On February 12, 2002, the Department of Labor ( DOL ) released its long-awaited class exemption for cross trades of securities involving passive index- and model-driven funds, which was proposed more than two years ago. PTE 2002-12, 67 Fed. Reg. 6614. The final exemption follows the framework laid out in the original proposal, and covers two types of passive transactions, specifically–

(a) cross-trades among Index Funds and Model-Driven Funds, and

(b) cross-trades between an Index or Model-Driven Fund and a “Large Account” (i.e., a plan or other institutional investor with more than $50 million in assets) engaged in a portfolio restructuring (i.e., buying and selling securities to produce a portfolio that would be an Index or Model-Driven Fund or to liquidate a specified portfolio for the large account).

Although there were numerous formal and informal comments, the final exemption reflects mostly technical comments. For example, the final exemption expands the definition of Large Account to include index or model-driven funds managed by an unaffiliated persons, increases from 30 to 90 days the time allowed for Large Account portfolio restructuring, allows certain securities to be excluded from an index or model, and decreases from 10 days to 3 the “blackout period” in which cross-trading is not permitted following a change to a computer model. Importantly, the final exemption also allows cross-trades involving securities of the financial institution manager or its affiliates, if included within the passive index or model (the proposal did not address this important issue).

The final exemption did not address two significant comments, specifically, (1) the fact that the exemption would not extend to in-house managers; and (2) the need to expand the relief to cover active cross trading. DOL has indicated that it hopes to address these issues through separate class exemptions, which are already in process. In doing so, DOL staff signaled a major change to the way that they intend to approach the exemption process in the future. One staff member noted that the new DOL intends to rely less on precedent and to issue more narrow, but more useful and focused exemptions.


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