[Federal Register Volume 59, Number 33 (Thursday, February 17, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-3607]
[[Page Unknown]]
[Federal Register: February 17, 1994]
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Prohibited Transaction Exemption 94-20; Application Number D-5700]
Class Exemption Relating to Certain Employee Benefit Plan Foreign
Exchange Transactions
AGENCY: Pension and Welfare Benefits Administration, Labor.
ACTION: Grant of Class Exemption.
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SUMMARY: This document contains a final exemption from certain
prohibited transaction restrictions of the Employee Retirement Income
Security Act of 1974 (the Act) and from certain taxes imposed by the
Internal Revenue Code of 1986 (the Code). The class exemption permits
the purchase and sale of foreign currencies between an employee benefit
plan and a bank or a broker-dealer or an affiliate thereof which is a
party in interest with respect to such plan.
The exemption affects participants and beneficiaries of employee
benefit plans involved in such transactions, as well as banks and
broker-dealers and their affiliates which act as dealers in foreign
exchange.
EFFECTIVE DATE: Section I(a) of PTE 94-20 is effective for transactions
occurring from January 1, 1975 to June 18, 1991. Section I(b) of PTE
94-20 is effective for transactions occurring on or after June 18,
1991.
FOR FURTHER INFORMATION CONTACT: Ms. Lyssa Hall, Pension and Welfare
Benefits Administration, Office of Exemption Determinations, U.S.
Department of Labor, Washington, DC 20210, (202) 219-8971 (not a toll-
free number) or Susan Rees, Plan Benefits Security Division, Office of
the Solicitor, (202) 219-9141 (not a toll-free number).
SUPPLEMENTARY INFORMATION: Exemptive relief for the transactions
described herein, as well as for other transactions not covered by the
proposed exemption, was 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 in accordance with the
procedures set forth in ERISA Procedure 75-1 (40 FR 18471, April 28,
1975).
In a letter to the ABA dated December 28, 1984, the Department of
Labor (the Department) tentatively denied the application. By letter
dated June 21, 1985, the ABA modified its application in response to
the Department's tentative denial, explaining that it was no longer
seeking exemptive relief for foreign exchange transactions between
banks and plans where the banks or their affiliates have investment
management discretion over the plan assets involved in the
transactions. On September 15, 1986, the Department published a notice
in the Federal Register (51 FR 32695), requesting additional
information from the public on various issues being considered by the
Department in deciding whether to propose a foreign exchange class
exemption in response to the ABA application. The comment period ended
on February 24, 1987. Seventeen substantive responses to the
solicitation of comments were received.1
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\1\For a discussion of those comments, see the proposed
exemption at 56 FR 11761 (March 20, 1991).
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On March 20, 1991, the Department published a notice in the Federal
Register (56 FR 11757) of the pendency of a proposed class exemption
from the restrictions of section 406(a)(1) (A) through (D) of the Act
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 (D) of the Code. The notice of pendency invited all interested
persons to submit written comments concerning the proposed class
exemption by May 20, 1991. The Department received nine public comments
requesting, among other things, that the Department broaden the scope
of the exemption to provide relief for transactions entered into
pursuant to standing instructions. In view of those comments, the
Department published a notice of public hearing in the Federal Register
(56 FR 46806 (September 16, 1991)). The hearing was held on October 3,
1991. Upon consideration of all of the comments received and testimony
offered at the public hearing, the Department has determined to grant
the proposed class exemption, subject to certain modifications. These
modifications and the major comments are discussed below.
Discussion of the Comments
The proposed exemption provided retroactive and prospective relief
from section 406(a)(1) (A) through (D) of the Act and section
4975(c)(1) (A) through (D) of the Code for foreign exchange
transactions between a party in interest bank or affiliate thereof and
an employee benefit plan.
One commentator urged the Department to expand the final exemption
to permit broker-dealers who are registered under the Securities Act of
1934 (1934 Act) and their affiliates to engage in foreign exchange
transactions with plans. According to this commentator, the same
reasons for granting the exemption to banks apply with equal force to
broker-dealers and their affiliates. Broker-dealers act as custodians
and provide other services to plans which cause them to be parties in
interest as defined in section 3(14) of the Act. In addition, broker-
dealers may also participate in foreign exchange transactions.
