[Federal Register Volume 84, Number 136 (Tuesday, July 16, 2019)]
[Notices]
[Pages 33966-33979]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-15069]
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
[Exemption Application No. D-11962]
Proposed Exemption From Certain Prohibited Transaction
Restrictions Credit Suisse Group AG (CSG) and Its Current and Future
Affiliates, Including Credit Suisse AG (CSAG) (Collectively, Credit
Suisse or the Applicant) Located in Zurich, Switzerland
AGENCY: Employee Benefits Security Administration, Labor.
ACTION: Notice of proposed exemption.
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SUMMARY: This document contains notice of pendency before the
Department of Labor (the Department) of a proposed temporary five-year
individual exemption from certain of the prohibited transaction
restrictions of the Employee Retirement Income Security Act of 1974
(ERISA or the Act) and/or the Internal Revenue Code of 1986 (the Code).
If this proposed exemption is granted, certain entities with specified
relationships to CSAG will not be precluded from relying on the
exemptive relief provided by Prohibited Transaction Class Exemption 84-
14.
DATES: If granted, this exemption will be effective for five years
following the date exemptive relief is no longer available under PTE
2015-14.
Written comments and requests for a public hearing on the proposed
exemption should be submitted to the Department by August 30, 2019.
ADDRESSES: All written comments and requests for a hearing (at least
three copies) should be sent to the Employee Benefits Security
Administration (EBSA), Office of Exemption Determinations, U.S.
Department of Labor, 200 Constitution Avenue NW, Suite 400, Washington,
DC 20210, Attention: Application No. D-11962 or via private delivery
service or courier to the Employee Benefits Security Administration
(EBSA), Office of Exemption Determinations, U.S. Department of Labor,
122 C St. NW, Suite 400, Washington, DC 20001. Attention: Application
No. D-11962. Interested persons may also submit comments and/or hearing
requests to EBSA via email to [email protected] or by FAX to (202) 693-
8474, or online through http://www.regulations.gov. Any such comments
or requests should be sent by the end of the scheduled comment period.
The application for exemption and the comments received will be
available for public inspection in the Public Disclosure Room of the
Employee Benefits Security Administration, U.S. Department of Labor,
Room N-1515, 200 Constitution Avenue NW, Washington, DC 20210. See
SUPPLEMENTARY INFORMATION below for additional information regarding
comments.
FOR FURTHER INFORMATION CONTACT: Ms. Blessed Chuksorji-Keefe of the
Department at (202) 693-8402. (This is not a toll-free number.)
SUPPLEMENTARY INFORMATION:
Comments
Comments should state the nature of the person's interest in the
proposed exemption and the manner in which the person would be
adversely affected by the exemption, if granted. A request for a
hearing can be requested by any interested person who may be adversely
affected by an exemption. A request for a hearing must state: (1) The
name, address, telephone number, and email address of the person making
the request; (2) the nature of the person's interest in the exemption
and the manner in which the person would be adversely affected by the
exemption; and (3) a statement of the issues to be addressed and a
general description of the evidence to be presented at the hearing. The
Department will grant a request for a hearing made in accordance with
the requirements above where a hearing is necessary to fully explore
material factual issues identified by the person requesting the
hearing. A notice of such hearing shall be published by the Department
in the Federal Register. The Department may decline to hold a hearing
where: (1) The request for the hearing does not meet the requirements
above; (2) the only issues identified for exploration at the hearing
are matters of law; or (3) the factual issues identified can be fully
explored through the submission of evidence in written (including
electronic) form.
WARNING: All comments received will be included in the public
record without change and may be made available online at http://www.regulations.gov, including any personal information provided,
unless the comment includes information claimed to be confidential
or other information whose disclosure is restricted by statute. If
you submit a comment, EBSA recommends that you include your name and
other contact information in the body of your comment, but DO NOT
submit information that you consider to be confidential, or
otherwise protected (such as Social Security number or an unlisted
phone number) or confidential business information that you do not
want publicly disclosed. However, if EBSA cannot read your comment
due to technical difficulties and cannot contact you for
[[Page 33967]]
clarification, EBSA might not be able to consider your comment.
Additionally, the http://www.regulations.gov website is an
``anonymous access'' system, which means EBSA will not know your
identity or contact information unless you provide it in the body of
your comment. If you send an email directly to EBSA without going
through http://www.regulations.gov, your email address will be
automatically captured and included as part of the comment that is
placed in the public record and made available on the internet.
Background
On May 19, 2014, CSAG entered a guilty plea for assisting U.S.
citizens in federal income tax evasion. On November 21, 2014, the
District Court entered a judgment of conviction (the Conviction)
against CSAG. As a result of the Conviction, QPAMs with certain
corporate relationships to CSAG, as well as its client plans that are
subject to Part 4 of Title I of ERISA (ERISA--covered plans) or section
4975 of the Code (IRAs), could no longer rely on PTE 84-14 without an
individual exemption issued by the Department. As described below, in
order to protect plans and IRAs managed by CS-related QPAMs, the
Department issued a temporary one-year exemption allowing Credit Suisse
Affiliated and Related QPAMs to continue to rely on PTE 84-14, if
numerous conditions were met. Prior to the expiration of that
exemption, the Department issued another exemption allowing Credit
Suisse Affiliated and Related QPAMs to continue to rely on PTE 84-14
for a period of four years and ten years respectively, if numerous
conditions were met. On June 14, 2018, the Applicant filed an exemption
request for Credit Suisse Affiliated asset managers to continue to rely
on PTE 84-14 after the November 20, 2019, expiration of the four-year
exemption.
The Department is proposing this exemption to protect plans and
IRAs that use Credit Suisse Affiliated QPAMs, from the costs and
expenses that may arise if those asset managers are no longer able to
rely on the relief provided by PTE 84-14.
This proposed five-year exemption, if granted, provides relief from
certain of the restrictions set forth in sections 406 and 407 of ERISA.
No relief or waiver of a violation of any other law is provided by the
exemption. The relief in this proposed five-year exemption would
terminate immediately if, among other things, an entity within the
Credit Suisse corporate structure is convicted of any crime covered by
Section I(g) of PTE 84-14 (other than the Conviction during the
effective period of the proposed five-year exemption. While such an
entity could apply for a new exemption in that circumstance, the
Department is not obligated to grant a requested exemption.
The terms of this proposed five-year exemption have been
specifically designed to permit plans to terminate their relationships
in an orderly and cost-effective fashion in the event of an additional
conviction or a determination that it is otherwise prudent for a plan
to terminate its relationship with the Applicant.
When interpreting and implementing this exemption, the Applicant
and the Credit Suisse Affiliated QPAMs should resolve any ambiguities
in light of the exemption's protective purposes. To the extent
additional clarification is necessary, these persons or entities should
contact EBSA's Office of Exemption Determinations, at 202-693-8540.
Summary of Facts and Representations \1\
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\1\ The Summary of Facts and Representations is based on the
Applicant's representations, unless indicated otherwise.
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The Applicant(s)
1. Credit Suisse Group AG (CSG) is a publicly-traded corporation
headquartered in Zurich, Switzerland. CSG and its affiliates (which are
collectively referred to herein as the Applicant or Credit Suisse)
operate in about 50 countries and currently have approximately 46,720
employees. As of December 31, 2017, CSG and its consolidated
subsidiaries had total balance sheet assets of CHF 796 billion, and
total shareholders' equity of CHF 42 billion (approximately $817
billion and $43 billion, respectively).
2. CSG owns a 100% interest in Credit Suisse AG (CSAG). CSAG
operates as a bank, in Switzerland and abroad. CSAG currently has two
affiliates: CSAM LLC and CSAM Ltd. that manage the assets of ERISA-
covered plans on a discretionary basis. CSAG also owns a five percent
or more interest in certain other entities that may provide investment
management services to plans (the CS Related QPAMs), but that are not
affiliates of CSAG.
ERISA and Code Prohibited Transactions and PTE 84-14
3. The rules set forth in section 406 of ERISA and section
4975(c)(1) of the Code proscribe certain ``prohibited transactions''
between plans and related parties with respect to those plans. Under
ERISA such parties are known as ``parties in interest.'' Under section
3(14) of ERISA, parties in interest with respect to a plan include,
among others, the plan fiduciary, a sponsoring employer of the plan, a
union whose members are covered by the plan, service providers with
respect to the plan, and certain of their affiliates.\2\ The prohibited
transaction provisions under section 406(a) of ERISA and 4975(c)(1) of
the Code prohibit, in relevant part, sales, leases, loans or the
provision of services between a party in interest and a plan (or an
entity whose assets are deemed to constitute the assets of a plan), as
well as the use of plan assets by or for the benefit of, or a transfer
of plan assets to, a party in interest.\3\ Under the authority of
section 408(a) of ERISA and section 4975(c)(2) of the Code, the
Department has the authority to grant exemptions from such ``prohibited
transactions'' in accordance with the procedures set forth in 29 CFR
part 2570, subpart B (76 FR 66637, 66644, October 27, 2011).
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\2\ Under the Code such parties, or similar parties, are
referred to as ``disqualified persons.''
\3\ The prohibited transaction provisions also include certain
fiduciary prohibited transactions under section 406(b) of ERISA and
4975(c)(1)(E) and (F) of the Code. These include transactions
involving fiduciary self-dealing, fiduciary conflicts of interest,
and kickbacks to fiduciaries. PTE 84-14 provides only very narrow
conditional relief for transactions described in Section 406(b) of
ERISA.
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4. Prohibited Transaction Exemption 84-14 (PTE 84-14) \4\ exempts
certain prohibited transactions between a party in interest and an
``investment fund'' (as defined in Section VI(b) of PTE 84-14) \5\ in
which a plan has an interest, if the investment manager satisfies the
definition of ``qualified professional asset manager'' (QPAM) and
satisfies additional conditions for the exemption. PTE 84-14 was
developed and granted based on the essential premise that broad relief
could be afforded for all types of transactions in which a plan engages
only if the commitments and the investments of plan assets and the
negotiations leading thereto are the sole responsibility of an
independent, discretionary, manager.\6\
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\4\ 49 FR 9494 (March 13, 1984), as corrected at 50 FR 41430
(October 10, 1985), as amended at 70 FR 49305 (August 23, 2005), and
as amended at 75 FR 38837 (July 6, 2010).
\5\ An ``investment fund'' includes single customer and pooled
separate accounts maintained by an insurance company, individual
trusts and common, collective or group trusts maintained by a bank,
and any other account or fund to the extent that the disposition of
its assets (whether or not in the custody of the QPAM) is subject to
the discretionary authority of the QPAM.
\6\ See 75 FR 38837, 38839 (July 6, 2010).
