Notice2023-00341
Proposed Exemption for Certain Prohibited Transaction Restrictions: TT International Asset Management Ltd
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
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 individual exemption from certain of the prohibited transaction restrictions of the Employee Retirement Income Security Act of 1974 (ERISA or the Act) and/or the Internal Revenue Code of 1986 (the Code). If this proposed exemption is granted, TT International Asset Management Ltd 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), notwithstanding the Conviction (defined in Section I(a)), during the Exemption Period (as defined in Section I(c)).
Full Text
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<title>Federal Register, Volume 88 Issue 6 (Tuesday, January 10, 2023)</title>
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[Federal Register Volume 88, Number 6 (Tuesday, January 10, 2023)]
[Notices]
[Pages 1408-1418]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-00341]
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
[Exemption Application No. D-12080]
Proposed Exemption for Certain Prohibited Transaction
Restrictions: TT International Asset Management Ltd
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 individual exemption
from certain of the prohibited transaction restrictions of the Employee
Retirement Income Security Act of 1974 (ERISA or the Act) and/or the
Internal Revenue Code of 1986 (the Code). If this proposed exemption is
granted, TT International Asset Management Ltd 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),
notwithstanding the Conviction (defined in Section I(a)), during the
Exemption Period (as defined in Section I(c)).
DATES: If granted, the exemption will be in effect for a period of one
year, beginning on the date of the Conviction. Written comments and
requests for a public hearing on the proposed exemption should be
submitted to the Department by February 13, 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-12080
via email to <a href="/cdn-cgi/l/email-protection#c7a2ea88828387a3a8abe9a0a8b1"><span class="__cf_email__" data-cfemail="aacf87e5efeeeacec5c684cdc5dc">[email protected]</span></a> or online through <a href="http://www.regulations.gov">http://www.regulations.gov</a>. Any such comments or requests should be sent by
the end of the scheduled comment period. The application for exemption
and the comments received will be available for public inspection in
the Public Disclosure Room of the Employee Benefits Security
Administration, U.S. Department of Labor, Room N-1515, 200 Constitution
Avenue NW, Washington, DC 20210. See SUPPLEMENTARY INFORMATION below
for additional information regarding comments.
FOR FURTHER INFORMATION CONTACT: Mrs. Blessed Chuksorji-Keefe of the
Department at (202) 693-8567. (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="http://www.regulations.gov">http://www.regulations.gov</a>, including any personal information provided,
unless the comment includes information claimed to be confidential or
other information whose disclosure is restricted by statute. If you
submit a comment, EBSA recommends that you include your name and other
contact information in the body of your comment, but DO NOT submit
information that you consider to be confidential, or otherwise
protected (such as a Social Security number or an unlisted phone
number) or confidential business information that you do not want
publicly disclosed. However, if EBSA cannot read your comment due to
technical difficulties and cannot contact you for clarification, EBSA
might not be able to consider your comment.
Additionally, the <a href="http://www.regulations.gov">http://www.regulations.gov</a> website is an
``anonymous access'' system, which means EBSA will not know your
identity or contact information unless you provide it in the body of
your comment. If you send an email directly to EBSA without going
through <a href="http://www.regulations.gov">http://www.regulations.gov</a>, your email address will be
automatically captured and included as part of the comment that is
placed in the public record and made available on the internet.
Proposed Exemption
The Department is considering granting an exemption under the
authority of Section 408(a) of the Employee Retirement Income Security
Act of 1974, as amended (ERISA), and Section 4975(c)(2) of the Internal
Revenue Code of 1986, as amended (the Code), and in accordance with the
Department's exemption procedures.\1\ If the proposed exemption is
granted, TT International Asset Management Ltd (TTI) 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),\2\
notwithstanding the
[[Page 1409]]
impending judgment of conviction against its affiliate, Sumitomo Mitsui
Banking Corporation Nikko Securities, Inc. (Nikko Tokyo) for attempting
to peg, fix or stabilize \3\ the prices of certain Japanese equity
securities that Nikko Tokyo was attempting to place in a block offering
(the Conviction).\4\ This proposed exemption would be effective for a
one-year period beginning on the date of the Conviction if the
exemption's conditions and definitions are satisfied.
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\1\ 29 CFR part 2570, subpart B (75 FR 66637, 66644, October 27,
2011). For purposes of this proposed exemption, references to
specific provisions of ERISA Title I, unless otherwise specified,
should be read to refer as well to the corresponding provisions of
Code Section 4975. Further, this proposed exemption, if granted,
does not provide relief from the requirements of, or specific
sections of, any law not noted above. Accordingly, TTI is
responsible for ensuring compliance with any other laws applicable
to the transactions described herein.
\2\ 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).
\3\ According to the Applicant, the unofficial English-language
translation of Article 159, paragraph 3 of the FIEA, available on
the Japanese Financial Services Agency website, provides that no
person may ``conduct a series of Sales and Purchase of Securities,
etc. or make offer, Entrustment, etc. or Accepting an Entrustment,
etc. therefore in violation of a Cabinet Order for the purpose of
pegging, fixing or stabilizing prices of Listed Financial
Instruments, etc. in a Financial Instruments Exchange Market or
prices of Over-the-Counter Traded Securities in an Over-the-Counter
Securities Market.''
\4\ Section I(g) of PTE 84-14 generally provides that
``[n]either the QPAM nor any affiliate thereof . . . nor any owner .
. . of a 5 percent or more interest in the QPAM is a person who
within the 10 years immediately preceding the transaction has been
either convicted or released from imprisonment, whichever is later,
as a result of'' certain crimes.
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This proposed exemption would provide relief from certain
restrictions set forth in ERISA Sections 406 and 407. It would not,
however, provide relief from any other violation of law. Furthermore,
the Department cautions that the relief in this proposed exemption
would terminate immediately if, among other things, TTI or an affiliate
of TTI (as defined in Section VI(d) of PTE 84-14) \5\ is convicted of a
crime covered by Section I(g) of PTE 84-14 (other than the Conviction
as defined in Section I(a)) during the exemption period (as defined in
Section I(c)). Although TTI could apply for a new exemption in that
circumstance, the Department would not be obligated to grant the
exemption.
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\5\ Section VI(d) of PTE 84-14 defines the term ``affiliate''
for purposes of Section I(g) as ``(1) Any person directly or
indirectly through one or more intermediaries, controlling,
controlled by, or under common control with the person, (2) Any
director of, relative of, or partner in, any such person, (3) Any
corporation, partnership, trust or unincorporated enterprise of
which such person is an officer, director, or a 5 percent or more
partner or owner, and (4) Any employee or officer of the person
who--(A) Is a highly compensated employee (as defined in Section
4975(e)(2)(H) of the Code) or officer (earning 10 percent or more of
the yearly wages of such person), or (B) Has direct or indirect
authority, responsibility or control regarding the custody,
management or disposition of plan assets.''