Accordingly, absent the availability of an exemption, many major money
market broker-dealers and their affiliates might not be able to deal
with plans with respect to foreign exchange transactions. The
commentator also asserts that in order for the ``general'' arm's length
test contained in the exemption to work effectively, the exemption must
include significant participants in the foreign exchange market.
Finally, the commentator notes that broker-dealers which are registered
under the 1934 Act are subject to extensive regulatory control
consisting of a panoply of federal, self-regulatory organization and
state regulations and supervisory structures. The Department has
considered this comment and determined that it would be appropriate to
include broker-dealers which are registered under the 1934 Act and
their affiliates within the scope of relief provided by the final class
exemption. Accordingly, the final exemption has been modified in this
regard.
One commentator requested that the exemption be expanded to provide
relief for individual retirement accounts (IRAs) and Keogh plans which
are not employee benefit plans covered by title I of the Act.2 The
Department does not believe that a sufficient showing has been made
regarding the demand for exemptive relief for non-title I IRAs and
Keogh Plans. Therefore, the Department is unable to conclude that the
final exemption should be expanded as requested.
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\2\29 CFR 2510.3-2(d) explains that IRAs described in section
408(a) of the Code will not be considered pension plans subject to
title I of ERISA, provided that: (1) no contributions to the plan
are made by the employer or employee association; (2) participation
is completely voluntary for employees or members; (3) the sole
involvement of the employer or employee organization is without
endorsement to permit the sponsor to publicize the program, to
collect contributions on behalf of the sponsor through payroll
deductions or dues checkoffs and to remit them to the sponsor; and
(4) the employer or employee organization receives no consideration
in the form of cash or otherwise, other than reasonable compensation
for services actually rendered in connection with payroll deductions
or dues checkoffs.
29 CFR 2510.3-3(b) explains that for purposes of title I of
ERISA, ``employee benefit plan'' shall not include a Keogh Plan
under which no employees are covered under the plan. In this regard,
29 CFR 2510.3-3(c) states that for purposes of the above referenced
section: (1) an individual and his or her spouse shall not be deemed
to be employees with respect to a trade or business, whether
incorporated or unincorporated, which is wholly owned by the
individual or by the individual and his or her spouse; and (2) a
partner in a partnership and his or her spouse shall not be deemed
to be employees with respect to the partnership.
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The proposed exemption contained a condition requiring that the
bank maintain written policies and procedures regarding the handling of
foreign exchange transactions with plans which assure that the person
acting for the bank knows that he or she is dealing with a plan.
One commentator expressed concern that requiring the person acting
for the bank to know that he or she is dealing with an ERISA plan will
require the institution of new procedures at foreign exchange desks
which will increase the cost of transactions for ERISA plans. The
commentator stated that it treats all client transactions in a uniform
manner. Finally, the commentator stated that it does not believe that
the condition will achieve beneficial results for plan transactions at
its facility.
While the commentator states that all client transactions at its
facility are treated in a uniform manner, the Department notes that
purchases and sales of foreign currency between an employee benefit
plan and a party in interest bank or broker-dealer are prohibited in
the absence of exemptive relief. The purpose of the above-noted
condition is to put persons who act for the bank or broker-dealer on
notice that they are dealing with a plan in order that any additional
steps or procedures that are necessary to comply with the conditions of
the exemption may be implemented. The Department believes that the
identification of the client as a plan will help assure compliance with
the conditions of the exemption. Accordingly, the Department has
determined not to revise the final exemption in this regard.
Section III(c)(6) of the proposed exemption required the issuance
of a written confirmation statement for each covered transaction. The
proposal required that the confirmation statement disclose the amount
of U.S. dollars purchased or sold. A commentator noted that U.S.
dollars are not involved in every foreign currency transaction. In
response to this comment, the Department has modified section III(c)(6)
to require disclosure of the currencies purchased and sold pursuant to
the final exemption.