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5. However, Section I(g) of PTE 84-14 prevents an entity that may
otherwise meet the definition of QPAM from utilizing the exemptive
relief provided by PTE 84-14, for itself and its client
[[Page 33968]]
plans, if that entity or an ``affiliate'' \7\ thereof or any owner,
direct or indirect, of a 5 percent or more interest in the QPAM has,
within 10 years immediately preceding the transaction, been either
convicted or released from imprisonment, whichever is later, as a
result of criminal activity described in that section. Section I(g) was
included in PTE 84-14, in part, based on the expectation that a QPAM,
and those who may be in a position to influence its policies, maintain
a high standard of integrity.\8\
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\7\ Section VI(d) of PTE 84-14 defines the term ``affiliate''
for purposes of Section I(g) as ``(1) Any person directly or
indirectly through one or more intermediaries, controlling,
controlled by, or under common control with the person, (2) Any
director of, relative of, or partner in, any such person, (3) Any
corporation, partnership, trust or unincorporated enterprise of
which such person is an officer, director, or a 5 percent or more
partner or owner, and (4) Any employee or officer of the person
who--(A) Is a highly compensated employee (as defined in Section
4975(e)(2)(H) of the Code) or officer (earning 10 percent or more of
the yearly wages of such person), or (B) Has direct or indirect
authority, responsibility or control regarding the custody,
management or disposition of plan assets.''
\8\ See 47 FR 56945, 56947 (December 21, 1982).
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The Guilty Plea and the Conviction
6. On May 19, 2014, in the U.S. District Court for the Eastern
District of Virginia (the District Court),\9\ the U.S. Department of
Justice charged CSAG with, and CSAG pled guilty to, one criminal count
of conspiracy to violate Code section 7206(2).\10\ As described in
further detail below, the charging documents cite the Applicant and its
subsidiaries, Credit Suisse Fides and Clariden Leu Ltd., for willfully
aiding, assisting in, procuring, counseling, and advising the
preparation and presentation of false income tax returns and other
documents to the Internal Revenue Service of the Treasury Department
(IRS), for decades, prior to and through approximately 2009.
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\9\ United States of America v. Credit Suisse AG, Case Number
1:14-cr-188-RBS.
\10\ Section 7206(2) of the Code prohibits willfully aiding,
assisting, procuring, counseling, or advising the preparation or
presentation of false income tax returns. Section 371 of Title 18 of
the United States Code generally prohibits two or more persons from
conspiring either to commit any offense against the United States or
to defraud the United States.
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7. On May 19, 2014, pursuant to a plea agreement (the Plea
Agreement), CSAG entered a guilty plea for assisting U.S. citizens in
federal income tax evasion. On November 21, 2014, the District Court
entered a judgment of conviction (the Conviction). As part of its
sentence, CSAG agreed to pay a total of $2.815 billion, which included:
(a) A criminal fine of $1.33 billion; (b) restitution to the IRS of
$0.67 billion; (c) a civil penalty of $715 million to New York State;
and (d) a civil penalty of $100 million to the Federal Reserve.
8. As a result of the Conviction, QPAMs with certain corporate
relationships to CSAG, as well as its client plans that are subject to
Part 4 of Title I of ERISA (ERISA-covered plans) or section 4975 of the
Code (IRAs), cannot rely on PTE 84-14 without an individual exemption
issued by the Department.
Prior Exemptions and the Public Hearing
9. On September 3, 2014, the Department published a proposed
exemption (the First Proposed Exemption) for certain entities with
specified relationships to CSAG, to continue to rely upon the relief
provided by PTE 84-14, notwithstanding the Conviction.\11\ The
Department received ten comments and four requests for a hearing
regarding the First Proposed Exemption.
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\11\ See 79 FR 52365.
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10. The requested hearing could not be held prior to the date of
the Conviction, so, in order to protect plans and IRAs managed by CS-
related QPAMs, the Department issued a temporary exemption.\12\ The
temporary exemption allowed Credit Suisse asset managers to continue to
rely on PTE 84-14, for one year following the date of the Conviction,
while the Department determined whether further relief would be
protective of affected plans and IRAs.
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\12\ See 79 FR 68716.
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11. The public hearing (requested by commenters to the First
Proposed Exemption) was held on January 15, 2015. The Department
considered all the testimony and information provided at the hearing,
and all the issues raised by the commenters, and thereafter published
the Second Final Exemption.\13\ The Second Final Exemption addressed
all the material information and issues submitted in connection with
the hearing.
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\13\ The proposal to the Second Final Exemption was published on
November 18, 2014, at 79 FR 68712.
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Current Exemption Request
12. On June 14, 2018, the Applicant filed an exemption request for
Credit Suisse Affiliated asset managers to continue to rely on PTE 84-
14 after the November 20, 2019, expiration of the Second Final
Exemption. The request was for an exemption modeled on PTE 2015-14,
with certain exceptions. On August 24, 2018, the Applicant submitted a
letter in further support of its request (the CSAG Letter). In the CSAG
Letter, the Applicant requested that the Department ``not make small,
nonmaterial language changes [to the conditions of this exemption] that
do not change the substance of the provision[s] but nonetheless will
require changes to Credit Suisse's policies and training, and
explanations to its clients.'' The Applicant stated further that while
``it understands the Department's interest in consistency, this goal
should not override the expense, effort and confusion for clients that
such changes would cause.'' The Applicant notes that the facts
underlying the Second Final Exemption have not changed, and the
Department already found the Second Final Exemption to be in the
interest of and protective of affected plans and IRAs, and
administratively feasible.
13. In developing administrative exemptions under Section 408(a) of
ERISA, the Department seeks to implement its statutory directive to
grant only exemptions that are appropriately protective of affected
plans and IRAs and in their interest. In discharging this obligation,
the Department will sometimes impose conditions that depart from those
provided in older exemptions based on the Department's experience with
those exemptions, the Department's conclusion that new or revised
conditions will better serve the interests of affected plans and IRAs,
similar changes in more recent exemptions applicable to other firms
providing the same services, and other factors. Many of the conditions
of this exemption are new or revised, relative to the Second Final
Exemption, reflecting the Department's current views on how best to
ensure that Covered Plans are adequately protected. In general, the
revised conditions are the same as or similar to conditions imposed in
other recent Section I(g) exemptions. The distinctions between the
conditions in the Second Final Exemption and this proposed exemption
are material.
For example, the Second Final Exemption requires that ``(t)he
Credit Suisse Affiliated QPAMs and the Credit Suisse Related QPAMs did
not directly receive compensation in connection with the criminal
conduct of Credit Suisse AG that is the subject of the Conviction.''
CSAG states that this condition is ``substantively the same'' as a
parallel provision in the Department's most recent line of QPAM Section
I(g) exemptions. However, the analogous provision in those exemptions,
and in this proposed exemption further require that the CS Affiliated
QPAMs and the CS Related QPAMs must not have knowingly received
indirect compensation in connection with the
[[Page 33969]]
criminal conduct of CSAG that is the subject of the Conviction.
As another example, Section I(g) of PTE 2015-14 provides that,
``Each Credit Suisse Affiliated QPAM will ensure that it does not
engage or employ any person involved in the criminal conduct that
underlies the Conviction in connection with the transactions involving
any `investment fund' (as defined in PTE 84-14) subject to ERISA and
managed by such Credit Suisse Affiliated QPAMs.'' Although CSAG asserts
that Section I(g) of the Second Final Exemption is ``substantively the
same'' as the analogous provision in the Department's most recent line
of cases, the analogous condition in those exemptions, and in this
proposed exemption, contains a more expansive prohibition against
hiring individuals engaging in wrongful misconduct, requiring that,
``(t)he CS Affiliated QPAMs will not employ or knowingly engage any of
the individuals that `participated in' the criminal conduct of CSAG
that is the subject of the Conviction, where `participate in' refers
not only to active participation in the criminal conduct of CSAG that
is the subject of the Conviction, but also to knowing approval of the
criminal conduct, or knowledge of such conduct without taking active
steps to prohibit such conduct, including reporting the conduct to such
individual's supervisors, and to the Board of Directors.''
Other meaningful distinctions between the Second Final Exemption
and the Department's most recent line of QPAM Section I(g) exemptions
are described below. In all cases, the revised conditions of this
exemption are consistent with the record provided by the Applicant, and
the Department's understanding of the facts attributable to the
Conviction. CSAG has not demonstrated that the revised conditions would
confuse fiduciaries of Covered Plans, or would cause unnecessary
expense to CSAG and/or its QPAMs, as it asserts.
14. A summary of the proposed exemption appears below, and is
organized into several parts. The first part describes the conditions
in this proposed exemption that are materially similar to the
conditions in CS's soon-to-expire exemption (i.e., the Second Final
Exemption or PTE 2015-14). The second part summarizes the conditions in
this proposed exemption that are new or enhanced, relative to the
Second Final Exemption. The third part describes the Applicant's
request that certain exceptions be made to one of the conditions
described in the Second Final Exemption. The fourth part summarizes
this proposed exemption's audit requirement, and the Applicant's
comment regarding the necessity of the audit. The remaining parts
summarize the Department's findings.
I. Conditions in this Proposed Exemption that are Substantially
Similar to Conditions in CS's Second Final Exemption.
15. This proposed exemption requires that any failure of a CS
Affiliated QPAM to satisfy Section I(g) of PTE 84-14 arose solely from
the Conviction.
16. Further, this proposed exemption requires that each CS
Affiliated QPAM continue to maintain, adjust or immediately implement
and follow written Policies designed to protect the interests of plans
and IRAs in conformity with fiduciary standards.\14\ The written
Policies cover a range of issues, from asset management decisions of
the CS Affiliated QPAMs to the CS Affiliated QPAM's compliance with
ERISA's fiduciary duties. The proposed exemption requires the
continuation of a program of training for each Credit Suisse Affiliated
QPAM's relevant legal, compliance, management and internal audit
personnel. In addition, the CS Affiliated QPAMs must promptly address
any determination as to the adequacy of the Policies and Training and
the auditor's recommendations (if any) on strengthening the Policies
and Training of the respective CS Affiliated QPAM. Finally, each CS
Affiliated QPAM must maintain for six years the records necessary to
demonstrate that the conditions of this proposed five-year exemption
have been met.
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\14\ The Department notes that a CS Affiliated QPAM established
after November 20, 2019 would need to immediately implement and
follow written Policies, where CS Affiliated QPAMs established prior
to that date must have already immediately implemented and followed
the written Policies.
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II. Conditions in this Proposed Exemption that Contain Material
Distinctions with the Second Final Exemption.
