58450 Federal Register / Vol. 73, No. 195 / Tuesday, October 7, 2008 / Rules and Regulations 

1Section 611(g)(2) of the PPA added a parallel 

provision under the Internal Revenue Code of 1986 

(Code), section 4975(d)(22), which provides relief 

from the prohibitions described in section 4975(c) 

of the Code in connection with the cross-trading of 

securities. Under Reorganization Plan No. 4 of 1978, 

effective December 31, 1978 (5 U.S.C. App. 214 

(2000)), the authority of the Secretary of the 

Treasury to issue interpretations regarding section 

4975 of the Code has been transferred, with certain 

exceptions not here relevant, to the Secretary of 

Labor, and the Secretary of the Treasury is bound 

by the interpretations of the Secretary of Labor 

pursuant to such authority. 

annuity provider for defined benefit 

plans see 29 CFR 2509.95–1. 

(2) This section sets forth an optional 

means for satisfying the fiduciary 

responsibilities under section 

404(a)(1)(B) of ERISA with respect to the 

selection of an annuity provider or 

contract for benefit distributions. This 

section does not establish minimum 

requirements or the exclusive means for 

satisfying these responsibilities. 

(b) Safe harbor. The selection of an 

annuity provider for benefit 

distributions from an individual 

account plan satisfies the requirements 

of section 404(a)(1)(B) of ERISA if the 

fiduciary: 

(1) Engages in an objective, thorough 

and analytical search for the purpose of 

identifying and selecting providers from 

which to purchase annuities; 

(2) Appropriately considers 

information sufficient to assess the 

ability of the annuity provider to make 

all future payments under the annuity 

contract; 

(3) Appropriately considers the cost 

(including fees and commissions) of the 

annuity contract in relation to the 

benefits and administrative services to 

be provided under such contract; 

(4) Appropriately concludes that, at 

the time of the selection, the annuity 

provider is financially able to make all 

future payments under the annuity 

contract and the cost of the annuity 

contract is reasonable in relation to the 

benefits and services to be provided 

under the contract; and 

(5) If necessary, consults with an 

appropriate expert or experts for 

purposes of compliance with the 

provisions of this paragraph (b). 

(c) Time of selection. For purposes of 

paragraph (b) of this section, the ‘‘time 

of selection’’ may be either: 

(1) The time that the annuity provider 

and contract are selected for distribution 

of benefits to a specific participant or 

beneficiary; or 

(2) The time that the annuity provider 

is selected to provide annuity contracts 

at future dates to participants or 

beneficiaries, provided that the selecting 

fiduciary periodically reviews the 

continuing appropriateness of the 

conclusion described in paragraph (b)(4) 

of this section, taking into account the 

factors described in paragraphs (b)(2), 

(3) and (5) of this section. For purposes 

of this paragraph (c)(2), a fiduciary is 

not required to review the 

appropriateness of this conclusion with 

respect to any annuity contract 

purchased for any specific participant or 

beneficiary. 

Signed at Washington, DC, this 29th day of 

September, 2008. 

Bradford P. Campbell, 

Assistant Secretary, Employee Benefits 

Security Administration, Department of 

Labor. 

[FR Doc. E8–23427 Filed 10–6–08; 8:45 am] 

BILLING CODE 4510–29–P 

DEPARTMENT OF LABOR 

Employee Benefits Security 

Administration 

29 CFR Part 2550 

RIN 1210–AB17 

Statutory Exemption for Cross-Trading 

of Securities 

AGENCY: Employee Benefits Security 

Administration, Labor. 

ACTION: Final rule. 

SUMMARY: This document contains a 

final rule that implements the content 

requirements for the written crosstrading policies and procedures 

required under section 408(b)(19)(H) of 

the Employee Retirement Income 

Security Act of 1974 (ERISA or the Act). 

Section 611(g) of the Pension Protection 

Act of 2006, Public Law No. 109–280, 

120 Stat. 780, 972, amended section 

408(b) of ERISA by adding a new 

subsection (19) that exempts the 

purchase and sale of a security between 

a plan and any other account managed 

by the same investment manager if 

certain conditions are satisfied. Among 

other requirements, section 

408(b)(19)(H) stipulates that the 

investment manager must adopt, and 

effect cross-trades in accordance with, 

written cross-trading policies and 

procedures that are fair and equitable to 

all accounts participating in the crosstrading program. This final rule affects 

employee benefit plans, investment 

managers, plan fiduciaries and plan 

participants and beneficiaries. 

DATES: Effective Date: This final rule is 

effective February 4, 2009. 

FOR FURTHER INFORMATION CONTACT: G. 

Christopher Cosby or Brian Buyniski, 

Office of Exemption Determinations, 

Employee Benefits Security 

Administration, Room N–5700, U.S. 

Department of Labor, Washington, DC 

20210, telephone (202) 693–8540. This 

is not a toll-free number. 

SUPPLEMENTARY INFORMATION: 

A. Background 

Section 611(g)(1) of the Pension 

Protection Act of 2006, Public Law No. 

109–280, 120 Stat. 780, 972 (PPA), 

which was enacted on August 17, 2006, 

amended ERISA by adding a new 

section 408(b)(19), which exempts from 

the prohibitions of sections 406(a)(1)(A) 

and 406(b)(2) of the Act those 

transactions involving the purchase and 

sale of a security between a plan and 

any other account managed by the same 

investment manager, provided that 

certain conditions are satisfied.1 Among 

other requirements, an investment 

manager must adopt, and cross-trades 

must be effected in accordance with, 

written cross-trading policies and 

procedures that are fair and equitable to 

all accounts participating in the crosstrading program. The policies and 

procedures must include descriptions of 

(i) the investment manager’s policies 

and procedures relating to pricing, and 

(ii) the investment manager’s policies 

and procedures for allocating crosstrades in an objective manner among 

accounts participating in the crosstrading program. 

The investment manager also must 

designate an individual (a compliance 

officer) who is responsible for 

periodically reviewing purchases and 

sales of securities made pursuant to the 

exemption to ensure compliance with 

the foregoing policies and procedures. 

Following such review, the compliance 

officer must provide, on an annual 

basis, a written report describing the 

steps performed during the course of the 

review, the level of compliance with the 

foregoing policies and procedures, and 

any specific instances of 

noncompliance. The report must be 

provided to the plan fiduciary who 

authorized the cross-trading no later 

than 90 days following the period to 

which it relates. Additionally, the 

written report must notify the plan 

fiduciary of the plan’s right to terminate 

participation in the investment 

manager’s cross-trading program at any 

time and must be signed by the 

compliance officer under penalty of 

perjury. 

Section 611(g)(3) of the PPA provides 

that the Secretary of Labor, after 

consultation with the Securities and 

Exchange Commission (SEC), shall, no 

later than 180 days after the date of the 

enactment of the PPA, issue regulations 


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2The policies and procedures containing the 

disclosure statement must be provided to the plan 

fiduciary that authorized the plan to participate in 

the investment manager’s cross-trading program in 

advance of any cross-trade. For a further 

explanation of this amendment, see the discussion 

of paragraph (b)(3)(i)(D) under the heading 2. 

Content of Policies and Procedures—§ 2550.408(b)– 

19(b)(3)(i), below. 

3 In this regard, the Department notes that the 

investment manager’s cross-trading program may 

also be subject to the requirements of applicable 

Federal securities laws. 4 17 CFR 270.17a–7. 

regarding the content of the written 

policies and procedures required to be 

adopted by an investment manager in 

order for such manager to qualify for 

relief under section 408(b)(19) of the 

Act. Section 611(h) of the PPA provides 

that the amendments made by section 

611 of the PPA shall apply to 

transactions occurring after the date of 

enactment of the PPA. In accordance 

with section 611(g)(3) of the PPA, the 

Department of Labor (the Department) 

published an interim final rule on 

Monday, February 12, 2007 (72 FR 

6473) in the Federal Register for public 

comment. The Department received 4 

comment letters in response to its 

request for comments. Submissions are 

available for review under Public 

Comments on the Laws & Regulations 

page of the Department’s Employee 

Benefits Security Administration Web 

site at http://www.dol.gov/ebsa. 

Set forth below is an overview of the 

final rule, along with a discussion of the 

public comments submitted on the 

interim final rule. 

