DoL OKs Limited Cross Trading

February 11, 2002 (PLANSPONSOR.com) - Investment firms now have a green light to cross trade securities of an employee defined benefit plan with the firm's other trading accounts.

The approval came from the US Department of Labor (DoL), which issued a final class exemption to allow the transactions under certain circumstances.

Cross-trading is a common practice in the securities industry in which investment managers and advisors buy and sell securities between client accounts. Its supporters say the practice can lead to cost savings.

The DoL’s exemption would apply only to passive cross-trading among index and model-driven funds under the control of the same investment manager where such funds hold plan assets subject to ERISA.

It also would apply to cross-trades of securities executed as part of a portfolio-restructuring program between index/model-driven funds and large accounts – including large plans and other institutional investors – which hold at least $50 million in total assets.

Under the exemption, investment firms would be required, among others things, to:

  • obtain prior approval of the participating plan to engage in a cross-trading program,
  • properly disclose information about the program to plan investors,
  • ensure that there are fair-pricing procedures for securities cross-traded between the index/model-driven funds or between such funds and certain large accounts, and
  • engage in cross-trades as a result of specified events outside the control of the investment managers

The final exemption  is published in the Federal Register.

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