DoL Issues Proposed Class Exemption for Foreign Exchange Transactions

Washington, DC, March 4, 1997 - The Department of Labor recently issued a proposed class prohibited transaction exemption that would permit banks or broker-dealers to perform certain foreign exchange transactions based on standing instructions from an employee benefit plan without regard to the prohibited transaction rules at ERISA Section 406(b) and Code Section 4975. This proposed exemption expands PTE 94-20, which provides relief for foreign exchange transactions, but precludes the use of standing instructions. The proposed class exemption provides both retroactive and prospective relief for "income item conversions" and "de minimis purchase or sale transactions" where specific conditions are met.

Under the proposed class exemption, an "income item conversion" is the conversion into U.S. dollars of an amount which is the equivalent of no more than $100,000 of interest, dividends, distributions, or other payments in the form of foreign currency received by a bank or broker-dealer on behalf of a plan as a result of the plan's foreign investments. A "de minimis purchase or sale transaction" is a purchase or sale of foreign currency in an amount valued at no more than $100,000 in connection with the purchase or sale of foreign securities by a plan.

The proposed class exemption provides retroactive relief with respect to such foreign exchange transactions that occurred in the period from June 18, 1991 to May 5, 1997 if the following conditions were met: (1) the terms of the transaction were not less favorable to the plans than terms available in a comparable arm's length transaction or actually provided by the bank or broker-dealer in comparable transactions involving unrelated parties; (2) the bank or broker-dealer did not have any discretion or render any investment advice with respect to the investment of the plan assets involved in the transaction; (3) the bank or broker-dealer maintained written policies and procedures regarding the handling of such transactions for plans with respect to which it was a trustee, custodian, fiduciary, or party in interest, and such policies assured that the individual conducting the transaction knew it involved plan assets; (4) the exchange rate did not deviate by more than 10% from the interbank bid and "asked rates"; and (5) written confirmation was furnished for each transaction to an independent plan fiduciary no more than five days after the transaction was executed.

Prospectively, for transactions occurring after May 5, 1997, the proposed exemption sets forth the following additional conditions: (1) An independent plan fiduciary executes in advance of any such transaction a standing, written authorization specifying the currencies in which transactions may be executed, and this authorization must be terminable without penalty on no more than ten days notice; (2) the transaction is executed within one business day from the date of receipt of notice by the bank or broker-dealer that proceeds of a sale or income item conversion funds are "good funds"; in the case of affiliated foreign custodians such notice must be provided within one business day, and for unaffiliated foreign custodians within two business days; (3) at least once but no more than four times each day, as specified in written policies and procedures, the bank or broker-dealer establishes a rate of exchange or range of rates to be used for such transactions; (4) certain transactions of de minimis value may be delayed and aggregated, but only within time frames and at conversion rates specified in the exemption and pursuant to procedures disclosed to an independent plan fiduciary; and (5) records of each transaction must be maintained for a period of six years.

Written comments concerning the proposed class exemption must be submitted to the Department of Labor on or before April 4, 1997.