Class Exemption Relating to Certain Employee Benefit Plan Foreign Exchange Transactions

DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

[Prohibited Transaction Exemption 94-20; Application Number D-5700]

Class Exemption Relating to Certain Employee Benefit Plan Foreign

Exchange Transactions

AGENCY: Pension and Welfare Benefits Administration, Labor.

ACTION: Grant of Class Exemption.

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SUMMARY: This document contains a final exemption from certain

prohibited transaction restrictions of the Employee Retirement Income

Security Act of 1974 (the Act) and from certain taxes imposed by the

Internal Revenue Code of 1986 (the Code). The class exemption permits

the purchase and sale of foreign currencies between an employee benefit

plan and a bank or a broker-dealer or an affiliate thereof which is a

party in interest with respect to such plan.

The exemption affects participants and beneficiaries of employee

benefit plans involved in such transactions, as well as banks and

broker-dealers and their affiliates which act as dealers in foreign

exchange.

EFFECTIVE DATE: Section I(a) of PTE 94-20 is effective for transactions

occurring from January 1, 1975 to June 18, 1991. Section I(b) of PTE

94-20 is effective for transactions occurring on or after June 18,

1991.

FOR FURTHER INFORMATION CONTACT: Ms. Lyssa Hall, Pension and Welfare

Benefits Administration, Office of Exemption Determinations, U.S.

Department of Labor, Washington, DC 20210, (202) 219-8971 (not a toll-

free number) or Susan Rees, Plan Benefits Security Division, Office of

the Solicitor, (202) 219-9141 (not a toll-free number).

SUPPLEMENTARY INFORMATION: Exemptive relief for the transactions

described herein, as well as for other transactions not covered by the

proposed exemption, was requested in an application dated July 18, 1984

(Application No. D-5700) submitted by the American Bankers Association

(ABA) pursuant to section 408(a) of ERISA and in accordance with the

procedures set forth in ERISA Procedure 75-1 (40 FR 18471, April 28,

1975).

In a letter to the ABA dated December 28, 1984, the Department of

Labor (the Department) tentatively denied the application. By letter

dated June 21, 1985, the ABA modified its application in response to

the Department's tentative denial, explaining that it was no longer

seeking exemptive relief for foreign exchange transactions between

banks and plans where the banks or their affiliates have investment

management discretion over the plan assets involved in the

transactions. On September 15, 1986, the Department published a notice

in the Federal Register (51 FR 32695), requesting additional

information from the public on various issues being considered by the

Department in deciding whether to propose a foreign exchange class

exemption in response to the ABA application. The comment period ended

on February 24, 1987. Seventeen substantive responses to the

solicitation of comments were received.1

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\1\For a discussion of those comments, see the proposed

exemption at 56 FR 11761 (March 20, 1991).

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On March 20, 1991, the Department published a notice in the Federal

Register (56 FR 11757) of the pendency of a proposed class exemption

from the restrictions of section 406(a)(1) (A) through (D) of the Act

and from the taxes imposed by section 4975 (a) and (b) of the Code by

reason of certain transactions described in section 4975(c)(1) (A)

through (D) of the Code. The notice of pendency invited all interested

persons to submit written comments concerning the proposed class

exemption by May 20, 1991. The Department received nine public comments

requesting, among other things, that the Department broaden the scope

of the exemption to provide relief for transactions entered into

pursuant to standing instructions. In view of those comments, the

Department published a notice of public hearing in the Federal Register

(56 FR 46806 (September 16, 1991)). The hearing was held on October 3,

1991. Upon consideration of all of the comments received and testimony

offered at the public hearing, the Department has determined to grant

the proposed class exemption, subject to certain modifications. These

modifications and the major comments are discussed below.

Discussion of the Comments

The proposed exemption provided retroactive and prospective relief

from section 406(a)(1) (A) through (D) of the Act and section

4975(c)(1) (A) through (D) of the Code for foreign exchange

transactions between a party in interest bank or affiliate thereof and

an employee benefit plan.