B. Overview of Final Rule and 

Comments 

1. General 

Paragraph (a) of the final rule 

describes the general requirement of 

section 408(b)(19)(H) of the Act, which 

requires investment managers to adopt, 

and effect cross-trades in accordance 

with, written cross-trading policies and 

procedures that are fair and equitable to 

all accounts participating in the crosstrading program. The policies and 

procedures must include: (i) A 

description of the investment manager’s 

pricing policies and procedures, and (ii) 

the investment manager’s policies and 

procedures for allocating cross-trades in 

an objective manner among accounts 

participating in the cross-trading 

program. 

Paragraph (a)(3) of the interim final 

rule stated that section 408(b)(19)(D) of 

the Act requires that a plan fiduciary for 

each plan participating in the crosstrades receive in advance of any crosstrades disclosure regarding the 

conditions under which the cross-trades 

may take place in a document that is 

separate from any other agreement or 

disclosure involving the asset 

management relationship. The interim 

final rule required that the disclosure 

contain a statement that any investment 

manager participating in a cross-trading 

program will have a potentially 

conflicting division of loyalties and 

responsibilities to the parties involved 

in any cross-trade transaction. In the 

interest of clarity, the Department has 

determined to delete this statement from 

the interim final rule and to amend the 

policies and procedures under 

paragraph (b)(3)(i)(D) of the final rule to 

require that the policies and procedures 

contain a statement regarding a 

manager’s conflicting loyalties and 

responsibilities to the parties to the 

cross-trade transaction and a description 

of how the investment manager will 

mitigate such conflicts.2

Paragraph (a)(4) of the final rule, like 

paragraph (a)(4) of the interim final rule, 

states that the standards set forth in the 

final rule apply solely for purposes of 

determining whether an investment 

manager’s written policies and 

procedures satisfy the content 

requirements of section 408(b)(19)(H) of 

the Act. Accordingly, such standards 

shall not apply in determining whether, 

or to what extent, the investment 

manager satisfies the other requirements 

for relief under section 408(b)(19) of the 

Act.3

2. Content of Policies and Procedures— 

§ 2550.408(b)–19(b)(3)(i) 

Paragraph (b)(3) of the final rule, like 

the interim final rule, sets forth the 

content requirements of the written 

cross-trading policies and procedures 

that must be adopted by the investment 

manager, and provided to the plan 

fiduciary prior to authorizing crosstrading in order for transactions to 

qualify for relief under section 

408(b)(19) of the Act. Paragraph (b)(3)(i) 

provides that an investment manager’s 

policies and procedures must be fair 

and equitable to all accounts 

participating in its cross-trading 

program and reasonably designed to 

ensure compliance with the 

requirements of section 408(b)(19)(H) of 

the Act. 

Several commenters requested 

additional clarification and guidance 

concerning the policies and procedures 

to be followed by investment managers 

in connection with cross-trades under 

§ 2550.408b–19(b)(3)(i) of the interim 

final rule. One commenter 

recommended that the interim final rule 

be revised to ensure that investment 

managers will not be subject to crosstrading disclosure requirements that are 

more extensive than those currently 

applicable to registered investment 

advisers to mutual funds under SEC 

Rule 17a–7, issued under the 

Investment Company Act of 1940.4 The 

commenter argued that many of the 

provisions of the PPA regarding crosstrading are substantially similar to the 

provisions of Rule 17a–7, and that the 

Department and SEC share the same 

underlying policy considerations 

regarding cross-trade transactions. 

Therefore, the commenter concluded 

that the final rule should be consistent 

with, and comparable to, the Rule 17a– 

7 cross-trading provisions and any 

inconsistencies and additional 

disclosure obligations should be 

eliminated from the interim final rule to 

the extent possible. One commenter 

opined that, to the extent that some 

investment managers execute crosstrades on behalf of both mutual funds 

and pension plans, the imposition of 

this requirement would prove 

administratively burdensome insofar as 

it would require managers to adopt 

different cross-trading policies and 

procedures for different clients. 

Another commenter suggested that 

the Department establish a ‘‘safe harbor’’ 

provision in the final rule whereby the 

adoption of a fair allocation rule for 

cross-trades that meets the requirements 

of the Investment Company Act of 1940 

would automatically satisfy the 

requirements of the statutory 

exemption. 

The Department has not adopted the 

commenters’ suggestions in light of the 

significant differences between Rule 

17a–7 and the statutory exemption. The 

Department recognizes that Congress 

modeled certain aspects of the crosstrading statutory exemption on Rule 

17a–7. For example, both Rule 17a–7 

and ERISA section 408(b)(19) limit 

cross-trades to purchases or sales for 

cash of securities for which market 

quotations are readily available. In 

addition, the transactions must be 

effected at the independent current 

market price of the security as described 

in Rule 17a–7(b) and no brokerage 

commissions or fees (except for 

customary transfer fees) may be paid in 

connection with the transactions. 

Rule 17a–7, however, places primary 

responsibility on the mutual fund’s 

board of directors (a majority of whom 

must be independent of the mutual 

fund) to adopt the mutual fund’s crosstrading policies and procedures, to 

make and approve changes as the board 

deems necessary, and to determine no 

less frequently than quarterly that all 

purchases and sales during the 

preceding quarter were effected in 


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5 ‘‘Cherry picking’’ of securities refers to a 

practice where an investment manager with 

discretion on both sides of a transaction utilizes 

cross-trading to transfer particular securities from 

less favored accounts to promote the interests of 

more favored accounts. 

6 ‘‘Dumping’’ of securities refers to a practice 

where an investment manager with discretion on 

both sides of a transaction utilizes cross-trading to 

transfer particular securities to less favored 

accounts to promote the interests of more favored 

accounts. 

7The Department notes the deletion of the word 

‘‘potentially’’ from the operative language of the 

interim final rule in the phrase ‘‘potentially 

conflicting loyalties and responsibilities’’. The 

Department believes that there is an inherent 

conflict of interests when there is a common 

investment manager for both sides of a transaction. 

The Department has taken the position that, where 

an investment manager has investment discretion 

with respect to both sides of a cross-trade of 

securities and at least one side is an employee 

benefit plan account, a violation of section 406(b)(2) 

would occur. (See Complaint, Reich v. Strong 

Capital Management, Inc., No. 96–C–0669, E.D. 

Wis., June 6, 1996). The Department has also taken 

the position that by representing the buyer on one 

side and the seller on the other in a cross-trade, a 

plan fiduciary acts on behalf of parties that have 

interests adverse to each other. (See Complaint, 

Strong Capital Management, Inc., supra). 

compliance with the policies and 

procedures. In contrast, ERISA section 

408(b)(19) requires the investment 

manager to adopt the written crosstrading policies and procedures and to 

effect cross-trades in accordance with 

such procedures. 

In recognition of the differences 

between mutual funds and ERISAcovered employee benefit plans, the 

statutory exemption requires the 

investment manager to appoint a 

compliance officer to periodically 

review purchases and sales to ensure 

compliance with the cross-trading 

policies and procedures adopted by the 

manager. The statutory exemption also 

adds the requirement that the 

investment manager and compliance 

officer provide detailed, advance and 

periodic disclosures to the plan 

fiduciary responsible for authorizing the 

investment manager to engage in crosstrading on the plan’s behalf. In effect, 

the expanded role of the compliance 

officer under ERISA section 408(b)(19), 

coupled with more detailed disclosures 

to the independent fiduciary, functions 

in a manner similar to the mutual fund’s 

board of directors under Rule 17a–7. 

Accordingly, the Department has not 

adopted the commenters’ suggestions. 

Another commenter suggested that 

the language of subsection (b)(3)(i) be 

revised to read as follows: 

(i) An investment manager’s policies and 

procedures must be reasonably designed (1) 

to ensure that the transactions entered into 

pursuant to the policies and procedures are 

fair and equitable to all accounts 

participating in its cross-trading program and 

(2) to ensure compliance with the 

requirements of section 408(b)(19)(H) of the 

Act and the requirements of this regulation. 

