Class Exemption Relating to Certain Employee Benefit Plan; Foreign Exchange Transactions Executed Pursuant to Standing Instructions

DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

[Prohibited Transaction Exemption 98-54; Application Number D-09643]

Class Exemption Relating to Certain Employee Benefit Plan;

Foreign Exchange Transactions Executed Pursuant to Standing

Instructions

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

[[Page 63504]]

(ERISA or the Act) and from certain taxes imposed by the Internal

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

foreign exchange transactions between employee benefit plans and

certain banks and broker-dealers which are parties in interest with

respect to such plans, pursuant to standing instructions. The exemption

affects participants and beneficiaries of employee benefit plans

involved in such transactions, as well as banks and broker-dealers

which act as dealers in foreign exchange.

EFFECTIVE DATES: Section II is effective for transactions occurring

from June 18, 1991 to January 12, 1999. Section III is effective for

transactions occurring after January 12, 1999.

FOR FURTHER INFORMATION CONTACT: Lyssa E. Hall, Office of Exemption

Determinations, Pension and Welfare Benefits Administration, U.S.

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

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

of the Solicitor, (202) 219-4600, ext. 105 (not a toll-free number).

Paperwork Reduction Act Analysis: Pursuant to the Paperwork

Reduction Act of 1995, Pub. L. 104-13, 44 U.S.C. Chapter 35 and 5 CFR

Part 1320, the information collection request (ICR) in this class

exemption was published for public comment on February 3, 1997 (62 FR

5051). Based upon information received by the Department of Labor (the

Department), the estimated information collection burden has been

adjusted (see Respondents and Proposed Frequency of Response and

Estimated Annual Burden, below). The Office of Management and Budget

(OMB) has approved this ICR with the control number OMB 1210-0111,

which expires on November 30, 2001. Persons are not required to respond

to this ICR unless it displays a currently valid OMB control number.

Respondents and Proposed Frequency of Response: The Department

staff estimates that approximately 35 parties will seek to take

advantage of the class exemption in any given year. The respondents

will be banks and broker-dealers acting as fiduciaries of plans which

engage in foreign exchange transactions with such plans.

Estimated Annual Burden: The Department staff estimates the annual

burden hours for preparing disclosure materials and maintaining records

required under the class exemption to be 4,200 hours.

Supplementary Information

The proposed exemption was initially 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

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).

Pursuant to the foregoing authority, the Department proposed additional

conditions with respect to the relief requested by the Applicant.

On February 17, 1994, the Department granted PTE 94-20 (59 FR

8022), a class exemption which permits purchases and sales of foreign

currencies between employee benefit plans and certain banks or broker-

dealers which are parties in interest with respect to such plans

provided that such transactions are directed by a plan fiduciary who is

independent of the bank or broker-dealer and the other conditions of

the exemption are met. PTE 94-20 provides an exemption from the

prohibited transaction restrictions of section 406(a)(1)(A) through (D)

of the Act and from the sanctions resulting from section 4975(a) and

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

Code. PTE 94-20 did not provide relief for all of the transactions

described in the 1984 ABA exemption request.

In response to the notice of proposed exemption for PTE 94-20, a

number of commenters (the Commenters) expressed concern regarding the

lack of relief for foreign exchange transactions executed pursuant to

standing instructions. As explained in greater detail in the preamble

to PTE 94-20, the Commenters requested that the Department expand the

exemption to include retroactive and prospective relief for foreign

exchange transactions entered into pursuant to a ``standing

authorization'' (hereinafter standing instruction). Many of the

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 Commenters represented that the utilization of standing

instructions is an integral component in foreign exchange transactions

involving employee benefit plans. In this regard, the Commenters

indicated that, without the ability to execute foreign exchange

transactions with plans pursuant to standing instructions, plans would

lose investment income and incur higher exchange rates on small

transactions.

Based upon the comments and additional information received

following publication of the proposal to PTE 94-20, the Department

concluded that it might be appropriate, under limited circumstances, to

provide relief from section 406(b)(1)and (b)(2) of the Act for foreign

exchange transactions entered into pursuant to standing instructions.

