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The U. S. Department of Labor today
announced a proposed class exemption to allow investment firms to cross-trade
securities of employee benefit plan clients with other accounts managed by the
firms.
Cross-trading is a common practice of the
securities industry in which investment managers and advisors buy and sell
securities between client accounts. Plans may benefit from the practice due to
savings on transaction costs, such as brokerage commissions and other fees.
The Employee Retirement Income Security Act
(ERISA) gives the department authority to grant administrative exemptions for
transactions normally prohibited by the law if the transactions meet certain
conditions. The proposed class exemption is, in part, the result of certain
public comments made to the department in response to its March 20, 1998
Federal Register notice asking whether, among other things, the department
should issue a class exemption on cross-trading.
The department decided to issue a proposed class
exemption to allow more investment managers to use cross-trades as a means of
executing securities transactions for their clients. Ten individual exemptions
have been granted to date to allow cross-trades of securities by plans.
The proposed exemption would apply only to
"passive" cross-trading among index or model-driven funds under the control of
the same investment manager where such funds hold "plan assets" subject to
ERISA. It also would apply to cross-trades of securities executed as part of a
portfolio restructuring program between index/model-driven funds and large
accounts -- including large plans and other institutional investors -- which
hold at least $50 million in total assets.
Under the proposal, investment firms would be
required, among other things, to:
-- obtain prior approval of the participating
plan to engage in a cross-trading program;
-- properly disclose information about the
program to plan investors;
-- ensure that there are fair-pricing
procedures for securities cross-traded between the index/model-driven funds or
between such funds and certain large accounts; and
-- engage in cross-trades as a result of
particular events which are outside the control of the investment managers.
Written comments and requests for a public
hearing on the proposed exemption should be submitted to the Office of
Exemption Determinations, Pension and Welfare Benefits Administration, U. S.
Department of Labor, Room N5649, 200 Constitution Avenue, N.W., Washington,
D.C., Attention: "Class Exemption for Securities Cross-Traded by
Index/Model-Driven Funds." All public comments will be available for public
inspection in the PWBA Public Disclosure Facility in Room N5638 at the same
street address.
If adopted, the proposed exemption would be
effective for cross-trading transactions which occur after the date the final
exemption is published in the Federal Register.
The department also will hold a public hearing on
Feb. 10, and Feb. 11 if necessary, to receive testimony on the future use of
cross-trading for employee benefit plan accounts which are actively managed by
investment firms. The hearing will convene at 10:00 a.m. in Room N5437 of the
U. S. Department of Labor, 200 Constitution Avenue, N.W., Washington, D.C.
The proposed exemption and hearing notice are
scheduled to be published in the Dec. 15 Federal Register.
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