Administration November 2, 2002

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.
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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.

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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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