One commentator urged the Department to expand the final exemption

to permit broker-dealers who are registered under the Securities Act of

1934 (1934 Act) and their affiliates to engage in foreign exchange

transactions with plans. According to this commentator, the same

reasons for granting the exemption to banks apply with equal force to

broker-dealers and their affiliates. Broker-dealers act as custodians

and provide other services to plans which cause them to be parties in

interest as defined in section 3(14) of the Act. In addition, broker-

dealers may also participate in foreign exchange transactions.

Accordingly, absent the availability of an exemption, many major money

market broker-dealers and their affiliates might not be able to deal

with plans with respect to foreign exchange transactions. The

commentator also asserts that in order for the ``general'' arm's length

test contained in the exemption to work effectively, the exemption must

include significant participants in the foreign exchange market.

Finally, the commentator notes that broker-dealers which are registered

under the 1934 Act are subject to extensive regulatory control

consisting of a panoply of federal, self-regulatory organization and

state regulations and supervisory structures. The Department has

considered this comment and determined that it would be appropriate to

include broker-dealers which are registered under the 1934 Act and

their affiliates within the scope of relief provided by the final class

exemption. Accordingly, the final exemption has been modified in this

regard.

One commentator requested that the exemption be expanded to provide

relief for individual retirement accounts (IRAs) and Keogh plans which

are not employee benefit plans covered by title I of the Act.2 The

Department does not believe that a sufficient showing has been made

regarding the demand for exemptive relief for non-title I IRAs and

Keogh Plans. Therefore, the Department is unable to conclude that the

final exemption should be expanded as requested.

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\2\29 CFR 2510.3-2(d) explains that IRAs described in section

408(a) of the Code will not be considered pension plans subject to

title I of ERISA, provided that: (1) no contributions to the plan

are made by the employer or employee association; (2) participation

is completely voluntary for employees or members; (3) the sole

involvement of the employer or employee organization is without

endorsement to permit the sponsor to publicize the program, to

collect contributions on behalf of the sponsor through payroll

deductions or dues checkoffs and to remit them to the sponsor; and

(4) the employer or employee organization receives no consideration

in the form of cash or otherwise, other than reasonable compensation

for services actually rendered in connection with payroll deductions

or dues checkoffs.

29 CFR 2510.3-3(b) explains that for purposes of title I of

ERISA, ``employee benefit plan'' shall not include a Keogh Plan

under which no employees are covered under the plan. In this regard,

29 CFR 2510.3-3(c) states that for purposes of the above referenced

section: (1) an individual and his or her spouse shall not be deemed

to be employees with respect to a trade or business, whether

incorporated or unincorporated, which is wholly owned by the

individual or by the individual and his or her spouse; and (2) a

partner in a partnership and his or her spouse shall not be deemed

to be employees with respect to the partnership.

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The proposed exemption contained a condition requiring that the

bank maintain written policies and procedures regarding the handling of

foreign exchange transactions with plans which assure that the person

acting for the bank knows that he or she is dealing with a plan.

One commentator expressed concern that requiring the person acting

for the bank to know that he or she is dealing with an ERISA plan will

require the institution of new procedures at foreign exchange desks

which will increase the cost of transactions for ERISA plans. The

commentator stated that it treats all client transactions in a uniform

manner. Finally, the commentator stated that it does not believe that

the condition will achieve beneficial results for plan transactions at

its facility.

While the commentator states that all client transactions at its

facility are treated in a uniform manner, the Department notes that

purchases and sales of foreign currency between an employee benefit

plan and a party in interest bank or broker-dealer are prohibited in

the absence of exemptive relief. The purpose of the above-noted

condition is to put persons who act for the bank or broker-dealer on

notice that they are dealing with a plan in order that any additional

steps or procedures that are necessary to comply with the conditions of

the exemption may be implemented. The Department believes that the

identification of the client as a plan will help assure compliance with

the conditions of the exemption. Accordingly, the Department has

determined not to revise the final exemption in this regard.

Section III(c)(6) of the proposed exemption required the issuance

of a written confirmation statement for each covered transaction. The

proposal required that the confirmation statement disclose the amount

of U.S. dollars purchased or sold. A commentator noted that U.S.

dollars are not involved in every foreign currency transaction. In

response to this comment, the Department has modified section III(c)(6)

to require disclosure of the currencies purchased and sold pursuant to

the final exemption.

