Notice2022-25039
Proposed Exemption for Certain Prohibited Transaction Restrictions Involving Citigroup, Inc. (Citigroup or the Applicant); Located in New York, New York
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
November 16, 2022
Effective
January 10, 2023
Issuing agencies
Labor DepartmentEmployee Benefits Security Administration
Abstract
This document provides notice of the pendency before the Department of Labor (the Department) of a proposed exemption extending the exemptive relief provided by PTE 2017-05 for an additional four (4) years. If this proposed exemption is granted, certain entities with specified relationships to Citigroup (hereinafter, the Citigroup Affiliated QPAMs and the Citigroup Related QPAMs, as defined in Sections I(f) and I(g), respectively) would not be precluded from relying on the exemptive relief provided by Prohibited Transaction Class Exemption 84-14 (PTE 84-14 or the QPAM Exemption), notwithstanding the Conviction (defined in Section I(a)), during the Exemption Period (as defined in Section I(d)).
Full Text
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<title>Federal Register, Volume 87 Issue 220 (Wednesday, November 16, 2022)</title>
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[Federal Register Volume 87, Number 220 (Wednesday, November 16, 2022)]
[Notices]
[Pages 68728-68743]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-25039]
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
[Exemption Application No. D-12067]
Proposed Exemption for Certain Prohibited Transaction
Restrictions Involving Citigroup, Inc. (Citigroup or the Applicant);
Located in New York, New York
AGENCY: Employee Benefits Security Administration, Labor.
ACTION: Notice of proposed exemption.
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SUMMARY: This document provides notice of the pendency before the
Department of Labor (the Department) of a proposed exemption extending
the exemptive relief provided by PTE 2017-05 for an additional four (4)
years. If this proposed exemption is granted, certain entities with
specified relationships to Citigroup (hereinafter, the Citigroup
Affiliated QPAMs and the Citigroup Related QPAMs, as defined in
Sections I(f) and I(g), respectively) would not be precluded from
relying on the exemptive relief provided by Prohibited Transaction
Class Exemption 84-14 (PTE 84-14 or the QPAM Exemption),
notwithstanding the Conviction (defined in Section I(a)), during the
Exemption Period (as defined in Section I(d)).
DATES: If granted, this proposed exemption will be in effect for four
(4) years from January 10, 2023, through January 9, 2027. Written
comments and requests for a public hearing on the proposed exemption
should be submitted to the Department by January 3, 2023.
ADDRESSES: All written comments and requests for a hearing should be
submitted to the Employee Benefits Security Administration (EBSA),
Office of Exemption Determinations, Attention: Application No. D-12067
via email to <a href="/cdn-cgi/l/email-protection#a7c2e8e2e3e7c3c8cb89c0c8d1"><span class="__cf_email__" data-cfemail="2b4e646e6f6b4f4447054c445d">[email protected]</span></a> or online through <a href="https://www.regulations.gov">https://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: Anna Mpras Vaughan of the Department
at (202) 693-8565. (This is not a toll-free number.)
SUPPLEMENTARY INFORMATION:
Comments
Persons are encouraged to submit all comments electronically and
not to follow with paper copies. Comments should state the nature of
the person's interest in the proposed exemption and how 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="https://www.regulations.gov">https://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="https://www.regulations.gov">https://www.regulations.gov</a> website is an
[[Page 68729]]
``anonymous access'' system, which means EBSA will not know your
identity or contact information unless you provide it in the body of
your comment. If you send an email directly to EBSA without going
through <a href="https://www.regulations.gov">https://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.
The Department is considering granting this proposed four-year
exemption under the authority of section 408(a) of the Employee
Retirement Income Security Act of 1974 (ERISA) and section 4975(c)(2)
of the Internal Revenue Code of 1986 (the Code), and in accordance with
the procedures set forth in the Department's regulations.\1\
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\1\ 29 CFR part 2570, subpart B (76 FR 66637, 66644, October 27,
2011). For purposes of this proposed four-year exemption, references
to section 406 of Title I of ERISA, unless otherwise specified,
should be read to refer as well to the corresponding provisions of
Code section 4975.
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Department's Comment: The proposed four-year exemption would
provide relief from certain of the restrictions set forth in ERISA
Sections 406 and 407. 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 four-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 propose such an exemption. The terms of this
proposed four-year exemption have been designed to permit plans to
terminate their relationships with the Citigroup Affiliated QPAMs 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 them.
Summary of Facts and Representations <SUP>\2\</SUP>
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\2\ The Summary of Facts and Representations is based on the
representations the Applicant provided in its exemption application
and does not reflect factual findings or opinions of the Department,
unless indicated otherwise. The Department notes that availability
of this exemption, if granted, is subject to the express condition
that the material facts and representations contained in Application
D-12067 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 fact or representation described in the
application, the exemption will cease to apply as of the date of
such change.
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Background
1. Citigroup is a global diversified financial services holding
company headquartered in New York, New York. As of December 31, 2020,
Citigroup's investment advisory programs within the United States (the
Advisory Business) had over 56,700 customer advisory accounts, with
over $113 billion in assets under management, including over 12,700
accounts for ERISA-covered pension plans (ERISA Plans) and individual
retirement accounts (IRAs) (collectively, Retirement Accounts), with
approximately $4.6 billion in assets under management.\3\
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\3\ Citigroup's advisory programs within the United States are
offered primarily by Citi Global Wealth Investments (CGWI). CGWI is
comprised of various businesses formerly within Citi Private Bank
(CPB) and Citigroup's Consumer Wealth businesses, acting through
Citigroup Global Markets Inc. (CGMI) or through Citibank, N.A.
(Citibank) and Citi Private Advisory, LLC (CPA).
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2. As described in more detail below, Citigroup affiliates that
manage plan and IRA assets rely on the exemptive relief described in
class exemption PTE 84-14 (the Citigroup Affiliated QPAMs).\4\
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\4\ Certain entities that are owed 5% or more by Citigroup but
are not ``controlled by, or under common control with'' Citigroup
may also manage plan assets and rely on the QPAM Exemption. These
entities are not ``affiliates'' of Citigroup, as defined under Part
VI(d) of PTE 84-14. They are referred to as ``Citigroup Related
QPAMs''.
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ERISA and Code Prohibited Transactions and PTE 84-14
3. The rules set forth in ERISA Section 406 and Code section
4975(c)(1) proscribe certain ``prohibited transactions'' between plans
and related parties with respect to those plans. Under ERISA, such
parties are known as ``parties in interest.'' ERISA Section 3(14)
defines the term parties in interest with respect to a plan to include,
among others, (i) the plan fiduciary, (ii) a sponsoring employer of the
plan, (iii) a union whose members are covered by the plan, service
providers with respect to the plan, and (iv) certain of their
affiliates.\5\ The prohibited transaction provisions under ERISA
Section 406(a) and Code Section 4975(c)(1) 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 a party in interest or a transfer of plan assets to a party
in interest.\6\
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\5\ Under the Code, such parties, or similar parties, are
referred to as ``disqualified persons.''
\6\ The prohibited transaction provisions also include certain
fiduciary prohibited transactions under ERISA Section 406(b). These
include transactions involving fiduciary self-dealing, fiduciary
conflicts of interest, and kickbacks to fiduciaries.
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4. ERISA Section 408(a) and Code section 4975(c)(2) grant the
Department with the authority to issue exemptions for such prohibited
transactions if the Department finds that an exemption is (i)
administratively feasible, (ii) in the interests of the plan and of its
participants and beneficiaries, and (iii) protective of the rights of
participants and beneficiaries. The Department has codified its
procedures for filing and granting such exemptions in 29 CFR part 2570,
subpart B.\7\
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\7\ (76 FR 66637, 66644, October 27, 2011).
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5. PTE 84-14 exempts certain prohibited transactions between a
party in interest and an ``investment fund'' (as defined in Section
VI(b) of PTE 84-14) in which a plan has an interest if the fund's
investment manager satisfies the definition of ``qualified professional
asset manager'' (QPAM) and additional exemption conditions. PTE 84-14
was developed and granted based on the essential premise that broad
relief from the prohibited transaction provisions could be provided for
all types of transactions in which a plan engages with parties in
interest only if the commitments and the investments of plan assets,
and the negotiations leading thereto, are the sole responsibility of an
independent, discretionary, manager.\8\
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\8\ See 75 FR 38837, 38839 (July 6, 2010).
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6. Section I(g) of PTE 84-14 prevents an entity that may otherwise
meet requirements of the QPAM definition from utilizing the exemptive
relief provided by PTE 84-14 for itself and its client plans if that
entity, an ``affiliate'' thereof, or any direct or indirect owner of a
five percent or more interest in the QPAM has been either convicted or
released from imprisonment within 10 years immediately preceding the
transaction, whichever is later, as a result of criminal activity
described in that section. The Department included Section I(g) in PTE
84-14, in part, based on its expectation that QPAMs will maintain a
high standard of integrity to justify the broad relief the exemption
provides. This expectation extends not only to the QPAM itself but also
to parties that may be positioned to influence the QPAM's policies.
[[Page 68730]]
2017 Conviction of Citigroup and PTE 84-14 Ineligibility
7. The U.S. Department of Justice (DOJ) investigated certain
conduct and practices of Citigroup and other financial services firms
in the foreign exchange (FX) spot market. As a result of the DOJ'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 DOJ (the Plea Agreement)
pursuant to which Citicorp pleaded guilty to one count of an antitrust
violation of the Sherman Antitrust Act (15 U.S.C. 1). The plea
agreement was approved by the U.S. District Court for the District of
Connecticut (the District Court) on January 10, 2017 (Case Number 3:15-
cr-78-SRU).
8. As set forth in the Plea Agreement, from at least December 2007
until at least January 2013, Citicorp, through one London-based Euro/
U.S. dollar (EUR/USD) trader employed by Citibank and other traders at
unrelated financial services firms acting as dealers in the FX spot
market, 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
Misconduct). The Criminal Misconduct included almost 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
employed by Citibank. The Criminal Misconduct forms the basis for the
DOJ's antitrust charge that Citicorp violated 15 U.S.C. 1.
