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Employee Benefits Security Administration

EBSA Final Rule

Statutory Exemption for Cross-Trading of Securities [02/12/2007]

[PDF Version]

Volume 72, Number 28, Page 6473-6480


[[Page 6473]]

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DEPARTMENT OF LABOR

Employee Benefits Security Administration

29 CFR Part 2550

RIN 1210-AB17

 
Statutory Exemption for Cross-Trading of Securities

AGENCY: Employee Benefits Security Administration, Labor.

ACTION: Interim final rule with request for comments.

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SUMMARY: This document contains an interim final rule that implements 
the content requirements for the written cross-trading policies and 
procedures required under section 408(b)(19)(H) of the Employee 
Retirement Income Security Act of 1974 (ERISA or the Act). Section 
611(g) of the Pension Protection Act of 2006, Public Law 109-280, 120 
Stat. 780, 972, amended section 408(b) of ERISA by adding a new 
subsection (19) that exempts the purchase and sale of a security 
between a plan and any other account managed by the same investment 
manager if certain conditions are satisfied. Among other requirements, 
section 408(b)(19)(H) stipulates that the investment manager must 
adopt, and effect cross-trades in accordance with, written cross-
trading policies and procedures that are fair and equitable to all 
accounts participating in the cross-trading program. This interim final 
rule would affect employee benefit plans, investment managers, plan 
fiduciaries and plan participants and beneficiaries.

DATES: Effective Date: This interim final rule is effective April 13, 
2007.
    Comment Date: Written comments on this interim final rule should be 
received by the Department of Labor on or before April 13, 2007.

ADDRESSES: Written comments (preferably, at least three copies) should 
be addressed to the Office of Exemption Determinations, Employee 
Benefits Security Administration, Room N-5700, U.S. Department of 
Labor, Washington, DC 20210, Attention: Cross-Trading Policies and 
Procedures Interim Final Rule. Commenters are encouraged to submit 
responses electronically by e-mail to e-OED@dol.gov, or by using the 
Federal eRulemaking portal at http://www.regulations.gov. Persons 

submitting responses electronically should not submit paper copies. All 
responses will be available to the public at the Public Disclosure 
Room, N-1513, Employee Benefits Security Administration, U.S. 
Department of Labor, 200 Constitution Avenue, NW., Washington, DC 
20210, and online at http://www.regulations.gov and http://www.dol.gov/ 
ebsa.

FOR FURTHER INFORMATION CONTACT: G. Christopher Cosby or Brian 
Buyniski, Office of Exemption Determinations, Employee Benefits 
Security Administration, Room N-5700, U.S. Department of Labor, 
Washington, DC 20210, telephone (202) 693-8540. This is not a toll-free 
number.

SUPPLEMENTARY INFORMATION:

A. Background

    Section 611(g)(1) of the Pension Protection Act of 2006, Public Law 
109-280, 120 Stat. 780, 972 (PPA), which was enacted on August 17, 
2006, amended ERISA by adding a new section 408(b)(19), which exempts 
from the prohibitions of sections 406(a)(1)(A) and 406(b)(2) of the Act 
those transactions involving the purchase and sale of a security 
between a plan and any other account managed by the same investment 
manager, provided that certain conditions are satisfied.\1\ Among other 
requirements, an investment manager must adopt, and cross-trades must 
be effected in accordance with, written cross-trading policies and 
procedures that are fair and equitable to all accounts participating in 
the cross-trading program. The policies and procedures must include 
descriptions of (i) the investment manager's policies and procedures 
relating to pricing, and (ii) the investment manager's policies and 
procedures for allocating cross-trades in an objective manner among 
accounts participating in the cross-trading program.
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    \1\ Section 611(g)92) of the PPA added a parallel provision 
under the Internal Revenue Code of 1986 (Code), section 4975(d)(22), 
which provides relief from the prohibitions described in section 
4975(c) of the Code in connection with the cross-trading of 
securities. Under Reorganization Plan No. 4 of 1978, effective 
December 31, 1978 (5 U.S.C. App. 214 (2000)), the authority of the 
Secretary of the Treasury to issue interpretations regarding section 
4975 of the Code has been transferred, with certain exceptions not 
here relevant, to the Secretary of Labor, and the Secretary of the 
Treasury is bound by the interpretations of the Secretary of Labor 
pursuant to such authority.
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    The investment manager also must designate an individual (a 
compliance officer) who is responsible for periodically reviewing 
purchases and sales of securities made pursuant to the exemption to 
ensure compliance with the foregoing policies and procedures. Following 
such review, the compliance officer must provide, on an annual basis, a 
written report describing the steps performed during the course of the 
review, the level of compliance with the foregoing policies and 
procedures, and any specific instances of noncompliance. The report 
must be provided to the plan fiduciary who authorized the cross-trading 
no later than 90 days following the period to which it relates. 
Additionally, the written report must notify the plan fiduciary of the 
plan's right to terminate participation in the investment manager's 
cross-trading program at any time and must be signed by the compliance 
officer under penalty of perjury.
    Section 611(g)(3) of the PPA provides that the Secretary of Labor, 
after consultation with the Securities and Exchange Commission (SEC), 
shall, no later than 180 days after the date of the enactment of the 
PPA, issue regulations regarding the content of the written policies 
and procedures required to be adopted by an investment manager in order 
for such manager to qualify for relief under section 408(b)(19) of the 
Act. Section 611(h) of the PPA provides that the amendments made by 
section 611 of the PPA shall apply to transactions occurring after the 
date of enactment of the PPA.
    The rule contained in this document is being issued on an interim 
final basis to provide immediate guidance regarding the contents of the 
written cross-trading policies and procedures that must be adopted by 
investment managers in order to comply with the requirements of the 
statutory exemption. ERISA section 408(b)(19) is effective for 
transactions occurring after August 17, 2006, and Congress directed the 
Secretary of Labor to issue regulations by February 13, 2007. Given the 
current need for regulations and the short period in which the 
regulations are to be issued, the Department finds for good cause that 
notice and public procedure before issuance of this regulation is 
impracticable. Nevertheless, the Department will carefully review the 
comments received on this regulation and will thereafter issue a final 
regulation that takes them into consideration.