17. The Second Final Exemption provided that the CS Affiliated and
Related QPAMs did not participate in the criminal conduct that was the
subject of the Conviction. This proposed exemption adds clarifying
language to that condition, consistent with the record provided by the
Applicant. Accordingly, the proposed exemption mandates that the CS
Affiliated QPAMs and the CS Related QPAMs (including their officers,
directors, agents other than CSAG, employees of such QPAMs, and certain
CSAG employees described below) did not know of, have reason to know
of, or ``participate in'' the criminal conduct of CSAG that is the
subject of the Conviction. The proposed exemption clarifies further
that ``participate in'' refers not only to active participation in the
criminal conduct of CSAG, but also to knowing approval of the criminal
conduct, or knowledge of such conduct without taking active steps to
prohibit such conduct, including reporting the conduct to supervisors,
and to the Board of Directors. In this regard, unless the individual
reasonably believed that his or her initial report was given an
appropriate response within a reasonable time, the individual must have
further reported the criminal conduct to the person or persons the
individual reasonably expected would carry out the appropriate
response. Whether an individual reasonably believed that an appropriate
response was taken turns on the facts and circumstances.
18. The Second Final Exemption provided that the CS Affiliated and
Related QPAMs did not directly receive compensation in connection with
the criminal conduct. This proposed exemption expands that prohibition
in a manner that is consistent with the record provided by the
Applicant, and the Department's understanding of the facts attributable
to the Conviction. In addition to the Second Final Exemption
requirement that the CS Affiliated and Related QPAMs (including their
officers, directors, agents other than CSAG, employees of such QPAMs,
and certain CSAG employees described below) did not directly receive
compensation in connection with the criminal conduct, this proposed
exemption further specifies that the CS Affiliated QPAMs and the CS
Related QPAMs did not knowingly receive indirect compensation in
connection with the criminal conduct of CSAG.
19. The Second Final Exemption provided that criminal conduct of
CSAG that is the subject of the Conviction did not directly or
indirectly involve the assets of an ERISA-covered Plan or IRA. Whereas
that condition in the Second Final Exemption focused on the criminal
conduct of CSAG, this proposed exemption contains a condition that
focuses on the conduct of the CS Affiliated and Related QPAMs. This
proposed exemption requires that no CS Affiliated QPAM or CS Related
QPAM exercised authority over the assets of an ERISA-covered plan or
IRA in a manner that it knew or should have known would: Further
criminal conduct that is the subject of the Conviction; or cause the CS
Affiliated QPAM or CS Related QPAM, its affiliates, or related parties
to directly or indirectly profit
[[Page 33970]]
from the criminal conduct that is the subject of the Conviction.
20. The Second Final Exemption required that each Credit Suisse
Affiliated QPAM ensure that none of its employees or agents, if any,
that were involved in the criminal conduct underlying the Conviction
will engage in transactions on behalf of any investment fund managed by
the QPAM. This proposed exemption expands that prohibition, in a manner
that is consistent with the record provided by the Applicant, and the
Department's understanding of the facts attributable to the Conviction.
In this regard, this proposed exemption prohibits each CS Affiliated
QPAM from employing or knowingly engaging any of the individuals that
``participated in'' the criminal conduct of CSAG that is the subject of
the Conviction, where ``participated in'' refers not only to active
participation in the criminal conduct of CSAG, but also to knowing
approval of the criminal conduct, or knowledge of such conduct without
taking active steps to prohibit such conduct, including reporting the
conduct to such individual's supervisors, and to the Board of
Directors. In this regard, unless the individual reasonably believed
that his or her initial report was given an appropriate response within
a reasonable time, the individual must further report the criminal
conduct to the person or persons the individual reasonably expected
would carry out the appropriate response. Whether an individual
reasonably believed that an appropriate response was taken turns on the
facts and circumstances.
21. The Second Final Exemption provided that CSAG would not provide
any fiduciary services to ERISA-covered Plans or IRAs, except in
connection with securities lending services of the New York branch of
CSAG, or act as a QPAM. this proposed exemption mandates instead that
CSAG will not act as a fiduciary within the meaning of section
3(21)(A)(i) or (iii) of ERISA, or section 4975(e)(3)(A) and (C) of the
Code, other than with respect to employee benefit plans sponsored for
its own employees or employees of an affiliate, or in connection with
securities lending services of the New York branch of CSAG.
22. The Second Final Exemption requires that the CS Affiliated
QPAMs agree to certain conduct and standards, and to refrain from
certain conduct, in their dealings with ERISA-covered plans and
IRAs.\15\ This condition was intended to ensure that, when an ERISA-
covered plan or IRA entered into an asset management agreement with a
CS Affiliated QPAM in reliance on the manager's qualification as a
QPAM, the plan or IRA could expect adherence to basic fiduciary norms
and standards of fair dealing, notwithstanding the Conviction. The
condition was further intended to ensure that the ERISA-covered plan or
IRA could disengage from that relationship, without undue injury.
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\15\ Specifically, condition (k) of the Second Final Exemption
requires that, each Credit Suisse Affiliated QPAM agrees: (1) To
comply with ERISA and the Code, as applicable with respect to such
ERISA-covered plan or IRA, and refrain from engaging in prohibited
transactions that are not otherwise exempt; (2) not to waive, limit,
or qualify the liability of the Credit Suisse Affiliated QPAM for
violating ERISA or the Code or engaging in prohibited transactions;
(3) not to require the ERISA-covered plan or IRA (or sponsor of such
ERISA-covered plan or beneficial owner of such IRA) to indemnify the
Credit Suisse Affiliated QPAM for violating ERISA or engaging in
prohibited transactions, except for violations or prohibited
transactions caused by an error, misrepresentation, or misconduct of
a plan fiduciary or other party hired by the plan fiduciary who is
independent of Credit Suisse AG; (4) not to restrict the ability of
such ERISA-covered plan or IRA to terminate or withdraw from its
arrangement with the Credit Suisse Affiliated QPAM, with the
exception of reasonable restrictions, appropriately disclosed in
advance, that are specifically designed to ensure equitable
treatment of all investors in a pooled fund in the event such
withdrawal or termination may have adverse consequences for all
other investors, provided that such restrictions are applied
consistently and in like manner to all such investors; and (5) not
to impose any fees, penalties, or charges for such termination or
withdrawal with the exception of reasonable fees, appropriately
disclosed in advance, that are specifically designed to prevent
generally recognized abusive investment practices or specifically
designed to ensure equitable treatment of all investors in a pooled
fund in the event such withdrawal or termination may have adverse
consequences for all other investors, provided that such fees are
applied consistently and in like manner to all such investors.
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This proposed exemption enhances those important protections.
Specifically, each CS Affiliated QPAM must not only agree, but must
also warrant, to Covered Plans: (a) To comply with ERISA and the Code,
as applicable with respect to the Covered Plan; (b) not to require (or
otherwise cause) the Covered Plan to waive, limit, or qualify the
liability of the CS Affiliated QPAM for violating ERISA or the Code or
engaging in prohibited transactions; (c) not to restrict the ability of
the Covered Plan to terminate or withdraw from its arrangement with the
CS Affiliated QPAM; (d) not to impose any fees, penalties, or charges
for such termination or withdrawal with the exception of reasonable
fees, appropriately disclosed in advance; (e) not to include
exculpatory provisions disclaiming or otherwise limiting liability of
the CS Affiliated QPAMs for a violation of the agreement's terms; (f)
to indemnify and hold harmless the Covered Plan for any actual losses
resulting directly from a CS Affiliated QPAM's violation of ERISA's
fiduciary duties, as applicable; and (g) to provide a notice of its
obligations to each Covered Plan. Further, this proposed exemption
requires that by January 21, 2020, each CS Affiliated QPAM is required
to provide a notice of the five-year exemption, along with a separate
summary describing the facts that led to the Conviction.
23. The Second Final Exemption required that the CS Affiliated QPAM
comply with each condition of PTE 84-14, as amended, with the sole
exception of the violation of Section I(g) of PTE 84-14 that is
attributable to the Conviction. This proposed exemption clarifies that
if, during the Exemption Period, an entity within the Credit Suisse
corporate structure is convicted of a crime described in Section I(g)
of PTE 84-14, (other than the Conviction), including a conviction in a
foreign jurisdiction for a crime described in Section I(g) of PTE 84-
14, relief in this proposed exemption would terminate immediately.
24. Unlike the Second Final Exemption, this proposed exemption
requires CSAG to immediately disclose to the Department any Deferred
Prosecution Agreement or Non-Prosecution Agreement that Credit Suisse
Group AG or CSAG or any affiliate enters into with the U.S Department
of Justice. This proposed exemption also requires that, by May 20,
2020, CSAG must designate a senior compliance officer (the Compliance
Officer) who will be responsible for compliance with the Policies and
Training requirements described herein. Further, by May 20, 2020, each
CS Affiliated QPAM, in its agreements with, or in other written
disclosures provided to Covered Plans, must clearly inform Covered Plan
clients of their right to obtain a copy of the Policies or a
description which accurately summarizes key components of the CS
Affiliated QPAM's Policies developed in connection with this proposed
exemption.
25. Finally, under this proposed exemption, a Credit Suisse
Affiliated QPAM will fail to meet the terms of this exemption if: (a) A
different Credit Suisse Affiliated QPAM (or a Credit Suisse Related
QPAM) knew of, had reason to know of, or participated in the criminal
conduct of CSAG that is the subject of the Conviction; (b) a CS
Affiliated QPAM or a CS Related QPAM (including their officers,
directors, agents other than CSAG, and employees of such QPAMs)
received direct
[[Page 33971]]
compensation, or knowingly receive indirect compensation, in connection
with the criminal conduct of CSAG that is the subject of the
Conviction; (c) any failure of a CS Affiliated QPAM to satisfy Section
I(g) of PTE 84-14 arose from a conviction other than the Conviction;
(d) a CS Affiliated QPAM or a CS Related QPAM exercised authority over
the assets of an ERISA-covered plan or an IRA in a manner that it knew
or should have known would: Further criminal conduct that is the
subject of the Conviction; or cause the CS Affiliated QPAM, its
affiliates, or related parties to directly or indirectly profit from
the criminal conduct that is the subject of the Conviction; (e) with
limited exceptions, CSAG acts as a fiduciary within the meaning of
section 3(21)(A)(i) or (iii) of ERISA, or section 4975(e)(3)(A) and (C)
of the Code, with respect to ERISA-covered Plan and IRA assets; (f)
CSAG fails to designate a Compliance Officer, or if the Compliance
office fails to meet his or her responsibilities under the exemption;
and (g) CSAG fails to immediately disclose to the Department any
Deferred Prosecution Agreement (a DPA) or Non-Prosecution Agreement (an
NPA) Credit Suisse Group AG or CSAG or any affiliate enters into with
the U.S. Department of Justice, to the extent such DPA or NPA relates
to the conduct described in Section I(g) of PTE 84-14 or section 411 of
ERISA, or (h) if CSAG fails to immediately provide the Department any
information requested by the Department, as permitted by law, regarding
any agreement under subparagraph (g) and/or the conduct and allegations
that led to the agreement.
