[Federal Register Volume 62, Number 22 (Monday, February 3, 1997)]
[Notices]
[Pages 5051-5057]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-2556]
[[Page 5051]]
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application Number D-10078]
Proposed Class Exemption Relating to Certain Employee Benefit
Plan Foreign Exchange Transactions Executed Pursuant to Standing
Instructions
AGENCY: Pension and Welfare Benefits Administration, Labor.
ACTION: Notice of Proposed Class Exemption.
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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 (ERISA or the Act) and from certain taxes
imposed by the Internal Revenue Code of 1986 (the Code). If granted,
the proposed exemption would permit certain foreign exchange
transactions between employee benefit plans and certain banks and
broker-dealers which are parties in interest with respect to such
plans, pursuant to standing instructions. The proposed exemption, if
granted, would affect participants and beneficiaries of employee
benefit plans involved in such transactions, as well as banks and
broker-dealers which act as dealers in foreign exchange.
DATES: Written comments and requests for a public hearing with regard
to the substantive content of the proposed exemption shall be submitted
to the Department before April 4, 1997.
ADDRESSES: All written comments and requests for a public hearing
(preferably 3 copies) should be sent to: Pension and Welfare Benefits
Administration, Room N-5649, 200 Constitution Avenue NW., Washington,
DC 20210. Attention: Foreign Exchange Class Exemption Proposal--
Standing Instructions. The application and all comments received, 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 NW., Washington, DC 20210.
FOR FURTHER INFORMATION CONTACT:
Lyssa E. Hall, Office of Exemption Determinations, Pension and Welfare
Benefits Administration, U.S. Department of Labor, Washington, DC 20210
(202) 219-8971 (not a toll-free number) or Susan E. Rees, Plan Benefits
Security Division, Office of the Solicitor, (202) 219-9141 (not a toll-
free number).
Paperwork Reduction Act Analysis
The Department of Labor, as part of its continuing effort to reduce
paperwork and respondent burden, provides the general public and
Federal agencies with an opportunity to comment on proposed and/or
continuing collections of information in accordance with the Paperwork
Reduction Act of 1995, 44 U.S.C. 3506(c)(2)(A) (1995) (PRA 95). This
program 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 is
soliciting comments concerning the proposed new collection of
information under the Proposed Class Exemption Relating to Certain
Employee Benefit Plan Foreign Exchange Transactions Executed Pursuant
to Standing Instructions.
Dates: Written comments concerning the proposed collection of
information must be submitted on or before April 4, 1997 to Mr. Gerald
B. Lindrew, Department of Labor, Pension and Welfare Benefits
Administration, Room N-5647, 200 Constitution Avenue, NW., Washington,
DC 20210. The Department of Labor is particularly interested in
comments which:
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 clarify 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 submissions of responses.
Title: Class Exemption Relating to Certain Foreign Exchange
Transactions Pursuant to Standing Instructions.
Summary: The proposed exemption would permit certain foreign
exchange transactions between employee benefit plans and certain banks,
broker-dealers, and domestic affiliates thereof, which are parties in
interest with respect to such plans, pursuant to standing instructions.
Needs and Uses: ERISA requires that the Department make a finding
that the proposed exemption meets the statutory requirements of section
408(a) before granting the exemption. The Department therefore finds
its necessary that certain information be provided to an independent
fiduciary of each plan in advance of, and subsequent to, the proposed
transaction, and that the independent fiduciary approve the proposed
transaction.
Type of Review: New.
Respondents and Proposed Frequency of Response: The Department
staff estimates that approximately 65 parties will seek to take
advantage of the class exemption in any given year. The respondents
will be banks and broker-dealers acting as fiduciaries of plans which
engage in foreign exchange transactions with such plans.
Estimated Annual Burden: The Department staff estimates the annual
burden for preparing the materials required under the proposed class
exemption to be 5 hours per respondent for a total of 325 hours. The
total annual burden cost (operating/maintenance) is estimated to be
$24,375. These are estimated to be capital/start-up burden costs.
Comments submitted in response to this notice will be summarized and/or
included in the request for Office of Management and Budget approval of
the information collection request; they will also become a matter of
public record.
SUPPLEMENTARY INFORMATION: This document contains a notice of pendency
before the Department of a proposed class exemption from the
restrictions of section 406(a)(1) (A) through (D) and section 406
(b)(1) and (b)(2) of ERISA and from the taxes imposed by section
4975(a) and (b) of the Code by reason of certain transactions described
in section 4975(c)(1) (A) through (E) of the Code. The proposed
exemption was initially requested in an application dated July 18, 1984
(Application No. D-5700) submitted by the American Bankers Association
(ABA) pursuant to section 408(a) of ERISA and section 4975(c)(2) of the
Code, and in accordance with the procedures set forth in ERISA
Procedure 75-1 (40 FR 18471, April 28, 1975). Pursuant to the foregoing
authority, the Department is proposing additional conditions with
respect to the relief requested by the Applicant.
