Notice2023-27937
Proposed Exemption for Certain Prohibited Transaction Restrictions Involving TT International Asset Management Ltd (TTI or the Applicant) Located in London, United Kingdom
Primary source
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Published
December 20, 2023
Effective
February 13, 2024
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) and/or the Internal Revenue Code of 1986 (the Code). If this 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), notwithstanding the conviction of 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 occurred on February 13, 2023 (the Conviction).
Full Text
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<title>Federal Register, Volume 88 Issue 243 (Wednesday, December 20, 2023)</title>
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[Federal Register Volume 88, Number 243 (Wednesday, December 20, 2023)]
[Notices]
[Pages 88115-88126]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-27937]
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
[Exemption Application No. D-12096]
Proposed Exemption for Certain Prohibited Transaction
Restrictions Involving TT International Asset Management Ltd (TTI or
the Applicant) Located in London, United Kingdom
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) and/or the Internal
Revenue Code of 1986 (the Code). If this 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),
notwithstanding the conviction of 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 occurred on February 13,
2023 (the Conviction).
DATES: If granted, the exemption will be in effect for a period of five
years, beginning on February 13, 2024, and ending on February 12, 2029.
Written comments and requests for a public hearing on the proposed
exemption should be submitted to the Department by February 5, 2024.
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-12096,
via email to <a href="/cdn-cgi/l/email-protection#17723a5852535773787b39707861"><span class="__cf_email__" data-cfemail="cca9e18389888ca8a3a0e2aba3ba">[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: Mr. Joseph Brennan of the Department
at (202) 693-8456. (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 requestor, and a notice of
such hearing will 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 stated above;
(2) the only issues identified for exploration at the hearing are
matters of law; or (3) the factual issues identified in the request 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
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. 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
This proposed exemption would provide relief from certain
restrictions
[[Page 88116]]
set forth in ERISA sections 406 and 407.\1\ 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) \2\ is convicted of a
crime covered by Section I(g) of PTE 84-14 (other than the Conviction)
during the Exemption Period. 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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\1\ 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\ 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 a plan to terminate its relationship in an orderly
and cost-effective fashion in the event of an additional conviction of
TTI or a TTI affiliate, or a determination by the plan that it is
otherwise prudent to terminate its relationship with TTI.
Summary of Facts and Representations <SUP>3</SUP>
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\3\ 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-12096 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. The Sumitomo Mitsui Banking Corporation group (SMBC) 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.
SMBC 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.
2. TTI is a global investment firm headquartered in London, UK that
manages approximately $7.1 billion in assets. TTI and its subsidiaries
\4\ 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 SMBC Group. Since
the acquisition, TTI has remained a stand-alone business with distinct
reporting lines, governance structures, and control frameworks.
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\4\ TTI subsidiaries include TT International Investment
Management LLP, TT International (Hong Kong) Ltd, TT Crosby Ltd, and
TT International Advisors Inc.
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3. TTI is an SEC-registered investment advisor that specializes in
managing portfolios for institutional investors, including ERISA-
covered Plans (Covered Plans),\5\ 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.
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\5\ 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 PTE
84-14. 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.
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4. In offering investment management services, TTI operates as a
QPAM in reliance on PTE 84-14.\6\ TTI advises four segregated ERISA
accounts on behalf of the ERISA-covered plans of two major U.S.
employers \7\ and operates three segregated accounts for public pension
plans, which currently hold approximately $466.4 million in assets.\8\
TTI also manages three funds as ERISA ``plan asset'' funds: the TT
Emerging Markets Opportunities Fund II Limited, which is operational
and holds ERISA assets; the TT Environmental Solutions Equity Master
Fund II Limited, which is in the process of being launched; and the TT
Non-U.S. Equity Master Fund Limited, which is operational but does not
hold any ERISA assets.
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\6\ Currently, TTI is the only member of the SMBC group that
relies on the QPAM Exemption.
\7\ Together, these two ERISA-covered plans currently hold
approximately $352.7 million in assets.
\8\ Although the public pension plans are not statutory ERISA
assets, TTI has committed to those plans to follow the same rules
and operate under the same restrictions as ERISA plans. Accordingly,
these plans are operated in compliance with ERISA and utilize the
QPAM exemption.