However, pursuant to the requirements of section 408(a) of the Act, the

Department is required to offer interested persons an opportunity to

present their views and an opportunity to request a hearing before

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

order not to have delayed the publication of PTE 94-20, the Department

determined to separately consider exemptive relief from sections

406(a)(1)(A) through (D), 406(b)(1) and (b)(2) of the Act for foreign

exchange transactions between a plan and a party in interest bank or,

broker-dealer where such transactions are engaged in pursuant to a

standing instruction.

During the Department's consideration of the standing instruction

issue, the ABA made a supplemental submission on September 1, 1992, in

which they limited their request for relief for standing instruction

transactions and suggested additional conditions regarding such

transactions. Over the course of the following two years, the

Department solicited further information from the ABA and other

interested parties. As a result of the suggestions and comments

received from those parties, as well as the imposition of additional

conditions by the Department, the Department believed that a number of

its concerns regarding standing instruction 1 transactions

have been addressed.

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

exemption at 62 FR 5052-54.

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On February 3, 1997, the Department published a notice in the

Federal Register (62 FR 5051) of the pendency of a proposed class

exemption from the restrictions of sections 406(a)(1)(A) through (D),

406(b)(1) and (b)(2) of ERISA and from the taxes imposed by section

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

through (E) of the Code for foreign exchange transactions, between a

bank or broker-dealer and an employee benefit plan with respect to

which the bank or broker-dealer is a trustee, custodian, fiduciary or

other party in interest, pursuant to a standing instruction.

The notice of pendency gave all interested persons an opportunity

to submit written comments or request a public hearing on the proposed

class exemption by April 4, 1997. The Department received three public

comment letters and no requests for a public hearing in response to the

notice.

[[Page 63505]]

Upon consideration of the record as a whole, the Department has

determined to grant the proposed class exemption, subject to certain

modifications. These modifications and the comments are discussed

below.

Discussion of the Comments

Section III(i) of the proposed exemption contains a condition which

requires that a bank or broker-dealer which engaged in a covered

transaction, furnish the authorizing plan fiduciary with a confirmation

statement for each covered transaction. The confirmation statement must

disclose the time of the exchange.2 All of the Commenters

objected to this requirement. According to the Commenters, time

stamping confirmation statements is not a current industry practice,

nor a practice which could be easily implemented. The Commenters

indicated that the cost of disclosing the time of the transaction on

the confirmation statements would far outweigh any benefits to be

gained.

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\2\ Under the proposal, this requirement would be deemed

satisfied if the bank or broker-dealer engaged in the covered

transactions only once a day and the time of such conversions is set

forth in the bank's or broker-dealer's written policies and

procedures which are provided to the independent plan fiduciary.

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One Commenter explained in greater detail why the inclusion of the

time on the confirmation statement was not only impractical but also

unresponsive to our concern that a plan fiduciary be able to monitor

the rates charged in foreign exchange transactions. According to the

Commenter, a time-stamp enables a plan to look at the rates available

at the time stamped, without regard to whether those rates would have

been available for transactions the size of that particular plan's

transaction. In addition, the information may be misleading because the

trade may or may not have been batched with other trades to achieve a

better rate for the client plan. Where trades are aggregated prior to

conversion, it may take several hours before the investment manager

desegregates the trades and allocates pieces to each of its clients.

The trade is not time-stamped until it has been allocated to each

client and booked into the trade entry system. The trade entry system

uses a current time-stamp and cannot be manipulated to reflect the time

when the actual transaction occurred. Thus, the rate at the time that

the order is stamped may have nothing to do with the rate at which the

trade was executed.

In addressing the Department's concern regarding the ability of

plan fiduciaries to monitor the rates charged in foreign exchange

transactions, the Commenter noted that there are a variety of sources

from which foreign exchange price quotes are available. These include

Reuters, electronic brokerage systems and the Internet. The Commenter

indicated that the foreign exchange market is very transparent as a

result of new technologies and that any plan which engages in foreign

exchange trading can easily access at least one of the sources of

foreign currency rates. Thus, plan fiduciaries have the ability to

monitor prices for trades by reviewing the highs and lows of the day as

displayed on one of the reporting services. In addition, the Commenter

noted that in order to comply with banking safety and soundness

requirements, banks must have a system for detecting trades which are

off market i.e., whose currency spreads deviate significantly from

other trades in the same currency. These internal safeguards enable a

bank to monitor its own traders to maintain the integrity of their

foreign currency pricing systems.

