Labor Department Finalizes Exemption For Plans Engaging In Securities Cross-Trades

Archived News Release — Caution: Information may be out of date.

Washington, DC - The U.S. Department of Labor today issued a final class exemption allowing investment management firms to cross-trade securities of employee benefit plan clients with other accounts managed by the firms. The final exemption would apply only to passive cross-trading among index and model-driven funds under the control of the same investment manager where such funds hold plan assets subject to ERISA.  It also would apply to cross-trades of securities executed as part of a portfolio-restructuring program between index/model-driven funds and large accounts – including large plans and other institutional investors – which hold at least $50 million in total assets.

“The class exemption will lower transaction costs for individual trades by eliminating brokerage commissions and other fees or by avoiding the bid-ask spreads on transactions executed through dealers,” said Ann L. Combs, assistant secretary of the department’s Pension and Welfare Benefits Administration.

Cross-trading is a common practice of the securities industry in which investment managers and advisors buy and sell securities between client accounts. “The exemption for passive cross-trades is expected to save retirement plans hundreds of millions of dollars annually. These lower costs will translate into increased retirement savings for American workers,” Combs said.

“This is an important first step in the department’s effort to reduce plan expenses associated with asset management,” Combs said. “PWBA is considering additional exemptions for cross-trades among master trusts within a controlled group that are managed by an in-house asset manager as well as cross-trades between plan and non-plan customers of an investment manager. We look forward to working with interested parties to develop additional exemptions with appropriate safeguards.”

The Employee Retirement Income Security Act (ERISA) gives the department authority to grant administrative exemptions for transactions normally prohibited by the law if the transactions meet certain conditions. Under the exemption, investment firms would be required, among others things, to:

• Obtain prior approval of the participating plan to engage in a cross-trading program
• Properly disclose information about the program to plan investors
• Ensure that there are fair-pricing procedures for securities cross-traded between the index/model-driven funds or between such funds and certain large accounts
• Engage in cross-trades as a result of specified events outside the control of the investment managers

The final exemption is to be published in the February 12, 2002 Federal Register.

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Archived News Release — Caution: Information may be out of date.