Notice2024-12746
Proposed Exemption for Certain Prohibited Transaction Restrictions Involving UBS AG (UBS) Located in Zurich, Switzerland
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
June 11, 2024
Effective
June 12, 2024
Issuing agencies
Employee 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). The Department previously issued an individual prohibited transaction exemption (PTE) 2023-14 that allowed certain asset managers related to UBS (the Applicant) and Credit Suisse Group AG (CSAG) to continue to rely on the exemptive relief provided by Prohibited Transaction Exemption 84-14 for one year following UBS' acquisition of CSAG. This proposed exemption would allow current and future asset managers under the UBS corporate umbrella to continue to rely on PTE 84-14 from June 12, 2024, to June 11, 2029 if certain conditions were met, notwithstanding the five judgments of conviction involving entities within the UBS and CSAG corporate umbrellas that are described below.
Full Text
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<title>Federal Register, Volume 89 Issue 113 (Tuesday, June 11, 2024)</title>
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[Federal Register Volume 89, Number 113 (Tuesday, June 11, 2024)]
[Notices]
[Pages 49213-49231]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-12746]
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EMPLOYEE BENEFITS SECURITY ADMINISTRATION
[Exemption Application No. D-12098]
Proposed Exemption for Certain Prohibited Transaction
Restrictions Involving UBS AG (UBS) Located in Zurich, Switzerland
AGENCY: Employee Benefits Security Administration, Department of 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). The Department previously
issued an individual prohibited transaction exemption (PTE) 2023-14
that allowed certain asset managers related to UBS (the Applicant) and
Credit Suisse Group AG (CSAG) to continue to rely on the exemptive
relief provided by Prohibited Transaction Exemption 84-14 for one year
following UBS' acquisition of CSAG. This proposed exemption would allow
current and future asset managers under the UBS corporate umbrella to
continue to rely on PTE 84-14 from June 12, 2024, to June 11, 2029 if
certain conditions were met, notwithstanding the five judgments of
conviction involving entities within the UBS and CSAG corporate
umbrellas that are described below.
DATES: If granted, this proposed exemption will be in effect for the
period beginning on June 12, 2024, and ending on June 11, 2029, and may
also provide retrospective relief for part or all of the period covered
by the preceding exemption, PTE 2023-14, which permitted the UBS QPAMs
to rely on PTE 84-14 and extended from June 12, 2023, through June 11,
2024.
Comments due: Written comments and requests for a public hearing on
the proposed exemption should be submitted to the Department by July
15, 2024.
ADDRESSES: All written comments and requests for a hearing should be
sent to the Employee Benefits Security Administration (EBSA), Office of
Exemption Determinations, Attention: Application No. D-12098, via email
to <a href="/cdn-cgi/l/email-protection#50357d1f151410343f3c7e373f26"><span class="__cf_email__" data-cfemail="adc880e2e8e9edc9c2c183cac2db">[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 ((202)
693-8673). See SUPPLEMENTARY INFORMATION below for additional
information regarding comments.
FOR FURTHER INFORMATION CONTACT: Nicholas Schroth of the Department at
(202) 693-8571. (This is not a toll-free number.)
SUPPLEMENTARY INFORMATION:
Comments
1. 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 the manner in which
the person would be adversely affected by the exemption, if granted.
Any person who may be adversely affected by an exemption can request
that the Department holds 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.
2. 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.
[[Page 49214]]
Background
3. Upon the expiration of the one-year period set forth in PTE
2023-14 (June 12, 2024), the exemption no longer will provide the
Applicant with relief from ERISA's prohibited transaction provisions.
This proposed exemption would allow current and future asset managers
under the UBS corporate umbrella to continue to rely on PTE 84-14 from
June 12, 2024, to June 11, 2029, if the conditions specified herein are
satisfied. As described below, the Department is proposing the
exemption to protect affected plans from the harms that the Applicant
has represented would occur if the UBS QPAMs are no longer allowed to
engage in the transactions permitted by PTE 84-14. The Department also
seeks comments on whether the requested exemption, if granted, should
include retrospective relief covering transactions that would have been
permitted under the QPAMs' previous exemption, (PTE 2023-14), but for
their failure to comply timely with the audit requirements of that
exemption.
4. The current UBS-affiliated asset managers that rely on PTE 84-14
are UBS Asset Management (Americas) LLC, and UBS Hedge Fund Solutions
LLC (together with any future entity within the Asset Management or the
Global Wealth Management Americas U.S. divisions of UBS that qualifies
as a ``qualified professional asset manager'' as defined in Section
VI(a) of PTE 84-14, (hereafter referred to as the Affiliated QPAMs)).
In addition, UBS holds or may in the future hold a greater than five
(5) percent interest in a number of smaller asset managers that are not
considered to be ``affiliates'' of UBS and also may qualify as a
``qualified professional asset manager'' as defined in Section VI(a) of
PTE 84-14 (the Related QPAMs). The Affiliated QPAMs and Related QPAMs
are collectively referred to herein as the ``UBS QPAMs.'' This proposed
exemption, if granted, would enable UBS QPAMs to continue to rely on
PTE 84-14 for a five-year period ending on June 11, 2029, if the
conditions of this exemption are met, notwithstanding four criminal
convictions of entities within the UBS corporate family that occurred
within the last 10 years.\1\ The proposed exemption would provide the
Applicant with continued relief under PTE 84-14 which, in turn, would
provide relief from restrictions set forth in ERISA sections 406 and
407.\2\ In addition, the Applicant is requesting that the Department
structure the exemption in such a way that it avoids the loss of relief
under the terms of PTE 2023-14 as a result of its failure to timely
comply with the audit requirements set forth in that exemption. No
relief from a violation of any other law would be provided by this
exemption, including any criminal conviction described herein.
