[Federal Register Volume 81, Number 224 (Monday, November 21, 2016)]
[Notices]
[Pages 83336-83438]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-27563]
[[Page 83335]]
Vol. 81
Monday,
No. 224
November 21, 2016
Part II
Department of Labor
-----------------------------------------------------------------------
Employee Benefits Security Administration
-----------------------------------------------------------------------
Proposed Exemptions From Certain Prohibited Transaction Restrictions;
Notice
Federal Register / Vol. 81 , No. 224 / Monday, November 21, 2016 /
Notices
[[Page 83336]]
-----------------------------------------------------------------------
DEPARTMENT OF LABOR
Employee Benefits Security Administration
Proposed Exemptions From Certain Prohibited Transaction
Restrictions
AGENCY: Employee Benefits Security Administration, Labor.
ACTION: Notice of proposed exemptions.
-----------------------------------------------------------------------
SUMMARY: This document contains notices of pendency before the
Department of Labor (the Department) of proposed exemptions from
certain of the prohibited transaction restrictions of the Employee
Retirement Income Security Act of 1974 (ERISA or the Act) and/or the
Internal Revenue Code of 1986 (the Code). This notice includes the
following proposed exemptions: D-11856, Deutsche Investment Management
Americas Inc. and Certain Current and Future Asset Management
Affiliates of Deutsche Bank AG; D-11859, Citigroup, Inc.; D-11861,
JPMorgan Chase & Co.; D-11862, Barclays Capital Inc.; D-11906, JPMorgan
Chase & Co.; D-11907, UBS Assets Management, UBS Realty Investors, UBS
Hedge Fund Solutions LLC, UBS O'Connor LLC, and Certain Future
Affiliates in UBS's Asset Management and Wealth Management Americas
Divisions; D-11908, Deutsche Investment Management Americas Inc. and
Certain Current and Future Asset Management Affiliates of Deutsche
Bank; D-11909, Citigroup, Inc.; and, D-11910, Barclays Capital Inc.
DATES: All interested persons are invited to submit written comments or
requests for a hearing on the pending exemptions, unless otherwise
stated in the Notice of Proposed Exemption, within 45 days from the
date of publication of this Federal Register Notice.
ADDRESSES: Comments and requests for a hearing should state: (1) The
name, address, and telephone number of the person making the comment or
request, and (2) the nature of the person's interest in the exemption
and the manner in which the person would be adversely affected by the
exemption. A request for a hearing must also state the issues to be
addressed and include a general description of the evidence to be
presented at the hearing. All written comments and requests for a
hearing (at least three copies) should be sent to the Employee Benefits
Security Administration (EBSA), Office of Exemption Determinations,
U.S. Department of Labor, 200 Constitution Avenue NW., Suite 400,
Washington, DC 20210. Attention: Application No. __, stated in each
Notice of Proposed Exemption. Interested persons are also invited to
submit comments and/or hearing requests to EBSA via email or FAX. Any
such comments or requests should be sent either by email to:
moffitt.betty@dol.gov, or by FAX to (202) 693-8474 by the end of the
scheduled comment period. The applications for exemption and the
comments received will be available for public inspection in the Public
Documents Room of the Employee Benefits Security Administration, U.S.
Department of Labor, Room N-1515, 200 Constitution Avenue NW.,
Washington, DC 20210.
Warning: All comments will be made available to the public. Do not
include any personally identifiable information (such as Social
Security number, name, address, or other contact information) or
confidential business information that you do not want publicly
disclosed. All comments may be posted on the Internet and can be
retrieved by most Internet search engines.
SUPPLEMENTARY INFORMATION:
Notice to Interested Persons
Notice of the proposed exemptions will be provided to all
interested persons in the manner agreed upon by the applicant and the
Department within 15 days of the date of publication in the Federal
Register. Such notice shall include a copy of the notice of proposed
exemption as published in the Federal Register and shall inform
interested persons of their right to comment and to request a hearing
(where appropriate).
The proposed exemptions were requested in applications filed
pursuant to section 408(a) of the Act and/or section 4975(c)(2) of the
Code, and in accordance with procedures set forth in 29 CFR part 2570,
subpart B (76 FR 66637, 66644, October 27, 2011).\1\ Effective December
31, 1978, section 102 of Reorganization Plan No. 4 of 1978, 5 U.S.C.
App. 1 (1996), transferred the authority of the Secretary of the
Treasury to issue exemptions of the type requested to the Secretary of
Labor. Therefore, these notices of proposed exemption are issued solely
by the Department.
---------------------------------------------------------------------------
\1\ The Department has considered exemption applications
received prior to December 27, 2011 under the exemption procedures
set forth in 29 CFR part 2570, subpart B (55 FR 32836, 32847, August
10, 1990).
---------------------------------------------------------------------------
The applications contain representations with regard to the
proposed exemptions which are summarized below. Interested persons are
referred to the applications on file with the Department for a complete
statement of the facts and representations.
Deutsche Investment Management Americas Inc. (DIMA) and Certain Current
and Future Asset Management Affiliates of Deutsche Bank AG
(Collectively, the Applicant or the DB QPAMs), Located in New York, New
York
[Exemption Application No. D-11856]
Proposed Temporary Exemption
The Department is considering granting a temporary exemption under
the authority of section 408(a) of the Employee Retirement Income
Security Act of 1974, as amended (ERISA or the Act), and section
4975(c)(2) of the Internal Revenue Code of 1986, as amended (the Code),
and in accordance with the procedures set forth in 29 CFR part 2570,
subpart B (76 FR 66637, 66644, October 27, 2011).\2\
---------------------------------------------------------------------------
\2\ For purposes of this proposed temporary exemption,
references to section 406 of Title I of the Act, unless otherwise
specified, should be read to refer as well to the corresponding
provisions of section 4975 of the Code.
---------------------------------------------------------------------------
Section I: Covered Transactions
If the proposed temporary exemption is granted, certain entities
with specified relationships to Deutsche Bank AG (hereinafter, the DB
QPAMs, as further defined in Section II(b)) will not be precluded from
relying on the exemptive relief provided by Prohibited Transaction
Exemption (PTE) 84-14,\3\ notwithstanding (1) the ``Korean Conviction''
against Deutsche Securities Korea Co., a South Korean affiliate of
Deutsche Bank AG (hereinafter, DSK, as further defined in Section
II(f)), entered on January 23, 2016; and (2) the ``US Conviction''
against DB Group Services UK Limited, an affiliate of Deutsche Bank
based in the United Kingdom (hereinafter, DB Group Services, as further
defined in Section II(e)), scheduled to be entered on the April 3, 2017
(collectively, the Convictions, as further defined in Section
II(a)),\4\ for a period of up to 12 months beginning on the U.S.
Conviction Date (as further defined in Section II(d)), provided that
the following conditions are satisfied:
---------------------------------------------------------------------------
\3\ 49 FR 9494 (March 13, 1984), as corrected at 50 FR 41430
(October 10, 1985), as amended at 70 FR 49305 (August 23, 2005), and
as amended at 75 FR 38837 (July 6, 2010).
\4\ Section I(g) of PTE 84-14 generally provides that
``[n]either the QPAM nor any affiliate thereof . . . nor any owner .
. . of a 5 percent or more interest in the QPAM is a person who
within the 10 years immediately preceding the transaction has been
either convicted or released from imprisonment, whichever is later,
as a result of'' certain criminal activity therein described.
---------------------------------------------------------------------------
[[Page 83337]]
(a) The DB QPAMs (including their officers, directors, agents other
than Deutsche Bank, and employees of such DB QPAMs) did not know of,
have reason to know of, or participate in the criminal conduct of DSK
and DB Group Services that is the subject of the Convictions (for
purposes of this paragraph (a), ``participate in'' includes the knowing
or tacit approval of the misconduct underlying the Convictions);
(b) The DB QPAMs (including their officers, directors, agents other
than Deutsche Bank, and employees of such DB QPAMs) did not receive
direct compensation, or knowingly receive indirect compensation, in
connection with the criminal conduct that is the subject of the
Convictions;
(c) The DB QPAMs will not employ or knowingly engage any of the
individuals that participated in the criminal conduct that is the
subject of the Convictions (for purposes of this paragraph (c),
``participated in'' includes the knowing or tacit approval of the
misconduct underlying the Convictions);
(d) A DB QPAM will not use its authority or influence to direct an
``investment fund'' (as defined in Section VI(b) of PTE 84-14) that is
subject to ERISA or the Code and managed by such DB QPAM to enter into
any transaction with DSK or DB Group Services, or engage DSK or DB
Group Services to provide any service to such investment fund, for a
direct or indirect fee borne by such investment fund, regardless of
whether such transaction or service may otherwise be within the scope
of relief provided by an administrative or statutory exemption;
(e) Any failure of the DB QPAMs to satisfy Section I(g) of PTE 84-
14 arose solely from the Convictions;
(f) A DB QPAM did not exercise authority over the assets of any
plan subject to Part 4 of Title I of ERISA (an ERISA-covered plan) or
section 4975 of the Code (an IRA) in a manner that it knew or should
have known would: Further the criminal conduct that is the subject of
the Convictions; or cause the QPAM, affiliates, or related parties to
directly or indirectly profit from the criminal conduct that is the
subject of the Convictions;
(g) DSK and DB Group Services will not provide discretionary asset
management services to ERISA-covered plans or IRAs, nor will otherwise
act as a fiduciary with respect to ERISA-covered plan and IRA assets;
(h)(1) Each DB QPAM must immediately develop, implement, maintain,
and follow written policies and procedures (the Policies) requiring and
reasonably designed to ensure that:
(i) The asset management decisions of the DB QPAM are conducted
independently of Deutsche Bank's corporate management and business
activities, including the corporate management and business activities
of DB Group Services and DSK;
(ii) The DB QPAM fully complies with ERISA's fiduciary duties and
with ERISA and the Code's prohibited transaction provisions, and does
not knowingly participate in any violations of these duties and
provisions with respect to ERISA-covered plans and IRAs;
(iii) The DB QPAM does not knowingly participate in any other
person's violation of ERISA or the Code with respect to ERISA-covered
plans and IRAs;
(iv) Any filings or statements made by the DB QPAM to regulators,
including but not limited to, the Department of Labor, the Department
of the Treasury, the Department of Justice, and the Pension Benefit
Guaranty Corporation, on behalf of ERISA-covered plans or IRAs are
materially accurate and complete, to the best of such QPAM's knowledge
at that time;
(v) The DB QPAM does not make material misrepresentations or omit
material information in its communications with such regulators with
respect to ERISA-covered plans or IRAs, or make material
misrepresentations or omit material information in its communications
with ERISA-covered plan and IRA clients;
(vi) The DB QPAM complies with the terms of this temporary
exemption; and
(vii) Any violation of, or failure to comply with, an item in
subparagraph (ii) through (vi), is corrected promptly upon discovery,
and any such violation or compliance failure not promptly corrected is
reported, upon the discovery of such failure to promptly correct, in
writing, to appropriate corporate officers, the head of compliance and
the General Counsel (or their functional equivalent) of the relevant DB
QPAM, the independent auditor responsible for reviewing compliance with
the Policies, and an appropriate fiduciary of any affected ERISA-
covered plan or IRA where such fiduciary is independent of Deutsche
Bank; however, with respect to any ERISA-covered plan or IRA sponsored
by an ``affiliate'' (as defined in Section VI(d) of PTE 84-14) of
Deutsche Bank or beneficially owned by an employee of Deutsche Bank or
its affiliates, such fiduciary does not need to be independent of
Deutsche Bank. A DB QPAM will not be treated as having failed to
develop, implement, maintain, or follow the Policies, provided that it
corrects any instance of noncompliance promptly when discovered or when
it reasonably should have known of the noncompliance (whichever is
earlier), and provided that it adheres to the reporting requirements
set forth in this subparagraph (vii);
(2) Each DB QPAM must immediately develop and implement a program
of training (the Training), conducted at least annually, for all
relevant DB QPAM asset/portfolio management, trading, legal,
compliance, and internal audit personnel. The Training must be set
forth in the Policies and at a minimum, cover the Policies, ERISA and
Code compliance (including applicable fiduciary duties and the
prohibited transaction provisions), ethical conduct, the consequences
for not complying with the conditions of this temporary exemption
(including any loss of exemptive relief provided herein), and prompt
reporting of wrongdoing;
(i)(1) Each DB QPAM submits to an audit conducted by an independent
auditor, who has been prudently selected and who has appropriate
technical training and proficiency with ERISA and the Code, to evaluate
the adequacy of, and the DB QPAM's compliance with, the Policies and
Training described herein. The audit requirement must be incorporated
in the Policies. The audit period under this proposed temporary
exemption begins on October 24, 2016, and continues through the entire
effective period of this temporary exemption (the Audit Period). The
Audit Period will cover the contiguous periods of time during which PTE
2016-12, the Extension of PTE 2015-15 (81 FR 75153, October 28, 2016)
(the Extension) and this proposed temporary exemption are effective.
The audit terms contained in this paragraph (i) supersede the terms of
paragraph (f) of the Extension. However, in determining compliance with
the conditions for the Extension and this proposed temporary exemption,
including the Policies and Training requirements, for purposes of
conducting the audit, the auditor will rely on the conditions for
exemptive relief as then applicable to the respective portions of the
Audit Period. The audit must be completed no later than six (6) months
after the period to which the audit applies;
(2) To the extent necessary for the auditor, in its sole opinion,
to complete its audit and comply with the conditions for relief
described herein, and as permitted by law, each DB QPAM and, if
applicable, Deutsche
[[Page 83338]]
Bank, will grant the auditor unconditional access to its business,
including, but not limited to: Its computer systems; business records;
transactional data; workplace locations; training materials; and
personnel;
(3) The auditor's engagement must specifically require the auditor
to determine whether each DB QPAM has developed, implemented,
maintained, and followed the Policies in accordance with the conditions
of this temporary exemption, and has developed and implemented the
Training, as required herein;
(4) The auditor's engagement must specifically require the auditor
to test each DB QPAM's operational compliance with the Policies and
Training. In this regard, the auditor must test a sample of each QPAM's
transactions involving ERISA-covered plans and IRAs sufficient in size
and nature to afford the auditor a reasonable basis to determine the
operational compliance with the Policies and Training;
(5) For each audit, on or before the end of the relevant period
described in Section I(i)(1) for completing the audit, the auditor must
issue a written report (the Audit Report) to Deutsche Bank and the DB
QPAM to which the audit applies that describes the procedures performed
by the auditor during the course of its examination. The Audit Report
must include the auditor's specific determinations regarding: The
adequacy of the DB QPAM's Policies and Training; the DB QPAM's
compliance with the Policies and Training; the need, if any, to
strengthen such Policies and Training; and any instance of the
respective DB QPAM's noncompliance with the written Policies and
Training described in Section I(h) above. Any determination by the
auditor regarding the adequacy of the Policies and Training and the
auditor's recommendations (if any) with respect to strengthening the
Policies and Training of the respective DB QPAM must be promptly
addressed by such DB QPAM, and any action taken by such DB QPAM to
address such recommendations must be included in an addendum to the
Audit Report (which addendum is completed prior to the certification
described in Section I(i)(7) below). Any determination by the auditor
that the respective DB QPAM has implemented, maintained, and followed
sufficient Policies and Training must not be based solely or in
substantial part on an absence of evidence indicating noncompliance. In
this last regard, any finding that the DB QPAM has complied with the
requirements under this subsection must be based on evidence that
demonstrates the DB QPAM has actually implemented, maintained, and
followed the Policies and Training required by this temporary
exemption; and
(6) The auditor must notify the respective DB QPAM of any instance
of noncompliance identified by the auditor within five (5) business
days after such noncompliance is identified by the auditor, regardless
of whether the audit has been completed as of that date;
(7) With respect to each Audit Report, the General Counsel, or one
of the three most senior executive officers of the DB QPAM to which the
Audit Report applies, must certify in writing, under penalty of
perjury, that the officer has reviewed the Audit Report and this
temporary exemption; addressed, corrected, or remedied any inadequacy
identified in the Audit Report; and determined that the Policies and
Training in effect at the time of signing are adequate to ensure
compliance with the conditions of this proposed temporary exemption,
and with the applicable provisions of ERISA and the Code;
(8) The Risk Committee of Deutsche Bank's Board of Directors is
provided a copy of each Audit Report; and a senior executive officer
with a direct reporting line to the highest ranking legal compliance
officer of Deutsche Bank must review the Audit Report for each DB QPAM
and must certify in writing, under penalty of perjury, that such
officer has reviewed each Audit Report;
(9) Each DB QPAM provides its certified Audit Report, by regular
mail to: the Department's Office of Exemption Determinations (OED), 200
Constitution Avenue NW., Suite 400, Washington, DC 20210, or by private
carrier to: 122 C Street NW., Suite 400, Washington, DC 20001-2109, no
later than 45 days following its completion. The Audit Report will be
part of the public record regarding this temporary exemption.
Furthermore, each DB QPAM must make its Audit Report unconditionally
available for examination by any duly authorized employee or
representative of the Department, other relevant regulators, and any
fiduciary of an ERISA-covered plan or IRA, the assets of which are
managed by such DB QPAM;
(10) Each DB QPAM and the auditor must submit to OED: (A) Any
engagement agreement(s) entered into pursuant to the engagement of the
auditor under this exemption; and (B) any engagement agreement entered
into with any other entity retained in connection with such QPAM's
compliance with the Training or Policies conditions of this proposed
temporary exemption, no later than six (6) months after the effective
date of this temporary exemption (and one month after the execution of
any agreement thereafter);
(11) The auditor must provide OED, upon request, all of the
workpapers created and utilized in the course of the audit, including,
but not limited to: The audit plan; audit testing; identification of
any instance of noncompliance by the relevant DB QPAM; and an
explanation of any corrective or remedial action taken by the
applicable DB QPAM; and
(12) Deutsche Bank must notify the Department at least 30 days
prior to any substitution of an auditor, except that no such
replacement will meet the requirements of this paragraph unless and
until Deutsche Bank demonstrates to the Department's satisfaction that
such new auditor is independent of Deutsche Bank, experienced in the
matters that are the subject of the exemption, and capable of making
the determinations required of this exemption;
(j) Effective as of the effective date of this temporary exemption,
with respect to any arrangement, agreement, or contract between a DB
QPAM and an ERISA-covered plan or IRA for which a DB QPAM provides
asset management or other discretionary fiduciary services, each DB
QPAM agrees:
(1) To comply with ERISA and the Code, as applicable with respect
to such ERISA-covered plan or IRA; to refrain from engaging in
prohibited transactions that are not otherwise exempt (and to promptly
correct any inadvertent prohibited transactions); and to comply with
the standards of prudence and loyalty set forth in section 404 of ERISA
with respect to each such ERISA-covered plan and IRA;
(2) Not to require (or otherwise cause) the ERISA-covered plan or
IRA to waive, limit, or qualify the liability of the DB QPAM for
violating ERISA or the Code or engaging in prohibited transactions;
(3) Not to require the ERISA-covered plan or IRA (or sponsor of
such ERISA-covered plan or beneficial owner of such IRA) to indemnify
the DB QPAM for violating ERISA or engaging in prohibited transactions,
except for violations or prohibited transactions caused by an error,
misrepresentation, or misconduct of a plan fiduciary or other party
hired by the plan fiduciary who is independent of Deutsche Bank;
(4) Not to restrict the ability of such ERISA-covered plan or IRA
to terminate or withdraw from its arrangement with the DB QPAM
(including any investment in a separately managed account or pooled
fund subject to ERISA
[[Page 83339]]
and managed by such QPAM), with the exception of reasonable
restrictions, appropriately disclosed in advance, that are specifically
designed to ensure equitable treatment of all investors in a pooled
fund in the event such withdrawal or termination may have adverse
consequences for all other investors as a result of an actual lack of
liquidity of the underlying assets, provided that such restrictions are
applied consistently and in like manner to all such investors;
(5) Not to impose any fees, penalties, or charges for such
termination or withdrawal with the exception of reasonable fees,
appropriately disclosed in advance, that are specifically designed to
prevent generally recognized abusive investment practices or
specifically designed to ensure equitable treatment of all investors in
a pooled fund in the event such withdrawal or termination may have
adverse consequences for all other investors, provided that such fees
are applied consistently and in like manner to all such investors;
(6) Not to include exculpatory provisions disclaiming or otherwise
limiting liability of the DB QPAM for a violation of such agreement's
terms, except for liability caused by an error, misrepresentation, or
misconduct of a plan fiduciary or other party hired by the plan
fiduciary who is independent of Deutsche Bank and its affiliates; and
(7) To indemnify and hold harmless the ERISA-covered plan or IRA
for any damages resulting from a violation of applicable laws, a breach
of contract, or any claim arising out of the failure of such DB QPAM to
qualify for the exemptive relief provided by PTE 84-14 as a result of a
violation of Section I(g) of PTE 84-14 other than the Convictions;
Within four (4) months of the effective date of this temporary
exemption, each DB QPAM will provide a notice of its obligations under
this Section I(j) to each ERISA-covered plan and IRA for which the DB
QPAM provides asset management or other discretionary fiduciary
services;
(k) The DB QPAMs comply with each condition of PTE 84-14, as
amended, with the sole exceptions of the violations of Section I(g) of
PTE 84-14 that are attributable to the Convictions;
(l) Deutsche Bank disgorged all of its profits generated by the
spot/futures-linked market manipulation activities of DSK personnel
that led to the Conviction against DSK entered on January 25, 2016, in
Seoul Central District Court;
(m) Each DB QPAM will maintain records necessary to demonstrate
that the conditions of this temporary exemption have been met, for six
(6) years following the date of any transaction for which such DB QPAM
relies upon the relief in the temporary exemption;
(n) During the effective period of this temporary exemption,
Deutsche Bank: (1) Immediately discloses to the Department any Deferred
Prosecution Agreement (a DPA) or Non-Prosecution Agreement (an NPA)
that Deutsche Bank or any of its affiliates enter into with the U.S
Department of Justice, to the extent such DPA or NPA involves conduct
described in Section I(g) of PTE 84-14 or section 411 of ERISA; and (2)
immediately provides the Department any information requested by the
Department, as permitted by law, regarding the agreement and/or the
conduct and allegations that led to the agreements; and
(o) A DB QPAM will not fail to meet the terms of this temporary
exemption, solely because a different DB QPAM fails to satisfy a
condition for relief under this temporary exemption described in
Sections I(c), (d), (h), (i), (j), (k), and (m).
Section II: Definitions
(a) The term ``Convictions'' means (1) the judgment of conviction
against DB Group Services, in Case 3:15-cr-00062-RNC to be entered in
the United States District Court for the District of Connecticut to a
single count of wire fraud, in violation of 18 U.S.C. 1343, and (2) the
judgment of conviction against DSK entered on January 25, 2016, in
Seoul Central District Court, relating to charges filed against DSK
under Articles 176, 443, and 448 of South Korea's Financial Investment
Services and Capital Markets Act for spot/futures-linked market price
manipulation. For all purposes under this exemption, ``conduct'' of any
person or entity that is the ``subject of [a] Conviction'' encompasses
any conduct of Deutsche Bank and/or their personnel, that is described
in the Plea Agreement (including the Factual Statement thereto), Court
judgments (including the judgment of the Seoul Central District Court),
criminal complaint documents from the Financial Services Commission in
Korea, and other official regulatory or judicial factual findings that
are a part of this record;
(b) The term ``DB QPAM'' means a ``qualified professional asset
manager'' (as defined in section VI(a) \5\ of PTE 84-14) that relies on
the relief provided by PTE 84-14 and with respect to which DSK or DK
Group Services is a current or future ``affiliate'' (as defined in
section VI(d) of PTE 84-14). For purposes of this temporary exemption,
Deutsche Bank Securities, Inc. (DBSI), including all entities over
which it exercises control; and Deutsche Bank AG, including all of its
branches, are excluded from the definition of a DB QPAM;
---------------------------------------------------------------------------
\5\ In general terms, a QPAM is an independent fiduciary that is
a bank, savings and loan association, insurance company, or
investment adviser that meets certain equity or net worth
requirements and other licensure requirements and that has
acknowledged in a written management agreement that it is a
fiduciary with respect to each plan that has retained the QPAM.
---------------------------------------------------------------------------
(c) The term ``Deutsche Bank'' means Deutsche Bank AG but, unless
indicated otherwise, does not include its subsidiaries or affiliates;
(d) The term ``U.S. Conviction Date'' means the date that a
judgment of conviction against DB Group Services, in Case 3:15-cr-
00062-RNC, is entered in the United States District Court for the
District of Connecticut;
(e) The term ``DB Group Services'' means DB Group Services UK
Limited, an ``affiliate'' of Deutsche Bank (as defined in Section VI(c)
of PTE 84-14) based in the United Kingdom;
(f) The term ``DSK'' means Deutsche Securities Korea Co., a South
Korean ``affiliate'' of Deutsche Bank (as defined in Section VI(c) of
PTE 84-14);
(g) The term ``Plea Agreement'' means the Plea Agreement (including
the Factual Statement thereto), dated April 23, 2015, between the
Antitrust Division and Fraud Section of the Criminal Division of the
U.S. Department of Justice (the DOJ) and DB Group Services resolving
the actions brought by the DOJ in Case 3:15-cr-00062-RNC against DB
Group Services for wire fraud in violation of Title 18, United States
Code, Section 1343 related to the manipulation of the London Interbank
Offered Rate (LIBOR); and
(h) The terms ``ERISA-covered plan'' and ``IRA'' mean,
respectively, a plan subject to Part 4 of Title I of ERISA and a plan
subject to section 4975 of the Code;
Effective Date: This proposed temporary exemption will be effective
for the period beginning on the U.S. Conviction Date, and ending on the
earlier the date that is twelve months following the U.S. Conviction
Date; or the effective date of a final agency action made by the
Department in connection with Exemption Application No. D-11908, an
application for long-term exemptive relief for the covered transactions
described herein.
Department's Comment: The Department is publishing this proposed
[[Page 83340]]
temporary exemption in order to protect ERISA-covered plans and IRAs
from certain costs and/or investment losses for up to one year, that
may arise to the extent entities with a corporate relationship to
Deutsche Bank lose their ability to rely on PTE 84-14 as of the U.S.
Conviction Date, as described below. Elsewhere today in the Federal
Register, the Department is also proposing a five-year proposed
exemption, Exemption Application No. D-11908, that would provide the
same relief that is described herein, but for a longer effective
period. The five-year proposed exemption is subject to enhanced
conditions and a longer comment period. Comments received in response
to this proposed temporary exemption will be considered in connection
with the Department's determination whether or not to grant such five-
year exemption.
The proposed exemption would provide relief from certain of the
restrictions set forth in sections 406 and 407 of ERISA. If granted, no
relief from a violation of any other law would be provided by this
exemption.
Furthermore, the Department cautions that the relief in this
proposed temporary exemption would terminate immediately if, among
other things, an entity within the Deutsche Bank corporate structure is
convicted of a crime described in Section I(g) of PTE 84-14 (other than
the Conviction) during the effective period of the exemption. While
such an entity could apply for a new exemption in that circumstance,
the Department would not be obligated to grant the exemption. The terms
of this proposed temporary exemption have been specifically designed to
permit plans to terminate their relationships in an orderly and cost
effective fashion in the event of an additional conviction or a
determination that it is otherwise prudent for a plan to terminate its
relationship with an entity covered by the proposed exemption.
Summary of Facts and Representations \6\
---------------------------------------------------------------------------
\6\ The Summary of Facts and Representations is based on
Deutsche Bank and DIMA's representations, unless indicated
otherwise.
---------------------------------------------------------------------------
Background
1. Deutsche Bank AG (together with its current and future
affiliates, Deutsche Bank) is a German banking corporation and a
commercial bank. Deutsche Bank, with and through its affiliates,
subsidiaries and branches, provides a wide range of banking, fiduciary,
recordkeeping, custodial, brokerage and investment services to, among
others, corporations, institutions, governments, employee benefit
plans, government retirement plans and private investors. Deutsche Bank
had [euro]68.4 billion in total shareholders' equity and [euro]1,709
billion in total assets as of December 31, 2014.\7\
---------------------------------------------------------------------------
\7\ Deutsche Bank represents that its audited financial
statements are expressed in Euros and are not converted to dollars.
---------------------------------------------------------------------------
2. Deutsche Investment Management Americas Inc. (DIMA) is an
investment adviser registered with the SEC under the Investment
Advisers Act of 1940, as amended. DIMA and other wholly-owned
subsidiaries of Deutsche Bank provide discretionary asset-management
services to employee benefit plans and IRAs. Such entities include: (A)
DIMA; (B) Deutsche Bank Securities Inc., which is a dual-registrant
with the SEC under the Advisers Act as an investment adviser and
broker-dealer; (C) RREEF America L.L.C., a Delaware limited liability
company and investment adviser registered with the SEC under the
Advisers Act; (D) Deutsche Bank Trust Company Americas, a corporation
organized under the laws of the State of New York and supervised by the
New York State Department of Financial Services, a member of the
Federal Reserve and an FDIC-insured bank; (E) Deutsche Bank National
Trust Company, a national banking association, organized under the laws
of the United States and supervised by the Office of the Comptroller of
the Currency, and a member of the Federal Reserve; (F) Deutsche Bank
Trust Company, NA, a national banking association, organized under the
laws of the United States and supervised by the OCC; (G) Deutsche
Alternative Asset Management (Global) Limited, a London-based
investment adviser registered with the SEC under the Advisers Act; (H)
Deutsche Investments Australia Limited, a Sydney, Australia-based
investment adviser registered with the SEC under the Advisers Act; (I)
DeAWM Trust Company (DTC), a limited purpose trust company organized
under the laws of New Hampshire and subject to supervision of the New
Hampshire Banking Department; and the four following entities which
currently do not rely on PTE 84-14 for the management of any ERISA-
covered plan or IRA assets, but may in the future: (J) Deutsche Asset
Management (Hong Kong) Ltd.; (K) Deutsche Asset Management
International GmbH; (L) DB Investment Managers, Inc.; and (M) Deutsche
Bank AG, New York Branch.
3. Korean Conviction. On January 25, 2016, Deutsche Securities
Korea, Co. (DSK), an indirectly held, wholly-owned subsidiary of
Deutsche Bank, was convicted in Seoul Central District Court (the
Korean Court) of violations of certain provisions of Articles 176, 443,
and 448 of the Korean Financial Investment Services and Capital Markets
Act (FSCMA) (the Korean Conviction) for spot/futures linked market
manipulation in connection with the unwind of an arbitrage position
which in turn caused a decline on the Korean market. Charges under
Article 448 of the FSCMA stemmed from vicarious liability assigned to
DSK for the actions of its employee, who was convicted of violations of
certain provisions of Articles 176 and 443 of the FCMA. Upon
conviction, the Korean Court sentenced DSK to pay a criminal fine of
1.5 billion South Korean Won (KRW). Furthermore, the Korean Court
ordered that Deutsche Bank forfeit KRW 43,695,371,124, while KRW
1,183,362,400 was ordered forfeited by DSK.
4. US Conviction. On April 23, 2015, the Antitrust Division and
Fraud Section of the Criminal Division of the U.S. Department of
Justice (collectively, the DOJ) filed a one-count criminal information
(the Criminal Information) in Case 3:15-cr-00062-RNC in the District
Court for the District of Connecticut (the District Court) against DB
Group Services UK Limited (DB Group Services). The Criminal Information
charged DB Group Services with wire fraud in violation of Title 18,
United States Code, Section 1343 related to the manipulation of the
London Interbank Offered Rate (LIBOR) for the purpose of creating
favorable trading positions for Deutsche Bank traders. DB Group
Services agreed to resolve the actions brought by the DOJ through a
plea agreement, dated April 23, 2015 (the Plea Agreement), which is
expected to result in the District Court issuing a judgment of
conviction (the US Conviction and together with the Korean Conviction,
the Convictions). Under the terms of the Plea Agreement, DB Group
Services plead guilty to the charges set out in the Criminal
Information and forfeited $150,000,000 to the United States.
Furthermore, Deutsche Bank AG and the DOJ entered into a deferred
prosecution agreement, dated April 23, 2015 (the DPA). Pursuant to the
terms of the DPA, Deutsche Bank agreed to pay a penalty of
$625,000,000.
PTE 84-14
5. The Department notes that the rules set forth in section 406 of
the Employee Retirement Income Security Act of 1974, as amended (ERISA)
and section 4975(c) of the Internal Revenue Code of 1986, as
[[Page 83341]]
amended (the Code) proscribe certain ``prohibited transactions''
between plans and related parties with respect to those plans, known as
``parties in interest.'' \8\ Under section 3(14) of ERISA, parties in
interest with respect to a plan include, among others, the plan
fiduciary, a sponsoring employer of the plan, a union whose members are
covered by the plan, service providers with respect to the plan, and
certain of their affiliates. The prohibited transaction provisions
under section 406(a) of ERISA prohibit, in relevant part, sales,
leases, loans or the provision of services between a party in interest
and a plan (or an entity whose assets are deemed to constitute the
assets of a plan), as well as the use of plan assets by or for the
benefit of, or a transfer of plan assets to, a party in interest.\9\
---------------------------------------------------------------------------
\8\ For purposes of the Summary of Facts and Representations,
references to specific provisions of Title I of ERISA, unless
otherwise specified, refer also to the corresponding provisions of
the Code.
\9\ The prohibited transaction provisions also include certain
fiduciary prohibited transactions under section 406(b) of ERISA.
These include transactions involving fiduciary self-dealing;
fiduciary conflicts of interest, and kickbacks to fiduciaries.
---------------------------------------------------------------------------
6. Under the authority of ERISA section 408(a) and Code section
4975(c)(2), the Department has the authority to grant exemptions from
such ``prohibited transactions'' in accordance with the procedures set
forth in 29 CFR part 2570, subpart B (76 FR 66637, 66644, October 27,
2011).
7. Class Prohibited Transaction Exemption 84-14 (PTE 84-14) \10\
exempts certain prohibited transactions between a party in interest and
an ``investment fund'' (as defined in Section VI(b) of PTE 84-14) \11\
in which a plan has an interest, if the investment manager satisfies
the definition of ``qualified professional asset manager'' (QPAM) and
satisfies additional conditions for the exemption. In this regard, PTE
84-14 was developed and granted based on the essential premise that
broad relief could be afforded for all types of transactions in which a
plan engages only if the commitments and the investments of plan assets
and the negotiations leading thereto are the sole responsibility of an
independent, discretionary, manager.\12\ Deutsche Bank has corporate
relationships with a wide range of entities that may act as QPAMs and
utilize the exemptive relief provided in PTE 84-14.
---------------------------------------------------------------------------
\10\ 49 FR 9494 (March 13, 1984), as corrected at 50 FR 41430
(October 10, 1985), as amended at 70 FR 49305 (August 23, 2005), and
as amended at 75 FR 38837 (July 6, 2010).
\11\ An ``investment fund'' includes single customer and pooled
separate accounts maintained by an insurance company, individual
trusts and common, collective or group trusts maintained by a bank,
and any other account or fund to the extent that the disposition of
its assets (whether or not in the custody of the QPAM) is subject to
the discretionary authority of the QPAM.
\12\ See 75 FR 38837, 38839 (July 6, 2010).
---------------------------------------------------------------------------
8. However, Section I(g) of PTE 84-14 prevents an entity that may
otherwise meet the definition of QPAM from utilizing the exemptive
relief provided by PTE 84-14, for itself and its client plans, if that
entity or an affiliate thereof or any owner, direct or indirect, of a 5
percent or more interest in the QPAM has, within 10 years immediately
preceding the transaction, been either convicted or released from
imprisonment, whichever is later, as a result of certain specified
criminal activity described in that section. The Department notes that
Section I(g) was included in PTE 84-14, in part, based on the
expectation that a QPAM, and those who may be in a position to
influence its policies, maintain a high standard of integrity.\13\
Accordingly, as a result of the Korean Conviction and the US
Conviction, QPAMs with certain corporate relationships to DSK and DB
Group Services, as well as their client plans that are subject to Part
4 of Title I of ERISA (ERISA-covered plans) or section 4975 of the Code
(IRAs), will no longer be able to rely on PTE 84-14 without an
individual exemption issued by the Department.
---------------------------------------------------------------------------
\13\ See 47 FR 56945, 56947 (December 21, 1982).
---------------------------------------------------------------------------
The DB QPAMs
9. Deutsche Bank represents that certain current and future
``affiliates'' of DSK and DB Group Services, as that term is defined in
Section VI(d) of PTE 84-14, may act as QPAMs in reliance on the relief
provided in PTE 84-14 (these entities are collectively referred to as
the ``DB QPAMs'' or the ``Applicant''). The DB QPAMs are currently
comprised of several wholly-owned direct and indirect subsidiaries of
Deutsche Bank including: (A) DIMA; (B) Deutsche Bank Securities Inc.,
which is a dual-registrant with the SEC under the Advisers Act as an
investment adviser and broker-dealer; (C) RREEF America L.L.C., a
Delaware limited liability company and investment adviser registered
with the SEC under the Advisers Act; (D) Deutsche Bank Trust Company
Americas, a corporation organized under the laws of the State of New
York and supervised by the New York State Department of Financial
Services, a member of the Federal Reserve and an FDIC-insured bank; (E)
Deutsche Bank National Trust Company, a national banking association,
organized under the laws of the United States and supervised by the
Office of the Comptroller of the Currency, and a member of the Federal
Reserve; (F) Deutsche Bank Trust Company, NA, a national banking
association, organized under the laws of the United States and
supervised by the OCC; (G) Deutsche Alternative Asset Management
(Global) Limited, a London-based investment adviser registered with the
SEC under the Advisers Act; (H) Deutsche Investments Australia Limited,
a Sydney, Australia-based investment adviser registered with the SEC
under the Advisers Act; (I) DeAWM Trust Company (DTC), a limited
purpose trust company organized under the laws of New Hampshire and
subject to supervision of the New Hampshire Banking Department; and the
four following entities which currently do not rely on PTE 84-14 for
the management of any ERISA-covered plan or IRA assets, but may in the
future: (J) Deutsche Asset Management (Hong Kong) Ltd.; (K) Deutsche
Asset Management International GmbH; (L) DB Investment Managers, Inc.;
and (M) Deutsche Bank AG, New York Branch.\14\
---------------------------------------------------------------------------
\14\ For reasons described below, exemptive relief to rely on
PTE 84-14 notwithstanding the Convictions is not being proposed for
DBSI and the branches of Deutsche Bank AG (including the NY Branch),
and as such, these entities are excluded from the definition of ``DB
QPAM'' for purposes of the operative language of this proposed
temporary exemption.
---------------------------------------------------------------------------
10. DIMA notes that discretionary asset management services are
provided to ERISA-covered plans, IRAs and others under the following
Asset & Wealth Management (AWM) business lines, each of which may be
served by one or more of the DB QPAMs: (A) Wealth Management--Private
Client Services and Wealth Management--Private Bank ($178.1 million in
ERISA assets, $643.9 million in IRA assets and $1.8 million in rabbi
trust assets); (B) Active Management ($299 million in ERISA assets,
$227.9 million in governmental plan assets, and $141.7 million in rabbi
trust assets); (C) Alternative and Real Assets ($7.4 billion in ERISA-
covered and governmental plan assets); \15\ (D) Alternatives & Fund
Solutions ($20.8 million in ERISA accounts, $29 million in IRA holdings
and $14.1 million in governmental plan holdings); and (E) Passive
Management
[[Page 83342]]
(no current ERISA or IRA assets).\16\ Finally, DTC manages the DWS
Stock Index Fund, a collective investment trust with $192 million in
assets as of March 31, 2015.
---------------------------------------------------------------------------
\15\ The Alternatives and Real Assets business line also
provides discretionary asset management services, through a
separately managed account, to one church plan with total assets
under management of $168.6 million and, through a pooled fund
subject to ERISA, to two church plans with total assets under
management of $7.9 million. According to Deutsche Bank, with respect
to governmental plan assets, most management agreements are
contractually subject to ERISA standards.
\16\ With the exception of Passive Management, the statistics
for each of the individual business lines listed here have been
updated by Deutsche Bank and are current as of June 30, 2015, to the
best of Deutsche Bank's knowledge.
---------------------------------------------------------------------------
11. The Applicant represents that the AWM business is separate from
Group Services. The DB QPAMs that serve the AWM business have their own
boards of directors. The Applicant represents that the AWM business has
its own legal and compliance teams. The Applicant further notes that
the DB QPAMs are subject to certain policies and procedures that are
designed to, among other things, ensure that asset management decisions
are made without inappropriate outside influence, applicable law and
governing documents are followed, personnel act with professionalism
and in the best interests of clients, clients are treated fairly,
confidential information is protected, conflicts of interest are
avoided, errors are reported and a high degree of integrity is
maintained.
Market Manipulation Activities of DSK \17\
---------------------------------------------------------------------------
\17\ The Department has incorporated the facts related to the
circumstances leading to the Korean Conviction as represented by
Deutsche Bank in Application No. D-11696 and included in the Federal
Register in the notice of proposed exemption for the aforementioned
application at 80 FR 51314 (August 24, 2015).
---------------------------------------------------------------------------
12. Deutsche Securities Korea Co. (DSK), an indirect wholly-owned
subsidiary of Deutsche Bank, is a broker-dealer organized in Korea and
supervised by the Financial Supervisory Service in Korea. The Absolute
Strategy Group (ASG) of Deutsche Bank's Hong Kong Branch (DB HK)
conducts index arbitrage trading for proprietary accounts in Asian
markets, including Korea. On January 25, 2016, DSK was convicted in
Seoul Central District Court (the Korean Court), under Articles 176,
443, and 448 of South Korea's Financial Investment Services and Capital
Markets Act (FSCMA) for spot/futures-linked market price manipulation.
The Korean Court issued a written decision (the Korean Decision) in
connection with the Korean Conviction.
13. Deutsche Bank represents that index arbitrage trading is a
trading strategy through which an investor such as Deutsche Bank seeks
to earn a return by identifying and exploiting a difference between the
value of futures contracts in respect of a relevant equity index and
the spot value of the index, as determined by the current market price
of the constituent stocks. For instance, where the futures contracts
are deemed to be overpriced by reference to the spot value of the index
(i.e., if the premium is sufficiently large), then an index arbitrageur
will short sell the relevant futures contracts (either the exchange-
traded contracts or the put and call option contracts which together
synthetically replicate the exchange-traded futures contracts) and
purchase the underlying stocks. The short and long positions offset
each other in order to be hedged (although the positions may not always
be perfectly risk-neutral).
14. Deutsche Bank represents that ASG pursued an index arbitrage
trading strategy in various Asian markets, including Korea. In Korea,
the index arbitrage position involved the Korean Composite Stock Price
Index (KOSPI 200 Index), which reflects stocks commonly traded on the
Korea Exchange (KRX). Deutsche Bank represents that, while ASG tried to
track the KOSPI 200 Index as closely as possible, there is a limit on
foreign ownership for certain shares such as telecommunication
companies. Thus, once ASG's cash position reached this limitation, DSK
carried the remainder and ASG's book, combined with DSK's book for
Korea telecommunication companies, reflected ASG's overall KOSPI 200
index arbitrage position.
15. On November 11, 2010, the Applicant states that ASG ``unwound''
an arbitrage position on the KOSPI 200 Index through DSK.\18\ The
``unwind'' included a sale of $2.1 billion worth of stocks in the KRX
during the final 10 minutes of trading (i.e., the closing auction
period) and comprised 88% of the volume of stock traded during this
period. This large volume sale contributed to a drop of the KOSPI 200
Index by 2.7%.
---------------------------------------------------------------------------
\18\ The Department understands the ``unwinding'' of a
transaction to mean closing out a relatively complicated investment
position. For example, an investor who practices arbitrage by taking
one position in stocks and the opposite position in option contracts
would have to unwind by the date on which the options would expire.
This would entail selling the underlying stocks and covering the
options.
---------------------------------------------------------------------------
16. Prior to the unwinding, but after the decision to unwind was
made, ASG had taken certain derivative positions, including put options
on the KOSPI 200 Index. Thus, ASG earned a profit when the KOSPI 200
Index declined as a result of the unwind trades (the derivative
positions and unwind trades cumulatively referred to as the Trades).
DSK had also purchased put options on that day that resulted in it
earning a profit as a result of the drop of the KOSPI 200 Index. The
aggregate amount of profit earned from such Trades was approximately
$40 million.
17. The Seoul Central District Prosecutor's Office (the Korean
Prosecutors) alleged that the Trades constitute spot/futures linked
market manipulation, a criminal violation under Korean securities law.
In this regard, the Korean Prosecutors alleged that ASG unwound its
cash position of certain securities listed on the KRX(spot) through
DSK, and caused a fluctuation in the market price of securities related
to exchange-traded derivatives (the put options) for the purpose of
gaining unfair profit from such exchange-traded derivatives. On August
19, 2011, the Korean Prosecutors indicted DSK and four individuals on
charges of stock market manipulation to gain unfair profits. Two of the
individuals, Derek Ong and Bertrand Dattas, worked for ASG at DB HK.
Mr. Ong was a Managing Director and head of ASG, with power and
authority with respect to the KOSPI 200 Index arbitrage trading
conducted by Deutsche Bank. Mr. Dattas served as a Director of ASG and
was responsible for the direct operations of the KOSPI 200 Index
arbitrage trading. Philip Lonergan, the third individual, was employed
by Deutsche Bank Services (Jersey) Limited. At the time of the
transaction, Mr. Lonergan was seconded to DB HK and served as Head of
Global Market Equity, Trading and Risk. Mr. Lonergan served as Mr.
Ong's regional superior and was in charge of risk management for his
team. The fourth individual charged, Do-Joon Park, was employed by DSK,
serving as a Managing Director of Global Equity Derivatives (GED) at
DSK and was in charge of the index arbitrage trading using DSK's book
that had been integrated into and managed by ASG. Mr. Park was also a
de facto chief officer of equity and derivative product operations of
DSK.
18. The Korean Prosecutors' case against DSK was based on Korea's
criminal vicarious liability provision, under which DSK may be held
vicariously liable for an act of its employee (i.e., Mr. Park) if it
failed to exercise due care in the appointment and supervision of its
employees.\19\
---------------------------------------------------------------------------
\19\ Article 448 of the FSCMA allows for charges against an
employer stemming from vicarious liability for the actions of its
employees.
---------------------------------------------------------------------------
19. The trial commenced in January 2012 in the Korean Court. The
Korean Court convicted both DSK and Mr. Park on January 25, 2016. The
Korean Court sentenced Mr. Park to five years imprisonment. Upon
conviction, the
[[Page 83343]]
Korean Court ordered DSK to pay a criminal fine of KRW 1.5 billion.
Furthermore, the Korean Court ordered that Deutsche Bank forfeit KRW
43,695,371,124, while KRW 1,183,362,400 was ordered forfeited by
DSK.\20\
---------------------------------------------------------------------------
\20\ KRW refers to a South Korean Won.
---------------------------------------------------------------------------
LIBOR Manipulation Activities by DB Group Services
20. DB Group Services is an indirect wholly-owned subsidiary of
Deutsche Bank located in the United Kingdom. On April 23, 2015, DB
Group Services pled guilty in the United States District Court for the
District of Connecticut to a single count of wire fraud, in violation
of 18 U.S.C. 1343 (the Plea Agreement), related to the manipulation of
the London Interbank Offered Rate (LIBOR) described below. In
connection with the Plea Agreement with DB Group Services, the DOJ
filed a Statement of Fact (the DOJ Plea Factual Statement) that details
the underlying conduct that serves as the basis for the criminal
charges and impending US Conviction.
21. According to the DOJ Plea Factual Statement, LIBOR is a
benchmark interest rate used in financial markets around the world.
Futures, options, swaps, and other derivative financial instruments
traded in the over-the-counter market. The LIBOR for a given currency
is derived from a calculation based upon submissions from a panel of
banks for that currency (the Contributor Panel) selected by the British
Bankers' Association (BBA). Each member of the Contributor Panel would
submit its rates electronically. Once each Contributor Panel bank had
submitted its rate, the contributed rates were ranked. The highest and
lowest quartiles were excluded from the calculation, and the middle two
quartiles (i.e., 50% of the submissions) were averaged to formulate the
LIBOR ``fix'' or ``setting'' for the given currency and maturity.
22. The DOJ Plea Factual Statement states that, from 2006 to 2011,
Deutsche Bank's Global Finance and Foreign Exchange business units
(GFFX) had employees in multiple entities associated with Deutsche
Bank, in multiple locations around the world including London and New
York. Deutsche Bank, through the GFFX unit, employed traders in both
its Pool Trading groups (Pool) and its Money Market Derivatives (MMD)
groups. Many of the GFFX traders based in London were employed by DB
Group Services.
23. According to the DOJ Plea Factual Statement, Deutsche Bank's
Pool traders engaged in, among other things, cash trading and
overseeing Deutsche Bank's internal funding and liquidity. Deutsche
Bank's Pool traders traded a variety of financial instruments. Deutsche
Bank's Pool traders were primarily responsible for formulating and
submitting Deutsche Bank's LIBOR and EURIBOR daily contributions.
Deutsche Bank's MMD traders, on the other hand, were responsible for,
among other things, trading a variety of financial instruments, some of
which, such as interest rate swaps and forward rate agreements, were
tied to LIBOR and EURIBOR. The DOJ Plea Factual Statement notes that
both the Pool traders and the MMD traders worked in close proximity and
reported to the same chain of command. DB Group Services employed many
of Deutsche Bank's London-based Pool and MMD traders.
24. Deutsche Bank and DB Group Services's derivatives traders (the
Derivatives Traders) were responsible for trading a variety of
financial instruments, some of which, such as interest rate swaps and
forward rate agreements, were tied to reference rates such as LIBOR and
EURIBOR. According to the DOJ Plea Factual Statement, from
approximately 2003 through at least 2010, the Derivatives Traders
defrauded their counterparties by secretly manipulating U.S. Dollar
(USD), Yen, and Pound Sterling LIBOR, as well as the EURO Interbank
Offered Rate (EURIBOR, and collectively, the IBORs or IBOR). The
Derivatives Traders requested that the IBOR submitters employed by
Deutsche Bank and other banks send in IBORs that would benefit the
Derivatives Traders' trading positions, rather than rates that complied
with the definitions of the IBORs. According to the DOJ, Deutsche Bank
employees engaged in this collusion through face-to-face requests,
electronic communications, which included both emails and electronic
chats, and telephone calls.
25. The DOJ Plea Factual Statement explains that when the
Derivatives Traders' requests for favorable IBOR submissions were taken
into account by the submitters, the resultant contributions affected
the value and cash flows of derivatives contracts, including interest
rate swap contracts. In accommodating these requests, the Derivatives
Traders and submitters were engaged in a deceptive course of conduct in
an effort to gain an advantage over their counterparties. As part of
this effort: (1) The Deutsche Bank Pool and MMD Traders submitted
materially false and misleading IBOR contributions; and (2) Derivatives
Traders, after initiating and continuing their effort to manipulate
IBOR contributions, entered into derivative transactions with
counterparties that did not know that the Deutsche Bank personnel were
often manipulating the relevant rate.
26. The DOJ Plea Factual Statement notes that from 2003 through at
least 2010, DB Group Services employees regularly sought to manipulate
USD LIBOR to benefit their trading positions and thereby benefit
themselves and Deutsche Bank. During most of this period, traders at
Deutsche Bank who traded products linked to USD LIBOR were primarily
located in London and New York. DB Group Services employed almost all
of the USD LIBOR traders who were located in London and involved in the
misconduct. Throughout the period during which the misconduct occurred,
the Deutsche Bank USD LIBOR submitters in London sat within feet of the
USD LIBOR traders. This physical proximity enabled the traders and
submitters to conspire to make and solicit requests for particular
LIBOR submissions.
27. Pursuant to the Plea Agreement that DB Group Services entered
into with the DOJ on April 23, 2015, pleading guilty to wire fraud for
manipulation of LIBOR, DB Group Services also agreed: (A) To work with
its parent company (Deutsche Bank) in fulfilling obligations undertaken
by the Bank in connection with its own settlements; (B) to continue to
fully cooperate with the DOJ and any other law enforcement or
government agency designated by the DOJ in a manner consistent with
applicable laws and regulations; and (C) to pay a fine of $150 million.
28. On April 23, 2015, Deutsche Bank AG entered into a deferred
prosecution agreement (DPA) with the DOJ, in disposition of a 2-count
criminal information charging Deutsche Bank with one count of wire
fraud, in violation of Title 18, United States Code, Section 1343, and
one count of price-fixing, in violation of the Sherman Act, Title 15,
United States Code, Section 1. By entering into the DPA, Deutsche Bank
AG agreed, among other things: (A) To continue to cooperate with the
DOJ and any other law enforcement or government agency; (B) to retain
an independent compliance monitor for three years, subject to extension
or early termination, to be selected by the DOJ from among qualified
candidates proposed by the Bank; (C) to further strengthen its internal
controls as recommended by the monitor and as required by other
settlements; and (D) to pay a penalty of $625 million.
[[Page 83344]]
29. On April 23, 2015, Deutsche Bank AG and Deutsche Bank AG, New
York Branch (DB NY) also entered into a consent order with the New York
State Department of Financial Services (NY DFS) in which Deutsche Bank
AG and DB NY agreed to pay a penalty of $600 million. Furthermore,
Deutsche Bank AG and DB NY engaged an independent monitor selected by
the NY DFS in the exercise of the NY DFS's sole discretion, for a 2-
year engagement. Finally, the NY DFS ordered that certain employees
involved in the misconduct be terminated, or not be allowed to hold or
assume any duties, responsibilities, or activities involving
compliance, IBOR submissions, or any matter relating to U.S. or U.S.
Dollar operations.
30. Furthermore, the United States Commodities Futures Trading
Commission (CFTC) entered a consent order, dated April 23, 2015,
requiring Deutsche Bank AG to cease and desist from certain violations
of the Commodity Exchange Act, to pay a fine of $800 million, and to
agree to certain undertakings.
31. The United Kingdom's Financial Conduct Authority (FCA) issued a
final notice (Final Notice), dated April 23, 2015, imposing a fine of
[pound]226.8 million on Deutsche Bank AG. In its Final Notice, the FCA
cited Deutsche Bank's inadequate systems and controls specific to IBOR.
The FCA noted that Deutsche Bank had defective systems to support the
audit and investigation of misconduct by traders; and Deutsche Bank's
systems for identifying and recording traders' telephone calls and for
tracing trading books to individual traders were inadequate. The FCA's
Final Notice provided that Deutsche Bank took over two years to
identify and produce all relevant audio recordings requested by the
FCA. Furthermore, according to the Final Notice, Deutsche Bank gave the
FCA misleading information about its ability to provide a report
commissioned by Bundesanstalt f[uuml]r Finanzdienstleistungsaufsicht,
Germany's Federal Financial Supervisory Authority (BaFin). In addition,
the FCA notes in its Final Notice that Deutsche Bank provided it with a
false attestation that stated that its systems and controls in relation
to LIBOR were adequate, an attestation known to be false by the person
who drafted it. The Final Notice provides that, in one instance,
Deutsche Bank, in error, destroyed 482 tapes of telephone calls,
despite receiving an FCA notice requiring their preservation, and
provided inaccurate information to the regulator about whether other
records existed.
32. Finally, BaFin set forth preliminary findings based on an audit
of LIBOR related issues in a May 15, 2015, letter to Deutsche Bank. At
that time, BaFin raised certain questions about the extent of certain
senior managers' possible awareness of wrongdoing within Deutsche Bank.
Prior and Anticipated Convictions and Failure To Comply With Section
I(g) of PTE 84-14
33. The Korean Conviction caused the DB QPAMs to violate Section
I(g) of PTE 84-14. As a result, the Department granted, and later
extended the effective period for, PTE 2015-15, which allows the DB
QPAMs to rely on the relief provided by PTE 84-14, notwithstanding the
January 25, 2016 Korean Conviction. The Department granted, and
extended, PTE 2015-15 in order to protect ERISA-covered plans and IRAs
from IRAs from certain costs and/or investment losses that could have
occurred to the extent the DB QPAMs lost their ability to rely on PTE
84-14 as a result of the Korean Conviction. PTE 2015-15 and its
extension, PTE 2016-12 (81 FR 75153, October 28, 2016) (the Extension)
are subject to enhanced conditions that are protective of the rights of
the participants and beneficiaries of affected ERISA-covered plans and
IRAs.
34. The Applicant represents that date on which the US Conviction
will be entered (the U.S. Conviction Date) is tentatively scheduled for
April 3, 2017, will also cause DB QPAMs to violate Section I(g) of PTE
84-14. Therefore, Deutsche Bank requests a single, new exemption that
would permit the DB QPAMs, and their ERISA-covered plan and IRA
clients, to continue to utilize the relief in PTE 84-14,
notwithstanding both the Korean Conviction and the US Conviction.
35. The Department is proposing a temporary exemption herein to
allow the DB QPAMs to rely on PTE 84-14 notwithstanding the Korean
Conviction and the US Conviction, subject to a comprehensive suite of
protective conditions designed to protect the rights of the
participants and beneficiaries of the ERISA-covered plans and IRAs that
are managed by DB QPAMs. This proposed temporary exemption would be
effective for a period of up to one year beginning on the U.S.
Conviction Date; and ending on the earlier of the date that is twelve
months after the U.S. Conviction Date or the effective date of a final
agency action made by the Department in connection with Exemption
Application No. D-11908. In this regard, elsewhere today in the Federal
Register, the Department is proposing Exemption Application No. D-
11908, a five-year proposed exemption subject to enhanced protective
conditions that would provide the same exemptive relief that is
described herein, but for a longer effective period.
This temporary exemption will allow the Department sufficient time
to contemplate whether or not to grant the five-year exemption without
risking the sudden loss of exemptive relief for the DB QPAMs upon the
expiration of the relief provided by the Extension. The Extension
expires upon the earlier of April 23, 2017 or the effective date of a
final agency action in connection with this proposed temporary
exemption (e.g., the Department denies or grants this proposed
temporary exemption).
36. This temporary exemption will not apply to Deutsche Bank
Securities, Inc. (DBSI).\21\ Section I(a) of PTE 2015-15, as well as
this proposed temporary exemption, requires that ``DB QPAMs (including
their officers, directors, agents other than Deutsche Bank, and
employees of such DB QPAMs) did not know of, have reason to know of, or
participate in the criminal conduct of DSK that is the subject of the
[Korean] Conviction.'' In a letter to the Department dated July 15,
2016, Deutsche Bank raised the possibility that an individual,\22\
while employed at DBSI, may have known or had reason to know of the
criminal conduct of DSK that is the subject of the Korean Conviction.
In a letter to the Department dated August 19, 2016, Deutsche Bank
further clarified that ``there is no evidence that anyone at DBSI other
than Mr. Ripley knew in advance of the trades conducted by the Absolute
Strategy Group on November 11, 2010.'' Deutsche Bank states that it had
previously interpreted Section I(a) of PTE 2015-15 as requiring only
that ``any current director, officer or employee did not know of, have
reason to know of, or participate in the conduct.'' The Department
notes that Deutsche Bank did not raise any interpretive questions
regarding Section I(a) of PTE 2015-15, or express any concerns
regarding DBSI's possible noncompliance, during the comment period for
PTE 2015-15. Nor did Deutsche Bank seek a technical
[[Page 83345]]
correction or other remedy to address such concerns between the time
that PTE 2015-15 was granted and the date of the Korean Conviction. The
Department notes that a period of approximately nine months passed
before Deutsche Bank raised an interpretive question regarding Section
I(a) of PTE 2015-15. Accordingly, the Department is not proposing
exemptive relief for DBSI in this temporary exemption.
---------------------------------------------------------------------------
\21\ The Applicant represents that DBSI has not relied on the
relief provided by PTE 84-14 since the date of the Korean
Conviction.
\22\ The Applicant identifies the individual as Mr. John Ripley,
a senior global manager in DBSI who was based in the United States
and who was a functional supervisor over the employees of DSK that
were prosecuted for market manipulation. Furthermore, the Applicant
states that Mr. Ripley was terminated by DBSI for ``loss of
confidence'' in that he could have exercised more care and been more
proactive in reviewing the trades at issue.
---------------------------------------------------------------------------
This temporary exemption will also not apply with respect to
Deutsche Bank AG (the parent entity) or any of its branches. The
Applicant represents that neither Deutsche Bank AG nor its branches
have relied on the relief provided by PTE 84-14 since the date of the
Korean Conviction.
37. Finally, the Applicant represents that it currently does not
have a reasonable basis to believe that any pending criminal
investigation \23\ of any of Deutsche Bank's affiliated corporate
entities would cause a reasonable plan or IRA customer not to hire or
retain the Bank's affiliated managers as a QPAM. Furthermore, this
temporary exemption will not apply to any other conviction(s) of
Deutsche Bank or its affiliates for crimes described in Section I(g) of
PTE 84-14. The Department notes that, in such event, the Applicant and
its ERISA-covered plan and IRA clients should be prepared to rely on
exemptive relief other than PTE 84-14 for any prohibited transactions
entered into after the date of such new conviction(s); withdraw from
any arrangements that solely rely on PTE 84-14 for exemptive relief; or
avoid engaging in any such prohibited transactions in the first place.
---------------------------------------------------------------------------
\23\ The Applicant references the Deutsche Bank AG Form 6-K,
filed July 27, 2016, available at: https://www.db.com/ir/en/download/6_K_Jul_2016.pdf; and the Deutsche Bank AG Form 10-F filed
March 11, 2016 and available at: https://www.db.com/ir/en/download/Deutsche_Bank_20_F_2015.pdf.
---------------------------------------------------------------------------
Remedial Measures To Address Criminal Conduct of DSK
38. Deutsche Bank represents that it has voluntarily disgorged its
profits generated from exercising derivative positions and put options
in connection with the activity associated with the Korean Conviction.
DSK also suspended its proprietary trading from April 2011 to 2012, and
thereafter DSK only engaged in limited proprietary trading (but not
index arbitrage trading).\24\ Further, in response to the actions of
the Korean Prosecutors, Deutsche Bank enhanced its compliance measures
and implemented additional measures in order to ensure compliance with
applicable laws in Korea and Hong Kong, as well as within other
jurisdictions where Deutsche Bank conducts business.
---------------------------------------------------------------------------
\24\ Deutsche Bank notes that DSK was never permitted to trade
on behalf of Deutsche Bank.
---------------------------------------------------------------------------
39. Deutsche Bank states that Mr. Ong and Mr. Dattas were
terminated for cause by DB HK on December 6, 2011, and Mr. Lonergan was
terminated on January 31, 2012. In addition, Mr. Park was suspended for
six months due to Korean administrative sanctions, and remained on
indefinite administrative leave, until being terminated effective
January 25, 2016. John Ripley, a New York-based employee of Deutsche
Bank Securities Inc. (DBSI) who was not indicted, was also terminated
in October 2011.\25\
---------------------------------------------------------------------------
\25\ According to the Korean prosecutors, Mr. Ripley served as a
Head of Global ASG of Deutsche Bank, AG, and was a functional
superior to Mr. Ong. Mr. Ripley was suspected of having advised to
unwind all the KOSPI 200 index arbitrage trading for the purpose of
management of the ending profits and losses of Global ASK and
approved Mr. Ong's request to establish the speculative positions in
the course of the unwinding. Though the Korean prosecutors named Mr.
Ripley as a suspect, he was not named in the August 19, 2011, Writ
of Indictment.
---------------------------------------------------------------------------
Remedial Measures To Address Criminal Conduct of DB Group Services
40. Deutsche Bank represents that it has significantly modified its
compensation structure. Specifically, Deutsche Bank: Eliminated the use
of ``percentage of trading profit'' contracts once held by two traders
involved in the LIBOR case; extended the vesting/distribution period
for deferred compensation arrangements; made compliance with its
internal policies a significant determinant of bonus awards; and
modified its compensation plans to facilitate forfeiture/clawback of
compensation when employees are found after the fact to have engaged in
wrongdoing. Deutsche Bank represents that the forfeiture/clawback
provisions of its compensation plans have been altered so as to permit
action against employees even when misconduct is discovered years
later.
41. With respect to the LIBOR-related misconduct, Deutsche Bank
represents that it has separated from or disciplined the employees
responsible. With the exceptions described below, none of the employees
determined to be responsible for the misconduct remains employed by
Deutsche Bank. Deutsche Bank represents that, during the initial phase
of its internal investigation into the LIBOR matters, it terminated the
two employees most responsible for the misconduct, including the Global
Head of Money Market and Derivatives Trading.
42. Deutsche Bank then terminated five benchmark submitters in its
Frankfurt office, including the Head of Global Finance and Foreign
Exchange in Frankfurt. Four of these employees successfully challenged
their termination in a German Labor court, and one employee entered
into a separation agreement with Deutsche Bank after initially
indicating that he would challenge the termination decision. With
respect to the four employees who challenged their termination, the
Bank agreed to mediate the employee labor disputes and reached
settlements with the four employees. Pursuant to the settlements, the
two more senior employees remained on paid leave through the end of
2015 and then have no association with Deutsche Bank. The two more
junior employees have returned to the Bank in non-risk-taking roles.
They do not work for any DB QPAMs and have no involvement in the Bank's
AWM business or the setting of interest rate benchmarks. Deutsche Bank
represents that it also terminated four additional individuals, and
another eight individuals left the bank before facing disciplinary
action.
43. Deutsche Bank represents that it will take action to terminate
any additional employees who are determined to have been involved in
the improper benchmark manipulation conduct, as well as those who knew
about it and approved it. Moreover, the Applicant states that Deutsche
Bank has taken further steps, both on its own and in consultation with
U.S. and foreign regulators, to discipline those whose performance fell
short of DB's expectations in connection with the above-described
conduct.
Statutory Findings--In the Interests of Affected Plans and IRAs
44. The Applicant represents that the proposed exemption is in the
interests of affected ERISA-covered plans and IRAs. Deutsche Bank
represents that the DB QPAMS provide discretionary asset management
services under several business lines, including (A) Alternative and
Real Assets (ARA); (B) Alternatives & Fund Solutions (AFS); (C) Active
Management (AM); and (D) Wealth Management--Private Client Services and
Wealth Management--Private Bank. Deutsche Bank asserts that plans will
incur direct transaction costs in liquidating and reinvesting their
portfolios. According to Deutsche Bank, the direct transaction costs of
liquidating and reinvesting ERISA-covered plan, IRA and ERISA-like
assets
[[Page 83346]]
under the various business lines (other than core real estate) could
range from 2.5 to 25 basis points, resulting in an estimated dollar
cost of approximately $5-7 million. Deutsche Bank also states that an
unplanned liquidation of the Alternatives and Real Assets business'
direct real estate portfolios could result in portfolio discounts of
10-20% of gross asset value, in addition to transaction costs ranging
from 30 to 100 basis points, for estimated total cost to plan investors
of between $281 million and $723 million, depending on the liquidation
period.
45. Deutsche Bank states that its managers provide discretionary
asset management services, through both separately managed accounts and
four pooled funds subject to ERISA, to a total of 46 ERISA-covered plan
accounts, with total assets under management (AuM) of $1.1 billion.
Deutsche Bank estimates that the underlying plans cover in total at
least 640,000 participants. Deutsche Bank represents that its managers
provide asset management services, through both separately managed
accounts and pooled funds subject to ERISA, to a total of 22
governmental plan accounts, with total AuM of $7.1 billion. The
underlying plans cover at least 3 million participants. With respect to
church plans and rabbi trust accounts, Deutsche Bank investment
managers separately manage accounts and a pooled fund subject to ERISA,
to a total of 4 church plan and rabbi trust accounts, with total AuM of
$318.3 million. With respect to ERISA-covered Plan, IRA, Governmental
Plan and Church Plan Accounts in Non-Plan Asset Pooled Funds, Deutsche
Bank represents that its asset managers manages 175 ERISA-covered plan
accounts with interests totaling $4.23 billion, 178 IRAs with interests
totaling $29 million, 66 governmental plan accounts with interests
totaling $2.08 billion, and 14 church plan accounts with interests
totaling $67.1 million.
46. Deutsche Bank contends that ERISA-covered, IRA, governmental
plan and other plan investors that terminate or withdraw from their
relationship with their DB QPAM manager may be harmed in several
specific ways, including: The costs of searching for and evaluating a
new manager; the costs of leaving a pooled fund and finding a
replacement fund or investment vehicle; and the lack of a secondary
market for certain investments and the costs of liquidation.\26\
---------------------------------------------------------------------------
\26\ The Department notes that, if this temporary exemption is
granted, compliance with the condition in Section I(j) of the
exemption would require the DB QPAMs to hold their plan customers
harmless for any losses attributable to, inter alia, any prohibited
transactions or violations of the duty of prudence and loyalty.
---------------------------------------------------------------------------
47. Deutsche Bank represents that its ARA business line provides
discretionary asset management services to, among others, 17 ERISA
accounts and 18 governmental plan accounts. The largest account has
$1.6 billion in AuM. ERISA-covered and governmental plans total $7.4
billion in AuM. Deutsche Bank estimates that the underlying plans cover
at least 2.7 million participants. ARA provides these services through
separately managed accounts and pooled funds subject to ERISA. ARA also
provides discretionary asset management services, through a separately
managed account, to one church plan with total AuM of $168.6 million
and, through a pooled fund subject to ERISA, to two church plans with
total AuM of $7.9 million.
Deutsche Bank argues that PTE 84-14 is the sole exemption available
to ARA for investments in direct real estate for separately managed
accounts.
48. Deutsche Bank represents that, as a result of terminating ARA's
management, a typical plan client may incur $30,000 to $40,000 in
consulting fees in searching for a new manager as well as $10,000 to
$30,000 in legal fees. Furthermore, with respect to direct real estate
investments, Deutsche Bank states that plan clients may face direct
transaction costs of 30-100 basis points for early liquidation, or a
$4.8 million to $16 million loss for its largest ARA governmental plan
client; as well as a 10-20% discount for early liquidation, or a $162.5
million to $325 million loss for the largest ARA governmental plan
client. With respect to non-direct real estate investments, Deutsche
Bank states that plan clients may face direct transaction costs of 20-
60 basis points, or $933,000 for ARA's largest ERISA client.
49. Deutsche Bank notes that ARA manages seven unregistered real
estate investment trusts and other funds that currently rely on one or
more exceptions to the Department's plan asset regulation. Interests in
the funds are held by 131 ERISA-covered plan accounts, 63 governmental
plan accounts and 14 church plan accounts. Deutsche Bank represents
that the largest holding in these funds by an ERISA-covered plan
account is $647.4 million. Holdings by all ERISA plan accounts in these
funds total $4.21 billion. The underlying ERISA-covered plans cover at
least 2 million participants. The largest holding by a governmental
plan account in these funds is $286.5 million. Holdings of all
governmental plan accounts in these funds total $2.07 billion. The
underlying plans cover at least 6.1 million participants. The largest
holding by a church plan is $16 million. Holdings of all church plans
in these funds total $67.1 million.
50. Deutsche Bank represents that its AFS business line manages 28
unregistered, closed-end, private equity funds, with $2.8 billion in
total assets, in which ERISA-covered, IRA and governmental plans
invest. Interests in these funds are held by, among others, 44 ERISA-
covered plan accounts, 178 IRAs and 3 governmental plan accounts.
Holdings by all ERISA-covered plan accounts total $20.8 million.
Deutsche Bank notes that the underlying plans cover at least 57,000
participants. Holdings by all IRAs total $29 million. Holdings by all
governmental plans total $14.1 million. These funds invest primarily in
equity interests issued by other private equity funds. The funds
currently rely on the 25% benefit plan investor participation exception
under the Department's plan asset regulation.
51. Deutsche Bank contends that, in the event the AFS business line
cannot rely upon the exemptive relief of PTE 84-14, all plans would
have to undertake the time and expense of identifying suitable
transferees, accept a discounted sale price, comply with applicable
transfer rules and pay the funds a transfer fee, which may run to
$5,000 or more. Deutsche Bank states that, in locating a replacement
fund, a typical plan could incur 6-8 months of delay, $30,000-$40,000
in consultant fees for a private manager/fund search, 25-50 hours in
client time and $10,000-$30,000 in legal fees to review subscription
agreements and negotiate side letters.
52. Deutsche Bank represents that its AM business line provides
discretionary asset management services to separately managed plan
accounts, including five ERISA-covered plan accounts and three
governmental plan accounts. The largest ERISA account is $164.2
million. Total ERISA AuM is $299.2 million. The underlying ERISA-
covered plans cover at least 143,000 participants. The largest
governmental plan account is $164.3 million. Total governmental plan
AuM is $227.9 million. The underlying plans cover at least 731,000
participants. Deutsche Bank notes that AM also provides such services
to one rabbi trust with total AuM of $141.7 million.
53. Deutsche Bank represents that the AM line manages these
accounts with a variety of strategies, including: (A) Equities, (B)
fixed income, (C) overlay, (D) commodities, and (E) cash. These
strategies involve a range of asset classes
[[Page 83347]]
and types, including: (A) U.S. and foreign fixed income (Treasuries,
Agencies, corporate bonds, asset-backed securities, mortgage and
commercial mortgage-backed securities, deposits); (B) U.S. and foreign
mutual funds and ETFs; (C) U.S. and foreign futures, (D) currency; (E)
swaps (interest rate and credit default); (F) U.S. and foreign
equities; and (G) short term investment funds.
54. Deutsche Bank estimates that, in the event the AM business line
cannot rely upon the exemptive relief of PTE 84-14, plan clients would
typically incur $30,000 to $40,000 in consulting fees related to a new
manager search, up to 5 basis points in direct transaction costs, and
$15,000-$30,000 in legal costs to negotiate each new futures, cleared
derivatives, swap or other trading agreements.
55. Deutsche Bank represents that its Wealth Management--Private
Client Services and Wealth Management--Private Bank business lines
manage $178.1 million in ERISA assets, $643.9 million in IRA assets,
and $1.8 million of rabbi trust assets (Wealth Management--Private
Bank). Deutsche Bank asserts that causing plan clients to change
managers will lead the plans and IRAs to incur transaction costs,
estimated at 2.5 basis points overall.
Statutory Findings--Protective of the Rights of Participants of
Affected Plans and IRAs
56. The Applicant has proposed certain conditions it believes are
protective of plans and IRAs with respect to the transactions described
herein. The Department has determined to revise and supplement the
proposed conditions so that it can make its required finding that the
requested exemption is protective of the rights of participants and
beneficiaries of affected plans and IRAs.
57. Several of the conditions underscore the Department's
understanding, based on Deutsche Bank's representations, that the
affected DB QPAMs were not involved in the misconduct that is the
subject of the Convictions. The temporary exemption, if granted as
proposed, mandates that the DB QPAMs (including their officers,
directors, agents other than Deutsche Bank, and employees of such DB
QPAMs) did not know of, have reason to know of, or participate in the
criminal conduct of DSK and DB Group Services that is the subject of
the Convictions. For purposes of this requirement, ``participate in''
includes an individual's knowing or tacit approval of the misconduct
underlying the Convictions. Furthermore, the DB QPAMs (including their
officers, directors, employees, and agents other than Deutsche Bank)
cannot have received direct compensation, or knowingly received
indirect compensation, in connection with the criminal conduct that is
the subject of the Convictions.
58. The proposed temporary exemption defines the Convictions as:
(1) The judgment of conviction against DB Group Services, in Case 3:15-
cr-00062-RNC to be entered in the United States District Court for the
District of Connecticut to a single count of wire fraud, in violation
of 18 U.S.C. 1343 (the US Conviction); and (2) the judgment of
conviction against DSK entered on January 25, 2016, in Seoul Central
District Court, relating to charges filed against DSK under Articles
176, 443, and 448 of South Korea's Financial Investment Services and
Capital Markets Act for spot/futures-linked market price manipulation
(the Korean Conviction). The Department notes that the ``conduct'' of
any person or entity that is the ``subject of [a] Conviction''
encompasses any conduct of Deutsche Bank and/or their personnel, that
is described in the Plea Agreement (including the Factual Statement),
Court judgments (including the judgment of the Seoul Central District
Court), criminal complaint documents from the Financial Services
Commission in Korea, and other official regulatory or judicial factual
findings that are a part of this record.
59. The Department expects that DB QPAMs will rigorously ensure
that the individuals associated with the misconduct will not be
employed or knowingly engaged by such QPAMs. In this regard, the
proposed temporary exemption mandates that the DB QPAMs will not employ
or knowingly engage any of the individuals that knowingly participated
in the spot/futures-linked market manipulation or LIBOR manipulation
activities that led to the Convictions, respectively. For purposes of
this condition, ``participated in'' includes an individual's knowing or
tacit approval of the behavior that is the subject of the Convictions.
Further, a DB QPAM will not use its authority or influence to direct an
``investment fund'' (as defined in Section VI(b) of PTE 84-14) that is
subject to ERISA or the Code and managed by such DB QPAM to enter into
any transaction with DSK or DB Group Services, nor otherwise engage DSK
or DB Group Services to provide additional services to such investment
fund, for a direct or indirect fee borne by such investment fund,
regardless of whether such transaction or services may otherwise be
within the scope of relief provided by an administrative or statutory
exemption.
60. The DB QPAMs must comply with each condition of PTE 84-14, as
amended, with the sole exceptions of the violations of Section I(g) of
PTE 84-14 that are attributable to the Convictions. Further, any
failure of the DB QPAMs to satisfy Section I(g) of PTE 84-14 must
result solely from the US Conviction and the Korean Conviction.
61. No relief will be provided by this temporary exemption to the
extent that a DB QPAM exercised its authority over the assets of any
plan subject to Part 4 of Title I of ERISA (an ERISA-covered plan) or
section 4975 of the Code (an IRA) in a manner that it knew or should
have known would: Further the criminal conduct that is the subject of
the Convictions; or cause the QPAM, affiliates, or related parties to
directly or indirectly profit from the criminal conduct that is the
subject of the Convictions.
Further, no temporary relief will be provided to the extent DSK or
DB Group Services provides any discretionary asset management services
to ERISA-covered plans or IRAs or otherwise act as a fiduciary with
respect to ERISA-covered plan or IRA assets.
62. Policies. The Department believes that robust policies and
training are warranted where, as here, extensive criminal misconduct
has occurred within a corporate organization that includes one or more
QPAMs managing plan investments in reliance on PTE 84-14. Therefore,
this proposed temporary exemption requires each DB QPAM to immediately
develop, implement, maintain, and follow written policies and
procedures (the Policies) requiring and reasonably designed to ensure
that: The asset management decisions of the DB QPAM are conducted
independently of the corporate management and business activities of
Deutsche Bank, including DB Group Services and DSK; the DB QPAM fully
complies with ERISA's fiduciary duties and ERISA and the Code's
prohibited transaction provisions and does not knowingly participate in
any violations of these duties and provisions with respect to ERISA-
covered plans and IRAs; the DB QPAM does not knowingly participate in
any other person's violation of ERISA or the Code with respect to
ERISA-covered plans and IRAs; any filings or statements made by the DB
QPAM to regulators, including but not limited to, the Department of
Labor, the Department of the Treasury, the Department of Justice, and
the Pension Benefit Guaranty Corporation, on behalf of ERISA covered
plans or IRAs are
[[Page 83348]]
materially accurate and complete, to the best of such QPAM's knowledge
at that time; the DB QPAM does not make material misrepresentations or
omit material information in its communications with such regulators
with respect to ERISA-covered plans or IRAs, or make material
misrepresentations or omit material information in its communications
with ERISA-covered plan and IRA clients; and the DB QPAM complies with
the terms of this proposed temporary exemption. Any violation of, or
failure to comply with, the Policies must be corrected promptly upon
discovery, and any such violation or compliance failure not promptly
corrected must be reported, upon discovering the failure to promptly
correct, in writing, to appropriate corporate officers, the head of
Compliance and the General Counsel of the relevant DB QPAM (or their
functional equivalent), the independent auditor responsible for
reviewing compliance with the Policies, and an appropriate fiduciary of
any affected ERISA-covered plan or IRA that is independent of Deutsche
Bank.\27\ A DB QPAM will not be treated as having failed to develop,
implement, maintain, or follow the Policies, provided that it corrects
any instance of noncompliance promptly when discovered or when it
reasonably should have known of the noncompliance (whichever is
earlier), and provided that it reports such instance of noncompliance
as explained above.
---------------------------------------------------------------------------
\27\ With respect to any ERISA-covered plan or IRA sponsored by
an ``affiliate'' (as defined in Part VI(d) of PTE 84-14) of Deutsche
Bank or beneficially owned by an employee of Deutsche Bank or its
affiliates, such fiduciary does not need to be independent of
Deutsche Bank.
---------------------------------------------------------------------------
63. Training. The Department has also imposed a condition that
requires each DB QPAM to immediately develop and implement a program of
training (the Training) for all relevant DB QPAM asset/portfolio
management, trading, legal, compliance, and internal audit personnel.
