Prohibited Transaction Class Exemption for Cross-Trades of Securities by Index and Model-Driven Funds (PTCE2002-12)

Tuesday,
February 12, 2002

Part III

Department of Labor
Pension and Welfare Benefits
Administration
Class Exemption for Cross-Trades of
Securities by Index and Model-Driven
Funds; Notice

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Federal Register / Vol. 67, No. 29 / Tuesday, February 12, 2002 / Notices

DEPARTMENT OF LABOR
Pension and Welfare Benefits
Administration
[Prohibited Transaction Exemption 2002–
12; Application No. D–10851]

Class Exemption for Cross-Trades of
Securities by Index and Model-Driven
Funds
AGENCY: Pension and Welfare Benefits
Administration, Department of Labor.
ACTION: Grant of class exemption.
SUMMARY: This document contains a
final exemption from certain prohibited
transaction restrictions of the Employee
Retirement Income Security Act of 1974
(the Act or ERISA), the Federal
Employees’ Retirement System Act
(FERSA), and from certain taxes
imposed by the Internal Revenue Code
of 1986 (the Code). The exemption
permits cross-trades of securities among
Index and Model-Driven Funds (Funds)
managed by investment managers, and
among such Funds and certain large
accounts which engage such managers
to carry out a specific portfolio
restructuring program or to otherwise
act as a ‘‘trading adviser’’ for such a
program. The exemption affects
participants and beneficiaries of
employee benefit plans whose assets are
invested in Index or Model-Driven
Funds, large pension plans and other
large accounts involved in portfolio
restructuring programs, as well as the
Funds and their investment managers.
This exemption does not address crosstrades of securities among ‘‘activelymanaged’’ accounts. The Department is
considering additional safeguards to
protect participants in plans that engage
in active cross-trading prior to
publishing a proposal to permit such
cross-trades.
EFFECTIVE DATE: The effective date of the
exemption is April 15, 2002.
FOR FURTHER INFORMATION CONTACT:
Karen E. Lloyd or Christopher J. Motta
of the Office of Exemption
Determinations, Pension and Welfare
Benefits Administration, U.S.
Department of Labor, Washington, DC
20210 at (202) 693–8540; or Michael
Schloss, Plan Benefits Security Division,
Office of the Solicitor, U.S. Department
of Labor, Washington, DC 20210, at
(202) 693–5600. (These are not toll-free
numbers.)

Paperwork Reduction Act Analysis
In accordance with the Paperwork
Reduction Act of 1995 (44 U.S.C. 3501–
3520)(PRA 95), the Department
submitted the information collection
request (ICR) included in the Class

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Exemption for Cross-Trades of
Securities by Index and Model-Driven
Funds to the Office of Management and
Budget (OMB) for review and clearance
at the time the Notice of proposed class
exemption was published in the Federal
Register (December 15, 1999, 64 FR
70057). OMB subsequently approved
the ICR under OMB control number
1210–0115. The approval will expire on
April 30, 2003. The public is not
required to respond to an information
collection request unless it displays a
currently valid OMB control number.
As described in detail in the
SUPPLEMENTARY INFORMATION section
which follows, the Department of Labor
(Department) has made certain
modifications to the terms of the
proposed class exemption in response to
comments received from the public.
Although the recordkeeping and
information disclosure requirements
which constitute the information
collection provisions of the final class
exemption have been clarified in certain
respects, the information collection
provisions have not been substantively
or materially changed from the
proposed exemption. The Department
has, however, made certain adjustments
to its burden estimates and underlying
assumptions in response to comments
on the proposal. These adjustments
relate to the numbers of entities offering
Index and Model-Driven Funds and
their client plans, and the number of
Large Accounts that may make use of
the exemption, and the estimated
burden of the record-keeping
requirement.
The Department’s original estimates
of the number of users of the exemption
were based on the number of individual
exemptions granted and applications
received, and information received from
exemption applicants about the number
of plans involved, resulting in estimates
of 10 entities with an average of 20
client plans for each. One commenter
expressed the view that at least 50
entities with an average of 40 client
plans would make use of the exemption.
Because the Department acknowledges
that the grant of this final exemption
may affect the number of entities that
would consider implementing a
program of cross trading involving
index and model funds, the assumed
numbers of entities and plans have been
increased for purposes of burden
estimates to 20 entities and 40 plans,
respectively. Similarly, the number of
Large Accounts assumed for purposes of
estimating burden has been increased
from 10 to 40. While the assumed
number of Large Accounts is smaller
than the 1,000 offered by the
commenter, the Department believes

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that a number approximating 18% of all
plans with $50 million in assets would
substantially overstate the number
likely to make use of the exemption in
connection with a portfolio
restructuring program in a given year.
The commenter also indicated that
the Department’s estimates of the time
required to establish and maintain the
record-keeping systems that would be
needed to comply with the exemption
were significantly low. The comment
states that a significant investment of $4
to $5 million would be required for each
user to establish the necessary recordkeeping systems, and that substantial
amounts of time would be required
daily for ongoing record-keeping, and
annually for ongoing disclosures. Upon
consideration of the comment, the
Department has concluded that its
original estimates did omit the impact of
the initial investment of resources that
would be required to enhance existing
software and systems to track crosstrades to triggering events. As a result,
the Department has revised its estimates
to include the hours, or costs as
applicable, of 1,040 hours of systems
analyst time at $51 per hour (based on
Occupational Employment Survey data
and 1999 Employment Cost Index,
adjusted for non-wage compensation
and overhead.) This change adds
approximately 12,500 hours and
$424,000 to the estimated burden of the
final exemption. These totals are
distributed over a three year period for
purposes of the annual burden shown
below.
Given that record-keeping systems for
securities transactions are primarily
electronic in nature, and that the
Department’s burden estimates now take
into account the start-up cost of
modifying automated record-keeping
systems, the Department has decided
not to revise the estimated time required
to maintain the required records of
trades and to prepare disclosure
materials. In the Department’s view, the
original estimates are reasonable in light
of the degree to which record-keeping is
automated, the industry’s existing
record-keeping practices involving
cross-trading, and the information
provided by other commenters.
In addition, the final exemption
clarifies that the annual disclosures are
required to be made with respect to only
those Funds that hold plan assets and in
which a given plan invests. The
commenter had indicated that
eliminating the annual disclosure
requirement with respect to Funds in
which a plan had no investments would
substantially reduce the burden. This
clarification, therefore, further supports
retention of the original assumptions.

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Federal Register / Vol. 67, No. 29 / Tuesday, February 12, 2002 / Notices
Finally, the commenter expressed the
view that certain of the information
required to be disclosed by the terms of
the proposed exemption was
duplicative and unnecessary. As noted
earlier, with the exception of certain
clarifications, the information collection
provisions of the final exemption are
unchanged from the proposal. The
Department’s basis for its conclusions
with respect to the need for the
disclosure and record-keeping
provisions of the final exemption are
discussed in detail in the
SUPPLEMENTARY INFORMATION section
that follows.
The burden estimates that result from
the revised assumptions are presented
below:
Title: Prohibited Transaction Class
Exemption for Cross-Trades of
Securities by Index and Model-Driven
Funds.
Agency: Department of Labor, Pension
and Welfare Benefits Administration.
Affected Entities: Business or other
for-profit.
Respondents: 60 (20 entities and 40
Large Accounts).
Responses: 840.
Annual Hour Burden: $9,100.
Annualized Capital/Start-up Cost:
$141,000.
Annual Cost (Operating and
Maintenance): $280,000.
Annual Cost Burden: $421,000.
Executive Order 12866 Statement
Under Executive Order 12866, the
Department must determine whether a
regulatory action is ‘‘significant’’ and
therefore subject to the requirements of
the Executive Order and subject to
review by the Office of Management and
Budget (OMB). Under section 3(f), the
order defines a ‘‘significant regulatory
action’’ as an action that is likely to
result in a rule (1) having an annual
effect on the economy of $100 million
or more, or adversely and materially
affecting a sector of the economy,
productivity, competition, jobs, the
environment, public health or safety, or
State, local or tribal governments or
communities (also referred to as
‘‘economically significant’’); (2) creating
serious inconsistency or otherwise
interfering with an action taken or
planned by another agency; (3)
materially altering the budgetary
impacts of entitlement grants, user fees,
or loan programs or the rights and
obligations of recipients thereof; or (4)
raising novel legal or policy issues
arising out of legal mandates, the
President’s priorities, or the principles
set forth in the Executive Order.
Pursuant to the terms of the Executive
Order, it was determined that this action

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is ‘‘significant’’ under section 3(f)(1) of
the Executive Order. Accordingly, this
action has been reviewed by OMB.
Economic Analysis
Establishing a class exemption that
permits plans to cross-trade can be
expected to have a variety of positive
economic effects that will considerably
exceed the direct costs incurred by
plans to comply with the record keeping
and reporting requirements enumerated
in the PRA section of the final class
exemption. By removing existing
barriers to these types of transactions,
the exemption will significantly
increase the utilization of cross-trading
among index and model-driven
portfolios. This will result in substantial
savings to plans by lowering the
transaction costs in a number of ways.
Although there is currently no source of
data that can be used to precisely
estimate the level of these savings or the
distribution of these effects among
various parties, extrapolating from
several sources can provide a reasonable
estimate of their overall magnitude.
Limiting the exemption to index and
model-driven portfolio management
techniques should preclude any changes
in the incidence of trading activity. In
contrast to active management
techniques, index and model funds will
continue to execute trades at the same
levels that they would in the absence of
the exemption because their trading is
motivated by the need to remain within
their tracking parameters rather than in
response to marginal changes in
expected transaction costs. It is
therefore reasonable to assume that the
changes in costs will result solely from
a decrease in the cost of executing many
individual trades rather than from a
change in the levels of trades.
Changes in the costs of individual
trades will result from (1) the
elimination of commission costs that
would otherwise be associated with a
trade, (2) the avoidance of bid-ask
spreads that impose costs for
transactions executed through dealers,
(3) the absence of fees and taxes that
might otherwise apply, and (4) the
avoidance of the market impact of large
trades which might otherwise require
price concessions to execute or effect
the trade which would directly impact
the market value of the resulting
holdings.
Only the first three of these effects are
considered in the analysis. The last,
market impact, is not included because
it can reasonably be expected to have
largely offsetting effects. ERISA plans
are equally likely to be on either side of
a cross trade and in most cases are likely
to represent both parties to a

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transaction. In some instances, they will
be advantaged by avoiding the changes
in an individual securities price that
might otherwise have resulted from a
trade executed through another venue.
In other circumstances, they will be
disadvantaged. An equal probability of
either will result in essentially offsetting
effects in the aggregate.
A similarly conservative approach is
taken in regard to two other aspects of
the analysis. These are a result of the
limitations in the available data and the
absence of any experience with the full
scope of relief afforded by the
exemption on which to base an
estimate. Although some data on the
amount of ERISA plan assets in index
funds is available, there is no similar
source of reliable information to
estimate the size of ERISA model driven
assets to which the exemption would
apply. There is also no experience with
more extensive opportunities for crosstrading that are available under the
exemption resulting from increased
flexibility in allocating cross-trading
opportunities, the extension of relief to
a broader range of entities, and the
inclusion of debt securities in the
allowable transactions. Consequently
the analysis is limited to index funds
and does not incorporate increases in
savings resulting from the extension of
relief to circumstances with which there
is no prior experience. As such, it
should be interpreted as an extremely
conservative estimate that is likely to
represent a lower bound of the level of
savings that can be expected to accrue
to plans.
Two large financial services firms
currently operating under individual
exemptions that permit cross-trading
among ERISA plans provided estimates
of the savings in commissions, spreads,
and fees that they have experienced
managing both ERISA and non-ERISA
indexed assets. These two estimates
represent a significant portion of the
ERISA plan universe and are therefore
likely to be representative of the cost
savings likely to occur. One of the firms
estimated the cost savings to be
approximately $275 million per year for
a total indexed portfolio of $400 billion.
The other estimated a savings of $207
million for $441 billion of indexed
assets under management. Both of these
include ERISA and non-ERISA assets,
however, the experience should be
indicative of expected results because
the nature of trading costs for indexed
funds should be virtually identical.
Averaging these figures yields an
estimate that costs savings of .057% or
5.7 basis points for each dollar of
affected ERISA plan assets can be
expected.

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Federal Register / Vol. 67, No. 29 / Tuesday, February 12, 2002 / Notices

A recent survey of pension funds
indicates that among the largest private
sector defined benefit pension funds,
14% of the total assets were held in
index funds. Among defined
contribution plans, index funds
constituted 12% of total assets.
Applying these percentages to the most
recent estimates of the total value of
private pension funds yields an estimate
of approximately $584 billion of ERISA
pension funds that are currently
managed as indexed funds.
Applying the estimate of $.00057 of
savings for each dollar of assets under
management results in an estimated
level of cost reductions of
approximately $332 million per year
that will result from the class
exemption. This total cost savings
estimate overlaps, in part, current costs
savings experienced by plans whose
managers have cross-trading programs
covered under existing individual
exemptions. While certain large index
fund managers are successfully
operating cross-trading programs for
ERISA plans at this time, the class
exemption is expected to create
additional cost savings for these plans
by increasing the number and frequency
of cross-trading opportunities among the
managers’ client accounts. In addition,
new cross-trading opportunities will be
made available for plans whose assets
are managed by entities that currently
do not have individual exemptions.
Finally, the conservative nature of the
total estimate is highlighted by the fact
that cost savings associated with crosstrading by model-driven funds have not
been factored into the estimate of total
cost savings due to the absence of
available data.
SUPPLEMENTARY INFORMATION: On
December 15, 1999, the Department of
Labor (the Department) published a
notice in the Federal Register (64 FR
70057) of the pendency of a proposed
class exemption from the restrictions of
sections 406(a)(1)(A) and 406(b)(2) of
the Act, section 8477(c)(2)(B) of
FERSA,1 and from the taxes imposed by
section 4975(a) and (b) of the Code by
reason of section 4975(c)(1)(A) of the
Code.
The Department proposed the class
exemption on its own motion pursuant
1 The Department has responsibility for the
administration and enforcement of section 8477 of
FERSA. Section 8477 establishes the standards of
fiduciary responsibility and requirements relating
to the activities of fiduciaries with respect to the
Federal Thrift Savings Fund. All references herein
to the fiduciary responsibility provisions of Part 4
of Title I of ERISA also apply to the corresponding
provisions of FERSA. Accordingly, the relief
provided under this class exemption applies to
cross-trades of securities by the Federal Thrift
Savings Fund.

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to section 408(a) of the Act and section
4975(c)(2) of the Code, and in
accordance with the procedures set
forth in 29 CFR part 2570, subpart B, (55
FR 32836, August 10, 1990).2 The
Department’s determination to proceed
with the proposed class exemption was
based, in part, on information received
from interested persons in response to a
notice (the Notice) published in the
Federal Register on March 20, 1998 (63
FR 13696).
The notice of pendency gave
interested persons an opportunity to
comment or request a public hearing on
the proposal. Fourteen (14) public
comments were received by the
Department. Upon consideration of all
the comments received, 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 Comments Received
The comments received by the
Department were generally supportive
of the issuance of a separate class
exemption for cross-trading of securities
by Index and Model-Driven Funds.
However, many of the commenters
requested specific modifications to the
proposal in the following areas:
1. Accounts Permitted to Cross-Trade.
Several comments noted that section I(a)
and (b) of the proposal does not
explicitly permit cross-trades between
two or more Large Accounts. These
comments noted that when more than
one Large Account is buying or selling
a particular security as part of a
manager’s cross-trading program, that
security could be traded between two
Large Accounts, two Index or ModelDriven Funds, or any combination
thereof. In the operation of a crosstrading program, the matching of the
buyer and seller would be coincidental.
The commenters believe that a manager
should be permitted to submit trade lists
from each Large Account to its crosstrade allocation system and allow trades
submitted on behalf of one Large
Account to be crossed with trades
submitted on behalf of another Large
Account.
The Department notes that section I(a)
and (b) of the proposal does not provide
relief for cross-trades exclusively
2 Section 102 of Reorganization Plan No. 4 of
1978, 5 U.S.C. App. 1 (1996) generally transferred
the authority of the Secretary of the Treasury to
issue exemptions under section 4975(c)(2) of the
Code to the Secretary of Labor.
In the discussion of the exemption, references to
specific provisions of the Act should be read to
refer as well to the corresponding provisions of
section 4975 of the Code.

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between two or more Large Accounts.
The Department is of the view that such
cross-trading would be outside the
scope of the exemption because, among
other things, there would be no
‘‘triggering event’’ to limit the amount of
discretion exercised by the manager
where such transactions occurred solely
between Large Accounts.
The Department does recognize,
however, that a manager’s cross-trading
program that complies with the
requirements of the proposal may
produce cross-trade opportunities that
result from both triggering events of
particular Index and Model-Driven
Funds as well as from the decision of an
independent fiduciary to restructure all
or a portion of a Large Account’s
portfolio. Under such circumstances,
the Department anticipates that the
allocation of buying and selling
opportunities across all Funds and
Accounts participating in the crosstrading program may result in some
individual cross-trades between two
Large Accounts. In such an event, the
exemption would permit the
‘‘coincidental’’ matching of a buyer and
seller of particular securities where both
buyer and seller are Large Accounts
since such cross trades would be part of
a unified process-driven cross-trading
program where the allocations of
available securities (from all Funds and/
or Large Accounts) resulted from an
objective process which did not permit
the exercise of discretion by the
manager, as required under section II(d)
of the exemption. The Department has
revised section I of the exemption to
clarify this point.
Another commenter noted that no
specific relief for cross-trades between
two Large Accounts may be necessary
where the decision to liquidate or
restructure is made by an independent
fiduciary or independent Account
representative, and, therefore, the
manager would not be acting as a
fiduciary for either side of the
transaction. Thus, the commenter
suggested that the Department may wish
to clarify whether additional relief for
cross-trades exclusively between two or
more Large Accounts is necessary.
Alternatively, the commenter suggested
that section I(b) of the proposal be
modified to explicitly permit crosstrades solely between Large Accounts.
In response to this comment, the
Department notes that violations of
section 406(b)(2) of the Act would occur
if the manager used its discretionary
authority to determine whether to crosstrade securities between two Large
Accounts at least one of which holds
plan assets, which securities to crosstrade, the timing of such cross-trades,

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and the amount of securities to crosstrade notwithstanding that the overall
determination to restructure the
accounts was made by independent
fiduciaries.
Accordingly, except as provided
above, the Department has determined
not to expand the relief provided under
this exemption to include cross-trades
solely between two or more Large
Accounts. The Department notes that
the final exemption provides a manager
with a significant amount of time in
which to conduct cross-trades for a
Large Account in connection with a
specific portfolio restructuring program.
A manager’s discretion to time specific
cross-trades for two Large Accounts,
absent the limitations provided by a
process-driven cross-trading program
involving ‘‘triggering events’’ for Index
and Model-Driven Funds, would entail
the type of discretion commonly
exercised by managers for ‘‘activelymanaged’’ accounts. In this regard, relief
for cross-trades by ‘‘actively-managed’’
accounts and pooled funds containing
‘‘plan assets’’ will be considered by the
Department in a separate proceeding.
2. Use of closing prices. One
commenter suggested that the
Department modify the requirement that
all cross-trades occur at the closing
prices for the securities on the relevant
market in order to allow for alternate
pricing methodologies (e.g., ‘‘volume
weighted average price’’ or ‘‘VWAP’’),
after appropriate disclosure to the
affected plans. Section II(a) of the
proposal requires that the cross-trade be
executed at the closing price, as defined
in section IV(h). Section IV(h) of the
proposal defines ‘‘closing price’’ as the
price for a security on the date of the
transaction, as determined by objective
procedures disclosed to Fund investors
in advance and consistently applied
with respect to securities traded in the
same market, which procedures shall
indicate the independent pricing source
used to establish the closing price and
the time frame after the close of the
market in which the closing price will
be determined. The commenter does
note that ‘‘closing prices’’ are the most
appropriate prices currently in use for
cross-trades of securities by Index and
Model-Driven Funds, whose objective is
to track the return of an index, since the
calculation of an Index Fund’s ‘‘tracking
error’’ is based on closing prices for the
securities listed in the relevant index.
However, the commenter states that
index providers may utilize alternative
pricing methodologies in the future and
suggests that the Department should
consider broadening the exemption to
include such pricing methodologies.