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\1\ Relief in this exemption is not provided for one of the
criminal convictions covered by PTE 2023-14, because that conviction
occurred outside the 10-year ineligibility period under PTE 84-14
Section I(g).
\2\ Unless otherwise specified, references to specific
provisions of Title I of ERISA also refers to the corresponding
provisions of Code section 4975.
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Benefits of the Proposed Exemption
5. The Department is proposing relief based on the Applicant's
representation that significant harm to the Applicant's Covered Plan
clients would be prevented if the Department grants an exemption. The
Department's objective in proposing this exemption is to protect
Covered Plans from the harms and costs that could be imposed on them if
the UBS QPAMs no longer could rely on the relief provided in PTE 84-14.
Furthermore, the terms of this exemption are intended to promote the
UBS QPAMs' adherence to basic fiduciary standards under Title I of
ERISA and the Code and reinforce their obligation to act with a high
degree of integrity on behalf of their Covered Plan clients.
6. The Department notes that this individual exemption would solely
provide relief from the limitations of PTE 84-14 Section I(g) with
respect to the four criminal convictions of entities within the UBS
corporate family that are described below. The conditions of this
exemption explicitly require the UBS QPAMs to adhere to every other
condition for relief specified in PTE 84-14, as amended, including the
robust disqualification provisions found in Section I(g). If any
condition of PTE 84-14, as amended, is violated by a UBS Affiliated
QPAM, that QPAM would fail to comply with the requirements of the
exemption.
Summary of Facts and Representations <SUP>3</SUP>
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\3\ The Summary of Facts and Representations is based on UBS
representations and does not reflect factual findings or opinions of
the Department unless indicated otherwise. The Department notes that
availability of this exemption is subject to the express condition
that the material facts and representations made by UBS are true,
complete, and accurately describe all material terms of the
transaction(s) covered by the exemption. If there is any material
change in a transaction covered by the exemption, or in a material
fact or representation that is part of the record attributable to D-
12098, the exemption will cease to apply as of the date of the
change.
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7. UBS is a Swiss-based global financial services company organized
under the laws of Switzerland. UBS Asset Management (Americas) LLC and
UBS Hedge Fund Solutions LLC are entities under the UBS corporate
umbrella that currently operate as QPAMs and manage the assets of
Covered Plans \4\ on a discretionary basis in reliance on PTE 84-14.\5\
On June 12, 2023, UBS acquired CSAG, another Swiss-based global
financial services firm. This acquisition brought Credit Suisse Asset
Management, LLC, a subsidiary of CSAG, under the UBS corporate
umbrella. The Applicant represents that, on May 1, 2024, Credit Suisse
Asset Management, LLC (an entity that previously constituted an
Affiliated QPAM) was merged into UBS Asset Management (Americas) LLC,
with UBS Asset Management (Americas) LLC being the surviving entity.
The only current Affiliated QPAMs are UBS Asset Management (Americas)
LLC and UBS Hedge Fund Solutions LLC.
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\4\ 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 an
Affiliated QPAM relies on PTE 84-14 or with respect to which an
Affiliated QPAM (or any UBS affiliate) 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 the Affiliated QPAM 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. Notwithstanding the
above, an Affiliated QPAM may disclaim reliance on QPAM status or
PTE 84-14 in a written modification of a contract, arrangement, or
agreement with an ERISA-covered plan or IRA, where: the modification
is made in a bilateral document signed by the client; the client's
attention is specifically directed toward the disclaimer; and the
client is advised in writing that, with respect to any transaction
involving the client's assets, the Affiliated QPAM will not
represent that it is a QPAM, and will not rely on the relief
described in PTE 84-14.
\5\ UBS represents that UBS O'Connor LLC and UBS Realty
Investors LLC are entities under the UBS corporate umbrella that
currently offer investment products which are assessable by ERISA-
covered plans, but do not currently rely on Class PTE 84-14 when
managing those products.
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Relevant ERISA Provisions and PTE 84-14
8. The rules set forth in ERISA section 406 and Code section
4975(c)(1) proscribe certain ``prohibited transactions'' between plans
and related parties with respect to those plans. Under ERISA section
3(14), such parties are known as ``parties in interest'' with respect
to a plan, and 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.\6\
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\6\ Under the Code, such parties, or similar parties, are
referred to as ``disqualified persons.''
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[[Page 49215]]
9. The prohibited transaction provisions under ERISA section 406(a)
and Code section 4975(c)(1) prohibit, in relevant part, sales, leases,
loans or the provision of services between a party in interest and a
plan (or an entity whose assets are deemed to constitute the assets of
a plan), as well as the use of plan assets by or for the benefit of a
party in interest or a transfer of plan assets to a party in
interest.\7\ Under ERISA section 408(a) and Code section 4975(c)(2),
the Department has the authority to grant exemptions from such
``prohibited transactions'' in accordance with its exemption procedures
if the Department finds that an exemption is (1) administratively
feasible for the Department; (2) in the interests of the plan and of
its participants and beneficiaries; and (3) protective of the rights of
participants and beneficiaries.\8\ PTE 84-14 reflects the Department's
conclusion that it could provide broad relief from the prohibited
transaction provisions of ERISA section 406(a) and Code section
4975(c)(1) only if the commitments and the investments of plan assets
and the negotiations leading thereto are the sole responsibility of an
independent discretionary manager the meets the exemption's conditions.
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\7\ The prohibited transaction provisions also include certain
fiduciary prohibited transactions under ERISA section 406(b) and
Code section 4975(c)(1)(E) and (F). These include transactions
involving fiduciary self-dealing, fiduciary conflicts of interest,
and kickbacks to fiduciaries. PTE 84-14 provides only very narrow
conditional relief for transactions described in ERISA section
406(b).
