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Secretary of Labor Thomas E. Perez
Proposed Class Exemption Relating to Certain Employee Benefit Plan Foreign Exchange Transactions Executed Pursuant to Standing Instructions [Notices] [02/03/1997]

EBSA (Formerly PWBA) Federal Register Notice

Proposed Class Exemption Relating to Certain Employee Benefit Plan Foreign Exchange Transactions Executed Pursuant to Standing Instructions [02/03/1997]

[PDF Version]

Volume 62, Number 22, Page 5051-5057

[[Page 5051]]

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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application Number D-10078]

 
Proposed Class Exemption Relating to Certain Employee Benefit 
Plan Foreign Exchange Transactions Executed Pursuant to Standing 
Instructions

AGENCY: Pension and Welfare Benefits Administration, Labor.

ACTION: Notice of Proposed Class Exemption.

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SUMMARY: This document contains a notice of pendency before the 
Department of Labor (the Department) of a proposed class exemption from 
certain prohibited transaction restrictions of the Employee Retirement 
Income Security Act of 1974 (ERISA or the Act) and from certain taxes 
imposed by the Internal Revenue Code of 1986 (the Code). If granted, 
the proposed exemption would permit certain foreign exchange 
transactions between employee benefit plans and certain banks and 
broker-dealers which are parties in interest with respect to such 
plans, pursuant to standing instructions. The proposed exemption, if 
granted, would affect participants and beneficiaries of employee 
benefit plans involved in such transactions, as well as banks and 
broker-dealers which act as dealers in foreign exchange.

DATES: Written comments and requests for a public hearing with regard 
to the substantive content of the proposed exemption shall be submitted 
to the Department before April 4, 1997.

ADDRESSES: All written comments and requests for a public hearing 
(preferably 3 copies) should be sent to: Pension and Welfare Benefits 
Administration, Room N-5649, 200 Constitution Avenue NW., Washington, 
DC 20210. Attention: Foreign Exchange Class Exemption Proposal--
Standing Instructions. The application and all comments received, will 
be available for public inspection in the Public Documents Room, 
Pension and Welfare Benefits Administration, U.S. Department of Labor, 
Room N-5638, 200 Constitution Avenue NW., Washington, DC 20210.

FOR FURTHER INFORMATION CONTACT:
Lyssa E. Hall, Office of Exemption Determinations, Pension and Welfare 
Benefits Administration, U.S. Department of Labor, Washington, DC 20210 
(202) 219-8971 (not a toll-free number) or Susan E. Rees, Plan Benefits 
Security Division, Office of the Solicitor, (202) 219-9141 (not a toll-
free number).

Paperwork Reduction Act Analysis

    The Department of Labor, as part of its continuing effort to reduce 
paperwork and respondent burden, provides the general public and 
Federal agencies with an opportunity to comment on proposed and/or 
continuing collections of information in accordance with the Paperwork 
Reduction Act of 1995, 44 U.S.C. 3506(c)(2)(A) (1995) (PRA 95). This 
program helps to ensure that requested data can be provided in the 
desired format, reporting burden (time and financial resources) is 
minimized, collection instruments are clearly understood, and the 
impact of collection requirements on respondents can be properly 
assessed. Currently, the Pension and Welfare Benefits Administration is 
soliciting comments concerning the proposed new collection of 
information under the Proposed Class Exemption Relating to Certain 
Employee Benefit Plan Foreign Exchange Transactions Executed Pursuant 
to Standing Instructions.
    Dates: Written comments concerning the proposed collection of 
information must be submitted on or before April 4, 1997 to Mr. Gerald 
B. Lindrew, Department of Labor, Pension and Welfare Benefits 
Administration, Room N-5647, 200 Constitution Avenue, NW., Washington, 
DC 20210. The Department of Labor is particularly interested in 
comments which:
    <bullet> Evaluate whether the proposed collection of information is 
necessary for the proper performance of the functions of the agency, 
including whether the information will have practical utility;
    <bullet> Evaluate the accuracy of the agency's estimate of the 
burden of the proposed collection of information, including the 
validity of the methodology and assumptions used;
    <bullet> Enhance the quality, utility, and clarify the information 
to be collected; and
    <bullet> Minimize the burden of the collection of information on 
those who are to respond, including through the use of appropriate 
automated, electronic, mechanical, or other technological collection 
techniques or other forms of information technology, e.g., permitting 
electronic submissions of responses.
    Title: Class Exemption Relating to Certain Foreign Exchange 
Transactions Pursuant to Standing Instructions.
    Summary: The proposed exemption would permit certain foreign 
exchange transactions between employee benefit plans and certain banks, 
broker-dealers, and domestic affiliates thereof, which are parties in 
interest with respect to such plans, pursuant to standing instructions.
    Needs and Uses: ERISA requires that the Department make a finding 
that the proposed exemption meets the statutory requirements of section 
408(a) before granting the exemption. The Department therefore finds 
its necessary that certain information be provided to an independent 
fiduciary of each plan in advance of, and subsequent to, the proposed 
transaction, and that the independent fiduciary approve the proposed 
transaction.
    Type of Review: New.
    Respondents and Proposed Frequency of Response: The Department 
staff estimates that approximately 65 parties will seek to take 
advantage of the class exemption in any given year. The respondents 
will be banks and broker-dealers acting as fiduciaries of plans which 
engage in foreign exchange transactions with such plans.
    Estimated Annual Burden: The Department staff estimates the annual 
burden for preparing the materials required under the proposed class 
exemption to be 5 hours per respondent for a total of 325 hours. The 
total annual burden cost (operating/maintenance) is estimated to be 
$24,375. These are estimated to be capital/start-up burden costs. 
Comments submitted in response to this notice will be summarized and/or 
included in the request for Office of Management and Budget approval of 
the information collection request; they will also become a matter of 
public record.