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The terms of this proposed exemption have been specifically
designed to permit plans to terminate their relationships in an orderly
and cost-effective fashion in the event of an additional conviction or
a determination by the plan that it is otherwise prudent to terminate
its relationship with TTI.
Summary of Facts and Representations <SUP>6</SUP>
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\6\ The Summary of Facts and Representations is based on TTI's
representations provided in its exemption application and does not
reflect factual findings or opinions of the Department unless
indicated otherwise. The Department notes that the availability of
this exemption is subject to the express condition that the material
facts and representations contained in application D-12080 are true
and complete at all times, and accurately describe all material
terms of the transactions covered by the exemption. If there is any
material change in a transaction covered by the exemption, or in a
material fact or representation described in the application, the
exemption will cease to apply as of the date of the change.
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Background
1. TTI is a global investment firm headquartered in London, UK that
currently manages approximately $8.4 billion in assets. TTI and its
subsidiaries \7\ have operations in the United States, Hong Kong, and
Japan. TTI was wholly acquired by Sumitomo Mitsui Financial Group, Inc.
(SMFG) on February 28, 2020, and is currently a member of the Sumitomo
Mitsui Banking Corporation group (the SMBC Group).\8\
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\7\ TTI subsidiaries include TT International Investment
Management LLP, TT International (Hong Kong) Ltd, TT Crosby Ltd, and
TT International Advisors Inc.
\8\ The SMBC group is a diversified Japanese financial services
firm that conducts activities across a wide range of financial
sectors, including banking, asset management, securities trading,
leasing, credit card lending, and consumer finance.
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2. The SMBC group is a Japanese financial services firm that
conducts activities across a wide range of financial sectors, including
banking, asset management, securities trading, leasing, credit card
lending, and consumer finance. As currently constituted, SMFG is the
group's ultimate parent company. The SMBC group provides asset
management services through two subsidiaries. The first is TTI, which
is managed independently of the broader SMBC group. The second is
Sumitomo Mitsui DS Asset Management Company, Limited, an investment
manager headquartered in Tokyo. The SMBC group also conducts securities
market activities through the SMBC Nikko Securities franchise. As
relevant to this proposed exemption, that includes Nikko Tokyo, a
Japanese broker-dealer.
3. TTI is an SEC-registered investment advisor that specializes in
managing portfolios for institutional investors, including ERISA-
covered Plans (Covered Plans), public retirement plans, and other
collective investment vehicles through a variety of equity long-only
and long/short strategies across a broad range of industry sectors and
geographies.
4. In offering investment management services, TTI operates as a
QPAM in reliance on PTE 84-14.\9\ TTI advises four segregated ERISA
accounts on behalf of the ERISA-covered plans of two major U.S.
employers \10\ and operates three segregated accounts for public
pension plans, which currently hold approximately $1.1 billion in
assets. TTI also manages three funds as ERISA ``plan asset'' funds: the
TT Emerging Markets Opportunities Fund II Limited, the TT Environmental
Solutions Equity Master Fund II Limited, and the TT Non-U.S. Equity
Master Fund Limited.\11\
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\9\ Currently, TTI is the only member of the SMBC group that is
relying upon the QPAM Exemption. TTI states that it is possible that
certain affiliates may seek ERISA business in the future that would
require reliance on the QPAM Exemption.
\10\ Together, these two ERISA-covered plans currently hold
approximately $218 million in assets.
\11\ TTI is currently in the process of launching the TT
Environmental Solutions Fund; the TT Non-U.S. Equity Fund is
operational but does not currently hold any ERISA assets.
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ERISA and Code Prohibited Transactions and PTE 84-14
5. The rules set forth in ERISA Section 406 and Code Section
4975(c)(1) proscribe certain ``prohibited transactions'' between plans
and certain parties in interest with respect to those plans.\12\ ERISA
Section 3(14) defines parties in interest with respect to a plan to
include, among others, the plan fiduciary, a sponsoring employer of the
plan, a union whose members are covered by the plan, service providers
with respect to the plan, and certain of their affiliates.\13\ The
prohibited transaction provisions under ERISA Section 406(a) and Code
Section 4975(c)(1) prohibit, in relevant part, (1) 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), (2) the use of plan assets by or for the benefit of a party in
interest, or (3) a transfer of plan assets to a party in interest.\14\
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\12\ For purposes of the Summary of Facts and Representations,
references to specific provisions of Title I of ERISA, unless
otherwise specified, refer also to the corresponding provisions of
the Code.
\13\ Under the Code, such parties, or similar parties, are
referred to as ``disqualified persons.''
\14\ 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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6. Under the authority of ERISA Section 408(a) and Code Section
4975(c)(2), the Department has the
[[Page 1410]]
authority to grant an exemption from such ``prohibited transactions''
in accordance with the procedures set forth in its exemption procedure
regulation if the Department finds an exemption is: (a)
administratively feasible, (b) in the interests of the plan and of its
participants and beneficiaries, and (c) protective of the rights of
participants and beneficiaries of the plan.\15\
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\15\ The Department's exemption procedure regulation is codified
at 29 CFR part 2570, subpart B (76 FR 66637, 66644, October 27,
2011).
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7. 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 investment
manager managing said investment fund satisfies the definition of
``qualified professional asset manager'' (QPAM) and satisfies
additional conditions of the exemption. PTE 84-14 was developed and
granted based on the essential premise that broad relief could be
afforded for all types of transactions in which a plan engages only if
the commitments and the investments of plan assets and the negotiations
leading thereto are the sole responsibility of an independent,
discretionary manager.\16\
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\16\ See 75 FR 38837, 38839 (July 6, 2010).
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8. Section I(g) of PTE 84-14 prevents an entity that may otherwise
meet the QPAM definition from utilizing the exemptive relief provided
by the QPAM exemption for itself and its client plans if that entity,
an ``affiliate'' thereof, or any direct or indirect five percent or
more owner in the QPAM has been either convicted or released from
imprisonment, whichever is later, as a result of criminal activity
described in Section I(g) within the 10 years immediately preceding a
transaction. Section I(g) was included in PTE 84-14, in part, based on
the Department's expectation that QPAMs, and those who may be in a
position to influence the QPAM's policies, must maintain a high
standard of integrity.
Nikko Tokyo Conviction and PTE 84-14 Disqualification
9. On March 24, 2022, the Tokyo District Public Prosecutors Office
charged Nikko Tokyo and four of its officers and employees in Tokyo
District Court with alleged violations of Japan's Financial Instruments
and Exchange Act (the FIEA) for allegedly attempting to peg, fix, or
stabilize the prices of certain Japanese equity securities that Nikko
Tokyo was attempting to place in a block offering (the Misconduct).
Specifically, a block offering is a type of limited public offering
that is common in Japan, whereby a dealer typically applies a spread to
the price at which it purchased the shares from the seller and the
price at which it sells them in the block offering.