\8\ 29 CFR part 2570, subpart B at 76 FR 66637, 66644, October
27, 2011, amended at 89 FR 4662, January 24, 2024.
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10. PTE 84-14 Section I(g) prevents an entity that may otherwise
meet the QPAM definition from utilizing the exemptive relief provided
by PTE 84-14 for itself and its client plans, if that entity, an
``affiliate'' thereof,\9\ or any direct or indirect five percent or
more owner in the QPAM has within 10 years immediately preceding the
transaction, been: (1) either convicted or released from imprisonment,
whichever is later, as a result of criminal activity described in
Section I(g); or (2) engaged in prohibited misconduct as described in
that section (in both cases subject to the Ineligibility Date described
in Section I(h)).\10\
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\9\ 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 five 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 Code
section 4975(e)(2)(H) or officer (earning ten (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.''
\10\ The prohibited misconduct provision is effective on June
17, 2024.
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11. The Department's inclusion of Section I(g) in PTE 84-14 is, in
part, based on an expectation that QPAMs will maintain a high standard
of integrity. This expectation extends not only to the QPAM itself but
also to those who may be in a position to influence the policies of the
QPAM.
Five Relevant Convictions
The 2017 UBS Conviction
12. In 2013, UBS Securities Japan Co. Ltd. (UBS Securities Japan)
pled guilty to a crime arising out of its fraudulent submission of Yen
London Interbank Offer Rate (Yen LIBOR) rates between 2006 and 2009,
and its participation in a scheme to defraud counterparties to interest
rate derivatives trades executed on its behalf, by secretly
manipulating certain benchmark interest rates to which the
profitability of those trades was tied (the 2013 UBS Conviction).\11\
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\11\ In connection with the 2013 Conviction, the UBS QPAMs
received exemptive relief to continue to rely on PTE 84-14
notwithstanding such conviction. However, the disqualification
period under Section I(g) of PTE 84-14 with respect to the 2013
Conviction expired on or about February 19, 2023 and therefore the
UBS QPAMs no longer require an exemption to continue to rely on PTE
84-14 with respect to that conviction.
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13. In connection with misconduct related to the 2013 UBS
Conviction, UBS and the DOJ entered into a Non-Prosecution Agreement
(the LIBOR NPA) wherein the DOJ agreed not to criminally prosecute UBS
for any crimes related to UBS's misconduct involving its submission of
Yen LIBOR rates and other benchmark rates between 2001 and 2010 (LIBOR
Manipulation). As a condition for the DOJ's agreement not to prosecute
UBS for the LIBOR Manipulation, UBS was required, among other things,
to avoid engaging in additional criminal activity for two years from
the date of the NPA.
14. Separately from the LIBOR Manipulation and after entering into
the NPA, UBS was also revealed to have participated in certain
deceptive currency trading and sales practices with respect to certain
foreign exchange (FX) market transactions and collusive conduct in
certain FX markets (FX Misconduct). The DOJ determined that by engaging
in the FX Misconduct, UBS had breached the terms of the LIBOR NPA. As a
result, UBS entered a guilty plea and was convicted on January 10, 2017
of engaging in the LIBOR Manipulation that was the subject of the LIBOR
NPA--specifically, UBS pled guilty to a scheme to defraud
counterparties to interest rate derivatives transactions by secretly
manipulating benchmark interest rates to which the profitability of
those transactions was tied. This is referred to as the ``2017 UBS
Conviction''.\12\ PTE 84-14, Section I(g), disqualifies UBS-related
QPAMs from relying on the relief set forth in PTE 84-14 for ten years,
from January 10, 2017, to January 9, 2027.
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\12\ In PTE 2023-14, the Department erroneously referred to this
conviction as the 2018 Conviction. The actual conviction occurred on
January 10, 2017 (as described in the prior UBS PTE 2020-01).
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The 2014 CSAG Conviction
15. On May 19, 2014, the Tax Division of the United States
Department of Justice (DOJ) and the U.S. Attorney's Office for the
Eastern District of Virginia filed a one-count criminal information in
the District Court for the Eastern District of Virginia charging CSAG
with a conspiracy to violate Code section 7206(2) in violation of Title
18, United States Code, Section 371. According to the Statement of
Facts, for decades before and through approximately 2009 CSAG operated
an illegal cross-border banking business that knowingly and willfully
aided and assisted thousands of U.S. clients in opening and maintaining
undeclared accounts that concealed offshore assets and income from the
IRS. On May 19, 2014, pursuant to a plea agreement (the Plea
Agreement), CSAG entered a plea of guilty for assisting U.S. citizens
in federal income tax evasion. The District Court entered a judgment of
conviction against CSAG on November 21, 2014. PTE 84-14, Section I(g),
disqualifies CSAG-related (and, thus, UBS-related QPAMs) from the
relief set forth in PTE 84-14 for ten years, from November 21, 2014 to
November 20, 2024.
The 2019 UBS France Conviction
16. In 2013, France opened an investigation into UBS, UBS France,
and certain former employees of UBS France S.A. The investigation
centered on the maintenance of foreign (``cross-border'') UBS bank
accounts held for private citizens. Following a trial in the French
First Instance Court, the French court convicted UBS and UBS France on
February 20, 2019, of illegally soliciting clients from 2004 to 2012
and laundering the proceeds of tax fraud from 2004 to 2012. PTE 84-14,
Section I(g), disqualifies UBS-related QPAMs from relying on the relief
in PTE 84-14 for ten years, from February 20, 2019 to February 19,
2029.