The commenter stated that such a 

modification would be desirable 

because the fairness and equity of the 

policies and procedures would be 

evaluated, not on the basis of their 

written terms, but rather on the basis of 

the results of the cross-trades executed 

pursuant to such terms. After 

consideration of the comment, the 

Department has determined not to adopt 

the commenter’s suggestion. In the 

Department’s view, the suggested 

modification is inconsistent with 

section 408(b)(19)(H) of the Act, which 

requires an investment manager to 

adopt and effect cross-trades in 

accordance with written cross-trading 

policies and procedures that are fair and 

equitable to all accounts participating in 

the cross-trading program. 

Paragraph (b)(3)(i)(D) of the interim 

final rule required an investment 

manager’s cross-trading policies and 

procedures to contain a description of 

how the investment manager will 

mitigate any conflicting loyalties and 

responsibilities to the parties involved 

in any cross-trade transaction. Several 

commenters recommended the deletion 

of this provision. They suggested that, 

taken together, the remaining 

requirements in the interim final rule 

under § 2550.408b–19(b)(3)(i)—such as 

the statement of policy describing the 

criteria that will be applied by the 

investment manager in determining that 

the transaction is beneficial to both 

parties to the cross-trade, the 

requirement that cross-trades be effected 

at the independent current market price 

of the security, and the requirement that 

cross-trading opportunities be allocated 

in an objective and equitable manner— 

are sufficient to mitigate such conflicts, 

thus obviating the need for this 

additional procedural requirement. 

The Department has not adopted this 

suggestion. The Department believes 

that sole reliance upon an independent 

current market price and an objective 

allocation method will not reduce the 

potential for abusive practices such as 

‘‘cherry picking’’ 5 or ‘‘dumping’’ 6 of 

securities among client accounts in a 

manner designed to favor one account 

over the other. The content 

requirements in § 2550.408(b)– 

19(b)(3)(i)(A) and (D) address these 

potential abusive practices by requiring 

the investment manager to adopt, and 

adhere to, policies and criteria that are 

designed to ensure that conflicts of 

interest are mitigated. These provisions 

also reinforce the general proposition 

that, notwithstanding the relief 

provided in ERISA section 408(b)(19), 

the Act’s general standards of fiduciary 

conduct apply to an investment 

manager’s decision to cross-trade 

securities on behalf of any plan. In this 

regard, the Department has amended 

paragraph (b)(3)(i)(D) of the final rule to 

require that the policies and procedures 

contain a statement regarding a 

manager’s conflicting loyalties and 

responsibilities 7 to the parties to the 

cross-trade transaction in addition to a 

description of how the investment 

manager will mitigate such conflicts. 

One commenter suggested that the 

policies and procedures should do more 

than simply describe how conflicts will 

be mitigated. The commenter suggested 

that the rule be revised to require each 

proposed transaction to be evaluated by 

two qualified individuals employed at 

the investment manager firm, each 

acting for only one of the plans 

involved, other than the individuals 

who made the initial determination to 

engage in the cross-trade under 

consideration. According to the 

commenter, this additional level of 

review, even though not truly 

independent because the individuals are 

employees of the investment manager, 

would provide additional protection. 

The Department has not adopted this 

suggestion because it would add 

significant costs that could obviate the 

financial advantages of cross-trading. 

The same commenter suggested that 

the rule should be modified to require 

that the statement about potential 

conflicts be prominently displayed in a 

bold font sufficiently large (at least 14 

point) to be distinguishable from the 

rest of the text included in the 

disclosure to the independent fiduciary. 

In addition, the commenter suggested 

that the Department consider requiring 

the font size for the entire disclosure 

statement to be no less than 12 point. 

The final regulation does not include 

this suggestion. The Department does 

not believe that it is necessary to 

provide a specific format for this 

statement. Although the Department 

believes that these statements in the 

policies and procedures should be 

prominently displayed in a manner that 

will bring it to the attention of the 

independent fiduciary, it does not 

believe it is necessary to require a 

specific font size. 

3. Role and Responsibility of the 

Compliance Officer—§ 2550.408b– 

19(b)(3)(i)(F) 

Paragraph (b)(3)(i)(F) of the final rule, 

like the interim final rule, requires an 

investment manager’s cross-trading 

policies and procedures to identify the 

compliance officer responsible for 


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periodically reviewing the investment 

manager’s compliance with section 

408(b)(19)(H) of the Act and to include 

a statement of the compliance officer’s 

qualifications for this position. 

Several commenters disagreed with 

the interim final rule’s requirement that 

each investment manager identify, by 

name, the compliance officer who will 

review the cross-trading program and 

specify that individual’s qualifications 

for the position. One commenter stated 

that notifying all ERISA clients each 

time the person with compliance 

responsibilities changes is burdensome 

and expensive, given that the 

individuals performing these 

compliance duties are replaced from 

time to time. Such compliance 

responsibilities, the commenter further 

stated, are typically a matter of 

corporate, rather that individual, 

responsibility. 

Another commenter agreed with the 

Department’s position that the 

compliance officer should be identified 

and recommended that the 

compensation paid to the compliance 

officer should not be materially affected 

by any trading resulting from the 

transactions that are reviewed to ensure 

the compliance officer’s independence. 

The Department has determined not 

to amend the regulation to adopt these 

suggestions. In the Department’s view, it 

is important for the plan fiduciary 

authorizing a plan to engage in crosstrading to know the identity and 

qualifications of the compliance officer, 

since this information could impact the 

fiduciary’s decision to participate in an 

investment manager’s cross-trading 

program. Moreover, it may be useful for 

the approving plan fiduciary to know 

the extent of compliance officer 

turnover in an investment manager’s 

cross-trading program. The Department 

believes that the benefits of providing 

these disclosures to the authorizing plan 

fiduciary outweigh any associated 

burdens. 

The Department has determined not 

to amend the rule to provide that the 

compensation paid to the compliance 

officer should not be materially affected 

by any trading resulting from the 

transactions that are reviewed. In the 

Department’s view, limitations on the 

compliance officer’s compensation are 

beyond the scope of this regulatory 

proceeding. The Department believes 

that section 408(b)(19)(I) of the Act, 

which requires that the compliance 

officer sign the annual report to the 

authorizing plan fiduciary under 

penalty of perjury, provides a sufficient 

deterrent to ensure that the compliance 

officer will act independently in 

periodically reviewing purchases and 

sales under the investment manager’s 

cross-trading program. 

Most of the commenters requested 

that the Department clarify the role and 

responsibilities of the compliance 

officer under the rule. One commenter 

suggested that the Department modify 

the interim final rule to stipulate that, 

in reviewing the cross-trading 

transactions of an investment manager 

who is also registered as an investment 

adviser with the SEC, the compliance 

officer may perform his or her duties in 

a manner consistent with the SEC rules 

regarding the role of a chief compliance 

officer under the Investment Advisers 

Act of 1940 and the Investment 

Company Act of 1940. According to the 

commenter, these rules permit a chief 

compliance officer to rely upon others 

(including independent third parties, 

such as independent certified public 

accounting firms) to carry out the 

review of the adequacy and 

effectiveness of the policies and 

procedures, and do not require a review 

of every cross-trade. The commenter 

further suggested that the compliance 

review mandated by ERISA section 

408(b)(19)(I) should be subject to the 

oversight of the designated compliance 

officer, who, in turn, would be 

permitted to delegate responsibility for 

certain aspects of the review. 

The Department has not adopted 

these suggestions in the final rule. The 

Department believes that the respective 

roles of the chief compliance officer 

under Rule 38a–1 of the Investment 

Company Act of 1940 (17 CFR 270.38a– 

1) and the compliance officer under the 

cross-trading statutory exemption differ 

in a number of respects. Under the 

Investment Company Act, the chief 

compliance officer is approved by, and 

serves at the pleasure of, the mutual 

fund’s board of directors (including a 

majority of independent directors) and 

can be removed by the board at any 

time. The chief compliance officer also 

must meet with the independent 

directors at least once each year. On the 

other hand, the compliance officer 

under ERISA section 408(b)(19) is 

designated by the investment manager, 

and there is no direct parallel under 

ERISA to the board of directors’ 

oversight. Moreover, the ERISA 

compliance officer is responsible for the 

periodic review of the cross-trades and 

the preparation of the annual report that 

must be furnished to the independent 

fiduciary of each plan participating in 

the cross-trading program. Although 

nothing in the final rule prohibits a 

compliance officer from delegating 

certain aspects of its responsibilities 

under ERISA section 408(b)(19)(I), the 

compliance officer is ultimately 

responsible for the review under penalty 

of perjury. 