The Training must be set forth in the Policies and at a minimum, cover
the Policies, ERISA and Code compliance (including applicable fiduciary
duties and the prohibited transaction provisions) and ethical conduct,
the consequences for not complying with the conditions of this proposed
temporary exemption (including the loss of the exemptive relief
provided herein), and prompt reporting of wrongdoing.
64. Independent Transparent Audit. The Department views a rigorous,
transparent audit that is conducted by an independent party as
essential to ensuring that the conditions for exemptive relief
described herein are followed by the DB QPAMs. Therefore, Section I(i)
of this proposed temporary exemption requires that each DB QPAM submits
to an audit conducted by an independent auditor, who has been prudently
selected and who has appropriate technical training and proficiency
with ERISA and the Code, to evaluate the adequacy of, and the DB QPAM's
compliance with, the Policies and Training described herein. The audit
requirement must be incorporated in the Policies.
This proposed temporary exemption requires that the audit described
herein must ``look back'' to cover the period of time beginning on the
effective date of the Extension, October 24, 2016, and ending on the
earlier the date that is twelve months following the U.S. Conviction
Date; or the effective date of a final agency action made by the
Department in connection with Exemption Application No. D-11908 (the
Audit Period). The audit must be completed no later than six (6) months
after the Audit Period. In order to harmonize the audit required herein
with the audit required by the Extension, the audit requirement
described in paragraph (i) of this temporary exemption expressly
supersedes paragraph (f) of the Extension. However, in determining the
DB QPAMs' compliance with the provisions of the Extension and the
temporary exemption for purposes of conducting the audit, the auditor
will rely on the conditions for exemptive relief as then applicable to
the respective portions of the Audit Period.
The audit condition requires that, to the extent necessary for the
auditor, in its sole opinion, to complete its audit and comply with the
conditions for relief described herein, and as permitted by law, each
DB QPAM and, if applicable, Deutsche Bank, will grant the auditor
unconditional access to its business, including, but not limited to:
Its computer systems; business records; transactional data; workplace
locations; training materials; and personnel.
The auditor's engagement must specifically require the auditor to
determine whether each DB QPAM has complied with the Policies and
Training conditions described herein, and must further require the
auditor to test each DB QPAM's operational compliance with the Policies
and Training. The auditor must issue a written report (the Audit
Report) to Deutsche Bank and the DB QPAM to which the audit applies
that describes the procedures performed by the auditor during the
course of its examination. The Audit Report must include the auditor's
specific determinations regarding: The adequacy of the DB QPAM's
Policies and Training; the DB QPAM's compliance with the Policies and
Training; the need, if any, to strengthen such Policies and Training;
and any instance of the respective DB QPAM's noncompliance with the
written Policies and Training.
Any determination by the auditor regarding the adequacy of the
Policies and Training and the auditor's recommendations (if any) with
respect to strengthening the Policies and Training of the respective DB
QPAM must be promptly addressed by such DB QPAM, and any action taken
by such DB QPAM to address such recommendations must be included in an
addendum to the Audit Report. Any determination by the auditor that the
respective DB QPAM has implemented, maintained, and followed sufficient
Policies and Training must not be based solely or in substantial part
on an absence of evidence indicating noncompliance. In this last
regard, any finding that the DB QPAM has complied with the requirements
under this subsection must be based on evidence that demonstrates the
DB QPAM has actually implemented, maintained, and followed the Policies
and Training required by this temporary exemption. Furthermore, the
auditor must notify the respective DB QPAM of any instance of
noncompliance identified by the auditor within five (5) business days
after such noncompliance is identified by the auditor, regardless of
whether the audit has been completed as of that date.
This proposed temporary exemption requires that certain senior
personnel of Deutsche Bank review the Audit Report, make
certifications, and take various corrective actions. In this regard,
the General Counsel, or one of the three most senior executive officers
of the DB QPAM to which the Audit Report applies, must certify in
writing, under penalty of perjury, that the officer has reviewed the
Audit Report and this exemption; addressed, corrected, or remedied any
inadequacy identified in the Audit Report; and determined that the
Policies and Training in effect at the time of signing are adequate to
ensure compliance with the conditions of this proposed temporary
exemption and with the applicable provisions of ERISA and the Code. The
Risk Committee of Deutsche Bank's Board of Directors is provided a copy
of each Audit Report; and a senior executive officer with a direct
reporting line to the highest ranking legal compliance officer of
Deutsche Bank must review the Audit Report for each DB QPAM and must
certify in writing, under penalty of
[[Page 83349]]
perjury, that such officer has reviewed each Audit Report.
In order to create a more transparent record in the event that the
proposed temporary relief is granted, each DB QPAM must provide its
certified Audit Report to the Department no later than 45 days
following its completion. The Audit Report will be part of the public
record regarding this temporary exemption. Furthermore, each DB QPAM
must make its Audit Report unconditionally available for examination by
any duly authorized employee or representative of the Department, other
relevant regulators, and any fiduciary of an ERISA-covered plan or IRA,
the assets of which are managed by such DB QPAM. Additionally, each DB
QPAM and the auditor must submit to the Department any engagement
agreement(s) entered into pursuant to the engagement of the auditor
under this temporary exemption; and any engagement agreement entered
into with any other entity retained in connection with such QPAM's
compliance with the Training or Policies conditions of this proposed
temporary exemption, no later than six (6) months after the effective
date of this temporary exemption (and one month after the execution of
any agreement thereafter). Finally, if the temporary exemption is
granted, the auditor must provide the Department, upon request, all of
the workpapers created and utilized in the course of the audit,
including, but not limited to: The audit plan; audit testing;
identification of any instance of noncompliance by the relevant DB
QPAM; and an explanation of any corrective or remedial action taken by
the applicable DB QPAM.
In order to enhance oversight of the compliance with the temporary
exemption, Deutsche Bank must notify the Department at least 30 days
prior to any substitution of an auditor, and Deutsche Bank must
demonstrate to the Department's satisfaction that any new auditor is
independent of Deutsche Bank, experienced in the matters that are the
subject of the temporary exemption, and capable of making the
determinations required of this temporary exemption.
65. Contractual Obligations. This proposed temporary exemption
requires DB QPAMs to enter into certain contractual obligations in
connection with the provision of services to their clients. It is the
Department's view that the condition in Section I(j) is essential to
the Department's ability to make its findings that the proposed
temporary exemption is protective of the rights of the participants and
beneficiaries of ERISA-covered plan and IRA clients. In this regard,
effective as of the effective date of this temporary exemption, with
respect to any arrangement, agreement, or contract between a DB QPAM
and an ERISA-covered plan or IRA for which a DB QPAM provides asset
management or other discretionary fiduciary services, each DB QPAM
agrees: To comply with ERISA and the Code, as applicable with respect
to such ERISA-covered plan or IRA; to refrain from engaging in
prohibited transactions that are not otherwise exempt (and to promptly
correct any inadvertent prohibited transactions); to comply with the
standards of prudence and loyalty set forth in section 404 of ERISA
with respect to each such ERISA-covered plan and IRA; and to indemnify
and hold harmless the ERISA-covered plan and IRA for any damages
resulting from a DB QPAM's violation of applicable laws, a DB QPAM's
breach of contract, or any claim brought in connection with the failure
of such DB QPAM to qualify for the exemptive relief provided by PTE 84-
14 as a result of a violation of Section I(g) of PTE 84-14 other than
the Convictions. Furthermore, DB QPAMs must agree not to require (or
otherwise cause) the ERISA-covered plan or IRA to waive, limit, or
qualify the liability of the DB QPAM for violating ERISA or the Code or
engaging in prohibited transactions; not to require the ERISA-covered
plan or IRA (or sponsor of such ERISA-covered plan or beneficial owner
of such IRA) to indemnify the DB QPAM for violating ERISA or engaging
in prohibited transactions, except for violations or prohibited
transactions caused by an error, misrepresentation, or misconduct of a
plan fiduciary or other party hired by the plan fiduciary who is
independent of Deutsche Bank; not to restrict the ability of such
ERISA-covered plan or IRA to terminate or withdraw from its arrangement
with the DB QPAM (including any investment in a separately managed
account or pooled fund subject to ERISA and managed by such QPAM), with
the exception of reasonable restrictions, appropriately disclosed in
advance, that are specifically designed to ensure equitable treatment
of all investors in a pooled fund in the event such withdrawal or
termination may have adverse consequences for all other investors as a
result of an actual lack of liquidity of the underlying assets,
provided that such restrictions are applied consistently and in like
manner to all such investors; not to impose any fees, penalties, or
charges for such termination or withdrawal with the exception of
reasonable fees, appropriately disclosed in advance, that are
specifically designed to prevent generally recognized abusive
investment practices or specifically designed to ensure equitable
treatment of all investors in a pooled fund in the event such
withdrawal or termination may have adverse consequences for all other
investors, provided that such fees are applied consistently and in like
manner to all such investors; and not to include exculpatory provisions
disclaiming or otherwise limiting liability of the DB QPAM for a
violation of such agreement's terms, except for liability caused by an
error, misrepresentation, or misconduct of a plan fiduciary or other
party hired by the plan fiduciary who is independent of Deutsche Bank.
66. Within four (4) months of the effective date of this proposed
temporary exemption, each DB QPAM will provide a notice of its
obligations under Section I(j) to each ERISA-covered plan and IRA
client for which the DB QPAM provides asset management or other
discretionary fiduciary services.
67. Each DB QPAM must maintain records necessary to demonstrate
that the conditions of this proposed temporary exemption have been met,
for six (6) years following the date of any transaction for which such
DB QPAM relies upon the relief in the proposed temporary exemption.
68. Certain of the conditions of the temporary exemption are
specifically directed at Deutsche Bank. In this regard, Deutsche Bank
must have disgorged all of its profits generated by the spot/futures-
linked market manipulation activities of DSK personnel that led to the
Conviction against DSK entered on January 25, 2016, in Seoul Central
District Court.
69. The proposed temporary exemption mandates that, during the
effective period of this temporary exemption, Deutsche Bank: Must (1)
immediately disclose to the Department any Deferred Prosecution
Agreement (a DPA) or Non-Prosecution Agreement (an NPA) that Deutsche
Bank or an affiliate enters into with the U.S Department of Justice, to
the extent such DPA or NPA involves conduct described in Section I(g)
of PTE 84-14 or section 411 of ERISA; and (2) immediately provide the
Department any information requested by the Department, as permitted by
law, regarding the agreement and/or the conduct and allegations that
led to the agreements. In this regard, any conduct that would have
constituted a violation of Section I(g) of PTE 84-14 or given rise to
the prohibition described under section 411 of ERISA if such conduct
had resulted in a conviction, but instead was the subject of a DPA or
NPA
[[Page 83350]]
between Deutsche Bank or any affiliate of Deutsche Bank and the U.S.
Department of Justice, must be disclosed to the Department.
Statutory Findings--Administratively Feasible
70. Deutsche Bank represents that the proposed temporary exemption
is administratively feasible because it does not require any monitoring
by the Department but relies on an independent auditor to determine
that the exemption conditions are being complied with. Furthermore, the
requested temporary exemption does not require the Department's
oversight because, as a condition of this proposed temporary exemption,
neither DB Group Services nor DSK will provide any fiduciary or QPAM
services to ERISA covered plans and IRAs.
71. Given the revised and new conditions described above, the
Department has tentatively determined that the temporary relief sought
by the Applicant satisfies the statutory requirements for an exemption
under section 408(a) of ERISA.
Notice to Interested Persons
All written comments and/or requests for a hearing must be received
by the Department within five days of the date of publication of this
proposed temporary exemption in the Federal Register. All comments will
be made available to the public. To the extent the Department publishes
a proposed exemption that contains more permanent relief for the
transactions described herein, the notice of proposed exemption will
set forth a notice and comment period that extends at least 45 days.
All comments will be made available to the public.
Warning: If you submit a comment, EBSA recommends that you include
your name and other contact information in the body of your comment,
but DO NOT submit information that you consider to be confidential, or
otherwise protected (such as Social Security number or an unlisted
phone number) or confidential business information that you do not want
publicly disclosed. All comments may be posted on the Internet and can
be retrieved by most Internet search engines.
FOR FURTHER INFORMATION CONTACT: Scott Ness of the Department,
telephone (202) 693-8561. (This is not a toll-free number.)
Citigroup, Inc. (Citigroup or the Applicant), Located in New York, New
York
[Application No. D-11859]
Proposed Temporary Exemption
The Department is considering granting a temporary exemption under
the authority of section 408(a) of the Act (or ERISA) and section
4975(c)(2) of the Code, and in accordance with the procedures set forth
in 29 CFR part 2570, subpart B (76 FR 66637, 66644, October 27,
2011).\28\
---------------------------------------------------------------------------
\28\ For purposes of this proposed temporary exemption,
references to section 406 of Title I of the Act, unless otherwise
specified, should be read to refer as well to the corresponding
provisions of section 4975 of the Code.
---------------------------------------------------------------------------
Section I: Covered Transactions
If the proposed temporary exemption is granted, the Citigroup
Affiliated QPAMs and the Citigroup Related QPAMs, as defined in
Sections II(a) and II(b), respectively, will not be precluded from
relying on the exemptive relief provided by Prohibited Transaction
Class Exemption 84-14 (PTE 84-14 or the QPAM Exemption),\29\
notwithstanding the judgment of conviction against Citicorp (the
Conviction, as defined in Section II(c)),\30\ for engaging in a
conspiracy to: (1) Fix the price of, or (2) eliminate competition in
the purchase or sale of the euro/U.S. dollar currency pair exchanged in
the Foreign Exchange (FX) Spot Market. This temporary exemption will be
effective for a period of up to twelve (12) months beginning on the
Conviction Date (as defined in Section II(d)), provided the following
conditions are satisfied:
---------------------------------------------------------------------------
\29\ 49 FR 9494 (March 13, 1984), as corrected at 50 FR 41430
(October 10, 1985), as amended at 70 FR 49305 (August 23, 2005), and
as amended at 75 FR 38837 (July 6, 2010).
\30\ Section I(g) of PTE 84-14 generally provides that
``[n]either the QPAM nor any affiliate thereof . . . nor any owner .
. . of a 5 percent or more interest in the QPAM is a person who
within the 10 years immediately preceding the transaction has been
either convicted or released from imprisonment, whichever is later,
as a result of'' certain felonies including violation of the Sherman
Antitrust Act, Title 15 United States Code, Section 1.
---------------------------------------------------------------------------
(a) Other than a single individual who worked for a non-fiduciary
business within Citigroup's Markets and Securities Services business,
and who had no responsibility for, and exercised no authority in
connection with, the management of plan assets, the Citigroup
Affiliated QPAMs and the Citigroup Related QPAMs (including their
officers, directors, agents other than Citicorp, and employees of such
Citigroup QPAMs) did not know of, have reason to know of, or
participate in the criminal conduct of Citicorp that is the subject of
the Conviction (for purposes of this paragraph (a), ``participate in''
includes the knowing or tacit approval of the misconduct underlying the
Conviction);
(b) Other than a single individual who worked for a non-fiduciary
business within Citigroup's Markets and Securities Services business,
and who had no responsibility for, and exercised no authority in
connection with, the management of plan assets, the Citigroup
Affiliated QPAMs and the Citigroup Related QPAMs (including their
officers, directors, agents other than Citicorp, and employees of such
Citigroup Affiliated QPAMs), did not receive direct compensation, or
knowingly receive indirect compensation in connection with the criminal
conduct that is the subject of the Conviction;
(c) The Citigroup Affiliated QPAMs will not employ or knowingly
engage any of the individuals that participated in the criminal conduct
that is the subject of the Conviction (for purposes of this paragraph
(c), ``participated in'' includes the knowing or tacit approval of the
misconduct underlying the Conviction);
(d) A Citigroup Affiliated QPAM will not use its authority or
influence to direct an ``investment fund'' (as defined in Section VI(b)
of PTE 84-14), that is subject to ERISA or the Code and managed by such
Citigroup Affiliated QPAM, to enter into any transaction with Citicorp
or the Markets and Securities Services business of Citigroup, or to
engage Citicorp or the Markets and Securities Services business of
Citigroup, to provide any service to such investment fund, for a direct
or indirect fee borne by such investment fund, regardless of whether
such transaction or service may otherwise be within the scope of relief
provided by an administrative or statutory exemption;
(e) Any failure of a Citigroup Affiliated QPAM or a Citigroup
Related QPAM to satisfy Section I(g) of PTE 84-14 arose solely from the
Conviction;
(f) A Citigroup Affiliated QPAM or a Citigroup Related QPAM did not
exercise authority over the assets of any plan subject to Part 4 of
Title I of ERISA (an ERISA-covered plan) or section 4975 of the Code
(an IRA) in a manner that it knew or should have known would: Further
the criminal conduct that is the subject of the Conviction; or cause
the Citigroup Affiliated QPAM or the Citigroup Related QPAM or its
affiliates or related parties to directly or indirectly profit from the
criminal
[[Page 83351]]
conduct that is the subject of the Conviction;
(g) Citicorp and the Markets and Securities Services business of
Citigroup will not provide discretionary asset management services to
ERISA-covered plans or IRAs, nor will otherwise act as a fiduciary with
respect to ERISA-covered plan and IRA assets;
(h)(1) Within four (4) months of the Conviction, each Citigroup
Affiliated QPAM must develop, implement, maintain, and follow written
policies and procedures (the Policies) requiring and reasonably
designed to ensure that:
(i) The asset management decisions of the Citigroup Affiliated QPAM
are conducted independently of the corporate management and business
activities of Citigroup, including the corporate management and
business activities of the Markets and Securities Services business of
Citigroup;
(ii) The Citigroup Affiliated QPAM fully complies with ERISA's
fiduciary duties, and with ERISA and the Code's prohibited transaction
provisions, and does not knowingly participate in any violations of
these duties and provisions with respect to ERISA-covered plans and
IRAs;
(iii) The Citigroup Affiliated QPAM does not knowingly participate
in any other person's violation of ERISA or the Code with respect to
ERISA-covered plans and IRAs;
(iv) Any filings or statements made by the Citigroup Affiliated
QPAM to regulators, including but not limited to, the Department, the
Department of the Treasury, the Department of Justice, and the Pension
Benefit Guaranty Corporation, on behalf of ERISA-covered plans or IRAs,
are materially accurate and complete, to the best of such QPAM's
knowledge at that time;
(v) The Citigroup Affiliated QPAM does not make material
misrepresentations or omit material information in its communications
with such regulators with respect to ERISA-covered plans or IRAs, or
make material misrepresentations or omit material information in its
communications with ERISA-covered plans and IRA clients;
(vi) The Citigroup Affiliated QPAM complies with the terms of this
temporary exemption; and
(vii) Any violation of, or failure to comply with an item in
subparagraphs (ii) through (vi), is corrected promptly upon discovery,
and any such violation or compliance failure not promptly corrected is
reported, upon discovering the failure to promptly correct, in writing,
to appropriate corporate officers, the head of compliance, and the
General Counsel (or their functional equivalent) of the relevant
Citigroup Affiliated QPAM, and an appropriate fiduciary of any affected
ERISA-covered plan or IRA, where such fiduciary is independent of
Citigroup; however, with respect to any ERISA-covered plan or IRA
sponsored by an ``affiliate'' (as defined in Section VI(d) of PTE 84-
14) of Citigroup or beneficially owned by an employee of Citigroup or
its affiliates, such fiduciary does not need to be independent of
Citigroup. A Citigroup Affiliated QPAM will not be treated as having
failed to develop, implement, maintain, or follow the Policies,
provided that it corrects any instance of noncompliance promptly when
discovered, or when it reasonably should have known of the
noncompliance (whichever is earlier), and provided that it adheres to
the reporting requirements set forth in this subparagraph (vii);
(2) Within four (4) months of the date of the Conviction, each
Citigroup Affiliated QPAM must develop and implement a program of
training (the Training), conducted at least annually, for all relevant
Citigroup Affiliated QPAM asset/portfolio management, trading, legal,
compliance, and internal audit personnel. The Training must be set
forth in the Policies and, at a minimum, cover the Policies, ERISA and
Code compliance (including applicable fiduciary duties and the
prohibited transaction provisions), ethical conduct, the consequences
for not complying with the conditions of this temporary exemption
(including any loss of exemptive relief provided herein), and prompt
reporting of wrongdoing;
(i)(1) Effective as of the effective date of this temporary
exemption, with respect to any arrangement, agreement, or contract
between a Citigroup Affiliated QPAM and an ERISA-covered plan or IRA
for which a Citigroup Affiliated QPAM provides asset management or
other discretionary fiduciary services, each Citigroup Affiliated QPAM
agrees:
(i) To comply with ERISA and the Code, as applicable, with respect
to such ERISA-covered plan or IRA; to refrain from engaging in
prohibited transactions that are not otherwise exempt (and to promptly
correct any inadvertent prohibited transactions); and to comply with
the standards of prudence and loyalty set forth in section 404 of
ERISA, as applicable, with respect to each such ERISA-covered plan and
IRA;
(ii) Not to require (or otherwise cause) the ERISA covered plan or
IRA to waive, limit, or qualify the liability of the Citigroup
Affiliated QPAM for violating ERISA or the Code or engaging in
prohibited transactions;
(iii) Not to require the ERISA-covered plan or IRA (or sponsor of
such ERISA-covered plan or beneficial owner of such IRA) to indemnify
the Citigroup Affiliated QPAM for violating ERISA or the Code, or
engaging in prohibited transactions, except for violations or
prohibited transactions caused by an error, misrepresentation, or
misconduct of a plan fiduciary or other party hired by the plan
fiduciary, which is independent of Citigroup, and its affiliates;
(iv) Not to restrict the ability of such ERISA-covered plan or IRA
to terminate or withdraw from its arrangement with the Citigroup
Affiliated QPAM (including any investment in a separately managed
account or pooled fund subject to ERISA and managed by such QPAM), with
the exception of reasonable restrictions, appropriately disclosed in
advance, that are specifically designed to ensure equitable treatment
of all investors in a pooled fund in the event such withdrawal or
termination may have adverse consequences for all other investors as a
result of the actual lack of liquidity of the underlying assets,
provided that such restrictions are applied consistently and in like
manner to all such investors;
(v) Not to impose any fee, penalty, or charge for such termination
or withdrawal, with the exception of reasonable fees, appropriately
disclosed in advance, that are specifically designed to prevent
generally recognized abusive investment practices, or specifically
designed to ensure equitable treatment of all investors in a pooled
fund in the event such withdrawal or termination may have adverse
consequences for all other investors, provided that each such fee is
applied consistently and in like manner to all such investors;
(vi) Not to include exculpatory provisions disclaiming or otherwise
limiting liability of the Citigroup Affiliated QPAM for a violation of
such agreement's terms, except for liability caused by an error,
misrepresentation, or misconduct of a plan fiduciary or other party
hired by the plan fiduciary which is independent of Citigroup, and its
affiliates; and
(vii) To indemnify and hold harmless the ERISA-covered plan or IRA
for any damages resulting from a violation of applicable laws, a breach
of contract, or any claim arising out of the failure of such Citigroup
Affiliated QPAM to qualify for the exemptive relief provided by PTE 84-
14 as a result of a violation
[[Page 83352]]
of Section I(g) of PTE 84-14 other than the Conviction;
(2) Within four (4) months of the date of the Conviction, each
Citigroup Affiliated QPAM will provide a notice of its obligations
under this Section I(i) to each ERISA-covered plan and IRA for which a
Citigroup Affiliated QPAM provides asset management or other
discretionary fiduciary services;
(j) The Citigroup Affiliated QPAMs must comply with each condition
of PTE 84-14, as amended, with the sole exception of the violation of
Section I(g) of PTE 84-14 that is attributable to the Conviction;
(k) Each Citigroup Affiliated QPAM will maintain records necessary
to demonstrate that the conditions of this temporary exemption have
been met, for six (6) years following the date of any transaction for
which such Citigroup Affiliated QPAM relies upon the relief in the
temporary exemption;
(l) During the effective period of this temporary exemption,
Citigroup: (1) Immediately discloses to the Department any Deferred
Prosecution Agreement (a DPA) or Non-Prosecution Agreement (an NPA)
with the U.S. Department of Justice to the extent such DPA or NPA
involves conduct described in Section I(g) of PTE 84-14 or section 411
of ERISA; and
(2) Immediately provides the Department any information requested
by the Department, as permitted by law, regarding the agreement and/or
the conduct and allegations that led to the agreement; and
(m) A Citigroup Affiliated QPAM or a Citigroup Related QPAM will
not fail to meet the terms of this temporary exemption solely because a
different Citigroup Affiliated QPAM or Citigroup Related QPAM fails to
satisfy a condition for relief under this temporary exemption,
described in Sections I(c), (d), (h), (i), (j), and (k).
Section II: Definitions
(a) The term ``Citigroup Affiliated QPAM'' means a ``qualified
professional asset manager'' (as defined in section VI(a) \31\ of PTE
84-14) that relies on the relief provided by PTE 84-14 and with respect
to which Citigroup is a current or future ``affiliate'' (as defined in
section VI(d)(1) of PTE 84-14). The term ``Citigroup Affiliated QPAM''
excludes the parent entity, Citicorp and Citigroup's Markets and
Securities Services business.
---------------------------------------------------------------------------
\31\ In general terms, a QPAM is an independent fiduciary that
is a bank, savings and loan association, insurance company, or
investment adviser that meets certain equity or net worth
requirements and other licensure requirements, and has acknowledged
in a written management agreement that it is a fiduciary with
respect to each plan that has retained the QPAM.
---------------------------------------------------------------------------
(b) The term ``Citigroup Related QPAM'' means any current or future
``qualified professional asset manager'' (as defined in section VI(a)
of PTE 84-14) that relies on the relief provided by PTE 84-14, and with
respect to which Citigroup owns a direct or indirect five percent or
more interest, but with respect to which Citigroup is not an
``affiliate'' (as defined in Section VI(d)(1) of PTE 84-14).
(c) The terms ``ERISA-covered plan'' and ``IRA'' mean,
respectively, a plan subject to Part 4 of Title I of ERISA and a plan
subject to section 4975 of the Code;
(d) The term ``Citigroup'' means Citigroup, Inc., the parent
entity, and does not include any subsidiaries or other affiliates;
(e) The term ``Conviction'' means the judgment of conviction
against Citigroup for violation of the Sherman Antitrust Act, 15 U.S.C.
1, which is scheduled to be entered in the District Court for the
District of Connecticut (the District Court)(Case Number 3:15-cr-78-
SRU), in connection with Citigroup, through one of its euro/U.S. dollar
(EUR/USD) traders, entering into and engaging in a combination and
conspiracy to fix, stabilize, maintain, increase or decrease the price
of, and rig bids and offers for, the EUR/USD currency pair exchanged in
the FX spot market by agreeing to eliminate competition in the purchase
and sale of the EUR/USD currency pair in the United States and
elsewhere. For all purposes under this temporary exemption, ``conduct''
of any person or entity that is the ``subject of [a] Conviction''
encompasses any conduct of Citigroup and/or their personnel, that is
described in the Plea Agreement, (including the Factual Statement), and
other official regulatory or judicial factual findings that are a part
of this record; and
(f) The term ``Conviction Date'' means the date that a judgment of
Conviction against Citicorp is entered by the District Court in
connection with the Conviction.
Effective Date: This proposed temporary exemption will be effective
for the period beginning on the Conviction Date until the earlier of:
(1) The date that is twelve (12) months following the Conviction Date;
or (2) the effective date of final agency action made by the Department
in connection with an application for long-term exemptive relief for
the covered transactions described herein.
Department's Comment: The Department is publishing this proposed
temporary exemption in order to protect ERISA-covered plans and IRAs
from certain costs and/or investment losses that may arise to the
extent entities with a corporate relationship to Citigroup lose their
ability to rely on PTE 84-14 as of the Conviction Date, as described
below. Elsewhere today in the Federal Register, the Department is also
proposing a five-year proposed exemption that would provide the same
relief that is described herein, but for a longer effective period. The
five-year proposed exemption is subject to enhanced conditions and a
longer comment period. Comments received in response to this proposed
temporary exemption will be considered in connection with the
Department's determination whether or not to grant such five-year
exemption.
The proposed exemption would provide relief from certain of the
restrictions set forth in sections 406 and 407 of ERISA. No relief from
a violation of any other law would be provided by this exemption,
including any criminal conviction described herein.
Furthermore, the Department cautions that the relief in this
proposed exemption would terminate immediately if, among other things,
an entity within the Citigroup corporate structure is convicted of a
crime described in Section I(g) of PTE 84-14 (other than the
Conviction) during the effective period of the exemption. While such an
entity could apply for a new exemption in that circumstance, the
Department would not be obligated to grant the exemption. The terms of
this proposed exemption have been specifically designed to permit plans
to terminate their relationships in an orderly and cost effective
fashion in the event of an additional conviction or a determination
that it is otherwise prudent for a plan to terminate its relationship
with an entity covered by the proposed exemption.
Summary of Facts and Representations \32\
---------------------------------------------------------------------------
\32\ The Summary of Facts and Representations is based on the
Applicant's representations, unless indicated otherwise.
---------------------------------------------------------------------------
Background
1. Citigroup is a global diversified financial services holding
company incorporated in Delaware and headquartered in New York, New
York. Citigroup and its affiliates provide consumers, corporations,
governments and institutions with a broad range of financial products
and services, including consumer banking and credit, corporate and
investment banking, securities brokerage, trade and securities
[[Page 83353]]
services and wealth management. Citigroup has approximately 241,000
employees and operations in over 160 countries and jurisdictions. As of
December 31, 2014, Citigroup had approximately $1.8 trillion of assets
under management and held $889 billion in deposits.
2. Citigroup currently operates, for management reporting purposes,
via two primary business segments which include: (a) Citigroup's Global
Consumer Banking businesses (GCB); and (b) Citigroup's Institutional
Clients Group (ICG).
GCB includes a global, full-service consumer franchise delivering a
wide array of retail banking, commercial banking, Citi-branded credit
cards and investment services through a network of local branches,
offices and electronic delivery systems. GCB had 3,280 branches in 35
countries around the world. For the year ended December 31, 2014, GCB
had $399 billion of average assets and $331 billion of average
deposits.
ICG provides a broad range of banking and financial products and
services to corporate, institutional, public sector and high-net-worth
clients in approximately 100 countries. ICG transacts with clients in
both cash instruments and derivatives, including fixed income, foreign
currency, equity and commodity products. ICG is divided into several
business lines including: (a) Citi Corporate and Investment Banking;
(b) Treasury and Trade Solutions; (c) Markets and Securities Services;
and (d) Citi Private Bank (CPB).
3. The Applicant represents that Citigroup has several affiliates
that provide investment management services.\33\ Citigroup provides
investment advisory services to clients world-wide through a number of
different programs offered by various businesses that are tailored to
meet the needs of its diverse clientele. Within the United States,
Citigroup offers its investment advisory programs primarily through the
following: (a) CPB and Citigroup's Global Consumers Group (GCG), acting
through Citigroup Global Markets Inc. (CGMI); and (b) Citibank, N.A.
(Citibank) and Citi Private Advisory, LLC (CPA) (collectively, the
Advisory Businesses). The Applicant represents that CPA and CGMI are
each investment advisers, registered under the Advisers Act. The
Applicant also represents that CPB, CGMI, Citibank, and CPA are QPAMs.
---------------------------------------------------------------------------
\33\ Section VI(d) of PTE 84-14 defines an ``affiliate'' of a
person, for purposes of Section I(g), as: (1) Any person directly or
indirectly through one or more intermediaries, controlling,
controlled by, or under common control with the person, (2) any
director of, relative of, or partner in, any such person, (3) any
corporation, partnership, trust or unincorporated enterprise of
which such person is an officer, director, or a 5 percent or more
partner or owner, and (4) any employee or officer of the person
who--(A) is a highly compensated employee (as defined in section
4975(e)(2)(H) of the Code) or officer (earning 10 percent or more of
the yearly wages of such person), or (B) has direct or indirect
authority, responsibility or control regarding the custody,
management or disposition of plan assets.
---------------------------------------------------------------------------
Within the United States, Citigroup's Advisory Businesses are
conducted within CPB and GCG. Together, CPB and GCG provide services to
over 44,000 customer advisory accounts with assets under management
totaling over $33 billion. Of these, there are over 20,000 accounts for
ERISA pension plans and individual retirement accounts (IRAs)
(collectively, Retirement Accounts), with assets under management of
approximately $3.8 billion.
Although each of the advisory programs offered by the Advisory
Businesses is unique, most utilize independent third-party managers on
a discretionary or nondiscretionary basis, as determined by the client.
Other programs such as Citi Investment Management (CIM), which operates
through both the CGMI and CPB business units, primarily provide advice
concerning the selection of individual securities for CPB clients.
CPB, GCG, CBNA, CGMI and their affiliates provide administrative,
management and/or technical services designed to implement and monitor
client's investment guidelines, and in certain nondiscretionary
programs, offer recommendations on investing and re-investing portfolio
assets for the client's consideration. CPB provides private banking
services, and offers its clients access to a broad array of products
and services available through bank and non-bank affiliates of
Citigroup. GCG services include U.S. and international retail banking,
U.S. consumer lending, international consumer finance, and commercial
finance. Citibank is a wholly-owned subsidiary of Citigroup and a
national banking association which provides fiduciary advisory
services.
4. CGMI is a wholly-owned subsidiary of Citigroup whose principal
activities include retail and institutional private client services
which include: (a) Advice with respect to financial markets; (b) the
execution of securities and commodities transactions as a broker or
dealer; (c) securities underwriting; (d) investment banking; (e)
investment management (including fiduciary and administrative
services); and (f) trading and holding securities and commodities for
its own account. CGMI holds a number of registrations, including
registration as an investment adviser, a securities broker-dealer, and
a futures commission merchant.
CPA is also a wholly-owned subsidiary of Citigroup and provides
advisory services to private investment funds that are organized to
invest primarily in other private investment funds advised by third-
party managers.
The Applicant represents that trading decisions and investment
strategy of current Citigroup Affiliated QPAMs for their clients is not
shared with Citigroup employees outside of the Advisory Business, nor
do employees of the Advisory Business consult with other Citigroup
affiliates prior to making investment decisions on behalf of clients.
5. On May 20, 2015, the Applicant filed an application for
exemptive relief from the prohibitions of sections 406(a) and 406(b) of
ERISA, and the sanctions resulting from the application of section 4975
of the Code, by reason of section 4975(c)(1) of the Code, in connection
with a conviction that would make the relief in PTE 84-14 unavailable
to any current or future Citigroup-related investment managers.
The U.S. Department of Justice (Department of Justice) has
conducted an investigation of certain conduct and practices of
Citigroup in the FX spot market. To resolve the Department of Justice's
investigation, Citicorp, a Delaware corporation that is a financial
services holding company and the direct parent company of Citibank,
entered into a plea agreement with the Department of Justice (the Plea
Agreement), to be approved by the U.S. District Court for the District
of Connecticut (the District Court), pursuant to which Citicorp has
pleaded guilty to one count of an antitrust violation of the Sherman
Antitrust Act, 15 U.S.C. 1 (15 U.S.C. 1). The Plea Agreement
acknowledges that Citigroup has provided ``substantial assistance'' to
the Department of Justice in carrying out its investigation.
As set forth in the Plea Agreement, from at least December 2007 and
continuing to at least January 2013 (the Relevant Period), Citicorp,
through one London-based euro/U.S. dollar (EUR/USD) trader employed by
Citibank, entered into and engaged in a conspiracy to fix, stabilize,
maintain, increase or decrease the price of, and rig bids and offers
for, the EUR/USD currency pair exchanged in the FX spot market by
agreeing to eliminate competition in the purchase and sale of the EUR/
USD currency pair in the United States and elsewhere. The criminal
conduct that is the subject of the Conviction included near daily
[[Page 83354]]
conversations, some of which were in code, in an exclusive electronic
chat room used by certain EUR/USD traders, including the EUR/USD trader
employed by Citibank. The criminal conduct that is the subject of the
Conviction forms the basis for the Department of Justice's antitrust
charge that Citicorp violated 15 U.S.C. 1.
Under the terms of the Plea Agreement, the Department of Justice
and Citicorp have agreed that the District Court should impose a
sentence requiring Citicorp to pay a criminal fine of $925 million. The
Plea Agreement also provides for a three-year term of probation, with
conditions to include, among other things, Citigroup's continued
implementation of a compliance program designed to prevent and detect
the criminal conduct that is the subject of the Conviction throughout
its operations, as well as Citigroup's further strengthening of its
compliance and internal controls as required by other regulatory or
enforcement agencies that have addressed the criminal conduct that is
the subject of the Conviction, including: (a) The U.S. Commodity
Futures Trading Commission (the CFTC), pursuant to its settlement with
Citibank on November 11, 2014, requiring remedial measures to
strengthen the control framework governing Citigroup's FX trading
business; (b) the Office of the Comptroller of the Currency, pursuant
to its settlement with Citibank on November 11, 2014, requiring
remedial measures to improve the control framework governing
Citigroup's wholesale trading and benchmark activities; (c) the U.K.
Financial Conduct Authority (FCA), pursuant to its settlement with
Citibank on November 11, 2014; and (d) the U.S. Board of Governors of
the Federal Reserve System (FRB), pursuant to its settlement with
Citigroup entered into concurrently with the Plea Agreement with
Department of Justice, requiring remedial measures to improve
Citigroup's controls for FX trading and activities involving
commodities and interest rate products.
6. The Applicant states that in January 2016, Nigeria's Federal
Director of Public Prosecutions filed charges against a Nigerian
subsidiary of Citibank and fifteen individuals (some of whom are
current or former employees of that subsidiary) relating to specific
credit facilities provided to a certain customer in 2000 to finance the
import of goods. The Applicant represents that these charges are the
latest of a series of charges that were filed and then withdrawn
between 2007 and 2011. The Applicant also represents that to its best
knowledge, it does not have a reasonable basis to believe that the
discretionary asset management activities of any Citigroup QPAMs are
subject to these charges. Further, the Applicant represents that it
does not have a reasonable basis to believe that there are any pending
criminal investigations involving Citigroup or any of its affiliates
that would cause a reasonable plan or IRA customer not to hire or
retain the institution as a QPAM.
7. Notwithstanding the aforementioned charges, once the Conviction
is entered, the Citigroup Affiliated QPAMs and the Citigroup Related
QPAMs, as well as their client plans that are subject to Part 4 of
Title I of ERISA (ERISA-covered plans) or section 4975 of the Code
(IRAs), will no longer be able to rely on PTE 84-14, pursuant to the
anti-criminal rule set forth in section I(g) of the class exemption,
absent an individual exemption. The Applicant is seeking an individual
exemption that would permit the Citigroup Affiliated QPAMs and the
Citigroup Related QPAMs, and their ERISA-covered plan and IRA clients
to continue to utilize the relief in PTE 84-14, notwithstanding the
anticipated Conviction, provided that such QPAMs satisfy the additional
conditions imposed by the Department in the proposed temporary
exemption herein.
8. The Applicant represents that the criminal conduct that is the
subject of the Conviction was neither widespread nor pervasive. The
Applicant states that such criminal conduct consisted of isolated acts
perpetrated by a single EUR/USD trader employed in Citigroup's Markets
and Securities Services business in the United Kingdom who was removed
from the activities of the Citigroup Affiliated QPAMs, both
geographically and organizationally. The Applicant represents that this
London-based EUR/USD trader was not an officer or director of
Citigroup, and did not have any involvement in, or influence over,
Citigroup or any of the Citigroup Affiliated QPAMs. The Applicant
states that this London-based EUR/USD trader had minimal management
responsibilities, which related exclusively to Citigroup's G10 Spot FX
trading business, outside of the United States. As represented by the
Applicant, once senior management became aware of the criminal conduct
that is the subject of the Conviction, Citibank took action to
terminate the employee.
9. The Applicant represents that no current or former employee of
Citigroup or of any Citigroup Affiliated QPAM who previously has been
or who subsequently may be identified by Citigroup, or any U.S. or non-
U.S. regulatory or enforcement agencies, as having been responsible for
the criminal conduct that is the subject of the Conviction will have
any involvement in providing asset management services to plans and
IRAs or will be an officer, director, or employee of the Applicant or
of any Citigroup Affiliated QPAM.
Citigroup's Business Separation/Compliance/Training
10. The Applicant represents that Citigroup's Advisory Businesses
are operated independently from Citigroup's Markets and Securities
Services, the segment of Citigroup in which foreign exchange trading is
conducted.\34\ Although the Advisory Business falls under the umbrellas
of ICG and GCG, it operates separately in all material respects from
the sales and trading businesses that comprise that business segment.
The Advisory Business maintains separate: (a) Management and reporting
lines; (b) compliance programs; (c) compensation arrangements; (d)
profit and loss reporting (with different comptrollers), (e) human
resources and training programs, and (f) legal coverage. The Applicant
represents that the Advisory Businesses maintain a separate, dedicated
compliance function, and have protocols to preserve the separation
between employees in the Advisory Business and those in Markets and
Securities Services.
---------------------------------------------------------------------------
\34\ The Applicant represents that each of Citigroup's primary
business units operates a large number of separate and independent
businesses. These lines of business generally have: (a) A group of
employees working solely on matters specific to its line of
business, (b) separate management and reporting lines; (c) tailored
compliance regimens; (d) separate compensation arrangements; (e)
separate profit and loss reporting; (vi) separate human resources
personnel and training, (f) dedicated risk and compliance officers
and (g) dedicated legal coverage.
---------------------------------------------------------------------------
11. The Applicant represents that Citigroup's independent control
functions, including Compliance, Finance, Legal and Risk, set standards
according to which Citigroup and its businesses are expected to manage
and oversee risks, including compliance with applicable laws,
regulatory requirements, policies and standards of ethical conduct.
Among other things, the independent control functions provide advice
and training to Citigroup's businesses and establish tools,
methodologies, processes and oversight of controls used by the
businesses to foster a culture of compliance and control and to satisfy
those standards.
12. The Applicant represents that compliance at Citigroup is an
[[Page 83355]]
independent control function within Franchise Risk and Strategy that is
designed to protect Citigroup not only by managing adherence to
applicable laws, regulations and other standards of conduct, but also
by promoting business behavior and activity that is consistent with
global standards for responsible finance. The Applicant states that
Citigroup has implemented company-wide initiatives designed to further
embed ethics in Citigroup's culture. This includes training for more
than 40,000 senior employees that fosters ethical decision-making and
underscores the importance of escalating issues, a video series
featuring senior leaders discussing ethical decisions, regular
communications on ethics and culture, and the development of enhanced
tools to support ethical decision-making.
Statutory Findings--In the Interest of Affected Plans and IRAs
13. The Applicant represents that, if the exemption is denied, the
Citigroup Affiliated QPAMs may be unable to effectively manage assets
subject to ERISA or the prohibited transaction provisions of the Code
where PTE 84-14 is needed to avoid engaging in a prohibited
transaction. The Applicant further represents that plans and
participants would be harmed because they would be unnecessarily
deprived of the current and future opportunity to utilize the
Applicant's experience in and expertise with respect to the financial
markets and investing. The Applicant anticipates that, if the exemption
is denied, some of Citigroup's 20,000 existing Retirement Account
clients may feel forced to terminate their advisory relationship with
Citigroup, incurring expenses related to: (a) Consultant fees and other
due diligence expenses for identifying new managers; (b) transaction
costs associated with a change in investment manager, including the
sale and purchase of portfolio investments to accommodate the
investment policies and strategy of the new manager, and the cost of
entering into new custodial arrangements; and (c) lost investment
opportunities in connection with the change.\35\
---------------------------------------------------------------------------
\35\ The Department notes that, if this temporary exemption is
granted, compliance with the condition in Section I(j) of the
exemption would require the Citigroup Affiliated QPAMs to hold their
plan customers harmless for any losses attributable to, inter alia,
any prohibited transactions or violations of the duty of prudence
and loyalty.
---------------------------------------------------------------------------
Statutory Findings--Protective of the Rights of Participants of
Affected Plans and IRAs
14. The Applicant has proposed certain conditions it believes are
protective of participants and beneficiaries of ERISA-covered plans and
IRAs with respect to the transactions described herein. The Department
has determined to revise and supplement the proposed conditions so that
it can make its required finding that the requested exemption is
protective of the rights of participants and beneficiaries of affected
plans and IRAs. In this regard, the Department has tentatively
determined that the following conditions adequately protect the rights
of participants and beneficiaries of affected plans and IRAs with
respect to the transactions that would be covered by this temporary
exemption.
Relief under this proposed exemption is only available to the
extent: (a) Other than with respect to a single individual who worked
for a non-fiduciary business within Citigroup's Markets and Securities
Services business and who had no responsibility for, and exercised no
authority in connection with, the management of plan assets, Citigroup
Affiliated QPAMs, including their officers, directors, agents other
than Citicorp, and employees of such Citigroup Affiliated QPAMs, did
not know of, have reason to know of, or participate in the criminal
conduct of Citicorp that is the subject of the Conviction (For purposes
of the foregoing condition, the term ``participate in'' includes the
knowing or tacit approval of the misconduct underlying the
Conviction.); (b) any failure of those QPAMs to satisfy Section I(g) of
PTE 84-14 arose solely from the Conviction; and (c) other than a single
individual who worked for a non-fiduciary business within Citigroup's
Markets and Securities Services business, and who had no responsibility
for, and exercised no authority in connection with, the management of
plan assets, the Citigroup Affiliated QPAMs and the Citigroup Related
QPAMs (including their officers, directors, agents other than Citicorp,
and employees of such Citigroup QPAMs) did not receive direct
compensation, or knowingly receive indirect compensation, in connection
with the criminal conduct that is the subject of the Conviction.
15. The Department expects the Citigroup Affiliated QPAMs to
rigorously ensure that the individual associated with the criminal
conduct of Citicorp will not be employed or knowingly engaged by such
QPAMs. In this regard, the temporary exemption, if granted as proposed,
mandates that the Citigroup Affiliated QPAMs will not employ or
knowingly engage any of the individuals that participated in the
criminal conduct that is the subject of the Conviction. For purposes of
this condition, the term ``participated in'' includes the knowing or
tacit approval of the misconduct underlying the Conviction.
16. Further, the Citigroup Affiliated QPAM will not use its
authority or influence to direct an ``investment fund,'' (as defined in
Section VI(b) of PTE 84-14), that is subject to ERISA or the Code and
managed by such Citigroup Affiliated QPAM to enter into any transaction
with Citicorp or the Markets and Securities business of Citigroup, or
to engage Citigroup or the Markets and Securities business of Citigroup
to provide any service to such investment fund, for a direct or
indirect fee borne by such investment fund, regardless of whether such
transaction or service may otherwise be within the scope of relief
provided by an administrative or statutory exemption.
17. The Citigroup Affiliated QPAMs and the Citigroup Related QPAMs
must comply with each condition of PTE 84-14, as amended, with the sole
exception of the violation of Section I(g) of PTE 84-14 that is
attributable to the Conviction. Further, any failure of the Citigroup
Affiliated QPAMs or the Citigroup Related QPAMs to satisfy Section I(g)
of PTE 84-14 arose solely from the Conviction.
No relief will be provided by the temporary exemption to the extent
that a Citigroup Affiliated QPAM or a Citigroup Related QPAM exercised
authority over the assets of an ERISA-covered plan or IRA in a manner
that it knew or should have known would: Further the criminal conduct
that is the subject of the Conviction; or cause the Citigroup
Affiliated QPAM or the Citigroup Related QPAM, or its affiliates or
related parties to directly or indirectly profit from the criminal
conduct that is the subject of the Conviction. Further, no relief will
be provided to the extent Citicorp or the Markets and Securities
business of Citigroup provides any discretionary asset management
services to ERISA-covered plans or IRAs, or otherwise acts as a
fiduciary with respect to ERISA-covered plan or IRA assets.
18. The Department believes that robust policies and training are
warranted where, as here, the criminal misconduct has occurred within a
corporate organization that is affiliated with one or more QPAMs
managing
[[Page 83356]]
plan assets in reliance on PTE 84-14. Therefore, this proposed
temporary exemption requires that within four (4) months of the date of
the Conviction, each Citigroup Affiliated QPAM must develop, implement,
maintain, and follow written policies and procedures (the Policies)
requiring and reasonably designed to ensure that: The asset management
decisions of the Citigroup Affiliated QPAM are conducted independently
of the corporate management and business activities of Citigroup,
including the Markets and Securities business of Citigroup; the
Citigroup Affiliated QPAM fully complies with ERISA's fiduciary duties,
and with ERISA and the Code's prohibited transaction provisions, and
does not knowingly participate in any violation of these duties and
provisions with respect to ERISA-covered plans and IRAs; the Citigroup
Affiliated QPAM does not knowingly participate in any other person's
violation of ERISA or the Code with respect to ERISA-covered plans and
IRAs; any filings or statements made by the Citigroup Affiliated QPAM
to regulators, including, but not limited to, the Department, the
Department of the Treasury, the Department of Justice, and the Pension
Benefit Guaranty Corporation, on behalf of ERISA-covered plans or IRAs,
are materially accurate and complete, to the best of such QPAM's
knowledge at that time; the Citigroup Affiliated QPAM does not make
material misrepresentations or omit material information in its
communications with such regulators with respect to ERISA-covered plans
or IRAs, or make material misrepresentations or omit material
information in its communications with ERISA-covered plan and IRA
clients; and the Citigroup Affiliated QPAM complies with the terms of
this temporary exemption. Any violation of, or failure to comply with
these items is corrected promptly upon discovery, and any such
violation or compliance failure not promptly corrected is reported,
upon discovering the failure to promptly correct, in writing, to
appropriate corporate officers, the head of compliance, and the General
Counsel (or their functional equivalent) of the relevant Citigroup
Affiliated QPAM, and an appropriate fiduciary of any affected ERISA-
covered plan or IRA, which fiduciary is independent of Citigroup.
19. The Department has also imposed a condition that requires each
Citigroup Affiliated QPAM within four (4) months of the date of the
Conviction, to develop and implement a program of training (the
Training), conducted at least annually, for all relevant Citigroup
Affiliated QPAM asset/portfolio management, trading, legal, compliance,
and internal audit personnel. The Training must be set forth in the
Policies and, at a minimum, cover the Policies, ERISA and Code
compliance (including applicable fiduciary duties and the prohibited
transaction provisions), ethical conduct, the consequences for not
complying with the conditions of this temporary exemption, (including
any loss of exemptive relief provided herein), and prompt reporting of
wrongdoing.
20. This temporary exemption requires the Citigroup Affiliated
QPAMs to enter into certain contractual obligations in connection with
the provision of services to their clients. It is the Department's view
that the condition for exemptive relief requiring these contractual
obligations is essential to the Department's ability to make its
findings that the proposed temporary exemption is protective of the
rights of the participants and beneficiaries of ERISA-covered and IRA
plan clients of Citigroup Affiliated QPAMs under section 408(a) of
ERISA. In this regard, Section I(i) of the proposed temporary exemption
provides that, as of the effective date of this temporary exemption,
with respect to any arrangement, agreement, or contract between a
Citigroup Affiliated QPAM and an ERISA-covered plan or IRA for which a
Citigroup Affiliated QPAM provides asset management or other
discretionary fiduciary services, each Citigroup Affiliated QPAM must
agree: (a) To comply with ERISA and the Code, as applicable, with
respect to such ERISA-covered plan or IRA, and refrain from engaging in
prohibited transactions that are not otherwise exempt (and to promptly
correct any inadvertent prohibited transactions), and to comply with
the standards of prudence and loyalty set forth in section 404 of
ERISA, as applicable, with respect to each such ERISA-covered plan and
IRA; (b) to indemnify and hold harmless the ERISA-covered plan or IRA
for any damages resulting from a violation of applicable laws, a breach
of contract, or any claim arising out of the failure of such Citigroup
Affiliated QPAM to qualify for the exemptive relief provided by PTE 84-
14 as a result of a violation of Section I(g) of PTE 84-14 other than
the Conviction; (c) not to require (or otherwise cause) the ERISA-
covered plan or IRA to waive, limit, or qualify the liability of the
Citigroup Affiliated QPAM for violating ERISA or the Code or engaging
in prohibited transactions; (d) not to require the ERISA-covered plan
or IRA (or sponsor of such ERISA-covered plan or beneficial owner of
such IRA) to indemnify the Citigroup Affiliated QPAM for violating
ERISA or the Code, or engaging in prohibited transactions, except for a
violation or a prohibited transaction caused by an error,
misrepresentation, or misconduct of a plan fiduciary or other party
hired by the plan fiduciary who is independent of Citigroup, and its
affiliates; (e) not to restrict the ability of such ERISA-covered plan
or IRA to terminate or withdraw from its arrangement with the Citigroup
Affiliated QPAM (including any investment in a separately-managed
account or pooled fund subject to ERISA and managed by such QPAM), with
the exception of reasonable restrictions, appropriately disclosed in
advance, that are specifically designed to ensure equitable treatment
of all investors in a pooled fund in the event such withdrawal or
termination may have adverse consequences for all other investors as a
result of an actual lack of liquidity of the underlying assets,
provided that such restrictions are applied consistently and in like
manner to all such investors; and (f) not to impose any fee, penalty,
or charge for such termination or withdrawal with the exception of
reasonable fees, appropriately disclosed in advance, that are
specifically designed to prevent generally recognized abusive
investment practices or specifically designed to ensure equitable
treatment of all investors in a pooled fund in the event such
withdrawal or termination may have adverse consequences for all other
investors, provided that each such fee is applied consistently and in
like manner to all such investors. Furthermore, any contract, agreement
or arrangement between a Citigroup Affiliated QPAM and its ERISA-
covered plan or IRA client must not contain exculpatory provisions
disclaiming or otherwise limiting liability of the Citigroup Affiliated
QPAM for a violation of such agreement's terms, except for liability
caused by an error, misrepresentation, or misconduct of a plan
fiduciary or other party hired by the plan fiduciary which is
independent of Citigroup, and its affiliates.
21. Within four (4) months of the date of the Conviction, each
Citigroup Affiliated QPAM will provide a notice of its obligations
under Section I(i) to each ERISA-covered plan and IRA for which the
Citigroup Affiliated QPAM provides asset management or other
discretionary fiduciary services. In addition, each Citigroup
Affiliated QPAM must maintain records necessary
[[Page 83357]]
to demonstrate that the conditions of this temporary exemption have
been met for six (6) years following the date of any transaction for
which such Citigroup Affiliated QPAM relies upon the relief in the
temporary exemption.
22. Furthermore, the proposed temporary exemption mandates that,
during the effective period of this temporary exemption, Citigroup must
immediately disclose to the Department any Deferred Prosecution
Agreement (a DPA) or a Non-Prosecution Agreement (an NPA) that
Citigroup or an affiliate enters into with the Department of Justice,
to the extent such DPA or NPA involves conduct described in Section
I(g) of PTE 84-14 or section 411 of ERISA. In addition, Citigroup or an
affiliate must immediately provide the Department any information
requested by the Department, as permitted by law, regarding the
agreement and/or conduct and allegations that led to the agreement.
23. The proposed exemption would provide relief from certain of the
restrictions set forth in Section 406 and 407 of ERISA. Such a granted
exemption would not provide relief from any other violation of law.
Pursuant to the terms of this proposed exemption, any criminal
conviction not expressly described herein, but otherwise described in
Section I(g) of PTE 84-14 and attributable to the Applicant for
purposes of PTE 84-14, would result in the Applicant's loss of this
exemption.
Statutory Findings--Administratively Feasible
24. The Applicant represents that the proposed temporary exemption
is administratively feasible because it does not require any monitoring
by the Department. In addition, the limited effective duration of the
temporary exemption provides the Department with the opportunity to
determine whether long-term exemptive relief is warranted, without
causing sudden and potentially costly harm to ERISA-covered plans and
IRAs.
Summary
25. Given the revised and new conditions described above, the
Department has tentatively determined that the relief sought by the
Applicant satisfies the statutory requirements for a temporary
exemption under section 408(a) of ERISA.
Notice to Interested Persons
Written comments and requests for a public hearing on the proposed
temporary exemption should be submitted to the Department within five
(5) days from the date of publication of this Federal Register notice.
Given the short comment period, the Department will consider comments
received after such date, in connection with its consideration of more
permanent relief.
Warning: Do not include any personally identifiable information
(such as name, address, or other contact information) or confidential
business information that you do not want publicly disclosed. All
comments may be posted on the Internet and can be retrieved by most
Internet search engines.
FOR FURTHER INFORMATION CONTACT: Mr. Joseph Brennan of the Department
at (202) 693-8456. (This is not a toll-free number.)
JPMorgan Chase & Co. (JPMC or the Applicant), Located in New York, New
York
[Application No. D-11861]
Proposed Temporary Exemption
The Department is considering granting a temporary exemption under
the authority of section 408(a) of the Act (or ERISA) and section
4975(c)(2) of the Code, and in accordance with the procedures set forth
in 29 CFR part 2570, subpart B (76 FR 66637, 66644, October 27,
2011).\36\
---------------------------------------------------------------------------
\36\ For purposes of this proposed temporary exemption,
references to section 406 of Title I of the Act, unless otherwise
specified, should be read to refer as well to the corresponding
provisions of section 4975 of the Code.
---------------------------------------------------------------------------
Section I: Covered Transactions
If the proposed temporary exemption is granted, the JPMC Affiliated
QPAMs and the JPMC Related QPAMs, as defined in Sections II(a) and
II(b), respectively, will not be precluded from relying on the
exemptive relief provided by Prohibited Transaction Class Exemption 84-
14 (PTE 84-14 or the QPAM Exemption),\37\ notwithstanding the judgment
of conviction against JPMC (the Conviction), as defined in Section
II(c)),\38\ for engaging in a conspiracy to: (1) Fix the price of, or
(2) eliminate competition in the purchase or sale of the euro/U.S.
dollar currency pair exchanged in the Foreign Exchange (FX) Spot
Market. This temporary exemption will be effective for a period of up
to twelve (12) months beginning on the Conviction Date (as defined in
Section II(d)), provided the following conditions are satisfied:
---------------------------------------------------------------------------
\37\ 49 FR 9494 (March 13, 1984), as corrected at 50 FR 41430
(October 10, 1985), as amended at 70 FR 49305 (August 23, 2005), and
as amended at 75 FR 38837 (July 6, 2010).
\38\ Section I(g) of PTE 84-14 generally provides that
``[n]either the QPAM nor any affiliate thereof . . . nor any owner .
. . of a 5 percent or more interest in the QPAM is a person who
within the 10 years immediately preceding the transaction has been
either convicted or released from imprisonment, whichever is later,
as a result of'' certain felonies including violation of the Sherman
Antitrust Act, Title 15 United States Code, Section 1.
---------------------------------------------------------------------------
(a) Other than a single individual who worked for a non-fiduciary
business within JPMorgan Chase Bank and who had no responsibility for,
and exercised no authority in connection with, the management of plan
assets, the JPMC Affiliated QPAMs and the JPMC Related QPAMs (including
their officers, directors, agents other than JPMC, and employees of
such JPMC QPAMs) did not know of, have reason to know of, or
participate in the criminal conduct of JPMC that is the subject of the
Conviction (for purposes of this paragraph (a), ``participate in''
includes the knowing or tacit approval of the misconduct underlying the
Conviction);
(b) Other than a single individual who worked for a non-fiduciary
business within JPMorgan Chase Bank and who had no responsibility for,
and exercised no authority in connection with, the management of plan
assets, the JPMC Affiliated QPAMs and the JPMC Related QPAMs (including
their officers, directors, agents other than JPMC, and employees of
such JPMC QPAMs) did not receive direct compensation, or knowingly
receive indirect compensation in connection with the criminal conduct
that is the subject of the Conviction;
(c) The JPMC Affiliated QPAMs will not employ or knowingly engage
any of the individuals that participated in the criminal conduct that
is the subject of the Conviction (for purposes of this paragraph (c),
``participated in'' includes the knowing or tacit approval of the
misconduct underlying the Conviction);
(d) A JPMC Affiliated QPAM will not use its authority or influence
to direct an ``investment fund'' (as defined in Section VI(b) of PTE
84-14), that is subject to ERISA or the Code and managed by such JPMC
Affiliated QPAM to enter into any transaction with JPMC or the
Investment Banking Division of JPMorgan Chase Bank, or engage JPMC or
the Investment Banking Division of JPMorgan Chase Bank to provide any
service to such investment fund, for a direct or indirect fee borne by
such investment fund, regardless of whether such transaction or service
may otherwise be within the scope of relief provided by an
administrative or statutory exemption;
(e) Any failure of a JPMC Affiliated QPAM or a JPMC Related QPAM to
satisfy Section I(g) of PTE 84-14 arose solely from the Conviction;
[[Page 83358]]
(f) A JPMC Affiliated QPAM or a JPMC Related QPAM did not exercise
authority over plan assets in a manner that it knew or should have
known would: Further the criminal conduct that is the subject of the
Conviction; or cause the JPMC QPAM or its affiliates or related parties
to directly or indirectly profit from the criminal conduct that is the
subject of the Conviction;
(g) JPMC and the Investment Banking Division of JPMorgan Chase Bank
will not provide discretionary asset management services to ERISA-
covered plans or IRAs, and will not otherwise act as a fiduciary with
respect to ERISA-covered plan and IRA assets;
(h)(1) Within four (4) months of the Conviction, each JPMC
Affiliated QPAM must develop, implement, maintain, and follow written
policies and procedures (the Policies) requiring and reasonably
designed to ensure that:
(i) The asset management decisions of the JPMC Affiliated QPAM are
conducted independently of the corporate management and business
activities of JPMC, including the Investment Banking Division of
JPMorgan Chase Bank;
(ii) The JPMC Affiliated QPAM fully complies with ERISA's fiduciary
duties, and with ERISA and the Code's prohibited transaction
provisions, and does not knowingly participate in any violations of
these duties and provisions with respect to ERISA-covered plans and
IRAs;
(iii) The JPMC Affiliated QPAM does not knowingly participate in
any other person's violation of ERISA or the Code with respect to
ERISA-covered plans and IRAs;
(iv) Any filings or statements made by the JPMC Affiliated QPAM to
regulators, including but not limited to, the Department, the
Department of the Treasury, the Department of Justice, and the Pension
Benefit Guaranty Corporation, on behalf of ERISA-covered plans or IRAs,
are materially accurate and complete, to the best of such QPAM's
knowledge at that time;
(v) The JPMC Affiliated QPAM does not make material
misrepresentations or omit material information in its communications
with such regulators with respect to ERISA-covered plans or IRAs, or
make material misrepresentations or omit material information in its
communications with ERISA-covered plans and IRA clients;
(vi) The JPMC Affiliated QPAM complies with the terms of this
temporary exemption; and
(vii) Any violation of, or failure to comply with an item in
subparagraphs (ii) through (vi), is corrected promptly upon discovery,
and any such violation or compliance failure not promptly corrected is
reported, upon discovering the failure to promptly correct, in writing,
to appropriate corporate officers, the head of compliance, and the
General Counsel (or their functional equivalent) of the relevant JPMC
Affiliated QPAM, and an appropriate fiduciary of any affected ERISA-
covered plan or IRA, where such fiduciary is independent of JPMC;
however, with respect to any ERISA-covered plan or IRA sponsored by an
``affiliate'' (as defined in Section VI(d) of PTE 84-14) of JPMC or
beneficially owned by an employee of JPMC or its affiliates, such
fiduciary does not need to be independent of JPMC. A JPMC Affiliated
QPAM will not be treated as having failed to develop, implement,
maintain, or follow the Policies, provided that it corrects any
instance of noncompliance promptly when discovered, or when it
reasonably should have known of the noncompliance (whichever is
earlier), and provided that it adheres to the reporting requirements
set forth in this subparagraph (vii);
(2) Within four (4) months of the date of the Conviction, each JPMC
Affiliated QPAM must develop and implement a program of training (the
Training), conducted at least annually, for all relevant JPMC
Affiliated QPAM asset/portfolio management, trading, legal, compliance,
and internal audit personnel. The Training must be set forth in the
Policies and, at a minimum, cover the Policies, ERISA and Code
compliance (including applicable fiduciary duties and the prohibited
transaction provisions), ethical conduct, the consequences for not
complying with the conditions of this temporary exemption (including
any loss of exemptive relief provided herein), and prompt reporting of
wrongdoing;
(i)(1) Effective as of the effective date of this temporary
exemption, with respect to any arrangement, agreement, or contract
between a JPMC Affiliated QPAM and an ERISA-covered plan or IRA for
which a JPMC Affiliated QPAM provides asset management or other
discretionary fiduciary services, each JPMC Affiliated QPAM agrees:
(i) To comply with ERISA and the Code, as applicable, with respect
to such ERISA-covered plan or IRA; to refrain from engaging in
prohibited transactions that are not otherwise exempt (and to promptly
correct any inadvertent prohibited transactions); and to comply with
the standards of prudence and loyalty set forth in section 404 of
ERISA, as applicable, with respect to each such ERISA-covered plan and
IRA;
(ii) Not to require (or otherwise cause) the ERISA covered plan or
IRA to waive, limit, or qualify the liability of the JPMC Affiliated
QPAM for violating ERISA or the Code or engaging in prohibited
transactions;
(iii) Not to require the ERISA-covered plan or IRA (or sponsor of
such ERISA-covered plan or beneficial owner of such IRA) to indemnify
the JPMC Affiliated QPAM for violating ERISA or the Code, or engaging
in prohibited transactions, except for violations or prohibited
transactions caused by an error, misrepresentation, or misconduct of a
plan fiduciary or other party hired by the plan fiduciary, which is
independent of JPMC and its affiliates;
(iv) Not to restrict the ability of such ERISA-covered plan or IRA
to terminate or withdraw from its arrangement with the JPMC Affiliated
QPAM (including any investment in a separately managed account or
pooled fund subject to ERISA and managed by such QPAM), with the
exception of reasonable restrictions, appropriately disclosed in
advance, that are specifically designed to ensure equitable treatment
of all investors in a pooled fund in the event such withdrawal or
termination may have adverse consequences for all other investors as a
result of the actual lack of liquidity of the underlying assets,
provided that such restrictions are applied consistently and in like
manner to all such investors;
(v) Not to impose any fee, penalty, or charge for such termination
or withdrawal, with the exception of reasonable fees, appropriately
disclosed in advance, that are specifically designed to prevent
generally recognized abusive investment practices, or specifically
designed to ensure equitable treatment of all investors in a pooled
fund in the event such withdrawal or termination may have adverse
consequences for all other investors, provided that each such fee is
applied consistently and in like manner to all such investors;
(vi) Not to include exculpatory provisions disclaiming or otherwise
limiting liability of the JPMC Affiliated QPAM for a violation of such
agreement's terms, except for liability caused by an error,
misrepresentation, or misconduct of a plan fiduciary or other party
hired by the plan fiduciary which is independent of JPMC, and its
affiliates; and
(vii) To indemnify and hold harmless the ERISA-covered plan or IRA
for any damages resulting from a violation of applicable laws, a breach
of contract, or any claim arising out of the failure of such JPMC
Affiliated QPAM to qualify for the exemptive relief provided by
[[Page 83359]]
PTE 84-14 as a result of a violation of Section I (g) of PTE 84-14
other than the Conviction;
(2) Within four (4) months of the date of the Conviction, each JPMC
Affiliated QPAM will provide a notice of its obligations under this
Section I(i) to each ERISA-covered plan and IRA for which a JPMC
Affiliated QPAM provides asset management or other discretionary
fiduciary services;
(j) The JPMC Affiliated QPAMs must comply with each condition of
PTE 84-14, as amended, with the sole exception of the violation of
Section I(g) of PTE 84-14 that is attributable to the Conviction;
(k) Each JPMC Affiliated QPAM will maintain records necessary to
demonstrate that the conditions of this temporary exemption have been
met, for six (6) years following the date of any transaction for which
such JPMC Affiliated QPAM relies upon the relief in the temporary
exemption;
(l) During the effective period of this temporary exemption, JPMC:
(1) Immediately discloses to the Department any Deferred Prosecution
Agreement (a DPA) or Non-Prosecution Agreement (an NPA) with the U.S.
Department of Justice to the extent such DPA or NPA involves conduct
described in Section I(g) of PTE 84-14 or section 411 of ERISA; and
(2) Immediately provides the Department any information requested
by the Department, as permitted by law, regarding the agreement and/or
the conduct and allegations that led to the agreement; and
(m) A JPMC Affiliated QPAM or a JPMC Related QPAM will not fail to
meet the terms of this temporary exemption solely because a different
JPMC Affiliated QPAM or JPMC Related QPAM fails to satisfy a condition
for relief under this temporary exemption, as described in Sections
I(c), (d), (h), (i), (j) and (k).
Section II: Definitions
(a) The term ``JPMC Affiliated QPAM'' means a ``qualified
professional asset manager'' (as defined in Section VI(a) \39\ of PTE
84-14) that relies on the relief provided by PTE 84-14 and with respect
to which JPMC is a current or future ``affiliate'' (as defined in
Section VI(d)(1) of PTE 84-14). The term ``JPMC Affiliated QPAM''
excludes the parent entity, JPMC, the division directly implicated by
the criminal conduct that is the subject of the Conviction.
---------------------------------------------------------------------------
\39\ In general terms, a QPAM is an independent fiduciary that
is a bank, savings and loan association, insurance company, or
investment adviser that meets certain equity or net worth
requirements and other licensure requirements, and has acknowledged
in a written management agreement that it is a fiduciary with
respect to each plan that has retained the QPAM.
---------------------------------------------------------------------------
(b) The term ``JPMC Related QPAM'' means any current or future
``qualified professional asset manager'' (as defined in section VI(a)
of PTE 84-14) that relies on the relief provided by PTE 84-14, and with
respect to which JPMC owns a direct or indirect five percent or more
interest, but with respect to which JPMC is not an ``affiliate'' (as
defined in Section VI(d)(1) of PTE 84-14).
(c) The terms ``ERISA-covered plan'' and ``IRA'' mean,
respectively, a plan subject to Part 4 of Title I of ERISA and a plan
subject to section 4975 of the Code;
(d) The term ``JPMC'' means JPMorgan Chase and Co., the parent
entity, but does not include any subsidiaries or other affiliates;
(e) The term ``Conviction'' means the judgment of conviction
against JPMC for violation of the Sherman Antitrust Act, 15 U.S.C. 1,
which is scheduled to be entered in the District Court for the District
of Connecticut (the District Court) (Case Number 3:15-cr-79-SRU), in
connection with JPMC, through one of its euro/U.S. dollar (EUR/USD)
traders, entering into and engaging in a combination and conspiracy to
fix, stabilize, maintain, increase or decrease the price of, and rig
bids and offers for, the EUR/USD currency pair exchanged in the FX spot
market by agreeing to eliminate competition in the purchase and sale of
the EUR/USD currency pair in the United States and elsewhere. For all
purposes under this temporary exemption, ``conduct'' of any person or
entity that is the ``subject of [a] Conviction'' encompasses any
conduct of JPMC and/or their personnel, that is described in the Plea
Agreement, (including the Factual Statement), and other official
regulatory or judicial factual findings that are a part of this record;
and
(f) The term ``Conviction Date'' means the date that a judgment of
Conviction against JPMC is entered by the District Court in connection
with the Conviction.
Effective Date: This proposed temporary exemption will be effective
for the period beginning on the Conviction Date until the earlier of:
(1) The date that is twelve (12) months following the Conviction Date;
or (2) the effective date of final agency action made by the Department
in connection with an application for long-term exemptive relief for
the covered transactions described herein.
Department's Comment: The Department is publishing this proposed
temporary exemption in order to protect ERISA-covered plans and IRAs
from certain costs and/or investment losses that may arise to the
extent entities with a corporate relationship to JPMC lose their
ability to rely on PTE 84-14 as of the Conviction Date, as described
below. Elsewhere today in the Federal Register, the Department is also
proposing a five-year proposed exemption that would provide the same
relief that is described herein, but for a longer effective period. The
five-year proposed exemption is subject to enhanced conditions and a
longer comment period. Comments received in response to this proposed
temporary exemption will be considered in connection with the
Department's determination whether or not to grant such five-year
exemption.
The proposed exemption would provide relief from certain of the
restrictions set forth in sections 406 and 407 of ERISA. No relief from
a violation of any other law would be provided by this exemption
including any criminal conviction described herein.
Furthermore, the Department cautions that the relief in this
proposed exemption would terminate immediately if, among other things,
an entity within the JPMC corporate structure is convicted of a crime
described in Section I(g) of PTE 84-14 (other than the Conviction)
during the effective period of the exemption. While such an entity
could apply for a new exemption in that circumstance, the Department
would not be obligated to grant the exemption. The terms of this
proposed exemption have been specifically designed to permit plans to
terminate their relationships in an orderly and cost effective fashion
in the event of an additional conviction or a determination that it is
otherwise prudent for a plan to terminate its relationship with an
entity covered by the proposed exemption.
Summary of Facts and Representations \40\
---------------------------------------------------------------------------
\40\ The Summary of Facts and Representations is based on the
Applicant's representations, unless indicated otherwise.
---------------------------------------------------------------------------
Background
1. JPMC is a financial holding company and global financial
services firm, incorporated in Delaware and headquartered in New York,
New York, with approximately 240,000 employees and operations in over
60 countries. According to the Applicant, JPMC provides a variety of
services, including investment banking, financial services for
consumers and small business, commercial banking, financial transaction
processing, and asset management.
[[Page 83360]]
The Applicant represents that JPMC's principal bank subsidiaries
are: (a) JPMorgan Chase Bank, a national banking association wholly
owned by JPMC, with U.S. branches in 23 states; and (b) Chase Bank USA,
National Association, a national banking association that is JPMC's
credit card-issuing bank. The Applicant also represents that two of
JPMC's principal non-bank subsidiaries are its investment bank
subsidiary, J.P. Morgan Securities LLC, and its primary investment
management subsidiary, J.P. Morgan Investment Management Inc. (JPMIM).
The bank and nonbank subsidiaries of JPMC operate internationally
through overseas branches and subsidiaries, representative offices and
subsidiary foreign banks.
The Applicant explains that entities within the JPMC's asset
management line of business (Asset Management) serve institutional and
retail clients worldwide through the Global Investment Management (GIM)
and Global Wealth Management (GWM) businesses. The Applicant represents
that JPMC's Asset Management line of business had total client assets
of about $2.4 trillion and discretionary assets under management of
approximately $1.7 trillion at the end of 2014.\41\
---------------------------------------------------------------------------
\41\ In addition to its Asset Management line of business, the
Applicant represents that JPMC operates three other core lines of
business. They are: Consumer and Community Banking Services;
Corporate and Investment Banking Services; and Commercial Banking
Services.
---------------------------------------------------------------------------
2. The Applicant represents that JPMC has several affiliates that
provide investment management services.\42\ JPMorgan Chase Bank and
most of the U.S. registered advisers manage the assets of ERISA-covered
plans and/or IRAs on a discretionary basis. They routinely rely on the
QPAM Exemption to provide relief for party in interest transactions.
According to the Applicant, the primary domestic bank and U.S.
registered adviser affiliates in which JPMC owns a significant
interest, directly or indirectly, include the following: JPMorgan Chase
Bank, N.A.; JPMorgan Investment Management Inc.; J.P. Morgan Securities
LLC; JF International Management Inc.; J.P. Morgan Alternative Asset
Management, Inc.; Highbridge Capital Management, LLC; and Security
Capital Research & Management Incorporated. These are the entities that
currently would be covered by the exemption, if it is granted.
---------------------------------------------------------------------------
\42\ Section VI(d) of PTE 84-14 defines an ``affiliate'' of a
person, for purposes of Section I(g), as: (1) Any person directly or
indirectly through one or more intermediaries, controlling,
controlled by, or under common control with the person, (2) any
director of, relative of, or partner in, any such person, (3) any
corporation, partnership, trust or unincorporated enterprise of
which such person is an officer, director, or a 5 percent or more
partner or owner, and (4) any employee or officer of the person
who--(A) is a highly compensated employee (as defined in section
4975(e)(2)(H) of the Code) or officer (earning 10 percent or more of
the yearly wages of such person), or (B) has direct or indirect
authority, responsibility or control regarding the custody,
management or disposition of plan assets.
---------------------------------------------------------------------------
3. In addition to the QPAMs identified above, the Applicant has
other affiliated managers that meet the definition of a QPAM that do
not currently manage ERISA or IRA assets on a discretionary basis, but
may in the future, including: J.P. Morgan Partners, LLC; Sixty Wall
Street Management Company LLC; J.P. Morgan Private Investments Inc.;
J.P. Morgan Asset Management (UK) Limited; JPMorgan Funds Limited; and
Bear Stearns Asset Management, Inc. The Applicant requests that
affiliates that manage ERISA or IRA assets be covered by the exemption.
The Applicant also acquires and creates new affiliates frequently, and
to the extent that these new affiliates meet the definition of a QPAM
and manage ERISA-covered plans or IRAs, the Applicant requests that
these entities be covered by the exemption. The Applicant represents
that JPMC owns, directly or indirectly, a 5% or greater interest in
certain investment managers (and may in the future own similar
interests in other managers), but such managers are not affiliated in
the sense that JPMC has actual control over their operations and
activities. JPMC does not have the authority to exercise a controlling
influence over these investment managers and is not involved with the
managers' clients, strategies, or ERISA assets under management, if
any.\43\ The Applicant requests that these entities also be covered by
the proposed temporary exemption.
---------------------------------------------------------------------------
\43\ Section VI(d) of PTE 84-14 defines an ``affiliate'' of a
person, for purposes of Section I(g), as: (1) Any person directly or
indirectly through one or more intermediaries, controlling,
controlled by, or under common control with the person, (2) any
director of, relative of, or partner in, any such person, (3) any
corporation, partnership, trust or unincorporated enterprise of
which such person is an officer, director, or a 5 percent or more
partner or owner, and (4) any employee or officer of the person
who--(A) is a highly compensated employee (as defined in section
4975(e)(2)(H) of the Code) or officer (earning 10 percent or more of
the yearly wages of such person), or (B) has direct or indirect
authority, responsibility or control regarding the custody,
management or disposition of plan assets.
Section VI(e) of PTE 84-14 defines the term ``control'' as the
power to exercise a controlling influence over the management or
policies of a person other than an individual.
---------------------------------------------------------------------------
4. On May 20, 2015, the Applicant filed an application for
exemptive relief from the prohibitions of sections 406(a) and 406(b) of
ERISA, and the sanctions resulting from the application of section 4975
of the Code, by reason of section 4975(c)(1) of the Code, in connection
with a conviction that would make the relief in PTE 84-14 unavailable
to any current or future JPMC-related investment managers.
On May 20, 2015, the U.S. Department of Justice (Department of
Justice) filed a criminal information in the U.S. District Court for
the District of Connecticut (the District Court) against JPMC, charging
JPMC with a one-count violation of the Sherman Antitrust Act, 15 U.S.C.
1 (the Information). The Information charges that, from at least as
early as July 2010 until at least January 2013, JPMC, through one of
its euro/U.S. dollar (EUR/USD) traders, entered into and engaged in a
combination and conspiracy to fix, stabilize, maintain, increase or
decrease the price of, and rig bids and offers for, the EUR/USD
currency pair exchanged in the FX spot market by agreeing to eliminate
competition in the purchase and sale of the EUR/USD currency pair in
the United States and elsewhere. The criminal conduct that is the
subject of the Conviction involved near daily conversations, some of
which were in code, in an exclusive electronic chat room used by
certain EUR/USD traders, including the EUR/USD trader described herein.
5. JPMC sought to resolve the charges through a Plea Agreement
presented to the District Court on May 20, 2015. Under the Plea
Agreement, JPMC agreed to enter a plea of guilty to the charge set out
in the Information (the Plea). In addition, JPMC has made an admission
of guilt to the District Court. The Applicant expects that the District
Court will enter a judgment against JPMC that will require remedies
that are materially the same as those set forth in the Plea Agreement.
Pursuant to the Plea Agreement, the District Court will order a
term of probation and JPMC will be subject to certain conditions.
First, JPMC must not commit another crime in violation of the federal
laws of the United States or engage in the Conduct set forth in
Paragraphs 4(g)-(i) of the Plea Agreement during the term of probation,
and shall make disclosures relating to certain other sales-related
practices. Second, JPMC must notify the probation officer upon learning
of the commencement of any federal criminal investigation in which JPMC
is a target, or of any federal criminal prosecution against it. Third,
JPMC must implement and must continue to implement a compliance program
designed to prevent and detect the criminal conduct that is the subject
of the Conviction.
[[Page 83361]]
Fourth, JPMC must further strengthen its compliance and internal
controls as required by the CFTC, the Financial Conduct Authority
(FCA), and any other regulatory or enforcement agencies that have
addressed the criminal conduct that is the subject of the Conviction,
as set forth in the factual basis section of the Plea Agreement, and
report to the probation officer and the United States, upon request,
regarding its remediation and implementation of any compliance program
and internal controls, policies, and procedures that relate to the
conduct described in the factual basis section of the Plea Agreement.
