Institute Comments on Cross-Trading GuidanceWashington, DC, April 18, 2007 - ICI commended guidance issued by the U.S. Department of Labor concerning cross-trading exemptions, but recommends clarifications and additional guidance regarding its application to ICI member firms. Background
The Department's interim final rule on cross-trading policies and procedures, adopted under the statutory exemption for cross trading enacted in the Pension Protection Act (PPA). ICI members have a substantial interest in this exemption, since many manage separate accounts or collective funds that hold "plan assets" subject to ERISA fiduciary responsibility rules and that could benefit from the cross trading exemption. Cross trading involves two separate decisions that occur in separate parts of an organization - the portfolio management decision to purchase or sell a security and the decision on how to execute the transaction. Portfolio management decisions are made based on what is in the interests of the particular accounts, driven by the investment strategies for the accounts and/or the cash flows in and out of the accounts, and are not influenced by whether there may be cross trading opportunities in buying or selling a particular security. The trading decisions relating to cross trading are largely automatic, based on matching buy and sell orders received from portfolio managers on particular securities. ICI Position
ICI commended the Department for issuing prompt interim guidance on the cross trading exemption, noting the rule will allow investment managers to extend their existing cross trading programs to ERISA plans that meet the requirements of the statutory exemption. ICI also supported the Department's decision to follow, in many respects, the conditions of Rule 17a-7 under the Investment Company Act of 1940 in regards to the requirements for an investment manager's policies and procedures on cross trading. ICI called for clarification or additional guidance, however: - urging the Department to clarify that the exemption applies to cross trading between accounts managed by affiliated investment managers and to pooled funds where at least one participating plan has assets of at least $100 million;
- making several suggestions to streamline the required policies and procedures and enhance their compatibility with Rule 17a-7;
- requesting that the Department revise the interim rule to permit annual determinations on whether a plan meets the $100 million asset requirement; and
- recommending that the Department use its existing exemptive authority to go beyond the statutory exemption and permit plans of all sizes to enjoy the benefits of cross trading.
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