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The Department notes that many
commenters have indicated that the use
of closing prices for cross-trades of
securities by Index and Model-Driven
Funds is common industry practice at
the present time. The Department does
not believe that it has sufficient
information at this time to determine
which types of alternative pricing
methodologies may be used by
managers in the future or how such
pricing systems would enable Index and
Model-Driven Funds to better achieve
their investment goals and strategies.
Therefore, the Department has
determined not to modify the
requirement that cross-trades be
executed at the closing price. The
Department would be prepared to
consider additional relief at a later date
upon proper demonstration that the
appropriate findings can be made under
section 408(a) of the Act with respect to
other pricing methods for cross-traded
securities.
3. ‘‘Triggering Events’’ and CrossTrade Executions. Several of the
comments objected to the requirement
in section II(b) of the proposal that any
cross-trade of securities by a Fund be
executed no later than the close of the
second business day following a
‘‘triggering event.’’ These comments
noted that previously issued individual
exemptions for cross-trades by Index
and Model-Driven Funds allowed crosstrades to be executed within three (3)
business days of a ‘‘triggering event’’
and that the proposal’s reduction of this
requirement to two days is inconsistent
with the stated premise of the proposal
that cross-trading is beneficial to plans.
Other comments noted that, once an
investment decision is made, a manager
should have 5 days to trade after a
‘‘triggering event’’—the same period of
time to execute the trade as is permitted
under the safe harbor provided in the
Department’s regulations for
determining whether a broker-dealer is
a fiduciary when it executes a securities
transaction on behalf of a plan (see 29
CFR 2510.3–21(d)). Another comment
requested that section II(b) be revised to
require that cross-trades be executed
either within three (3) days of a
‘‘triggering event,’’ or within such other
period of time as the manager may
disclose to the independent plan
fiduciary pursuant to the disclosure
requirements under section II(l) of the
proposal.
In response to the comments, the
Department has determined that it
would be appropriate to modify section
II(b) of the final exemption to require
that all cross-trades by a Fund be
executed no later than the close of the
third business day following a Fund’s

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‘‘triggering event.’’ The Department
notes that a three-day limit for crosstrades by a Fund following the relevant
‘‘triggering event(s)’’ has worked
successfully in the past for managers
who were granted individual
exemptions.3
4. Blackout Period for Cross-Trades by
Model-Driven Funds. Many of the
comments objected to the requirement
in section II(c) of the proposal that no
cross-trades by a Model-Driven Fund
may take place within ten (10) business
days following any change made by the
manager to the model underlying the
Fund. The preamble to the proposal
indicated that this restriction is
intended to prevent model changes
which might be made by managers, in
part, to deliberately create additional
cross-trading activity. The comments
suggested that such a long delay on the
ability of a manager to cross-trade after
a change in the computer model was
unnecessarily restrictive. According to
the commenters, this condition would
prevent cross-trading during the 10-day
‘‘blackout’’ period even though other
‘‘triggering events’’ were occurring in
the Fund. Other commenters noted that
there are already sufficient restrictions
on a manager’s discretion built into the
proposal.
While most comments objected to the
10-day ‘‘blackout’’ period, several of the
comments indicated that a 5-day period
would be sufficient to safeguard against
the Department’s concerns regarding
model changes that may be timed to
create additional cross-trading
opportunities. Other commenters
suggested that, rather than imposing a
‘‘blackout’’ period for an arbitrary
period of time (e.g., 5 or 10 days), a
more flexible approach could be used
where a Model-Driven Fund would be
able to cross-trade following the period
of time necessary to complete the first
re-balancing of the Fund’s portfolio after
the change is made by the manager to
the Fund’s model. Thus, under this
approach, the ‘‘blackout’’ period could
be less than three (3) days. One
comment suggested that any crosstrading ‘‘hiatus’’ for a Fund should not
be more than three (3) days. Other
comments simply requested that the
condition for a ‘‘blackout’’ period after
a model change be deleted. Still other
comments noted that, in the absence of
a ‘‘blackout’’ period, a requirement for
10-day prior notice of a model change
to each relevant plan’s independent
fiduciary should suffice. Finally, some
3 See, for example, Prohibited Transaction
Exemption (PTE) 95–56, 60 FR 35933 (July 12,
1999), regarding Mellon Bank, N.A., and its
Affiliates.

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commenters requested clarification that
model changes made either (i) at the
direction of a client plan, or (ii) as a
direct result of input changes furnished
by a third party data vendor (e.g.,
BARRA or Vestek), would not invoke a
‘‘blackout’’ period because such model
changes would not be the result of an
exercise of discretion on the part of the
manager.
The Department continues to believe
that some ‘‘blackout’’ period is
necessary to prevent managers from
exercising their discretion over the
criteria or data used for a model to
generate specific cross-trade
opportunities. However, in recognition
that a 10-day restriction may be too long
a period to prevent a Model-Driven
Fund from cross-trading, the
Department has decided to modify the
final exemption to require that crosstrades not take place within three (3)
business days following any change
made by the manager to the model
underlying the Fund.
In addition, with respect to the one
commenter’s concerns that model
changes resulting from independent
events should not invoke a ‘‘blackout’’
period for a Model-Driven Fund, the
Department acknowledges that any
change to a model which is not the
result of an exercise of discretion by the
manager (e.g., changes directed by an
independent plan fiduciary or furnished
by a third party data vendor whose
model is being used by the manager)
would not require a ‘‘blackout’’ period
for cross-trades by such Fund.
5. Restrictions on Cross-Trades by a
Manager Plan. One comment objected
to, and requested the deletion of, the
requirement in section II(e) of the
proposal that no more than ten (10)
percent of the assets of any Fund or
Large Account engaging in a cross-trade
may be comprised of assets of employee
benefit plans maintained by the
manager for its own employees (i.e., a
Manager Plan), for which the manager
exercises investment discretion. The
comment stated that this condition
would create a disincentive to in-house
management and may cause investment
managers to place assets of a Manager
Plan with outside managers solely on
the basis of the potential cost savings
that the outside managers could derive
from cross-trades.
The comment noted that for large
plans, in-house management is
frequently more cost-effective and keeps
the asset management function closer to
the people who have the most to gain
from maximizing investment
performance and minimizing
investment risk. The comment further
noted that larger in-house fiduciaries

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also manage assets for unaffiliated plans
and other institutional investors, often
as a result of a corporate spin-off with
an accompanying plan restructuring.
The comment stated that it understood
the Department’s concern regarding a
manager’s potential ability, through
cross-trades, to unduly benefit a
Manager Plan at the expense of its
outside clients. However, the
commenter believes that the other
conditions of the proposal, including
‘‘triggering events’’ for cross-trades,
detailed disclosures of cross-trading
procedures and reporting of cross-trades
resulting from a portfolio restructuring,
would serve as a check on the manager’s
ability to favor a Manager Plan.
Moreover, the commenter notes that to
the extent that a Manager Plan’s assets
are commingled with assets of outside
clients that are held in an Index or
Model-Driven Fund managed as a
collective investment fund, it would not
be possible for the manager to ‘‘favor’’
only the Manager Plan in that Fund,
even if the Manager Plan’s assets
represented more than 10 percent of the
Fund’s total assets. In any event, the
comment noted that the 10 percent
limitation should not apply to crosstrades that are made solely between
Manager Plans.
With respect to the commenter’s
request to delete the 10% limitation in
section II(e) of the proposal, the
Department notes that, without such a
percentage limitation, a substantial
majority of the investors in a Fund
could be comprised of Manager Plans.
The Department does not believe that
deletion of this percentage requirement
would ensure a sufficient level of
independent investor oversight of the
manager’s cross-trading program.
However, in consideration of the
arguments raised by the commenters,
the Department believes that a 20%
limitation would still ensure a sufficient
level of independent investor oversight
in a Fund and would not unduly restrict
the investment opportunities available
for a Manager Plan with respect to such
Funds. Therefore, the Department has
modified section II(e) to increase the
percentage limitation to 20%.
Accordingly, this exemption does not
provide relief for cross-trades of
securities of Index and Model-Driven
Funds maintained by a manager under
circumstances where the assets of the
Manager Plans comprise all or a high
percentage of the assets of the Fund. As
noted above, the Department believes
that the presence of independent
fiduciaries to approve of plan
participation in cross-trading programs
following receipt of meaningful
disclosures and the ability of such

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fiduciaries to periodically monitor the
arrangements provide important
protections under the exemption.
However, in response to several
comments, the Department wishes to
take the opportunity to state that the
granting of this exemption does not
foreclose future consideration of
additional relief for cross-trading
transactions that do not fit within the
framework developed by the
Department for this exemption. For
example, the Department is currently
considering additional relief for
transactions involving assets of plans
managed by in-house managers, as well
as for transactions involving
discretionary asset managers.
With respect to the comments
requesting that the exemption allow
cross-trades to occur solely between two
or more Manager Plans, the Department
notes that relief for these transactions
could involve the exercise of discretion
on both sides to a transaction that is
inconsistent with the underlying
concept of the proposal—which is to
provide relief for cross-trades made
pursuant to ‘‘process-driven’’
investment strategies. For this reason,
the Department has determined not to
revise the exemption in this regard.
Another comment stated that section
II(e) of the proposal does not adequately
address how the independent
authorization conditions in section II(i)
through (n) of the proposal would apply
to a Manager Plan, given that the plan
fiduciary responsible for the plan’s
investment matters is unlikely to be
independent of the manager. This
comment suggested that the Department
not require an independent fiduciary
authorization for a Manager Plan’s
participation in the manager’s crosstrading program. The commenter stated
that the suggested modification would
be consistent with other exemptions
that do not apply an independent
authorization requirement to plans of
the fiduciary for whom relief is
provided.4 Accordingly, the commenter
requests that the Department adopt a
similar provision under the final
exemption.
The Department concurs with the
comments and has determined to
modify section II(h) of the final
exemption (formerly section II(i) of the
proposal) to clarify that the requirement
that the authorizing fiduciary be
independent of the manager shall not
apply in the case of a Manager Plan.
Nevertheless, the appropriate fiduciary
for the Manager Plan must still receive
the proper disclosures and provide an
4 In this regard, see section IV(d)(1)(A) of PTE 86–
128 (51 FR at 41696, November 18, 1986).

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authorization for the Manager Plan to
participate in the manager’s crosstrading program. This clarification
modifies the disclosure and
authorization requirements applicable
to a plan’s participation in a manager’s
cross-trading program, as described in
section II(h) through (l) of the final
exemption (formerly section II(i)
through (m) of the proposal).
In addition, the Department has also
determined to modify the requirements
contained in section II(n) of the
proposal, relating to disclosures to, and
authorization by, a fiduciary of a Large
Account who is independent of the
manager for cross-trades in connection
with a portfolio restructuring for the
Large Account. To clarify this matter,
the Department has revised section II(m)
of the final exemption (formerly section
II(n) of the proposal) by adding the
parenthetical phrase ‘‘* * * (other than
in the case of any assets of a Manager
Plan)’’ to the requirements for an
independent fiduciary discussed in
section II(m)(1) through (4). In this
regard, the Department notes that the
final exemption still requires that
proper disclosures be made to, and
written authorization be made by, a
Manager Plan’s fiduciary in order for the
Manager Plan to participate in a specific
portfolio restructuring program.
6. Exclusion of Thinly-Traded Equity
Securities. A number of commenters
objected to the condition contained in
section II(f)(1) of the proposal that
required that cross-trades of equity
securities involve only securities that
are widely-held, actively-traded, and for
which market quotations are readily
available from independent sources. In
this regard, the terms ‘‘widely-held’’ and
‘‘actively-traded’’ are deemed to include
any security listed in an ‘‘Index’’ (as that
term is defined in section IV(c) of the
proposal).
The comments stated that this
requirement was not necessary for an
exemption for cross-trading by Index
and Model-Driven Funds. According to
the comments, security selection for
such Funds is driven solely by objective
factors. The commenters argued that the
level of trading and diversity of
holdings for securities are not relevant
to security selections made by Funds
and that such factors should not serve
as a constraint on the ability of such
Funds to cross-trade. Generally, the
comments noted that if market prices
are readily available, the exclusion of
‘‘closely-held’’ and ‘‘thinly-traded’’
equity securities is unduly restrictive.
They further argued that such
limitations would prevent use of the
exemption for many ‘‘small-cap’’ and
foreign equity securities. Thus, the

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commenters urged the Department to
delete the requirement that cross-traded
equity securities be ‘‘widely-held’’ and
‘‘actively-traded.’’
As an alternative approach, one
commenter suggested a limitation based
on a comparison of the size of the crosstrade to the prior public trading volume
in the security over a reasonable period
of time prior to the date of the
transaction. Such a volume limitation
would prevent cross-trades of equity
securities where the total volume of
shares being cross-traded would exceed
a certain percentage of the total number
of shares publicly traded on the market
during a particular period of time.
The Department is not persuaded by
the arguments submitted in favor of
deletion of the requirements contained
in section II(f)(1) that equity securities
that are cross-traded must be ‘‘widelyheld’’ and ‘‘actively-traded.’’ The
Department continues to believe that
cross-trades of ‘‘thinly-traded’’
securities raise issues as to whether both
sides of the cross-trade have benefitted
equally from the avoidance of adverse
market impact. The avoidance of market
impact would be more dramatic with
‘‘thinly-traded’’ equity securities than
with equity securities that are ‘‘widelyheld’’ and ‘‘actively-traded.’’ 5 Similarly,
the avoidance of liquidity restraints
would be more dramatic with ‘‘thinlytraded’’ equity securities than with
equity securities that are ‘‘widely-held’’
and ‘‘actively-traded.’’
In order to address its concerns
without unnecessarily restricting the
scope of relief under the proposal, the
Department determined to deem equity
securities that are included in an Index
(as defined in section IV(c) of the
exemption) to be ‘‘widely-held’’ and
‘‘actively-traded’’ for purposes of the
exemption. However, the Department
notes that the exemption does not
preclude a manager from cross-trading a
particular equity security not included
in an index if the manager otherwise
determines that such security is
‘‘widely-held’’ and ‘‘actively-traded.’’6
5 The Department notes that these concerns
would also arise with ‘‘thinly-traded’’ debt
securities. However, since ‘‘thinly-traded’’ debt
securities of different issuers with the same coupon
rate, maturity, and credit rating are relatively
fungible, the Department did not believe that it
would be appropriate to apply these concepts to
such securities for purposes of this exemption.
6 With respect to the selection criteria for
securities included in a Fund’s portfolio which are
not included in an Index, the Department assumes
that any screening criteria and/or weighting
procedures used to create the portfolio will be
determined using purely mathematical
computations based upon objective raw data. In
addition, the Department assumes that the
investment management agreement relating to each
Fund, as approved by plan investors in the Fund,

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6619

With respect to the comment
suggesting a trading volume limitation,
the Department notes that other
commenters have discouraged it from
addressing its concerns about crosstrades of ‘‘thinly-traded’’ securities
through volume limitations, based on
arbitrary percentages of the average
daily trading volume for the securities.
These commenters noted that the
systems used by managers to allocate
cross-trades among various Funds
would have difficulty monitoring and
re-allocating cross-traded securities to
conform to such volume limitations.
In consideration of the above, the
Department has determined not to
modify section II(f)(1) in the final
exemption.
7. Cross-Trades of Securities Issued
By the Manager. Several comments
objected to the requirement in section
II(h) of the proposal that cross-trades not
involve securities issued by the
manager, unless the manager has
obtained a separate prohibited
transaction exemption for the
acquisition of such security. One
commenter noted that, although some
institutions have obtained individual
exemptions to deal with issues relating
to acquisitions and dispositions of the
manager’s own stock by its Index and
Model-Driven Funds,7 others have
concluded that no exemptive relief is
necessary based on the facts and
circumstances surrounding their
individual situations. The commenter
noted that, with regard to certain Index
Funds, the manager does not exercise
discretion in choosing the individual
stocks to buy or sell, but rather seeks to
mechanically purchase stocks selected
through objective criteria which is
outside of the manager’s control. For
example, in an Index Fund that is
designed to replicate the exact
capitalization-weighted composition of
the Standard & Poor’s 500 Composite
Stock Price Index (the S&P 500 Index),
if the manager’s stock is included in the
index, that stock will be purchased in
the proportion dictated by the index
without the manager exercising any
investment discretion. In such
instances, the commenter stated that a
manager’s failure to acquire the stock
would cause ‘‘tracking error,’’ thereby
subverting the goal of plan investors in
would set forth the specific dates on which the
Fund’s portfolio will be re-balanced. In this regard,
the Department notes that no relief would be
provided under this exemption for violations of
section 406(b)(1) of the Act which may occur as a
result of a manager’s exercise of fiduciary authority
or discretion to affect the components of an Index.
7 For example, see Prohibited Transaction
Exemption (PTE) 2000–30, 65 FR 37166 (June 13,
2000), regarding Barclays Bank PLC and its
Affiliates.