SUPPLEMENTARY INFORMATION: This document contains a notice of pendency 
before the Department of a proposed class exemption from the 
restrictions of section 406(a)(1) (A) through (D) and section 406 
(b)(1) and (b)(2) of ERISA and from the taxes imposed by section 
4975(a) and (b) of the Code by reason of certain transactions described 
in section 4975(c)(1) (A) through (E) of the Code. The proposed 
exemption was initially requested in an application dated July 18, 1984 
(Application No. D-5700) submitted by the American Bankers Association 
(ABA) pursuant to section 408(a) of ERISA and section 4975(c)(2) of the 
Code, and in accordance with the procedures set forth in ERISA 
Procedure 75-1 (40 FR 18471, April 28, 1975). Pursuant to the foregoing 
authority, the Department is proposing additional conditions with 
respect to the relief requested by the Applicant.
    On February 17, 1994, the Department granted PTE 94-20 (59 FR 
8022), a class exemption which permits purchases and sales of foreign 
currencies between employee benefit plans and certain banks, broker-
dealers and affiliates

[[Page 5052]]

thereof which are parties in interest with respect to such plans 
provided that such transactions are directed by a plan fiduciary who is 
independent of the bank, broker-dealer or affiliate thereof and the 
other conditions of the exemption are met. PTE 94-20 provides an 
exemption from the prohibited transaction restrictions of section 
406(a)(1) (A) through (D) of the Act and from the sanctions resulting 
from section 4975(a) and (b) of the Code by reason of section 
4975(c)(1) (A) through (D) of the Code. PTE 94-20 did not provide 
relief for all of the transactions described in the 1984 ABA exemption 
request.
    In response to the notice of proposed exemption for PTE 94-20,\1\ a 
number of commenters (the Commenters) expressed concern regarding the 
lack of relief for foreign exchange transactions executed pursuant to 
standing instructions. As explained in greater detail in the preamble 
to PTE 94-20, the Commenters requested that the Department expand the 
exemption to include retroactive and prospective relief for foreign 
exchange transactions entered into pursuant to a ``standing 
authorization'' (hereinafter standing instruction). Many of the 
Commenters also requested that the Department amend the definition of 
the term ``directed transaction'' by modifying the requirement that the 
independent plan fiduciary effect the foreign exchange transaction at a 
specific exchange rate.
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    \1\ 56 FR 11757 (March 20, 1991).
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    The Commenters represented that the utilization of standing 
instructions is an integral component in foreign exchange transactions 
involving employee benefit plans. In this regard, the Commenters 
indicated that, without the ability to execute foreign exchange 
transactions with plans pursuant to standing instructions, plans would 
lose investment income and incur higher exchange rates on small 
transactions.
    The ABA requested relief for transactions entered into by a bank on 
behalf of a plan pursuant to standing instructions from an independent 
fiduciary in its application dated July 18, 1984. The Department did 
not include relief with respect to such transactions in the proposal to 
PTE 94-20 because it was unable, at that time, to make the findings 
required under section 408(a) of the Act. Specifically, the Department 
was unable to conclude that the conditions proposed by the ABA would 
effectively and consistently address the potential for abuse of 
discretion by party in interest banks in setting exchange rates for 
foreign exchange transactions. On the basis of the comments and 
additional information received following publication of the proposal 
to PTE 94-20,\2\ the Department concluded that it might be appropriate, 
under limited circumstances, to provide relief from section 406(b)(1) 
and (b)(2) of the Act for foreign exchange transactions entered into 
pursuant to standing instructions.
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    \2\ On October 3, 1991, the Department held a public hearing and 
received testimony regarding standing instructions. See 56 FR 46806, 
September 16, 1991.
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    However, pursuant to the requirements of section 408(a) of the Act, 
the Department is required to offer interested persons an opportunity 
to present their views and an opportunity to request a hearing before 
granting an exemption from section 406(b) of the Act. Therefore, in 
order not to have delayed the publication of PTE 94-20, the Department 
determined to separately consider exemptive relief from sections 
406(a)(1) (A) through (D), 406(b)(1) and (b)(2) of the Act for foreign 
exchange transactions between a plan and a party in interest bank, 
broker-dealer or affiliate thereof where such transactions are engaged 
in pursuant to a standing instruction.
    During the Department's consideration of the standing instruction 
issue, the ABA made a supplemental submission on September 1, 1992, in 
which they limited their request for relief for standing instruction 
transactions and suggested additional conditions regarding such 
transactions. Over the course of the following two years, the 
Department solicited further information from the ABA and other 
interested parties, the most recent of which was received on March 1, 
1994, and September 12, 1994. As a result of the suggestions and 
comments received from those parties, as well as the imposition of 
additional conditions by the Department, the Department believes that a 
number of its concerns regarding standing instruction transactions have 
been addressed.
    The Commenters also requested retroactive exemptive relief as of 
January 1, 1975, for foreign exchange transactions effected pursuant to 
standing instructions. In this regard, they suggested that the 
interests of participants and beneficiaries were adequately protected 
if the general arm's-length requirement and a good faith standard were 
met for standing instruction transactions effected prior to the 
publication of a final exemption.\3\
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    \3\ See 56 FR at 11760, for a discussion of the general arm's 
length test.
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    As the Department stated in the proposal to PTE 94-20, it does not 
believe that the conditions suggested by the Commenters for retroactive 
relief would effectively address the potential for abuse of discretion 
under circumstances where a bank or broker-dealer sets foreign exchange 
rates for foreign exchange transactions which have been executed 
pursuant to standing instructions. However, the Department has 
concluded that it is appropriate to provide limited relief, retroactive 
to June 18, 1991, for those banks and broker-dealers who effect foreign 
exchange transactions in accordance with the applicable conditions of 
Section II of this proposal.\4\
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    \4\ June 18, 1991 is the effective date for prospective relief 
in PTE 94-20.
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    The Department believes that the following conditions, which are 
contained in PTE 94-20, are equally applicable with respect to the 
retroactive and prospective relief provided for transactions described 
in this proposed class exemption: the general and particular arm's 
length tests; the proscription against the bank or any of its 
affiliates having any discretionary authority or control with respect 
to the investment of plan assets involved in the transaction or 
rendering investment advice with respect to those assets; the 
requirements concerning confirmation statements; and the maintenance of 
written policies and procedures regarding the handling of foreign 
exchange transactions with plans that ensure that the person acting for 
the bank knows that he or she is acting for the plan.
    The Department has further conditioned retroactive relief upon 
satisfaction of the following condition that addresses the discretion 
that was exercised by a bank or broker-dealer in setting foreign 
exchange rates for transactions executed pursuant to standing 
instructions. Thus, under this requirement, the specific exchange rate 
for a covered transaction could not have deviated by more than ten 
percent (above or below) from the interbank bid and asked rates as 
displayed on Reuters or another independent nationally recognized 
service in the foreign exchange market for the effected currencies at 
the time that the bank or broker-dealer executed the foreign exchange 
transaction. Notwithstanding this requirement, a prohibited transaction 
will not be considered to have occurred solely because the records 
necessary to demonstrate compliance with the ten percent requirement 
have been lost, destroyed or are not available to the bank or broker-
dealer. Nonetheless, the bank or

