[12018]
June 20, 2000
TO: PENSION COMMITTEE No. 41-00
RE: DOL GRANTS EXEMPTION FOR UNDERWRITING TRANSACTIONS
The Department of Labor has published a final exemption applicable to five financial services
firms engaged in underwriting activity. Specifically, the exemption permits purchases of securities by
asset managers on behalf of employee benefit plans for which the asset manager is a fiduciary, from
underwriting syndicates in which a broker-dealer affiliate of the asset manager participates as a manager
or syndicate member. The final exemption, like the proposed exemption,1 is similar to Part III of PTE 75-
1. Based on comments received by the Department, there were a number of technical clarifications made
to the exemption when finalized. Some of the more notable changes are as follows:
(1) Three-percent limitations modified. Section I(c) and (d) of the exemption were
modified so that both provisions impose a three-percent limitation on each employee
benefit plan investing in a pooled fund, rather than on the pooled fund as a whole.
(2) Characterization of asset-backed securities clarified. The Department clarified that,
solely for purposes of the exemption, appropriately rated mortgage-backed or other
asset-backed securities should be treated as debt securities.
(3) Quarterly affiliated broker-dealer certification. The proposed exemption would have
required that the written certification required of the “affiliated broker-dealer” be made
part of quarterly reports to independent fiduciaries of the employee benefit plans. In lieu
of the requirement to provide the actual certification, the quarterly reports need only
include a representation that the certification relates to each covered transaction
conducted during the quarter.
(4) Annual provision of termination form. The proposed exemption would have required
that a “termination form” be provided annually to independent fiduciaries of employee
benefit plans. The Department has eliminated this requirement. Employee benefit plans
that are in a pooled fund, however, are required to receive a termination form as part of
the initial disclosure materials. Also, notification of the right to terminate authorization
must be prominently displayed in the required quarterly reports.
(5) Limitation on in-house plan investment in pooled funds. The Department adjusted the
proposed requirement that no more than 10 percent of the assets of a pooled fund be
comprised of assets of employee benefit plans maintained by the asset manager or
affiliated broker-dealer for their own employees. The limit is raised to 20 percent in the
final exemption.
1 The proposed exemption was described in Institute Memorandum to Pension Committee No. 15-00, dated
February 22, 2000.
2(6) Revised definition of “independent fiduciary.” The Department amended the definition
of “independent fiduciary” in response to comments indicating that it was
administratively burdensome to track all relationship between the asset manager and all
officers, directors, partners, employees of the asset manager in order to comply with the
exemption, especially in large organizations, when most of these persons would have no
power to influence any decisions on matters relating to the exemption.
Russell G. Galer
Senior Counsel
Attachment