[[Page 49216]]
The 2022 Credit Suisse Securities (Europe) Limited (CSSEL) Conviction
17. On October 19, 2021, the DOJ, Criminal Division, Money
Laundering and Asset Recovery Section and Fraud Section, and the United
States Attorney's Office for the Eastern District of New York, filed a
criminal information in the District Court for the Eastern District of
New York charging CSSEL with one count of conspiracy to commit wire
fraud in violation of 18 U.S.C. 1349. CSSEL agreed to resolve the
action through a plea agreement presented to the New York District
Court on October 19, 2021 (the CSSEL Plea Agreement). Under the CSSEL
Plea Agreement, CSSEL agreed to enter a plea of guilty to the charge
set out in the CSSEL information (the CSSEL Plea). The District Court
entered a judgment of conviction against CSSEL on July 22, 2022. PTE
84-14, Section I(g), disqualifies CSAG-related QPAMs (and, thus, UBS-
related QPAMs) from relying on the relief set forth in PTE 84-14 for
ten years, from July 22, 2022 to July 21, 2032.
Prior Exemptions
18. The UBS entities of UBS Asset Management (Americas) Inc., UBS
Realty Investors LLC, UBS Hedge Fund Solutions LLC, and UBS O'Connor
LLC (the Prior UBS Applicants) and two CSAG asset management
affiliates, Credit Suisse Asset Management, LLC and Credit Suisse Asset
Management Limited, as well as other entities in which CSAG owned a
five percent or more interest (cumulatively, the Prior Applicants),
historically relied on the exemptive relief provided in PTE 84-14. To
protect Covered Plans from the costs and harms that could arise if the
Prior Applicants lost their ability to engage in beneficial
transactions on behalf of the Covered Plans due to the convictions
described above, the Department issued a number of individual
exemptions. The Department's practice was to issue temporary short-term
exemptions that generally lasted for a one-year period to enable the
Department to conduct an in-depth evaluation of the Prior Applicants'
criminal activity and compliance regimes. These short-term temporary
exemptions afforded the Department time to: (i) ascertain whether
exemptive relief was warranted based on a robust demonstration from
Applicants of the harms that could be sustained by Covered Plan clients
if the Department chose not to provide longer-term relief; (ii) develop
stringent conditions designed to safeguard the interests of Covered
Plan clients; and (iii) more fully develop the factual record to
determine if it supports relief. Generally, the temporary exemptions
were followed by longer-term exemptions that were limited to four or
five-year time periods. These longer term (but still temporary)
exemptions provided the Department with a further opportunity to
ascertain whether the exemptions continued to be in the interest of the
Applicant's Covered Plan clients and the conditions continued to be
protective of their rights and interests. In connection with Credit
Suisse-related convictions, the Department issued the following
exemptions: PTE 2022-01 (87 FR 1186 (Jan. 10, 2022)); PTE 2019-07 (84
FR 61928 (Nov. 14, 2019)); PTE 2015-14 (80 FR 59817 (Oct. 2, 2015));
PTE 2014-11 (79 FR 68716 (Nov. 18, 2014)). In connection with the UBS-
related convictions, the Department issued: PTE 2020-01 (85 FR 8020
(Feb. 12, 2020)); PTE 2019-01 (84 FR 6163 (Feb. 26, 2019)); PTE 2017-07
(82 FR 61903 (Dec. 29, 2017)); PTE 2016-17 (81 FR 94049 (Dec. 22,
2016)); PTE 2013-09 (78 FR 56740 (Sep. 13, 2013)).
Merger of UBS and CSAG
19. PTE 2020-01 permitted the UBS asset managers to continue to
rely on PTE 84-14 only if, among other things, UBS and its affiliates
had not been convicted of a crime described in Section I(g) of PTE 84-
14 over the prior 10 years, other than the UBS-related convictions
described above. Similarly, PTE 2022-01 permitted Credit Suisse QPAMs
to continue to rely on PTE 84-14 only if, among other things, such
entities and their affiliates had not been convicted of a crime
described in Section I(g) of PTE 84-14 other than the CSAG-related
convictions described above. Following the Merger, UBS was affiliated
with CSAG and CSSEL; therefore, the convictions attributable to CSAG
and CSSEL resulted in a violation of PTE 2020-01. In addition, CSAG was
affiliated with UBS, UBS Securities Japan, and UBS France, and was
accountable for the convictions attributable to those entities in
violation of PTE 2022-01.
20. In order to protect Covered Plans that could be harmed by the
sudden loss of PTE 2020-01 and PTE 2022-01 due to the Merger, the
Department granted PTE 2023-14 which was effective on the Merger date
(June 12, 2023). PTE 2023-14 granted relief only for the one-year
period following the closing of the Merger in order to afford
Department sufficient time to build a record upon which it could make
its findings under ERISA section 408(a) that longer-term exemptive
relief was warranted and for UBS and Credit Suisse's covered plan
clients to exercise their discretion to find a different investment
manager in the event they deemed it was prudent to do so in light of
the numerous convictions of these entities and their affiliates.
Application for Five-Year Extension
21. On February 22, 2024, UBS applied to the Department for a five-
year extension of the relief granted in PTE 2023-14 that would allow
the UBS QPAMs to rely on PTE 84-14 notwithstanding the 2014 CSAG
Conviction, the 2022 CSSEL Conviction, the 2017 UBS Conviction, and the
2019 UBS France Conviction. These four criminal convictions are
hereinafter referred to as the ``Covered Convictions.'' \13\ The
Applicant represents that the conduct underlying the Covered
Convictions occurred within business divisions that are separate from
UBS QPAMs and that the UBS QPAMs are insulated from the business
divisions where the wrongdoing incurred by policies, procedures, and
dedicated personnel.