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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.\9\ 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.\10\ 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.\11\
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\9\ 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.
\10\ Under the Code, such parties, or similar parties, are
referred to as ``disqualified persons.''
\11\ 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 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
that 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 the plan's participants and
beneficiaries.\12\
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\12\ 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)
[[Page 88117]]
in which a plan has an interest if the investment manager managing the
investment fund satisfies the definition of a ``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.\13\
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\13\ 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 a QPAM, and those who may be in a
position to influence the QPAM's policies, maintain a high standard of
integrity.\14\
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\14\ 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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Nikko Tokyo Conviction and PTE 84-14 Disqualification
9. On February 13, 2023, Nikko Tokyo and four of its officers and
employees were convicted in Tokyo District Court of violating Japan's
Financial Instruments and Exchange Act (the FIEA) for attempting to
peg, fix, or stabilize \15\ the prices of certain Japanese equity
securities that Nikko Tokyo was attempting to place in a block offering
(the Conviction). Nikko Tokyo was convicted of 10 violations of the
FIEA and was ordered to pay a [yen]700 million fine (approximately $5.3
million) and a surcharge of approximately [yen]4.5 billion
(approximately $33.7 million).
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\15\ 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.''
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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 purchases the shares from the seller and the price at
which it sells them in the block offering. Between December 2019 and
November 2021, 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.\16\
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\16\ 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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Nikko Tokyo Affiliation and Loss of QPAM Status
10. 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. When the Tokyo District Court sentenced Nikko Tokyo in
connection with the Conviction, Section I(g) of PTE 84-14 was
triggered, and TTI became ineligible to rely on the QPAM Exemption to
service its Plan clients, without receiving an individual prohibited
transaction exemption from the Department.
PTE 2023-13
11. On October 19, 2022, TTI requested an individual exemption for
TTI and its Covered Plan clients to continue to utilize the relief in
PTE 84-14, notwithstanding the then-anticipated Conviction of Nikko
Tokyo. In support of its exemption request, TTI asserted that: there
has always been a complete separation in operations between TTI and
Nikko Tokyo; Nikko Tokyo is a remote foreign affiliate of TTI with
wholly separate businesses, operations, management, systems, premises,
and legal and compliance personnel; TTI was not involved in any way in
the Misconduct; and the Misconduct did not involve any ERISA assets. In
its exemption application, TTI requested: (1) a five-year term of
relief and (2) an exemption that would cover TTI and TTI's current and
future affiliates and related entities.
12. On April 28, 2023, the Department granted PTE 2023-13,\17\
which permitted TTI to continue to rely upon the relief provided in the
QPAM exemption for a one-year period from the date of the Conviction.
The Department declined TTI's request for a longer five-year exemption
term and instead proposed a limited one-year term that applies
exclusively to TTI, so the Department retained the ability to review
TTI's adherence to the conditions set out in the one-year exemption
before considering longer-term relief.
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\17\ See PTE 2023-13, 88 FR 26336 (April 28, 2023).
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Conditions of PTE 2023-13
13. PTE 2023-13 contains a set of conditions that are designed to
protect those Covered Plans that entrust their assets to TTI despite
the serious nature of the criminal misconduct underlying the Conviction
of Nikko Tokyo. Under PTE 2023-13, TTI must: \18\
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\18\ The following paragraphs do not discuss all of the
conditions set out in PTE 2023-13. For the complete set of
conditions, see PTE 2023-13.
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<bullet> Develop, implement, maintain, and follow written policies
(the Policies) that are reasonably designed to ensure that, among other
things: the asset management decisions of TTI are conducted
independently of Nikko Tokyo; TTI fully complies with ERISA's fiduciary
duties; and any filings or statements made by TTI to regulators are
materially accurate and complete.
<bullet> Develop and implement a training program (the Training)
conducted by a prudently selected independent 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.
<bullet> Submit to an audit conducted by a prudently selected
independent auditor (the Auditor) who completes a written report (the
Audit Report) assessing the adequacy of TTI's 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.\19\
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\19\ Further, certain TTI senior personnel must review the Audit
Report, make certain certifications, and take corrective actions
when necessary.
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<bullet> Agree and warrant to Covered Plan clients that it 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.