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the Fund to replicate the performance of
the index. Other comments stated that it
was not clear why a restriction for crosstrades of a manager’s own stock is
necessary and that there appears to be
no reason to exclude such securities
from the exemption. The Department
accepts these comments and has
determined to delete section II(h) of the
proposal from the final exemption.
However, the Department notes that
the exemption does not provide relief
for any discretionary changes in an
Index or Model-Driven Fund made by a
manager, or any other discretionary
decisions by the manager, which are
designed to result in cross-trades of the
manager’s own stock for the benefit of
the manager. Only cross-trades
generated by non-discretionary changes
in a Fund (e.g., changes in the
capitalization weighting of the
manager’s stock within an index, or the
addition or removal of the manager’s
stock from an index) are covered by this
exemption. Accordingly, no relief is
provided for such discretionary changes
regarding the manager’s own stock.
As noted previously, all conditions in
the final exemption have been redesignated to reflect the deletion of
section II(h) of the proposal.
8. Disclosure and Authorization
Requirements. Many comments raised
concerns about the scope of the
disclosure and authorization
requirements contained in section II(j),
(k), (l) and (m) of the proposal. In this
regard, the comments noted that section
II(i) of the proposal expressly states that
the written authorization requirement
for a plan’s participation in a manager’s
cross-trading program only applies to
plans investing in an Index or ModelDriven Fund that holds ‘‘plan assets’’
subject to the Act. The commenters
urged the Department to clarify that the
notice and disclosure requirements
contained in section II(j), (k), (l) and (m)
of the proposal similarly apply only to
independent fiduciaries of employee
benefit plans that invest in Funds
holding plan assets.
The Department acknowledges the
commenters’ concerns regarding the
intended scope of the disclosure and
authorization requirements of the
proposal and wishes to clarify that such
requirements were meant to apply only
to those Index and Model-Driven Funds
which hold ‘‘plan assets,’’ as defined
under the Department’s regulations (see
29 CFR 2510.3–101). Therefore, the
Department has revised section II(i) and
(l) of the final exemption (formerly
section II(j) and (m) of the proposal)
accordingly.
Other comments objected to the prior
written authorization requirement

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contained in section II(i) of the
proposal, noting that prior individual
exemptions granted by the Department
for cross-trades by Index and ModelDriven Funds did not contain a similar
requirement. These comments
expressed the view that requiring prior
written consent from an independent
plan fiduciary as a condition for the
plan to invest in a Fund that is part of
a manager’s cross-trading program
serves no useful purpose. The
comments noted that if a plan fiduciary
were to develop any objections to crosstrading on philosophical grounds, then
the plan would be free to withdraw from
the Fund without penalty. The
commenters believed that imposition of
such a requirement will be perceived
negatively by plan sponsors as an
unnecessary obstacle to their ability to
freely invest and reinvest plan assets in
a manager’s Funds.
The Department disagrees with the
commenters’ assertion that prior written
consent from an independent plan
fiduciary is unnecessary. The
Department notes that part of the reason
for proposing a class exemption for
cross-trades of securities by Index and
Model-Driven Funds was to address
issues which had come to the
Department’s attention subsequent to its
granting of a number of individual
cross-trading exemptions.
As stated in the Notice published on
March 20, 1998, the Department
recognizes that it is important to retain
the flexibility to periodically review its
exemption policy in the context of
changed circumstances or new facts that
may be brought to its attention (see 63
FR at 13698, first paragraph of section
entitled ‘‘Issues and Developments’’).
The Department became aware of new
issues involving cross-trades, including
cross-trades by certain ‘‘passive’’
investment managers, through
enforcement proceedings that raised
concerns about whether plan fiduciaries
were being provided with adequate
disclosures regarding a manager’s crosstrading program.
The Department continues to believe
that adequate disclosures are necessary
in order to enable a plan fiduciary to
understand a manager’s cross-trading
program and how that program may
affect the investment goals and
objectives of Funds in which the plan
may invest. The Department notes that
the written authorization required by
section II(i) of the proposal will apply
to all of the Funds which participate in
a manager’s cross-trading program.
Thus, once an authorization is provided
by an independent fiduciary, a plan will
be able to invest in any of the Funds
without any additional authorization.

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The Department further notes that the
authorizations required under the
exemption for existing plan investors in
any Funds may be obtained through a
separate notice which describes the
Funds’ participation in the manager’s
cross-trading program. Under this
requirement, failure to return the
termination form by the date specified
in the notice will be deemed to be an
approval by the independent plan
fiduciary of the plan’s participation in
the cross-trading program. Therefore,
the Department has determined not to
revise the authorization requirements in
the final exemption.
With respect to the required content
for the disclosures that must be
furnished pursuant to sections II(l) and
(m) of the proposal, the commenters
were concerned that the initial and
annual notices must identify all Index
and Model-Driven Funds participating
in the manager’s cross-trading program,
together with detailed information
regarding the ‘‘triggering events’’ and
other information relating to each Fund.
The comments noted that requiring such
disclosures would cause managers to
violate confidentiality restrictions
contained in many client agreements
and would also raise privacy concerns
for clients who do not wish their
identity, or the fact that they maintain
an investment account with the
manager, to be disclosed. In this regard,
the comments noted that managers are
restricted from disclosing confidential
information about clients, particularly
the Funds in which clients invest. In
addition, the comments stated that such
detailed disclosure would be of little
practical value to plan fiduciaries when
deciding whether to authorize or
maintain plan investments in a
particular Fund. As an alternative,
several comments suggested that the
initial and annual notices should
include only general descriptions of the
types of Funds that participate in the
manager’s cross-trading program and of
the ‘‘triggering events’’ that give rise to
cross-trade opportunities.
The Department acknowledges the
concerns expressed by the commenters
regarding the confidentiality restrictions
contained in client agreements and
privacy concerns relating to the identity
of such clients and the Funds in which
they may invest. Nevertheless, the
Department continues to believe that the
required disclosures will be useful to a
plan fiduciary in understanding the
scope and operation of the manager’s
cross-trading program and whether
participation in the program remains in
the plan’s best interests. However, the
Department does not intend for the
disclosures in section II(k) of the

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exemption (relating to a manager’s
ongoing disclosures of information
about the cross-trading program) or
section II(l) of the exemption (relating to
disclosures for an annual reauthorization of the cross-trading
program by an independent plan
fiduciary) to require that privileged or
confidential information be revealed by
the manager. For example, these
provisions, as revised herein, do not
require a manager to furnish to
independent plan fiduciaries the
identity of any clients of the manager
that are invested in other Funds that are
added to the cross-trading program. In
addition, any information disclosed by
the manager regarding new ‘‘triggering
events’’ for existing Funds need only
provide such information with respect
to Funds in which the plans are
invested. With respect to disclosures
regarding new ‘‘triggering events’’
which must be provided to the relevant
independent plan fiduciaries of the
affected Funds (as discussed further
below), the Department does not believe
that the final exemption requires the
disclosure of privileged or confidential
information.
Other commenters requested that the
Department clarify that portion of
section II(l) of the proposal which
requires that the manager notify each
relevant independent plan fiduciary of
the addition of Funds to the manager’s
cross-trading program, or changes to, or
additions of, ‘‘triggering events’’
regarding Funds, following a plan’s
initial authorization of participation in
the program. Specifically, the comments
requested clarification as to whether the
phrase ‘‘each relevant independent plan
fiduciary’’ was intended by the
Department to be limited to fiduciaries
of plans invested in those specific
Funds that are added to a manager’s
cross-trading program or whose
‘‘triggering events’’ have been modified.
The comments noted that it would be
burdensome to require managers to
notify all plans regarding modifications
to ‘‘triggering events’’ that may occur in
all Funds, including Funds in which
such plans are not invested, just because
such Funds participate in the crosstrading program. In addition, it would
be difficult to provide notice to all plans
prior to, or within 10 days following,
such events affecting any of the Funds.
In consideration of such comments,
the Department has modified section
II(k) of the final exemption (formerly
section II(l) of the proposal) to provide
that the ongoing notices of information
that must be furnished to ‘‘each relevant
independent plan fiduciary’’ are
required to be made only to those
fiduciaries whose plans are invested in

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the affected Funds (i.e., the Funds
added to the program or whose
‘‘triggering events’’ have been changed).
Other commenters stated that certain
of the disclosures are unnecessary. For
example, several comments objected to
the statement required by section II(k) of
the proposal, relating to investment
decisions for a Fund not being based on
the availability of cross-trade
opportunities. These comments noted
that this statement would be duplicative
of other information required in the
proposal and would provide no added
protection to plans, other than the
manager’s promise to follow the
conditions of the exemption. Certain
comments objected to the disclosures
described in section II(l) of the proposal
including the required statement that
‘‘* * * the Manager will have a
potentially conflicting division of
loyalties and responsibilities to the
parties to any cross-trade transaction
* * *.’’ In addition, section II(l) of the
proposal required that the Manager
explain how its cross-trading practices
and procedures will mitigate such
conflicts. According to the comments,
following the terms of the exemption
should be viewed as precisely what is
necessary to mitigate the conflicts.
Thus, the commenters believed that it
will be misleading to inform client
plans that the operation of a manager’s
cross-trading program, even with
adherence to the terms of the proposed
exemption, will still create conflicts.
The Department believes that specific
statements relating to the fact that
investment decisions for a Fund will not
be based on cross-trade opportunities
(as described in section II(k) of the
proposal), and that there are potential
conflicts of interest in such cross-trades
(as described in section II(l) of the
proposal), are important to an
independent plan fiduciary’s
understanding of the issues involved
with cross-trades of securities. The
Department notes that, in any crosstrading program, including cross-trading
programs maintained by ‘‘passive’’
investment managers, there would be a
potential for abuse if a manager were
able to control cross-trade opportunities
to favor the interests of particular
clients. Therefore, the Department has
determined not to revise the exemption
as requested.
Section II(l) of the proposal requires
that independent plan fiduciaries be
furnished with detailed disclosure of
the procedures to be implemented
under the manager’s cross-trading
program (including the ‘‘triggering
events’’ that will create cross-trading
opportunities, the independent pricing
services that will be used by the

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manager to price the cross-traded
securities, and the methods that will be
used for determining closing price). The
comments noted that the preamble to
the proposal suggests with respect to
foreign securities that the applicable
independent pricing source should
provide the price in local currency rates
and, if that currency is other than U.S.
dollars, also provide the U.S. dollar
exchange rate (see first paragraph of
Section IV.B. of the preamble, 64 FR at
70062). In this regard, the comments
noted that most pricing services that
price foreign securities do not provide
currency conversion rates. These
commenters suggested that managers be
allowed to use another independent
service to provide such conversion
rates, so long as the service is disclosed
to plan investors.
The Department acknowledges the
commenter’s concerns, based on the
language contained in the preamble to
the proposal. However, the Department
did not intend to prevent a manager
from using another independent service
to provide the appropriate currency
exchange rates for a foreign security.
Thus, the Department notes that no
modification to section II(k) of the final
exemption (formerly section II(l) of the
proposal) is necessary.
A number of the comments noted that
Section II(m) of the proposal (relating to
a plan’s annual re-authorization of its
participation in the manager’s crosstrading program) appears to require,
among other things, that each plan
fiduciary be notified annually of: (i) Any
change in the ‘‘triggering events’’ in the
Funds in which their plans are invested;
(ii) any change in the ‘‘triggering
events’’ in the Funds in which their
plans are not invested; and (iii) any
‘‘triggering events’’ and other disclosure
items for new Funds added to the crosstrading program since the last annual
notice. These comments stated that the
latter two categories of disclosures
noted above are irrelevant to a plan
fiduciary who has no assets invested in
those Funds. The commenters believe
that such information in the annual
disclosures will make it more difficult
for plans to properly analyze data which
is relevant to an annual re-authorization
of the plan’s participation in the
manager’s cross-trading program. The
comments suggested that annual
disclosures to a plan fiduciary should be
limited to that material which is
relevant to its plan’s investments in the
manager’s Funds. If a plan fiduciary
determines to invest in other Funds for
which no annual disclosure information
has been previously provided, the
fiduciary would then be provided with

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the material relevant to the new Funds
in such annual disclosures.8
Upon consideration of these
comments, the Department believes that
some plan fiduciaries may still find
information about other Funds to be
useful and should be provided that
information by the manager upon
request. Therefore, in order to limit the
scope of the annual disclosures required
in section II(l) of the exemption
(formerly section II(m) of the proposal),
the Department has modified that
section to read as follows:
‘‘* * * Such annual re-authorization must
provide information to the relevant
independent plan fiduciary regarding each
Fund in which the plan is invested as well
as explicit notification that the plan fiduciary
may upon request obtain disclosures
regarding any new Funds in which the plan
is not invested that are added to the crosstrading program, or any new triggering events
that may have been added to existing Funds
in which the plan is not invested, since the
time of the initial authorization * * * etc.’’
[emphasis added]

A commenter requested that the
annual re-authorization requirement
contained in section II(m) of the
proposal be deleted in its entirety. The
commenter stated that coordinating
such a re-authorization would entail the
same administrative burdens as a
requirement for periodic notice of new
Funds to all plan fiduciaries investing
in Funds which participate in the
manager’s cross-trading program.
According to the commenter, a plan
could request that the plan’s investment
in any Fund that participates in the
cross-trading program be terminated
without penalty. Thus, the commenter
maintained that a plan’s participants
and beneficiaries should be adequately
protected without having to re-authorize
participation in the cross-trading
program every year.
In the event that the Department
determined to retain the annual reauthorization requirement, the
commenter requested two modifications
to section II(m) of the proposal. First,
the commenter believed that providing
a plan fiduciary with a list of new
Funds participating in the manager’s
cross-trading program would not
provide the fiduciary with any useful
information. Therefore, the commenter
requested that the requirement in
8 With

respect to such annual disclosures, it
should be noted that all relevant independent plan
fiduciaries of plans invested in a Fund that is added
to a manager’s cross-trading program, or has
changed or added any ‘‘triggering events’’ for crosstrades by such Fund after the Fund is included in
the program, will already have been provided a
separate notice of such event(s) prior to, or within
ten (10) days following, each event, as required by
section II(k) of the exemption.

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section II(m) of the proposal for
disclosure regarding new Funds added
to the manager’s cross-trading program
or any new triggering events be
modified to permit the manager to make
such information available upon
request. Second, the commenter noted
that section II(m) of the proposal
requires the use of a ‘‘special
termination form’’ in the annual reauthorization. The commenter noted
that there are other methods of
communication which would be easier
and more efficient for a plan fiduciary
to use in the event that the fiduciary
decides to terminate its prior
authorization.
The Department has determined that
it would not be appropriate to delete the
requirement for plan fiduciaries of
affected Funds to provide an annual reauthorization of their plan’s
participation in the manager’s crosstrading program. The Department
believes that annual re-authorization
will help ensure effective monitoring of
a cross-trading program by the affected
plans. Therefore, the Department has
retained this requirement in section II(l)
of the exemption.
However, in response to the
comments regarding the need for a
special termination form to be sent to
each plan fiduciary, the Department has
modified section II(l) of the exemption
(formerly section II(m) of the proposal)
to permit other forms of written
communication to be used to terminate
an authorization. Thus, the following
new sentence has been added to section
II(l) of the final exemption:
‘‘* * * In lieu of providing a special
termination form, the notice may permit the
independent plan fiduciary to utilize another
written instrument by the specified date to
terminate the plan’s participation in the
cross-trading program, provided that in such
case the notice explicitly discloses that a
termination form may be obtained from the
Manager upon request.’’

