Notice2021-21578
Notice of Proposed Exemption Involving J.P. Morgan Securities LLC, J.P. Morgan Investment Management Inc., J.P. Morgan Securities, and Chase Wealth Management (Collectively, the Applicants); Located in Weehawken, New Jersey
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
October 15, 2021
Effective
December 14, 2010
Issuing agencies
Labor DepartmentEmployee Benefits Security Administration
Abstract
This document gives notice of a proposed individual exemption from certain prohibited transaction restrictions of the Internal Revenue Code of 1986, as amended (the Code) involving certain principal trades previously caused or executed by J.P. Morgan Securities LLC and J.P. Morgan Investment Management Inc. for certain non-ERISA plan clients.
Full Text
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<title>Federal Register, Volume 86 Issue 197 (Friday, October 15, 2021)</title>
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[Federal Register Volume 86, Number 197 (Friday, October 15, 2021)]
[Notices]
[Pages 57446-57451]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-21578]
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
[Exemption Application No. D-11963]
Notice of Proposed Exemption Involving J.P. Morgan Securities
LLC, J.P. Morgan Investment Management Inc., J.P. Morgan Securities,
and Chase Wealth Management (Collectively, the Applicants); Located in
Weehawken, New Jersey
AGENCY: Employee Benefits Security Administration, Labor.
ACTION: Notice of Proposed Exemption.
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SUMMARY: This document gives notice of a proposed individual exemption
from certain prohibited transaction restrictions of the Internal
Revenue Code of 1986, as amended (the Code) involving certain principal
trades previously caused or executed by J.P. Morgan Securities LLC and
J.P. Morgan Investment Management Inc. for certain non-ERISA plan
clients.
DATES: If granted, the exemption will be in effect from December 14,
2010 until September 16, 2013. Written comments and a request for a
public hearing on the proposed exemption should be submitted to the
Department by January 13, 2022.
ADDRESSES: All written comments and requests for a hearing should be
sent to the Employee Benefits Security Administration (EBSA), Office of
Exemption Determinations, Attention: Application No. D-11963 via email
to <a href="/cdn-cgi/l/email-protection#791c54363c3d391d1615571e160f"><span class="__cf_email__" data-cfemail="97f2bad8d2d3d7f3f8fbb9f0f8e1">[email protected]</span></a> or online through the Federal eRulemaking Portal:
<a href="http://www.regulations.gov">http://www.regulations.gov</a>. Any such comments or requests should be
sent by the end of the scheduled comment period. The application for
exemption and the comments received will be available for public
inspection in the Public Disclosure Room of the Employee Benefits
Security Administration, U.S. Department of Labor, Room N-1515, 200
Constitution Avenue NW, Washington, DC 20210. See SUPPLEMENTARY
INFORMATION below for additional information regarding comments.
FOR FURTHER INFORMATION CONTACT: Ms. Anna Vaughan of the Department,
telephone (202) 693-8565. (This is not a toll-free number.)
SUPPLEMENTARY INFORMATION: As described in further detail below, J.P.
Morgan Securities LLC (JPMS) and J.P. Morgan Investment Management Inc.
(JPMIM) previously caused or executed prohibited principal transactions
on behalf of certain plans covered by the Employee Retirement Income
Security Act of 1974 (ERISA plans) and plans not covered by ERISA (non-
ERISA plans). The Applicants corrected the ERISA plan-related
prohibited transactions, which were reviewed and confirmed by an
independent fiduciary, and received ``no action letters under the
Department's Voluntary Fiduciary Compliance Program (the VFC
Program).\1\
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\1\ See 67 FR 15062 (Mar. 28, 2002), as updated at 71 FR 20262
(Apr. 19, 2006).
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The VFC Program is not available for corrections of non-ERISA plan-
related prohibited transactions; therefore, the Applicants are seeking
exemptive relief for their correction of prohibited principal
transactions involving the Applicants and their non-ERISA plan clients
(the Covered Transactions). The Applicants adhered to the same
conditions to correct the Covered Transactions that they applied to
correct the transactions involving their ERISA plan clients under the
VFC Program.