6. Pursuant to the Plea Agreement, JPMC must promptly bring to the
Department of Justice Antitrust Division's attention: (a) All credible
information regarding criminal violations of U.S. antitrust laws by the
defendant or any of its employees as to which the JPMC's Board of
Directors, management (that is, all supervisors within the bank), or
legal and compliance personnel are aware; (b) all federal criminal or
regulatory investigations in which the defendant is a subject or a
target, and all administrative or regulatory proceedings or civil
actions brought by any federal governmental authority in the United
States against the defendant or its employees, to the extent that such
investigations, proceedings or actions allege violations of U.S.
antitrust laws.
7. Pursuant to the Plea Agreement, JPMC must promptly bring to the
Department of Justice Criminal Division, Fraud Section's attention: (a)
All credible information regarding criminal violations of U.S. law
concerning fraud, including securities or commodities fraud by the
defendant or any of its employees as to which the JPMC's Board of
Directors, management (that is, all supervisors within the bank), or
legal and compliance personnel are aware; and (b) all criminal or
regulatory investigations in which JPMC is or may be a subject or a
target, and all administrative proceedings or civil actions brought by
any governmental authority in the United States against JPMC or its
employees, to the extent such investigations, proceedings or actions
allege violations of U.S. law concerning fraud, including securities or
commodities fraud.
Pursuant to Paragraph 9(c) of the Plea Agreement, the Department of
Justice agreed ``that it [would] support a motion or request by [JPMC]
that sentencing in this matter be adjourned until the Department of
Labor has issued a ruling on the defendant's request for an exemption .
. . .'' According to the Applicant, sentencing has not yet occurred in
the District Court, nor has sentencing been scheduled.
8. Along with the Department of Justice, the Board of Governors of
the Federal Reserve Board (FRB), the Office of the Comptroller of the
Currency (OCC), the Commodity Futures Trading Commission (CFTC), and
the Financial Conduct Authority (FCA) have conducted or have been
conducting investigations into the practices of JPMC and its direct and
indirect subsidiaries relating to FX trading.
The FRB issued a cease and desist order on May 20, 2015, against
JPMC concerning unsafe and unsound banking practices relating to JPMC's
FX business and requiring JPMC to cease and desist, assessing against
JPMC a civil money penalty of $342,000,000, and requiring JPMC to agree
to take certain affirmative actions (FRB Order).
The OCC issued a cease and desist order on November 11, 2014,
against JPMorgan Chase Bank concerning deficiencies and unsafe or
unsound practices relating to JPMorgan Chase Bank's wholesale FX
business and requiring JPMorgan Chase Bank to cease and desist,
ordering JPMorgan Chase Bank to pay a civil money penalty of
$350,000,000, and requiring JPMorgan Chase Bank to agree to take
certain affirmative actions (OCC Order).
The CFTC issued a cease and desist order on November 11, 2014,
against JPMorgan Chase Bank relating to certain FX trading activities
and requiring JPMorgan Chase Bank to cease and desist from violating
certain provisions of the Commodity Exchange Act, ordering JPMorgan
Chase Bank to pay a civil monetary penalty of $310,000,000, and
requiring JPMorgan Chase Bank to agree to certain conditions and
undertakings (CFTC Order).
The FCA issued a warning notice on November 11, 2014, against
JPMorgan Chase Bank for failing to control business practices in its
G10 spot FX trading operations and caused JPMorgan Chase Bank to pay a
financial penalty of [pound]222,166,000 (FCA Order).
9. In addition to the investigations described above, relating to
FX trading, the Applicant is or has been the subject of other
investigations, by: (a) The Hong Kong Monetary Authority, which
concluded its investigation of the Applicant on December 14, 2014, and
found no evidence of collusion among the banks investigated, rigging of
FX benchmarks published in Hong Kong, or market manipulation, and
imposed no financial penalties on the Applicant; (b) the South Africa
Reserve Bank, which released the report of its inquiry of the Applicant
on October 19, 2015, and found no evidence of widespread malpractice or
serious misconduct by the Applicant in the South Africa FX market, and
noted that most authorized dealers have acceptable arrangements and
structures in place as well as whistle-blowing policies and client
complaint processes; (c) the Australian Securities & Investments
Commission, (d) the Japanese Financial Services Agency, (e) the Korea
Fair Trade Commission, and (f) the Swiss Competition Commission.
According to the Applicant, it is cooperating with the inquiries by
these organizations.
In addition, the French criminal authorities have been
investigating a series of transactions involving senior managers of
Wendel Investissement (Wendel) during the period 2004-2007. In 2007,
the Paris branch of JPMorgan Chase Bank provided financing for the
transactions to Wendel managers. The Applicant explains that JPMC is
responding to and cooperating with the investigation, and to date, no
decision or indictment has been made by the French court.
In addition, the Applicant represents that the Criminal Division of
the Department of Justice is investigating the Applicant's compliance
with the Foreign Corrupt Practices Act and other laws with respect the
Applicant's hiring practices related to candidates referred by clients,
potential clients, and government officials, and its engagement of
consultants in the Asia Pacific region. The Applicant states that it is
responding to and cooperating with this investigation.
The Applicant also represents that to its best knowledge, it does
not have a reasonable basis to believe that the discretionary asset
management activities of any affiliated QPAM are subject to the
aforementioned investigations. Further, the Applicant represents that
JPMC currently does not have a reasonable basis to believe that there
are any pending criminal investigations involving JPMC or any of its
affiliated companies that would cause a reasonable plan or IRA customer
not to hire or retain the institution as a QPAM.
10. Once the Conviction is entered, the JPMC Affiliated QPAMs and
the JPMC Related QPAMs, as well as their client plans that are subject
to Part 4 of Title I of ERISA (ERISA-covered plans) or section 4975 of
the Code (IRAs), will no longer be able to rely on PTE 84-14, pursuant
to the anti-criminal rule set forth in section I(g) of the class
exemption, absent an individual exemption. The Applicant is seeking an
individual exemption that would permit the JPMC Affiliated QPAMs and
the JPMC Related QPAMs, and their ERISA-
[[Page 83362]]
covered plan and IRA clients to continue to utilize the relief in PTE
84-14, notwithstanding the anticipated Conviction, provided that such
QPAMs satisfy the additional conditions imposed by the Department in
the proposed temporary exemption herein.
11. According to the Applicant, the criminal conduct giving rise to
the Plea did not involve any of the JPMC Affiliated QPAMs acting in the
capacity of investment manager or trustee. JPMC represents that its
participation in the antitrust conspiracy described in the Plea
Agreement is limited to a single EUR/USD trader in London. The
Applicant represents that the criminal conduct that is the subject of
the Conviction was not widespread, nor was it pervasive; rather it was
isolated to a single trader. No current or former personnel from JPMC
or its affiliates have been sued individually in this matter for the
criminal conduct that is the subject of the Conviction, and the
individual referenced in the Complaint as responsible for such criminal
conduct is no longer employed by JPMC or its affiliates.\44\
---------------------------------------------------------------------------
\44\ The Applicant has confirmed with JPMC's Human Resources
Department that the individual referenced in the Complaint is no
longer employed with any entity within JPMC or its affiliates.
---------------------------------------------------------------------------
The Applicant submits that the criminal conduct that is the subject
of the Conviction did not involve any of JPMC's asset management staff.
The Applicant represents that: (a) Other than a single individual who
worked for a non-fiduciary business within JPMorgan Chase Bank and who
had no responsibility for, and exercised no authority in connection
with, the management of plan assets, the JPMC Affiliated QPAMs, and the
JPMC Related QPAMs (including officers, directors, agents other than
JPMC, and employees of such QPAMs who had responsibility for, or
exercised authority in connection with, the management of plan assets)
did not know of, did not have reason to know of, and did not
participate in the criminal conduct that is the subject of the
Conviction; and (b) no current or former employee of JPMC or of any
JPMC Affiliated QPAM who previously has been or who subsequently may be
identified by JPMC, or any U.S. or non-U.S. regulatory or enforcement
agencies, as having been responsible for the such criminal conduct has
or will have any involvement in providing asset management services to
plans and IRAs or will be an officer, director, or employee of the
Applicant or of any JPMC Affiliated QPAM.\45\
---------------------------------------------------------------------------
\45\ The Applicant states that counsel for JPMC confirmed that
the individual responsible for the criminal conduct that is the
subject of the Conviction is not currently employed by any entity
that is part of JPMC. This individual's employment has been
terminated and a notation has been made in his employment file to
ensure he is not re-hired at any future date.
---------------------------------------------------------------------------
12. According to the Applicant, the transactions covered by the
temporary exemption include the full range of everyday investment
transactions that a plan might enter into, including the purchase and
sale of debt and equity securities, both foreign and domestic, both
registered and sold under Rule 144A or otherwise (e.g., traditional
private placement), pass-through securities, asset-backed securities,
the purchase and sale of commodities, futures, forwards, options,
swaps, stable value wrap contracts, real estate, real estate financing
and leasing, foreign repurchase agreements, foreign exchange, and other
investments, and the hedging of risk through a variety of investment
instruments and strategies. The Applicant states that these
transactions are customary for the industry and investment managers
routinely rely on the QPAM Exemption to enter into them.
13. The Applicant represents that the investment management
businesses that are operated out of the JPMC Affiliated QPAMs are
separated from the non-investment management businesses of the
Applicant. Each of these investment management businesses, including
the investment management business of JPMorgan Chase Bank (as well as
the agency securities lending business of JPMorgan Chase Bank), have
systems, management, dedicated risk and compliance officers and legal
coverage that are separate from the foreign exchange trading activities
that were the subject of the Plea Agreement.
The Applicant represents that the investment management businesses
of the JPMC Affiliated QPAMs are subject to policies and procedures and
JPMC Affiliated QPAM personnel engage in training designed to ensure
that such businesses understand and manage their fiduciary duties in
accordance with applicable law. Thus, the Applicant maintains that the
management of plan assets is conducted separately from: (a) The non-
investment management business activities of the Applicant, including
the investment banking, treasury services and other investor services
businesses of the Corporate & Investment Bank business of the Applicant
(CIB); and/or (b) the criminal conduct that is the subject of the Plea
Agreement. Generally, the policies and procedures create information
barriers, which prevent employees of the JPMC Affiliated QPAMs from
gaining access to inside information that an affiliate may have
acquired or developed in connection with investment banking, treasury
services or other investor services business activities. These policies
and procedures apply to employees, officers, and directors of the JPMC
Affiliated QPAMs. The Applicant maintains an employee hotline for
employees to express any concerns of wrongdoing anonymously.
The Applicant represents that, to the best of its knowledge: (a) No
JPMC employees are involved in the trading decisions or investment
strategies of the JPMC Affiliated or Related QPAMs; (b) the JPMC
Affiliated and Related QPAMs do not consult with JPMC employees prior
to making investment decisions on behalf of plans; (c) JPMC does not
control the asset management decisions of the JPMC Affiliated or
Related QPAMs; (d) the JPMC Affiliated and Related QPAMs do not need
JPMC's consent to make investment decisions, correct errors, or adopt
policies or training for staff; and (e) there is no interaction between
JPMC employees and the JPMC Affiliated or Related QPAMs in connection
with the investment management activities of the JPMC Affiliated QPAMs.
Statutory Findings--In the Interest of Affected Plans and IRAs
14. The Applicant represents that, if the proposed temporary
exemption is denied, the JPMC Affiliated QPAMs may be unable to manage
efficiently the strategies for which they have contracted with
thousands of plans and IRAs. Transactions currently dependent on the
QPAM Exemption could be in default and be terminated at a significant
cost to the plans. In particular, the Applicant represents that the
JPMC Affiliated QPAMs have entered, and could in the future enter, into
contracts on behalf of, or as investment adviser of, ERISA-covered
plans, collective trusts and other funds subject to ERISA for certain
outstanding transactions, including but not limited to: The purchase
and sale of debt and equity securities, both foreign and domestic, both
registered and sold under Rule 144A or otherwise (e.g., traditional
private placement); pass-through securities; asset-backed securities;
and the purchase and sale of commodities, futures, options, stable
value wrap contracts, real estate, foreign repurchase agreements,
foreign exchange, and other investments.
The JPMC Affiliated QPAMs also have entered into, and could in the
future enter into, contracts for other transactions such as swaps,
forwards, and real estate financing and leasing on
[[Page 83363]]
behalf of their ERISA clients. According to the Applicant, these and
other strategies and investments require the JPMC Affiliated QPAMs to
meet the conditions in the QPAM Exemption. The Applicant states that
certain derivatives transactions and other contractual agreements
automatically and immediately could be terminated without notice or
action, or could become subject to termination upon notice from a
counterparty, in the event the Applicant no longer qualifies for relief
under the QPAM Exemption.
15. The Applicant represents that real estate transactions, for
example, could be subject to significant disruption without the QPAM
Exemption. Clients of the JPMC Affiliated QPAMs have over $27 billion
in ERISA and public plan assets in commingled funds invested in real
estate strategies, with approximately 235 holdings. Many transactions
in these accounts rely on Parts I, II and III of the QPAM Exemption as
a backup to the collective investment fund exemption (which may become
unavailable to the extent a related group of plans has a greater than
10% interest in the collective investment fund). The Applicant
estimates that there would be significant loss in value if assets had
to be quickly liquidated--over a 10% bid-ask spread--in addition to
substantial reinvestment costs and opportunity costs. There could also
be prepayment penalties. In addition, real estate transactions are
affected in funds that are not deemed to hold plan assets under
applicable law. While funds may have other available exemptions for
certain transactions, that fact could change in the future.
16. The JPMC Affiliated QPAMs also rely on the QPAM Exemption when
buying and selling fixed income products. Stable value strategies, for
example, rely on the QPAM Exemption to enter into wrappers and
insurance contracts that permit the assets to be valued at book value.
Many counterparties specifically require a representation that the QPAM
Exemption applies, and those contracts could be in default if the
requested exemption were not granted. Depending on the market value of
the assets in these funds at the time of termination, such termination
could result in losses to the stable value funds. The Applicant states
that, while the market value currently exceeds book value, that can
change at any time, and could result in market value adjustments to
withdrawing plans and withdrawal delays under their contracts.
17. The Applicant submits that nearly 400 accounts managed by the
JPMC Affiliated QPAMs (including commingled funds and separately
managed accounts) invest in fixed income products, with a total
portfolio of approximately $49.3 billion in market value of ERISA and
public plan assets in commingled funds. Fixed income strategies in
which those accounts are invested include investment-grade short,
intermediate, and long duration bonds, as well as securitized products,
and high yield and emerging market investments. If the QPAM Exemption
were lost, the Applicant estimates that its clients could incur average
weighted liquidation costs of approximately 65 basis points of the
total market value in fixed income products, assuming normal market
conditions where the holdings can be liquidated at a normal bid-offer
spread without significant widening. While short and intermediate term
bonds could be liquidated for between 15-50 basis points, long duration
bonds may be more difficult to liquidate and costs may range from 75-
100 basis points. Costs of liquidating high-yield and emerging market
investments could range from 75-150 basis points. Such costs do not
include reinvestment costs for transitioning to a new manager.
18. The Applicant states that, futures, options, and cleared and
bilateral swaps, which certain strategies rely on to hedge risk and
obtain certain exposures on an economic basis, rely on the QPAM
Exemption. The Applicant further states that the QPAM Exemption is
particularly important for securities and other instruments that may be
traded on a principal basis, such as mortgage-backed securities,
corporate debt, municipal debt, other U.S. fixed income securities,
Rule 144A securities, non-US fixed income securities, non-US equity
securities, U.S. and non-US over-the-counter instruments such as
forwards and options, structured products and FX.
19. The Applicant represents that plans that decide to continue to
employ the JPMC Affiliated QPAMs could be prohibited from engaging in
certain transactions that would be beneficial to such plans, such as
hedging transactions using over-the-counter options or derivatives.
Counterparties to such transactions are far more comfortable with the
QPAM Exemption than any other exemption, and a failure of the QPAM
Exemption to be available could trigger a default or early termination
by the plan or pooled trust. Even if other exemptions are available to
such counterparties, the Applicant predicts that the cost of the
transaction might increase to reflect any lack of comfort in
transacting business using a less familiar exemption. The Applicant
represents that plans may also face collateral consequences, such as
missed investment opportunities, administrative delay, and the cost of
investing in cash pending reinvestments.
20. The Applicant represents that, to the extent that plans and
IRAs believe they need to withdraw from their arrangements, they could
incur significant transaction costs, including costs associated with
the liquidation of investments, finding new asset managers, and the
reinvestment of plan assets.\46\ The Applicant believes that the
transaction costs to plans of changing managers are significant,
especially for many of the strategies employed by the JPMC Affiliated
QPAMs. The Applicant also represents that, depending on the strategy,
the cost of liquidating assets in connection with transitioning clients
to another manager could be significant.\47\ The process for
transitioning to a new manager typically is lengthy, and likely would
involve numerous steps--each of which could last several months--
including retaining a consultant, engaging in the request for
proposals, negotiating contracts, and ultimately transitioning assets.
In addition, securities transactions would incur transaction-related
expenses.
---------------------------------------------------------------------------
\46\ The Department notes that, if this temporary exemption is
granted, compliance with the condition in Section I(i) of the
exemption would require the JPMC Affiliated QPAMs to hold their plan
customers harmless for any losses attributable to, inter alia, any
prohibited transactions or violations of the duty of prudence and
loyalty.
\47\ According to the Applicant: Some investments are more
liquid than others (e.g., Treasury bonds generally are more liquid
than foreign sovereign bonds and equities generally are more liquid
than swaps); some of the strategies followed by the Applicant tend
to be less liquid than certain other strategies and, thus, the cost
of a transition would be significantly higher than, for example,
liquidating a large cap equity portfolio; and particularly hard hit
would be the real estate separate account strategies, which are
illiquid and highly dependent on the QPAM Exemption.
---------------------------------------------------------------------------
Statutory Findings--Protective of the Rights of Participants of
Affected Plans and IRAs
21. The Applicant has proposed certain conditions it believes are
protective of participants and beneficiaries of ERISA-covered plans and
IRAs with respect to the transactions described herein. The Department
has determined that it is necessary to modify and supplement the
conditions before it can tentatively determine that the requested
exemption meets the statutory requirements of section 408(a) of ERISA.
In this regard, the Department has tentatively determined that the
following
[[Page 83364]]
conditions adequately protect the rights of participants and
beneficiaries of affected plans and IRAs with respect to the
transactions that would be covered by this temporary exemption.
The exemption, if granted as proposed, is only available to the
extent: (a) Other than with respect to a single individual who worked
for a non-fiduciary business within JPMorgan Chase Bank and who had no
responsibility for, and exercised no authority in connection with, the
management of plan assets, the JPMC Affiliated QPAMs, including their
officers, directors, agents other than JPMC, and employees of such JPMC
Affiliated QPAMs, did not know of, have reason to know of, or
participate in the criminal conduct of JPMC that is the subject of the
Conviction (Again, for purposes of the foregoing condition, the term
``participate in'' includes the knowing or tacit approval of the
misconduct underlying the Conviction.); (b) any failure of those QPAMs
to satisfy Section I(g) of PTE 84-14 arose solely from the Conviction;
and (c) other than a single individual who worked for a non-fiduciary
business within JPMorgan Chase Bank and who had no responsibility for,
and exercised no authority in connection with, the management of plan
assets, the JPMC Affiliated QPAMs and the JPMC Related QPAMs (including
their officers, directors, agents other than JPMC, and employees of
such JPMC QPAMs) did not receive direct compensation, or knowingly
receive indirect compensation, in connection with the criminal conduct
that is the subject of the Conviction.
22. The Department expects the JPMC Affiliated QPAMs to rigorously
ensure that the individual associated with the criminal conduct of JPMC
will not be employed or knowingly engaged by such QPAMs. In this
regard, the temporary exemption, if granted as proposed, mandates that
the JPMC Affiliated QPAMs will not employ or knowingly engage any of
the individuals that participated in the criminal conduct that is the
subject of the Conviction. For purposes of this condition, the term
``participated in'' includes the knowing or tacit approval of the
misconduct underlying the Conviction.
23. Further, the JPMC Affiliated QPAM will not use its authority or
influence to direct an ``investment fund,'' (as defined in Section
VI(b) of PTE 84-14), that is subject to ERISA or the Code and managed
by such JPMC Affiliated QPAM to enter into any transaction with JPMC or
the Investment Banking Division of JPMorgan Chase Bank, or to engage
JPMC or the Investment Banking Division of JPMorgan Chase Bank to
provide any service to such investment fund, for a direct or indirect
fee borne by such investment fund, regardless of whether such
transaction or service may otherwise be within the scope of relief
provided by an administrative or statutory exemption.
24. The JPMC Affiliated QPAMs and the JPMC Related QPAMs must
comply with each condition of PTE 84-14, as amended, with the sole
exception of the violation of Section I(g) of PTE 84-14 that is
attributable to the Conviction. Further, any failure of the JPMC
Affiliated QPAMs or the JPMC Related QPAMs to satisfy Section I(g) of
PTE 84-14 arose solely from the Conviction.
No relief will be provided by the temporary exemption to the extent
that a JPMC Affiliated QPAM or a JPMC Related QPAM exercised authority
over plan assets in a manner that it knew or should have known would:
Further the criminal conduct that is the subject of the Conviction; or
cause the JPMC QPAM or its affiliates or related parties to directly or
indirectly profit from the criminal conduct that is the subject of the
Conviction.
Further, no relief will be provided to the extent JPMC or the
Investment Banking Division of JPMorgan Chase Bank provides any
discretionary asset management services to ERISA-covered plans or IRAs,
or otherwise acts as a fiduciary with respect to ERISA-covered plan or
IRA assets.
25. The Department believes that robust policies and training are
warranted where, as here, the criminal misconduct has occurred within a
corporate organization that is affiliated with one or more QPAMs
managing plan assets in reliance on PTE 84-14. Therefore, this proposed
temporary exemption requires that within four (4) months of the date of
the Conviction, each JPMC Affiliated QPAM must develop, implement,
maintain, and follow written policies and procedures (the Policies)
requiring and reasonably designed to ensure that: The asset management
decisions of the JPMC Affiliated QPAM are conducted independently of
the corporate management and business activities of JPMC, including the
Investment Banking Division of JPMorgan Chase Bank; the JPMC Affiliated
QPAM fully complies with ERISA's fiduciary duties, and with ERISA and
the Code's prohibited transaction provisions, and does not knowingly
participate in any violation of these duties and provisions with
respect to ERISA-covered plans and IRAs; the JPMC Affiliated QPAM does
not knowingly participate in any other person's violation of ERISA or
the Code with respect to ERISA-covered plans and IRAs; any filings or
statements made by the JPMC Affiliated QPAM to regulators, including,
but not limited to, the Department, the Department of the Treasury, the
Department of Justice, and the Pension Benefit Guaranty Corporation, on
behalf of ERISA-covered plans or IRAs, are materially accurate and
complete, to the best of such QPAM's knowledge at that time; the JPMC
Affiliated QPAM does not make material misrepresentations or omit
material information in its communications with such regulators with
respect to ERISA-covered plans or IRAs, or make material
misrepresentations or omit material information in its communications
with ERISA-covered plan and IRA clients; and the JPMC Affiliated QPAM
complies with the terms of this temporary exemption. Any violation of,
or failure to comply with these items is corrected promptly upon
discovery, and any such violation or compliance failure not promptly
corrected is reported, upon discovering the failure to promptly
correct, in writing, to appropriate corporate officers, the head of
compliance, and the General Counsel (or their functional equivalent) of
the relevant JPMC Affiliated QPAM, and an appropriate fiduciary of any
affected ERISA-covered plan or IRA, which fiduciary is independent of
JPMC.
26. The Department has also imposed a condition that requires each
JPMC Affiliated QPAM, within four (4) months of the date of the
Conviction, to develop and implement a program of training (the
Training), conducted at least annually, for all relevant JPMC
Affiliated QPAM asset/portfolio management, trading, legal, compliance,
and internal audit personnel. The Training must be set forth in the
Policies and, at a minimum, cover the Policies, ERISA and Code
compliance (including applicable fiduciary duties and the prohibited
transaction provisions), ethical conduct, the consequences for not
complying with the conditions of this temporary exemption, (including
any loss of exemptive relief provided herein), and prompt reporting of
wrongdoing.
27. This temporary exemption requires the JPMC Affiliated QPAMs to
enter into certain contractual obligations in connection with the
provision of services to their clients. It is the Department's view
that the condition for exemptive relief requiring these contractual
obligations is essential to the Department's ability to make its
findings that the proposed temporary
[[Page 83365]]
exemption is protective of the rights of the participants and
beneficiaries of ERISA-covered and IRA plan clients of JPMC Affiliated
QPAMs under section 408(a) of ERISA.
In this regard, effective as of the effective date of this
temporary exemption, with respect to any arrangement, agreement, or
contract between a JPMC Affiliated QPAM and an ERISA-covered plan or
IRA for which a JPMC Affiliated QPAM provides asset management or other
discretionary fiduciary services, each JPMC Affiliated QPAM agrees: (a)
To comply with ERISA and the Code, as applicable, with respect to such
ERISA-covered plan or IRA, to refrain from engaging in prohibited
transactions that are not otherwise exempt (and to promptly correct any
inadvertent prohibited transactions), and to comply with the standards
of prudence and loyalty set forth in section 404 of ERISA, as
applicable, with respect to each such ERISA-covered plan and IRA; (b)
not to require (or otherwise cause) the ERISA covered plan or IRA to
waive, limit, or qualify the liability of the JPMC Affiliated QPAM for
violating ERISA or the Code or engaging in prohibited transactions; (c)
not to require the ERISA-covered plan or IRA (or sponsor of such ERISA-
covered plan or beneficial owner of such IRA) to indemnify the JPMC
Affiliated QPAM for violating ERISA or the Code, or engaging in
prohibited transactions, except for violations or prohibited
transactions caused by an error, misrepresentation, or misconduct of a
plan fiduciary or other party hired by the plan fiduciary, which is
independent of JPMC, and its affiliates; (d) not to restrict the
ability of such ERISA-covered plan or IRA to terminate or withdraw from
its arrangement with the JPMC Affiliated QPAM (including any investment
in a separately managed account or pooled fund subject to ERISA and
managed by such QPAM), with the exception of reasonable restrictions,
appropriately disclosed in advance, that are specifically designed to
ensure equitable treatment of all investors in a pooled fund in the
event such withdrawal or termination may have adverse consequences for
all other investors as a result of the actual lack of liquidity of the
underlying assets, provided that such restrictions are applied
consistently and in like manner to all such investors; (e) not to
impose any fee, penalty, or charge for such termination or withdrawal,
with the exception of reasonable fees, appropriately disclosed in
advance, that are specifically designed to prevent generally recognized
abusive investment practices, or specifically designed to ensure
equitable treatment of all investors in a pooled fund in the event such
withdrawal or termination may have adverse consequences for all other
investors, provided that each such fee is applied consistently and in
like manner to all such investors; (f) not to include exculpatory
provisions disclaiming or otherwise limiting liability of the JPMC
Affiliated QPAM for a violation of such agreement's terms, except for
liability caused by an error, misrepresentation, or misconduct of a
plan fiduciary or other party hired by the plan fiduciary which is
independent of JPMC, and its affiliates; and (g) to indemnify and hold
harmless the ERISA-covered plan or IRA for any damages resulting from a
violation of applicable laws, a breach of contract, or any claim
arising out of the failure of such JPMC Affiliated QPAM to qualify for
the exemptive relief provided by PTE 84-14 as a result of a violation
of Section I (g) of PTE 84-14 other than the Conviction.
28. Within four (4) months of the date of the Conviction, each JPMC
Affiliated QPAM will provide a notice of its obligations under this
Section I(i) to each ERISA-covered plan and IRA for which a JPMC
Affiliated QPAM provides asset management or other discretionary
fiduciary services. In addition, each JPMC Affiliated QPAM must
maintain records necessary to demonstrate that the conditions of this
temporary exemption have been met for six (6) years following the date
of any transaction for which such JPMC Affiliated QPAM relies upon the
relief in the temporary exemption.
29. Furthermore, the proposed temporary exemption mandates that,
during the effective period of this temporary exemption, JPMC must
immediately disclose to the Department any Deferred Prosecution
Agreement (a DPA) or a Non-Prosecution Agreement (an NPA) that JPMC or
an affiliate enters into with the Department of Justice, to the extent
such DPA or NPA involves conduct described in Section I(g) of PTE 84-14
or section 411 of ERISA. In addition, JPMC or an affiliate must
immediately provide the Department any information requested by the
Department, as permitted by law, regarding the agreement and/or conduct
and allegations that led to the agreement.
30. The proposed exemption would provide relief from certain of the
restrictions set forth in Section 406 and 407 of ERISA. Such a granted
exemption would not provide relief from any other violation of law.
Pursuant to the terms of this proposed exemption, any criminal
conviction not expressly described herein, but otherwise described in
Section I(g) of PTE 84-14 and attributable to the Applicant for
purposes of PTE 84-14, would result in the Applicant's loss of this
exemption.
Statutory Findings--Administratively Feasible
31. The Applicant represents that the proposed temporary exemption
is administratively feasible because it does not require any monitoring
by the Department. In addition, the limited effective duration of the
temporary exemption provides the Department with the opportunity to
determine whether long-term exemptive relief is warranted, without
causing sudden and potentially costly harm to ERISA-covered plans and
IRAs.
32. Given the revised and new conditions described above, the
Department has tentatively determined that the relief sought by the
Applicant satisfies the statutory requirements for a temporary
exemption under section 408(a) of ERISA.
Notice to Interested Persons
Written comments and requests for a public hearing on the proposed
temporary exemption should be submitted to the Department within seven
(7) days from the date of publication of this Federal Register notice.
Given the short comment period, the Department will consider comments
received after such date, in connection with its consideration of more
permanent relief.
Warning: Do not include any personally identifiable information
(such as name, address, or other contact information) or confidential
business information that you do not want publicly disclosed. All
comments may be posted on the Internet and can be retrieved by most
Internet search engines.
FOR FURTHER INFORMATION CONTACT: Mr. Joseph Brennan of the Department
at (202) 693-8456. (This is not a toll-free number.)
Barclays Capital Inc. (BCI or the Applicant), Located in New York, New
York
[Application No. D-11862]
Proposed Temporary Exemption
The Department is considering granting a temporary exemption under
the authority of section 408(a) of Employee Retirement Income Security
Act of 1974, as amended, (ERISA or the Act) and section 4975(c)(2) of
the Internal Revenue Code of 1986, as amended (the Code), and in
accordance
[[Page 83366]]
with the procedures set forth in 29 CFR part 2570, subpart B (76 FR
66637, 66644, October 27, 2011).\48\
---------------------------------------------------------------------------
\48\ For purposes of this proposed temporary exemption,
references to section 406 of Title I of the Act, unless otherwise
specified, refer as well to the corresponding provisions of section
4975 of the Code.
---------------------------------------------------------------------------
Section I: Covered Transactions
If the proposed temporary exemption is granted, the Barclays
Affiliated QPAMs and the Barclays Related QPAMs, as defined in Sections
II(a) and II(b), respectively, will not be precluded from relying on
the exemptive relief provided by Prohibited Transaction Exemption 84-14
(PTE 84-14 or the QPAM Exemption),\49\ notwithstanding a judgment of
conviction against Barclays PLC (BPLC) (the Conviction), as defined in
Section II(c)),\50\ for engaging in a conspiracy to: (1) Fix the price
of, or (2) eliminate competition in the purchase or sale of the euro/
U.S. dollar currency pair exchanged in the Foreign Exchange (FX) Spot
Market. This temporary exemption will be effective for a period of up
to twelve (12) months beginning on the Conviction Date (as defined in
Section II(e)), provided the following conditions are satisfied:
---------------------------------------------------------------------------
\49\ 49 FR 9494 (March 13, 1984), as corrected at 50 FR 41430
(October 10, 1985), as amended at 70 FR 49305 (August 23, 2005), and
as amended at 75 FR 38837 (July 6, 2010).
\50\ Section I(g) of PTE 84-14 generally provides that
``[n]either the QPAM nor any affiliate thereof . . . nor any owner .
. . of a 5 percent or more interest in the QPAM is a person who
within the 10 years immediately preceding the transaction has been
either convicted or released from imprisonment, whichever is later,
as a result of'' certain felonies including violation of the Sherman
Antitrust Act, Title 15 United States Code, Section 1.
---------------------------------------------------------------------------
(a) Other than certain individuals who: Worked for a non-fiduciary
business within BCI; had no responsibility for, and exercised no
authority in connection with, the management of plan assets; and are no
longer employed by BCI, the Barclays Affiliated QPAMs (including their
officers, directors, agents other than BPLC, and employees of such
QPAMs who had responsibility for, or exercised authority in connection
with the management of plan assets) did not know of, have reason to
know of, or participate in the criminal conduct that is the subject of
the Conviction (for purposes of this paragraph (a), ``participate in''
includes the knowing or tacit approval of the misconduct underlying the
Conviction);
(b) The Barclays Affiliated QPAMs and the Barclays Related QPAMs
(including their officers, directors, agents other than BPLC, and
employees of such QPAMs) did not receive direct compensation, or
knowingly receive indirect compensation, in connection with the
criminal conduct that is the subject of the Conviction;
(c) The Barclays Affiliated QPAMs will not employ or knowingly
engage any of the individuals that participated in the criminal conduct
that is the subject of the Conviction (for purposes of this paragraph
(c), ``participated in'' includes the knowing or tacit approval of the
misconduct underlying the Conviction);
(d) A Barclays Affiliated QPAM will not use its authority or
influence to direct an ``investment fund,'' (as defined in Section
VI(b) of PTE 84-14) that is subject to ERISA or the Code and managed by
such Barclays Affiliated QPAM, to enter into any transaction with BPLC
or BCI, or to engage BPLC or BCI, to provide any service to such
investment fund, for a direct or indirect fee borne by such investment
fund, regardless of whether such transaction or service may otherwise
be within the scope of relief provided by an administrative or
statutory exemption;
(e) Any failure of a Barclays Affiliated QPAM or a Barclays Related
QPAM to satisfy Section I(g) of PTE 84-14 arose solely from the
Conviction;
(f) A Barclays Affiliated QPAM or a Barclays Related QPAM did
exercise authority over the assets of any plan subject to Part 4 of
Title I of ERISA (an ERISA-covered plan) or section 4975 of the Code
(an IRA) in a manner that it knew or should have known would: further
the criminal conduct that is the subject of the Conviction; or cause
the Barclays Affiliate QPAM or the Barclays Related QPAM, or its
affiliates or related parties to directly or indirectly profit from the
criminal conduct that is the subject of the Conviction;
(g) BPLC and BCI will not provide discretionary asset management
services to ERISA-covered plans or IRAs, nor will otherwise act as a
fiduciary with respect to ERISA-covered plan and IRA assets;
(h)(1) Prior to a Barclays Affiliated QPAM's engagement by any
ERISA-covered plan or IRA for discretionary asset management services,
the Barclays Affiliated QPAM must develop, implement, maintain, and
follow written policies and procedures (the Policies) requiring and
reasonably designed to ensure that:
(i) The asset management decisions of the Barclays Affiliated QPAM
are conducted independently of the corporate management and business
activities of BPLC and BCI;
(ii) The Barclays Affiliated QPAM fully complies with ERISA's
fiduciary duties and with ERISA and the Code's prohibited transaction
provisions, and does not knowingly participate in any violations of
these duties and provisions with respect to ERISA-covered plans and
IRAs;
(iii) The Barclays Affiliated QPAM does not knowingly participate
in any other person's violation of ERISA or the Code with respect to
ERISA-covered plans and IRAs;
(iv) Any filings or statements made by the Barclays Affiliated QPAM
to regulators, including but not limited to, the Department of Labor,
the Department of the Treasury, the Department of Justice, and the
Pension Benefit Guaranty Corporation, on behalf of ERISA-covered plans
or IRAs are materially accurate and complete, to the best of such
QPAM's knowledge at that time;
(v) The Barclays Affiliated QPAM does not make material
misrepresentations or omit material information in its communications
with such regulators with respect to ERISA-covered plans or IRAs, or
make material misrepresentations or omit material information in its
communications with ERISA-covered plan and IRA clients;
(vi) The Barclays Affiliated QPAM complies with the terms of this
temporary exemption; and
(vii) Any violation of, or failure to comply with, an item in
subparagraphs (ii) through (vi), is corrected promptly upon discovery,
and any such violation or compliance failure not promptly corrected is
reported, upon discovering the failure to promptly correct, in writing,
to appropriate corporate officers, the head of compliance, and the
General Counsel (or their functional equivalent) of the relevant
Barclays Affiliated QPAM, and an appropriate fiduciary of any affected
ERISA-covered plan or IRA where such fiduciary is independent of BPLC;
however, with respect to any ERISA-covered plan or IRA sponsored by an
``affiliate'' (as defined in Section VI(d) of PTE 84-14) of BPLC or
beneficially owned by an employee of BPLC or its affiliates, such
fiduciary does not need to be independent of BPLC. A Barclays
Affiliated QPAM will not be treated as having failed to develop,
implement, maintain, or follow the Policies, provided that it corrects
any instance of noncompliance promptly when discovered or when it
reasonably should have known of the noncompliance (whichever is
earlier), and provided that it adheres to the reporting requirements
set forth in this subparagraph (vii);
(2) Prior to a Barclays Affiliated QPAM's engagement by any ERISA
covered plan or IRA for discretionary asset management services, the
Barclays
[[Page 83367]]
Affiliated QPAM must develop and implement a program of training (the
Training), conducted at least annually, for all relevant Barclays
Affiliated QPAM asset/portfolio management, trading, legal, compliance,
and internal audit personnel. The Training must be set forth in the
Policies and, at a minimum, cover the Policies, ERISA and Code
compliance (including applicable fiduciary duties and the prohibited
transaction provisions), ethical conduct, the consequences for not
complying with the conditions of this temporary exemption (including
any loss of exemptive relief provided herein), and prompt reporting of
wrongdoing;
(i) Effective as of the effective date of this temporary exemption
with respect to any arrangement, agreement, or contract between a
Barclays Affiliated QPAM and an ERISA-covered plan or IRA for which
such Barclays Affiliated QPAM provides asset management or other
discretionary fiduciary services, each Barclays Affiliated QPAM agrees:
(1) To comply with ERISA and the Code, as applicable with respect
to such ERISA-covered plan or IRA; to refrain from engaging in
prohibited transactions that are not otherwise exempt (and to promptly
correct any inadvertent prohibited transactions); and to comply with
the standards of prudence and loyalty set forth in section 404 of ERISA
with respect to each such ERISA-covered plan and IRA;
(2) Not to require (or otherwise cause) the ERISA-covered plan or
IRA to waive, limit, or qualify the liability of the Barclays
Affiliated QPAM for violating ERISA or the Code or engaging in
prohibited transactions;
(3) Not to require the ERISA-covered plan or IRA (or sponsor of
such ERISA-covered plan or beneficial owner of such IRA) to indemnify
the Barclays Affiliated QPAM for violating ERISA or engaging in
prohibited transactions, except for violations or prohibited
transactions caused by an error, misrepresentation, or misconduct of a
plan fiduciary or other party hired by the plan fiduciary who is
independent of BPLC, and its affiliates;
(4) Not to restrict the ability of such ERISA-covered plan or IRA
to terminate or withdraw from its arrangement with the Barclays
Affiliated QPAM (including any investment in a separately managed
account or pooled fund subject to ERISA and managed by such QPAM), with
the exception of reasonable restrictions, appropriately disclosed in
advance, that are specifically designed to ensure equitable treatment
of all investors in a pooled fund in the event such withdrawal or
termination may have adverse consequences for all other investors as a
result of an actual lack of liquidity of the underlying assets,
provided that such restrictions are applied consistently and in like
manner to all such investors;
(5) Not to impose any fees, penalties, or charges for such
termination or withdrawal with the exception of reasonable fees,
appropriately disclosed in advance, that are specifically designed to
prevent generally recognized abusive investment practices or
specifically designed to ensure equitable treatment of all investors in
a pooled fund in the event such withdrawal or termination may have
adverse consequences for all other investors, provided that such fees
are applied consistently and in like manner to all such investors;
(6) Not to include exculpatory provisions disclaiming or otherwise
limiting liability of the Barclays Affiliated QPAM for a violation of
such agreement's terms, except for liability caused by an error,
misrepresentation, or misconduct of a plan fiduciary or other party
hired by the plan fiduciary who is independent of BPLC, and its
affiliates; and
(7) To indemnify and hold harmless the ERISA-covered plan or IRA
for any damages resulting from a violation of applicable laws, a breach
of contract, or any claim arising out of the failure of such Barclays
Affiliated QPAM to qualify for the exemptive relief provided by PTE 84-
14 as a result of a violation of Section I(g) of PTE 84-14 other than
the Conviction.
Within four (4) months of the date of the Conviction, each Barclays
Affiliated QPAM will provide a notice of its obligations under this
Section I(i) to each ERISA-covered plan and IRA for which a Barclays
Affiliated QPAM provides asset management or other discretionary
fiduciary services;
(j) The Barclays Affiliated QPAMs comply with each condition of PTE
84-14, as amended, with the sole exceptions of the violations of
Section I(g) of PTE 84-14 that are attributable to the Conviction;
(k) Each Barclays Affiliated QPAM will maintain records necessary
to demonstrate that the conditions of this temporary exemption have
been met, for six (6) years following the date of any transaction for
which such Barclays Affiliated QPAM relies upon the relief in the
temporary exemption;
(l) During the effective period of this temporary exemption, BPLC:
(1) Immediately discloses to the Department any Deferred Prosecution
Agreement (a DPA) or Non-Prosecution Agreement (an NPA) that BPLC or an
affiliate enters into with the U.S. Department of Justice, to the
extent such DPA or NPA involves conduct described in Section I(g) of
PTE 84-14 or section 411 of ERISA; and
(2) Immediately provides the Department any information requested
by the Department, as permitted by law, regarding the agreement and/or
the conduct and allegations that led to the agreements; and
(m) A Barclays Affiliated QPAM or a Barclays Related QPAM will not
fail to meet the terms of this temporary exemption solely because a
different Barclays Affiliated QPAM or Barclays Related QPAM fails to
satisfy a condition for relief under this temporary exemption,
described in Sections I(c), (d), (h), (i), (j) and (k).
Section II: Definitions
(a) The term ``Barclays Affiliated QPAM'' means a ``qualified
professional asset manager'' (as defined in Section VI(a) \51\ of PTE
84-14) that relies on the relief provided by PTE 84-14 and with respect
to which BPLC is a current or future ``affiliate'' (as defined in
Section VI(d)(1) of PTE 84-14). The term ``Barclays Affiliated QPAM''
excludes BPLC and BCI.
---------------------------------------------------------------------------
\51\ In general terms, a QPAM is an independent fiduciary that
is a bank, savings and loan association, insurance company, or
investment adviser that meets certain equity or net worth
requirements and other licensure requirements and that has
acknowledged in a written management agreement that it is a
fiduciary with respect to each plan that has retained the QPAM.
---------------------------------------------------------------------------
(b) The term ``Barclays Related QPAM'' means any current or future
``qualified professional asset manager'' (as defined in Section VI(a)
of PTE 84-14) that relies on the relief provided by PTE 84-14, and with
respect to which BPLC owns a direct or indirect five percent or more
interest, but with respect to which BPLC is not an ``affiliate'' (as
defined in Section VI(d)(1) of PTE 84-14).
(c) The terms ``ERISA-covered plan'' and ``IRA'' mean,
respectively, a plan subject to Part 4 of Title I of ERISA and a plan
subject to section 4975 of the Code;
(d) The term ``BPLC'' means Barclays PLC, the parent entity, and
does not include any subsidiaries or other affiliates;
(e) The term ``Conviction'' means the judgment of conviction
against BPLC for violation of the Sherman Antitrust Act, 15 U.S.C. 1,
which is scheduled to be entered in the District Court for the District
of Connecticut (the District Court), Case Number 3:15-cr-00077-SRU-1,
in connection with BPLC,
[[Page 83368]]
through certain of its euro/U.S. dollar (EUR/USD) traders, entering
into and engaging in a combination and conspiracy to fix, stabilize,
maintain, increase or decrease the price of, and rig bids and offers
for, the EUR/USD currency pair exchanged in the FX spot market by
agreeing to eliminate competition in the purchase and sale of the EUR/
USD currency pair in the United States and elsewhere. For all purposes
under this temporary exemption, ``conduct'' of any person or entity
that is the ``subject of [a] Conviction'' encompasses any conduct of
BPLC and/or their personnel, that is described in the Plea Agreement,
(including the Factual Statement), and other official regulatory or
judicial factual findings that are a part of this record; and
(f) The term ``Conviction Date'' means the date that a judgment of
Conviction against BPLC is entered by the District Court in connection
with the Conviction.
Effective Date: This proposed temporary exemption will be effective
for the period beginning on the Conviction Date until the earlier of:
the date that is twelve months following the Conviction Date; or the
effective date of a final agency action made by the Department in
connection with an application for long-term exemptive relief for the
covered transactions described herein.
Department's Comment: The Department is publishing this proposed
temporary exemption in order to protect ERISA-covered plans and IRAs
from certain costs and/or investment losses that may arise to the
extent entities with a corporate relationship to BPLC lose their
ability to rely on PTE 84-14 as of the Conviction Date, as described
below. Elsewhere today in the Federal Register, the Department is also
proposing a five-year proposed exemption that would provide the same
relief that is described herein, but for a longer effective period. The
five-year proposed exemption is subject to enhanced conditions and a
longer comment period. Comments received in response to this proposed
temporary exemption will be considered in connection with the
Department's determination whether or not to grant such five-year
exemption.
The proposed exemption would provide relief from certain of the
restrictions set forth in sections 406 and 407 of ERISA. No relief from
a violation of any other law would be provided by this exemption.
Furthermore, the Department cautions that the relief in this
proposed exemption would terminate immediately if, among other things,
an entity within the BPLC corporate structure is convicted of a crime
described in Section I(g) of PTE 84-14 (other than the Conviction)
during the effective period of the exemption. While such an entity
could apply for a new exemption in that circumstance, the Department
would not be obligated to grant the exemption. The terms of this
proposed exemption have been specifically designed to permit plans to
terminate their relationships in an orderly and cost effective fashion
in the event of an additional conviction or a determination that it is
otherwise prudent for a plan to terminate its relationship with an
entity covered by the proposed exemption.
Summary of Facts and Representations \52\
---------------------------------------------------------------------------
\52\ The Summary of Facts and Representations is based on the
Applicant's representations, unless indicated otherwise.
---------------------------------------------------------------------------
Background
1. BCI is a broker-dealer registered under the Securities Exchange
Act of 1934, as amended, and was, until December 28, 2015, an
investment adviser registered under the Investment Advisers Act of
1940, as amended. As a registered broker-dealer, BCI is regulated by
the U.S. Securities and Exchange Commission and Financial Industry
Regulatory Authority.
BCI is incorporated in the State of Connecticut and headquartered
in New York, with 18 U.S. branch offices. BCI is wholly-owned by
Barclays Group US Inc., a wholly-owned subsidiary of Barclays Bank PLC,
which, in turn, is a wholly-owned subsidiary of BPLC, a non-operating
holding company.
Barclays Bank PLC wholly owns, indirectly, one bank subsidiary in
the United States--Barclays Bank Delaware, a Delaware chartered
commercial bank supervised and regulated by the Federal Deposit
Insurance Corporation, the Delaware Office of the State Bank
Commissioner and the Consumer Financial Protection Bureau. Barclays
Bank Delaware does not manage ERISA plan or IRA assets currently, but
may do so in the future.
BPLC's asset management business, Barclays Wealth and Investment
Management (BWIM), offers wealth management products and services for
many types of clients, including individual and institutional clients.
BWIM operates through over 20 offices worldwide. Prior to December 4,
2015, BWIM functioned in the United States through BCI.
On December 4, 2015, BCI consummated a sale of its U.S. operations
of BWIM, including Barclays Wealth Trustees, to Stifel Financial Corp.
As a result of the transaction, as of that date, neither BCI nor any of
its affiliates continued to manage ERISA-covered plan or IRA assets.
2. On May 20, 2015, the Department of Justice filed a one-count
criminal information (the Information) in the United States District
Court for the District of Connecticut charging BPLC, an affiliate of
BCI, with participating in a combination and a conspiracy to fix,
stabilize, maintain, increase or decrease the price of, and rig bids
and offers for, Euro/USD currency pairs exchanged in the foreign
currency exchange spot market by agreeing to eliminate competition in
the purchase and sale of such currency pairs in the United States and
elsewhere, in violation of the Sherman Antitrust Act, 15 U.S.C. 1. For
example, BPLC engaged in communications with other financial services
firms in an electronic chat room limited to specific EUR/USD traders,
each of whom was employed, at certain times, by one of the financial
services firms engaged in the FX Spot Market.
BPLC also participated in a conspiracy to decrease competition in
the purchase and sale of the EUR/USD currency pair. BPLC and other
financial services firms coordinated the trading of the EUR/USD
currency pair in connection with certain benchmark currency ``fixes''
which occurred at specific times each trading day. In addition, BPLC
and other financial services firms refrained from certain trading
behavior, by withholding bids and offers, when another firm held an
open risk position, so that the price of the currency traded would not
move in a direction adverse to the firm with the open risk position.
Also, on May 20, 2015, pursuant to a plea agreement (the Plea
Agreement), BPLC entered a plea of guilty for the violation of Sherman
Antitrust Act, 15 U.S.C. 1. Under the Plea Agreement, BPLC pled guilty
to the charge set out in the Information. The judgment of Conviction
has not yet been entered.
BPLC paid a criminal fine of $710 million to the Department of
Justice, of which $650 million is attributable to the charge set out in
the Information. The remaining $60 million is attributable to conduct
covered by the non-prosecution agreement that BPLC entered into on June
26, 2012, with the Criminal Division, Fraud Section of the Department
of Justice related to BPLC's submissions of benchmark interest rates,
including the London InterBank Offered Rate (known as LIBOR). In
addition, Barclays Bank PLC, a wholly-owned subsidiary of BPLC, entered
into a settlement agreement with the U.K.
[[Page 83369]]
Financial Conduct Authority to pay a monetary penalty of [pound]284.432
million ($440.9 million).
As part of the settlement, Barclays Bank PLC consented to the entry
of an Order Instituting Proceedings Pursuant to Sections 6(c)(4)(A) and
6(d) of the Commodity Exchange Act, Making Findings, and Imposing
Remedial Sanctions by the Commodity Futures Trading Commission (CFTC)
imposing a civil money penalty of $400 million (the CFTC Order). In
addition, Barclays Bank PLC and its New York branch consented to the
entry of an Order to Cease and Desist and Order of Assessment of a
Civil Money Penalty Issued Upon Consent Pursuant to the Federal Deposit
Insurance Act, as Amended, by the Board of Governors of the Federal
Reserve System (the Federal Reserve) imposing a civil money penalty of
$342 million (the Board Order). Barclays Bank PLC and its New York
branch also consented to the entry of a Consent Order under New York
Bank Law 44 and 44-a by the New York Department of Financial Services
(DFS) imposing a civil money penalty of $485 million \53\ (the DFS
Order and, together with the Plea Agreement, the CFTC Order and the
Board Order, the FX Settlements).
---------------------------------------------------------------------------
\53\ On November 17, 2015, Barclays Bank PLC announced that it
had reached a subsequent settlement with DFS in respect of its
investigation into Barclays Bank PLC's electronic trading of FX and
FX electronic trading system, that it had agreed to pay a civil
money penalty of $150 million and that Barclays Bank PLC would take
certain remedial steps, including submission of a proposed
remediation plan concerning the underlying conduct to the
independent consultant who was initially installed pursuant to a
Memorandum of Understanding entered between Barclays Bank PLC and
DFS, and whose engagement terminated February 19, 2016.
---------------------------------------------------------------------------
3. In addition to the settlements described above, relating to FX
trading, in July 2015, the Israeli tax authorities commenced a criminal
investigation relating to the Value Added Tax returns of Barclays Bank
PLC in Israel. The Applicant represents that the investigation is
ongoing, and the outcome is anticipated to be a non-material financial
penalty.
In addition, the Applicant represents that Barclays Italy is the
subject of three separate criminal proceedings before the Tribunal of
Rome, which stem from individual allegations of usury, fraud and
forgery in connection with a mortgage, and embezzlement. With respect
to this investigation, Applicant also anticipates the outcome will be a
non-material financial penalty.
The Applicant represents that to the best of its knowledge, it
does not have a reasonable basis to believe that the discretionary
activities of any affiliated QPAM are the subject of the
investigation or the criminal proceedings discussed above. The
Applicant also represents that it does not have a reasonable basis
to believe that any pending criminal investigation involving the
Applicant or its affiliates would cause a reasonable plan or IRA
customer not to hire or retain a QPAM affiliated with the
Applicant.\54\
---------------------------------------------------------------------------
\54\ According to the Applicant, for further information related
to both criminal and civil matters involving BPLC, BPLC's most
recent litigation-related disclosure can be found in note 19
(``Legal, competition and regulatory matters'') to the ``Results of
Barclays PLC Group as of, and for the six months ended, 30 June
2016,'' filed as exhibit 99.1 to a Form 6-K (Report of Foreign
Private Issuer Pursuant to Rule 13a-16 or 15d-16 of the Securities
Exchange Act of 1934), filed by BPLC with the U.S. Securities and
Exchange Commission on July 29, 2016. The Applicant also notes that
this disclosure does not specifically describe certain confidential
investigations resulting from BPLC's reporting of certain conduct
that may be criminal to enforcement authorities but as to which BPLC
would not expect to be the subject of an indictment.
---------------------------------------------------------------------------
Failure To Comply With Section I(g) of PTE 84-14 and Proposed Relief
4. PTE 84-14 is a class exemption that permits certain transactions
between a party in interest with respect to an employee benefit plan
and an investment fund in which the plan has an interest and which is
managed by a ``qualified professional asset manager'' (QPAM), if the
conditions of the exemption are satisfied. These conditions include
Section I(g), which precludes a person who may otherwise meet the
definition of a QPAM from relying on the relief provided by PTE 84-14
if that person or its ``affiliate'' \55\ has, within 10 years
immediately preceding the transaction, been either convicted or
released from imprisonment, whichever is later, as a result of certain
specified criminal activity described therein.\56\ The Department notes
that a QPAM, and those who may be in a position to influence its
policies, are expected to maintain a high standard of integrity.
---------------------------------------------------------------------------
\55\ Section VI(d) of PTE 84-14 defines the term ``affiliate''
for purposes of Section I(g) as ``(1) Any person directly or
indirectly through one or more intermediaries, controlling,
controlled by, or under common control with the person, (2) Any
director of, relative of, or partner in, any such person, (3) Any
corporation, partnership, trust or unincorporated enterprise of
which such person is an officer, director, or a 5 percent or more
partner or owner, and (4) Any employee or officer of the person
who--(A) Is a highly compensated employee (as defined in Section
4975(e)(2)(H) of the Code) or officer (earning 10 percent or more of
the yearly wages of such person), or (B) Has direct or indirect
authority, responsibility or control regarding the custody,
management or disposition of plan assets.''
\56\ For purposes of Section I(g) of PTE 84-14, a person shall
be deemed to have been ``convicted'' from the date of the judgment
of the trial court, regardless of whether that judgment stands on
appeal.
---------------------------------------------------------------------------
5. The Applicant represents that BPLC is currently affiliated
(within the meaning of Part VI(d) of PTE 84-14) with only two entities
that could meet the definition of ``QPAM'' in Part VI(a) of PTE 84-14,
namely Barclays Bank Delaware and Barclays Bank PLC, New York Branch,
both of which are subject to its control (within the meaning of Part
VI(d)(1) of PTE 84-14). The Applicant states that BPLC or a subsidiary
may, in the future, invest in non-controlled, minimally related QPAMs
that could constitute Barclays Related QPAMs, as defined in the
proposed exemption.\57\ The Applicant states that it may acquire a new
affiliate at any time, and creates new affiliates frequently, in either
case that could constitute Barclays Affiliated QPAMs or Barclays
Related QPAMs, as defined in the proposed exemption. To the extent that
these new affiliates manage ERISA-covered plans or IRAs, these future
affiliates would also be covered by the exemption.
---------------------------------------------------------------------------
\57\ For example, the Applicant states that BPLC may provide
seed investments for new managers in exchange for minority
interests. However, the Applicant points out that these managers,
which had nothing to do with the conduct underlying the Conviction,
would be unable to rely on PTE 84-14 for the benefit of their plan
clients absent such relief.
---------------------------------------------------------------------------
However, the exemption described herein does not extend to the
convicted entity, BPLC, or BCI. Regarding BCI, according to the
Applicant, the New York Department of Financial Services referred to 14
people who DFS believed should be sanctioned in some way. According to
Barclays' human resources records, seven of those individuals were line
managers with some supervisory authority at some point during the
relevant time period. Five of those individuals were employed by both
Barclays Bank PLC and BCI. Nine of the fourteen worked, at one time or
another, in New York. The Department views BCI's level of involvement
in the misconduct that gave rise to the Conviction as unacceptable, and
is not proposing relief herein for that entity to act as a QPAM.
Remedial Actions To Address the Criminal Conduct of BPLC--Pursuant to
the Plea Agreement
6. The Applicant states that the Department of Justice and BPLC
negotiated a settlement reflected in the Plea Agreement, in which BPLC
agreed to lawfully undertake the following pursuant to the Plea
Agreement:
(a) Payment by BPLC of a total monetary penalty in the amount of
$710 million;
(b) During the probation term of three years, BPLC will not commit
another crime under U.S. federal law or engage
[[Page 83370]]
in the conduct that gave rise to the Plea Agreement;
(c) BPLC will notify the probation officer upon learning of the
commencement of any federal criminal investigation in which BPLC is a
target, or federal criminal prosecution against it;
(d) During the probation term, BPLC will prominently post and
maintain on its Web site and, within 30 days after BPLC pleads guilty,
make best efforts to send spot FX customers and counterparties (other
than customers and counterparties who BPLC can establish solely engaged
in buying or selling foreign currency through its consumer bank units
and not its spot FX sales or trading staff) a retrospective disclosure
notice regarding certain historical conduct involving FX Spot Market
transactions with customers via telephone, email and/or electronic
chat;
(e) BPLC will implement a compliance program designed to prevent
and detect the conduct underlying the Plea Agreement throughout its
operations including those of its affiliates and subsidiaries and
provide an annual progress report to the Department of Justice and the
probation officer;
(f) BPLC will further strengthen its compliance and internal
controls as required by the CFTC and the U.K. Financial Conduct
Authority and any other regulatory or enforcement agencies that have
addressed the conduct underlying the Plea Agreement, which shall
include, but not be limited to, a thorough review of the activities and
decision-making by employees of BPLC's legal and compliance functions
with respect to the historical conduct underlying the Plea Agreement,
and promptly report to the Department of Justice and the probation
officer all of its remediation efforts required by these agencies, as
well as remediation and implementation of any compliance program and
internal controls, policies and procedures related to the criminal
conduct underlying the Plea Agreement;
(g) BPLC will report to the Department of Justice all credible
information regarding criminal violations of U.S. antitrust laws and of
U.S. law concerning fraud, including securities or commodities fraud,
by BPLC or any of its employees, as to which BPLC's Board of Directors,
management (that is, all supervisors within the bank), or legal and
compliance personnel are aware;
(h) BPLC will bring to the Antitrust Division's attention all
federal criminal investigations in which BPLC is identified as a
subject or a target, and all administrative or regulatory proceedings
or civil actions brought by any federal or state governmental authority
in the United States against BPLC or its employees, to the extent that
such investigations, proceedings or actions allege facts that could
form the basis of a criminal violation of U.S. antitrust laws, and also
bring to the Criminal Division, Fraud Section's attention all federal
criminal or regulatory investigations in which BPLC is identified as a
subject or a target, and all administrative or regulatory proceedings
or civil actions brought by any federal governmental authority in the
United States against BPLC or its employees, to the extent that such
investigations, proceedings or actions allege violation of U.S. law
concerning fraud, including securities or commodities fraud;
(i) BPLC and all of the entities in which BPLC had, indirectly or
directly, a greater than 50% ownership interest as of the date of the
Plea Agreement, including Barclays Bank PLC and Barclays Capital
Services Ltd. (i.e., the Related Entities), will cooperate fully and
truthfully with the Department of Justice in its investigation and
prosecution of the conduct underlying the Plea Agreement, or any other
currency pair in the FX Spot Market, or any foreign exchange forward,
foreign exchange option or other foreign exchange derivative, or other
financial product, to the extent such other financial product has been
disclosed to the Department of Justice (excluding a certain sealed
investigation). This will include producing non-privileged non-
protected materials, wherever located; using its best efforts to secure
continuing cooperation of the current or former directors, officers and
employees of BPLC and its Related Entities; and identifying witnesses
who, to BPLC's knowledge, may have material information regarding the
matters under investigation;
(j) During the probation term, BPLC will cooperate fully with the
Department of Justice and any other law enforcement authority or
government agency designated by the Department of Justice, in a manner
consistent with applicable law and regulations, with regard to a
certain sealed investigation.
(k) BPLC must expeditiously seek relief from the Department by
filing an application for the QPAM Exemption and will provide all
information requested by the Department in a timely manner.
Remedial Actions To Address the Criminal Conduct of BPLC Subject to the
Conviction--Structural Enhancements
7. The Applicant represents that BPLC and its subsidiaries and
affiliates, including Barclays Bank PLC and its New York branch
(collectively, the Bank) have implemented and will continue to
implement policies and procedures designed to prevent the recurrence of
the conduct that is the subject of the FX Settlements as required by
the Plea Agreement.
Remedial Actions To Address the Criminal Conduct of BPLC Subject to the
Conviction--Additional Structural Enhancements
8. The Applicant states that the Bank has made substantial
investments in the independent, external review of its governance,
operational model, and risk and control programs, conducted by Sir
Anthony Salz, including interviews of more than 600 employees, clients,
and competitors, as well as consideration of more than 9,000 responses
to an internal staff survey. The Applicant represents that the Bank has
taken steps to clearly articulate its policies and values and
disseminate that information firm-wide through trainings.
The Applicant states that the Bank continues to develop a strong
institutionalized framework of supervision and accountability running
from the desk level to the top of the organization. The Applicant
represents that the Bank continues to institute an enhanced global
compliance and controls system, supported by substantial financial and
human resources, and charged with enforcing and continually monitoring
adherence to BPLC's policies.
Statutory Findings--Protective of the Rights of Participants of
Affected Plans and IRAs
9. The Applicant proposed certain conditions it believes are
protective of the rights of participants and beneficiaries of ERISA-
covered plans and IRAs with respect to the transactions described
herein. The Department has determined to revise and supplement the
proposed conditions so that it can make its required finding that the
requested exemption is protective of the rights of participants and
beneficiaries of affected plans and IRAs. In this regard, the
Department has tentatively determined that the following conditions
adequately protect the rights of participants and beneficiaries of
affected plans and IRAs with respect to the transactions that
[[Page 83371]]
would be covered by this temporary exemption.
10. Relief under this proposed exemption is only available to the
extent: (a) Other than with respect to certain individuals who worked
for a non-fiduciary business within BCI and who had no responsibility
for, and exercised no authority in connection with, the management of
plan assets, the Barclays Affiliated QPAMs, including their officers,
directors, agents other than BPLC and employees of such Barclays
Affiliated QPAMs, did not know of, have reason to know of, or
participate in the criminal conduct of BPLC that is the subject of the
Conviction (for purposes of this condition, the term ``participated
in'' includes the knowing or tacit approval of the misconduct
underlying the Conviction); (b) any failure of those QPAMs to satisfy
Section I(g) of PTE 84-14 arose solely from the Conviction; and (c) the
Barclays Affiliated QPAMs and the Barclays Related QPAMs (including
their officers, directors, agents other than BPLC, and employees of
such QPAMs) did not receive direct compensation, or knowingly receive
indirect compensation, in connection with the criminal conduct that is
the subject of the Conviction.
11. The Department expects the Barclays Affiliated QPAMs to
rigorously ensure that the individuals associated with the criminal
conduct of BPLC will not be employed or knowingly engaged by such
QPAMs. In this regard, the temporary exemption, if granted as proposed,
mandates that the Barclays Affiliated QPAMs will not employ or
knowingly engage any of the individuals that participated in criminal
conduct that is the subject of the Conviction. Again, for purposes of
this condition, the term ``participated in'' includes the knowing or
tacit approval of the misconduct underlying the Conviction.
Further, the Barclays Affiliated QPAM will not use its authority or
influence to direct an ``investment fund,'' (as defined in Section
VI(b) of PTE 84-14), that is subject to ERISA or the Code and managed
by such Barclays Affiliated QPAM, to enter into any transaction with
BPLC or BCI, or to engage BPLC or BCI, to provide any service to such
investment fund, for a direct or indirect fee borne by such investment
fund, regardless of whether such transaction or service may otherwise
be within the scope of relief provided by an administrative or
statutory exemption.
12. The Barclays Affiliated QPAMs and Barclays Related QPAMs must
comply with each condition of PTE 84-14, as amended, with the sole
exception of the violation of Section I(g) of PTE 84-14 that is
attributable to the Conviction. Further, any failure of the Barclays
Affiliated QPAMs or the Barclays Related QPAMs to satisfy Section I(g)
of PTE 84-14 arose solely from the Conviction.
13. No relief will be provided by the temporary exemption to the
extent that a Barclays Affiliated QPAM or a Barclays Related QPAM
exercised authority over the assets of an ERISA-covered plan or IRA in
a manner that it knew or should have known would: Further the criminal
conduct that is the subject of the Conviction; or cause the Barclays
Affiliated QPAM or the Barclays Related QPAM, affiliates, or related
parties to directly or indirectly profit from the criminal conduct that
is the subject of the Conviction. Further, no relief will be provided
to the extent BPLC or BCI provides any discretionary asset management
services to ERISA-covered plans or IRAs, or otherwise acts as a
fiduciary with respect to ERISA-covered plan and IRA assets.
13. The Department believes that robust policies and training are
warranted where, as here, the criminal misconduct has occurred within a
corporate organization that is affiliated with one or more QPAMs
managing plan or IRA assets in reliance on PTE 84-14. Therefore, this
proposed temporary exemption requires that prior to a Barclays
Affiliated QPAM's engagement by any ERISA-covered plan or IRA for
discretionary asset management services, each Barclays Affiliated QPAM
must develop, implement, maintain, and follow written policies and
procedures (the Policies) requiring and reasonably designed to ensure
that: The asset management decisions of the Barclays Affiliated QPAM
are conducted independently of the corporate management and business
activities of BPLC and BCI; the Barclays Affiliated QPAM fully complies
with ERISA's fiduciary duties, and with ERISA and the Code's prohibited
transaction provisions, and does not knowingly participate in any
violations of these duties and provisions with respect to ERISA-covered
plans and IRAs; the Barclays Affiliated QPAM does not knowingly
participate in any other person's violation of ERISA or the Code with
respect to ERISA-covered plans and IRAs; any filings or statements made
by the Barclays Affiliated QPAM to regulators, including but not
limited to, the Department, the Department of the Treasury, the
Department of Justice, and the Pension Benefit Guaranty Corporation, on
behalf of ERISA-covered plans or IRAs are materially accurate and
complete, to the best of such QPAM's knowledge at that time; the
Barclays Affiliated QPAM does not make material misrepresentations or
omit material information in its communications with such regulators
with respect to ERISA-covered plans or IRAs, or make material
misrepresentations or omit material information in its communications
with ERISA-covered plan and IRA clients; and the Barclays Affiliated
QPAM complies with the terms of this temporary exemption. Any violation
of, or failure to comply with, these items is corrected promptly upon
discovery, and any such violation or compliance failure not promptly
corrected is reported, upon discovering the failure to promptly
correct, in writing, to appropriate corporate officers, the head of
compliance and the General Counsel (or their functional equivalent) of
the relevant Barclays Affiliated QPAM, and an appropriate fiduciary of
any affected ERISA-covered plan or IRA, where such fiduciary is
independent of BPLC.
13. The Department has also imposed a condition that requires that
prior to a Barclays Affiliated QPAM's engagement by any ERISA-covered
plan or IRA for discretionary asset management services reliant on PTE
84-14, each Barclays Affiliated QPAM develops and implements a program
of training (the Training), conducted at least annually, for all
relevant Barclays Affiliated QPAM asset/portfolio management, trading,
legal, compliance, and internal audit personnel. The Training must be
set forth in the Policies and, at a minimum, cover the Policies, ERISA
and Code compliance (including applicable fiduciary duties and the
prohibited transaction provisions), ethical conduct, the consequences
for not complying with the conditions of this temporary exemption
(including any loss of exemptive relief provided herein), and prompt
reporting of wrongdoing.
14. This temporary exemption requires the Barclays Affiliated QPAMs
to enter into certain contractual obligations in connection with the
provision of services to their clients. It is the Department's view
that the condition for exemptive relief requiring these contractual
obligations is essential to the Department's ability to make its
findings that the proposed temporary exemption is protective of the
rights of the participants and beneficiaries of ERISA-covered and IRA
plan clients of Barclays Affiliated QPAMs under section 408(a) of
ERISA. In this regard, Section I(i) of the proposed temporary exemption
provides that, as of the effective date of this temporary exemption
with respect to any
[[Page 83372]]
arrangement, agreement, or contract between a Barclays Affiliated QPAM
and an ERISA-covered plan or IRA for which a Barclays Affiliated QPAM
provides asset management or other discretionary fiduciary services,
each Barclays Affiliated QPAM must agree: To comply with ERISA and the
Code, as applicable, with respect to such ERISA-covered plan or IRA,
and refrain from engaging in prohibited transactions that are not
otherwise exempt (and to promptly correct any inadvertent prohibited
transactions), and to comply with the standards of prudence and loyalty
set forth in section 404 of ERISA with respect to each such ERISA-
covered plan and IRA; to indemnify and hold harmless the ERISA-covered
plan or IRA for any damages resulting from a violation of applicable
laws, a breach of contract, or any claim arising out of the failure of
such Barclays Affiliated QPAM to qualify for the exemptive relief
provided by PTE 84-14 as a result of a violation of Section I(g) of PTE
84-14 other than the Conviction; not to require (or otherwise cause)
the ERISA-covered plan or IRA to waive, limit, or qualify the liability
of the Barclays Affiliated QPAM for violating ERISA or the Code or
engaging in prohibited transactions; not to require the ERISA-covered
plan or IRA (or sponsor of such ERISA-covered plan or beneficial owner
of such IRA) to indemnify the Barclays Affiliated QPAM for violating
ERISA or engaging in prohibited transactions, except for violations or
prohibited transactions caused by an error, misrepresentation, or
misconduct of a plan fiduciary or other party hired by the plan
fiduciary who is independent of BPLC, and its affiliates; not to
restrict the ability of such ERISA-covered plan or IRA to terminate or
withdraw from its arrangement with the Barclays Affiliated QPAM
(including any investment in a separately managed account or pooled
fund subject to ERISA and managed by such QPAM), with the exception of
reasonable restrictions, appropriately disclosed in advance, that are
specifically designed to ensure equitable treatment of all investors in
a pooled fund in the event such withdrawal or termination may have
adverse consequences for all other investors as a result of the actual
lack of liquidity of the underlying assets, provided that such
restrictions are applied consistently and in like manner to all such
investors; and not to impose any fees, penalties, or charges for such
termination or withdrawal with the exception of reasonable fees,
appropriately disclosed in advance, that are specifically designed to
prevent generally recognized abusive investment practices or
specifically designed to ensure equitable treatment of all investors in
a pooled fund in the event such withdrawal or termination may have
adverse consequences for all other investors, provided that such fees
are applied consistently and in like manner to all such investors.
Furthermore, any contract, agreement or arrangement between a Barclays
Affiliated QPAM and its ERISA-covered plan or IRA client must not
contain exculpatory provisions disclaiming or otherwise limiting
liability of the Barclays Affiliated QPAM for a violation of such
agreement's terms, except for liability caused by an error,
misrepresentation, or misconduct of a plan fiduciary or other party
hired by the plan fiduciary who is independent of BPLC, and its
affiliates, and its affiliates.
15. Within four (4) months of the date of the Conviction, each
Barclays Affiliated QPAM will: Provide a notice of its obligations
under Section I(i) to each ERISA-covered plan and IRA for which the
Barclays Affiliated QPAM provides asset management or other
discretionary fiduciary services.
16. In addition, each Barclays Affiliated QPAM must maintain
records necessary to demonstrate that the conditions of this temporary
exemption have been met for six (6) years following the date of any
transaction for which such Barclays Affiliated QPAM relies upon the
relief in the temporary exemption.
17. Furthermore, the proposed temporary exemption mandates that,
during the effective period of this temporary exemption, BPLC must
immediately disclose to the Department any Deferred Prosecution
Agreement (a DPA) or a Non-Prosecution Agreement (an NPA) that BPLC or
an affiliate enters into with the Department of Justice, to the extent
such DPA or NPA involves conduct described in section I(g) of PTE 84-14
or section 411 of ERISA. In addition, BPLC or an affiliate must
immediately provide the Department any information requested by the
Department, as permitted by law, regarding the agreement and/or the
conduct and allegations that led to the agreement.
18. The proposed exemption would provide relief from certain of the
restrictions set forth in Section 406 and 407 of ERISA. Such a granted
exemption would not provide relief from any other violation of law.
Pursuant to the terms of this proposed exemption, any criminal
conviction not expressly described herein, but otherwise described in
Section I(g) of PTE 84-14 and attributable to the Applicant for
purposes of PTE 84-14, would result in the Applicant's loss of this
exemption.
Statutory Findings--Administratively Feasible
19. The Applicant represents that the proposed temporary exemption
is administratively feasible because it does not require any monitoring
by the Department. In addition, the limited effective duration of the
temporary exemption provides the Department with the opportunity to
determine whether long-term exemptive relief is warranted, without
causing sudden and potentially costly harm to ERISA-covered plans and
IRAs.
Summary
20. Given the revised and new conditions described above, the
Department has tentatively determined that the relief sought by the
Applicant satisfies the statutory requirements for an exemption under
section 408(a) of ERISA.
Notice to Interested Persons
Written comments and requests for a public hearing on the proposed
temporary exemption should be submitted to the Department within five
(5) days from the date of publication of this Federal Register Notice.
Given the short comment period, the Department will consider comments
received after such date, in connection with its consideration of more
permanent relief.
Warning: Do not include any personally identifiable information
(such as name, address, or other contact information) or confidential
business information that you do not want publicly disclosed. All
comments may be posted on the Internet and can be retrieved by most
Internet search engines.
FOR FURTHER INFORMATION CONTACT: Ms. Anna Mpras Vaughan of the
Department, telephone (202) 693-8565. (This is not a toll-free number.)
JPMorgan Chase & Co. (JPMC or the Applicant), Located in New York, New
York
[Application No. D-11906]
Proposed Five Year Exemption
The Department is considering granting a five-year exemption under
the authority of section 408(a) of the Act (or ERISA) and section
4975(c)(2) of the Code, and in accordance with the procedures set forth
in 29 CFR part 2570, subpart B (76 FR 66637, 66644, October 27,
2011).\58\
---------------------------------------------------------------------------
\58\ For purposes of this proposed five-year exemption,
references to section 406 of Title I of the Act, unless otherwise
specified, should be read to refer as well to the corresponding
provisions of section 4975 of the Code.
---------------------------------------------------------------------------
[[Page 83373]]
Section I: Covered Transactions
If the proposed five-year exemption is granted, certain asset
managers with specified relationships to JPMC (the JPMC Affiliated
QPAMs and the JPMC Related QPAMs, as defined further in Sections II(a)
and II(b), respectively) will not be precluded from relying on the
exemptive relief provided by Prohibited Transaction Class Exemption 84-
14 (PTE 84-14 or the QPAM Exemption),\59\ notwithstanding the judgment
of conviction against JPMC (the Conviction), as defined in Section
II(c)),\60\ for engaging in a conspiracy to: (1) Fix the price of, or
(2) eliminate competition in the purchase or sale of the euro/U.S.
dollar currency pair exchanged in the Foreign Exchange (FX) Spot
Market, for a period of five years beginning on the date the exemption
is granted, provided the following conditions are satisfied:
---------------------------------------------------------------------------
\59\ 49 FR 9494 (March 13, 1984), as corrected at 50 FR 41430
(October 10, 1985), as amended at 70 FR 49305 (August 23, 2005), and
as amended at 75 FR 38837 (July 6, 2010).
\60\ Section I(g) of PTE 84-14 generally provides that
``[n]either the QPAM nor any affiliate thereof . . . nor any owner .
. . of a 5 percent or more interest in the QPAM is a person who
within the 10 years immediately preceding the transaction has been
either convicted or released from imprisonment, whichever is later,
as a result of'' certain felonies including violation of the Sherman
Antitrust Act, Title 15 United States Code, Section 1.
---------------------------------------------------------------------------
(a) Other than a single individual who worked for a non-fiduciary
business within JPMorgan Chase Bank and who had no responsibility for,
and exercised no authority in connection with, the management of plan
assets, the JPMC Affiliated QPAMs and the JPMC Related QPAMs (including
their officers, directors, agents other than JPMC, and employees of
such QPAMs who had responsibility for, or exercised authority in
connection with the management of plan assets) did not know of, did not
have reason to know of, or participate in the criminal conduct that is
the subject of the Conviction. For purposes of this paragraph (a),
``participate in'' includes the knowing or tacit approval of the
misconduct underlying the Conviction;
(b) Other than a single individual who worked for a non-fiduciary
business within JPMorgan Chase Bank and who had no responsibility for,
and exercised no authority in connection with, the management of plan
assets, the JPMC Affiliated QPAMs and the JPMC Related QPAMs (including
their officers, directors, and agents other than JPMC, and employees of
such JPMC QPAMs) did not receive direct compensation, or knowingly
receive indirect compensation in connection with the criminal conduct
that is the subject of the Conviction;
(c) The JPMC Affiliated QPAMs will not employ or knowingly engage
any of the individuals that participated in the criminal conduct that
is the subject of the Conviction For the purposes of this paragraph
(c), ``participated in'' includes the knowing or tacit approval of the
misconduct underlying Conviction;
(d) A JPMC Affiliated QPAM will not use its authority or influence
to direct an ``investment fund'' (as defined in Section VI(b) of PTE
84-14), that is subject to ERISA or the Code and managed by such JPMC
Affiliated QPAM, to enter into any transaction with JPMC or the
Investment Banking Division of JPMorgan Chase Bank, or engage JPMC or
the Investment Banking Division of JPMorgan Chase Bank to provide any
service to such investment fund, for a direct or indirect fee borne by
such investment fund, regardless of whether such transaction or service
may otherwise be within the scope of relief provided by an
administrative or statutory exemption;
(e) Any failure of a JPMC Affiliated QPAM or a JPMC Related QPAM to
satisfy Section I(g) of PTE 84-14 arose solely from the Conviction;
(f) A JPMC Affiliated QPAM or a JPMC Related QPAM did not exercise
authority over the assets of any plan subject to Part 4 of Title I of
ERISA (an ERISA-covered plan) or section 4975 of the Code (an IRA) in a
manner that it knew or should have known would: Further the criminal
conduct that is the subject of the Conviction; or cause the JPMC QPAM
or its affiliates or related parties to directly or indirectly profit
from the criminal conduct that is the subject of the Conviction;
(g) JPMC and the Investment Banking Division of JPMorgan Chase Bank
will not provide discretionary asset management services to ERISA-
covered plans or IRAs, and will not otherwise act as a fiduciary with
respect to ERISA-covered plan or IRA assets;
(h)(1) Within four (4) months of the Conviction, each JPMC
Affiliated QPAM must develop, implement, maintain, and follow written
policies and procedures (the Policies) requiring and reasonably
designed to ensure that:
(i) The asset management decisions of the JPMC Affiliated QPAM are
conducted independently of JPMC's management and business activities,
including the corporate management and business activities of the
Investment Banking Division of JPMorgan Chase Bank;
(ii) The JPMC Affiliated QPAM fully complies with ERISA's fiduciary
duties, and with ERISA and the Code's prohibited transaction
provisions, and does not knowingly participate in any violation of
these duties and provisions with respect to ERISA-covered plans and
IRAs;
(iii) The JPMC Affiliated QPAM does not knowingly participate in
any other person's violation of ERISA or the Code with respect to
ERISA-covered plans and IRAs;
(iv) Any filings or statements made by the JPMC Affiliated QPAM to
regulators, including, but not limited to, the Department, the
Department of the Treasury, the Department of Justice, and the Pension
Benefit Guaranty Corporation, on behalf of ERISA-covered plans or IRAs,
are materially accurate and complete, to the best of such QPAM's
knowledge at that time;
(v) The JPMC Affiliated QPAM does not make material
misrepresentations or omit material information in its communications
with such regulators with respect to ERISA-covered plans or IRAs, or
make material misrepresentations or omit material information in its
communications with ERISA-covered plans and IRA clients;
(vi) The JPMC Affiliated QPAM complies with the terms of this five-
year exemption; and
(vii) Any violation of, or failure to comply with an item in
subparagraphs (ii) through (vi), is corrected promptly upon discovery,
and any such violation or compliance failure not promptly corrected is
reported, upon the discovery of such failure to promptly correct, in
writing, to appropriate corporate officers, the head of compliance, and
the General Counsel (or their functional equivalent) of the relevant
JPMC Affiliated QPAM, the independent auditor responsible for reviewing
compliance with the Policies, and an appropriate fiduciary of any
affected ERISA-covered plan or IRA that is independent of JPMC;
however, with respect to any ERISA-covered plan or IRA sponsored by an
``affiliate'' (as defined in Section VI(d) of PTE 84-14) of JPMC or
beneficially owned by an employee of JPMC or its affiliates, such
fiduciary does not need to be independent of JPMC. A JPMC Affiliated
QPAM will not be treated as having failed to develop, implement,
maintain, or follow the Policies, provided that it corrects any
instance of noncompliance promptly when discovered, or when it
reasonably should have known of the noncompliance (whichever is
earlier), and provided that it adheres to the reporting requirements
set forth in this subparagraph (vii);
[[Page 83374]]
(2) Within four (4) months of the date of the Conviction, each JPMC
Affiliated QPAM must develop and implement a program of training (the
Training), conducted at least annually, for all relevant JPMC
Affiliated QPAM asset/portfolio management, trading, legal, compliance,
and internal audit personnel. The Training must:
(i) Be set forth in the Policies and, at a minimum, cover the
Policies, ERISA and Code compliance (including applicable fiduciary
duties and the prohibited transaction provisions), ethical conduct, the
consequences for not complying with the conditions of this five-year
exemption (including any loss of exemptive relief provided herein), and
prompt reporting of wrongdoing; and
(ii) Be conducted by an independent professional who has been
prudently selected and who has appropriate technical and training and
proficiency with ERISA and the Code;
(i)(1) Each JPMC Affiliated QPAM submits to an audit conducted
annually by an independent auditor, who has been prudently selected and
who has appropriate technical training and proficiency with ERISA and
the Code, to evaluate the adequacy of, and the JPMC Affiliated QPAM's
compliance with, the Policies and Training described herein. The audit
requirement must be incorporated in the Policies. Each annual audit
must cover a consecutive twelve month period starting with the twelve
month period that begins on the effective date of the five-year
exemption, and each annual audit must be completed no later than six
(6) months after the period to which the audit applies;
(2) To the extent necessary for the auditor, in its sole opinion,
to complete its audit and comply with the conditions for relief
described herein, and as permitted by law, each JPMC Affiliated QPAM
and, if applicable, JPMC, will grant the auditor unconditional access
to its business, including, but not limited to: Its computer systems;
business records; transactional data; workplace locations; training
materials; and personnel;
(3) The auditor's engagement must specifically require the auditor
to determine whether each JPMC Affiliated QPAM has developed,
implemented, maintained, and followed the Policies in accordance with
the conditions of this five-year exemption, and has developed and
implemented the Training, as required herein;
(4) The auditor's engagement must specifically require the auditor
to test each JPMC Affiliated QPAM's operational compliance with the
Policies and Training. In this regard, the auditor must test a sample
of each QPAM's transactions involving ERISA-covered plans and IRAs
sufficient in size and nature to afford the auditor a reasonable basis
to determine the operational compliance with the Policies and Training;
(5) For each audit, on or before the end of the relevant period
described in Section I(i)(1) for completing the audit, the auditor must
issue a written report (the Audit Report) to JPMC and the JPMC
Affiliated QPAM to which the audit applies that describes the
procedures performed by the auditor during the course of its
examination. The Audit Report must include the auditor's specific
determinations regarding:
(i) The adequacy of the JPMC Affiliated QPAM's Policies and
Training; the JPMC Affiliated QPAM's compliance with the Policies and
Training; the need, if any, to strengthen such Policies and Training;
and any instance of the respective JPMC Affiliated QPAM's noncompliance
with the written Policies and Training described in Section I(h) above.