In response to the comments
regarding the requirement in the
proposal for the annual disclosures to
include a list of any new Funds
participating in the manager’s crosstrading program in which the plan is not
invested, or any new triggering events
for a manager’s Funds in which the plan
is not invested, the Department has
previously noted above that section II(l)
of the exemption has been modified to
require that such information need only
be provided by a manager upon request.
9. Authorizations for Large Account
Restructures. Under section II(n)(3) of
the proposal, a portfolio restructuring
program must be completed within the
later of: (i) 30 days of the initial
authorization by an independent

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fiduciary of the Large Account; or (ii) 30
days of the manager’s initial receipt of
assets associated with the portfolio
restructuring, unless such fiduciary
agrees to extend this period for another
30-days. The comments requested a
number of revisions and clarifications to
this provision. First, the commenters
noted that most portfolio restructuring
programs are completed within a thirty
(30) day period. However, very large
portfolio restructurings may take
considerably longer. In such instances,
the commenters believe that it would be
more efficient to allow the manager to
obtain authorization to extend the 30day restructure period at the time of the
Large Account fiduciary’s initial
authorization. Second, one commenter
questioned whether securities that
cannot be cross-traded with the
manager’s Funds and, therefore, must be
traded on the open market, are affected
by the 30-day deadline. Third, another
commenter suggested that the 30-day
period should begin for each asset on
the date on which the asset is included
as part of the restructuring account.
According to the comment, this change
would be responsive to the fact that the
manager or trading adviser for a Large
Account may not receive all assets to be
restructured at the same time.
In response to these comments, the
Department has determined to modify
section II(m)(3) of the exemption
(formerly section II(n)(3) of the
proposal) to allow the initial
authorization by an independent
fiduciary of the Large Account for a
specific portfolio restructuring to be
effective for 60 days. The 60-day
restructure period can be extended for
another 30 days if the independent
fiduciary for the Large Account agrees to
the extension. In addition, the
Department wishes to clarify that only
securities that are cross-traded are
affected by the requirements of section
II(m) of the final exemption.
Accordingly, the Department has
revised section II(m)(3) of the exemption
(formerly section II(n)(3) of the
proposal) to provide that:
‘‘* * *All cross-trades made in connection
with the portfolio restructuring program must
be completed by the Manager within sixty
(60) days of the initial authorization * * *’’
[emphasis added]

In light of the Department’s revision
to section II(m)(3), the Department does
not believe that any further relief is
warranted.
10. Record-keeping. Several
comments expressed concerns regarding
the record-keeping requirements
contained in section III(a) of the
proposal. In this regard, section III(a)(2)

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requires, among other things, that each
manager retain, on a Fund by Fund
basis, trade lists which specify the
amounts of each security to be
purchased or sold for a Fund. This
information should be provided in
sufficient detail to allow an
independent plan fiduciary to verify
that each of the investment decisions for
the Fund were made in response to
specific triggering events. Section
III(a)(3) of the proposal requires that, on
a Fund by Fund basis, the manager must
record the actual trades executed on a
particular day, noting which of those
trades (including all cross-trades)
resulted from triggering events. The
comments noted that the preamble to
the proposal does not seem to require
that the notations necessary to meet the
requirements of section III(a)(3) specify
which specific triggering event caused
each trade (or cross-trade), provided that
it is clear that a triggering event(s)
caused such trades.
Other commenters stated that the
record-keeping requirements of section
III(a) are unnecessary because, under the
proposed exemption, an Index or
Model-Driven Fund can only cross-trade
as a result of a triggering event. In
addition, these commenters suggested
that such a record-keeping requirement
would be extremely burdensome if it
became necessary to ‘‘tag’’ each
purchase or sale of a security to a
specific triggering event. In such
instances, the comments stated that the
exemption would involve so much
additional record-keeping and costs
(i.e., millions of dollars worth per year
per manager) that no manager will be
able to economically maintain or
operate a cross-trading program for its
client accounts. Conversely, the
comments noted that if the Department
believes that ‘‘tagging’’ is not required
under the proposal, this record-keeping
requirement should be deleted since all
cross-trades by a manager’s Funds will
result from at least one ‘‘triggering
event’’ in order to meet the conditions
of the exemption. Other comments
noted that records regarding specific
triggering events should be retained
only if the triggering event resulted in
actual cross-trading.
In response to these comments, the
Department notes that other
commenters have indicated that the
record-keeping requirements contained
in section III of the proposal are
consistent with their current recordkeeping practices. In this regard, the
Department understands that under the
individual exemptions granted for crosstrades by Index and Model-Driven
Funds, managers have established
record-keeping and monitoring systems

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designed to ensure compliance with the
terms and conditions of those
exemptions.
The Department notes that the recordkeeping requirements contained in the
proposal, while more specific than those
of the individual exemptions, were
designed to be consistent with the
record-keeping systems of managers
operating cross-trading programs under
the individual exemptions. Thus, the
Department is not persuaded by the
arguments submitted in favor of
deletion of this record-keeping
requirement. The Department continues
to believe that records must be
maintained with sufficient specificity to
permit an independent plan fiduciary to
verify compliance with the conditions
of the exemption.
In response to the commenter’s
request for clarification as to whether
the record-keeping requirements
contained in section III(a) of the
proposal would mandate that a
manager’s records demonstrate that each
cross-trade by a Fund resulted from a
specific ‘‘triggering event,’’ the
Department believes that the following
discussion will be helpful.
When more than one bona fide
‘‘triggering event’’ has occurred, the
Department expects that a manager’s
record-keeping system will be able to
demonstrate that the cross-trades by the
Fund resulted from such ‘‘triggering
events.’’ For example, if a manager’s
record-keeping system enables the
manager to ‘‘link’’ purchases and sales
of specific amounts of securities in each
cross-trade by a Fund to ‘‘triggering
events’’ within the 3-day period, then
such a system would satisfy the recordkeeping requirements of the exemption.
As discussed by the Department in
the preamble to the proposal, the
record-keeping requirements are
intended to assure that independent
plan fiduciaries will be able to
determine whether Funds and their
underlying models or indexes operate
consistently in following the input of
triggering event information. This
information should be kept in sufficient
detail to enable a replication of specific
historical events in order to satisfy an
inquiry by interested persons (as
described in section III(b)(1) of the
exemption). The Department further
notes that records regarding specific
triggering events need only be
maintained if such events resulted in
cross-trades that are subject to the
conditions of this exemption.
Another comment noted that section
III(a) of the proposal requires that the
records must be ‘‘* * * readily
available to assure accessibility and
maintained so that an independent

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6623

fiduciary’’ may obtain them within a
reasonable period of time. The comment
noted that most of the required records
would be maintained electronically and
archived after a few months. The
commenter maintained that, while such
records are retrievable within a period
of days or weeks, the exemption should
recognize that the volume of trading and
records involved would make faster
retrieval impossible. Another comment
requested that the Department
acknowledge that a ‘‘reasonable period
of time’’ in this context would be thirty
(30) days. In this regard, the Department
acknowledges that thirty (30) days may
be a reasonable period of time for
obtaining and assembling the required
information for interested persons if the
volume and complexity of the crosstrading records that must be assembled
for such persons is significant.
Other comments noted that making
records available to plan participants
and beneficiaries would be unduly
burdensome and would add no
significant additional protections.
The Department has determined that
it would be appropriate to modify
section III(b)(1) to exclude plan
participants and beneficiaries unless
such persons are participants or
beneficiaries in a Manager Plan.
11. Definition of ‘‘Index Fund’’ and
‘‘Model-Driven Fund.’’ Several
comments noted that, unlike prior
individual exemptions for cross-trading,
the definition of the term ‘‘Index Fund’’
in the proposal (see section IV(a) below)
requires not only that a Fund be
designed to track the rate of return, risk
profile and other characteristics of an
independently maintained securities
index, but also that such tracking occur
either by ‘‘* * * replicating the same
combination of securities which
compose such index’’ or by ‘‘* * *
sampling the securities which compose
such index based on objective criteria
and data.’’ The commenters urged the
Department to clarify that this definition
was not intended to preclude an Index
Fund from holding cash, cash
equivalents or other equitizing cash
investments.
The Department concurs with this
comment. The definition of the term
‘‘Index Fund’’ under section IV(a) of the
exemption is not intended to prevent a
Fund from holding cash, cash
equivalents or other equitizing cash
investments. For example, the
Department notes that the definition of
‘‘triggering event’’ contained in section
IV(d)(3) of the exemption specifically
contemplates that a Fund may have an
accumulation of cash which is
attributable to interest or dividends on,

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and/or tender offers for, portfolio
securities.
In this regard, the Department
recognizes that significant levels of cash
or cash equivalents in an Index Fund
generally will create ‘‘tracking error’’
vis-a-vis the independently maintained
securities index which the Fund is
designed to track. Therefore, assets
other than securities which are included
in the designated index will only be
held by a Fund for a limited period of
time.
However, the Department also
understands that many managers use
temporary cash investments to buy
index futures contracts (e.g., S&P 500
futures) in order to more precisely
replicate the rate of return and other
characteristics of the index prior to
investing in the actual securities. It is
the view of the Department that the term
‘‘Index Fund’’ would allow the use of
futures contracts by an Index Fund in
order to reduce ‘‘tracking error’’ and to
achieve the designated investment
objectives of the Fund provided that
such use is disclosed to plan investors.
The disclosures should adequately
describe the appropriate parameters and
limitations on a manager’s use of futures
contracts for a Fund.
In this regard, the Department’s
conclusion is based upon its
understanding that ‘‘passive’’
investment strategies employed by
managers for Index Funds do not
primarily rely on futures contracts to
achieve a Fund’s investment objectives,
but rather rely on such contracts as a
means for temporarily investing cash
accumulations in the Fund prior to
actually investing in and holding
securities contained in the index.
Conversely, the Department is unable to
conclude that an Index Fund which
invests primarily in index futures
contracts as a means of achieving its
investment objectives would meet the
definition of ‘‘Index Fund’’ under
section IV(a) of this exemption.
Several comments noted that the
definition of the term ‘‘Model-Driven
Fund’’ under the proposal (see section
IV(b) below) requires that the identity
and amount of a Fund’s securities be
‘‘* * * selected by a computer model
that is based on prescribed objective
criteria using independent third party
data, not within the control of the
Manager * * *’’ These comments
expressed concern that the definition
does not appear to include separately
managed Index Fund portfolios that
exclude specific securities based on
independent plan sponsor direction (as
opposed to the determination of a
computer model). In this regard, the
comments noted that the Department

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has recognized in the past that the
composition of a Model-Driven Fund
may be influenced by client-initiated
instructions to delete certain securities
(e.g., tobacco stocks) from an index that
is otherwise being tracked. The
comments suggested that the definition
should be modified to include plan
sponsor direction. According to the
comments, this modification will not
affect the intended purpose of the
definition, which is to limit the amount
of discretion a manager may exercise to
affect the identity or amount of
securities to be purchased or sold and
to assure that such transactions are not
part of an arrangement to benefit the
manager.
In response to these comments, the
Department notes that the definition of
‘‘Model-Driven Fund’’ in section
IV(b)(1) of the exemption would include
separately managed Fund portfolios
which exclude specific securities based
upon an independent plan fiduciary’s
(e.g., a plan sponsor’s) direction. The
Department understands that managers
will often use computer models which
are designed to ‘‘screen’’ certain
securities that are listed in an index
from the acquisitions that a Fund would
otherwise make, in order to
accommodate plan sponsor direction.
The definition of ‘‘Model-Driven Fund,’’
by allowing the identity of the securities
which compose the Fund to be selected
by a computer model, can accommodate
Fund portfolios which are specifically
designed to meet the guidelines dictated
by plan sponsors. Thus, the Department
does not believe that any further
modification to this definition is
necessary.
Another commenter noted that the
definition of ‘‘Model-Driven Fund’’ in
section IV(b) of the proposal is limited
to Funds which use a computer model
to ‘‘transform an Index.’’ The
commenter stated that many ModelDriven Funds do not seek merely to
‘‘transform an index’’ by limiting their
investment universe to those securities
contained in a single Index, but rather
seek to apply quantitative techniques
using various forms of publicly
available data across a wide spectrum of
securities. For example, the Fund may
seek to design a portfolio based on the
largest 2500 stocks in the United States,
based on market capitalization. These
stocks may be contained in various
independently maintained indexes, but
not all 2500 stocks will be contained in
a single index. The commenter urged
the Department to delete the phrase
‘‘* * * to transform an Index’’ from
section IV(b)(1) of the proposal and to
substitute in its place the following
‘‘* * * to achieve an investment return

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that is either based upon or measured by
an Index.’’
The Department does not believe that
it would be appropriate in the context
of a passive cross-trading exemption to
permit managers to use indexes merely
as a benchmark for the performance of
a portfolio of a Model-Driven Fund.
Accordingly, the Department has
determined not to revise this definition.
Another comment related to both the
definitions of ‘‘Index Fund’’ and
‘‘Model-Driven Fund.’’ The commenter
noted that sections IV(a)(3) and IV(b)(2)
of the proposal provide that each
definition includes any investment
fund, account or portfolio which either
contains ‘‘plan assets,’’ is an investment
company registered under the
Investment Company Act of 1940,
‘‘* * * or is an institutional investor.’’
The comment noted that many index
and model-driven funds are structured
as common trust funds, limited liability
companies, New Hampshire trusts or
other forms of collective investment
vehicles. Many of these funds do not
contain ‘‘plan assets’’ subject to the Act,
but are managed in the exact same
manner as Funds that do contain ‘‘plan
assets.’’ The commenter is concerned
that the definitions of ‘‘Index Fund’’ and
‘‘Model-Driven Fund’’ will not include
such funds unless the phrase ‘‘* * * or
is an institutional investor’’ contained
in sections IV(a)(3) and IV(b)(2) is
modified to provide ‘‘* * * or contains
assets of one or more institutional
investors.’’
The Department concurs with the
commenter’s suggestion and,
accordingly, has modified sections
IV(a)(3) and IV(b)(2) of the final
exemption.
12. Definition of ‘‘Triggering Event.’’
Section IV(d) of the proposal defines the
term ‘‘triggering event’’ by listing four
specific ‘‘events’’ that are included
within the definition. In this regard, the
comments noted that the preamble to
the proposal states that if a computer
model used to create a portfolio for a
Model-Driven Fund is designed to
exclude particular securities for reasons
specified by a plan client or the plan’s
investment guidelines, such exclusions
would not be considered a separate
triggering event. However, the
comments noted that some of the
Department’s prior individual
exemptions for cross-trading included,
as a separate triggering event, the
following:
‘‘* * * a change in the composition or
weighting of a portfolio used for a ModelDriven Fund which results from an
independent fiduciary’s decision to exclude
certain stocks or types of stocks from the

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Fund even though such stocks are part of the
index used by the Fund.’’9
The commenters requested that the
Department modify the definition of
‘‘triggering event’’ to include a similar
provision under the final exemption.
In response to the comments, the
Department has added a fifth ‘‘triggering
event’’ to section IV(d) of the exemption to
incorporate the suggestion made by the
commenters. Thus, section IV(d)(5) of the
exemption includes within the definition of
the term ‘‘triggering event’’ purchases and
sales of securities made by Funds after
changes to the portfolio of an Index or
Model-Driven Fund solely as a result of an
independent fiduciary’s decision to exclude
certain securities from the Fund.
In this regard, the Department notes that
with respect to a Model-Driven Fund, if the
exclusion of certain securities is ‘‘built into’’
the original design of the model, the
operation of that model by the manager
should not create additional cross-trade
opportunities for the Fund, since the Fund
was not designed to buy the specific
securities which are excluded. Similarly, if
an ‘‘excluded security’’ is added to an index
which has been used by the model to create
a portfolio for a Model-Driven Fund, the
model should have been already programed
to ‘‘screen’’ such securities from the
acquisitions made by the Fund. Moreover,
the additional triggering event would not
apply with respect to any Index Fund or
Model-Driven Fund that is a collective
investment fund maintained by the manager,
if the decision to exclude certain securities
from the Fund’s portfolio was made by the
manager.
Lastly, the Department notes that the
‘‘triggering event’’ contained in section IV(d)
would be effective on the date that the
independent fiduciary directed the manager
to exclude the securities from the Index or
Model-Driven Fund, and, accordingly, the
cross-trades of such securities would have to
occur within three (3) business days,
pursuant to the requirements of section II(b)
of the exemption.
Another comment suggested a further
modification to the definition of ‘‘triggering
event’’ in the proposal. The commenter
objected to the requirement in section
IV(d)(2) of the proposal that a triggering event
include a ‘‘specific amount’’ of net change in
the overall level of assets in a Fund, as a
result of investments and withdrawals, and
the requirement in section IV(d)(3) of a
‘‘specified amount’’ of accumulated cash or
stock in a Fund. The commenter suggested
that the references to ‘‘specific amount’’ and
‘‘specified amount’’ be changed to ‘‘material
amount’’ in both section IV(d)(2) and (3). In
connection with this modification, the
commenter also requested that a manager be
allowed to either (i) identify such material
amount in advance as a specified amount of
net change (or accumulated cash or
9 See, for example, condition (c)(2) of PTE 94–36
(59 FR 19249, April 22, 1994) regarding The
Northern Trust Company.

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securities) relating to such Fund, or (ii)
disclose, in the description of the manager’s
cross-trading practices, pursuant to section
II(l) of the proposal, the parameters for
determining a material amount of net change
(or accumulated cash or stock), including any
amount of discretion retained by the manager
that may affect such net change (or
accumulated cash or securities), in sufficient
detail to allow the independent fiduciary to
determine whether the authorization to
engage in cross-trading should be given.
The Department has considered the
commenter’s suggestions for changes to the
definition of ‘‘triggering event,’’ as contained
in section IV(d)(2) and (3) of the proposal,
and has determined that it would be
appropriate to modify the final exemption.
Thus, section IV(d)(2) and (3) of the
exemption now reads as follows:
‘‘(d) Triggering Event:
(2) A material amount of net change in the
overall level of assets in a Fund, as a result
of investments in and withdrawals from the
Fund, provided that: (A) such material
amount has either been identified in advance
as a specified amount of net change relating
to such Fund and disclosed in writing as a
‘‘triggering event’’ to an independent
fiduciary of each plan having assets held in
the Fund prior to, or within ten (10) days
following, its inclusion as a ‘‘triggering
event’’ for such Fund, or the Manager has
otherwise disclosed in the description of its
cross-trading practices pursuant to section
II(k) the parameters for determining a
material amount of net change, including
any amount of discretion retained by the
Manager that may affect such net change, in
sufficient detail to allow the independent
fiduciary to determine whether the
authorization to engage in cross-trading
should be given; and * * *.’’ [emphasis
added]
(3) An accumulation in the Fund of a
material amount of either:
(A) cash which is attributable to interest or
dividends on, and/or tender offers for,
portfolio securities; or
(B) stock attributable to dividends on
portfolio securities; provided that such
material amount has either been identified in
advance as a specified amount relating to
such Fund and disclosed in writing as a
‘‘triggering event’’ to an independent
fiduciary of each plan having assets held in
the Fund prior to, or within ten (10) days
after, its inclusion as a ‘‘triggering event’’ for
such Fund, or the Manager has otherwise
disclosed in the description of its crosstrading practices pursuant to section II(k) the
parameters for determining a material
amount of accumulated cash or securities,
including any amount of discretion retained
by the Manager that may affect such
accumulated amount, in sufficient detail to
allow the independent fiduciary to determine
whether the authorization to engage in crosstrading should be given * * * ’’ [emphasis
added]

In connection with the modification
noted above, the Department cautions

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managers that any parameters
established for determining a material
amount of net change (or accumulated
cash or securities), and any discretion
retained by the manager which may
affect such amounts, must be
sufficiently limited and described in
enough detail to enable proper
identification and monitoring of such
triggering events by plan fiduciaries.
Further, with respect to the
‘‘triggering events’’ that must be
disclosed to client plans, certain
comments noted that section III(b)(2) of
the proposal permits a manager, under
certain circumstances, to refuse to
disclose to clients any trade secrets, or
commercial or financial information
that is privileged or confidential, where
such information is contained in the
manager’s record-keeping system.
However, these comments noted that
the proposal does not include a similar
protection for privileged or confidential
information included within the
mandated client disclosures for
triggering events. For example, the
triggering event contained in section
IV(d)(4) of the proposal (i.e., a change in
the model-prescribed portfolio solely by
operation of the formulae contained in
the computer model underlying the
Fund) can only be utilized if certain
disclosures are made to an independent
fiduciary of each of the plans
participating in the Model-Driven Fund.
The comments stated that certain of
these disclosures may involve highly
proprietary information that the
investment manager is reluctant to
disclose to clients, particularly through
a written communication that a client
could easily transmit to others. Thus,
the comments requested that the
Department allow a manager to refuse to
disclose trade secrets, or commercial or
financial information that is privileged
or confidential, so long as the manager
notes the reason for non-disclosure in
its general disclosure to clients.
In this regard, the Department does
not believe that the disclosure of basic
factors for making changes in a portfolio
for a Model-Driven Fund would require
that privileged or confidential
information be revealed by the manager
to independent plan fiduciaries.
Therefore, the Department has not
modified the language of section
IV(d)(4) in the final exemption.
13. Definition of ‘‘Large Account.’’
One comment noted that section IV(e) of
the proposal excludes from the
definition of ‘‘Large Account’’ any ‘‘