The proposed exemption included a recordkeeping requirement which

provided that the bank, broker-dealer or affiliate must maintain within

territories under the jurisdiction of the United States Government, the

records necessary to determine whether the applicable conditions of the

exemption have been met. Several commentators objected to the

requirement that records be maintained within territories under the

jurisdiction of the U.S. Government. In this regard, they represented

that this requirement creates difficulties for those banks who maintain

foreign exchange trading desks in a country or countries other than the

United States. In addition, one commenter suggested that the

recordkeeping requirement may result in higher costs to plans involved

in foreign exchange transactions.

The ABA suggested that the recordkeeping requirement should permit

the required records to be maintained on a computer system located at a

foreign facility which would be accessible in the United States. These

systems could print out any information requested and produce a hard

copy to anyone who is authorized to have such information. These

systems would contain all the bank's foreign exchange transactions on a

daily basis for employee benefit plans as well as other entities. In

this way, all information needed to test for compliance would be

available in the United States. Other commenters suggested that

requirements similar to those provided in the regulations under section

404(b) of the Act regarding the maintenance of the indicia of ownership

of plan assets should be adopted. Specifically, they requested that the

exemption permit the required records to be maintained at foreign

locations described under the section 404(b) regulations.

The Department notes that the purpose of the record maintenance

requirement is to ensure that the persons described in paragraph III(e)

of the exemption will have access to bank, broker-dealer or affiliate

records involving covered foreign exchange transactions. The Department

is unable to determine how the alternatives for holding securities,

which are described in the regulations under section 404(b) of the Act,

would operate in the context of a record maintenance requirement. If

the records were maintained outside of the jurisdiction of the United

States Government and became unavailable for reasons beyond the control

of the bank, broker-dealer or affiliate, there would be no comparable

records available for determining compliance with the terms of this

exemption. Accordingly, the Department is not persuaded that the

conditions described in the regulations under section 404(b) of the Act

would be appropriate with respect to the record maintenance

requirement.

The Department has considered the ABA's suggestion to modify the

final exemption to include records which are maintained on a foreign

computer system that could be accessed in the United States. We note,

however, that the ABA is unable to represent that such records could

always be accessed on a foreign computer system without the risk of

restriction by a foreign government. Accordingly, the Department is

unable to conclude that the final exemption should be modified to

include this method of recordkeeping.

The ABA, as well as a number of other commentators, requested that

the Department expand the proposed exemption to include retroactive and

prospective relief for foreign exchange transactions entered into

pursuant to a standing authorization, hereinafter ``standing

instruction.'' Similarly, many of those commenters also requested that

the Department amend the definition of the term ``directed

transaction'' by modifying the requirement that the independent plan

fiduciary effect the foreign exchange transaction at a specific

exchange rate.

The commentators represent that the utilization of a standing

instruction is an integral component in foreign exchange transactions

involving employee benefit plans. They further indicate that standing

instructions are necessary to repatriate relatively minor amounts of

income such as dividend and interest payments routinely generated by

foreign securities which are held by plans. In this regard, they state

that obtaining individual directions for each income receipt would be

impractical and that plan beneficiaries would lose investment income

due to the time that it would take to receive directions from

investment managers and convert the payments. In addition, many

investment managers who wish to effectuate a foreign exchange

transaction do not contact the foreign exchange desk directly, but

instead leave their trading instructions with their account managers in

the bank's trust or global area. Transactions effected in this manner

can be bulked or added together with other transactions from employee

benefit plans as well as other trusts and custodial accounts so as to

obtain a more beneficial exchange rate. Under the circumstances

described above, foreign exchange transactions would not meet the

definition of ``directed'' as set forth in the proposed exemption

because of the inability to comply with the requirement that the

independent plan fiduciary designate a specific exchange rate.

The Department notes that a bank or broker-dealer engages in

violations of section 406(b) of the Act whenever it uses its fiduciary

authority or control with respect to the plan assets involved in the

transaction to increase the amount of its compensation by determining

the timing or the specific exchange rate for the foreign exchange

transaction. The Department did not propose relief with respect to such

transactions because it was unable, at the time, to make the findings

required under section 408(a) of the Act. Specifically, the Department

was unable to conclude that the conditions proposed by the ABA would

effectively and consistently address the potential for abuse of

discretion by party in interest banks or broker-dealers in setting

exchange rates for foreign exchange transactions.