[[Page 5053]]

broker-dealer is not relieved of its responsibility to otherwise 
demonstrate compliance with the conditions of the proposed exemption. 
In this regard, the Department notes that there may be other objective 
pricing information that was readily available at the time of the 
transaction which could be provided by a bank or broker-dealer to 
demonstrate compliance with the ten percent requirement.
    In response to the Department's concerns regarding the amount of 
discretion a bank can exercise under a standing instruction, the 
Commenters suggested, as a further safeguard, a limitation on the types 
of transactions for which the bank could exercise discretion. 
Specifically, it was suggested that relief could be limited to 
transactions which would result in the receipt of small amounts of 
foreign currency, or where, due to the uncertainty of foreign 
settlement dates, the exact timing of the receipt of the currency by 
the bank was uncertain. The Department has adopted this suggestion and 
proposed limited relief for the conversion of income receipts, such as 
interest and dividend payments, as well as for de minimis purchases and 
sales of foreign securities.\5\
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    \5\ The Department notes that this exemption does not provide 
relief for options contracts on foreign exchange transactions. See 
section IV(a) of PTE 94-20.
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    According to the ABA, standing instructions are necessary to 
repatriate income receipts received on foreign investments into U.S. 
dollars so that interest can be earned on such funds. In this regard, 
the Department did not receive sufficient information regarding how the 
conversion of foreign denominated income receipts into other foreign 
currencies would operate under standing instructions. The Department 
also has concerns about the ability of the bank to maintain the 
converted funds in an interest-bearing account. Therefore, the 
Department has limited the scope of the proposed exemption to cover 
transactions involving the exchange of income conversion items into 
U.S. dollars.
    The Commenters also requested relief for de minimis purchase and 
sale transactions involving foreign securities, i.e., foreign 
securities transactions requiring the purchase and sale of foreign 
currency in an amount not exceeding $500,000.\6\ The ABA represents 
that many foreign markets outside the U.S. do not have firm settlement 
dates. Thus, it is difficult to anticipate when the proceeds from sales 
of plan owned foreign securities will be received by a bank's foreign 
custodian. In order to keep the funds invested, standing instructions 
are used so that the conversion can be done as soon as practicable and 
the plan can begin to earn interest on the sale proceeds. Under these 
circumstances, obtaining specific directions from an independent plan 
fiduciary for relatively small transactions is time consuming and not 
in the best interests of plans. In this regard, the Department has 
proposed relief for de minimis transactions but believes that a 
limitation of $100,000 is a more appropriate measure for transactions 
which are intended to be relatively small.\7\
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    \6\ No relief is provided where the bank or broker-dealer has 
investment discretion or provides investment advice (within the 
meaning of 29 CFR 2510.3-21) with respect to the investment of the 
plan assets involved in the transaction. In this regard, Part I of 
the class exemption would not be available for any foreign exchange 
transaction involving a bank or broker-dealer that has any 
discretionary authority or control over either the initial purchase 
or sale of foreign securities or the subsequent reinvestment of the 
proceeds.
    \7\ Similarly, the Department is proposing a limitation of 
$100,000 for income item conversions.
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    The Commenters suggested several conditions that would have to be 
satisfied in order for a bank to enter into a prospective transaction 
involving the conversion of income receipts pursuant to a standing 
instruction. Upon review, the Department proposes to apply the same 
conditions to de minimis purchase and sale transactions. The ABA 
proposed that income item conversions be executed within no more than 
two business days following the time of receipt by the bank. In this 
regard, the Department believes that one business day following notice 
to the bank that ``good funds \8\'' have been received by the bank's 
foreign custodian \9\ is a more appropriate limitation on a bank's 
exercise of discretion than the suggestion made by the ABA. Such notice 
must be provided to the bank within one business day following receipt 
of good funds by the foreign custodian if the custodian is an affiliate 
of the bank. If the foreign custodian is not an affiliate of the bank, 
the bank still must convert within one business day following notice to 
the bank that good funds have been received. However, the notice must 
be provided to the bank by the nonaffiliated custodian no later than 
two business days following receipt by the foreign custodian.
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    \8\ Individual commenters have indicated that there may be 
governmental restrictions on the transfer of funds outside of some 
foreign countries. In general, ``good funds'' are defined for 
purposes of this class exemption as funds available in cash with no 
governmental restrictions on transfer. This concept was not a part 
of the ABA application but rather was suggested by individual 
commenters to ensure that the time period during which the bank must 
convert income from foreign securities did not begin to run until 
after the funds became available.
    \9\ According to an individual commenter, U.S. custodial banks 
may operate through their own foreign branches or may employ foreign 
banks as subcustodians so that foreign instruments can be held in 
the country of the issuer.
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    Under the requested exemption, the exchange rate(s) or a range of 
rates to be used for covered transactions would be established on a 
daily basis using objective criteria which would be disclosed to and 
approved by an independent plan fiduciary in advance of the 
transaction. More specifically, the written policies of the bank will 
state that the bank will set an exchange rate or range of rates at 
least once a day but no more than four times per day.\10\ Once set, a 
rate or range of rates will remain in effect for all conversions that 
occur prior to the time that a new rate is set. The bank will disclose 
the time or times each day that it will convert income conversion items 
or execute de minimis purchase and sales transactions.\11\ Income item 
conversions will be executed and de minimis purchase and sale 
transactions will be executed at the next scheduled time for 
conversions or executions following notice of receipt of ``good 
funds'', or a direction to acquire foreign currency, as applicable. 
However, if the bank's policy is to bundle or hold small foreign 
exchange items until a specified threshold amount is reached, then the 
conversion of such items may be delayed, but in no case may such delay 
be more than 24 hours after the receipt of notice that good funds were 
received or the direction to acquire foreign currency was received.
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    \10\ The ABA application suggested that the bank set the rate 
only once per day. However, other Commenters noted that if the bank 
were allowed to set the rate more than once a day, the rate 
established would be more closely related to the current rates in 
the foreign exchange market. The Department has determined to modify 
the ABA proposal in order to provide flexibility to those financial 
institutions that intend to set rates more frequently than once per 
day.
    \11\ For example, a bank which converts income items only once a 
day may set the rate at 10:00 a.m. each day and convert such items 
at 10:30 a.m. each day. Both times would be disclosed in the bank's 
written policies.
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    The bank's policies and procedures will describe the methodology 
used by the bank to determine the specific exchange rate or range of 
rates for covered transactions. If a range of rates is used, such range 
cannot deviate by more than three percent (above or below) from the 
interbank bid and asked rates as displayed on Reuters or another 
independent nationally recognized service in the foreign exchange 
market for the effected currencies at the time such range of rates is 
set by the bank. For example, pursuant to its written procedures, Bank 
A converts foreign

[[Page 5054]]