Comments
In light of the current circumstances surrounding the COVID-19
pandemic caused by the novel coronavirus which may result in disruption
to the receipt of comments by U.S. Mail or hand delivery/courier,
persons are encouraged to submit all comments electronically and not to
submit paper copies. Comments should state the nature of the person's
interest in the proposed exemption and the manner in which the person
would be adversely affected by the exemption, if granted. Any person
who may be adversely affected by an exemption can request a hearing on
the exemption. A request for a hearing must state: (1) The name,
address, telephone number, and email address of the person making the
request; (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; and (3) a statement of the issues to be addressed and a
general description of the evidence to be presented at the hearing. The
Department will grant a request for a hearing made in accordance with
the requirements above where a hearing is necessary to fully explore
material factual issues identified by the person requesting the
hearing. A notice of such hearing shall be published by the Department
in the Federal Register. The Department may decline to hold a hearing
if: (1) The request for the hearing does not meet the requirements
above; (2) the only issues identified for exploration at the hearing
are matters of law; or (3) the factual issues identified can be fully
explored through the submission of evidence in written (including
electronic) form. Warning: All comments received will be included in
the public record without change and may be made available online at
<a href="http://www.regulations.gov">http://www.regulations.gov</a>, including any personal information
provided, unless the comment includes information claimed to be
confidential or other information whose disclosure is restricted by
statute. 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. However, if EBSA cannot read your comment due to
technical difficulties and cannot contact you for clarification, EBSA
might not be able to consider your comment. Additionally, the <a href="http://www.regulations.gov">http://www.regulations.gov</a> website is an ``anonymous access'' system, which
means EBSA will not know your identity or contact information unless
[[Page 57447]]
you provide it in the body of your comment. If you send an email
directly to EBSA without going through <a href="http://www.regulations.gov">http://www.regulations.gov</a>, your
email address will be automatically captured and included as part of
the comment that is placed in the public record and made available on
the internet.
Background
This document contains a notice of proposed exemption that, if
granted, would provide exemptive relief from the sanctions resulting
from the application of Code Section 4975, by reason of Code Section
4975(c)(1)(A) and (D)-(E). The proposed exemption has been requested by
JPMS and its affiliates pursuant to Code Section 4975(c)(2) in
accordance with the Department's prohibited transaction exemption
procedures set forth in 29 CFR part 2570, subpart B (76 FR 66637,
66644, October 27, 2011). Effective December 31, 1978, Section 102 of
the Reorganization Plan No. 4 of 1978, 5 U.S.C. App 1 (1996)
transferred the authority of the Secretary of the Treasury to issue
administrative exemptions under Code Section 4975(c)(2) to the
Secretary of Labor. Accordingly, this notice of proposed exemption is
being issued solely by the Department.
Summary of Facts and Representations <SUP>2</SUP>
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\2\ The Department notes that the availability of this
exemption, if granted, is subject to the express condition that the
material facts and representations contained in application D-11963
are true and complete, and accurately describe all material terms of
the transactions covered by the exemption. If there is any material
change in a transaction covered by the exemption, or in a material
fact or representation described in the application, the exemption
will cease to apply as of the date of the change.
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1. JPMorgan Chase & Co. (JPMorgan) is a global financial services
firm that provides investment banking, financial services for consumers
and small businesses, commercial banking, financial transaction
processing and asset management.
2. JPMS, an indirect wholly-owned subsidiary of JPMorgan, is a
broker-dealer registered with the U.S. Securities and Exchange
Commission (the SEC) and supervised by the Financial Industry
Regulatory Authority, Inc. In addition, JPMS is an investment advisor
regulated by the SEC as a ``dual registrant.'' JPMS serves as an
investment advisor under investment advisory programs offered by its
retail brokerage lines of business, including the J.P. Morgan
Securities division of JPMS (JPMS Brokerage). JPMS Brokerage serves as
an investment adviser to ERISA-covered plans (the ERISA Plan Clients)
and accounts and plans subject to Code Section 4975 that are not
covered by ERISA (the Non-ERISA Plan Clients). JPMS' ERISA and Non-
ERISA Plan Clients participate in certain JPMS-sponsored wrap fee
programs under the Chase Wealth Management (CWM) line of business (the
CWM Wrap Program). Clients of these programs generally pay a bundled
fee to the program sponsor and receive custody, trade execution,
investment management, and other services.