The commenters have responded to the Department's concerns by

suggesting additional conditions which would limit the amount of

discretion that a bank or broker-dealer would have in executing the

foreign exchange transactions pursuant to standing instructions. Thus,

some of the commenters suggested that the class exemption could limit

relief to those situations where the triggering event, such as the

receipt of cash dividends, would not be within the control of the bank

or broker-dealer. In addition, the exchange transaction would have to

take place within a short period of time following the triggering

event. As a further limitation on the bank or broker-dealer, a

commenter suggested that the exchange rate could be set daily prior to

execution of the covered foreign exchange transaction using objective

criteria which would be disclosed to and approved by a plan fiduciary

independent of the bank or broker-dealer. Finally, it was represented

that conditions relating to the information which must be provided or

made available to the independent plan fiduciary could require very

detailed disclosures which would enable such fiduciary to determine the

reasonableness of the foreign exchange rates paid by the plan.

On the basis of the comments received following publication of the

proposed exemption, the Department believes that it may be appropriate,

under certain circumstances, to provide relief from section 406(b)(1)

of the Act. Pursuant to the requirements of section 408(a) of the Act,

however, the Department is required to offer interested persons an

opportunity to present their views and an opportunity for a hearing

before granting an exemption from section 406(b) of the Act. Therefore,

in order not to delay the publication of an exemption from section

406(a) of the Act for foreign exchange transactions, the Department has

decided to grant the exemption described herein while it continues to

consider additional exemptive relief for foreign exchange transactions

between a plan and a party in interest bank, broker-dealer or affiliate

thereof where such transactions are engaged in pursuant to a ``standing

instruction.''

Miscellaneous

One commenter requested that the Department clarify that the term

``foreign exchange transaction'' which is defined in section IV(a) of

the proposed exemption as ``the exchange of the currency of one nation

for the currency of another nation or a contract for such exchange''

includes options to buy or sell foreign currency. The commenter is

concerned that a footnote to the supplementary information accompanying

the proposed exemption which describes foreign exchange transactions as

``generally * * * either `spot', `forward', or `split''' delimits the

scope of the literal language of the exemption.

The commenter represents that options contracts operate in a manner

similar to that of forward contracts. For example, a forward contract

to sell a specified sum of Yen for dollars would enable a party to sell

Yen at the agreed upon rate even if the value of Yen declined over the

time period covered by the forward contract; the same forward contract

would require the counterparty to buy Yen from the party at a rate

favorable to the counterparty if the Yen appreciated during the same

time period. A similar economic result could be achieved if the party

had bought an option to sell Yen at the forward contract rate, and sold

an option to buy Yen at the same rate.

After considering this comment, the Department has decided to amend

the final exemption to specifically include options to buy or sell

currency.

One commenter requested that the Department expand the final

exemption to include relief from section 406 (b)(1) & (b)(2) of the Act

and section 4975(c)(1)(E) of the Code so that it would be clear that a

fiduciary bank would not violate those provisions when it engaged in a

foreign exchange transaction if it did not exercise its fiduciary

authority to cause the plan to pay it an additional fee. The

regulations at 29 CFR 2550.408b-2(e)(2) specifically state that a

fiduciary does not engage in an act described in section 406(b)(1) of

the Act if the fiduciary does not use any of the authority, control or

responsibility which makes such person a fiduciary to cause a plan to

pay additional fees for a service furnished by such fiduciary.

Accordingly, the Department has determined that it is unnecessary to

modify the final exemption as requested.

Finally, for purposes of clarity, the Department has added a

definition to section IV of the class exemption. Paragraph (g) defines

the term ``employee benefit plan'' for purposes of this class

exemption.