The Department has considered the comments regarding the

requirement for inclusion of the time of the transaction on the

confirmation statement and has determined to delete this requirement

from the final exemption.

The Department wishes to point out that ERISA's general standards

of fiduciary conduct would apply to the standing instruction

arrangements permitted by this class exemption. Section 404 of ERISA

requires, among other things, that a fiduciary discharge his duties

with respect to a plan solely in the interest of the plan's

participants and beneficiaries and in a prudent fashion.3

Specifically, the investment manager or independent plan fiduciary must

be capable of periodically monitoring the actions taken by the bank or

broker-dealer in the course of its execution of foreign exchange

transactions pursuant to standing instructions. In considering whether

to authorize a bank or broker-dealer to execute foreign exchange

transactions pursuant to standing instructions, a fiduciary should take

into account its ability to provide adequate oversight of the bank or

broker-dealer.

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\3\ The investment manager or other independent plan fiduciary

must act prudently with respect to the decision to enter into such

an arrangement, such as considering the effect of restrictions on

funds transfers by foreign governments, as well as to the

negotiation of the specific terms under which the bank or broker-

dealer will engage in foreign exchange transactions on behalf of the

plan including whether the bank or broker-dealer may use non-

affiliated foreign custodians. In addition, the investment manager

or other independent plan fiduciary must fully understand the

benefits and risks associated with engaging in foreign exchange

transactions pursuant to standing instructions, following disclosure

by the bank or broker-dealer of all relevant information.

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Under section I of the proposed exemption, relief was provided for

transactions involving income item conversions, as well as for de

minimis purchase or sale transactions. The definition of ``income item

conversion'' under section IV(g) was limited to transactions involving

the exchange of income conversion items into U.S. dollars. The

Department imposed this limitation because of concerns regarding the

ability of a bank to maintain converted funds in an interest bearing

account. The ABA requested that the Department expand the scope of the

final exemption to include the conversion of foreign denominated income

receipts into another foreign currency pursuant to standing

instructions. The Commenter represents that plans benefit from foreign

exchange conversions under standing instructions because the foreign

exchange trades can be done quickly and the plans can begin to earn

interest on the funds as soon as possible. The ABA further represents

that some financial institutions have interest bearing investments or

investment pools that will accept currencies that are not U.S. dollars.

Accordingly, the ABA suggested that the Department modify the final

exemption to permit the conversion of income items into non-U.S.

dollars under any of the following circumstances: (1) Income items

which are received in a foreign currency are exchanged into another

foreign currency and the exchanged funds are held in an interest

bearing investment vehicle pending further investment instruction; (2)

the conversion is executed pursuant to a standing instruction and the

reinvestment of the exchanged foreign currency occurs within a

prescribed period of time, such as 24 hours; and (3) the standing

instruction directs that an income item be converted from one foreign

currency into another foreign currency. According to the ABA, plans

will receive the benefit of only going through one conversion instead

of two, thus, saving the cost of one foreign exchange transaction. In

this regard, the Department is unable to conclude that income item

conversions into non-U.S. dollars should be permitted under the final

exemption if the plan is not able to earn interest on the conversion

amounts which are held by the bank for more than 24 hours after

conversion. We note, however, that such conversions may be appropriate

where interest is earned on amounts held for more than 24 hours after

conversion as long as the bank does not determine the non-U.S.

[[Page 63506]]

currency into which the income item is converted. Accordingly, the

Department has determined to modify the definition of the term income

item conversion in the final exemption to provide relief for

transactions in which the bank has a standing instruction that requires

the conversion of income items from one foreign currency into another

foreign currency and either the converted funds are transferred to an

interest bearing account within 24 hours of the conversion and held

therein pending further investment direction from the plan or the bank

reinvests such proceeds within 24 hours of the conversion at the

direction of the plan. In response to the Commenter's third suggestion,

the Department does not believe that the Commenter has adequately

demonstrated that such further relief is warranted. Therefore, the

Department has determined not to adopt the Commenter's last suggestion.

Section IV (g) and (h) of the proposed exemption define the terms

``income item conversion'' and ``de minimis purchase or sale

transaction'' to limit relief to transactions involving no more than

100,000 in U.S. dollars or the equivalent thereof for each transaction.