3. JPMIM, an indirect wholly-owned subsidiary of JPMorgan, is an
investment advisor registered with the SEC. JPMIM serves as an
investment adviser for ERISA and Non-ERISA Plan Clients participating
in the CWM Wrap Program. During the time period relevant to this
proposed exemption, JPMIM was the overlay manager for one program and
one of the offered portfolio managers of another program.
Covered Transactions Involving JPMIM
4. According to the Applicants, a JPMorgan employee conducted a
routine monitoring of accounts in early July 2012, and noticed that a
particular account number was not enabled to trade on JPM-X, an
``alternative trading system'' owned and operated by JPMS. According to
the Applicants, the employee did not recognize the account was
associated with JPMIM or an affiliate. Instead, the employee had seen
documentation indicating that the account was associated with a non-
affiliated third party. On July 27, 2012, the employee authorized the
account for activation in JPM-X, including engaging in principal
trading.
The Applicants state that, on July 30, 2012, the head of the
Electronic Client Services (ECS) group noticed the JPM-X trading flow
associated with the recently-activated account number had an account
name that included a ``jpmim'' prefix. Based on that information, the
head of the ECS group immediately de-activated the account for
principal trading in JPM-X. The principal trades executed for the CWM
Wrap Program were discovered a few months later in connection with a
routine exam of JPMS by the SEC (the SEC Exam of JPMS). In total, 3,989
trades of securities issued by third-parties were executed for the CWM
Wrap Program on a principal basis. Regarding these trades: (a) 3,985
were sales by a Non-ERISA Plan Client to a counterparty affiliated with
JPMorgan (a JPM Counterparty), with an aggregate sales price of
$2,682,332.34 (the JPMIM Sales Transactions); \3\ and (b) four were
purchases by a Non-ERISA Plan Client from a JPM Counterparty (the JPMIM
Purchase Transactions) with an aggregate purchase price of $46,940.55.
The purchased shares had not been re-sold by the Non-ERISA Plan Client
as of the date the transactions were corrected.\4\ The Applicants
represent that JPMIM and JPMS endeavored to correct the prohibited
transactions as quickly as possible in the manner described in
paragraph 11 below.
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\3\ These trades involved 3,784 Non-ERISA Plan Clients.
\4\ These trades involved two Non-ERISA Plan Clients.
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5. The Applicants represent that the trades did not result in any
commissions being paid by the Non-ERISA Plan Clients to JPMIM or its
affiliates. Rather, because the trades were executed under the CWM Wrap
Program, no identifiable transaction compensation was paid in
connection with either the JPMIM Sales Transactions or the JPMIM
Purchase Transactions. The Applicants represent that JPMIM is no longer
enabled to execute trades on JPM-X.
Covered Transactions Involving JPMS Brokerage
6. According to the Applicants, on December 14, 2010, January 13,
2011, February 3, 2012, December 31, 2012, August 22, 2013 and
September 16, 2013, 15 trades involving JPMS Brokerage were mistakenly
executed on a principal basis, although not on JPM-X. The Applicants
state that JPMS Brokerage's compliance department discovered the
Covered Transactions in connection with the SEC Exam of JPMS. Of the 15
trades: (a) Two were sales of securities,\5\ where each sale was by a
Non-ERISA Plan Client to a JPM Counterparty (the JPMS Brokerage Sales
Transactions), with an aggregate sales price of $61,854.54; and (b) 13
were purchases of securities by a Non-ERISA Plan Client from a JPM
Counterparty (the JPMS Brokerage Purchase Transactions), with an
aggregate purchase price of $557,232.08.\6\ The purchased securities
were subsequently sold by the Non-ERISA Plan Client before the
prohibited transactions were discovered. The Applicants state that JPMS
Brokerage endeavored to correct the prohibited transactions as quickly
as possible in the manner described in paragraph 11 below.
