4.18.2007 The Investment Company Institute ("ICI"), the trade group for the investment company industry, has made certain recommendations to clarify guidance issued by the U.S. Department of Labor ("DOL") concerning cross-trading exemptions for investment advisers subject to ERISA because they are fiduciaries.

DOL recently adopted an interim final rule on cross-trading policies and procedures. This rule was adopted under the statutory exemption for cross trading enacted in the Pension Protection Act ("PPA"). Many investment advisers manage separate accounts or collective funds that hold "plan assets" subject to ERISA fiduciary responsibility rules, and these advisers often engage in cross trading on behalf of their clients.
Cross trading involves the portfolio management decision to purchase or sell a security and the decision on how to execute the transaction. Portfolio management decisions are made based on what is in the interests of the particular accounts. The ICI noted that trading decisions relating to cross trading are largely automatic, based on matching buy-and-sell orders received from portfolio managers on particular securities. The ICI also noted that in many respects the DOL rules track the conditions of Rule 17a-7 under the Investment Company Act of 1940 regarding the requirements for an investment manager's policies and procedures on cross trading.

The ICI requested DOL to provide clarification and additional guidance on the following:

  • urging the DOL to clarify that the exemption applies to cross trading between accounts managed by affiliated investment managers and to pooled funds where at least one participating plan has assets of at least $100 million;
  • making several suggestions to streamline the required policies and procedures and enhance their compatibility with Rule 17a-7;
  • requesting that the Department revise the interim rule to permit annual determinations on whether a plan meets the $100 million asset requirement; and
  • recommending that the Department use its existing exemptive authority to go beyond the statutory exemption and permit plans of all sizes to enjoy the benefits of cross trading.

Please click http://www.ici.org/new/07_dol_cross_cvr.html#TopOfPage to access a copy of the ICI letter.