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\13\ As noted above, the UBS QPAMs represent that they no longer
need exemptive relief from the prohibitions of PTE 84-14 Section
I(g) with respect to the 2013 UBS Conviction.
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22. Department's Note: Although only the Covered Convictions would
cause the UBS QPAMs to become ineligible under PTE 84-14 Section I(g),
the Department also is concerned about the conduct underlying the 2013
UBS Conviction and the FX Misconduct. Therefore, the Department has
conditioned relief in the proposed exemption on the Applicant's
insulation of the UBS QPAMs from the conduct underlying the Covered
Convictions, the FX Misconduct, and the 2013 UBS Conviction (referred
to in the aggregate as the Criminal Activity). Accordingly, the
Department uses the term ``Misconduct Entity'' in the proposed
exemption to refer to any of the following: an entity subject to one of
the Covered Convictions, i.e., UBS, UBS France (recently merged into
UBS Europe), CSAG and CSSEL; an entity that is the subject of the 2013
Conviction, i.e., UBS Securities Japan; and the entity that is the
subject of the FX Misconduct, i.e., also UBS. Similarly, the Department
uses the term ``Criminal Activity'' in the proposed exemption to refer
to the facts underlying the Covered Convictions, the 2013 UBS
Conviction, and the FX Misconduct in order to ensure the insulation of
the UBS QPAMs from the past criminal behavior of entities in the UBS
and Credit Suisse corporate families.
[[Page 49217]]
23. In its exemption application, UBS represents that every
independent audit that has been performed has determined that the UBS
QPAMs met the terms and conditions of each exemption. Finally, as
described below, UBS represents that an exemption would prevent
significant harms and costs from being imposed on the UBS QPAMs'
Covered Plan clients if the UBS QPAMs no longer could rely on the
relief provided in PTE 84-14.
Retroactive Relief Periods
24. Based on its review of the record, the UBS QPAMs appear to have
lost their exemptive relief for the period from June 12, 2023, through
June 11, 2024 (the PTE 2023-14 Period) because of their failure, during
the pendency of the exemption, to comply with the audit conditions set
forth in Section III(j) of PTE 2023-14, as described below.
25. In addition, UBS will not have relief for the period subsequent
to the original term of PTE 2023-14, which expires on June 12, 2024,
until the date the Department grants an exemption (if it determines the
record supports the grant of a final exemption). These two periods are
discussed more fully below.
Retroactive Relief Relating to the PTE 2023-14 Period
26. Section I(i) of PTE 2020-01 provides that each UBS QPAM must
submit to an audit 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
each UBS QPAM's compliance with, the Policies and Training described
herein. As UBS stated in its exemption application, ``[t]he purpose of
the independent audit is to give [Covered Plans] clients and the
Department the confidence that the asset manager is complying with
ERISA, and that continued exemptive relief is warranted.'' Under this
provision, the UBS QPAMs were required to complete an audit for the
period from March 20, 2023 through March 19, 2024. However, PTE 2023-14
truncated this period due to the Merger, which was effective on June
12, 2023.
27. Section III(j)(1) of PTE 2023-14 requires the UBS QPAMs to
complete an audit for the period from March 20, 2023 through June 12,
2023 (the beginning date of the one-year exemption provided in PTE
2023-14), which is referred to herein as the ``stub period audit''
within 180 days of June 12, 2023 (by December 9, 2023).\14\ Section
III(j)(7) required the General Counsel or one of the three most senior
executive officers of the UBS QPAM to which the audit report applies to
certify the audit; Section III(j)(8), required the Risk Committee of
UBS's Board of Directors to be provided with a copy of the Audit
Report, and for a senior executive officer of UBS's Compliance and
Operational Risk Control function to review the Audit Report for each
UBS QPAM and certify in writing, under penalty of perjury, that such
officer has reviewed the Audit Report; and III(j)(9) required each UBS
QPAM to provide its certified Audit Report to the Department no later
than 45 days following completion of the Audit Report (January 23,
2024). The Department required these audits in order to specifically
and closely assess whether the UBS QPAMs remain insulated from the
convicted UBS and Credit Suisse entities and could be trusted to
safeguard plan assets, notwithstanding the convictions. On May 3, 2024,
UBS' counsel notified the Department that UBS failed to complete the
stub period audit report. UBS did not submit the certified audit report
to the Department until May 10, 2024.
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\14\ The stub audit was required because UBS' audit cycle under
its prior QPAM section I(g) five-year exemption that was in effect
before the merger (PTE 2020-01) required an audit to be performed
covering the period of March 20, 2023 through March 19, 2024.
However, due to the timing of the merger (June 2024) the audit
period shifted from a March-to-March cycle to a June-to-June cycle.
Due to this shift, an audit was required for a ``stub'' period from
the beginning of the March audit period on March 20, 2024, through
the date of the merger on June 12, 2024. The audit requirement for
this ``stub'' period was included in both the Department's proposed
relief, and following a comment period, retained in the final
exemption.
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28. The record currently before the Department indicates that UBS
did not engage the Independent Auditor, Fiduciary Counselors Inc, to
complete the stub period audit until March 18, 2024, notwithstanding
the fact that PTE 2023-14 required the audit to be completed by
December 9, 2023, and for the audit report to be certified and
submitted to the Department by January 23, 2024.\15\ UBS should have
engaged an independent auditor well in advance of the dates set forth
in Section III(j) of the exemption for the audit to be timely completed
and for the audit report to be timely certified and submitted to the
Department. Because it failed to meet this exemption condition, UBS did
not comply with the requirements for relief in PTE 2023-14 and engaged
in non-exempt prohibited transactions for which it now requests relief.