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\5\ These trades involved two Non-ERISA Plan Clients.
\6\ These trades involved seven Non-ERISA Plan Clients.
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7. The Applicants represent that the trades in question did not
result in any
[[Page 57448]]
commissions being paid by the Non-ERISA Plan Clients to JPMS or its
affiliates. Rather, the trades were executed under the CWM Wrap
Program. Further, no identifiable transaction compensation was paid in
connection with either the JPMS Brokerage Sales Transactions or the
JPMS Brokerage Purchase Transactions.
Other Prohibited Transactions, as Corrected Under the VFC Program
8. The Applicants represent that the errors and mistakes that gave
rise to prohibited transactions involving the Non-ERISA Plan Clients
also gave rise to prohibited transactions involving certain ERISA Plan
clients of JPMIM and JPMS (the ERISA Plan Prohibited Transactions). The
Applicants state that JPMIM and JPMS Brokerage corrected the ERISA Plan
Prohibited Transactions pursuant to the requirements set forth in the
VFC Program.\7\ The Applicants represents that they did not intend to
engage in the prohibited transactions and have implemented policies and
procedures to prevent future occurrences of such (or similar)
transactions.
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\7\ The Department notes that the VFC Program encourages the
full correction of certain breaches of fiduciary responsibility and
the restoration to participants and beneficiaries of losses
resulting from those breaches. Persons potentially liable for
certain types of ERISA fiduciary breaches may avoid certain civil
action and penalties by fulfilling the Program's requirements.
Several categories of transactions covered by the VFC Program also
qualify for excise tax relief under class exemption 2002-51, if the
conditions therein are met. See 67 FR 70623 (Nov. 25, 2002) as
amended at 71 FR 20135 (Apr. 19 2006).
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JPMIM and JPMS filed VFC Program Applications 30-105378 and 30-
105379, respectively, on December 31, 2014, and filed a supplement to
those applications on July 1, 2015 (collectively, the VFC Program
Applications). The Applicants received ``no action'' letters from the
Department dated September 14, 2015, in connection with their VFC
Program Applications for the ERISA Plan Prohibited Transactions.\8\
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\8\ In general terms, the Department may issue a ``no action''
letter to an applicant under the VFC Program, with respect to the
breach identified in the application, if the applicable requirements
of the VFC Program are satisfied.
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9. The Applicants state that although the Non-ERISA Plan Prohibited
Transactions were entered into under similar circumstances as the ERISA
Plan Prohibited Transactions (and in some cases pursuant to the same
block trade) and corrected using the same methodology used to correct
the ERISA Plan Prohibited Transactions, the Non-ERISA Plan Prohibited
Transactions are ineligible for relief under the VFC Program and PTE
2002-51, as amended, because they involved transactions with Non-ERISA
Plan Clients that are not covered under Title I of ERISA.\9\
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\9\ In granting an amendment to PTE 2002-51, and in response to
a comment to the proposed amendment, the Department noted, ``the
grant of this amendment does not foreclose [the Department's] future
consideration of individual exemption requests for transactions that
are outside the scope of relief provided by both the VFC Program and
the class exemption under circumstances when, for example a
financial institution received a no action letter applicable only to
plans subject to the Program for a transaction(s) that involved both
plans and such IRAs.'' See 71 FR 20135 at 37.
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Prohibited Transaction Analysis
10. Absent an exemption, the Covered Transactions violated several
prohibited transaction provisions, because JPMS or JPMIM caused Covered
Transactions to occur that resulted in JPMS or JPMIM receiving money or
securities from the Non-ERISA Plan Client. Specifically, the Covered
Transactions constitute: (a) A sale or exchange of property (i.e.,
money or securities) between a Non-ERISA Plan Client and a JPM
Counterparty (a disqualified person) prohibited by Code Section
4975(c)(1)(A); (b) a transfer of plan assets (i.e., money or
securities) from the Non-ERISA Plan Client to a JPM Counterparty (a
disqualified person) prohibited by Code Section 4975(c)(1)(D); and (c)
an act undertaken by JPMS or JPMIM to deal with plan assets in its own
interest or for its own account prohibited by Code Section
4975(c)(1)(E).