The proposed exemption included a recordkeeping requirement which
provided that the bank, broker-dealer or affiliate must maintain within
territories under the jurisdiction of the United States Government, the
records necessary to determine whether the applicable conditions of the
exemption have been met. Several commentators objected to the
requirement that records be maintained within territories under the
jurisdiction of the U.S. Government. In this regard, they represented
that this requirement creates difficulties for those banks who maintain
foreign exchange trading desks in a country or countries other than the
United States. In addition, one commenter suggested that the
recordkeeping requirement may result in higher costs to plans involved
in foreign exchange transactions.
The ABA suggested that the recordkeeping requirement should permit
the required records to be maintained on a computer system located at a
foreign facility which would be accessible in the United States. These
systems could print out any information requested and produce a hard
copy to anyone who is authorized to have such information. These
systems would contain all the bank's foreign exchange transactions on a
daily basis for employee benefit plans as well as other entities. In
this way, all information needed to test for compliance would be
available in the United States. Other commenters suggested that
requirements similar to those provided in the regulations under section
404(b) of the Act regarding the maintenance of the indicia of ownership
of plan assets should be adopted. Specifically, they requested that the
exemption permit the required records to be maintained at foreign
locations described under the section 404(b) regulations.
The Department notes that the purpose of the record maintenance
requirement is to ensure that the persons described in paragraph III(e)
of the exemption will have access to bank, broker-dealer or affiliate
records involving covered foreign exchange transactions. The Department
is unable to determine how the alternatives for holding securities,
which are described in the regulations under section 404(b) of the Act,
would operate in the context of a record maintenance requirement. If
the records were maintained outside of the jurisdiction of the United
States Government and became unavailable for reasons beyond the control
of the bank, broker-dealer or affiliate, there would be no comparable
records available for determining compliance with the terms of this
exemption. Accordingly, the Department is not persuaded that the
conditions described in the regulations under section 404(b) of the Act
would be appropriate with respect to the record maintenance
requirement.
The Department has considered the ABA's suggestion to modify the
final exemption to include records which are maintained on a foreign
computer system that could be accessed in the United States. We note,
however, that the ABA is unable to represent that such records could
always be accessed on a foreign computer system without the risk of
restriction by a foreign government. Accordingly, the Department is
unable to conclude that the final exemption should be modified to
include this method of recordkeeping.
The ABA, as well as a number of other commentators, requested that
the Department expand the proposed exemption to include retroactive and
prospective relief for foreign exchange transactions entered into
pursuant to a standing authorization, hereinafter ``standing
instruction.'' Similarly, many of those 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.
The commentators represent that the utilization of a standing
instruction is an integral component in foreign exchange transactions
involving employee benefit plans. They further indicate that standing
instructions are necessary to repatriate relatively minor amounts of
income such as dividend and interest payments routinely generated by
foreign securities which are held by plans. In this regard, they state
that obtaining individual directions for each income receipt would be
impractical and that plan beneficiaries would lose investment income
due to the time that it would take to receive directions from
investment managers and convert the payments. In addition, many
investment managers who wish to effectuate a foreign exchange
transaction do not contact the foreign exchange desk directly, but
instead leave their trading instructions with their account managers in
the bank's trust or global area. Transactions effected in this manner
can be bulked or added together with other transactions from employee
benefit plans as well as other trusts and custodial accounts so as to
obtain a more beneficial exchange rate. Under the circumstances
described above, foreign exchange transactions would not meet the
definition of ``directed'' as set forth in the proposed exemption
because of the inability to comply with the requirement that the
independent plan fiduciary designate a specific exchange rate.
The Department notes that a bank or broker-dealer engages in
violations of section 406(b) of the Act whenever it uses its fiduciary
authority or control with respect to the plan assets involved in the
transaction to increase the amount of its compensation by determining
the timing or the specific exchange rate for the foreign exchange
transaction. The Department did not propose relief with respect to such
transactions because it was unable, at the 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 or broker-dealers in setting
exchange rates for foreign exchange transactions.