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\15\ In a supplemental letter to the Department dated May 29,
2024, UBS' counsel informed the Department that the auditor notified
UBS about the failure to complete the stub audit in January 2024,
and the auditor sent a draft of the engagement letter to perform the
audit to UBS on February 12, 2024. These events occurred before the
Department received UBS' exemption application on February 23, 2024,
and UBS should have disclosed them in its exemption application.
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29. In its exemption application, UBS stated that ``. . . through
independent audits required by the Department, the UBS QPAMs have
proven, on an annual basis for many years, that they are in compliance
with ERISA and protective of plan assets. In every category, and in
every audit, the independent auditor has deemed that the UBS QPAMs met
the terms of the exemption.'' As stated above, however, based on the
record, it appears that UBS became aware that the UBS QPAMs failed to
complete the stub period audit report in January 2024, and did not
notify the Department of this failure until May 3, 2024. The
Department's exemption procedure regulation provides that ``[w]hile an
exemption application is pending final action with the Department, an
applicant must promptly notify the Department in writing if he or she
discovers that any material fact or representation contained in the
application . . . is inaccurate, [or] if any such fact or
representation changes during this period. . . .'' Under the exemption
procedure, UBS had an affirmative obligation to notify the Department
of its failure to complete the stub period audit, and therefore to
comply with a core condition of the exemption, well before it notified
the Department on May 3, 2024.
30. Because the UBS QPAMs failed to comply with the audit
conditions of the exemption, they lost the benefit of the relief
provided by PTE 2023-14, and the Department is considering whether it
should grant retroactive relief extending back to June 12, 2023 as part
of this exemption, which would otherwise provide relief only from June
12, 2024 through June 11, 2029.\16\ The Department requests comments
from UBS, the public, and interested parties on whether retroactive
relief is appropriately including in this exemption, which would extend
exemptive coverage to include the period from June 12, 2023 to June 11,
2024, as well as June 12, 2024 to June 11, 2029. In this connection,
UBS should provide a detailed statement as to how a grant of
retroactive relief would be consistent with the requirements for such
relief as set forth in 29 CFR 2570.35(d).
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\16\ The Department's requirements for retroactive relief are
set forth in 29 CFR 2570.35(d).
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31. The Department, however, will consider granting retroactive
relief in connection with this proposal to the extent that UBS
demonstrates to the Department that such relief is
[[Page 49218]]
appropriate in this exemption. In this connection, UBS should provide a
detailed statement as to how it has satisfied the requirements for
retroactive relief as set forth in 29 CFR 2570.35(d).
32. Specifically, for the Department to grant retroactive relief,
UBS must explain how the Covered Plans were adequately safeguarded,
notwithstanding UBS's failure to (1) contract with an auditor for the
stub period audit and (2) timely certify, under penalty of perjury,
that UBS reviewed this audit. The UBS QPAMs must also demonstrate that
at a minimum that the UBS QPAMs: (i) ensured and will ensure that
appropriate safeguards were established during the PTE 2023-14 Period
to protect the interests of Covered Plan clients; \17\ (ii) Covered
Plan clients were not harmed by non-exempt transactions during the PTE
2023-14 Period; \18\ (iii) a responsible plan fiduciary acted (and is
acting) in good faith and took (and will take) appropriate steps that
are necessary to protect the Covered Plans from abuse, loss, and risk
during the PTE 2023-23 Period; and (iv) the UBS QPAMs have adjusted
their policies and procedures in light of past failures to comply with
PTE 2023-14 to ensure that such failures will not reoccur.\19\
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\17\ 29 CFR 2570.35(d)(1)(i).
\18\ 29 CFR 3570.35(d)(1)(ii).
\19\ Id.
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33. The Department also invites comment from the UBS QPAMs, the
independent auditor, UBS, and Covered Plans regarding whether UBS acted
in good faith in engaging in the transactions permitted by PTE 2023-14,
notwithstanding the fact that the UBS QPAMs, the independent auditor,
and UBS failed to timely comply with an essential condition of the
exemption.
34. The Department further requests UBS to provide detailed
information to the Department regarding the costs and harms Covered
Plans would occur if the Department does not grant retroactive relief
for the period from June 12, 2023, to June 11, 2024. This detailed
information should include, but not be limited to, a quantified
estimate of the size of the losses Covered Plans would suffer if
retroactive relief is not granted, and an explanation of the
methodology UBS used to calculate these amounts and the underlying
assumptions UBS used in its calculation. The Department notes that
receipt of this explanation and detailed estimate of specific dollar
amounts of the costs and harms is critical to its decision regarding
whether it will grant retroactive relief to UBS.
Retroactive Period Relating to Filing Date of UBS' Exemption
Application
35. As previously stated, PTE 2023-14 allowed the UBS QPAMs to
continue to rely on the QPAM exemption for a one-year period following
the Merger date notwithstanding the Convictions. This relief was
necessary, because the relief granted to QPAMs before the Merger was no
longer available on the effective date of the Merger. To receive
further relief after the end of the one-period in PTE 2023-14, the UBS
QPAMs would have to submit another exemption application to the
Department to receive relief after the Merger.