Any determination by the auditor regarding the adequacy of the Policies
and Training and the auditor's recommendations (if any) with respect to
strengthening the Policies and Training of the respective JPMC
Affiliated QPAM must be promptly addressed by such JPMC Affiliated
QPAM, and any action taken by such JPMC Affiliated QPAM to address such
recommendations must be included in an addendum to the Audit Report
(which addendum is completed prior to the certification described in
Section I(i)(7) below). Any determination by the auditor that the
respective JPMC Affiliated QPAM has implemented, maintained, and
followed sufficient Policies and Training must not be based solely or
in substantial part on an absence of evidence indicating noncompliance.
In this last regard, any finding that the JPMC Affiliated QPAM has
complied with the requirements under this subsection must be based on
evidence that demonstrates the JPMC Affiliated QPAM has actually
implemented, maintained, and followed the Policies and Training
required by this five-year exemption. Furthermore, the auditor must not
rely on the Annual Report created by the compliance officer (the
Compliance Officer) as described in Section I(m) below in lieu of
independent determinations and testing performed by the auditor as
required by Section I(i)(3) and (4) above; and
(ii) The adequacy of the Annual Review described in Section I(m)
and the resources provided to the Compliance Officer in connection with
such Annual Review;
(6) The auditor must notify the respective JPMC Affiliated QPAM of
any instance of noncompliance identified by the auditor within five (5)
business days after such noncompliance is identified by the auditor,
regardless of whether the audit has been completed as of that date;
(7) With respect to each Audit Report, the General Counsel, or one
of the three most senior executive officers of the JPMC Affiliated QPAM
to which the Audit Report applies, must certify in writing, under
penalty of perjury, that the officer has reviewed the Audit Report and
this exemption; addressed, corrected, or remedied any inadequacy
identified in the Audit Report; and determined that the Policies and
Training in effect at the time of signing are adequate to ensure
compliance with the conditions of this proposed five-year exemption,
and with the applicable provisions of ERISA and the Code;
(8) The Risk Committee of JPMC's Board of Directors is provided a
copy of each Audit Report; and a senior executive officer with a direct
reporting line to the highest ranking legal compliance officer of JPMC
must review the Audit Report for each JPMC Affiliated QPAM and must
certify in writing, under penalty of perjury, that such officer has
reviewed each Audit Report;
(9) Each JPMC Affiliated QPAM provides its certified Audit Report,
by regular mail to: The Department's Office of Exemption Determinations
(OED), 200 Constitution Avenue NW., Suite 400, Washington, DC 20210, or
by private carrier to: 122 C Street NW., Suite 400, Washington, DC
20001-2109, no later than 30 days following its completion. The Audit
Report will be part of the public record regarding this five-year
exemption. Furthermore, each JPMC Affiliated QPAM must make its Audit
Report unconditionally available for examination by any duly authorized
employee or representative of the Department, other relevant
regulators, and any fiduciary of an ERISA-covered plan or IRA, the
assets of which are managed by such JPMC Affiliated QPAM;
(10) Each JPMC Affiliated QPAM and the auditor must submit to OED:
(A) Any engagement agreement(s) entered into pursuant to the engagement
of the auditor under this five-year exemption; and (B) any engagement
agreement entered into with any other entity retained in connection
with such QPAM's compliance with the Training or Policies conditions of
this five-year
[[Page 83375]]
exemption, no later than six (6) months after the Conviction Date (and
one month after the execution of any agreement thereafter);
(11) The auditor must provide OED, upon request, all of the
workpapers created and utilized in the course of the audit, including,
but not limited to: The audit plan; audit testing; identification of
any instance of noncompliance by the relevant JPMC Affiliated QPAM; and
an explanation of any corrective or remedial action taken by the
applicable JPMC Affiliated QPAM; and
(12) JPMC must notify the Department at least 30 days prior to any
substitution of an auditor, except that no such replacement will meet
the requirements of this paragraph unless and until JPMC demonstrates
to the Department's satisfaction that such new auditor is independent
of JPMC, experienced in the matters that are the subject of the
exemption, and capable of making the determinations required of this
exemption;
(j) Effective as of the effective date of this five-year exemption,
with respect to any arrangement, agreement, or contract between a JPMC
Affiliated QPAM and an ERISA-covered plan or IRA for which a JPMC
Affiliated QPAM provides asset management or other discretionary
fiduciary services, each JPMC Affiliated QPAM agrees and warrants:
(1) To comply with ERISA and the Code, as applicable with respect
to such ERISA-covered plan or IRA; to refrain from engaging in
prohibited transactions that are not otherwise exempt (and to promptly
correct any inadvertent prohibited transactions); and to comply with
the standards of prudence and loyalty set forth in section 404 of
ERISA, as applicable, with respect to each such ERISA-covered plan and
IRA;
(2) To indemnify and hold harmless the ERISA-covered plan or IRA
for any damages resulting from a JPMC Affiliated QPAM's violation of
applicable laws, a JPMC Affiliated QPAM's breach of contract, or any
claim brought in connection with the failure of such JPMC Affiliated
QPAM to qualify for the exemptive relief provided by PTE 84-14 as a
result of a violation of Section I(g) of PTE 84-14 other than the
Conviction;
(3) Not to require (or otherwise cause) the ERISA-covered plan or
IRA to waive, limit, or qualify the liability of the JPMC Affiliated
QPAM for violating ERISA or the Code or engaging in prohibited
transactions;
(4) Not to require the ERISA-covered plan or IRA (or sponsor of
such ERISA-covered plan or beneficial owner of such IRA) to indemnify
the JPMC Affiliated QPAM for violating ERISA or engaging in prohibited
transactions, except for violations or prohibited transactions caused
by an error, misrepresentation, or misconduct of a plan fiduciary or
other party hired by the plan fiduciary who is independent of JPMC, and
its affiliates;
(5) Not to restrict the ability of such ERISA-covered plan or IRA
to terminate or withdraw from its arrangement with the JPMC Affiliated
QPAM (including any investment in a separately managed account or
pooled fund subject to ERISA and managed by such QPAM), with the
exception of reasonable restrictions, appropriately disclosed in
advance, that are specifically designed to ensure equitable treatment
of all investors in a pooled fund in the event such withdrawal or
termination may have adverse consequences for all other investors as a
result of an actual lack of liquidity of the underlying assets,
provided that such restrictions are applied consistently and in like
manner to all such investors;
(6) Not to impose any fees, penalties, or charges for such
termination or withdrawal with the exception of reasonable fees,
appropriately disclosed in advance, that are specifically designed to
prevent generally recognized abusive investment practices or
specifically designed to ensure equitable treatment of all investors in
a pooled fund in the event such withdrawal or termination may have
adverse consequences for all other investors, provided that such fees
are applied consistently and in like manner to all such investors; and
(7) Not to include exculpatory provisions disclaiming or otherwise
limiting liability of the JPMC Affiliated QPAM for a violation of such
agreement's terms, except for liability caused by an error,
misrepresentation, or misconduct of a plan fiduciary or other party
hired by the plan fiduciary who is independent of JPMC, and its
affiliates;
(8) Within four (4) months of the date of the Conviction, each JPMC
Affiliated QPAM must provide a notice of its obligations under this
Section I(j) to each ERISA-covered plan and IRA for which an JPMC
Affiliated QPAM provides asset management or other discretionary
fiduciary services. For all other prospective ERISA-covered plan and
IRA clients for which a JPMC Affiliated QPAM provides asset management
or other discretionary services, the JPMC Affiliated QPAM will agree in
writing to its obligations under this Section I(j) in an updated
investment management agreement between the JPMC Affiliated QPAM and
such clients or other written contractual agreement;
(k)(1) Notice to ERISA-covered plan and IRA clients. Within thirty
(30) days of the publication of this proposed five-year exemption in
the Federal Register, each JPMC Affiliated QPAM will provide a notice
of the proposed five-year exemption, along with a separate summary
describing the facts that led to the Conviction (the Summary), which
have been submitted to the Department, and a prominently displayed
statement (the Statement) that the Conviction results in a failure to
meet a condition in PTE 84-14, to each sponsor of an ERISA-covered plan
and each beneficial owner of an IRA for which a JPMC Affiliated QPAM
provides asset management or other discretionary services, or the
sponsor of an investment fund in any case where a JPMC Affiliated QPAM
acts only as a sub-advisor to the investment fund in which such ERISA-
covered plan and IRA invests. In the event that this proposed five-year
exemption is granted, the Federal Register copy of the notice of final
five-year exemption must be delivered to such clients within sixty (60)
days of its publication in the Federal Register, and may be delivered
electronically (including by an email that has a link to the
exemption). Any prospective clients for which a JPMC Affiliated QPAM
provides asset management or other discretionary services must receive
the proposed and final five-year exemptions with the Summary and the
Statement prior to, or contemporaneously with, the client's receipt of
a written asset management agreement from the JPMC Affiliated QPAM; and
(2) Notice to Non-Plan Clients. Each JPMC Affiliated QPAM will
provide a Federal Register copy of the proposed five-year exemption, a
Federal Register copy of the final five-year exemption; the Summary;
and the Statement to each: (A) Current Non-Plan Client within four (4)
months of the effective date, if any, of a final five-year exemption;
and (B) Future Non-Plan Client prior to, or contemporaneously with, the
client's receipt of a written asset management agreement from the JPMC
Affiliated QPAM. For purposes of this subparagraph (2), a Current Non-
Plan Client means a client of a JPMC Affiliated QPAM that: Is neither
an ERISA-covered plan nor an IRA; has assets managed by the JPMC
Affiliated QPAM as of the effective date, if any, of a final five-year
exemption; and has received a written representation (qualified or
otherwise) from the JPMC Affiliated QPAM that such JPMC Affiliated QPAM
qualifies as a QPAM or
[[Page 83376]]
qualifies for the relief provided by PTE 84-14. For purposes of this
subparagraph (2), a Future Non-Plan Client means a client of a JPMC
Affiliated QPAM that is neither an ERISA-covered plan nor an IRA that,
has assets managed by the JPMC Affiliated QPAM as of the effective
date, if any, of a final five-year exemption, and has received a
written representation (qualified or otherwise) from the JPMC
Affiliated QPAM that such JPMC Affiliated QPAM is a QPAM, or qualifies
for the relief provided by PTE 84-14;
(l) The JPMC Affiliated QPAMs must comply with each condition of
PTE 84-14, as amended, with the sole exception of the violation of
Section I(g) of PTE 84-14 that is attributable to the Conviction;
(m)(1) JPMC designates a senior compliance officer (the Compliance
Officer) who will be responsible for compliance with the Policies and
Training requirements described herein. The Compliance Officer must
conduct an annual review (the Annual Review) to determine the adequacy
and effectiveness of the implementation of the Policies and Training.
With respect to the Compliance Officer, the following conditions must
be met:
(i) The Compliance Officer must be a legal professional with
extensive experience with, and knowledge of, the regulation of
financial services and products, including under ERISA and the Code;
and
(ii) The Compliance Officer must have a direct reporting line to
the highest-ranking corporate officer in charge of legal compliance
that is independent of JPMC's other business lines;
(2) With respect to each Annual Review, the following conditions
must be met:
(i) The Annual Review includes a review of: Any compliance matter
related to the Policies or Training that was identified by, or reported
to, the Compliance Officer or others within the compliance and risk
control function (or its equivalent) during the previous year; any
material change in the business activities of the JPMC Affiliated
QPAMs; and any change to ERISA, the Code, or regulations related to
fiduciary duties and the prohibited transaction provisions that may be
applicable to the activities of the JPMC Affiliated QPAMs;
(ii) The Compliance Officer prepares a written report for each
Annual Review (each, an Annual Report) that (A) summarizes his or her
material activities during the preceding year; (B) sets forth any
instance of noncompliance discovered during the preceding year, and any
related corrective action; (C) details any change to the Policies or
Training to guard against any similar instance of noncompliance
occurring again; and (D) makes recommendations, as necessary, for
additional training, procedures, monitoring, or additional and/or
changed processes or systems, and management's actions on such
recommendations;
(iii) In each Annual Report, the Compliance Officer must certify in
writing that to his or her knowledge: (A) The report is accurate; (B)
the Policies and Training are working in a manner which is reasonably
designed to ensure that the Policies and Training requirements
described herein are met; (C) any known instance of noncompliance
during the preceding year and any related correction taken to date have
been identified in the Annual Report; (D) the JPMC Affiliated QPAMs
have complied with the Policies and Training in all respects, and/or
corrected any instances of noncompliance in accordance with Section
I(h) above; and (E) JPMC has provided the Compliance Officer with
adequate resources, including, but not limited to, adequate staffing;
(iv) Each Annual Report must be provided to appropriate corporate
officers of JPMC and each JPMC Affiliated QPAM to which such report
relates; the head of compliance and the General Counsel (or their
functional equivalent) of the relevant JPMC Affiliated QPAM; and must
be made unconditionally available to the independent auditor described
in Section I(i) above;
(v) Each Annual Review, including the Compliance Officer's written
Annual Report, must be completed at least three (3) months in advance
of the date on which each audit described in Section I(i) is scheduled
to be completed;
(n) Each JPMC Affiliated QPAM will maintain records necessary to
demonstrate that the conditions of this exemption have been met, for
six (6) years following the date of any transaction for which such JPMC
Affiliated QPAM relies upon the relief in the exemption;
(o) During the effective period of the five-year exemption JPMC:
(1) Immediately discloses to the Department any Deferred Prosecution
Agreement (a DPA) or a Non-Prosecution Agreement (an NPA) with the U.S.
Department of Justice, entered into by JPMC or any of its affiliates in
connection with conduct described in Section I(g) of PTE 84-14 or
section 411 of ERISA; and
(2) Immediately provides the Department any information requested
by the Department, as permitted by law, regarding the agreement and/or
conduct and allegations that led to the agreement. After review of the
information, the Department may require JPMC, its affiliates, or
related parties, as specified by the Department, to submit a new
application for the continued availability of relief as a condition of
continuing to rely on this exemption. If the Department denies the
relief requested in the new application, or does not grant such relief
within twelve months of application, the relief described herein is
revoked as of the date of denial or as of the expiration of the twelve
month period, whichever date is earlier;
(p) Each JPMC Affiliated QPAM, in its agreements with ERISA-covered
plan and IRA clients, or in other written disclosures provided to
ERISA-covered plan and IRA clients, within 60 days prior to the initial
transaction upon which relief hereunder is relied, and then at least
once annually, will clearly and prominently: Inform the ERISA-covered
plan and IRA client that the client has the right to obtain copies of
the QPAM's written Policies adopted in accordance with the exemption;
and
(q) A JPMC Affiliated QPAM or a JPMC Related QPAM will not fail to
meet the terms of this exemption solely because a different JPMC
Affiliated QPAM or JPMC Related QPAM fails to satisfy a condition for
relief described in Sections I(c), (d), (h), (i), (j), (k), (l), (n)
and (p).
Section II: Definitions
(a) The term ``JPMC Affiliated QPAM'' means a ``qualified
professional asset manager'' (as defined in Section VI(a) \61\ of PTE
84-14) that relies on the relief provided by PTE 84-14 and with respect
to which JPMC is a current or future ``affiliate'' (as defined in
Section VI(d)(1) of PTE 84-14). The term ``JPMC Affiliated QPAM''
excludes the parent entity, JPMC, the division implicated in the
criminal conduct that is the subject of the Conviction.
---------------------------------------------------------------------------
\61\ In general terms, a QPAM is an independent fiduciary that
is a bank, savings and loan association, insurance company, or
investment adviser that meets certain equity or net worth
requirements and other licensure requirements, and has acknowledged
in a written management agreement that it is a fiduciary with
respect to each plan that has retained the QPAM.
---------------------------------------------------------------------------
(b) The term ``JPMC Related QPAM'' means any current or future
``qualified professional asset manager'' (as defined in section VI(a)
of PTE 84-14) that relies on the relief provided by PTE 84-14, and with
respect to which JPMC owns a direct or indirect five percent or more
interest, but with respect to which JPMC
[[Page 83377]]
is not an ``affiliate'' (as defined in Section VI(d)(1) of PTE 84-14).
(c) The terms ``ERISA-covered plan'' and ``IRA'' mean,
respectively, a plan subject to Part 4 of Title I of ERISA and a plan
subject to section 4975 of the Code.
(d) The term ``JPMC'' means JPMorgan Chase and Co., the parent
entity, but does not include any subsidiaries or other affiliates;
(e) The term ``Conviction'' means the judgment of conviction
against JPMC for violation of the Sherman Antitrust Act, 15 U.S.C. 1,
which is scheduled to be entered in the District Court for the District
of Connecticut (the District Court) (Case Number 3:15-cr-79-SRU), in
connection with JPMC, through one of its euro/U.S. dollar (EUR/USD)
traders, entering into and engaging in a combination and conspiracy to
fix, stabilize, maintain, increase or decrease the price of, and rig
bids and offers for, the EUR/USD currency pair exchanged in the FX spot
market by agreeing to eliminate competition in the purchase and sale of
the EUR/USD currency pair in the United States and elsewhere. For all
purposes under this exemption, ``conduct'' of any person or entity that
is the ``subject of [a] Conviction'' encompasses any conduct of JPMC
and/or their personnel, that is described in the Plea Agreement,
(including the Factual Statement), and other official regulatory or
judicial factual findings that are a part of this record; and
(f) The term ``Conviction Date'' means the date that a judgment of
Conviction against JPMC is entered by the District Court in connection
with the Conviction.
Effective Date: This proposed five-year exemption will be effective
beginning on the date of publication of such grant in the Federal
Register and ending on the date that is five years thereafter. Should
the Applicant wish to extend the effective period of exemptive relief
provided by this proposed five-year exemption, the Applicant must
submit another application for an exemption. In this regard, the
Department expects that, in connection with such application, the
Applicant should be prepared to demonstrate compliance with the
conditions for this exemption and that the JPMC Affiliated QPAMs, and
those who may be in a position to influence their policies, have
maintained the high standard of integrity required by PTE 84-14.
Department's Comment: Concurrently with this proposed five-year
exemption, the Department is publishing a proposed one-year exemption
for JPMC Affiliated QPAMs to continue to rely on PTE 84-14. That one-
year exemption is intended to allow the Department sufficient time,
including a longer comment period, to determine whether to grant this
five-year exemption. The proposed one-year exemption is designed to
protect ERISA-covered plans and IRAs from the potential costs and
losses, described below, that would be incurred if such JPMC Affiliated
QPAMs were to suddenly lose their ability to rely on PTE 84-14 as of
the Conviction date.
The proposed five-year exemption would provide relief from certain
of the restrictions set forth in sections 406 and 407 of ERISA. No
relief from a violation of any other law would be provided by this
exemption including any criminal conviction described herein.
The Department cautions that the relief in this proposed five-year
exemption would terminate immediately if, among other things, an entity
within the JPMC corporate structure is convicted of a crime described
in Section I(g) of PTE 84-14 (other than the Conviction) during the
effective period of the exemption. While such an entity could apply for
a new exemption in that circumstance, the Department would not be
obligated to grant the exemption. The terms of this proposed five-year
exemption have been specifically designed to permit plans to terminate
their relationships in an orderly and cost effective fashion in the
event of an additional conviction or a determination that it is
otherwise prudent for a plan to terminate its relationship with an
entity covered by the proposed exemption.
Summary of Facts and Representations \62\
Background
1. JPMC is a financial holding company and global financial
services firm, incorporated in Delaware and headquartered in New York,
New York, with approximately 240,000 employees and operations in over
60 countries. According to the Applicant, JPMC provides a variety of
services, including investment banking, financial services for
consumers and small business, commercial banking, financial transaction
processing, and asset management.
---------------------------------------------------------------------------
\62\ The Summary of Facts and Representations is based on the
Applicant's representations, unless indicated otherwise.
---------------------------------------------------------------------------
The Applicant represents that JPMC's principal bank subsidiaries
are: (a) JPMorgan Chase Bank, a national banking association wholly
owned by JPMC, with U.S. branches in 23 states; and (b) Chase Bank USA,
National Association, a national banking association that is JPMC's
credit card-issuing bank. The Applicant also represents that two of
JPMC's principal non-bank subsidiaries are its investment bank
subsidiary, J.P. Morgan Securities LLC, and its primary investment
management subsidiary, J.P. Morgan Investment Management Inc. (JPMIM).
The bank and nonbank subsidiaries of JPMC operate internationally
through overseas branches and subsidiaries, representative offices and
subsidiary foreign banks.
The Applicant explains that entities within the JPMC's asset
management line of business (Asset Management) serve institutional and
retail clients worldwide through the Global Investment Management (GIM)
and Global Wealth Management (GWM) businesses. The Applicant represents
that JPMC's Asset Management line of business had total client assets
of about $2.4 trillion and discretionary assets under management of
approximately $1.7 trillion at the end of 2014.\63\
---------------------------------------------------------------------------
\63\ In addition to its Asset Management line of business, the
Applicant represents that JPMC operates three other core lines of
business. They are: Consumer and Community Banking Services;
Corporate and Investment Banking Services; and Commercial Banking
Services.
---------------------------------------------------------------------------
2. The Applicant represents that JPMC has several affiliates that
provide investment management services.\64\ JPMorgan Chase Bank and
most of the U.S. registered advisers manage the assets of ERISA-covered
plans and/or IRAs on a discretionary basis. They routinely rely on the
QPAM Exemption to provide relief for party in interest transactions.
According to the Applicant, the primary domestic bank and U.S.
registered adviser affiliates in which JPMC owns a significant
interest, directly or indirectly, include the following: JPMorgan Chase
Bank, N.A.; JPMorgan Investment Management Inc.; J.P. Morgan Securities
LLC; JF International Management Inc.; J.P. Morgan Alternative Asset
Management, Inc.; Highbridge Capital Management, LLC; and Security
Capital Research & Management Incorporated. These are the entities that
currently would be
[[Page 83378]]
covered by the exemption, if it is granted.
---------------------------------------------------------------------------
\64\ Section VI(d) of PTE 84-14 defines an ``affiliate'' of a
person, for purposes of Section I(g), as: (1) Any person directly or
indirectly through one or more intermediaries, controlling,
controlled by, or under common control with the person, (2) any
director of, relative of, or partner in, any such person, (3) any
corporation, partnership, trust or unincorporated enterprise of
which such person is an officer, director, or a 5 percent or more
partner or owner, and (4) any employee or officer of the person
who--(A) is a highly compensated employee (as defined in section
4975(e)(2)(H) of the Code) or officer (earning 10 percent or more of
the yearly wages of such person), or (B) has direct or indirect
authority, responsibility or control regarding the custody,
management or disposition of plan assets.
---------------------------------------------------------------------------
3. In addition to the QPAMs identified above, the Applicant has
other affiliated managers that meet the definition of a QPAM that do
not currently manage ERISA or IRA assets on a discretionary basis, but
may in the future, including: J.P. Morgan Partners, LLC; Sixty Wall
Street Management Company LLC; J.P. Morgan Private Investments Inc.;
J.P. Morgan Asset Management (UK) Limited; JPMorgan Funds Limited; and
Bear Stearns Asset Management, Inc. The Applicant requests that
affiliates that manage ERISA or IRA assets be covered by the five-year
exemption. The Applicant also acquires and creates new affiliates
frequently, and to the extent that these new affiliates meet the
definition of a QPAM and manage ERISA-covered plans or IRAs, the
Applicant requests that these entities be covered by the five-year
exemption. The Applicant represents that JPMC owns, directly or
indirectly, a 5% or greater interest in certain investment managers
(and may in the future own similar interests in other managers), but
such managers are not affiliated in the sense that JPMC has actual
control over their operations and activities. JPMC does not have the
authority to exercise a controlling influence over these investment
managers and is not involved with the managers' clients, strategies, or
ERISA assets under management, if any.\65\ The Applicant requests that
these entities also be covered by the five-year exemption.
---------------------------------------------------------------------------
\65\ Section VI(d) of PTE 84-14 defines an ``affiliate'' of a
person, for purposes of Section I(g), as: (1) Any person directly or
indirectly through one or more intermediaries, controlling,
controlled by, or under common control with the person, (2) any
director of, relative of, or partner in, any such person, (3) any
corporation, partnership, trust or unincorporated enterprise of
which such person is an officer, director, or a 5 percent or more
partner or owner, and (4) any employee or officer of the person
who--(A) is a highly compensated employee (as defined in section
4975(e)(2)(H) of the Code) or officer (earning 10 percent or more of
the yearly wages of such person), or (B) has direct or indirect
authority, responsibility or control regarding the custody,
management or disposition of plan assets.
Section VI(e) of PTE 84-14 defines the term ``control'' as the
power to exercise a controlling influence over the management or
policies of a person other than an individual.
---------------------------------------------------------------------------
4. On May 20, 2015, the Applicant filed an application for
exemptive relief from the prohibitions of sections 406(a) and 406(b) of
ERISA, and the sanctions resulting from the application of section 4975
of the Code, by reason of section 4975(c)(1) of the Code, in connection
with a conviction that would make the relief in PTE 84-14 unavailable
to any current or future JPMC-related investment managers.
On May 20, 2015, the U.S. Department of Justice (Department of
Justice) filed a criminal information in the U.S. District Court for
the District of Connecticut (the District Court) against JPMC, charging
JPMC with a one-count violation of the Sherman Antitrust Act, 15 U.S.C.
1 (the Information). The Information charges that, from at least as
early as July 2010 until at least January 2013, JPMC, through one of
its euro/U.S. dollar (EUR/USD) traders, entered into and engaged in a
combination and conspiracy to fix, stabilize, maintain, increase or
decrease the price of, and rig bids and offers for, the EUR/USD
currency pair exchanged in the FX spot market by agreeing to eliminate
competition in the purchase and sale of the EUR/USD currency pair in
the United States and elsewhere. The criminal conduct that is the
subject of the Conviction involved near daily conversations, some of
which were in code, in an exclusive electronic chat room used by
certain EUR/USD traders, including the EUR/USD trader described herein.
5. JPMC sought to resolve the charges through a Plea Agreement
presented to the District Court on May 20, 2015. Under the Plea
Agreement, JPMC agreed to enter a plea of guilty to the charge set out
in the Information (the Plea). In addition, JPMC has made an admission
of guilt to the District Court. The Applicant expects that the District
Court will enter a judgment against JPMC that will require remedies
that are materially the same as those set forth in the Plea Agreement.
Pursuant to the Plea Agreement, the District Court will order a
term of probation and JPMC will be subject to certain conditions.
First, JPMC must not commit another crime in violation of the federal
laws of the United States or engage in the Conduct set forth in
Paragraphs 4(g)-(i) of the Plea Agreement during the term of probation,
and shall make disclosures relating to certain other sales-related
practices. Second, JPMC must notify the probation officer upon learning
of the commencement of any federal criminal investigation in which JPMC
is a target, or federal criminal prosecution against it. Third, JPMC
must implement and must continue to implement a compliance program
designed to prevent and detect the criminal conduct that is the subject
of the Conviction. Fourth, JPMC must further strengthen its compliance
and internal controls as required by the CFTC, the Financial Conduct
Authority (FCA), and any other regulatory or enforcement agencies that
have addressed the criminal conduct that is the subject of the
Conviction, as set forth in the factual basis section of the Plea
Agreement, and report to the probation officer and the United States,
upon request, regarding its remediation and implementation of any
compliance program and internal controls, policies, and procedures that
relate to the conduct described in the factual basis section of the
Plea Agreement.
6. Pursuant to the Plea Agreement, JPMC must promptly bring to the
Department of Justice Antitrust Division's attention: (a) All credible
information regarding criminal violations of U.S. antitrust laws by the
defendant or any of its employees as to which the JPMC's Board of
Directors, management (that is, all supervisors within the bank), or
legal and compliance personnel are aware; (b) all federal criminal or
regulatory investigations in which the defendant is a subject or a
target, and all administrative or regulatory proceedings or civil
actions brought by any federal governmental authority in the United
States against the defendant or its employees, to the extent that such
investigations, proceedings or actions allege violations of U.S.
antitrust laws.
7. Pursuant to the Plea Agreement, JPMC must promptly bring to the
Department of Justice Criminal Division, Fraud Section's attention: (a)
All credible information regarding criminal violations of U.S. law
concerning fraud, including securities or commodities fraud by the
defendant or any of its employees as to which the JPMC's Board of
Directors, management (that is, all supervisors within the bank), or
legal and compliance personnel are aware; and (b) all criminal or
regulatory investigations in which JPMC is or may be a subject or a
target, and all administrative proceedings or civil actions brought by
any governmental authority in the United States against JPMC or its
employees, to the extent such investigations, proceedings or actions
allege violations of U.S. law concerning fraud, including securities or
commodities fraud.
Pursuant to Paragraph 9(c) of the Plea Agreement, the Department of
Justice agreed ``that it [would] support a motion or request by [JPMC]
that sentencing in this matter be adjourned until the Department of
Labor has issued a ruling on the defendant's request for an exemption.
. . .'' According to the Applicant, sentencing has not yet occurred in
the District Court, nor has sentencing been scheduled.
8. Along with the Department of Justice, the Board of Governors of
the Federal Reserve Board (FRB), the Office of the Comptroller of the
Currency (OCC), the Commodity Futures Trading
[[Page 83379]]
Commission (CFTC), and the Financial Conduct Authority (FCA) have
conducted or have been conducting investigations into the practices of
JPMC and its direct and indirect subsidiaries relating to FX trading.
The FRB issued a cease and desist order on May 20, 2015, against
JPMC concerning unsafe and unsound banking practices relating to JPMC's
FX business and requiring JPMC to cease and desist, assessing against
JPMC a civil money penalty of $342,000,000, and requiring JPMC to agree
to take certain affirmative actions (FRB Order).
The OCC issued a cease and desist order on November 11, 2014,
against JPMorgan Chase Bank concerning deficiencies and unsafe or
unsound practices relating to JPMorgan Chase Bank's wholesale FX
business and requiring JPMorgan Chase Bank to cease and desist,
ordering JPMorgan Chase Bank to pay a civil money penalty of
$350,000,000, and requiring JPMorgan Chase Bank to agree to take
certain affirmative actions (OCC Order).
The CFTC issued a cease and desist order on November 11, 2014,
against JPMorgan Chase Bank relating to certain FX trading activities
and requiring JPMorgan Chase Bank to cease and desist from violating
certain provisions of the Commodity Exchange Act, ordering JPMorgan
Chase Bank to pay a civil monetary penalty of $310,000,000, and
requiring JPMorgan Chase Bank to agree to certain conditions and
undertakings (CFTC Order).
The FCA issued a warning notice on November 11, 2014, against
JPMorgan Chase Bank for failing to control business practices in its
G10 spot FX trading operations and caused JPMorgan Chase Bank to pay a
financial penalty of [pound]222,166,000 (FCA Order).
9. In addition to the investigations described above, relating to
FX trading, the Applicant is or has been the subject of other
investigations, by: (a) The Hong Kong Monetary Authority, which
concluded its investigation of the Applicant on December 14, 2014, and
found no evidence of collusion among the banks investigated, rigging of
FX benchmarks published in Hong Kong, or market manipulation, and
imposed no financial penalties on the Applicant; (b) the South Africa
Reserve Bank, which released the report of its inquiry of the Applicant
on October 19, 2015, and found no evidence of widespread malpractice or
serious misconduct by the Applicant in the South Africa FX market, and
noted that most authorized dealers have acceptable arrangements and
structures in place as well as whistle-blowing policies and client
complaint processes; (c) the Australian Securities & Investments
Commission, (d) the Japanese Financial Services Agency, (e) the Korea
Fair Trade Commission, and (f) the Swiss Competition Commission.
According to the Applicant, it is cooperating with the inquiries by
these organizations.
In addition, the French criminal authorities have been
investigating a series of transactions entered into by senior managers
of Wendel Investissement (Wendel) during the period 2004-2007. In 2007,
the Paris branch of JPMorgan Chase Bank provided financing for the
transactions to a number of Wendel managers. The Applicant explains
that JPMC is responding to and cooperating with the investigation, and
to date, no decision or indictment has been made by the French court.
In addition, the Applicant represents that the Criminal Division of
the Department of Justice is investigating the Applicant's compliance
with the Foreign Corrupt Practices Act and other laws with respect the
Applicant's hiring practices related to candidates referred by clients,
potential clients, and government officials, and its engagement of
consultants in the Asia Pacific region. The Applicant states that it is
responding to, and cooperating with, this investigation.
The Applicant also represents that to its best knowledge, it does
not have a reasonable basis to believe that the discretionary asset
management activities of any affiliated QPAM are subject to the
aforementioned investigations. Further, the Applicant represents that
JPMC currently does not have a reasonable basis to believe that there
are any pending criminal investigations involving JPMC or any of its
affiliated companies that would cause a reasonable plan or IRA customer
not to hire or retain the institution as a QPAM.
10. Once the Conviction is entered, the JPMC Affiliated QPAMs and
the JPMC Related QPAMs, as well as their client plans that are subject
to Part 4 of Title I of ERISA (ERISA-covered plans) or section 4975 of
the Code (IRAs), will no longer be able to rely on PTE 84-14, pursuant
to the anti-criminal rule set forth in section I(g) of the class
exemption, absent an individual exemption. The Applicant is seeking an
individual exemption that would permit the JPMC Affiliated QPAMs and
the JPMC Related QPAMs, and their ERISA-covered plan and IRA clients to
continue to utilize the relief in PTE 84-14, notwithstanding the
anticipated Conviction, provided that such QPAMs satisfy the additional
conditions imposed by the Department in the proposed five-year
exemption herein.
11. According to the Applicant, the criminal conduct giving rise to
the Plea did not involve any of the JPMC Affiliated QPAMs acting in the
capacity of investment manager or trustee. JPMC's participation in the
antitrust conspiracy described in the Plea Agreement is limited to a
single EUR/USD trader in London. The Applicant represents that the
criminal conduct that is the subject of the Conviction was not
widespread, nor was it pervasive; rather it was isolated to a single
trader. No current or former personnel from JPMC or its affiliates have
been sued individually in this matter for the criminal conduct that is
the subject of the Conviction, and the individual referenced in the
Complaint as responsible for such criminal conduct is no longer
employed by JPMC or its affiliates.\66\
---------------------------------------------------------------------------
\66\ The Applicant has confirmed with JPMC's Human Resources
Department that the individual referenced in the Complaint is no
longer employed with any entity within JPMC or its affiliates.
---------------------------------------------------------------------------
The Applicant submits that the criminal conduct that is the subject
of the Conviction did not involve any of JPMC's asset management staff.
The Applicant represents that: (a) Other than a single individual who
worked for a non-fiduciary business within JPMorgan Chase Bank and who
had no responsibility for, and exercised no authority in connection
with, the management of plan assets, the JPMC Affiliated QPAMs, and the
JPMC Related QPAMs (including officers, directors, agents other than
JPMC, and employees of such QPAMs who had responsibility for, or
exercised authority in connection with, the management of plan assets)
did not know of, did not have reason to know of, and did not
participate in the criminal conduct that is the subject of the
Conviction; and (b) no current or former employee of JPMC or of any
JPMC Affiliated QPAM who previously has been or who subsequently may be
identified by JPMC, or any U.S. or non-U.S. regulatory or enforcement
agencies, as having been responsible for the such criminal conduct has
or will have any involvement in providing asset management services to
plans and IRAs or will be an officer, director, or employee of the
Applicant or of any JPMC Affiliated QPAM.\67\
---------------------------------------------------------------------------
\67\ The Applicant states that counsel for JPMC confirmed that
the individual responsible for the criminal conduct that is the
subject of the Conviction is not currently employed by any entity
that is part of JPMC. This individual's employment has been
terminated and a notation has been made in his employment file to
ensure he is not re-hired at any future date.
---------------------------------------------------------------------------
[[Page 83380]]
12. According to the Applicant, the transactions covered by this
five-year exemption include the full range of everyday investment
transactions that a plan might enter into, including the purchase and
sale of debt and equity securities, both foreign and domestic, both
registered and sold under Rule 144A or otherwise (e.g., traditional
private placement), pass-through securities, asset-backed securities,
the purchase and sale of commodities, futures, forwards, options,
swaps, stable value wrap contracts, real estate, real estate financing
and leasing, foreign repurchase agreements, foreign exchange, and other
investments, and the hedging of risk through a variety of investment
instruments and strategies. The Applicant states that all of these
transactions are customary for the industry and investment managers
routinely rely on the QPAM Exemption to enter into them.
13. The Applicant represents that the investment management
businesses that are operated out of the JPMC Affiliated QPAMs are
separated from the non-investment management businesses of the
Applicant. Each of these investment management businesses, including
the investment management business of JPMorgan Chase Bank (as well as
the agency securities lending business of JPMorgan Chase Bank), have
systems, management, dedicated risk and compliance officers and legal
coverage that are separate from the foreign exchange trading activities
that were the subject of the Plea Agreement.
The Applicant represents that the investment management businesses
of the JPMC Affiliated QPAMs are subject to policies and procedures and
JPMC Affiliated QPAM personnel engage in training designed to ensure
that such businesses understand and manage their fiduciary duties in
accordance with applicable law. Thus, the Applicant maintains that the
management of plan assets is conducted separately from: (a) The non-
investment management business activities of the Applicant, including
the investment banking, treasury services and other investor services
businesses of the Corporate & Investment Bank business of the Applicant
(CIB); and/or (b) the criminal conduct that is the subject of the Plea
Agreement. Generally, the policies and procedures create information
barriers, which prevent employees of the JPMC Affiliated QPAMs from
gaining access to inside information that an affiliate may have
acquired or developed in connection with the investment banking,
treasury services or other investor services business activities. These
policies and procedures apply to employees, officers, and directors of
the JPMC Affiliated QPAMs. The Applicant maintains an employee hotline
for employees to express any concerns of wrongdoing anonymously.
The Applicant represents that, to the best of its knowledge: (a) No
JPMC employees are involved in the trading decisions or investment
strategies of the JPMC Affiliated or Related QPAMs; (b) the JPMC
Affiliated and Related QPAMs do not consult with JPMC employees prior
to making investment decisions on behalf of plans; (c) JPMC does not
control the asset management decisions of the JPMC Affiliated or
Related QPAMs; (d) the JPMC Affiliated and Related QPAMs do not need
JPMC's consent to make investment decisions, correct errors, or adopt
policies or training for staff; and (e) there is no interaction between
JPMC employees and the JPMC Affiliated or Related QPAMs in connection
with the investment management activities of the JPMC Affiliated QPAMs.
Statutory Findings--In the Interest of Affected Plans and IRAs
14. The Applicant states that, if the proposed five-year exemption
is denied, the JPMC Affiliated QPAMs may be unable to manage
efficiently the strategies for which they have contracted with
thousands of plans and IRAs. Transactions currently dependent on the
QPAM Exemption could be in default and be terminated at a significant
cost to the plans. In particular, the Applicant represents that the
JPMC Affiliated QPAMs have entered, and could in the future enter, into
contracts on behalf of, or as investment adviser of, ERISA-covered
plans, collective trusts and other funds subject to ERISA for certain
outstanding transactions, including but not limited to: The purchase
and sale of debt and equity securities, both foreign and domestic, both
registered and sold under Rule 144A or otherwise (e.g., traditional
private placement); pass-through securities; asset-backed securities;
and the purchase and sale of commodities, futures, options, stable
value wrap contracts, real estate, foreign repurchase agreements,
foreign exchange, and other investments.
The JPMC Affiliated QPAMs also have entered into, and could in the
future enter into, contracts for other transactions such as swaps,
forwards, and real estate financing and leasing on behalf of their
ERISA clients. According to the Applicant, these and other strategies
and investments require the JPMC Affiliated QPAMs to meet the
conditions in the QPAM Exemption. The Applicant states that certain
derivatives transactions and other contractual agreements automatically
and immediately could be terminated without notice or action, or could
become subject to termination upon notice from a counterparty, in the
event the Applicant no longer qualifies for relief under the QPAM
Exemption.
15. The Applicant represents that real estate transactions, for
example, could be subject to significant disruption without the QPAM
Exemption. Clients of the JPMC Affiliated QPAMs have over $27 billion
in ERISA and public plan assets in commingled funds invested in real
estate strategies, with approximately 235 holdings. Many transactions
in these accounts rely on Parts I, II and III of the QPAM Exemption as
a backup to the collective investment fund exemption (which may become
unavailable to the extent a related group of plans has a greater than
10% interest in the collective investment fund). The Applicant
estimates that there would be significant loss in value if assets had
to be quickly liquidated--over a 10% bid-ask spread--in addition to
substantial reinvestment costs and opportunity costs. There could also
be prepayment penalties. In addition, real estate transactions are
affected in funds that are not deemed to hold plan assets under
applicable law. While funds may have other available exemptions for
certain transactions, that fact could change in the future.
16. The JPMC Affiliated QPAMs also rely on the QPAM Exemption when
buying and selling fixed income products. Stable value strategies, for
example, rely on the QPAM Exemption to enter into wrappers and
insurance contracts that permit the assets to be valued at book value.
Many counterparties specifically require a representation that the QPAM
Exemption applies, and those contracts could be in default if the
requested exemption were not granted. Depending on the market value of
the assets in these funds at the time of termination, such termination
could result in losses to the stable value funds. The Applicant states
that, while the market value currently exceeds book value, that can
change at any time, and could result in market value adjustments to
withdrawing plans and withdrawal delays under their contracts.
17. The Applicant submits that nearly 400 accounts managed by the
JPMC Affiliated QPAMs (including commingled funds and separately
managed accounts) invest in fixed
[[Page 83381]]
income products, with a total portfolio of approximately $49.3 billion
in market value of ERISA and public plan assets in commingled funds.
Fixed income strategies in which those accounts are invested include
investment-grade short, intermediate, and long duration bonds, as well
as securitized products, and high yield and emerging market
investments. If the QPAM Exemption were lost, the Applicant estimates
that its clients could incur average weighted liquidation costs of
approximately 65 basis points of the total market value in fixed income
products, assuming normal market conditions where the holdings can be
liquidated at a normal bid-offer spread without significant widening.
While short and intermediate term bonds could be liquidated for between
15-50 basis points, long duration bonds may be more difficult to
liquidate and costs may range from 75-100 basis points. Costs of
liquidating high-yield and emerging market investments could range from
75-150 basis points. Such costs do not include reinvestment costs for
transitioning to a new manager.
18. The Applicant states that, futures, options, and cleared and
bilateral swaps, which certain strategies rely on to hedge risk and
obtain certain exposures on an economic basis, rely on the QPAM
Exemption. The Applicant further states that the QPAM Exemption is
particularly important for securities and other instruments that may be
traded on a principal basis, such as mortgage-backed securities,
corporate debt, municipal debt, other US fixed income securities, Rule
144A securities, non-US fixed income securities, non-US equity
securities, US and non-US over-the-counter instruments such as forwards
and options, structured products and FX.
19. The Applicant represents that plans that decide to continue to
employ the JPMC Affiliated QPAMs could be prohibited from engaging in
certain transactions that would be beneficial to such plans, such as
hedging transactions using over-the-counter options or derivatives.
Counterparties to such transactions are far more comfortable with the
QPAM Exemption than any other exemption, and a failure of the QPAM
Exemption to be available could trigger a default or early termination
by the plan or pooled trust. Even if other exemptions were acceptable
to such counterparties, the Applicant predicts that the cost of the
transaction might increase to reflect any lack of comfort in
transacting business using a less familiar exemption. The Applicant
represents that plans may also face collateral consequences, such as
missed investment opportunities, administrative delay, and the cost of
investing in cash pending reinvestments.
20. The Applicant represents that, to the extent that plans and
IRAs believe they need to withdraw from their arrangements, they could
incur significant transaction costs, including costs associated with
the liquidation of investments, finding new asset managers, and the
reinvestment of plan assets.\68\ The Applicant believes that the
transaction costs to plans of changing managers are significant,
especially for many of the strategies employed by the JPMC Affiliated
QPAMs. The Applicant also believes that, depending on the strategy, the
cost of liquidating assets in connection with transitioning clients to
another manager could be significant.\69\ The process for transitioning
to a new manager typically is lengthy, and likely would involve
numerous steps--each of which could last several months--including
retaining a consultant, engaging in the request for proposals,
negotiating contracts, and ultimately transitioning assets. In
addition, securities transactions would incur transaction-related
expenses.
---------------------------------------------------------------------------
\68\ The Department notes that, if this temporary exemption is
granted, compliance with the condition in Section I(j) of the
exemption would require the JPMC Affiliated QPAMs to hold their plan
customers harmless for any losses attributable to, inter alia, any
prohibited transactions or violations of the duty of prudence and
loyalty.
\69\ Some investments are more liquid than others (e.g.,
Treasury bonds generally are more liquid than foreign sovereign
bonds and equities generally are more liquid than swaps). Some of
the strategies followed by the Applicant tend to be less liquid than
certain other strategies and, thus, the cost of a transition would
be significantly higher than, for example, liquidating a large cap
equity portfolio. Particularly hard hit would be the real estate
separate account strategies, which are illiquid and highly dependent
on the QPAM Exemption.
---------------------------------------------------------------------------
Statutory Findings--Protective of the Rights of Participants of
Affected Plans and IRAs
21. The Applicant has proposed certain conditions it believes are
protective of participants and beneficiaries of ERISA-covered plans and
IRAs with respect to the transactions described herein. The Department
has determined that it is necessary to modify and supplement the
conditions before it can tentatively determine that the requested
exemption meets the statutory requirements of section 408(a) of ERISA.
In this regard, the Department has tentatively determined that the
following conditions adequately protect the rights of participants and
beneficiaries of affected plans and IRAs with respect to the
transactions that would be covered by this proposed five-year
exemption.
The five-year exemption, if granted as proposed, is only available
to the extent: (a) Other than with respect to a single individual who
worked for a non-fiduciary business within JPMorgan Chase Bank and who
had no responsibility for, and exercised no authority in connection
with, the management of plan assets, JPMC Affiliated QPAMs, including
their officers, directors, agents other than JPMC, and employees, did
not know of, have reason to know of, or participate in the criminal
conduct of JPMC that is the subject of the Conviction (for purposes of
this requirement, ``participate in'' includes an individual's knowing
or tacit approval of the misconduct underlying the Conviction); (b) any
failure of those QPAMs to satisfy Section I(g) of PTE 84-14 arose
solely from the Conviction; and (c) other than a single individual who
worked for a non-fiduciary business within JPMorgan Chase Bank and who
had no responsibility for, and exercised no authority in connection
with, the management of plan assets, the JPMC Affiliated QPAMs and the
JPMC Related QPAMs (including their officers, directors, agents other
than JPMC, and employees of such JPMC QPAMs) did not receive direct
compensation, or knowingly receive indirect compensation, in connection
with the criminal conduct that is the subject of the Conviction.
22. The Department expects the JPMC Affiliated QPAMs will
rigorously ensure that the individual associated with the misconduct
will not be employed or knowingly engaged by such QPAMs. In this
regard, the five-year exemption mandates that the JPMC Affiliated QPAMs
will not employ or knowingly engage any of the individuals that
participated in the FX manipulation that is the subject of the
Conviction. For purposes of this condition, ``participated in''
includes an individual's knowing or tacit approval of the behavior that
is the subject of the Conviction.
23. Further, the JPMC Affiliated QPAM will not use its authority or
influence to direct an ``investment fund,'' (as defined in Section
VI(b) of PTE 84-14), that is subject to ERISA or the Code and managed
by such JPMC Affiliated QPAM to enter into any transaction with JPMC or
the Investment Banking Division of JPMorgan Chase Bank, or to engage
JPMC or the Investment Banking Division of JPMorgan Chase Bank to
provide any service to such investment fund, for a direct or indirect
fee borne by such
[[Page 83382]]
investment fund, regardless of whether such transaction or service may
otherwise be within the scope of relief provided by an administrative
or statutory exemption.
24. The JPMC Affiliated QPAMs and the JPMC Related QPAMs must
comply with each condition of PTE 84-14, as amended, with the sole
exception of the violation of Section I(g) of PTE 84-14 that is
attributable to the Conviction. Further, any failure of the JPMC
Affiliated QPAMs or the JPMC Related QPAMs to satisfy Section I(g) of
PTE 84-14 arose solely from the Conviction.
No relief will be provided by this five-year exemption if a JPMC
Affiliated QPAM or a JPMC Related QPAM exercised authority over plan
assets in a manner that it knew or should have known would: Further the
criminal conduct that is the subject of the Conviction; or cause the
JPMC QPAM or its affiliates or related parties to directly or
indirectly profit from the criminal conduct that is the subject of the
Conviction. Also, no relief will be provided by this five-year
exemption to the extent JPMC or the Investment Banking Division of
JPMorgan Chase Bank: Provides any discretionary asset management
services to ERISA-covered plans or IRAs; or otherwise acts as a
fiduciary with respect to ERISA-covered plan or IRA assets.
25. The Department believes that robust policies and training are
warranted where, as here, the criminal misconduct has occurred within a
corporate organization that is affiliated with one or more QPAMs
managing plan or IRA assets. Therefore, this proposed five-year
exemption requires that within four (4) months of the Conviction, each
JPMC Affiliated QPAM must develop, implement, maintain, and follow
written policies (the Policies) requiring and reasonably designed to
ensure that: The asset management decisions of the JPMC Affiliated QPAM
are conducted independently of the corporate management and business
activities of JPMC, including the management and business activities of
the Investment Banking Division of JPMorgan Chase Bank; the JPMC
Affiliated QPAM fully complies with ERISA's fiduciary duties, and with
ERISA and the Code's prohibited transaction provisions, and does not
knowingly participate in any violation of these duties and provisions
with respect to ERISA-covered plans and IRAs; the JPMC Affiliated QPAM
does not knowingly participate in any other person's violation of ERISA
or the Code with respect to ERISA-covered plans and IRAs; any filings
or statements made by the JPMC Affiliated QPAM to regulators,
including, but not limited to, the Department of Labor, the Department
of the Treasury, the Department of Justice, and the Pension Benefit
Guaranty Corporation, on behalf of ERISA-covered plans or IRAs, are
materially accurate and complete, to the best of such QPAM's knowledge
at that time; the JPMC Affiliated QPAM does not make material
misrepresentations or omit material information in its communications
with such regulators with respect to ERISA-covered plans or IRAs, or
make material misrepresentations or omit material information in its
communications with ERISA-covered plan and IRA clients; and the JPMC
Affiliated QPAM complies with the terms of this five-year exemption.
Any violation of, or failure to comply with these Policies must be
corrected promptly upon discovery, and any such violation or compliance
failure not promptly corrected is reported, upon discovering the
failure to promptly correct, in writing, to appropriate corporate
officers, the head of compliance, and the General Counsel (or their
functional equivalent) of the relevant JPMC Affiliated QPAM, the
independent auditor responsible for reviewing compliance with the
Policies, and an appropriate fiduciary of any affected ERISA-covered
plan or IRA, which fiduciary is independent of JPMC. A JPMC Affiliated
QPAM will not be treated as having failed to develop, implement,
maintain, or follow the Policies, provided that it corrects any
instance of noncompliance promptly when discovered or when it
reasonably should have known of the noncompliance (whichever is
earlier), and provided that it reports such instance of noncompliance
as explained above.
26. The Department has also imposed a condition that requires each
JPMC Affiliated QPAM, within four (4) months of the date of the
Conviction, to develop and implement a program of training (the
Training), conducted at least annually, for all relevant JPMC
Affiliated QPAM asset/portfolio management, trading, legal, compliance,
and internal audit personnel. The Training must be set forth in the
Policies and, at a minimum, cover the Policies, ERISA and Code
compliance (including applicable fiduciary duties and the prohibited
transaction provisions), ethical conduct, the consequences for not
complying with the conditions of this five-year exemption (including
any loss of exemptive relief provided herein), and prompt reporting of
wrongdoing. Further, the Training must be conducted by an independent
professional who has been prudently selected and who has appropriate
technical training and proficiency with ERISA and the Code.
27. Independent Transparent Audit. The Department views a rigorous
and transparent audit that is conducted annually by an independent
party, as essential to ensuring that the conditions for exemptive
relief described herein are followed by the JPMC Affiliated QPAMs.
Therefore, Section I(i) of this proposed five-year exemption requires
that each JPMC Affiliated QPAM submits to an audit, conducted annually
by an independent auditor, who has been prudently selected and who has
appropriate technical training and proficiency with ERISA and the Code,
to evaluate the adequacy of, and the JPMC Affiliated QPAM's compliance
with, the Policies and Training described herein. The audit requirement
must be incorporated in the Policies. In addition, each annual audit
must cover a consecutive twelve (12) month period starting with the
twelve (12) month period that begins on the effective date of the five-
year exemption. Each annual audit must be completed no later than six
(6) months after the period to which the audit applies.
28. Among other things, the audit condition requires that, to the
extent necessary for the auditor, in its sole opinion, to complete its
audit and comply with the conditions for relief described herein, and
as permitted by law, each JPMC Affiliated QPAM and, if applicable,
JPMC, will grant the auditor unconditional access to its business,
including, but not limited to: Its computer systems; business records;
transactional data; workplace locations; training materials; and
personnel.
In addition, the auditor's engagement must specifically require the
auditor to determine whether each JPMC Affiliated QPAM has complied
with the Policies and Training conditions described herein, and must
further require the auditor to test each JPMC Affiliated QPAM's
operational compliance with the Policies and Training. The auditor must
issue a written report (the Audit Report) to JPMC and the JPMC
Affiliated QPAM to which the audit applies that describes the
procedures performed by the auditor during the course of its
examination. The Audit Report must include the auditor's specific
determinations regarding: The adequacy of the JPMC Affiliated QPAM's
Policies and Training; the JPMC Affiliated QPAM's compliance with the
Policies and Training; the need, if any, to strengthen such Policies
and Training; and any instance of the respective JPMC
[[Page 83383]]
Affiliated QPAM's noncompliance with the written Policies and Training.
Any determination by the auditor regarding the adequacy of the
Policies and Training and the auditor's recommendations (if any) with
respect to strengthening the Policies and Training of the respective
JPMC Affiliated QPAM must be promptly addressed by such JPMC Affiliated
QPAM, and any action taken by such JPMC Affiliated QPAM to address such
recommendations must be included in an addendum to the Audit Report.
Further, any determination by the auditor that the respective JPMC
Affiliated QPAM has implemented, maintained, and followed sufficient
Policies and Training must not be based solely or in substantial part
on an absence of evidence indicating noncompliance. In this last
regard, any finding that the JPMC Affiliated QPAM has complied with the
requirements, as described above, must be based on evidence that
demonstrates the JPMC Affiliated QPAM has actually implemented,
maintained, and followed the Policies and Training required by this
five-year exemption. Finally, the Audit Report must address the
adequacy of the Annual Review required under this exemption and the
resources provided to the Compliance Officer in connection with such
Annual Review. Moreover, the auditor must notify the respective JPMC
Affiliated QPAM of any instance of noncompliance identified by the
auditor within five (5) business days after such noncompliance is
identified by the auditor, regardless of whether the audit has been
completed as of that date.
29. This exemption requires that certain senior personnel of JPMC
review the Audit Report and make certain certifications and take
various corrective actions. In this regard, the General Counsel, or one
of the three most senior executive officers of the JPMC Affiliate QPAM
to which the Audit Report applies, must certify, in writing, under
penalty of perjury, that the officer has reviewed the Audit Report and
this five-year exemption; addressed, corrected, or remedied an
inadequacy identified in the Audit Report; and determined that the
Policies and Training in effect at the time of signing are adequate to
ensure compliance with the conditions of this proposed five-year
exemption and with the applicable provisions of ERISA and the Code. The
Risk Committee of JPMC's Board of Directors is provided a copy of each
Audit Report; and a senior executive officer with a direct reporting
line to the highest ranking legal compliance officer of JPMC must
review the Audit Report for each JPMC Affiliated QPAM and must certify
in writing, under penalty of perjury, that such officer has reviewed
each Audit Report.
30. In order to create a more transparent record in the event that
the proposed relief is granted, each JPMC Affiliated QPAM must provide
its certified Audit Report to the Department no later than thirty (30)
days following its completion. The Audit Report will be part of the
public record regarding this five-year exemption.
Further, each JPMC Affiliated QPAM must make its Audit Report
unconditionally available for examination by any duly authorized
employee or representative of the Department, other relevant
regulators, and any fiduciary of an ERISA-covered plan or IRA, the
assets of which are managed by such JPMC Affiliated QPAM. Additionally,
each JPMC Affiliated QPAM and the auditor must submit to the Department
any engagement agreement(s) entered into pursuant to the engagement of
the auditor under this five-year exemption. Also, they must submit to
the Department any engagement agreement entered into with any other
entity retained in connection with such QPAM's compliance with the
Training or Policies conditions of this proposed five-year exemption no
later than six (6) months after the Conviction Date (and one month
after the execution of any agreement thereafter).
Finally, if the exemption is granted, the auditor must provide the
Department, upon request, all of the workpapers created and utilized in
the course of the audit, including, but not limited to: The audit plan;
audit testing; identification of any instance of noncompliance by the
relevant JPMC Affiliated QPAM; and an explanation of any corrective or
remedial action taken by the applicable JPMC Affiliated QPAM.
In order to enhance oversight of the compliance with the exemption,
JPMC must notify the Department at least thirty (30) days prior to any
substitution of an auditor, and JPMC must demonstrate to the
Department's satisfaction that any new auditor is independent of JPMC,
experienced in the matters that are the subject of the exemption, and
capable of making the determinations required of this five-year
exemption.
31. Contractual Obligations. This five-year exemption requires the
JPMC Affiliated QPAMs to enter into certain contractual obligations in
connection with the provision of services to their clients. It is the
Department's view that the condition in Section I(j) is essential to
the Department's ability to make its findings that the proposed five-
year exemption is protective of the rights of the participants and
beneficiaries of ERISA-covered and IRA plan clients of JPMC Affiliated
QPAMs under section 408(a) of ERISA.
In this regard, effective as of the effective date of this five-
year exemption, with respect to any arrangement, agreement, or contract
between a JPMC Affiliated QPAM and an ERISA-covered plan or IRA for
which a JPMC Affiliated QPAM provides asset management or other
discretionary fiduciary services, each JPMC Affiliated QPAM agrees and
warrants: (a) To comply with ERISA and the Code, as applicable with
respect to such ERISA-covered plan or IRA, to refrain from engaging in
prohibited transactions that are not otherwise exempt (and to promptly
correct any inadvertent prohibited transactions), and to comply with
the standards of prudence and loyalty set forth in section 404 of
ERISA, as applicable, with respect to each such ERISA-covered plan and
IRA; (b) to indemnify and hold harmless the ERISA-covered plan or IRA
for any damages resulting from a JPMC Affiliated QPAM's violation of
applicable laws, a JPMC Affiliated QPAM's breach of contract, or any
claim brought in connection with the failure of such JPMC Affiliated
QPAM to qualify for the exemptive relief provided by PTE 84-14 as a
result of a violation of Section I(g) of PTE 84-14 other than the
Conviction; (c) not to require (or otherwise cause) the ERISA-covered
plan or IRA to waive, limit, or qualify the liability of the JPMC
Affiliated QPAM for violating ERISA or the Code or engaging in
prohibited transactions; (d) not to require the ERISA-covered plan or
IRA (or sponsor of such ERISA-covered plan or beneficial owner of such
IRA) to indemnify the JPMC Affiliated QPAM for violating ERISA or
engaging in prohibited transactions, except for violations or
prohibited transactions caused by an error, misrepresentation, or
misconduct of a plan fiduciary or other party hired by the plan
fiduciary who is independent of JPMC, and its affiliates; (e) not to
restrict the ability of such ERISA-covered plan or IRA to terminate or
withdraw from its arrangement with the JPMC Affiliated QPAM (including
any investment in a separately managed account or pooled fund subject
to ERISA and managed by such QPAM), with the exception of reasonable
restrictions, appropriately disclosed in advance, that are specifically
designed to ensure equitable treatment of all investors in a
[[Page 83384]]
pooled fund in the event such withdrawal or termination may have
adverse consequences for all other investors as a result of an actual
lack of liquidity of the underlying assets, provided that such
restrictions are applied consistently and in like manner to all such
investors; (f) not to impose any fees, penalties, or charges for such
termination or withdrawal with the exception of reasonable fees,
appropriately disclosed in advance, that are specifically designed to
prevent generally recognized abusive investment practices or
specifically designed to ensure equitable treatment of all investors in
a pooled fund in the event such withdrawal or termination may have
adverse consequences for all other investors, provided that such fees
are applied consistently and in like manner to all such investors; and
(g) not to include exculpatory provisions disclaiming or otherwise
limiting liability of the JPMC Affiliated QPAM for a violation of such
agreement's terms, except for liability caused by an error,
misrepresentation, or misconduct of a plan fiduciary or other party
hired by the plan fiduciary who is independent of JPMC, and its
affiliates.
32. Further, within four (4) months of the date of the Conviction,
each JPMC Affiliated QPAM must provide a notice of its obligations
under Section I(j) to each ERISA-covered plan and IRA for which an JPMC
Affiliated QPAM provides asset management or other discretionary
fiduciary services. For all other prospective ERISA-covered plan and
IRA clients for which a JPMC Affiliated QPAM provides asset management
or other discretionary services, the JPMC Affiliated QPAM will agree in
writing to its obligations under Section I(j) in an updated investment
management agreement between the JPMC Affiliated QPAM and such clients
or other written contractual agreement.
33. Notice Requirements. The proposed exemption contains extensive
notice requirements, some of which extend not only to ERISA-covered
plan and IRA clients of JPMC Affiliated QPAMs, but which also go to
non-Plan clients of JPMC Affiliated QPAMs. In this regard, the
Department understands that many firms may promote their ``QPAM''
designation in order to earn asset management business, including from
non-ERISA plans. Therefore, in order to fully inform any clients that
may have retained JPMC Affiliated QPAMs as asset managers because such
JPMC Affiliated QPAMs have represented themselves as able to rely on
PTE 84-14, the Department has determined to condition exemptive relief
upon the following notice requirements.
Within fifteen (15) days of the publication of this proposed five-
year exemption in the Federal Register, each JPMC Affiliated QPAM will
provide a notice of the proposed five-year exemption, along with a
separate summary describing the facts that led to the Conviction (the
Summary), which have been submitted to the Department, and a
prominently displayed statement (the Statement) that the Conviction
results in the failure to meet a condition in PTE 84-14, to each
sponsor of an ERISA-covered plan and each beneficial owner of an IRA
for which a JPMC Affiliated QPAM provides asset management or other
discretionary services, or the sponsor of an investment fund in any
case where a JPMC Affiliated QPAM acts only as a sub-adviser to the
investment fund in which such ERISA-covered plan and IRA invests. In
the event that this proposed five-year exemption is granted, the
Federal Register copy of the notice of final five-year exemption must
be delivered to such clients within sixty (60) days of its publication
in the Federal Register, and may be delivered electronically (including
by an email that has a link to the exemption). Any prospective clients
for which a JPMC Affiliated QPAM provides asset management or other
discretionary services must receive the proposed and final five-year
exemptions with the Summary and the Statement prior to, or
contemporaneously with, the client's receipt of a written asset
management agreement from the JPMC Affiliated QPAM.
In addition, each JPMC Affiliated QPAM will provide a Federal
Register copy of the proposed five-year exemption, a Federal Register
copy of the final five-year exemption; the Summary; and the Statement
to each: (A) Current Non-Plan Client within four (4) months of the
effective date, if any, of a final five-year exemption; and (B) Future
Non-Plan Client prior to, or contemporaneously with, the client's
receipt of a written asset management agreement from the JPMC
Affiliated QPAM. A ``Current Non-Plan Client'' is a client of a JPMC
Affiliated QPAM that: Is neither an ERISA-covered plan nor an IRA; has
assets managed by the JPMC Affiliated QPAM as of the effective date, if
any, of a final five-year exemption; and has received a written
representation (qualified or otherwise) from the JPMC Affiliated QPAM
that such JPMC Affiliated QPAM qualifies as a QPAM or qualifies for the
relief provided by PTE 84-14. A ``Future Non-Plan Client'' is a client
of a JPMC Affiliated QPAM that is neither an ERISA-covered plan nor an
IRA that has assets managed by the JPMC Affiliated QPAM after the
effective date, if any, of a final five-year exemption, and has
received a written representation (qualified or otherwise) from the
JPMC Affiliated QPAM that such JPMC Affiliated QPAM is a QPAM, or
qualifies for the relief provided by PTE 84-14.
34. This proposed five-year exemption also requires JPMC to
designate a senior compliance officer (the Compliance Officer) who will
be responsible for compliance with the Policies and Training
requirements described herein. The Compliance Officer will have several
obligations that it must comply with, as described in Section I(m)
above. These include conducting an annual review (the Annual Review) to
determine the adequacy and effectiveness of the implementation of the
Policies and Training; the preparation of a written report for each
Annual Review (each, an Annual Report) that, among other things,
summarizes his or her material activities during the preceding year;
and sets forth any instance of noncompliance discovered during the
preceding year, and any related corrective action. Each Annual Report
must be provided to appropriate corporate officers of JPMC and each
JPMC Affiliated QPAM to which such report relates; the head of
compliance and the General Counsel (or their functional equivalent) of
the relevant JPMC Affiliated QPAM; and must be made unconditionally
available to the independent auditor described above.
35. Each JPMC Affiliated QPAM must maintain records necessary to
demonstrate that the conditions of this exemption have been met for six
(6) years following the date of any transaction for which such JPMC
Affiliated QPAM relies upon the relief in the proposed five-year
exemption.
36. The proposed five-year exemption mandates that, during the
effective period of this five-year exemption JPMC must immediately
disclose to the Department any Deferred Prosecution Agreement (a DPA)
or Non-Prosecution Agreement (an NPA) that JPMC or an affiliate enters
into with the U.S. Department of Justice, to the extent such DPA or NPA
involved conduct described in Section I(g) of PTE 84-14 or section 411
of ERISA. In addition, JPMC must immediately provide the Department any
information requested by the Department, as permitted by law, regarding
the agreement and/or the conduct and allegations that led to the
agreement. The Department may,
[[Page 83385]]
following its review of that information, require JPMC or a party
specified by the Department, to submit a new application for the
continued availability of relief as a condition of continuing to rely
on this exemption. In this regard, the QPAM (or other party submitting
the application) will have the burden of justifying the relief sought
in the application. If the Department denies the relief requested in
that application, or does not grant such relief within twelve months of
the application, the relief described herein would be revoked as of the
date of denial or as of the expiration of the twelve month period,
whichever date is earlier.
37. Finally, each JPMC Affiliated QPAM, in its agreements with
ERISA-covered plan and IRA clients, or in other written disclosures
provided to ERISA-covered plan and IRA clients, within sixty (60) days
prior to the initial transaction upon which relief hereunder is relied,
will clearly and prominently: Inform the ERISA-covered plan or IRA
client that the client has the right to obtain copies of the QPAM's
written Policies adopted in accordance with this five-year exemption.
Statutory Findings--Administratively Feasible
38. The Applicant represents that the proposed exemption is
administratively feasible because it does not require any monitoring by
the Department. Furthermore, the requested five-year exemption does not
require the Department's oversight because, as a condition of this
proposed five-year exemption, neither JPMC nor the Investment Banking
Division of JPMorgan Chase Bank will provide any fiduciary or QPAM
services to ERISA-covered plans and IRAs.
Summary
39. Given the revised and new conditions described above, the
Department has tentatively determined that the relief sought by the
Applicant satisfies the statutory requirements for a five-year
exemption under section 408(a) of ERISA.
Notice to Interested Persons
Notice of the proposed exemption will be provided to all interested
persons within 30 days of the publication of the notice of proposed
five-year exemption in the Federal Register. The notice will be
provided to all interested persons in the manner described in Section
I(k)(1) of this proposed five-year exemption and will contain the
documents described therein and a supplemental statement, as required
pursuant to 29 CFR 2570.43(a)(2). The supplemental statement will
inform interested persons of their right to comment on and to request a
hearing with respect to the pending exemption. All written comments
and/or requests for a hearing must be received by the Department within
sixty (60) days of the date of publication of this proposed exemption
in the Federal Register. All comments will be made available to the
public.
Warning: If you submit a comment, EBSA recommends that you include
your name and other contact information in the body of your comment,
but DO NOT submit information that you consider to be confidential, or
otherwise protected (such as a Social Security number or an unlisted
phone number) or confidential business information that you do not want
publicly disclosed. All comments may be posted on the Internet and can
be retrieved by most Internet search engines.
FOR FURTHER INFORMATION CONTACT: Mr. Joseph Brennan of the Department
at (202) 693-8456. (This is not a toll-free number.)
UBS Assets Management (Americas) Inc.; UBS Realty Investors LLC; UBS
Hedge Fund Solutions LLC; UBS O'Connor LLC; and Certain Future
Affiliates in UBS's Asset Management and Wealth Management Americas
Divisions (Collectively, the Applicants or the UBS QPAMs), Located in
Chicago, Illinois; Hartford, Connecticut; New York, New York; and
Chicago, Illinois, Respectively
[Exemption Application No. D-11907]
Proposed Five Year Exemption
The Department is considering granting a five-year exemption under
the authority of section 408(a) of the Employee Retirement Income
Security Act of 1974, as amended (ERISA or the Act), and section
4975(c)(2) of the Internal Revenue Code of 1986, as amended (the Code),
and in accordance with the procedures set forth in 29 CFR part 2570,
subpart B (76 FR 66637, 66644, October 27, 2011).\70\
---------------------------------------------------------------------------
\70\ For purposes of this proposed five-year exemption,
references to section 406 of Title I of the Act, unless otherwise
specified, should be read to refer as well to the corresponding
provisions of section 4975 of the Code.
---------------------------------------------------------------------------
Section I: Covered Transactions
If the proposed five-year exemption is granted, certain asset
managers with specified relationships to UBS, AG (hereinafter, the UBS
QPAMs, as further defined in Section II(b)) will not be precluded from
relying on the exemptive relief provided by Prohibited Transaction
Exemption 84-14 (PTE 84-14),\71\ notwithstanding the ``2013
Conviction'' against UBS Securities Japan Co., Ltd. entered on
September 18, 2013 and the ``2016 Conviction'' against UBS AG scheduled
to be entered on November 29, 2016 (collectively the Convictions, as
further defined in Section II(a)),\72\ for a period of five years
beginning on the date on which a grant notice is published in the
Federal Register, provided that the following conditions are satisfied:
---------------------------------------------------------------------------
\71\ 49 FR 9494 (March 13, 1984), as corrected at 50 FR 41430
(October 10, 1985), as amended at 70 FR 49305 (August 23, 2005), and
as amended at 75 FR 38837 (July 6, 2010).
\72\ Section I(g) of PTE 84-14 generally provides that
``[n]either the QPAM nor any affiliate thereof . . . nor any owner .
. . of a 5 percent or more interest in the QPAM is a person who
within the 10 years immediately preceding the transaction has been
either convicted or released from imprisonment, whichever is later,
as a result of'' certain criminal activity therein described.
---------------------------------------------------------------------------
(a) The UBS QPAMs (including their officers, directors, agents
other than UBS, and employees of such UBS QPAMs) did not know of, have
reason to know of, or participate in: (1) The FX Misconduct; or (2) the
criminal conduct that is the subject of the Convictions (for the
purposes of this Section I(a), ``participate in'' includes the knowing
or tacit approval of the FX Misconduct or the misconduct that is the
subject of the Convictions);
(b) The UBS QPAMs (including their officers, directors, agents
other than UBS, and employees of such UBS QPAMs) did not receive direct
compensation, or knowingly receive indirect compensation, in connection
with: (1) The FX Misconduct; or (2) the criminal conduct that is the
subject of the Convictions;
(c) The UBS QPAMs will not employ or knowingly engage any of the
individuals that participated in: (1) The FX Misconduct or (2) the
criminal conduct that is the subject of the Convictions (for the
purposes of this Section I(c), ``participated in'' includes the knowing
or tacit approval of the FX Misconduct or the misconduct that is the
subject of the Convictions);
(d) A UBS QPAM will not use its authority or influence to direct an
``investment fund'' (as defined in Section VI(b) of PTE 84-14) that is
subject to ERISA or the Code and managed by such UBS QPAM, to enter
into any transaction with UBS or UBS Securities Japan or engage UBS or
UBS Securities Japan to provide any service to such investment fund,
for a direct or indirect fee borne by such investment fund, regardless
of whether such
[[Page 83386]]
transaction or service may otherwise be within the scope of relief
provided by an administrative or statutory exemption;
(e) Any failure of the UBS QPAMs to satisfy Section I(g) of PTE 84-
14 arose solely from the Convictions;
(f) A UBS QPAM did not exercise authority over the assets of any
plan subject to Part 4 of Title I of ERISA (an ERISA-covered plan) or
section 4975 of the Code (an IRA) in a manner that it knew or should
have known would: Further the FX Misconduct or the criminal conduct
that is the subject of the Convictions; or cause the UBS QPAM, its
affiliates or related parties to directly or indirectly profit from the
FX Misconduct or the criminal conduct that is the subject of the
Convictions;
(g) UBS and UBS Securities Japan will not provide discretionary
asset management services to ERISA-covered plans or IRAs, nor will
otherwise act as a fiduciary with respect to ERISA-covered plan or IRA
assets;
(h)(1) Each UBS QPAM must immediately develop, implement, maintain,
and follow written policies and procedures (the Policies) requiring and
reasonably designed to ensure that:
(i) The asset management decisions of the UBS QPAM are conducted
independently of UBS's corporate management and business activities,
including the corporate management and business activities of the
Investment Bank division and UBS Securities Japan;
(ii) The UBS QPAM fully complies with ERISA's fiduciary duties, and
with ERISA and the Code's prohibited transaction provisions, and does
not knowingly participate in any violation of these duties and
provisions with respect to ERISA-covered plans and IRAs;
(iii) The UBS QPAM does not knowingly participate in any other
person's violation of ERISA or the Code with respect to ERISA-covered
plans and IRAs;
(iv) Any filings or statements made by the UBS QPAM to regulators,
including but not limited to, the Department of Labor, the Department
of the Treasury, the Department of Justice, and the Pension Benefit
Guaranty Corporation, on behalf of ERISA-covered plans or IRAs are
materially accurate and complete, to the best of such QPAM's knowledge
at that time;
(v) The UBS QPAM does not make material misrepresentations or omit
material information in its communications with such regulators with
respect to ERISA-covered plans or IRAs, or make material
misrepresentations or omit material information in its communications
with ERISA-covered plan and IRA clients;
(vi) The UBS QPAM complies with the terms of this five-year
exemption; and
(vii) Any violation of, or failure to comply with, an item in
subparagraphs (ii) through (vi), is corrected promptly upon discovery,
and any such violation or compliance failure not promptly corrected is
reported, upon discovery of such failure to promptly correct, in
writing, to appropriate corporate officers, the head of compliance and
the General Counsel (or their functional equivalent) of the relevant
UBS QPAM, the independent auditor responsible for reviewing compliance
with the Policies, and an appropriate fiduciary of any affected ERISA-
covered plan or IRA that is independent of UBS; however, with respect
to any ERISA-covered plan or IRA sponsored by an ``affiliate'' (as
defined in Section VI(d) of PTE 84-14) of UBS or beneficially owned by
an employee of UBS or its affiliates, such fiduciary does not need to
be independent of UBS. A UBS QPAM will not be treated as having failed
to develop, implement, maintain, or follow the Policies, provided that
it corrects any instance of noncompliance promptly when discovered, or
when it reasonably should have known of the noncompliance (whichever is
earlier), and provided that it adheres to the reporting requirements
set forth in this subparagraph (vii);
(2) Each UBS QPAM must immediately develop and implement a program
of training (the Training), conducted at least annually, for all
relevant UBS QPAM asset/portfolio management, trading, legal,
compliance, and internal audit personnel. The Training must:
(i) Be set forth in the Policies and at a minimum, cover the
Policies, ERISA and Code compliance (including applicable fiduciary
duties and the prohibited transaction provisions), ethical conduct, the
consequences for not complying with the conditions of this five-year
exemption (including any loss of exemptive relief provided herein), and
prompt reporting of wrongdoing; and
(ii) Be conducted by an independent professional who has been
prudently selected and who has appropriate technical training and
proficiency with ERISA and the Code;
(i)(1) Each UBS QPAM submits to an audit conducted annually by an
independent auditor, who has been prudently selected and who has
appropriate technical training and proficiency with ERISA and the Code,
to evaluate the adequacy of, and the UBS QPAM's compliance with, the
Policies and Training described herein. The audit requirement must be
incorporated in the Policies. Each annual audit must cover a
consecutive twelve month period starting with the twelve month period
that begins on the date of the Conviction Date (the Initial Audit
Period). If this proposed five-year exemption is granted within one
year of the effective date of the proposed temporary exemption for UBS
QPAMs (Exemption Application No. D-11863),\73\ then the Initial Audit
Period will cover the period of time during which such temporary
exemption is effective and a portion of the time during which this
proposed five-year exemption is effective. In such event, the audit
terms contained in this Section I(i) will supersede the terms of
Section I(i) of the proposed temporary exemption. Additionally, in
determining compliance with the conditions for relief in the proposed
temporary exemption and this proposed five-year exemption, including
the Policies and Training requirements, for purposes of conducting the
audit, the auditor will rely on the conditions for exemptive relief as
then applicable to the respective periods under audit. For time periods
prior to the Conviction Date and covered under PTE 2013-09, the audit
requirements in Section (g) of PTE 2013-09 will remain in effect. Each
annual audit must be completed no later than six (6) months after the
period to which the audit applies;
---------------------------------------------------------------------------
\73\ A proposed temporary exemption in respect of Exemption
Application No. D-11863 for UBS QPAMs to rely on the exemptive
relief provided by PTE 84-14, notwithstanding the Convictions, for
up to twelve months from the date of the U.S. Conviction, is being
published elsewhere in the Federal Register.