B. Overview of Interim Final Rule

    The interim final rule amends 29 CFR part 2550 by adding a new 
section, 2550.408b-19. Paragraph (a) of the interim final rule states 
that the standards set forth in this interim final rule apply solely 
for purposes of determining whether an investment manager's written 
policies and procedures satisfy the content requirements of section 
408(b)(19)(H) of the Act. Accordingly, such standards shall not apply 
in determining whether, or to what extent, the investment manager 
satisfies the other requirements

[[Page 6474]]

for relief under section 408(b)(19) of the Act.
    Paragraph (b)(2) requires the content of the written cross-trading 
policies and procedures to be clear, concise, and written in a manner 
calculated to be understood by the plan fiduciary authorizing a plan's 
participation in the manager's cross-trading program. Although no 
specific format is required for the investment manager's written cross-
trading policies and procedures, the information contained in the 
policies and procedures must be sufficiently detailed to facilitate a 
periodic review by the compliance officer of the cross-trades.
    As discussed below, paragraph (b)(3) of the interim final rule 
describes the content requirements of the written cross-trading 
policies and procedures that must be adopted by the investment manager, 
and provided to the plan fiduciary, prior to the investment manager 
engaging in any cross-trades under section 408(b)(19) of the Act. The 
Department of Labor (Department) expects that, following disclosure of 
the written policies and procedures adopted by the investment manager 
and any other disclosures required by the exemption,\2\ the plan 
fiduciary will be able to determine whether it is appropriate to 
authorize the plan's participation in the investment manager's cross-
trading program. The definitions of certain terms used in the interim 
final rule are contained in paragraph (c).
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    \2\ Under section 408(b)(19)(D) of the Act, the authorizing plan 
fiduciary must receive disclosures regarding the conditions under 
which cross-trades may take place in a document that is separate 
from any other agreement or disclosure involving the asset 
management relationship. Such disclosure must contain a statement 
that any investment manager participating in a cross-trading program 
will have a potentially conflicting division of loyalties and 
responsibilities to the parties involved in any cross-trade 
transaction. The written cross-trading policies and procedures must 
explain how the investment manager will mitigate such conflicts. 
Further, section 408(b)(19)(F) of the Act requires the investment 
manager to provide the plan fiduciary who authorized cross-trading a 
quarterly report detailing all the cross-trades executed by the 
investment manager in which the plan participated during such 
quarter.
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C. Content of Written Cross-Trading Policies and Procedures

    Section 408(b)(19)(H) of the Act requires the investment manager to 
adopt, and effect cross-trades in accordance with, written cross-
trading policies and procedures that are fair and equitable to all 
accounts participating in the cross-trading program, and that include a 
description of the manager's pricing policies and procedures, and the 
manager's policies and procedures for allocating cross-trades in an 
objective manner among accounts participating in the cross-trading 
program.
    Paragraph (b)(3) of the interim final rule sets forth the content 
requirements for the written cross-trading policies and procedures to 
be adopted by the investment manager. The Department believes that the 
policies and procedures must provide sufficient information to enable a 
plan fiduciary to assess the investment manager's cross-trading 
program. In this regard, the relief provided by section 408(b)(19) of 
the Act is subject to satisfaction of a number of conditions by the 
investment manager, including the designation of a compliance officer 
to periodically review purchases and sales and prepare an annual 
report. A number of the content requirements mandated by the interim 
final rule require the investment manager to describe the method or 
process that will be employed by the manager to satisfy section 
408(b)(19)(H) of the exemption. This information will enable the 
compliance officer to review securities purchases and sales to ensure 
compliance with the written policies and procedures. Since the 
compliance officer's annual report must be issued to plan fiduciaries 
responsible for authorizing a plan's participation in the investment 
manager's cross-trading program, it will assist the plan fiduciary in 
making an informed decision regarding the plan's continued 
participation in the cross-trading program.
    The interim final rule requires the compliance officer to determine 
whether an investment manager's cross-trading program meets the 
requirements of section 408(b)(19) (H) of the Act. The Department 
specifically requests comments from interested persons regarding 
whether the scope of the compliance officer's responsibilities under 
the regulation should be expanded to encompass compliance with all of 
the requirements of the statutory exemption. In this regard, the 
Department is interested in any information regarding the current 
practices of compliance officers in determining compliance with 
applicable statutory or administrative exemptions under ERISA.
    In order to assure that plan fiduciaries recognize the scope of 
compliance reviews conducted under these rules, paragraph (b)(3)(vii) 
requires the policies and procedures to contain a statement describing 
whether such review is limited to compliance with the policies and 
procedures required pursuant to 408(b)(19)(H).
    Section 408(b)(19)(H) of the Act specifies that the written cross-
trading policies and procedures adopted by the investment manager must 
include a description of the manager's policies and procedures for 
determining the price at which securities are cross-traded. The 
Department expects that the pricing policies and procedures will be 
described in sufficient detail to enable the compliance officer to 
independently determine that the cross-trade transaction was effected 
at the ``independent current market price'' of the security (within the 
meaning of Sec.  270.17a-7(b) of Title 17, Code of Federal Regulations) 
as required by section 408(b)(19)(B) of the Act.\3\
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    \3\ The Department notes that the SEC has issued several no-
action and interpretive letters under 17 CFR 270.17a-7(b). The 
Department is of the view that investment managers who comply with 
17 CFR 270.17a-7(b) and SEC no-action and interpretative letters 
thereunder will satisfy the requirements of section 408(b)(19)(B) of 
the Act.
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    Section 408(b)(19)(H) further specifies that such policies and 
procedures must include the policies and procedures for allocating 
cross-trades in an objective manner among accounts participating in the 
cross-trading program. In this regard, the Department notes that 
frequently the demand for a particular security among the accounts of 
an investment manager may exceed the supply available to cross-trade. 
Section 408(b)(19)(D) of the Act requires that the basis for any 
objective allocation to be used must be disclosed to each plan 
fiduciary prior to obtaining the required authorization. It is the 
Department's understanding that managers have relied on different 
systems, e.g., a pro rata or queue system, to allocate cross-trade 
opportunities on an objective basis. The Department recognizes that 
there may be a number of objective systems that are appropriate for the 
allocation of securities.
    Paragraph (b)(3) of the interim final rule specifies that the 
investment manager's written cross-trading policies and procedures must 
include:
     A statement of policy which describes the criteria that 
will be applied by the investment manager in determining that execution 
of a securities transaction as a cross-trade will be beneficial to both 
parties to the transaction; \4\
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    \4\ Notwithstanding the relief provided in section 408(b)(19) of 
the Act, the Department notes that the Act's general standards of 
fiduciary conduct also would apply to the investment manager's 
determination to cross-trade securities on behalf of a plan. In this 
regard, section 404 of the Act requires, among other things, a 
fiduciary to discharge his duties respecting the plan solely in the 
interests of the participants and beneficiaries and in a prudent 
manner. Accordingly, an investment manager must act prudently and 
solely in the interest of the participants and beneficiaries of the 
plans on whose behalf they are acting with respect to: (1) The 
decision to enter into a cross-trade; and (2) the terms of such 
cross-trade.