General Information

The attention of interested persons is directed to the following:

(1) The fact that a transaction is the subject of an exemption

under section 408(a) of the Act and section 4975(c)(2) of the Code does

not relieve a fiduciary or other party in interest or disqualified

person from certain other provisions of the Act and the Code, including

any prohibited transaction provisions to which the exemption does not

apply and the general fiduciary responsibility provisions of section

404 of the Act which require, among other things, that a fiduciary

discharge his duties respecting the plan solely in the interests of the

participants and beneficiaries of the plan and in a prudent fashion in

accordance with section 404(a)(1)(B) of the Act; nor does it affect the

requirement of section 401(a) of the Code that the plan must operate

for the exclusive benefit of the employees of the employer maintaining

the plan and their beneficiaries;

(2) The exemption, will not extend to transactions prohibited under

section 406(b) of the Act and section 4975(c)(1) (E) and (F) of the

Code;

(3) In accordance with section 408(a) of the Act and section

4975(c)(2) of the Code, and based upon the entire record, the

Department finds that the exemption is administratively feasible, in

the interests of plans and of their participants and beneficiaries and

protective of the rights of the participants and beneficiaries of

plans.

(4) The exemption is supplemental to, and not in derogation of, any

other provisions of the Act and the Code, including statutory or

administrative exemptions and transitional rules. Furthermore, the fact

that a transaction is subject to an administrative or statutory

exemption is not dispositive of whether the transaction is in fact a

prohibited transaction.

(5) The exemption is applicable to a transaction only if the

conditions specified in the exemption are met.

Exemption

Accordingly, the following exemption is granted under the authority

of section 408(a) of the Act and section 4975(c)(2) of the Code, and in

accordance with the procedures set forth in ERISA Procedure 75-1 (40 FR

18471, April 28, 1975).

Section I. Transactions

(a) For the period from January 1, 1975 to June 18, 1991, the

restrictions of section 406(a)(1) (A) through (D) of the Employee

Retirement Income Security Act of 1974 (the Act) and the taxes imposed

by section 4975 (a) and (b) of the Internal Revenue Code of 1986 (the

Code) by reason of Code section 4975(c)(1) (A) through (D) shall not

apply to any foreign exchange transaction between a bank or broker-

dealer or an affiliate thereof and an employee benefit plan with

respect to which the bank or broker-dealer or affiliate thereof is a

trustee, custodian, fiduciary or other party in interest, provided that

(i) the transaction is directed (within the meaning of section IV(e))

on behalf of the plan by a fiduciary which is independent of the bank,

the broker-dealer, and any affiliate thereof, and (ii) the conditions

set forth in section II are met.

(b) Effective June 18, 1991, the restrictions of section 406(a)(1)

(A) through (D) of the Act and the taxes imposed by section 4975 (a)

and (b) of the Code by reason of Code section 4975(c)(1) (A) through

(D) shall not apply to any foreign exchange transaction between a bank

or broker-dealer or an affiliate thereof and an employee benefit plan

with respect to which the bank or broker-dealer or an affiliate thereof

is a trustee, custodian, fiduciary, or other party in interest,

provided that (i) the transaction is directed (within the meaning of

section IV(e)) on behalf of the plan by a fiduciary which is

independent of the bank, the broker-dealer, and any affiliate thereof,

and (ii) all of the conditions set forth in sections II and III are

met.

Section II. General Conditions

Section I of this exemption applies only if the following

conditions of this section II are satisfied. In the case of

transactions described in section I(b), all of the conditions specified

in section III below must also be satisfied.

(a) At the time the transaction is entered into, the terms of the

transaction are not less favorable to the plan than the terms generally

available in comparable arm's length foreign exchange transactions

between unrelated parties.

(b) Neither the bank, the broker-dealer, nor any affiliate thereof

has any discretionary authority or control with respect to the

investment of the plan assets involved in the transaction or renders

investment advice (within the meaning of 29 CFR 2510.3-21(c)) with

respect to the investments of those assets.

Section III. Specific Conditions

Section I(b) of this exemption applies only if the conditions

specified in section II above and the following conditions are

satisfied:

(a) At the time the transaction is entered into, the terms of the

transaction are not less favorable to the plan than the terms afforded

by the bank, the broker-dealer, or any affiliate thereof in comparable

arm's length foreign exchange transactions involving unrelated parties.

(b) The bank, or broker-dealer, maintains at all times written

policies and procedures regarding the handling of foreign exchange

transactions with plans with respect to which the bank or broker-dealer

is a trustee, custodian, fiduciary or other party in interest or

disqualified person which assure that the person acting for the bank or

broker-dealer knows that he or she is dealing with a plan.

