Institute Testifies and Comments on Cross Trades

Washington, DC, February 16, 2000 - The Institute recently submitted testimony at the Department of Labor's hearing on active cross-trade issues and a comment letter on the agency's proposed class exemption for passive cross trades.

Department of Labor Hearing on Active Cross Trades
The agency held hearings on active cross trades Thursday, February 10 and Friday, February 11, 2000. Institute General Counsel Craig Tyle testified on February 10. At the hearing, the Institute stated that cross trades provide tangible and significant benefits to mutual funds and other clients of Institute investment adviser members. The Institute noted that, historically, pension plans have been denied the benefits associated with cross trades, and urged the agency to propose a class exemption for active cross trades, noting that potential abuses identified by the agency could be addressed by imposing appropriate conditions in such an exemption. The testimony addressed the following four points: general background concerning the process of cross trading, the benefits associated with cross-trade transactions, how overly restrictive conditions on cross trades are harmful to ERISA-covered pension plans, and the Institute's recommended conditions for a class exemption on cross trades.

Other witnesses at the hearing included the Association of Investment Management and Research, the Securities Industry Association, the AFL-CIO, the Investment Counsel Association of America, Credit Agricole Indosuez Luxembourg, the Committee on Investment of Employee Benefit Assets, and T. Rowe Price Associates.

Institute Comment Letter on Passive Cross Trades
The Institute's comment letter indicated general support for the proposed class exemption for passive cross trades, noting areas requiring modification and clarification. With respect to the requested modifications section, the Institute made the following points: (1) a black-out period is unnecessary and burdensome; (2) the requirements that equity securities be "widely-held" and "actively-traded" are not appropriate for inclusion in a passive cross-trade exemption; (3) the passive cross-trade class exemption should permit cross trades between large accounts; (4) the definition of "large account" should not exclude investment companies managed or sponsored by the investment manager; and (5) the class exemption should permit cross trades of manager-issued securities.

With respect to suggested clarifications, ICI requested that the Department clarify the following issues: (1) that the disclosure provision for "new" funds require investment advisers to provide disclosure of new funds only to those "relevant" independent plan fiduciaries whose plans have invested in those funds; (2) that the independent fiduciary authorization conditions do not apply to plans maintained by the investment manager; and (3) that the scope of disclosure and authorization requirements for index and model funds and large accounts only apply if these accounts hold plan assets.