The commenters have responded to the Department's concerns by
suggesting additional conditions which would limit the amount of
discretion that a bank or broker-dealer would have in executing the
foreign exchange transactions pursuant to standing instructions. Thus,
some of the commenters suggested that the class exemption could limit
relief to those situations where the triggering event, such as the
receipt of cash dividends, would not be within the control of the bank
or broker-dealer. In addition, the exchange transaction would have to
take place within a short period of time following the triggering
event. As a further limitation on the bank or broker-dealer, a
commenter suggested that the exchange rate could be set daily prior to
execution of the covered foreign exchange transaction using objective
criteria which would be disclosed to and approved by a plan fiduciary
independent of the bank or broker-dealer. Finally, it was represented
that conditions relating to the information which must be provided or
made available to the independent plan fiduciary could require very
detailed disclosures which would enable such fiduciary to determine the
reasonableness of the foreign exchange rates paid by the plan.
On the basis of the comments received following publication of the
proposed exemption, the Department believes that it may be appropriate,
under certain circumstances, to provide relief from section 406(b)(1)
of the Act. Pursuant to the requirements of section 408(a) of the Act,
however, the Department is required to offer interested persons an
opportunity to present their views and an opportunity for a hearing
before granting an exemption from section 406(b) of the Act. Therefore,
in order not to delay the publication of an exemption from section
406(a) of the Act for foreign exchange transactions, the Department has
decided to grant the exemption described herein while it continues to
consider additional exemptive relief 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.''
Miscellaneous
One commenter requested that the Department clarify that the term
``foreign exchange transaction'' which is defined in section IV(a) of
the proposed exemption as ``the exchange of the currency of one nation
for the currency of another nation or a contract for such exchange''
includes options to buy or sell foreign currency. The commenter is
concerned that a footnote to the supplementary information accompanying
the proposed exemption which describes foreign exchange transactions as
``generally * * * either `spot', `forward', or `split''' delimits the
scope of the literal language of the exemption.
The commenter represents that options contracts operate in a manner
similar to that of forward contracts. For example, a forward contract
to sell a specified sum of Yen for dollars would enable a party to sell
Yen at the agreed upon rate even if the value of Yen declined over the
time period covered by the forward contract; the same forward contract
would require the counterparty to buy Yen from the party at a rate
favorable to the counterparty if the Yen appreciated during the same
time period. A similar economic result could be achieved if the party
had bought an option to sell Yen at the forward contract rate, and sold
an option to buy Yen at the same rate.
After considering this comment, the Department has decided to amend
the final exemption to specifically include options to buy or sell
currency.
One commenter requested that the Department expand the final
exemption to include relief from section 406 (b)(1) & (b)(2) of the Act
and section 4975(c)(1)(E) of the Code so that it would be clear that a
fiduciary bank would not violate those provisions when it engaged in a
foreign exchange transaction if it did not exercise its fiduciary
authority to cause the plan to pay it an additional fee. The
regulations at 29 CFR 2550.408b-2(e)(2) specifically state that a
fiduciary does not engage in an act described in section 406(b)(1) of
the Act if the fiduciary does not use any of the authority, control or
responsibility which makes such person a fiduciary to cause a plan to
pay additional fees for a service furnished by such fiduciary.
Accordingly, the Department has determined that it is unnecessary to
modify the final exemption as requested.
Finally, for purposes of clarity, the Department has added a
definition to section IV of the class exemption. Paragraph (g) defines
the term ``employee benefit plan'' for purposes of this class
exemption.
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) 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 respecting 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) The exemption, will not extend to transactions prohibited under
section 406(b) of the Act and section 4975(c)(1) (E) and (F) of the
Code;
(3) In accordance with section 408(a) of the Act and section
4975(c)(2) of the Code, and based upon the entire record, the
Department finds that the exemption is administratively feasible, in
the interests of plans and of their participants and beneficiaries and
protective of the rights of the participants and beneficiaries of
plans.
(4) The exemption is supplemental to, and not in derogation of, any
other provisions of the Act 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.
(5) The exemption is applicable to a transaction only if the
conditions specified in the exemption are met.
Exemption
Accordingly, the following exemption is granted 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 ERISA Procedure 75-1 (40 FR
18471, April 28, 1975).
Section I. Transactions
(a) For the period from January 1, 1975 to June 18, 1991, the
restrictions of section 406(a)(1) (A) through (D) 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 (D) shall not
apply to any foreign exchange transaction between a bank or broker-
dealer or an affiliate thereof and an employee benefit plan with
respect to which the bank or broker-dealer or affiliate thereof is a
trustee, custodian, fiduciary or other party in interest, provided that
(i) the transaction is directed (within the meaning of section IV(e))
on behalf of the plan by a fiduciary which is independent of the bank,
the broker-dealer, and any affiliate thereof, and (ii) the conditions
set forth in section II are met.