On February 17, 1994, the Department granted PTE 94-20 (59 FR
8022), a class exemption which permits purchases and sales of foreign
currencies between employee benefit plans and certain banks, broker-
dealers and affiliates
[[Page 5052]]
thereof which are parties in interest with respect to such plans
provided that such transactions are directed by a plan fiduciary who is
independent of the bank, broker-dealer or affiliate thereof and the
other conditions of the exemption are met. PTE 94-20 provides an
exemption from the prohibited transaction restrictions of section
406(a)(1) (A) through (D) of the Act and from the sanctions resulting
from section 4975(a) and (b) of the Code by reason of section
4975(c)(1) (A) through (D) of the Code. PTE 94-20 did not provide
relief for all of the transactions described in the 1984 ABA exemption
request.
In response to the notice of proposed exemption for PTE 94-20,\1\ a
number of commenters (the Commenters) expressed concern regarding the
lack of relief for foreign exchange transactions executed pursuant to
standing instructions. As explained in greater detail in the preamble
to PTE 94-20, the Commenters requested that the Department expand the
exemption to include retroactive and prospective relief for foreign
exchange transactions entered into pursuant to a ``standing
authorization'' (hereinafter standing instruction). Many of the
Commenters also requested that the Department amend the definition of
the term ``directed transaction'' by modifying the requirement that the
independent plan fiduciary effect the foreign exchange transaction at a
specific exchange rate.
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\1\ 56 FR 11757 (March 20, 1991).
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The Commenters represented that the utilization of standing
instructions is an integral component in foreign exchange transactions
involving employee benefit plans. In this regard, the Commenters
indicated that, without the ability to execute foreign exchange
transactions with plans pursuant to standing instructions, plans would
lose investment income and incur higher exchange rates on small
transactions.
The ABA requested relief for transactions entered into by a bank on
behalf of a plan pursuant to standing instructions from an independent
fiduciary in its application dated July 18, 1984. The Department did
not include relief with respect to such transactions in the proposal to
PTE 94-20 because it was unable, at that time, to make the findings
required under section 408(a) of the Act. Specifically, the Department
was unable to conclude that the conditions proposed by the ABA would
effectively and consistently address the potential for abuse of
discretion by party in interest banks in setting exchange rates for
foreign exchange transactions. On the basis of the comments and
additional information received following publication of the proposal
to PTE 94-20,\2\ the Department concluded that it might be appropriate,
under limited circumstances, to provide relief from section 406(b)(1)
and (b)(2) of the Act for foreign exchange transactions entered into
pursuant to standing instructions.
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\2\ On October 3, 1991, the Department held a public hearing and
received testimony regarding standing instructions. See 56 FR 46806,
September 16, 1991.
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However, pursuant to the requirements of section 408(a) of the Act,
the Department is required to offer interested persons an opportunity
to present their views and an opportunity to request a hearing before
granting an exemption from section 406(b) of the Act. Therefore, in
order not to have delayed the publication of PTE 94-20, the Department
determined to separately consider exemptive relief from sections
406(a)(1) (A) through (D), 406(b)(1) and (b)(2) of the Act for foreign
exchange transactions between a plan and a party in interest bank,
broker-dealer or affiliate thereof where such transactions are engaged
in pursuant to a standing instruction.
During the Department's consideration of the standing instruction
issue, the ABA made a supplemental submission on September 1, 1992, in
which they limited their request for relief for standing instruction
transactions and suggested additional conditions regarding such
transactions. Over the course of the following two years, the
Department solicited further information from the ABA and other
interested parties, the most recent of which was received on March 1,
1994, and September 12, 1994. As a result of the suggestions and
comments received from those parties, as well as the imposition of
additional conditions by the Department, the Department believes that a
number of its concerns regarding standing instruction transactions have
been addressed.
The Commenters also requested retroactive exemptive relief as of
January 1, 1975, for foreign exchange transactions effected pursuant to
standing instructions. In this regard, they suggested that the
interests of participants and beneficiaries were adequately protected
if the general arm's-length requirement and a good faith standard were
met for standing instruction transactions effected prior to the
publication of a final exemption.\3\
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\3\ See 56 FR at 11760, for a discussion of the general arm's
length test.
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As the Department stated in the proposal to PTE 94-20, it does not
believe that the conditions suggested by the Commenters for retroactive
relief would effectively address the potential for abuse of discretion
under circumstances where a bank or broker-dealer sets foreign exchange
rates for foreign exchange transactions which have been executed
pursuant to standing instructions. However, the Department has
concluded that it is appropriate to provide limited relief, retroactive
to June 18, 1991, for those banks and broker-dealers who effect foreign
exchange transactions in accordance with the applicable conditions of
Section II of this proposal.\4\
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\4\ June 18, 1991 is the effective date for prospective relief
in PTE 94-20.
