1 See Institute Memorandum to Pension Members, No. 22-98 and Investment Adviser Members, No. 8-98, dated March 24,
1998.
[9956]
May 21, 1998
TO: INVESTMENT ADVISERS COMMITTEE No. 19-98
PENSION COMMITTEE No. 29-98
CROSS-TRADES AD HOC WORKING GROUP
RE: INSTITUTE FILES COMMENT LETTER WITH THE DEPARTMENT OF LABOR
ON CROSS-TRADES
______________________________________________________________________________
On May 19, the Institute filed a comment letter with the Department of Labor in response to the
Department’s request for information on cross-trades.1 In its letter, the Institute urges the Department to
issue a class exemption modeled on Rule 17a-7 of the Investment Company Act of 1940 to permit accounts
subject to the Employee Retirement Income Security Act of 1974, as amended, to enter into cross-trades
transactions.
The letter consists of four points: (1) cross-trading can benefit clients; (2) the Department’s overly
restrictive conditions are harmful to plan clients; (3) Rule 17a-7 provides a model for an appropriate class
exemption; and (4) consistent regulatory requirements for cross-trades would be consistent with
Administration policy. In addition, an addendum to the comment letter discusses the background and
operation of Rule 17a-7, as well as other provisions of the federal securities laws that govern cross-trading of
securities.
Specifically, the letter addresses various issues of concern raised in the Department’s request for
information including the following: dumping and cherry-picking; unfair allocations of cross-trading
opportunities; improperly influencing portfolio management decisions; precluding clients from benefiting
from market impact costs; and concerns over pricing methodology. Finally, the Institute’s comment letter
suggests that a Department class exemption on cross-trades should include requirements similar to those in
Rule 17a-7. However, the Institute urges the Department not to include other conditions that it has required
in previous individual exemptions that it has granted for actively managed accounts, including a pre-approval
requirement, volume limitations and the restriction on changes in the price of the security.
We will follow-up with the Department regarding its request for information on cross-trades and the
Institute’s comment letter in the near future. A copy of the comment letter is attached.
Kathryn A. Ricard
Assistant Counsel
Attachment