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     A description of how the investment manager will determine 
that cross-trades are effected at the ``independent current market 
price'' of the security (within the meaning of section 270.17a-7(b) of 
Title 17, Code of Federal Regulations and SEC no-action and 
interpretative letters thereunder) as required by section 408(b)(19)(B) 
of the Act, including the identity of sources used to establish such 
price;
     A description of the procedures for ensuring compliance 
with the $100,000,000 minimum asset size requirement of section 
408(b)(19); \5\
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    \5\ A plan or mater trust will satisfy this minimum asset size 
requirement as to a transaction if it satisfies the requirement upon 
its initial participation in the cross-trading program and on a 
quarterly basis thereafter.
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     A description of how the investment manager will mitigate 
any potentially conflicting division of loyalties and responsibilities 
to the parties involved in any cross-trade transaction;
     A requirement that the investment manager allocate cross-
trades among accounts participating in the cross-trading program in an 
objective and equitable manner and a description of the allocation 
method(s) that will be available to and used by the investment manager;
     The identity of the compliance officer responsible for 
reviewing the investment manager's compliance with its written cross-
trading policies and procedures, and the compliance officer's 
qualifications for this position; and
     A statement which describes the scope of the review 
conducted by the compliance officer, specifically noting whether such 
review is limited to compliance with the policies and procedures 
required by 408(b)(19)(H), or whether such review extends to any 
determinations regarding the overall level of compliance with the other 
requirements of section 408(b)(19) of ERISA.

D. Request for Comments

    The Department invites comments from interested persons on all 
aspects of the interim final rule. Comments should be addressed to the 
Office of Exemption Determinations, Employee Benefits Security 
Administration, Room N-5700, U.S. Department of Labor, Washington, DC 
20210, Attention: Cross-Trading Policies and Procedures Interim Final 
Rule. All responses will be available for public inspection at the 
Public Disclosure Room, Employee Benefits Security Administration, Room 
N-1513, U.S. Department of Labor, Washington, DC 20210. Electronic 
responses should contain ``Cross-Trading Policies and Procedures 
Interim Final Rule'' in the subject line and be addressed to 
e-OED@dol.gov.


E. Good Cause Finding That Proposed Rulemaking Unnecessary

    Rulemaking under section 553 of the Administrative Procedure Act 
(APA) ordinarily involves publication of a notice of proposed 
rulemaking in the Federal Register and the public is given an 
opportunity to comment on the proposed rule. The APA authorizes 
agencies to dispense with proposed rulemaking procedures, however, if 
they find both good cause that such procedures are impracticable, 
unnecessary, or contrary to the public interest, and incorporate a 
statement of the finding with the underlying reasons in the interim 
final rule issued.
    In this case, the Department finds that it is impracticable to 
undertake proposed rulemaking with regard to the content of the cross-
trading policies and procedures. The Department believes such 
rulemaking is impracticable because, prior to the issuance of the 
Department's regulation, investment managers who engage in cross-
trading on behalf of plans do so are at risk that their cross-trading 
programs will run afoul of the statutory exemption if their policies 
and procedures do not meet the requirements of the Department's 
regulation. The Department understands that the lack of guidance has 
had a ``chilling effect'' on the willingness of investment managers and 
plans to take advantage of the statutory exemption. Therefore, the 
Department made a policy determination to issue the regulation as an 
interim final regulation to allow plans to take advantage of the cost-
savings derived from cross-trades as soon as possible. The Department 
therefore finds that notice and public procedure is impracticable and 
is publishing the rule as an interim final rule and is including a 
request for comment.
    The Department has limited the comment period to 60 days in order 
to enable the Department to adopt changes to the interim final rule at 
the earliest possible date, taking into account Congress' expectation 
that regulations would be issued not later than 180 days from enactment 
of the PPA on August 17, 2006. The Department believes that, in light 
of the limited number of issues presented for consideration by the 
interim final rule, the provided 60-day comment period affords 
interested persons an adequate amount of time to analyze the rule and 
submit comments.