III. Applicant's Request for Exceptions to Section I(f) of CS's
Second Final Exemption.
26. Section I(f) of the Second Final Exemption provides, in
relevant part, that a CS Affiliated QPAM will not use its authority or
influence to direct an investment fund to enter into any transaction
with CSAG, or engage CSAG to provide any service to such investment
fund, for a direct or indirect fee borne by the investment fund.\16\
The Applicant requests that the Department add three exceptions to this
proposed condition:
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\16\ In its entirety, Section I(f) of the Second Final Exemption
provides that, ``A Credit Suisse Affiliated QPAM will not use its
authority or influence to direct an ``investment fund'' (as defined
in Section VI(b) of PTE 84-14) that is subject to ERISA and managed
by such Credit Suisse Affiliated QPAM to enter into any transaction
with Credit Suisse AG or engage Credit Suisse AG to provide
additional services to such investment fund, for a direct or
indirect fee borne by such investment fund regardless of whether
such transactions or services may otherwise be within the scope of
relief provided by an administrative or statutory exemption[.]''
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Request 1. CSAG Should Be Permitted to Act as Local Sub-Custodian.
27. The Applicant notes that Section I(f) of the Second Final
Exemption precludes a CS Affiliated QPAM from investing plan assets in
a market where CSAG or its branch or affiliate might serve as the sub-
custodian CSAG. In this regard, this condition might not be met if a CS
Affiliated QPAM invests plan assets in a market where CSAG or its
branch or affiliate might serve as the sub-custodian, even where the CS
Affiliated QPAM has no role in selecting the global custodian, or the
local sub-custodians in its network. According to the Applicant,
Section I(f) of the Second Final Exemption may only be met by
prohibiting plans managed by the CS Affiliated QPAMs from investing in
that market. In that event, the Applicant asserts that Plans that want
to invest with the CS Affiliated QPAMs would be deprived of the ability
to choose from a full slate of investment products, and would be
compelled to invest in a different product, or with an alternate
investment manager, which could have an adverse impact on investment
performance.
28. The Applicant notes that the Department previously expressed
concern that sub-custodian arrangements had ERISA section 406(b)
implications, and PTE 84-14 only provides relief from section 406(a) of
ERISA.\17\ In the Applicant's view, a CS Affiliated QPAM's investment
in a market where an unaffiliated global custodian has selected a CSAG
affiliate as its local subcustodian does not automatically result in a
violation of section 406(b) of ERISA. The Applicant states it should be
capable of factually demonstrating when sub-custodial arrangements do
not violate ERISA section 406(b).
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\17\ In granting the Second Final Exemption, the Department
expressed concern, in relation to Section I(f), that a CS Affiliated
QPAM might effectively use its ``authority or influence to direct''
an investment fund to ``enter into'' a ``transaction with'' Credit
Suisse AG or ``provide additional services, for a fee borne by'' the
investment fund.
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29. The Applicant states that preventing a plan from investing in
markets covered by its chosen strategy and chosen investment manager,
could have an adverse impact on investment performance in that
strategy. For ERISA-covered plans, there are four primary global
custodians. None of these are affiliated with CSAG. The global
custodian may not have a local custodian in its network in every market
where an investment manager trades on behalf of its clients. In such
instances, the global custodian will engage a local sub-custodian. The
global custodian's choice of local sub-custodian is based on factors
including potential local sub-custodians' credit, efficiency in trade
processing, back office functions, and tax reclaims processing. None of
these factors are related to asset management. When a plan's custodian
uses more than one local sub-custodian in a market, the decision of the
plan's custodian on how to divide its custody clients among those local
subcustodians is entirely its own.
30. The Applicant requests that Section I(d) of this proposed
exemption contain an exception that permits CSAG and its branches and
affiliates to serve as local sub-custodians.
Department's Response to Request that CSAG Should Be Permitted to
Act as Local Sub-Custodian.
31. The Department is tentatively persuaded that, in narrow
circumstances, plans and IRAs would benefit from the broader range of
investment options that may result from CSAG affiliates being permitted
to serve as local sub-custodians. However, given the magnitude of
CSAG's fraudulent misconduct, the Department is not proposing that CSAG
itself or its branches be permitted to act as local sub-custodians in
these arrangements. Accordingly, Section I(d) of this proposed
exemption contains an exception that permits CSAG affiliates to serve
as a local sub-custodian, if the global custodian and the sub-custodian
are selected by someone other than a CSAG-related entity. This proposed
exemption requires each CS Affiliated QPAM to have policies and
procedures in place to ensure that its asset management decisions are
not made with any consideration of the fee a related local sub-
custodian may receive. Further, the auditor must review these policies
and procedures and test a representative sample of transactions
involving CSAG affiliates that serve as a local sub-custodian.
Request 2. CSAG Should be Permitted to Provide Support Services to
CS Affiliated QPAMs.
32. The Applicant notes that Section I(f) of the Second Final
Exemption may prevent CSAG from providing services supporting the
operations of the CS Affiliated QPAM, without cost to an ERISA-covered
plan or IRA (e.g., at the QPAM's own expense). These services include
necessary non-investment, non-fiduciary ``back-office'' or ``middle-
office'' administrative functions such as human resources, information
technology, finance, accounting, legal, compliance, treasury, and tax
services.
[[Page 33972]]
Currently, certain CS asset managers that do not manage ERISA money use
CSAG for these types of services.
33. The Applicant requests that Section I(d) of this proposed
exemption contain an exception which permits CSAG to provide the
services described above to CS Affiliated QPAMs.
Department's Response to Request that CSAG Be Permitted to Provide
Support Services to CS Affiliated QPAMs.
34. Section I(d) of this proposed exemption contains an exception
that permits CSAG to provide only necessary, non-investment-related and
non-fiduciary administrative services to CS Affiliated QPAMs, solely at
the QPAM's own expense. Given its misconduct, the Department is not
proposing that CSAG be allowed to provide services to investment funds
managed by CSAG. The auditor must make express findings regarding the
Applicant's compliance with this condition, and these findings must be
set forth in the written report.
Request 3. The Exemption Should Permit CS Employees To Be Seconded
to CS Affiliated QPAMs.
35. The Applicant states that, from time to time, employees from
other affiliates are ``seconded'' to a CS-affiliated asset manager.
Although these employees are paid by their home location, they are
fully subject to the authority, control, and supervision of the QPAM,
and to all of its rules, regulations, and restrictions. The Applicant
requests that, consistent with recent QPAM Section I(g) exemptive
relief for other convicted entities, the Department clarify that
Section I(d) of the proposed exemption will not be violated if
employees from other affiliates are ``seconded'' to a CS Affiliated
QPAM.
Department's Response to Request that the Exemption Permit CS
Employees To Be Seconded to CS Affiliated QPAMs.
36. Section I(d) of this proposed exemption contains an exception
allowing employees from CSAG affiliates to be seconded to a CS-
affiliated asset manager.
IV. The Audit Requirement.
37. The Applicant requested that, unlike the Second Final
Exemption, this proposed exemption not contain an annual audit
requirement. The Applicant states that the independent auditor found
the compliance environment of the CS Affiliated QPAMs to be compliant.
The Applicant states that over the last several audits, the auditor
made no suggestions for improving the compliance environment. The
Applicant represents that the audits have been detailed, comprehensive,
and exacting. For example, the auditor reviewed systems used by the
QPAMs to effect compliance, met in person and by phone several times
during each audit with operations personnel and others, reviewed
floorplans and physical information barriers, and discussed and
reviewed the CS Affiliated QPAMs' incident reports. In addition, the
auditor sampled and reviewed accounts and transactions, reviewed the
ERISA compliance manual, the proxy voting policy, the global error
handling policy, the performance fee policy, organizational charts,
information technology protocols to restrict access to electronic
systems based on user profiles, investment management agreements with
investment guidelines, various reports, including the training mandated
by the exemption, and the roster of employees trained. The auditor
matched guidelines to investment guidelines monitoring exception
reports, and noted that alerts or warnings were promptly addressed with
either an explanation or correction. Finally, the auditor reviewed the
trade blotters and systems to determine whether the transactions
complied with the prohibited transaction rules.
38. The Applicant states that over the course of four audits, the
independent auditor has thoroughly examined the CS Affiliated QPAMs'
ERISA compliance programs, and has not made any findings of
noncompliance with the Second Final Exemption (which requires
compliance with ERISA generally, including its prohibited transaction
and fiduciary responsibility provisions), PTE 84-14, or their internal
ERISA policies. To the contrary, the Applicant represents that the
independent auditor has found that the CS Affiliated QPAMs have: (a)
Updated and consolidated-their policies and procedures; (b) developed
and implemented ERISA training; and (c) complied with PTE 84-14, the
Second Final Exemption, and their internal ERISA policies. Thus, the
Applicant is of the view that these audits have demonstrated the CS
Affiliated QPAMs' comprehensive and robust ERISA compliance
environment.
39. The Applicant states that these factors demonstrate that the CS
Affiliated QPAMs had strong controls in place before the Second Final
Exemption was granted, which have improved since the exemption was
issued. The Applicant requests that the Department conclude that an
additional five years of exemptive relief is warranted for the CS
Affiliated QPAMs, and that the relief not be conditioned on an annual
audit.
Department's Response to Request for Removal of Annual Audit
Requirement.
40. The Department is not removing the Annual Audit Requirement.
The Conviction arose from serious, prolonged and widespread misconduct.
According to the Statement of Facts filed in the criminal case (the
Statement of Facts), for decades prior to and through approximately
2009, CSAG operated an illegal cross-border banking business that
knowingly and willfully aided and assisted thousands of U.S. clients in
opening and maintaining undeclared accounts \18\ concealing their
offshore assets and income from the IRS. Private bankers employed by
CSAG (referred to as ``Relationship Managers'' or ``RMs'') served as
the primary contact for U.S. clients with undeclared accounts at CSAG.