36. The Department issued a clear statement to Covered Plan
fiduciaries in the preamble to PTE 2023-14's proposal that clearly
indicated that in order for the UBS QPAMs to receive relief beyond the
one-year period in PTE 2023-14, they must submit sufficient written
information to the Department substantially in advance of the
expiration of the exemption's one-year term to permit the Department to
make its requisite findings under ERISA section 408(a).\20\ The
Department also stated in that preamble that, it ``is requesting
detailed information from UBS and CSAG regarding the costs and harms to
Covered Plans, if any, that could arise if the UBS QPAMs and the [CSAG
QPAMs] can no longer rely on PTE 2020-01 and PTE 2022-01 following the
Merger.'' Finally, the Department stated that, ``if UBS and CSAG do not
submit detailed and reliable information in this regard, the Department
will not extend the relief [proposed] in this exemption beyond one
year.'' \21\
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\20\ 88 FR 30785, 30786 (May 12, 2023).
\21\ Id at 30788.
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37. The Department made these statements in the preamble to the
notice of proposal for PTE 2023-14 to ensure that the UBS QPAMs were
aware that they needed to submit their exemption application for
extended relief sufficiently in advance of the expiration of the relief
provided in PTE 2023-14 for the Department to be afforded with
sufficient information and time to develop a complete required record
upon which it could determine whether the Department could make its
requisite findings under ERISA section 408(a) that UBS' requested
exemptive relief is (1) administratively feasible, (2) in the interest
of its Covered Plan clients, (3) and protective of the rights of its
Cover Plan client's participants and beneficiaries.\22\
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\22\ ERISA section 408(a) also requires the Secretary to publish
a notice in the Federal Register of the pendency of an exemption,
provide adequate notice to interested persons, and afford interested
persons with an opportunity to comment on the proposed exemption.
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38. Nevertheless, UBS did not submit its application until February
22, 2024,and the application failed to convincingly establish the
specific ``costs and harms to Covered Plans,'' as requested by the
Department in the preamble to proposed PTE 2023-14.\23\ Further, as
noted above, UBS and the UBS QPAMs failed to perform and certify the
stub period audit in accordance with Section III(j) of PTE 2023-14, and
did not disclose this failure in the February 22, 2024, exemption
application which further complicated and delayed the Department's
ability to review and resolve UBS' exemption application. For all these
reasons, the Department has not been given sufficient information and
time to develop a complete record, publish a proposed exemption with
adequate public notice and comment, and issue a final exemption before
the June 11, 2024 that grants all the requested exemptive relief prior
to the expiration date provided in PTE 2023-14. In particular, the
Department cannot make the required findings under ERISA section 408(a)
that UBS' requested exemptive relief is (1) administratively feasible,
(2) in the interest of its Covered Plan clients, (3) and protective of
the rights of its Covered Plan clients' participants and beneficiaries,
without additional submissions, public comments, and review.
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\23\ UBS did not provide this detailed information until May 2,
2024, a little more than a month from the expiration of PTE 2023-14.
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39. Nonetheless, to protect Covered Plans, the Department is
proposing to grant UBS retroactive relief from the date the Department
publishes a final exemption (if granted) back to June 12, 2024,
provided that UBS demonstrates, as part of the public notice and
comment process, that the Department can make the required findings
under ERISA Section 408(a) and that UBS will properly safeguard Covered
Plans from harm. Since this retroactive relief period has not yet
occurred, the Department also is requesting UBS to represent in a
statement made in its comment response to this proposed exemption that
it will continuously adhere to the conditions of PTE 2023-14 through
the effective date of a final exemption (if granted). Moreover, to
ensure that Covered Plans are adequately protected, the Department
seeks comments from UBS and the public on whether it should grant
retroactive relief for the period that would have been covered by PTE
2023-14, but for the failure to comply with the audit condition. As
[[Page 49219]]
discussed below, the Department also proposes to add an additional
condition designed to minimize the risk of future harm to Covered
Plans.
Harm to Covered Plans in the Absence of QPAM Relief
40. Before it grants relief from ineligibility under PTE 84-14
Section I(g) due to a conviction or misconduct, the Department requires
ineligible QPAMs to provide detailed statements that demonstrate and
quantify the harms that Covered Plan clients would experience if the
QPAMs were unable to rely on PTE 84-14 due to ineligibility. In its
exemption application and in a response to a request for supplemental
information from the Department, UBS provided the Department with the
following estimates of the costs that each type of portfolio managed by
the UBS QPAMs would incur if denied relief. The application assumed
that Covered Plan assets would have to be liquidated because of the
unavailability of PTE 84-14 with the following consequences for Covered
Plans.\24\
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\24\ The Department notes that UBS provided information not
mentioned in this proposal regarding the potential losses to ERISA
clients, but without clearly identifying the dollar amount of losses
to plans in concrete terms. In such cases, the Department does not
have enough information to include such representations in its
findings. However, the information the Applicant provided that the
Department can rely on is described below.
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41. UBS Hedge Fund Solutions provides customized portfolios of
hedge funds that are run as plan asset funds. UBS Hedge Fund Solutions
manages approximately $6.8 billion as part of this business. UBS
estimated that these customized hedge fund portfolios would lose $46.8
million if the covered plans liquidated their assets because the UBS
QPAMs could not rely upon PTE 84-14. In calculating the estimates of
losses in the event these portfolios were liquidated, UBS assumed that
its clients would immediately request full redemptions and any current
illiquid/side pocket investment would need to be sold in the secondary
market at a 30 percent discount.
42. UBS Hedge Fund Solutions also provides investment advice to a
private pension client that is invested in a customized portfolio of
credit funds, including private credit funds. UBS Hedge Fund Solutions
currently manages $1.3 billion for this client. Due to the less liquid
nature of these holdings, UBS estimates that it would take from two to
six years to liquidate these holdings, or sometimes longer under the
investments terms. UBS estimates that the costs of liquidation would be
$14.5 million. This estimate assumes that any investment that would
take five years or longer to be redeemed would be sold in the secondary
market at a 30 percent discount.