Covered Transaction Corrections
11. The Applicants represent that the Covered Transactions were
corrected using the same applicable methodologies described in the VFC
Program that they used to correct similar prohibited transactions that
occurred with their ERISA clients. The Applicants engaged an
independent fiduciary, Evercore Trust Company, N.A. (Evercore),\10\ to
determine: Whether the correction methodologies were properly applied,
including verifying the market value of the securities at the time the
prohibited transactions occurred; and whether the correction
methodologies provided the Non-ERISA Plan Clients with a greater
benefit than other correction methodology alternatives consistent with
the VFC Program.\11\
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\10\ This proposed exemption requires, among other things, that
there were no contractual provisions purporting to entitle Evercore,
in whole or in part, to indemnification by the Applicants, or by a
party related to the Applicants, for negligence or breach of federal
or state law responsibilities by Evercore, with respect to any task
performed by Evercore pursuant to the Applicants' exemption request.
\11\ Evercore sold its institutional trust and independent
fiduciary business to Newport Group Inc. and its subsidiary, Newport
Trust Company (NTC). Since October 19, 2017, NTC has served as the
independent fiduciary in connection with this proposed exemption.
The Department understands that the non-indemnification (for
negligence) provision in Evercore's engagement letter applies to
NTC, because NTC became the successor of Evercore as a result of the
acquisition.
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In a written report dated August 28, 2017, Evercore stated that it
reviewed the correction methodology alternatives outlined in the VFC
Program and considered the specific facts and circumstances related to
the Covered Transactions. Based on the foregoing, Evercore determined
that the correction methodologies utilized to correct the transactions:
(a) Were sufficient to return each affected Non-ERISA Plan Client to at
least the position it would have been in had the Covered Transaction
not occurred; (b) provided Non-ERISA Plan Clients with a greater
benefit than other correction methodology alternatives, consistent with
the VFC Program; and (c) were properly applied based on a review of a
representative sample of the corrections selected at random by
Evercore.
12. The Applicants describe the specific correction methodologies
as follows:
(a) With respect to JPMIM Sales Transactions involving securities
that had not been repurchased by the Non-ERISA Plan Clients, the
corrections were calculated based on Section 7.4(b)(2)(ii) of the VFC
Program, which permits monetary correction if an independent fiduciary
determines the plan will receive a greater benefit than it would from
rescission. The correction formula used was the sum of: (i) The excess,
if any, of the fair market value of the shares on the correction date
over the shares' original sale price; plus (ii) any transaction costs
paid by the Non-ERISA Plan Client in the original transaction; plus
(iii) lost earnings on the amounts described in (i) and (ii) calculated
from the original sale date to the correction date.\12\
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\12\ The Applicants represent that the lost earnings were
calculated in accordance with Section 5(b)(5) of the VFC Program.
The Department notes that, in general terms, the amount of ``lost
earnings'' calculable under Section 5(b)(5) approximates the amount
that would have been earned by the affected plan on the ``Principal
Amount,'' but for the breach. The Applicants state that to ensure
that the affected Non-ERISA Plan Clients (who had sold shares to JPM
Counterparties) would receive the greatest benefit through the
correction process, if the fair market value of the shares on the
correction date was greater than the original sale price of the
shares, that excess amount was paid to the Non-ERISA Plan Client.
The Applicants state that technically, under the VFC Program rules,
JPMorgan was not required to pay lost earnings on the excess amount,
but to ensure that the affected Non-ERISA Plan Clients would receive
the greatest benefit, JPMorgan determined that it was appropriate to
pay lost earnings on the excess amount.
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[[Page 57449]]
(b) With respect to the JPMIM Purchase Transactions where the Non-
ERISA Plan Clients continued to hold the purchased securities prior to
the date of correction, the correction amount was calculated based on
Section 7.4(a)(2)(i) of the VFC Program. Under this correction
procedure, the Non-ERISA Plan Clients were entitled to sell the
securities for a price equal to the greater of: The fair market value
of the shares on the correction date; or the sum of: (i) The original
purchase price; plus (ii) any transaction costs (e.g., commissions)
paid by the Non-ERISA Plan Clients in the original purchase; plus (iii)
lost earnings on the items (i) and (ii) from the original purchase date
to the correction date.