10. In connection with the March 24, 2022 charges, the Tokyo Public
Prosecutor alleged that between December 2019 and November 2020, Nikko
Tokyo, through the actions of relevant officers, purchased shares of
five issuers for its own account in an attempt to peg, fix, or
stabilize the prices of those securities in anticipation of a block
offer. This activity was intended to ensure that the price of the
securities being sold through the block offering did not decline
significantly, which would have potentially harmed Nikko Tokyo's
interests.\17\
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\17\ The Tokyo Public Prosecutor alleged that these
``stabilization transactions'' violated Article 197 Paragraph 1,
Item 5, Article 159, Paragraph 3, and Article 207, Paragraph 1, Item
1 of the FIEA and Article 60 of the Penal Code.
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11. On April 13, 2022, the Tokyo Public Prosecutor filed additional
charges against Nikko Tokyo and two officers and employees of Nikko
Tokyo for engaging in similar conduct in connection with five
additional block offers between October 2020 and April 2021.\18\ The
March 24, 2022, and April 13, 2022 charges against Nikko Tokyo have
been consolidated for purposes of the Tokyo District Court proceeding.
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\18\ Charges were filed under Article 197 Paragraph 1, Item 5,
Article 159, Paragraph 3, and Article 207, Paragraph 1, Item 1 of
the FIEA and Article 60 of the Penal Code.
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12. The trial in Tokyo District Court occurred over three days on
October 28, 2022, December 1, 2022, and December 26, 2022. TTI
represents that the Tokyo District Court is expected to issue a final
decision on February 13, 2023. TTI also states that under Japanese law,
conviction and judgment occur simultaneously.
Nikko Tokyo Affiliation and Loss of QPAM Status
13. Both TTI and Nikko Tokyo are direct subsidiaries of SMFG and
thus are affiliates for the purposes of Section I(g) of the QPAM
Exemption. Once the Tokyo District Court issues its final decision and
Nikko Tokyo is sentenced in connection with its Conviction, Section
I(g) will be triggered and TTI, as well as its Covered Plan clients,
will be ineligible to rely on the QPAM Exemption, without receiving an
individual prohibited transaction exemption from the Department.
Exemption Request
14. On October 19, 2022, TTI submitted an exemption request to the
Department that would permit TTI and its Covered Plan clients to
continue to utilize the relief in PTE 84-14, notwithstanding the
anticipated Conviction of Nikko Tokyo. In support of its exemption
request, TTI asserts that Nikko Tokyo is a remote foreign affiliate of
TTI with wholly separate businesses, operations, management, systems,
premises, and legal and compliance personnel; that TTI was not involved
in any way in the Misconduct; and that the Misconduct did not involve
any ERISA assets.
Separation of TTI and Nikko Tokyo
15. TTI states that none of the Misconduct underlying the
anticipated Nikko Tokyo Conviction involved TTI or the SMBC group's
asset management businesses. Further, it states that none of TTI's
personnel was involved in the misconduct and none of the individual
officers or employees of Nikko Tokyo had any role at TTI. According to
the Applicant, TTI and Nikko Tokyo have separate businesses,
operations, management teams, systems, premises, and legal and
compliance personnel. Since its acquisition by SMFG on February 28,
2020, TTI has remained a stand-alone business with distinct reporting
lines, governance structures, and control frameworks. Further, TTI is
not directly owned by or in the same vertical ownership chain as Nikko
Tokyo, and TTI and Nikko Tokyo do not share personnel or office space.
16. The Applicant acknowledges that TTI's seven-member board of
directors includes four representatives from the SMBC group, but
additionally represents that TTI's Management Committee provides direct
oversight of the business.\19\ The Applicant states that the SMBC group
exercises oversight through representation on TTI's board of directors
and management committee and TTI receives the benefit of an internal
audit back-office function provided by the SMBC group. According to the
Applicant, however, TTI personnel remain fully and independently
responsible for TTI's material functions, including portfolio and risk
management activities, investment and trading decisions, compliance,
marketing, and the provision of client services. In addition, dedicated
TTI personnel perform all day-to-day functions related to TTI's
business as an investment adviser, including onboarding customers,
[[Page 1411]]
managing customer accounts, and executing trading decisions.
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\19\ The board of directors is responsible for, among other
things, setting strategic objectives, approving major initiatives,
and ensuring the company has adopted and implemented a compliance
infrastructure that is reasonably designed to meet its regulatory
obligations.
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17. TTI's Management Committee, which includes TTI's Managing
Director, Chief Financial Officer, three other TTI executives, and a
single representative from the SMBC group, provides direct oversight of
the business, including ensuring that TTI implements the strategy set
by the board. Day-to-day management at TTI is conducted by a dedicated
management team with support from other TTI committees, including the
Operations Committee, Product Committee, Valuation Committee, and ESG
Committee. The Applicant submits that TTI has retained its investment
autonomy and does not rely on SMBC group personnel for any material
functions. In addition, TTI has dedicated independent legal, risk, and
compliance teams, as well as its own control framework and compliance
infrastructure.\20\
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\20\ This includes TTI's Code of Ethics, which sets forth TTI's
expectation that all personnel will ``[o]bserve the highest
standards of integrity'' and ensure that TTI maintains its ``strong
reputation for regulatory compliance and high professional
standards.'' This Code of Ethics also addresses prohibitions on
market abuse and restrictions on personal trading.
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18. TTI has detailed policies setting forth its process for
handling ERISA assets, identifying and addressing conflicts of
interest, best execution, and compliance with applicable anti-money
laundering requirements. TTI also has a dedicated Compliance Manual
that sets forth, among other things, firm policies related to
whistleblowing, handling internal and external complaints, client
onboarding, and the process for approving new products or instruments.
19. In addition to its own compliance and governance frameworks,
TTI is subject to groupwide oversight as part of the SMBC group.
Specifically, TTI's U.S. office and U.S. subsidiary are subject to
oversight as part of SMBC group's combined U.S. operations, including
by the U.S. Risk Committee. According to the Applicant, this ensures
that TTI adheres to the SMBC group's global and regional policies and
compliance expectations and provides a mechanism for escalating
potential issues to the U.S. chief risk officer or other oversight
functions as appropriate.
20. Besides common ownership, the sole connection between TTI and
Nikko Tokyo is Hideyuki Fred Omokawa, an SMBC group representative on
TTI's board of directors and Management Committee who was appointed as
Nikko Tokyo's Managing Executive Officer of Business Strategy and
Development on April 1, 2021. The Applicant states that Mr. Omokawa was
not involved in any of the Misconduct.
21. TTI states that Nikko Tokyo is not a QPAM, does not manage any
ERISA assets, and that no ERISA assets were involved in the Misconduct
underlying the anticipated Nikko Tokyo Conviction.
22. Finally, TTI represents that it has not engaged in trading
activity with Nikko Tokyo on behalf of ERISA accounts at any point
since TTI became affiliated with Nikko Tokyo.