---------------------------------------------------------------------------
(2) To the extent necessary for the auditor, in its sole opinion,
to complete its audit and comply with the conditions for relief
described herein, and as permitted by law, each UBS QPAM and, if
applicable, UBS, will grant the auditor unconditional access to its
business, including, but not limited to: Its computer systems; business
records; transactional data; workplace locations; training materials;
and personnel;
(3) The auditor's engagement must specifically require the auditor
to determine whether each UBS QPAM has developed, implemented,
maintained, and followed the Policies in accordance with the conditions
of this five-year exemption, and has developed and implemented the
Training, as required herein;
(4) The auditor's engagement must specifically require the auditor
to test
[[Page 83387]]
each UBS QPAM's operational compliance with the Policies and Training.
In this regard, the auditor must test a sample of each QPAM's
transactions involving ERISA-covered plans and IRAs sufficient in size
and nature to afford the auditor a reasonable basis to determine the
operational compliance with the Policies and Training;
(5) For each audit, on or before the end of the relevant period
described in Section I(i)(1) for completing the audit, the auditor must
issue a written report (the Audit Report) to UBS and the UBS QPAM to
which the audit applies that describes the procedures performed by the
auditor during the course of its examination. The Audit Report must
include the auditor's specific determinations regarding:
(i) The adequacy of the UBS QPAM's Policies and Training; the UBS
QPAM's compliance with the Policies and Training; the need, if any, to
strengthen such Policies and Training; and any instance of the
respective UBS QPAM's noncompliance with the written Policies and
Training described in Section I(h) above. Any determination by the
auditor regarding the adequacy of the Policies and Training and the
auditor's recommendations (if any) with respect to strengthening the
Policies and Training of the respective UBS QPAM must be promptly
addressed by such UBS QPAM, and any action taken by such UBS QPAM to
address such recommendations must be included in an addendum to the
Audit Report (which addendum is completed prior to the certification
described in Section I(i)(7) below). Any determination by the auditor
that the respective UBS QPAM has implemented, maintained, and followed
sufficient Policies and Training must not be based solely or in
substantial part on an absence of evidence indicating noncompliance. In
this last regard, any finding that the UBS QPAM has complied with the
requirements under this subsection must be based on evidence that
demonstrates the UBS QPAM has actually implemented, maintained, and
followed the Policies and Training required by this five-year
exemption. Furthermore, the auditor must not rely on the Annual Report
created by the Compliance Officer as described in Section I(m) below in
lieu of independent determinations and testing performed by the auditor
as required by Section I(i)(3) and (4) above; and
(ii) The adequacy of the Annual Review described in Section I(m)
and the resources provided to the Compliance officer in connection with
such Annual Review;
(6) The auditor must notify the respective UBS QPAM of any instance
of noncompliance identified by the auditor within five (5) business
days after such noncompliance is identified by the auditor, regardless
of whether the audit has been completed as of that date;
(7) With respect to each Audit Report, the General Counsel, or one
of the three most senior executive officers of the UBS QPAM to which
the Audit Report applies, must certify in writing, under penalty of
perjury, that the officer has reviewed the Audit Report and this five-
year exemption; addressed, corrected, or remedied any inadequacy
identified in the Audit Report; and determined that the Policies and
Training in effect at the time of signing are adequate to ensure
compliance with the conditions of this proposed five-year exemption and
with the applicable provisions of ERISA and the Code;
(8) The Risk Committee, the Audit Committee, and the Corporate
Culture and Responsibility Committee of UBS's Board of Directors are
provided a copy of each Audit Report; and a senior executive officer of
UBS's Compliance and Operational Risk Control function must review the
Audit Report for each UBS QPAM and must certify in writing, under
penalty of perjury, that such officer has reviewed each Audit Report;
(9) Each UBS QPAM must provide its certified Audit Report, by
regular mail to: the Department's Office of Exemption Determinations
(OED), 200 Constitution Avenue NW., Suite 400, Washington DC 20210, or
by private carrier to: 122 C Street NW., Suite 400, Washington, DC
20001-2109, no later than 45 days following its completion. The Audit
Report will be part of the public record regarding this five-year
exemption. Furthermore, each UBS QPAM must make its Audit Report
unconditionally available for examination by any duly authorized
employee or representative of the Department, other relevant
regulators, and any fiduciary of an ERISA-covered plan or IRA, the
assets of which are managed by such UBS QPAM;
(10) Each UBS QPAM and the auditor must submit to OED: (A) Any
engagement agreement entered into pursuant to the engagement of the
auditor under this five-year exemption; and (B) any engagement
agreement entered into with any other entity retained in connection
with such QPAM's compliance with the Training or Policies conditions of
this proposed five-year exemption no later than six (6) months after
the effective date of this five-year exemption (and one month after the
execution of any agreement thereafter);
(11) The auditor must provide OED, upon request, all of the
workpapers created and utilized in the course of the audit, including,
but not limited to: The audit plan; audit testing; identification of
any instance of noncompliance by the relevant UBS QPAM; and an
explanation of any corrective or remedial action taken by the
applicable UBS QPAM; and
(12) UBS must notify the Department at least 30 days prior to any
substitution of an auditor, except that no such replacement will meet
the requirements of this paragraph unless and until UBS demonstrates to
the Department's satisfaction that such new auditor is independent of
UBS, experienced in the matters that are the subject of the five-year
exemption and capable of making the determinations required of this
five-year exemption;
(j) Effective as of the effective date of this five-year exemption,
with respect to any arrangement, agreement, or contract between a UBS
QPAM and an ERISA-covered plan or IRA for which such UBS QPAM provides
asset management or other discretionary fiduciary services, each UBS
QPAM agrees and warrants:
(1) To comply with ERISA and the Code, as applicable with respect
to such ERISA-covered plan or IRA; to refrain from engaging in
prohibited transactions that are not otherwise exempt (and to promptly
correct any inadvertent prohibited transactions); and to comply with
the standards of prudence and loyalty set forth in section 404 of
ERISA, as applicable;
(2) Not to require (or otherwise cause) the ERISA-covered plan or
IRA to waive, limit, or qualify the liability of the UBS QPAM for
violating ERISA or the Code or engaging in prohibited transactions;
(3) Not to require the ERISA-covered plan or IRA (or sponsor of
such ERISA-covered plan or beneficial owner of such IRA) to indemnify
the UBS QPAM for violating ERISA or engaging in prohibited
transactions, except for violations or prohibited transactions caused
by an error, misrepresentation, or misconduct of a plan fiduciary or
other party hired by the plan fiduciary who is independent of UBS;
(4) Not to restrict the ability of such ERISA-covered plan or IRA
to terminate or withdraw from its arrangement with the UBS QPAM
(including any investment in a separately managed account or pooled
fund subject to ERISA and managed by such QPAM), with the exception of
reasonable restrictions, appropriately disclosed in advance, that are
specifically designed to ensure
[[Page 83388]]
equitable treatment of all investors in a pooled fund in the event such
withdrawal or termination may have adverse consequences for all other
investors as a result of an actual lack of liquidity of the underlying
assets, provided that such restrictions are applied consistently and in
like manner to all such investors;
(5) Not to impose any fees, penalties, or charges for such
termination or withdrawal with the exception of reasonable fees,
appropriately disclosed in advance, that are specifically designed to
prevent generally recognized abusive investment practices or
specifically designed to ensure equitable treatment of all investors in
a pooled fund in the event such withdrawal or termination may have
adverse consequences for all other investors, provided that such fees
are applied consistently and in like manner to all such investors;
(6) Not to include exculpatory provisions disclaiming or otherwise
limiting liability of the UBS QPAM for a violation of such agreement's
terms, except for liability caused by an error, misrepresentation, or
misconduct of a plan fiduciary or other party hired by the plan
fiduciary who is independent of UBS and its affiliates; and
(7) To indemnify and hold harmless the ERISA-covered plan and IRA
for any damages resulting from a violation of applicable laws, a UBS
QPAM's breach of contract, or any claim arising out of the failure of
such UBS QPAM to qualify for the exemptive relief provided by PTE 84-14
as a result of a violation of Section I(g) of PTE 84-14 other than the
Convictions;
(8) Within four (4) months of the effective date of this proposed
five-year exemption, each UBS QPAM must provide a notice of its
obligations under this Section I(j) to each ERISA-covered plan and IRA
for which the UBS QPAM provides asset management or other discretionary
fiduciary services. For all other prospective ERISA-covered plan and
IRA clients for which a UBS QPAM provides asset management or other
discretionary fiduciary services, the UBS QPAM will agree in writing to
its obligations under this Section I(j) in an updated investment
management agreement or advisory agreement between the UBS QPAM and
such clients or other written contractual agreement;
(k)(1) Notice to ERISA-covered plan and IRA clients. Within fifteen
(15) days of the publication of this proposed five-year exemption in
the Federal Register, each UBS QPAM will provide a notice of the
proposed five-year exemption, along with a separate summary describing
the facts that led to the Convictions (the Summary), which have been
submitted to the Department, and a prominently displayed statement (the
Statement) that each Conviction separately results in a failure to meet
a condition in PTE 84-14, to each sponsor of an ERISA-covered plan and
each beneficial owner of an IRA for which a UBS QPAM provides asset
management or other discretionary fiduciary services, or the sponsor of
an investment fund in any case where a UBS QPAM acts only as a sub-
advisor to the investment fund in which such ERISA-covered plan and IRA
invests. In the event that this proposed five-year exemption is
granted, the Federal Register copy of the notice of final five-year
exemption must be delivered to such clients within sixty (60) days of
its publication in the Federal Register, and may be delivered
electronically (including by an email that has a link to the five-year
exemption). Any prospective clients for which a UBS QPAM provides asset
management or other discretionary fiduciary services must receive the
proposed and final five-year exemptions with the Summary and the
Statement prior to, or contemporaneously with, the client's receipt of
a written asset management agreement from the UBS QPAM; and
(2) Notice to Non-Plan Clients. Each UBS QPAM will provide a
Federal Register copy of the proposed five-year exemption, a Federal
Register copy of the final five-year exemption; the Summary; and the
Statement to each: (A) Current Non-Plan Client within four (4) months
of the effective date, if any, of a final five-year exemption; and (B)
Future Non-Plan Client prior to, or contemporaneously with, the
client's receipt of a written asset management agreement, or other
written contractual agreement, from the UBS QPAM. For purposes of this
subparagraph (2), a Current Non-Plan Client means a client of a UBS
QPAM that: Is neither an ERISA-covered plan nor an IRA; has assets
managed by the UBS QPAM as of the effective date, if any, of a final
five-year exemption; and has received a written representation
(qualified or otherwise) from the UBS QPAM that such UBS QPAM qualifies
as a QPAM or qualifies for the relief provided by PTE 84-14. For
purposes of this subparagraph (2), a Future Non-Plan Client means a
prospective client of a UBS QPAM that: Is neither an ERISA-covered plan
nor an IRA; has assets managed by the UBS QPAM after (but not as of)
the effective date, if any, of a final five-year exemption; and has
received a written representation (qualified or otherwise) from the UBS
QPAM that such UBS QPAM qualifies as a QPAM or qualifies for the relief
provided by PTE 84-14;
(l) The UBS QPAMs must comply with each condition of PTE 84-14, as
amended, with the sole exceptions of the violations of Section I(g) of
PTE 84-14 that are attributable to the Convictions;
(m)(1) UBS designates a senior compliance officer (the Compliance
Officer) who will be responsible for compliance with the Policies and
Training requirements described herein. The Compliance Officer must
conduct an annual review (the Annual Review) to determine the adequacy
and effectiveness of the implementation of the Policies and Training.
With respect to the Compliance Officer, the following conditions must
be met:
(i) The Compliance Officer must be a legal professional with
extensive experience with, and knowledge of, the regulation of
financial services and products, including under ERISA and the Code;
and
(ii) The Compliance Officer has a dual-reporting line within UBS's
Compliance and Operational Risk Control (C&ORC) function: (A) A
divisional reporting line to the Head of Compliance and Operational
Risk Control, Asset Management, and (B) a regional reporting line to
the Head of Americas Compliance and Operational Risk Control. The C&ORC
function will be organizationally independent of UBS's business
divisions--including Asset Management and the Investment Bank--and is
led by the Global Head of C&ORC, who will report directly to UBS's
Chief Risk Officer;
(2) With respect to each Annual Review, the following conditions
must be met:
(i) The Annual Review includes a review of: Any compliance matter
related to the Policies or Training that was identified by, or reported
to, the Compliance Officer or others within the Compliance and
Operational Risk Control function during the previous year; any
material change in the business activities of the UBS QPAMs; and any
change to ERISA, the Code, or regulations related to fiduciary duties
and the prohibited transaction provisions that may be applicable to the
activities of the UBS QPAMs;
(ii) The Compliance Officer prepares a written report for each
Annual Review (each, an Annual Report) that (A) summarizes his or her
material activities during the preceding year; (B) sets forth any
instance of noncompliance discovered during the preceding year, and any
related corrective action; (C)
[[Page 83389]]
details any change to the Policies or Training to guard against any
similar instance of noncompliance occurring again; and (D) makes
recommendations, as necessary, for additional training, procedures,
monitoring, or additional and/or changed processes or systems, and
management's actions on such recommendations;
(iii) In each Annual Report, the Compliance Officer must certify in
writing that to his or her knowledge: (A) The report is accurate; (B)
the Policies and Training are working in a manner which is reasonably
designed to ensure that the Policies and Training requirements
described herein are met; (C) any known instance of noncompliance
during the preceding year and any related correction taken to date have
been identified in the Annual Report; (D) the UBS QPAMs have complied
with the Policies and Training in all respects, and/or corrected any
instances of noncompliance in accordance with Section I(h) above; and
(E) UBS has provided the Compliance Officer with adequate resources,
including, but not limited to, adequate staffing;
(iv) Each Annual Report must be provided to appropriate corporate
officers of UBS and each UBS QPAM to which such report relates; the
head of Compliance and the General Counsel (or their functional
equivalent) of the relevant UBS QPAM; and must be made unconditionally
available to the independent auditor described in Section I(i) above;
(v) Each Annual Review, including the Compliance Officer's written
Annual Report, must be completed at least three (3) months in advance
of the date on which each audit described in Section I(i) is scheduled
to be completed;
(n) UBS imposes its internal procedures, controls, and protocols on
UBS Securities Japan to: (1) Reduce the likelihood of any recurrence of
conduct that that is the subject of the 2013 Conviction, and (2) comply
in all material respects with the Business Improvement Order, dated
December 16, 2011, issued by the Japanese Financial Services Authority;
(o) UBS complies in all material respects with the audit and
monitoring procedures imposed on UBS by the United States Commodity
Futures Trading Commission Order, dated December 19, 2012;
(p) Each UBS QPAM will maintain records necessary to demonstrate
that the conditions of this five-year exemption have been met, for six
(6) years following the date of any transaction for which such UBS QPAM
relies upon the relief in the five-year exemption;
(q) During the effective period of this five-year exemption UBS:
(1) Immediately discloses to the Department any Deferred Prosecution
Agreement (a DPA) or Non-Prosecution Agreement (an NPA) that UBS or an
affiliate enters into with the U.S Department of Justice, to the extent
such DPA or NPA involves conduct described in Section I(g) of PTE 84-14
or section 411 of ERISA; and (2) immediately provides the Department
any information requested by the Department, as permitted by law,
regarding the agreement and/or the conduct and allegations that led to
the agreement;
After review of the information, the Department may require UBS,
its affiliates, or related parties, as specified by the Department, to
submit a new application for the continued availability of relief as a
condition of continuing to rely on this exemption. If the Department
denies the relief requested in the new application, or does not grant
such relief within twelve months of application, the relief described
herein is revoked as of the date of denial or as of the expiration of
the twelve month period, whichever date is earlier;
(r) Each UBS QPAM, in its agreements with ERISA-covered plan and
IRA clients, or in other written disclosures provided to ERISA-covered
plan and IRA clients, within 60 days prior to the initial transaction
upon which relief hereunder is relied, and then at least once annually,
will clearly and prominently: Inform the ERISA-covered plan or IRA
client that the client has the right to obtain copies of the QPAM's
written Policies adopted in accordance with this five-year exemption;
and
(s) A UBS QPAM will not fail to meet the terms of this five-year
exemption, solely because a different UBS QPAM fails to satisfy a
condition for relief under this five-year exemption described in
Sections I(c), (d), (h), (i), (j), (k), (l), (p), and (r).
Section II: Definitions
(a) The term ``Convictions'' means the 2013 Conviction and the 2016
Conviction. The term ``2013 Conviction'' means the judgment of
conviction against UBS Securities Japan Co. Ltd. in Case Number 3:12-
cr-00268-RNC in the U.S. District Court for the District of Connecticut
for one count of wire fraud in violation of Title 18, United Sates
Code, sections 1343 and 2 in connection with submission of YEN London
Interbank Offered Rates and other benchmark interest rates. The term
``2016 Conviction'' means the anticipated judgment of conviction
against UBS AG in Case Number 3:15-cr-00076-RNC in the U.S. District
Court for the District of Connecticut for one count of wire fraud in
violation of Title 18, United States Code, Sections 1343 and 2 in
connection with UBS's submission of Yen London Interbank Offered Rates
and other benchmark interest rates between 2001 and 2010. For all
purposes under this proposed five-year exemption, ``conduct'' of any
person or entity that is the ``subject of [a] Conviction'' encompasses
any conduct of UBS and/or their personnel, that is described in the
Plea Agreement, (including Exhibits 1 and 3 attached thereto), and
other official regulatory or judicial factual findings that are a part
of this record.
(b) The term ``UBS QPAM'' means UBS Asset Management (Americas)
Inc., UBS Realty Investors LLC, UBS Hedge Fund Solutions LLC, UBS
O'Connor LLC, and any future entity within the Asset Management or the
Wealth Management Americas divisions of UBS AG that qualifies as a
``qualified professional asset manager'' (as defined in Section VI(a)
\74\ of PTE 84-14) and that relies on the relief provided by PTE 84-14
and with respect to which UBS AG is an ``affiliate'' (as defined in
Part VI(d) of PTE 84-14). The term ``UBS QPAM'' excludes the parent
entity, UBS AG and UBS Securities Japan.
---------------------------------------------------------------------------
\74\ In general terms, a QPAM is an independent fiduciary that
is a bank, savings and loan association, insurance company, or
investment adviser that meets certain equity or net worth
requirements and other licensure requirements and that has
acknowledged in a written management agreement that it is a
fiduciary with respect to each plan that has retained the QPAM.
---------------------------------------------------------------------------
(c) The term ``UBS'' means UBS AG.
(d) The term ``Conviction Date'' means the date that a judgment of
conviction against UBS is entered in the 2016 Conviction.
(e) The term ``FX Misconduct'' means the conduct engaged in by UBS
personnel described in Exhibit 1 of the Plea Agreement (Factual Basis
for Breach) entered into between UBS AG and the Department of Justice
Criminal Division, on May 20, 2015 in connection with Case Number 3:15-
cr-00076-RNC filed in the U.S. District Court for the District of
Connecticut.
(f) The term ``UBS Securities Japan'' means UBS Securities Japan
Co. Ltd, a wholly-owned subsidiary of UBS incorporated under the laws
of Japan.
(g) The term ``Plea Agreement'' means the Plea Agreement (including
Exhibits 1 and 3 attached thereto) entered into between UBS AG and the
Department of Justice Criminal Division, on May 20,
[[Page 83390]]
2015 in connection with Case Number 3:15-cr-00076-RNC filed in the US
District Court for the District of Connecticut.
Effective Date: This proposed five-year exemption will be effective
beginning on the date of publication of such grant in the Federal
Register and ending on the date that is five years thereafter. Should
the Applicants wish to extend the effective period of exemptive relief
provided by this proposed five-year exemption, the Applicants must
submit another application for an exemption. In this regard, the
Department expects that, in connection with such application, the
Applicants should be prepared to demonstrate compliance with the
conditions for this exemption and that the UBS QPAMs, and those who may
be in a position to influence their policies, have maintained the high
standard of integrity required by PTE 84-14.
Department's Comment: As described in further detail below, on
September 13, 2013, the Department published PTE 2013-09, which is an
exemption that permits certain UBS asset managers to continue to rely
on PTE 84-14, notwithstanding the 2013 Conviction. The impending 2016
Conviction will constitute a violation of the conditions of PTE 2013-09
and PTE 84-14. As a result, the UBS QPAMs will not be able to rely on
PTE 84-14 for exemptive relief as of the Conviction Date.
Elsewhere in the Federal Register, in connection with Exemption
Application D-11863, the Department is publishing a proposed temporary
exemption for the UBS QPAMs to continue to rely on PTE 84-14
notwithstanding the Convictions, for a period of up to twelve months.
That temporary exemption is intended to allow the Department sufficient
time, including a longer comment period, to determine whether or not to
grant this five-year exemption. The proposed temporary exemption is
designed to protect ERISA-covered plans and IRAs from the potential
costs and losses, described below, that would be incurred if such UBS
QPAMs were to suddenly lose their ability to rely on PTE 84-14 as of
the Conviction date.
The five-year exemption proposed herein would permit certain asset
managers affiliated with UBS and its affiliates to continue to rely on
PTE 84-14 for a period of five years from its effective date. Upon the
effective date of the proposed five-year exemption, the Temporary
Exemption, if still effective, would expire.
The proposed five-year exemption would provide relief from certain
of the restrictions set forth in sections 406 and 407 of ERISA. If
granted, no relief or waiver of a violation of any other law would be
provided by this five-year exemption.
Furthermore, the Department cautions that the relief in this
proposed five-year exemption would terminate immediately if, among
other things, an entity within the UBS corporate structure is convicted
of a crime described in Section I(g) of PTE 84-14 (other than the
Convictions) during the effective period of the five-year exemption.
While such an entity could apply for a new exemption in that
circumstance, the Department would not be obligated to grant the
exemption. The terms of this proposed five-year exemption have been
specifically designed to permit plans to terminate their relationships
in an orderly and cost effective fashion in the event of an additional
conviction or a determination that it is otherwise prudent for a plan
to terminate its relationship with an entity covered by the proposed
five-year exemption.
Summary of Facts and Representations 75
---------------------------------------------------------------------------
\75\ The Summary of Facts and Representations is based on the
Applicants' representations, unless indicated otherwise.
---------------------------------------------------------------------------
The Applicants
1. UBS AG (UBS) is a Swiss-based global financial services company
organized under the laws of Switzerland. UBS has banking divisions and
subsidiaries throughout the world, with its United States headquarters
located in New York, New York and Stamford, Connecticut. UBS and its
affiliates employ approximately 20,000 people in the United States.
2. The operational structure of UBS and its affiliates
(collectively, the UBS Group) consists of a Corporate Center function
and five business divisions: Wealth Management; Wealth Management
Americas; Retail & Corporate; Asset Management; and the Investment
Bank.
3. LIBOR NPA. On December 18, 2012, UBS and the United States
Department of Justice (DOJ) entered into a Non-Prosecution Agreement
(the LIBOR NPA) related to UBS's misconduct and involving its
submission of Yen London Interbank Offer Rate (Yen LIBOR) rates and
other benchmark rates between 2001 and 2010. In exchange for UBS
promising, among other things, not to commit any crime in violation of
U.S. laws for a period of two years from the date of the LIBOR NPA, DOJ
agreed that it would not prosecute UBS for any crimes related to the
submission of Yen LIBOR rates and other benchmark rates. For its part,
UBS agreed to, among other things: (i) Pay a monetary penalty of
$500,000,000; and (ii) take steps to further strengthen its internal
controls, as required by certain other U.S. and non-U.S. regulatory
agencies that had addressed the misconduct described in the LIBOR NPA.
Such requirements include those imposed by the United States Commodity
Futures Trading Commission's (CFTC) order dated December 19, 2012 (the
CFTC Order) which requires UBS to comply with significant auditing and
monitoring conditions that set standards for submissions related to
interest rate benchmarks such as LIBOR, qualifications of submitters
and supervisors, documentation, training, and firewalls. Under the CFTC
Order, UBS must maintain monitoring systems or electronic exception
reporting systems that identify possible improper or unsubstantiated
submissions. The CFTC Order requires UBS to conduct internal audits of
reasonable and random samples of its submissions every six months.
Additionally, UBS must retain an independent, third-party auditor to
conduct a yearly audit of the submission process for five years and a
copy of the report must be provided to the CFTC. Furthermore, the
Japanese Financial Service Authority's (JFSA) Business Improvement
Order dated December 16, 2011 requires UBS Securities Japan to (i)
develop a plan to ensure compliance with its legal and regulatory
obligations and to establish a control framework that is designed to
prevent recurrences of the fraudulent submissions for benchmark
interest rates; and (ii) provide periodic written reports to the JFSA
regarding UBS Securities Japan's implementation of the measures
required by the order.
4. 2013 Conviction. Although UBS, the parent entity, was not
criminally charged in connection with the submission of benchmark rates
when it entered into the LIBOR NPA, UBS Securities Japan Co. Ltd. (UBS
Securities Japan), a wholly-owned subsidiary of UBS incorporated under
the laws of Japan, pled guilty on December 19, 2012, to one count of
wire fraud in violation of Title 18, United Sates Code, sections 1343
and 2. UBS Securities Japan's guilty plea arose out of its fraudulent
submission of Yen LIBOR rates between 2006 and 2009,\76\
[[Page 83391]]
and its participation in a scheme to defraud counterparties to interest
rate derivatives trades executed on its behalf, by secretly
manipulating certain benchmark interest rates, namely Yen LIBOR and the
Euroyen Tokyo InterBank Offered Rate (EuroYen TIBOR), to which the
profitability of those trades was tied. On September 18, 2013 (the 2013
Conviction Date), UBS Securities Japan was sentenced by the United
States District Court for the District of Connecticut (the 2013
Conviction).\77\
---------------------------------------------------------------------------
\76\ Section 1343 generally imposes criminal liability for
fraud, including fines and/or imprisonment, when a person utilizes
wire, radio, or television communication in interstate or foreign
commerce. Section 2 generally imposes criminal liability on a person
as a principal if that person aids, counsels, commands, induces, or
willfully causes another person to engage in criminal activity.
\77\ United States of America v. UBS Securities Japan Limited,
Case Number 3:12-cr-00268-RNC.
---------------------------------------------------------------------------
5. FX Misconduct and Breach of LIBOR NPA. At approximately the same
time, the DOJ was conducting an investigation of several multi-national
banks, including UBS, in connection with the reported manipulation of
the foreign exchange (FX) markets. The DOJ determined, among other
things, that UBS had engaged in deceptive currency trading and sales
practices in conducting certain FX market transactions, as well as
collusive conduct in certain FX markets. The DOJ did not file separate
charges in connection with the FX-related misconduct, but instead
determined that the LIBOR NPA had been breached. The DOJ terminated the
LIBOR NPA and filed a one-count criminal information (the Information),
Case Number 3:15-cr-00076-RNC, in the U.S. District Court for the
District of Connecticut. The Information charged that, on or about June
29, 2009, in furtherance of a scheme to defraud counterparties to
interest rate derivatives transactions UBS transmitted or caused the
transmission of electronic communications in interstate and foreign
commerce, in violation of Title 18, United States Code, Sections 1343
and 2.
6. 2016 Conviction. UBS entered into a Plea Agreement with the DOJ
dated May 20, 2015 (the Plea Agreement), pleading guilty to the charges
in the Information, and agreeing to pay a $203,000,000 criminal
penalty.\78\ In addition, UBS agreed not to commit another federal
crime during a three year probation period; to continue implement a
compliance program designed to prevent and detect, or otherwise remedy,
conduct that led to the LIBOR NPA; and to provide annual reports to the
probation officer and the DOJ on its progress in implementing the
program. UBS also agreed to continue to strengthen its compliance
program and internal controls as required by: The U.S. Commodity
Futures Trading Commission (CFTC); the United Kingdom's Financial
Conduct Authority (UK FCA); the Swiss Financial Market Supervisory
Authority (FINMA); and any other regulatory enforcement agency, in
connection with resolutions involving conduct in FX markets or conduct
related to benchmark rates. UBS must provide information regarding its
compliance programs to the probation officer, upon request. A judgment
of conviction (the 2016 Conviction) against UBS in Case Number 3:15-cr-
00076-RNC is scheduled to be entered in the U.S. District Court for the
District of Connecticut on or about November 29, 2016.
---------------------------------------------------------------------------
\78\ United States of America v. UBS, Case Number 3:15-cr-00076-
RNC.
---------------------------------------------------------------------------
PTE 84-14
7. The Department notes that the rules set forth in section 406 of
the Employee Retirement Income Security Act of 1974, as amended (ERISA)
and section 4975(c) of the Internal Revenue Code of 1986, as amended
(the Code) proscribe certain ``prohibited transactions'' between plans
and related parties with respect to those plans, known as ``parties in
interest.'' \79\ Under section 3(14) of ERISA, parties in interest with
respect to a plan include, among others, the plan fiduciary, a
sponsoring employer of the plan, a union whose members are covered by
the plan, service providers with respect to the plan, and certain of
their affiliates. The prohibited transaction provisions under section
406(a) of ERISA prohibit, in relevant part, sales, leases, loans or the
provision of services between a party in interest and a plan (or an
entity whose assets are deemed to constitute the assets of a plan), as
well as the use of plan assets by or for the benefit of, or a transfer
of plan assets to, a party in interest.\80\ Under the authority of
section 408(a) of ERISA and section 4975(c)(2) of the Code, the
Department has the authority to grant exemptions from such ``prohibited
transactions'' in accordance with the procedures set forth in 29 CFR
part 2570, subpart B (76 FR 66637, 66644, October 27, 2011).
---------------------------------------------------------------------------
\79\ For purposes of the Summary of Facts and Representations,
references to specific provisions of Title I of ERISA, unless
otherwise specified, refer also to the corresponding provisions of
the Code.
\80\ The prohibited transaction provisions also include certain
fiduciary prohibited transactions under section 406(b) of ERISA.
These include transactions involving fiduciary self-dealing;
fiduciary conflicts of interest, and kickbacks to fiduciaries.
---------------------------------------------------------------------------
8. Prohibited Transaction Exemption 84-14 (PTE 84-14) \81\ exempts
certain prohibited transactions between a party in interest and an
``investment fund'' (as defined in Section VI(b) of PTE 84-14) \82\ in
which a plan has an interest, if the investment manager satisfies the
definition of ``qualified professional asset manager'' (QPAM) and
satisfies additional conditions for the exemption. In this regard, PTE
84-14 was developed and granted based on the essential premise that
broad relief could be afforded for all types of transactions in which a
plan engages only if the commitments and the investments of plan assets
and the negotiations leading thereto are the sole responsibility of an
independent, discretionary, manager.\83\
---------------------------------------------------------------------------
\81\ 49 FR 9494 (March 13, 1984), as corrected at 50 FR 41430
(October 10, 1985), as amended at 70 FR 49305 (August 23, 2005), and
as amended at 75 FR 38837 (July 6, 2010).
\82\ An ``investment fund'' includes single customer and pooled
separate accounts maintained by an insurance company, individual
trusts and common, collective or group trusts maintained by a bank,
and any other account or fund to the extent that the disposition of
its assets (whether or not in the custody of the QPAM) is subject to
the discretionary authority of the QPAM.
\83\ See 75 FR 38837, 38839 (July 6, 2010).
---------------------------------------------------------------------------
9. However, Section I(g) of PTE 84-14 prevents an entity that may
otherwise meet the definition of QPAM from utilizing the exemptive
relief provided by PTE 84-14, for itself and its client plans, if that
entity or an ``affiliate'' \84\ thereof or any owner, direct or
indirect, of a 5 percent or more interest in the QPAM has, within 10
years immediately preceding the transaction, been either convicted or
released from imprisonment, whichever is later, as a result of certain
specified criminal activity described in that section. The Department
notes that Section I(g) was included in PTE 84-14, in part, based on
the expectation that a QPAM, and those who may be in a position to
influence its policies, maintain a high standard of integrity.\85\
Accordingly, as a result of the Convictions, QPAMs with certain
corporate relationships to UBS and UBS Securities Japan, as well as
their client plans that are subject to Part 4 of Title I of ERISA
(ERISA-covered plans) or section 4975 of the Code (IRAs), will no
longer be able to rely on
[[Page 83392]]
PTE 84-14 without an individual exemption issued by the Department.
---------------------------------------------------------------------------
\84\ Section VI(d) of PTE 84-14 defines the term ``affiliate''
for purposes of Section I(g) as ``(1) Any person directly or
indirectly through one or more intermediaries, controlling,
controlled by, or under common control with the person, (2) Any
director of, relative of, or partner in, any such person, (3) Any
corporation, partnership, trust or unincorporated enterprise of
which such person is an officer, director, or a 5 percent or more
partner or owner, and (4) Any employee or officer of the person
who--(A) Is a highly compensated employee (as defined in Section
4975(e)(2)(H) of the Code) or officer (earning 10 percent or more of
the yearly wages of such person), or (B) Has direct or indirect
authority, responsibility or control regarding the custody,
management or disposition of plan assets.''
\85\ See 47 FR 56945, 56947 (December 21, 1982).
---------------------------------------------------------------------------
The UBS QPAMs
10. UBS Asset Management (Americas) Inc., UBS Realty Investors LLC,
UBS Hedge Fund Solutions LLC, and UBS O'Connor LLC are affiliates of
UBS, AG (UBS) \86\ within UBS's Asset Management division, and may rely
on PTE 84-14. Such entities, along with future entities in UBS's Assets
Management and Wealth Management Americas divisions that qualify as
``qualified professional asset managers'' (as defined in Part VI(a) of
PTE 84-14) and rely on the relief provided by PTE 84-14 and with
respect to which UBS AG is an ``affiliate'' (as defined in Part VI(d)
of PTE 84-14) are hereinafter referred to as the ``UBS QPAMs''. The
Applicants represent that currently, the Asset Management division is
the only division that has entities functioning as QPAMs and that UBS
itself does not provide investment management services to client plans
that are subject to Part 4 of Title I of ERISA (ERISA plans) or section
4975 of the Code (IRAs), or otherwise exercise discretionary control
over ERISA assets.
---------------------------------------------------------------------------
\86\ UBS Asset Management (Americas) Inc. and UBS Realty
Investors LLC are wholly owned by UBS Americas, Inc., a wholly-owned
subsidiary of UBS AG. UBS Hedge Fund Solutions LLC (formerly UBS
Alternative and Quantitative Investments, LLC) and UBS O'Connor LLC
are wholly owned by UBS Americas Holding LLC, a wholly owned
subsidiary of UBS AG.
---------------------------------------------------------------------------
11. The Applicants represent further that the UBS QPAMs provide
investment management services to 36 ERISA plan and IRA clients through
separately-managed accounts and pooled funds. These ERISA plan clients
are all large plans and several have more than 500,000 participants and
beneficiaries. Collectively, the UBS QPAMs currently manage
approximately $22.1 billion of ERISA Plan and IRA assets (excluding
ERISA Plan and IRA assets invested in pooled funds that are not plan
asset funds). Several types of investment strategies are used by the
UBS QPAMs to invest ERISA plan and IRA assets. These strategies include
investments of approximately $3.3 billion in alternative investments/
hedge funds, $835 million in equity investments, $8.6 billion in fixed
income, $2.2 billion in multi-asset investments, $5.8 billion in
derivative investments and $1.4 billion in real estate investments.
UBS's FX Misconduct
12. The DOJ determined that, prior to and after UBS signed the
LIBOR NPA on December 18, 2012, certain employees of UBS engaged in
fraudulent and deceptive currency trading and sales practices in
conducting certain FX market transactions via telephone, email and/or
electronic chat, to the detriment of UBS's customers.\87\ These
employees also engaged in collusion with other participants in certain
FX markets (such conduct, as further detailed below, is hereinafter
referred to as the ``FX Misconduct'').
---------------------------------------------------------------------------
\87\ The circumstances of UBS's violation of the terms of the
LIBOR NPA are described in Exhibit 1 to the Plea Agreement, entitled
``The Factual Basis for Breach of the Non-Prosecution Agreement''
(the Factual Basis for Breach).
---------------------------------------------------------------------------
13. According to the Factual Basis for Breach, the FX Misconduct
included the addition of undisclosed markups to certain FX
transactions. In that regard, sales staff misrepresented to customers
on certain transactions that markups were not being added, when in fact
they were.
14. The Factual Basis for Breach explains that for certain limit
orders, UBS personnel would use a price level different from the one
specified by the customers, without the customers' knowledge, to
``track'' certain limit orders. This practice was done to obtain an
undisclosed markup on the trade for UBS if the market hit both the
customer's limit price and UBS's altered tracking price. Additionally,
the practice also subjected customers to the potential that their limit
orders would be delayed or not filled when the market hit the
customer's limit price but not UBS's altered tracking price.
15. The Factual Basis for Breach also details how certain customers
obtaining quotes and placing trades over the phone would, on occasion,
request an ``open-line'' so they could hear the conversation regarding
price quotes between the UBS trader and salesperson. Certain of these
customers had an expectation the price they heard from the trader did
not include a sales markup for their transaction currency. While on
certain ``open-line'' phone calls, UBS traders and salespeople used
hand signals to fraudulently conceal markups from these customers.
16. The Factual Basis for Breach describes how, from about October
2011 to at least January 2013, a UBS FX trader conspired with other
financial services firms acting as dealers in the FX spot market, by
agreeing to restrain competition in the purchase and sale of the Euro/
U.S. dollar currency pair. To achieve this, among other things, the
conspirators: (i) Coordinated the trading of the Euro/U.S. dollar
currency pair in connection with the European Central Bank and the
World Markets/Reuters benchmark currency ``fixes;'' and (ii) refrained
from certain trading behavior by withholding offers and bids when one
conspirator held an open risk position. They did this so that the price
of the currency traded would not move in a direction adverse to the
conspirator with an open risk position.
17. The Factual Basis for Breach explains that in determining that
UBS was in breach of the LIBOR NPA, the DOJ considered UBS's FX
Misconduct described above in light of UBS's obligation under the LIBOR
NPA to commit no further crimes. The DOJ also took into account UBS's
three recent prior criminal resolutions \88\ and multiple civil and
regulatory resolutions. In addition, the DOJ also considered that the
compliance programs and remedial efforts put in place by UBS following
the LIBOR NPA failed to detect the collusive and deceptive conduct in
the FX markets until an article was published pointing to potential
misconduct in the FX markets.
---------------------------------------------------------------------------
\88\ In addition to the 2012 LIBOR NPA described above, in
February 2009, UBS entered into a deferred prosecution agreement
with the DOJ's Tax Division for conspiring to defraud the United
States of tax revenue through secret Swiss bank accounts for United
States tax payers. In connection therewith, UBS agreed to pay $780
million. In May of 2011, UBS entered into a non-prosecution
agreement with the DOJ's Antitrust Division to resolve allegations
of bid-rigging in the municipal bond derivatives market, and agreed
to pay $160 million.
---------------------------------------------------------------------------
UBS's LIBOR Misconduct
18. The Statement of Facts (SOF) in Exhibit 3 of the Plea Agreement
describes the circumstances of UBS's scheme to defraud counterparties
to interest rate derivatives transactions, by secretly manipulating
benchmark interest rates to which the profitability of those
transactions was tied. According to the SOF, LIBOR is a benchmark
interest rate used in financial markets worldwide, namely on exchanges
and in over-the-counter markets, to settle trades for futures, options,
swaps, and other derivative financial instruments. In addition, LIBOR
is often used as a reference rate for mortgages, credit cards, student
loans, and other consumer lending products. LIBOR and the other
benchmark interest rates play a fundamentally important role in
financial markets throughout the world due their widespread use.
19. Each business day the LIBOR average benchmark interest rates
are calculated and published by Thomson Reuters, acting as agent for
the British Bankers' Association (BBA), for ten currencies (including
the United States Dollar, the British Pound Sterling, and
[[Page 83393]]
the Japanese Yen) and for various maturities (ranging from overnight to
twelve months). The calculation for a given currency is based upon rate
submissions from a panel of banks for that currency (the Contributor
Panel). In general terms, LIBOR is the rate at which the Contributor
Panel member could borrow funds. According to the BBA, the Contributor
Bank Panel must submit the rate considered by the bank's cash
management staff, and not the bank's personnel responsible for
derivative trading, as the rate the bank could borrow unsecured inter-
bank funds in the London money market, without reference to rates
contributed by other Contributor Panel banks. Additionally, a
Contributor Panel bank may not contribute a rate based on the pricing
of any derivative financial instrument. Once each Contributor Panel
bank has submitted its rate, the contributed rates are ranked and
averaged, discarding the highest and lowest 25%, to formulate the LIBOR
``Fix'' for that particular currency and maturity. Since 2005, UBS has
been a member of the Contributor Panels for the Dollar LIBOR, Yen
LIBOR, Euro LIBOR, Swiss Franc LIBOR, and Pound Sterling LIBOR.
20. UBS has also been a member of the Contributor Panel for the
Euro Interbank Offered Rate (Euribor) since 2005. The European Banking
Federation (EBF) oversees the Euribor reference rate which is the rate
expected to be offered by one prime bank to another for Euro interbank
term deposits within the Euro zone. The Euribor Contributor Panel bank
rate submissions are ranked, and the highest and lowest 15% of all the
submissions are excluded from the calculation. The Euribor fix is then
formulated using the average of the remaining rate submissions.
21. In addition, UBS was also a member of the Contributor Panel for
the Euroyen TIBOR from at least 2005 until 2012. The Japanese Bankers
Association (JBA) oversees the TIBOR reference rate. Yen deposits
maintained in accounts outside of Japan are referred to as ``Euroyen''
and the prevailing lending market rates between prime banks in the
Japan Offshore Market is Euroyen TIBOR. Euroyen TIBOR is calculated by
averaging the rate submissions of Contributor Panel members after
discarding the two highest and lowest rate submissions. The Euroyen
TIBOR rates and the Contributor Panel members' rate submissions are
made available worldwide.
22. The SOF also describes the wide-ranging and systematic efforts,
practiced nearly on a daily basis, by several UBS employees to
manipulate YEN LIBOR in order to benefit UBS's trading positions
through internal manipulation within UBS, by using cash brokers to
influence other Contributor Panel banks' Yen LIBOR submissions, and by
colluding directly with employees at other Contributor Panel banks to
influence those banks' Yen LIBOR submissions.
23. The SOF provides that, at various times from at least 2001
through June 2010, certain UBS derivatives traders manipulated
submissions for various interest rate benchmarks, and colluded with
employees at other banks and cash brokers to influence certain
benchmark rates to benefit their trading positions. The SOF explains
that the UBS derivatives traders directly and indirectly exercised
improper influence over UBS's submissions for LIBOR, Euroyen TIBOR and
Euribor. In this regard, those UBS derivatives traders requested, and
sometimes directed, that certain UBS benchmark interest submitters
submit a particular benchmark interest rate contribution or a higher,
lower, or unchanged rate for LIBOR, Euroyen TIBOR, and Euribor that
would be beneficial to the traders. These UBS traders' requests for
favorable benchmark rates submissions were regularly accommodated by
the UBS submitters.\89\
---------------------------------------------------------------------------
\89\ According to the SOF, UBS personnel on occasion also
engaged in the internal manipulation of UBS's interest rate
submissions in connection with the Swiss Franc LIBOR, the British
Pound Sterling LIBOR, the Euribor, and the U.S. Dollar LIBOR.
---------------------------------------------------------------------------
24. The SOF also details how cash brokers \90\ were used by certain
UBS Yen derivatives traders to distribute misinformation to other
Contributor Panel banks regarding Yen LIBOR in order to manipulate Yen
LIBOR submissions to the benefit of UBS. The SOF details further how
the UBS traders, submitters, supervisors and certain UBS managers,
continued to encourage, allow, or participate in the conduct even
though they were aware that manipulation of LIBOR submissions was
inappropriate and they attempted to conceal the manipulation and
obstruct the LIBOR investigation.
---------------------------------------------------------------------------
\90\ Bids and offers for cash are tracked in the market by cash
brokers. These cash brokers also act as intermediaries by assisting
derivatives and money market traders in arranging transactions
between financial institutions.
---------------------------------------------------------------------------
25. UBS acknowledges that the SOF is true and correct and that the
wrongful acts taken by the participating employees in furtherance of
the misconduct set forth above were within the scope of their
employment at UBS. Furthermore, UBS acknowledges that the participating
employees intended, at least in part, to benefit UBS through the
actions described above.
Prior and Anticipated Convictions and Failure To Comply With Section
I(g) of PTE 84-14
26. The 2013 Conviction caused the UBS QPAMs to violate Section
I(g) of PTE 84-14. On September 13, 2013, the Department granted PTE
2013-09, which allows the UBS QPAMs to rely on the relief provided in
PTE 84-14, notwithstanding the 2013 Conviction of UBS Securities
Japan.\91\ Under PTE 2013-09, the UBS QPAMs must comply with a number
of conditions, including the condition in Section I(h) which provides
that, ``Notwithstanding the [2013 Conviction], UBS complies with each
condition of PTE 84-14, as amended.'' \92\ As a result of this
requirement, if UBS or one of its affiliates is convicted of another
crime (besides the 2013 Conviction) described in Section I(g) of PTE
84-14, then the relief provided by PTE 2013-09 would be unavailable.
---------------------------------------------------------------------------
\91\ 78 FR 56740 (September 13, 2013).
\92\ Section I(h) of PTE 2013-09, at 78 FR 56741 (September 18,
2013).
---------------------------------------------------------------------------
27. The 2016 Conviction will cause the UBS QPAMs to violate Section
I(g) of PTE 84-14, once a judgment of conviction is entered by the
District Court. As a consequence, the UBS QPAMs will not be able to
rely upon the exemptive relief provided by PTE 84-14 for a period of
ten years as of the 2016 Conviction Date. Furthermore, the 2016
Conviction will also cause Section I(h) of PTE 2013-09 to be violated,
as of the 2016 Conviction Date. UBS QPAMs will become ineligible for
the relief provided by PTE 84-14 as a result of both the 2013
Conviction and 2016 Conviction. Therefore, the Applicants request a
single, new exemption that provides relief for the UBS QPAMs to rely on
PTE 84-14 notwithstanding the 2013 Conviction and the 2016 Conviction,
effective as of the 2016 Conviction Date.
28. The Department is proposing a five-year exemption herein to
allow the UBS QPAMs to rely on PTE 84-14 notwithstanding the
Convictions, subject to a comprehensive suite of protective conditions
that are designed to protect the rights of the participants and
beneficiaries of the ERISA-covered plans and IRAs that are managed by
UBS QPAMs.
Elsewhere in the Federal Register, the Department is publishing a
proposed temporary exemption for UBS QPAMs to rely on PTE 84-14
notwithstanding the Convictions, for a period of up to one year. The
temporary exemption will allow the Department to determine whether to
grant this proposed five-year exemption, and will protect ERISA-covered
plans and IRAs from potential
[[Page 83394]]
losses if such UBS QPAMs suddenly lose their ability to rely on PTE 84-
14 with respect to such plans and IRAs. The temporary exemption will be
effective from the Conviction Date until the earlier of twelve months
from such Conviction Date or until the effective date of a final agency
action made by the Department in connection with this proposed five-
year exemption. The proposed five-year exemption would supplant the
exemptive relief set forth in a temporary exemption, effective as of
the date of grant.
29. Finally, excluding the Convictions and the FX Misconduct, UBS
represents that it currently does not have a reasonable basis to
believe there are any pending criminal investigations involving the
Applicants or any of their affiliated companies that would cause a
reasonable plan or IRA customer not to hire or retain the institution
as a QPAM.
Furthermore, this proposed five-year exemption will not apply to
any other conviction(s) of UBS or its affiliates for crimes described
in Section I(g) of PTE 84-14. The Department notes that, in such event,
the Applicants and their ERISA-covered plan and IRA clients should be
prepared to rely on exemptive relief other than PTE 84-14 for any
prohibited transactions entered into after the date of such
conviction(s), withdraw from any arrangements that solely rely on PTE
84-14 for exemptive relief; or avoid engaging in any such prohibited
transactions in the first place.
Remedial Measures Taken by UBS To Address the LIBOR Conduct and FX
Misconduct
30. The Applicants represent that UBS took extensive remedial
actions and implemented internal control procedures before, during, and
after the LIBOR investigations and FX Misconduct, in order to reform
its compliance structure and strengthen its corporate culture. UBS
represents that it undertook the following structural reforms and
compliance enhancements:
Corporate Culture. UBS represents that it has significantly revised
and strengthened its Code of Business Conduct and Ethics from
approximately 2008 through 2011, and instituted a ``Principles of
Behavior'' program from approximately late 2013 through the present. In
2013, UBS adopted a firm-wide definition of ``conduct risk,'' and
defined the roles and responsibilities of UBS's business divisions with
respect to such conduct risk. In 2013 UBS also enhanced employee
supervision policies.
Annual Risk Assessments. Beginning in approximately 2008, UBS
instituted annual business and operational risk assessments for each
UBS sub-division and for particular risks across the firm, such as
fraud risk and market risk.
Coordination of High-Risk Matters and Compliance Reorganization.
During 2011 through 2013, UBS established the cross-functional
Investigation Sounding Board (ISB) chaired by UBS's Global Head of
Litigation and Investigations, which oversees and coordinates all
investigations of high risk issues. In 2013, UBS integrated its
compliance function and operational risk control functions to avoid
gaps in risk coverage.
Transactional and Employee Monitoring. In 2013, UBS adopted and
began to implement an automated system to monitor transactions covering
all asset classes. UBS enhanced the monitoring of all email and group
messaging, and implemented a system to monitor audio communications
including land lines and cell phones. UBS implemented a trader
surveillance system, and developed and implemented a tool to monitor
and assess employee behavioral indicators. UBS also expanded cross
border monitoring, and improved the processes associated with the UBS
Group's whistleblowing policy.
Compensation Reformation. From approximately 2008 through 2011, UBS
reformed its compensation and incentives structure, including longer
deferred compensation periods, greater claw-back and forfeiture
provisions. UBS enhanced processes to ensure that disciplinary
sanctions and compliance related violations (such as failure to
complete training) are considered when determining employee
compensation and in an individual's performance review.
Corporate Reforms. In October 2012, UBS announced a transformation
of the Investment Bank--where the LIBOR and FX Misconduct occurred--by
reducing the size and complexity of the Investment Bank to ensure it
can operate within strict risk and financial resource limitations.
Benchmark Interest Rate Submissions. From 2011 through 2013, UBS
created a dedicated, independent benchmark submissions team and index
group segregated from the for-profit activities of the bank. UBS also
imposed appropriate communications firewalls between those functions of
the bank, and implemented strict controls and procedures for
determining benchmark submissions. UBS enhanced supervisory oversight
of benchmark and indices submissions, and implemented appropriate
monitoring systems to identify unsubstantiated submissions.
Risk Management and Control. In 2013, UBS adopted or strengthened
firm-wide policies that set forth and established: Standards for market
conduct; a ``zero tolerance'' approach to fraud; standard approaches
for fraud risk management and issue escalation across the firm; a firm-
wide approach to identifying, managing, and escalating actual and
potential conflicts of interest; and key principles to ensure that UBS
complies with all applicable competition laws.
Front Office Processes. UBS invested approximately $100 million to
address the FX business conduct and control deficiencies identified
during the FX investigation, including initiating continuous
transaction monitoring and detailed time stamping of orders and
implementing controls, principles and systems similar to those required
by the regulated markets for its FX business. UBS states that it has:
Standardized the FX fixing order process; updated chatroom standards
and controls; prohibited the use of mobile phones on trading floors;
implemented new requirements for client and market conduct, behavior,
and communications; established enhanced supervisory procedures; and
required all Investment Bank personnel to take market conduct training.
31. Furthermore, the Applicants represent that UBS took
disciplinary action against forty-four individuals in connection with
the LIBOR misconduct, and against sixteen individuals in connection
with the FX Misconduct. The individuals involved in the disciplinary
actions included traders, benchmark submitters, compliance personnel,
salespeople and managers. The disciplinary actions encompassed the
termination or separation of thirty employees and also included
financial consequences, such as forfeiture of deferred compensation,
loss of bonuses and bonus reductions.
Statutory Findings--In the Interest of Affected ERISA Plans and IRAs
32. The Applicants represent that the requested exemption is in the
interest of affected plans and their participants and beneficiaries
because it will enable ERISA plan and IRA clients to have the
opportunity to enter into transactions that are beneficial to the plan
and may otherwise be prohibited or more costly. The Applicants maintain
that if the exemption request is denied, the UBS QPAMs will be unable
to cause ERISA-covered plan clients to engage in many routine and
standard transactions that occur across many asset classes. According
to the Applicants, these
[[Page 83395]]
transactions encompass the following asset classes:
Real Estate. UBS QPAMs manage approximately $1.4 billion of real
estate assets in a separate account as an ERISA section 3(38)
investment manager for a large multiemployer pension plan with many
participating employers (and therefore, numerous parties in interest).
The investments constitute equity and debt investments in operating
real properties, including apartments, office buildings, retail
centers, and industrial buildings. The Applicants represent that they
rely on PTE 84-14 for the acquisitions of properties in the separate
account, as well as mortgage loans entered into in connection with the
purchases of the properties; leases of space in commercial properties
and residential leases in apartment properties; property management
agreements and agreements with vendors providing services at the
properties (e.g. janitorial services); and sales to potential buyers of
the properties.
Alternative Investments. The UBS QPAMs manage three hedge funds of
funds that hold assets deemed to constitute ``plan assets'' under
ERISA, with approximately $825 million under management. The Applicants
state that they rely on PTE 84-14 to enter into and manage the credit
facilities totaling approximately $56 million entered into by the
funds.
Derivatives. The UBS QPAMs manage approximately $8.3 billion of
assets for ERISA plan separate account clients and plan assets funds
whose investment guidelines permit or require investment in derivatives
contracts documented through International Swaps and Derivatives
Association, Inc. (ISDA) agreements or cleared swap agreements.
According to the Applicants, approximately 12 ERISA plan separate
account clients and 23 plan asset funds are counterparties to ISDA
umbrella agreements and cleared swaps account agreements, and the UBS
QPAMs currently manage approximately 350 separate trading lines on
behalf of those clients and funds. According to the Applicants, PTE 84-
14 is primarily relied upon for these transactions, and the
counterparties to these agreements almost always require
representations to such effect to be included in the agreements.
Fixed Income. The Applicants state that, as a result of regulatory
proposals by the Financial Regulatory Authority (FINRA) and the Federal
Reserve of New York Treasury Markers Practice Group, Master Securities
Forward Transaction Agreements (MSFTAs) are beginning to be required to
be in place in order to enter into several broad categories of agency
mortgage-backed securities transactions. According to the Applicants,
similar to ISDAs, the counterparties to MSFTAs universally require UBS
QPAMs to represent that they can rely on PTE 84-14, making it
impossible for the UBS QPAMs to execute such transactions on behalf of
their ERISA plan and IRA clients. The UBS QPAMs manage approximately
$5.3 billion of assets for ERISA separate account clients and plan
asset funds whose investment guidelines permit these types of
transactions, of which approximately $25 million has been invested in
these types of fixed income transactions.
Equity Investments. The Applicants state that, although direct
investments in equities typically do not require reliance on PTE 84-14,
certain related transactions do, such as futures contracts. Moreover,
according to the Applicants, even when another exemption is available
for equity investments, ERISA plan and IRA clients may not want to
retain an investment manager that cannot rely on PTE 84-14 for the
reasons discussed above.
OCIO Services. The Applicants explain that in addition to providing
investment management services, the UBS QPAMs also provide outsourced
chief investment officer (OCIO) services to a number of ERISA plan
clients, one of which, to the Applicants knowledge, is the largest
ERISA plan to enter into an OCIO arrangement. According to the
Applicants, OCIO services generally provide that UBS has the authority
to manage a plan's entire investment portfolio, including selecting and
negotiating contracts with other investment managers, allocating
assets, developing investment policies, assisting with regulatory
reporting, and advising plan fiduciaries. The Applicants represent that
PTE 84-14 is the only exemption the UBS QPAMs can rely on for the large
OCIO ERISA plan client because no other exemptions are available for
transactions involving futures, derivatives, and other investments that
are not widely-traded.
33. The Applicants represent that, if the exemption request is
denied, and ERISA plan and IRA clients leave the UBS QPAMs, these
clients would typically incur transition costs associated with
identifying appropriate replacement investment managers and liquidating
and re-investing the assets currently managed by the UBS QPAMs. The
Applicants estimate that the aggregate transition costs for liquidating
and re-investing of each asset class for UBS's ERISA plan and IRA
clients would be approximately $280 million.\93\ These cost estimates
are described below:
---------------------------------------------------------------------------
\93\ The Applicants state that the estimates that UBS developed
do not assume a ``fire sale'' of any assets; rather, they assume
that assets would be liquidated quickly as reasonably possible
consistent with the UBS QPAMs' fiduciary obligations to their ERISA
plan clients.
---------------------------------------------------------------------------
Real Estate. The Applicants estimate transition costs of 1,152
basis points for the $1.4 billion of ERISA plan and IRA real estate
assets under UBS QPAMs' management. These costs include the losses
incurred from selling properties for 90 cents on the dollar, closing
costs of 1.5 percent of the sale price and mortgage prepayment fees of
one percent of the outstanding mortgages. This would result in a total
estimated cost of $160 million for the real estate assets, all of which
would be absorbed by one ERISA plan client.
Alternative Investments. UBS states that, combined with early
redemption penalties,\94\ the cost of liquidating the alternative
investments managed by UBS QPAMs on behalf of ERISA-covered plans and
IRAs would be 212 basis points of the NAV for a total cost of about $69
million (of which approximately $58 million would be to one ERISA plan
client).
---------------------------------------------------------------------------
\94\ The Department notes that, if this exemption and the
related temporary exemption were granted, compliance with the
condition in Section I(j) would require the UBS QPAMs to clearly
demonstrate that any ``early redemption penalties'' are
``specifically designed to prevent generally recognized abusive
investment practices or specifically designed to ensure equitable
treatment of all investors in a pooled fund in the event such
withdrawal or termination may have adverse consequences for all
other investors . . . .'' In addition, under Section I(j), the UBS
QPAMs would have to hold their plan customers harmless for any
losses attributable to, inter alia, any prohibited transactions or
violations of the duties of prudence and loyalty.
---------------------------------------------------------------------------
Fixed Income. According to the Applicants, the approximate
transition costs for liquidating domestic and international fixed
income investments is estimated by the Applicants to be $48 million.
The Applicants explain that they estimated the costs of liquidating
domestic and international bonds using Barclays Capital's ``liquidity
cost score'' methodology (LCS), which reflects the percentage of a
bond's price that is estimated to be incurred in transaction costs in a
standard institutional transaction. The Applicants note that the LCS is
primarily driven by the liquidity of the market, but is also impacted
by other factors, including the time to maturity for the bond. Using
LCS, the Applicants state that liquidating and re-investing fixed
income products, emerging market debt securities, and fixed income
funds would result in transition costs,
[[Page 83396]]
respectively, of 94, 91, and 97 basis points.\95\
---------------------------------------------------------------------------
\95\ The Applicants assume that the costs of liquidating and re-
investing cash equivalent and currency holdings would be negligible,
given the liquidity associated with those assets.
---------------------------------------------------------------------------
Equities. The Applicants state that UBS' investment professionals
conducted trading simulations to determine the impact of selling the
aggregate block of each class of equity securities currently held by
the UBS QPAMs on behalf of their clients. According to the Applicants,
the trading simulations yielded transition cost assumptions of 32 basis
points for U.S. large-cap equities; 79 basis points for U.S. small-cap
equities; 19 basis points for global equities; 40 basis points for
emerging market equities; and 17 basis points for equity funds. The
Applicants represent that the total estimated costs for liquidating
equities held by UBS QPAMs' ERISA plan and IRA clients would be
approximately $2.5 million.
Derivatives. Lastly, the Applicants estimate the transition costs
for derivative investments such as swaps, forwards, futures, and
options would be approximately $2.3 million. The Applicants also used
the LCS methodology to arrive at a transition cost assumption of 10
basis points for credit default swaps; 6 basis points for interest rate
swaps; 35 basis points for total return swaps; and 4 basis points for
fixed income futures. Transition costs for equities futures were
assumed to be 6 basis points given the liquidity of the indices
underlying those transactions. Finally, the Applicants note that,
because of the liquidity associated with currency forwards and the
relatively small amount of the UBS QPAMs' investments in equity and
fixed income options, UBS assumed that the costs of liquidating and re-
investing those assets would be negligible.
OCIO Relationship. In the absence of granted relief, the Applicants
estimate that it would take this large OCIO ERISA plan client 18 to 24
months to find providers to replicate all the OCIO services provided by
the UBS QPAMs. UBS represents that this estimate is consistent with the
following projections for the steps this plan client would need to take
to secure and fully implement replacement OCIO services: (i) 6-9 months
to issue a Request for Proposals, receive and evaluate proposals, and
select a new service provider(s); (ii) 3-6 months to negotiate a
contract and complete other necessary transition tasks (e.g.,
establishing custodial accounts) with the new service provider(s); and
(iii) 9-12 months for the new service provider(s) to implement its own
investment program, which would include evaluating the client's
existing investments and performing due diligence on existing sub-
managers. The Applicants note that the estimate is also consistent with
the amount of time it took UBS to establish the current OCIO
relationship with this client. The Applicants represent in addition to
these transition costs, the ERISA plan client would pay substantially
more in fees than it is currently paying if it had to obtain all these
services from a variety of different providers.
Statutory Findings--Protective of the Rights of Participants of
Affected Plans and IRAs
34. The Applicants have proposed certain conditions it believes are
protective of ERISA-covered plans and IRAs with respect to the
transactions described herein. The Department has determined to revise
and supplement the proposed conditions so that it can make its required
finding that the requested five-year exemption is protective of the
rights of participants and beneficiaries of affected plans and IRAs.
35. Several of these conditions underscore the Department's
understanding, based on the Applicant's representations, that the
affected UBS QPAMs were not involved in the FX Misconduct or the
misconduct that is the subject of the Convictions. For example, the
five-year exemption, if granted as proposed, mandates that the UBS
QPAMs (including their officers, directors, agents other than UBS, and
employees of such UBS QPAMs) did not know of, have reason to know of,
or participate in: (1) The FX Misconduct; or (2) the criminal conduct
that is the subject of the Convictions (for purposes of this
requirement, ``participate in'' includes an individual's knowing or
tacit approval of the FX Misconduct and the misconduct that is the
subject of the Convictions). Under this the proposed five-year
exemption, the term ``Convictions'' includes the 2013 Conviction and
the 2016 Conviction. The term ``2013 Conviction'' means the judgment of
conviction against UBS Securities Japan Co. Ltd. in Case Number 3:12-
cr-00268-RNC in the U.S. District Court for the District of Connecticut
for one count of wire fraud in violation of Title 18, United Sates
Code, sections 1343 and 2 in connection with submission of YEN London
Interbank Offered Rates and other benchmark interest rates. The term
``2016 Conviction'' means the anticipated judgment of conviction
against UBS AG in Case Number 3:15-cr-00076-RNC in the U.S. District
Court for the District of Connecticut for one count of wire fraud in
violation of Title 18, United States Code, Sections 1343 and 2 in
connection with UBS's submission of Yen London Interbank Offered Rates
and other benchmark interest rates between 2001 and 2010. Furthermore,
for all purposes under the proposed five-year exemption, ``conduct'' of
any person or entity that is the ``subject of [a] Conviction''
encompasses any conduct of UBS and/or their personnel, that is
described in the Plea Agreement, (including Exhibits 1 and 3 attached
thereto), the plea agreement entered into between UBS Securities Japan
and the Department of Justice Criminal Division, on December 19, 2012,
in connection with Case Number 3:12-cr-00268-RNC (and attachments
thereto), and other official regulatory or judicial factual findings
that are a part of this record. The proposed five-year exemption
defines the FX Misconduct as the conduct engaged in by UBS personnel
described in Exhibit 1 of the Plea Agreement entered into between UBS
AG and the Department of Justice Criminal Division, on May 20, 2015 in
connection with Case Number 3:15-cr-00076-RNC filed in the US District
Court for the District of Connecticut.
36. Further, the UBS QPAMs (including their officers, directors,
agents other than UBS, and employees of such UBS QPAMs) may not have
received direct compensation, or knowingly have received indirect
compensation, in connection with: (1) The FX Misconduct; or (2) the
criminal conduct that is the subject of the Convictions.
37. The Department expects that UBS QPAMs will rigorously ensure
that the individuals associated with the UBS misconduct will not be
employed or knowingly engaged by such QPAMs. In this regard, the
proposed five-year exemption mandates that the UBS QPAMs will not
employ or knowingly engage any of the individuals that participated in:
(1) The FX Misconduct or (2) the criminal conduct that is the subject
of the Convictions. For purposes of this condition, ``participated in''
includes an individual's knowing or tacit approval of the FX Misconduct
or the conduct that is the subject of Convictions. Further, a UBS QPAM
will not use its authority or influence to direct an ``investment
fund,'' (as defined in Section VI(b) of PTE 84-14) that is subject to
ERISA or the Code and managed by such UBS QPAM, to enter into any
transaction with UBS or UBS Securities Japan, nor otherwise engage UBS
or UBS Securities Japan to provide
[[Page 83397]]
additional services to such investment fund, for a direct or indirect
fee borne by such investment fund, regardless of whether such
transaction or services may otherwise be within the scope of relief
provided by an administrative or statutory exemption.
38. The UBS QPAMs must comply with each condition of PTE 84-14, as
amended, with the sole exceptions of the violations of Section I(g) of
PTE 84-14 that are attributable to the Convictions. Further, any
failure of the UBS QPAMs to satisfy Section I(g) of PTE 84-14 must
result solely from the Convictions.
39. No relief will be provided by this five-year exemption to the
extent a UBS QPAM exercised authority over the assets of any plan
subject to Part 4 of Title I of ERISA (an ERISA-covered plan) or
section 4975 of the Code (an IRA) in a manner that it knew or should
have known would: Further the FX Misconduct or the criminal conduct
that is the subject of the Convictions; or cause the UBS QPAM, its
affiliates or related parties to directly or indirectly profit from the
FX Misconduct or the criminal conduct that is the subject of the
Convictions. The conduct that is the subject of the Convictions
includes that which is described in the Plea Agreement (including
Exhibits 1 and 3 attached thereto) and the plea agreement entered into
between UBS Securities Japan and the Department of Justice Criminal
Division, on December 19, 2012, in connection with Case Number 3:12-cr-
00268-RNC (and attachments thereto). The FX Misconduct engaged in by
UBS personnel includes that which is described in Exhibit 1 of the Plea
Agreement (Factual Basis for Breach) entered into between UBS AG and
the Department of Justice Criminal Division, on May 20, 2015 in
connection with Case Number 3:15-cr-00076-RNC filed in the US District
Court for the District of Connecticut. Further, no five-year relief
will be provided to the extent UBS, or UBS Securities Japan, provides
any discretionary asset management services to ERISA-covered plans or
IRAs or otherwise act as a fiduciary with respect to ERISA-covered plan
or IRA assets.
40. Policies. The Department believes that robust policies and
training are warranted where, as here, extensive criminal misconduct
has occurred within a corporate organization that includes one or more
QPAMs managing plan investments in reliance on PTE 84-14. Therefore,
this proposed five-year exemption requires that each UBS QPAM must
immediately develop, implement, maintain, and follow written policies
and procedures (the Policies) requiring and reasonably designed to
ensure that: The asset management decisions of the UBS QPAM are
conducted independently of UBS's corporate management and business
activities, including the corporate management and business activities
of the Investment Bank division and UBS Securities Japan; the UBS QPAM
fully complies with ERISA's fiduciary duties and ERISA and the Code's
prohibited transaction provisions and does not knowingly participate in
any violations of these duties and provisions with respect to ERISA-
covered plans and IRAs; the UBS QPAM does not knowingly participate in
any other person's violation of ERISA or the Code with respect to
ERISA-covered plans and IRAs; any filings or statements made by the UBS
QPAM to regulators, including but not limited to, the Department of
Labor, the Department of the Treasury, the Department of Justice, and
the Pension Benefit Guaranty Corporation, on behalf of ERISA-covered
plans or IRAs are materially accurate and complete, to the best of such
QPAM's knowledge at that time; the UBS QPAM does not make material
misrepresentations or omit material information in its communications
with such regulators with respect to ERISA-covered plans or IRAs, or
make material misrepresentations or omit material information in its
communications with ERISA-covered plan and IRA clients; and the UBS
QPAM complies with the terms of this proposed five-year exemption. Any
violation of, or failure to comply with, the Policies must be corrected
promptly upon discovery, and any such violation or compliance failure
not promptly corrected must be reported, upon the discovery of such
failure to promptly correct, in writing, to appropriate corporate
officers, the head of Compliance and the General Counsel of the
relevant UBS QPAM (or their functional equivalent), the independent
auditor responsible for reviewing compliance with the Policies, and an
appropriate fiduciary of any affected ERISA-covered plan or IRA that is
independent of UBS.\96\ A UBS QPAM will not be treated as having failed
to develop, implement, maintain, or follow the Policies, provided that
it corrects any instance of noncompliance promptly when discovered or
when it reasonably should have known of the noncompliance (whichever is
earlier), and provided that it reports such instance of noncompliance
as explained above.
---------------------------------------------------------------------------
\96\ With respect to any ERISA-covered plan or IRA sponsored by
an ``affiliate'' (as defined in Part VI(d) of PTE 84-14) of UBS or
beneficially owned by an employee of UBS or its affiliates, such
fiduciary does not need to be independent of UBS.
---------------------------------------------------------------------------
41. Training. The Department has also imposed a condition that
requires each UBS QPAM to immediately develop and implement a program
of training (the Training), conducted at least annually, for all
relevant UBS QPAM asset/portfolio management, trading, legal,
compliance, and internal audit personnel. The Training must be set
forth in the Policies and at a minimum, cover the Policies, ERISA and
Code compliance (including applicable fiduciary duties and the
prohibited transaction provisions) and ethical conduct, the
consequences for not complying with the conditions of this proposed
five-year exemption (including the loss of the exemptive relief
provided herein), and prompt reporting of wrongdoing. Furthermore, the
Training must be conducted by an independent professional who has been
prudently selected and who has appropriate technical training and
proficiency with ERISA and the Code.
42. Independent Transparent Audit. The Department views a rigorous,
transparent audit that is conducted by an independent party as
essential to ensuring that the conditions for exemptive relief
described herein are followed by the UBS QPAMs. Therefore, Section I(i)
of this proposed five-year exemption requires that each UBS QPAM
submits to an audit conducted annually by an independent auditor, who
has been prudently selected and who has appropriate technical training
and proficiency with ERISA and the Code, to evaluate the adequacy of,
and the UBS QPAM's compliance with, the Policies and Training described
herein. The audit requirement must be incorporated in the Policies.
Each annual audit must cover a consecutive twelve month period starting
with the twelve month period that begins on the date of the 2016
Conviction (the Initial Audit Period). If this proposed five-year
exemption is granted within one year of the effective date of the
proposed temporary exemption for UBS QPAMs (Exemption Application No.
D-11863), then the Initial Audit Period will cover the period of time
during which such temporary exemption is effective and a portion of the
time during which this proposed five-year exemption is effective. In
such event, the audit terms contained in Section I(i) of this five-year
exemption will supersede the terms of Section I(i) of the temporary
exemption. Additionally, in determining compliance with the conditions
for relief in the temporary exemption and this five-year exemption
including the
[[Page 83398]]
Policies and Training requirements, for purposes of conducting the
audit, the auditor will rely on the conditions for exemptive relief as
then applicable to the respective periods under audit. For time periods
prior to the Conviction Date and covered under PTE 2013-09, the audit
requirements in Section (g) of PTE 2013-09 will remain in effect such
for time periods. Each annual audit must be completed no later than six
(6) months after the period to which the audit applies.
43. The audit condition requires that, to the extent necessary for
the auditor, in its sole opinion, to complete its audit and comply with
the conditions for relief described herein, and as permitted by law,
each UBS QPAM and, if applicable, UBS, will grant the auditor
unconditional access to its business, including, but not limited to:
Its computer systems; business records; transactional data; workplace
locations; training materials; and personnel.
44. The auditor's engagement must specifically require the auditor
to determine whether each UBS QPAM has complied with the Policies and
Training conditions described herein, and must further require the
auditor to test each UBS QPAM's operational compliance with the
Policies and Training.
45. On or before the end of the relevant period described in
Section I(i)(1) for completing the audit, the auditor must issue a
written report (the Audit Report) to UBS and the UBS QPAM to which the
audit applies that describes the procedures performed by the auditor
during the course of its examination. The Audit Report must include the
auditor's specific determinations regarding: The adequacy of the UBS
QPAM's Policies and Training; the UBS QPAM's compliance with the
Policies and Training; the need, if any, to strengthen such Policies
and Training; and any instance of the respective UBS QPAM's
noncompliance with the written Policies and Training.
Any determination by the auditor regarding the adequacy of the
Policies and Training and the auditor's recommendations (if any) with
respect to strengthening the Policies and Training of the respective
UBS QPAM must be promptly addressed by such UBS QPAM, and any action
taken by such UBS QPAM to address such recommendations must be included
in an addendum to the Audit Report. Any determination by the auditor
that the respective UBS QPAM has implemented, maintained, and followed
sufficient Policies and Training must not be based solely or in
substantial part on an absence of evidence indicating noncompliance. In
this last regard, any finding that the UBS QPAM has complied with the
requirements under this subsection must be based on evidence that
demonstrates the UBS QPAM has actually implemented, maintained, and
followed the Policies and Training required by this proposed five-year
exemption. Finally, the Audit Report must address the adequacy of the
Annual Review required under this exemption and the resources provided
to the Compliance Officer in connection with such Annual Review.
46. Furthermore, the auditor must notify the respective UBS QPAM of
any instance of noncompliance identified by the auditor within five (5)
business days after such noncompliance is identified by the auditor,
regardless of whether the audit has been completed as of that date.
This proposed five-year exemption requires that certain senior
personnel of UBS review the Audit Report, make certain certifications,
and take various corrective actions. In this regard, the General
Counsel, or one of the three most senior executive officers of the UBS
QPAM to which the Audit Report applies, must certify in writing, under
penalty of perjury, that the officer has reviewed the Audit Report and
this proposed five-year exemption; addressed, corrected, or remedied
any inadequacy identified in the Audit Report; and determined that the
Policies and Training in effect at the time of signing are adequate to
ensure compliance with the conditions of this proposed five-year
exemption and with the applicable provisions of ERISA and the Code.
47. The Risk Committee, the Audit Committee, and the Corporate
Culture and Responsibility Committee of UBS's Board of Directors are
provided a copy of each Audit Report; and a senior executive officer of
UBS's Compliance and Operational Risk Control function must review the
Audit Report for each UBS QPAM and must certify in writing, under
penalty of perjury, that such officer has reviewed each Audit Report.
In order to create a more transparent record in the event that the
proposed relief is granted, each UBS QPAM must provide its certified
Audit Report to the Department no later than 45 days following its
completion. The Audit Report will be part of the public record
regarding this proposed five-year exemption. Furthermore, each UBS QPAM
must make its Audit Report unconditionally available for examination by
any duly authorized employee or representative of the Department, other
relevant regulators, and any fiduciary of an ERISA-covered plan or IRA,
the assets of which are managed by such UBS QPAM.
48. Additionally, each UBS QPAM and the auditor must submit to the
Department any engagement agreement entered into pursuant to the
engagement of the auditor under this proposed five-year exemption; and
any engagement agreement entered into with any other entity retained in
connection with such QPAM's compliance with the Training or Policies
conditions of this proposed five-year exemption no later than six (6)
months after the effective date of this five-year exemption (and one
month after the execution of any agreement thereafter). Finally, if the
five-year exemption is granted, the auditor must provide the
Department, upon request, all of the workpapers created and utilized in
the course of the audit, including, but not limited to: The audit plan;
audit testing; identification of any instance of noncompliance by the
relevant UBS QPAM; and an explanation of any corrective or remedial
action taken by the applicable UBS QPAM.
In order to enhance oversight of the compliance with the exemption,
UBS must notify the Department at least 30 days prior to any
substitution of an auditor, and UBS must demonstrate to the
Department's satisfaction that any new auditor is independent of UBS,
experienced in the matters that are the subject of the five-year
exemption, and capable of making the determinations required of this
five-year exemption.
49. Contractual Obligations. This five-year exemption requires UBS
QPAMs to enter into certain contractual obligations in connection with
the provision of services to their clients. It is the Department's view
that the condition in Section I(j) is essential to the Department's
ability to make its findings that the proposed five-year exemption is
protective of the rights of the participants and beneficiaries of
ERISA-covered plan and IRA clients. In this regard, effective as of the
effective date of this five-year exemption with respect to any
arrangement, agreement, or contract between a UBS QPAM and an ERISA-
covered plan or IRA for which a UBS QPAM provides asset management or
other discretionary fiduciary services, each UBS QPAM agrees and
warrants: To comply with ERISA and the Code, as applicable with respect
to such ERISA-covered plan or IRA; to refrain from engaging in
prohibited transactions that are not otherwise exempt (and to promptly
correct any inadvertent prohibited transactions); to comply with the
standards of prudence and loyalty set forth in section 404 of ERISA, as
applicable; and to indemnify and hold
[[Page 83399]]
harmless the ERISA-covered plan or IRA for any damages resulting from a
UBS QPAM's violation of applicable laws, a UBS QPAM's breach of
contract, or any claim brought in connection with the failure of such
UBS QPAM to qualify for the exemptive relief provided by PTE 84-14 as a
result of a violation of Section I(g) of PTE 84-14 other than the
Convictions. Furthermore, UBS QPAMs must agree not to require (or
otherwise cause) the ERISA-covered plan or IRA to waive, limit, or
qualify the liability of the UBS QPAM for violating ERISA or the Code
or engaging in prohibited transactions; not to require the ERISA-
covered plan or IRA (or sponsor of such ERISA-covered plan or
beneficial owner of such IRA) to indemnify the UBS QPAM for violating
ERISA or engaging in prohibited transactions, except for violations or
prohibited transactions caused by an error, misrepresentation, or
misconduct of a plan fiduciary or other party hired by the plan
fiduciary who is independent of UBS; not to restrict the ability of
such ERISA-covered plan or IRA to terminate or withdraw from its
arrangement with the UBS QPAM (including any investment in a separately
managed account or pooled fund subject to ERISA and managed by such
QPAM), with the exception of reasonable restrictions, appropriately
disclosed in advance, that are specifically designed to ensure
equitable treatment of all investors in a pooled fund in the event such
withdrawal or termination may have adverse consequences for all other
investors as a result of an actual lack of liquidity of the underlying
assets, provided that such restrictions are applied consistently and in
like manner to all such investors; not to impose any fees, penalties,
or charges for such termination or withdrawal with the exception of
reasonable fees, appropriately disclosed in advance, that are
specifically designed to prevent generally recognized abusive
investment practices or specifically designed to ensure equitable
treatment of all investors in a pooled fund in the event such
withdrawal or termination may have adverse consequences for all other
investors, provided that such fees are applied consistently and in like
manner to all such investors; and not to include exculpatory provisions
disclaiming or otherwise limiting liability of the UBS QPAMs for a
violation of such agreement's terms, except for liability caused by an
error, misrepresentation, or misconduct of a plan fiduciary or other
party hired by the plan fiduciary who is independent of UBS.
50. Within four (4) months of the effective date of this proposed
five-year exemption each UBS QPAM will provide a notice of its
obligations under this Section I(j) to each ERISA-covered plan and IRA
for which a UBS QPAM provides asset management or other discretionary
fiduciary services. For all other prospective ERISA-covered plan and
IRA clients for which a UBS QPAM provides asset management or other
discretionary fiduciary services, the UBS QPAM will agree in writing to
its obligations under this Section I(j) in an updated investment
management agreement or advisory agreement between the UBS QPAM and
such clients or other written contractual agreement.