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* * * Index Fund or Model-Driven
Fund sponsored, maintained, trusteed
or managed by the Manager * * *’’
[emphasis added] The commenter noted
that some banks act as a directed trustee
for group trusts which are managed by
third party investment managers. In
these situations, the bank acts as a nondiscretionary trustee and its primary
role is to provide custody and recordkeeping services for the group trust. The
commenter stated that there is no reason
that an independent investment
manager should be precluded from
retaining the bank as a trading adviser
for the liquidation or restructuring of
the Large Account since, in its capacity
as a non-discretionary trustee, the bank
will not be making the underlying
investment decisions for the portfolio
restructuring of the Large Account.
Therefore, the commenter requested that
the word ‘‘trusteed’’ be deleted from the
definition of ‘‘Large Account’’ in section
IV(e) of the proposal.
In this regard, the Department does
not believe that it would be appropriate
to include all investment funds trusteed
by the manager in the definition of
‘‘Large Account’’ contained in the
exemption. However, the Department
has determined it would be appropriate
to modify the language of section IV(e)
of the final exemption to include an
Index Fund or a Model-Driven Fund for
which the manager is a
nondiscretionary trustee. Consequently,
the Department has added a definition
of the term ‘‘nondiscretionary trustee’’
to the exemption under section IV(m).
Other comments suggested that the
definition of ‘‘Large Account’’ in section
IV(e) of the proposal should be modified
by deleting entirely the phrase which
provides that a Large Account ‘‘ * * *
is not an Index Fund or a Model-Driven
Fund sponsored, maintained, trusteed
or managed by the Manager.’’ These
comments stated that, if the decision to
liquidate a Fund’s portfolio is made by
an independent plan fiduciary, and
such decision is entirely out of the
manager’s control, it should not matter
whether the portfolio is an Index or
Model-Driven Fund that is managed by
the manager.
In response to these comments, the
Department has determined that it
would not be appropriate to make the
requested modification to the definition
of the term ‘‘Large Account’’ in section
IV(e) of the exemption. The Department
continues to believe that cross-trades by
a manager’s Index and Model-Driven
Funds should be subject to the
requirements and limitations applicable
to Funds under the exemption, such as
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Another comment noted that section
IV(e) of the proposal defines a ‘‘Large
Account’’ as any investment fund,
account or portfolio that, among other
things, holds assets of a registered
investment company other than an
investment company advised or
sponsored by the manager. The
commenter believes that the limitation
excluding investment companies
advised or sponsored by the manager
should be deleted. The commenter
argued that the Large Account would
not be participating in the manager’s
cross-trading program unless it were
advised by the manager, and that the
definition in the proposal excludes the
very category of investment companies
for which relief was intended.
The Department notes that the
commenter’s argument that a Large
Account could be, and most likely
would be, a registered investment
company advised or sponsored by the
manager is not consistent with the
record upon which the exemption was
developed by the Department. In this
regard, the category of investment
companies for which relief was
intended under this exemption, as well
as under prior individual exemptions,
were those entities that are independent
of the manager operating the crosstrading program, but who decide to hire
the manager in order to carry out a
specific portfolio restructuring program.
In such instances, the restructured
portfolio will often become an ‘‘Index
Fund’’ or ‘‘Model-Driven Fund’’ (as
defined herein) that will be managed by
the manager.
However, the situation described by
the commenter, which would permit the
inclusion within a manager’s crosstrading program for Large Accounts of
‘‘actively-managed’’ investment
company portfolios advised by the
manager, would expand the scope of the
exemption beyond that intended by the
Department. As discussed further
below, the Department is not providing
relief at this time for cross-trading
programs involving ‘‘actively-managed’’
accounts or funds. Therefore, in
response to this comment, the
Department has determined not to
modify section IV(e)(3) of the final
exemption.
Other comments noted that the
definition of ‘‘Large Account’’ in section
IV(e) of the proposal requires that the
plan or institutional investor whose
assets are held by the Large Account
have $50 million or more in total assets.
The commenter suggested that the
definition be revised to permit assets of
affiliated plans maintained by the same
employer, or controlled group of

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employers, to be aggregated for purposes
of meeting the $50 million threshold.
In consideration of the commenter’s
suggestion, the Department has
modified the definition of ‘‘Large
Account’’ in section IV(e)(1) of the
exemption to permit the aggregation of
assets of employee benefit plans
maintained by the same employer, or
controlled group of employers, provided
that such assets are pooled for
investment purposes in a single master
trust.
14. Definition of ‘‘Portfolio
Restructuring Program.’’ Several
comments noted that the term ‘‘portfolio
restructuring program’’ is defined in
section IV(f) of the proposal to include
the buying and selling of securities on
behalf of a Large Account in order to
produce a portfolio of securities which
will be an Index Fund or a ModelDriven Fund ‘‘managed by the Manager
* * *’’ In this regard, the comments
noted that portfolio restructuring
assignments occasionally contemplate
that a manager will construct an Index
Fund or Model-Driven Fund portfolio or
some other type of portfolio which, once
formed, will be managed on an ongoing
basis by either the plan sponsor or an
independent third party manager. In
addition, the comments stated that since
the terms ‘‘Index Fund’’ and ‘‘ModelDriven Fund’’ are already defined in the
proposal, the phrase ‘‘* * * managed
by the Manager’’ in the definition of
‘‘portfolio restructuring program’’ is
unnecessary. Accordingly, the
commenters suggested that the phrase
‘‘managed by the Manager’’ be deleted
from the definition in section IV(f) of
the final exemption.
In response to the comments, the
Department has modified the definition
of the term ‘‘portfolio restructuring
program’’ in section IV(f) of the
exemption to reads as follows:
‘‘(f) Portfolio restructuring program—
Buying and selling the securities on behalf of
a Large Account in order to produce a
portfolio of securities which will be an Index
Fund or a Model-Driven Fund managed by
the Manager or by another investment
manager, or in order to produce a portfolio
of securities the composition of which is
designated by a party independent of the
Manager, without regard to the requirements
of * * * etc.’’ [emphasis added]

15. Volume Restrictions for CrossTraded Securities. A number of
commenters responded to the
Department’s request for information on
whether Index and Model-Driven Funds
may hold a significant amount of the
outstanding shares of a particular
security, whether cross-trades of
securities by a manager’s Funds may
represent a high percentage of the

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outstanding daily trading volume for
such securities, and whether some
volume limitation for cross-traded
securities would be appropriate. The
commenters expressed the view that,
even if a manager’s Funds were crosstrading securities representing a high
percentage of the average daily trading
volume, there is no reason to impose a
volume limitation in the exemption so
long as the purchase or sale of such
securities is mandated by a triggering
event of an Index or Model-Driven Fund
and the securities can be crossed at the
closing market price, as established
through an independent pricing source.
These comments noted that such crosstrades are beneficial to plans regardless
of whether the securities involved are
thinly-traded, whether the Index and
Model-Driven Funds hold significant
amounts of the outstanding shares of the
securities, or whether the manager’s
trading represents a high percentage of
the trading volume for the securities.
The commenters again noted the
significant savings which are incurred
by avoiding brokerage commissions and
bid-ask spreads.
Thus, most commenters expressed the
view that if a manager’s Index and
Model-Driven Funds have a bona fide
need to buy or sell specific amounts of
securities on any particular business
day, in response to various triggering
events, there should not be an arbitrary
percentage limitation that would inhibit
the manager from taking advantage of all
cross-trade opportunities for such
securities. However, another commenter
expressed the view that the
Department’s exclusion of ‘‘thinlytraded’’ equity securities (by requiring
in section II(f)(1) of the proposal that all
cross-traded equity securities must be
‘‘widely-held’’ and ‘‘actively-traded’’) is
unduly burdensome and unnecessary.
As an alternative, this commenter
recommended that the Department
include ‘‘thinly-traded’’ equity
securities, but impose some reasonable
limitation on cross-trades of such
securities, based on a comparison of the
size of the cross-trade to the prior
trading volume in the security over a
reasonable period of time prior to the
date of the transaction.
After considering the comments
regarding the inclusion of ‘‘thinlytraded’’ equity securities in the
exemption if an appropriate volume
limitation is imposed, the Department
has determined not to adopt this
approach. The Department’s decision is
based, in part, on its understanding that,
since a process-driven cross-trading
program must allocate cross-trade
opportunities in a mechanical fashion, it
would not be economically feasible to

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override such allocations whenever the
equity securities involved exceeded a
specified volume limitation. Therefore,
the Department continues to believe that
it is more appropriate to allow crosstrades of all equity securities that are
listed in an independently maintained
third party index (see definition of
‘‘Index’’ in section IV(c) of the
exemption), without any volume
limitations. Under the exemption, the
Department deemed all equity securities
listed in an index to be ‘‘widely-held’’
and ‘‘actively-traded’’ for purposes of
this exemption in order to allow the
largest possible universe of equity
securities to be cross-traded within the
parameters of the conditions of the
exemption. In the Department’s view,
the inclusion of ‘‘thinly-traded’’ equity
securities that are not listed in an index
would require additional safeguards,
such as volume information and
limitations, which may not be
economically feasible in connection
with the operation of a manager’s crosstrading program.
16. Avoidance of Adverse Market
Impact; Savings in Transaction Costs; A
Computer Model’s Consideration of
Liquidity. In response to specific
questions posed by the Department in
the preamble to the proposal on the
avoidance of market impact through
cross-trades (see Section IV.B. of the
preamble, 64 FR at 70063), several
commenters noted that, by cross-trading
at the close of market price, both sides
of the cross-trade benefit by avoiding
the potential for adverse market impact.
The comments stated that adverse
market impact occurs each time an
investor trades through the market as
the market price moves away from the
offered price, meaning that the price
decreases when the investor wants to
sell and increases when the investor
wants to buy.
One commenter stated that the
Department appears to have concerns
about the fact that a manager’s
avoidance of market impact may not be
beneficial to plans at certain times.
These concerns originate from the
assumption that a manager could benefit
certain plans by using a particular
trade’s market impact as an opportunity
for obtaining a better price for a security
on the open market. In this regard, the
commenter noted that market impact is
unpredictable and cannot be forecast by
the manager. The commenter stated that
managers believe that in most cases
market impact is to be avoided, if
possible. Thus, the commenter
expressed the view that cross-trading,
by avoiding the uncertainty of market
impact, enables a manager to avoid the
possibility of harm to certain clients

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6627

which would result if trades were
placed on the open market, and also
eliminate transaction costs and custody
costs.
Most commenters noted that a
‘‘passive’’ manager would have no
incentive to use the limited amount of
discretion allowed by its cross-trading
program to favor one Fund or Account
over another. One commenter stated
that each manager would have the same
trading goals for all Funds and Large
Accounts—i.e., to maximize crosstrading and to minimize transaction
costs for open market transactions.
Another commenter noted that Index
and Model-Driven Funds are often
buying and selling the same securities
because there are many different Funds
maintained by a manager that are
tracking the same index (e.g., the S&P
500 Index). Many managers also design
portfolios for Model-Driven Funds that
are based on the same index. Moreover,
many large capitalization stocks are
listed in more than one index. The
commenters noted that cross-trades of
such stocks between Index and ModelDriven Funds, pursuant to triggering
events that occur without a manager’s
exercise of any investment discretion, at
an objectively determined ‘‘closing
price’’ as reported from a reputable third
party source, are an efficient and
effective way of meeting the investment
objectives of plans which invest in such
Funds.
In response, the Department
recognizes the merits of cross-trading to
reduce or eliminate transaction costs in
the context of ‘‘passively managed’’
assets. In such instances, a manager has
limited investment discretion as a result
of independently determined triggering
events.
With respect to the Department’s
concerns that the avoidance of market
impact through cross-trades may not
equally benefit both sides of such
transactions, the Department notes that
the potential for abuse appears to be
significantly less with ‘‘passivelymanaged’’ assets than with ‘‘activelymanaged’’ assets. However, the
Department does not believe that the
commenters have demonstrated that
cross-trading creates market impact
savings, if any, for both sides to any
given cross-trade. The Department has
been provided with data by one
commenter demonstrating some market
impact savings for one side in crosstrades of significant amounts of
securities (i.e. market impact savings
were measured where the cross-trades
involved a large capitalization security
traded in amounts averaging one and a
quarter days of the average public
trading volume of the security). No data

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was provided to the Department
measuring market impact savings for
smaller cross-trades, nor was data
provided measuring the market impact
savings, if any, for each side in a
particular cross-trade. Even so, as noted
below, certain commenters have
concluded that there has been
significant transaction cost savings with
cross-trading ‘‘passively-managed’’
assets and that these savings are
attributable solely to the reduction or
elimination of brokerage commissions
and bid-ask spreads.
Another commenter noted that the
preamble to the proposal suggests that
relief would not be available under the
exemption if the computer model used
for a Fund considered the liquidity or
availability of securities that are in the
cross-trading ‘‘network’’ of Funds
managed by the manager (see the sixth
paragraph of Section IV.A. of the
preamble, 64 FR at 70062). This
commenter expressed the view that
such a restriction is harmful to plans
and misapprehends the operation of
some ‘‘passively-managed’’ Funds. The
commenter stated that truly ‘‘passive’’
Index Funds track the relevant indices
and attempt to reduce or eliminate
‘‘tracking error’’ between the value of
the Fund’s portfolio vis-a-vis the value
of the index’s portfolio. The more
identical an Index Fund’s portfolio
looks when compared to the underlying
index’s portfolio, and the cheaper the
acquisition and disposition costs of the
securities in the index, the lower the
‘‘tracking error’’ becomes. Thus, a
successful ‘‘passive’’ manager is one
who has the least amount of tracking
error in its Index Funds. The commenter
noted that the model used for such an
Index Fund will always start with the
proposition that the portfolio wants
each security in the index in its precise
capitalization-weighting, as determined
by the index. The more information the
model has about the costs of acquisition
of any security, the less the tracking
error will be for the Fund’s portfolio and
the more successful the manager will be
in meeting the plan’s investment
objectives.
The Department’s concerns regarding
a computer model’s consideration of
liquidity or availability of certain
securities that are in the manager’s
cross-trading ‘‘network’’ are best
illustrated by the following example:
A computer model for a Model-Driven
Fund identifies three possible securities for
acquisition by the Fund in an attempt to
achieve the optimal portfolio for the Fund
within the specified guidelines dictated by
the Fund’s investors. These securities are
identified, for purposes of this example, as
‘‘A’’, ‘‘B’’, and ‘‘C’’. Security ‘‘A’’ is the most

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liquid of the three securities, based on third
party data, and security ‘‘C’’ is the least
liquid. The model considers each security’s
liquidity factor, among other factors, and the
estimated transaction costs which would be
incurred to acquire the security, as part of its
determination as to which security to buy
and how much of the security to buy.
Assume that the model is programmed to
make the selection of which security to buy,
and the amount to buy, by considering only
the liquidity information about each security
that is available based on third party market
data. Let’s also assume that, based on such
data, the model chooses security ‘‘A’’ and
does not choose securities ‘‘B’’ or ‘‘C’’. The
exemption would apply for acquisition of
security ‘‘A’’ to be made by the Fund through
cross-trades.
However, let’s assume that the model is
programmed to make the selection of which
security to buy, and the amount to buy, by
considering cross-trade opportunities that are
available for each security, in addition to
other liquidity information that is available
based on third party data. Let’s also assume
that security ‘‘C’’ is available through a crosstrade and that the Fund can acquire all the
securities it needs through cross-trades of
that security. The model has been
programmed to ‘‘view’’ security ‘‘C’’ as
having ‘‘infinite liquidity’’ because the data
within the control of the manager suggests
that it can be acquired without incurring any
transaction costs. However, this circumstance
results from the fact that the necessary
number of shares of security ‘‘C’’ which the
model has determined that the Fund needs
is available through cross-trades. Under this
example, security ‘‘C’’ is considerably less
liquid than security ‘‘A’’ based upon
available third party data. The exemption
would not apply for acquisitions of security
‘‘C’’ to be made by the Fund through crosstrades because the selection of security ‘‘C’’
was based upon the manager’s own liquidity
information at that time and not liquidity
information based solely on third party data.