Hardship to Covered Plans
The Applicant represents that Covered Plans would suffer certain
hardships if the Applicant loses its eligibility to rely on the QPAM
Exemption. The Applicant's representations regarding these hardships
are set forth below in paragraphs 23 through 37.
23. TTI represents that if the Department declines to grant this
proposed exemption, there would be adverse consequences for Covered
Plans and public plans. In this regard, loss of the QPAM Exemption
would severely limit the investment transactions available to the
accounts that TTI manages on behalf of Covered Plans, hindering TTI's
ability to efficiently manage the strategies for which TTI contracted
with Covered Plan clients. Further, if TTI were not QPAM Exemption
eligible, it could receive less advantageous pricing and certain
counterparties could, as a blanket policy, refuse to transact with or
provide services to TTI.
24. TTI states that it has extensively reviewed its investment
activity and concluded that, as a practical matter, the QPAM Exemption
is the only exemption available to provide relief. TTI states that
counterparties to the swaps and other transactions in which TTI-managed
accounts engage require compliance with, and a representation as to
satisfaction of the conditions of, the QPAM Exemption. In light of
market reliance on QPAM Exemption, the Applicant submits that it would
not be possible for TTI to effectively manage its strategies for ERISA
clients, absent the grant of exemptive relief.
The Applicant states that, particularly given the nature of
emerging market investments and swap, options, and other derivative
transactions, there is discomfort and reluctance on both the part of
Covered Plan clients and counterparties to utilize more recent
alternative exemptions, such as the service provider exemption under
ERISA section 408(b)(17), due to uncertainty about the application of
the adequate consideration requirements and the resulting possibility
that the use of the exemption is later challenged on those grounds.
25. TTI states that it relies on the QPAM Exemption to conduct a
variety of transactions on behalf of Covered Plans, including buying
and selling equity securities; preferred stock; American Depository
Receipts, and related options; U.S. and foreign fixed-income
instruments, including unregistered offerings; various derivatives,
including futures, options on futures, and swaps; and foreign exchange
products, including spot currencies, forwards, and swaps. TTI also
relies upon the QPAM Exemption for the purchase and sale of both
foreign and domestic equity securities, registered and sold under Rule
144A or otherwise (e.g., traditional private placement).
TTI specializes in international and emerging market strategies and
these strategies depend on TTI's ability to translate and maintain the
value of Covered Plan investments from the local currency in which the
investment is made into U.S. dollars, the benchmark currency in which
the Covered Plan's performance is measured. This creates inherent
currency risks. To limit the plans' risk exposure to the underlying
securities without simultaneously exposing them to the risk of currency
fluctuation, TTI makes substantial use of foreign exchange (FX) hedges
by using forward transactions and other FX derivatives. If the
Department does not grant this proposed exemption, nearly $2.07 billion
in ERISA plans and separately managed accounts for private and public
employers would likely be affected, either directly or as a result of
TTI's inability to effectively hedge risk.
26. For all but one of the ERISA funds that TTI manages, virtually
all assets are either actively or dynamically hedged based on exposures
and market conditions.\21\ As of November 3, 2022, approximately 16% of
the assets under management (AUM) in each of the four segregated ERISA
accounts that TTI manages on behalf of the ERISA plans of two major
U.S. employers is hedged with respect to Indian, Taiwanese, and Chinese
currency, which translates to approximately $35 million in hedges.
Further, the TT Emerging Markets Opportunities Fund II has over the
past year hedged risks associated with British, Indian, Taiwanese,
Chinese, Mexican, and Polish currencies. Without these positions, the
TT Emerging Markets Opportunities Fund II would have incurred nearly
$5.5 million
[[Page 1412]]
in losses due to unhedged FX exposures, negatively impacting overall
returns.
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\21\ The actual percentage of AUM in each fund that is hedged at
any given time varies.
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27. According to the Applicant, TTI's ability to deliver returns
depends on its ability to limit its customers' exposure to defined
risks, such as international and emerging market equity risk, without
introducing additional risk factors such as FX volatility. If TTI loses
its ability to rely upon the QPAM Exemption, it would no longer be able
to hedge currency for its private and public plan asset clients,
preventing it from managing absolute and relative currency risk for
such clients in such clients' best interests.
28. Loss of the QPAM Exemption would also impact TTI's agreements
with the swap dealers it executes these hedges with pursuant to
International Swaps and Derivatives Association Agreements (ISDA
Agreements). ISDA agreements require TTI to represent that it meets all
conditions of the QPAM Exemption, and a breach of this representation
would entitle the counterparty to terminate the transaction. The
Applicant states that, as a practical matter, swap dealers would be
nearly certain to exercise their right to terminate because TTI's loss
of the QPAM Exemption would increase the swap dealers' exposure to
risk. Thus, these agreements would be unwound and TTI would no longer
be able to employ the hedging activities on which its strategies
depend. If these ISDA Agreements were terminated, TTI stats that it
would immediately need to unwind approximately $330 million in
hedges.\22\
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\22\ The approximate total FX forward exposure of TTI's public
and private plan asset accounts as of November 10, 2022 is $330
million.
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29. TTI submits that if this proposed exemption is not granted,
Covered Plans could incur significant costs, including transaction
costs, costs associated with finding and evaluating other managers, and
costs associated with reinvesting assets with those new managers. TTI
states that it has longstanding relationships with its ERISA plan
clients and if this exemption were denied, these plans would need to
undertake significant work to find an alternative manager.\23\ These
costs, according to the Applicant include the following: (a) consultant
fees, legal 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.
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\23\ TTI represents that it has managed ERISA assets for a major
U.S. financial institution since at least 2015. TTI also states that
it has managed ERISA assets for a large aerospace company since at
least 2018.
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30. The Applicant states that, given the sophistication of TTI's
investment strategies, Covered Plan clients would likely engage in a
full RFP process which could take several months to complete. TTI
represents that it is considered a leader in emerging markets
strategies, and that Covered Plans would have a difficult time finding
a suitable replacement. TTI states that plans generally incur tens of
thousands of dollars in consulting and legal fees in connection with a
search for a new manager and that consultants may charge more for
searches involving specialized strategies, such as TTI's international,
emerging markets, and environmentally conscious portfolios.
31. The Applicant states that terminating management agreements and
liquidating associated positions can have a significant impact on both
transaction fees and the market value of the underlying assets. This is
particularly true for many of TTI's strategies, which focus on
international and emerging markets and may occasionally involve
investments in illiquid foreign securities and related derivatives that
have large bid-ask spreads, infrequent trading, and/or low trading
volumes.
32. TTI states that for U.S. Equity Strategies, assuming average
market conditions, the liquidation costs over a 30-day liquidation
timeframe might range from 20 to 40 basis points; for significantly
shorter liquidation periods, and depending on the strategy, the range
could be 30 to 50 basis points. In addition, commission fees and
transactions would likely average an additional 4 basis points.