CSAG used a variety of means to assist U.S. clients in concealing their
undeclared accounts, including: (a) Assisting clients in using sham
entities as nominee beneficial owners of the undeclared accounts; (b)
soliciting IRS forms that falsely stated under penalty of perjury that
the sham entities beneficially owned the assets in the accounts; (c)
failing to maintain in the United States records related to the
accounts; (d) destroying account records sent to the United States for
client review; (e) using Credit Suisse managers and employees as
unregistered investment advisors on undeclared accounts; (f)
facilitating withdrawals of funds from undeclared accounts by either
providing hand-delivered cash in the United States or using Credit
Suisse's correspondent bank accounts in the United States; (g)
structuring transfers of funds to evade currency transaction reporting
requirements; and (h) providing offshore credit and debit cards to
repatriate funds in the undeclared accounts.
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\18\ An ``undeclared account'' is a financial account owned by
an individual subject to U.S. tax and maintained in a foreign
country that has not been reported by the individual account owner
to the U.S. government on an income tax return and a Report of
Foreign Bank and Financial Accounts. U.S. citizens, resident aliens,
and legal permanent residents have an obligation to report all
income earned from foreign bank accounts on their tax returns and to
pay the taxes due on that income.
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41. Given the above, the four annual audits of the CS Affiliated
QPAMs do not provide an adequate basis for the Department to determine
that asset managers controlled by CSAG should be allowed to engage in
prohibited transactions, unmonitored, over the next five years, using
an exemption that otherwise relies on an asset manager's integrity. The
five additional consecutive years of in-depth audits required by this
proposed exemption are essential to the Department's findings
[[Page 33973]]
that this proposed exemption will be protective of Covered Plans.
This Proposed Exemption's Audit Requirement
42. Section I(i) of this proposed five-year exemption requires that
each CS Affiliated QPAM submit to an audit conducted annually by an
independent auditor, who has been prudently selected and who has
appropriate technical training and proficiency with ERISA and the Code,
to evaluate the adequacy of, and the CS Affiliated QPAM's compliance
with, the Policies and Training described herein. The audit requirement
must be incorporated in the Policies. Each annual audit must cover a
consecutive twelve month period starting with the twelve month period
that begins on the effective date of the proposed five-year exemption,
and each annual audit must be completed no later than six (6) months
after the period to which the audit applies.
43. The audit condition requires that, to the extent necessary for
the auditor, in its sole opinion, to complete its audit and comply with
the conditions for relief described herein, and only to the extent such
disclosure is not prevented by state or federal statute, or involves
communications subject to attorney client privilege, each CS Affiliated
QPAM and, if applicable, CSAG, will grant the auditor unconditional
access to its business, including, but not limited to: Its computer
systems; business records; transactional data; workplace locations;
training materials; and personnel. This access is limited to
information that is relevant to the auditor's objectives, as specified
by the proposed exemption.
44. The auditor's engagement must specifically require the auditor
to determine whether each CS Affiliated QPAM has developed,
implemented, maintained and followed the Policies in accordance with
the conditions of this proposed five-year exemption, and has developed
and implemented the training, as required herein, and must further
require the auditor to test each CS Affiliated QPAM's operational
compliance with the Policies and Training. In this regard, the auditor
must test a sample of each CS Affiliated QPAM's transactions involving
Covered Plans, sufficient in size and nature to afford the auditor a
reasonable basis to determine the QPAM's operational compliance with
the Policies and Training.
45. For each audit, on or before the end of the relevant period
described in Section I(i)(1) for completing the audit, the auditor must
issue a written report (the Audit Report) to CSAG and the CS Affiliated
QPAM to which the audit applies that describes the procedures performed
by the auditor during the course of its examination. The auditor may
issue one consolidated Audit Report that covers all the CS Affiliated
QPAMs. The Audit Report must include the auditor's specific
determinations regarding: (a) The adequacy of the CS Affiliated QPAM's
Policies and Training; (b) the CS Affiliated QPAM's compliance with the
Policies and Training; (c) the need, if any, to strengthen such
Policies and Training; and (d) any instance of the respective CS
Affiliated QPAM's noncompliance with the written Policies and Training.
46. The CS Affiliated QPAM must promptly address or prepare a
written plan of action to address any determination as to the adequacy
of the Policies and Training and the auditor's recommendations (if any)
with respect to strengthening the Policies and Training of the
respective CS Affiliated QPAM, and any action taken or the plan of
action to be taken by the CS Affiliated QPAM must be included in an
addendum to the Audit Report (the addendum must be completed prior to
the certification described below). In the event a plan of action to
address the auditor's recommendation regarding the adequacy of the
Policies and Training is not completed by the time of submission of the
Audit Report, the following period's Audit Report must state whether
the plan was satisfactorily completed.
47. Any determination by the auditor that the respective CS
Affiliated QPAM has implemented, maintained, and followed sufficient
Policies and Training must not be based solely or in substantial part
on an absence of evidence indicating noncompliance. In this last
regard, any finding that the CS Affiliated QPAM has complied with the
requirements herein must be based on evidence that the particular CS
Affiliated QPAM has actually implemented, maintained and followed the
Policies and Training required by this proposed five-year exemption.
Furthermore, the auditor must not solely rely on the Annual Exemption
Report as the basis for the auditor's conclusions in lieu of
independent determinations and testing performed by the auditor.
Finally, the Audit Report must address the adequacy of the Annual
Exemption Review required under this proposed exemption.
48. Further, the auditor must notify the respective CS Affiliated
QPAM of any instance of noncompliance identified by the auditor within
five (5) business days after such noncompliance is identified by the
auditor, regardless of whether the audit has been completed as of that
date. In addition, this proposed five-year exemption requires that
certain senior personnel of CSAG review the Audit Report, make certain
certifications, and take various corrective actions. In this regard,
the General Counsel, or one of the three most senior executive officers
of the CS Affiliated QPAM to which the Audit Report applies, must
certify in writing, under penalty of perjury, that the officer has
reviewed the Audit Report and this proposed five-year exemption; and
that to the best of such officer's knowledge at the time the CS
Affiliated QPAM has: (a) Addressed, corrected, or remedied any
noncompliance and inadequacy or has an appropriate written plan to
address any inadequacy regarding the Policies and Training identified
in the Audit Report; and (b) determined that the Policies and Training
in effect at the time of signing are adequate to ensure compliance with
the conditions of this proposed five-year exemption and with the
applicable provisions of ERISA and the Code.
49. The Risk Committee, the Audit Committee, and CSAG's Board of
Directors are provided a copy of each Audit Report; and a senior
executive officer of CSAG's Compliance function must review the Audit
Report for each CS Affiliated QPAM and must certify in writing, under
penalty of perjury, that the officer has reviewed each Audit Report.
50. In order to create a more transparent record in the event that
the proposed relief is granted, each CS Affiliated QPAM must provide
its certified Audit Report to the Department no later than 30 days
following its completion. The Audit Report will be part of the public
record regarding this proposed five-year exemption. Furthermore, each
CS Affiliated QPAM must make its Audit Report unconditionally
available, electronically or otherwise, for examination upon request by
any duly authorized employee or representative of the Department, other
relevant regulators, and any fiduciary of a Covered Plan, the assets of
which are managed by such CS Affiliated QPAM.
51. Additionally, any engagement agreement entered into pursuant to
the engagement of the auditor under this proposed five-year exemption
must be submitted to the Department's Office of Exemption
Determinations (OED). Finally, if the proposed five-year exemption is
granted, the auditor must provide the Department, upon request, for
inspection and review, access to all of the workpapers created and used
in
[[Page 33974]]
connection with the audit, provided the access and inspection are
otherwise permitted by law.
52. In order to enhance oversight of the compliance with the
proposed exemption, CSG must notify the Department no later than two
(2) months after the engagement of a substitute or subsequent auditor,
and CSG must provide an explanation for the substitution or change
including a description of any material disputes between the terminated
auditor and CSG.
Statutory Findings
53. Section 408(a) of ERISA provides, in part, that the Department
may not grant an exemption unless the Department finds that the
exemption is administratively feasible, in the interest of affected
plans and of their participants and beneficiaries, and protective of
the rights of such participants and beneficiaries. These criteria are
discussed below.
a. ``Administratively Feasible.'' The Department has tentatively
determined that the proposal is administratively feasible since, among
other things, a qualified independent auditor will be required to
perform an in-depth audit covering, among other things, each CS
Affiliated QPAM's compliance with the proposed exemption, and a
corresponding written audit report will be provided to the Department
and available to the public. The independent audit will provide an
incentive for and measure of compliance, while reducing the immediate
need for review and oversight by the Department.
b. ``In the interest of.'' The Department has tentatively
determined that the proposed exemption is in the interests of the
participants and beneficiaries of each affected Covered Plan. It is the
Department's understanding, based on representations from the
Applicant, that if the requested exemption is denied, the CS Affiliated
QPAMs may be unable to effectively manage plan assets subject to ERISA
or the prohibited transaction provisions of the Code. The CS Affiliated
QPAMs state that this would cause client ERISA-covered plans to
question the prudence of retaining the CS Affiliated QPAMs as a manager
of choice, and client ERISA-covered plans could feel compelled to find
other managers who could manage their assets without having to either
forego transactions or rely on other more complex prohibited
transaction exemptions.
54. The CS Affiliated QPAMs have represented that if client ERISA-
covered plans were to move to new asset managers they could incur
transition costs including the costs associated with identifying an
asset manager (such as the costs and management time required in a
Request for Proposal process, consultant fees and other due diligence
expenses), brokerage and other transaction costs associated with the
sale of portfolio investments to accommodate the investment policies
and strategy of the new asset manager, the opportunity costs of holding
cash pending investment by the new asset manager, and lost investment
opportunities in connection with a change of asset managers. The CS
Affiliated QPAMs claim that losing the ability to use PTE 84-14 would
make it difficult, costly, and impracticable to enter into many
transactions that are in the best interests of client ERISA-covered
plans, reducing plan choices, especially among large institutional
financial banks.