(c) With respect to the JPMS Brokerage Sales Transactions, the
methodology used was the same methodology that was used for the JPMIM
Sales Transactions.
(d) With respect to the JPMS Brokerage Purchase Transactions for
which the Non-ERISA Plan Clients subsequently sold the purchased
securities before the correction date, the correction amount was
calculated based on Section 7.4(a)(2)(i) of the VFC Program.\13\ Under
that methodology, the correction amount was determined by applying the
following calculation: (i) The excess, if any, of A over B (described
below), plus (ii) lost earnings on such excess calculated from the
prior resale date to the correction date. For purposes of this
calculation, A is the greater of: (i) The fair market value of the
shares at the time of resale; and (ii) the original purchase price plus
any transaction costs paid by the client in the original purchase, plus
any lost earnings on the original purchase price and transaction costs
calculated from the original purchase date to the resale date, and B is
the price received for the shares when they were resold, less any
transaction costs paid by the client in the resale.
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\13\ Securities purchased in a prohibited transaction were
matched to securities of the same type subsequently sold on a last-
in-first-out basis.
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13. The Applicants represent that the Covered Transactions were
inadvertent and that all of the Covered Transactions were executed at
fair market value and achieved best execution. In this regard, the
Covered Transactions were conducted using trading systems and
procedures designed to result in the trades being conducted at prices
that were as favorable as possible to the Non-ERISA Plan Clients under
prevailing market conditions, and were in fact conducted at prices no
less favorable to the Non-ERISA Plan Clients than the prices the
financial advisers could have obtained for the Non-ERISA Plan Clients
by conducting trades in arm's-length transactions with third-party
market participants. In addition, the Applicants state that there were
no identifiable profits to the JPM Counterparties in any of the Covered
Transactions, because all of the securities traded were liquid
securities that JPMorgan and its affiliates regularly hold in
inventory, deal in, or make a market in.
14. The Applicants represent that they have not taken advantage of
the relief provided by the VFC Program and PTE 2002-51 for the three
(3) years before the date of the Applicants' submission of the VFC
Program Applications, and that the Covered Transactions were not part
of an agreement, arrangement or understanding designed to benefit a
disqualified person.
15. Based on the foregoing, as required by ERISA Section 408(a),
the Department has tentatively determined that the proposed exemption
is:
(a) Administratively feasible because, among other things, the
corrections were performed in a manner consistent with the VFC Program
and verified by Evercore, an independent fiduciary acting on behalf of
the non-ERISA Plan Clients;
(b) In the interests of the affected Non-ERISA Plan Clients and
their owners and beneficiaries because, among other things, the Non-
ERISA Plan Clients were put in at least as favorable a position as they
would have been had the Covered Transaction not occurred; and
(c) Protective of the rights of the owners and beneficiaries of the
Non-ERISA Plan Clients because, among other things, the Covered
Transactions have been effectively unwound consistent with the
requirements set forth in the VFC Program.
Notice to Interested Persons
Notice of the proposed exemption will be provided to all interested
persons within 60 days of the publication of the notice of proposed
exemption in the Federal Register. The notice will be provided to all
interested persons in the manner agreed upon by the Applicants and the
Department and will contain a copy of the notice of proposed exemption
as published in the Federal Register 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 90 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.
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 ERISA Section 408(a) and/or Code Section 4975(c)(2) does not
relieve a fiduciary or other party in interest or disqualified person
from certain other provisions of ERISA and/or the Code, including any
prohibited transaction provisions to which the exemption does not apply
and the general fiduciary responsibility provisions of ERISA Section
404, 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 ERISA Section 404(a)(1)(b); nor does it affect the requirement of
Code Section 401(a)that requires plans to 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 ERISA Section 408(a)
and/or Code Section 4975(c)(2), 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 exemption, if granted, will be supplemental to,
and not in derogation of, any other provisions of ERISA 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
[[Page 57450]]
whether the transaction is in fact a prohibited transaction; and
(4) The proposed exemption, 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.