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The Department believes that the following conditions, which are
contained in PTE 94-20, are equally applicable with respect to the
retroactive and prospective relief provided for transactions described
in this proposed class exemption: the general and particular arm's
length tests; the proscription against the bank or any of its
affiliates having any discretionary authority or control with respect
to the investment of plan assets involved in the transaction or
rendering investment advice with respect to those assets; the
requirements concerning confirmation statements; and the maintenance of
written policies and procedures regarding the handling of foreign
exchange transactions with plans that ensure that the person acting for
the bank knows that he or she is acting for the plan.
The Department has further conditioned retroactive relief upon
satisfaction of the following condition that addresses the discretion
that was exercised by a bank or broker-dealer in setting foreign
exchange rates for transactions executed pursuant to standing
instructions. Thus, under this requirement, the specific exchange rate
for a covered transaction could not have deviated by more than ten
percent (above or below) from the interbank bid and asked rates as
displayed on Reuters or another independent nationally recognized
service in the foreign exchange market for the effected currencies at
the time that the bank or broker-dealer executed the foreign exchange
transaction. Notwithstanding this requirement, a prohibited transaction
will not be considered to have occurred solely because the records
necessary to demonstrate compliance with the ten percent requirement
have been lost, destroyed or are not available to the bank or broker-
dealer. Nonetheless, the bank or
[[Page 5053]]
broker-dealer is not relieved of its responsibility to otherwise
demonstrate compliance with the conditions of the proposed exemption.
In this regard, the Department notes that there may be other objective
pricing information that was readily available at the time of the
transaction which could be provided by a bank or broker-dealer to
demonstrate compliance with the ten percent requirement.
In response to the Department's concerns regarding the amount of
discretion a bank can exercise under a standing instruction, the
Commenters suggested, as a further safeguard, a limitation on the types
of transactions for which the bank could exercise discretion.
Specifically, it was suggested that relief could be limited to
transactions which would result in the receipt of small amounts of
foreign currency, or where, due to the uncertainty of foreign
settlement dates, the exact timing of the receipt of the currency by
the bank was uncertain. The Department has adopted this suggestion and
proposed limited relief for the conversion of income receipts, such as
interest and dividend payments, as well as for de minimis purchases and
sales of foreign securities.\5\
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\5\ The Department notes that this exemption does not provide
relief for options contracts on foreign exchange transactions. See
section IV(a) of PTE 94-20.
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According to the ABA, standing instructions are necessary to
repatriate income receipts received on foreign investments into U.S.
dollars so that interest can be earned on such funds. In this regard,
the Department did not receive sufficient information regarding how the
conversion of foreign denominated income receipts into other foreign
currencies would operate under standing instructions. The Department
also has concerns about the ability of the bank to maintain the
converted funds in an interest-bearing account. Therefore, the
Department has limited the scope of the proposed exemption to cover
transactions involving the exchange of income conversion items into
U.S. dollars.
The Commenters also requested relief for de minimis purchase and
sale transactions involving foreign securities, i.e., foreign
securities transactions requiring the purchase and sale of foreign
currency in an amount not exceeding $500,000.\6\ The ABA represents
that many foreign markets outside the U.S. do not have firm settlement
dates. Thus, it is difficult to anticipate when the proceeds from sales
of plan owned foreign securities will be received by a bank's foreign
custodian. In order to keep the funds invested, standing instructions
are used so that the conversion can be done as soon as practicable and
the plan can begin to earn interest on the sale proceeds. Under these
circumstances, obtaining specific directions from an independent plan
fiduciary for relatively small transactions is time consuming and not
in the best interests of plans. In this regard, the Department has
proposed relief for de minimis transactions but believes that a
limitation of $100,000 is a more appropriate measure for transactions
which are intended to be relatively small.\7\
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\6\ No relief is provided where the bank or broker-dealer has
investment discretion or provides investment advice (within the
meaning of 29 CFR 2510.3-21) with respect to the investment of the
plan assets involved in the transaction. In this regard, Part I of
the class exemption would not be available for any foreign exchange
transaction involving a bank or broker-dealer that has any
discretionary authority or control over either the initial purchase
or sale of foreign securities or the subsequent reinvestment of the
proceeds.
\7\ Similarly, the Department is proposing a limitation of
$100,000 for income item conversions.
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The Commenters suggested several conditions that would have to be
satisfied in order for a bank to enter into a prospective transaction
involving the conversion of income receipts pursuant to a standing
instruction. Upon review, the Department proposes to apply the same
conditions to de minimis purchase and sale transactions. The ABA
proposed that income item conversions be executed within no more than
two business days following the time of receipt by the bank. In this
regard, the Department believes that one business day following notice
to the bank that ``good funds \8\'' have been received by the bank's
foreign custodian \9\ is a more appropriate limitation on a bank's
exercise of discretion than the suggestion made by the ABA. Such notice
must be provided to the bank within one business day following receipt
of good funds by the foreign custodian if the custodian is an affiliate
of the bank. If the foreign custodian is not an affiliate of the bank,
the bank still must convert within one business day following notice to
the bank that good funds have been received. However, the notice must
be provided to the bank by the nonaffiliated custodian no later than
two business days following receipt by the foreign custodian.