9. Under the terms of the Plea Agreement, the DOJ and Citicorp
agreed that the District Court should impose a sentence requiring
Citicorp to pay a criminal fine of $925 million. The Plea Agreement
also provided for a three-year term of probation that required, among
other things, Citigroup's continued implementation of a compliance
program designed to prevent and detect the Criminal Misconduct
throughout its operations and the strengthening of its compliance
program and internal controls as required by other regulatory or
enforcement agencies that have addressed the Criminal Misconduct. Such
agencies include:
<bullet> the U.S. Commodity Futures Trading Commission, pursuant to
its settlement with Citibank on November 11, 2014, that required
Citibank to implement remedial measures to strengthen the control
framework governing Citigroup's FX trading business;
<bullet> the U.S. Office of the Comptroller of the Currency
pursuant to its settlement with Citibank on November 11, 2014, that
required Citibank to impose remedial measures to improve the control
framework governing Citigroup's wholesale trading and benchmark
activities;
<bullet> the U.K. Financial Conduct Authority, pursuant to its
settlement with Citibank on November 11, 2014; and
<bullet> the U.S. Board of Governors of the Federal Reserve System,
pursuant to its settlement with Citigroup that was entered into
concurrently with the DOJ resolution and required Citibank to implement
remedial measures to improve controls for its FX trading and activities
involving commodities and interest rate products.
The Applicant represents that Citicorp fulfilled all of these
obligations during the three-year term of probation, and that neither
the DOJ nor any of the regulators described above notified the
Applicant to the contrary.
As a result of the Conviction, the Citigroup Affiliated QPAMS and
Citigroup Related QPAMs (throughout this proposal and only when
applicable, these entities may collectively be referred to as the
``Citigroup QPAMs'') would be ineligible to rely on the relief provided
in PTE 84-14 as of the January 10, 2017 sentencing date without an
administrative individual exemption issued by the Department that would
allow it to continue relying on such relief. The Citigroup Affiliated
QPAMs applied for and received the administrative individual exemptions
described below.
Prior and Existing Exemptions
10. Following the Conviction, the Citigroup Affiliated QPAMs
submitted an exemption application to the Department that would allow
their continued reliance on the relief provided in PTE 84-14 following
the Conviction. The Citigroup Affiliated QPAMs supported their
application by representing to the Department that Covered Plans \9\
could incur significant costs and other harm if the Citigroup
Affiliated QPAMs became ineligible to rely on the relief provided in
PTE 84-14 as of the date of the Conviction.\10\ The Applicant asserted
that approximately 20,000 of Citigroup's existing Covered Plan clients
could be compelled to terminate their advisory relationship with
Citigroup if the Department denies the individual exemption request and
would incur 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 as a
result of the change in investment managers.\11\
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\9\ The term ``Covered Plan'' means a plan subject to Part 4 of
Title 1 of ERISA (ERISA-covered plan) or a plan subject to Section
4975 of the Code (IRA) with respect to which a Citigroup Affiliated
QPAM relies on PTE 84-14, or with respect to which a Citigroup
Affiliated QPAM (or any Citigroup affiliate) has expressly
represented that the manager qualifies as a QPAM or relies on the
QPAM class exemption (PTE 84-14).
\10\ A description of the potential costs and harm to Covered
Plans is provided below.
\11\ In PTE 2017-05, the Department noted that, if a five-year
exemption were 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 actual losses
attributable to, among other things, any prohibited transactions or
violations of the duty of prudence and loyalty.
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The Department granted the Applicants an exemption that would allow
the Citigroup QPAMs to continue relying on the relief provided in PTE
84-14 for 12 months on December 22, 2016,\12\ and for five years on
December 29, 2017.\13\ This five-year exemption expires on January 9,
2023.
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\12\ PTE 2016-14, 81 FR 94034.
\13\ PTE 2017-05, 82 FR 61864.
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11. PTE 2017-05 contains conditions that subject the Citigroup
Affiliated QPAMs to biennial audits with a one-year look-back period
and annual certifications that must be submitted to the Department and
made available to the public. Under PTE 2017-05, a qualified,
independent auditor, currently Fiduciary Counselors, Inc. (FCI), is
responsible for: (a) determining whether each Citigroup Affiliated QPAM
has developed, implemented, maintained and followed written policies
and procedures in accordance with the exemption conditions and
developed and implemented the training program in accordance with the
exemption conditions; (b) testing whether each of the Citigroup
Affiliated QPAMs is compliant with these policies and training; and (c)
issuing a written audit report \14\ summarizing its findings
[[Page 68731]]
and recommendations with respect to each Citigroup Affiliated QPAM.\15\
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\14\ The audit reports required under PTE 2017-05 (the Reports)
and this proposed exemption, if granted, comprise a part of the
record supporting PTE 2017-05 and this proposed exemption.
Therefore, copies of the Reports can be requested by the public by
contacting the EBSA Public Disclosure Room.
\15\ The Department notes that the Independent Auditor's methods
of testing for compliance with the conditions of the exemption
described herein are specifically tailored to the Applicant's facts
underlying the Criminal Misconduct, as well as the Applicant's
corporate organization, business lines, compliance regimes, etc. As
such, the Department would expect the Independent Auditor to develop
its audit plan based on the Applicant's specific facts.
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Findings of the Auditor--the First Audit Period
12. On January 6, 2020, FCI issued a written Audit Report (the
First Audit Report) covering the twelve-month period from July 10,
2018, through July 9, 2019 (the First Audit Period). On January 24,
2020, Citigroup provided the Department with a copy of the
certifications related to the Audit Report.\16\
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\16\ The following Citigroup QPAM executive officers made
certifications: Robert Cole, Chief Compliance Officer for CPB, CGMI
and CPA; Mary McNiff, Chief Executive Officer of Citibank; Daniel
Keegan, Chief Executive Officer of CGMI; and Daniel O'Donnell, Chief
Executive Officer of CPA.
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13. Policies. FCI reported that by July 9, 2018, the Citigroup
Affiliated QPAMs developed, implemented, maintained, and followed
written policies and procedures (Policies) reasonably designed to
ensure the following:
Section I(h)(l)(i). Asset management decisions of the Citigroup
Affiliated QPAMs are conducted independently of the corporate
management and business activities of Citigroup.
To make this finding FCI, among other things, reviewed minutes of
investment committee meetings, Information Barriers Policies and
Procedures, and held discussions with employees of the Citigroup
Affiliated QPAMs.\17\ FCI states that there were 112 instances in which
a Citi Private Bank (CPB) employee and six instances in which a Global
Consumer Bank (GCB) employee ``wall-crossed.\18\'' FCI notes that in
these instances, established notification procedures were followed that
require employees to alert Citigroup's compliance teams when they come
into contact with material nonpublic information, indicating that the
Information Barriers Policies and Procedures were complied with. FCI
states that employees of the Citigroup Affiliated QPAMs were involved
in three of these 118 incidents, which all were resolved in accordance
with established procedures.
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\17\ Citigroup's ``Code of Conduct'' provides that ``Information
barriers [are used to] Prevent confidential information from being
shared with individuals who are not authorized to know such
information, [and] Address actual or potential conflicts of interest
among business activities.'' See <a href="http://www.citigroup.com/citi/investor/data/codeconduct_en.pdf">www.citigroup.com/citi/investor/data/codeconduct_en.pdf</a>, Page 35.
\18\ Wall crossing generally may occur when individuals
inadvertently gain access to ``insider'' or confidential
information. Asset management firms have compliance regimes to
manage wall-crossing events, which generally require the execution
of non-disclosure agreements by the individual that received such
information and a range of remedial actions to prevent such
disclosures from re-occurring.
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Section I(h)(l)(ii). The Citigroup Affiliated QPAMs fully complied
with ERISA's fiduciary duties and with ERISA and the Code's prohibited
transaction provisions, as applicable with respect to each Covered
Plan, and did not knowingly participate in any violation of these
duties with respect to Covered Plans.
In making this finding FCI, among other things, reviewed several
trade management systems used to support the Citigroup Affiliated QPAMs
investment compliance and trading process. In its review of trade
management systems, FCI reviewed the restrictions contained in those
systems to avoid prohibited transactions, oversight procedures,
complaint logs, trade error logs, overdraft reports and relevant
policies and procedures. FCI also reviewed CPB and GCB records of
employee disciplinary actions in order to determine whether employees
had committed violations of Title I of ERISA with respect to Covered
Plans. In this regard, FCI reviewed approximately 82 disciplinary
actions related to personal trading/trade issues, encryption issues,
use of personal email address in communicating with a client, Mystery
Shopper non-disclosures, investment concentration, failure to escalate
and altered documentation. These violations resulted in a range of
disciplinary actions including letters of education, letters of
reprimand, and final written warnings.
FCI represented that its review of the foregoing information
enabled it to determine that the mechanisms Citigroup has in place,
including relevant policies, procedures and training, were designed to
ensure that the Citigroup Affiliated QPAMs complied with ERISA and the
Code's prohibited transaction provisions.
Section I(h)(1)(iii). The Citigroup Affiliated QPAM does not
knowingly participate in any other person's violation of ERISA or the
Code with respect to Covered Plans.
FCI reviewed records of client complaint escalations (including
completed complaint logs, sample written/email and oral complaints, and
trade error logs and resolution reports). Based on its review, FCI
determined that the Citigroup Affiliated QPAMs complied with the
requirements of Section I(h)(1)(iii).
Section I(h)(1)(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 or
in relation to Covered Plans, are materially accurate and complete to
the best of such QPAM's knowledge at the time.
FCI planned to review excise tax filings and associated incident
reports. However, FCI notes that no prohibited transaction excise tax
filings were submitted to the IRS during the First Audit Period. FCI
states that it reviewed the Form ADVs filed by the Citigroup Affiliated
QPAMs, which confirmed the Citigroup Affiliated QPAMs discretionary
assets under management and confirmed that the Citigroup Affiliated
QPAMs were registered investment advisers.