F. Regulatory Impact Analysis

Executive Order 12866 Statement

    Under Executive Order 12866 (58 FR 51735), the Department must 
determine whether a regulatory action is ``significant'' and therefore 
subject to review by the Office of Management and Budget (OMB). Section 
3(f) of the Executive Order defines a ``significant regulatory action'' 
as an action that is likely to result in a rule (1) having an annual 
effect on the economy of $100 million or more, or adversely and 
materially affecting a sector of the economy, productivity, 
competition, jobs, the environment, public health or safety, or State, 
local or tribal governments or communities (also referred to as 
``economically significant''); (2) creating serious inconsistency or 
otherwise interfering with an action taken or planned by another 
agency; (3) materially altering the budgetary impacts of entitlement 
grants, user fees, or loan programs or the rights and obligations of 
recipients thereof; or (4) raising novel legal or policy issues arising 
out of legal mandates, the President's priorities, or the principles 
set forth in the Executive Order. Although the Department believes that 
this regulatory action is not economically significant within the 
meaning of section 3(f)(1) the Executive Order, the action has been 
determined to be significant within the meaning of section 3(f)(4) of 
the Executive Order, and the Department accordingly provides the 
following assessment of its potential costs and benefits. As elaborated 
below, the Department believes that the benefits of the interim final 
rule will be substantial and will justify its costs.
    In assessing the costs and benefits of the interim final rule and 
associated provisions of the Act, the Department endeavored to consider 
all of the major activities that will be carried out pursuant to them. 
For example, investment managers will adopt, and effect cross-trades in 
accordance with, policies and procedures that clearly describe the 
criteria governing fair and equitable cross-trading, including the 
pricing of securities when cross-traded and the methods for allocating 
cross-trades among accounts. Investment managers will also appoint 
compliance officers responsible for determining and notifying 
participating plans' fiduciaries whether the applicable policies and 
procedures have been followed. These activities will help equip plan 
fiduciaries to evaluate cross-trading programs, and will help ensure 
that the cross-trades executed under such programs benefit all parties 
whose

[[Page 6476]]

assets are cross-traded, including participating plans.
    These activities will entail some cost (a part of which is 
quantified later in this preamble in connection with the Department's 
information collection request). The Department believes that many of 
these activities are already common practice among investment managers 
that operate high-quality, successful cross-trading programs. As such, 
much of the cost of these activities is not properly classified as a 
cost of the interim final rule or associated provisions of the Act.
    The Department also believes that all of these activities are a 
necessary and efficient means of safeguarding plan assets invested in 
accounts subject to cross-trading programs.
    The activities are necessary because plans' investments, and the 
retirement benefits they will provide for participants and 
beneficiaries, might otherwise be at avoidable risk. Investment 
managers operating cross-trading programs owe loyalty to both parties 
to any cross-trade (as well as to all prospective parties to any cross-
trade). Such parties' interests in relation to the cross-trades often 
conflict. Accordingly, the Department believes that the transparency 
and protections provided by the interim final rule and associated 
provisions of the Act are essential to reducing the risks to the 
security of pension plan investments that are inherent in allowing 
cross-trading involving plans.
    The activities are efficient insofar as they exploit investment 
managers' and compliance officers' comparative advantage at performing 
certain functions that help fiduciaries protect participants' 
interests. Investment managers, as the designers and operators of 
cross-trading programs, are well positioned to evaluate the economic 
merits of alternative permissible approaches. Compliance officers are 
well situated to monitor programs' adherence to established policies 
and procedures. The interim final rule and associated provisions of the 
Act exploit these efficiencies to protect participants' interests both 
directly (by creating better conditions for cross-trading) and 
indirectly (by more efficiently delivering relevant information to 
participating plans' fiduciaries). By assigning duties of designing, 
operating, and monitoring cross-trading programs to investment managers 
and compliance officers, and by ensuring that plan fiduciaries will 
receive timely and relevant information on adherence to established 
policies and procedures, the interim final rule will improve the 
ability of plan fiduciaries to satisfy their fiduciary duties in 
determining the appropriateness of a plan's investment in an account 
subject to cross-trading.
    On this basis of this assessment, the Department concludes that the 
benefits of the interim final rule justify its cost. The Department 
invites comments on this assessment and conclusion.
    The Department is considering whether in the future to pursue 
additional regulatory action under section 408(b)(19) of the Act. For 
example, should cross-trading programs' policies and procedures be 
required to include elements that would ensure the programs' compliance 
with all of the conditions of the exemption enumerated under section 
408(b)(19) of the Act? Should compliance officers be responsible for 
reviewing and reporting on compliance with all such conditions? 
Expanding the content requirements might add to the cost of developing, 
distributing, and adhering to them. Expanding compliance officers' 
responsibilities might increase their costs to carry out those 
responsibilities. But, as with the requirements of the interim final 
rule and associated provisions of the Act, such expanded requirements 
also might favorably leverage investment managers' and compliance 
officers' comparative advantage at performing certain functions that 
help fiduciaries protect participants' interests. The Department 
invites comment on the desirability of additional regulatory action in 
this area.

Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) imposes 
certain requirements with respect to federal rules that are subject to 
the notice and comment requirements of section 553(b) of the 
Administrative Procedure Act (5 U.S.C 551 et seq.) and that are likely 
to have a significant economic impact on a substantial number of small 
entities. Unless an agency certifies that a proposed rule will not have 
a significant economic impact on a substantial number of small 
entities, section 603 of the RFA requires that the agency present an 
initial regulatory flexibility analysis at the time of the publication 
of the notice of proposed rule-making describing the impact of the rule 
on small entities and seeking public comment on such impact. Because 
this rule is being issued as an interim final rule, the RFA does not 
apply and the Department is not required to either certify that the 
rule will not have a significant impact on a substantial number of 
small businesses or conduct an initial regulatory flexibility analysis. 
Nevertheless, the Department has considered the likely impact of the 
interim rule on small entities in connection with its assessment under 
Executive Order 12866, described above, and believes this rule will not 
have a significant impact on a substantial number of small entities. 
For purposes of this discussion, the Department deemed a small entity 
to be an employee benefit plan with fewer than 100 participants. The 
basis of this definition is found in section 104(a)(2) of ERISA, which 
permits the Secretary of Labor to prescribe simplified annual reports 
for pension plans which cover fewer than 100 participants.

Paperwork Reduction Act

    As part of its continuing effort to reduce paperwork and respondent 
burden, the Department of Labor conducts a preclearance consultation 
program to provide the general public and Federal agencies with an 
opportunity to comment on proposed and continuing collections of 
information in accordance with the Paperwork Reduction Act of 1995 (PRA 
95) (44 U.S.C. 3506(c)(2)(A)). This helps to ensure that the public 
understands the Department's collection instructions, respondents can 
provide the requested data in the desired format, the reporting burden 
(time and financial resources) is minimized, and the Department can 
properly assess the impact of collection requirements on respondents.
    Currently, the Department is soliciting comments concerning the 
information collection request (ICR) included in the Interim Final 
Regulation on Statutory Exemption for Cross-Trading. A copy of the ICR 
may be obtained by contacting the person listed in the PRA Addressee 
section below.
    The Department has submitted a copy of the interim final regulation 
to OMB in accordance with 44 U.S.C. 3507(d) for review of its 
information collections. The Department and OMB are particularly 
interested in comments that:
     Evaluate whether the collection of information is 
necessary for the proper performance of the functions of the agency, 
including whether the information will have practical utility;
     Evaluate the accuracy of the agency's estimate of the 
burden of the collection of information, including the validity of the 
methodology and assumptions used;
     Enhance the quality, utility, and clarity of the 
information to be collected; and
     Minimize the burden of the collection of information on 
those who are to respond, including through the

[[Page 6477]]

use of appropriate automated, electronic, mechanical, or other 
technological collection techniques or other forms of information 
technology, e.g., by permitting electronic submission of responses.
    Comments should be sent to the Office of Information and Regulatory 
Affairs, Office of Management and Budget, Room 10235, New Executive 
Office Building, Washington, DC 20503; Attention: Desk Officer for the 
Employee Benefits Security Administration. Although comments may be 
submitted through April 13, 2007, OMB requests that comments be 
received within 30 days of publication of the Notice of Interim Final 
Rulemaking to ensure their consideration.
    PRA Addressee: Address requests for copies of the ICR to Susan G. 
Lahne, Office of Policy and Research, U.S. Department of Labor, 
Employee Benefits Security Administration, 200 Constitution Avenue, 
NW., Room N-5718, Washington, DC 20210. Telephone: (202) 693-8410; Fax: 
(202) 219-5333. These are not toll-free numbers.
    This regulation implements the content requirements for the written 
cross-trading policies and procedures required under section 
408(b)(19)(H) of ERISA, as added by section 611(g) of the PPA. As 
described earlier in this preamble, section 611(g)(1) of the PPA 
created a new statutory exemption, added to section 408(b) of ERISA as 
subsection 408(b)(19), that exempts from the prohibitions of sections 
406(a)(1)(A) and 406(b)(2) of ERISA cross-trading transactions 
involving the purchase and sale of a security between an account 
holding assets of a pension plan and any other account managed by the 
same investment manager, provided that certain conditions are 
satisfied.
    The information collection provisions of the regulation safeguard 
plan assets by ensuring that important information about an investment 
manager's cross-trading program is provided to plan fiduciaries prior 
to their decision whether to begin or continue participation in the 
cross-trading program. The information collections also assist in 
ensuring that investment managers relying on the statutory exemption 
effect cross-trades in accordance with the criteria described in the 
policies and procedures.
    Under the interim final regulation, an investment manager would be 
required to develop written cross-trading policies and procedures that 
meet the regulation's content requirements and to disclose them to plan 
fiduciaries prior to their deciding whether to invest plan assets in an 
account managed under the cross-trading program. The regulation would 
provide that the policies and procedures for cross-trading under the 
new statutory exemption must include detailed explanations and 
descriptions of certain aspects of the investment manager's cross-
trading program, as explained earlier in this preamble. These 
information collections, therefore, constitute third-party disclosures 
between an investment manager and plan fiduciaries.
Annual Hour Burden
    Based on data derived primarily from the Form 5500 Series filings 
for the 2001 to 2003 plan years, which is the most recent reliable data 
available, the Department estimates that approximately 2,100 \6\ plans 
would be eligible to, and would likely, participate in cross-trading 
programs.\7\ Further, the Department estimates that approximately 1,600 
investment managers would serve as investment managers for the assets 
of such eligible plans.\8\ On average, the Department estimates that 
each of the 1,600 investment managers will manage assets of nine plans. 
Assuming that 90 percent of the 1,600 investment managers have cross-
trading programs, investment managers would be required to provide 
about 13,000 initial disclosures of cross-trading policies and 
procedures to plan fiduciaries (1,600 investment managers x 9 plans 
each x 90 percent = 13,000 initial disclosures). The Department assumes 
that each investment manager would require 10 hours of a financial 
analyst's time to develop written policies and procedures in the first 
year.\9\ For the 90 percent of the 1,600 investment managers that 
develop cross-trading programs, the Department estimates an initial 
annual hour burden of a little over 14,000 hours.
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    \6\ All numbers in this burden analysis, apart from the hourly 
wage rates, have been rounded either to the nearest thousand or the 
nearest hundred, as appropriate.
    \7\ Under the statutory exemption, ``each plan participating in 
a cross-trading transaction must have assets of at least 
$100,000,000, except that if the assets of a plan are invested in a 
master trust containing the assets of plans maintained by employers 
in the same controlled group (as defined in section 407(d)(7)), the 
master trust has assets of at least $100,000,000.''
    \8\ Because of a plan of this size likely to use the services of 
more than one investment manager to invest its assets, the 
Department has assumed that some of the eligible plans will have 
assets invested under more than one cross-trading program.
    \9\ The Department assumed that investment managers, which are 
large, sophisticated financial institutions, will use existing in-
house resources to prepare the information and disclosures.
---------------------------------------------------------------------------