Proposed Exemption
Based on the facts and representations set forth in the
application, the Department is considering granting an exemption under
the authority of Code Section 4975(c)(2) and in accordance with the
Department's prohibited transaction exemption procedures set forth in
29 CFR part 2570, subpart B (76 FR 66637, October 27, 2011), as
follows:
Section I: Covered Transactions
If the proposed exemption is granted, the sanctions resulting from
the application of Code Section 4975, by reason of Code Section
4975(c)(1)(A), (D) and (E), shall not apply, effective December 14,
2010, until September 16, 2013, to certain principal trades involving
J.P. Morgan Securities LLC (JPMS), J.P. Morgan Investment Management
Inc. (JPMIM), J.P. Morgan Securities (JPMS Brokerage), and Chase Wealth
Management (CWM) (collectively, the Applicants), and certain of their
client plans that are subject to Code Section 4975 but covered by not
Title I of ERISA (the Non-ERISA Plan Clients). These principal
transactions resulted in the Non-ERISA Plan Clients purchasing or
selling securities from or to the Applicants (the Covered Transactions,
as defined in Section II, below).
This exemption is subject to the conditions set forth below in
Sections III and IV.
Section II: Definition of Covered Transaction
For purposes of this proposed exemption, the term ``Covered
Transaction'' means:
(a) 3,989 trades of securities issued by third-parties that were
executed on a principal basis for certain JPMS-sponsored wrap fee
programs under the Chase Wealth Management line of business (i.e., the
CWM Wrap Program) on or about July 27 and July 30, 2012. Of these
trades: (i) 3,985 involved sales by a Non-ERISA Plan Client to a
counterparty affiliated with JPMorgan (a JPM Counterparty), with an
aggregate sales price of $2,682,332.34 (i.e., the JPMIM Sales
Transactions); and (ii) four involved purchases by a Non-ERISA Plan
Client from a JPM Counterparty (i.e. the JPMIM Purchase Transactions)
and the purchased shares, with an aggregate purchase price of
$46,940.55, had not been re-sold by the Non-ERISA Plan Client as of the
date the transactions were corrected; and
(b) 15 trades involving JPMS Brokerage that were executed on a
principal basis on December 14, 2010, January 13, 2011, February 3,
2012, December 31, 2012, August 22, 2013 and September 16, 2013. Of
these trades: (a) Two involved sales of securities by a Non-ERISA Plan
Client to a JPM Counterparty (i.e., the JPMS Brokerage Sales
Transactions), with an aggregate sales price of $61,854.54; and (b) 13
involved purchases of securities by a Non-ERISA Plan Client from a JPM
Counterparty (i.e., the JPMS Brokerage Purchase Transactions), with an
aggregate purchase price of $557,232.08, that were purchased and
subsequently sold by the Non-ERISA Plan Client before the prohibited
transactions were discovered.
Section III: Specific Conditions
(a) The Applicants corrected the Covered Transactions in a manner
that was: (1) Consistent with the relevant requirements set forth in
the Department's Voluntary Fiduciary Correction Program (the VFC
Program); and (2) consistent with the Applicants' corrections of
similar prohibited transactions involving its ERISA plan clients, as
described in their VFC Program applications, dated December 31, 2014
(the VFC Program Applications);
(b) The Applicants received ``no action letters'' from the
Department in connection with their VFC Program Applications;
(c) An independent fiduciary, Evercore Trust Company, N.A.
(Evercore), reviewed the Applicants' corrections of the Covered
Transactions;
(d) Evercore confirmed that the methods utilized to correct the
Covered Transactions were properly applied to the Covered Transactions
and sufficient to return each affected Non-ERISA Plan Client to at
least the same position it would have been in had the Covered
Transactions not occurred.