Two Commenters urged the Department to reconsider the $100,000

limitation for such transactions. The ABA stated that the $100,000

limitation may add costs to employee benefit plan foreign exchange

transactions. It was explained, for example, that banks may hold

foreign securities through a global custody network of affiliated and

non-affiliated subcustodians. Under these circumstances, securities

issued in a foreign country are commingled with the securities of a

number of the bank's clients and held in omnibus accounts at the bank's

subcustodians in that foreign country. For tax reasons, omnibus

accounts may be further divided into several subaccounts maintained at

the subcustodians. According to the Commenter, foreign exchange

conversions are transacted at either the omnibus account level or the

subaccount level to expedite the conversion and to enable the

conversion to be bundled. Since the process of allocating income items

to individual accounts is not done until after the conversion takes

place, a bank would not know the amount of any particular plan's assets

that are involved at the time of the foreign exchange transaction.

Thus, the Commenter noted that a bank could not determine whether a

transaction met the $100,000 limitation proposed by the Department for

income conversions. The Commenter argues that, if a plan was unable to

take advantage of the omnibus or subaccount system, the plan would be

precluded from receiving the benefit of bundling its income conversion

items with the bank's other customers to get a more favorable foreign

exchange rate. In addition, the Commenters represent that plans would

incur increased custody costs if the omnibus or subaccounts system was

not available for plan foreign exchange transactions.

Both Commenters urged the Department to raise the dollar limitation

for de minimis purchases and sales and income conversions. According to

the Commenters, $100,000 is no longer an adequate limitation for either

purchase and sale transactions or income conversions. The ABA suggested

that the Department adopt a floating cap based on the size of a plan's

total assets. Under this approach, a plan with $50 million or more in

total assets would be limited to $500,000 under the exemption. Plans

with total assets of less than $50 million would be limited to $100,000

for each foreign exchange transaction. As an alternative suggestion,

the Commenter urged the Department to raise the dollar limitation to

$500,000 and inform small plans in the preamble to the final class

exemption that it may be prudent to utilize standing instructions with

a lower dollar limit.

One of the major reasons cited by the ABA for the utilization of

standing instructions by plans was that obtaining specific directions

from plans for relatively small transactions was time consuming and not

in the best interests of plans because of increased transaction costs.

At the time the Department proposed relief for income item conversions

and de minimis purchases and sales, such relief was based on the

premise that the exemption would only cover transactions involving the

receipt of relatively small amounts of foreign currency. In this

regard, the conditions proposed by the Department were specifically

designed to address foreign exchange transactions in the context of

small transactions. Although the ABA initially suggested a $500,000

limitation, the Department believed at the time that a limitation of

$100,000 was a more appropriate measure for transactions which are

intended to be relatively small. The Department recognizes that, over

the past several years, plans have increased foreign investments so

that $100,000 may no longer be an appropriate limitation for income

item conversions or de minimis purchases and sales. However, the

Department is not persuaded by the argument that a foreign exchange

transaction involving $500,000 should be properly viewed as a small

transaction for purposes of this exemption. After considering the

issue, the Department has decided to modify the final exemption to

increase the limitation to $300,000. The Department believes that

increasing the dollar limitation to $300,000 will make it easier for

those banks which use the omnibus/subaccount system to monitor the

amount of a plan's assets which are involved in a foreign exchange

transaction. In addition, a $300,000 limitation will ensure that the

transactions that a plan is permitted to engage in pursuant to this

exemption will only be those which are relatively small. Accordingly,

the Department has modified the definitions of the terms ``income item

conversion'' and ``de minimis purchase or sale transaction'' to

increase the dollar limitation to no more than 300,000 in U.S. dollars

or the equivalent thereof.\4\

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\4\ Although the Department believes that the $300,000

limitation is appropriate for large plans that purchase and sell

foreign securities, it further notes that such dollar limitation may

not be appropriate for smaller plans (e.g., plans with aggregate

plan assets of less than $50 million). It is the responsibility of

the investment manager or other plan fiduciary, consistent with its

duties under section 404 of ERISA, to utilize standing instructions

with a dollar limitation that is prudent under the particular

circumstances.