33. For International and Emerging Markets Equity, TTI relies on
the QPAM Exemption to buy and sell certain international and emerging
markets equity securities. International, and particularly emerging,
equity markets are typically less liquid than their domestic
counterparts and incur higher transaction costs. Assuming average
market conditions, the liquidation costs for equity strategies over a
30-day liquidation timeframe might range from 30 to 50 basis points;
for significantly shorter liquidation periods, the range could be 40 to
80 basis points, depending on the strategy. In addition, there would
also be an additional average of 10 basis points in commission fees on
the transactions.
34. For futures, options, and cleared and bilateral swaps, TTI
relies on the QPAM Exemption to buy and sell these products, which
certain strategies rely on to hedge risk and obtain certain exposures
on an economic basis. TTI states that these investments are important
to plans and commingled funds both as an ongoing risk management matter
and to hedge various risks. Without the ability to invest in these
instruments, plans would no longer have access to a tool that managers
routinely use to protect against losses caused by market volatility. If
the QPAM Exemption were lost, TTI estimates that its clients could
incur average weighted liquidation costs of approximately 5 basis
points of the total market value of these products.
35. In the case of foreign currency exposure, Plans that invest in
global strategies would be disadvantaged were they to lose the ability
to hedge currency risk. If the QPAM Exemption were lost, TTI estimates
that its clients could incur average weighted liquidation costs of
approximately 5 basis points of the total market value in fixed income
products.
Steps Taken To Protect Covered Plans
36. After becoming aware of Nikko Tokyo's indictment, TTI states
that it took immediate steps to prevent the trading of all TTI managed
accounts with or through Nikko Tokyo. Further, TTI inventoried the
ISDAs to which it is a party and reached out to counsel to begin
exploring alternative exemptions, none of which were practically
available to TTI (both as a contractual matter and as a substantive
matter given the nature and extent of the hedging activities employed
in the strategies).\24\ TTI further states that it has not onboarded
any new ERISA clients since becoming aware of Nikko Tokyo's indictment.
---------------------------------------------------------------------------
\24\ TTI represents that, given the nature of emerging market
investments and swap, options, and other derivative transactions,
there is discomfort and reluctance on both the part of ERISA clients
and counterparties to utilize more recent alternative exemptions,
such as the service provider exemption under ERISA Section
408(b)(17), due to uncertainty about the application of the adequate
consideration requirements and the resulting possibility that the
use of the exemption is later challenged on those grounds.
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37. With respect to existing clients, TTI's options are limited.
Because TTI cannot execute its foreign investment strategies consistent
with Covered Plans' investment goals absent the QPAM Exemption, TTI
states that it is unable to adequately protect Covered Plans from loss
of the QPAM Exemption beyond assisting the funds in
[[Page 1413]]
identifying potential alternative QPAMs.
Protective Conditions
38. In its exemption application, TTI requested a five-year
exemption for TTI and its current and future affiliates and related
entities. However, given the short time between now and the Conviction
date and the lack of a record necessary to determine that TTI's full
request would be in the interest of, and protective of, all affected
Covered Plans, the Department has determined to propose this one-year
exemption solely for TTI. With the limited term of relief, the
Department reserves the right to review TTI's adherence to the
conditions set out in this exemption before granting a longer term of
relief.
39. In developing administrative exemptions under ERISA Section
408(a), the Department implements its statutory directive to grant only
exemptions that are appropriately protective and in the interest of
affected plans and IRAs. The Department is proposing this exemption
with conditions that would protect Covered Plans (and their
participants and beneficiaries) and allow them to continue to utilize
the services of TTI if they determine that it is prudent to do so. If
this proposed exemption is granted as proposed, it would allow Covered
Plans to avoid costs and disruption to investment strategies that may
arise if such Covered Plans are forced, on short notice, to hire a
different QPAM or asset manager because TTI no longer is able to rely
on the relief provided by PTE 84-14 due to the Conviction.
40. This proposed exemption requires TTI to develop, implement,
maintain, and follow written policies (the Policies) that are
reasonably designed to ensure that, among other things: (a) the asset
management decisions of TTI are conducted independently of the
corporate management and business activities of Nikko Tokyo; (b) TTI
fully complies with ERISA's fiduciary duties; (c) any filings or
statements made by TTI to regulators on behalf of Covered Plans are
materially accurate and complete; and (d) TTI complies with the terms
of this proposed exemption. Further, any violation of or failure to
comply with the Policies must be corrected promptly upon discovery, and
any such violation or compliance failure that is not promptly corrected
must be reported, in writing to appropriate corporate officers upon the
discovery of the failure to promptly correct.
41. This proposed exemption requires TTI to develop and implement a
training program (the Training) that is conducted by a prudently
selected independent professional. The Training must cover the
Policies, ERISA and Code compliance, ethical conduct, the consequences
for not complying with the conditions of this proposed exemption, and
the duty to promptly report wrongdoing.
42. This proposed exemption further requires TTI to be audited for
the 12-month exemption period by a prudently selected independent
auditor (the Auditor). The Auditor must evaluate the adequacy of TTI's
implementation and compliance with the Policies and Training
requirements of this proposed exemption. The Auditor must also issue a
written report (the Audit Report) to TTI that describes the procedures
it performed during the Audit. In its Audit Report, the Auditor must
further assess the adequacy of the Policies and Training, TTI's
compliance with the Policies and Training, the need, if any, to
strengthen the Policies and Training; and any instance(s) of
noncompliance by TTI.
43. This proposed exemption also requires that certain TTI senior
personnel must review the Audit Report, make certain certifications,
and take corrective actions when necessary. In this regard, a general
counsel, or one of the three most senior executive officers of TTI must
certify in writing and under penalty of perjury that the officer has
reviewed the Audit Report, addressed, corrected, or remedied any
inadequacy identified in the Audit Report, and determined that the
Policies and Training comply with the requirements of this proposed
exemption and applicable provisions of ERISA and the Code.
44. This proposed exemption requires TTI to agree and warrant to
their Covered Plan clients that they will: (a) comply with ERISA and
the Code; (b) refrain from engaging in prohibited transactions that are
not otherwise exempt (and promptly correct any inadvertent prohibited
transactions); and (c) comply with the standards of prudence and
loyalty set forth in ERISA Section 404. This proposed exemption also
requires TTI to agree and warrant: (a) to indemnify and hold harmless
Covered Plans for certain damages; and (b) not to require (or otherwise
cause) Covered Plans to waive, limit, or qualify the liability of TTI
for violating ERISA or the Code or engaging in prohibited transactions.
Finally, this proposed exemption requires TTI to agree and warrant not
to: (a) restrict the ability of Covered Plans to terminate or withdraw
from their arrangement with TTI except for reasonable restrictions
disclosed in advance, as defined in this proposed exemption; or (b)
impose any fees, penalties, or charges for such termination or
withdrawal, except for reasonable fees.