Several of the commenters also 

proposed that, rather than conducting a 

review of each individual cross-trade, 

the compliance officer should be 

permitted to periodically assess the 

overall effectiveness of the policies and 

procedures through a representative 

sampling of cross-trades. Although the 

Department did not specifically address 

this issue in the interim final rule, the 

Department notes that nothing in the 

final rule would preclude cross-trades 

from being reviewed using an 

appropriate sampling methodology 

based upon the universe of cross-trades 

effected by the investment manager 

under the exemption, provided that the 

sample methodology is disclosed in the 

investment manager’s policies and 

procedures. The Department expects 

auditors to ensure that the sample 

selected is an appropriate representation 

of the total universe of transactions 

engaged in over the entire test period. 

4. Compliance Officer’s Review— 

§ 2550.408b–19(b)(3)(i)(G) 

In order to inform plan fiduciaries 

regarding the scope of compliance 

reviews conducted by the compliance 

officer, paragraph (b)(3)(i)(G) of the final 

rule, like the interim final rule, requires 

the policies and procedures to contain 

a statement describing whether such 

review is limited to compliance with the 

policies and procedures required 

pursuant to ERISA section 

408(b)(19)(H), or whether such review 

extends to any determinations regarding 

the overall level of compliance with the 

other requirements of section 408(b)(19) 

of the Act. 

Two commenters expressed concern 

about this provision. One commenter 

stated that a compliance officer’s 

performance of any review 

responsibilities beyond assessing 

compliance with the requirements of 

ERISA section 408(b)(19)(H) would be 

inconsistent with the extent of a 

compliance officer’s duties under the 

Investment Advisers Act of 1940. 

Accordingly, the commenter 

recommended that the interim final rule 

be revised to limit the scope of the 

officer’s review to the narrower 

statutory provision. Another commenter 

noted that the provision permitting the 

compliance officer to review adherence 

to the totality of the requirements 

contained in section 408(b)(19) is 

unnecessary and should be deleted. 

According to the commenter, the 

requirement that the policies and 

procedures include a statement that the 

review does not cover more than is 


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8See ERISA sections 402(c)(3) and 403(a)(2) 

regarding the appointment of an investment 

manager. 

required implies that the scope of the 

review is somehow deficient. 

The Department continues to believe 

that disclosure of the scope of the 

compliance officer’s review is an 

important consideration that may 

influence an authorizing fiduciary’s 

determination of whether to participate, 

or continue participation, in the 

investment manager’s cross-trading 

program. It also places the approving 

plan fiduciary on notice of the extent to 

which it may rely on the compliance 

officer’s review in performing its 

monitoring duties. Nonetheless, the 

Department did not intend for such a 

statement to imply that a review only 

for compliance with the policies and 

procedures described in section 

408(b)(19)(H), as opposed to all 

requirements of the statutory 

exemption, would be deficient. 

Therefore, the Department has modified 

the final rule to require that the policies 

and procedures only provide a 

statement regarding the scope of the 

compliance officer’s review. In order to 

ensure that authorizing plan fiduciaries 

are aware that the other conditions of 

the statutory exemption also must be 

satisfied, the final rule has been 

modified further to require that the 

policies and procedures include a 

statement that the ERISA cross-trading 

statutory exemption requires 

satisfaction by the investment manager 

of a number of objective conditions in 

addition to the requirements that the 

investment manager adopt and effect 

cross-trades in accordance with written 

cross-trading policies and procedures. 

5. Definition of Investment Manager— 

§ 2550.408b–19(c)(4) 

Like the interim final rule, paragraph 

(c)(4) of the final rule defines the term 

‘‘investment manager’’ by crossreferencing the definition of such term 

in section 3(38) of the Act. One 

commenter stated that the final rule 

would be a suitable regulatory vehicle 

for the Department to clarify the term 

‘‘investment manager,’’ noting that the 

definition in section 3(38) of the Act 

excludes trustees. This commenter 

maintained that the Department has 

taken the view that the exclusion of 

trustees generally from the section 3(38) 

definition was not intended to exclude 

bank trustees, such as collective trust 

trustees or an institutional bank trustee 

managing assets on a separate account 

basis. Accordingly, the commenter 

requested guidance from the 

Department that would enable trustees 

of bank collective trusts to use the crosstrading exemption if the other 

conditions of the statutory exemption 

are met. 

The Department reiterates that the 

term ‘‘investment manager,’’ as used in 

Title I of ERISA,8 is defined in ERISA 

section 3(38) to mean, in pertinent part, 

any fiduciary (other than a trustee or 

named fiduciary, as defined in section 

402(a)(2))— 

(A) Who has the power to manage, acquire, 

or dispose of any asset of a plan; 

(B) who (i) is registered as an investment 

adviser under the Investment Advisers Act of 

1940[, 15 U.S.C. 80b–1 et seq.]; (ii) is not 

registered as an investment adviser under 

such Act by reason of paragraph (1) of section 

203A(a) of such Act[, 15 U.S.C. 80b–3a(a)], is 

registered as an investment adviser under the 

laws of the State (referred to in such 

paragraph (1)) in which it maintains its 

principal office and place of business, and, 

at the time the fiduciary last filed the 

registration form most recently filed by the 

fiduciary with such State in order to 

maintain the fiduciary’s registration under 

the laws of such State, also filed a copy of 

such form with the Secretary; (iii) is a bank, 

as defined in that Act; or (iv) is an insurance 

company qualified to perform services 

described in subparagraph (A) under the laws 

of more than one State; and 

(C) has acknowledged in writing that he is 

a fiduciary with respect to the plan. 

The Department has not adopted this 

suggestion in the final rule because it is 

inconsistent with the statutory 

definition. However, the Department 

notes that the parenthetical expression 

‘‘other than a trustee or named 

fiduciary’’ in ERISA section 3(38) does 

not preclude a trustee from serving as an 

investment manager, so long as the 

trustee meets the requirements set forth 

in subsections (A), (B), and (C) of ERISA 

section 3(38) and is formally appointed 

as an investment manager by a named 

fiduciary. (See DOL Advisory Opinion 

77–69/70). 

6. Additional Comments 

Cross-Trades With Investment 

Manager’s Affiliates 

Several commenters requested that 

the Department clarify the rule by 

expressly permitting cross-trades 

between the account of an investment 

manager and the account of an 

investment manager’s affiliate. One 

commenter noted that many crosstrading programs cover trades between 

accounts of affiliated managers. For 

example, a financial institution may 

have separate investment adviser 

subsidiaries managing mutual funds and 

separate account investments, and a 

trust company subsidiary managing 

collective investment funds. To 

facilitate cross-trading with client plans, 

the commenter urged the Department to 

clarify that the purchase and sale of a 

security between accounts managed by 

the ‘‘same investment manager’’ in 

ERISA section 408(b)(19) includes both 

a single investment manager, as well as 

affiliated investment managers, and that 

the term ‘‘affiliate’’ encompasses an 

entity controlling, controlled by, or 

under common control with, the 

investment manager. Another 

commenter stated that, absent such 

clarification, cross-trades involving plan 

assets executed between the accounts of 

an investment manager and its affiliate 

could be construed to violate ERISA 

section 406(b)(2). 

In the Department’s view, securities 

trades executed between an account 

managed by an investment manager and 

an account managed by an affiliate of 

such manager are beyond the scope of 

the statutory exemption. The 

Department believes that the language of 

ERISA section 408(b)(19), which 

provides relief for any transaction 

described in ERISA sections 

406(a)(1)(A) and 406(b)(2) ‘‘involving 

the purchase and sale of a security 

between accounts managed by the same 

investment manager,’’ only applies to 

the purchase and sale of a security 

between accounts managed by the same 

investment management entity. In this 

regard, the Department notes that an 

investment manager’s exercise of 

discretionary authority, on behalf of an 

account it manages, to effect a purchase 

or sale of a security with another 

account over which an affiliate of the 

manager exercises discretionary 

authority would not, in itself, constitute 

a violation of 406(b)(2) of ERISA. 