<bullet> Agree and warrant: (a) to indemnify and hold harmless
Covered Plans for certain damages; (b) not to require (or otherwise
cause) Covered Plans to
[[Page 88118]]
waive, limit, or qualify the liability of TTI for violating ERISA or
the Code or engaging in prohibited transactions; (c) not to restrict
the ability of Covered Plans to terminate or withdraw from their
arrangement with TTI except for reasonable restrictions disclosed in
advance; and (d) not to impose any fees, penalties, or charges for such
termination or withdrawal, except for reasonable fees.
<bullet> Designate a senior compliance officer (the Compliance
Officer) to conduct a twelve-month review to determine the adequacy and
effectiveness of TTI's implementation of the Policies and Training (the
Review).
PTE 2023-13 Compliance
14. TTI states that it has complied with the conditions of PTE
2023-13 and, therefore, should be permitted to continue to rely upon
PTE 84-14 through the remainder of its 10-year Section I(g)
ineligibility period in order to avoid substantial costs and other
disruptions that would occur if TTI no could no longer act as a QPAM.
TTI represents that it has taken the following concrete steps to comply
with the requirements of PTE 2023-13.
15. Adoption of Comprehensive Policies. TTI states that it has
developed and implemented specific policies (the ERISA Policies) that
ensure that asset management decisions of TTI are conducted
independently of Nikko Tokyo. TTI states that its ERISA Policies
promote compliance with ERISA's fiduciary duties and prohibited
transaction provisions, including with respect to co-fiduciary
liability, and ensure accuracy in communications with regulators and
Covered Plan clients. TTI further states that its ERISA Policies
include required monitoring to ensure compliance with the specific
terms of PTE 2023-13 and the prompt identification and correction of
any Policy violations.
TTI states that it maintains policies and procedures that are
reasonably designed to ensure that all TTI personnel comply with
applicable regulations and act in the best interests of TTI's clients,
including ERISA plan participants. TTI represents that it does not
share trading decisions and investment strategies for its clients with
personnel outside of TTI's asset management businesses and does not
consult with other parts of the SMBC group in connection with
investment decisions it makes on behalf of its clients.
16. Implementation of a Training Program. TTI represents that it
has implemented a comprehensive, mandatory training program for all
relevant TTI asset/portfolio management, trading, legal, compliance,
and internal audit personnel (the ERISA Training). TTI submits that
initial ERISA Training sessions under PTE 2023-13 have been completed,
with mandatory attendance for relevant personnel. Two WilmerHale
partners who are experienced in ERISA training and the regulatory
compliance of asset managers taught the ERISA Training course on August
8, 2023, with a simultaneous broadcast in TTI's London office. TTI
states that required personnel who were unable to attend the live
training have completed the training via a recording of the live
session. TTI represents further that it has made electronic training
modules available for new relevant personnel and that follow-ups are
made to ensure that all relevant personnel complete the Training.
17. Disclosure to Client and Amendment of Client Agreements. TTI
represents that it has provided its Covered Plan clients with a copy of
PTE 2023-13, a summary of TTI's written ERISA Policies developed in
connection therewith, a summary of the conduct leading to the
Conviction, and notice that the requirements of the QPAM Exemption were
not satisfied as a result of the Conviction. TTI states further that it
has amended its agreements with Covered Plan clients to allow for the
termination of the relationship with TTI without penalty to the Covered
Plan clients, and to incorporate all other conditions of PTE 2023-13.
TTI notes that, throughout this process, no Covered Plan client has
decided to terminate its relationship with TTI.
18. Strengthening of Compliance within TTI. TTI represents that it
has designated its Chief Compliance Officer as the initial Compliance
Officer under PTE 2023-13. TTI states that its Chief Compliance Officer
now oversees the ERISA Policies and ERISA Training and ensures that
each conforms to the requirements set out in PTE 2023-13. TTI states
that by designating its Chief Compliance Officer to this role, it is
ensuring that the Compliance Officer will have a direct reporting line
to senior management.
19. Strengthening of Compliance within the SMBC Group. The
Applicant states that TTI and the SMBC group have strengthened their
group-wide coordination regarding potentially disqualifying conduct, in
order to ensure compliance with the conditions of PTE 2023-13,
including identification of deferred prosecution or non-prosecution
agreements. Further, to prevent the possibility of reoccurrence, Nikko
Tokyo has ceased block offerings while completing remedial measures
supervised by Japanese regulators, including a verification process to
assess whether the root causes of the problems have been addressed.