exchange items at 7:30 a.m., 12:30 p.m. and 3:30 p.m. At 7:00 a.m. Bank 
A sets the range of rates to be used at 7:30 a.m. To determine the 
range, the Bank first determines the interbank bid and asked rates at 
7:00 a.m. by checking a nationally recognized reporting service. Assume 
that at 7:00 a.m. the interbank rate for converting Great Britain 
Pounds into U.S. Dollars is 1.7025-1.7200. In order to determine the 
range of exchange rates for 7:30 am, the Bank would subtract a maximum 
of three percent from the bid quoted price and add a maximum of three 
percent to the asked price. The permissible range of rates under the 
exemption would be 1.6514-1.7716.
    The Department believes that the conditions suggested by the 
Commenters regarding income item conversions reduce a great deal of the 
discretion exercised by a bank executing a foreign exchange transaction 
pursuant to a standing instruction. Accordingly, the Department has 
adopted their suggestions with the modifications discussed above, as 
conditions of the proposed exemption.
    In addition to the above-noted conditions, the proposal also 
requires that the authorization to utilize a standing instruction must 
be in writing. With respect to a record maintenance requirement, the 
Commenters suggested that this condition should be deemed met if the 
records are maintained in foreign countries but were available by 
electronic access in the United States. As discussed in greater detail 
in PTE 94-20, the Commenters were not able to address the Department's 
concerns that access to such records could be restricted by foreign 
governments.\12\
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    \12\ 59 FR 8024.
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    Finaly, the Department has required that the confirmation 
statements for each covered transaction include the time of the 
exchange. The ABA as well as other Commenters indicated that the 
inclusion of time on the confirmation statements is not 
administratively feasible and in any case is unnecessary. The 
Commenters stated that it would be expensive to revise their computer 
programs to include the time of the covered transaction. In addition, 
they stated that such information would not be used by an independent 
fiduciary to determine the reasonableness of the foreign exchange rates 
charged to a plan.
    In response to the Commenters, the Department notes that, under the 
proposal, the exchange rates established by a bank can vary depending 
upon the time of the transaction. In order to monitor covered 
transactions, an independent fiduciary would need to know when the 
transactions occurred in order to compare the rates used by the bank to 
rates charged in similar transactions executed at the same time. 
Accordingly, the Department continues to believe that this information 
is necessary to enable independent plan fiduciaries to monitor the 
reasonableness of the exchange rates established by the bank.
    In light of the apparent industry concern regarding this issue, the 
Department invites comments and suggestions from interested parties 
regarding how an independent fiduciary could adequately monitor the 
exchange rates used for plan foreign exchange transactions if the time 
of the transaction is not included on the confirmation statements. Any 
such comments should include a discussion of the feasibility of the 
suggested alternative as well as how the alternative would be 
protective of plans.
    The Department requests that interested persons, in addition to 
other comments, describe how an exemption would operate with respect to 
de minimis purchase and sale transactions and whether the conditions 
applicable to income item conversions are practical and appropriate to 
protect the interests of the participants and beneficiaries of plan 
engaging in de minimis foreign exchange transactions.
    In response to the proposal that became PTE 94-20, the Securities 
Industry Association (SIA) requested that the Department include 
registered broker-dealers within the scope of that exemption.\13\ The 
SIA further requested that the Department include broker-dealers within 
the scope of any additional relief which it contemplated providing to 
banks. After considering the SIA's comment, the Department determined 
that it was appropriate to include registered broker-dealers within the 
scope of the relief provided by PTE 94-20. For the same reasons, the 
Department has included registered broker-dealers within the scope of 
this proposed class exemption.
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    \13\ For a discussion of the SIA comment, see 59 FR 8023 
(Thursday, Feb. 17, 1994).