The Department notes that ``filings or statements made by the
Citigroup Affiliated QPAM to regulators . . . on behalf of or in
relation to Covered Plans,'' should be interpreted broadly. In this
regard, the Department's view is that relevant filings or statements
under this condition may include, among other things, filings made by
the Citigroup Affiliated QPAMs for pooled funds on behalf of Covered
Plans such as Forms 5500, statements made by a Citigroup Affiliated
QPAM in response to regulatory inquiries related to proprietary
vehicles in which Covered Plans invest, such as target-date funds
managed by such QPAM, statements made in response to regulatory
inquiries regarding abandoned plans or missing participants, and
similar information.\19\
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\19\ It is the Department's view that FCI is empowered under the
terms of PTE 2017-05 and Section III(i)(2) of this proposed
exemption, if granted, to request such materials. FCI should contact
the Department if the Applicant is unwilling to grant such request.
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Moreover, the Department expects that FCI should request for its
review (in addition to the information described above) any policies
specifically addressing the Citigroup Affiliated QPAMs' government
filings or responses to regulatory inquiries, including any review
processes to ensure accuracy and any corrective mechanisms if a
deficiency is noted.
In the absence of any of the above-described information, FCI
should contact the Department in order to determine the course of
action FCI should take to complete its audit of compliance with Section
I(h)(1)(iv).
[[Page 68732]]
Section I(h)(1)(v). To the best of the Citigroup Affiliated QPAM's
knowledge at the time, the Citigroup Affiliated QPAM does not make
material misrepresentations or omit material information in its
communications with the Department, the Department of the Treasury, the
Department of Justice, and the Pension Benefit Guaranty Corporation
with respect to Covered Plans or make material misrepresentations or
omit material information in its communications with Covered Plans.
In making this finding, FCI reviewed, among other things,
regulatory filings, billing and performance reports, marketing
materials, certain other incident reports (including Form ADV
omissions), client complaints, trade error logs and complaint logs.
During its review, FCI specifically noted the three following incident
reports:
(1) Missing documentation for rollovers required for compliance
with the now-vacated Department of Labor's Fiduciary Rule. CPB oversaw
efforts to obtain documentation for the accounts where the information
was not on file and to train personnel on the documentation
requirement. Once the Fiduciary Rule was vacated by the Fifth Circuit
Court of Appeals, no further action was taken to recover the missing
rollover information, as the requirement to retain the rollover
information was no longer necessary to comply with ERISA.
(2) Form ADV omissions involved certain multi-asset investment sub-
accounts with approximately $310 million in assets under management
that were inadvertently omitted from the Form ADV filed in March 2018.
The Form ADV was updated on June 20, 2018, with corrected data. CPB
Advisory Operations, a unit of CPB, conducted a detailed review to
determine if any other sub-accounts could have been left off the March
ADV filing. The registration associated with the omitted accounts was
corrected in the system and CPB Operations scheduled training on the
revised procedures.
(3) A technical issue resulted in the firm's website not displaying
the Summary of QPAM Policies and Procedures. The issue was remediated
in 24 hours and a quarterly monitoring routine was incepted to ensure
that the website links remain active and accurate.
Section I(h)(1)(vi). The Citigroup Affiliated QPAMs comply with the
terms of PTE 2017-05, including compliance with the conditions of Class
PTE 84-14.
FCI reviewed whether each condition of PTE 2017-05 was met,
including conditions related to timing and adequacy of notices required
under the exemption; whether training was held in a timely manner; and
whether the Citigroup Affiliated QPAMs complied with the additional
contractual undertakings requirements described in Section I(j).
Specifically, FCI reviewed sample Citigroup investment management
agreements, assets under management tables with data on a per client
basis, trading restrictions in Citigroup trade management systems,
financial statements demonstrating equity capital and shareholder
equity, Form ADVs, and copies of notices to interested persons.
14. Correction of Policy Violations. FCI determined that any
violations of, or failure to comply with an item in subparagraphs (ii)
though (iv) of Section I(h)(1) were corrected as soon as reasonably
possible upon discovery or as soon after the QPAM reasonably should
have known of the noncompliance, and that any violations or failures
not so corrected were reported in writing to the head of compliance and
the General Counsel (or the functional equivalent) of the relevant line
of business that engaged in the violation or failure.
FCI reviewed, among other things, policies applicable to the
Citigroup Affiliated QPAMs, including the Information Barriers Policy,
Restricted Trading List Policy, Escalation Policy, Complaint Policy and
Procedures, Error Standard for Managed Accounts, Personal Trading and
Investment Policy, Fiduciary Code of Ethics Standard, the Citigroup
Code of Conduct, and the Gifts and Entertainment Standard.
Further, FCI was able to conclude that any violations of items in
subparagraphs (ii) through (iv) of Section I(h)(1) were corrected in
compliance with Section I(h)(1)(vii) of PTE 2017-05 through its review
of certain documents and spreadsheets provided by Citigroup to FCI.
These documents and spreadsheets included a description of the
violation or other action, how it was corrected or addressed, and the
date or dates that action was undertaken. In this regard, FCI reviewed
incident reports, if any, employee trading violations, employee
disciplinary actions taken, overdraft reports, and errors and
complaints.
15. Training. FCI determined that the Citigroup Affiliated QPAMs
developed an annual training program (Training) by July 9, 2018, and
completed the first Training by July 9, 2019, for all relevant
Citigroup Affiliated QPAM asset/portfolio management, trading, legal,
compliance, and internal audit personnel:
Section I(h)(2)(i). The Training, at a minimum, covers the
Policies, ERISA and Code compliance (including applicable fiduciary
duties and the prohibited transaction provisions), ethical conduct, the
consequences of not complying with the conditions of PTE 2017-05
(including any loss of exemptive relief provided herein), and prompt
reporting of wrongdoing.
In making this finding, FCI reviewed a copy of the 2018 ERISA
Fiduciary Training, proof of training sessions provided by Citigroup
(including spreadsheets detailing each QPAM employee who took the
training), conducted interviews with portfolio managers and QPAM
employees regarding the training, and reviewed the training system and
process of assigning courses to employees (and governing the completion
of training).
16. Annual Compliance Review. FCI reviewed the most recent annual
review (Annual Review) conducted by a senior compliance officer
designated by Citigroup (Compliance Officer) in accordance with Section
I(m) of PTE 2017-05 and specifically validated the adequacy of the
Annual Review and Citigroup's compliance with Section I(m) of PTE 2017-
05.\20\
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\20\ Pursuant to Section I(m) of PTE 2017-05, the Compliance
Officer must conduct an Annual Review for each annual period
beginning on January 10, 2018. The Annual Review must be completed
with respect to the annual periods ending January 9, 2019; January
9, 2020; January 9, 2021; January 9, 2022; and January 9, 2023. The
Applicant represents that Citigroup has performed all annual reviews
required by Section I(m) of PTE 2017-05 to date, including during
the periods not under audit by FCI. The Department notes that in the
future, FCI will verify that Citigroup performed its annual reviews
during off-audit year periods.
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FCI determined that Citigroup timely appointed the Compliance
Officer, who prepared a combined annual report for all Citigroup
Affiliated QPAMs (Annual Report) that complied with the requirement of
Section I(m)(2)(ii). Based on its review of the Annual Report, FCI
concluded that Citigroup developed a robust monitoring program with
several compliance routines that address relevant compliance issues
under PTE 2017-05 and established committees and meetings that address
ERISA compliance issues as they arise.
Findings of the Auditor--the Second Audit Period
17. On January 6, 2022, FCI issued a written Audit Report covering
the twelve-month period from July 10, 2020, through July 9, 2021 (the
Second Audit Period). On January 31, 2022, on behalf of each Citigroup
Affiliated QPAM, Citigroup provided the Department with a copy of the
certifications related to the Audit Report.\21\
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\21\ The following Citigroup QPAM executive officers made
certifications: Daniel Keegan, Chief Executive Officer of CGMI;
Robert Cole, Chief Compliance Officer for CPB, CGMI, and Citi
Private Advisory, LLC (CPA); Sunil Garg, Chief Executive Officer of
Citibank N.A.; and Daniel O'Donnell, Chief Executive Officer of CPA.
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[[Page 68733]]
18. Policies. FCI reported that the Citigroup Affiliated QPAMs
timely developed, implemented, maintained, and followed written
policies and procedures (Policies) reasonably designed to ensure the
following:
Section I(h)(l)(i). Asset management decisions of the Citigroup
Affiliated QPAMs are conducted independently of the corporate
management and business activities of Citigroup.
FCI based its conclusions on reviews of marketing materials made
available to Covered Plans, interviews with portfolio managers,
investment committee members' affiliations, minutes of investment
committee meetings, Information Barriers Policies and Procedures,
restricted trading list policies and procedures, and discussions with
applicable Citigroup Affiliated QPAM employees. FCI reviewed reports of
approximately 200 ``wall-crossing \22\'' incidents. In this regard, FCI
states that there were 169 instances in which a Citi Private Bank (CPB)
employee and 21 instances in which a Global Consumer Bank (GCB)
employee ``wall-crossed.'' The reports describe the incident and the
remedial activity taken that indicate compliance with the Information
Barriers Policies and Procedures. FCI states that employees of
Citigroup Affiliated QPAMs were involved in three of these
approximately 200 incidents, which were resolved pursuant to
established procedures.
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\22\ Wall crossing generally may occur when individuals
inadvertently gain access to ``insider'' or confidential
information. Asset management firms have compliance regimes to
manage wall-crossing events, which generally require the execution
of non-disclosure agreements by the individual that received such
information and a range of remedial actions to prevent such
disclosures from re-occurring.
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Section I(h)(l)(ii). The Citigroup Affiliated QPAMs fully comply
with ERISA's fiduciary duties (as more fully described above).
FCI reviewed the trade management systems used to support the
Citigroup Affiliated QPAMs' investment compliance and trading process.
FCI reviewed the restrictions contained in those systems to avoid
prohibited transactions, oversight procedures, complaint logs, trade
error logs, overdraft reports and relevant policies and procedures. FCI
also reviewed, among other things, policies and procedures regarding
client complaints, errors, overdrafts, affiliated broker and/or dealer
compliance; trading systems hardcoding related to compliance with
affiliated broker/dealers and cross-trading and block-trading
compliance; and policies for handling breaches of investment guidelines
and ERISA restrictions in trading systems. FCI specifically reviewed
reports of actual instances of breaches of the aforementioned policies
and procedures and how such breaches were remediated. FCI also reviewed
records of CPB and GCB employee disciplinary actions in order to
determine whether employees had committed violations of Title I of
ERISA with respect to Covered Plans. In this regard, FCI reviewed
records of approximately 30 disciplinary actions related primarily to
personal trading issues, failure to obtain preapproval for a gift,
Mystery Shopper non-disclosures, failure to identify customer
complaints, personal use of a corporate credit card and altered
documentation.
