fund) will
not be based in whole or in part by the Manager on the availability of
cross-trade opportunities and will be made prior to the identification
and determination of any cross-trade opportunities. In addition, all
cross-trades by a Fund will be based solely upon a ``triggering event''
set forth in this exemption. Records documenting each cross-trade
transaction will be retained by the Manager.
(l) Prior to any authorization set forth in Section II(i), and at
the time of any notice described in Section II(j) above, the
independent plan fiduciary must be furnished with any reasonably
available information necessary for the fiduciary to determine whether
the authorization should be given, including (but not limited to) a
copy of this exemption, an explanation of how the authorization may be
terminated, detailed disclosure of the procedures to be implemented
under the Manager's cross-trading practices (including the ``triggering
events'' that will create the cross-trading opportunities, the
independent pricing services that will be used by the manager to price
the cross-traded securities, and the methods that will be used for
determining closing price), and any other reasonably available
information regarding the matter that the authorizing fiduciary
requests. The independent plan fiduciary must also be provided with a
statement that the Manager will have a potentially conflicting division
of loyalties and responsibilities to the parties to any cross-trade
transaction and must explain how the Manager's cross-trading practices
and procedures will mitigate such conflicts.
With respect to Funds that are added to the Manager's cross-trading
program or changes to, or additions of, triggering events regarding
Funds, following the authorizations described in section II(i) or
section II(j), the Manager shall provide a notice to each relevant
independent plan fiduciary prior to, or within ten (10) days following
such addition of Funds or change to, or addition of, triggering events,
which contains a description of such Fund(s) or triggering event(s).
Such notice will also include a statement that the plan has the right
to terminate its participation in the cross-trading program and its
investment in any Index Fund or Model-Driven Fund without penalty at
any time, as soon as is necessary to effectuate the withdrawal in an
orderly manner.
(m) At least annually, the Manager notifies the independent
fiduciary for each plan that has previously authorized participation in
the Manager's cross-trading program as a Fund investor, that the plan
has the right to terminate its participation in the cross-trading
program and its investment in any Index Fund or Model-Driven Fund
without penalty at any time, as soon as is necessary to effectuate the
withdrawal in an orderly manner. This notice shall also provide each
independent plan fiduciary with a special termination form and instruct
the fiduciary that failure to return the form to the Manager by a
specified date (which shall be at least thirty (30) days following the
plan's receipt of the form) shall be deemed an approval of the subject
plan's continued participation in the cross-trading program as a Fund
investor. Such annual re-authorization must contain disclosures
regarding any new Funds that are added to the cross-trading program or
any new triggering events (as defined in Section IV(d) below) that may
have been added to existing Funds since the time of the initial
authorization described in Section II(i), or the time of the notice
described in Section II(j).
(n) With respect to a cross-trade involving a Large Account:
(1) The cross-trade is executed in connection with a portfolio
restructuring program, as defined in Section IV(f) below, with respect
to all or a portion of the Large Account's investments which an
independent fiduciary of the Large Account has authorized the Manager
to carry out or to act as a ``trading adviser,'' as defined in Section
IV(g) below, in carrying out a Large Account-initiated liquidation or
restructuring of its portfolio;
(2) Prior to the cross-trade, a fiduciary of the Large Account who
is independent of the Manager has been fully informed of the Manager's
cross-trading program, has been provided with the information required
in Section II(l), and has provided the Manager with advance written
authorization to engage in cross-trading in connection with the
restructuring, provided that--
(A) Such authorization may be terminated at will by the Large
Account upon receipt by the Manager of written notice of termination.
(B) A form expressly providing an election to terminate the
authorization, with instructions on the use of the form, is supplied to
the authorizing Large Account fiduciary concurrent with the receipt of
the written information describing the cross-trading program. The
instructions for such form must specify that the authorization may be
terminated at will by the Large Account, without penalty to the Large
Account, upon receipt by the Manager of written notice from the
authorizing Large Account fiduciary;
(3) The portfolio restructuring program must be completed by the
Manager within thirty (30) days of the initial authorization (or
initial receipt of assets associated with the restructuring, if later)
to engage in such restructuring by the Large Account's independent
fiduciary, unless such fiduciary agrees in writing to extend this
period for another thirty (30) days; and,
(4) No later than thirty (30) days following the completion of the
Large Account's portfolio restructuring program, the Large Account's
independent fiduciary must be fully apprised in writing of all cross-
trades executed in connection with the restructuring. Such writing
shall include a notice that the Large Account's independent fiduciary
may obtain, upon request, the information described in Section III(a),
subject to the limitations described in Section III(b). However, if the
program takes longer than thirty (30) days to complete, interim reports
containing the transaction results must be provided to the Large
Account fiduciary no later than fifteen (15) days following the end of
each thirty (30) day period.