55. The CS Affiliated QPAMs represent further that if the requested
exemption is not granted, client ERISA-covered plans may be effectively
prohibited from entering into certain transactions, either because no
other exemption is available or the counterparty is not willing to
enter into the transaction without the protections provided by PTE 84-
14. The CS Affiliated QPAMS state that these transactions would include
those not covered by other exemptions such as a purchase or sale from a
party in interest of a security without a readily ascertainable fair
market value. The CS Affiliated QPAMs claim that the loss of the
ability to utilize PTE 84-14 could significantly delay or even make
impossible transactions that would be beneficial for the ERISA-covered
plans because other statutory and class prohibited transaction
exemptions are not broad enough to cover such routine transactions
entered at the direction of the CS Affiliated QPAMs. The CS Affiliated
QPAMs also represent that counterparties could seek to terminate
contracts for certain outstanding transactions (including swaps) that
require the CS Affiliated QPAMs to represent that they are QPAMs and/or
utilize PTE 84-14 and additionally, pursuant to these contracts, swap
transactions with certain counterparties could automatically and
immediately be terminated without any notice or action of such
counterparties, even if other prohibited transaction exemptions are
available. The CS Affiliated QPAMs further claim that such a
termination could result in significant losses for the client ERISA-
covered plans that would be avoided if the proposed exemption were
granted.
c. ``Protective of.'' The Department has tentatively determined
that the exemption, as proposed, will be protective of the rights of
participants and beneficiaries of Covered Plans. As described above,
the proposed exemption is subject to a suite of conditions, including:
(a) The creation, maintenance and compliance with policies and
procedures (the Policies); (b) the implementation of and participation
in a comprehensive training program (the Training); (c) a robust annual
audit conducted by an independent auditor evaluating the CS Affiliated
QPAMs' operational compliance with the Policies and Training, to be
submitted to the Department and made available as part of the public
record; (d) the provision of certain agreements and warrants on the
part of the CS Affiliated QPAMs with respect to any arrangement,
agreement, or contract between a CS Affiliated QPAM and a Covered Plan
for which the CS Affiliated QPAM provides asset management or other
discretionary fiduciary services, including provisions requiring
compliance with ERISA and the Code, as well as indemnification of such
Covered Plans for any actual losses resulting directly from certain
enumerated actions by the CS Affiliated QPAM; (e) specific notice and
disclosure requirements with respect to the circumstances leading to
this proposed exemption and compliance with the proposed exemption; and
(f) the designation of a Compliance Officer responsible for compliance
with the Policies and Training requirements and the completion by the
Compliance Officer of an annual Exemption Review and corresponding
Exemption Report; and (g) the immediate disclosure by CSAG to the
Department of any Deferred Prosecution Agreement (a DPA) or Non-
Prosecution Agreement (an NPA) that CSAG or an affiliate enters into
with the U.S Department of Justice, to the extent such DPA or NPA in
connection with the conduct described in Section I(g) of PTE 84-14 or
section 411 of ERISA, and any additional information requested by the
Department in connection therewith.
Summary
56. Given the conditions described above, the Department has
tentatively determined that the five-year relief sought by the
Applicant satisfies the statutory requirements for an exemption under
section 408(a) of ERISA and section 4975(c)(2) of the Code.
Notice to Interested Persons
Notice of the proposed exemption will be provided to all interested
[[Page 33975]]
persons within fifteen (15) days of the publication of the notice of
proposed five-year exemption in the Federal Register. The notice will
be provided to all interested persons in the manner described in
Section I(k) of this proposed five-year exemption and will contain the
documents described therein and a supplemental statement, as required
pursuant to 29 CFR 2570.43(a)(2). The supplemental statement will
inform interested persons of their right to comment on and to request a
hearing with respect to the pending exemption. All written comments
and/or requests for a hearing must be received by the Department within
forty five (45) days of the date of publication of this proposed five-
year exemption in the Federal Register. All comments will be made
available to the public.
Warning: If you submit a comment, EBSA recommends that you
include your name and other contact information in the body of your
comment, but DO NOT submit information that you consider to be
confidential, or otherwise protected (such as Social Security number
or an unlisted phone number) or confidential business information
that you do not want publicly disclosed. All comments may be posted
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engines.
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/or 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/or 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, among other things, require a fiduciary
to discharge his duties respecting the plan solely in the interest 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 the
Act and/or section 4975(c)(2) of the Code, the Department must find
that the exemption is administratively feasible, in the interests of
the plan and of its participants and beneficiaries, and protective of
the rights of participants and beneficiaries of the plan;
(3) The proposed exemption, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act and/or 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; and
(4) The proposed exemption, if granted, will be subject to the
express condition that the material facts and representations contained
in each application are true and complete, and that each application
accurately describes all material terms of the transaction which is the
subject of the exemption.
Proposed Five-Year Exemption
The Department is considering granting a five-year exemption under
the authority of section 408(a) of the Employee Retirement Income
Security Act of 1974, as amended (ERISA), and section 4975(c)(2) of the
Internal Revenue Code of 1986, as amended (the Code), and in accordance
with the procedures set forth in 29 CFR part 2570, subpart B (76 FR
66637, 66644, October 27, 2011).\19\
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\19\ For purposes of this proposed five-year exemption,
references to section 406 of Title I of ERISA, unless otherwise
specified, should be read to refer as well to the corresponding
provisions of section 4975 of the Code.
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Section I. Covered Transactions
If the proposed five-year exemption is granted, the CS Affiliated
QPAMs, as further defined in Section II(d), will not be precluded from
relying on the exemptive relief provided by Prohibited Transaction
Exemption 84-14 (PTE 84-14),\20\ notwithstanding the ``Conviction''
against CSAG (as further defined in Section II(a)),\21\ during the
Exemption Period, provided that the following conditions are satisfied:
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\20\ 49 FR 9494 (March 13, 1984), as corrected at 50 FR 41430
(October 10, 1985), as amended at 70 FR 49305 (August 23, 2005), and
as amended at 75 FR 38837 (July 6, 2010).
\21\ Section I(g) of PTE 84-14 generally provides that
``[n]either the QPAM nor any affiliate thereof . . . nor any owner .
. . of a 5 percent or more interest in the QPAM is a person who
within the 10 years immediately preceding the transaction has been
either convicted or released from imprisonment, whichever is later,
as a result of'' certain criminal activity therein described.
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(a) The CS Affiliated QPAMs and the CS Related QPAMs (including
their officers, directors, agents other than CSAG, employees of such
QPAMs, and CSAG employees described in subparagraph (d) below) did not
know of, have reason to know of, or participate in the criminal conduct
of CSAG that is the subject of the Conviction. For purposes of this
exemption, including paragraph (c) below, ``participate in'' refers not
only to active participation in the criminal conduct of CSAG that is
the subject of the Conviction, but also to knowing approval of the
criminal conduct, or knowledge of such conduct without taking active
steps to prohibit such conduct, including reporting the conduct to such
individual's supervisors, and to the Board of Directors. In this
regard, unless the individual reasonably believed that his or her
initial report was given an appropriate response within a reasonable
time, the individual must further report the criminal conduct to the
person or persons the individual reasonably expected would carry out
the appropriate response.
(b) The CS Affiliated QPAMs and the CS Related QPAMs (including
their officers, directors, agents other than CSAG, employees of such
QPAMs, and CSAG employees described in subparagraph (d) below) did not
receive direct compensation, or knowingly receive indirect
compensation, in connection with the criminal conduct of CSAG that is
the subject of the Conviction;
(c) The CS Affiliated QPAMs will not employ or knowingly engage any
of the individuals that ``participated in'' the criminal conduct of
CSAG that is the subject of the Conviction;
(d) At all times during the Exemption Period, a CS Affiliated QPAM
will not use its authority or influence to direct an ``investment
fund'' (as defined in Section VI(b) of PTE 84-14) that is subject to
ERISA or the Code and managed by such CS Affiliated QPAM with respect
to one or more Covered Plans, to enter into any transaction with CSAG
or to engage CSAG to provide any service to such investment fund, for a
direct or indirect fee borne by such investment fund, regardless of
whether such transaction or service may otherwise be within the scope
of relief provided by an administrative or statutory exemption. A CS
Affiliated QPAM will not fail this condition solely because:
(1) A CSAG affiliate serves as a local sub-custodian that is
selected by an unaffiliated global custodian that, in turn, is selected
by someone other than a CS Affiliated QPAM or CS Related QPAM;
(2) CSAG provides only necessary, non-investment, non-fiduciary
services that support the operations of CS Affiliated QPAMs, at the CS
Affiliated QPAM's own expense, and the Covered Plan is not required to
pay any
[[Page 33976]]
additional fee beyond its agreed-to asset management fee. This
exception does not permit CSAG or its branches to provide any service
to an investment fund managed by a CS Affiliated QPAM or CS Related
QPAM; or
(3) CSAG employees are double-hatted, seconded, supervised, or
subject to the control of a CS Affiliated QPAM;
(e) Any failure of a CS Affiliated QPAM to satisfy Section I(g) of
PTE 84-14 arose solely from the Conviction;
(f) A CS Affiliated QPAM or a CS Related QPAM did not exercise
authority over the assets of any plan subject to Part 4 of Title I of
ERISA (an ERISA-covered plan) or section 4975 of the Code (an IRA) in a
manner that it knew or should have known would: Further criminal
conduct that is the subject of the Conviction; or cause the CS
Affiliated QPAM or CS Related QPAM, its affiliates, or related parties
to directly or indirectly profit from the criminal conduct that is the
subject of the Conviction;
(g) CSAG will not act as a fiduciary within the meaning of section
3(21)(A)(i) or (iii) of ERISA, or section 4975(e)(3)(A) and (C) of the
Code, with respect to ERISA-covered Plan and IRA assets, except it may
act as such a fiduciary (1) with respect to employee benefit plans
sponsored for its own employees or employees of an affiliate; or (2) in
connection with securities lending services of the New York Branch of
CSAG. CSAG will not be treated as violating the conditions of the
exemption solely because it acted as an investment advice fiduciary
within the meaning of section 3(21)(A)(ii) or section 4975(e)(3)(B) of
the Code;
(h)(1) Each CS Affiliated QPAM must continue to maintain, adjust
(to the extent necessary) or immediately implement and follow written
policies and procedures (the Policies). The Policies must require and
be reasonably designed to ensure that:
(i) The asset management decisions of the CS Affiliated QPAMs are
conducted independently of CSAG's corporate management and business
activities, and without considering any fee a CS-related local sub-
custodian may receive from those decisions. This condition does not
preclude a CS Affiliated QPAM from receiving publicly available
research and other widely available information from a CSAG affiliate;
(ii) The CS Affiliated QPAM fully complies with ERISA's fiduciary
duties, and with ERISA and the Code's prohibited transaction
provisions, in each case, as applicable, with respect to each Covered
Plan, and does not knowingly participate in any violation of these
duties and provisions with respect to Covered Plans;
(iii) The CS Affiliated QPAM does not knowingly participate in any
other person's violation of ERISA or the Code with respect to Covered
Plans;
(iv) Any filings or statements made by the CS Affiliated QPAM to
regulators, including but not limited to, the Department of Labor, the
Department of the Treasury, the Department of Justice, and the Pension
Benefit Guaranty Corporation, on behalf of, or in relation to Covered
Plans are materially accurate and complete, to the best of such QPAM's
knowledge at that time;
(v) To the best of its knowledge at the time, the CS Affiliated
QPAM does not make material misrepresentations or omit material
information in its communications with such regulators with respect to
Covered Plans, or make material misrepresentations or omit material
information in its communications with Covered Plans; and
(vi) The CS Affiliated QPAM complies with the terms of this five-
year exemption, and CSAG complies with the terms of Section I(d)(2);
(2) Any violation of, or failure to comply with, an item in
subparagraphs (h)(1)(ii) through (vi) of this section, is corrected as
soon as reasonably possible upon discovery, or as soon after the QPAM
reasonably should have known of the noncompliance (whichever is
earlier), and any such violation or compliance failure not so corrected
is reported, upon discovery of such failure to so correct, in writing,
to appropriate corporate officers, the head of Compliance and the
General Counsel (or their functional equivalent) of the relevant CS
Affiliated QPAM, and the independent auditor responsible for reviewing
compliance with the Policies. A CS Affiliated QPAM will not be treated
as having failed to develop, implement, maintain, or follow the
Policies, provided that it corrects any instance of noncompliance as
soon as reasonably possible upon discovery, or as soon as reasonably
possible after the QPAM reasonably should have known of the
noncompliance (whichever is earlier), and provided that it adheres to
the reporting requirements set forth in this paragraph (2);
(3) Each CS Affiliated QPAM must maintain, adjust (to the extent
necessary), and implement a program of training (the Training),
conducted at least annually, for all relevant CS Affiliated QPAM asset/
portfolio management, trading, legal, compliance, and internal audit
personnel. The Training must:
(i) At a minimum, cover the Policies, ERISA and Code compliance
(including applicable fiduciary duties and the prohibited transaction
provisions), ethical conduct, the consequences for not complying with
the conditions of this five-year exemption (including any loss of
exemptive relief provided herein), and prompt reporting of wrongdoing;
and
(ii) Be conducted by a professional who has been prudently selected
and who has appropriate technical training and proficiency with ERISA
and the Code;
(i)(1) Each CS Affiliated QPAM submits to three audits, conducted
by an independent auditor, who has been prudently selected and who has
appropriate technical training and proficiency with ERISA and the Code,
to evaluate the adequacy of, and each CS Affiliated QPAM's compliance
with, the Policies and Training described herein. The audit requirement
must be incorporated in the Policies. The first audit must cover the 24
month period that begins on November 21, 2019. The second audit must
cover the 24 month period that begins on November 21, 2021, and the
third audit must cover the 12 month period that begins on November 21,
2023. Each audit must be completed no later than six (6) months after
the period to which the audit applies; \22\
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\22\ Periods prior to November 21, 2019 must be audited
consistent with PTE 2015-14.