The Department believes that
adoption of the commenter’s liquidity
approach could result in cross-trading
opportunities within the control of the
manager impacting upon the investment
determinations of the Fund. In this
regard, the Department notes that
investment decisions made by a Fund
may not be based in whole or in part by
the manager on the availability of crosstrade opportunities and must be made
prior to the identification and
determination of any cross-trade
opportunities, pursuant to the statement
required under section II(j) of the
exemption. Therefore, any model’s
consideration of information relating to
cross-trade opportunities for particular
securities, as part of the model’s
determination of which securities to buy
or sell, how much of a security to buy
or sell, or when to execute a sale or
purchase of the securities for the Fund,
would not be permitted under the
exemption. The Department continues

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to believe that liquidity considerations
and other factors considered by a
computer model must be based on
independent third party data, not within
the control of the manager, as described
under section IV(b) of the exemption.
Other commenters noted that the
transaction cost savings attributable to
cross-trades, pursuant to cross-trading
programs operating under the
Department’s existing individual
exemptions, are significant. In response
to the Department’s questions about
whether such cost savings are
attributable to the avoidance of market
impact or only commission savings, one
commenter stated that its clients have
saved over $300 million annually
through cross-trading and that this
calculation is based entirely on the
avoidance of brokerage commissions
and bid-ask spreads. Another
commenter stated that its clients saved
approximately $282 million in the
calendar year 1999, based on the total
number of shares that were cross-traded
during the year, broken down by the
market in which each share would have
been traded if it went to the open
market. This commenter also confirmed
that these savings are attributable to
savings in brokerage commissions, bidask spreads and taxes, as applicable in
each market. Thus, in both instances,
the commenters noted significant cost
savings even without taking into
consideration whatever measurable
‘‘savings’’ may have been attributable to
the avoidance of market impact.
17. Effect of Class Exemption on
Individual Exemptions; Appropriate
Scope of Relief for the Exemption. The
commenters expressed many different
points of view in response to the
Department’s invitation for comments
on the effect that the continuation of
current individual exemptions, for
cross-trades by Index and Model-Driven
Funds, would have in offering an
advantage to those investment managers
granted such relief compared to those
managers which would utilize this
exemption (see Section IV.H. of the
preamble to the proposal, 64 FR at
70066).
One comment noted that the proposal
would expand the relief for crosstrading beyond the relief currently
available under the individual
exemptions, particularly by permitting
cross-trades of debt securities and by
expanding the definitions of Funds and
Large Accounts that are permitted to
cross-trade. However, the comment also
noted that the proposal imposes a
number of additional disclosure,
authorization and operational
requirements on cross-trading programs.
Thus, the comment stated that it is not

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clear whether managers who continue to
utilize their individual exemptions
would have an advantage over those
utilizing the class exemption.
Another comment stated that some
individual exemptions have been relied
upon by managers for more than a
decade and that such exemptions
should remain in place after the class
exemption is granted. This commenter
noted that managers have invested
substantial time and resources in the
current cross-trading systems, and other
programmatic features in such systems
have been developed in reliance upon
the conditions of the individual
exemptions. Any revocation of the
existing exemptions would mandate
conformance with the new exemption’s
requirements and features, and the
manager’s cross-trading procedures and
systems would have to be significantly
revised. The commenter stated that such
revisions would place an undue burden
on the managers, would add significant
costs to the operation of the existing
cross-trading programs, and would not
provide any added benefits to the
managers’ client plans.
However, other commenters stated
that, by permitting firms to continue to
rely on individual exemptions that
have, in some respects, less stringent
conditions than the proposal, the
Department would create a competitive
advantage for advisers who already have
exemptions. Some commenters further
stated that, by granting the class
exemption, the Department is already
creating a competitive advantage for
firms that ‘‘passively manage’’ plan
assets over those which ‘‘actively
manage’’ such assets. These commenters
urged the Department to hold all firms
to the same standard, at least with
respect to the class exemption, and
eliminate the existing individual
exemptions to ensure an ‘‘equal playing
field’’ for all similarly situated managers
that ‘‘passively-manage’’ assets.
In this regard, the Department has not
made a determination at the present
time whether to revoke any past
individual exemptions for cross-trading
programs involving Index and ModelDriven Funds. It is not clear whether
managers who continue to utilize their
individual exemptions will have an
advantage over those utilizing the class
exemption since cross-trades may only
be performed if they conform with
either all of the provisions of an
individual exemption or all of the
provisions of the class exemption (i.e.,
managers who hold individual
exemptions may not pick and choose
selected provisions from their own
exemptions and the class exemption).
As noted in the preamble to the

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proposal, prior to modifying or revoking
any individual exemption, the
Department must publish a notice of its
proposed action in the Federal Register
and provide interested persons with an
opportunity to comment on any
proposed revocation or modification of
such exemptions.
Other commenters requested that the
Department expand the proposal to
permit cross-trades by ‘‘activelymanaged’’ plan accounts of a manager.
These commenters noted that the clear
advantages of cross-trading should be
available to both actively and passively
managed funds, and that the
Department’s exclusion of ‘‘activelymanaged’’ funds from the current
exemption is unfair.
Other commenters stated that it was
appropriate for the Department to
handle cross-trades by ‘‘passivelymanaged’’ funds separately. Such
commenters noted that ‘‘passive’’
managers have far less discretion than
‘‘active’’ managers. One comment stated
that a class exemption attempting to
address both ‘‘actively’’ and ‘‘passively’’
managed funds would be confusing and
could lead to the application of
unnecessarily burdensome conditions
on ‘‘passively-managed’’ funds to
address concerns applicable only to
‘‘actively-managed’’ funds.
The Department has determined to
grant this exemption for cross-trading
programs involving Index and ModelDriven Funds and to separately proceed
with its consideration of relief for crosstrades by ‘‘actively-managed’’ plan
accounts or pooled funds containing
‘‘plan assets’’ covered by the Act.10 The
Department acknowledges that
appropriate cross-trades of securities by
‘‘actively-managed’’ accounts or funds
would be beneficial to employee benefit
plans in saving transaction costs and
avoiding adverse market impact for both
sides of the transactions. However, the
Department believes that adequate
safeguards must be developed in order
to prevent abuses which could occur
10 Interested persons may wish to review the
information received by the Department in response
to the Notice published in the Federal Register on
March 20, 1998 (63 FR 13696) and in the testimony
provided at the public hearing on cross-trades of
securities by ‘‘actively-managed’’ plan accounts and
pooled funds (the Hearing), which was held at the
Department on February 10 and 11, 2000. Copies of
the comments received by the Department in
response to the Notice, and the testimony received
at the Hearing, are available for public inspection
in the Public Documents Room, Pension and
Welfare Benefits Administration, U.S. Department
of Labor, Room N–1513, 200 Constitution Avenue
NW, Washington, DC 20210. For copies of the
comments relating to the Notice, interested persons
should request File No. M–9043. For copies of the
testimony received at the Hearing, interested
persons should request File No. D–10851 (CrossTrades of Securities Hearing).

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6629

when an investment manager has
significant investment discretion which
could be used to benefit certain clients
or the manager itself at the expense of
its ERISA-covered accounts.
The Department is currently
considering what conditions may be
necessary to address potential abuses in
cross-trading programs that would
involve ‘‘actively-managed’’ plan
accounts. The Department continues to
receive and review additional
information from various interested
persons which will assist the
Department in developing a separate
class exemption for cross-trades by
‘‘actively-managed’’ plan accounts.
Description of the Exemption
A. Scope and General Rule
The exemption consists of four parts.
Section I sets forth the general
exemption and describes the
transactions covered by the exemption.
Sections II and III contain specific and
general conditions applicable to
transactions described in section I.
Section IV contains definitions for
certain terms used in the exemption.
The exemption set forth in section I
provides relief from the restrictions of
sections 406(a)(1)(A) and 406(b)(2) of
ERISA and section 8477(c)(2)(B) of
FERSA for: (a) The purchase and sale of
securities between an Index or ModelDriven Fund and another such Fund, at
least one of which holds ‘‘plan assets’’
subject to the Act; and (b) the purchase
and sale of securities between such
Funds and certain large accounts (Large
Accounts) pursuant to portfolio
restructuring programs of the Large
Accounts. The exemption also would
apply to cross-trades between two or
more Large Accounts if such crosstrades occur as part of a single crosstrading program involving both Funds
and Large Accounts pursuant to which
securities are cross-traded solely as a
result of the objective operation of the
program.
The exemption under section I(a)
applies to cross-trades of securities
among Index or Model-Driven Funds
managed by the same investment
manager where both Funds contain plan
assets. However, as stated above, a
violation of section 406(b)(2) occurs
when an investment manager has
investment discretion with respect to
both sides of a cross-trade of securities
and at least one side is an entity which
contains plan assets. As a result, the
exemption is also applicable to
situations where the investment
manager has investment discretion for
both Funds involved in a cross-trade but
one Fund does not contain plan assets

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because, for example, it is registered as
an investment company under the
Investment Company Act of 1940 (e.g.,
a mutual fund). Any mutual fund or
other institutional investor covered by
the exemption under section I(a) must
meet the definition of an Index Fund or
a Model-Driven Fund, contained in
section IV(a) and (b). Institutional
investors which meet the definitions
contained in section IV(a) and (b) may
include, but are not limited to, entities
such as insurance company separate
accounts or general accounts,
governmental plans, university
endowment funds, charitable
foundation funds, trusts or other funds
exempt from taxation under section
501(a) of the Code.
The exemption under section I(b)
applies to the purchase and sale of
securities between a Fund and a Large
Account, at least one of which holds
‘‘plan assets’’ subject to ERISA or
FERSA, pursuant to portfolio
restructuring programs initiated on
behalf of certain Large Accounts. The
term ‘‘Large Account’’ is defined in
section IV(e) to include certain large
employee benefit plans or other large
institutional investors with at least $50
million in total assets, including certain
insurance company separate and general
accounts and registered investment
companies. For purposes of the $50
million requirement, the assets of one or
more employee benefit plans
maintained by the same employer, or
controlled group of employers, may be
aggregated, provided that such assets are
pooled for investment purposes in a
single master trust. A portfolio
restructuring program, as defined in
section IV(f), involves the buying and
selling of securities on behalf of a Large
Account in order to produce a portfolio
of securities which either becomes an
Index Fund or a Model-Driven Fund or
resembles such a Fund, or to carry out
a liquidation of a specified portfolio of
securities for a Large Account. The
Fund or other portfolio resulting from
the restructuring program will be either
managed by the manager of the Fund or
by an investment manager that is
independent of the Fund manager. The
definition of a Large Account requires
that an independent fiduciary authorize
a Fund manager (i.e., a Manager, as
defined in section IV(i)) to restructure
all or part of the portfolio or to act as
a ‘‘trading adviser’’ as defined in section
IV(g) with respect to the restructuring of
such portfolio. The trading adviser’s
role is limited under the exemption to
the disposition within a stated period of
time of a securities portfolio of a Large

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Account and/or the creation of the
required portfolio.
Under this definition, the manager
may not have any discretionary
authority for any asset allocation,
restructuring or liquidation decisions or
otherwise provide investment advice
with respect to such transactions. In this
regard, the Department notes that it
expects the investment manager to
comply with the applicable securities
laws in connection with any portfolio
restructuring program.
Section IV(a) and (b) require that the
Index or Model-Driven Fund be based
upon an index which represents the
investment performance of a specific
segment of the public market for equity
or debt securities. Section IV(c) requires
that the index be established and
maintained by an independent
organization which is: in the business of
providing financial information or
brokerage services to institutional
clients; a publisher of financial news or
information; or a public stock exchange
or association of securities dealers. The
index must be a standardized index of
securities which is not specifically
tailored for the use of the Fund
manager.
Section IV(a) and (b) specifically
define Index and Model-Driven Funds
for purposes of the exemption. These
definitions are designed to limit the
amount of discretion the manager can
exercise to affect the identity or amount
of securities to be purchased or sold and
to assure that the purchase or sale of any
security is not part of an arrangement,
agreement or understanding designed to
benefit the manager. Under the
definition of ‘‘Index Fund’’ contained in
section IV(a), the investment manager
must track the rate of return of an
independently maintained securities
index by either replicating the same
combination of securities which
compose such index or by investing in
a representative sample of such
portfolio based on objective criteria and
data designed to recreate the projected
return, risk profile and other
characteristics of the index. Under the
definition of ‘‘Model-Driven Fund’’
contained in section IV(b), trading
decisions are passive or process-driven
since the identity and the amount of the
securities contained in the Fund must
be selected by a computer model.
Although the manager can use its
discretion to design the computer
model, the model must be based on
prescribed objective criteria using third
party data, not within the control of the
manager, to transform an independently
maintained index. Thus, for example,
no exemptive relief would be available
if the manager designed the computer

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model to consider the liquidity or the
availability of a security based on
information that was solely within the
control of the manager. In such
instances, the computer model would be
considering data that was not from a
third party source, and that was within
the control of the manager.
B. Price and Securities
Section II(a) of the exemption requires
that each cross-trade be executed at the
closing price for that security. In
addition, section II(g) of the exemption
requires that the manager may not
receive any brokerage fees or
commissions as a result of the crosstrades.
Closing price is defined in section
IV(h) as the price for the security on the
date of the transaction, as determined by
objective procedures disclosed to Fund
investors in advance and consistently
applied with respect to securities traded
in the same market. The procedures
shall indicate the independent pricing
source (and alternates, if the designated
pricing source is unavailable) used to
establish the closing price and the time
frame after the close of the market in
which the closing price will be
determined. The pricing source must be
independent of the manager and must
be engaged in the ordinary course of
business of providing financial news
and pricing information to institutional
investors and/or the general public, and
must be widely recognized as an
accurate and reliable source for such
information. In this regard, some
managers may use one pricing service
for pricing domestic securities and
another pricing service for pricing
foreign securities. With respect to
foreign securities, the applicable
independent pricing source should
provide the price in local currency rates
and, if that currency is other than U.S.
dollars, may also provide the U.S. dollar
exchange rate. Thus, securities must be
cross-traded in all cases at the closing
prices received by the manager from the
relevant independent pricing source.
The Department has adopted this
definition of the term ‘‘closing price’’ in
an effort to be consistent with the
methods for determining the price of
cross-traded securities currently utilized
by Index and Model-Driven Fund
investment managers, according to both
the comments received in response to
the proposal published on December 15,
1999 and the comments received in
response to the Notice published on
March 20, 1998. In addition, the
Department believes that this pricing
approach will ensure that the pricing
procedures utilized are objective and
not subject to the discretion or

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manipulation of any of the involved
parties.
Section II(f) of the exemption requires
that cross-trades of either equity
securities or fixed income securities
involve only securities for which market
quotations are readily available from
independent sources that are engaged in
the ordinary course of business of
providing financial news and pricing
information to institutional investors
and/or the general public, and are
widely recognized as accurate and
reliable sources for such information.
Section II(f)(1) further requires that
cross-trades of equity securities only
involve securities which are widelyheld and actively-traded. In this regard,
the Department notes that equity
securities will be deemed to be ‘‘widelyheld’’ and ‘‘actively-traded’’ under this
exemption if such securities are
included in an independently
maintained index, as defined in section
IV(c) herein. The Department expects
that managers, in making their
determinations regarding the types of
securities included within the scope of
this condition, would consider
information about the average daily
trading volume for equities traded on
any recognized securities exchange or
automated broker-dealer quotation
system which would be readily
available from independent pricing
sources or other independent sources
which publish financial news and
information.
C. Triggering Events
Section II(b) of the exemption requires
that any purchase or sale of securities by
a Fund in a cross-trade with another
Fund or with a Large Account occur as
a direct result of a ‘‘triggering event,’’ as
defined in section IV(d), and that such
cross-trade be executed no later than the
close of the third business day following
such ‘‘triggering event.’’ The
Department believes that trading
pursuant to triggering events limits the
discretion of the manager to affect the
identity or amount of securities to be
purchased or sold. Triggering events, as
defined in section IV(d), are outside the
control of the manager and will
‘‘automatically’’ cause the buy or sell
decision to occur.
Triggering events are defined in
section IV(d) as:
(1) A change in the composition or
weighting of the index underlying the
Fund by the independent organization
creating and maintaining the index;
(2) A material amount of net change
in the overall level of assets in a Fund,
as a result of investments in and
withdrawals from the Fund, provided
that:

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(A) Such material amount has either
been identified in advance as a specified
amount of net change relating to such
Fund and disclosed in writing as a
‘‘triggering event’’ to an independent
fiduciary of each plan having assets
held in the Fund prior to, or within ten
(10) days following, its inclusion as a
‘‘triggering event’’ for such Fund or the
Manager has otherwise disclosed in the
description of its cross-trading practices
pursuant to section II(k) the parameters
for determining a material amount of net
change, including any amount of
discretion retained by the Manager that
may affect such net change, in sufficient
detail to allow the independent
fiduciary to determine whether the
authorization to engage in cross-trading
should be given; and
(B) Investments or withdrawals as a
result of the manager’s discretion to
invest or withdraw assets of a Manager
Plan, other than a Manager Plan which
is a defined contribution plan under
which participants direct the
investment of their accounts among
various investment options, including
such Fund, will not be taken into
account in determining the specified
amount of net change;
(3) An accumulation in the Fund of a
material amount of either:
(A) Cash which is attributable to
interest or dividends on, and/or tender
offers for, portfolio securities; or
(B) Stock attributable to dividends on
portfolio securities;
provided that such material amount has
either been identified in advance as a
specified amount relating to such Fund
and disclosed in writing as a ‘‘triggering
event’’ to an independent fiduciary of
each plan having assets held in the
Fund prior to, or within ten (10) days
after, its inclusion as a ‘‘triggering
event’’ for such Fund, or the Manager
has otherwise disclosed in the
description of its cross-trading practices
pursuant to section II(k) the parameters
for determining a material amount of
accumulated cash or securities,
including any amount of discretion
retained by the Manager that may affect
such accumulated amount, in sufficient
detail to allow the independent
fiduciary to determine whether the
authorization to engage in cross-trading
should be given;
(4) A change in the composition of the
portfolio of a Model-Driven Fund
mandated solely by operation of the
formulae contained in the computer
model underlying the Fund where the
basic factors for making such changes
(and any fixed frequency for operating
the computer model) have been
disclosed in writing to an independent

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6631

fiduciary of each plan having assets
held in the Fund, prior to, or within ten
(10) days after, its inclusion as a
‘‘triggering event’’ for such Fund; or
(5) A change in the composition or
weighting of a portfolio for an Index
Fund or a Model-Driven Fund which
results from an independent fiduciary’s
direction to exclude certain securities or
types of securities from the Fund,
notwithstanding that such securities are
part of the index used by the Fund.
The first three triggering events have
been adopted based upon those
triggering events utilized in prior
individual exemptions, with an
additional requirement in the second
and third triggering events for the
amounts involved, or the parameters for
determining such amounts, to be
specified and disclosed to independent
fiduciaries of plans investing in the
Funds. In addition, the fourth triggering
event has been added in order to clarify
that a triggering event also occurs as a
result of a change in the composition of
a Fund’s portfolio mandated solely by
operation of the computer model
underlying the Fund. For example, if a
model contained a formula for a Fund
requiring only stocks with a certain
price/earnings ratio and some of the
originally prescribed stocks now were
above the specified tolerances of the
formula relating to that model, a
triggering event would occur requiring
that those stocks be sold by the Fund.
The Department has included this
triggering event under this exemption in
order to clarify that Model-Driven
Funds may need to buy or sell securities
to conform to changes to the portfolio
prescribed by the model that differ from
changes to a portfolio necessitated as a
result of changes to the underlying
index. The exemption does not require
that a computer model be operated
according to any fixed frequency.
However, the Department is of the view
that the exemption would not be
available unless the formulae contained
in the computer model underlying a
Fund were operated by the manager on
an objective basis rather than being used
for the purpose of creating cross-trade
opportunities in response to the needs
of other Funds or certain Large
Accounts.
The Department further notes that
under section II(k), disclosures must be
made to independent plan fiduciaries of
the affected Funds regarding the
triggering events that would create
cross-trading opportunities for such
Funds under the manager’s crosstrading program. Under the modeldriven triggering event contained in the
exemption, the basic factors for making
changes in the composition of the