20. Note on the Audit. PTE 2023-13 requires TTI to undergo an audit
that covers the one-year period of February 13, 2023, through February
12, 2024. The audit report must be completed by August 12, 2024. TTI
represents that it has engaged Newport Trust Company to carry out the
independent auditor functions required under PTE 2023-13 and this
exemption if it is granted by the Department.
Remedial Efforts by Nikko Tokyo and SMFG
21. According to the Applicant, Nikko Tokyo has taken significant
steps to address the issues that led to the Conviction and has enhanced
its policies and procedures related to proprietary trading and enhanced
its surveillance over that activity, including hiring additional
compliance officers. In addition, Nikko Tokyo refused to renew its
employment contracts with each of the four executive officers who were
alleged to have been involved in the misconduct underlying the
Conviction and has dismissed the remaining two employees on
disciplinary grounds.
Separation of TTI and Nikko Tokyo
22. TTI states that: none of the misconduct underlying the Nikko
Tokyo Conviction involved TTI or the SMBC group's asset management
businesses; 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.
23. The Applicant states that although TTI's seven-member board of
directors includes four representatives from the SMBC group, TTI's
Management Committee provides direct oversight of TTI's business.\20\
Day-to-day management at TTI is conducted by a
[[Page 88119]]
dedicated management team with support from other TTI committees,
including the Operations Committee, Product Committee, Valuation
Committee, and ESG Committee. In addition, TTI has dedicated
independent legal, risk, and compliance teams, as well as its own
control framework and compliance infrastructure.\21\
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\20\ 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.
\21\ 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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24. According to the Applicant, 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, managing customer accounts, and executing trading
decisions.
25. TTI states that it 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 states that it 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.
26. Finally, 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 Nikko Tokyo Conviction. Further, TTI 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
27. TTI represents that Covered Plans would suffer certain
hardships if TTI loses its eligibility to rely on the QPAM Exemption.
TTI's representations regarding these hardships are set forth below in
paragraphs 28 through 37.
28. According to the Applicant, 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 it contracted with Covered
Plan clients. Further, if TTI were ineligible to rely on the QPAM
Exemption, it could receive less advantageous pricing for transactions
it engages in on behalf of Covered Plans.
29. 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 for certain types of
investment transactions it enters into on behalf of Covered Plans. 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.
TTI states that considering the nature of emerging market
investments and swap, options, and other derivative transactions,
Covered Plan clients and counterparties are reluctant to utilize more
recent alternative exemptions, such as the service provider exemption
under ERISA section 408(b)(17). This reluctance is due to uncertainty
about the application of the adequate consideration requirements of the
statutory exemption and the resulting possibility that the use of the
exemption could later be challenged by the Department on those grounds.
30. 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).
31. TTI represents that if it 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. TTI states that it specializes in international and
emerging market strategies that 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 performance is measured. To limit plan 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 this proposed exemption is not granted, TTI states that
nearly $900 million 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.
32. 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.\22\ 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 are 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
Applicant states that TT Emerging Markets Opportunities Fund II would
have incurred nearly $5.5 million in losses due to unhedged FX
exposures, negatively impacting overall returns.
---------------------------------------------------------------------------
\22\ The actual percentage of AUM in each fund that is hedged at
any given time varies.
---------------------------------------------------------------------------
33. TTI represents that the 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
[[Page 88120]]
Agreements were terminated, TTI states that it would immediately need
to unwind approximately $73,784,388 million in hedges.\23\
---------------------------------------------------------------------------
\23\ The approximate total FX forward exposure of TTI's public
and private plan asset accounts as of November 10, 2022, is $330
million.
---------------------------------------------------------------------------
34. 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.\24\ These
costs, according to TTI include the following: (a) consultant fees,
legal fees, and other due diligence expenses associated with
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.
---------------------------------------------------------------------------
\24\ 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.
---------------------------------------------------------------------------
The Applicant states that, given the sophistication of TTI's
investment strategies, Covered Plan clients would likely engage in a
full RFP process that could take several months to complete. 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.
35. TTI represents 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.
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.
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.
36. 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. 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.