45. This proposed exemption contains extensive notice requirements
that obligate TTI to provide Covered Plans with a notice of the TTI's
obligations under the exemption, a copy of the notice of the exemption
as published in the Federal Register, a separate summary describing the
facts that led to the Conviction (the Summary), and a prominently
displayed statement (the Statement) that the Conviction results in a
failure to meet a condition in PTE 84-14.
46. This proposed exemption also requires TTI to designate a senior
compliance officer (the Compliance Officer) to conduct a twelve-month
review to determine the adequacy and effectiveness of the
implementation of the Policies and Training (the Review). The
Compliance Officer must prepare a written report for the Review that,
among other things, summarizes their material activities during the
preceding year, sets forth any instance of noncompliance discovered
during the preceding year, and any related corrective action taken.
47. Finally, the Department notes that relief under this proposed
exemption is limited solely to TTI and no other affiliates of TTI, SMBC
or SMFG, as the term affiliate is defined in PTE 84-14. Further, this
proposed exemption will only apply for a limited period of one year. To
continue to rely upon the QPAM Exemption beyond the one-year term of
the exemption, TTI will have to submit another exemption application to
the Department.
Statutory Findings
48. Based on the conditions included in this proposed exemption,
the Department has tentatively determined that the relief sought by TTI
would satisfy the statutory requirements for an exemption under ERISA
Section 408(a).
49. The Proposed Exemption is ``Administratively Feasible.'' The
Department has tentatively determined that the proposed exemption is
administratively feasible because, among other things, a qualified
independent auditor would be required to perform an in-depth audit
covering TTI's compliance with the terms of the exemption, and a
corresponding written audit report would be provided to the Department
and be made available to the public. The Department notes that the
independent audit will incentivize compliance while reducing the
immediate need for direct review and oversight by the Department.
[[Page 1414]]
50. The Proposed Exemption is ``In the Interest of the Covered
Plans.'' The Department has tentatively determined that the proposed
exemption would be in the interests of the participants and
beneficiaries of affected Covered Plans. It is the Department's
understanding, based on representations from TTI, that if the requested
exemption is denied, Covered Plans may be forced to find other managers
at a potentially significant cost. According to TTI, ineligibility
under the QPAM Exemption would deprive Covered Plans of the investment
management services that they expected to receive when they appointed
TTI. In this regard, an exemption denial could result in the
termination of relationships that the fiduciaries of the Covered Plans
have determined to be in the best interests of those plans.
51. The Proposed Exemption Is ``Protective of the Plan.'' The
Department has tentatively determined that the proposed exemption is
protective of the interests of the participants and beneficiaries of
Covered Plans. As described above, the proposed exemption is subject to
a suite of conditions that include, but are not limited to: (a) the
development and maintenance of the Policies; (b) the implementation of
the Training; (c) a robust audit conducted by a qualified independent
auditor; (d) the provision of certain agreements and warranties on the
part of TTI; (e) specific notices and disclosures that inform Covered
Plans of the circumstances necessitating the need for exemptive relief
and TTI's obligations under this exemption; and (f) the designation of
a Compliance Officer who must ensure TTI continues to comply with the
Policies and Training requirements of this exemption.
Summary
52. This proposed exemption would provide relief from certain of
the restrictions set forth in ERISA Section 406 and Code Section
4975(c)(1). No relief or waiver of a violation of any other law would
be provided by this proposed exemption. The relief set forth in this
proposed exemption would terminate immediately if, among other things,
an entity within the TTI corporate structure were convicted of any
crime covered by Section I(g) of PTE 84-14 (other than the Conviction).
While such an entity could request a new individual prohibited
transaction exemption in that event, the Department is not obligated to
grant such a request. Consistent with this proposed exemption, the
Department's consideration of additional exemptive relief is subject to
the findings required under ERISA Section 408(a) and Code Section
4975(c)(2).
53. When interpreting and implementing this exemption, TTI should
resolve any ambiguities in favor of the exemption's protective
purposes. To the extent additional clarification is necessary, TTI and
others should contact EBSA's Office of Exemption Determinations at 202-
693-8540.
54. Based on the conditions that are included in this proposed
exemption, the Department has tentatively determined that the relief
sought by TTI would satisfy the statutory requirements for an
individual exemption under ERISA Section 408(a) and Code Section
4975(c)(2).
Notice to Interested Persons
Notice of the proposed exemption will be provided to all interested
persons within three (3) days of the publication of the notice of
proposed one-year exemption in the Federal Register. The notice will be
provided to all interested persons in the manner approved by the
Department and will contain the documents described therein and a
supplemental statement, as required pursuant to 29 CFR 2570.43(a)(2).
The supplemental statement will inform interested persons of their
right to comment on and to request a hearing with respect to the
pending exemption. All written comments and/or requests for a hearing
must be received by the Department within thirty-three (33) days of the
date of publication of this proposed one-year exemption in the Federal
Register. All comments will be made available to the public.
Warning
If you submit a comment, EBSA recommends that you include your name
and other contact information in the body of your comment, but DO NOT
submit information that you consider to be confidential, or otherwise
protected (such as 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 the plan solely in the interest of the participants
and beneficiaries of the plan and in a prudent fashion in accordance
with ERISA Section 404(a)(1)(B); nor does it affect the requirement of
Code Section 401(a) that the plan must operate for the exclusive
benefit of the employees of the employer maintaining the plan and their
beneficiaries;
(2) Before an exemption may be granted under ERISA Section 408(a)
and/or Code Section 4975(c)(2), the Department must find that the
exemption is administratively feasible, in the interests of the plan
and of its participants and beneficiaries, and protective of the rights
of participants and beneficiaries of the plan;
(3) The proposed exemption 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 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.
(5) The Department notes that all of the material facts and
representations set forth in the Summary of Facts and Representations
must be true and accurate at all times, and that the relief provided
herein is conditioned upon the veracity of all material representations
made by the Applicant.
Proposed Exemption
The Department is considering granting a one-year exemption under
the authority of ERISA Section 408(a) and Internal Revenue Code (or
Code) section 4975(c)(2), and in accordance with the procedures set
forth in the exemption procedure regulation.\25\
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\25\ 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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[[Page 1415]]
Section I. Definitions
(a) The term ``Conviction'' means the judgment of conviction
against SMBC Nikko Securities, Inc. (Nikko Tokyo) in Tokyo District
Court for attempting to peg, fix or stabilize the prices of certain
Japanese equity securities that Nikko Tokyo was attempting to place in
a block offering that is expected to occur on February 13, 2023.
(b) The term ``Covered Plan'' means a plan subject to Part IV of
Title I of ERISA (an ``ERISA-covered plan'') or a plan subject to Code
section 4975 (an ``IRA''), in each case, with respect to which TTI
relies on PTE 84-14, or with respect to which TTI has expressly
represented that the manager qualifies as a QPAM or relies on the QPAM
class exemption (PTE 84-14 or the QPAM Exemption). A Covered Plan does
not include an ERISA-covered plan or IRA to the extent that TTI has
expressly disclaimed reliance on QPAM status or PTE 84-14 in entering
into a contract, arrangement, or agreement with the ERISA-covered plan
or IRA.
