Foreign Currency Transactions; Prohibited Transaction Class Exemption 94-20

PTE 94-20 999
PTE 94-20
Find Exemption
59 Fed. Reg. 8022 (Feb. 17, 1994)
Admlnlstration
(~whlbbd
Tmnudion ksmptlon
WW;Appllcatlon Number ~ 7 0 0 1
Class Exemption RekUng to Csrtaln
Employee Benefit Plan Formlgn
Exchange tmnwdlons

*omev: pension and welfare~
Administration, Labor.

m
n
:
Grant of Class Exemption.

*

SUPPLEMENTARY
I W O R M A ~
Exenlptive

~ relief~ for the
~ transactions
f
i described
~
herein, as well as for 0th transactions
not covered by the proposal exemption,
w= rtquested in an application dated
July 18, I 984 (Application No.D-57M)

permits
~ and mle
E &fmi@
~
~cWEnc*~
m e m ~ ' O ~benefit
e
plan and
a bank Or a b*-dealer
Or an
thmof which is a +Y in interest with
tespect to such plan.
The
affects participants
and beneficides of
&mfit
plans involved such transactions* as
well as banks and hkm-dealers and
(he
the P

Delerrninations, U.S.Department of Labar, Washington, DC 20210, (202) 2198971 (not a toll-free number) or Susan
R-S, Plan Benefits Security Division,
Office of the Solicitor, (202) 2 1 9-914 1
a ~ 1 l - number).
k

1, letter to the AHA dated Dwember
28, 1984, the b p m n t of -r
(he
D e m e n t ) tentatively
application. By letter dated June 21, 1985, h e

ABA modified i l application in response
to the Department's tentative denial, explaining that it was no longer seeking
,,,ptive
relief for foreign exchange
transactions between banks and plans
where h e banks or their affiliates have

on various issues being considered by
[8023] the Department in deciding
whether to propose a foreign exchmge
FOR FURTHER INHWUIATUN COIITACT: MS. class exemption in tespons to the *B*
Lyssa Hall, Pension and Welfare Bene- application. The comment parid ended
fits Administration, Office of Exemption on February 24, 1987. Seventeen sub94-20: Fbnl &templion

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1002 EKISA Class Excmptions
filialt: must mainrain within territories
under the jurisdiction of the United
States Govcrnrnent, the records necessary to & m i n e whether the applicabla
conditions of the exemption have been
met. Several commentators objrcled to
the quiremen1 that records be mainl a i n 4 within tenitoties under the jUIUdiction of thc U.S. aovemment. In his
regard, they represented that this q u i r e ment creaks difficulties for those banks
who maintain foreign exchange [8024]
t d i n g d e s b in a country or countries
other than the United States. In addition,
o w cornmenter suggestad that the recurdkeeping requirement may result in
higher costs to plans involved in foreign
exchange transactions.
The ABA suggested that the recodkeeping requiren~entshould permit the
required records to be maintained on a
cornpurer system locakd at a foreign facility which would be accessible in the
United States.These systems could print
out any infom~alionrequested and produce a hard copy to anyone who is authorized to have such information. These
systems would contain all Lhc bank's foreign exchange transactions on a h l y
basis for employee benefit plans ars well
as other entities. la this way, all information needed to test for compliance would
be available in dre United States. Other
commentem suggested that requirements
similar to those provided in the regulalions under section 404(b) of the Act
regarding the maintenance of the indicia
of ownership of plan w e b should be
adopted. Specifically, they rquested that
the exemption permit the required records to be rnainmned at foreign locations described under the section
4W(b) regulations.
Tbe J k p m e n t notes that the purpose
of the record maintenance requirement
is to ensure that the persons described in
paragraph U(e) of the exemption wwill