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Sections II(d) and III(d) of the proposed class exemption require

banks and broker-dealers to maintain written policies and procedures

regarding the handling of foreign exchange transactions for plans which

assure that the person acting for the bank or broker-dealer knows that

he or she is dealing with a plan. A Commenter represents that, since a

subaccount typically holds the securities of a number of customers

which are not ERISA covered plans, foreign exchange traders would not

always know whether the funds involved in a specific foreign exchange

transaction contain plan assets. It is the view of the Department that

sections II(d) and III(d) will be deemed satisfied if bank policies and

procedures for handling foreign exchange transactions require the bank

or broker-dealer to always assume that foreign exchange trades of

amounts held in subaccounts involve plan assets.

Section III(h) of the proposed exemption required that the written

policies and procedures provided to the authorizing fiduciary disclose

the time(s) each day that the bank or broker-dealer will establish the

specific rate of exchange or the range of exchange rates, as well as

the time(s) that the conversions will take place. The ABA requested

that the Department clarify whether this condition requires that a

[[Page 63507]]

bank with several locations in different time zones engage in foreign

exchange transactions at all locations at the same time period based on

a specific time zone (i.e., 10:00 a.m. New York and 4 p.m. London).

The Department notes that the purpose of this condition is to

provide the authorizing fiduciary with the information necessary to

effectively monitor the rates that the plans are charged. The

Department does not interpret this condition to require that a bank's

foreign exchange desks located in different time zones establish

foreign exchange rates simultaneously with their U.S. affiliate.

Accordingly, nothing contained in section III(h) would preclude a bank

or broker-dealer from setting exchange rate(s) at different times if

the bank or broker-dealer engages in foreign exchange transactions at

locations in different time zones, provided that this information is

provided to the authorizing fiduciary.

Two Commenters requested that the Department delete the requirement

under section III(f) of the proposal that a non-affiliated custodian

provide notice to the bank or broker-dealer that good funds have been

received no later than two business days following receipt of such

funds by the foreign custodian. The Commenters noted that, while non-

affiliated subcustodians are generally required to send notice

promptly, the banks do not control the actions of their non-affiliated

subcustodians and thus cannot monitor or control when notice of good

funds will be provided. The Commenters also noted that even absent this

requirement, conversions will still have to be executed by the bank

either at the next scheduled time for such transactions following

receipt of notice from the non-affiliated subcustodian that good funds

have been received or under some circumstances not more than 24 hours

after receipt of such notice.

After considering the comments, the Department has determined to

delete this requirement as it pertains to non-affiliated custodians of

the bank or broker-dealer. In this regard, the Department expects the

bank or broker-dealer to act prudently with respect to the selection

and continued retention of a non-affiliated foreign custodian. Any such

determination should reflect the capability of the foreign affiliate to

promptly notify the bank or broker-dealer of its receipt of good funds.

The prospective conditional relief under the proposal is effective

for covered transactions entered into after May 5, 1997. The ABA urged

the Department to delay application of the prospective conditions of

the exemption for sixty days after publication of the final class

exemption. According to the ABA, the banking industry needs sufficient

time to change their practices to meet the requirements and conditions

of the final exemption. The Department finds merit in this comment and

has modified the final exemption to make the prospective conditions

effective sixty days after publication of this final class exemption.

The proposed exemption provided conditional retroactive relief for

foreign exchange transactions which were executed pursuant to standing

instructions from June 18, 1991, until May 5, 1997. The ABA questioned

why the Department did not provide retroactive relief for transactions

which were executed pursuant to standing instructions prior to June 18,

1991.

The Department does not believe that the Commenter has sufficiently

demonstrated the need for an earlier effective date. Therefore, the

Department cannot conclude that an earlier effective date is warranted.

One Commenter expressed concern regarding the provision in section

III(g)(1) of the proposed class exemption which limits the number of

times per day that a bank or broker-dealer could establish a rate of

exchange or a range of rates to be used for transactions covered by the

exemption. The Commenter stated that they could see no purpose in this

limitation. Moreover, the Commenter believes that in highly active

markets it would not be in the best interests of plans to set an

arbitrary limit.

The Department finds merit in the Commenter's argument and has

determined to delete this limitation from the final exemption. We note,

however, that the written policies and procedures provided to the

authorizing fiduciary must disclose, among other things, the time(s)

each day that the rate(s) will be established.