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\8\ Individual commenters have indicated that there may be
governmental restrictions on the transfer of funds outside of some
foreign countries. In general, ``good funds'' are defined for
purposes of this class exemption as funds available in cash with no
governmental restrictions on transfer. This concept was not a part
of the ABA application but rather was suggested by individual
commenters to ensure that the time period during which the bank must
convert income from foreign securities did not begin to run until
after the funds became available.
\9\ According to an individual commenter, U.S. custodial banks
may operate through their own foreign branches or may employ foreign
banks as subcustodians so that foreign instruments can be held in
the country of the issuer.
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Under the requested exemption, the exchange rate(s) or a range of
rates to be used for covered transactions would be established on a
daily basis using objective criteria which would be disclosed to and
approved by an independent plan fiduciary in advance of the
transaction. More specifically, the written policies of the bank will
state that the bank will set an exchange rate or range of rates at
least once a day but no more than four times per day.\10\ Once set, a
rate or range of rates will remain in effect for all conversions that
occur prior to the time that a new rate is set. The bank will disclose
the time or times each day that it will convert income conversion items
or execute de minimis purchase and sales transactions.\11\ Income item
conversions will be executed and de minimis purchase and sale
transactions will be executed at the next scheduled time for
conversions or executions following notice of receipt of ``good
funds'', or a direction to acquire foreign currency, as applicable.
However, if the bank's policy is to bundle or hold small foreign
exchange items until a specified threshold amount is reached, then the
conversion of such items may be delayed, but in no case may such delay
be more than 24 hours after the receipt of notice that good funds were
received or the direction to acquire foreign currency was received.
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\10\ The ABA application suggested that the bank set the rate
only once per day. However, other Commenters noted that if the bank
were allowed to set the rate more than once a day, the rate
established would be more closely related to the current rates in
the foreign exchange market. The Department has determined to modify
the ABA proposal in order to provide flexibility to those financial
institutions that intend to set rates more frequently than once per
day.
\11\ For example, a bank which converts income items only once a
day may set the rate at 10:00 a.m. each day and convert such items
at 10:30 a.m. each day. Both times would be disclosed in the bank's
written policies.
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The bank's policies and procedures will describe the methodology
used by the bank to determine the specific exchange rate or range of
rates for covered transactions. If a range of rates is used, such range
cannot deviate by more than three percent (above or below) from the
interbank bid and asked rates as displayed on Reuters or another
independent nationally recognized service in the foreign exchange
market for the effected currencies at the time such range of rates is
set by the bank. For example, pursuant to its written procedures, Bank
A converts foreign
[[Page 5054]]
exchange items at 7:30 a.m., 12:30 p.m. and 3:30 p.m. At 7:00 a.m. Bank
A sets the range of rates to be used at 7:30 a.m. To determine the
range, the Bank first determines the interbank bid and asked rates at
7:00 a.m. by checking a nationally recognized reporting service. Assume
that at 7:00 a.m. the interbank rate for converting Great Britain
Pounds into U.S. Dollars is 1.7025-1.7200. In order to determine the
range of exchange rates for 7:30 am, the Bank would subtract a maximum
of three percent from the bid quoted price and add a maximum of three
percent to the asked price. The permissible range of rates under the
exemption would be 1.6514-1.7716.
The Department believes that the conditions suggested by the
Commenters regarding income item conversions reduce a great deal of the
discretion exercised by a bank executing a foreign exchange transaction
pursuant to a standing instruction. Accordingly, the Department has
adopted their suggestions with the modifications discussed above, as
conditions of the proposed exemption.
In addition to the above-noted conditions, the proposal also
requires that the authorization to utilize a standing instruction must
be in writing. With respect to a record maintenance requirement, the
Commenters suggested that this condition should be deemed met if the
records are maintained in foreign countries but were available by
electronic access in the United States. As discussed in greater detail
in PTE 94-20, the Commenters were not able to address the Department's
concerns that access to such records could be restricted by foreign
governments.\12\
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\12\ 59 FR 8024.
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Finaly, the Department has required that the confirmation
statements for each covered transaction include the time of the
exchange. The ABA as well as other Commenters indicated that the
inclusion of time on the confirmation statements is not
administratively feasible and in any case is unnecessary. The
Commenters stated that it would be expensive to revise their computer
programs to include the time of the covered transaction. In addition,
they stated that such information would not be used by an independent
fiduciary to determine the reasonableness of the foreign exchange rates
charged to a plan.