(c) A written confirmation statement is issued with respect to each

covered transaction to the independent plan fiduciary who directs the

transaction for the plan.

The confirmation shall disclose the following information:

(1) Account name;

(2) Transaction date;

(3) Exchange rates;

(4) Settlement date;

(5) Currencies exchanged:

(i) Identity of the currency sold;

(ii) The amount sold;

(iii) Identity of the currency purchased;

(iv) The amount purchased.

The confirmation shall be issued in no event more than 5 business

days after execution of the transaction.

(d) The bank or broker-dealer, or affiliate thereof, maintains

within territories under the jurisdiction of the United States

Government, for a period of six years from the date of the transaction,

the records necessary to enable the persons described in paragraph (e)

of this section to determine whether the applicable conditions of this

exemption have been met. Notwithstanding these recordkeeping

requirements, a prohibited transaction will not be considered to have

occurred if, due to circumstances beyond the bank's or broker-dealer's

control, the records are lost or destroyed prior to the end of the six-

year period, and no fiduciary of a plan who is independent of the bank

or broker-dealer or any affiliate thereof, which engages in a

transaction covered by the exemption, shall be subject to the civil

penalty that may be assessed under 502(i) of the Act, or to the taxes

imposed by section 4975 (a) and (b) of the Code, solely because the

records are not maintained by the bank, the broker-dealer, or its

affiliate, or are not made available for examination by the bank or

broker-dealer or affiliate as required by paragraph (e) below.

(e)(i) Except as provided in subparagraph (ii) of this paragraph

and notwithstanding any provisions of subsection (a)(2) and (b) of

section 504 of the Act, the records referred to in paragraph (d) of

this Section are available at their customary location for examination,

upon reasonable notice, during normal business hours by:

(A) Any duly authorized employee or representative of the

Department of Labor or the Internal Revenue Service.

(B) Any fiduciary of a plan who has authority to acquire or dispose

of the assets of the plan involved in the foreign exchange transaction

or any duly authorized employee and representative of such fiduciary.

(C) Any contributing employer to the plan involved in the foreign

exchange transaction or any duly authorized employee or representative

of such employer.

(ii) None of the persons described in subparagraphs (B) and (C)

shall be authorized to examine a bank's or broker-dealer's trade

secrets or commercial or financial information of a bank or broker-

dealer or an affiliate thereof which is privileged or confidential.

Section IV. Definitions and General Rules

For purposes of this exemption.

(a) A ``foreign exchange transaction'' means the exchange of the

currency of one nation for the currency of another nation, or a

contract for such an exchange. The term foreign exchange transaction

includes options contracts on foreign exchange transactions.

(b) A ``bank'' means a bank which is supervised by the United

States or a State thereof, or any affiliate thereof.

(c) A ``broker-dealer'' means a broker-dealer registered under the

Securities Exchange Act of 1934, or any affiliate thereof.

(d) An ``affiliate'' of a bank or broker-dealer means any entity

directly or indirectly, through one or more intermediaries,

controlling, controlled by, or under common control with such bank or

broker-dealer.

(e) The term ``control'' means the power to exercise a controlling

influence over the management or policies of a person other than an

individual.

(f) A foreign exchange transaction involving assets of an employee

benefit plan shall be considered ``directed'' only where the

independent plan fiduciary who has not been appointed by the bank or

broker-dealer or affiliate thereof, directs such bank or broker-dealer

or affiliate thereof to effect the purchase or sale of a specific

amount of currency at a specific exchange rate.

(g) For purposes of this exemption, the term ``employee benefit

plan'' refers to a pension plan described in 29 CFR 2510.3-2 and/or a

welfare benefit plan described in 29 CFR 2510.3-1.

Signed at Washington, DC, this 10th day of February, 1994.

Alan D. Lebowitz,

Deputy Assistant Secretary for Program Operations, Pension and Welfare

Benefits Administration, U.S. Department of Labor.

[FR Doc. 94-3607 Filed 2-16-94; 8:45 am]

BILLING CODE 4510-29-P