However, a violation of ERISA’s 

prohibited transaction provisions could 

arise in operation if, in fact, there was 

an agreement or understanding between 

the affiliated entities to favor one 

managed account at the expense of the 

other account in connection with the 

transaction. Finally, the Department 

notes that individual portfolio managers 

employed by the same investment 

management entity may execute crosstrades in accordance with the relief 

provided by the statutory exemption. 

Quarterly Report Under ERISA Section 

408(b)(19)(F) and Annual Report Under 

ERISA Section 408(b)(19)(I) 

One commenter noted that the 

regulation did not discuss the 

investment manager’s quarterly report 

required under ERISA section 

408(b)(19)(F). The commenter requested 

that the Department include a provision 

in the final rule clarifying that the actual 

names of the counterparties do not have 

to be provided in the quarterly report, 


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but that such parties could be identified 

by type, i.e., endowment, insurance 

company account, mutual fund, or other 

institutional account. This commenter 

expressed concern that without this 

clarification, investment managers may 

violate confidentiality provisions in 

client contracts. The Department notes 

that the interim final rule addressed the 

content of the written cross-trading 

policies and procedures that must be 

adopted by the investment manager in 

order to comply with the requirements 

of the statutory exemption. However, 

the interim final rule did not address 

any issues related to the quarterly 

report. In this regard, the Department 

notes that the quarterly report described 

in section 408(b)(19)(F) of the Act 

requires detailed disclosures of all 

cross-trades executed by the manager 

during the quarter, including the parties 

involved in the cross-trade. In light of 

the language in the statutory exemption, 

the Department does not concur with 

the commenter’s suggested clarification. 

Another commenter stated that the 

rule should be expanded to address the 

compliance officer’s annual report. The 

commenter noted that the statutory 

language requiring the report to provide 

notification to the plan fiduciary of its 

right to terminate participation in the 

cross-trading program at any time is 

very important. Therefore, the 

commenter suggested that the opt out 

language should be prominent and in a 

bold font sufficiently large (at least 14 

point) to be distinguishable from the 

rest of the text included in the 

disclosure. Although the Department 

believes that the language in the annual 

report regarding a fiduciary’s right to 

terminate its participation in the crosstrading program at any time should be 

prominently displayed in a manner that 

will bring it to the attention of the 

independent fiduciary, it does not 

believe that it is necessary to require a 

specific font size. 

Consequences of Non-Compliance With 

Policies and Procedures 

One commenter asked the Department 

to clarify that non-compliance with the 

policies and procedures mandated by 

the interim final rule would not, in 

itself, invalidate the applicability of the 

statutory exemption to either a specific 

cross-trade transaction or to any crosstrades undertaken by a particular 

investment manager. The commenter 

expressed the view that Congress did 

not intend that non-compliance with the 

policies and procedures, in itself, would 

cause the exemption not to be available 

for cross-trades by a particular manager, 

provided that the non-compliance did 

not result in a failure to conform with 

the conditions stipulated in ERISA 

section 408(b)(19)(A) through (G). To 

support this view, the commenter noted 

that the annual compliance report 

mandated in ERISA section 408(b)(19)(I) 

requires only that instances of noncompliance with the investment 

manager’s policies and procedures be 

reported to the plan fiduciary 

authorizing the cross-trades. Following 

receipt of this report, the authorizing 

fiduciary would then make a 

determination as to whether the noncompliance warrants further action 

(such as termination of the 

authorization). 

In response to the commenter’s 

suggestion, the Department notes that 

ERISA section 408(b)(19)(H) requires 

that, in order for the exemption to 

apply, the investment manager must 

adopt, and cross-trades must be effected 

in accordance with, written crosstrading policies and procedures. It is the 

Department’s view that the exemption 

would be unavailable for any 

transaction that was not effected in 

accordance with cross-trading policies 

and procedures that satisfy the 

requirements of section 408(b)(19)(H) 

and the regulations issued thereunder. 

The Department is of the further view 

that reporting instances of noncompliance serves as a notice to the 

plan fiduciary but does not relieve the 

investment manager from the 

responsibility to comply with the 

requirements of the statutory 

exemption. However, individual 

instances of non-compliance with the 

policies and procedures by the 

investment manager would not, in itself, 

render the statutory exemption 

inapplicable to the investment 

manager’s entire cross-trading program, 

provided that the other cross-trading 

transactions met all of the requirements 

of section 408(b)(19) of the Act. 

Application of Final Rule to Pooled 

Investment Vehicles 

Several commenters suggested 

modification of the minimum plan asset 

size required for participation in the 

manager’s cross-trading program by 

clarifying that the cross-trading 

exemption is available to a common or 

collective trust or other pooled 

investment vehicle where at least one 

participating plan has assets of at least 

$100 million. One commenter stated 

that this clarification should also extend 

to master-feeder trust arrangements, 

where the only investors in the 

‘‘master’’ collective trust (i.e., the entity 

that would engage in cross-trades) are 

other collective trusts. Under this 

approach, subject to the requirement 

that one of the participating ‘‘feeder’’ 

trusts includes a plan with assets of at 

least $100 million, the entire master 

trust would be permitted to cross-trade 

with the consent of an authorizing 

fiduciary of the $100 million plan. 

According to the commenter, absent 

such clarification, a plan that meets the 

$100 million minimum asset 

requirement may not be able to utilize 

the cross-trading exemption where it 

participates in such a collective trust or 

other pooled investment vehicle. 

Another commenter suggested that 

the final regulation should clarify that a 

pooled fund is eligible to use the 

statutory exemption if ERISA-covered 

plans with more than $100 million in 

assets hold 50 percent or more of the 

units of such pooled investment fund. 

Plans would have the option not to 

invest in pooled investment funds that 

intend to engage in cross-trading or to 

withdraw from the fund if the crosstrading program begins after the plan’s 

initial investment. This commenter 

stated that it believes the Department 

has sufficient regulatory authority to 

create a pooled fund rule. 

Another commenter suggested that 

cross-trades should be allowed (i) by 

plans meeting a $50 million threshold 

and (ii) between plans maintained by 

employers in the same controlled group, 

as long as ERISA plans within the same 

controlled group meet the minimum 

threshold requirements in the aggregate. 

The Department has not adopted the 

commenters’ suggestions, because it 

believes that the proposed changes are 

inconsistent with ERISA section 

408(b)(19)(E), which requires ‘‘each plan 

participating in the transaction [to have] 

assets of at least $100,000,000.’’ The 

only exception to this requirement is for 

master trusts containing the assets of 

plans maintained by employers in the 

same controlled group, in which case 

the master trust must have assets of at 

least $100,000,000. In this regard, the 

Department notes that pooled 

investment vehicles comprised solely of 

plans with assets of at least $100 million 

may take advantage of the statutory 

exemption. 

Minimum Asset Size Test 

Several commenters requested that 

the Department modify the procedure 

contained in the interim final rule for 

verifying that any plan (or master trust 

containing the assets of plans 

maintained by employers in the same 

controlled group) participating in a 

manager’s cross-trading program has 

assets of at least $100 million. 

Specifically, the interim final rule at 

section 2550.408b–19(b)(3)(i)(C) 

provided that ‘‘[a] plan or master trust 

will satisfy the minimum asset size 


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requirement as to a transaction if it 

satisfies the requirement upon its initial 

participation in the cross-trading 

program and on a quarterly basis 

thereafter.’’ The commenters expressed 

the view that annual, rather than 

quarterly, verification of the minimum 

asset size requirement would be more 

practical for investment managers and 

plan sponsors. 

One commenter pointed out that 

many managers obtain updated 

information about their clients only on 

an annual basis. Moreover, cross-trading 

managers who oversee only a portion of 

a plan’s assets may not have continuous 

access to information on the client 

plan’s overall asset level. 

Another commenter suggested that 

the Department adopt an alternative 

means for satisfying the minimum asset 

test. Under such an approach, a plan 

fiduciary would be required to certify 

satisfaction of the $100 million 

threshold at the inception of its 

participation in the cross-trading 

program, and to inform the investment 

manager if the asset level subsequently 

falls below the minimum asset 

requirement. 

In response to these comments, the 

Department has modified the rule to 

provide that a plan’s minimum asset 

size may be verified on an annual basis. 