94-U): F S d hempdon

have access to bank, broker-dealeror effiliate ~corrisinvolving covered foreign
exchange transactions. The Department
is unable to detemune how the altemattves for holding securities. whrch are
described in the regulations under seetion 4 0 e ) of the Act would operate
in the eonkxt of a record maintcnancc
requirement. If tbe records were maintained outside of the jurisdiction of the
United States Government and became
unavailable for masons beyond the control of the bank, broker-dealeror affiliate,
there would be no comparable records
available for determining compliance
with the t u m s of h i s exemption. Accordingly, the Depamnent is not persuaded
bat the condiliona described in the regulainns under section 404(b) of the Act
would be appropriate with respect to h e
record mntenance requirement.
The Deparunent has considerad the
ABA's suggestion to modify h e tinal
exemption to include records which art
maintained on a foreign computer system
that could be accessed in the United
States. W e note, however. that h e ABA
is unable to reprasent that such records
could always be accessed on a foreign
computer system without [he risk of Eauktion by a foreign govcnuncnt. Accordingly. the Department is unable to
conclude that the find e~ernptionshwld
be modifiedto include this method of re
cordheping.
The ABA, as well as a nrunber of other
commentators, requested that h e Department e~pandthe proposed exemption to
include retroactive and prospective relief
for foreign exchange transactions entered into pursuant co a standing authorization, hereinafter "standing i n s t r u ~
tion." Similarly, many of those
cammentea also requested that the Department amend the definitionof h e term
"directed tramaction" by modifying the
requirement that the indepenhnt plan

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PTE W-20 1003
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'nited
:able

been
d to
uinuristhis
lire-

have access to bank. brokerdealera
1
a
filiate records invalving covered
exchange transactions. Ihe Dep
is unable to determine how the
lives far hoiding wurifies, w
descriki in the regulations un
tion 404@) of the Act, would
in the context of a reford main
requirement. If the mm& we
rained outside of the jurisdictio

fma

r b United States Government and
'241 unavailable for reasom beyond

trol ofthe hQ brokcr-dealer or a
F
f
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ion, there would be no compvable r
q
re- available fa determining compli-'
in with the terms of this exemption.Ammign ingly. h e Department is not p e r s u m
that thc conditions describal in the re@.
rd- latians under section 4W(b) of the Act
he would be appmpriare with respect to &I a
record maintenance requiremant.
9
?he Department has considered he
he ABA's suggestion to mdify h e find
nt exemption to include
which art
Dmaintainedon a fonign computer sysm :
Uthat cuuld h accessed i n the United
ie Sfafes. We l a c , however, that the ABA r
is unable b rcplerettt that such r e c a
Y could always be acecssed on a foreign
I1 compulsr system witbut the risk of re!striction by a foreign g o v m n t . Accordingly, the Depamnent is unable to
r conclude that the Bnal exemplivn should
3 bc modified to include this melhod ofre-

ries

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cmdkceping.

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The ABA, as well as a number of other
cornmenlators. requestedthat the Department expand the proposed exemption to
include retrowlive aud prospective relief
for fareign exchange hnsactions entered into pursuant ul a standing authwization, hereinafter '%landing instruction." Similarly, many of those
commentcrs also requested thar the Department amend the definition of the twm
' ' d k t e d &ansaction"by modifying ihs
regui~mcnlthat the independent plan

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y
the foreign exchange
rnsaction at a specific exchange rate.
me commentators represent that the
a d o n of a standing instruction is an
btegralcomponent in foreign exchange
wsactions involving employee benefit
w.They further indicate that standing
mlativelyminor amounts of income such
as dividend and interest payments routinely generated by foreign securities
~ h i c harc held by plans. In this regard,
they state that obtaining individual direcpons for each income receipt would be
impciical and that plan kneficiaries
would lose investment income due to the
t i e that ik would take to receive directions from investment managers and convert the payments. In addition, many investment managers who wish to
effectuate a foreign exchange transaction
do not contact the foreign exchange desk
directly, but instead leave their trading
insmtions with their account manapers
in the bank's trust or global area. &sactions effected in t h i s manner can be
bulk& or added together with other
aansactions from employee benefit plans
as well as other trusts and custodial accounts so as to obtain a morz bcneficid
exchange rate. Undar the circumstances
described above, foreign exchange transactions would not me& the definition of
"directed" as set forth in the proposed
exemption because of the inability to
comply with the requirement that the independent plan fiduciary designate a 8pecitic exchange rate.
The Depamnent notes that a bank or
broker-dealer engages in violations of
section 406(b) of the Act whenever, it
uses its fiduciary authority or control
with respect to the plan &ts involved
in the transaction io increase the amount
of its compensation by determining the
timing or the specific exchnnge rate for
the foreign exchangt transktion. The