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portfolio of a Model-Driven Fund
mandated solely by operation of the
formulae contained in the computer
model must be included in these
disclosures.
The Department notes that a fifth
triggering event has been added to the
final exemption, based on comments
received, which permits plan sponsors
to direct the manager to delete certain
securities from an Index or ModelDriven Fund where the Fund otherwise
would hold such securities based upon
the particular index or computer model.
The Department understands that this
triggering event is consistent with
practices utilized by certain managers in
prior individual exemptions and will
facilitate additional cross-trade
opportunities.
D. Modifications to the Computer Model
Section II(c) requires that, if the
model or the computer program used to
generate the model underlying the Fund
is changed by the manager, no crosstrades of any securities can be engaged
in pursuant to the exemption for three
(3) business days following the change.
This restriction recognizes the authority
of the manager to change assumptions
involving computer models after the
model’s activation.
The Department notes that the three
(3) business day ‘‘blackout’’ period for
cross-trades by a Fund after any change
made by the manager to the model
underlying the Fund is intended to
prevent model changes which might be
made by managers, in part, to
deliberately create additional crosstrading activity.
In addition, under section IV(b), a
computer model for a Model-Driven
Fund must use independent third party
data, not within the control of the
manager, to transform an index.
E. Allocation of Cross-Trade
Opportunities
The Department notes that frequently
the amount of a security which all of the
Funds need to buy may be less than the
amount of such security which all of the
Funds will need to sell, or vice versa.
Thus, section II(d) of the exemption
requires that all cross-trade
opportunities be allocated by the
manager among potential buyers, or
sellers, on an objective basis. Under
section II(d), this basis for allocation
must have been previously disclosed to
independent fiduciaries on behalf of
each plan investor, and must not permit
the exercise of any discretion by the
manager. In previous individual
exemptions, applicants have relied on
different systems (e.g. pro rata or queue)
to objectively allocate cross-trade

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opportunities. While it appears to the
Department that a pro rata basis of
allocation would be the method least
subject to scrutiny, the Department
recognizes the validity of other
workable objective systems. However,
the Department cautions that such
systems may not permit the exercise of
discretion by the manager.
F. Requirements for Cross-Trades by a
Manager Plan
Section II(e) of the exemption requires
that no more than twenty (20) percent
of the assets of the Fund or Large
Account at the time of the cross-trade
may be comprised of assets of employee
benefit plans maintained by the
Manager for its own employees
(Manager Plans) for which the Manager
exercises investment discretion. In this
regard, the Department wishes to note
that this percentage limitation would
not apply to any Manager Plan(s) for
which the Manager does not exercise
investment discretion. For example, a
Manager Plan which is a defined
contribution plan under which
participants direct the investment of
their accounts among various
investment options would not be subject
to the twenty (20) percent limit.
G. Disclosures and Authorizations
Section II(h) of the exemption
requires that a plan’s participation in a
cross-trade program of a manager
involving Index and Model-Driven
Funds at least one of which holds ‘‘plan
assets’’ subject to the Act will be subject
to the prior written authorization of a
plan fiduciary who is independent of
the manager. However, for purposes of
this exemption, the requirement that the
authorizing fiduciary be independent of
the manager shall not apply in the case
of a Manager Plan. In this regard,
section II(e) of the exemption requires
that no more than twenty (20) percent
of the assets of the Fund or Large
Account at the time of the cross-trade
may be comprised of assets of a Manager
Plan for which the Manager exercises
investment discretion.
The authorization described in
section II(h), once given, would apply to
all Funds that comprise the manager’s
cross-trading program at the time of the
authorization. Thus, a new
authorization by an independent plan
fiduciary for investment in a different
Fund, in which the plan did not invest
at the time of its initial written
authorization, would not be necessary to
the extent that such Fund was part of
the program at the time of the original
authorization. However, where a
manager makes new Funds available for
plan investors or changes triggering

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events relating to Funds subject to the
initial authorization, and such Funds or
triggering events were not previously
disclosed as being part of the manager’s
cross-trading program, section II(k) of
the exemption requires that the manager
furnish additional disclosures to an
independent plan fiduciary. The
Manager shall provide a notice to each
relevant independent plan fiduciary of
plans invested in the affected Funds
prior to, or within ten (10) days
following, such addition of Funds or
change to, or addition of, triggering
events, which contains a description of
such Fund(s) or triggering event(s). Such
notice will also include a statement that
the plan has the right to terminate its
participation in the cross-trading
program and its investment in any Index
Fund or Model-Driven Fund without
penalty at any time, as soon as is
necessary to effectuate the withdrawal
in an orderly manner.
As noted below, section II(l) requires
that disclosures be made to the relevant
independent plan fiduciaries regarding
each Fund in which the plan is invested
as part of the notice required for a plan’s
annual re-authorization of its
participation in the manager’s crosstrading program. In addition, section
II(l) requires that disclosures regarding
any new Funds, or new triggering events
in any existing Funds, in which a plan
is not invested be made available, upon
request, as part of the notice required for
a plan’s annual re-authorization of its
participation in the manager’s crosstrading program.
Section II(i) clarifies the meaning of
Section II(h) with respect to existing
plan investors in any of the Funds,
which hold plan assets subject to the
Act, prior to a manager’s
implementation of a cross-trading
program. Under section II(i), the
authorizing independent fiduciary must
be furnished notice and an opportunity
to object to that plan’s participation in
the program not less than forty-five (45)
days prior to the implementation of the
cross-trade program. Section II(i) further
states that the failure of the authorizing
fiduciary to return a special termination
form provided in the notice by a
specified date that is at least thirty (30)
days from receipt shall be deemed to be
approval of the plan’s participation in
the program. If the authorizing plan
fiduciary objects to the plan’s inclusion
in the program, the plan will be given
the opportunity to withdraw without
penalty prior to the program’s
implementation.
Sections II(j) and II(k) describe the
type of information that is required to be
disclosed to a plan fiduciary prior to the
authorization defined in sections II(h)

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and II(i). Important among these
disclosures is a statement describing the
conflicts that will exist as a result of the
manager’s cross-trading activities. This
statement must also detail and explain
how the manager’s practices and
procedures will mitigate such conflicts.
Such writing must include a statement
that:
Investment decisions will not be
based in whole or in part by the
manager on the availability of crosstrade opportunities. These investment
decisions include:
• Which securities to buy or sell;
• How much of each security to buy
or sell; and,
• When to execute a sale or purchase
of each security.
Investment decisions will be made
prior to the identification and
determination of any cross-trade
opportunities. In addition, all crosstrades by a Fund will be based solely
upon triggering events set forth in the
exemption. Records documenting each
cross-trade transaction will be retained
by the manager.
Section II(l) further requires that
notice be provided to the authorizing
plan fiduciary at least annually of the
plan’s right to terminate its participation
in the cross-trading program and its
investment in any of the Funds without
penalty. Such notice must be
accompanied by a special termination
form. Failure to return the form by a
specified date that is at least thirty (30)
days from the receipt will be deemed
approval of the plan’s continued
participation in the cross-trading
program. In lieu of providing a special
termination form, the notice may permit
the independent plan fiduciary to
utilize another written instrument by
the specified date to terminate the
plan’s participation in the cross-trading
program, provided that in such case the
notice explicitly discloses that a
termination form may be obtained from
the Manager upon request. Such annual
re-authorization will provide
information to the relevant independent
plan fiduciary regarding each Fund in
which the plan is invested, as well as
explicit notification that the plan
fiduciary may request and obtain
disclosures regarding any new Funds in
which the plan is not invested that are
added to the cross-trading program, or
any new ‘‘triggering events’’ (as defined
in Section IV(d) below) that may have
been added to existing Funds in which
the plan is not invested, since the time
of the initial authorization described in
Section II(h), or the time of the notice
described in Section II(i).
Section II(m) of the exemption details
specific requirements for cross-trades of

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securities which will occur in
connection with a Large Account
restructuring. In particular, section
II(m)(2) requires that the authorization
for such cross-trades must be made in
writing prior to the cross-trade
transactions by fiduciaries of the Large
Account who are independent of the
manager (except in the case of a
Manager Plan). Such authorization must
follow full written disclosure of
information regarding the cross-trading
program. Such authorization may be
terminated at will upon receipt by the
manager of written notice of
termination. A termination form must
be supplied to the Large Account
fiduciary concurrent with the written
description of the cross-trading
program. Under section II(m)(3), the
portfolio restructuring program must be
completed within sixty (60) days of the
initial authorization made by the Large
Account’s fiduciary (or initial receipt of
assets associated with the restructuring,
if later), unless the Large Account’s
fiduciary agrees in writing to extend this
period for another thirty (30) days. Large
Account fiduciaries may utilize the
termination form or any other written
instrument at any time within the 60day period, or the additional 30-day
period, to terminate their prior written
authorization for cross-trading related to
the portfolio restructuring program.
Under section II(m)(4), within thirty (30)
days of the completion of the
restructuring program, the Large
Account fiduciary must be fully
apprised in writing of the results of the
transactions. Such writing may include,
upon request by the Large Account
fiduciary, additional information
sufficient to allow the independent
fiduciary for the Large Account to verify
the need for each cross-trade and the
determination of the above decisions.
However, pursuant to section III(b)(2)
the manager may refuse to disclose to a
Large Account fiduciary or other person
any such information which is deemed
confidential or privileged if the manager
is otherwise permitted by law to
withhold such information from such
person, provided that by the close of the
thirtieth (30th) day following the
request, the manager gives a written
notice to such person advising that
person both the reasons for the refusal
and that the Department may request
such information.
H. Recordkeeping
Section III(a) requires that the
manager maintain records necessary to
allow a determination of whether the
conditions of the exemption have been
met. These records must be maintained
for a period of six (6) years from the date

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of the transactions. These records must
include records which identify the
following:
(1) On a Fund by Fund basis, the
specific triggering events which result
in the creation of the model prescribed
output or trade list of specific securities
to be cross-traded;
(2) On a Fund by Fund basis, the
model prescribed output or trade list
which describes: (A) which securities to
buy or sell; (B) how much of each
security to buy or sell; in detail
sufficient to allow an independent plan
fiduciary to verify that each of the above
decisions for the Fund was made in
response to specific triggering events;
and
(3) On a Fund by Fund basis, the
actual trades executed by the Fund on
a particular day and which of those
trades were associated with triggering
events.
As explained to the Department, the
triggering event relating to net
investments in, or withdrawals from, a
Fund results in new cash to invest in
the Fund or the need to liquidate
securities from a Fund. The model or
index underlying the Fund determines
which securities to purchase or sell
based on the amount of net investments
or withdrawals. This process results in
the creation of a trade list or a model
prescribed output of securities to be
purchased or sold. The manager then
applies its objective allocation system to
the trade lists or model prescribed
outputs used for other Funds
participating in the cross-trade program
to determine which particular crosstrades will occur between Funds. For
those securities which cannot be crosstraded after application of the manager’s
allocation system, the necessary
purchases and sales are made through
other means.
In the view of the Department, records
must be maintained of this cross-trading
activity with enough specificity to allow
an independent plan fiduciary to verify
whether the safeguards of this
exemption have been met. Section II(b)
requires that any cross-trade of
securities by a Fund occur as a direct
result of a ‘‘triggering event’’ as defined
in section IV(d) and is executed no later
than the close of the third business day
following such ‘‘triggering event.’’
Among the records needed to verify that
this condition has been satisfied, section
III(a)(1) requires that, on a Fund by
Fund basis, the manager maintain a
record of the specific triggering events
which result in the creation of the list
of specific securities for the manager’s
cross-trading system. Section III(a)(2)
further requires that, on a Fund by Fund
basis, the manager maintain records of

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the model prescribed output or trade
list, as well as the procedures utilized
by the manager to determine which
securities to buy or sell and how much
of each security to buy or sell, in detail
sufficient to allow an independent plan
fiduciary to verify that each of the above
decisions for the Fund was made in
response to specific triggering events.
As provided by section III(b)(2), if such
material is viewed as a trade secret, or
privileged or confidential, the manager
may refuse to disclose such information
if reasons for the refusal are given and
the person is also notified that the
Department of Labor may request such
information.
This record-keeping requirement is
intended to assure that independent
plan fiduciaries will be able to
determine whether Funds and their
underlying models or indexes operate
consistently in following the input of
triggering event information. The
Department does not intend to prescribe
a detailed list of records that are
necessary to enable a determination of
compliance with the exemption because
the necessary records will depend on
the nature of the Index or Model-Driven
Funds involved and other factors. This
information, however, should be kept in
sufficient detail to enable a replication
of specific historical events in order to
satisfy an inquiry by persons identified
in section III(b)(1). Section III(a)(3)
requires that, on a Fund by Fund basis,
records be maintained of the actual
trades executed by the Fund on a
particular day and which of those trades
resulted from triggering events.
Further, Section III(a) requires that the
records must be readily available to
assure accessibility and maintained so
that an independent fiduciary, or other
persons identified in section III(b)(1),
may obtain them within a reasonable
time. This requirement should permit
the records to be retrieved and
assembled quickly, regardless of the
location in which they are maintained.
For those records which are not
maintained electronically, the records
should be maintained in a central
location to facilitate assembly and
examination.
All records must be unconditionally
available at their customary location for
examination during normal business
hours by the persons described in
section III(b)(1). However, as noted with
respect to information which may be
disclosed to a Large Account fiduciary
or other person, the manager may refuse
to disclose to a person, other than a duly
authorized employee or representative
of the Department or the Internal
Revenue Service, any such information
which is deemed confidential or

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privileged if the manager is otherwise
permitted by law to withhold such
information from such person. In such
instances, the manager shall provide, by
the close of the thirtieth (30th) day
following the request, a written notice to
such person advising that person of the
reasons for the refusal and that the
Department may request such
information.
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 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 the plans and their
participants and beneficiaries and
protective of the rights of participants
and beneficiaries of such plans;
(3) The exemption is applicable to a
particular transaction only if the
conditions specified in the class
exemption are met; and
(4) The exemption is supplemental to,
and not in derogation of, any other
provisions of the Code and the Act,
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.
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 CFR part
2570, subpart B (55 FR 32836, 32847,
August 10, 1990.)

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Section I—Exemption for Cross-Trading
of Securities by Index and/or ModelDriven Funds
Effective April 15, 2002, the
restrictions of sections 406(a)(1)(A) and
406(b)(2) of the Act, section
8477(c)(2)(B) of FERSA, and the
sanctions resulting from the application
of section 4975 of the Code, by reason
of section 4975(c)(1)(A) of the Code,
shall not apply to the transactions
described below if the applicable
conditions set forth in Sections II and III
below are satisfied.
(a) The purchase and sale of securities
between an Index Fund or a ModelDriven Fund (a ‘‘Fund’’), as defined in
Sections IV(a) and (b) below, and
another Fund, at least one of which
holds ‘‘plan assets’’ subject to the Act or
FERSA; or
(b) The purchase and sale of securities
between a Fund and a Large Account, as
defined in Section IV(e) below, at least
one of which holds ‘‘plan assets’’
subject to the Act or FERSA, pursuant
to a portfolio restructuring program, as
defined in Section IV(f) below, of the
Large Account;
Notwithstanding the foregoing, this
exemption shall apply to cross-trades
between two or more Large Accounts
pursuant to a portfolio restructuring
program if such cross-trades occur as
part of a single cross-trading program
involving both Funds and Large
Accounts for which securities are crosstraded solely as a result of the objective
operation of the program.
Section II. Specific Conditions
(a) The cross-trade is executed at the
closing price, as defined in Section
IV(h) below.
(b) Any cross-trade of securities by a
Fund occurs as a direct result of a
‘‘triggering event,’’ as defined in Section
IV(d) below, and is executed no later
than the close of the third business day
following such ‘‘triggering event.’’
(c) If the cross-trade involves a ModelDriven Fund, the cross-trade does not
take place within three (3) business days
following any change made by the
Manager to the model underlying the
Fund.
(d) The Manager has allocated the
opportunity for all Funds or Large
Accounts to engage in the cross-trade on
an objective basis which has been
previously disclosed to the authorizing
fiduciaries of plan investors, and which
does not permit the exercise of
discretion by the Manager (e.g., a pro
rata allocation system).
(e) No more than twenty (20) percent
of the assets of the Fund or Large
Account at the time of the cross-trade is

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comprised of assets of employee benefit
plans maintained by the Manager for its
own employees (Manager Plans) for
which the Manager exercises investment
discretion.
(f)(1) Cross-trades of equity securities
involve only securities that are widelyheld, actively-traded, and for which
market quotations are readily available
from independent sources that are
engaged in the ordinary course of
business of providing financial news
and pricing information to institutional
investors and/or the general public, and
are widely recognized as accurate and
reliable sources for such information.
For purposes of this requirement, the
terms ‘‘widely-held’’ and ‘‘activelytraded’’ shall be deemed to include any
security listed in an Index, as defined in
Section IV(c) below; and
(2) Cross-trades of fixed-income
securities involve only securities for
which market quotations are readily
available from independent sources that
are engaged in the ordinary course of
business of providing financial news
and pricing information to institutional
investors and/or the general public, and
are widely recognized as accurate and
reliable sources for such information.
(g) The Manager receives no brokerage
fees or commissions as a result of the
cross-trade.
(h) As of the date this exemption is
granted, a plan’s participation in the
Manager’s cross-trading program as a
result of investments made in any Index
or Model-Driven Fund that holds plan
assets is subject to a written
authorization executed in advance of
such investment by a fiduciary of the
plan which is independent of the
Manager engaging in the cross-trade
transactions. For purposes of this
exemption, the requirement that the
authorizing fiduciary be independent of
the Manager shall not apply in the case
of a Manager Plan.
(i) With respect to existing plan
investors in any Index or Model-Driven
Fund that holds plan assets as of the
date this exemption is granted, the
independent fiduciary is furnished with
a written notice, not less than forty-five
(45) days prior to the implementation of
the cross-trading program, that describes
the Fund’s participation in the
Manager’s cross-trading program,
provided that:
(1) Such notice allows each plan an
opportunity to object to the plan’s
participation in the cross-trading
program as a Fund investor by
providing the plan with a special
termination form;
(2) The notice instructs the
independent plan fiduciary that failure
to return the termination form to the