One Commenter requested that the final exemption be expanded to

include relief for ``a limited standing instruction,'' in order to

permit transactions to occur at market prices within one business day

after the instruction is given without the requirement that a specific

amount of foreign currency and a specific exchange rate be directed,

provided that a fiduciary independent of the broker-dealer specifies a

price range and a quantity range in which the transaction should be

conducted. The Department does not believe that it has sufficient

information on the record at this time to make the findings necessary

to provide further exemptive relief. Moreover, the Department does not

believe that a sufficient showing has been made that the conditions

suggested by the Commenter would adequately protect the interests of

participants and beneficiaries of plans which engage in transactions

pursuant to the limited standing instructions. Finally, we note that

while the class exemption is only available to banks, broker-dealers

and their domestic affiliates, many of the conditions in the exemption

apply to both domestic and foreign affiliates. Accordingly, we have

added a new paragraph (l) which defines the term ``foreign affiliate'',

to the final class exemption to clarify this distinction.

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 with respect to 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) In accordance with section 408(a) of ERISA and section

4975(c)(2) of the Code, the Department finds that the exemption is

administratively feasible, in the interests of plans and their

participants and beneficiaries and protective of the rights of

participants and beneficiaries of the plans.

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

conditions specified in the class exemption are met; and

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

of, any other provisions of ERISA 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.

[[Page 63508]]

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 29 ERISA Procedure 75-1 (40

FR 18471, April 28, 1975).

Section I Covered Transactions

(a) For the period from June 18, 1991 to January 12, 1999, the

restrictions of sections 406(a)(1)(A) through (D) and 406(b)(1) and

(b)(2) of the Employee Retirement Security Act of 1974 (ERISA or 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 (E), shall not apply to the following foreign

exchange transactions, between a bank or broker-dealer and an employee

benefit plan with respect to which the bank or broker-dealer is a

trustee, custodian, fiduciary or other party in interest, pursuant to a

standing instruction, if the conditions set forth in section II below

are met:

(1) An income item conversion; or

(2) A de minimis purchase or sale transaction.

(b) Effective after January 12, 1999, the restrictions of sections

406(a)(1)(A) through (D) and 406(b)(1) and (b)(2) of the Act and the

taxes imposed by section 4975(a) and (b) of Code, by reason of Code

section 4975(c)(1)(A) through (E), shall not apply to the following

foreign exchange transactions, between a bank or broker-dealer, and an

employee benefit plan with respect to which the bank or broker-dealer

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

to a standing instruction, if the conditions set forth in section III

below are met:

(1) An income item conversion; or

(2) A de minimis purchase or sale transaction.

Section II Retroactive Conditions

(a) At the time the foreign exchange 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) At the time the foreign exchange transaction is entered into,

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

the terms afforded by the bank or the broker-dealer in comparable arm's

length foreign exchange transactions involving unrelated parties.

(c) Neither the bank, the broker-dealer nor any foreign 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 investment of those assets.

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

policies and procedures regarding the handling of foreign exchange

transactions for 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.

(e) The exchange rate used by the bank or broker-dealer for a

particular foreign exchange transaction did not deviate by more than

10% (above or below) the interbank bid and asked rates at the time of

the transaction as displayed on Reuters or another independent service

in the foreign currency market for such currency; provided, however,

that a prohibited transaction shall not be deemed to have occurred

solely because records demonstrating compliance with this section with

respect to specific transactions have been lost, destroyed or are not

available to the bank or broker-dealer. Nothing in this section shall

be deemed to relieve the bank or broker-dealer of its responsibility to

demonstrate compliance with the conditions of this exemption.

(f) A written confirmation statement is furnished with respect to

each covered transaction to the independent plan fiduciary that

authorized the standing instruction. The confirmation statement shall

include:

(A) Account name;

(B) Transaction date;

(C) Exchange rates;

(D) Settlement date;

(E) Currencies exchanged;

(i) Identity of foreign currency sold;

(ii) Amount sold;

(iii) Identity of currency purchased; and

(iv) Amount purchased.

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

days after execution of the transaction.

Section III Prospective Conditions

(a) At the time the foreign exchange 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) At the time the foreign exchange transaction is entered into,

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

the terms afforded by the bank or broker-dealer in comparable arm's-

length foreign exchange transactions involving unrelated parties.

(c) Neither the bank, the broker-dealer, nor any foreign 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 investment of those assets.

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

policies and procedures regarding the handling of foreign exchange

transactions for 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.