37. In the case of foreign currency exposure, Covered 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.
38. TTI also provides estimated liquidation as dollar cost
estimates. TTI's estimate of liquidation costs is of the emerging
market equity portfolios only, which represents the predominant
strategy for ERISA Clients. TTI states that its estimates on equity
liquidation costs below are based on the gross values of the portfolio,
utilizing the basis point figures, without analysis as to the specific
portfolio components.
----------------------------------------------------------------------------------------------------------------
Emerging market Min. 30-day equity Max. 30-day Min. intermediate
ERISA client portfolio AUM at liquidation cost liquidation cost liquidation cost
12/7/23 (30 bps) (50 bps) (40 bps)
----------------------------------------------------------------------------------------------------------------
1................................ $54,845,803 164,537 274,229 219,383
2................................ 172,160,384 516,481 860,801 688,641
3................................ 102,787,100 308,361 513,935 411,148
(Plan Asset Fund)................ 441,117,644 1,323,352 2,205,588 1,764,470
------------------------------------------------------------------------------
Total........................ 770,910,931 2,312,731 3,854,553 3,083,642
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Max. intermediate Liquidation cost of
ERISA client liquidation cost Commission fees currency hedge (50
(80 bps) (10 bps) bps)
----------------------------------------------------------------------------------------------------------------
1.................................................. $438,766 $54,845 $27,788
2.................................................. 1,377,283 172,160 86,914
3.................................................. 822,296 102,787 51,982
Plan Asset Fund.................................... 3,528,941 441,117 202,235
------------------------------------------------------------
Total.......................................... 6,167,286 770,909 368,919
----------------------------------------------------------------------------------------------------------------
[[Page 88121]]
Term of Relief Requested
39. In its exemption application, TTI requested a nine-year
exemption that would carry TTI through the end of the Section I(g) 10-
year disqualification period triggered by the Conviction. The
Department is declining to include a nine-year term with this exemption
and instead has proposed a five-year term. With this limited term of
relief, the Department is reserving the right to review TTI's adherence
to the conditions set out in this exemption before granting additional
relief that would carry TTI through the end of its disqualification
period. To continue to rely upon the QPAM Exemption beyond the five-
year term of this exemption, TTI will have to submit another exemption
application to the Department.
40. 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 is no longer able to rely
on the relief provided by PTE 84-14 due to the Conviction.
41. This proposed exemption includes a suite of conditions that are
similar to those conditions set out under PTE 2023-13 and requires TTI
to: continue to implement, maintain, and follow its ERISA Policies and
ERISA Training; submit to an annual independent audit performed by a
prudently selected independent auditor; agree and warrant to Covered
Plan clients that it will, among other things, comply with ERISA and
the Code and refrain from engaging in prohibited transactions that are
not otherwise exempt; agree and warrant to indemnify and hold harmless
Covered Plans for certain damages, not to require (or otherwise cause)
Covered Plans to waive, limit, or qualify the liability of TTI, and not
to restrict the ability of Covered Plans to terminate or withdraw from
their arrangement with TTI, except for reasonable restrictions, or
impose any fees, penalties, or charges for such termination or
withdrawal, except for reasonable fees. This proposed exemption also
contains extensive notice requirements and obligates TTI to ensure that
a qualified senior compliance officer continues to conduct annual
reviews to determine the adequacy and effectiveness of TTI's
implementation of the Policies and Training.
42. 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.
Statutory Findings
43. 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).
44. The Proposed Exemption is ``Administratively Feasible.'' The
Department has tentatively determined that the proposed exemption is
administratively feasible for the Department 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 TTI to comply with
conditions set out herein while reducing the immediate need for direct
review and oversight by the Department.
45. The Proposed Exemption is ``In the Interest of the Covered
Plans and their Participants and Beneficiaries.'' The Department has
tentatively determined that the proposed exemption is in the interests
of the participants and beneficiaries of affected Covered Plans because
of the likely costs that plans would incur if the exemption were denied
and the benefits of permitting plans to continue to rely upon TTI's
services with the additional protections set forth in this exemption.