Department did no1 propose relief with
respect to such transactions because it
was unable, at the time. to make the findings required under section 408(a) of the
Act. Specificdly, thc Department was
unable to conclude that the conditions
proposed by the ABA would effectively
and consistenlly address the potential for
abuse of discretion by early in interest
banks or broker-dealers in setting exchange rates for foreign exchange transactions.
The mmmenters have responded to
the Department'sconcerns by sugg~ting
additional conditions which would limit
the amount of discretion that a bank or
broker-dealer would have in executing
the forciga exchange transactions pursuant to standing insuuctions. Thus, some
of the commentem suggested that the
class exemption could limit relief to
those situations where the triggering
event, B U C ~as the receipt of cash dividends, would not be within the control
of the bank or broker-dealer. Ln addition,
the exchange transaction would have to
take place within a short period of rime

following the triggering avent. As a further litation on the bank or brokerdealer, a commentor suggested chat the
exchange ratc could be set daily prior to
execution of the covered foreign exchange transaction using objective criteria which would lx dialosed to and approved by a plan fiduciary independent
of the bank or broker-dealer. Finally, it
was represented that conditions relating
to the information which must be pavided or made available to the idependent plan fiduciary could require very
detailed disclosures which would enable
such fiduciary to determine the reasonabfeness of the foreign exchange rates
paid by the plan.
On the basis of the commentsreceived
following publication of the proposed
exemption, the .Departmentbelieves that
94-,20:Final Exemption

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1004 ERISA C

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mprion~

it m y be appropriate, under certain circurnstances, to provide relief from saction 4Wb111) of tht Act. Pursuant to

the requirements of section 408(a) of the
Act, however, the D e w e n t is required
to offer interested persons an opportunity
to present their views and an opportunity
for a hearing before granting an exemption from section W b ) of the Act.
Therefore. in order not to delay the publication of an exemption €mm section
406(a) of the Act for foreign exchange
transactions, the Department has decided
h grant the exemption describad herein
while it continues to consider additional
exemptive relief fix Foreign exchange
Wansactions between e plan and a party
in interest bank, broker-dealer or &liate
thewf where [SO251 such transactions
are engaged in pursuant to a " m d i n g in-

over thr: rime period covered by
forward contrect; the same forward
contract would q u i r e the counterparty
Lo buy Yen from the party at a rate favmable to the counterparty if the Yen a p
pmiaed during the same time period.
A similar economic result could be
~chievedif the party had bwght an op
tion to se!! Yon at the fanward coneact
rate, and sold an option to buy Yen at
Ihe same rate.
A k r considering lhin comment. chc
Department has decided to amend the
final exemption to spifically inclu&
options ur buy or sell currency.
clined

the

One commcn~errequested that he &
partment expand the final exemption to
include relief from section 406 @)(I) &
(bI(2) of the Act and section
4975(c)( l )(El of the Code so that it
would k clear that a fiduciuy bank
would not violate thosc provisions when
it engaged h a foreign exchange bansacMis4daneous
riun if it did not exercise its fiduciary
One commenter requested that the D e authority to cause the plan to pay it an
partmetit dwify that the term 'Toreign additional fee.'lhe regulations ar 29 CFR
excucbnge transaction" which is defined 2550.408b-!l(e)(2} specifically state that
insectio~~W(I)ofrhepropwedexemp afiduciarydoeanotenga~inanact
tion as *'the exchange of the currency of describd in stmion 4 W ) ( I ) of the Act
one nation for the currency of another if the fiduciary does not use any of the
nariun or a contract for such exchange" authority, control or responsibility which
includes options to buy or sell foreign makes such w o n a Gduciary to cause
currency. The conunenter is mncmed a plan to pay additional fees for a service
that a footnote to the supplementary h- furnish4 by such fiduciary. A d formation accompanying the proposed ingly, h Department has determined

of the exe~nption.
lar to that af forward contracts. For ex-.,ample, a forward conbact to sell a
spcificd sum of Yen for dollars would
enable a pany to sell Yen at the agreed
upon rate even if the value of Yen de94-20: Find Exemptiw