In response to the Commenters, the Department notes that, under the
proposal, the exchange rates established by a bank can vary depending
upon the time of the transaction. In order to monitor covered
transactions, an independent fiduciary would need to know when the
transactions occurred in order to compare the rates used by the bank to
rates charged in similar transactions executed at the same time.
Accordingly, the Department continues to believe that this information
is necessary to enable independent plan fiduciaries to monitor the
reasonableness of the exchange rates established by the bank.
In light of the apparent industry concern regarding this issue, the
Department invites comments and suggestions from interested parties
regarding how an independent fiduciary could adequately monitor the
exchange rates used for plan foreign exchange transactions if the time
of the transaction is not included on the confirmation statements. Any
such comments should include a discussion of the feasibility of the
suggested alternative as well as how the alternative would be
protective of plans.
The Department requests that interested persons, in addition to
other comments, describe how an exemption would operate with respect to
de minimis purchase and sale transactions and whether the conditions
applicable to income item conversions are practical and appropriate to
protect the interests of the participants and beneficiaries of plan
engaging in de minimis foreign exchange transactions.
In response to the proposal that became PTE 94-20, the Securities
Industry Association (SIA) requested that the Department include
registered broker-dealers within the scope of that exemption.\13\ The
SIA further requested that the Department include broker-dealers within
the scope of any additional relief which it contemplated providing to
banks. After considering the SIA's comment, the Department determined
that it was appropriate to include registered broker-dealers within the
scope of the relief provided by PTE 94-20. For the same reasons, the
Department has included registered broker-dealers within the scope of
this proposed class exemption.
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\13\ For a discussion of the SIA comment, see 59 FR 8023
(Thursday, Feb. 17, 1994).
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The Department wishes to point out that ERISA's general standards
of fiduciary conduct would apply to the standing instruction
arrangements permitted by this proposed class exemption. Section 404 of
the Act requires, among other things, that a fiduciary discharge his
duties with respect to a plan solely in the interest of the plan's
participants and beneficiaries and in a prudent fashion. Accordingly,
the investment manager or other independent plan fiduciary must act
prudently with respect to the decision to enter into such an
arrangement, such as considering the effect of restrictions on funds
transfers by foreign governments, as well as to the negotiation of the
specific terms under which the bank or broker-dealer will engage in
foreign exchange transactions on behalf of the plan. The Department
further emphasizes that it expects an investment manager or other
independent plan fiduciary, to fully understand the benefits and risks
associated with engaging in foreign exchange transactions pursuant to
standing instructions, following disclosure by the bank or broker-
dealer of all relevant information. In addition, such investment
manager or independent plan fiduciary must be capable of periodically
monitoring the actions taken by the bank or broker-dealer in the course
of its execution of foreign exchange transactions. Thus, in considering
whether to authorize a bank or broker-dealer to execute foreign
exchange transactions pursuant to standing instructions, a fiduciary
should take into account its ability to provide adequate oversight of
the bank or broker-dealer.
The Department further notes that the rates at which a plan's
foreign exchange transactions are executed directly impact on the
plan's overall rate of return with respect to its portfolio of foreign
securities. Accordingly, the plan's investment manager has a continuing
obligation to prudently maximize the plan's rate of return by ensuring
that the plan's foreign exchange transactions are executed at prices
that are fair and reasonable.
Finally, the Department wishes to note that, during periods of
increased foreign exchange market volatility, it may not be consistent
with ERISA's prudence and exclusive benefit requirements for an
investment manager to permit foreign exchange transactions on behalf of
a plan at prices established by the bank or broker-dealer pursuant to
the procedures contained in the standing instruction agreement. Under
those circumstances, the exchange rate established by the bank or
broker-dealer may be significantly less favorable to the plan than
market prices at the time that the transaction is executed. In such
cases, it may be necessary for the bank or broker-dealer to comply with
the requirements of PTE 94-20.
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)
[[Page 5055]]
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 respect the plan solely in the
interests of the participants and beneficiaries of the plan and in a
prudent fashion in accordance with section 404(a)(1)(B) of the Act; nor
does it affect the requirement of section 401(a) of the Code that the
plan must operate for the exclusive benefit of the employees of the
employer maintaining the plan and their beneficiaries;
(2) Before an exemption may be granted under section 408(a) of
ERISA and section 4975(c)(2) of the Code, the Department must find that
the exemption is administratively feasible, in the interests of plans
and their participants and beneficiaries and protective of the rights
of participants and beneficiaries of plans;
(3) If granted, the proposed exemption will be applicable to a
transaction only if the conditions specified in the class exemption are
met; and
(4) The proposed exemption, if granted, will be supplemental to,
and not in derogation of, any other provisions of ERISA and the code,
including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction.
Written Comments and Hearing Request
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 32847, August 10,
1990.)