(c) The term ``Exemption Period'' means the one-year period
beginning on the date of the Conviction.
(d) The term ``TTI'' means TT International Asset Management Ltd,
and does not include SMBC Nikko Securities, Inc. (Nikko Tokyo).
Section II. Covered Transactions
Under this proposed exemption, TTI 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, as defined in Section I(a), during the Exemption
Period, provided that the conditions set forth in in Section III below
are satisfied.
Section III. Conditions
(a) TTI (including its officers, directors, agents other than Nikko
Tokyo, and employees) did not know of, did not have reason to know of,
and did not participate in the criminal conduct that is the subject of
the Conviction. Further, any other party engaged on behalf of TTI who
had responsibility for or exercised authority in connection with the
management of plan assets did not know or have reason to know of and
did not participate in the criminal conduct that is the subject of the
Conviction. For purposes of this proposed exemption, ``participate in''
refers not only to active participation in the criminal conduct of
Nikko Tokyo that is the subject of the Conviction, but also to knowing
approval of the criminal conduct or knowledge of such conduct without
taking active steps to prohibit it, including reporting the conduct to
such individual's supervisors, and to the Board of Directors;
(b) TTI (including its officers, directors, employees, and agents,
other than Nikko Tokyo) did not receive direct compensation, or
knowingly receive indirect compensation, in connection with the
criminal conduct that is the subject of the Conviction. Further, any
other party engaged on behalf of TTI who had responsibility for, or
exercised authority in connection with the management of plan assets
did not receive direct compensation, or knowingly receive indirect
compensation, in connection with the criminal conduct that is the
subject of the Conviction;
(c) TTI does not currently and will not in the future employ or
knowingly engage any of the individuals that participated in the
criminal conduct that is the subject of the Conviction.
(d) At all times during the Exemption Period, TTI will not use its
authority or influence to direct an ``investment fund'' (as defined in
Section VI(b) of PTE 84-14) that is subject to ERISA or the Code and
managed by TTI in reliance on PTE 84-14, or with respect to which TTI
has expressly represented to a Covered Plan that it qualifies as a QPAM
or relies on the QPAM Exemption, to enter into any transaction with
Nikko Tokyo, or to engage Nikko Tokyo 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 TTI to satisfy Section I(g) of PTE 84-14 arose
solely from the Conviction;
(f) TTI did not exercise authority over the assets of any plan
subject to Part 4 of Title I of ERISA or Code Section 4975 (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 TTI or its
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, Nikko
Tokyo will not act as a fiduciary within the meaning of ERISA Section
3(21)(A)(i) or (iii), or Code Section 4975(e)(3)(A) and (C), with
respect to Covered Plan assets.
(h)(1) TTI must develop, implement, maintain, adjust (to the extent
necessary), and follow the written policies and procedures (the
Policies). The Policies must require and be reasonably designed to
ensure that:
(i) The asset management decisions of TTI are conducted
independently of the corporate management and business activities of
Nikko Tokyo;
(ii) TTI 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) TTI 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 TTI 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 that time;
(v) To the best of TTI's knowledge at the time, TTI does not make
material misrepresentations or omit material information in its
communications with such regulators with respect to Covered Plans or
make material misrepresentations or omit material information in its
communications with Covered Plans;
(vi) TTI 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 TTI 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
TTI, and the independent auditor responsible for reviewing compliance
with the Policies. TTI will not be treated as having failed to develop,
implement, maintain, or follow the Policies, provided it corrects any
instance of noncompliance as soon as reasonably possible upon
discovery, or as soon as reasonably possible after TTI reasonably
should have known of the noncompliance (whichever is earlier), and
provided it adheres to the reporting requirements set forth in this
subparagraph (vii);
(2) TTI must implement a training program (the Training) during the
[[Page 1416]]
Exemption Period for all relevant TTI asset/portfolio management,
trading, legal, compliance, and internal audit personnel. The Training
required under this exemption may be conducted electronically and must:
(a) 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 exemption (including any loss of exemptive
relief provided herein), and prompt reporting of wrongdoing; and (b) be
conducted by a professional who has been prudently selected and who has
appropriate technical training and proficiency with ERISA and the Code
to perform the tasks required by this exemption;
(i)(1) TTI must submit to an audit by an independent auditor who
has been prudently selected and who has appropriate technical training
and proficiency with ERISA and the Code, to evaluate the adequacy of
and TTI's compliance with the Policies and Training conditions
described herein. The audit requirement must be incorporated in the
Policies. The audit must cover the entire Exemption Period.
(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, TTI will grant the auditor
unconditional access to its businesses, including, but not limited to:
its computer systems; business records; transactional data; workplace
locations; training materials; and personnel. Such access will be
provided only to the extent that it is not prevented by state or
federal statute, or involves communications subject to attorney client
privilege and may be 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 TTI 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 TTI's operational compliance with the Policies and Training
conditions. In this regard, the auditor must test, for TTI,
transactions involving Covered Plans sufficient in size, number, and
nature to afford the auditor a reasonable basis to determine TTI's
operational compliance with the Policies and Training;
(5) Before the end of the relevant period for completing the audit,
the auditor must issue a written report (the Audit Report) to TTI that
describes the procedures performed by the auditor during the course of
its examination. The Audit Report must include the auditor's specific
determinations regarding:
(i) the adequacy of TTI's Policies and Training; TTI's compliance
with the Policies and Training conditions; the need, if any, to
strengthen such Policies and Training; and any instance of TTI's
noncompliance with the written Policies and Training described in
Section III(h) above. TTI 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. Any action taken, or the plan
of action to be taken by TTI 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 Report is submitted, the following period's Audit Report must
state whether the plan was satisfactorily completed. Any determination
by the auditor that TTI 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 TTI has complied with the
requirements under this subparagraph must be based on evidence that TTI
has actually implemented, maintained, and followed the Policies and
Training required by this exemption. Furthermore, the auditor must not
solely rely on the 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 Review described in Section III(m);
(6) The auditor must notify TTI 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 the Audit Report, the joint general manager of
the Corporate Planning who has a direct reporting line to the highest-
ranking compliance officer of TTI must certify in writing, under
penalty of perjury, that the officer has reviewed the Audit Report and
this exemption and that to the best of such officer's knowledge at the
time, TTI 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. The certification must also include the signatory's
determination that the Policies and Training in effect at the time of
signing are adequate to ensure compliance with the conditions of this
exemption and with the applicable provisions of ERISA and the Code.