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Manager by a specified date (which
shall be at least 30 days following the
plan’s receipt of the form) shall be
deemed to be an approval by the plan
of its participation in the Manager’s
cross-trading program as a Fund
investor; and
(3) If the independent plan fiduciary
objects to the plan’s participation in the
cross-trading program as a Fund
investor by returning the termination
form to the Manager by the specified
date, the plan is given the opportunity
to withdraw from each Index or ModelDriven Fund without penalty prior to
the implementation of the cross-trading
program, within such time as may be
reasonably necessary to effectuate the
withdrawal in an orderly manner.
(j) Prior to obtaining the authorization
described in Section II(h), and in the
notice described in Section II(i), the
following statement must be provided
by the Manager to the independent plan
fiduciary:
Investment decisions for the Fund
(including decisions regarding which
securities to buy or sell, how much of
a security to buy or sell, and when to
execute a sale or purchase of securities
for the Fund) will not be based in whole
or in part by the Manager on the
availability of cross-trade opportunities
and will be made prior to the
identification and determination of any
cross-trade opportunities. In addition,
all cross-trades by a Fund will be based
solely upon a ‘‘triggering event’’ set
forth in this exemption. Records
documenting each cross-trade
transaction will be retained by the
Manager.
(k) Prior to any authorization set forth
in Section II(h), and at the time of any
notice described in Section II(i) above,
the independent plan fiduciary must be
furnished with any reasonably available
information necessary for the fiduciary
to determine whether the authorization
should be given, including (but not
limited to) a copy of this exemption, an
explanation of how the authorization
may be terminated, detailed disclosure
of the procedures to be implemented
under the Manager’s cross-trading
practices (including the ‘‘triggering
events’’ that will create the cross-trading
opportunities, the independent pricing
services that will be used by the
manager to price the cross-traded
securities, and the methods that will be
used for determining closing price), and
any other reasonably available
information regarding the matter that
the authorizing fiduciary requests. The
independent plan fiduciary must also be
provided with a statement that the
Manager will have a potentially
conflicting division of loyalties and

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6635

responsibilities to the parties to any
cross-trade transaction and must explain
how the Manager’s cross-trading
practices and procedures will mitigate
such conflicts.
With respect to Funds that are added
to the Manager’s cross-trading program
or changes to, or additions of, triggering
events regarding Funds, following the
authorizations described in section II(h)
or section II(i), the Manager shall
provide a notice to each relevant
independent plan fiduciary of each plan
invested in the affected Funds prior to,
or within ten (10) days following, such
addition of Funds or change to, or
addition of, triggering events, which
contains a description of such Fund(s)
or triggering event(s). Such notice will
also include a statement that the plan
has the right to terminate its
participation in the cross-trading
program and its investment in any Index
Fund or Model-Driven Fund without
penalty at any time, as soon as is
necessary to effectuate the withdrawal
in an orderly manner.
(l) At least annually, the Manager
notifies the independent fiduciary for
each plan that has previously
authorized participation in the
Manager’s cross-trading program as a
Fund investor, that the plan has the
right to terminate its participation in the
cross-trading program and its
investment in any Index Fund or ModelDriven Fund that holds plan assets
without penalty at any time, as soon as
is necessary to effectuate the withdrawal
in an orderly manner. This notice shall
also provide each independent plan
fiduciary with a special termination
form and instruct the fiduciary that
failure to return the form to the Manager
by a specified date (which shall be at
least thirty (30) days following the
plan’s receipt of the form) shall be
deemed an approval of the subject
plan’s continued participation in the
cross-trading program as a Fund
investor. In lieu of providing a special
termination form, the notice may permit
the independent plan fiduciary to
utilize another written instrument by
the specified date to terminate the
plan’s participation in the cross-trading
program, provided that in such case the
notice explicitly discloses that a
termination form may be obtained from
the Manager upon request. Such annual
re-authorization must provide
information to the relevant independent
plan fiduciary regarding each Fund in
which the plan is invested, as well as
explicit notification that the plan
fiduciary may request and obtain
disclosures regarding any new Funds in
which the plan is not invested that are
added to the cross-trading program, or

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any new triggering events (as defined in
Section IV(d) below) that may have been
added to any existing Funds in which
the plan is not invested, since the time
of the initial authorization described in
Section II(h), or the time of the notice
described in Section II(i).
(m) With respect to a cross-trade
involving a Large Account:
(1) The cross-trade is executed in
connection with a portfolio
restructuring program, as defined in
Section IV(f) below, with respect to all
or a portion of the Large Account’s
investments which an independent
fiduciary of the Large Account (other
than in the case of any assets of a
Manager Plan) has authorized the
Manager to carry out or to act as a
‘‘trading adviser,’’ as defined in Section
IV(g) below, in carrying out a Large
Account-initiated liquidation or
restructuring of its portfolio;
(2) Prior to the cross-trade, a fiduciary
of the Large Account who is
independent of the Manager (other than
in the case of any assets of a Manager
Plan) 11 has been fully informed of the
Manager’s cross-trading program, has
been provided with the information
required in Section II(k), and has
provided the Manager with advance
written authorization to engage in crosstrading in connection with the
restructuring, provided that—
(A) Such authorization may be
terminated at will by the Large Account
upon receipt by the Manager of written
notice of termination.
(B) A form expressly providing an
election to terminate the authorization,
with instructions on the use of the form,
is supplied to the authorizing Large
Account fiduciary concurrent with the
receipt of the written information
describing the cross-trading program.
The instructions for such form must
specify that the authorization may be
terminated at will by the Large Account,
without penalty to the Large Account,
upon receipt by the Manager of written
notice from the authorizing Large
Account fiduciary;
(3) All cross-trades made in
connection with the portfolio
restructuring program must be
completed by the Manager within sixty
(60) days of the initial authorization (or
initial receipt of assets associated with
the restructuring, if later) to engage in
such restructuring by the Large
Account’s independent fiduciary, unless
such fiduciary agrees in writing to
11 However, proper disclosures must be made to,
and written authorization must be made by, an
appropriate fiduciary for the Manager Plan in order
for the Manager Plan to participate in a specific
portfolio restructuring program as part of a Large
Account.

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extend this period for another thirty (30)
days; and,
(4) No later than thirty (30) days
following the completion of the Large
Account’s portfolio restructuring
program, the Large Account’s
independent fiduciary must be fully
apprised in writing of all cross-trades
executed in connection with the
restructuring. Such writing shall
include a notice that the Large
Account’s independent fiduciary may
obtain, upon request, the information
described in Section III(a), subject to the
limitations described in Section III(b).
However, if the program takes longer
than sixty (60) days to complete, interim
reports containing the transaction
results must be provided to the Large
Account fiduciary no later than fifteen
(15) days following the end of the initial
sixty (60) day period and the succeeding
thirty (30) day period.
Section III—General Conditions
(a) The Manager maintains or causes
to be maintained for a period of six (6)
years from the date of each cross-trade
the records necessary to enable the
persons described in paragraph (b) of
this Section to determine whether the
conditions of the exemption have been
met, including records which identify:
(1) On a Fund by Fund basis, the
specific triggering events which result
in the creation of the model prescribed
output or trade list of specific securities
to be cross-traded;
(2) On a Fund by Fund basis, the
model prescribed output or trade list
which describes: (A) Which securities to
buy or sell; and (B) how much of each
security to buy or sell; in detail
sufficient to allow an independent plan
fiduciary to verify that each of the above
decisions for the Fund was made in
response to specific triggering events;
and
(3) On a Fund by Fund basis, the
actual trades executed by the Fund on
a particular day and which of those
trades resulted from triggering events.
Such records must be readily
available to assure accessibility and
maintained so that an independent
fiduciary, or other persons identified
below in paragraph (b) of this Section,
may obtain them within a reasonable
period of time. However, a prohibited
transaction will not be considered to
have occurred if, due to circumstances
beyond the control of the Manager, the
records are lost or destroyed prior to the
end of the six-year period, and no party
in interest other than the Manager shall
be subject to the civil penalty that may
be assessed under section 502(i) of the
Act or to the taxes imposed by sections
4975(a) and (b) of the Code if the

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records are not maintained or are not
available for examination as required by
paragraph (b) below.
(b)(1) Except as provided in paragraph
(b)(2) and notwithstanding any
provisions of sections 504(a)(2) and (b)
of the Act, the records referred to in
paragraph (a) of this Section are
unconditionally available at their
customary location for examination
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
participating in a cross-trading program
who has the authority to acquire or
dispose of the assets of the Plan, or any
duly authorized employee or
representative of such fiduciary,
(C) Any contributing employer with
respect to any Plan participating in a
cross-trading program or any duly
authorized employee or representative
of such employer, and
(D) Any participant or beneficiary of
any Manager Plan participating in a
cross-trading program, or any duly
authorized employee or representative
of such participant or beneficiary.
(2) If in the course of seeking to
inspect records maintained by a
Manager pursuant to this exemption,
any person described in paragraph
(b)(1)(B) through (D) seeks to examine
trade secrets, or commercial or financial
information of the Manager that is
privileged or confidential, and the
Manager is otherwise permitted by law
to withhold such information from such
person, the Manager may refuse to
disclose such information provided that,
by the close of the thirtieth (30th) day
following the request, the Manager gives
a written notice to such person advising
the person of the reasons for the refusal
and that the Department of Labor may
request such information.
(3) The information required to be
disclosed to persons described in
paragraph (b)(1)(B) through (D) shall be
limited to information that pertains to
cross-trades involving a Fund or Large
Account in which they have an interest.
Section IV—Definitions
The following definitions apply for
purposes of this exemption:
(a) Index Fund—Any investment
fund, account or portfolio sponsored,
maintained, trusteed, or managed by the
Manager or an Affiliate, in which one or
more investors invest, and—
(1) Which is designed to track the rate
of return, risk profile and other
characteristics of an Index, as defined in
Section IV(c) below, by either (i)
replicating the same combination of
securities which compose such Index or

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(ii) sampling the securities which
compose such Index based on objective
criteria and data;
(2) For which the Manager does not
use its discretion, or data within its
control, to affect the identity or amount
of securities to be purchased or sold;
(3) That either contains ‘‘plan assets’’
subject to the Act, is an investment
company registered under the
Investment Company Act of 1940, or
contains assets of one or more
institutional investors, which may
include, but not be limited to, such
entities as an insurance company
separate account or general account, a
governmental plan, a university
endowment fund, a charitable
foundation fund, a trust or other fund
which is exempt from taxation under
section 501(a) of the Code; and,
(4) That involves no agreement,
arrangement, or understanding
regarding the design or operation of the
Fund which is intended to benefit the
Manager, its Affiliates, or any party in
which the Manager or an Affiliate may
have an interest.
(b) Model-Driven Fund—Any
investment fund, account or portfolio
sponsored, maintained, trusteed, or
managed by the Manager or an Affiliate,
in which one or more investors invest,
and—
(1) Which is composed of securities
the identity of which and the amount of
which are selected by a computer model
that is based on prescribed objective
criteria using independent third party
data, not within the control of the
Manager, to transform an Index, as
defined in Section IV(c) below;
(2) Which either contains ‘‘plan
assets’’ subject to the Act, is an
investment company registered under
the Investment Company Act of 1940, or
contains assets of one or more
institutional investors, which may
include, but not be limited to, such
entities as an insurance company
separate account or general account, a
governmental plan, a university
endowment fund, a charitable
foundation fund, a trust or other fund
which is exempt from taxation under
section 501(a) of the Code; and
(3) That involves no agreement,
arrangement, or understanding
regarding the design or operation of the
Fund or the utilization of any specific
objective criteria which is intended to
benefit the Manager, its Affiliates, or
any party in which the Manager or an
Affiliate may have an interest.
(c) Index—A securities index that
represents the investment performance
of a specific segment of the public
market for equity or debt securities in

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the United States and/or foreign
countries, but only if—
(1) The organization creating and
maintaining the index is—
(A) Engaged in the business of
providing financial information,
evaluation, advice or securities
brokerage services to institutional
clients,
(B) A publisher of financial news or
information, or
(C) A public securities exchange or
association of securities dealers; and,
(2) The index is created and
maintained by an organization
independent of the Manager, as defined
in Section IV(i) below; and,
(3) The index is a generally accepted
standardized index of securities which
is not specifically tailored for the use of
the Manager.
(d) Triggering Event:
(1) A change in the composition or
weighting of the Index underlying a
Fund by the independent organization
creating and maintaining the Index;
(2) A material amount of net change
in the overall level of assets in a Fund,
as a result of investments in and
withdrawals from the Fund, provided
that: (A) Such material amount has
either been identified in advance as a
specified amount of net change relating
to such Fund and disclosed in writing
as a ‘‘triggering event’’ to an
independent fiduciary of each plan
having assets held in the Fund prior to,
or within ten (10) days following, its
inclusion as a ‘‘triggering event’’ for
such Fund or the Manager has otherwise
disclosed in the description of its crosstrading practices pursuant to section
II(k) the parameters for determining a
material amount of net change,
including any amount of discretion
retained by the Manager that may affect
such net change, in sufficient detail to
allow the independent fiduciary to
determine whether the authorization to
engage in cross-trading should be given;
and
(B) Investments or withdrawals as a
result of the Manager’s discretion to
invest or withdraw assets of a Manager
Plan, other than a Manager Plan which
is a defined contribution plan under
which participants direct the
investment of their accounts among
various investment options, including
such Fund, will not be taken into
account in determining the specified
amount of net change;
(3) An accumulation in the Fund of a
material amount of either:
(A) Cash which is attributable to
interest or dividends on, and/or tender
offers for, portfolio securities; or
(B) Stock attributable to dividends on
portfolio securities; provided that such

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material amount has either been
identified in advance as a specified
amount relating to such Fund and
disclosed in writing as a ‘‘triggering
event’’ to an independent fiduciary of
each plan having assets held in the
Fund prior to, or within ten (10) days
after, its inclusion as a ‘‘triggering
event’’ for such Fund, or the Manager
has otherwise disclosed in the
description of its cross-trading practices
pursuant to section II(k) the parameters
for determining a material amount of
accumulated cash or securities,
including any amount of discretion
retained by the Manager that may affect
such accumulated amount, in sufficient
detail to allow the independent
fiduciary to determine whether the
authorization to engage in cross-trading
should be given;
(4) A change in the composition of the
portfolio of a Model-Driven Fund
mandated solely by operation of the
formulae contained in the computer
model underlying the Fund where the
basic factors for making such changes
(and any fixed frequency for operating
the computer model) have been
disclosed in writing to an independent
fiduciary of each plan having assets
held in the Fund, prior to, or within ten
(10) days after, its inclusion as a
‘‘triggering event’’ for such Fund; or
(5) A change in the composition or
weighting of a portfolio for an Index
Fund or a Model-Driven Fund which
results from an independent fiduciary’s
direction to exclude certain securities or
types of securities from the Fund,
notwithstanding that such securities are
part of the index used by the Fund.
(e) Large Account—Any investment
fund, account or portfolio that is not an
Index Fund or a Model-Driven Fund
sponsored, maintained, trusteed (other
than a Fund for which the Manager is
a nondiscretionary trustee) or managed
by the Manager, which holds assets of
either:
(1) An employee benefit plan within
the meaning of section 3(3) of the Act
that has $50 million or more in total
assets (for purposes of this requirement,
the assets of one or more employee
benefit plans maintained by the same
employer, or controlled group of
employers, may be aggregated provided
that such assets are pooled for
investment purposes in a single master
trust);
(2) An institutional investor that has
total assets in excess of $50 million,
such as an insurance company separate
account or general account, a
governmental plan, a university
endowment fund, a charitable
foundation fund, a trust or other fund

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Federal Register / Vol. 67, No. 29 / Tuesday, February 12, 2002 / Notices

which is exempt from taxation under
section 501(a) of the Code; or
(3) An investment company registered
under the Investment Company Act of
1940 (e.g., a mutual fund) other than an
investment company advised or
sponsored by the Manager;
provided that the Manager has been
authorized to restructure all or a portion
of the portfolio for such Large Account
or to act as a ‘‘trading adviser’’ (as
defined in Section IV(g) below) in
connection with a portfolio
restructuring program (as defined in
Section IV(f)) for the Large Account.
(f) Portfolio restructuring program—
Buying and selling the securities on
behalf of a Large Account in order to
produce a portfolio of securities which
will be an Index Fund or a ModelDriven Fund managed by the Manager
or by another investment manager, or in
order to produce a portfolio of securities
the composition of which is designated
by a party independent of the Manager,
without regard to the requirements of
Section IV(a)(3) or (b)(2), or to carry out
a liquidation of a specified portfolio of
securities for the Large Account.
(g) Trading adviser—A person whose
role is limited with respect to a Large
Account to the disposition of a
securities portfolio in connection with a
portfolio restructuring program that is a
Large Account-initiated liquidation or
restructuring within a stated period of
time in order to minimize transaction
costs. The person does not have
discretionary authority or control with
respect to any underlying asset

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allocation, restructuring or liquidation
decisions for the account in connection
with such transactions and does not
render investment advice [within the
meaning of 29 CFR 2510.3–21(c)] with
respect to such transactions.
(h) Closing price—The price for a
security on the date of the transaction,
as determined by objective procedures
disclosed to investors in advance and
consistently applied with respect to
securities traded in the same market,
which procedures shall indicate the
independent pricing source (and
alternates, if the designated pricing
source is unavailable) used to establish
the closing price and the time frame
after the close of the market in which
the closing price will be determined.
(i) Manager—A person who is:
(1) A bank or trust company, or any
Affiliate thereof, as defined in Section
IV(j) below, which is supervised by a
state or federal agency; or,
(2) An investment adviser or any
Affiliate thereof, as defined in Section
IV(j) below, which is registered under
the Investment Advisers Act of 1940.
(j) Affiliate—An ‘‘affiliate’’ of a
Manager includes:
(1) Any person, directly or indirectly,
through one or more intermediaries,
controlling, controlled by or under
common control with the person;
(2) Any officer, director, employee or
relative of such person, or partner of any
such person; and
(3) Any corporation or partnership of
which such person is an officer,
director, partner or employee.

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(k) Control—The power to exercise a
controlling influence over the
management or policies of a person
other than an individual.
(l) Relative—A ‘‘relative’’ is a person
that is defined in section 3(15) of the
Act (or a ‘‘member of the family’’ as that
term is defined in section 4975(e)(6) of
the Code), or a brother, a sister, or a
spouse of a brother or a sister.
(m) Nondiscretionary trustee—A plan
trustee whose powers and duties with
respect to any assets of the plan are
limited to (1) the provision of
nondiscretionary trust services to the
plan, and (2) duties imposed on the
trustee by any provision or provisions of
the Act or the Code. The term
‘‘nondiscretionary trust services’’ means
custodial services and services ancillary
to custodial services, none of which
services are discretionary. For purposes
of this exemption, a person who is
otherwise a nondiscretionary trustee
will not fail to be a nondiscretionary
trustee solely by reason of having been
delegated, by the sponsor of a master or
prototype plan, the power to amend
such plan.
Signed at Washington, DC, this 6th day of
February, 2002.
Alan D. Lebowitz,
Deputy Assistant Secretary for Program
Operations, Pension and Welfare Benefits
Administration, Department of Labor.
[FR Doc. 02–3341 Filed 2–11–02; 8:45 am]
BILLING CODE 4510–29–P

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