    Each investment manager would be required to provide the cross-
trading policies and procedures as an initial disclosure to each plan. 
The Department assumes that the initial disclosure will be provided in 
writing to provide a desired formality of compliance. Thus, the 
Department estimates that investment managers will be required to 
provide about 13,000 initial plan disclosures to plan fiduciaries (90 
percent of 1,600 investment managers, times nine plans) in the first 
year in which the exemption is effective. The Department assumes that 3 
(three) minutes of clerical time per plan disclosure will be needed to 
gather the required information, collate and package the information 
for distribution, and ensure that the information is distributed, for a 
total of 650 hours of clerical time.
    In years subsequent to the first year of applicability, the 
Department estimates that new policies and procedures will be written 
by investment managers whose policies and procedures have changed and 
by investment managers that inaugurate new cross-trading programs. For 
purposes of burden analysis, the Department has assumed that the number 
of investment managers that either change or newly adopt cross-trading 
policies and procedures in a subsequent year will equal 14 percent of 
the investment managers that currently have cross-trading policies and 
procedures, or about 200 managers. These 200 investment managers will 
each spend 10 hours of a financial analyst's time to develop new 
written policies and procedures, for a total of about 2,000 hours each 
year. These investment managers are also estimated to distribute their 
new written policies and procedures to 1,800 plan fiduciaries. This 
would require 90 hours of clerical time.
    In total, the initial disclosure of cross-trading policies and 
procedures is estimated to require about 15,000 hours in the first year 
(14,000 hours of financial analysts' time + 650 hours of clerical time 
= 14,650 hours total) and about 2,100 hours in each subsequent year 
(2,000 hours of financial analysts' time + 90 hours of clerical time = 
2,090 hours total). The equivalent costs of these hours are $779,000 
and $109,000, respectively.\10\
---------------------------------------------------------------------------

    \10\ Hourly wage estimates, for purposes of deriving cost 
equivalents, were based on data from the Bureau of Labor Statistics 
Occupational Employment Survey (November 30, 2004) and the 2005 
Employment Cost Trends. Clerical wage and benefits estimates were 
based on metropolitan wage rates for Executive Secretaries and 
Administrative Assistants. Professional wage and benefits estimates 
were based on metropolitan wage estimates for Financial Analysis. 
The resulting hourly wage rates were $53, including both wages and 
benefits, for professional financial analysts and $25, similarly 
including both wages and benefits, for clerical personnel.

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[[Page 6478]]

Annual Cost Burden
    The only additional costs arising from this information collection 
derive from the direct costs of distribution.
    The Department believes that initial disclosure of the investment 
manager's written policies and procedures to plan fiduciaries eligible 
to participate in the investment manager's cross-trading program will 
be prepared in paper form and distributed by mail delivery service, 
courier or some other means of distribution that will create a record 
of delivery. For the initial disclosures to the plan fiduciaries 
assumed to receive such disclosure, the Department assumes a 
distribution cost of $4.00 per plan. This includes the actual cost of 
distribution, plus any overhead costs associated with printing the 
documentation. Given that about 90% of the approximately 1,600 
investment managers are estimated to engage in cross-trading and that 
each of them manages on average nine plans, investment managers would 
have to prepare about 13,000 disclosures to plan fiduciaries. The total 
initial annual cost burden for distributing the required notice amounts 
to $52,000.
    In years subsequent to the first year of applicability, policies 
and procedures will only have to be distributed by investment managers 
that develop new policies and procedures. For purposes of burden 
analysis, the Department has assumed that the number of investment 
managers that will do so in a subsequent year will be equal to 14 
percent of existing investment managers with cross-trading programs, or 
about 200 managers.
    The distribution of these new written policies and procedures in a 
subsequent year to plan fiduciaries will require material and postage 
costs of $4.00 per plan. Assuming that, on average, the assets of about 
nine plans are managed by each investment manager, this would require a 
little more than 1,800 disclosures annually and about $7,300 annually 
in materials and postage costs.
    In total, the initial disclosure of policies and procedures is 
estimated to require about $52,000 for materials and postage in the 
first year and about $7,300 in each subsequent year.
    These paperwork burden estimates are summarized as follows:
    Type of Review: New collection.
    Agency: Employee Benefits Security Administration, Department of 
Labor.
    Title: Statutory Exemption for Cross-Trading of Securities.
    OMB Number: 1210-NEW.
    Affected Public: Business or other for-profit; not-for-profit 
institutions.
    Respondents: 1,440.
    Responses: 13,000.
    Frequency of Response: Occasionally.
    Estimated Total Annual Burden Hours: 15,000 (first year); 2,100 
(subsequent years).
    Estimated Total Annual Burden Cost: $52,000 (first year); $7,300 
(subsequent years).