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    The Department wishes to point out that ERISA's general standards 
of fiduciary conduct would apply to the standing instruction 
arrangements permitted by this proposed class exemption. Section 404 of 
the Act requires, among other things, that a fiduciary discharge his 
duties with respect to a plan solely in the interest of the plan's 
participants and beneficiaries and in a prudent fashion. Accordingly, 
the investment manager or other independent plan fiduciary must act 
prudently with respect to the decision to enter into such an 
arrangement, such as considering the effect of restrictions on funds 
transfers by foreign governments, as well as to the negotiation of the 
specific terms under which the bank or broker-dealer will engage in 
foreign exchange transactions on behalf of the plan. The Department 
further emphasizes that it expects an investment manager or other 
independent plan fiduciary, to fully understand the benefits and risks 
associated with engaging in foreign exchange transactions pursuant to 
standing instructions, following disclosure by the bank or broker-
dealer of all relevant information. In addition, such investment 
manager or independent plan fiduciary must be capable of periodically 
monitoring the actions taken by the bank or broker-dealer in the course 
of its execution of foreign exchange transactions. Thus, in considering 
whether to authorize a bank or broker-dealer to execute foreign 
exchange transactions pursuant to standing instructions, a fiduciary 
should take into account its ability to provide adequate oversight of 
the bank or broker-dealer.
    The Department further notes that the rates at which a plan's 
foreign exchange transactions are executed directly impact on the 
plan's overall rate of return with respect to its portfolio of foreign 
securities. Accordingly, the plan's investment manager has a continuing 
obligation to prudently maximize the plan's rate of return by ensuring 
that the plan's foreign exchange transactions are executed at prices 
that are fair and reasonable.
    Finally, the Department wishes to note that, during periods of 
increased foreign exchange market volatility, it may not be consistent 
with ERISA's prudence and exclusive benefit requirements for an 
investment manager to permit foreign exchange transactions on behalf of 
a plan at prices established by the bank or broker-dealer pursuant to 
the procedures contained in the standing instruction agreement. Under 
those circumstances, the exchange rate established by the bank or 
broker-dealer may be significantly less favorable to the plan than 
market prices at the time that the transaction is executed. In such 
cases, it may be necessary for the bank or broker-dealer to comply with 
the requirements of PTE 94-20.

General Information

    The attention of interested persons is directed to the following:
    (1) The fact that a transaction is the subject of an exemption 
under section 408(a) of the Act and section 4975(c)(2)

[[Page 5055]]

of the Code does not relieve a fiduciary or other party in interest or 
disqualified person from certain other provisions of the Act and the 
Code, including any prohibited transaction provisions to which the 
exemption does not apply and the general fiduciary responsibility 
provisions of section 404 of the Act which require, among other things, 
that a fiduciary discharge his duties respect the plan solely in the 
interests of the participants and beneficiaries of the plan and in a 
prudent fashion in accordance with section 404(a)(1)(B) of the Act; nor 
does it affect the requirement of section 401(a) of the Code that the 
plan must operate for the exclusive benefit of the employees of the 
employer maintaining the plan and their beneficiaries;
    (2) Before an exemption may be granted under section 408(a) of 
ERISA and section 4975(c)(2) of the Code, the Department must find that 
the exemption is administratively feasible, in the interests of plans 
and their participants and beneficiaries and protective of the rights 
of participants and beneficiaries of plans;
    (3) If granted, the proposed exemption will be applicable to a 
transaction only if the conditions specified in the class exemption are 
met; and
    (4) The proposed exemption, if granted, will be supplemental to, 
and not in derogation of, any other provisions of ERISA and the code, 
including statutory or administrative exemptions and transitional 
rules. Furthermore, the fact that a transaction is subject to an 
administrative or statutory exemption is not dispositive of whether the 
transaction is in fact a prohibited transaction.