51. Notice Requirements. The proposed five-year exemption contains
extensive notice requirements, some of which extend not only to ERISA-
covered plan and IRA clients of UBS QPAMs, but which also apply to the
non-Plan clients of UBS QPAMs. In this regard, the Department
understands that many firms may promote their ``QPAM'' designation in
order to earn asset management business, including business from non-
ERISA plans. Therefore, in order to fully inform any clients that may
have retained UBS QPAMs as asset managers because such UBS QPAMs have
represented themselves as able to rely on PTE 84-14, the Department has
determined to condition exemptive relief upon the following notice
requirements.
Within fifteen (15) days of the publication of this proposed five-
year exemption in the Federal Register, each UBS QPAM must provide a
notice of the proposed five-year exemption, along with a separate
summary describing the facts that led to the Convictions (the Summary),
which have been submitted to the Department, and a prominently
displayed statement (the Statement) that each Conviction separately
results in a failure to meet a condition in PTE 84-14, to each sponsor
of an ERISA-covered plan and each beneficial owner of an IRA for which
a UBS QPAM provides asset management or other discretionary fiduciary
services, or the sponsor of an investment fund in any case where a UBS
QPAM acts only as a sub-advisor to the investment fund in which such
ERISA-covered plan and IRA invests. In the event that this proposed
five-year exemption is granted, the Federal Register copy of the notice
of final five-year exemption must be delivered to such clients within
sixty (60) days of its publication in the Federal Register, and may be
delivered electronically (including by an email that has a link to the
exemption). Any prospective clients for which a UBS QPAM provides asset
management or other discretionary fiduciary services must receive the
proposed and final five-year exemptions with the Summary and the
Statement prior to, or contemporaneously with, the client's receipt of
a written asset management agreement or other contractual agreement
from the UBS QPAM.
In addition, each UBS QPAM will provide a Federal Register copy of
the proposed five-year exemption, a Federal Register copy of the final
five-year exemption; the Summary; and the Statement to each: (A)
Current Non-Plan Client within four (4) months of the effective date,
if any, of a final five-year exemption; and (B) Future Non-Plan Client
prior to, or contemporaneously with, the client's receipt of a written
asset management agreement from the UBS QPAM. A ``Current Non-Plan
Client'' is a client of a UBS QPAM that: Is neither an ERISA-covered
plan nor an IRA; has assets managed by the UBS QPAM as of the effective
date, if any, of a final five-year exemption; and has received a
written representation (qualified or otherwise) from the UBS QPAM that
such UBS QPAM qualifies as a QPAM or qualifies for the relief provided
by PTE 84-14. A ``Future Non-Plan Client'' is a prospective client of a
UBS QPAM that: Is neither an ERISA-covered plan nor an IRA; has assets
managed by the UBS QPAM after (but not as of) the effective date, if
any, of a final five-year exemption; and has received a written
representation (qualified or otherwise) from the UBS QPAM that such UBS
QPAM qualifies as a QPAM, or qualifies for the relief provided by PTE
84-14.
52. This proposed five-year exemption also requires UBS to
designate a senior compliance officer (the Compliance Officer) who will
be responsible for compliance with the Policies and Training
requirements described herein. The Compliance Officer will have several
obligations that it must comply with, as described in Section I(m)
above. These include conducting an annual review (the Annual Review) to
determine the adequacy and effectiveness of the implementation of the
Policies and Training; preparing a written report for each Annual
Review (each, an Annual Report) that, among other things, summarizes
his or her material activities during the preceding year; and sets
forth any instance of noncompliance discovered during the preceding
year, and any related corrective action. Each Annual Report must be
provided to appropriate corporate officers of UBS and each UBS QPAM to
which such
[[Page 83400]]
report relates; the head of Compliance and the General Counsel (or
their functional equivalent) of the relevant UBS QPAM; and must be made
unconditionally available to the independent auditor described above.
53. Each UBS QPAM must maintain records necessary to demonstrate
that the conditions of this proposed five-year exemption have been met,
for six (6) years following the date of any transaction for which such
UBS QPAM relies upon the relief in the five-year exemption.
54. Certain conditions of the proposed five-year exemption are
directed UBS and UBS Securities Japan. These requirements were included
in PTE 2013-09 as conditions to providing exemptive relief and have
been included in this proposed five-year exemption. In this regard, UBS
must impose internal procedures, controls, and protocols on UBS
Securities Japan to: (1) Reduce the likelihood of any recurrence of
conduct that that is the subject of the 2013 Conviction, and (2) comply
in all material respects with the Business Improvement Order, dated
December 16, 2011, issued by the Japanese Financial Services Authority.
Additionally, UBS must comply in all material respects with the audit
and monitoring procedures imposed on UBS by the United States Commodity
Futures Trading Commission Order, dated December 19, 2012.
55. The proposed five-year exemption requires that, during the
effective period of this proposed five-year exemption UBS: (1)
Immediately discloses to the Department any Deferred Prosecution
Agreement (a DPA) or Non-Prosecution Agreement (an NPA) that UBS or an
affiliate enters into with the U.S. Department of Justice, to the
extent such DPA or NPA involves conduct described in Section I(g) of
PTE 84-14 or section 411 of ERISA; and (2) immediately provides the
Department any information requested by the Department, as permitted by
law, regarding the agreement and/or the conduct and allegations that
led to the agreement. After review of the information, the Department
may require UBS, its affiliates, or related parties, as specified by
the Department, to submit a new application for the continued
availability of relief as a condition of continuing to rely on this
exemption. In this regard, the UBS QPAM (or other party submitting the
application) will have the burden of justifying the relief sought in
the application. If the Department denies the relief requested in the
new application, or does not grant such relief within twelve months of
application, the relief described herein is revoked as of the date of
denial or as of the expiration of the twelve-month period, whichever
date is earlier.
56. Finally, each UBS QPAM, in its agreements with ERISA-covered
plan and IRA clients, or in other written disclosures provided to
ERISA-covered plan and IRA clients, within 60 days prior to the initial
transaction upon which relief hereunder is relied, will clearly and
prominently inform the ERISA-covered plan or IRA client that the client
has the right to obtain copies of the QPAM's written Policies adopted
in accordance with this five-year exemption.
Statutory Findings--Administratively Feasible
57. The Applicants represents that the proposed five-year
exemption, is administratively feasible because it does not require any
monitoring by the Department but relies on an independent auditor to
determine that the exemption conditions are being complied with.
Furthermore, the requested five-year exemption does not require the
Department's oversight because, as a condition of this proposed five-
year exemption, neither UBS nor UBS Securities Japan will provide any
fiduciary or QPAM services to ERISA-covered plans and IRAs.
58. Given the revised and new conditions described above, the
Department has tentatively determined that the five-year relief sought
by the Applicants satisfies the statutory requirements for an exemption
under section 408(a) of ERISA.
Notice to Interested Persons
Notice of the proposed exemption will be provided to all interested
persons within fifteen (15) days of the publication of the notice of
proposed five-year exemption in the Federal Register. The notice will
be provided to all interested persons in the manner described in
Section I(k)(1) of this proposed five-year exemption and will contain
the documents described therein and a supplemental statement, as
required pursuant to 29 CFR 2570.43(a)(2). The supplemental statement
will inform interested persons of their right to comment on and to
request a hearing with respect to the pending exemption. All written
comments and/or requests for a hearing must be received by the
Department within forty five (45) days of the date of publication of
this proposed five-year exemption in the Federal Register. All comments
will be made available to the public.
Warning: If you submit a comment, EBSA recommends that you include
your name and other contact information in the body of your comment,
but DO NOT submit information that you consider to be confidential, or
otherwise protected (such as Social Security number or an unlisted
phone number) or confidential business information that you do not want
publicly disclosed. All comments may be posted on the Internet and can
be retrieved by most Internet search engines.
FOR FURTHER INFORMATION CONTACT: Mr. Brian Mica of the Department,
telephone (202) 693-8402. (This is not a toll-free number.)
Deutsche Investment Management Americas Inc. (DIMA) and Certain Current
and Future Asset Management Affiliates of Deutsche Bank AG
(Collectively, the Applicant or the DB QPAMs), Located in New York, New
York
[Exemption Application No. D-11908]
Proposed Five-Year Exemption
The Department is considering granting a five-year exemption under
the authority of section 408(a) of the Employee Retirement Income
Security Act of 1974, as amended (ERISA or the Act) and section
4975(c)(2) of the Internal Revenue Code of 1986, as amended (the Code),
and in accordance with the procedures set forth in 29 CFR part 2570,
subpart B (76 FR 66637, 66644, October 27, 2011).\97\
---------------------------------------------------------------------------
\97\ For purposes of this proposed five-year exemption,
references to section 406 of Title I of the Act, unless otherwise
specified, should be read to refer as well to the corresponding
provisions of section 4975 of the Code.
---------------------------------------------------------------------------
Section I: Covered Transactions
If the proposed five-year exemption is granted, certain asset
managers with specified relationships to Deutsche Bank AG (hereinafter,
the DB QPAMs, as further defined in Section II(b)) will not be
precluded from relying on the exemptive relief provided by Prohibited
Transaction Exemption 84-14 (PTE 84-14),\98\ notwithstanding: (1) The
``Korean Conviction'' against Deutsche Securities Korea Co., a South
Korean affiliate of Deutsche Bank AG (hereinafter, DSK, as further
defined in Section II(f)), entered on January 23, 2016; and (2) the
``US Conviction'' against DB Group Services UK Limited, an affiliate of
Deutsche Bank based in the United Kingdom (hereinafter, DB Group
Services, as
[[Page 83401]]
further defined in Section II(e)), scheduled to be entered on April 3,
2017 (collectively, the Convictions, as further defined in Section
II(a)),\99\ for a period of five years beginning on the later of: The
U.S. Conviction Date (as further defined in Section II(d)); or the date
on which a grant notice is published in the Federal Register, provided
that the following conditions are satisfied:
---------------------------------------------------------------------------
\98\ 49 FR 9494 (March 13, 1984), as corrected at 50 FR 41430
(October 10, 1985), as amended at 70 FR 49305 (August 23, 2005), and
as amended at 75 FR 38837 (July 6, 2010).
\99\ Section I(g) of PTE 84-14 generally provides that
``[n]either the QPAM nor any affiliate thereof . . . nor any owner .
. . of a 5 percent or more interest in the QPAM is a person who
within the 10 years immediately preceding the transaction has been
either convicted or released from imprisonment, whichever is later,
as a result of'' certain criminal activity therein described.
---------------------------------------------------------------------------
(a) The DB QPAMs (including their officers, directors, agents other
than Deutsche Bank, and employees of such DB QPAMs) did not know of,
have reason to know of, or participate in the criminal conduct of DSK
and DB Group Services that is the subject of the Convictions (for
purposes of this Section I(a), ``participate in'' includes the knowing
or tacit approval of the misconduct underlying the Convictions);
(b) The DB QPAMs (including their officers, directors, agents other
than Deutsche Bank, and employees of such DB QPAMs) did not receive
direct compensation, or knowingly receive indirect compensation in
connection with the criminal conduct that is the subject of the
Convictions;
(c) The DB QPAMs will not employ or knowingly engage any of the
individuals that participated in the criminal conduct that is the
subject of the Convictions (for the purposes of this Section I(c),
``participated in'' includes the knowing or tacit approval of the
misconduct underlying the Convictions);
(d) A DB QPAM will not use its authority or influence to direct an
``investment fund'' (as defined in Section VI(b) of PTE 84-14) that is
subject to ERISA or the Code and managed by such DB QPAM to enter into
any transaction with DSK or DB Group Services, or engage DSK or DB
Group Services to provide any service to such investment fund, for a
direct or indirect fee borne by such investment fund, regardless of
whether such transaction or service may otherwise be within the scope
of relief provided by an administrative or statutory exemption;
(e) Any failure of the DB QPAMs to satisfy Section I(g) of PTE 84-
14 arose solely from the Convictions;
(f) A DB QPAM did not exercise authority over the assets of any
plan subject to Part 4 of Title I of ERISA (an ERISA-covered plan) or
section 4975 of the Code (an IRA) in a manner that it knew or should
have known would: Further the criminal conduct that is the subject of
the Convictions; or cause the QPAM, affiliates, or related parties to
directly or indirectly profit from the criminal conduct that is the
subject of the Convictions;
(g) DSK and DB Group Services will not provide discretionary asset
management services to ERISA-covered plans or IRAs, nor will otherwise
act as a fiduciary with respect to ERISA-covered plan or IRA assets;
(h)(1) Each DB QPAM must immediately develop, implement, maintain,
and follow written policies and procedures (the Policies) requiring and
reasonably designed to ensure that:
(i) The asset management decisions of the DB QPAM are conducted
independently of Deutsche Bank's corporate management and business
activities, including the corporate management and business activities
of DB Group Services and DSK;
(ii) The DB QPAM fully complies with ERISA's fiduciary duties and
with ERISA and the Code's prohibited transaction provisions, and does
not knowingly participate in any violation of these duties and
provisions with respect to ERISA-covered plans and IRAs;
(iii) The DB QPAM does not knowingly participate in any other
person's violation of ERISA or the Code with respect to ERISA-covered
plans and IRAs;
(iv) Any filings or statements made by the DB QPAM to regulators,
including but not limited to, the Department, the Department of the
Treasury, the Department of Justice, and the Pension Benefit Guaranty
Corporation, on behalf of ERISA-covered plans or IRAs are materially
accurate and complete, to the best of such QPAM's knowledge at that
time;
(v) The DB QPAM does not make material misrepresentations or omit
material information in its communications with such regulators with
respect to ERISA-covered plans or IRAs, or make material
misrepresentations or omit material information in its communications
with ERISA-covered plan and IRA clients;
(vi) The DB QPAM complies with the terms of this five-year
exemption; and
(vii) Any violation of, or failure to comply with, an item in
subparagraphs (ii) through (vi), is corrected promptly upon discovery,
and any such violation or compliance failure not promptly corrected is
reported, upon the discovery of such failure to promptly correct, in
writing, to appropriate corporate officers, the head of compliance and
the General Counsel (or their functional equivalent) of the relevant DB
QPAM, the independent auditor responsible for reviewing compliance with
the Policies, and an appropriate fiduciary of any affected ERISA-
covered plan or IRA that is independent of Deutsche Bank; however, with
respect to any ERISA-covered plan or IRA sponsored by an ``affiliate''
(as defined in Section VI(d) of PTE 84-14) of Deutsche Bank or
beneficially owned by an employee of Deutsche Bank or its affiliates,
such fiduciary does not need to be independent of Deutsche Bank. A DB
QPAM will not be treated as having failed to develop, implement,
maintain, or follow the Policies, provided that it corrects any
instance of noncompliance promptly when discovered, or when it
reasonably should have known of the noncompliance (whichever is
earlier), and provided that it adheres to the reporting requirements
set forth in this subparagraph (vii);
(2) Each DB QPAM must immediately develop and implement a program
of training (the Training), conducted at least annually, for all
relevant DB QPAM asset/portfolio management, trading, legal,
compliance, and internal audit personnel. The Training must:
(i) Be set forth in the Policies and at a minimum, cover the
Policies, ERISA and Code compliance (including applicable fiduciary
duties and the prohibited transaction provisions), ethical conduct, the
consequences for not complying with the conditions of this five-year
exemption (including any loss of exemptive relief provided herein), and
prompt reporting of wrongdoing; and
(ii) Be conducted by an independent professional who has been
prudently selected and who has appropriate technical training and
proficiency with ERISA and the Code;
(i)(1) Each DB QPAM submits to an audit conducted annually by an
independent auditor, who has been prudently selected and who has
appropriate technical training and proficiency with ERISA and the Code,
to evaluate the adequacy of, and the DB QPAM's compliance with, the
Policies and Training described herein. The audit requirement must be
incorporated in the Policies. Each annual audit must cover a
consecutive twelve month period beginning on the effective date of this
five-year exemption and must be completed no later than six (6) months
after the period to which the audit applies;
[[Page 83402]]
(2) To the extent necessary for the auditor, in its sole opinion,
to complete its audit and comply with the conditions for relief
described herein, and as permitted by law, each DB QPAM and, if
applicable, Deutsche Bank, will grant the auditor unconditional access
to its business, including, but not limited to: Its computer systems;
business records; transactional data; workplace locations; training
materials; and personnel;
(3) The auditor's engagement must specifically require the auditor
to determine whether each DB QPAM has developed, implemented,
maintained, and followed the Policies in accordance with the conditions
of this five-year exemption, and has developed and implemented the
Training, as required herein;
(4) The auditor's engagement must specifically require the auditor
to test each DB QPAM's operational compliance with the Policies and
Training. In this regard, the auditor must test a sample of each QPAM's
transactions involving ERISA-covered plans and IRAs sufficient in size
and nature to afford the auditor a reasonable basis to determine the
operational compliance with the Policies and Training;
(5) For each audit, on or before the end of the relevant period
described in Section I(i)(1) for completing the audit, the auditor must
issue a written report (the Audit Report) to Deutsche Bank and the DB
QPAM to which the audit applies that describes the procedures performed
by the auditor during the course of its examination. The Audit Report
must include the auditor's specific determinations regarding:
(i) The adequacy of the DB QPAM's Policies and Training; the DB
QPAM's compliance with the Policies and Training; the need, if any, to
strengthen such Policies and Training; and any instance of the
respective DB QPAM's noncompliance with the written Policies and
Training described in Section I(h) above. Any determination by the
auditor regarding the adequacy of the Policies and Training and the
auditor's recommendations (if any) with respect to strengthening the
Policies and Training of the respective DB QPAM must be promptly
addressed by such DB QPAM, and any action taken by such DB QPAM to
address such recommendations must be included in an addendum to the
Audit Report (which addendum is completed prior to the certification
described in Section I(i)(7) below). Any determination by the auditor
that the respective DB QPAM has implemented, maintained, and followed
sufficient Policies and Training must not be based solely or in
substantial part on an absence of evidence indicating noncompliance. In
this last regard, any finding that the DB QPAM has complied with the
requirements under this subsection must be based on evidence that
demonstrates the DB QPAM has actually implemented, maintained, and
followed the Policies and Training required by this five-year
exemption. Furthermore, the auditor must not rely on the Annual Report
created by the Compliance Officer as described in Section I(m) below in
lieu of independent determinations and testing performed by the auditor
as required by Section I(i)(3) and (4) above; and
(ii) The adequacy of the Annual Review described in Section I(m)
and the resources provided to the Compliance officer in connection with
such Annual Review;
(6) The auditor must notify the respective DB QPAM of any instance
of noncompliance identified by the auditor within five (5) business
days after such noncompliance is identified by the auditor, regardless
of whether the audit has been completed as of that date;
(7) With respect to each Audit Report, the General Counsel, or one
of the three most senior executive officers of the DB QPAM to which the
Audit Report applies, must certify in writing, under penalty of
perjury, that the officer has reviewed the Audit Report and this
exemption; addressed, corrected, or remedied any inadequacy identified
in the Audit Report; and determined that the Policies and Training in
effect at the time of signing are adequate to ensure compliance with
the conditions of this proposed five-year exemption and with the
applicable provisions of ERISA and the Code;
(8) The Risk Committee of Deutsche Bank's Board of Directors is
provided a copy of each Audit Report; and a senior executive officer
with a direct reporting line to the highest ranking legal compliance
officer of Deutsche Bank must review the Audit Report for each DB QPAM
and must certify in writing, under penalty of perjury, that such
officer has reviewed each Audit Report;
(9) Each DB QPAM provides its certified Audit Report, by regular
mail to: The Department's Office of Exemption Determinations (OED), 200
Constitution Avenue NW., Suite 400, Washington, DC 20210, or by private
carrier to: 122 C Street NW., Suite 400, Washington, DC 20001-2109, no
later than 45 days following its completion. The Audit Report will be
part of the public record regarding this five-year exemption.
Furthermore, each DB QPAM must make its Audit Report unconditionally
available for examination by any duly authorized employee or
representative of the Department, other relevant regulators, and any
fiduciary of an ERISA-covered plan or IRA, the assets of which are
managed by such DB QPAM;
(10) Each DB QPAM and the auditor must submit to OED: (A) Any
engagement agreement(s) entered into pursuant to the engagement of the
auditor under this exemption; and (B) any engagement agreement entered
into with any other entity retained in connection with such QPAM's
compliance with the Training or Policies conditions of this proposed
exemption, no later than six (6) months after the effective date of
this five-year exemption (and one month after the execution of any
agreement thereafter);
(11) The auditor must provide OED, upon request, all of the
workpapers created and utilized in the course of the audit, including,
but not limited to: The audit plan; audit testing; identification of
any instance of noncompliance by the relevant DB QPAM; and an
explanation of any corrective or remedial action taken by the
applicable DB QPAM; and
(12) Deutsche Bank must notify the Department at least 30 days
prior to any substitution of an auditor, except that no such
replacement will meet the requirements of this paragraph unless and
until Deutsche Bank demonstrates to the Department's satisfaction that
such new auditor is independent of Deutsche Bank, experienced in the
matters that are the subject of the exemption and capable of making the
determinations required of this exemption;
(j) Effective as of the effective date of this five-year exemption,
with respect to any arrangement, agreement, or contract between a DB
QPAM and an ERISA-covered plan or IRA for which a DB QPAM provides
asset management or other discretionary fiduciary services, each DB
QPAM agrees and warrants:
(1) To comply with ERISA and the Code, as applicable with respect
to such ERISA-covered plan or IRA; to refrain from engaging in
prohibited transactions that are not otherwise exempt (and to promptly
correct any inadvertent prohibited transactions); and to comply with
the standards of prudence and loyalty set forth in section 404 of ERISA
with respect to each such ERISA-covered plan and IRA;
(2) Not to require (or otherwise cause) the ERISA-covered plan or
IRA to waive, limit, or qualify the liability of the DB QPAM for
violating ERISA or the Code or engaging in prohibited transactions;
[[Page 83403]]
(3) Not to require the ERISA-covered plan or IRA (or sponsor of
such ERISA-covered plan or beneficial owner of such IRA) to indemnify
the DB QPAM for violating ERISA or engaging in prohibited transactions,
except for violations or prohibited transactions caused by an error,
misrepresentation, or misconduct of a plan fiduciary or other party
hired by the plan fiduciary who is independent of Deutsche Bank;
(4) Not to restrict the ability of such ERISA-covered plan or IRA
to terminate or withdraw from its arrangement with the DB QPAM
(including any investment in a separately managed account or pooled
fund subject to ERISA and managed by such QPAM), with the exception of
reasonable restrictions, appropriately disclosed in advance, that are
specifically designed to ensure equitable treatment of all investors in
a pooled fund in the event such withdrawal or termination may have
adverse consequences for all other investors as a result of an actual
lack of liquidity of the underlying assets, provided that such
restrictions are applied consistently and in like manner to all such
investors;
(5) Not to impose any fees, penalties, or charges for such
termination or withdrawal with the exception of reasonable fees,
appropriately disclosed in advance, that are specifically designed to
prevent generally recognized abusive investment practices or
specifically designed to ensure equitable treatment of all investors in
a pooled fund in the event such withdrawal or termination may have
adverse consequences for all other investors, provided that such fees
are applied consistently and in like manner to all such investors;
(6) Not to include exculpatory provisions disclaiming or otherwise
limiting liability of the DB QPAM for a violation of such agreement's
terms, except for liability caused by an error, misrepresentation, or
misconduct of a plan fiduciary or other party hired by the plan
fiduciary who is independent of Deutsche Bank and its affiliates; and
(7) To indemnify and hold harmless the ERISA-covered plan or IRA
for any damages resulting from a violation of applicable laws, a breach
of contract, or any claim arising out of the failure of such DB QPAM to
qualify for the exemptive relief provided by PTE 84-14 as a result of a
violation of Section I(g) of PTE 84-14 other than the Convictions;
(8) Within four (4) months of the effective date of this proposed
five-year exemption, each DB QPAM must provide a notice of its
obligations under this Section I(j) to each ERISA-covered plan and IRA
for which the DB QPAM provides asset management or other discretionary
fiduciary services. For all other prospective ERISA-covered plan and
IRA clients for which a DB QPAM provides asset management or other
discretionary fiduciary services, the DB QPAM must agree in writing to
its obligations under this Section I(j) in an updated investment
management agreement or advisory agreement between the DB QPAM and such
clients or other written contractual agreement;
(k)(1) Notice to ERISA-covered plan and IRA clients. Within fifteen
(15) days of the publication of this proposed five-year exemption in
the Federal Register, each DB QPAM will provide a notice of the
proposed five-year exemption, along with a separate summary describing
the facts that led to the Convictions (the Summary), which have been
submitted to the Department, and a prominently displayed statement (the
Statement) that each Conviction separately results in a failure to meet
a condition in PTE 84-14, to each sponsor of an ERISA-covered plan and
each beneficial owner of an IRA for which a DB QPAM provides asset
management or other discretionary fiduciary services, or the sponsor of
an investment fund in any case where a DB QPAM acts only as a sub-
advisor to the investment fund in which such ERISA-covered plan and IRA
invests. In the event that this proposed five-year exemption is
granted, the Federal Register copy of the notice of final five-year
exemption must be delivered to such clients within sixty (60) days of
its publication in the Federal Register, and may be delivered
electronically (including by an email that has a link to the
exemption). Any prospective clients for which a DB QPAM provides asset
management or other discretionary fiduciary services must receive the
proposed and final five-year exemptions with the Summary and the
Statement prior to, or contemporaneously with, the client's receipt of
a written asset management agreement from the DB QPAM; and
(2) Notice to Non-Plan Clients. Each DB QPAM will provide a Federal
Register copy of the proposed five-year exemption, a Federal Register
copy of the final five-year exemption; the Summary; and the Statement
to each: (A) Current Non-Plan Client within four (4) months of the
effective date, if any, of a final five-year exemption; and (B) Future
Non-Plan Client prior to, or contemporaneously with, the client's
receipt of a written asset management agreement, or other written
contractual agreement, from the DB QPAM. For purposes of this
subparagraph (2), a Current Non-Plan Client means a client of a DB QPAM
that: Is neither an ERISA-covered plan nor an IRA; has assets managed
by the DB QPAM as of the effective date, if any, of a final five-year
exemption; and has received a written representation (qualified or
otherwise) from the DB QPAM that such DB QPAM qualifies as a QPAM or
qualifies for the relief provided by PTE 84-14. For purposes of this
subparagraph (2), a Future Non-Plan Client means a prospective client
of a DB QPAM that: Is neither an ERISA-covered plan nor an IRA; has
assets managed by the DB QPAM after the effective date, if any, of a
final five-year exemption; and has received a written representation
(qualified or otherwise) from the DB QPAM that such DB QPAM qualifies
as a QPAM or qualifies for the relief provided by PTE 84-14;
(l) The DB QPAMs must comply with each condition of PTE 84-14, as
amended, with the sole exceptions of the violations of Section I(g) of
PTE 84-14 that are attributable to the Convictions;
(m)(1) Deutsche Bank designates a senior compliance officer (the
Compliance Officer) who will be responsible for compliance with the
Policies and Training requirements described herein. The Compliance
Officer must conduct an annual review (the Annual Review) to determine
the adequacy and effectiveness of the implementation of the Policies
and Training. With respect to the Compliance Officer, the following
conditions must be met:
(i) The Compliance Officer must be a legal professional with
extensive experience with, and knowledge of, the regulation of
financial services and products, including under ERISA and the Code;
and
(ii) The Compliance Officer must have a direct reporting line to
the highest-ranking corporate officer in charge of legal compliance
that is independent of Deutsche Bank's other business lines;
(2) With respect to each Annual Review, the following conditions
must be met:
(i) The Annual Review includes a review of: Any compliance matter
related to the Policies or Training that was identified by, or reported
to, the Compliance Officer or others within the compliance and risk
control function (or its equivalent) during the previous year; any
material change in the business activities of the DB QPAMs; and any
change to ERISA, the Code, or regulations related to fiduciary duties
and the prohibited transaction provisions that may be applicable to the
activities of the DB QPAMs;
[[Page 83404]]
(ii) The Compliance Officer prepares a written report for each
Annual Review (each, an Annual Report) that (A) summarizes his or her
material activities during the preceding year; (B) sets forth any
instance of noncompliance discovered during the preceding year, and any
related corrective action; (C) details any change to the Policies or
Training to guard against any similar instance of noncompliance
occurring again; and (D) makes recommendations, as necessary, for
additional training, procedures, monitoring, or additional and/or
changed processes or systems, and management's actions on such
recommendations;
(iii) In each Annual Report, the Compliance Officer must certify in
writing that to his or her knowledge: (A) The report is accurate; (B)
the Policies and Training are working in a manner which is reasonably
designed to ensure that the Policies and Training requirements
described herein are met; (C) any known instance of noncompliance
during the preceding year and any related correction taken to date have
been identified in the Annual Report; (D) the DB QPAMs have complied
with the Policies and Training in all respects, and/or corrected any
instances of noncompliance in accordance with Section I(h) above; and
(E) Deutsche Bank has provided the Compliance Officer with adequate
resources, including, but not limited to, adequate staffing;
(iv) Each Annual Report must be provided to appropriate corporate
officers of Deutsche Bank and each DB QPAM to which such report
relates; the head of Compliance and the General Counsel (or their
functional equivalent) of the relevant DB QPAM; and must be made
unconditionally available to the independent auditor described in
Section I(i) above;
(v) Each Annual Review, including the Compliance Officer's written
Annual Report, must be completed at least three (3) months in advance
of the date on which each audit described in Section I(i) is scheduled
to be completed;
(n) Deutsche Bank disgorged all of its profits generated by the
spot/futures-linked market manipulation activities of DSK personnel
that led to the Conviction against DSK entered on January 25, 2016, in
Seoul Central District Court;
(o) Each DB QPAM will maintain records necessary to demonstrate
that the conditions of this exemption have been met, for six (6) years
following the date of any transaction for which such DB QPAM relies
upon the relief in the exemption;
(p)(1) During the effective period of this five-year exemption,
Deutsche Bank immediately discloses to the Department any Deferred
Prosecution Agreement (a DPA) or Non-Prosecution Agreement (an NPA)
entered into by Deutsche Bank or any of its affiliates with the U.S
Department of Justice, in connection with conduct described in Section
I(g) of PTE 84-14 or section 411 of ERISA; and (2) Immediately provides
the Department any information requested by the Department, as
permitted by law, regarding such agreement and/or conduct and
allegations that led to the agreement. After review of the information,
the Department may require Deutsche Bank or its affiliates, as
specified by the Department, to submit a new application for the
continued availability of relief as a condition of continuing to rely
on this exemption. If the Department denies the relief requested in the
new application, or does not grant such relief within twelve (12)
months of the application, the relief described herein is revoked as of
the date of denial or as of the expiration of the twelve month period,
whichever date is earlier;
(q) Each DB QPAM, in its agreements with ERISA-covered plan and IRA
clients, or in other written disclosures provided to ERISA-covered plan
and IRA clients, within 60 days prior to the initial transaction upon
which relief hereunder is relied, and then at least once annually, will
clearly and prominently inform the ERISA-covered plan and IRA client
that the client has the right to obtain copies of the QPAM's written
Policies adopted in accordance with this five-year exemption; and
(r) A DB QPAM will not fail to meet the terms of this exemption,
solely because a different DB QPAM fails to satisfy a condition for
relief under this exemption described in Sections I(c), (d), (h), (i),
(j), (k), (l), (o), and (q).
Section II: Definitions
(a) The term ``Convictions'' means (1) the judgment of conviction
against DB Group Services, in Case 3:15-cr-00062-RNC to be entered in
the United States District Court for the District of Connecticut to a
single count of wire fraud, in violation of 18 U.S.C. 1343, and (2) the
judgment of conviction against DSK entered on January 25, 2016, in
Seoul Central District Court, relating to charges filed against DSK
under Articles 176, 443, and 448 of South Korea's Financial Investment
Services and Capital Markets Act for spot/futures-linked market price
manipulation. For all purposes under this exemption, ``conduct'' of any
person or entity that is the ``subject of [a] Conviction'' encompasses
any conduct of Deutsche Bank and/or their personnel, that is described
in the Plea Agreement (including the Factual Statement thereto), Court
judgments (including the judgment of the Seoul Central District Court),
criminal complaint documents from the Financial Services Commission in
Korea, and other official regulatory or judicial factual findings that
are a part of this record;
(b) The term ``DB QPAM'' means a ``qualified professional asset
manager'' (as defined in Section VI(a) \100\ of PTE 84-14) that relies
on the relief provided by PTE 84-14 and with respect to which DSK or DK
Group Services is a current or future ``affiliate'' (as defined in
Section VI(d) of PTE 84-14). For purposes of this exemption, Deutsche
Bank Securities, Inc. (DBSI), including all entities over which it
exercises control; and Deutsche Bank AG, including all of its branches,
are excluded from the definition of a DB QPAM;
---------------------------------------------------------------------------
\100\ In general terms, a QPAM is an independent fiduciary that
is a bank, savings and loan association, insurance company, or
investment adviser that meets certain equity or net worth
requirements and other licensure requirements and that has
acknowledged in a written management agreement that it is a
fiduciary with respect to each plan that has retained the QPAM.
---------------------------------------------------------------------------
(c) The term ``Deutsche Bank'' means Deutsche Bank AG but, unless
indicated otherwise, does not include its subsidiaries or affiliates;
(d) The term ``U.S. Conviction Date'' means the date that a
judgment of conviction against DB Group Services, in Case 3:15-cr-
00062-RNC, is entered in the United States District Court for the
District of Connecticut;
(e) The term ``DB Group Services'' means DB Group Services UK
Limited, an ``affiliate'' of Deutsche Bank (as defined in Section VI(c)
of PTE 84-14) based in the United Kingdom;
(f) The term ``DSK'' means Deutsche Securities Korea Co., a South
Korean ``affiliate'' of Deutsche Bank (as defined in Section VI(c) of
PTE 84-14); and
(g) The term ``Plea Agreement'' means the Plea Agreement (including
the Factual Statement thereto), dated April 23, 2015, between the
Antitrust Division and Fraud Section of the Criminal Division of the
U.S. Department of Justice (the DOJ) and DB Group Services resolving
the actions brought by the DOJ in Case 3:15-cr-00062-RNC against DB
Group Services for wire fraud in violation of Title 18, United States
Code, Section 1343 related to the manipulation of the London Interbank
Offered Rate (LIBOR).
[[Page 83405]]
Effective Date: This proposed five-year exemption will be effective
beginning on the later of: The U.S. Conviction Date; or the date of
publication of the grant notice in the Federal Register and ending on
the date that is five years thereafter. Should the Applicant wish to
extend the effective period of exemptive relief provided by this
proposed five-year exemption, the Applicant must submit another
application for an exemption. In this regard, the Department expects
that, in connection with such application, the Applicant should be
prepared to demonstrate compliance with the conditions for this
exemption and that the DB QPAMs, and those who may be in a position to
influence their policies, have maintained the high standard of
integrity required by PTE 84-14.
Department's Comment: As described in further detail below, on
September 4, 2015, the Department published PTE 2015-15, which is a
nine-month exemption that permits certain Deutsche Bank asset managers
to continue to rely on PTE 84-14, notwithstanding the conviction of an
affiliate in Korea. The effective period for PTE 2015-15 expired on
October 24, 2016. On October 28, 2016, the Department issued PTE 2016-
12,\101\ a limited extension of PTE 2015-15 (the Extension), which
extends the exemptive relief of PTE 2015-15 to the earlier of April 23,
2017 or the effective date of a final agency action by the Department
in connection with Exemption Application No. D-11856. Exemption
Application No. D-11856 is a proposed temporary one-year exemption (the
temporary exemption), being published today elsewhere in the Federal
Register, that allows DB QPAMs to continue to rely on PTE 84-14
notwithstanding the Korean Conviction and the U.S. Conviction, for a
period of up to twelve months beginning on the date of the U.S.
Conviction.
---------------------------------------------------------------------------
\101\ PTE 2016-12 is published in the Federal Register at 81 FR
75153 (October 28, 2016).
---------------------------------------------------------------------------
The five-year exemption proposed herein would permit certain asset
managers affiliated with Deutsche Bank and its affiliates to continue
to rely on PTE 84-14 for a period of five years from its effective
date. Upon the effective date of the proposed five-year exemption, the
Temporary Exemption, if still effective, would expire.
The proposed exemption would provide relief from certain of the
restrictions set forth in sections 406 and 407 of ERISA. If granted, no
relief from a violation of any other law would be provided by this
exemption.
Furthermore, the Department cautions that the relief in this
proposed five-year exemption would terminate immediately if, among
other things, an entity within the Deutsche Bank corporate structure is
convicted of a crime described in Section I(g) of PTE 84-14 (other than
the Convictions) during the effective period of the five-year
exemption. While such an entity could apply for a new exemption in that
circumstance, the Department would not be obligated to grant the
exemption. The terms of this proposed five-year exemption have been
specifically designed to permit plans to terminate their relationships
in an orderly and cost effective fashion in the event of an additional
conviction or a determination that it is otherwise prudent for a plan
to terminate its relationship with an entity covered by the proposed
five-year exemption.
Summary of Facts and Representations 102
---------------------------------------------------------------------------
\102\ The Summary of Facts and Representations is based on
Deutsche Bank and DIMA's representations, unless indicated
otherwise.
---------------------------------------------------------------------------
Background
1. Deutsche Bank AG (together with its current and future
affiliates, Deutsche Bank) is a German banking corporation and a
commercial bank. Deutsche Bank, with and through its affiliates,
subsidiaries and branches, provides a wide range of banking, fiduciary,
recordkeeping, custodial, brokerage and investment services to, among
others, corporations, institutions, governments, employee benefit
plans, government retirement plans and private investors. Deutsche Bank
had [euro]68.4 billion in total shareholders' equity and [euro]1,709
billion in total assets as of December 31, 2014.\103\
---------------------------------------------------------------------------
\103\ Deutsche Bank represents that its audited financial
statements are expressed in Euros and are not converted to dollars.
---------------------------------------------------------------------------
2. Deutsche Investment Management Americas Inc. (DIMA) is an
investment adviser registered with the SEC under the Investment
Advisers Act of 1940, as amended. DIMA and other wholly-owned
subsidiaries of Deutsche Bank provide discretionary asset-management
services to employee benefit plans and IRAs. Such entities include: (A)
DIMA; (B) Deutsche Bank Securities Inc., which is a dual-registrant
with the SEC under the Advisers Act as an investment adviser and
broker-dealer; (C) RREEF America L.L.C., a Delaware limited liability
company and investment adviser registered with the SEC under the
Advisers Act; (D) Deutsche Bank Trust Company Americas, a corporation
organized under the laws of the State of New York and supervised by the
New York State Department of Financial Services, a member of the
Federal Reserve and an FDIC-insured bank; (E) Deutsche Bank National
Trust Company, a national banking association, organized under the laws
of the United States and supervised by the Office of the Comptroller of
the Currency, and a member of the Federal Reserve; (F) Deutsche Bank
Trust Company, NA, a national banking association, organized under the
laws of the United States and supervised by the OCC; (G) Deutsche
Alternative Asset Management (Global) Limited, a London-based
investment adviser registered with the SEC under the Advisers Act; (H)
Deutsche Investments Australia Limited, a Sydney, Australia-based
investment adviser registered with the SEC under the Advisers Act; (I)
DeAWM Trust Company (DTC), a limited purpose trust company organized
under the laws of New Hampshire and subject to supervision of the New
Hampshire Banking Department; and the four following entities which
currently do not rely on PTE 84-14 for the management of any ERISA-
covered plan or IRA assets, but may in the future: (J) Deutsche Asset
Management (Hong Kong) Ltd.; (K) Deutsche Asset Management
International GmbH; (L) DB Investment Managers, Inc.; and (M) Deutsche
Bank AG, New York Branch.
3. Korean Conviction. On January 25, 2016, Deutsche Securities
Korea, Co. (DSK), an indirectly held, wholly-owned subsidiary of
Deutsche Bank, was convicted in Seoul Central District Court (the
Korean Court) of violations of certain provisions of Articles 176, 443,
and 448 of the Korean Financial Investment Services and Capital Markets
Act (FSCMA) (the Korean Conviction) for spot/futures linked market
manipulation in connection with the unwind of an arbitrage position
which in turn caused a decline on the Korean market. Charges under
Article 448 of the FSCMA stemmed from vicarious liability assigned to
DSK for the actions of its employee, who was convicted of violations of
certain provisions of Articles 176 and 443 of the FCMA. Upon
conviction, the Korean Court sentenced DSK to pay a criminal fine of
1.5 billion South Korean Won (KRW). Furthermore, the Korean Court
ordered that Deutsche Bank forfeit KRW 43,695,371,124, while KRW
1,183,362,400 was ordered forfeited by DSK.
4. US Conviction. On April 23, 2015, the Antitrust Division and
Fraud Section of the Criminal Division of the U.S. Department of
Justice (collectively,
[[Page 83406]]
the DOJ) filed a one-count criminal information (the Criminal
Information) in Case 3:15-cr-00062-RNC in the District Court for the
District of Connecticut (the District Court) against DB Group Services
UK Limited (DB Group Services). The Criminal Information charged DB
Group Services with wire fraud in violation of Title 18, United States
Code, Section 1343 related to the manipulation of the London Interbank
Offered Rate (LIBOR) for the purpose of creating favorable trading
positions for Deutsche Bank traders. DB Group Services agreed to
resolve the actions brought by the DOJ through a plea agreement, dated
April 23, 2015 (the Plea Agreement), which is expected to result in the
District Court issuing a judgment of conviction (the US Conviction and
together with the Korean Conviction, the Convictions). Under the terms
of the Plea Agreement, DB Group Services plead guilty to the charges
set out in the Criminal Information and forfeited $150,000,000 to the
United States. Furthermore, Deutsche Bank AG and the DOJ entered into a
deferred prosecution agreement, dated April 23, 2015 (the DPA).
Pursuant to the terms of the DPA, Deutsche Bank agreed to pay a penalty
of $625,000,000.
PTE 84-14
5. The Department notes that the rules set forth in section 406 of
the Employee Retirement Income Security Act of 1974, as amended (ERISA)
and section 4975(c) of the Internal Revenue Code of 1986, as amended
(the Code) proscribe certain ``prohibited transactions'' between plans
and related parties with respect to those plans, known as ``parties in
interest.'' \104\ Under section 3(14) of ERISA, parties in interest
with respect to a plan include, among others, the plan fiduciary, a
sponsoring employer of the plan, a union whose members are covered by
the plan, service providers with respect to the plan, and certain of
their affiliates. The prohibited transaction provisions under section
406(a) of ERISA prohibit, in relevant part, sales, leases, loans or the
provision of services between a party in interest and a plan (or an
entity whose assets are deemed to constitute the assets of a plan), as
well as the use of plan assets by or for the benefit of, or a transfer
of plan assets to, a party in interest.\105\
---------------------------------------------------------------------------
\104\ For purposes of the Summary of Facts and Representations,
references to specific provisions of Title I of ERISA, unless
otherwise specified, refer also to the corresponding provisions of
the Code.
\105\ The prohibited transaction provisions also include certain
fiduciary prohibited transactions under section 406(b) of ERISA.
These include transactions involving fiduciary self-dealing;
fiduciary conflicts of interest, and kickbacks to fiduciaries.
---------------------------------------------------------------------------
6. Under the authority of section 408(a) of ERISA and section
4975(c)(2) of the Code, the Department has the authority to grant
exemptions from such ``prohibited transactions'' in accordance with the
procedures set forth in 29 CFR part 2570, subpart B (76 FR 66637,
66644, October 27, 2011).
7. Class Prohibited Transaction Exemption 84-14 (PTE 84-14) \106\
exempts certain prohibited transactions between a party in interest and
an ``investment fund'' (as defined in Section VI(b)) \107\ in which a
plan has an interest, if the investment manager satisfies the
definition of ``qualified professional asset manager'' (QPAM) and
satisfies additional conditions for the exemption. In this regard, PTE
84-14 was developed and granted based on the essential premise that
broad relief could be afforded for all types of transactions in which a
plan engages only if the commitments and the investments of plan assets
and the negotiations leading thereto are the sole responsibility of an
independent, discretionary, manager.\108\ Deutsche Bank has corporate
relationships with a wide range of entities that may act as QPAMs and
utilize the exemptive relief provided in Class Prohibited Transaction
Exemption 84-14 (PTE 84-14).
---------------------------------------------------------------------------
\106\ 49 FR 9494 (March 13, 1984), as corrected at 50 FR 41430
(October 10, 1985), as amended at 70 FR 49305 (August 23, 2005), and
as amended at 75 FR 38837 (July 6, 2010).
\107\ An ``investment fund'' includes single customer and pooled
separate accounts maintained by an insurance company, individual
trusts and common, collective or group trusts maintained by a bank,
and any other account or fund to the extent that the disposition of
its assets (whether or not in the custody of the QPAM) is subject to
the discretionary authority of the QPAM.
\108\ See 75 FR 38837, 38839 (July 6, 2010).
---------------------------------------------------------------------------
8. However, Section I(g) of PTE 84-14 prevents an entity that may
otherwise meet the definition of QPAM from utilizing the exemptive
relief provided by PTE 84-14, for itself and its client plans, if that
entity or an affiliate thereof or any owner, direct or indirect, of a 5
percent or more interest in the QPAM has, within 10 years immediately
preceding the transaction, been either convicted or released from
imprisonment, whichever is later, as a result of certain specified
criminal activity described in that section. The Department notes that
Section I(g) was included in PTE 84-14, in part, based on the
expectation that a QPAM, and those who may be in a position to
influence its policies, maintain a high standard of integrity.\109\
Accordingly, as a result of the Korean Conviction and the US
Conviction, QPAMs with certain corporate relationships to DSK and DB
Group Services, as well as their client plans that are subject to Part
4 of Title I of ERISA (ERISA-covered plans) or section 4975 of the Code
(IRAs), will no longer be able to rely on PTE 84-14 without an
individual exemption issued by the Department.
---------------------------------------------------------------------------
\109\ See 47 FR 56945, 56947 (December 21, 1982).
---------------------------------------------------------------------------
The DB QPAMs
9. Deutsche Bank represents that certain current and future
``affiliates'' of DSK and DB Group Services, as that term is defined in
section VI(d) of PTE 84-14, may act as QPAMs in reliance on the relief
provided in PTE 84-14 (these entities are collectively referred to as
the ``DB QPAMs'' or the ``Applicant''). The DB QPAMs are currently
comprised of several wholly-owned direct and indirect subsidiaries of
Deutsche Bank including: (A) DIMA; (B) Deutsche Bank Securities Inc.,
which is a dual-registrant with the SEC under the Advisers Act as an
investment adviser and broker-dealer; (C) RREEF America L.L.C., a
Delaware limited liability company and investment adviser registered
with the SEC under the Advisers Act; (D) Deutsche Bank Trust Company
Americas, a corporation organized under the laws of the State of New
York and supervised by the New York State Department of Financial
Services, a member of the Federal Reserve and an FDIC-insured bank; (E)
Deutsche Bank National Trust Company, a national banking association,
organized under the laws of the United States and supervised by the
Office of the Comptroller of the Currency, and a member of the Federal
Reserve; (F) Deutsche Bank Trust Company, NA, a national banking
association, organized under the laws of the United States and
supervised by the OCC; (G) Deutsche Alternative Asset Management
(Global) Limited, a London-based investment adviser registered with the
SEC under the Advisers Act; (H) Deutsche Investments Australia Limited,
a Sydney, Australia-based investment adviser registered with the SEC
under the Advisers Act; (I) DeAWM Trust Company (DTC), a limited
purpose trust company organized under the laws of New Hampshire and
subject to supervision of the New Hampshire Banking Department; and the
four following entities which currently do not rely on PTE 84-14 for
the management of any ERISA-covered plan or IRA assets, but may in the
future: (J) Deutsche Asset Management (Hong Kong) Ltd.; (K) Deutsche
Asset Management International GmbH; (L) DB Investment
[[Page 83407]]
Managers, Inc.; and (M) Deutsche Bank AG, New York Branch.\110\
---------------------------------------------------------------------------
\110\ For reasons described below, exemptive relief is not being
proposed for DBSI and the branches of Deutsche Bank AG (including
the NY Branch), and as such, these entities are excluded from the
definition of ``DB QPAM'' for purposes of the operative language of
this proposed five-year exemption.
---------------------------------------------------------------------------
10. The Applicant notes that discretionary asset management
services are provided to ERISA-covered plans, IRAs and others under the
following Asset & Wealth Management (AWM) business lines, each of which
may be served by one or more of the DB QPAMs: (A) Wealth Management--
Private Client Services and Wealth Management--Private Bank ($178.1
million in ERISA assets, $643.9 million in IRA assets and $1.8 million
in rabbi trust assets); (B) Active Management ($299 million in ERISA
assets, $227.9 million in governmental plan assets, and $141.7 million
in rabbi trust assets); (C) Alternative and Real Assets ($7.4 billion
in ERISA-covered and governmental plan assets); \111\ (D) Alternatives
& Fund Solutions ($20.8 million in ERISA accounts, $29 million in IRA
holdings and $14.1 million in governmental plan holdings); and (E)
Passive Management (no current ERISA or IRA assets).\112\ Finally, DTC
manages the DWS Stock Index Fund, a collective investment trust with
$192 million in assets as of March 31, 2015.
---------------------------------------------------------------------------
\111\ The Alternatives and Real Assets business line also
provides discretionary asset management services, through a
separately managed account, to one church plan with total assets
under management of $168.6 million and, through a pooled fund
subject to ERISA, to two church plans with total assets under
management of $7.9 million. According to Deutsche Bank, with respect
to governmental plan assets, most management agreements are
contractually subject to ERISA standards.
\112\ With the exception of Passive Management, the statistics
for each of the individual business lines listed here have been
updated by Deutsche Bank and are current as of June 30, 2015, to the
best of Deutsche Bank's knowledge.
---------------------------------------------------------------------------
11. The Applicant represents that the AWM business is separate from
Group Services. The DB QPAMs that serve the AWM business have their own
boards of directors. The Applicant represents that the AWM business has
its own legal and compliance teams. The Applicant further notes that
the DB QPAMs are subject to certain policies and procedures that are
designed to, among other things, ensure that asset management decisions
are made without inappropriate outside influence, applicable law and
governing documents are followed, personnel act with professionalism
and in the best interests of clients, clients are treated fairly,
confidential information is protected, conflicts of interest are
avoided, errors are reported and a high degree of integrity is
maintained.
Market Manipulation Activities of DSK \113\
---------------------------------------------------------------------------
\113\ The Department has incorporated the facts related to the
circumstances leading to the Korean Conviction as represented by
Deutsche Bank in Application No. D-11696 and included in the Federal
Register in the notice of proposed exemption for the aforementioned
application at 80 FR 51314 (August 24, 2015).
---------------------------------------------------------------------------
12. Deutsche Securities Korea Co. (DSK), an indirect wholly-owned
subsidiary of Deutsche Bank, is a broker-dealer organized in Korea and
supervised by the Financial Supervisory Service in Korea. The Absolute
Strategy Group (ASG) of Deutsche Bank's Hong Kong Branch (DB HK)
conducts index arbitrage trading for proprietary accounts in Asian
markets, including Korea. On January 25, 2016, DSK was convicted in
Seoul Central District Court (the Korean Court), under Articles 176,
443, and 448 of South Korea's Financial Investment Services and Capital
Markets Act (FSCMA) for spot/futures-linked market price manipulation.
The Korean Court issued a written decision (the Korean Decision) in
connection with the Korean Conviction.
13. Deutsche Bank represents that index arbitrage trading is a
trading strategy through which an investor such as Deutsche Bank seeks
to earn a return by identifying and exploiting a difference between the
value of futures contracts in respect of a relevant equity index and
the spot value of the index, as determined by the current market price
of the constituent stocks. For instance, where the futures contracts
are deemed to be overpriced by reference to the spot value of the index
(i.e., if the premium is sufficiently large), then an index arbitrageur
will short sell the relevant futures contracts (either the exchange-
traded contracts or the put and call option contracts which together
synthetically replicate the exchange-traded futures contracts) and
purchase the underlying stocks. The short and long positions offset
each other in order to be hedged (although the positions may not always
be perfectly hedged).
14. Deutsche Bank represents that ASG pursued an index arbitrage
trading strategy in various Asian markets, including Korea. In Korea,
the index arbitrage position involved the Korean Composite Stock Price
Index (KOSPI 200 Index), which reflects stocks commonly traded on the
Korea Exchange (KRX). Deutsche Bank represents that, while ASG tried to
track the KOSPI 200 Index as closely as possible, there is a limit on
foreign ownership for certain shares such as telecommunication
companies. Thus, once ASG's cash position reached this limitation, DSK
carried the remainder; and ASG's book, combined with DSK's book for
Korea telecommunication companies, reflected ASG's overall KOSPI 200
index arbitrage position.
15. On November 11, 2010, ASG unwound an arbitrage position on the
KOSPI 200 Index through DSK. The ``unwind'' included a sale of $2.1
billion worth of stocks in the KRX during the final 10 minutes of
trading (i.e., the closing auction period) and comprised 88% of the
volume of stock traded during this period. This large volume sale
contributed to a drop of the KOSPI 200 Index by 2.7%.
16. Prior to the unwinding, but after the decision to unwind was
made, ASG had taken certain derivative positions, including put options
on the KOSPI 200 Index. Thus, ASG earned a profit when the KOSPI 200
Index declined as a result of the unwind trades (the derivative
positions and unwind trades cumulatively referred to as the Trades).
DSK had also purchased put options on that day that resulted in it
earning a profit as a result of the drop of the KOSPI 200 Index. The
aggregate amount of profit earned from such Trades was approximately
$40 million.
17. The Seoul Central District Prosecutor's Office (the Korean
Prosecutors) alleged that the Trades constitute spot/futures linked
market manipulation, a criminal violation under Korean securities law.
In this regard, the Korean Prosecutors alleged that ASG unwound its
cash position of certain securities listed on the KRX (spot) through
DSK, and caused a fluctuation in the market price of securities related
to exchange-traded derivatives (the put options) for the purpose of
gaining unfair profit from such exchange-traded derivatives. On August
19, 2011, the Korean Prosecutors indicted DSK and four individuals on
charges of stock market manipulation to gain unfair profits. Two of the
individuals, Derek Ong and Bertrand Dattas, worked for ASG at DB HK.
Mr. Ong was a Managing Director and head of ASG, with power and
authority with respect to the KOSPI 200 Index arbitrage trading
conducted by Deutsche Bank. Mr. Dattas served as a Director of ASG and
was responsible for the direct operations of the KOSPI 200 Index
arbitrage trading. Philip Lonergan, the third individual, was employed
by Deutsche Bank Services (Jersey) Limited. At the time of the
transaction, Mr. Lonergan was seconded to DB HK and served as Head of
Global Market Equity, Trading and Risk. Mr. Lonergan
[[Page 83408]]
served as Mr. Ong's regional superior and was in charge of risk
management for his team. The fourth individual charged, Do-Joon Park,
was employed by DSK, serving as a Managing Director of Global Equity
Derivatives (GED) at DSK and was in charge of the index arbitrage
trading using DSK's book that had been integrated into and managed by
ASG. Mr. Park was also a de facto chief officer of equity and
derivative product operations of DSK.
18. The Korean Prosecutors' case against DSK was based on Korea's
criminal vicarious liability provision, under which DSK may be held
vicariously liable for an act of its employee (i.e., Mr. Park) if it
failed to exercise due care in the appointment and supervision of its
employees.\114\
---------------------------------------------------------------------------
\114\ Article 448 of the FSCMA allows for charges against an
employer stemming from vicarious liability for the actions of its
employees.
---------------------------------------------------------------------------
19. The trial commenced in January 2012 in the Korean Court. The
Korean Court convicted both DSK and Mr. Park on January 25, 2016. The
Korean Court sentenced Mr. Park to five years imprisonment. Upon
conviction, the Korean Court ordered DSK to pay a criminal fine of KRW
1.5 billion. Furthermore, the Korean Court ordered that Deutsche Bank
forfeit KRW 43,695,371,124, while KRW 1,183,362,400 was ordered
forfeited by DSK.\115\
---------------------------------------------------------------------------
\115\ KRW refers to a South Korean Won.
---------------------------------------------------------------------------
LIBOR Manipulation Activities by DB Group Services
20. DB Group Services is an indirect wholly-owned subsidiary of
Deutsche Bank located in the United Kingdom. On April 23, 2015, DB
Group Services pled guilty in the United States District Court for the
District of Connecticut to a single count of wire fraud, in violation
of 18 U.S.C. 1343 (the Plea Agreement), related to the manipulation of
the London Interbank Offered Rate (LIBOR) described below. In
connection with the Plea Agreement with DB Group Services, the DOJ
filed a Statement of Fact (the DOJ Plea Factual Statement) that details
the underlying conduct that serves as the basis for the criminal
charges and impending US Conviction.
21. According to the DOJ Plea Factual Statement, LIBOR is a
benchmark interest rate used in financial markets around the world.
Futures, options, swaps, and other derivative financial instruments
traded in the over-the-counter market. The LIBOR for a given currency
is derived from a calculation based upon submissions from a panel of
banks for that currency (the Contributor Panel) selected by the British
Bankers' Association (BBA). Each member of the Contributor Panel would
submit its rates electronically. Once each Contributor Panel bank had
submitted its rate, the contributed rates were ranked. The highest and
lowest quartiles were excluded from the calculation, and the middle two
quartiles (i.e., 50% of the submissions) were averaged to formulate the
LIBOR ``fix'' or ``setting'' for the given currency and maturity.
22. The DOJ Plea Factual Statement states that, from 2006 to 2011,
Deutsche Bank's Global Finance and Foreign Exchange business units
(GFFX) had employees in multiple entities associated with Deutsche
Bank, in multiple locations around the world including London and New
York. Deutsche Bank, through the GFFX unit, employed traders in both
its Pool Trading groups (Pool) and its Money Market Derivatives (MMD)
groups. Many of the GFFX traders based in London were employed by DB
Group Services.
23. According to the DOJ Plea Factual Statement, Deutsche Bank's
Pool traders engaged in, among other things, cash trading and
overseeing Deutsche Bank's internal funding and liquidity. Deutsche
Bank's Pool traders traded a variety of financial instruments. Deutsche
Bank's Pool traders were primarily responsible for formulating and
submitting Deutsche Bank's LIBOR and EURIBOR daily contributions.
Deutsche Bank's MMD traders, on the other hand, were responsible for,
among other things, trading a variety of financial instruments, some of
which, such as interest rate swaps and forward rate agreements, were
tied to LIBOR and EURIBOR. The DOJ Plea Factual Statement notes that
both the Pool traders and the MMD traders worked in close proximity and
reported to the same chain of command. DB Group Services employed many
of Deutsche Bank's London-based Pool and MMD traders.
24. Deutsche Bank and DB Group Services's derivatives traders (the
Derivatives Traders) were responsible for trading a variety of
financial instruments, some of which, such as interest rate swaps and
forward rate agreements, were tied to reference rates such as LIBOR and
EURIBOR. According to the DOJ Plea Factual Statement, from
approximately 2003 through at least 2010, the Derivatives Traders
defrauded their counterparties by secretly manipulating U.S. Dollar
(USD), Yen, and Pound Sterling LIBOR, as well as the EURO Interbank
Offered Rate (EURIBOR, and collectively, the IBORs or IBOR). The
Derivatives Traders requested that the IBOR submitters employed by
Deutsche Bank and other banks send in IBORs that would benefit the
Derivatives Traders' trading positions, rather than rates that complied
with the definitions of the IBORs. According to the DOJ, Deutsche Bank
employees engaged in this collusion through face-to-face requests,
electronic communications, which included both emails and electronic
chats, and telephone calls.
25. The DOJ Plea Factual Statement explains that when the
Derivatives Traders' requests for favorable IBOR submissions were taken
into account by the submitters, the resultant contributions affected
the value and cash flows of derivatives contracts, including interest
rate swap contracts. In accommodating these requests, the Derivatives
Traders and submitters were engaged in a deceptive course of conduct in
an effort to gain an advantage over their counterparties. As part of
this effort: (1) The Deutsche Bank Pool and MMD Traders submitted
materially false and misleading IBOR contributions; and (2) Derivatives
Traders, after initiating and continuing their effort to manipulate
IBOR contributions, entered into derivative transactions with
counterparties that did not know that the Deutsche Bank personnel were
often manipulating the relevant rate.
26. The DOJ Plea Factual Statement notes that from 2003 through at
least 2010, DB Group Services employees regularly sought to manipulate
USD LIBOR to benefit their trading positions and thereby benefit
themselves and Deutsche Bank. During most of this period, traders at
Deutsche Bank who traded products linked to USD LIBOR were primarily
located in London and New York. DB Group Services employed almost all
of the USD LIBOR traders who were located in London and involved in the
misconduct. Throughout the period during which the misconduct occurred,
the Deutsche Bank USD LIBOR submitters in London sat within feet of the
USD LIBOR traders. This physical proximity enabled the traders and
submitters to conspire to make and solicit requests for particular
LIBOR submissions.
27. Pursuant to the Plea Agreement that DB Group Services entered
into with the DOJ on April 23, 2015, pleading guilty to wire fraud for
manipulation of LIBOR, DB Group Services also agreed: (A) To work with
its parent company (Deutsche Bank) in fulfilling obligations undertaken
by the Bank in connection with its own settlements; (B) to continue to
fully cooperate with the DOJ and any other law enforcement or
government agency
[[Page 83409]]
designated by the DOJ in a manner consistent with applicable laws and
regulations; and (C) to pay a fine of $150 million.
28. On April 23, 2015, Deutsche Bank AG entered into a deferred
prosecution agreement (DPA) with the DOJ, as a disposition for a 2-
count criminal information charging Deutsche Bank with one count of
wire fraud, in violation of Title 18, United States Code, Section 1343,
and one count of price-fixing, in violation of the Sherman Act, Title
15, United States Code, Section 1. By entering into the DPA, Deutsche
Bank AG agreed, among other things: (A) To continue to cooperate with
the DOJ and any other law enforcement or government agency; (B) to
retain an independent compliance monitor for three years, subject to
extension or early termination, to be selected by the DOJ from among
qualified candidates proposed by the Bank; (C) to further strengthen
its internal controls as recommended by the monitor and as required by
other settlements; and (D) to pay a penalty of $625 million.
29. On April 23, 2015, Deutsche Bank AG and Deutsche Bank AG, New
York Branch (DB NY) also entered into a consent order with the New York
State Department of Financial Services (NY DFS) in which Deutsche Bank
AG and DB NY agreed to pay a penalty of $600 million. Furthermore,
Deutsche Bank AG and DB NY engaged an independent monitor selected by
the NY DFS in the exercise of the NY DFS's sole discretion, for a 2-
year engagement. Finally, the NY DFS ordered that certain employees
involved in the misconduct be terminated, or not be allowed to hold or
assume any duties, responsibilities, or activities involving
compliance, IBOR submissions, or any matter relating to U.S. or U.S.
Dollar operations.
30. Furthermore, the United States Commodities Futures Trading
Commission (CFTC) entered a consent order, dated April 23, 2015,
requiring Deutsche Bank AG to cease and desist from certain violations
of the Commodity Exchange Act, to pay a fine of $800 million, and to
agree to certain undertakings.
31. The United Kingdom's Financial Conduct Authority (FCA) issued a
final notice (Final Notice), dated April 23, 2015, imposing a fine of
[pound]226.8 million on Deutsche Bank AG. In its Final Notice, the FCA
cited Deutsche Bank's inadequate systems and controls specific to IBOR.
The FCA noted that Deutsche Bank had defective systems to support the
audit and investigation of misconduct by traders; and Deutsche Bank's
systems for identifying and recording traders' telephone calls and for
tracing trading books to individual traders were inadequate. The FCA's
Final Notice provided that Deutsche Bank took over two years to
identify and produce all relevant audio recordings requested by the
FCA. Furthermore, according to the Final Notice, Deutsche Bank gave the
FCA misleading information about its ability to provide a report
commissioned by Bundesanstalt f[uuml]r Finanzdienstleistungsaufsicht,
Germany's Federal Financial Supervisory Authority (BaFin). In addition,
the FCA notes in its Final Notice that Deutsche Bank provided it with a
false attestation that stated that its systems and controls in relation
to LIBOR were adequate, an attestation known to be false by the person
who drafted it. The Final Notice provides that, in one instance,
Deutsche Bank, in error, destroyed 482 tapes of telephone calls,
despite receiving an FCA notice requiring their preservation, and
provided inaccurate information to the regulator about whether other
records existed.
32. Finally, BaFin set forth preliminary findings based on an audit
of LIBOR related issues in a May 15, 2015, letter to Deutsche Bank. At
that time, BaFin raised certain questions about the extent of certain
senior managers' possible awareness of wrongdoing within Deutsche Bank.
Prior and Anticipated Convictions and Failure To Comply With Section
I(g) of PTE 84-14
33. The Korean Conviction caused the DB QPAMs to violate Section
I(g) of PTE 84-14. As a result, the Department granted PTE 2015-15,
which allows the DB QPAMs to rely on the relief provided by PTE 84-14,
notwithstanding the January 25, 2016 Korean Conviction. The Department
granted PTE 2015-15 in order to protect ERISA-covered plans and IRAs
from certain costs and/or investment losses that could have occurred to
the extent the DB QPAMs lost their ability to rely on PTE 84-14 as a
result of the Korean Conviction. On October 28, 2016, the Department
published in the Federal Register PTE 2016-12 (81 FR 75153, October 28,
2016) (the Extension), extending the effective period of 2015-15, which
was about to expire. PTE 2015-15 and the Extension are subject to
enhanced conditions that are protective of the rights of the
participants and beneficiaries of affected ERISA-covered plans and
IRAs.
34. The Applicant represents that the US Conviction, tentatively
scheduled for April 3, 2017, will also cause DB QPAMs to violate
Section I(g) of PTE 84-14. Therefore, Deutsche Bank requests a single,
new exemption that would permit the DB QPAMs, and their ERISA-covered
plan and IRA clients, to continue to utilize the relief in PTE 84-14,
notwithstanding both the Korean Conviction and the US Conviction.
35. The Department is proposing the five-year exemption herein to
allow the DB QPAMs to rely on PTE 84-14 notwithstanding the Korean
Conviction and the US Conviction, subject to a comprehensive suite of
protective conditions designed to protect the rights of the
participants and beneficiaries of the ERISA-covered plans and IRAs that
are managed by DB QPAMs.
36. Concurrently with this proposed five-year exemption, elsewhere
in the Federal Register, the Department is publishing a proposed
temporary exemption for DB QPAMs to rely on PTE 84-14 notwithstanding
the Korean Conviction and the US Conviction, for a period of up to one
year (the Temporary Exemption). The Temporary Exemption will allow the
Department to determine whether to grant this five-year exemption, and
will protect ERISA-covered plans and IRAs from potential losses if such
DB QPAMs suddenly lose their ability to rely on PTE 84-14 with respect
to such plans and IRAs. The Temporary Exemption will be effective from
the date of the US Conviction until the earlier of twelve months from
such date or until the effective date of a final agency action made by
the Department in connection with this proposed five-year exemption.
The exemptive relief set forth in the Temporary Exemption would be
replaced by that in the proposed five-year exemption.
37. This five-year exemption will not apply to Deutsche Bank
Securities, Inc. (DBSI).\116\ Section I(a) of PTE 2015-15 and the
Extension, requires that ``DB QPAMs (including their officers,
directors, agents other than Deutsche Bank, and employees of such DB
QPAMs) did not know of, have reason to know of, or participate in the
criminal conduct of DSK that is the subject of the Korean Conviction.''
In a letter to the Department dated July 15, 2016, Deutsche Bank raised
the possibility that an individual,\117\ while
[[Page 83410]]
employed at DBSI, may have known or had reason to know of the criminal
conduct of DSK that is the subject of the Korean Conviction. In a
letter to the Department dated August 19, 2016, Deutsche Bank further
clarified that ``there is no evidence that anyone at DBSI other than
Mr. Ripley knew in advance of the trades conducted by the Absolute
Strategy Group on November 11, 2010.'' Deutsche Bank states that it had
previously interpreted Section I(a) of PTE 2015-15 as requiring only
that ``any current director, officer or employee did not know of, have
reason to know of, or participate in the conduct.'' The Department
notes that Deutsche Bank did not raise any interpretive questions
regarding Section I(a) of PTE 2015-15, or express any concerns
regarding DBSI's possible noncompliance, during the comment period for
PTE 2015-15. Nor did Deutsche Bank seek a technical correction or other
remedy to address such concerns between the time that PTE 2015-15 was
granted and the date of the Korean Conviction. The Department notes
that a period of approximately nine months passed before Deutsche Bank
raised an interpretive question regarding Section I(a) of PTE 2015-15.
Accordingly, the Department is not proposing exemptive relief for DBSI
in this five-year exemption.
---------------------------------------------------------------------------
\116\ The Applicant represents that DBSI has not relied on the
relief provided by PTE 84-14 since the date of the Korean
Conviction.
\117\ The Applicant identifies the individual as Mr. John
Ripley, a senior global manager in DBSI who was based in the United
States and who was a functional supervisor over the employees of DSK
that were prosecuted for market manipulation. Furthermore, the
Applicant states that Mr. Ripley was terminated by DBSI for ``loss
of confidence'' in that he could have exercised more care and been
more proactive in reviewing the trades at issue.
---------------------------------------------------------------------------
The five-year exemption will also not apply with respect to
Deutsche Bank AG (the parent entity) or any of its branches. The
Applicant represents that neither Deutsche Bank AG nor its branches
have relied on the relief provided by PTE 84-14 since the date of the
Korean Conviction.
38. Finally, the Applicant represents that it currently does not
have a reasonable basis to believe that any pending criminal
investigation \118\ of any of Deutsche Bank's affiliated corporate
entities would cause a reasonable plan or IRA customer not to hire or
retain the Bank's affiliated managers as a QPAM. Furthermore, this
five-year exemption will not apply to any other conviction(s) of
Deutsche Bank or its affiliates for crimes described in Section I(g) of
PTE 84-14. The Department notes that, in such event, the Applicant and
its ERISA-covered plan and IRA clients should be prepared to rely on
exemptive relief other than PTE 84-14 for any prohibited transactions
entered into after the date of such new conviction(s); withdraw from
any arrangements that solely rely on PTE 84-14 for exemptive relief; or
avoid engaging in any such prohibited transactions in the first place.
---------------------------------------------------------------------------
\118\ The Applicant references the Deutsche Bank AG Form 6-K,
filed July 27, 2016, available at: https://www.db.com/ir/en/download/6_K_Jul_2016.pdf; and the Deutsche Bank AG Form 10-F filed
March 11, 2016 and available at: https://www.db.com/ir/en/download/Deutsche_Bank_20_F_2015.pdf.
---------------------------------------------------------------------------
Remedial Measures To Address Criminal Conduct of DSK
39. Deutsche Bank represents that it has voluntarily disgorged its
profits generated from exercising derivative positions and put options
in connection with the activity associated with the Korean Conviction.
DSK also suspended its proprietary trading from April 2011 to 2012, and
thereafter DSK only engaged in limited proprietary trading (but not
index arbitrage trading).\119\ Further, in response to the actions of
the Korean Prosecutors, Deutsche Bank enhanced its compliance measures
and implemented additional measures in order to ensure compliance with
applicable laws in Korea and Hong Kong, as well as within other
jurisdictions where Deutsche Bank conducts business.
---------------------------------------------------------------------------
\119\ Deutsche Bank notes that DSK was never permitted to trade
on behalf of Deutsche Bank.
---------------------------------------------------------------------------
40. Deutsche Bank states that Mr. Ong and Mr. Dattas were
terminated for cause by DB HK on December 6, 2011, and Mr. Lonergan was
terminated on January 31, 2012. In addition, Mr. Park was suspended for
six months due to Korean administrative sanctions, and remained on
indefinite administrative leave, until being terminated effective
January 25, 2016. John Ripley, a New York-based employee of Deutsche
Bank Securities Inc. (DBSI) who was not indicted, was also terminated
in October 2011.\120\
---------------------------------------------------------------------------
\120\ According to the Korean prosecutors, Mr. Ripley served as
a Head of Global ASG of Deutsche Bank, AG, and was a functional
superior to Mr. Ong. Mr. Ripley was suspected of having advised to
unwind all the KOSPI 200 index arbitrage trading for the purpose of
management of the ending profits and losses of Global ASK and
approved Mr. Ong's request to establish the speculative positions in
the course of the unwinding. Though the Korean prosecutors named Mr.
Ripley as a suspect, he was not named in the August 19, 2011, Writ
of Indictment.
---------------------------------------------------------------------------
Remedial Measures To Address Criminal Conduct of DB Group Services
41. Deutsche Bank represents that it has significantly modified its
compensation structure. Specifically, Deutsche Bank: Eliminated the use
of ``percentage of trading profit'' contracts once held by two traders
involved in the LIBOR case; extended the vesting/distribution period
for deferred compensation arrangements; made compliance with its
internal policies a significant determinant of bonus awards; and
modified its compensation plans to facilitate forfeiture/clawback of
compensation when employees are found after the fact to have engaged in
wrongdoing. Deutsche Bank represents that the forfeiture/clawback
provisions of its compensation plans have been altered so as to permit
action against employees even when misconduct is discovered years
later.
42. With respect to the LIBOR-related misconduct, Deutsche Bank
represents that it has separated from or disciplined the employees
responsible. With the exceptions described below, none of the employees
determined to be responsible for the misconduct remains employed by
Deutsche Bank. Deutsche Bank represents that, during the initial phase
of its internal investigation into the LIBOR matters, it terminated the
two employees most responsible for the misconduct, including the Global
Head of Money Market and Derivatives Trading.
43. Deutsche Bank then terminated five benchmark submitters in its
Frankfurt office, including the Head of Global Finance and Foreign
Exchange in Frankfurt. Four of these employees successfully challenged
their termination in a German Labor court, and one employee entered
into a separation agreement with Deutsche Bank after initially
indicating that he would challenge the termination decision. With
respect to the four employees who challenged their termination, the
Bank agreed to mediate the employee labor disputes and reached
settlements with the four employees. Pursuant to the settlements, the
two more senior employees remained on paid leave through the end of
2015 and then have no association with Deutsche Bank. The two more
junior employees have returned to the Bank in non-risk-taking roles.
They do not work for any DB QPAMs and have no involvement in the Bank's
AWM business or the setting of interest rate benchmarks. Deutsche Bank
represents that it also terminated four additional individuals, and
another eight individuals left the bank before facing disciplinary
action.
44. Deutsche Bank represents that it will take action to terminate
any additional employees who are determined to have been involved in
the improper benchmark manipulation conduct, as well as those who knew
about it and approved it. Moreover, the Applicant states that Deutsche
Bank has taken further steps, both on its own and in consultation with
U.S. and foreign regulators, to discipline those whose performance fell
short of DB's
[[Page 83411]]
expectations in connection with the above-described conduct.
Statutory Findings--In the Interests of Affected Plans and IRAs
45. The Applicant represents that the proposed exemption is in the
interests of affected ERISA-covered plans and IRAs. Deutsche Bank
represents that the DB QPAMS provide discretionary asset management
services under several business lines, including (A) Alternative and
Real Assets (ARA); (B) Alternatives & Fund Solutions (AFS); (C) Active
Management (AM); and (D) Wealth Management--Private Client Services and
Wealth Management--Private Bank. Deutsche Bank asserts that plans will
incur direct transaction costs in liquidating and reinvesting their
portfolios. According to Deutsche Bank, the direct transaction costs of
liquidating and reinvesting ERISA-covered plan, IRA and ERISA-like
assets under the various business lines (other than core real estate)
could range from 2.5 to 25 basis points, resulting in an estimated
dollar cost of approximately $5-7 million. Deutsche Bank also states
that an unplanned liquidation of the Alternatives and Real Assets
business' direct real estate portfolios could result in portfolio
discounts of 10-20% of gross asset value, in addition to transaction
costs ranging from 30 to 100 basis points, for estimated total cost to
plan investors of between $281 million and $723 million, depending on
the liquidation period.
46. Deutsche Bank states that its managers provide discretionary
asset management services, through both separately managed accounts and
four pooled funds subject to ERISA, to a total of 46 ERISA-covered plan
accounts, with total assets under management (AuM) of $1.1 billion.
Deutsche Bank estimates that the underlying plans cover in total at
least 640,000 participants. Deutsche Bank represents that its managers
provide asset management services, through both separately managed
accounts and pooled funds subject to ERISA, to a total of 22
governmental plan accounts, with total AuM of $7.1 billion. The
underlying plans cover at least 3 million participants. With respect to
church plans and rabbi trust accounts, Deutsche Bank investment
managers separately manage accounts and a pooled fund subject to ERISA,
to a total of 4 church plan and rabbi trust accounts, with total AuM of
$318.3 million. With respect to ERISA-covered Plan, IRA, Governmental
Plan and Church Plan Accounts in Non-Plan Asset Pooled Funds, Deutsche
Bank represents that its asset managers manages 175 ERISA-covered plan
accounts with interests totaling $4.23 billion, 178 IRAs with interests
totaling $29 million, 66 governmental plan accounts with interests
totaling $2.08 billion, and 14 church plan accounts with interests
totaling $67.1 million.
47. Deutsche Bank contends that ERISA-covered, IRA, governmental
plan and other plan investors that terminate or withdraw from their
relationship with their DB QPAM manager may be harmed in several
specific ways, including: The costs of searching for and evaluating a
new manager; the costs of leaving a pooled fund and finding a
replacement fund or investment vehicle; and the lack of a secondary
market for certain investments and the costs of liquidation.\121\
---------------------------------------------------------------------------
\121\ The Department notes that, if this temporary exemption is
granted, compliance with the condition in Section I(j) of the
exemption would require the DB QPAMs to hold their plan customers
harmless for any losses attributable to, inter alia, any prohibited
transactions or violations of the duty of prudence and loyalty.
---------------------------------------------------------------------------
48. Deutsche Bank represents that its ARA business line provides
discretionary asset management services to, among others, 17 ERISA
accounts and 18 governmental plan accounts. The largest account has
$1.6 billion in AuM. ERISA-covered and governmental plans total $7.4
billion in AuM. Deutsche Bank estimates that the underlying plans cover
at least 2.7 million participants. ARA provides these services through
separately managed accounts and pooled funds subject to ERISA. ARA also
provides discretionary asset management services, through a separately
managed account, to one church plan with total AuM of $168.6 million
and, through a pooled fund subject to ERISA, to two church plans with
total AuM of $7.9 million.
49. Deutsche Bank argues that PTE 84-14 is the sole exemption
available to ARA for investments in direct real estate for separately
managed accounts. Deutsche Bank represents that, as a result of
terminating ARA's management, a typical plan client may incur $30,000
to $40,000 in consulting fees in searching for a new manager as well as
$10,000 to $30,000 in legal fees. Furthermore, with respect to direct
real estate investments, Deutsche Bank states that plan clients may
face direct transaction costs of 30-100 basis points for early
liquidation, or a $4.8 million to $16 million loss for its largest ARA
governmental plan client; as well as a 10-20% discount for early
liquidation, or a $162.5 million to $325 million loss for the largest
ARA governmental plan client. With respect to non-direct real estate
investments, Deutsche Bank states that plan clients may face direct
transaction costs of 20-60 basis points, or $933,000 for ARA's largest
ERISA client.
50. Deutsche Bank notes that ARA manages seven unregistered real
estate investment trusts and other funds that currently rely on one or
more exceptions to the Department's plan asset regulation. Interests in
the funds are held by 131 ERISA-covered plan accounts, 63 governmental
plan accounts and 14 church plan accounts. Deutsche Bank represents
that the largest holding in these funds by an ERISA-covered plan
account is $647.4 million. Holdings by all ERISA plan accounts in these
funds total $4.21 billion. The underlying ERISA-covered plans cover at
least 2 million participants. The largest holding by a governmental
plan account in these funds is $286.5 million. Holdings of all
governmental plan accounts in these funds total $2.07 billion. The
underlying plans cover at least 6.1 million participants. The largest
holding by a church plan is $16 million. Holdings of all church plans
in these funds total $67.1 million.
51. Deutsche Bank represents that its AFS business line manages 28
unregistered, closed-end, private equity funds, with $2.8 billion in
total assets, in which ERISA-covered, IRA and governmental plans
invest. Interests in these funds are held by, among others, 44 ERISA-
covered plan accounts, 178 IRAs and 3 governmental plan accounts.
Holdings by all ERISA-covered plan accounts total $20.8 million.
Deutsche Bank notes that the underlying plans cover at least 57,000
participants. Holdings by all IRAs total $29 million. Holdings by all
governmental plans total $14.1 million. These funds invest primarily in
equity interests issued by other private equity funds. The funds
currently rely on the 25% benefit plan investor participation exception
under the Department's plan asset regulation.
52. Deutsche Bank contends that, in the event the AFS business line
cannot rely upon the exemptive relief of PTE 84-14, all plans would
have to undertake the time and expense of identifying suitable
transferees, accept a discounted sale price, comply with applicable
transfer rules and pay the funds a transfer fee, which may run to
$5,000 or more. Deutsche Bank states that, in locating a replacement
fund, a typical plan could incur 6-8 months of delay, $30,000-$40,000
in consultant fees for a private manager/fund search, 25-50 hours in
client time and $10,000-$30,000 in legal fees to review subscription
agreements and negotiate side letters.