Congressional Review Act

    The interim final rule being issued here is subject to the 
provisions of the Congressional Review Act provisions of the Small 
Business Regulatory Enforcement Fairness Act of 1996 (5 U.S.C. 801 et 
seq.) and will be transmitted to Congress and the Comptroller General 
for review. The interim final rule is not a ``major rule'' as that term 
is defined in 5 U.S.C. 804, because it does not result in (1) an annual 
effect on the economy of $100 million or more; (2) a major increase in 
costs or prices for consumers, individual industries, or Federal, 
State, or local government agencies, or geographic regions; or (3) 
significant adverse effects on competition, employment, investment, 
productivity, innovation, or on the ability of United States-based 
enterprises to compete with foreign-based enterprises in domestic and 
export markets.

Unfunded Mandates Reform Act

    For purposes of the Unfunded Mandates Reform Act of 1995 (Pub. L. 
104-4), the interim final rule does not include any Federal mandate 
that may result in expenditures by State, local, or tribal governments, 
or impose an annual burden exceeding $100 million on the private 
sector.

Federalism Statement

    Executive Order 13132 (August 4, 1999) outlines fundamental 
principles of federalism and requires Federal agencies to adhere to 
specific criteria in the process of their formulation and 
implementation of policies that have substantial direct effects on the 
States, the relationship between the national government and the 
States, or on the distribution of power and responsibilities among the 
various levels of government. This interim final rule does not have 
federalism implications because it has no substantial direct effect on 
the States, on the relationship between the national government and the 
States, or on the distribution of power and responsibilities among the 
various levels of government. Section 514 of ERISA provides, with 
certain exceptions specifically enumerated, that the provisions of 
Titles I and IV of ERISA supersede any and all laws of the States as 
they relate to any employee benefit plan covered under ERISA. The 
requirements implemented in the interim rule do not alter the 
fundamental provisions of the statute with respect to employee benefit 
plans, and as such would have no implications for the States or the 
relationship or distribution of power between the national government 
and the States.

List of Subjects in 29 CFR Part 2550

    Employee benefit plans, Employee Retirement Income Security Act, 
Employee stock ownership plans, Exemptions, Fiduciaries, Investments, 
Investments foreign, Party in interest, Pensions, Pension and Welfare 
Benefit Programs Office, Prohibited transactions, Real estate, 
Securities, Surety bonds, Trusts and trustees.

Cross-Trading Policies and Procedures Regulation

0
For the reasons set forth in the preamble, subchapter F, part 2550 of 
title 29 of the Code of Federal Regulations is amended as follows:

SUBCHAPTER F--FIDUCIARY RESPONSIBILITY UNDER THE EMPLOYEE RETIREMENT 
INCOME SECURITY ACT OF 1974

PART 2550--RULES AND REGULATIONS FOR FIDUCIARY RESPONSIBILITY

0
1. The authority citation for part 2550 is revised to read as follows:

    Authority: 29 U.S.C. 1135; sec. 657, Pub. L. 107-16, 115 Stat. 
38; sec. 611, Pub. L. 109-280, 120 Stat. 780; and Secretary of 
Labor's Order No. 1-2003, 68 FR 5374 (Feb. 3, 2003). Sec. 2550.401c-
1 also issued under 29 U.S.C. 1101. Sec. 2550.404c-1 also issued 
under 29 U.S.C. 1104. Sec. 2550.407c-3 also issued under 29 U.S.C. 
1107. Sec. 2550.408b-1 also issued under 29 U.S.C. 1108(b)(1) and 
sec. 102, Reorganization Plan No. 4 of 1978, 3 CFR, 1978 Comp., p. 
332, effective Dec. 31, 1978, 44 FR 1065 (Jan. 3, 1978), and 3 CFR, 
1978 Comp., p. 332. Sec. 2550.408b-19 also issued under sec. 611, 
Pub. L. 109-280, 120 Stat. 780, 972, and sec. 102, Reorganization 
Plan No. 4 of 1978, 3 CFR, 1978 Comp., p. 332, effective Dec. 31, 
1978, 44 FR 1065 (Jan. 3, 1979), and 3 CFR, 1978 Comp., p. 332. Sec. 
2550.412-1 also issued under 29 U.S.C. 1112.


0
2. Add Sec.  2550.408b-19 to read as follows:


Sec.  2550.408b-19  Statutory exemption for cross-trading of 
securities.

    (a) In General. (1) Section 408(b)(19) of the Employee Retirement 
Income Security Act of 1974 (the Act) exempts from the prohibitions of 
section

[[Page 6479]]