Section I Covered Transactions
(a) For the period from June 18, 1991 to May 5, 1997, the
restrictions of sections 406(a)(1) (A) through (D) and 406 (b)(1) and
(b)(2) of the Employee Retirement Security Act of 1974 (the Act) and
the taxes imposed by section 4975 (a) and (b) of the Internal Revenue
Code of 1986 (the Code), by reason of Code section 4975(c)(1) (A)
through (E), shall not apply to the following foreign exchange
transactions, between a bank or broker-dealer and an employee benefit
plan with respect to which the bank or broker-dealer, or any affiliate
is a trustee, custodian, fiduciary or other party in interest, pursuant
to a standing instruction, if the conditions set forth in section II
below are met:
(1) an income item conversion; or
(2) a de minimis purchase or sale transaction.
(b) Effective after May 5, 1997, the restrictions of sections
406(a)(1) (A) through (D) and 406 (b)(1) and (b)(2) of the Employee
Retirement Income Security Act of 1974 (the Act) and the taxes imposed
by section 4975 (a) and (b) of the Internal Revenue Code of 1986 (the
Code), by reason of Code section 4975(c)(1) (A) through (E), shall not
apply to the following foreign exchange transactions, between a bank or
broker-dealer, and an employee benefit plan with respect to which the
bank or broker-dealer, or any affiliate is a trustee, custodian,
fiduciary or other party in interest, pursuant to a standing
instruction, if the conditions set forth in section III below are met:
(1) an income item conversion; or
(2) a de minimis purchase or sale transaction.
Section II Retroactive Conditions
(a) At the time the foreign exchange transaction is entered into,
the terms of the transaction are not less favorable to the plan than
the terms generally available in comparable arm's length foreign
exchange transactions between unrelated parties.
(b) At the time the foreign exchange transaction is entered into,
the terms of the transaction are not less favorable to the plan than
the terms afforded by the bank, the broker-dealer, (or any affiliate
thereof) in comparable arm's length foreign exchange transactions
involving unrelated parties.
(c) Neither the bank, the broker-dealer, (nor any affiliate
thereof) has any discretionary authority or control with respect to the
investment of the plan assets involved in the transaction or renders
investment advice (within the meaning of 29 CFR 2510.3-21(c)) with
respect to the investments of those assets.
(d) The bank or broker-dealer maintains at all times written
policies and procedures regarding the handling of foreign exchange
transactions for plans with respect to which the bank or broker-dealer
is a trustee, custodian, fiduciary or other party in interest or
disqualified person which assure that the person acting for the bank or
broker-dealer knows that he or she is dealing with a plan.
(e) The exchange rate used by the bank or broker-dealer for a
particular foreign exchange transaction did not deviate by more than
10% (above or below) the interbank bid and asked rates at the time of
the transaction as displayed on Reuters or another independent service
in the foreign currency market for such currency; provided, however,
that a prohibited transaction shall not be deemed to have occurred
solely because the records necessary to demonstrate compliance with
this section have been lost, destroyed or are not available to the bank
or broker-dealer. Nothing in this section shall be deemed to relieve
the bank or broker-dealer of its responsibility to demonstrate
compliance with the conditions of this proposed exemption.
(f) A written confirmation statement is furnished with respect to
each covered transaction to the independent plan fiduciary. The
confirmation statement shall include:
(A) Account name;
(B) Transaction date;
(C) Exchange rates;
(D) Settlement date;
(E) Currencies exchanged;
(i) identity of foreign currency sold;
(ii) amount sold;
(iii) identity of currency purchased; and
(iv) amount purchased.
The confirmation shall be issued in no event more than 5 business
days after execution of the transaction.
Section III Prospective Conditions
(a) At the time the foreign exchange transaction is entered into,
the terms of the transaction are not less favorable to the plan than
the term generally available in comparable arm's-length foreign
exchange transactions between unrelated parties.
(b) At the time the foreign exchange transaction is entered into,
the terms of the transaction are not less favorable to the plan than
the terms afforded by the bank or broker-dealer, (or any affiliate
thereof) in comparable arm's-length foreign exchange transactions
involving unrelated parties.
[[Page 5056]]
(c) Neither the bank, the broker-dealer, (nor any affiliate
thereof) has any discretionary authority or control with respect to the
investment of the plan assets involved in the transaction or renders
investment advice (within the meaning of 29 CFR 2510.3-21(c)) with
respect to the investments of those assets.
(d) The bank or broker-dealer maintains at all times written
policies and procedures regarding the handling of foreign exchange
transactions for plans with respect to which the bank or broker-dealer
is a trustee, custodian, fiduciary or other party in interest or
disqualified person which assure that the person acting for the bank or
broker-dealer knows that he or she is dealing with a plan.
(e) The covered transaction is performed under a written
authorization executed in advance by a fiduciary of the plan whose
assets are involved in the transaction, which plan fiduciary is
independent of the bank or broker-dealer engaging in the covered
transaction. The written authorization must specify:
(1) The identities of the currencies in which covered transactions
may be executed; and
(2) That the authorization may be terminated by either party
without penalty on no more than ten days notice.