Individual Exemptive Relief for Smaller 

Plans 

One commenter requested that the 

Department issue an administrative 

class exemption for plans with assets 

below $100 million. This commenter 

stated that plans below the $100 million 

requirement may have less bargaining 

power to obtain lower commissions 

from brokers and potentially could 

benefit more from cross-trading relative 

to larger plans. 

The Department wishes to take the 

opportunity to state that enactment of 

the statutory exemption for crosstrading does not foreclose future 

consideration of administrative relief if 

the required findings under section 

408(a) of ERISA can be made. 

Effective Date 

The Department recognizes that 

implementation issues may arise 

concerning the effect of the final rule on 

investment managers that adopted 

cross-trading policies and procedures 

and made disclosures to, and obtained 

authorizations from, independent 

fiduciaries in reliance on the interim 

final regulation. After considering this 

issue, the Department has determined to 

make the final regulation effective 120 

days after publication. Also, it is the 

view of the Department that an 

investment manager that obtained a 

fiduciary’s authorization, in accordance 

with section 408(b)(19)(D) of the Act, 

prior to the effective date of this final 

regulation and based on compliance 

with the interim final regulation, will 

not be required to obtain a reauthorization following disclosures that 

reflect this final regulation. 

C. Regulatory Impact Analysis 

Executive Order 12866 Statement 

Under Executive Order 12866 (58 FR 

51735), the Department must determine 

whether a regulatory action is 

‘‘significant’’ and therefore subject to 

review by the Office of Management and 

Budget (OMB). Section 3(f) of the 

Executive 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 has been determined 

that this action is not ‘‘significant’’ 

within the meaning of section 3(f) of the 

Executive Order, and, therefore, is not 

subject to review by OMB. 

Regulatory Flexibility Act 

The Regulatory Flexibility Act (5 

U.S.C. 601 et seq.) (RFA) imposes 

certain requirements with respect to 

federal rules that are subject to the 

notice and comment requirements of 

section 553(b) of the Administrative 

Procedure Act (5 U.S.C 551 et seq.) and 

that are likely to have a significant 

economic impact on a substantial 

number of small entities. Unless an 

agency certifies that a proposed rule 

will not have a significant economic 

impact on a substantial number of small 

entities, section 603 of the RFA requires 

that the agency present an initial 

regulatory flexibility analysis at the time 

of the publication of the notice of 

proposed rule-making describing the 

impact of the rule on small entities and 

seeking public comment on such 

impact. 

Because this rule initially was issued 

as an interim final rule, the RFA does 

not apply and the Department is not 

required to either certify that the rule 

will not have a significant impact on a 

substantial number of small businesses 

or conduct an initial regulatory 

flexibility analysis. Nevertheless, the 

Department has considered the likely 

impact of the rule on small entities in 

connection with its assessment under 

Executive Order 12866, described 

above, and believes this rule will not 

have a significant impact on a 

substantial number of small entities. For 

purposes of this discussion, the 

Department deemed a small entity to be 

an employee benefit plan with fewer 

than 100 participants. The basis of this 

definition is found in section 104(a)(2) 

of ERISA, which permits the Secretary 

of Labor to prescribe simplified annual 

reports for pension plans which cover 

fewer than 100 participants. 

Paperwork Reduction Act 

In accordance with the requirements 

of the Paperwork Reduction Act of 1995 

(PRA) (44 U.S.C. 3506(c)(2)), the interim 

final rule solicited comments on the 

information collection included in the 

rule. The Department also submitted an 

information collection request (ICR) to 

OMB in accordance with 44 U.S.C. 

3507(d), contemporaneously with the 

publication of the interim final rule, for 

OMB’s review. No public comments 

were received that specifically 

addressed the paperwork burden 

analysis of the information collection. 

OMB approved the ICR on April 27, 

2007 under control number 1210–0130, 

which expires on April 30, 2010. This 

final rule does not implement any 

substantive or material change to the 

information collection; therefore, no 

change is made to the ICR, and no 

further review is requested of OMB at 

this time. The burden cost and hours 

were adjusted to reflect updated wage 

rates and a small increase in the 

estimated number of investment 

managers who are expected to engage in 

cross-trading. 

A copy of the ICR may be obtained by 

contacting the PRA addressee shown 

below. 

PRA Addressee: Gerald B. Lindrew, 

Office of Policy and Research, U.S. 

Department of Labor, Employee Benefits 

Security Administration, 200 

Constitution Avenue, NW., Room N– 

5718, Washington, DC 20210. 

Telephone: (202) 693–8410; Fax: (202) 

219–4745. These are not toll-free 

numbers. ICRs submitted to OMB are 


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9All numbers in this burden analysis, apart from 

the hourly wage rates, have been rounded either to 

the nearest thousand or the nearest hundred, as 

appropriate. 

10Under the statutory exemption, ‘‘each plan 

participating in the cross-trading transaction [must 

have] assets of at least $100,000,000, except that if 

the assets of a plan are invested in a master trust 

containing the assets of plans maintained by 

employers in the same controlled group (as defined 

in section 407(d)(7)), the master trust has assets of 

at least $100,000,000.’’ ERISA section 408(b)(19)(E). 

11Because a plan of this size is likely to use the 

services of more than one investment manager to 

invest its assets, the Department has assumed that 

some of the eligible plans will have assets invested 

under more than one cross-trading program. 

12The Department assumed that investment 

managers, which are large, sophisticated financial 

institutions, will use existing in-house resources to 

prepare the information and disclosures. 

13Hourly wage estimates for purposes of deriving 

cost equivalents were based on data of the 

Occupational Employment Survey (March 2005, 

Bureau of Labor Statistics) and the Employment 

Cost Trends (Sept. 2006, Bureau of Labor Statistics). 

The resulting hourly wage rates were $106, 

including both wages and benefits, for legal 

professionals and $25, similarly including both 

wages and benefits, for clerical personnel. 

also available at reginfo.gov (http:// 

www.reginfo.gov/public/do/PRAMain). 

This regulation implements the 

content requirements for the written 

cross-trading policies and procedures 

required under section 408(b)(19)(H) of 

ERISA, as added by section 611(g) of the 

PPA. As described earlier in this 

preamble, section 611(g)(1) of the PPA 

created a new statutory exemption, 

added to section 408(b) of ERISA as 

subsection 408(b)(19), that exempts 

from the prohibitions of sections 

406(a)(1)(A) and 406(b)(2) of ERISA 

cross-trading transactions involving the 

purchase and sale of a security between 

an account holding assets of a pension 

plan and any other account managed by 

the same investment manager, provided 

that certain conditions are satisfied. 

The information collection provisions 

of the regulation safeguard plan assets 

by ensuring that important information 

about an investment manager’s crosstrading program is provided to plan 

fiduciaries prior to their decision 

whether to begin or continue 

participation in the cross-trading 

program. The information collection 

also assists in ensuring that investment 

managers relying on the statutory 

exemption effect cross-trades in 

accordance with the criteria described 

in the policies and procedures. 

Under the final regulation, an 

investment manager would be required 

to develop written cross-trading policies 

and procedures that meet the 

regulation’s content requirements and to 

disclose them to plan fiduciaries prior 

to their deciding whether to invest plan 

assets in an account participating in the 

cross-trading program. The regulation 

would provide that the policies and 

procedures for cross-trading under the 

new statutory exemption must include 

detailed explanations and descriptions 

of certain aspects of the investment 

manager’s cross-trading program, as 

explained earlier in this preamble. This 

information collection, therefore, 

constitutes third-party disclosures 

between an investment manager and 

plan fiduciaries. 

Annual Hour Burden 

Based on data derived primarily from 

the Form 5500 Annual Return/Report of 

Employee Benefit Plan filings for the 

2001 to 2005 plan years, which is the 

most recent reliable data available, the 

Department estimates that 

approximately 2,200 9 plans would be 

eligible to participate in cross-trading 

programs. Further, the Department 

estimates that approximately 1,800 10

investment managers would serve as 

investment managers for the assets of 

such eligible plans.11 On average, the 

Department estimates that each of the 

1,800 investment managers will manage 

assets of nine plans. Assuming that 90 

percent of the 1,800 investment 

managers have cross-trading programs, 

investment managers would be required 

to provide about 15,000 initial 

disclosures of cross-trading policies and 

procedures to plan fiduciaries (1,800 

investment managers * 9 plans each * 

90 percent = 14,580 initial disclosures). 