406(a)(1)(A) and 406(b)(2) of the Act any cross-trade of securities if 
certain conditions are satisfied. Among other conditions, the exemption 
requires that the investment manager adopt, and effect cross-trades in 
accordance with, written cross-trading policies and procedures that are 
fair and equitable to all accounts participating in the cross-trading 
program, and that include:
    (i) A description of the investment manager's pricing policies and 
procedures, and
    (ii) The investment manager's policies and procedures for 
allocating cross-trades in an objective manner among accounts 
participating in the cross-trading program.
    (2) Section 4975(d)(22) of the Internal Revenue Code of 1986 (the 
Code) contains parallel provisions to section 408(b)(19) of the Act. 
Effective December 31, 1978, section 102 of Reorganization Plan No. 4 
of 1978, 5 U.S.C. App. 214 (2000 ed.), transferred the authority of the 
Secretary of the Treasury to promulgate regulations of the type 
published herein to the Secretary of Labor. Therefore, all references 
herein to section 408(b)(19) of the Act should be read to include 
reference to the parallel provisions of section 4975(d)(22) of the 
Code.
    (3) Section 408(b)(19)(D) of the Act requires that a plan fiduciary 
for each plan participating in the cross-trades receive in advance of 
any cross-trades disclosure regarding the conditions under which the 
cross-trades may take place. This disclosure must be in a document that 
is separate from any other agreement or disclosure involving the asset 
management relationship. The disclosure must contain a statement that 
any investment manager participating in a cross-trading program will 
have a potentially conflicting division of loyalties and 
responsibilities to the parties involved in any cross-trade 
transaction.
    (4) The standards set forth in this section apply solely for 
purposes of determining whether an investment manager's written 
policies and procedures satisfy the content requirements of section 
408(b)(19)(H) of the Act. Accordingly, such standards do not determine 
whether the investment manager satisfies the other requirements for 
relief under section 408(b)(19) of the Act.
    (b) Policies and Procedures.
    (1) In General. This paragraph specifies the content of the written 
policies and procedures required to be adopted by an investment manager 
and disclosed to the plan fiduciary prior to authorizing cross-trading 
in order for transactions to qualify for relief under section 
408(b)(19) of the Act.
    (2) Style and Format. The content of the policies and procedures 
required by this paragraph must be clear and concise and written in a 
manner calculated to be understood by the plan fiduciary authorizing 
cross-trading. Although no specific format is required for the 
investment manager's written policies and procedures, the information 
contained in the policies and procedures must be sufficiently detailed 
to facilitate a periodic review by the compliance officer of the cross-
trades and a determination by such compliance officer that the cross-
trades comply with the investment manager's written cross-trading 
policies and procedures.
    (3) Content. (i) An investment manager's policies and procedures 
must be fair and equitable to all accounts participating in its cross-
trading program and reasonably designed to ensure compliance with the 
requirements of section 408(b)(19)(H) of the Act. Such policies and 
procedures must include:
    (A) A statement of policy which describes the criteria that will be 
applied by the investment manager in determining that execution of a 
securities transaction as a cross-trade will be beneficial to both 
parties to the transaction;
    (B) A description of how the investment manager will determine that 
cross-trades are effected at the ``independent current market price'' 
of the security (within the meaning of Sec.  270.17a-7(b) of Title 17, 
Code of Federal Regulations and SEC no-action and interpretative 
letters thereunder) as required by section 408(b)(19)(B) of the Act, 
including the identity of sources used to establish such price;
    (C) A description of the procedures for ensuring compliance with 
the $100,000,000 minimum asset size requirement of section 408(b)(19). 
A plan or master trust will satisfy the minimum asset size requirement 
as to a transaction if it satisfies the requirement upon its initial 
participation in the cross-trading program and on a quarterly basis 
thereafter;
    (D) A description of how the investment manager will mitigate any 
potentially conflicting division of loyalties and responsibilities to 
the parties involved in any cross-trade transaction;
    (E) A requirement that the investment manager allocate cross-trades 
among accounts in an objective and equitable manner and a description 
of the allocation method(s) available to and used by the investment 
manager for assuring an objective allocation among accounts 
participating in the cross-trading program. If more than one allocation 
methodology may be used by the investment manager, a description of 
what circumstances will dictate the use of a particular methodology;
    (F) Identification of the compliance officer responsible for 
periodically reviewing the investment manager's compliance with section 
408(b)(19)(H) of the Act and a statement of the compliance officer's 
qualifications for this position; and
    (G) A statement which describes the scope of the review conducted 
by the compliance officer, specifically noting whether such review is 
limited to compliance with the policies and procedures required by 
408(b)(19)(H), or whether such review extends to any determinations 
regarding the overall level of compliance with the other requirements 
of section 408(b)(19) of the Act.
    (ii) Nothing herein is intended to preclude an investment manager 
from including such other policies and procedures not required by this 
regulation as the investment manager may determine appropriate to 
comply with the requirements of section 408(b)(19).
    (c) Definitions. For purposes of this section:
    (1) The term ``account'' includes any single customer or pooled 
fund or account.
    (2) The term ``compliance officer'' means an individual designated 
by the investment manager who is responsible for periodically reviewing 
the cross-trades made for the plan to ensure compliance with the 
investment manager's written cross-trading policies and procedures and 
the requirements of section 408(b)(19)(H) of the Act.
    (3) The term ``plan fiduciary'' means a person described in section 
3(21)(A) of the Act with respect to a plan (other than the investment 
manager engaging in the cross-trades or an affiliate) who has the 
authority to authorize a plan's participation in an investment 
manager's cross-trading program.
    (4) The term ``investment manager'' means a person described in 
section 3(38) of the Act.
    (5) The term ``plan'' means any employee benefit plan as described 
in section 3(3) of the Act to which Title I of the Act applies or any 
plan defined in section 4975(e)(1) of the Code.
    (6) The term ``cross-trade'' means the purchase and sale of a 
security between a plan and any other account managed by the same 
investment manager.


[[Page 6480]]


    Signed at Washington, DC, this 6th day of February, 2007.
Bradford P. Campbell,
Acting Assistant Secretary, Employee Benefits Security Administration, 
Department of Labor.
[FR Doc. E7-2290 Filed 2-9-07; 8:45 am]

BILLING CODE 4510-29-P