(f)(1) Income item conversions are executed within no more than one
business day from the date of receipt of notice by the bank or broker-
dealer that such items are good funds, and
(A) a foreign custodian which is an affiliate of the bank or
broker-dealer, provides such notice to the bank or broker-dealer within
``one business day'' of its receipt of good funds; or
(B) in the case of a foreign custodian which is not an affiliate of
the bank or broker-dealer, such notice is provided to the bank or
broker-dealer within two business days of such custodian's receipt of
good funds.
(2) De minimis purchase and sale transactions are executed within
no more than one business day from the date that either the bank or
broker-dealer receives notice from a foreign custodian that the
proceeds of a sale of foreign securities denominated in foreign
currency are good funds, or the direction to acquire foreign currency
was received by the bank or broker-dealer, and
(A) a foreign custodian which is an affiliate of the bank or
broker-dealer, provides such notice to the bank or broker-dealer within
one business day of its receipt of good funds from a sale; or
(B) in the case of a foreign custodian which is not an affiliate of
the bank or broker-dealer, such notice is provided to the bank or
broker-dealer within two business days of such custodian's receipt of
good funds from a sale.
(g)(1) At least once each day, at the time(s) specified in its
written policies and procedures, but no more than four times per day,
the bank or broker-dealer establishes either a rate of exchange or a
range of rates to be used for income item conversions and de minimis
purchase and sale transactions covered by this exemption.
(2) Income item conversions items are executed at the next
scheduled time for conversions following receipt of notice by the bank
or broker-dealer from the foreign custodian that such funds are good
funds. If it is the policy of the bank or broker-dealer to aggregate
small amounts of foreign currency until a specified minimum threshold
amount is received, then the conversion may take place at a later time
but in no event more than 24 hours after receipt of notice.
(3) De minimis purchase and sale transactions are executed at the
next scheduled time for such transactions following receipt of either
notice that the sales proceeds denominated in foreign currency are good
funds, or a direction to acquire foreign currency. If it is the policy
of the bank or broker-dealer to aggregate small transactions until a
specified threshold amount is received, then the execution may take
place at a later time but in no event more than 24 hours after receipt
of either notice that the sales proceeds, have been received by the
foreign custodian as good funds, or a direction to acquire foreign
currency.
For purposes of this paragraph (g), the range of exchange rates
established by the bank or broker-dealer for a particular foreign
currency cannot deviate by more than three percent [above or below] the
interbank bid and asked rates as displayed on Reuters or another
nationally recognized independent service in the foreign exchange
market, for such currency at the time such range of rates is
established by the bank or broker-dealer.
(h) Prior to the execution of the authorization referred to in
paragraph (e), the bank or broker-dealer provides the authorizing
fiduciary with a copy of the bank's or broker-dealer's written policies
and procedures regarding the handling of foreign exchange transactions
involving income item conversions and de minimis purchase and sale
transactions. The policies and procedures must, at a minimum, contain
the following information:
(1) Disclosure of the time(s) each day that the bank or broker-
dealer will establish the specific rate of exchange or the range of
exchange rates for the covered transactions to be executed and the
time(s) that such covered transactions will take place. The bank or
broker-dealer shall include a description of the methodology that the
bank or broker-dealer uses to determine the specific exchange rate or
range of exchange rates;
(2) Disclosure that income items conversions and de minimis
purchase and sale transactions will be executed at the first scheduled
transaction time after notice that good funds from an income conversion
or a sale have been received, or a direction to purchase foreign
currency has been received. To the extent that the bank or broker-
dealer aggregates small amounts of foreign currency until a specified
minimum threshold amount is met, a description of this practice and
disclosure of the threshold amount; and
(3) A description of the process by which the bank's or broker-
dealer's foreign exchange policies and procedures for income item
conversions and de minimis purchase and sale transactions may be
amended and disclosed to plans.
(1) The bank or broker-dealer engaging in the covered transaction
furnishes to the authorizing fiduciary a written confirmation statement
with respect to each covered transaction not more than five business
days after execution of the transaction.
1. With respect to income item conversions, the confirmation shall
disclose the following information:
(A) Account name;
(B) Date of notice that good funds were received;
(C) Transaction date;
(D) Exchange rate;
(E) Settlement date;
(F) Identity of foreign currency;
(G) Amount of foreign currency sold;
(H) Amount of U.S. dollars credited to the plan; and
(I) Time of the transaction.
2. With respect to de minimis purchase and sale transactions, the
confirmation shall disclose the following information:
(A) Account name;
(B) Date of notice that sales proceeds denominated in foreign
currency are received as good funds or direction to acquire foreign
currency was received.
(C) Transaction date;
(D) Exchange rates;
(E) Settlement date;
(F) Currencies exchanged:
i. identity of the currency sold;
ii. the amount sold;
[[Page 5057]]
iii. identity of the currency purchased;
iv. the amount purchased;
(G) Time of the transaction.