Notwithstanding the above, no person, including any person identified
by Japanese authorities, who knew of, or should have known of, or
participated in, any misconduct underlying the Conviction, by any
party, may provide the certification required by this exemption, unless
the person took active documented steps to stop the misconduct
underlying the Conviction;
(8) TTI's Board of Directors must be provided a copy of the Audit
Report and the joint general manager of the Corporate Planning who has
a direct reporting line to the highest-ranking compliance officer of
TTI must review the Audit Report for TTI and certify in writing, under
penalty of perjury, that such officer has reviewed the Audit Report;
(9) TTI must provide its certified Audit Report, by electronic mail
to <a href="/cdn-cgi/l/email-protection" class="__cf_email__" data-cfemail="43266e2c262703272c2f6d242c35">[email protected]</a>. This delivery must take place no later than thirty
(30) days following completion of the Audit Report. The Audit Report
will be made part of the public record regarding this exemption.
Furthermore, TTI 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) TTI and the auditor must submit to <a href="/cdn-cgi/l/email-protection#f693dbb9b3b2b692999ad8919980"><span class="__cf_email__" data-cfemail="94f1b9dbd1d0d4f0fbf8baf3fbe2">[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, access
to all the workpapers it created and utilized in the course of the
audit for inspection and review, provided such access and
[[Page 1417]]
inspection is otherwise permitted by law; and
(12) TTI must notify the Department of a change in the independent
auditor no later than 60 days 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 TTI;
(j) Throughout the Exemption Period, with respect to any
arrangement, agreement, or contract between TTI and a Covered Plan, TTI
agrees and warrants:
(1) To comply with ERISA and the Code, as applicable with respect
to such Covered Plan; refrain from engaging in prohibited transactions
that are not otherwise exempt (and to promptly correct any prohibited
transactions); and comply with the standards of prudence and loyalty
set forth in ERISA Section 404 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 TTI'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 TTI; or any
claim arising out of the failure of TTI 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 TTI'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 because of TTI'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 TTI for violating ERISA or the Code
or engaging in prohibited transactions;
(4) Not to restrict the ability of the Covered Plan to terminate or
withdraw from its arrangement with TTI with respect to any investment
in a separately managed account or pooled fund subject to ERISA and
managed by TTI, 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 the restrictions must be
applicable to all such investors 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 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 the 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 the liability of TTI 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 TTI and its
affiliates, or damages arising from acts outside the control of TTI;
and
(7) TTI must provide a notice of its obligations under this Section
III(j) to each Covered Plan. For all other prospective Covered Plans,
TTI must agree to its obligations under this Section III(j) in an
updated investment management agreement between TTI and such clients or
other written contractual agreement. Notwithstanding the above, TTI
will not violate this condition solely because a Covered Plan refuses
to sign an updated investment management agreement;
(k) Within 60 days after the effective date of this exemption, TTI
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 that has entered
into a written asset or investment management agreement with TTI. All
prospective Covered Plan clients that enter into a written asset or
investment management agreement with TTI after a date that is 60 days
after the effective date of this exemption must receive a copy of the
notice of the exemption, the Summary, and the Statement before, or
contemporaneously with, the Covered Plan's receipt of a written asset
or investment management agreement from TTI. The notices may be
delivered electronically (including by an email that has a link to the
exemption). Notwithstanding the above, TTI will not violate the
condition solely because a Covered Plan refuses to sign an updated
investment management agreement.
(l) TTI 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. If an entity within TTI's
corporate structure is convicted of a crime described in Section I(g)
of PTE 84-14 (other than the Conviction) during the Exemption Period,
relief in this exemption would terminate immediately;
(m)(1) Within 60 days after the effective date of this exemption,
TTI must designate a senior compliance officer (the Compliance Officer)
who will be responsible for compliance with the Policies and Training
requirements described herein. Notwithstanding the above, no person,
including any person referenced in the indictment that gave rise to the
Conviction, who knew of, or should have known of, or participated in,
any misconduct described in the indictment, by any party, may be
involved with the designation or responsibilities required by this
condition, unless the person took active documented steps to stop the
misconduct. The Compliance Officer must conduct a review of the
Exemption Period (the Exemption 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 have a direct reporting line to
the highest-ranking corporate officer in charge of legal compliance for
asset management.
(2) With respect to the Exemption Review, the following conditions
must be met:
(i) The Exemption Review includes a review of TTI's compliance with
and
[[Page 1418]]
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; any material change in the relevant business activities
of TTI; 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 TTI;
(ii) The Compliance Officer prepares a written report for the
Exemption Review (an Exemption Report) that (A) summarizes their
material activities during the Exemption Period; (B) sets forth any
instance of noncompliance discovered during the Exemption Period, 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 the Exemption 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 prior year and any related correction taken
to date have been identified in the Exemption Report; and (D) TTI
complied with the Policies and Training, and/or corrected (or are
correcting) any known instances of noncompliance in accordance with
Section III(h) above;
(iv) The Exemption Report must be provided to appropriate corporate
officers of TTI; the head of compliance and the general counsel (or
their functional equivalent) of TTI; and must be made unconditionally
available to the independent auditor described in Section III(i) above;
(v) The Exemption Review, including the Compliance Officer's
written Report, must be completed within 90 days following the end of
the period to which it relates.
(n) TTI imposes internal procedures, controls, and protocols to
reduce the likelihood of any recurrence of conduct that is the subject
of the Convictions;
(o) Nikko Tokyo complies in all material respects with any
requirements imposed by a U.S. regulatory authority in connection with
the Conviction;
(p) TTI maintains 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 TTI relies upon the relief in
this exemption;
(q) During the Exemption Period, TTI must: (1) immediately disclose
to the Department any Deferred Prosecution Agreement (a DPA) or Non-
Prosecution Agreement (an NPA) with the U.S. Department of Justice,
entered into by TTI or any of its affiliates (as defined in Section
VI(d) of PTE 84-14) in connection with conduct described in Section
I(g) of PTE 84-14 or ERISA Section 411; and (2) 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;
(r) Within 60 days after the effective date of this exemption, TTI,
in its agreements with, or in other written disclosures provided to
Covered Plans, will clearly and prominently inform Covered Plan clients
of their right to obtain a copy of the Policies or a description
(Summary Policies) which accurately summarizes key components of TTI'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 180 days following the end of the calendar year
during which the Policies were changed. If TTI 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 Summary Policies is clearly and prominently disclosed to
each Covered Plan; and
(s) All the material facts and representations set forth in the
Summary of Facts and Representations are true and accurate.
Effective date: If granted, the exemption will be in effect for a
period of one year, beginning on the date of the Conviction.
Signed at Washington, DC.
George Christopher Cosby,
Director, Office of Exemption Determinations, Employee Benefits
Security Administration, U.S. Department of Labor.
[FR Doc. 2023-00341 Filed 1-9-23; 8:45 am]
BILLING CODE 4510-29-P
</pre><script data-cfasync="false" src="/cdn-cgi/scripts/5c5dd728/cloudflare-static/email-decode.min.js"></script></body>
</html>Indexed from Federal Register on January 10, 2023.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.