Based on its review of the foregoing information, FCI confirmed
that the mechanisms Citigroup has in place, including relevant
policies, procedures and training, were designed to ensure that the
Citigroup Affiliated QPAMs comply with ERISA and the Code's prohibited
transaction provisions.
Section I(h)(1)(iii). The Citigroup Affiliated QPAMs do not
knowingly participate in any other person's violation of ERISA or the
Code with respect to Covered Plans.
FCI reviewed Citigroup's ``Escalation Policy,'' which was revised
effective December 11, 2020. Under the policy, employees must escalate
violations or potential violations of law, regulation, rule, or
breaches of policy, procedure or the Code of Conduct and other relevant
standards of conduct. The policy also sets forth responsibilities of
managers involved in the escalation. FCI reviewed records of client
complaint escalations and error handling (including completed complaint
logs, sample written/email and oral complaints, and trade error logs
and resolution reports) and confirmed that Citigroup complied with the
requirements of Section I(h)(1)(iii).
Section I(h)(1)(iv). Any filings or statements made by the
Citigroup Affiliated QPAMs to regulators are materially accurate and
complete (as more fully described above). FCI's determination of
compliance with this Section was to be based on a review of excise tax
filings and associated incident reports. No excise tax filings for
prohibited transactions were submitted to the IRS during the Second
Audit Period. FCI states that it reviewed the Form ADV for the
Citigroup Affiliated QPAM's discretionary assets under management and
to confirm that the Citigroup Affiliated QPAM is a registered
investment adviser.
As noted above, the Department expects that FCI should request for
its review of any policies specifically addressing a QPAM's government
filings or responses to regulatory inquiries, including any review
processes to ensure accuracy and any corrective mechanisms if a
deficiency is noted. Further, the Department notes that ``filings or
statements made by the Citigroup Affiliated QPAM to regulators . . . on
behalf of or in relation to Covered Plans,'' should be interpreted
broadly.\23\ If FCI cannot identify any such information to review, FCI
should contact the Department to determine how to complete its audit
for compliance with Section I(h)(1)(iv).
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\23\ It is the Department's view that FCI is empowered under the
terms of PTE 2017-05 and Section III(i)(2) of this proposed
exemption, if granted, to request such materials. FCI should contact
the Department if the Applicant is unwilling to grant such request.
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Section I(h)(1)(v). The Citigroup Affiliated QPAMs do not make
material misrepresentations or omit material information (as more fully
described above). FCI reviewed performance reports, marketing
materials, sample investment management agreements, certain incident
reports (including a late update to a notice required by ERISA Section
408(b)(2) and tax withholding errors), and client complaints. The late
ERISA Section 408(b)(2) notice update involved a description of the
firm's gift and entertainment disclosure related to brokerage offering
that was updated three days after the deadline. The tax withholding
error involved Citigroup's inadvertent failure to withhold Federal and
state taxes on several customers' IRA accounts but did not impact the
accounts' required minimum distributions under Code section 401(a)(9)
due to IRS rules applicable during the COVID-19 pandemic. FCI also
notes that during an update of Citi Private Bank's public facing
website on April 26, 2021, a technical issue resulted in the entity's
Form ADV showing as not found when entered in a particular format on
the website. According to the incident report reviewed by FCI, the
issue was identified on the same day and remediated within 48 hours of
discovery.
Section I(h)(1)(vi). The Citigroup Affiliated QPAMs comply with the
terms of PTE 2017-05, including compliance with the conditions of Class
PTE 84-14.
FCI reviewed whether each condition of PTE 2017-05 was met,
including
[[Page 68734]]
conditions related to timing and adequacy of notices required under the
exemption, whether the Training was held in a timely manner, and
whether the QPAMs complied with the additional contractual undertakings
requirements described in Section I(j) of PTE 2017-05. Specifically,
FCI reviewed sample Citigroup investment management agreements, assets
under management tables with data on a per client basis, trading
restrictions in Citigroup trade management systems, financial
statements demonstrating equity capital and shareholder equity, Form
ADVs, and copies of notices to interested persons.
19. Correction of Policy Violations. FCI determined that any
violations of, or failure to comply with an item in subparagraphs (ii)
though (iv) of Section I(h)(1) of PTE 2017-05 were corrected as soon as
reasonably possible upon discovery or as soon after the QPAM reasonably
should have known of the noncompliance; and that any violations or
failures not so corrected were reported in writing to the head of
compliance and the General Counsel (or the functional equivalent) of
the relevant line of business that engaged in the violation or failure.
In making its determination, FCI reviewed, among other things,
policies applicable to the Citigroup Affiliated QPAMs, including the
Information Barriers Policy, Restricted Trading List Policy, Escalation
Policy, Complaint Policy and Procedures, Error Standard for Managed
Accounts, Personal Trading and Investment Policy, Fiduciary Code of
Ethics Standard, the Citigroup Code of Conduct, and the Gifts and
Entertainment Standard.
Further, FCI was able to conclude that any violations of items in
subparagraphs (ii) through (iv) of Section I(h)(1) were corrected in
compliance with Section I(h)(1)(vii) of PTE 2017-05 through its review
of certain documents and spreadsheets provided by Citigroup to FCI.
These documents and spreadsheets included a description of the
violation or other action, how it was corrected or addressed, and the
date or dates that action was undertaken. In this regard, FCI reviewed
incident reports, if any, employee trading violations, employee
disciplinary actions taken, overdraft reports, and errors and
complaints.
20. Training. FCI determined that the Citigroup Affiliated QPAMs
developed Training:
Section I(h)(2)(i). The Training, at a minimum, covers the
Policies, ERISA and Code compliance, ethical conduct, the consequences
of not complying with the conditions of PTE 2017-05, and prompt
reporting of wrongdoing (as more fully described above).
FCI reviewed a copy of the annual 2020 Citigroup ERISA Fiduciary
Training and other annual trainings provided to new and current
employees throughout the year and proof of such trainings (including
spreadsheets detailing each QPAM employee who took the training);
conducted interviews with portfolio managers regarding the training;
reviewed the training system and process of assigning courses to
employees (and governing the completion of training); and specifically
interviewed Citigroup Affiliated QPAM employees as to the training
system and governance process.
21. Annual Compliance Review. FCI reviewed the most recent annual
review (Annual Review) conducted by a senior compliance officer
designated by Citigroup (Compliance Officer) in accordance with Section
I(m) of PTE 2017-05 and specifically validated the adequacy of the
Annual Review and Citigroup's compliance with Section I(m) of PTE 2017-
05.\24\
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\24\ As mentioned above, pursuant to Section I(m) of PTE 2017-
05, the Compliance Officer must conduct an Annual Review for each
annual period beginning on January 10, 2018. The Annual Review must
be completed with respect to the annual periods ending January 9,
2019; January 9, 2020; January 9, 2021; January 9, 2022; and January
9, 2023. The Applicant represents that Citigroup has performed all
annual reviews required by Section I(m) of PTE 2017-05 to date,
including during the periods not under audit by FCI. The Department
notes that in the future, FCI will verify that Citigroup performed
its annual reviews during off-audit year periods.
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FCI determined that Citigroup timely appointed the Compliance
Officer, who prepared a combined annual report for all Citigroup
Affiliated QPAMs (Annual Report) that complies with the requirement of
Section I(m)(2)(ii). Similar to its findings under the First Audit
Period, FCI found that the Compliance Officer's Annual Report reviewed
during the Second Audit Period includes a separate review of the
information barriers for each Citigroup Affiliated QPAM. The Annual
Report also includes a review of any compliance matter related to the
Policies or Training that was identified by, or reported to, the
Compliance Officer or other relevant parties during the Second Audit
Period, any material changes to the relevant business activities of the
Citigroup Affiliated QPAMs, and any changes 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.
FCI found that the Annual Report summarizes the Compliance
Officer's material activities during the Annual Review; sets forth any
instances of noncompliance discovered during the Annual Review, and any
related corrective action; details any change to the Policies or
Training; and makes recommendations, as necessary, for additional
training, procedures, monitoring, or additional and/or changed
processes or systems; and describes management's actions taken in
response to such recommendations.
Based on its above review of the Compliance Officer's Annual
Review, FCI concluded that Citigroup developed a robust monitoring
program with several routines that address relevant compliance issues
under PTE 2017-05 and established committees and meetings that address
ERISA compliance issues as they arise.
Current Exemption Request
22. The Applicant now seeks a four-year exemption that would allow
the Citigroup QPAMs to continue to rely on PTE 84-14 until the end of
the ten-year disqualification period in Section I(g). The requested
exemption is substantially similar to PTE 2017-05.
This proposed exemption requires each Citigroup Affiliated QPAM to
continue to maintain, implement and follow written policies and
procedures (Policies) that are reasonably designed to ensure the
following, among other things: the asset management decisions of the
Citigroup Affiliated QPAM are conducted independently of the corporate
management and business activities of Citigroup; the Citigroup
Affiliated QPAMs fully comply with ERISA's fiduciary duties, and with
ERISA and the Code's prohibited transaction provisions, as applicable
with respect to each Covered Plan; any filings or statements made by
Citigroup Affiliated QPAMs to regulators, on behalf of Covered plans,
are materially accurate and complete; and the Citigroup Affiliated
QPAMs comply with the terms of the proposed exemption, if granted.
Further, 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
discovering of the failure to promptly correct, in writing, to the head
of compliance and the General Counsel (or their functional equivalent)
of the relevant line of business that engaged in the violation or
failure, and the independent auditor response for reviewing compliance
with the Policies.