General Infomatlon
The attention d interested persons is
dirwed to the following:

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PTE 94-20 1005

(E) and (F)of the Code;
(3) In accordance with sectiun 408{a)
of the Act and scctiun 4975(c)(2) of h e
Code, and based upon the entire record,
the Department finds that the exemption
is administmtively feasible, in the intercats of plans and uf their partkipants and
beneficiaries and potactive of the rights
of the participants and heneficides of
(4) The exemption is supplemental to,
and not in derogation of, any &a pm-

transaction is directed (within the meaning of section TV(e)) on khalf of the
plan by a fiduciary which is independent
of the bank. the brobr-deakr, and any
affiliate thareof, and (ii) the conditions
set forth in -tion II are met.
(b) Effective June 18, 1991, the re~
C d sedion
C
~
406IaX1) (A)
h u g h @) of tha ACLand the tax-

imposed by section 4975 [a) and (b) of
the Code by reason of Cadr: =tion
49'75(c)(l) (A) hmugh (Dl shall not
apply to any foreign exchanp transwtion between a b m k or broker-&der W
an a€fdiatethereof and an employee benefit plan with respect to which the bank
or broker-dealeror an afiliate thereof is

visions of the Act and-theCode, including starulmy or Aminismarive a m p tions and transitional rules. Purthennm,
the fact that a -tion
is subject to
an Winistrative or statutory exemption
is not dispsitive of whether the transac- a
General Infomation
The attention of inkrested wsons is
dimted to the following:

tion is in fwt n prohibit4 transaction.
(5) The exemption is applicable to a
transaction ody if thc conditions speci-

fi6d in the exemption are met.

ustee, custodian, fiduciary, or other

party in interest, provided that (i) the
transaction is directed (within the meaning of section IV(e)) on behalf of thc

plan by a fiduciary which is independent
8620: Final Exemptlam

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1 Q M ERISA Chss Ezmptiorts
of the bank, the broker-dealer, and my
afhliate thereof, and (ii) all of the conditims set fmih in sections fI and IE are

ing for the bank w brokerdealer knows
that he or she is dealing with a plan.
{c) A written conhation statclhc~t
is issued with respect to each covered
&amaction to the independent plan TrduSeurion 11. Gerrernl C'vruIitions
ciary who directs the transaction for
Ssction I of this eltemption applies the plan.
only if the following conditiotls of this
The confirmation shdl disclose the
section U arc satisfied. Trt the cage of fnlIowing informerion:
ttansaclims d s c r i k l in sec'tiion Ilb), alt
C 1) Accwnt name;
of the conditions specified in action I
H
(2)Ramaction date;
below must also be satisfied.
(31 Exchange a s ;
(a) A l the time the transadion i s GIItered into, the terms d the transaction
are not less favorable to !la plan man the
terms generally available in comparable

lcngth fureign exchange bansactions between unrelated parties.
( b ) Neither the bank, the b m h dealer, nor any affiliate ~~f
has any
dismxionary authority or conkol with
respect to the investment of the plan
assets invdved in the transaction w rendm investment advice (within the meaning of 29 CFR 25 10.3-2l(c)) with ~dspect
u, the investments of those assets.
m ' s

(4) Sealemcnt
(5) Cmncies exchanged:

0) Identity of the currency sold;
(ii) The amount sold;
(iii) hhtity 01 the currency pChad

liv) The amount purchased.
The confirmationshall be issued in no
event more than 5 business days aRer
execution of t b m~uachon.
Cd) The bank ar broker&derI or affiliatc thtrtof, a a i d n s within krritories under the jurisdiction of the Unitcd
Siam Government, for a period of six
years from the date of thc -action.
he
Section fll. .Spec$c Conditions
mW t~acessaryto c~@lethe p m n s
Section I(&).ofthis exemptiou applies described in paragraph (el ofthis section
only if the conditions spccifd in ysOtd1 to detErmine whether the applicable consection II a b v e and tIw following d i - ditions of this txempchn Cave been met.
tbns are satisfied:
Notwithstanding these recordkeeping re(a) At h e time the transaction is en- quircments, a pmhibiled -action
wiIl
tcred in^, ihe terms of the transaction not k considered to have occurred if,
are not less Favorable to the plan than the due to circumstances beyond the bauk's
tcm~safforded by the bank, the broker- or hker&aIerls control. the records
dealer, or any aftiliak thereof in compa- are tost or destroyed prior u, the end of
sable am's length foreign exchange the six-yew perid, and no fiduciary of
Wmsactions involving unrelarwlUparties. a plan who is independent of the bank
(b) The bank, or broker-dealer, main- or broker-dealer or any afiiliate thereof,