(e) The Non-ERISA Plan Clients did not pay any identifiable
transaction costs with respect to the Covered Transactions;
(f) The Applicants promptly credited or issued a check to each Non-
ERISA Plan Client to whom a corrective payment was due after
discovering the Covered Transactions;
(g) The Covered Transactions were conducted using trading systems
and procedures designed to result in trades being conducted at prices
that are as favorable as possible to the Non-ERISA Plan Clients under
prevailing market conditions, and were in fact conducted at terms and
prices no less favorable to the Non-ERISA Plan Clients than the prices
the financial advisers could have obtained for the Non-ERISA Plan
Clients by conducting trades in arm's-length transactions with third-
party market participants;
(h) The Covered Transactions were not part of an agreement,
arrangement or understanding designed to benefit a disqualified person,
as defined in Code Section 4975(e)(2);
(i) The Applicants did not take advantage of the relief provided by
the VFC Program and Prohibited Transaction Exemption 2002-51 for three
(3) years prior to the date of the Applicants' submission of the VFC
Program Applications; \14\
---------------------------------------------------------------------------
\14\ 67 FR 70623 (Nov. 25, 2002), as amended, 71 FR 20135 (April
19, 2006).
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(j) The Applicants and their affiliates did not receive any
identifiable direct or indirect compensation in connection with the
Covered Transactions;
(k) The JPM Counterparties to the Non-ERISA Plan Clients did not
receive any identifiable direct or indirect profit from the Covered
Transactions;
(l) The Covered Transactions were inadvertent, executed at fair
market value, and achieved best execution;
(m) All of the securities traded were liquid securities that
JPMorgan and its affiliates regularly held in inventory, dealt in, or
made a market in; and
(n) No contractual provisions purported to give Evercore or Newport
Trust Company (i.e., NTC) a right to indemnification, in whole or part,
by a party related to the Applicants, for negligence or breach of
federal or state law responsibilities by Evercore or NTC, with respect
to any task performed by Evercore or NTC pursuant to the Applicants'
exemption request.
(o) All of the facts and representations set forth in the Summary
of Facts and Representations are true and accurate.
Section IV: General Conditions
(a) The Applicants maintain, or cause to be maintained, for a
period of six (6) years from the date of any Covered Transaction such
records as are necessary to enable the persons described in Section
IV(b)(1) to determine whether the conditions of this exemption have
been met, except that:
(1) A separate prohibited transaction shall not be considered to
have occurred if the records are lost or destroyed
[[Page 57451]]
before the end of the six-year period due to circumstances beyond the
control of Applicants; and
(2) No disqualified person with respect to a Non-ERISA Plan Client,
other than the Applicants, shall be subject to excise taxes imposed by
Code Section 4975 if such records are not maintained or made available
for examination as required by Section IV(b)(1), above.
(b)(1) Except as provided in Section IV(b)(2), the records referred
to in Section IV(a) are unconditionally available at their customary
location for examination during normal business hours by:
(A) Any duly authorized employee or representative of the
Department, the Internal Revenue Service, or the Securities and
Exchange Commission;
(B) Any fiduciary of any Non-ERISA Plan Client that engaged in a
Covered Transaction, or any duly authorized employee or representative
of such fiduciary; or
(C) Any owner or beneficiary of a Non-ERISA Plan Client that
engaged in a Covered Transaction or a representative of such owner or
beneficiary.
(2) None of the persons described in Sections IV(b)(1)(B) and (C)
shall be authorized to examine the Applicants' trade secrets or
privileged or confidential commercial and financial information.
(3) If the Applicants refuse to disclose records referred to in
Section IV(a) to any persons described in Sections IV(b)(1)(B), and (C)
on the basis that such information is exempt from disclosure, the
Applicants shall provide a written notice advising such persons of the
reasons for the refusal and that the Department may request such
information by the close of the thirtieth (30th) day following their
request.
Effective Date: The proposed exemption, if granted, will be in
effect from December 14, 2010 until September 16, 2013.
Signed at Washington, DC, this 27th day of September, 2021.
G. Christopher Cosby,
Acting Director, Office of Exemption Determinations, Employee Benefits
Security Administration, U.S. Department of Labor.
[FR Doc. 2021-21578 Filed 10-14-21; 8:45 am]
BILLING CODE 4510-29-P
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</html>Indexed from Federal Register on October 15, 2021.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.