Written Comments and Hearing Request

    All interested persons are invited to submit written comments or 
requests for a public hearing on the proposed exemption to the address 
and within the time period set forth above. All comments will be made a 
part of the record. Comments and requests for a hearing should state 
the reasons for the writer's interest in the proposed exemption. 
Comments received will be available for public inspection with the 
referenced application at the above address.

Proposed Exemption

    The Department has under consideration the grant of the following 
class exemption under the authority of section 408(a) of the Act and 
section 4975(c)(2) of the Code, and in accordance with the procedures 
set forth in 29 CFR Part 2570, Subpart B (55 FR 32847, August 10, 
1990.)

Section I  Covered Transactions

    (a) For the period from June 18, 1991 to May 5, 1997, the 
restrictions of sections 406(a)(1) (A) through (D) and 406 (b)(1) and 
(b)(2) of the Employee Retirement Security Act of 1974 (the Act) and 
the taxes imposed by section 4975 (a) and (b) of the Internal Revenue 
Code of 1986 (the Code), by reason of Code section 4975(c)(1) (A) 
through (E), shall not apply to the following foreign exchange 
transactions, between a bank or broker-dealer and an employee benefit 
plan with respect to which the bank or broker-dealer, or any affiliate 
is a trustee, custodian, fiduciary or other party in interest, pursuant 
to a standing instruction, if the conditions set forth in section II 
below are met:
    (1) an income item conversion; or
    (2) a de minimis purchase or sale transaction.
    (b) Effective after May 5, 1997, the restrictions of sections 
406(a)(1) (A) through (D) and 406 (b)(1) and (b)(2) of the Employee 
Retirement Income Security Act of 1974 (the Act) and the taxes imposed 
by section 4975 (a) and (b) of the Internal Revenue Code of 1986 (the 
Code), by reason of Code section 4975(c)(1) (A) through (E), shall not 
apply to the following foreign exchange transactions, between a bank or 
broker-dealer, and an employee benefit plan with respect to which the 
bank or broker-dealer, or any affiliate is a trustee, custodian, 
fiduciary or other party in interest, pursuant to a standing 
instruction, if the conditions set forth in section III below are met:
    (1) an income item conversion; or
    (2) a de minimis purchase or sale transaction.

Section II  Retroactive Conditions

    (a) At the time the foreign exchange transaction is entered into, 
the terms of the transaction are not less favorable to the plan than 
the terms generally available in comparable arm's length foreign 
exchange transactions between unrelated parties.
    (b) At the time the foreign exchange transaction is entered into, 
the terms of the transaction are not less favorable to the plan than 
the terms afforded by the bank, the broker-dealer, (or any affiliate 
thereof) in comparable arm's length foreign exchange transactions 
involving unrelated parties.
    (c) Neither the bank, the broker-dealer, (nor any affiliate 
thereof) has any discretionary authority or control with respect to the 
investment of the plan assets involved in the transaction or renders 
investment advice (within the meaning of 29 CFR 2510.3-21(c)) with 
respect to the investments of those assets.
    (d) The bank or broker-dealer maintains at all times written 
policies and procedures regarding the handling of foreign exchange 
transactions for plans with respect to which the bank or broker-dealer 
is a trustee, custodian, fiduciary or other party in interest or 
disqualified person which assure that the person acting for the bank or 
broker-dealer knows that he or she is dealing with a plan.
    (e) The exchange rate used by the bank or broker-dealer for a 
particular foreign exchange transaction did not deviate by more than 
10% (above or below) the interbank bid and asked rates at the time of 
the transaction as displayed on Reuters or another independent service 
in the foreign currency market for such currency; provided, however, 
that a prohibited transaction shall not be deemed to have occurred 
solely because the records necessary to demonstrate compliance with 
this section have been lost, destroyed or are not available to the bank 
or broker-dealer. Nothing in this section shall be deemed to relieve 
the bank or broker-dealer of its responsibility to demonstrate 
compliance with the conditions of this proposed exemption.
    (f) A written confirmation statement is furnished with respect to 
each covered transaction to the independent plan fiduciary. The 
confirmation statement shall include:
    (A) Account name;
    (B) Transaction date;
    (C) Exchange rates;
    (D) Settlement date;
    (E) Currencies exchanged;
    (i) identity of foreign currency sold;
    (ii) amount sold;
    (iii) identity of currency purchased; and
    (iv) amount purchased.
    The confirmation shall be issued in no event more than 5 business 
days after execution of the transaction.

Section III Prospective Conditions

    (a) At the time the foreign exchange transaction is entered into, 
the terms of the transaction are not less favorable to the plan than 
the term generally available in comparable arm's-length foreign 
exchange transactions between unrelated parties.
    (b) At the time the foreign exchange transaction is entered into, 
the terms of the transaction are not less favorable to the plan than 
the terms afforded by the bank or broker-dealer, (or any affiliate 
thereof) in comparable arm's-length foreign exchange transactions 
involving unrelated parties.