(b) Effective June 18, 1991, the restrictions of section 406(a)(1)
(A) through (D) of the Act and the taxes imposed by section 4975 (a)
and (b) of the Code by reason of Code section 4975(c)(1) (A) through
(D) shall not apply to any foreign exchange transaction between a bank
or broker-dealer or an affiliate thereof and an employee benefit plan
with respect to which the bank or broker-dealer or an affiliate thereof
is a trustee, custodian, fiduciary, or other party in interest,
provided that (i) the transaction is directed (within the meaning of
section IV(e)) on behalf of the plan by a fiduciary which is
independent of the bank, the broker-dealer, and any affiliate thereof,
and (ii) all of the conditions set forth in sections II and III are
met.
Section II. General Conditions
Section I of this exemption applies only if the following
conditions of this section II are satisfied. In the case of
transactions described in section I(b), all of the conditions specified
in section III below must also be satisfied.
(a) At the time the 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) 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.
Section III. Specific Conditions
Section I(b) of this exemption applies only if the conditions
specified in section II above and the following conditions are
satisfied:
(a) At the time the 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.
(b) The bank, or broker-dealer, maintains at all times written
policies and procedures regarding the handling of foreign exchange
transactions with 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.
(c) A written confirmation statement is issued with respect to each
covered transaction to the independent plan fiduciary who directs the
transaction for the plan.
The confirmation shall disclose the following information:
(1) Account name;
(2) Transaction date;
(3) Exchange rates;
(4) Settlement date;
(5) Currencies exchanged:
(i) Identity of the currency sold;
(ii) The amount sold;
(iii) Identity of the currency purchased;
(iv) The amount purchased.
The confirmation shall be issued in no event more than 5 business
days after execution of the transaction.
(d) The bank or broker-dealer, or affiliate thereof, 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 (e)
of this section to determine whether the applicable conditions of this
exemption have been met. Notwithstanding these recordkeeping
requirements, 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 fiduciary of a plan who is independent of the bank
or broker-dealer or any affiliate thereof, which engages in a
transaction covered by the exemption, shall be subject to the civil
penalty that may be assessed under 502(i) of the Act, or to the taxes
imposed by section 4975 (a) and (b) of the Code, solely because the
records are not maintained by the bank, the broker-dealer, or its
affiliate, or are not made available for examination by the bank or
broker-dealer or affiliate as required by paragraph (e) below.
(e)(i) Except as provided in subparagraph (ii) 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 (d) 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 and 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.
(ii) 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, or a
contract for such an exchange. The term foreign exchange transaction
includes options contracts on foreign exchange transactions.
(b) A ``bank'' means a bank which is supervised by the United
States or a State thereof, or any affiliate thereof.
(c) A ``broker-dealer'' means a broker-dealer registered under the
Securities Exchange Act of 1934, or any affiliate thereof.
(d) An ``affiliate'' of a bank or broker-dealer means any entity
directly or indirectly, through one or more intermediaries,
controlling, controlled by, or under common control with such bank or
broker-dealer.
(e) The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
(f) A foreign exchange transaction involving assets of an employee
benefit plan shall be considered ``directed'' only where the
independent plan fiduciary who has not been appointed by the bank or
broker-dealer or affiliate thereof, directs such bank or broker-dealer
or affiliate thereof to effect the purchase or sale of a specific
amount of currency at a specific exchange rate.
(g) For purposes of this exemption, the term ``employee benefit
plan'' refers to a pension plan described in 29 CFR 2510.3-2 and/or a
welfare benefit plan described in 29 CFR 2510.3-1.
Signed at Washington, DC, this 10th day of February, 1994.
Alan D. Lebowitz,
Deputy Assistant Secretary for Program Operations, Pension and Welfare
Benefits Administration, U.S. Department of Labor.
[FR Doc. 94-3607 Filed 2-16-94; 8:45 am]
BILLING CODE 4510-29-P