[[Page 83412]]
53. Deutsche Bank represents that its AM business line provides
discretionary asset management services to separately managed plan
accounts, including five ERISA-covered plan accounts and three
governmental plan accounts. The largest ERISA account is $164.2
million. Total ERISA AuM is $299.2 million. The underlying ERISA-
covered plans cover at least 143,000 participants. The largest
governmental plan account is $164.3 million. Total governmental plan
AuM is $227.9 million. The underlying plans cover at least 731,000
participants. Deutsche Bank notes that AM also provides such services
to one rabbi trust with total AuM of $141.7 million.
54. Deutsche Bank represents that the AM line manages these
accounts with a variety of strategies, including: (A) Equities, (B)
fixed income, (C) overlay, (D) commodities, and (E) cash. These
strategies involve a range of asset classes and types, including: (A)
U.S. and foreign fixed income (Treasuries, Agencies, corporate bonds,
asset-backed securities, mortgage and commercial mortgage-backed
securities, deposits); (B) US and foreign mutual funds and ETFs; (C) US
and foreign futures, (D) currency; (E) swaps (interest rate and credit
default); (F) US and foreign equities; and (G) short term investment
funds.
55. Deutsche Bank estimates that, in the event the AM business line
cannot rely upon the exemptive relief of PTE 84-14, plan clients would
typically incur $30,000 to $40,000 in consulting fees related to a new
manager search, up to 5 basis points in direct transaction costs, and
$15,000-$30,000 in legal costs to negotiate each new futures, cleared
derivatives, swap or other trading agreements.
56. Deutsche Bank represents that its Wealth Management--Private
Client Services and Wealth Management--Private Bank business lines
manage $178.1 million in ERISA assets, $643.9 million in IRA assets,
and $1.8 million of rabbi trust assets (Wealth Management--Private
Bank). Deutsche Bank asserts that causing plan clients to change
managers will lead the plans and IRAs to incur transaction costs,
estimated at 2.5 basis points overall.
Statutory Findings--Protective of the Rights of Participants of
Affected Plans and IRAs
57. The Applicant has proposed certain conditions it believes are
protective of plans and IRAs with respect to the transactions described
herein. The Department has determined to revise and supplement the
proposed conditions so that it can make its required finding that the
requested exemption is protective of the rights of participants and
beneficiaries of affected plans and IRAs.
58. Several of the conditions underscore the Department's
understanding, based on Deutsche Bank's representations, that the
affected DB QPAMs were not involved in the misconduct that is the
subject of the Convictions. The five-year exemption, if granted as
proposed, mandates that the DB QPAMs (including their officers,
directors, agents other than Deutsche Bank, and employees of such DB
QPAMs) did not know of, have reason to know of, or participate in the
criminal conduct of DSK and DB Group Services that is the subject of
the Convictions (for purposes of this requirement, ``participate in''
includes an individual's knowing or tacit approval of the misconduct
underlying the Convictions). Furthermore, the DB QPAMs (including their
officers, directors, employees, and agents other than Deutsche Bank)
cannot have received direct compensation, or knowingly received
indirect compensation, in connection with the criminal conduct that is
the subject of the Convictions.
59. The proposed five-year exemption defines the Convictions as:
(1) The judgment of conviction against DB Group Services, in Case 3:15-
cr-00062-RNC to be entered in the United States District Court for the
District of Connecticut to a single count of wire fraud, in violation
of 18 U.S.C. 1343 (the US Conviction); and (2) the judgment of
conviction against DSK entered on January 25, 2016, in Seoul Central
District Court, relating to charges filed against DSK under Articles
176, 443, and 448 of South Korea's Financial Investment Services and
Capital Markets Act for spot/futures-linked market price manipulation
(the Korean Conviction). The Department notes that the ``conduct'' of
any person or entity that is the ``subject of [a] Conviction''
encompasses any conduct of Deutsche Bank and/or their personnel, that
is described in the Plea Agreement (including the Factual Statement),
Court judgments (including the judgment of the Seoul Central District
Court), criminal complaint documents from the Financial Services
Commission in Korea, and other official regulatory or judicial factual
findings that are a part of this record.
60. The Department expects that DB QPAMs will rigorously ensure
that the individuals associated with the misconduct will not be
employed or knowingly engaged by such QPAMs. In this regard, the five-
year exemption mandates that the DB QPAMs will not employ or knowingly
engage any of the individuals that participated in the spot/futures-
linked market manipulation or LIBOR manipulation activities that led to
the Convictions, respectively. For purposes of this condition,
``participated in'' includes an individual's knowing or tacit approval
of the misconduct that is the subject of the Convictions. Further, a DB
QPAM will not use its authority or influence to direct an ``investment
fund,'' (as defined in Section VI(b) of PTE 84-14) that is subject to
ERISA or the Code and managed by such DB QPAM, to enter into any
transaction with DSK or DB Group Services, nor otherwise engage DSK or
DB Group Services to provide additional services to such investment
fund, for a direct or indirect fee borne by such investment fund,
regardless of whether such transaction or services may otherwise be
within the scope of relief provided by an administrative or statutory
exemption.
61. The DB QPAMs must comply with each condition of PTE 84-14, as
amended, with the sole exceptions of the violations of Section I(g) of
PTE 84-14 that are attributable to the Convictions. Further, any
failure of the DB QPAMs to satisfy Section I(g) of PTE 84-14 must
result solely from the LIBOR Conviction and the Korean Conviction.
62. No relief will be provided by this five-year exemption to the
extent that a DB QPAM exercised authority over the assets of any plan
subject to Part 4 of Title I of ERISA (an ERISA-covered plan) or
section 4975 of the Code (an IRA) in a manner that it knew or should
have known would: Further the criminal conduct that is the subject of
the Convictions; or cause the QPAM, affiliates, or related parties to
directly or indirectly profit from the criminal conduct that is the
subject of the Convictions. The conduct that is the subject of the
Convictions includes that which is described in the plea agreement with
the U.S. Department of Justice, dated April 23, 2015 (the Plea
Agreement), which is expected to result in the District Court issuing
the US Conviction; the deferred prosecution agreement between Deutsche
Bank AG and the DOJ, dated April 23, 2015 (the DPA); and in connection
with the January 25, 2016 conviction (the Korean Conviction) of DSK, in
Seoul Central District Court (the Korean Court) for spot/futures linked
market manipulation. Further, no five-year relief will be provided to
the extent DSK or DB Group Services provide any discretionary asset
management services to ERISA-covered plans or IRAs or
[[Page 83413]]
otherwise act as a fiduciary with respect to ERISA-covered plan or IRA
assets.
63. Policies. The Department believes that robust policies and
training are warranted where, as here, extensive criminal misconduct
has occurred within a corporate organization that includes one or more
QPAMs managing plan investments in reliance on PTE 84-14. Therefore,
this proposed five-year exemption requires each DB QPAM to immediately
develop, implement, maintain, and follow written policies and
procedures (the Policies) requiring and reasonably designed to ensure
that: The asset management decisions of the DB QPAM are conducted
independently of Deutsche Bank's corporate management and business
activities, including the corporate management and business activities
of DB Group Services and DSK; the DB QPAM fully complies with ERISA's
fiduciary duties and ERISA and the Code's prohibited transaction
provisions and does not knowingly participate in any violations of
these duties and provisions with respect to ERISA-covered plans and
IRAs; the DB QPAM does not knowingly participate in any other person's
violation of ERISA or the Code with respect to ERISA-covered plans and
IRAs; any filings or statements made by the DB QPAM to regulators,
including but not limited to, the Department, the Department of the
Treasury, the Department of Justice, and the Pension Benefit Guaranty
Corporation, on behalf of ERISA-covered plans or IRAs are materially
accurate and complete, to the best of such QPAM's knowledge at that
time; the DB QPAM does not make material misrepresentations or omit
material information in its communications with such regulators with
respect to ERISA-covered plans or IRAs, or make material
misrepresentations or omit material information in its communications
with ERISA-covered plan and IRA clients; and the DB QPAM complies with
the terms of this proposed exemption. Any violation of, or failure to
comply with, the Policies must be corrected promptly upon discovery,
and any such violation or compliance failure not promptly corrected
must be reported, upon the discovery of such failure to promptly
correct, in writing, to appropriate corporate officers, the head of
Compliance and the General Counsel of the relevant DB QPAM (or their
functional equivalent), the independent auditor responsible for
reviewing compliance with the Policies, and an appropriate fiduciary of
any affected ERISA-covered plan or IRA that is independent of Deutsche
Bank.\122\ A DB QPAM will not be treated as having failed to develop,
implement, maintain, or follow the Policies, provided that it corrects
any instance of noncompliance promptly when discovered or when it
reasonably should have known of the noncompliance (whichever is
earlier), and provided that it reports such instance of noncompliance
as explained above.
---------------------------------------------------------------------------
\122\ With respect to any ERISA-covered plan or IRA sponsored by
an ``affiliate'' (as defined in Part VI(d) of PTE 84-14) of Deutsche
Bank or beneficially owned by an employee of Deutsche Bank or its
affiliates, such fiduciary does not need to be independent of
Deutsche Bank.
---------------------------------------------------------------------------
64. Training. The Department has also imposed a condition that
requires each DB QPAM to immediately develop and implement a program of
training (the Training) for all relevant DB QPAM asset/portfolio
management, trading, legal, compliance, and internal audit personnel.
The Training must be set forth in the Policies and at a minimum, cover
the Policies, ERISA and Code compliance (including applicable fiduciary
duties and the prohibited transaction provisions) and ethical conduct,
the consequences for not complying with the conditions of this proposed
exemption (including the loss of the exemptive relief provided herein),
and prompt reporting of wrongdoing. Furthermore, the Training must be
conducted by an independent professional who has been prudently
selected and who has appropriate technical training and proficiency
with ERISA and the Code.
65. Independent Transparent Audit. The Department views a rigorous,
transparent audit that is conducted by an independent party as
essential to ensuring that the conditions for exemptive relief
described herein are followed by the DB QPAMs. Therefore, Section I(i)
of this proposed exemption requires that each DB QPAM submits to an
audit conducted annually by an independent auditor, who has been
prudently selected and who has appropriate technical training and
proficiency with ERISA and the Code, to evaluate the adequacy of, and
the DB QPAM's compliance with, the Policies and Training described
herein. The audit requirement must be incorporated in the Policies.
Each annual audit must cover a consecutive twelve month period and must
be completed no later than six (6) months after the period to which the
audit applies. The first twelve-month audit period hereunder begins on
the effective date of this proposed five-year exemption.
The audit condition requires that, to the extent necessary for the
auditor, in its sole opinion, to complete its audit and comply with the
conditions for relief described herein, and as permitted by law, each
DB QPAM and, if applicable, Deutsche Bank, will grant the auditor
unconditional access to its business, including, but not limited to:
Its computer systems; business records; transactional data; workplace
locations; training materials; and personnel. The auditor's engagement
must specifically require the auditor to determine whether each DB QPAM
has complied with the Policies and Training conditions described
herein, and must further require the auditor to test each DB QPAM's
operational compliance with the Policies and Training. On or before the
end of the relevant period described in Section I(i)(1) for completing
the audit, the auditor must issue a written report (the Audit Report)
to Deutsche Bank and the DB QPAM to which the audit applies that
describes the procedures performed by the auditor during the course of
its examination. The Audit Report must include the auditor's specific
determinations regarding: The adequacy of the DB QPAM's Policies and
Training; the DB QPAM's compliance with the Policies and Training; the
need, if any, to strengthen such Policies and Training; and any
instance of the respective DB QPAM's noncompliance with the written
Policies and Training.
Any determination by the auditor regarding the adequacy of the
Policies and Training and the auditor's recommendations (if any) with
respect to strengthening the Policies and Training of the respective DB
QPAM must be promptly addressed by such DB QPAM, and any action taken
by such DB QPAM to address such recommendations must be included in an
addendum to the Audit Report. Any determination by the auditor that the
respective DB QPAM has implemented, maintained, and followed sufficient
Policies and Training must not be based solely or in substantial part
on an absence of evidence indicating noncompliance. In this last
regard, any finding that the DB QPAM has complied with the requirements
under this subsection must be based on evidence that demonstrates the
DB QPAM has actually implemented, maintained, and followed the Policies
and Training required by this five-year exemption. Finally, the Audit
Report must address the adequacy of the Annual Review required under
this exemption and the resources provided to the Compliance officer in
connection with such Annual Review. Furthermore, the auditor must
notify the respective DB QPAM of any
[[Page 83414]]
instance of noncompliance identified by the auditor within five (5)
business days after such noncompliance is identified by the auditor,
regardless of whether the audit has been completed as of that date.
This five-year exemption requires that certain senior personnel of
Deutsche Bank review the Audit Report, make certifications, and take
various corrective actions. In this regard, the General Counsel, or one
of the three most senior executive officers of the DB QPAM to which the
Audit Report applies, must certify in writing, under penalty of
perjury, that the officer has reviewed the Audit Report and this
exemption; addressed, corrected, or remedied any inadequacy identified
in the Audit Report; and determined that the Policies and Training in
effect at the time of signing are adequate to ensure compliance with
the conditions of this proposed five-year exemption and with the
applicable provisions of ERISA and the Code. The Risk Committee of
Deutsche Bank's Board of Directors is provided a copy of each Audit
Report; and a senior executive officer with a direct reporting line to
the highest ranking legal compliance officer of Deutsche Bank must
review the Audit Report for each DB QPAM and must certify in writing,
under penalty of perjury, that such officer has reviewed each Audit
Report.
In order to create a more transparent record in the event that the
proposed relief is granted, each DB QPAM must provide its certified
Audit Report to the Department no later than 45 days following its
completion. The Audit Report will be part of the public record
regarding this five-year exemption. Furthermore, each DB QPAM must make
its Audit Report unconditionally available for examination by any duly
authorized employee or representative of the Department, other relevant
regulators, and any fiduciary of an ERISA-covered plan or IRA, the
assets of which are managed by such DB QPAM. Additionally, each DB QPAM
and the auditor must submit to the Department any engagement
agreement(s) entered into pursuant to the engagement of the auditor
under this exemption; and any engagement agreement entered into with
any other entity retained in connection with such QPAM's compliance
with the Training or Policies conditions of this proposed exemption, no
later than six (6) months after the effective date of this five-year
exemption (and one month after the execution of any agreement
thereafter). Finally, if the exemption is granted, the auditor must
provide the Department, upon request, all of the workpapers created and
utilized in the course of the audit, including, but not limited to: The
audit plan; audit testing; identification of any instance of
noncompliance by the relevant DB QPAM; and an explanation of any
corrective or remedial action taken by the applicable DB QPAM.
In order to enhance oversight of the compliance with the exemption,
Deutsche Bank must notify the Department at least 30 days prior to any
substitution of an auditor, and Deutsche Bank must demonstrate to the
Department's satisfaction that any new auditor is independent of
Deutsche Bank, experienced in the matters that are the subject of the
exemption, and capable of making the determinations required of this
exemption.
66. Contractual Obligations. This five-year exemption requires DB
QPAMs to enter into certain contractual obligations in connection with
the provision of services to their clients. It is the Department's view
that the condition in Section I(j) is essential to the Department's
ability to make its findings that the proposed five-year exemption is
protective of the rights of the participants and beneficiaries of
ERISA-covered plan and IRA clients. In this regard, effective as of the
effective date of this five-year exemption with respect to any
arrangement, agreement, or contract between a DB QPAM and an ERISA-
covered plan or IRA for which a DB QPAM provides asset management or
other discretionary fiduciary services, each DB QPAM agrees and
warrants: To comply with ERISA and the Code, as applicable with respect
to such ERISA-covered plan or IRA; to refrain from engaging in
prohibited transactions that are not otherwise exempt (and to promptly
correct any inadvertent prohibited transactions); to comply with the
standards of prudence and loyalty set forth in section 404 of ERISA
with respect to each such ERISA-covered plan and IRA; and to indemnify
and hold harmless the ERISA-covered plan and IRA for any damages
resulting from a DB QPAM's violation of applicable laws, a DB QPAM's
breach of contract, or any claim brought in connection with the failure
of such DB QPAM to qualify for the exemptive relief provided by PTE 84-
14 as a result of a violation of Section I(g) of PTE 84-14 other than
the Convictions. Furthermore, DB QPAMs must agree not to require (or
otherwise cause) the ERISA-covered plan or IRA to waive, limit, or
qualify the liability of the DB QPAM for violating ERISA or the Code or
engaging in prohibited transactions; not to require the ERISA-covered
plan or IRA (or sponsor of such ERISA-covered plan or beneficial owner
of such IRA) to indemnify the DB QPAM for violating ERISA or engaging
in prohibited transactions, except for violations or prohibited
transactions caused by an error, misrepresentation, or misconduct of a
plan fiduciary or other party hired by the plan fiduciary who is
independent of Deutsche Bank; not to restrict the ability of such
ERISA-covered plan or IRA to terminate or withdraw from its arrangement
with the DB QPAM (including any investment in a separately managed
account or pooled fund subject to ERISA and managed by such QPAM), with
the exception of reasonable restrictions, appropriately disclosed in
advance, that are specifically designed to ensure equitable treatment
of all investors in a pooled fund in the event such withdrawal or
termination may have adverse consequences for all other investors as a
result of an actual lack of liquidity of the underlying assets,
provided that such restrictions are applied consistently and in like
manner to all such investors; not to impose any fees, penalties, or
charges for such termination or withdrawal with the exception of
reasonable fees, appropriately disclosed in advance, that are
specifically designed to prevent generally recognized abusive
investment practices or specifically designed to ensure equitable
treatment of all investors in a pooled fund in the event such
withdrawal or termination may have adverse consequences for all other
investors, provided that such fees are applied consistently and in like
manner to all such investors; and not to include exculpatory provisions
disclaiming or otherwise limiting liability of the DB QPAM for a
violation of such agreement's terms, except for liability caused by an
error, misrepresentation, or misconduct of a plan fiduciary or other
party hired by the plan fiduciary who is independent of Deutsche Bank.
Within four (4) months of the effective date of this proposed five-
year exemption, each DB QPAM will provide a notice of its obligations
under this Section I(j) to each ERISA-covered plan and IRA for which a
DB QPAM provides asset management or other discretionary fiduciary
services. For all other prospective ERISA-covered plan and IRA clients
for which a DB QPAM provides asset management or discretionary other
fiduciary services, the DB QPAM will agree in writing to its
obligations under this Section I(j) in an updated investment management
agreement or advisory agreement between the DB QPAM and such clients or
other written contractual agreement.
67. Notice Requirements. The proposed exemption contains extensive
notice requirements, some of which
[[Page 83415]]
extend not only to ERISA-covered plan and IRA clients of DB QPAMs, but
which also apply to the non-Plan clients of DB QPAMs. In this regard,
the Department understands that many firms may promote their ``QPAM''
designation in order to earn asset management business, including
business from non-ERISA plans. Therefore, in order to fully inform any
clients that may have retained DB QPAMs as asset managers because such
DB QPAMs have represented themselves as able to rely on PTE 84-14, the
Department has determined to condition exemptive relief upon the
following notice requirements.
Within fifteen (15) days of the publication of this proposed five-
year exemption in the Federal Register, each DB QPAM will provide a
notice of the proposed five-year exemption, along with a separate
summary describing the facts that led to the Convictions (the Summary),
which have been submitted to the Department, and a prominently
displayed statement (the Statement) that each Conviction separately
results in a failure to meet a condition in PTE 84-14, to each sponsor
of an ERISA-covered plan and each beneficial owner of an IRA for which
a DB QPAM provides asset management or other discretionary fiduciary
services, or the sponsor of an investment fund in any case where a DB
QPAM acts only as a sub-advisor to the investment fund in which such
ERISA-covered plan and IRA invests. In the event that this proposed
five-year exemption is granted, the Federal Register copy of the notice
of final five-year exemption must be delivered to such clients within
sixty (60) days of its publication in the Federal Register, and may be
delivered electronically (including by an email that has a link to the
exemption). Any prospective clients for which a DB QPAM provides asset
management or other discretionary fiduciary services must receive the
proposed and final five-year exemptions with the Summary and the
Statement prior to, or contemporaneously with, the client's receipt of
a written asset management agreement or other contractual agreement
from the DB QPAM.
In addition, each DB QPAM will provide a Federal Register copy of
the proposed five-year exemption, a Federal Register copy of the final
five-year exemption; the Summary; and the Statement to each: (A)
Current Non-Plan Client within four (4) months of the effective date,
if any, of a final five-year exemption; and (B) Future Non-Plan Client
prior to, or contemporaneously with, the client's receipt of a written
asset management agreement or other contractual agreement from the DB
QPAM. A ``Current Non-Plan Client'' is a client of a DB QPAM that: Is
neither an ERISA-covered plan nor an IRA; has assets managed by the DB
QPAM as of the effective date, if any, of a final five-year exemption;
and has received a written representation (qualified or otherwise) from
the DB QPAM that such DB QPAM qualifies as a QPAM or qualifies for the
relief provided by PTE 84-14. A ``Future Non-Plan Client'' is a
prospective client of a DB QPAM that is neither an ERISA-covered plan
nor an IRA that has assets managed by the DB QPAM after the effective
date, if any, of a final five-year exemption, and has received a
written representation (qualified or otherwise) from the DB QPAM that
such DB QPAM is a QPAM, or qualifies for the relief provided by PTE 84-
14.
68. This proposed five-year exemption also requires Deutsche Bank
to designate a senior compliance officer (the Compliance Officer) who
will be responsible for compliance with the Policies and Training
requirements described herein. The Compliance Officer will have several
obligations that it must comply with, as described in Section I(m)
above. These include conducting an annual review (the Annual Review) to
determine the adequacy and effectiveness of the implementation of the
Policies and Training; and preparing a written report for each Annual
Review (each, an Annual Report) that, among other things, summarizes
his or her material activities during the preceding year and sets forth
any instance of noncompliance discovered during the preceding year, and
any related corrective action. Each Annual Report must be provided to
appropriate corporate officers of Deutsche Bank and each DB QPAM to
which such report relates; the head of Compliance and the General
Counsel (or their functional equivalent) of the relevant DB QPAM; and
must be made unconditionally available to the independent auditor
described above.
69. Each DB QPAM must maintain records necessary to demonstrate
that the conditions of this proposed five-year exemption have been met,
for six (6) years following the date of any transaction for which such
DB QPAM relies upon the relief in the five-year exemption.
70. In order for DB QPAMs to rely on the exemption provided herein,
Deutsche Bank must have disgorged all of its profits generated by the
spot/futures-linked market manipulation activities of DSK personnel
that led to the Conviction against DSK entered on January 25, 2016, in
Seoul Central District Court.
71. The proposed five-year exemption mandates that, during the
effective period of this five-year exemption, Deutsche Bank discloses
to the Department any Deferred Prosecution Agreement (a DPA) or Non-
Prosecution Agreement (an NPA) entered into by Deutsche Bank or any of
its affiliates with the U.S Department of Justice, in connection with
conduct described in Section I(g) of PTE 84-14 or section 411 of ERISA.
Furthermore, Deutsche Bank must immediately provide the Department any
information requested by the Department, as permitted by law, regarding
the agreement and/or conduct and allegations that led to the agreement.
After review of the information, the Department may require Deutsche
Bank or its affiliates, as specified by the Department, to submit a new
application for the continued availability of relief as a condition of
continuing to rely on this exemption. In this regard, the QPAM (or
other party submitting the application) will have the burden of
justifying the relief sought in the application. If the Department
denies the relief requested in the new application, or does not grant
such relief within twelve (12) months of the application, the relief
described herein is revoked as of the date of denial or as of the
expiration of the twelve month period, whichever date is earlier.
72. Finally, each DB QPAM, in its agreements with ERISA-covered
plan and IRA clients, or in other written disclosures provided to
ERISA-covered plan and IRA clients, within 60 days prior to the initial
transaction upon which relief hereunder is relied, will clearly and
prominently inform the ERISA-covered plan or IRA client that the client
has the right to obtain copies of the QPAM's written Policies adopted
in accordance with this five-year exemption.
Statutory Findings--Administratively Feasible
73. Deutsche Bank represents that the proposed five-year exemption
is administratively feasible because it does not require any monitoring
by the Department but relies on an independent auditor to determine
that the exemption conditions are being complied with. Furthermore, the
requested five-year exemption does not require the Department's
oversight because, as a condition of this proposed five-year exemption,
neither DB Group Services nor DSK will provide any fiduciary or QPAM
services to ERISA-covered plans and IRAs.
[[Page 83416]]
74. Given the revised and new conditions described above, the
Department has tentatively determined that the five-year relief sought
by the Applicant satisfies the statutory requirements for an exemption
under section 408(a) of ERISA.
Notice to Interested Persons
Notice of the proposed exemption will be provided to all interested
persons within 15 days of the publication of the notice of proposed
five-year exemption in the Federal Register. The notice will be
provided to all interested persons in the manner described in Section
I(k)(1) of this proposed exemption and will contain the documents
described therein and a supplemental statement, as required pursuant to
29 CFR 2570.43(a)(2). The supplemental statement will inform interested
persons of their right to comment on and to request a hearing with
respect to the pending exemption. All written comments and/or requests
for a hearing must be received by the Department within forty five (45)
days of the date of publication of this proposed exemption in the
Federal Register. All comments will be made available to the public.
All comments will be made available to the public. Warning: If you
submit a comment, EBSA recommends that you include your name and other
contact information in the body of your comment, but DO NOT submit
information that you consider to be confidential, or otherwise
protected (such as Social Security number or an unlisted phone number)
or confidential business information that you do not want publicly
disclosed. All comments may be posted on the Internet and can be
retrieved by most Internet search engines.
FOR FURTHER INFORMATION CONTACT: Scott Ness of the Department,
telephone (202) 693-8561. (This is not a toll-free number.)
Citigroup, Inc. (Citigroup or the Applicant), Located in New York, New
York
[Application No. D-11909]
Proposed Five Year Exemption
The Department is considering granting a five-year exemption under
the authority of section 408(a) of the Act (or ERISA) and section
4975(c)(2) of the Code, and in accordance with the procedures set forth
in 29 CFR part 2570, subpart B (76 FR 66637, 66644, October 27,
2011).\123\
---------------------------------------------------------------------------
\123\ For purposes of this proposed five-year exemption,
references to section 406 of Title I of the Act, unless otherwise
specified, should be read to refer as well to the corresponding
provisions of section 4975 of the Code.
---------------------------------------------------------------------------
Section I: Covered Transactions
If the proposed five-year exemption is granted, certain asset
managers with specified relationships to Citigroup (the Citigroup
Affiliated QPAMs and the Citigroup Related QPAMs, as defined further in
Sections II(a) and II(b), respectively) will not be precluded from
relying on the exemptive relief provided by Prohibited Transaction
Class Exemption 84-14 (PTE 84-14 or the QPAM Exemption),\124\
notwithstanding the judgment of conviction against Citicorp (the
Conviction), as defined in Section II(c)),\125\ for engaging in a
conspiracy to: (1) Fix the price of, or (2) eliminate competition in
the purchase or sale of the euro/U.S. dollar currency pair exchanged in
the Foreign Exchange (FX) Spot Market, for a period of five years
beginning on the date the exemption is granted, provided the following
conditions are satisfied:
---------------------------------------------------------------------------
\124\ 49 FR 9494 (March 13, 1984), as corrected at 50 FR 41430
(October 10, 1985), as amended at 70 FR 49305 (August 23, 2005), and
as amended at 75 FR 38837 (July 6, 2010).
\125\ Section I(g) of PTE 84-14 generally provides that
``[n]either the QPAM nor any affiliate thereof . . . nor any owner .
. . of a 5 percent or more interest in the QPAM is a person who
within the 10 years immediately preceding the transaction has been
either convicted or released from imprisonment, whichever is later,
as a result of'' certain felonies including violation of the Sherman
Antitrust Act, Title 15 United States Code, Section 1.
---------------------------------------------------------------------------
(a) Other than a single individual who worked for a non-fiduciary
business within Citigroup's Markets and Securities Services business,
and who had no responsibility for, and exercised no authority in
connection with, the management of plan assets, the Citigroup
Affiliated QPAMs and the Citigroup Related QPAMs (including their
officers, directors, agents other than Citicorp, and employees of such
QPAMs who had responsibility for, or exercised authority in connection
with the management of plan assets) did not know of, did not have
reason to know of, or participate in the criminal conduct that is the
subject of the Conviction (for purposes of this paragraph (a),
``participate in'' includes the knowing or tacit approval of the
misconduct underlying the Conviction);
(b) Other than a single individual who worked for a non-fiduciary
business within Citigroup's Markets and Securities Services business,
and who had no responsibility for, and exercised no authority in
connection with, the management of plan assets, the Citigroup
Affiliated QPAMs and the Citigroup Related QPAMs (including their
officers, directors, and agents other than Citigroup, and employees of
such Citigroup QPAMs) did not receive direct compensation, or knowingly
receive indirect compensation in connection with the criminal conduct
that is the subject of the Conviction;
(c) The Citigroup Affiliated QPAMs will not employ or knowingly
engage any of the individuals that participated in the criminal conduct
that is the subject of the Conviction (for the purposes of this
paragraph (c), ``participated in'' includes the knowing or tacit
approval of the misconduct underlying Conviction);
(d) A Citigroup Affiliated QPAM will not use its authority or
influence to direct an ``investment fund'' (as defined in Section VI(b)
of PTE 84-14), that is subject to ERISA or the Code and managed by such
Citigroup Affiliated QPAM, to enter into any transaction with Citicorp
or the Markets and Securities Services business of Citigroup, or to
engage Citicorp or the Markets and Securities Services business of
Citigroup, to provide any service to such investment fund, for a direct
or indirect fee borne by such investment fund, regardless of whether
such transaction or service may otherwise be within the scope of relief
provided by an administrative or statutory exemption;
(e) Any failure of a Citigroup Affiliated QPAM or a Citigroup
Related QPAM to satisfy Section I(g) of PTE 84-14 arose solely from the
Conviction;
(f) A Citigroup Affiliated QPAM or a Citigroup Related QPAM did not
exercise authority over the assets of any plan subject to Part 4 of
Title I of ERISA (an ERISA-covered plan) or section 4975 of the Code
(an IRA) in a manner that it knew or should have known would: Further
the criminal conduct that is the subject of the Conviction; or cause
the Citigroup Affiliated QPAM or the Citigroup Related QPAM or its
affiliates or related parties to directly or indirectly profit from the
criminal conduct that is the subject of the Conviction;
(g) Citicorp and the Markets and Securities Services business of
Citigroup will not provide discretionary asset management services to
ERISA-covered plans or IRAs, or otherwise act as a fiduciary with
respect to ERISA-covered plan or IRA assets;
(h)(1) Within four (4) months of the Conviction, each Citigroup
Affiliated QPAM must develop, implement, maintain, and follow written
policies and procedures (the Policies) requiring and reasonably
designed to ensure that:
(i) The asset management decisions of the Citigroup Affiliated QPAM
are
[[Page 83417]]
conducted independently of the corporate management and business
activities, including the corporate management and business activities
of the Markets and Securities Services business of Citigroup;
(ii) The Citigroup Affiliated QPAM fully complies with ERISA's
fiduciary duties, and with ERISA and the Code's prohibited transaction
provisions, and does not knowingly participate in any violation of
these duties and provisions with respect to ERISA-covered plans and
IRAs;
(iii) The Citigroup Affiliated QPAM does not knowingly participate
in any other person's violation of ERISA or the Code with respect to
ERISA-covered plans and IRAs;
(iv) Any filings or statements made by the Citigroup Affiliated
QPAM to regulators, including, but not limited to, the Department, the
Department of the Treasury, the Department of Justice, and the Pension
Benefit Guaranty Corporation, on behalf of ERISA-covered plans or IRAs,
are materially accurate and complete, to the best of such QPAM's
knowledge at that time;
(v) The Citigroup Affiliated QPAM does not make material
misrepresentations or omit material information in its communications
with such regulators with respect to ERISA-covered plans or IRAs, or
make material misrepresentations or omit material information in its
communications with ERISA-covered plans and IRA clients;
(vi) The Citigroup Affiliated QPAM complies with the terms of this
five-year exemption; and
(vii) Any violation of, or failure to comply with an item in
subparagraphs (ii) through (vi), is corrected promptly upon discovery,
and any such violation or compliance failure not promptly corrected is
reported, upon the discovery of such failure to promptly correct, in
writing, to appropriate corporate officers, the head of compliance, and
the General Counsel (or their functional equivalent) of the relevant
Citigroup Affiliated QPAM, the independent auditor responsible for
reviewing compliance with the Policies, and an appropriate fiduciary of
any affected ERISA-covered plan or IRA that is independent of
Citigroup; however, with respect to any ERISA-covered plan or IRA
sponsored by an ``affiliate'' (as defined in Section VI(d) of PTE 84-
14) of Citigroup or beneficially owned by an employee of Citigroup or
its affiliates, such fiduciary does not need to be independent of
Citigroup. A Citigroup Affiliated QPAM will not be treated as having
failed to develop, implement, maintain, or follow the Policies,
provided that it corrects any instance of noncompliance promptly when
discovered, or when it reasonably should have known of the
noncompliance (whichever is earlier), and provided that it adheres to
the reporting requirements set forth in this subparagraph (vii);
(2) Within four (4) months of the date of the Conviction, each
Citigroup Affiliated QPAM must develop and implement a program of
training (the Training), conducted at least annually, for all relevant
Citigroup Affiliated QPAM asset/portfolio management, trading, legal,
compliance, and internal audit personnel. The Training must:
(i) Be set forth in the Policies and, at a minimum, cover the
Policies, ERISA and Code compliance (including applicable fiduciary
duties and the prohibited transaction provisions), ethical conduct, the
consequences for not complying with the conditions of this five-year
exemption (including any loss of exemptive relief provided herein), and
prompt reporting of wrongdoing; and
(ii) Be conducted by an independent professional who has been
prudently selected and who has appropriate technical and training and
proficiency with ERISA and the Code;
(i)(1) Each Citigroup Affiliated QPAM submits to an audit conducted
annually by an independent auditor, who has been prudently selected and
who has appropriate technical training and proficiency with ERISA and
the Code, to evaluate the adequacy of, and the Citigroup Affiliated
QPAM's compliance with, the Policies and Training described herein. The
audit requirement must be incorporated in the Policies. Each annual
audit must cover a consecutive twelve (12) month period starting with
the twelve (12) month period that begins on the effective date of the
five-year exemption, and each annual audit must be completed no later
than six (6) months after the period to which the audit applies;
(2) To the extent necessary for the auditor, in its sole opinion,
to complete its audit and comply with the conditions for relief
described herein, and as permitted by law, each Citigroup Affiliated
QPAM and, if applicable, Citigroup, will grant the auditor
unconditional access to its business, including, but not limited to:
Its computer systems; business records; transactional data; workplace
locations; training materials; and personnel;
(3) The auditor's engagement must specifically require the auditor
to determine whether each Citigroup Affiliated QPAM has developed,
implemented, maintained, and followed the Policies in accordance with
the conditions of this five-year exemption, and has developed and
implemented the Training, as required herein;
(4) The auditor's engagement must specifically require the auditor
to test each Citigroup Affiliated QPAM's operational compliance with
the Policies and Training. In this regard, the auditor must test a
sample of each QPAM's transactions involving ERISA-covered plans and
IRAs sufficient in size and nature to afford the auditor a reasonable
basis to determine the operational compliance with the Policies and
Training;
(5) For each audit, on or before the end of the relevant period
described in Section I(i)(1) for completing the audit, the auditor must
issue a written report (the Audit Report) to Citigroup and the
Citigroup Affiliated QPAM to which the audit applies that describes the
procedures performed by the auditor during the course of its
examination. The Audit Report must include the auditor's specific
determinations regarding:
(i) The adequacy of the Citigroup Affiliated QPAM's Policies and
Training; the Citigroup Affiliated QPAM's compliance with the Policies
and Training; the need, if any, to strengthen such Policies and
Training; and any instance of the respective Citigroup Affiliated
QPAM's noncompliance with the written Policies and Training described
in Section I(h) above. Any determination by the auditor regarding the
adequacy of the Policies and Training and the auditor's recommendations
(if any) with respect to strengthening the Policies and Training of the
respective Citigroup Affiliated QPAM must be promptly addressed by such
Citigroup Affiliated QPAM, and any action taken by such Citigroup
Affiliated QPAM to address such recommendations must be included in an
addendum to the Audit Report (which addendum is completed prior to the
certification described in Section I(i)(7) below). Any determination by
the auditor that the respective Citigroup Affiliated QPAM has
implemented, maintained, and followed sufficient Policies and Training
must not be based solely or in substantial part on an absence of
evidence indicating noncompliance. In this last regard, any finding
that the Citigroup Affiliated QPAM has complied with the requirements
under this subsection must be based on evidence that demonstrates the
Citigroup Affiliated QPAM has actually implemented, maintained, and
followed the Policies and Training required by this five-year
exemption. Furthermore, the auditor must not rely on the Annual
[[Page 83418]]
Report created by the compliance officer (the Compliance Officer) as
described in Section I(m) below in lieu of independent determinations
and testing performed by the auditor as required by Section I(i)(3) and
(4) above; and
(ii) The adequacy of the Annual Review described in Section I(m)
and the resources provided to the Compliance Officer in connection with
such Annual Review;
(6) The auditor must notify the respective Citigroup Affiliated
QPAM of any instance of noncompliance identified by the auditor within
five (5) business days after such noncompliance is identified by the
auditor, regardless of whether the audit has been completed as of that
date;
(7) With respect to each Audit Report, the General Counsel, or one
of the three most senior executive officers of the Citigroup Affiliated
QPAM to which the Audit Report applies, must certify in writing, under
penalty of perjury, that the officer has reviewed the Audit Report and
this exemption; addressed, corrected, or remedied any inadequacy
identified in the Audit Report; and determined that the Policies and
Training in effect at the time of signing are adequate to ensure
compliance with the conditions of this proposed five-year exemption,
and with the applicable provisions of ERISA and the Code;
(8) The Risk Committee of Citigroup's Board of Directors is
provided a copy of each Audit Report; and a senior executive officer
with a direct reporting line to the highest ranking legal compliance
officer of Citigroup must review the Audit Report for each Citigroup
Affiliated QPAM and must certify in writing, under penalty of perjury,
that such officer has reviewed each Audit Report;
(9) Each Citigroup Affiliated QPAM provides its certified Audit
Report, by regular mail to: The Department's Office of Exemption
Determinations (OED), 200 Constitution Avenue NW., Suite 400,
Washington, DC 20210, or by private carrier to: 122 C Street NW., Suite
400, Washington, DC 20001-2109, no later than 30 days following its
completion. The Audit Report will be part of the public record
regarding this five-year exemption. Furthermore, each Citigroup
Affiliated QPAM must make its Audit Report unconditionally available
for examination by any duly authorized employee or representative of
the Department, other relevant regulators, and any fiduciary of an
ERISA-covered plan or IRA, the assets of which are managed by such
Citigroup Affiliated QPAM;
(10) Each Citigroup Affiliated QPAM and the auditor must submit to
OED: (A) Any engagement agreement(s) entered into pursuant to the
engagement of the auditor under this five-year exemption; and (B) any
engagement agreement entered into with any other entity retained in
connection with such QPAM's compliance with the Training or Policies
conditions of this five-year exemption, no later than six (6) months
after the Conviction Date (and one month after the execution of any
agreement thereafter);
(11) The auditor must provide OED, upon request, all of the
workpapers created and utilized in the course of the audit, including,
but not limited to: The audit plan; audit testing; identification of
any instance of noncompliance by the relevant Citigroup Affiliated
QPAM; and an explanation of any corrective or remedial action taken by
the applicable Citigroup Affiliated QPAM; and
(12) Citigroup must notify the Department at least thirty (30) days
prior to any substitution of an auditor, except that no such
replacement will meet the requirements of this paragraph unless and
until Citigroup demonstrates to the Department's satisfaction that such
new auditor is independent of Citigroup, experienced in the matters
that are the subject of the exemption, and capable of making the
determinations required of this exemption;
(j) Effective as of the effective date of this five-year exemption,
with respect to any arrangement, agreement, or contract between a
Citigroup Affiliated QPAM and an ERISA-covered plan or IRA for which a
Citigroup Affiliated QPAM provides asset management or other
discretionary fiduciary services, each Citigroup Affiliated QPAM agrees
and warrants:
(1) To comply with ERISA and the Code, as applicable with respect
to such ERISA-covered plan or IRA; to refrain from engaging in
prohibited transactions that are not otherwise exempt (and to promptly
correct any inadvertent prohibited transactions); and to comply with
the standards of prudence and loyalty set forth in section 404 of
ERISA, as applicable, with respect to each such ERISA-covered plan and
IRA;
(2) To indemnify and hold harmless the ERISA-covered plan or IRA
for any damages resulting from a Citigroup Affiliated QPAM's violation
of applicable laws, a Citigroup Affiliated QPAM's breach of contract,
or any claim brought in conection with the failure of such Citigroup
Affiliated QPAM to qualify for the exemptive relief provided by PTE 84-
14 as a result of a violation of Section I(g) of PTE 84-14 other than
the Conviction;
(3) Not to require (or otherwise cause) the ERISA-covered plan or
IRA to waive, limit, or qualify the liability of the Citigroup
Affiliated QPAM for violating ERISA or the Code or engaging in
prohibited transactions;
(4) Not to require the ERISA-covered plan or IRA (or sponsor of
such ERISA-covered plan or beneficial owner of such IRA) to indemnify
the Citigroup Affiliated QPAM for violating ERISA or engaging in
prohibited transactions, except for violations or prohibited
transactions caused by an error, misrepresentation, or misconduct of a
plan fiduciary or other party hired by the plan fiduciary who is
independent of Citigroup, and its affiliates;
(5) Not to restrict the ability of such ERISA-covered plan or IRA
to terminate or withdraw from its arrangement with the Citigroup
Affiliated QPAM (including any investment in a separately managed
account or pooled fund subject to ERISA and managed by such QPAM), with
the exception of reasonable restrictions, appropriately disclosed in
advance, that are specifically designed to ensure equitable treatment
of all investors in a pooled fund in the event such withdrawal or
termination may have adverse consequences for all other investors as a
result of an actual lack of liquidity of the underlying assets,
provided that such restrictions are applied consistently and in like
manner to all such investors;
(6) Not to impose any fees, penalties, or charges for such
termination or withdrawal with the exception of reasonable fees,
appropriately disclosed in advance, that are specifically designed to
prevent generally recognized abusive investment practices or
specifically designed to ensure equitable treatment of all investors in
a pooled fund in the event such withdrawal or termination may have
adverse consequences for all other investors, provided that such fees
are applied consistently and in like manner to all such investors;
(7) Not to include exculpatory provisions disclaiming or otherwise
limiting liability of the Citigroup Affiliated QPAM for a violation of
such agreement's terms, except for liability caused by an error,
misrepresentation, or misconduct of a plan fiduciary or other party
hired by the plan fiduciary which is independent of Citigroup, and its
affiliates; and
(8) Within four (4) months of the date of the Conviction, each
Citigroup Affiliated QPAM must provide a notice of its obligations
under this Section I(j) to each ERISA-covered plan and IRA for which a
Citigroup Affiliated QPAM
[[Page 83419]]
provides asset management or other discretionary fiduciary services.
For all other prospective ERISA-covered plan and IRA clients for which
a Citigroup Affiliated QPAM provides asset management or other
discretionary services, the Citigroup Affiliated QPAM will agree in
writing to its obligations under this Section I(j) in an updated
investment management agreement between the Citigroup Affiliated QPAM
and such clients or other written contractual agreement;
(k)(1) Notice to ERISA-covered plan and IRA clients. Within fifteen
(15) days of the publication of this proposed five-year exemption in
the Federal Register, each Citigroup Affiliated QPAM will provide a
notice of the proposed five-year exemption, along with a separate
summary describing the facts that led to the Conviction (the Summary),
which have been submitted to the Department, and a prominently
displayed statement (the Statement) that the Conviction results in a
failure to meet a condition in PTE 84-14, to each sponsor of an ERISA-
covered plan and each beneficial owner of an IRA for which a Citigroup
Affiliated QPAM provides asset management or other discretionary
services, or the sponsor of an investment fund in any case where a
Citigroup Affiliated QPAM acts only as a sub-advisor to the investment
fund in which such ERISA-covered plan and IRA invests. In the event
that this proposed five-year exemption is granted, the Federal Register
copy of the notice of final five-year exemption must be delivered to
such clients within sixty (60) days of its publication in the Federal
Register, and may be delivered electronically (including by an email
that has a link to the exemption). Any prospective clients for which a
Citigroup Affiliated QPAM provides asset management or other
discretionary services must receive the proposed and final five-year
exemptions with the Summary and the Statement prior to, or
contemporaneously with, the client's receipt of a written asset
management agreement from the Citigroup Affiliated QPAM; and
(2) Notice to Non-Plan Clients. Each Citigroup Affiliated QPAM will
provide a Federal Register copy of the proposed five-year exemption, a
Federal Register copy of the final five-year exemption; the Summary;
and the Statement to each: (A) Current Non-Plan Client within four (4)
months of the effective date, if any, of a final five-year exemption;
and (B) Future Non-Plan Client prior to, or contemporaneously with, the
client's receipt of a written asset management agreement from the
Citigroup Affiliated QPAM. For purposes of this subparagraph (2), a
Current Non-Plan Client means a client of a Citigroup Affiliated QPAM
that: Is neither an ERISA-covered plan nor an IRA; has assets managed
by the Citigroup Affiliated QPAM as of the effective date, if any, of a
final five-year exemption; and has received a written representation
(qualified or otherwise) from the Citigroup Affiliated QPAM that such
Citigroup Affiliated QPAM qualifies as a QPAM or qualifies for the
relief provided by PTE 84-14. For purposes of this subparagraph (2), a
Future Non-Plan Client means a client of a Citigroup Affiliated QPAM
that is neither an ERISA-covered plan nor an IRA that, has assets
managed by the Citigroup Affiliated QPAM as of the effective date, if
any, of a final five-year exemption, and has received a written
representation (qualified or otherwise) from the Citigroup Affiliated
QPAM that such Citigroup Affiliated QPAM is a QPAM, or qualifies for
the relief provided by PTE 84-14;
(l) The Citigroup Affiliated QPAMs must comply with each condition
of PTE 84-14, as amended, with the sole exception of the violation of
Section I(g) of PTE 84-14 that is attributable to the Conviction;
(m)(1) Citigroup designates a senior compliance officer (the
Compliance Officer) who will be responsible for compliance with the
Policies and Training requirements described herein. The Compliance
Officer must conduct an annual review (the Annual Review) to determine
the adequacy and effectiveness of the implementation of the Policies
and Training. With respect to the Compliance Officer, the following
conditions must be met:
(i) The Compliance Officer must be a legal professional with
extensive experience with, and knowledge of, the regulation of
financial services and products, including under ERISA and the Code;
and
(ii) The Compliance Officer must have a direct reporting line to
the highest-ranking corporate officer in charge of legal compliance
that is independent of Citigroup's other business lines;
(2) With respect to each Annual Review, the following conditions
must be met:
(i) The Annual Review includes a review of: Any compliance matter
related to the Policies or Training that was identified by, or reported
to, the Compliance Officer or others within the compliance and risk
control function (or its equivalent) during the previous year; any
material change in the business activities of the Citigroup Affiliated
QPAMs; and any change to ERISA, the Code, or regulations related to
fiduciary duties and the prohibited transaction provisions that may be
applicable to the activities of the Citigroup Affiliated QPAMs;
(ii) The Compliance Officer prepares a written report for each
Annual Review (each, an Annual Report) that (A) summarizes his or her
material activities during the preceding year; (B) sets forth any
instance of noncompliance discovered during the preceding year, and any
related corrective action; (C) details any change to the Policies or
Training to guard against any similar instance of noncompliance
occurring again; and (D) makes recommendations, as necessary, for
additional training, procedures, monitoring, or additional and/or
changed processes or systems, and management's actions on such
recommendations;
(iii) In each Annual Report, the Compliance Officer must certify in
writing that to his or her knowledge: (A) The report is accurate; (B)
the Policies and Training are working in a manner which is reasonably
designed to ensure that the Policies and Training requirements
described herein are met; (C) any known instance of noncompliance
during the preceding year and any related correction taken to date have
been identified in the Annual Report; (D) the Citigroup Affiliated
QPAMs have complied with the Policies and Training in all respects,
and/or corrected any instances of noncompliance in accordance with
Section I(h) above; and (E) Citigroup has provided the Compliance
Officer with adequate resources, including, but not limited to,
adequate staffing;
(iv) Each Annual Report must be provided to appropriate corporate
officers of Citigroup and each Citigroup Affiliated QPAM to which such
report relates; the head of compliance and the General Counsel (or
their functional equivalent) of the relevant Citigroup Affiliated QPAM;
and must be made unconditionally available to the independent auditor
described in Section I(i) above;
(v) Each Annual Review, including the Compliance Officer's written
Annual Report, must be completed at least three (3) months in advance
of the date on which each audit described in Section I(i) is scheduled
to be completed;
(n) Each Citigroup Affiliated QPAM will maintain records necessary
to demonstrate that the conditions of this exemption have been met, for
six (6) years following the date of any transaction for which such
Citigroup Affiliated QPAM relies upon the relief in the exemption;
[[Page 83420]]
(o) During the effective period of the five-year exemption,
Citigroup: (1) Immediately discloses to the Department any Deferred
Prosecution Agreement (a DPA) or a Non-Prosecution Agreement (an NPA)
with the U.S. Department of Justice, entered into by Citigroup or any
of its affiliates in connection with conduct described in Section I(g)
of PTE 84-14 or section 411 of ERISA; and
(2) Immediately provides the Department any information requested
by the Department, as permitted by law, regarding the agreement and/or
conduct and allegations that led to the agreement. The Department may,
following its review of that information, require Citigroup or a party
specified by the Department, to submit a new application for the
continued availability of relief as a condition of continuing to rely
on this exemption. If the Department denies the relief requested in
that application, or does not grant such relief within twelve (12)
months of the application, the relief described herein would be revoked
as of the date of denial or as of the expiration of the twelve month
period, whichever date is earlier;
(p) Each Citigroup Affiliated QPAM, in its agreements with ERISA-
covered plan and IRA clients, or in other written disclosures provided
to ERISA-covered plan and IRA clients, within 60 days prior to the
initial transaction upon which relief hereunder is relied, and then at
least once annually, will clearly and prominently: Inform the ERISA-
covered plan and IRA client that the client has the right to obtain
copies of the QPAM's written Policies adopted in accordance with the
exemption; and
(q) A Citigroup Affiliated QPAM or a Citigroup Related QPAM will
not fail to meet the terms of this exemption, solely because a
different Citigroup Affiliated QPAM or Citigroup Related QPAM fails to
satisfy a condition for relief described in Sections I(c), (d), (h),
(i), (j), (k), (l), (n) and (p).
Section II: Definitions
(a) The term ``Citigroup Affiliated QPAM'' means a ``qualified
professional asset manager'' (as defined in section VI(a) \126\ of PTE
84-14) that relies on the relief provided by PTE 84-14 and with respect
to which Citigroup is a current or future ``affiliate'' (as defined in
section VI(d)(1) of PTE 84-14). The term ``Citigroup Affiliated QPAM''
excludes the parent entity, Citigroup and Citigroup's Banking Division.
---------------------------------------------------------------------------
\126\ In general terms, a QPAM is an independent fiduciary that
is a bank, savings and loan association, insurance company, or
investment adviser that meets certain equity or net worth
requirements and other licensure requirements, and has acknowledged
in a written management agreement that it is a fiduciary with
respect to each plan that has retained the QPAM.
---------------------------------------------------------------------------
(b) The term ``Citigroup Related QPAM'' means any current or future
``qualified professional asset manager'' (as defined in section VI(a)
of PTE 84-14) that relies on the relief provided by PTE 84-14, and with
respect to which Citigroup owns a direct or indirect five percent or
more interest, but with respect to which Citigroup is not an
``affiliate'' (as defined in Section VI(d)(1) of PTE 84-14).
(c) The terms ``ERISA-covered plan'' and ``IRA'' mean,
respectively, a plan subject to Part 4 of Title I of ERISA and a plan
subject to section 4975 of the Code;
(d) The term ``Citicorp'' means Citicorp, Inc., the parent entity,
but does not include any subsidiaries or other affiliates;
(e) The term ``Conviction'' means the judgment of conviction
against Citigroup for violation of the Sherman Antitrust Act, 15 U.S.C.
1, which is scheduled to be entered in the District Court for the
District of Connecticut (the District Court) (Case Number 3:15-cr-78-
SRU), in connection with Citigroup, through one of its euro/U.S. dollar
(EUR/USD) traders, entering into and engaging in a combination and
conspiracy to fix, stabilize, maintain, increase or decrease the price
of, and rig bids and offers for, the EUR/USD currency pair exchanged in
the FX spot market by agreeing to eliminate competition in the purchase
and sale of the EUR/USD currency pair in the United States and
elsewhere. For all purposes under this five-year, ``conduct'' of any
person or entity that is the ``subject of [a] Conviction'' encompasses
any conduct of Citigroup and/or their personnel, that is described in
the Plea Agreement, (including the Factual Statement), and other
official regulatory or judicial factual findings that are a part of
this record; and
(f) The term ``Conviction Date'' means the date that a judgment of
Conviction against Citicorp is entered by the District Court in
connection with the Conviction.
Effective Date: This proposed five-year exemption, will be
effective beginning on the date of publication of such grant in the
Federal Register and ending on the date that is five years thereafter.
Should the Applicant wish to extend the effective period of exemptive
relief provided by this proposed five-year exemption, the Applicant
must submit another application for an exemption. In this regard, the
Department expects that, in connection with such application, the
Applicant should be prepared to demonstrate compliance with the
conditions for this exemption and that the Citigroup Affiliated QPAMs,
and those who may be in a position to influence their policies, have
maintained the high standard of integrity required by PTE 84-14.
Department's Comment: Concurrently with this proposed five-year
exemption, the Department is publishing a proposed one-year exemption
for Citigroup Affiliated QPAMs to continue to rely on PTE 84-14. That
one-year exemption is intended to allow the Department sufficient time,
including a longer comment period, to determine whether to grant this
five-year exemption. The proposed one-year exemption is designed to
protect ERISA-covered plans and IRAs from the potential costs and
losses, described below, that would be incurred if such Citigroup
Affiliated QPAMs were to suddenly lose their ability to rely on PTE 84-
14 as of the Conviction date.
The proposed five-year exemption would provide relief from certain
of the restrictions set forth in sections 406 and 407 of ERISA. No
relief from a violation of any other law would be provided by this
exemption, including any criminal conviction described herein.
The Department cautions that the relief in this proposed five-year
exemption would terminate immediately if, among other things, an entity
within the Citigroup corporate structure is convicted of a crime
described in Section I(g) of PTE 84-14 (other than the Conviction)
during the effective period of the exemption. While such an entity
could apply for a new exemption in that circumstance, the Department
would not be obligated to grant the exemption. The terms of this
proposed five-year exemption have been specifically designed to permit
plans to terminate their relationships in an orderly and cost effective
fashion in the event of an additional conviction or a determination
that it is otherwise prudent for a plan to terminate its relationship
with an entity covered by the proposed exemption.
Summary of Facts and Representations 127
---------------------------------------------------------------------------
\127\ The Summary of Facts and Representations is based on the
Applicant's representations, unless indicated otherwise.
---------------------------------------------------------------------------
Background
1. Citigroup is a global diversified financial services holding
company incorporated in Delaware and headquartered in New York, New
York. Citigroup and its affiliates provide
[[Page 83421]]
consumers, corporations, governments and institutions with a broad
range of financial products and services, including consumer banking
and credit, corporate and investment banking, securities brokerage,
trade and securities services and wealth management. Citigroup has
approximately 241,000 employees and operations in over 160 countries
and jurisdictions. As of December 31, 2014, Citigroup had approximately
$1.8 trillion of assets under management and held $889 billion in
deposits.
2. Citigroup currently operates, for management reporting purposes,
via two primary business segments which include: (a) Citigroup's Global
Consumer Banking businesses (GCB); and (b) Citigroup's Institutional
Clients Group (ICG).
GCB includes a global, full-service consumer franchise delivering a
wide array of retail banking, commercial banking, Citi-branded credit
cards and investment services through a network of local branches,
offices and electronic delivery systems. GCB had 3,280 branches in 35
countries around the world. For the year ended December 31, 2014, GCB
had $399 billion of average assets and $331 billion of average
deposits.
ICG provides a broad range of banking and financial products and
services to corporate, institutional, public sector and high-net-worth
clients in approximately 100 countries. ICG transacts with clients in
both cash instruments and derivatives, including fixed income, foreign
currency, equity and commodity products. ICG is divided into several
business lines including: (a) Citi Corporate and Investment Banking;
(b) Treasury and Trade Solutions; (c) Markets and Securities Services;
and (d) Citi Private Bank (CPB).
3. The Applicant represents that Citigroup has several affiliates
that provide investment management services.\128\ Citigroup provides
investment advisory services to clients world-wide through a number of
different programs offered by various businesses that are tailored to
meet the needs of its diverse clientele. Within the United States,
Citigroup offers its investment advisory programs primarily through the
following: (a) CPB and Citigroup's Global Consumers Group (GCG), acting
through Citigroup Global Markets Inc. (CGMI); and (b) Citibank, N.A.
(Citibank) and Citi Private Advisory, LLC (CPA) (collectively, the
Advisory Businesses). The Applicant represents that CPA and CGMI are
each investment advisers, registered under the Advisers Act. The
Applicant also represents that CPB, CGMI, Citibank, and CPA are QPAMs.
---------------------------------------------------------------------------
\128\ Section VI(d) of PTE 84-14 defines an ``affiliate'' of a
person, for purposes of Section I(g), as: (1) Any person directly or
indirectly through one or more intermediaries, controlling,
controlled by, or under common control with the person, (2) any
director of, relative of, or partner in, any such person, (3) any
corporation, partnership, trust or unincorporated enterprise of
which such person is an officer, director, or a 5 percent or more
partner or owner, and (4) any employee or officer of the person
who--(A) is a highly compensated employee (as defined in section
4975(e)(2)(H) of the Code) or officer (earning 10 percent or more of
the yearly wages of such person), or (B) has direct or indirect
authority, responsibility or control regarding the custody,
management or disposition of plan assets.
---------------------------------------------------------------------------
Within the United States, Citigroup's Advisory Businesses are
conducted within CPB and GCG. Together, CPB and GCG provide services to
over 44,000 customer advisory accounts with assets under management
totaling over $33 billion. Of these, there are over 20,000 accounts for
ERISA pension plans and individual retirement accounts (IRAs)
(collectively, Retirement Accounts), with assets under management of
approximately $3.8 billion.
Although each of the advisory programs offered by the Advisory
Businesses is unique, most utilize independent third-party managers on
a discretionary or nondiscretionary basis, as determined by the client.
Other programs such as Citi Investment Management (CIM), which operates
through both the CGMI and CPB business units, primarily provide advice
concerning the selection of individual securities for CPB clients.
CPB, GCG, CBNA, CGMI and their affiliates provide administrative,
management and/or technical services designed to implement and monitor
client's investment guidelines, and in certain nondiscretionary
programs, offer recommendations on investing and re-investing portfolio
assets for the client's consideration. CPB provides private banking
services, and offers its clients access to a broad array of products
and services available through bank and non-bank affiliates of
Citigroup. GCG services include U.S. and international retail banking,
U.S. consumer lending, international consumer finance, and commercial
finance. Citibank is a wholly-owned subsidiary of Citigroup and a
national banking association which provides fiduciary advisory
services.
4. CGMI is a wholly-owned subsidiary of Citigroup whose principal
activities include retail and institutional private client services
which include: (a) Advice with respect to financial markets; (b) the
execution of securities and commodities transactions as a broker or
dealer; (c) securities underwriting; (d) investment banking; (e)
investment management (including fiduciary and administrative
services); and (f) trading and holding securities and commodities for
its own account. CGMI holds a number of registrations, including
registration as an investment adviser, a securities broker-dealer, and
a futures commission merchant.
CPA is also a wholly-owned subsidiary of Citigroup and provides
advisory services to private investment funds that are organized to
invest primarily in other private investment funds advised by third-
party managers.
The Applicant represents that trading decisions and investment
strategy of current Citigroup Affiliated QPAMs for their clients is not
shared with Citigroup employees outside of the Advisory Business, nor
do employees of the Advisory Business consult with other Citigroup
affiliates prior to making investment decisions on behalf of clients.
5. On May 20, 2015, the Applicant filed an application for
exemptive relief in connection with a conviction that would make the
relief in PTE 84-14 unavailable to any current or future Citigroup-
related investment managers. In this regard, the U.S. Department of
Justice (Department of Justice) conducted an investigation of certain
conduct and practices of Citigroup in the FX spot market. Thereafter,
Citicorp, a Delaware corporation that is a financial services holding
company and the direct parent company of Citibank, entered into a plea
agreement with the Department of Justice (the Plea Agreement), to be
approved by the U.S. District Court for the District of Connecticut
(the District Court), pursuant to which Citicorp has pleaded guilty to
one count of an antitrust violation of the Sherman Antitrust Act, 15
U.S.C. 1 (15 U.S.C. 1).
As set forth in the Plea Agreement, from at least December 2007 and
continuing to at least January 2013 (the Relevant Period), Citicorp,
through one London-based euro/U.S. dollar (EUR/USD) trader employed by
Citibank, entered into and engaged in a conspiracy to fix, stabilize,
maintain, increase or decrease the price of, and rig bids and offers
for, the EUR/USD currency pair exchanged in the FX spot market by
agreeing to eliminate competition in the purchase and sale of the EUR/
USD currency pair in the United States and elsewhere. The criminal
conduct that is the subject of the Conviction included near daily
conversations, some of which were in code, in an exclusive electronic
chat room used by certain EUR/USD traders, including the EUR/USD trader
[[Page 83422]]
employed by Citibank. The criminal conduct that is the subject of the
Conviction forms the basis for the Department of Justice's antitrust
charge that Citicorp violated 15 U.S.C. 1.
Under the terms of the Plea Agreement, the Department of Justice
and Citicorp have agreed that the District Court should impose a
sentence requiring Citicorp to pay a criminal fine of $925 million. The
Plea Agreement also provides for a three-year term of probation, with
conditions to include, among other things, Citigroup's continued
implementation of a compliance program designed to prevent and detect
the criminal conduct that is the subject of the Conviction throughout
its operations, as well as Citigroup's further strengthening of its
compliance and internal controls as required by other regulatory or
enforcement agencies that have addressed the criminal conduct that is
the subject of the Conviction, including: (a) The U.S. Commodity
Futures Trading Commission (the CFTC), pursuant to its settlement with
Citibank on November 11, 2014, requiring remedial measures to
strengthen the control framework governing Citigroup's FX trading
business; (b) the Office of the Comptroller of the Currency, pursuant
to its settlement with Citibank on November 11, 2014, requiring
remedial measures to improve the control framework governing
Citigroup's wholesale trading and benchmark activities; (c) the U.K.
Financial Conduct Authority (FCA), pursuant to its settlement with
Citibank on November 11, 2014; and (d) the U.S. Board of Governors of
the Federal Reserve System (FRB), pursuant to its settlement with
Citigroup entered into concurrently with the Plea Agreement with
Department of Justice, requiring remedial measures to improve
Citigroup's controls for FX trading and activities involving
commodities and interest rate products.
6. The Applicant states that in January 2016, Nigeria's Federal
Director of Public Prosecutions filed charges against a Nigerian
subsidiary of Citibank and fifteen individuals (some of whom are
current or former employees of that subsidiary) relating to specific
credit facilities provided to a certain customer in 2000 to finance the
import of goods. The Applicant represents that these charges are the
latest of a series of charges that were filed and then withdrawn
between 2007 and 2011. The Applicant also represents that to its best
knowledge, it does not have a reasonable basis to believe that the
discretionary asset management activities of any Citigroup QPAMs are
subject to these charges. Further, the Applicant represents that it
does not have a reasonable basis to believe that there are any pending
criminal investigations involving Citigroup or any of its affiliates
that would cause a reasonable plan or IRA customer not to hire or
retain the institution as a QPAM.
7. Notwithstanding the aforementioned charges, once the Conviction
is entered, the Citigroup Affiliated QPAMs and the Citigroup Related
QPAMs, as well as their client plans that are subject to Part 4 of
Title I of ERISA (ERISA-covered plans) or section 4975 of the Code
(IRAs), will no longer be able to rely on PTE 84-14, pursuant to the
anti-criminal rule set forth in section I(g) of the class exemption,
absent an individual exemption. The Applicant is seeking an individual
exemption that would permit the Citigroup Affiliated QPAMs and the
Citigroup Related QPAMs, and their ERISA-covered plan and IRA clients
to continue to utilize the relief in PTE 84-14, notwithstanding the
anticipated Conviction, provided that such QPAMs satisfy the additional
conditions imposed by the Department in the proposed five-year
exemption herein.
8. The Applicant represents that the criminal conduct that is the
subject of the Conviction was neither widespread nor pervasive. The
Applicant states that such criminal conduct consisted of isolated acts
perpetrated by a single EUR/USD trader employed in Citigroup's Markets
and Securities Services business in the United Kingdom who was removed
from the activities of the Citigroup Affiliated QPAMs, both
geographically and organizationally. The Applicant represents that this
London-based EUR/USD trader was not an officer or director of
Citigroup, and did not have any involvement in, or influence over,
Citigroup or any of the Citigroup Affiliated QPAMs. The Applicant
states that this London-based EUR/USD trader had minimal management
responsibilities, which related exclusively to Citigroup's G10 Spot FX
trading business, outside of the United States. As represented by the
Applicant, once senior management became aware of the criminal conduct
that is the subject of the Conviction, Citibank took action to
terminate the employee.
9. The Applicant represents that the Citigroup Affiliated QPAMs,
did not know of, did not have reason to know of, and did not
participate in the criminal conduct that is the subject of the
Conviction. The Applicant also represents that no current or former
employee of Citigroup or of any Citigroup Affiliated QPAM who
previously has been or who subsequently may be identified by Citigroup,
or any U.S. or non-U.S. regulatory or enforcement agencies, as having
been responsible for the criminal conduct that is the subject of the
Conviction will have any involvement in providing asset management
services to plans and IRAs or will be an officer, director, or employee
of the Applicant or of any Citigroup Affiliated QPAM.
Citigroup's Business Separation/Compliance/Training
10. The Applicant represents that Citigroup's Advisory Businesses
are operated independently from Citigroup's Markets and Securities
Services, the segment of Citigroup in which foreign exchange trading is
conducted.\129\ Although the Advisory Business falls under the
umbrellas of ICG and GCG, it operates separately in all material
respects from the sales and trading businesses that comprise that
business segment. The Advisory Business maintains separate: (a)
Management and reporting lines; (b) compliance programs; (c)
compensation arrangements; (d) profit and loss reporting (with
different comptrollers), (e) human resources and training programs, and
(f) legal coverage. The Applicant represents that the Advisory
Businesses maintain a separate, dedicated compliance function, and have
protocols to preserve the separation between employees in the Advisory
Business and those in Markets and Securities Services.
---------------------------------------------------------------------------
\129\ The Applicant represents that each of Citigroup's primary
business units operates a large number of separate and independent
businesses. These lines of business generally have: (a) A group of
employees working solely on matters specific to its line of
business, (b) separate management and reporting lines; (c) tailored
compliance regimens; (d) separate compensation arrangements; (e)
separate profit and loss reporting; (vi) separate human resources
personnel and training, (f) dedicated risk and compliance officers
and (g) dedicated legal coverage.
---------------------------------------------------------------------------
11. The Applicant represents that Citigroup's independent control
functions, including Compliance, Finance, Legal and Risk, set standards
according to which Citigroup and its businesses are expected to manage
and oversee risks, including compliance with applicable laws,
regulatory requirements, policies and standards of ethical conduct.
Among other things, the independent control functions provide advice
and training to Citigroup's businesses and establish tools,
methodologies, processes and oversight of controls used by the
businesses to foster a culture of compliance and control and to satisfy
those standards.
[[Page 83423]]
12. The Applicant represents that compliance at Citigroup is an
independent control function within Franchise Risk and Strategy that is
designed to protect Citigroup not only by managing adherence to
applicable laws, regulations and other standards of conduct, but also
by promoting business behavior and activity that is consistent with
global standards for responsible finance. The Applicant states that
Citigroup has implemented company-wide initiatives designed to further
embed ethics in Citigroup's culture. This includes training for more
than 40,000 senior employees that fosters ethical decision-making and
underscores the importance of escalating issues, a video series
featuring senior leaders discussing ethical decisions, regular
communications on ethics and culture, and the development of enhanced
tools to support ethical decision-making.
Statutory Findings--In the Interest of Affected Plans and IRAs
13. The Applicant represents that, if the exemption is denied, the
Citigroup Affiliated QPAMs may be unable to effectively manage assets
subject to ERISA or the prohibited transaction provisions of the Code
where PTE 84-14 is needed to avoid engaging in a prohibited
transaction. The Applicant further represents that plans and
participants would be harmed because they would be unnecessarily
deprived of the current and future opportunity to utilize the
Applicant's experience in and expertise with respect to the financial
markets and investing. The Applicant anticipates that, if the exemption
is denied, some of Citigroup's 20,000 existing Retirement Account
clients may feel forced to terminate their advisory relationship with
Citigroup, incurring expenses related to: (a) Consultant fees and other
due diligence expenses for identifying new managers; (b) transaction
costs associated with a change in investment manager, including the
sale and purchase of portfolio investments to accommodate the
investment policies and strategy of the new manager, and the cost of
entering into new custodial arrangements; and (c) lost investment
opportunities in connection with the change.\130\
---------------------------------------------------------------------------
\130\ The Department notes that, if this five-year exemption is
granted, compliance with the condition in Section I(j) of the
exemption would require the Citigroup Affiliated QPAMs to hold their
plan customers harmless for any losses attributable to, inter alia,
any prohibited transactions or violations of the duty of prudence
and loyalty.
---------------------------------------------------------------------------
Statutory Findings--Protective of the Rights of Participants of
Affected Plans and IRAs
14. The Applicant has proposed certain conditions it believes are
protective of participants and beneficiaries of ERISA-covered plans and
IRAs with respect to the transactions described herein. The Department
has determined that it is necessary to modify and supplement the
conditions before it can tentatively determine that the requested
exemption meets the statutory requirements of section 408(a) of ERISA.
In this regard, the Department has tentatively determined that the
following conditions adequately protect the rights of participants and
beneficiaries of affected plans and IRAs with respect to the
transactions that would be covered by this proposed five-year
exemption.
The five-year exemption, if granted as proposed, is only available
to the extent: (a) Other than with respect to a single individual who
worked for a non-fiduciary business within Citigroup's Markets and
Securities Services business and who had no responsibility for, and
exercised no authority in connection with, the management of plan
assets, Citigroup Affiliated QPAMs, including their officers,
directors, agents other than Citigroup, and employees, did not know of,
have reason to know of, or participate in the criminal conduct of
Citigroup that is the subject of the Conviction (for purposes of this
requirement, the term ``participate in'' includes an individual's
knowing or tacit approval of the misconduct underlying the Conviction);
(b) any failure of those QPAMs to satisfy Section I(g) of PTE 84-14
arose solely from the Conviction; and (c) other than a single
individual who worked for a non-fiduciary business within Citigroup's
Markets and Securities Services business, and who had no responsibility
for, and exercised no authority in connection with, the management of
plan assets, the Citigroup Affiliated QPAMs and the Citigroup Related
QPAMs (including their officers, directors, agents other than
Citigroup, and employees of such Citigroup QPAMs) did not receive
direct compensation, or knowingly receive indirect compensation, in
connection with the criminal conduct that is the subject of the
Conviction.
15. The Department expects the Citigroup Affiliated QPAMs will
rigorously ensure that the individual associated with the misconduct
will not be employed or knowingly engaged by such QPAMs. In this
regard, the five-year exemption mandates that the Citigroup Affiliated
QPAMs will not employ or knowingly engage any of the individuals that
participated in the FX manipulation that is the subject of the
Conviction. For purposes of this condition, the term ``participated
in'' includes an individual's knowing or tacit approval of the behavior
that is the subject of the Conviction.
16. Further, the Citigroup Affiliated QPAM will not use its
authority or influence to direct an ``investment fund,'' (as defined in
Section VI(b) of PTE 84-14), that is subject to ERISA or the Code and
managed by such Citigroup Affiliated QPAM to enter into any transaction
with Citigroup or the Markets and Securities Services business of
Citigroup, or to engage Citigroup or the Markets and Securities
Services business of Citigroup to provide any service to such
investment fund, for a direct or indirect fee borne by such investment
fund, regardless of whether such transaction or service may otherwise
be within the scope of relief provided by an administrative or
statutory exemption.
17. The Citigroup Affiliated QPAMs and the Citigroup Related QPAMs
must comply with each condition of PTE 84-14, as amended, with the sole
exception of the violation of Section I(g) of PTE 84-14 that is
attributable to the Conviction. Further, any failure of the Citigroup
Affiliated QPAMs or the Citigroup Related QPAMs to satisfy Section I(g)
of PTE 84-14 arose solely from the Conviction.
No relief will be provided by this five-year exemption, if a
Citigroup Affiliated QPAM or a Citigroup Related QPAM exercised
authority over plan assets in a manner that it knew or should have
known would: Further the criminal conduct that is the subject of the
Conviction; or cause the Citigroup Affiliated QPAM or the Citigroup
Related QPAM or its affiliates or related parties to directly or
indirectly profit from the criminal conduct that is the subject of the
Conviction. Also, no relief will be provided by this five-year
exemption to the extent Citigroup or the Markets and Securities
Services business of Citigroup provides any discretionary asset
management services to ERISA-covered plans or IRAs, or otherwise acts
as a fiduciary with respect to ERISA-covered plan or IRA assets.
18. The Department believes that robust policies and training are
warranted where, as here, the criminal misconduct has occurred within a
corporate organization that is affiliated with one or more QPAMs
managing plan or IRA assets. Therefore, this proposed five-year
exemption requires
[[Page 83424]]
that within four (4) months of the Conviction, each Citigroup
Affiliated QPAM must develop, implement, maintain, and follow written
policies (the Policies) requiring and reasonably designed to ensure
that: The asset management decisions of the Citigroup Affiliated QPAM
are conducted independently of the management and business activities
of Citigroup, including the management and business activities of the
Markets and Securities business of Citigroup; the Citigroup Affiliated
QPAM fully complies with ERISA's fiduciary duties, and with ERISA and
the Code's prohibited transaction provisions, and does not knowingly
participate in any violation of these duties and provisions with
respect to ERISA-covered plans and IRAs; the Citigroup Affiliated QPAM
does not knowingly participate in any other person's violation of ERISA
or the Code with respect to ERISA-covered plans and IRAs; any filings
or statements made by the Citigroup Affiliated QPAM to regulators,
including, but not limited to, the Department of Labor, the Department
of the Treasury, the Department of Justice, and the Pension Benefit
Guaranty Corporation, on behalf of ERISA-covered plans or IRAs, are
materially accurate and complete, to the best of such QPAM's knowledge
at that time; the Citigroup Affiliated QPAM does not make material
misrepresentations or omit material information in its communications
with such regulators with respect to ERISA-covered plans or IRAs, or
make material misrepresentations or omit material information in its
communications with ERISA-covered plan and IRA clients; and the
Citigroup Affiliated QPAM complies with the terms of this five-year
exemption.
Any violation of, or failure to comply with these Policies must be
corrected promptly upon discovery, and any such violation or compliance
failure not promptly corrected is reported, upon discovering the
failure to promptly correct, in writing, to appropriate corporate
officers, the head of compliance, and the General Counsel (or their
functional equivalent) of the relevant Citigroup Affiliated QPAM, the
independent auditor responsible for reviewing compliance with the
Policies, and an appropriate fiduciary of any affected ERISA-covered
plan or IRA, which such fiduciary is independent of Citigroup. A
Citigroup Affiliated QPAM will not be treated as having failed to
develop, implement, maintain, or follow the Policies, provided that it
corrects any instance of noncompliance promptly when discovered or when
it reasonably should have known of the noncompliance (whichever is
earlier), and provided that it reports such instance of noncompliance
as explained above.
19. The Department has also imposed a condition that requires each
Citigroup Affiliated QPAM, within four (4) months of the date of the
Conviction, to develop and implement a program of training (the
Training), conducted at least annually, for all relevant Citigroup
Affiliated QPAM asset/portfolio management, trading, legal, compliance,
and internal audit personnel. The Training must be set forth in the
Policies and, at a minimum, cover the Policies, ERISA and Code
compliance (including applicable fiduciary duties and the prohibited
transaction provisions), ethical conduct, the consequences for not
complying with the conditions of this five-year exemption (including
any loss of exemptive relief provided herein), and prompt reporting of
wrongdoing. Further, the Training must be conducted by an independent
professional who has been prudently selected and who has appropriate
technical training and proficiency with ERISA and the Code.
20. Independent Transparent Audit. The Department views a rigorous
and transparent audit that is conducted annually by an independent
party, as essential to ensuring that the conditions for exemptive
relief described herein are followed by the Citigroup Affiliated QPAMs.
Therefore, Section I(i) of this proposed five-year exemption requires
that each Citigroup Affiliated QPAM submits to an audit, conducted
annually by an independent auditor, who has been prudently selected and
who has appropriate technical training and proficiency with ERISA and
the Code, to evaluate the adequacy of, and the Citigroup Affiliated
QPAM's compliance with, the Policies and Training described herein. The
audit requirement must be incorporated in the Policies. In addition,
each annual audit must cover a consecutive twelve (12) month period
starting with the twelve (12) month period that begins on the effective
date of the five-year exemption. Each annual audit must be completed no
later than six (6) months after the period to which the audit applies.
21. Among other things, the audit condition requires that, to the
extent necessary for the auditor, in its sole opinion, to complete its
audit and comply with the conditions for relief described herein, and
as permitted by law, each Citigroup Affiliated QPAM and, if applicable,
Citigroup, will grant the auditor unconditional access to its business,
including, but not limited to: Its computer systems; business records;
transactional data; workplace locations; training materials; and
personnel.
In addition, the auditor's engagement must specifically require the
auditor to determine whether each Citigroup Affiliated QPAM has
complied with the Policies and Training conditions described herein,
and must further require the auditor to test each Citigroup Affiliated
QPAM's operational compliance with the Policies and Training. The
auditor must issue a written report (the Audit Report) to Citigroup and
the Citigroup Affiliated QPAM to which the audit applies that describes
the procedures performed by the auditor during the course of its
examination. The Audit Report must include the auditor's specific
determinations regarding: The adequacy of the Citigroup Affiliated
QPAM's Policies and Training; the Citigroup Affiliated QPAM's
compliance with the Policies and Training; the need, if any, to
strengthen such Policies and Training; and any instance of the
respective Citigroup Affiliated QPAM's noncompliance with the written
Policies and Training.
Any determination by the auditor regarding the adequacy of the
Policies and Training and the auditor's recommendations (if any) with
respect to strengthening the Policies and Training of the respective
Citigroup Affiliated QPAM must be promptly addressed by such Citigroup
Affiliated QPAM, and any action taken by such Citigroup Affiliated QPAM
to address such recommendations must be included in an addendum to the
Audit Report. Further, any determination by the auditor that the
respective Citigroup Affiliated QPAM has implemented, maintained, and
followed sufficient Policies and Training must not be based solely or
in substantial part on an absence of evidence indicating noncompliance.
In this last regard, any finding that the Citigroup Affiliated QPAM has
complied with the requirements, as described above, must be based on
evidence that demonstrates the Citigroup Affiliated QPAM has actually
implemented, maintained, and followed the Policies and Training
required by this five-year exemption. Finally, the Audit Report must
address the adequacy of the Annual Review required under this exemption
and the resources provided to the Compliance Officer in connection with
such Annual Review. Moreover, the auditor must notify the respective
Citigroup Affiliated QPAM of any instance of noncompliance identified
by the auditor
[[Page 83425]]
within five (5) business days after such noncompliance is identified by
the auditor, regardless of whether the audit has been completed as of
that date.