(e) The covered transaction is performed under a written

authorization executed in advance by a fiduciary of the plan whose

assets are involved in the transaction, which plan fiduciary is

independent of the bank or broker-dealer engaging in the covered

transaction or any foreign affiliate thereof. The written authorization

must specify:

(1) The identities of the currencies in which covered transactions

may be executed; and (2) That the authorization may be terminated by

either party without penalty on no more than ten days notice.

(f)(1) Income item conversions are executed within no more than one

business day from the date of receipt of notice by the bank or broker-

dealer that such items are good funds, and a foreign custodian which is

an affiliate of the bank or broker-dealer, provides such notice to the

bank or broker-dealer within ``one business day'' of its receipt of

good funds;

(2) De minimis purchase and sale transactions are executed within

no more than one business day from the date that either the bank or

broker-dealer receives notice from a foreign custodian that the

proceeds of a sale of foreign securities denominated in foreign

currency are good funds, or the direction to acquire foreign currency

was received by the bank or broker-dealer, and a foreign custodian

which is an affiliate of the bank or broker-dealer, provides such

notice to the bank or broker-dealer within one business day of its

receipt of good funds from a sale.

(g)(1) At least once each day, at the time(s) specified in its

written policies and procedures, the bank or broker-dealer establishes

either a rate of exchange or a range of rates to be used

[[Page 63509]]

for income item conversions and de minimis purchase and sale

transactions covered by this exemption.

(2) Income item conversions are executed at the next scheduled time

for conversions following receipt of notice by the bank or broker-

dealer from the foreign custodian that such funds are good funds. If it

is the policy of the bank or broker-dealer to aggregate small amounts

of foreign currency until a specified minimum threshold amount is

received, then the conversion may take place at a later time but in no

event more than 24 hours after receipt of notice.

(3) De minimis purchase and sale transactions are executed at the

next scheduled time for such transactions following receipt of either

notice that the sales proceeds denominated in foreign currency are good

funds, or a direction to acquire foreign currency. If it is the policy

of the bank or broker-dealer to aggregate small transactions until a

specified threshold amount is received, then the execution may take

place at a later time but in no event more than 24 hours after receipt

of either notice that the sales proceeds have been received by the

foreign custodian as good funds, or a direction to acquire foreign

currency.

For purposes of this paragraph (g), the range of exchange rates

established by the bank or broker-dealer for a particular foreign

currency cannot deviate by more than three percent [above or below] the

interbank bid and asked rates as displayed on Reuters or another

nationally recognized independent service in the foreign exchange

market, for such currency at the time such range of rates is

established by the bank or broker-dealer.

(h) Prior to the execution of the authorization referred to in

paragraph (e), the bank or broker-dealer provides the independent

fiduciary with a copy of the bank's or broker-dealer's written policies

and procedures regarding the handling of foreign exchange transactions

involving income item conversions and de minimis purchase and sale

transactions. The policies and procedures must, at a minimum, contain

the following information:

(1) Disclosure of the time(s) each day that the bank or broker-

dealer will establish the specific rate of exchange or the range of

exchange rates for the covered transactions to be executed and the

time(s) that such covered transactions will take place. The bank or

broker-dealer shall include a description of the methodology that the

bank or broker-dealer uses to determine the specific exchange rate or

range of exchange rates;

(2) Disclosure that income item conversions and de minimis purchase

and sale transactions will be executed at the first scheduled

transaction time after notice that good funds from an income item

conversion or a sale have been received, or a direction to purchase

foreign currency has been received. To the extent that the bank or

broker-dealer aggregates small amounts of foreign currency until a

specified minimum threshold amount is met, a description of this

practice and disclosure of the threshold amount; and

(3) A description of the process by which the bank's or broker-

dealer's foreign exchange policies and procedures for income item

conversions and de minimis purchase and sale transactions may be

amended and disclosed to plans.

(i) The bank or broker-dealer engaging in the covered transaction

furnishes to the independent fiduciary a written confirmation statement

with respect to each covered transaction not more than five business

days after execution of the transaction.