The Department assumes that each 

investment manager would require 10 

hours of a legal professional’s time to 

develop written policies and procedures 

in the first year.12 For the 90 percent of 

the 1,800 investment managers that 

develop cross-trading programs, the 

Department estimates an initial annual 

hour burden of a little over 16,000 

hours. 

Each investment manager would be 

required to provide the cross-trading 

policies and procedures as an initial 

disclosure to each plan. The Department 

assumes that the initial disclosure will 

be provided in writing to provide a 

desired formality of compliance. Thus, 

the Department estimates that 

investment managers will be required to 

provide about 15,000 initial plan 

disclosures to plan fiduciaries (90 

percent of 1,800 investment managers, 

times nine plans) in the first year in 

which the exemption is effective. The 

Department assumes that 3 (three) 

minutes of clerical time per plan 

disclosure will be needed to gather the 

required information, collate and 

package the information for distribution, 

and ensure that the information is 

distributed in a manner that will create 

a record of delivery, for a total of about 

730 hours of clerical time. 

In years subsequent to the first year of 

applicability, the Department estimates 

that modified policies and procedures 

will be written by investment managers 

whose policies and procedures have 

changed, and new policies and 

procedures will be written by 

investment managers that inaugurate 

new cross-trading programs. For 

purposes of burden analysis, the 

Department has assumed that the 

number of investment managers that 

either change or newly adopt crosstrading policies and procedures in a 

subsequent year will equal 14 percent of 

the investment managers that currently 

have cross-trading policies and 

procedures, or about 230 managers. 

These 230 investment managers will 

each spend 10 hours of a legal 

professional’s time to develop new 

written policies and procedures, for a 

total of about 2,300 hours each year. 

These investment managers are also 

estimated to distribute their new written 

policies and procedures to 2,000 plan 

fiduciaries. This would require about 

100 hours of clerical time. 

In total, the initial disclosure of crosstrading policies and procedures is 

estimated to require about 17,000 hours 

in the first year (16,200 hours of legal 

professional’s time + 729 hours of 

clerical time = 16,929 hours total) and 

about 2,400 hours in each subsequent 

year (2,268 hours of legal professional’s 

time + 102 hours of clerical time = 2,370 

hours total). The equivalent costs of 

these hours are $1,735,000 and 

$243,000, respectively.13

Annual Cost Burden 

The only additional costs arising from 

this information collection derive from 

the direct costs of distribution. 

The Department believes that initial 

disclosure of the investment manager’s 

written policies and procedures to plan 

fiduciaries eligible to participate in the 

investment manager’s cross-trading 

program will be prepared in paper form 

and distributed by mail delivery service, 

courier or some other means of 

distribution that will create a record of 

delivery. For the initial disclosures to 

the plan fiduciaries assumed to receive 

such disclosure, the Department 

assumes a distribution cost of $4.00 per 

plan. This includes the actual cost of 

distribution, plus any overhead costs 

associated with printing the 

documentation. Given that about 90% of 

the approximately 1,800 investment 

managers are estimated to engage in 

cross-trading and that each of them 


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manages on average nine plans, 

investment managers would have to 

prepare a little less than 15,000 

disclosures to plan fiduciaries. The total 

initial annual cost burden for 

distributing the required notice amounts 

to $58,000. 

In years subsequent to the first year of 

applicability, policies and procedures 

will only have to be distributed by 

investment managers that develop new 

policies and procedures. For purposes 

of burden analysis, the Department has 

assumed that the number of investment 

managers that will do so in a subsequent 

year will be equal to 14 percent of 

existing investment managers with 

cross-trading programs, or about 230 

managers. 

The distribution of these new written 

policies and procedures in a subsequent 

year to plan fiduciaries will require 

material and postage costs of $4.00 per 

plan. Assuming that, on average, the 

assets of about nine plans are managed 

by each investment manager, this would 

require a little more than 2,000 

disclosures annually and about $8,200 

annually in materials and postage costs. 

In total, the initial disclosure of 

policies and procedures is estimated to 

require about $58,000 for materials and 

postage in the first year and about 

$8,200 in each subsequent year. 

These paperwork burden estimates 

are summarized as follows: 

Type of Review: New collection. 

Agency: Employee Benefits Security 

Administration, Department of Labor. 

Title: Statutory Exemption for CrossTrading of Securities. 

OMB Number: 1210–0130. 

Affected Public: Business or other forprofit; not-for-profit institutions. 

Respondents: 1,600 (first year); 230 

(subsequent years). 

Responses: 15,000 (first year); 2,000 

(subsequent years). 

Frequency of Response: Occasionally. 

Estimated Total Annual Burden 

Hours: 17,000 (first year); 2,400 

(subsequent years). 

Estimated Total Annual Burden Cost: 

$58,000 (first year); $8,200 (subsequent 

years). 

Congressional Review Act 

The final rule being issued here is 

subject to the provisions of the 

Congressional Review Act provisions of 

the Small Business Regulatory 

Enforcement Fairness Act of 1996 (5 

U.S.C. 801 et seq.) and will be 

transmitted to Congress and the 

Comptroller General for review. The 

final rule is not a ‘‘major rule’’ as that 

term is defined in 5 U.S.C. 804, because 

it does not result in (1) an annual effect 

on the economy of $100 million or 

more; (2) a major increase in costs or 

prices for consumers, individual 

industries, or federal, State, or local 

government agencies, or geographic 

regions; or (3) significant adverse effects 

on competition, employment, 

investment, productivity, innovation, or 

on the ability of United States-based 

enterprises to compete with foreignbased enterprises in domestic and 

export markets. 

Unfunded Mandates Reform Act 

For purposes of the Unfunded 

Mandates Reform Act of 1995 (Pub. L. 

104–4), the final rule does not include 

any federal mandate that may result in 

expenditures by State, local, or tribal 

governments, or impose an annual 

burden exceeding $100 million or more, 

adjusted for inflation, on the private 

sector. 

Federalism Statement 

Executive Order 13132 (August 4, 

1999) outlines fundamental principles 

of federalism and requires federal 

agencies to adhere to specific criteria in 

the process of their formulation and 

implementation of policies that have 

substantial direct effects on the States, 

the relationship between the national 

government and the States, or on the 

distribution of power and 

responsibilities among the various 

levels of government. This final rule 

does not have federalism implications 

because it has no substantial direct 

effect on the States, on the relationship 

between the national government and 

the States, or on the distribution of 

power and responsibilities among the 

various levels of government. Section 

514 of ERISA provides, with certain 

exceptions specifically enumerated, that 

the provisions of Titles I and IV of 

ERISA supersede any and all laws of the 

States as they relate to any employee 

benefit plan covered under ERISA. The 

requirements implemented in the rule 

do not alter the fundamental provisions 

of the statute with respect to employee 

benefit plans, and as such would have 

no implications for the States or the 

relationship or distribution of power 

between the national government and 

the States. 

List of Subjects 29 CFR Part 2550 

Employee benefit plans, Employee 

Retirement Income Security Act, 

Employee stock ownership plans, 

Exemptions, Fiduciaries, Investments, 

Investments foreign, Party in interest, 

Pensions, Pension and Welfare Benefit 

Programs Office, Prohibited 

transactions, Real estate, Securities, 

Surety bonds, Trusts and Trustees. 

■ For the reasons set forth above, the 

Department amends 29 CFR part 2550 as 

follows: 

PART 2550—RULES AND 

REGULATIONS FOR FIDUCIARY 

RESPONSIBILITY 

■ 1. The authority citation for part 2550 

is revised to read as follows: 

Authority: 29 U.S.C. 1135; and Secretary of 

Labor’s Order No. 1–2003, 68 FR 5374 (Feb. 

3, 2003). Sec. 2550.401c–1 also issued under 

29 U.S.C. 1101. Sec. 2550.404a–1 also issued 

under sec. 657, Pub. L. 107–16, 115 Stat. 38. 

Sections 2550.404c–1 and 2550.404c–5 also 

issued under 29 U.S.C. 1104. Sec. 2550.408b– 

1 also issued under 29 U.S.C. 1108(b)(1) and 

sec. 102, Reorganization Plan No. 4 of 1978, 

5 U.S.C. App. 1. Sec. 2550.408b–19 also 

issued under sec. 611, Pub. L. 109–280, 120 

Stat. 780, 972, and sec. 102, Reorganization 

Plan No. 4 of 1978, 5 U.S.C. App. 1. Sec. 