This proposed exemption requires each Citigroup Affiliated QPAM to
implement or maintain a training
[[Page 68735]]
program (the Training) to be conducted at least annually by a prudently
selected professional, that covers the Policies, ERISA and Code
compliance, ethical conduct, the consequences for not complying with
the conditions of the exemption, and the duty to promptly report
wrongdoing; and submit to a biennial compliance audit conducted by a
prudently-selected independent auditor (the Auditor), to evaluate the
adequacy of, and the Citigroup Affiliated QPAM's compliance with, the
Policies and Training requirements of the exemption. The Auditor must
issue a written report (the Audit Report) to Citigroup and the
Citigroup Affiliated QPAM to which such audit applies that describes
the procedures performed during the Audit. In its Audit Report, the
Auditor must assess the adequacy of the Citigroup Affiliated QPAM's
Policies and Training Program; the Citigroup Affiliated QPAM's
compliance with the Policies and Training Program; the need, if any to
strengthen the Policies and Training Program; and any instance of
noncompliance.
The proposed exemption requires certain senior Citigroup personnel
to 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 report applies must certify in writing and under
penalty of perjury that such officer has reviewed the Audit Report,
addressed, corrected, or remedied any inadequacy identified in the
Audit Report; and determined that the Policies and Training Program are
adequate to ensure compliance with the requirements of the exemption
and applicable provisions of ERISA and the Code. The Audit Report must
also be provided to the Department's Office of Exemption
Determinations.
The proposed exemption requires each Citigroup Affiliated QPAM to
agree and warrant to each Covered Plan client that they will comply
with ERISA and the Code, refrain from engaging in non-exempt prohibited
transactions (and will promptly correct any non-exempt prohibited
transactions), and comply with standards of prudence and loyalty set
forth in ERISA Section 404 for the duration of the Exemption. The
proposed exemption also requires the Citigroup Affiliated QPAM to agree
and warrant to indemnify and hold their Covered Plan clients harmless
for any actual losses resulting directly from the QPAM's violation of
these rules or failure to qualify for relief under PTE 84-14 as a
result of any other criminal convictions, and that it will not require
the Covered Plan to waive, limit, or qualify its liability for
violating ERISA or the Code or engaging in non-exempt prohibited
transactions. The proposed exemption also prohibits the Citigroup
Affiliated QPAM from restricting the ability of Covered Plan clients to
terminate their investment management arrangement with such QPAM or
from imposing fees, penalties, or other charges upon the client for
doing so, except for certain reasonable restrictions specifically
designed to ensure equitable treatment of all investors in a pooled
fund.
The proposed exemption contains extensive notice requirements that
obligate the Citigroup Affiliated QPAMs to provide Covered Plan clients
regarding the grant of the exemption and the QPAM's obligations
thereunder, including a separate summary describing the facts that led
to the Conviction, within specified time periods.
The proposed exemption also requires Citigroup to continue to
designate a senior compliance officer (the Compliance Officer) to
conduct an annual review (the Annual Review) of the adequacy and
effectiveness of the implementation of the Policies and Training
Program, and prepare a written report for each Annual Review that,
among other things, summarizes their material activities during the
preceding year; and sets forth any instance of noncompliance discovered
during the preceding year and any related corrective action.
The proposed exemption requires Citigroup to inform its Covered
Plan Clients of their right to obtain a copy or summary description of
the Policies and provided with updated disclosures following any
changes.\25\
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\25\ Citigroup maintains a summary of the policies on its
website, at: <a href="https://www.privatebank.citibank.com/pdf/Summary-QPAM-Policies-and-Procedures.pdf">https://www.privatebank.citibank.com/pdf/Summary-QPAM-Policies-and-Procedures.pdf</a>.
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The proposed exemption also requires Citigroup to immediately
disclose to the Department any Deferred Prosecution Agreement or Non-
Prosecution Agreement it enters into with the U.S. Department of
Justice in connection with conduct described in Section I(g) of PTE 84-
14 or ERISA Section 411 of ERISA. Under this condition, the Applicant
must notify the Department if and when it or any of its affiliates
enter into a DPA or NPA with the U.S. Department of Justice for conduct
described in section I(g) of PTE 84-14 or ERISA Section 411 and
immediately provide the Department with 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 will
review the information provided and may seek additional information
from the Department of Justice, in order to determine whether the
conduct described in the DPA or NPA raises questions about the
Citigroup Affiliated QPAMs' ability to act with a high standard of
integrity. The Department retains the right to propose a withdrawal of
the exemption pursuant to its procedures contained at 29 CFR 2570.50,
should the circumstances warrant such action.
Department's Request for Comment: The Department requests comments
whether the Applicant should be required to provide information
regarding adverse regulatory actions (e.g., fines, censures, penalties,
civil lawsuits, settlements of civil or criminal lawsuits), that are
taken by other regulators against Citigroup and its affiliates. Should
the Applicant be required to provide information regarding actions
taken by certain regulators (e.g., IRS, SEC, OCC, UK FCA), and is there
an appropriate type of information or class of regulatory actions that
are relevant or irrelevant to the Department's determination whether
under PTE 84-14 should continue to be permitted notwithstanding the
Conviction?
Modifications of Conditions for the Proposed Exemption From Those of
PTE 2017-05
23. The Department is proposing to modify the terms of PTE 2017-05
in the proposed exemption, based on the Applicant's request, to reflect
the following terms the Department has included in recently granted
individual exemptions providing relief from a violation of Section I(g)
of PTE 84-14:
<bullet> Allow the Training to be conducted electronically.
Department's Request for Comment Regarding Training: The Department
views the Training obligation under this exemption as a key protection
of Covered Plans and expects that Citigroup Affiliated QPAMs and their
personnel will complete their obligations in good faith. The Department
requests comments regarding whether the Citigroup Affiliated QPAMs
should be required to validate the efficacy of Training that is
provided electronically, through methods such as in-training knowledge
checks, ``graduation'' tests, and other technological tools designed to
confirm that personnel fully and in good faith participate in the
Training.
[[Page 68736]]
<bullet> Allow the certifications described in Section I(i)(7) of
PTE 2017-05 that are required to be made by the General Counsel or one
of the three most senior executive officers of the Citigroup Affiliated
QPAM to which an Audit Report applies,\26\ to be made ``to the best of
such officer's knowledge at the time.'' Similarly, the certification by
the designated compliance officer as to the accuracy of the written
report on each Annual Review and certain other matters (including the
correction of any ``known'' instance of noncompliance) in Section
I(m)(2)(iii) of PTE 2017-05 may be made to the compliance officer's
``best knowledge.''
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\26\ Section I(i)(7) of PTE 2017-05 provides that ``. . . the
General Counsel, or one of the three most senior executive officers
of the Citigroup Affiliated QPAM to which [an] Audit Report applies,
must certify in writing, under penalty of perjury, that the officer
has reviewed the Audit Report and this exemption; that such
Citigroup Affiliated QPAM has addressed, corrected or remedied any
noncompliance and inadequacy or has an appropriate written plan to
address any inadequacy regarding the Policies and Training
identified in the Audit Report . . . .''
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Department's Comment Regarding ``Best Knowledge'' Standard: The
Department intends for the ``Best Knowledge'' standard described in the
exemption to require the certifying senior executive to perform its due
diligence required under the exemption to determine whether the
information such executive is certifying is complete and accurate in
all respects.
<bullet> Allow the certified Audit Report to be delivered no later
than 45 days after completion of the report.
24. Other Conforming Changes. The Department has updated the
operative language of the proposed exemption to more accurately reflect
the factual record and the operative language of similar, recently
granted exemptions. The Department notes further that it has made minor
formatting changes in the proposed exemption, so that certain operative
language that is identical or parallel to language in PTE 2017-05 is
now located in different sections of the proposed exemption.\27\
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\27\ For example, in the proposed exemption, the definitions are
now located in Section I, the covered transactions are now located
in Section II, and the conditions for relief are located in Section
III.
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25. Department's Comment Regarding Audit Timing. The Department
notes that PTE 2017-05 requires the Independent Auditor to conduct
biennial audits covering the periods from July 10, 2018, through July
9, 2019, (which must be completed by January 9, 2020); from July 10,
2020, through July 9, 2021 (which must be completed by January 9,
2022); and from July 10, 2022, through July 9, 2023 (which must be
completed by January 9, 2024). As such, the last audit period under PTE
2017-05 will extend into this proposed exemption's Exemption Period.
In order to avoid confusion regarding the audit periods under this
proposed exemption, the Department provides the following
clarification: The first audit under this proposed four-year exemption
(the fourth audit under the totality of exemptive relief) would cover
the period from July 10, 2024 through July 9, 2025, (and must be
completed by January 9, 2026); and the second audit (the fifth audit
under the totality of exemptive relief) would cover the period from
July 10, 2026, through January 9, 2027, (must be completed by July 9,
2027).
As described above, the fifth audit period is truncated, so that it
expires with the expiration of the Exemption Period. However, the
Department expects the audit report for the fifth audit period to be
completed and delivered timely to the Department. The failure to
receive such report would impede Citigroup's ability to claim relief
under this proposed exemption for transactions entered into during the
Exemption Period.
Hardship to Covered Plans
26. Inability to Engage in Transactions that are in the Interest of
Plans. The Applicant states that it would be difficult for Citigroup to
engage in a variety of routine transactions on behalf of a Retirement
Account with counterparties, without the ability to use PTE 84-14,
because virtually every counterparty may be a service provider to that
Retirement Account. The Applicant states that because counterparties
are familiar and comfortable with PTE 84-14, it is generally the most-
commonly used prohibited transaction exemption. In addition, the
Applicant states that market participants, both clients and
counterparties, routinely expect an investment adviser or manager of
Retirement Accounts to represent that it qualifies as a QPAM, even if
such a representation is not technically required in a particular
circumstance.
27. The Applicant represents that disqualification would deprive
Covered Plans clients of the Citigroup Affiliated QPAMs from receiving
advisory or sub-advisory services that fiduciaries of the Covered Plans
have determined to be in the best interests of the Covered Plans.
According to the Applicant, this would be an undesirable result that
would extend to asset managers selected by fiduciaries that Citigroup
does not control and in which it has a non-controlling investment
(collectively, the Citigroup Related QPAMs).