Section III--General Conditions
(a) The Manager maintains or causes to be maintained for a period
of six (6) years from the date of each cross-trade the records
necessary to enable the persons described in paragraph (b) of this
Section to determine whether the conditions of the exemption have been
met, including records which identify:
(1) On a Fund by Fund basis, the specific triggering events which
result in the creation of the model prescribed output or trade list of
specific securities to be cross-traded;
(2) On a Fund by Fund basis, the model prescribed output or trade
list which describes: (A) which securities to buy or sell; and (B) how
much of each security to buy or sell; in detail sufficient to allow an
independent plan fiduciary to verify that each of the above decisions
for the Fund was made in response to specific triggering events; and
(3) On a Fund by Fund basis, the actual trades executed by the Fund
on
[[Page 70069]]
a particular day and which of those trades resulted from triggering
events.
Such records must be readily available to assure accessibility and
maintained so that an independent fiduciary, or other persons
identified below in paragraph (b) of this Section, may obtain them
within a reasonable period of time. However, a prohibited transaction
will not be considered to have occurred if, due to circumstances beyond
the control of the Manager, the records are lost or destroyed prior to
the end of the six-year period, and no party in interest other than the
Manager shall be subject to the civil penalty that may be assessed
under section 502(i) of the Act or to the taxes imposed by sections
4975(a) and (b) of the Code if the records are not maintained or are
not available for examination as required by paragraph (b) below.
(b)(1) Except as provided in paragraph (b)(2) and notwithstanding
any provisions of sections 504(a)(2) and (b) of the Act, the records
referred to in paragraph (a) of this Section are unconditionally
available at their customary location for examination 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 participating in a cross-trading
program who has the authority to acquire or dispose of the assets of
the Plan, or any duly authorized employee or representative of such
fiduciary,
(C) Any contributing employer with respect to any Plan
participating in a cross-trading program or any duly authorized
employee or representative of such employer, and
(D) Any participant or beneficiary of any Plan participating in a
cross-trading program, or any duly authorized employee or
representative of such participant or beneficiary.
(2) If in the course of seeking to inspect records maintained by a
Manager pursuant to this exemption, any person described in paragraph
(b)(1)(B) through (D) seeks to examine trade secrets, or commercial or
financial information of the Manager that is privileged or
confidential, and the Manager is otherwise permitted by law to withhold
such information from such person, the Manager may refuse to disclose
such information provided that, by the close of the thirtieth (30th)
day following the request, the Manager gives a written notice to such
person advising the person of the reasons for the refusal and that the
Department of Labor may request such information.
(3) The information required to be disclosed to persons described
in paragraph (b)(1)(B) through (D) shall be limited to information that
pertains to cross-trades involving a Fund or Large Account in which
they have an interest.
Section IV--Definitions
The following definitions apply for purposes of this proposed
exemption:
(a) Index Fund--Any investment fund, account or portfolio
sponsored, maintained, trusteed, or managed by the Manager or an
Affiliate, in which one or more investors invest, and--
(1) Which is designed to track the rate of return, risk profile and
other characteristics of an independently maintained securities index,
as defined in Section IV(c) below, by either (i) replicating the same
combination of securities which compose such index or (ii) sampling the
securities which compose such index based on objective criteria and
data;
(2) For which the Manager does not use its discretion, or data
within its control, to affect the identity or amount of securities to
be purchased or sold;
(3) That either contains ``plan assets'' subject to the Act, is an
investment company registered under the Investment Company Act of 1940,
or is an institutional investor, which may include, but not be limited
to, such entities as an insurance company separate account or general
account, a governmental plan, a university endowment fund, a charitable
foundation fund, a trust or other fund which is exempt from taxation
under section 501(a) of the Code; and
(4) That involves no agreement, arrangement, or understanding
regarding the design or operation of the Fund which is intended to
benefit the Manager, its Affiliates, or any party in which the Manager
or an Affiliate may have an interest.
(b) Model-Driven Fund--Any investment fund, account or portfolio
sponsored, maintained, trusteed, or managed by the Manager or an
Affiliate, in which one or more investors invest, and--
(1) Which is composed of securities the identity of which and the
amount of which are selected by a computer model that is based on
prescribed objective criteria using independent third party data, not
within the control of the Manager, to transform an Index, as defined in
Section IV(c) below;
(2) Which either contains ``plan assets'' subject to the Act, is an
investment company registered under the Investment Company Act of 1940,
or is an institutional investor, which may include, but not be limited
to, such entities as an insurance company separate account or general
account, a governmental plan, a university endowment fund, a charitable
foundation fund, a trust or other fund which is exempt from taxation
under section 501(a) of the Code; and
(3) That involves no agreement, arrangement, or understanding
regarding the design or operation of the Fund or the utilization of any
specific objective criteria which is intended to benefit the Manager,
its Affiliates, or any party in which the Manager or an Affiliate may
have an interest.
(c) Index--A securities index that represents the investment
performance of a specific segment of the public market for equity or
debt securities in the United States and/or foreign countries, but only
if--
(1) The organization creating and maintaining the index is--
(A) Engaged in the business of providing financial information,
evaluation, advice or securities brokerage services to institutional
clients,
(B) A publisher of financial news or information, or
(C) A public stock exchange or association of securities dealers;
and,
(2) The index is created and maintained by an organization
independent of the Manager, as defined in Section IV(i) below; and,
(3) The index is a generally accepted standardized index of
securities which is not specifically tailored for the use of the
Manager.