[[Page 5056]]

    (c) Neither the bank, the broker-dealer, (nor any affiliate 
thereof) has any discretionary authority or control with respect to the 
investment of the plan assets involved in the transaction or renders 
investment advice (within the meaning of 29 CFR 2510.3-21(c)) with 
respect to the investments of those assets.
    (d) The bank or broker-dealer maintains at all times written 
policies and procedures regarding the handling of foreign exchange 
transactions for plans with respect to which the bank or broker-dealer 
is a trustee, custodian, fiduciary or other party in interest or 
disqualified person which assure that the person acting for the bank or 
broker-dealer knows that he or she is dealing with a plan.
    (e) The covered transaction is performed under a written 
authorization executed in advance by a fiduciary of the plan whose 
assets are involved in the transaction, which plan fiduciary is 
independent of the bank or broker-dealer engaging in the covered 
transaction. The written authorization must specify:
    (1) The identities of the currencies in which covered transactions 
may be executed; and
    (2) That the authorization may be terminated by either party 
without penalty on no more than ten days notice.
    (f)(1) Income item conversions are executed within no more than one 
business day from the date of receipt of notice by the bank or broker-
dealer that such items are good funds, and
    (A) a foreign custodian which is an affiliate of the bank or 
broker-dealer, provides such notice to the bank or broker-dealer within 
``one business day'' of its receipt of good funds; or
    (B) in the case of a foreign custodian which is not an affiliate of 
the bank or broker-dealer, such notice is provided to the bank or 
broker-dealer within two business days of such custodian's receipt of 
good funds.
    (2) De minimis purchase and sale transactions are executed within 
no more than one business day from the date that either the bank or 
broker-dealer receives notice from a foreign custodian that the 
proceeds of a sale of foreign securities denominated in foreign 
currency are good funds, or the direction to acquire foreign currency 
was received by the bank or broker-dealer, and
    (A) a foreign custodian which is an affiliate of the bank or 
broker-dealer, provides such notice to the bank or broker-dealer within 
one business day of its receipt of good funds from a sale; or
    (B) in the case of a foreign custodian which is not an affiliate of 
the bank or broker-dealer, such notice is provided to the bank or 
broker-dealer within two business days of such custodian's receipt of 
good funds from a sale.
    (g)(1) At least once each day, at the time(s) specified in its 
written policies and procedures, but no more than four times per day, 
the bank or broker-dealer establishes either a rate of exchange or a 
range of rates to be used for income item conversions and de minimis 
purchase and sale transactions covered by this exemption.
    (2) Income item conversions items are executed at the next 
scheduled time for conversions following receipt of notice by the bank 
or broker-dealer from the foreign custodian that such funds are good 
funds. If it is the policy of the bank or broker-dealer to aggregate 
small amounts of foreign currency until a specified minimum threshold 
amount is received, then the conversion may take place at a later time 
but in no event more than 24 hours after receipt of notice.
    (3) De minimis purchase and sale transactions are executed at the 
next scheduled time for such transactions following receipt of either 
notice that the sales proceeds denominated in foreign currency are good 
funds, or a direction to acquire foreign currency. If it is the policy 
of the bank or broker-dealer to aggregate small transactions until a 
specified threshold amount is received, then the execution may take 
place at a later time but in no event more than 24 hours after receipt 
of either notice that the sales proceeds, have been received by the 
foreign custodian as good funds, or a direction to acquire foreign 
currency.
    For purposes of this paragraph (g), the range of exchange rates 
established by the bank or broker-dealer for a particular foreign 
currency cannot deviate by more than three percent [above or below] the 
interbank bid and asked rates as displayed on Reuters or another 
nationally recognized independent service in the foreign exchange 
market, for such currency at the time such range of rates is 
established by the bank or broker-dealer.
    (h) Prior to the execution of the authorization referred to in 
paragraph (e), the bank or broker-dealer provides the authorizing 
fiduciary with a copy of the bank's or broker-dealer's written policies 
and procedures regarding the handling of foreign exchange transactions 
involving income item conversions and de minimis purchase and sale 
transactions. The policies and procedures must, at a minimum, contain 
the following information:
    (1) Disclosure of the time(s) each day that the bank or broker-
dealer will establish the specific rate of exchange or the range of 
exchange rates for the covered transactions to be executed and the 
time(s) that such covered transactions will take place. The bank or 
broker-dealer shall include a description of the methodology that the 
bank or broker-dealer uses to determine the specific exchange rate or 
range of exchange rates;
    (2) Disclosure that income items conversions and de minimis 
purchase and sale transactions will be executed at the first scheduled 
transaction time after notice that good funds from an income conversion 
or a sale have been received, or a direction to purchase foreign 
currency has been received. To the extent that the bank or broker-
dealer aggregates small amounts of foreign currency until a specified 
minimum threshold amount is met, a description of this practice and 
disclosure of the threshold amount; and
    (3) A description of the process by which the bank's or broker-
dealer's foreign exchange policies and procedures for income item 
conversions and de minimis purchase and sale transactions may be 
amended and disclosed to plans.
    (1) The bank or broker-dealer engaging in the covered transaction 
furnishes to the authorizing fiduciary a written confirmation statement 
with respect to each covered transaction not more than five business 
days after execution of the transaction.
    1. With respect to income item conversions, the confirmation shall 
disclose the following information:
    (A) Account name;
    (B) Date of notice that good funds were received;
    (C) Transaction date;
    (D) Exchange rate;
    (E) Settlement date;
    (F) Identity of foreign currency;
    (G) Amount of foreign currency sold;
    (H) Amount of U.S. dollars credited to the plan; and
    (I) Time of the transaction.
    2. With respect to de minimis purchase and sale transactions, the 
confirmation shall disclose the following information:
    (A) Account name;
    (B) Date of notice that sales proceeds denominated in foreign 
currency are received as good funds or direction to acquire foreign 
currency was received.
    (C) Transaction date;
    (D) Exchange rates;
    (E) Settlement date;
    (F) Currencies exchanged:
    i. identity of the currency sold;
    ii. the amount sold;