28. The Applicant represents that PTE 84-14 is used for investment
transactions such as the purchase and sale of debt and equity
securities, both foreign and domestic that are either registered or
sold under Rule 144A, the purchase and sale of commodities, futures,
swaps, real estate, foreign exchange and other investments in the U.S.
and internationally, and the hedging of risk through a variety of
investment instruments and strategies. The Applicant states that it is
very difficult for a manager of ERISA assets to manage such assets
effectively without the ability to rely on PTE 84-14. Therefore, the
Applicant represents that if the Department does not grant the
exemption, fiduciaries that otherwise decided to retain Citigroup's
advisory services pursuant to a prudent process would have to seek an
alternative service provider.
29. Alternatively, the Applicant states that fiduciaries of Covered
Plans have been clearly informed and will, in keeping with their
fiduciary duties, be able to make their own individualized decisions
about continuing to utilize Citigroup as an advisor to their plans'
assets. In this regard, the Applicant states that the Plea Agreement
has been well-publicized and made readily available. Further, the
Applicant states that the Plea Agreement is disclosed in Citigroup's
Form ADVs and is the subject of notice to Covered Plan clients pursuant
to PTEs 2016-14 and 2017-05 (and will be further disclosed as required
by this proposed exemption, if granted).
30. Retirement Accounts Would Incur Significant Costs in
Transitioning Managers. The Applicant states that any Retirement
Account that transitions away from a Citigroup Affiliated QPAM if the
requested exemption is denied would incur quantifiable financial costs
that fall into three categories:(i) Trading and market impact costs,
(ii) consultant costs associated with identifying new investment
managers, and (iii) legal costs, are summarized below.\28\ These
categories are discussed below.
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\28\ The Applicant is not including certain costs in its
summary, such as those incurred to replace custodians, prepare
employee communications and implement new record-keeping procedures,
because they depend on a Covered Plan's current service arrangements
and may vary widely. In addition, the Applicant states that
estimates below are based on experience with employee pension plans,
so the costs described may differ for IRAs.
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31. Trading and Market Risk Costs. The Applicant states that
trading-related costs consist of brokerage commissions, bid-ask spreads
of assets traded on a principal basis, and ``market impact''
[[Page 68737]]
costs based on the effects of trading on the price of the particular
assets.\29\
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\29\ Market impact costs are generally a function of the size of
the trade and the liquidity of the particular asset.
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The Applicant estimates that the trading and market risk costs of
transitioning a hypothetical $1 billion investment portfolio,
categorized by asset class and assuming an index-based portfolio, are
as follows: \30\
---------------------------------------------------------------------------
\30\ Estimates are based on Citigroup's own transition
management services that are offered to transitioning pension plans.
\31\ Risk costs measure the potential loss from a portfolio
being uninvested and ``out of the market'' during the transition,
which is a function of the daily volatility in the particular
assets. However, if clients employ a ``transition manager'' to move
assets from Citigroup into a new target portfolio with a different
manager, the plan could avoid the full Risk Costs.
\32\ A portfolio that is not based on an index would likely be
expected to have higher Bid/Ask Spread and Market Impact costs.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Explicit fees Implicit costs
------------------------------------------------ Risk cost
Asset class Notional Bid ask spread Total trading- (daily
Commissions* Stamp and and market related costs volatility)
exchange fees impact \32\ \31\
--------------------------------------------------------------------------------------------------------------------------------------------------------
US Large Cap Equity..................................... 1,000,000,000 50,334 5,100 560,000 615,434 13,802,002
US Small Cap Equity..................................... 1,000,000,000 253,897 5,100 1,801,403 2,060,400 15,871,433
ACWI -Ex US Equity...................................... 1,000,000,000 568,156 1,050,138 1,030,495 2,648,789 9,713,042
Emerging Markets Equity................................. 1,000,000,000 741,785 1,029,998 2,702,068 4,473,851 10,323,360
US Agg Index Fixed income............................... 1,000,000,000 358,576 .............. 2,273,556 2,632,131 6,299,407
--------------------------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
Commission rates
------------------------------------------------------------------------
US Equities............................... 0.5 cents per share.
------------------------------------------------------------------------
32. Investment Consultant Costs. The costs for Pension plans that
use an investment consultant to advise on selecting a new investment
manager (including administering the request-for-proposal process) may
include: \33\
---------------------------------------------------------------------------
\33\ The Applicant states that these estimates could vary
depending on the specific circumstances of the particular plan and
RFP.
---------------------------------------------------------------------------
<bullet> $10,000-$50,000 for replacement of an individual manager
or a single investment option for a defined contribution plan.
<bullet> $30,000-$100,000 for replacement of a ``manager of
managers'' that chooses all investment managers for the plan, such as
an outsourced chief investment officer.
33. Legal Costs. The Applicant estimates that the cost of outside
counsel for a manager transition by a single employer plan is in the
range of $15,000 to $28,000. As noted above, plans may use a transition
manager to minimize transaction costs in moving assets to the new
manager. The Applicant states that the legal work retain a transition
manager could range from $5,000 to $10,000.
Statutory Findings
34. ERISA Section 408(a) provides, in part, that the Department may
not grant an exemption unless the Department finds that the exemption
is administratively feasible, in the interest of affected plans and of
their participants and beneficiaries, and protective of the rights of
such participants and beneficiaries. The Department's findings under
these criteria are discussed below.
35. ``Administratively Feasible.'' The Department has tentatively
determined that the proposal is administratively feasible because,
among other things, a qualified independent auditor would be required
to perform an in-depth audit covering each Citigroup Affiliated QPAMs'
compliance with the terms of the exemption, and a corresponding written
audit report would be provided to the Department and made available to
the public.
The independent audit would help to ensure that the continued
compliance with the terms of the exemption and ethical behavior of the
Applicant is subject to on-going oversight by an independent third
party reporting its findings to the Department.
36. ``In the Interests of.'' The Department has tentatively
determined that the proposed exemption is in the interests of the
participants and beneficiaries of the Covered Plans.
The primary reason the Department is proposing to provide the
Applicant with four additional years of exemptive relief, is to prevent
Covered Plans from incurring the costs and expenses that they would not
otherwise incur, in the event the Citigroup Affiliated QPAMs lose
exemptive relief under PTE 84-14, and Covered Plans terminate their
advisory relationships with Citigroup. As mentioned above, as of
December 31, 2020, Citigroup's advisory businesses had over 12,700
Retirement Accounts with approximately $4.6 billion of assets under
management.
The Applicant states that it made certain assumptions to quantify
the specific costs to Retirement Accounts if the exemption request were
denied, including the portion of those assets would transition away
from Citigroup if it were to not eligible to rely on the QPAM
Exemption. The Applicant states that making this assumption depends on
such factors as the type of account and investment strategy, because it
may be possible to substantially implement certain investment
strategies without relying on the QPAM Exemption (although there may be
clients that nevertheless view ineligibility to rely on the QPAM
Exemption as a reason to change asset managers).
The Applicant estimates that if 10% of such assets ($460 million)
representing 5% of such accounts (635) were to transition away from
Citigroup as a result of a denial of the exemption, the Quantifiable
Costs to Retirement Investors, assuming the midpoint level of such
costs for each category of Quantifiable Costs, would total $36.3
million.\34\
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\34\ The Applicant states that this calculation is based on
conservative assumptions, so the actual costs could be higher.
Further, the Applicant states that the calculation is limited to the
costs it was able to quantify so the actual costs could be higher.
The assumptions include the following:
<bullet> Trading and Market Risk Costs--averaging the figures
described above (leaving out Emerging Markets Equity, which tends to
constitute a smaller portion of investment portfolios) and adjusting
for an aggregate portfolio of $460 million in assets = $6,168,903.
<bullet> Investment Consultant Costs--using $30,000, the
midpoint of the above figures for a single manager search, times 635
accounts = $19,050,000.
<bullet> Legal Costs--using $17,500, the midpoint of the above
figures for a manager search (assuming either no transition manager
or a transition manager already in place), times 127 accounts =
$11,112,500.
---------------------------------------------------------------------------
The Applicant also represents that any manager transition will
cause Plans to incur costs in time and attention, which are not able to
be quantified, but no less disruptive in terms of resources that would
need to be re-directed away from activities that are otherwise
necessary for the functioning of a Plan.
37. ``Protective of.'' The Department has tentatively determined
that the proposed exemption is protective of the interests of the
participants and beneficiaries of affected Covered Plans.
[[Page 68738]]
The conditions, which are described in more detail above and in PTE
2017-05, require continued oversight of Citigroup's compliance with the
terms and conditions of PTE 2017-05 by the Independent Auditor and a
robust audit to be completed by the auditor that is reviewed by the
Department.
As demonstrated by the Audit Reports for the First and Second Audit
Periods, the Independent Audit is an important tool to test Citigroup's
adherence to the conditions of PTE 2017-05 and this proposed exemption
(if granted), and the audit reports provide transparency and
accountability to the Department and interested persons regarding
Citigroup's efforts to maintain a culture of compliance.
In addition to oversight by an Independent Auditor, the proposed
exemption is subject to protective conditions that include but not
limited to: (a) the development and maintenance of the Policies; (b)
the implementation of the Training Program; (c) the requirement for the
Citigroup Affiliated QPAMs to make certain agreements and warranties to
Covered Plan clients; (d) specific notice and disclosure requirements
concerning the circumstances necessitating the need for exemptive
relief and the Citigroup Affiliated QPAMs' obligations under this
proposed exemption; and (e) the designation of a Compliance Officer
with responsibility to ensure compliance with the Policies and Training
requirements under this proposed exemption, and the Compliance
Officer's completion of an Annual Review and corresponding Annual
Report.
Summary
38. Based on the representations of the Applicant, the substance of
the Audit Reports, and Citigroup's required continued compliance with a
robust set of conditions, the Department has tentatively determined
that the relief sought by the Applicant satisfies the statutory
requirements for a four-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 fifteen (15) days of the publication of the notice of
proposed four-year exemption in the Federal Register. The notice will
be provided to all interested persons in the manner described in
Section III(k)(1) of this proposed four-year exemption and will contain
the documents described therein and a supplemental statement required
by 29 CFR 2570.43(a)(2). The supplemental statement will inform
interested persons of their right to comment on and 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 and will be made available to the public. The
notice may be provided by first-class mail, hand delivery or through
electronic means, including by an email that has a link to the notice
documents on Citigroup's website that Covered Plan clients with an
internet connection can access at any time (except for any periods when
the website is temporarily unavailable because it is undergoing routine
maintenance).