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(2) Within the scope of the audit and to the extent necessary for
the auditor, in its sole opinion, to complete its audit and comply with
the conditions for relief described herein, and only to the extent such
disclosure is not prevented by state or federal statute, or involves
communications subject to attorney client privilege, each CS Affiliated
QPAM and, if applicable, CSAG, will grant the auditor unconditional
access to its business, including, but not limited to: Its computer
systems; business records; transactional data; workplace locations;
training materials; and personnel. Such access is limited to
information relevant to the auditor's objectives, as specified by the
terms of this exemption;
(3) The auditor's engagement must specifically require the auditor
to determine whether each CS Affiliated QPAM has developed,
implemented, maintained, and followed the Policies in accordance with
the conditions of this five-year exemption, and has developed and
implemented the Training, as required herein;
(4) The auditor's engagement must specifically require the auditor
to test
[[Page 33977]]
each CS Affiliated QPAM's operational compliance with the Policies and
Training. In this regard, the auditor must test a sample of: (1) Each
CS Affiliated QPAM's transactions involving Covered Plans; (2) each CS
Affiliated QPAM's transactions involving CSAG affiliates that serve as
a local sub-custodian. The samples must be sufficient in size and
nature to afford the auditor a reasonable basis to determine the QPAM's
operational compliance with the Policies and Training;
(5) For each audit, on or before the end of the relevant period
described in Section I(i)(1) for completing the audit, the auditor must
issue a written report (the Audit Report) to CSAG and the CS Affiliated
QPAMs to which the audit applies that describes the procedures
performed by the auditor during the course of its examination. The
auditor, at its discretion, may issue a single consolidated Audit
Report that covers all the CS Affiliated QPAMs. The Audit Report must
include the auditor's specific determinations regarding:
(i) The adequacy of the CS Affiliated QPAM's Policies and Training;
the CS Affiliated QPAM's compliance with the Policies and Training; the
need, if any, to strengthen such Policies and Training; and any
instance of the respective CS Affiliated QPAM's noncompliance with the
written Policies and Training described in Section I(h) above. The CS
Affiliated QPAMs must promptly address any noncompliance. The CS
Affiliated QPAM must promptly address or prepare a written plan of
action to address any determination as to the adequacy of the Policies
and Training and the auditor's recommendations (if any) with respect to
strengthening the Policies and Training of the respective CS Affiliated
QPAM. Any action taken or the plan of action to be taken by the
respective CS Affiliated QPAM must be included in an addendum to the
Audit Report (such addendum must be completed prior to the
certification described in Section I(i)(7) below). In the event such a
plan of action to address the auditor's recommendation regarding the
adequacy of the Policies and Training is not completed by the time of
submission of the Audit Report, the following period's Audit Report
must state whether the plan was satisfactorily completed. Any
determination by the auditor that the respective CS Affiliated QPAM has
implemented, maintained, and followed sufficient Policies and Training
must not be based solely or in substantial part on an absence of
evidence indicating noncompliance. In this last regard, any finding
that a CS Affiliated QPAM has complied with the requirements under this
subparagraph must be based on evidence that the particular CS
Affiliated QPAM has actually implemented, maintained, and followed the
Policies and Training required by this exemption. Furthermore, the
auditor must not solely rely on the Exemption Report created by the
compliance officer (the Compliance Officer), as described in Section
I(m) below, as the basis for the auditor's conclusions in lieu of
independent determinations and testing performed by the auditor as
required by Section I(i)(3) and (4) above; and
(ii) The adequacy of the Exemption Review described in Section
I(m);
(6) The auditor must notify the respective CS Affiliated QPAMs of
any instance of noncompliance identified by the auditor within five (5)
business days after such noncompliance is identified by the auditor,
regardless of whether the audit has been completed as of that date;
(7) With respect to each Audit Report, the General Counsel, or one
of the three most senior executive officers of the CS Affiliated QPAMs
to which the Audit Report applies, must certify in writing, under
penalty of perjury, that the officer has reviewed the Audit Report and
this five-year exemption; that to the best of such officer's knowledge
at the time the CS Affiliated QPAM addressed, corrected, or remedied
any noncompliance and inadequacy or has an appropriate written plan to
address any inadequacy regarding the Policies and Training identified
in the Audit Report. Such certification must also include the
signatory's determination that, to the best of the officer's knowledge
at the time, the Policies and Training in effect at the time of signing
are adequate to ensure compliance with the conditions of this exemption
and the applicable provisions of ERISA and the Code;
(8) The Risk Committee, the Audit Committee, and CSAG's Board of
Directors are provided a copy of each Audit Report; and the head of
Compliance and the General Counsel must review the Audit Report for
each CS Affiliated QPAM and must certify in writing, under penalty of
perjury, that such officer has reviewed each Audit Report;
(9) Each CS Affiliated QPAM must provide its certified Audit
Report, by regular mail to: The Department's Office of Exemption
Determinations (OED), 200 Constitution Avenue NW, Suite 400, Washington
DC 20210, or by private carrier to: 122 C Street NW, Suite 400,
Washington, DC 20001-2109. The delivery must take place no more than 30
days following the completion of the Audit Report. The Audit Report
will be part of the public record regarding this five-year exemption.
Furthermore, each CS Affiliated QPAM must make its Audit Report
unconditionally available, electronically or otherwise, for examination
upon request by any duly authorized employee or representative of the
Department, other relevant regulators, and any fiduciary of a Covered
Plan;
(10) Any engagement agreement with an auditor to perform the audit
required by this exemption must be submitted to OED no later than two
(2) months after the execution of the engagement agreement;
(11) The auditor must provide the Department, upon request, for
inspection and review, access to all of the workpapers created and used
in connection with the audit, provided the access and inspection are
otherwise permitted by law; and
(12) CSG must notify the Department of a change in the independent
auditor no later than two (2) months after the engagement of a
substitute or subsequent auditor and must provide an explanation for
the substitution or change including a description of any material
disputes between the terminated auditor and CSAG;
(j) As of the effective date of this five-year exemption, with
respect to any arrangement, agreement, or contract between a CS
Affiliated QPAM and a Covered Plan, each CS Affiliated QPAM agrees and
warrants to Covered Plans:
(1) To comply with ERISA and the Code, as applicable with respect
to the Covered Plan; to refrain from engaging in prohibited
transactions that are not otherwise exempt (and to promptly correct any
inadvertent prohibited transactions); and to comply with the standards
of prudence and loyalty set forth in section 404 of ERISA with respect
to each such ERISA-covered plan and IRA to the extent that section 404
is applicable;
(2) To indemnify and hold harmless the Covered Plan for any actual
losses resulting directly from a CS Affiliated QPAM's violation of
ERISA's fiduciary duties, as applicable, and of the prohibited
transaction provisions of ERISA and the Code, as applicable; a breach
of contract by a CS Affiliated QPAM or any claim arising out of the
failure of such CS Affiliated QPAMs to qualify for the exemptive relief
provided by PTE 84-14 as a result of a violation of Section I(g) of PTE
84-14 other than the Conviction. This condition only applies to actual
losses caused by the CS Affiliated QPAM's violations;
[[Page 33978]]
(3) Not to require (or otherwise cause) the Covered Plan to waive,
limit, or qualify the liability of the CS Affiliated QPAM for violating
ERISA or the Code or engaging in prohibited transactions;
(4) Not to restrict the ability of the Covered Plan to terminate or
withdraw from its arrangement with the CS Affiliated QPAM, with respect
to any investment in a separately-managed account or pooled fund
subject to ERISA and managed by such QPAM, with the exception of
reasonable restrictions, appropriately disclosed in advance, that are
specifically designed to ensure equitable treatment of all investors in
a pooled fund in the event such withdrawal or termination may have
adverse consequences for all other investors. In connection with any
such arrangement involving investments in pooled funds subject to ERISA
entered into after the effective date of this exemption, the adverse
consequences must relate to a lack of liquidity of the underlying
assets, valuation issues, or regulatory reasons that prevent the fund
from promptly redeeming an ERISA-covered plan's or IRA's investment,
and such restrictions must be applicable to all such investors and
effective no longer than reasonably necessary to avoid the adverse
consequences;
(5) Not to impose any fees, penalties, or charges for such
termination or withdrawal with the exception of reasonable fees,
appropriately disclosed in advance, that are specifically designed to
prevent generally-recognized abusive investment practices or
specifically designed to ensure equitable treatment of all investors in
a pooled fund in the event such withdrawal or termination may have
adverse consequences for all other investors, provided that such fees
are applied consistently and in like manner to all such investors;
(6) Not to include exculpatory provisions disclaiming or otherwise
limiting liability of the CS Affiliated QPAMs for a violation of the
agreement's terms. To the extent consistent with section 410 of ERISA,
however, this provision does not prohibit disclaimers for liability
caused by an error, misrepresentation, or misconduct of a plan
fiduciary or other party hired by the plan fiduciary who is independent
of CSAG and its affiliates, or damages arising outside the control of
the CS Affiliated QPAM; and
(7) Within four (4) months of the effective date of this five-year
exemption, each CS Affiliated QPAM must provide a notice of its
obligations under this Section I(j) to each Covered Plan. For Covered
Plans that enter into a written asset or investment management
agreement with a CS Affiliated QPAM on or after November 21, 2019, the
CS Affiliated QPAM must agree to its obligations under this Section
I(j) in an updated investment management agreement between the CS
Affiliated QPAM and such clients or other written contractual
agreement. Notwithstanding the above, a CS Affiliated QPAM will not
violate the condition solely because a Covered Plan refuses to sign an
updated investment management agreement. This condition will be deemed
met for each Covered Plan that received a notice pursuant to PTE 2015-
14 that meets the terms of this condition.