[[Page 5057]]

    iii. identity of the currency purchased;
    iv. the amount purchased;
    (G) Time of the transaction.
    With respect to section (i)(1)(I) and (i)(2)(G) above, the 
requirement for disclosure of the time of the exchange shall be deemed 
to be met, if income item conversions and/or de minimis purchase and 
sale transactions by a bank or broker-dealer take place once per day 
and the time of such conversions is set forth in the bank's or broker-
dealer's written policies and procedures which are provided to the 
independent plan fiduciary as required under section II(h)(1) of this 
exemption.
    (j) The bank or broker-dealer, or its affiliate, maintains, within 
territories under the jurisdiction of the United States Government, for 
a period of six years from the date of the transaction, the records 
necessary to enable the persons described in paragraph (1) of this 
section to determine whether the applicable conditions of this 
exemption have been met, including a record of the specific exchange 
rate or range of exchange rates the bank or broker-dealer established 
each day for foreign exchange transactions effected under standing 
instructions for income item conversions and de minimis purchase and 
sale transactions. However, a prohibited transaction will not be 
considered to have occurred if, due to circumstances beyond the bank's 
or broker-dealer's control, the records are lost or destroyed prior to 
the end of the six-year period, and no party in interest other than the 
bank or broker-dealer, or its affiliate shall be subject to the civil 
penalty that may be assessed under section 502(i) of the Act, or the 
taxes imposed by section 4975(a) and (b) of the Code, if the records 
are not maintained by the bank or broker-dealer, or its affiliate, or 
are not made available for examination by the bank or broker-dealer, or 
its affiliate as required by paragraph (h) below.
    (k)(1) Except as provided in subparagraph (2) of this paragraph and 
notwithstanding any provisions of subsection (a)(2) and (b) of section 
504 of the Act, the records referred to in paragraph (j) of this 
Section are available at their customary location for examination, upon 
reasonable notice, during normal business hours by:
    (A) Any duly authorized employee or representative of the 
Department of Labor or the Internal Revenue Service.
    (B) Any fiduciary of a plan who has authority to acquire or dispose 
of the assets of the plan involved in the foreign exchange transaction 
or any duly authorized employee or representative of such fiduciary.
    (C) Any contributing employer to the plan involved in the foreign 
exchange transaction or any duly authorized employee or representative 
of such employer.
    (2) None of the persons described in subparagraphs (B) and (C) 
shall be authorized to examine a bank's or broker-dealer's trade 
secrets or commercial or financial information of a bank or broker-
dealer, or an affiliate thereof which is privileged or confidential.

Section IV  Definitions and General Rules

    For purposes of this exemption,
    (a) A ``foreign exchange transaction'' means the exchange of the 
currency of one nation for the currency of another nation.
    (b) The term ``standing instruction'' means a written authorization 
from a plan fiduciary, who is independent of the bank or broker-dealer 
engaging in the foreign exchange transaction and any affiliate thereof, 
to the bank or broker-dealer to effect the transactions specified 
therein pursuant to the instructions provided in such authorization.
    (c) A ``bank'' means a bank which is supervised by the United 
States or a State thereof, or any domestic affiliate thereof.
    (d) A ``broker-dealer'' means a broker-dealer registered under the 
Securities Exchange Act of 1934, or any domestic affiliate thereof.
    (e) A ``domestic affiliate'' of a bank or broker-dealer means any 
entity which is supervised by the United States or a state thereof and 
which is directly or indirectly, through one or more intermediaries, 
controlling, controlled by, or under common control with such bank or 
broker-dealer.
    (f) The term ``control'' means the power to exercise a controlling 
influence over the management or policies of a person other than an 
individual.
    (g) An ``income item conversion'' means the conversion into U.S. 
dollars of an amount which is the equivalent of no more than 100,000 
U.S. dollars of interest, dividends or other distributions or payments 
with respect to a security, tax reclaims, proceeds from dispositions of 
rights, fractional shares or other similar items denominated in the 
currency of another nation that are received by the bank or broker-
dealer on behalf of the plan from the plan's foreign investment 
portfolio.
    (h) A ``de minimis purchase or sale transaction'' means the 
purchase or sale of foreign currencies in an amount of no more than 
100,000 U.S. dollars or the equivalent thereof in connection with the 
purchase or sale of foreign securities by a plan.
    (i) For purposes of this exemption the term ``employee benefit 
plan'' refers to a pension plan described in 29 CFR Sec. 2510.3-2 and/
or a welfare benefit plan described in 29 CFR Sec. 2510.3-1.
    (j) For purposes of this exemption, the term ``good funds'' means 
funds immediately available in cash with no sovereign or other 
governmental impediments or restrictions to the exchange or transfer of 
such funds.
    (k) For purposes of this exemption, the term ``business day'' means 
a banking day as defined by federal or state banking regulations.

    Signed at Washington, DC, this 28th day of January, 1997.
Alan D. Lebowitz,
Deputy Assistant Secretary for Program Operations, Pension and Welfare 
Benefits Administration, U.S. Department of Labor.
[FR Doc. 97-2556 Filed 1-31-97; 8:45 am]
BILLING CODE 4510-29-M