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 their
duties respecting an ERISA-covered plan solely in the interest of the
participants and beneficiaries of the plan and in a prudent fashion as
required by ERISA Section 404(a)(1)(B); nor does it affect the
requirement of Code Section 401(a), which require a plan 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, ERISA Section 408(a) and/or
Code Section 4975(c)(2) require the Department to 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, would 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 whether the
transaction is in fact a prohibited transaction; and
(4) The proposed exemption, if granted, would be subject to the
express condition that the material facts and representations contained
in the application are true and complete at all times, and that the
application accurately describes all material terms of the transactions
which are the subject of the exemption.
Proposed Exemption
The Department is considering granting a four-year exemption under
the authority of ERISA Section 408(a) and Code section 4975(c)(2), and
in accordance with the procedures set forth in exemption procedure
regulation.\35\
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\35\ 29 CFR part 2570, subpart B (76 FR 66637, 66644, October
27, 2011). 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, this notice of proposed exemption is issued solely by the
Department.
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Section I: Definitions
(a) The term ``Citicorp'' means Citicorp, a financial services
holding company organized and existing under the laws of Delaware and
does not include any subsidiaries or other affiliates.
(b) The term ``Citigroup Affiliated QPAM'' means a ``qualified
professional asset manager'' (as defined in section VI(a) \36\ 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 Citicorp, the entity implicated in the criminal conduct that
is the subject of the Conviction.
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\36\ 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.
---------------------------------------------------------------------------
(c) The term ``Citigroup Related QPAM'' means any current or future
``qualified professional asset manager'' (as defined in section VI(a)
of PTE 84-
[[Page 68739]]
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).
(d) The term ``Conviction'' means the judgment of conviction
against Citigroup for violation of the Sherman Antitrust Act (15 U.S.C.
1), entered in the District Court for the District of Connecticut (the
District Court) (Case Number 3:15-cr-78-SRU). For all purposes under
this exemption, ``conduct'' of any person or entity that is the
``subject of [a] Conviction'' encompasses the conduct described in
Paragraph 4(g)-(i) of the Plea Agreement filed in the District Court in
Case Number 3:15-cr-78-SRU.
(e) The term ``Covered Plan'' means a plan subject to Part 4 of
Title I of ERISA (ERISA-covered plan) or a plan subject to Section 4975
of the Code (IRA) with respect to which a Citigroup Affiliated QPAM
relies on PTE 84-14, or with respect to which a Citigroup Affiliated
QPAM (or any Citigroup affiliate) has expressly represented that the
manager qualifies as a QPAM or relies on the QPAM class exemption (PTE
84-14). A Covered Plan does not include an ERISA-covered Plan or IRA to
the extent the Citigroup affiliated QPAM has expressly disclaimed
reliance on QPAM status or PTE 84-14 in entering into its contract,
arrangement, or agreement with the ERISA-covered plan or IRA.
(f) The term ``Exemption Period'' means January 10, 2023, through
January 9, 2027.
Section II: Covered Transactions
If the proposed four-year exemption is granted, the Citigroup
Affiliated QPAMs and the Citigroup Related QPAMs (as defined in
Sections I(b) and I(c), 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 Conviction, as defined in Section I(d)), during the
Exemption Period, provided that the conditions in Section III below are
satisfied.
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\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).
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Section III: Conditions
(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''
means the knowing 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 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;
(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 approval of the
misconduct underlying Conviction;
(d) At all times during the Exemption Period, no Citigroup
Affiliated QPAM will 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 in reliance on PTE 84-14, or with respect to which a Citigroup
Affiliated QPAM has expressly represented to an ERISA-covered plan or
IRA with assets invested in such ``investment fund'' that it qualifies
as a QPAM or relies on PTE 84-14, to enter into any transaction with
Citicorp, or to engage Citicorp 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, the Citigroup Related QPAM or their
affiliates to directly or indirectly profit from the criminal conduct
that is the subject of the Conviction;
(g) Other than with respect to employee benefit plans maintained or
sponsored for its own employees or the employees of an affiliate,
Citicorp will not act as a fiduciary within the meaning of section
3(2l)(A)(i) or (iii) of ERISA, or section 4975(e)(3)(A) and (C) of the
Code, with respect to ERISA-covered plan and IRA assets; provided,
however, that Citicorp will not be treated as violating the conditions
of this exemption solely because it acted as an investment advice
fiduciary within the meaning of section 3(2l)(A)(ii) or section
4975(e)(3)(B) of the Code;
(h)(1) Each Citigroup Affiliated QPAM must continue to maintain,
adjust (to the extent necessary), implement and follow written policies
and procedures (the Policies). The Policies must require and be
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;
(ii) The Citigroup Affiliated QPAM fully complies with ERISA's
fiduciary duties and with ERISA and the Code's prohibited transaction
provisions, as applicable with respect to each Covered Plan, and does
not knowingly participate in any violation of these duties and
provisions with respect to Covered Plans;
(iii) The Citigroup Affiliated QPAM does not knowingly participate
in any other person's violation of ERISA or the Code with respect to
Covered Plans;
(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 or in relation to Covered
Plans, are materially accurate and complete to the best of such QPAM's
knowledge at the time;
(v) To the best of the Citigroup Affiliated QPAM's knowledge at the
time, the Citigroup Affiliated QPAM does not make material
misrepresentations or omit material information in its communications
with such regulators with respect to Covered
[[Page 68740]]
Plans, or make material misrepresentations or omit material information
in its communications with Covered Plans;
(vi) The Citigroup Affiliated QPAM complies with the terms of this
exemption; and
(vii) Any violation of, or failure to comply with an item in
subparagraphs (ii) through (vi), is corrected as soon as reasonably
possible upon discovery, or as soon after the QPAM reasonably should
have known of the noncompliance (whichever is earlier), and any such
violation or compliance failure not so corrected is reported, upon the
discovery of such failure to so correct, in writing, to the head of
compliance, and the General Counsel (or their functional equivalent) of
the relevant line of business that engaged in the violation or failure,
and the independent auditor responsible for reviewing compliance with
the Policies. 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 as soon as
reasonably possible upon discovery, or as soon as reasonably possible
after the QPAM 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 Citigroup Affiliated QPAM must maintain, adjust (to the
extent necessary), and implement a program of training (the Training)
to be conducted at least annually for all relevant Citigroup Affiliated
QPAM asset/portfolio management, trading, legal, compliance, and
internal audit personnel. The Training must:
(i) 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 four-year exemption (including any loss of
exemptive relief provided herein), and prompt reporting of wrongdoing;
(ii) Be conducted by a professional who has been prudently selected
and who has appropriate technical training and proficiency with ERISA
and the Code; and
(iii) Be conducted in-person, electronically or via a website;
(i)(1) Each Citigroup Affiliated QPAM, which Citigroup identifies
in a certificate signed by the officer who will review and certify the
Audit Report (as defined in Section I(i)(5)) pursuant to Section
I(i)(8), submits to an audit conducted every two years 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, each Citigroup Affiliated QPAM's
compliance with the Policies and Training conditions described herein.
The audit requirement must be incorporated in the Policies. The last
audit period under PTE 2017-05 will extend into the Exemption Period
under this proposed exemption; therefore, the audit periods under PTE
2017-05 and this proposed exemption are as follows:
(i) Under PTE 2017-05, the first audit covers the period from July
10, 2018 through July 9, 2019 (and must be completed by January 9,
2020); the second audit covers the period from July 10, 2020 through
July 9, 2021 (and must be completed by January 9, 2022); and the third
audit covers the period from July 10, 2022 through July 9, 2023 (and
must be completed by January 9, 2024).
(ii) The first audit under this proposed four-year exemption (the
fourth audit under the totality of exemptive relief) covers the period
from July 10, 2024 through July 9, 2025 (and must be completed by
January 9, 2026); and the second audit (the fifth audit under the
totality of exemptive relief) covers the period from July 10, 2026
through January 9, 2027 (must be completed by July 9, 2027). As
described above, the fifth audit period is truncated, so that it
expires concurrently with the expiration of the Exemption Period.
However, the audit report for the fifth audit period must be completed
and delivered timely and despite such report being due to the
Department after the expiration of the Exemption Period, the failure to
receive such report could impact negatively on Citigroup's ability to
claim relief under this exemption during the Exemption Period, if
granted.
(2) Within the scope of the audit and 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 only to the extent such
disclosure is not prevented by State or Federal statute, or involves
communications subject to attorney client privilege, 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. Such access is limited to
information relevant to the auditor's objectives as specified by the
terms of this exemption;
(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 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, for
each QPAM, a sample of such QPAM's transactions involving Covered
Plans, sufficient in size and nature to afford the auditor a reasonable
basis to determine such QPAM's operational compliance with the Policies
and Training;
(5) For each audit, on or before the end of the relevant period
described in Section III(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 auditor, at its discretion, may issue a single
consolidated Audit Report that covers all the Citigroup Affiliated
QPAMs. The Audit Report must include the auditor's specific
determinations regarding:
(i) The adequacy of each Citigroup Affiliated QPAM's Policies and
Training; each 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 III(h) above.