(k) Notice to Covered Plan Clients. Each CS Affiliated QPAM
provides a notice of the five-year exemption, along with a separate
summary describing the facts that led to the Conviction (the Summary),
which have been submitted to the Department, and a prominently
displayed statement (the Statement) that the Conviction results in a
failure to meet a condition in PTE 84-14, to each sponsor and
beneficial owner of a Covered Plan that entered into a written asset or
investment management agreement with a CS Affiliated QPAM, or the
sponsor of an investment fund in any case where a CS Affiliated QPAM
acts as a sub-adviser to the investment fund in which such ERISA-
covered plan and IRA invests. The notice, Summary and Statement must be
provided prior to, or contemporaneously with, the client's receipt of a
written asset management agreement from the CS Affiliated QPAM. If this
five-year exemption is granted, the clients must receive a Federal
Register copy of the notice of final five-year exemption within sixty
(60) days of its publication in the Federal Register. The notice may be
delivered electronically (including by an email that has a link to the
five-year exemption).
(l) The CS Affiliated QPAM must comply with each condition of PTE
84-14, as amended, with the sole exception of the violation of Section
I(g) of PTE 84-14 that is attributable to the Conviction. If, during
the Exemption Period, an entity within the Credit Suisse corporate
structure is convicted of a crime described in Section I(g) of PTE 84-
14, (other than the Conviction), including a conviction in a foreign
jurisdiction for a crime described in Section I(g) of PTE 84-14, relief
in this exemption would terminate immediately;
(m)(1) By May 20, 2020, CSAG designates a senior compliance officer
(the Compliance Officer) who will be responsible for compliance with
the Policies and Training requirements described herein. The Compliance
Officer must conduct an annual review for each twelve month period,
beginning on November 21, 2019, (the Annual Review) to determine the
adequacy and effectiveness of the implementation of the Policies and
Training. With respect to the Compliance Officer, the following
conditions must be met:
(i) The Compliance Officer must be a professional who has extensive
experience with, and knowledge of, the regulation of financial services
and products, including under ERISA and the Code; and
(ii) The Compliance Officer must have a direct reporting line to
the highest ranking corporate officer in charge of compliance for asset
management;
(2) With respect to each Annual Exemption Review, the following
conditions must be met:
(i) The Annual Exemption Review includes a review of the CS
Affiliated QPAMs compliance with and effectiveness of the Policies and
Training and of the following: Any compliance matter related to the
Policies or Training that was identified by, or reported to, the
Compliance Officer or others within the compliance and risk control
function (or its equivalent) during the previous year; the most recent
audit report issued pursuant to this exemption or PTE 2015-14; any
material change in the relevant business activities of the CS
Affiliated QPAMs; and any change to ERISA, the Code, or regulations
related to fiduciary duties and the prohibited transaction provisions
that may be applicable to the activities of the CS Affiliated QPAMs;
(ii) The Compliance Officer prepares a written report for each
Annual Exemption Review (each, an Annual Exemption Report) that (A)
summarizes his or her material activities during the preceding year;
(B) sets forth any instance of noncompliance discovered during the
preceding year, and any related corrective action; (C) details any
change to the Policies or Training to guard against any similar
instance of noncompliance occurring again; and (D) makes
recommendations, as necessary, for additional training, procedures,
monitoring, or additional and/or changed processes or systems, and
management's actions on such recommendations;
(iii) In each Annual Exemption Report, the Compliance Officer must
certify in writing that to the best of his or her knowledge at the
time: (A) The report is accurate; (B) the Policies and Training are
working in a manner which is reasonably designed to ensure that the
Policies and Training requirements
[[Page 33979]]
described herein are met; (C) any known instance of noncompliance
during the preceding year and any related correction taken to date have
been identified in the Annual Exemption Report; and (D) the CS
Affiliated QPAMs have complied with the Policies and Training, and/or
corrected (or are correcting) any known instances of noncompliance in
accordance with Section I(h) above;
(iv) Each Annual Exemption Report must be provided to appropriate
corporate officers of CSAG and each CS Affiliated QPAM to which such
report relates; the head of Compliance and the General Counsel (or
their functional equivalent) of the relevant CS Affiliated QPAM; and
must be made unconditionally available to the independent auditor
described in Section I(i) above;
(v) Each Annual Exemption Review, including the Compliance
Officer's written Annual Report, must be completed within three (3)
months following the end of the period to which it relates;
(n) Each CS Affiliated QPAM will maintain records necessary to
demonstrate that the conditions of this five-year exemption have been
met, for six (6) years following the date of any transaction for which
the CS Affiliated QPAM relies upon the relief in the five-year
exemption;
(o) During the Exemption Period, CSAG: (1) Immediately discloses to
the Department any Deferred Prosecution Agreement (a DPA) or Non-
Prosecution Agreement (an NPA) that Credit Suisse Group AG or CSAG or
any affiliate (as defined in Section VI(d) of PTE 84-14) enters into
with the U.S Department of Justice, to the extent such DPA or NPA
relates to the conduct described in Section I(g) of PTE 84-14 or
section 411 of ERISA; and (2) immediately provides the Department any
information requested by the Department, as permitted by law, regarding
the agreement and/or the conduct and allegations that led to the
agreement;
(p) Within 60 days of the effective date of the five-year
exemption, each CS Affiliated QPAM, in its agreements with, or in other
written disclosures provided to Covered Plans, will clearly and
prominently inform Covered Plan clients of their right to obtain a copy
of the Policies or a description (Summary Policies) which accurately
summarizes key components of the CS Affiliated QPAM's written Policies
developed in connection with this exemption. If the Policies are
thereafter changed, each Covered Plan client must receive a new
disclosure within six (6) months following the end of the calendar year
during which the Policies were changed.\23\ With respect to this
requirement, the description may be continuously maintained on a
website, provided that such website link to the Policies or Summary
Policies is clearly and prominently disclosed to each Covered Plan; and
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\23\ In the event the Applicant meets this disclosure
requirement through Summary Policies, changes to the Policies shall
not result in the requirement for a new disclosure unless, as a
result of changes to the Policies, the Summary Policies are no
longer accurate.
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(q) A CS Affiliated QPAM will not fail to meet the terms of this
five-year exemption, solely because a different CS Affiliated QPAM
fails to satisfy a condition for relief under this five-year exemption
described in Sections I(c), (d), (h), (i), (j), (k), (l), (n), and (p);
or, if the independent auditor described in Section I(i) fails a
provision of the exemption other than the requirement described in
Section I(i)(11), provided that such failure did not result from any
actions or inactions of CSAG or its affiliates.
Section II. Definitions
(a) The term ``Conviction'' means the judgment of conviction
against CSAG for one count of conspiracy to violate section 7206(2) of
the Internal Revenue Code in violation of Title 18, United States Code,
Section 371, that was entered in the District Court for the Eastern
District of Virginia in Case Number 1:14-cr-188-RBS, on November 21,
2014.
(b) The term ``Covered Plan'' means a plan subject to Part 4 of
Title I of ERISA (an ``ERISA-covered plan'') or a plan subject to
section 4975 of the Code (an ``IRA''), in each case, with respect to
which a CS Affiliated QPAM relies on PTE 84-14, or with respect to
which a CS Affiliated QPAM (or any CSAG affiliate) has expressly
represented that the manager qualifies as a QPAM or relies on the QPAM
class exemption (PTE 84-14). A Covered Plan does not include an ERISA-
covered plan or IRA to the extent the CS Affiliated QPAM has expressly
disclaimed reliance on QPAM status or PTE 84-14 in entering into a
contract, arrangement, or agreement with the ERISA-covered plan or IRA.
(c) The term ``CSAG'' means Credit Suisse AG.
(d) The term ``CS Affiliated QPAM'' means a ``qualified
professional asset manager'' (as defined in Section VI(a) of PTE 84-14)
that relies on the relief provided by PTE 84-14 and with respect to
which CSAG is a current or future ``affiliate'' (as defined in Section
VI(d) of PTE 84-14), but is not a CS Related QPAM. The term ``CS
Affiliated QPAM'' excludes the parent entity, CSAG.
(e) The term ``CS Related QPAM'' means any current or future
``qualified professional asset manager'' (as defined in Section VI(a)
of PTE 84-14) that relies on the relief provided by PTE 84-14, and with
respect to which CSAG owns a direct or indirect five (5) percent or
more interest, but with respect to which CSAG is not an ``affiliate''
(as defined in section VI(d)(1) of PTE 84-14).
(f) The term ``Exemption Period'' means the period from November
21, 2019 through November 20, 2024.
Effective Date: If granted, this proposed five-year exemption will
be in effect for five years beginning on the expiration of PTE 2015-14.
FOR FURTHER INFORMATION CONTACT: Mrs. Blessed Chuksorji-Keefe of the
Department, telephone (202) 693-8567. (This is not a toll-free number.)
Signed at Washington, DC, this 10th day of July, 2019.
Lyssa E. Hall,
Director, Office of Exemption Determinations, Employee Benefits
Security Administration, U.S. Department of Labor.
[FR Doc. 2019-15069 Filed 7-15-19; 8:45 am]
BILLING CODE 4510-29-P