1. With respect to income item conversions, the confirmation shall

disclose the following information:

(A) Account name;

(B) Date of notice that good funds were received;

(C) Transaction date;

(D) Exchange rate;

(E) Settlement date;

(F) Identity of foreign currency;

(G) Amount of foreign currency sold;

(H) Amount of U.S. dollars or other currency credited to the plan;

and

2. With respect to de minimis purchase and sale transactions, the

confirmation shall disclose the following information:

(A) Account name;

(B) Date of notice that sales proceeds denominated in foreign

currency are received as good funds or direction to acquire foreign

currency was received;

(C) Transaction date;

(D) Exchange rates;

(E) Settlement date;

(F) Currencies exchanged:

i. Identity of the currency sold;

ii. The amount sold;

iii. Identity of the currency purchased; and

iv. The amount purchased;

(j) The bank or broker-dealer, 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 (l) of this section to determine

whether the applicable conditions of this exemption have been met,

including a record of the specific exchange rate or range of exchange

rates the bank or broker-dealer established each day for foreign

exchange transactions effected under standing instructions for income

item conversions and de minimis purchase and sale transactions.

However, 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 party in interest other than the bank or broker-

dealer shall be subject to the civil penalty that may be assessed under

section 502(i) of the Act, or the taxes imposed by section 4975(a) and

(b) of the Code, if the records are not maintained by the bank or

broker-dealer, or are not made available for examination by the bank or

broker-dealer, or its affiliate as required by paragraph (k) of this

section.

(k)(1) Except as provided in subparagraph (2) 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 (j) 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 or 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.

(2) 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, 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.

(b) The term standing instruction means a written authorization

from a plan fiduciary, who is independent of the bank or broker-dealer

engaging in the foreign exchange transaction and any foreign affiliate

thereof, to the bank or broker-dealer to effect the transactions

specified therein pursuant

[[Page 63510]]

to the instructions provided in such authorization.

(c) A bank means a bank which is supervised by the United States or

a State thereof, or any domestic affiliate thereof.

(d) A broker-dealer means a broker-dealer registered under the

Securities Exchange Act of 1934, or any domestic affiliate thereof.

(e) A domestic affiliate of a bank or broker-dealer means any

entity which is supervised by the United States or a State thereof and

which is directly or indirectly, through one or more intermediaries,

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

broker-dealer.

(f) The term control means the power to exercise a controlling

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

individual.

(g) An income item conversion means: (1) The conversion into U.S.

dollars of an amount which is the equivalent of no more than 300,000

U.S. dollars of interest, dividends or other distributions or payments

with respect to a security, tax reclaims, proceeds from dispositions of

rights, fractional shares or other similar items denominated in the

currency of another nation that are received by the bank or broker-

dealer on behalf of the plan from the plan's foreign investment

portfolio; or (2) the conversion into any currency as required and

specified by the standing instruction of an amount which is the

equivalent of no more than 300,000 U.S. dollars of interest, dividends,

or other distributions or payments with respect to a security, tax

reclaims, proceeds from dispositions of rights, fractional shares or

other similar items denominated in the currency of another nation that

are received by the bank or broker-dealer on behalf of the plan from

the plan's foreign investment portfolio, provided that the converted

funds are either transferred to an interest bearing account which

provides a reasonable rate of interest within 24 hours of the

conversion and held therein pending reinvestment by the plan or the

bank reinvests such proceeds within 24 hours of the conversion at the

direction of the plan.

(h) A de minimis purchase or sale transaction means the purchase or

sale of foreign currencies in an amount of no more than 300,000 U.S.

dollars or the equivalent thereof in connection with the purchase or

sale of foreign securities by a plan.

(i) For purposes of this exemption the term employee benefit plan

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

welfare benefit plan described in 29 CFR Sec. 2510.3-1.

(j) For purposes of this exemption, the term good funds means funds

immediately available in cash with no sovereign or other governmental

impediments or restrictions to the exchange or transfer of such funds.

(k) For purposes of this exemption, the term business day means a

banking day as defined by federal or state banking regulations.

(l) For purposes of this exemption, the term foreign affiliate of a

bank or broker-dealer means any non-U.S. entity which is directly or

indirectly, through one or more intermediaries, controlling, controlled

by, or under common control with such bank or broker-dealer.

Signed at Washington, DC this 6th day of November 1998.

Alan D. Lebowitz,

Deputy Assistant Secretary for Program Operations, Pension and Welfare

Benefits Administration, Department of Labor.

[FR Doc. 98-30291 Filed 11-12-98; 8:45 am]

BILLING CODE 4510-29-P