94-20: Wnal Exemption

PTE 94-20 1007
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ing for the bank or broke

the plan.
The confirmarion shall disclw
following information:
(I) Account name;
(2) Transaction date;
(3) Exchange rates;
(4) Settlement date;
(51 Currencies exchanged:
(i) Identity of the currency mild;

ies under the jurisdic
States Government, for

y the exemption, shall l
x subjk
ivil penalty that may be assessed
D21i) of the Act, or to the taxes im

not made avaiIablc for transaction includes options contracts on
by the bank or broker-dealer foreign exchange transactions,
@) A "bank*' means a bank which is
BfClliate as r e q u i d by paragraph (e)
supervised
by the United Smes or a State
bI0W(&i) Except as provided in subpara- thereof, or any affiliate thereof.
Ic) A "broker-dealer"means a brokergraph (ii) d this paragraph and notwithmding any provisions of subsection dealer registeredunder the Securities Ex($2) and (b) of sation 504 of the Act, change Act of 1934, or any affiliatl:
the d
s referred to in pagraph Id) thereof.
td) An "affiliate" of a bank or brokerof chis Section are available at them cusmmary Iwation for examination, upon dealer means any entity directIy or indim n a b I e notice, during n m d busi- rectly, through one or more intermediaries, controlling, controlled by, or under
ness horn by:
(A) Any duly authorized employee or common control with such bank or bmwsentative of the D e p m e n t of La- ker-dealer.
(e) Tbe term "control" means the
bor or the Internal Revenue Service.
power
to exercise a controlling influence
( 0 ) Any fiduciary of a plan who hm
mthority to acquire as dispose of the over the management or policies of a
wets of the plan involved in the foreign person other than an individual.
( f ) A foreign exchange vansaction inexchange transaction or any duly authorized empioyaa and representative o f volving assets d an employee benefit
plan shall be considered "directed" only
mch fiduciary.
(C)Any conkibuting employer to the where the independent plan fiduciary
plan involved in the foreign exchange who has not been appointed by the bank
transaction or any duly authorized em- or brokerdeakr or affiliate thereof, diployee or representative of such em- rects such bank or brokw-dealer or affiliate themof to effect the purchase or sale
ployer.
of
a s p i f i c amount of currency at a
(ii) None of the persons described in
specific
exchange rate.
subparagraphs (B)and IC) shall be au(g) For purposes of this exemption,
lthorized to examine a bank's or brokerdealer's trade secrets or commercial or the term "employee benefit plan" refers
-financialinformation of a bank or broker- to a pension plan descrikd in 29 CFR
dealer or an affiliate thmf which is 2510.3-2 andlor a welfare benefit plan
described in 29 CFR 2510.3-1.
pivileged or confidential.
Signed at Washngton, DC.this 10th day
of February, 1994.
Secrion W.Definitions and Gefibral
Alan
D. Lebowih,
Rules
For purposes of this exemption.
Depuo Assistant Secrerury for
(a) A "foreign exchange transaction" Progmm Ope~tions,Pension and
,means the exchange of the currency of Wefire senefix Administration, U.S.
one nation lor the currency of another Department of labor.
nation, or a conuact for such an ex- [FR Dw.-3607 filed 2- I&W: 8:4S am] '
change. The term foreign exchange BU-LIMG CODE 4610-29-P
ib afiUart, or

that he or she is dealing
:
(c) A written confi
i s issued with respect to each
transaction lo the independent p
ciary who dirwts the &sac

omifltion

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94-20: Final Exemption

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