The Citigroup Affiliated QPAM must promptly address any
noncompliance and promptly address or prepare a written plan of action
to address 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. Any action taken, or the plan of
action to be taken, by the respective Citigroup Affiliated QPAM must be
included in an addendum to the Audit Report (and such addendum must be
completed before the certification described in Section III(i)(7)
below). In the event such a plan of action to address the auditor's
recommendation regarding the adequacy of the Policies and Training is
not completed by the time the Audit
[[Page 68741]]
Report is submitted, the following period's Audit Report must state
whether the plan was satisfactorily completed. 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 a
Citigroup Affiliated QPAM has complied with the requirements under this
subparagraph must be based on evidence that the particular Citigroup
Affiliated QPAM has actually implemented, maintained, and followed the
Policies and Training required by this exemption. Furthermore, the
auditor must not rely solely on the Annual Report created by the
compliance officer (the Compliance Officer) as described in Section
III(m) below, as the basis for the auditor's conclusions in lieu of
independent determinations and testing performed by the auditor as
required by Section III(i)(3) and (4) above; and
(ii) The adequacy of the most recent Annual Review described in
Section III(m);
(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 line of business
engaged in discretionary asset management services through the
Citigroup Affiliated QPAM with respect to which the Audit Report
applies, must certify in writing, under penalty of perjury, that such
signatory has reviewed the Audit Report and this exemption; and that,
to the best of such signatory's knowledge at the time, such Citigroup
Affiliated QPAM has addressed, corrected, or remedied any noncompliance
and inadequacy or has an appropriate written plan to address any
inadequacy regarding the Policies and Training identified in the Audit
Report. Such certification must also include the signatory's
determination that, to the best of such signatory's knowledge at the
time, the Policies and Training in effect at the time of signing are
adequate to ensure compliance with the conditions of this proposed
exemption, and with the applicable provisions of ERISA and the Code;
(8) The Risk Management Committee of Citigroup's Board of Directors
is provided a copy of each Audit Report; and a senior executive officer
of Citigroup or one of its affiliates who reports directly to, or
reports to another executive who reports directly to, the highest-
ranking 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 electronic mail to: <a href="/cdn-cgi/l/email-protection#82e7afede7e6c2e6edeeace5edf4"><span class="__cf_email__" data-cfemail="d4b1f9bbb1b094b0bbb8fab3bba2">[email protected]</span></a>; or by regular mail to:
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. This delivery must take place
no later than forty-five (45) days following completion of the Audit
Report. The Audit Report will be made part of the public record
regarding this exemption. Furthermore, each Citigroup Affiliated QPAM
must make its Audit Report unconditionally available, electronically or
otherwise, for examination upon request by any duly authorized employee
or representative of the Department, other relevant regulators, and any
fiduciary of a Covered Plan;
(10) Each Citigroup Affiliated QPAM and the auditor must submit to
OED by electronic mail to: <a href="/cdn-cgi/l/email-protection#96f3bbf9f3f2d6f2f9fab8f1f9e0"><span class="__cf_email__" data-cfemail="2a4f07454f4e6a4e4546044d455c">[email protected]</span></a>: Any engagement agreement(s)
entered into pursuant to the engagement of the auditor under this
exemption, no later than two (2) months after the execution of any such
engagement agreement;
(11) The auditor must provide the Department, upon request, for
inspection and review, access to all the workpapers created and
utilized in the course of the audit, provided such access and
inspection is otherwise permitted by law; and
(12) Citigroup must notify the Department of a change in the
independent auditor no later than two (2) months after the engagement
of a substitute or subsequent auditor and must provide an explanation
for the substitution or change including a description of any material
disputes between the terminated auditor, and Citigroup;
(j) Throughout the Exemption Period, with respect to any
arrangement, agreement, or contract between a Citigroup Affiliated QPAM
and a Covered Plan, the Citigroup Affiliated QPAM agrees and warrants:
(1) To comply with ERISA and the Code, as applicable with respect
to such Covered Plan; to refrain from engaging in prohibited
transactions that are not otherwise exempt (and to promptly correct any
non-exempt prohibited transactions in accordance with applicable rules
under ERISA and the Code); and to comply with the standards of prudence
and loyalty set forth in section 404 of ERISA with respect to each such
Covered Plan to the extent that section is applicable;
(2) To indemnify and hold harmless the Covered Plan for any actual
losses resulting directly from a Citigroup Affiliated QPAM's violation
of ERISA's fiduciary duties, as applicable, and of the prohibited
transaction provisions of ERISA and the Code, as applicable; a breach
of contract by the QPAM; 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. This condition applies only to actual
losses caused by the Citigroup Affiliated QPAM's violations. Actual
losses include losses and related costs arising from unwinding
transactions with third parties and from transitioning Plan assets to
an alternative asset manager as well as costs associated with any
exposure to excise taxes under Code section 4975 as a result of a
QPAM's inability to rely upon the relief in the QPAM Exemption.
(3) Not to require (or otherwise cause) the Covered Plan to waive,
limit, or qualify the liability of the Citigroup Affiliated QPAM for
violating ERISA or the Code or engaging in non-exempt prohibited
transactions;
(4) Not to restrict the ability of such Covered Plan to terminate
or withdraw from its arrangement with the Citigroup Affiliated QPAM
with respect to 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. In
connection with any of these arrangements involving investments in
pooled funds subject to ERISA entered into after the effective date of
this exemption, the adverse consequences must relate to a lack of
liquidity of the underlying assets, valuation issues, or regulatory
reasons that prevent the fund from promptly redeeming a Covered Plan's
investment, and such restrictions must be applicable to all investors
in the pooled fund on equal terms and effective no longer than
reasonably necessary to avoid the adverse consequences;
(5) Not to impose any fees, penalties, or charges for such
termination or
[[Page 68742]]
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 Citigroup Affiliated QPAM for a violation of
such agreement's terms. To the extent consistent with ERISA Section
410, however, this provision does not prohibit disclaimers 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 Citigroup, and its affiliates, or damages arising from
acts outside the control of the Citigroup Affiliated QPAM; and
(7) Each Citigroup Affiliated QPAM must provide a notice of its
obligations under this Section III(j) to each Covered Plan. For all
other prospective Covered Plans, the Citigroup Affiliated QPAM will
agree to its obligations under this Section III(j) in an updated
investment management agreement between the Citigroup Affiliated QPAM
and such clients or other written contractual agreement. This condition
will be deemed met for each Covered Plan that received a notice
pursuant to PTE 2016-14 or PTE 2017-05 that meets the terms of this
condition. This condition will also be met where the Citigroup
Affiliated QPAM has already agreed to the same obligations required by
this Section III(j) in an updated investment management agreement
between the Citigroup Affiliated QPAM and a Covered Plan.
Notwithstanding the above, a Citigroup Affiliated QPAM will not violate
the condition solely because a Covered Plan client refuses to sign an
updated investment management agreement;
(k) Notice to ERISA-covered plan and IRA clients. Within ninety
(90) days after the effective date of this exemption, each Citigroup
Affiliated QPAM provides notice of the exemption as published in the
Federal Register along with a separate summary describing the facts
that led to the Conviction (the Summary), which has 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 and beneficial owner of a Covered Plan, 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.
All prospective Covered Plan clients that enter into a written
asset or investment management agreement with a Citigroup Affiliated
QPAM (including a participation or subscription agreement in a pooled
fund managed by a Citigroup Affiliated QPAM) after the date that is
ninety (90) days after the effective date of this exemption must
receive the proposed and final 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
(for avoidance of doubt, all Covered Plan clients of a Citigroup
Affiliated QPAM during the Exemption Period must receive the
disclosures described in this Section by the later of (i) 90 days after
the effective date of the exemption or (ii) the date that a Covered
Plan client enters into a written asset or investment management
agreement with a Citigroup Affiliated QPAM). Disclosures required under
this paragraph (k) may be delivered electronically (including by an
email that has a link to this exemption);
(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 for each annual period beginning
on January 10, 2023 (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 professional who has 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 be a senior compliance officer of
Citigroup Inc. or one of its affiliates who reports directly to (or
reports to another compliance officer who reports directly to)
Citigroup Inc.'s highest ranking compliance officer (whose title is
currently Global Chief Compliance Officer of Citigroup Inc.);
(2) With respect to each Annual Review, the following conditions
must be met:
(i) The Annual Review includes a review of the Citigroup Affiliated
QPAM's compliance with and effectiveness of the Policies and Training
and of the following: 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; the most recent Audit Report
issued pursuant to this exemption (or pursuant to PTE 2017-05 if no
audit report has been issued under this exemption); any material change
in the relevant 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 their
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 the best of their knowledge at the time: (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; and (D) the
Citigroup Affiliated QPAMs have complied with the Policies and Training
and/or corrected (or is correcting) any known instances of
noncompliance in accordance with Section III(h) above;
(iv) Each Annual Report must be provided to: (A) the person or
persons who certify as to the current or most recent preceding Audit
Report provided pursuant to Section III(i)(7) above, and (B) the head
of compliance and the
[[Page 68743]]
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 III(i) above;
(v) Each Annual Review, including the Compliance Officer's written
Annual Report, must be completed within three (3) months following the
end of the period to which it relates;
(n) Citigroup imposes its internal procedures, controls, and
protocols to reduce the likelihood of any recurrence of conduct that is
the subject of the Conviction;
(o) Citigroup complies in all material respects with the
requirements imposed by a U.S. regulatory authority in connection with
the Conviction;
(p) 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;
(q) During the Exemption Period, 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;
(r) Each Citigroup Affiliated QPAM, in its agreements with, or in
other written disclosures provided to Covered Plans, clearly and
prominently informs Covered Plan clients of the Covered Plan's right to
obtain a copy of the Policies or a description (Summary Policies),
which accurately summarizes key components of the QPAM's written
Policies developed in connection with this exemption. If the Policies
are thereafter changed, each Covered Plan client must receive a new
disclosure within six (6) months following the end of the calendar year
during which the Policies were changed. If the Applicant meets this
disclosure requirement through Summary Policies, changes to the
Policies shall not result in the requirement for a new disclosure
unless, as a result of changes to the Policies, the Summary Policies
are no longer accurate. With respect to this requirement, the
description may be continuously maintained on a website, provided that
such website link to the Policies or the Summary Policies is clearly
and prominently disclosed to each Covered Plan;
(s) 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 III(c), (d), (h),
(i), (j), (k), (l), (p) and (r); or if the independent auditor
described in Section III(i) fails to comply with a provision of the
exemption, other than the requirement described in Section III(i)(11),
provided that such failure did not result from any actions or inactions
of Citigroup or its affiliates; and
(t) All the material facts and representations set forth in the
Summary of Facts and Representations are true and accurate.
Effective Date: This proposed four-year exemption, will be
effective from January 10, 2023, through January 9, 2027.
Signed at Washington, DC.
George Christopher Cosby,
Director, Office of Exemption, Determinations, Employee Benefits
Security Administration, U.S. Department of Labor.
[FR Doc. 2022-25039 Filed 11-15-22; 8:45 am]
BILLING CODE 4510-29-P
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</html>Indexed from Federal Register on November 16, 2022.
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