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News August 7, 2006 Issue

Active ERISA Cross Trade Relief Was Decades in the Making

For Investment Adviser Association general counsel Karen Barr, last week’s active ERISA cross trade relief was a hard-won victory.

The battle goes all the way back to 1981, when the SEC amended Rule 17a-7 to permit cross trades involving registered investment companies. Since then, many in the industry, including Barr, have been trying to convince the Department of Labor to harmonize their approach to cross trading for ERISA investment managers with the SEC’s rule. If the SEC determined that safeguards could be put in place to address potential abuses in crosses between registered funds, the argument went, why wouldn’t those same (or similar) safeguards work in the ERISA world?

Progress was slow. In the 1980’s and early 1990’s, DOL granted a handful of individual cross-trading exemptions. However, the firms that received them found them difficult to put into practice, because the conditions were overly-restrictive. Consequently, in the mid-1990’s, DOL began receiving requests for individual exemptions "that could be used more broadly," said Barr.

However, instead of considering the various individual exemptions, the DOL decided to consider a class exemption. In 1998, DOL published a notice requesting comments on a class exemption. "They got quite a few comments, as you might imagine," said Barr. Her group, along with others, argued that it was appropriate for DOL to follow the approach taken by the SEC in Rule 17a-7. They noted that the conditions in the fund rule were sufficient to address problems and potential abuses.

The next year, DOL took action. But it wasn’t what the industry had hoped. In 1999, DOL proposed a class exemption for cross trades for model-driven and index funds. That exemption was ultimately adopted in 2002.

Meanwhile, the issue of active cross trades languished. In 2000, DOL held a hearing to consider the status of cross trades for actively-managed funds. The IAA, along with the Investment Company Institute, the Securities Industry Association, and the CFA Institute (then known as the Association for Investment Management and Research or "AIMR"), testified in support of the relief. The AFL-CIO, however, opposed it.

"And then," said Barr, "nothing happened." Since the 2000 hearing, Barr’s group has submitted numerous letters asking DOL to move forward on the issue, both individually and together with other groups. "We met with people at the Department," she added.

Still, nothing. Why was DOL so reluctant to grant the relief?

Barr explained, diplomatically, that the DOL staff had "expressed concerns over what conditions would be appropriate to address all the potential concerns that they have."

A pause.

"Even though we have addressed all of them."