With respect to section (i)(1)(I) and (i)(2)(G) above, the
requirement for disclosure of the time of the exchange shall be deemed
to be met, if income item conversions and/or de minimis purchase and
sale transactions by a bank or broker-dealer take place once per day
and the time of such conversions is set forth in the bank's or broker-
dealer's written policies and procedures which are provided to the
independent plan fiduciary as required under section II(h)(1) of this
exemption.
(j) The bank or broker-dealer, or its affiliate, maintains, within
territories under the jurisdiction of the United States Government, for
a period of six years from the date of the transaction, the records
necessary to enable the persons described in paragraph (1) of this
section to determine whether the applicable conditions of this
exemption have been met, including a record of the specific exchange
rate or range of exchange rates the bank or broker-dealer established
each day for foreign exchange transactions effected under standing
instructions for income item conversions and de minimis purchase and
sale transactions. However, a prohibited transaction will not be
considered to have occurred if, due to circumstances beyond the bank's
or broker-dealer's control, the records are lost or destroyed prior to
the end of the six-year period, and no party in interest other than the
bank or broker-dealer, or its affiliate shall be subject to the civil
penalty that may be assessed under section 502(i) of the Act, or the
taxes imposed by section 4975(a) and (b) of the Code, if the records
are not maintained by the bank or broker-dealer, or its affiliate, or
are not made available for examination by the bank or broker-dealer, or
its affiliate as required by paragraph (h) below.
(k)(1) Except as provided in subparagraph (2) of this paragraph and
notwithstanding any provisions of subsection (a)(2) and (b) of section
504 of the Act, the records referred to in paragraph (j) of this
Section are available at their customary location for examination, upon
reasonable notice, during normal business hours by:
(A) Any duly authorized employee or representative of the
Department of Labor or the Internal Revenue Service.
(B) Any fiduciary of a plan who has authority to acquire or dispose
of the assets of the plan involved in the foreign exchange transaction
or any duly authorized employee or representative of such fiduciary.
(C) Any contributing employer to the plan involved in the foreign
exchange transaction or any duly authorized employee or representative
of such employer.
(2) None of the persons described in subparagraphs (B) and (C)
shall be authorized to examine a bank's or broker-dealer's trade
secrets or commercial or financial information of a bank or broker-
dealer, or an affiliate thereof which is privileged or confidential.
Section IV Definitions and General Rules
For purposes of this exemption,
(a) A ``foreign exchange transaction'' means the exchange of the
currency of one nation for the currency of another nation.
(b) The term ``standing instruction'' means a written authorization
from a plan fiduciary, who is independent of the bank or broker-dealer
engaging in the foreign exchange transaction and any affiliate thereof,
to the bank or broker-dealer to effect the transactions specified
therein pursuant to the instructions provided in such authorization.
(c) A ``bank'' means a bank which is supervised by the United
States or a State thereof, or any domestic affiliate thereof.
(d) A ``broker-dealer'' means a broker-dealer registered under the
Securities Exchange Act of 1934, or any domestic affiliate thereof.
(e) A ``domestic affiliate'' of a bank or broker-dealer means any
entity which is supervised by the United States or a state thereof and
which is directly or indirectly, through one or more intermediaries,
controlling, controlled by, or under common control with such bank or
broker-dealer.
(f) The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
(g) An ``income item conversion'' means the conversion into U.S.
dollars of an amount which is the equivalent of no more than 100,000
U.S. dollars of interest, dividends or other distributions or payments
with respect to a security, tax reclaims, proceeds from dispositions of
rights, fractional shares or other similar items denominated in the
currency of another nation that are received by the bank or broker-
dealer on behalf of the plan from the plan's foreign investment
portfolio.
(h) A ``de minimis purchase or sale transaction'' means the
purchase or sale of foreign currencies in an amount of no more than
100,000 U.S. dollars or the equivalent thereof in connection with the
purchase or sale of foreign securities by a plan.
(i) For purposes of this exemption the term ``employee benefit
plan'' refers to a pension plan described in 29 CFR Sec. 2510.3-2 and/
or a welfare benefit plan described in 29 CFR Sec. 2510.3-1.
(j) For purposes of this exemption, the term ``good funds'' means
funds immediately available in cash with no sovereign or other
governmental impediments or restrictions to the exchange or transfer of
such funds.
(k) For purposes of this exemption, the term ``business day'' means
a banking day as defined by federal or state banking regulations.
Signed at Washington, DC, this 28th day of January, 1997.
Alan D. Lebowitz,
Deputy Assistant Secretary for Program Operations, Pension and Welfare
Benefits Administration, U.S. Department of Labor.
[FR Doc. 97-2556 Filed 1-31-97; 8:45 am]
BILLING CODE 4510-29-M