22. This exemption requires that certain senior personnel of
Citigroup review the Audit Report and make certain certifications and
take various corrective actions. In this regard, the General Counsel,
or one of the three most senior executive officers of the Citigroup
Affiliated QPAM to which the Audit Report applies, must certify, in
writing, under penalty of perjury, that the officer has reviewed the
Audit Report and this five-year exemption; addressed, corrected, or
remedied an inadequacy identified in the Audit Report; and determined
that the Policies and Training in effect at the time of signing are
adequate to ensure compliance with the conditions of this proposed
five-year exemption and with the applicable provisions of ERISA and the
Code. The Risk Committee of Citigroup's Board of Directors is provided
a copy of each Audit Report; and a senior executive officer with a
direct reporting line to the highest ranking legal compliance officer
of Citigroup must review the Audit Report for each Citigroup Affiliated
QPAM and must certify in writing, under penalty of perjury, that such
officer has reviewed each Audit Report.
23. In order to create a more transparent record in the event that
the proposed relief is granted, each Citigroup Affiliated QPAM must
provide its certified Audit Report to the Department no later than
thirty (30) days following its completion. The Audit Report will be
part of the public record regarding this five-year exemption.
Further, each Citigroup Affiliated QPAM must make its Audit Report
unconditionally available for examination by any duly authorized
employee or representative of the Department, other relevant
regulators, and any fiduciary of an ERISA-covered plan or IRA, the
assets of which are managed by such Citigroup Affiliated QPAM.
Additionally, each Citigroup Affiliated QPAM and the auditor must
submit to the Department any engagement agreement(s) entered into
pursuant to the engagement of the auditor under this five-year
exemption. Also, they must submit to the Department any engagement
agreement entered into with any other entity retained in connection
with such QPAM's compliance with the Training or Policies conditions of
this proposed five-year exemption, no later than six (6) months after
the Conviction Date (and one month after the execution of any agreement
thereafter).
Finally, if the exemption is granted, the auditor must provide the
Department, upon request, all of the workpapers created and utilized in
the course of the audit, including, but not limited to: The audit plan;
audit testing; identification of any instance of noncompliance by the
relevant Citigroup Affiliated QPAM; and an explanation of any
corrective or remedial action taken by the applicable Citigroup
Affiliated QPAM.
In order to enhance oversight of the compliance with the exemption,
Citigroup must notify the Department at least thirty (30) days prior to
any substitution of an auditor, and Citigroup must demonstrate to the
Department's satisfaction that any new auditor is independent of
Citigroup, experienced in the matters that are the subject of the
exemption, and capable of making the determinations required of this
five-year exemption.
24. Contractual Obligations. This five-year exemption requires the
Citigroup Affiliated QPAMs to enter into certain contractual
obligations in connection with the provision of services to their
clients. It is the Department's view that the condition in Section I(j)
is essential to the Department's ability to make its findings that the
proposed five-year exemption is protective of the rights of the
participants and beneficiaries of ERISA-covered and IRA plan clients of
Citigroup Affiliated QPAMs under section 408(a) of ERISA. In this
regard, effective as of the effective date of this five-year exemption,
with respect to any arrangement, agreement, or contract between a
Citigroup Affiliated QPAM and an ERISA-covered plan or IRA for which a
Citigroup Affiliated QPAM provides asset management or other
discretionary fiduciary services, each Citigroup Affiliated QPAM must
agree and warrant: (a) To comply with ERISA and the Code, as
applicable, with respect to such ERISA-covered plan or IRA, and refrain
from engaging in prohibited transactions that are not otherwise exempt
(and to promptly correct any inadvertent prohibited transactions), and
to comply with the standards of prudence and loyalty set forth in
section 404 of ERISA, as applicable, with respect to each such ERISA-
covered plan and IRA; (b) to indemnify and hold harmless the ERISA-
covered plan or IRA for any damages resulting from a violation of
applicable laws, a breach of contract, or any claim arising out of the
failure of such Citigroup Affiliated QPAM to qualify for the exemptive
relief provided by PTE 84-14 as a result of a violation of Section I(g)
of PTE 84-14 other than the Conviction; (c) not to require (or
otherwise cause) the ERISA-covered plan or IRA to waive, limit, or
qualify the liability of the Citigroup Affiliated QPAM for violating
ERISA or the Code or engaging in prohibited transactions; (d) not to
require the ERISA-covered plan or IRA (or sponsor of such ERISA-covered
plan or beneficial owner of such IRA) to indemnify the Citigroup
Affiliated QPAM for violating ERISA or the Code, or engaging in
prohibited transactions, except for a violation or a prohibited
transaction caused by an error, misrepresentation, or misconduct of a
plan fiduciary or other party hired by the plan fiduciary which is
independent of Citigroup, and its affiliates; (e) not to restrict the
ability of such ERISA-covered plan or IRA to terminate or withdraw from
its arrangement with the Citigroup Affiliated QPAM (including any
investment in a separately-managed account or pooled fund subject to
ERISA and managed by such QPAM), with the exception of reasonable
restrictions, appropriately disclosed in advance, that are specifically
designed to ensure equitable treatment of all investors in a pooled
fund in the event such withdrawal or termination may have adverse
consequences for all other investors as a result of the actual lack of
liquidity of the underlying assets, provided that such restrictions are
applied consistently and in like manner to all such investors; and (f)
not to impose any fee, penalty, or charge for such termination or
withdrawal with the exception of reasonable fees, appropriately
disclosed in advance, that are specifically designed to prevent
generally recognized abusive investment practices or specifically
designed to ensure equitable treatment of all investors in a pooled
fund in the event such withdrawal or termination may have adverse
consequences for all other investors, provided that each such fee is
applied consistently and in like manner to all such investors.
Furthermore, any contract, agreement or arrangement between a Citigroup
Affiliated QPAM and its ERISA-covered plan or IRA client must not
contain exculpatory provisions disclaiming or otherwise limiting
liability of the Citigroup Affiliated QPAM for a violation of such
agreement's terms, except for liability caused by error,
misrepresentation, or misconduct of a plan fiduciary or other party
hired by the plan fiduciary which is independent of Citigroup, and its
affiliates.
30. With respect to current ERISA-covered plan and IRA clients for
which
[[Page 83426]]
a Citigroup Affiliated QPAM provides asset management or other
discretionary fiduciary services, within four (4) months of the date of
publication of this notice of five-year exemption in the Federal
Register, the Citigroup Affiliated QPAM will provide a notice of its
obligations under Section I(j) to each such ERISA-covered plan and IRA
client. For all other prospective ERISA-covered plan and IRA clients
for which a Citigroup Affiliated QPAM provides asset management or
other discretionary services, the Citigroup Affiliated QPAM will agree
in writing to its obligations under this Section I(j) in an updated
investment management agreement between the Citigroup Affiliated QPAM
and such clients or other written contractual agreement.
31. Notice Requirements. The proposed exemption contains extensive
notice requirements, some of which extend not only to ERISA-covered
plan and IRA clients of Citigroup Affiliated QPAMs, but which also go
to non-Plan clients of Citigroup Affiliated QPAMs. In this regard, the
Department understands that many firms may promote their ``QPAM''
designation in order to earn asset management business, including from
non-ERISA plans. Therefore, in order to fully inform any clients that
may have retained Citigroup Affiliated QPAMs as asset managers because
such Citigroup Affiliated QPAMs have represented themselves as able to
rely on PTE 84-14, the Department has determined to condition exemptive
relief upon the following notice requirements.
Within fifteen (15) days of the publication of this proposed five-
year exemption in the Federal Register, each Citigroup Affiliated QPAM
will provide a notice of the proposed five-year exemption, along with a
separate summary describing the facts that led to the Conviction (the
Summary), which have been submitted to the Department, and a
prominently displayed statement (the Statement) that the Conviction
results in the failure to meet a condition in PTE 84-14, to each
sponsor of an ERISA-covered plan and each beneficial owner of an IRA
for which a Citigroup Affiliated QPAM provides asset management or
other discretionary services, or the sponsor of an investment fund in
any case where a Citigroup Affiliated QPAM acts only as a sub-adviser
to the investment fund in which such ERISA-covered plan and IRA
invests. In the event that this proposed five-year exemption is
granted, the Federal Register copy of the notice of final five-year
exemption must be delivered to such clients within sixty (60) days of
its publication in the Federal Register, and may be delivered
electronically (including by an email that has a link to the
exemption). Any prospective clients for which a Citigroup Affiliated
QPAM provides asset management or other discretionary services must
receive the proposed and final five-year exemptions with the Summary
and the Statement prior to, or contemporaneously with, the client's
receipt of a written asset management agreement from the Citigroup
Affiliated QPAM.
In addition, each Citigroup Affiliated QPAM will provide a Federal
Register copy of the proposed five-year exemption, a Federal Register
copy of the final five-year exemption; the Summary; and the Statement
to each: (A) Current Non-Plan Client within four (4) months of the
effective date, if any, of a final five-year exemption; and (B) Future
Non-Plan Client prior to, or contemporaneously with, the client's
receipt of a written asset management agreement from the Citigroup
Affiliated QPAM. A ``Current Non-Plan Client'' is a client of a
Citigroup Affiliated QPAM that: Is neither an ERISA-covered plan nor an
IRA; has assets managed by the Citigroup Affiliated QPAM after the
effective date, if any, of a final five-year exemption; and has
received a written representation (qualified or otherwise) from the
Citigroup Affiliated QPAM that such Citigroup Affiliated QPAM qualifies
as a QPAM or qualifies for the relief provided by PTE 84-14. A ``Future
Non-Plan Client'' is a client of a Citigroup Affiliated QPAM that is
neither an ERISA-covered plan nor an IRA that has assets managed by the
Citigroup Affiliated QPAM after the effective date, if any, of a final
five-year exemption, and has received a written representation
(qualified or otherwise) from the Citigroup Affiliated QPAM that such
Citigroup Affiliated QPAM is a QPAM, or qualifies for the relief
provided by PTE 84-14.
32. This proposed five-year exemption also requires Citigroup to
designate a senior compliance officer (the Compliance Officer) who will
be responsible for compliance with the Policies and Training
requirements described herein. The Compliance Officer will have several
obligations that it must comply with, as described in Section I(m)
above. These include conducting an annual review (the Annual Review) to
determine the adequacy and effectiveness of the implementation of the
Policies and Training; the preparation of a written report for each
Annual Review (each, an Annual Report) that, among other things,
summarizes his or her material activities during the preceding year;
and sets forth any instance of noncompliance discovered during the
preceding year, and any related corrective action. Each Annual Report
must be provided to appropriate corporate officers of Citigroup and
each Citigroup Affiliated QPAM to which such report relates; the head
of compliance and the General Counsel (or their functional equivalent)
of the relevant Citigroup Affiliated QPAM; and must be made
unconditionally available to the independent auditor described above.
33. Each Citigroup Affiliated QPAM must maintain records necessary
to demonstrate that the conditions of this exemption have been met for
six (6) years following the date of any transaction for which such
Citigroup Affiliated QPAM relies upon the relief in the proposed five-
year exemption.
34. The proposed five-year exemption mandates that, during the
effective period of this five-year exemption, Citigroup must
immediately disclose to the Department any Deferred Prosecution
Agreement (a DPA) or Non-Prosecution Agreement (an NPA) that Citigroup
or an affiliate enters into with the Department of Justice, to the
extent such DPA or NPA involved conduct described in Section I(g) of
PTE 84-14 or section 411 of ERISA. In addition, Citigroup must
immediately provide the Department any information requested by the
Department, as permitted by law, regarding the agreement and/or the
conduct and allegations that led to the agreement. The Department may,
following its review of that information, require Citigroup or a party
specified by the Department, to submit a new application for the
continued availability of relief as a condition of continuing to rely
on this exemption. In this regard, the QPAM (or other party submitting
the application) will have the burden of justifying the relief sought
in the application. If the Department denies the relief requested in
that application, or does not grant such relief within twelve (12)
months of the application, the relief described herein would be revoked
as of the date of denial or as of the expiration of the twelve (12)
month period, whichever date is earlier.
35. Finally, each Citigroup Affiliated QPAM, in its agreements with
ERISA-covered plan and IRA clients, or in other written disclosures
provided to ERISA-covered plan and IRA clients, within sixty (60) days
prior to the initial transaction upon which relief hereunder is relied,
will clearly and prominently: Inform the ERISA-covered plan or IRA
client that the client has the right to obtain copies of the QPAM's
written
[[Page 83427]]
Policies adopted in accordance with this five-year exemption.
Statutory Findings--Administratively Feasible
36. The Applicant represents that the proposed exemption is
administratively feasible because it does not require any monitoring by
the Department. Furthermore, the requested five-year exemption does not
require the Department's oversight because, as a condition of this
proposed five-year exemption, neither Citigroup nor the Markets and
Securities Services business of Citigroup will provide any fiduciary or
QPAM services to ERISA-covered plans and IRAs.
Summary
37. Given the revised and new conditions described above, the
Department has tentatively determined that the relief sought by the
Applicant satisfies the statutory requirements for a five-year
exemption under section 408(a) of ERISA.
Notice to Interested Persons
Notice of the proposed exemption will be provided to all interested
persons within 15 days of the publication of the notice of proposed
five-year exemption in the Federal Register. The notice will be
provided to all interested persons in the manner described in Section
I(k)(1) of this proposed five-year exemption and will contain the
documents described therein and a supplemental statement, as required
pursuant to 29 CFR 2570.43(a)(2). The supplemental statement will
inform interested persons of their right to comment on and to request a
hearing with respect to the pending exemption. All written comments
and/or requests for a hearing must be received by the Department within
forty five (45) days of the date of publication of this proposed
exemption in the Federal Register. All comments will be made available
to the public.
Warning: If you submit a comment, EBSA recommends that you include
your name and other contact information in the body of your comment,
but DO NOT submit information that you consider to be confidential, or
otherwise protected (such as a Social Security number or an unlisted
phone number) or confidential business information that you do not want
publicly disclosed. All comments may be posted on the Internet and can
be retrieved by most Internet search engines.
FOR FURTHER INFORMATION CONTACT: Mr. Joseph Brennan of the Department
at (202) 693-8456. (This is not a toll-free number.)
Barclays Capital Inc. (BCI or the Applicant), Located in New York, New
York
[Application No. D-11910]
Proposed Five Year Exemption
The Department is considering granting a five-year exemption under
the authority of section 408(a) of the Act (or ERISA) and section
4975(c)(2) of the Code, and in accordance with the procedures set forth
in 29 CFR part 2570, subpart B (76 FR 66637, 66644, October 27,
2011).\131\
---------------------------------------------------------------------------
\131\ For purposes of this proposed exemption, references to
section 406 of the Act should be read to refer as well to the
corresponding provisions of section 4975 of the Code.
---------------------------------------------------------------------------
Section I: Covered Transactions
If the proposed five-year exemption is granted, certain asset
managers with specified relationships to Barclays PLC (BPLC) (the
Barclays Affiliated QPAMs and the Barclays Related QPAMs, as defined
further in Sections II(a) and II(b), respectively) will not be
precluded from relying on the exemptive relief provided by Prohibited
Transaction Class Exemption 84-14 (PTE 84-14 or the QPAM
Exemption),\132\ notwithstanding the judgment of conviction against
BPLC (the Conviction), as defined in Section II(c)),\133\ for engaging
in a conspiracy to: (1) Fix the price of, or (2) eliminate competition
in the purchase or sale of the euro/U.S. dollar currency pair exchanged
in the Foreign Exchange (FX) Spot Market, for a period of five years
beginning on the date the exemption is granted, provided the following
conditions are satisfied:
---------------------------------------------------------------------------
\132\ 49 FR 9494 (March 13, 1984), as corrected at 50 FR 41430
(October 10, 1985), as amended at 70 FR 49305 (August 23, 2005), and
as amended at 75 FR 38837 (July 6, 2010).
\133\ Section I(g) of PTE 84-14 generally provides that
``[n]either the QPAM nor any affiliate thereof . . . nor any owner .
. . of a 5 percent or more interest in the QPAM is a person who
within the 10 years immediately preceding the transaction has been
either convicted or released from imprisonment, whichever is later,
as a result of'' certain felonies including violation of the Sherman
Antitrust Act, Title 15 United States Code, Section 1.
---------------------------------------------------------------------------
(a) Other than certain individuals who: Worked for a non-fiduciary
business within BCI; had no responsibility for, and exercised no
authority in connection with, the management of plan assets; and are no
longer employed by BPLC, the Barclays Affiliated QPAMs and the Barclays
Related QPAMs (including their officers, directors, agents other than
BPLC, and employees of such QPAMs who had responsibility for, or
exercised authority in connection with the management of plan assets)
did not know of, did not have reason to know of, or participate in the
criminal conduct that is the subject of the Conviction (for purposes of
this paragraph (a), ``participate in'' includes the knowing or tacit
approval of the misconduct underlying the Conviction);
(b) The Barclays Affiliated QPAMs and the Barclays Related QPAMs
(including their officers, directors, agents other than BPLC, and
employees of such Barclays QPAMs) did not receive direct compensation,
or knowingly receive indirect compensation, in connection with the
criminal conduct that is the subject of the Conviction;
(c) A Barclays Affiliated QPAM will not employ or knowingly engage
any of the individuals that participated in the criminal conduct that
is the subject of the Conviction (for purposes of this paragraph (c),
``participated in'' includes the knowing or tacit approval of the
misconduct underlying the Conviction);
(d) A Barclays Affiliated QPAM will not use its authority or
influence to direct an ``investment fund,'' (as defined in Section
VI(b) of PTE 84-14) that is subject to ERISA or the Code and managed by
such Barclays Affiliated QPAM to enter into any transaction with BPLC
or BCI, or engage BPLC to provide any service to such investment fund,
for a direct or indirect fee borne by such investment fund, regardless
of whether such transaction or service may otherwise be within the
scope of relief provided by an administrative or statutory exemption;
(e) Any failure of a Barclays Affiliated QPAM or a Barclays Related
QPAM to satisfy Section I(g) of PTE 84-14 arose solely from the
Conviction;
(f) A Barclays Affiliated QPAM or a Barclays Related QPAM did not
exercise authority over the assets of any plan subject to Part 4 of
Title I of ERISA (an ERISA-covered plan) or section 4975 of the Code
(an IRA) in a manner that it knew or should have known would: Further
the criminal conduct that is the subject of the Conviction; or cause
the Barclays Affiliated QPAM or the Barclays Related QPAM or its
affiliates or related parties to directly or indirectly profit from the
criminal conduct that is the subject of the Conviction;
(g) BPLC and BCI will not provide discretionary asset management
services to ERISA-covered plans or IRAs, nor will otherwise act as a
fiduciary with respect to ERISA-covered plan or IRA assets;
[[Page 83428]]
(h)(1) Prior to a Barclays Affiliated QPAM's engagement by any
ERISA-covered plan or IRA for discretionary asset management services,
where the QPAM represents that it qualifies as a QPAM, the Barclays
Affiliated QPAM must develop, implement, maintain, and follow written
policies and procedures (the Policies) requiring and reasonably
designed to ensure that:
(i) The asset management decisions of the Barclays Affiliated QPAM
are conducted independently of the corporate management and business
activities of BPLC and BCI;
(ii) The Barclays Affiliated QPAM fully complies with ERISA's
fiduciary duties and with ERISA and the Code's prohibited transaction
provisions, and does not knowingly participate in any violation of
these duties and provisions with respect to ERISA-covered plans and
IRAs;
(iii) The Barclays Affiliated QPAM does not knowingly participate
in any other person's violation of ERISA or the Code with respect to
ERISA-covered plans and IRAs;
(iv) Any filings or statements made by the Barclays Affiliated QPAM
to regulators, including, but not limited to, the Department, the
Department of the Treasury, the Department of Justice, and the Pension
Benefit Guaranty Corporation, on behalf of ERISA-covered plans or IRAs,
are materially accurate and complete, to the best of such QPAM's
knowledge at that time;
(v) The Barclays Affiliated QPAM does not make material
misrepresentations or omit material information in its communications
with such regulators with respect to ERISA-covered plans or IRAs, or
make material misrepresentations or omit material information in its
communications with ERISA-covered plans and IRA clients;
(vi) The Barclays Affiliated QPAM complies with the terms of this
five-year exemption, if granted; and
(vii) Any violation of, or failure to comply with, an item in
subparagraphs (ii) through (vi), is corrected promptly upon discovery,
and any such violation or compliance failure not promptly corrected is
reported, upon the discovery of such failure to promptly correct, in
writing, to appropriate corporate officers, the head of compliance, and
the General Counsel (or their functional equivalent) of the relevant
Barclays Affiliated QPAM, the independent auditor responsible for
reviewing compliance with the Policies, and an appropriate fiduciary of
any affected ERISA-covered plan or IRA that is independent of BPLC;
however, with respect to any ERISA-covered plan or IRA sponsored by an
``affiliate'' (as defined in Section VI(d) of PTE 84-14) of BPLC or
beneficially owned by an employee of BPLC or its affiliates, such
fiduciary does not need to be independent of BPLC. A Barclays
Affiliated QPAM will not be treated as having failed to develop,
implement, maintain, or follow the Policies, provided that it corrects
any instance of noncompliance promptly when discovered, or when it
reasonably should have known of the noncompliance (whichever is
earlier), and provided that it adheres to the reporting requirements
set forth in this subparagraph (vii);
(2) Prior to a Barclays Affiliated QPAM's engagement by any ERISA
covered plan or IRA for discretionary asset management services, the
Barclays Affiliated QPAM must develop and implement a program of
training (the Training), conducted at least annually, for all relevant
Barclays Affiliated QPAM asset/portfolio management, trading, legal,
compliance, and internal audit personnel. The Training must:
(i) Be set forth in the Policies and, at a minimum, cover the
Policies, ERISA and Code compliance (including applicable fiduciary
duties and the prohibited transaction provisions), ethical conduct, the
consequences for not complying with the conditions of this five-year
exemption, if granted (including any loss of exemptive relief provided
herein), and prompt reporting of wrongdoing; and
(ii) Be conducted by an independent professional who has been
prudently selected and who has appropriate technical training and
proficiency with ERISA and the Code;
(i)(1) Each Barclays Affiliated QPAM submits to an audit conducted
annually by an independent auditor, who has been prudently selected and
who has appropriate technical training and proficiency with ERISA and
the Code, to evaluate the adequacy of, and the Barclays Affiliated
QPAM's compliance with, the Policies and Training described herein. The
audit requirement must be incorporated in the Policies. Each annual
audit must cover a consecutive twelve (12) month period starting with
the twelve (12) month period that begins on the date that a Barclays
Affiliated QPAM is first engaged by any ERISA-covered plan or IRA for
discretionary asset management services reliant on PTE 84-14, and each
annual audit must be completed no later than six (6) months after the
period to which the audit applies;
(2) To the extent necessary for the auditor, in its sole opinion,
to complete its audit and comply with the conditions for relief
described herein, and as permitted by law, each Barclays Affiliated
QPAM and, if applicable, BPLC, will grant the auditor unconditional
access to its business, including, but not limited to: Its computer
systems; business records; transactional data; workplace locations;
training materials; and personnel;
(3) The auditor's engagement must specifically require the auditor
to determine whether each Barclays Affiliated QPAM has developed,
implemented, maintained, and followed the Policies in accordance with
the conditions of this five-year exemption, if granted, and has
developed and implemented the Training, as required herein;
(4) The auditor's engagement must specifically require the auditor
to test each Barclays Affiliated QPAM's operational compliance with the
Policies and Training. In this regard, the auditor must test a sample
of each QPAM's transactions involving ERISA-covered plans and IRAs
sufficient in size and nature to afford the auditor a reasonable basis
to determine the operational compliance with the Policies and Training;
(5) For each audit, on or before the end of the relevant period
described in Section I(i)(1) for completing the audit, the auditor must
issue a written report (the Audit Report) to BPLC and the Barclays
Affiliated QPAM to which the audit applies that describes the
procedures performed by the auditor during the course of its
examination. The Audit Report must include the auditor's specific
determinations regarding:
(i) The adequacy of the Barclays Affiliated QPAM's Policies and
Training; the Barclays Affiliated QPAM's compliance with the Policies
and Training; the need, if any, to strengthen such Policies and
Training; and any instance of the respective Barclays Affiliated QPAM's
noncompliance with the written Policies and Training described in
Section I(h) above. Any determination by the auditor regarding the
adequacy of the Policies and Training and the auditor's recommendations
(if any) with respect to strengthening the Policies and Training of the
respective Barclays Affiliated QPAM must be promptly addressed by such
Barclays Affiliated QPAM, and any action taken by such Barclays
Affiliated QPAM to address such recommendations must be included in an
addendum to the Audit Report (which addendum is completed prior to the
certification described in Section I(i)(7) below). Any determination by
the auditor that the respective Barclays Affiliated QPAM
[[Page 83429]]
has implemented, maintained, and followed sufficient Policies and
Training must not be based solely or in substantial part on an absence
of evidence indicating noncompliance. In this last regard, any finding
that the Barclays Affiliated QPAM has complied with the requirements
under this subsection must be based on evidence that demonstrates the
Barclays Affiliated QPAM has actually implemented, maintained, and
followed the Policies and Training required by this five-year
exemption. Furthermore, the auditor must not rely on the Annual Report
created by the compliance officer (the Compliance Officer) as described
in Section I(m) below in lieu of independent determinations and testing
performed by the auditor as required by Section I(i)(3) and (4) above;
and
(ii) The adequacy of the Annual Review described in Section I(m)
and the resources provided to the Compliance Officer in connection with
such Annual Review;
(6) The auditor must notify the respective Barclays Affiliated QPAM
of any instance of noncompliance identified by the auditor within five
(5) business days after such noncompliance is identified by the
auditor, regardless of whether the audit has been completed as of that
date;
(7) With respect to each Audit Report, the General Counsel or one
of the three most senior executive officers of the Barclays Affiliated
QPAM to which the Audit Report applies, must certify in writing, under
penalty of perjury, that the officer has: reviewed the Audit Report and
this exemption, if granted; addressed, corrected, or remedied any
inadequacy identified in the Audit Report; and determined that the
Policies and Training in effect at the time of signing are adequate to
ensure compliance with the conditions of this proposed five-year
exemption, if granted, and with the applicable provisions of ERISA and
the Code;
(8) The Risk Committee of BPLC's Board of Directors is provided a
copy of each Audit Report; and a senior executive officer with a direct
reporting line to the highest ranking legal compliance officer of BPLC
must review the Audit Report for each Barclays Affiliated QPAM and must
certify in writing, under penalty of perjury, that such officer has
reviewed each Audit Report;
(9) Each Barclays Affiliated QPAM provides its certified Audit
Report by regular mail to: The Department's Office of Exemption
Determinations (OED), 200 Constitution Avenue NW., Suite 400,
Washington, DC 20210, or by private carrier to: 122 C Street NW., Suite
400, Washington, DC 20001-2109, no later than 30 days following its
completion. The Audit Report will be part of the public record
regarding this five-year exemption, if granted. Furthermore, each
Barclays Affiliated QPAM must make its Audit Report unconditionally
available for examination by any duly authorized employee or
representative of the Department, other relevant regulators, and any
fiduciary of an ERISA-covered plan or IRA, the assets of which are
managed by such Barclays Affiliated QPAM;
(10) Each Barclays Affiliated QPAM and the auditor must submit to
OED: (A) Any engagement agreement(s) entered into pursuant to the
engagement of the auditor under this five-year exemption, if granted;
and (B) any engagement agreement entered into with any other entity
retained in connection with such QPAM's compliance with the Training or
Policies conditions of this five-year exemption, if granted, no later
than six (6) months after the Conviction Date (and one month after the
execution of any agreement thereafter);
(11) The auditor must provide OED, upon request, all of the
workpapers created and utilized in the course of the audit, including,
but not limited to: The audit plan; audit testing; identification of
any instance of noncompliance by the relevant Barclays Affiliated QPAM;
and an explanation of any corrective or remedial action taken by the
applicable Barclays Affiliated QPAM; and
(12) BPLC must notify the Department at least thirty (30) days
prior to any substitution of an auditor, except that no such
replacement will meet the requirements of this paragraph unless and
until BPLC demonstrates to the Department's satisfaction that such new
auditor is independent of BPLC, experienced in the matters that are the
subject of the exemption, if granted, and capable of making the
determinations required of this exemption, if granted;
(j) Effective as of the effective date of this five-year exemption,
if granted, with respect to any arrangement, agreement, or contract
between a Barclays Affiliated QPAM and an ERISA-covered plan or IRA for
which a Barclays Affiliated QPAM provides asset management or other
discretionary fiduciary services, each Barclays Affiliated QPAM agrees
and warrants:
(1) To comply with ERISA and the Code, as applicable with respect
to such ERISA-covered plan or IRA, to refrain from engaging in
prohibited transactions that are not otherwise exempt (and to promptly
correct any inadvertent prohibited transactions); and to comply with
the standards of prudence and loyalty set forth in section 404 of ERISA
with respect to each such ERISA-covered plan and IRA;
(2) To indemnify and hold harmless the ERISA-covered plan or IRA
for any damages resulting from a Barclays Affiliated QPAM's violation
of applicable laws, a Barclays Affiliated QPAM's breach of contract, or
any claim brought in connection with the failure of such Barclays
Affiliated QPAM to qualify for the exemptive relief provided by PTE 84-
14 as a result of a violation of Section I(g) of PTE 84-14 other than
the Conviction;
(3) Not to require (or otherwise cause) the ERISA covered plan or
IRA to waive, limit, or qualify the liability of the Barclays
Affiliated QPAM for violating ERISA or the Code or engaging in
prohibited transactions;
(4) Not to require the ERISA-covered plan or IRA (or sponsor of
such ERISA-covered plan or beneficial owner of such IRA) to indemnify
the Barclays Affiliated QPAM for violating ERISA or engaging in
prohibited transactions, except for violations or prohibited
transactions caused by an error, misrepresentation, or misconduct of a
plan fiduciary or other party hired by the plan fiduciary who is
independent of BPLC, and its affiliates;
(5) Not to restrict the ability of such ERISA-covered plan or IRA
to terminate or withdraw from its arrangement with the Barclays
Affiliated QPAM (including any investment in a separately managed
account or pooled fund subject to ERISA and managed by such QPAM), with
the exception of reasonable restrictions, appropriately disclosed in
advance, that are specifically designed to ensure equitable treatment
of all investors in a pooled fund in the event such withdrawal or
termination may have adverse consequences for all other investors as a
result of an actual lack of liquidity of the underlying assets,
provided that such restrictions are applied consistently and in like
manner to all such investors;
(6) Not to impose any fees, penalties, or charges for such
termination or withdrawal with the exception of reasonable fees,
appropriately disclosed in advance, that are specifically designed to
prevent generally recognized abusive investment practices or
specifically designed to ensure equitable treatment of all investors in
a pooled fund in the event such withdrawal or termination may have
adverse consequences for all other investors, provided that such fees
are applied consistently and in like manner to all such investors;
[[Page 83430]]
(7) Not to include exculpatory provisions disclaiming or otherwise
limiting liability of the Barclays Affiliated QPAM for a violation of
such agreement's terms, except for liability caused by an error,
misrepresentation, or misconduct of a plan fiduciary or other party
hired by the plan fiduciary which is independent of BPLC; and
(8) Within four (4) months of the date of the Conviction, each
Barclays Affiliated QPAM must provide a notice of its obligations under
this Section I(j) to each ERISA-covered plan and IRA for which a
Barclays Affiliated QPAM provides asset management or other
discretionary fiduciary services. For all other prospective ERISA-
covered plan and IRA clients for which a Barclays Affiliated QPAM
provides asset management or other discretionary services, the Barclays
Affiliated QPAM will agree in writing to its obligations under this
Section I(j) in an updated investment management agreement between the
Barclays Affiliated QPAM and such clients or other written contractual
agreement;
(k) Notice to Future Covered Clients. Each BPLC affiliated asset
manager provides each Future Covered Client with a Federal Register
copy of the proposed five-year exemption, along with a separate summary
describing the facts that led to the Conviction (the Summary), which
have been submitted to the Department, and a prominently displayed
statement that the Conviction resulted in a failure to meet a condition
of PTE 84-14. The provision of these documents must occur prior to, or
contemporaneously with, the client's receipt of a written asset
management agreement from the BPLC affiliated asset manager. For
purposes of this paragraph, a ``Future Covered Client'' means a client
of the BPLC affiliated asset manager that, beginning after the date, if
any, that a final exemption is published in the Federal Register, has
assets managed by such asset manager, and has received a representation
from the asset manager that the asset manager is a QPAM, or qualifies
for the relief provided by PTE 84-14; \134\
---------------------------------------------------------------------------
\134\ The Applicant states that there are no pooled funds
subject to ERISA or section 4975 of the Code with respect to which
the QPAM cannot identify plan and IRA investors. However, the
Applicant states that if, at the time of the publication of the
proposed exemption there are such funds, the Applicant will send a
copy of the notice of the proposed exemption to each distribution
agent for such fund, requesting that such agent forward the Notice
to Interested Persons to its clients.
---------------------------------------------------------------------------
(l) The Barclays QPAMs must comply with each condition of PTE 84-
14, as amended, with the sole exception of the violation of Section
I(g) of PTE 84-14 that is attributable to the Conviction;
(m)(1) BPLC designates a senior compliance officer (the Compliance
Officer) who will be responsible for compliance with the Policies and
Training requirements described herein. The Compliance Officer must
conduct an annual review (the Annual Review) to determine the adequacy
and effectiveness of the implementation of the Policies and Training.
With respect to the Compliance Officer, the following conditions must
be met:
(i) The Compliance Officer must be a legal professional with
extensive experience with, and knowledge of, the regulation of
financial services and products, including under ERISA and the Code;
and
(ii) The Compliance Officer must have a direct reporting line to
the highest-ranking corporate officer in charge of legal compliance
that is independent of BPLC's other business lines;
(2) With respect to each Annual Review, the following conditions
must be met:
(i) The Annual Review includes a review of: Any compliance matter
related to the Policies or Training that was identified by, or reported
to, the Compliance Officer or others within the compliance and risk
control function (or its equivalent) during the previous year; any
material change in the business activities of the Barclays Affiliated
QPAMs; and any change to ERISA, the Code, or regulations related to
fiduciary duties and the prohibited transaction provisions that may be
applicable to the activities of the Barclays Affiliated QPAMs;
(ii) The Compliance Officer prepares a written report for each
Annual Review (each, an Annual Report) that (A) summarizes his or her
material activities during the preceding year; (B) sets forth any
instance of noncompliance discovered during the preceding year, and any
related corrective action; (C) details any change to the Policies or
Training to guard against any similar instance of noncompliance
occurring again; and (D) makes recommendations, as necessary, for
additional training, procedures, monitoring, or additional and/or
changed processes or systems, and management's actions on such
recommendations;
(iii) In each Annual Report, the Compliance Officer must certify in
writing that to his or her knowledge: (A) The report is accurate; (B)
the Policies and Training are working in a manner which is reasonably
designed to ensure that the Policies and Training requirements
described herein are met; (C) any known instance of noncompliance
during the preceding year and any related correction taken to date have
been identified in the Annual Report; (D) the Barclays Affiliated QPAMs
have complied with the Policies and Training in all respects, and/or
corrected any instances of noncompliance in accordance with Section
I(h) above; and (E) Barclays has provided the Compliance Officer with
adequate resources, including, but not limited to, adequate staffing;
(iv) Each Annual Report must be provided to appropriate corporate
officers of BPLC and each Barclays Affiliated QPAM to which such report
relates; the head of compliance and the General Counsel (or their
functional equivalent) of the relevant Barclays Affiliated QPAM; and
must be made unconditionally available to the independent auditor
described in Section I(i) above;
(v) Each Annual Review, including the Compliance Officer's written
Annual Report, must be completed at least three (3) months in advance
of the date on which each audit described in Section I(i) is scheduled
to be completed;
(n) Each Barclays Affiliated QPAM will maintain records necessary
to demonstrate that the conditions of this exemption, if granted, have
been met, for six (6) years following the date of any transaction for
which such Barclays Affiliated QPAM relies upon the relief in the
exemption, if granted;
(o) During the effective period of this five-year exemption, if
granted, BPLC: (1) Immediately discloses to the Department any Deferred
Prosecution Agreement (a DPA) or a Non-Prosecution Agreement (an NPA)
entered into by BPLC or any of its affiliates with the U.S. Department
of Justice, in connection with conduct described in Section I(g) of PTE
84-14 or section 411 of ERISA; and
(2) Immediately provides the Department any information requested
by the Department, as permitted by law, regarding the agreement and/or
conduct and allegations that led to the agreement. After review of the
information, the Department may require BPLC, its affiliates, or
related parties, as specified by the Department, to submit a new
application for the continued availability of relief as a condition of
continuing to rely on this exemption. If the Department denies the
relief requested in the new application, or does not grant such relief
within twelve (12) months of application, the relief described herein
is revoked as of the date of denial or as of the expiration of the
twelve (12) month period, whichever date is earlier;
(p) Each Barclays Affiliated QPAM, in its agreements with ERISA-
covered plan
[[Page 83431]]
and IRA clients, or in other written disclosures provided to ERISA-
covered plan and IRA clients, within 60 days prior to the initial
transaction upon which relief hereunder is relied, and then at least
once annually, will clearly and prominently: Inform the ERISA-covered
plan and IRA client that the client has the right to obtain copies of
the QPAM's written Policies adopted in accordance with this exemption,
if granted; and
(q) A Barclays Affiliated QPAM or a Barclays Related QPAM will not
fail to meet the terms of this exemption, if granted, solely because a
different Barclays Affiliated QPAM or a Barclays Related QPAM fails to
satisfy a condition for relief described in Sections I(c), (d), (h),
(i), (j), (k), (n) and (p).
Section II: Definitions
(a) The term ``Barclays Affiliated QPAM'' means a ``qualified
professional asset manager'' (as defined in Section VI(a) \135\ of PTE
84-14) that relies on the relief provided by PTE 84-14 and with respect
to which BPLC is a current or future ``affiliate'' (as defined in
Section VI(d)(1) of PTE 84-14). The term ``Barclays Affiliated QPAM''
excludes the parent entity, BPLC and BCI's Investment Bank division.
---------------------------------------------------------------------------
\135\ In general terms, a QPAM is an independent fiduciary that
is a bank, savings and loan association, insurance company, or
investment adviser that meets certain equity or net worth
requirements and other licensure requirements and that has
acknowledged in a written management agreement that it is a
fiduciary with respect to each plan that has retained the QPAM.
---------------------------------------------------------------------------
(b) The term ``Barclays Related QPAM'' means any current or future
``qualified professional asset manager'' (as defined in Section VI(a)
of PTE 84-14) that relies on the relief provided by PTE 84-14, and with
respect to which BPLC owns a direct or indirect five percent or more
interest, but with respect to which BPLC is not an ``affiliate'' (as
defined in Section VI(d)(1) of PTE 84-14).
(c) The term ``BPLC'' means Barclays PLC, the parent entity, and
does not include any subsidiaries or other affiliates.
(d) The terms ``ERISA-covered plan'' and ``IRA'' mean,
respectively, a plan subject to Part 4 of Title I of ERISA and a plan
subject to section 4975 of the Code.
(e) The term ``Conviction'' means the judgment of conviction
against BPLC in the United States District Court for the District of
Connecticut (the Court), Case No. 3:15-cr-00077-SRU-1, for
participating in a combination and conspiracy to fix, stabilize,
maintain, increase or decrease the price of, and rig bids and offers
for, euro/U.S. dollar currency pairs exchanged in the foreign currency
exchange spot market by agreeing to eliminate competition in the
purchase and sale of such currency pairs in the United States and
elsewhere, in violation of the Sherman Antitrust Act, 15 U.S.C. 1.
(f) The term ``Conviction Date'' means the date that a judgment of
conviction against BCI is entered by the Court in connection with the
Conviction.
Effective Date: This proposed five-year exemption, if granted, will
be effective beginning on the date of publication of such grant in the
Federal Register and ending on the date that is five years thereafter.
Should the Applicant wish to extend the effective period of exemptive
relief provided by this proposed five-year exemption, the Applicant
must submit another application for an exemption. In this regard, the
Department expects that, in connection with such application, the
Applicant should be prepared to demonstrate compliance with the
conditions for this exemption and that the Barclays Affiliated QPAMs,
and those who may be in a position to influence their policies, have
maintained the high standard of integrity required by PTE 84-14.
Department's Comment: Concurrently with this proposed five-year
exemption, the Department is publishing a proposed one-year exemption
for Barclays Affiliated QPAMs to continue to rely on PTE 84-14. That
one-year exemption, if granted, is intended to allow the Department
sufficient time, including a longer comment period, to determine
whether to grant this five-year exemption. The proposed one-year
exemption, if granted, is designed to protect ERISA-covered plans and
IRAs from the potential costs and losses, described below, that would
be incurred if such Barclays Affiliated QPAMs were to suddenly lose
their ability to rely on PTE 84-14 as of the Conviction date.
The proposed five-year exemption, if granted, would provide relief
from certain of the restrictions set forth in sections 406 and 407 of
ERISA. No relief from a violation of any other law would be provided by
this exemption, if granted, including any criminal conviction described
herein.
The Department cautions that the relief in this proposed five-year
exemption, if granted, would terminate immediately if, among other
things, an entity within the BPLC corporate structure is convicted of a
crime described in Section I(g) of PTE 84-14 (other than the
Conviction) during the effective period of the exemption. While such an
entity could apply for a new exemption in that circumstance, the
Department would not be obligated to grant the exemption. The terms of
this proposed five-year exemption have been specifically designed to
permit plans to terminate their relationships in an orderly and cost
effective fashion in the event of an additional conviction or a
determination that it is otherwise prudent for a plan to terminate its
relationship with an entity covered by the proposed exemption.
Summary of Facts and Representations 136
---------------------------------------------------------------------------
\136\ The Summary of Facts and Representations is based on the
Applicant's representations, unless indicated otherwise.
---------------------------------------------------------------------------
Background
1. BCI is a broker-dealer registered under the Securities Exchange
Act of 1934, as amended, and was, until December 28, 2015, an
investment adviser registered under the Investment Advisers Act of
1940, as amended. As a registered broker-dealer, BCI is regulated by
the U.S. Securities and Exchange Commission and Financial Industry
Regulatory Authority.
BCI is incorporated in the State of Connecticut and headquartered
in New York, with 18 U.S. branch offices. BCI is wholly-owned by
Barclays Group US Inc., a wholly-owned subsidiary of Barclays Bank PLC,
which, in turn, is a wholly-owned subsidiary of BPLC, a non-operating
holding company.
Barclays Bank PLC wholly owns, indirectly, one bank subsidiary in
the United States--Barclays Bank Delaware, a Delaware chartered
commercial bank supervised and regulated by the Federal Deposit
Insurance Corporation, the Delaware Office of the State Bank
Commissioner and the Consumer Financial Protection Bureau. Barclays
Bank Delaware does not manage ERISA plan or IRA assets currently, but
may do so in the future.
BPLC's asset management business, Barclays Wealth and Investment
Management (BWIM), offers wealth management products and services for
many types of clients, including individual and institutional clients.
BWIM operates through over 20 offices worldwide. Prior to December 4,
2015, BWIM functioned in the United States through BCI.
On December 4, 2015, BCI consummated a sale of its U.S. operations
of BWIM, including Barclays Wealth Trustees, to Stifel Financial Corp.
As a result of the transaction, as of that date, neither BCI nor any of
its affiliates continued to manage ERISA-covered plan or IRA assets.
However,
[[Page 83432]]
BCI or its current or future affiliates could manage such assets in the
future.
2. On May 20, 2015, the Department of Justice filed a one-count
criminal information (the Information) in the United States District
Court for the District of Connecticut charging BPLC, an affiliate of
BCI, with participating in a combination and a conspiracy to fix,
stabilize, maintain, increase or decrease the price of, and rig bids
and offers for, Euro/USD currency pairs exchanged in the foreign
currency exchange spot market by agreeing to eliminate competition in
the purchase and sale of such currency pairs in the United States and
elsewhere, in violation of the Sherman Antitrust Act, 15 U.S.C. 1. For
example, BPLC engaged in communications with other financial services
firms in an electronic chat room limited to specific EUR/USD traders,
each of whom was employed, at certain times, by one of the financial
services firms engaged in the FX Spot Market.
BPLC also participated in a conspiracy to decrease competition in
the purchase and sale of the EUR/USD currency pair. BPLC and other
financial services firms coordinated the trading of the EUR/USD
currency pair in connection with certain benchmark currency ``fixes''
which occurred at specific times each trading day. In addition, BPLC
and other financial services firms refrained from certain trading
behavior, by withholding bids and offers, when another firm held an
open risk position, so that the price of the currency traded would not
move in a direction adverse to the firm with the open risk position.
Also, on May 20, 2015, pursuant to a plea agreement (the Plea
Agreement), BPLC entered a plea of guilty for the violation of Sherman
Antitrust Act, 15 U.S.C. 1. Under the Plea Agreement, BPLC pled guilty
to the charge set out in the Information. The judgment of Conviction
has not yet been entered.
BPLC agreed to pay a criminal fine of $710 million to the
Department of Justice, of which $650 million is attributable to the
charge set out in the Information. The remaining $60 million is
attributable to conduct covered by the non-prosecution agreement that
BPLC entered into on June 26, 2012, with the Criminal Division, Fraud
Section of the Department of Justice related to BPLC's submissions of
benchmark interest rates, including the London InterBank Offered Rate
(known as LIBOR). In addition, Barclays Bank PLC, a wholly-owned
subsidiary of BPLC, entered into a settlement agreement with the U.K.
Financial Conduct Authority to pay a monetary penalty of [pound]284.432
million ($440.9 million).
As part of the settlement, Barclays Bank PLC consented to the entry
of an Order Instituting Proceedings Pursuant to Sections 6(c)(4)(A) and
6(d) of the Commodity Exchange Act, Making Findings, and Imposing
Remedial Sanctions by the Commodity Futures Trading Commission (CFTC)
imposing a civil money penalty of $400 million (the CFTC Order). In
addition, Barclays Bank PLC and its New York branch consented to the
entry of an Order to Cease and Desist and Order of Assessment of a
Civil Money Penalty Issued Upon Consent Pursuant to the Federal Deposit
Insurance Act, as Amended, by the Board of Governors of the Federal
Reserve System (the Federal Reserve) imposing a civil money penalty of
$342 million (the Board Order). Barclays Bank PLC and its New York
branch also consented to the entry of a Consent Order under New York
Bank Law 44 and 44-a by the New York Department of Financial Services
(DFS) imposing a civil money penalty of $485 million \137\ (the DFS
Order and, together with the Plea Agreement, the CFTC Order and the
Board Order, the FX Settlements).
---------------------------------------------------------------------------
\137\ On November 17, 2015, Barclays Bank PLC (BBPLC) announced
that it had reached a subsequent settlement with DFS in respect of
its investigation into BBPLC's electronic trading of FX and FX
electronic trading system, that it had agreed to pay a civil money
penalty of $150 million and that BBPLC would take certain remedial
steps, including submission of a proposed remediation plan
concerning the underlying conduct to the independent consultant who
was initially installed pursuant to a Memorandum of Understanding
entered between BBPLC and DFS, and whose engagement terminated
February 19, 2016.
---------------------------------------------------------------------------
Failure To Comply With Section I(g) of PTE 84-14 and Proposed Relief
3. PTE 84-14 is a class exemption that permits certain transactions
between a party in interest with respect to an employee benefit plan
and an investment fund in which the plan has an interest and which is
managed by a ``qualified professional asset manager'' (QPAM), if the
conditions of the exemption are satisfied. These conditions include
Section I(g), which precludes a person who may otherwise meet the
definition of a QPAM from relying on the relief provided by PTE 84-14
if that person or its ``affiliate'' \138\ has, within 10 years
immediately preceding the transaction, been either convicted or
released from imprisonment, whichever is later, as a result of certain
specified criminal activity described therein.\139\ The Department
notes that a QPAM, and those who may be in a position to influence its
policies, are expected to maintain a high standard of integrity.
---------------------------------------------------------------------------
\138\ Section VI(d) of PTE 84-14 defines the term ``affiliate''
for purposes of Section I(g) as ``(1) Any person directly or
indirectly through one or more intermediaries, controlling,
controlled by, or under common control with the person, (2) Any
director of, relative of, or partner in, any such person, (3) Any
corporation, partnership, trust or unincorporated enterprise of
which such person is an officer, director, or a 5 percent or more
partner or owner, and (4) Any employee or officer of the person
who--(A) Is a highly compensated employee (as defined in Section
4975(e)(2)(H) of the Code) or officer (earning 10 percent or more of
the yearly wages of such person), or (B) Has direct or indirect
authority, responsibility or control regarding the custody,
management or disposition of plan assets.''
\139\ For purposes of Section I(g) of PTE 84-14, a person shall
be deemed to have been ``convicted'' from the date of the judgment
of the trial court, regardless of whether that judgment stands on
appeal.
---------------------------------------------------------------------------
4. The Applicant represents that BPLC is currently affiliated
(within the meaning of Part VI(d) of PTE 84-14) with only two entities
that could meet the definition of ``QPAM'' in Part VI(a) of PTE 84-14,
namely Barclays Bank Delaware and Barclays Bank PLC, New York Branch,
both of which are subject to its control (within the meaning of Part
VI(d)(1) of PTE 84-14). The Applicant states that BPLC or a subsidiary
may, in the future, invest in non-controlled, minimally related QPAMs
that could constitute Barclays Related QPAMs, as defined in the
proposed exemption.\140\ The Applicant states that it may acquire a new
affiliate at any time, and creates new affiliates frequently, in either
case that could constitute Barclays Affiliated QPAMs or Barclays
Related QPAMs, as defined in the proposed exemption. To the extent that
these new affiliates manage ERISA-covered plans or IRAs, these future
affiliates would also be covered by the exemption, if granted.
---------------------------------------------------------------------------
\140\ For example, the Applicant states that BPLC may provide
seed investments for new managers in exchange for minority
interests. However, the Applicant points out that these managers,
which had nothing to do with the conduct underlying the Conviction,
would be unable to rely on PTE 84-14 for the benefit of their plan
clients absent such relief.
---------------------------------------------------------------------------
Remedial Actions To Address the Misconduct of BPLC--Pursuant to the
Plea Agreement
5. The Applicant states that the Department of Justice and BPLC
negotiated a settlement reflected in the Plea Agreement, in which BPLC
agreed to lawfully undertake the following pursuant to the Plea
Agreement:
(a) Pay a total monetary penalty in the amount of $710 million;
(b) Not commit another crime under U.S. federal law or engage in
the conduct that gave rise to the Plea Agreement, during a probation
term of three years;
(c) Notify the probation officer upon learning of the commencement
of any
[[Page 83433]]
federal criminal investigation in which BPLC is a target, or federal
criminal prosecution against it;
(d) Prominently post and maintain on its Web site and, within 30
days after pleading guilty, make best efforts to send spot FX customers
and counterparties (other than customers and counterparties who BPLC
can establish solely engaged in buying or selling foreign currency
through its consumer bank units and not its spot FX sales or trading
staff) a retrospective disclosure notice regarding certain historical
conduct involving FX Spot Market transactions with customers via
telephone, email and/or electronic chat, during the probation term;
(e) Implement a compliance program designed to prevent and detect
the conduct underlying the Plea Agreement throughout its operations
including those of its affiliates and subsidiaries and provide an
annual progress report to the Department of Justice and the probation
officer;
(f) Further strengthen its compliance and internal controls as
required by the CFTC and the U.K. Financial Conduct Authority and any
other regulatory or enforcement agencies that have addressed the
conduct underlying the Plea Agreement, which shall include, but not be
limited to, a thorough review of the activities and decision-making by
employees of BPLC's legal and compliance functions with respect to the
historical conduct underlying he Plea Agreement, and promptly report to
the Department of Justice and the probation officer all of its
remediation efforts required by these agencies, as well as remediation
and implementation of any compliance program and internal controls,
policies and procedures related to the misconduct underlying he Plea
Agreement;
(g) Report to the Department of Justice all credible information
regarding criminal violations of U.S. antitrust laws and of U.S. law
concerning fraud, including securities or commodities fraud, by BPLC or
any of its employees, as to which BPLC's Board of Directors, management
(that is, all supervisors within the bank), or legal and compliance
personnel are aware;
(h) Bring to the Antitrust Division's attention all federal
criminal investigations in which BPLC is identified as a subject or a
target, and all administrative or regulatory proceedings or civil
actions brought by any federal or state governmental authority in the
United States against BPLC or its employees, to the extent that such
investigations, proceedings or actions allege facts that could form the
basis of a criminal violation of U.S. antitrust laws, and also bring to
the Criminal Division, Fraud Section's attention all federal criminal
or regulatory investigations in which BPLC is identified as a subject
or a target, and all administrative or regulatory proceedings or civil
actions brought by any federal governmental authority in the United
States against BPLC or its employees, to the extent that such
investigations, proceedings or actions allege violation of U.S. law
concerning fraud, including securities or commodities fraud;
(i) Cooperate fully and truthfully (along with certain related
entities in which it had, indirectly or directly, a greater than 50%
ownership interest as of the date of the Plea Agreement) with the
Department of Justice in its investigation and prosecution of the
conduct underlying the Plea Agreement, or any other currency pair in
the FX Spot Market, or any foreign exchange forward, foreign exchange
option or other foreign exchange derivative, or other financial
product, to the extent such other financial product has been disclosed
to the Department of Justice (excluding a certain sealed
investigation). This would include producing non-privileged non-
protected materials, wherever located; using its best efforts to secure
continuing cooperation of the current or former directors, officers and
employees of BPLC and its Related Entities; and identifying witnesses
who, to BPLC's knowledge, may have material information regarding the
matters under investigation;
(j) Cooperate fully with the Department of Justice and any other
law enforcement authority or government agency designated by the
Department of Justice, in a manner consistent with applicable law and
regulations, with regard to a certain sealed investigation; and
(k) Expeditiously seek relief from the Department by filing an
application for the QPAM Exemption and will provide all information
requested by the Department in a timely manner.
Remedial Actions To Address the Misconduct of BPLC--Structural
Enhancements
6. The Applicant represents that BPLC and its subsidiaries and
affiliates, including Barclays Bank PLC and its New York branch
(collectively, the Bank) have implemented and will continue to
implement policies and procedures designed to prevent the recurrence of
the conduct that is the subject of the FX Settlements as required by
the Plea Agreement. The Applicant states that the Bank's efforts in
this regard are recognized in the Plea Agreement itself, which
acknowledges ``the substantial improvements to [BPLC's] compliance and
remediation program to prevent recurrence of the charged offense.''
The Applicant states that the Bank's efforts in this regard also
have been recognized by the CFTC, the Federal Reserve, the DFS and the
U.K. Financial Conduct Authority. For example, the Applicant states
that the Board Order notes that the Bank recently completed a number of
initiatives aimed at strengthening its governance and controls
framework to control and monitor risk in the FX business, and that the
Federal Reserve Bank of New York concluded that the current design of
the Bank's FX governance and controls framework is generally sound. The
Applicant further states that the DFS Order notes that the Bank has
implemented remedial measures to address the conduct identified in the
Order.
The Applicant also states that the U.K. Financial Conduct
Authority, in its settlement agreement, also acknowledges that the Bank
has undertaken and is continuing to undertake remedial action and
recognizes that the Bank has committed significant resources to
improving the business practices and associated controls relating to
its FX operations.
The Applicant states that the CFTC Order notes the Bank's review of
its business practices and systems and controls, which included
remedial efforts across the Bank at the Group, Compliance and Front
Office levels. The Applicant represents that at the Group level, an
independent review of the Bank's business practices was conducted,
which, among other things, led to the introduction of a new code of
conduct which sets out the ethical and professional behaviors expected
of employees. The Applicant states that at the Group level and with
respect to its investment banking operations, the Bank has undertaken
significant work to strengthen the role of Compliance. The Applicant
represents that the work has included increasing Compliance's
visibility on board and management committees, developing a process and
reporting framework to support monitoring and verification activity
undertaken by Compliance, holding standardized and structured monthly
business line meetings between Compliance and the Global Head of the
business they cover, formalizing a breach review process to ensure
consistent and effective treatment of Compliance policy breaches,
enhancing and transitioning to a centralized model for trade
surveillance and e-
[[Page 83434]]
communications surveillance, and increasing Compliance's budget for
staff and training.
Remedial Actions To Address the Misconduct of BPLC--Additional
Structural Enhancements
7. The Applicant states that the Bank has made substantial
investments in the independent, external review of its governance,
operational model, and risk and control programs, conducted by Sir
Anthony Salz, including interviews of more than 600 employees, clients,
and competitors, as well as consideration of more than 9,000 responses
to an internal staff survey.
The Applicant represents that the Bank has taken steps to clearly
articulate its policies and values and disseminate that information
firm-wide through trainings.
The Applicant states that the Bank continues to develop a strong
institutionalized framework of supervision and accountability running
from the desk level to the top of the organization. For example, the
Applicant states that Barclays established in 2013 a dedicated Board-
level committee, the Board Conduct, Operational and Reputation Risk
Committee, that is responsible for ensuring, on behalf of the Board,
the efficiency of the processes for identification and management of
conduct risk, reputation risk and operational risk. This committee
reports to the BPLC's Board of Directors. In addition, the Applicant
states that the Bank has established numerous business-specific
committees--comprising senior business personnel and regional
executives, among others--that are responsible for considering the
principal risks as they relate to the associated businesses. The
Applicant represents that each of these committees meets on a quarterly
basis, and all report up to the Board Conduct, Operational and
Reputation Risk Committee.
The Applicant represents that the Bank continues to institute an
enhanced global compliance and controls system, supported by
substantial financial and human resources, and charged with enforcing
and continually monitoring adherence to BPLC's policies. The Applicant
states that Junior Compliance employees receive approximately 600 hours
of Compliance-related training over a two-year period. The Applicant
states that more senior Compliance personnel receive additional
training.
Statutory Findings--Protective of the Rights of Participants of
Affected Plans and IRAs
8. The Applicant has proposed certain conditions it believes are
protective of participants and beneficiaries of ERISA-covered plans and
IRAs with respect to the transactions described herein. The Department
has determined that it is necessary to modify and supplement the
conditions before it can tentatively determine that the requested
exemption meets the statutory requirements of section 408(a) of ERISA.
In this regard, the Department has tentatively determined that the
following conditions adequately protect the rights of participants and
beneficiaries of affected plans and IRAs with respect to the
transactions that would be covered by this proposed five-year
exemption, if granted.
The five-year exemption, if granted, as proposed, is only available
to the extent that, (a) other than certain individuals who: (i) Worked
for a non-fiduciary business within BCI; (ii) had no responsibility
for, and exercised no authority in connection with, the management of
plan assets; and (iii) are no longer employed by BPLC, the Barclays
Affiliated QPAMs and the Barclays Related QPAMs (including their
officers, directors, agents other than BPLC, and employees of such
QPAMs who had responsibility for, or exercised authority in connection
with the management of plan assets) did not know of, did not have
reason to know of, or participate in the criminal conduct of BPLC that
is the subject of the Conviction (for purposes of this requirement, the
term ``participate in'' includes the knowing or tacit approval of the
misconduct underlying the Conviction); (b) any failure of the Barclays
Affiliated QPAM or a Barclays Related QPAM to satisfy Section I(g) of
PTE 84-14 arose solely from the Conviction; and (c) the Barclays
Affiliated QPAMs and (including their officers, directors, agents other
than BPLC, and employees of such Barclays QPAMs) did not receive direct
compensation, or knowingly receive indirect compensation, in connection
with the criminal conduct that is the subject of the Conviction.
9. The Department expects the Barclays Affiliated QPAMs will
rigorously ensure that the individuals associated with the misconduct
will not be employed or knowingly engaged by such QPAMs. In this
regard, the five-year exemption, if granted, mandates that the Barclays
Affiliated QPAMs will not employ or knowingly engage any of the
individuals that participated in the FX manipulation that is the
subject of the Conviction. For purposes of this condition, the term
``participated in'' includes an individual's knowing or tacit approval
of the behavior that is the subject of the Conviction.
10. Further, a Barclays Affiliated QPAM will not use its authority
or influence to direct an ``investment fund,'' (as defined in Section
VI(b) of PTE 84-14) that is subject to ERISA or the Code and managed by
such Barclays Affiliated QPAM to enter into any transaction with BPLC
or BCI or engage BPLC or BCI to provide any service to such investment
fund, for a direct or indirect fee borne by such investment fund,
regardless of whether such transaction or service may otherwise be
within the scope of relief provided by an administrative or statutory
exemption.
11. The Barclays Affiliated QPAMs and the Barclays Related QPAMs
must comply with each condition of PTE 84-14, as amended, with the sole
exception of the violation of Section I(g) of PTE 84-14 that is
attributable to the Conviction. Further, any failure of a Barclays
Affiliated QPAM or a Barclays Related QPAM to satisfy Section I(g) of
PTE 84-14 arose solely from the Conviction.
No relief will be provided by this five-year exemption, if granted,
if a Barclays Affiliated QPAM or a Barclays Related QPAM exercised
authority over the assets of an ERISA-covered plan or an IRA in a
manner that it knew or should have known would: Further the criminal
conduct that is the subject of the Conviction; or cause the Barclays
Affiliated QPAM or the Barclays Related QPAM, or its affiliates or
related parties to directly or indirectly profit from the criminal
conduct that is the subject of the Conviction. Also, no relief will be
provided by this five-year exemption, if granted, to the extent BPLC or
BCI provides any discretionary asset management services to ERISA-
covered plans or IRAs, or otherwise acts as a fiduciary with respect to
ERISA-covered plan or IRA assets.
12. The Department believes that robust policies and training are
warranted where, as here, the criminal misconduct has occurred within a
corporate organization that is affiliated with one or more QPAMs
managing plan or IRA assets. Therefore, this proposed five-year
exemption, if granted, requires that prior to a Barclays Affiliated
QPAM's engagement by any ERISA-covered plan or IRA for discretionary
asset management services, where the QPAM represents that it qualifies
as a QPAM, the Barclays Affiliated QPAM must develop,
[[Page 83435]]
implement, maintain, and follow written policies and procedures (the
Policies) requiring and reasonably designed to ensure that: The asset
management decisions of the Barclays Affiliated QPAM are conducted
independently of the corporate management and business activities of
BPLC, including the management and business activities of BCI; the
Barclays Affiliated QPAM fully complies with ERISA's fiduciary duties
and with ERISA and the Code's prohibited transaction provisions, and
does not knowingly participate in any violation of these duties and
provisions with respect to ERISA-covered plans and IRAs; the Barclays
Affiliated QPAM does not knowingly participate in any other person's
violation of ERISA or the Code with respect to ERISA-covered plans and
IRAs; any filings or statements made by the Barclays Affiliated QPAM to
regulators, including, but not limited to, the Department of Labor, the
Department of the Treasury, the Department of Justice, and the Pension
Benefit Guaranty Corporation, on behalf of ERISA-covered plans or IRAs,
are materially accurate and complete, to the best of such QPAM's
knowledge at that time; the Barclays Affiliated QPAM does not make
material misrepresentations or omit material information in its
communications with such regulators with respect to ERISA-covered plans
or IRAs, or make material misrepresentations or omit material
information in its communications with ERISA-covered plan and IRA
clients; and the Barclays Affiliated QPAM complies with the terms of
this five-year exemption, if granted.
13. Any violation of, or failure to comply with, these Policies
must be corrected promptly upon discovery, and any such violation or
compliance failure not promptly corrected is reported, upon discovering
the failure to promptly correct, in writing, to appropriate corporate
officers, the head of compliance, and the General Counsel (or their
functional equivalent) of the relevant Barclays Affiliated QPAM, the
independent auditor responsible for reviewing compliance with the
Policies, and an appropriate fiduciary of any affected ERISA-covered
plan or IRA, which fiduciary is independent of BPLC. A Barclays
Affiliated QPAM will not be treated as having failed to develop,
implement, maintain, or follow the Policies, provided that it corrects
any instance of noncompliance promptly when discovered, or when it
reasonably should have known of the noncompliance (whichever is
earlier), and provided that it reports such instance of noncompliance
as explained above.
14. The Department has also imposed a condition that requires each
Barclays Affiliated QPAM, prior to its engagement by any ERISA covered
plan or IRA, to develop and implement a Training program, conducted at
least annually, for all relevant Barclays Affiliated QPAM asset/
portfolio management, trading, legal, compliance, and internal audit
personnel. The Training must be set forth in the Policies and, at a
minimum, cover the Policies, ERISA and Code compliance (including
applicable fiduciary duties and the prohibited transaction provisions),
ethical conduct, the consequences for not complying with the conditions
of this five-year exemption, if granted, (including any loss of
exemptive relief provided herein), and prompt reporting of wrongdoing.
Further, the Training must be conducted by an independent professional
who has been prudently selected and who has appropriate technical
training and proficiency with ERISA and the Code.
15. Independent Transparent Audit. The Department views a rigorous
and transparent audit that is conducted annually by an independent
party, as essential to ensuring that the conditions for exemptive
relief described herein are followed by the Barclays Affiliated QPAMs.
Therefore, Section I(i) of this proposed five-year exemption, if
granted, requires that each Barclays Affiliated QPAM submits to an
audit, conducted annually by an independent auditor, who has been
prudently selected and who has appropriate technical training and
proficiency with ERISA and the Code, to evaluate the adequacy of, and
the Barclays Affiliated QPAM's compliance with, the Policies and
Training described herein. The audit requirement must be incorporated
in the Policies. In addition, each annual audit must cover a
consecutive twelve (12) month period starting with the twelve (12)
month period that begins on the date that a Barclays Affiliated QPAM is
first engaged by any ERISA-covered plan or IRA for discretionary asset
management services reliant on PTE 84-14 and each annual audit must be
completed no later than six (6) months after the period to which the
audit applies.
16. Among other things, the audit condition requires that, to the
extent necessary for the auditor, in its sole opinion, to complete its
audit and comply with the conditions for relief described herein, and
as permitted by law, each Barclays Affiliated QPAM and, if applicable,
BPLC, will grant the auditor unconditional access to its business,
including, but not limited to: Its computer systems, business records,
transactional data, workplace locations, training materials, and
personnel.
In addition, the auditor's engagement must specifically require the
auditor to determine whether each Barclays Affiliated QPAM has complied
with the Policies and Training conditions described herein, and must
further require the auditor to test each Barclays Affiliated QPAM's
operational compliance with the Policies and Training. The auditor must
issue a written report (the Audit Report) to BPLC and the Barclays
Affiliated QPAM to which the audit applies that describes the
procedures performed by the auditor during the course of its
examination. The Audit Report must include the auditor's specific
determinations regarding: The adequacy of the Barclays Affiliated
QPAM's Policies and Training; the Barclays Affiliated QPAM's compliance
with the Policies and Training; the need, if any, to strengthen such
Policies and Training; and any instance of the respective Barclays
Affiliated QPAM's noncompliance with the written Policies and Training.
17. Any determination by the auditor regarding the adequacy of the
Policies and Training and the auditor's recommendations (if any) with
respect to strengthening the Policies and Training of the respective
Barclays Affiliated QPAM must be promptly addressed by such Barclays
Affiliated QPAM, and any action taken by such Barclays Affiliated QPAM
to address such recommendations must be included in an addendum to the
Audit Report. Further, any determination by the auditor that the
respective Barclays Affiliated QPAM has implemented, maintained, and
followed sufficient Policies and Training must not be based solely or
in substantial part on an absence of evidence indicating noncompliance.
In this last regard, any finding that the Barclays Affiliated QPAM has
complied with the requirements, as described above, must be based on
evidence that demonstrates the Barclays Affiliated QPAM has actually
implemented, maintained, and followed the Policies and Training
required by this five-year exemption. Finally, the Audit Report must
address the adequacy of the Annual Review required under this exemption
and the resources provided to the Compliance Officer in connection with
such Annual Review. Moreover, the auditor must notify the respective
Barclays Affiliated QPAM of any instance of
[[Page 83436]]
noncompliance identified by the auditor within five (5) business days
after such noncompliance is identified by the auditor, regardless of
whether the audit has been completed as of that date.
18. This exemption, if granted, requires that certain senior
personnel of BPLC review the Audit Report and make certain
certifications and take various corrective actions. In this regard, the
General Counsel or one of the three most senior executive officers of
the Barclays Affiliated QPAM to which the Audit Report applies, must
certify, in writing, under penalty of perjury, that the officer has
reviewed the Audit Report and this five-year exemption, if granted;
addressed, corrected, or remedied an inadequacy identified in the Audit
Report; and determined that the Policies and Training in effect at the
time of signing are adequate to ensure compliance with the conditions
of this proposed five-year exemption, if granted, and with the
applicable provisions of ERISA and the Code. The Risk Committee of
BPLC's Board of Directors is provided a copy of each Audit Report; and
a senior executive officer with a direct reporting line to the highest
ranking legal compliance officer of BPLC must review the Audit Report
for each Barclays Affiliated QPAM and must certify in writing, under
penalty of perjury, that such officer has reviewed each Audit Report.
19. In order to create a more transparent record in the event that
the proposed relief is granted, each Barclays Affiliated QPAM must
provide its certified Audit Report to the Department no later than
thirty (30) days following its completion. The Audit Report will be
part of the public record regarding this five-year exemption, if
granted. Further, each Barclays Affiliated QPAM must make its Audit
Report unconditionally available for examination by any duly authorized
employee or representative of the Department, other relevant
regulators, and any fiduciary of an ERISA-covered plan or IRA, the
assets of which are managed by such Barclays Affiliated QPAM.
Additionally, each Barclays Affiliated QPAM and the auditor must submit
to the Department any engagement agreement(s) entered into pursuant to
the engagement of the auditor under this five-year exemption, if
granted. Also, they must submit to the Department any engagement
agreement entered into with any other entity retained in connection
with such QPAM's compliance with the Training or Policies conditions of
this proposed five-year exemption, if granted, no later than six (6)
months after the Barclays Affiliated QPAM is first engaged by any ERISA
covered plan or IRA for discretionary asset management services reliant
on PTE 84-14 (and one month after the execution of any agreement
thereafter).
Finally, if the exemption is granted, the auditor must provide the
Department, upon request, all of the workpapers created and utilized in
the course of the audit, including, but not limited to: The audit plan;
audit testing; identification of any instance of noncompliance by the
relevant Barclays Affiliated QPAM; and an explanation of any corrective
or remedial action taken by the applicable Barclays Affiliated QPAM.
In order to enhance oversight of the compliance with the exemption,
if granted, BPLC must notify the Department at least thirty (30) days
prior to any substitution of an auditor, and BPLC must demonstrate to
the Department's satisfaction that any new auditor is independent of
BPLC, experienced in the matters that are the subject of the exemption,
if granted, and capable of making the determinations required of this
five-year exemption, if granted.
20. Contractual Obligations. This five-year exemption, if granted,
requires the Barclays Affiliated QPAMs to enter into certain
contractual obligations in connection with the provision of services to
their clients. It is the Department's view that the condition in
Section I(j) is essential to the Department's ability to make its
findings that the proposed five-year exemption is protective of the
rights of the participants and beneficiaries of ERISA-covered and IRA
plan clients of Barclays Affiliated QPAMs under section 408(a) of
ERISA. In this regard, effective as of the effective date of this five-
year exemption, if granted, with respect to any arrangement, agreement,
or contract between a Barclays Affiliated QPAM and an ERISA-covered
plan or IRA for which a Barclays Affiliated QPAM provides asset
management or other discretionary fiduciary services, each Barclays
Affiliated QPAM must agree: (a) To comply with ERISA and the Code, as
applicable, with respect to such ERISA-covered plan or IRA, and to
refrain from engaging in prohibited transactions that are not otherwise
exempt (and to promptly correct any inadvertent prohibited
transactions), and to comply with the standards of prudence and loyalty
set forth in section 404 of ERISA with respect to each such ERISA-
covered plan and IRA; (b) to indemnify and hold harmless the ERISA-
covered plan or IRA for any damages resulting from a violation of
applicable laws, a breach of contract, or any claim arising out of the
failure of such Barclays Affiliated QPAM to qualify for the exemptive
relief provided by PTE 84-14 as a result of a violation of Section I(g)
of PTE 84-14 other than the Conviction; (c) not to require (or
otherwise cause) the ERISA-covered plan or IRA to waive, limit, or
qualify the liability of the Barclays Affiliated QPAM for violating
ERISA or the Code or engaging in prohibited transactions; (d) not to
require the ERISA-covered plan or IRA (or sponsor of such ERISA-covered
plan or beneficial owner of such IRA) to indemnify the Barclays
Affiliated QPAM for violating ERISA or the Code, or engaging in
prohibited transactions, except for a violation or a prohibited
transaction caused by an error, misrepresentation, or misconduct of a
plan fiduciary or other party hired by the plan fiduciary which is
independent of BPLC, and its affiliates; (e) not to restrict the
ability of such ERISA-covered plan or IRA to terminate or withdraw from
its arrangement with the Barclays Affiliated QPAM (including any
investment in a separately managed account or pooled fund subject to
ERISA and managed by such QPAM), with the exception of reasonable
restrictions, appropriately disclosed in advance, that are specifically
designed to ensure equitable treatment of all investors in a pooled
fund in the event such withdrawal or termination may have adverse
consequences for all other investors as a result of the actual lack of
liquidity of the underlying assets, provided that such restrictions are
applied consistently and in like manner to all such investors; and (f)
not to impose any fees, penalties, or charges for such termination or
withdrawal with the exception of reasonable fees, appropriately
disclosed in advance, that are specifically designed to prevent
generally recognized abusive investment practice, or specifically
designed to ensure equitable treatment of all investors in a pooled
fund in the event such withdrawal or termination may have adverse
consequences for all other investors, provided that such fees are
applied consistently and in like manner to all such investors.
Furthermore, any contract, agreement or arrangement between a Barclays
Affiliated QPAM and its ERISA-covered plan or IRA client must not
contain exculpatory provisions disclaiming or otherwise limiting
liability of the Barclays Affiliated QPAM for a violation of such
agreement's terms, except for liability caused by error,
misrepresentation, or misconduct of a plan fiduciary or other party
hired by the plan fiduciary which
[[Page 83437]]
is independent of BPLC and its affiliates.
21. Within four (4) months of the date of the Conviction, each
Barclays Affiliated QPAM must provide a notice of its obligations under
this Section I(j) to each ERISA-covered plan and IRA for which a
Barclays Affiliated QPAM provides asset management or other
discretionary fiduciary services. For all other prospective ERISA-
covered plan and IRA clients for which a Barclays Affiliated QPAM
provides asset management or other discretionary services, the Barclays
Affiliated QPAM will agree in writing to its obligations under this
Section I(j) in an updated investment management agreement between the
Barclays Affiliated QPAM and such clients or other written contractual
agreement. In no event may any of these obligations be waived,
qualified, or limited by any other agreement, side letter, or
investment term.
22. Notice Requirements. The proposed exemption contains extensive
notice requirements, some of which extend not only to ERISA-covered
plan and IRA clients of Barclays Affiliated QPAMs, but which also go to
non-Plan clients of Barclays Affiliated QPAMs. In this regard, the
Department understands that many firms may promote their ``QPAM''
designation in order to earn asset management business, including from
non-ERISA plans. Therefore, each BPLC affiliated asset manager will
provide each Future Covered Client with a Federal Register copy of the
proposed five-year exemption, along with a separate summary describing
the facts that led to the Conviction (the Summary), which have been
submitted to the Department, and a prominently displayed statement that
the Conviction resulted in a failure to meet a condition of PTE 84-14.
The provision of these documents must occur prior to, or
contemporaneously with, the client's receipt of a written asset
management agreement from the BPLC affiliated asset manager. For
purposes of this paragraph, a ``Future Covered Client'' means a client
of the BPLC affiliated asset manager that, beginning after the date, if
any, that a final exemption is published in the Federal Register, has
assets managed by such asset manager, and has received a representation
from the asset manager that the asset manager is a QPAM, or qualifies
for the relief provided by PTE 84-14.
23. This proposed five-year exemption, if granted, also requires
BPLC to designate a senior compliance officer (the Compliance Officer)
who will be responsible for compliance with the Policies and Training
requirements described herein. The Compliance Officer will have several
obligations that it must comply with, as described in Section I(m)
above. These include conducting an annual review (the Annual Review) to
determine the adequacy and effectiveness of the implementation of the
Policies and Training; the preparation of a written report for each
Annual Review (each, an Annual Report) that, among other things,
summarizes his or her material activities during the preceding year;
and sets forth any instance of noncompliance discovered during the
preceding year, and any related corrective action. Each Annual Report
must be provided to appropriate corporate officers of BPLC and each
Barclays Affiliated QPAM to which such report relates; the head of
compliance and the General Counsel (or their functional equivalent) of
the relevant Barclays Affiliated QPAM; and must be made unconditionally
available to the independent auditor described above.
24. Each Barclays Affiliated QPAM must maintain records necessary
to demonstrate that the conditions of this exemption, if granted, have
been met, for six (6) years following the date of any transaction for
which such Barclays Affiliated QPAM relies upon the relief in the
proposed five-year exemption, if granted.
25. The Department stresses that it is proposing this five-year
exemption based on representations from BCI that it has changed and
improved its corporate culture and compliance capabilities. Consistent
with this, the proposed five-year exemption mandates that, during the
effective period, BPLC must immediately disclose to the Department any
Deferred Prosecution Agreement (a DPA) or Non-Prosecution Agreement (an
NPA) that BPLC or an affiliate enters into with the U.S. Department of
Justice, to the extent such DPA or NPA involved conduct described in
Section I(g) of PTE 84-14 or section 411 of ERISA. In addition, BPLC
must immediately provide the Department any information requested by
the Department, as permitted by law, regarding the agreement and/or the
conduct and allegations that led to the agreement.
The Department may, following its review of that information,
require BPLC or a party specified by the Department, to submit a new
application for the continued availability of relief as a condition of
continuing to rely on this exemption. In this regard, the QPAM (or
other party submitting the application) will have the burden of
justifying the relief sought in the application. If the Department
denies the relief requested in that application, or does not grant such
relief within twelve (12) months of the application, the relief
described herein would be revoked as of the date of denial or as of the
expiration of the twelve (12) month period, whichever date is earlier.
26. Finally, each Barclays Affiliated QPAM, in its agreements with
ERISA-covered plan and IRA clients, or in other written disclosures
provided to ERISA-covered plan and IRA clients, within sixty (60) days
prior to the initial transaction upon which relief hereunder is relied,
will clearly and prominently: Inform the ERISA-covered plan or IRA
client that the client has the right to obtain copies of the QPAM's
written Policies adopted in accordance with this five-year exemption,
if granted.
Statutory Findings--Administratively Feasible
27. The Applicant represents that the proposed exemption, if
granted, is administratively feasible because it does not require any
ongoing monitoring by the Department. Furthermore, the requested five-
year does not require the Department's oversight because, as a
condition of this proposed five-year exemption, neither BPLC nor BCI
may provide any fiduciary or QPAM services to ERISA-covered plan or
IRAs.
Summary
28. Given the revised and new conditions described above, the
Department has tentatively determined that the relief sought by the
Applicant satisfies the statutory requirements for an exemption under
section 408(a) of ERISA.
Notice to Interested Persons
As BCI ceased acting as a discretionary asset manager as of
December 4, 2015, notice of the proposed exemption (the Notice) will be
given solely by publication of the Notice in the Federal Register. All
written comments and/or requests for a hearing must be received by the
Department within thirty (30) days of the publication of the Notice in
the Federal Register.
All comments will be made available to the public. Warning: Do not
include any personally identifiable information (such as name, address,
or other contact information) or confidential business information that
you do not want publicly disclosed. All comments may be posted on the
Internet and can be retrieved by most Internet search engines.
[[Page 83438]]
FOR FURTHER INFORMATION CONTACT: Ms. Anna Mpras Vaughan of the
Department at (202) 693-8565. (This is not a toll-free number.)
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and/or section 4975(c)(2) of the Code
does not relieve a fiduciary or other party in interest or disqualified
person from certain other provisions of the Act and/or the Code,
including any prohibited transaction provisions to which the exemption
does not apply and the general fiduciary responsibility provisions of
section 404 of the Act, which, among other things, require a fiduciary
to discharge his duties respecting the plan solely in the interest of
the participants and beneficiaries of the plan and in a prudent fashion
in accordance with section 404(a)(1)(b) of the Act; nor does it affect
the requirement of section 401(a) of the Code that the plan must
operate for the exclusive benefit of the employees of the employer
maintaining the plan and their beneficiaries;
(2) Before an exemption may be granted under section 408(a) of the
Act and/or section 4975(c)(2) of the Code, the Department must find
that the exemption is administratively feasible, in the interests of
the plan and of its participants and beneficiaries, and protective of
the rights of participants and beneficiaries of the plan;
(3) The proposed exemptions, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act and/or the
Code, including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction; and
(4) The proposed exemptions, if granted, will be subject to the
express condition that the material facts and representations contained
in each application are true and complete, and that each application
accurately describes all material terms of the transaction which is the
subject of the exemption.
Signed at Washington, DC, this 10th day of November 2016.
Lyssa E. Hall,
Director, Office of Exemption Determinations, Employee Benefits
Security Administration, U.S. Department of Labor.
[FR Doc. 2016-27563 Filed 11-18-16; 8:45 am]
BILLING CODE 4510-29-P