2550.412–1 also issued under 29 U.S.C. 1112. 

■ 2. Revise § 2550.408b–19 to part 2550 

to read as follows: 

§ 2550.408b–19 Statutory exemption for 

cross-trading of securities. 

(a) In General. (1) Section 408(b)(19) 

of the Employee Retirement Income 

Security Act of 1974 (the Act) exempts 

from the prohibitions of section 

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

cross-trade of securities if certain 

conditions are satisfied. Among other 

conditions, the exemption requires that 

the investment manager adopt, and 

effect cross-trades in accordance with, 

written cross-trading policies and 

procedures that are fair and equitable to 

all accounts participating in the crosstrading program, and that include: 

(i) A description of the investment 

manager’s pricing policies and 

procedures; and 

(ii) The investment manager’s policies 

and procedures for allocating crosstrades in an objective manner among 

accounts participating in the crosstrading program. 

(2) Section 4975(d)(22) of the Internal 

Revenue Code of 1986 (the Code) 

contains parallel provisions to section 

408(b)(19) of the Act. Effective 

December 31, 1978, section 102 of 

Reorganization Plan No. 4 of 1978, 5 

U.S.C. App. 214 (2000 ed.), transferred 

the authority of the Secretary of the 

Treasury to promulgate regulations of 

the type published herein to the 

Secretary of Labor. Therefore, all 

references herein to section 408(b)(19) 

of the Act should be read to include 

reference to the parallel provisions of 

section 4975(d)(22) of the Code. 

(3) Section 408(b)(19)(D) of the Act 

requires that a plan fiduciary for each 

plan participating in the cross-trades 

receive in advance of any cross-trades 


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Federal Register / Vol. 73, No. 195 / Tuesday, October 7, 2008 / Rules and Regulations 58459 

disclosure regarding the conditions 

under which the cross-trades may take 

place, including the written policies and 

procedures described in section 

408(b)(19)(H) of the Act. This disclosure 

must be in a document that is separate 

from any other agreement or disclosure 

involving the asset management 

relationship. For purposes of section 

408(b)(19)(D) of the Act, the policies 

and procedures furnished to the 

authorizing fiduciary must conform 

with the requirements of this regulation. 

(4) The standards set forth in this 

section apply solely for purposes of 

determining whether an investment 

manager’s written policies and 

procedures satisfy the content 

requirements of section 408(b)(19)(H) of 

the Act. Accordingly, such standards do 

not determine whether the investment 

manager satisfies the other requirements 

for relief under section 408(b)(19) of the 

Act. 

(1)(b) Policies and Procedures. In 

General. This paragraph specifies the 

content of the written policies and 

procedures required to be adopted by an 

investment manager and disclosed to 

the plan fiduciary prior to authorizing 

cross-trading in order for transactions to 

qualify for relief under section 

408(b)(19) of the Act. 

(2) Style and Format. The content of 

the policies and procedures required by 

this paragraph must be clear and 

concise and written in a manner 

calculated to be understood by the plan 

fiduciary authorizing cross-trading. 

Although no specific format is required 

for the investment manager’s written 

policies and procedures, the 

information contained in the policies 

and procedures must be sufficiently 

detailed to facilitate a periodic review 

by the compliance officer of the crosstrades and a determination by such 

compliance officer that the cross-trades 

comply with the investment manager’s 

written cross-trading policies and 

procedures. 

(3) Content (i). An investment 

manager’s policies and procedures must 

be fair and equitable to all accounts 

participating in its cross-trading 

program and reasonably designed to 

ensure compliance with the 

requirements of section 408(b)(19)(H) of 

the Act. Such policies and procedures 

must include: 

(A) A statement of policy which 

describes the criteria that will be 

applied by the investment manager in 

determining that execution of a 

securities transaction as a cross-trade 

will be beneficial to both parties to the 

transaction; 

(B) A description of how the 

investment manager will determine that 

cross-trades are effected at the 

independent ‘‘current market price’’ of 

the security (within the meaning of 

section 270.17a–7(b) of Title 17, Code of 

Federal Regulations and SEC no-action 

and interpretative letters thereunder) as 

required by section 408(b)(19)(B) of the 

Act, including the identity of sources 

used to establish such price; 

(C) A description of the procedures 

for ensuring compliance with the 

$100,000,000 minimum asset size 

requirement of section 408(b)(19). A 

plan or master trust will satisfy the 

minimum asset size requirement as to a 

transaction if it satisfies the requirement 

upon its initial participation in the 

cross-trading program and on an annual 

basis thereafter; 

(D) A statement that any investment 

manager participating in a cross-trading 

program will have conflicting loyalties 

and responsibilities to the parties 

involved in any cross-trade transaction 

and a description of how the investment 

manager will mitigate such conflicts; 

(E) A requirement that the investment 

manager allocate cross-trades among 

accounts in an objective and equitable 

manner and a description of the 

allocation method(s) available to and 

used by the investment manager for 

assuring an objective allocation among 

accounts participating in the crosstrading program. If more than one 

allocation methodology may be used by 

the investment manager, a description 

of what circumstances will dictate the 

use of a particular methodology; 

(F) Identification of the compliance 

officer responsible for periodically 

reviewing the investment manager’s 

compliance with section 408(b)(19)(H) 

of the Act and a statement of the 

compliance officer’s qualifications for 

this position; 

(G) A statement that the cross-trading 

statutory exemption under section 

408(b)(19) of the Act requires 

satisfaction of several objective 

conditions in addition to the 

requirements that the investment 

manager adopt and effect cross-trades in 

accordance with written cross-trading 

policies and procedures; and 

(H) A statement which specifically 

describes the scope of the annual review 

conducted by the compliance officer. 

(ii) Nothing herein is intended to 

preclude an investment manager from 

including such other policies and 

procedures not required by this 

regulation as the investment manager 

may determine appropriate to comply 

with the requirements of section 

408(b)(19). 

(c) Definitions. For purposes of this 

section: 

(1) The term ‘‘account’’ includes any 

single customer or pooled fund or 

account. 

(2) The term ‘‘compliance officer’’ 

means an individual designated by the 

investment manager who is responsible 

for periodically reviewing the crosstrades made for the plan to ensure 

compliance with the investment 

manager’s written cross-trading policies 

and procedures and the requirements of 

section 408(b)(19)(H) of the Act. 

(3) The term ‘‘plan fiduciary’’ means 

a person described in section 3(21)(A) of 

the Act with respect to a plan (other 

than the investment manager engaging 

in the cross-trades or an affiliate) who 

has the authority to authorize a plan’s 

participation in an investment 

manager’s cross-trading program. 

(4) The term ‘‘investment manager’’ 

means a person described in section 

3(38) of the Act. 

(5) The term ‘‘plan’’ means any 

employee benefit plan as described in 

section 3(3) of the Act to which Title I 

of the Act applies or any plan defined 

in section 4975(e)(1) of the Code. 

(6) The term ‘‘cross-trade’’ means the 

purchase and sale of a security between 

a plan and any other account managed 

by the same investment manager. 

Signed at Washington, DC, this 29th day of 

September, 2008. 

Bradford P. Campbell, 

Assistant Secretary, Employee Benefits 

Security Administration, Department of 

Labor. 

[FR Doc. E8–23434 Filed 10–6–08; 8:45 am] 

BILLING CODE 4510–29–P 

DEPARTMENT OF LABOR 

Employee Benefits Security 

Administration 

29 CFR Parts 2550 and 2578 

RIN 1210–AB16 

Amendments to Safe Harbor for 

Distributions From Terminated 

Individual Account Plans and 

Termination of Abandoned Individual 

Account Plans To Require Inherited 

Individual Retirement Plans for 

Missing Nonspouse Beneficiaries 

AGENCY: Employee Benefits Security 

Administration, Labor. 

ACTION: Final rule. 

SUMMARY: This document contains a 

final rule amending regulations under 

the Employee Retirement Income 

Security Act of 1974 that provide 

guidance and a fiduciary safe harbor for 

the distribution of benefits on behalf of 

participants or beneficiaries in 


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