Department of Labor Extends Relief for Cross Trading

Washington, DC, February 12, 2002 - The Department of Labor has issued prohibited transaction class exemption 2002-12, which permits cross trades of securities among index and model-driven funds. The final exemption includes a number of conditions that differ from those contained in the 1999 proposed class exemption, and will become effective on April 15, 2002.

The final exemption follows the proposed exemption in providing relief from ERISA for:

• the purchase and sale of securities between an index fund or model-driven fund and another fund where at least one of the funds holds plan assets subject to ERISA; and
• the purchase and sale of securities between a fund and a large account where at least one of the funds holds plan assets subject to ERISA, pursuant to a portfolio restructuring program of the large account, subject to certain conditions.

The final exemption, however, expands the scope of the relief, beyond that originally proposed, to cover cross trades between two or more large accounts pursuant to a portfolio restructuring program if such cross trades occur as part of a single cross-trading program involving both funds and large accounts for which securities are cross-traded solely as a result of the objective operation of the program.

In addition, the final exemption includes a number of modifications to the conditions to exemptive relief that were included in the proposed exemption and includes several changes to the conditions relating to disclosure to and authorization by independent plan fiduciaries. For example, the Department has revised these conditions to clarify that the notice and disclosure requirements, like the authorization requirement, apply only to those index and model-driven funds that hold plan assets.

In addition, the final exemption:

• requires that all cross trades by a fund be executed within three (rather than two) business days of the “triggering event;”
• requires that no more than 20 (rather than 10) percent of the assets of any fund or large account engaging in a cross trade may be comprised of assets of the plan for which the manager exercises investment discretion; and
• modifies the definitions of index fund, model-driven fund, triggering event, large account, and portfolio restructuring program.

In February 2000, the Institute submitted testimony at the Department’s hearing on active cross-trade issues and a comment letter on the agency’s proposed class exemption for passive cross trades.