46. The Proposed Exemption Is ``Protective of the Rights of Covered
Plan Participants and Beneficiaries.'' The Department has tentatively
determined that the proposed exemption is protective of the rights of
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 maintenance of the Policies;
(b) the continued implementation of the Training; (c) a robust audit
conducted by a qualified independent auditor; (d) the provision of
certain agreements and warranties by TTI to Covered Plans; (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 that TTI continues to comply with the Policies and Training
requirements of this exemption. Further, the Department notes that the
disqualifying conduct occurred at an entity (Nikko Tokyo) that is
completely separate from TTI.
Summary
47. 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 TTI could request a new individual prohibited transaction
exemption in that event, the Department would not be 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).
48. 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.
49. 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 fifteen (15) days of the publication of the notice of
proposed five-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
[[Page 88122]]
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 five-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 that are
the subject of the exemption.
Proposed Exemption
The Department is considering granting a five-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\
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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 occurred 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 five-year period
beginning on February 13, 2024, and ending on February 12, 2029.
(d) The term ``TTI'' means TT International Asset Management Ltd,
and does not include SMBC Nikko Securities, Inc. (Nikko Tokyo), or any
other entity affiliated with TT International Asset Management Ltd.
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, as defined in Section I(c), provided that the conditions set
forth 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 TTI's 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 who 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
[[Page 88123]]
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 Covered
Plan 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 continue to 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 of Labor (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 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 continue to implement an annual training program (the
Training) during the 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 biannual audits conducted 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 into the Policies. The first audit covered under this
exemption must cover the period of February 13, 2025, through February
12, 2026, and must be completed by August 12, 2026. The second audit
covered under this exemption must cover the period of February 13,
2027, through February 12, 2028, and must be completed by August 12,
2028.
(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 the
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
[[Page 88124]]
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 the 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 general counsel, or one
of the three most senior executive officers of TTI must certify in
writing, under penalty of perjury, that the officer has reviewed the
Audit Report and the 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 the 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 SMFG's Corporate Planning
Department must review the Audit Report for TTI and certify in writing,
under penalty of perjury, that such officer has reviewed the Audit
Report. With respect to this subsection (8), such certifying joint
general manager must not have known of, had reason to know of, or
participated in, any misconduct underlying the Conviction, unless such
person took active documented steps to stop the misconduct underlying
the Conviction.
(9) TTI must provide its certified Audit Report, by electronic mail
to <a href="/cdn-cgi/l/email-protection" class="__cf_email__" data-cfemail="5e3b73313b3a1e3a313270393128">[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#2441096b616064404b480a434b52"><span class="__cf_email__" data-cfemail="0b6e26444e4f4b6f6467256c647d">[email protected]</span></a>, any
engagement agreement(s) entered into pursuant to the engagement of the
auditor under the 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 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; to refrain from engaging in prohibited
transactions that are not otherwise exempt (and to promptly correct any
prohibited transactions); and to 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 with respect
to: 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;
[[Page 88125]]
(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 affiliate of TTI (as
defined in Section VI(d) of PTE 84-14) is convicted of a crime
described in Section I(g) of PTE 84-14 (other than the Conviction)
during the Exemption Period, relief in the exemption would terminate
immediately;
(m)(1) TTI must continue to designate a senior compliance officer
(the Compliance Officer) to be responsible for compliance with the
Policies and Training requirements described herein. The Compliance
Officer previously designated by TTI under PTE 2023-13 may continue to
serve in the role of Compliance Officer provided they meet all the
requirements of this Section (m)(1). 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 TTI's 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 must include a review of TTI'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; 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 in response to
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, has 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 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 Conviction;
(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 the 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 the 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
[[Page 88126]]
and allegations that led to the agreement;
(r) Within 60 days after the effective date of the 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;
(s) TTI must provide the Department with the records necessary to
demonstrate that each condition of this exemption has been met within
30 days of a request by the Department; and
(t) All the material facts and representations set forth in the
Summary of Facts and Representations are true and accurate at all
times.
Effective Date: If the Department grants this proposed exemption,
it would be in effect for a five-year period beginning on February 13,
2024, and ending on February 12, 2029.
Signed at Washington, DC.
George Christopher Cosby,
Director, Office of Exemption Determinations, Employee Benefits
Security Administration, U.S. Department of Labor.
[FR Doc. 2023-27937 Filed 12-19-23; 8:45 am]
BILLING CODE 4510-29-P
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</html>Indexed from Federal Register on December 20, 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.