(d) Triggering Event:
(1) A change in the composition or weighting of the Index
underlying a Fund by the independent organization creating and
maintaining the Index;
(2) A specific amount of net change in the overall level of assets
in a Fund, as a result of investments in and withdrawals from the Fund,
provided that: (A) Such specified amount has been disclosed in writing
as a ``triggering event'' to an independent fiduciary of each plan
having assets held in the Fund prior to, or within ten (10) days
following, its inclusion as a ``triggering event'' for such Fund; and
(B) investments or withdrawals as a result of the manager's discretion
to invest or withdraw assets of a Manager Plan, other than a Manager
Plan which is a defined contribution plan under which participants
direct the investment of their accounts among various investment
options, including such Fund, will not be taken into account in
determining the specified amount of net change;
(3) An accumulation in the Fund of a specified amount of either:
[[Page 70070]]
(A) cash which is attributable to interest or dividends on, and/or
tender offers for, portfolio securities; or
(B) Stock attributable to dividends on portfolio securities;
provided that such specified amount has been disclosed in writing as a
``triggering event'' to an independent fiduciary of each plan having
assets held in the Fund prior to, or within ten (10) days after, its
inclusion as a ``triggering event'' for such Fund; or
(4) A change in the composition of the portfolio of a Model-Driven
Fund mandated solely by operation of the formulae contained in the
computer model underlying the Fund where the basic factors for making
such changes (and any fixed frequency for operating the computer model)
have been disclosed in writing to an independent fiduciary of each plan
having assets held in the Fund prior to, or within ten (10) days after,
its inclusion as a ``triggering event'' for such Fund.
(e) Large Account--Any investment fund, account or portfolio that
is not an Index Fund or a Model-Driven Fund sponsored, maintained,
trusteed or managed by the Manager, which holds assets of either:
(1) An employee benefit plan within the meaning of section 3(3) of
the Act that has $50 million or more in total assets;
(2) An institutional investor that has total assets in excess of
$50 million, such as an insurance company separate account or general
account, a governmental plan, a university endowment fund, a charitable
foundation fund, a trust or other fund which is exempt from taxation
under section 501(a) of the Code; or
(3) An investment company registered under the Investment Company
Act of 1940 (e.g., a mutual fund) other than an investment company
advised or sponsored by the Manager;
provided that the Manager has been authorized to restructure all or a
portion of the portfolio for such Large Account or to act as a
``trading adviser'' (as defined in Section IV(g) below) in connection
with a specific liquidation or restructuring program for the Large
Account.
(f) Portfolio restructuring program--Buying and selling the
securities on behalf of a Large Account in order to produce a portfolio
of securities which will be an Index Fund or a Model-Driven Fund
managed by the Manager, without regard to the requirements of Section
IV(a)(3) or (b)(2), or to carry out a liquidation of a specified
portfolio of securities for the Large Account.
(g) Trading adviser--A person whose role is limited with respect to
a Large Account to the disposition of a securities portfolio in
connection with a Large Account-initiated liquidation or restructuring
within a stated period of time in order to minimize transaction costs.
The person does not have discretionary authority or control with
respect to any underlying asset allocation, restructuring or
liquidation decisions for the account in connection with such
transactions and does not render investment advice [within the meaning
of 29 CFR Sec. 2510.3-21(c)] with respect to such transactions.
(h) Closing price--The price for a security on the date of the
transaction, as determined by objective procedures disclosed to Fund
investors in advance and consistently applied with respect to
securities traded in the same market, which procedures shall indicate
the independent pricing source (and alternates, if the designated
pricing source is unavailable) used to establish the closing price and
the time frame after the close of the market in which the closing price
will be determined.
(i) Manager--A person who is:
(1) A bank or trust company, or any Affiliate thereof, as defined
in Section IV(j) below, which is supervised by a state or federal
agency; or
(2) An investment adviser or any Affiliate thereof, as defined in
Section IV(j) below, which is registered under the Investment Advisers
Act of 1940.
(j) Affiliate--An ``affiliate'' of a Manager includes:
(1) Any person, directly or indirectly, through one or more
intermediaries, controlling, controlled by or under common control with
the person;
(2) Any officer, director, employee or relative of such person, or
partner of any such person; and
(3) Any corporation or partnership of which such person is an
officer, director, partner or employee.
(k) Control--The power to exercise a controlling influence over the
management or policies of a person other than an individual.
(l) Relative--A ``relative'' is a person that is defined in section
3(15) of the Act (or a ``member of the family'' as that term is defined
in section 4975(e)(6) of the Code), or a brother, a sister, or a spouse
of a brother or a sister.
Signed at Washington, D.C., this 9th day of December, 1999.
Alan D. Lebowitz,
Deputy Assistant Secretary for Program Operations, Pension and Welfare
Benefits Administration, U.S. Department of Labor.
[FR Doc. 99-32404 Filed 12-14-99; 8:45 am]
BILLING CODE 4510-29-P