43. UBS Hedge Fund Solutions is also a platform manager for select
managed accounts with third party trading advisers. In this role, UBS
Hedge Fund Solutions provides investment advice to pension clients as
well as non-ERISA clients to invest in commingled managed accounts,
which are run as plan asset funds. UBS Hedge Fund Solutions manages
approximately $406.6 million as part of this business. If UBS QPAMs are
no longer allowed to rely on PTE 84-14, UBS estimated that the economic
loss for these investors would be $29.1 million. This estimate assumes
the entire portfolio would be liquidated and the Covered Plan clients
would pay the related transaction costs.
44. UBS also estimated the loss to active equity portfolios if UBS
QPAMs were no longer able to rely on PTE 84-14. These equity portfolios
cover large, small and mid-cap equity securities, and pursue a variety
of strategies. Within these portfolios, UBS QPAMs managed approximately
$727 million in assets for ERISA plan clients. UBS estimates that
liquidation costs for these portfolios would amount to approximately
$6.2 million based on a transaction cost model.
45. UBS offers a range of strategies across the global fixed income
asset class spectrum. These strategies trade a variety of products,
such as investment grade and non-investment grade debt securities, US
treasuries, agency and non-agency mortgage-backed securities, and
related derivatives. UBS QPAMs manage approximately $1.1 billion in
fixed income strategies for ERISA plan clients. If the Department does
not grant an exemption, UBS estimates that the liquidation costs to
these plans will be approximately $3.84 million. To calculate these
estimates, UBS constructed a bid/offer spread model based on the
individual securities held in each client portfolio. The model assumes
that liquidation will not occur during a time of market stress, and UBS
suggests that the estimates may therefore be low.
46. UBS Investment Solutions \25\ manages portfolios primarily
based on a long-term, fundamental analysis, but may also employ
different strategies as dictated by client investment guidelines and/or
market conditions and may allow long and/or short positions in markets,
currencies, or other portfolio factors through the use of derivatives.
UBS Investment Solutions may also employ long/short investment
strategies that purchase securities on margin and/or sell securities
short were permitted by client guidelines. UBS QPAMs manage
approximately $934 million in Investment Solutions strategies for ERISA
plan clients.
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\25\ It is the Department's understanding that UBS Investment
Solutions is a team within UBS that manages portfolios based on an
asset allocation investment process.
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47. If the Department does not grant an exemption, UBS estimates
that liquidation costs for those portfolios will amount to $358,907.
48. Credit Investments Group (CIG) is a business unit within UBS
Asset Management Americas LLC. As part of its business, CIG manages an
ERISA client account with a net asset value of $109 million. In the
event of a portfolio liquidation scenario, CIG would typically initiate
what is effectively an auction process for every unique line item in
the portfolio and invite various loan trading desks to bid on each
asset. In this auction process, positions marked below 80 percent
reasonably would be estimated to trade at least 10 percent below the
current mark. Based on this, and other, assumptions, UBS estimates
economic loss of $2 million to the ERISA client's account in the event
of liquidation.
49. In addition to the liquidation costs described above, UBS also
represents that its Covered Plan clients would incur other costs
associated with losing relief under PTE 84-14, such as costs of
performing due diligence on a replacement manager, liquidating the
legal entity, setting up a new legal entity with a replacement manager,
building back a portfolio, losing capacity in closed or customized
hedge funds, transferring positions, being out of the market, losing
time invested for purposes of lock up periods, and costs associated
with the paying commissions when a new manager sells the Covered Plans'
current securities and buys new securities that it prefers.
Hereinafter, these costs, and any other cost that may be incurred by a
Covered Plan due to a UBS QPAM's loss of relief under PTE 84-14, other
than a Liquidation Cost, is referred to as an additional cost.
Department's Request for Additional Information Regarding the
Liquidation Costs and Additional Costs
50. The Applicant's representations imply that if the exemption is
not granted, all affected Covered Plans will need to liquidate their
investments. If that was not the Applicant's intent, the Department
requests the Applicant to revise its Liquidation Costs estimates to
reflect the view that not all Covered Plans would need to liquidate
their
[[Page 49220]]
investments if the exemption is not granted, along with the methodology
the Applicant used to provide the estimates, and the factors that may
affect those estimates.
51. Section III(k)(2) of PTE 2023-14 requires that any arrangement,
agreement, or contract between the UBS QPAMs and Covered Plans, include
an obligation for the QPAM to indemnify and hold harmless Covered Plans
from actual losses. This includes the losses and related costs arising
from unwinding transactions with third parties and from transitioning
Covered Plan assets to an alternative asset manager as well as costs
associated with any exposure to excise taxes under Code section 4975 as
a result of a QPAM's inability to rely upon the relief in PTE 84-
14.\26\
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\26\ PTE 2023-14, Section III, Condition (k) states, in part,
``. . . with respect to any arrangement, agreement, or contract
between an Affiliated QP AM and a Covered Plan, the QPAM agrees and
warrants to Covered Plans . . . (2) To indemnify and hold harmless
the Covered Plan for any actual losses resulting directly from the
QPAM's violation of ERISA's fiduciary duties, as applicable, and of
the prohibited transaction provisions of ERISA and the Code, as
applicable; a breach of contract by the QP AM; or any claim arising
out of the failure of such QPAM to qualify for the exemptive relief
provided by PTE 84-14 as a result of a violation of Section I(g) of
PTE 84-14, other than a Conviction covered under this exemption.
This condition applies only to actual losses caused by the QPAM's
violations. The term Actual Losses includes, but is not limited to,
losses and related costs arising from unwinding transactions with
third parties and from transitioning Plan assets to an alternative
asset manager as well as costs associated with any exposure to
excise taxes under Code section 4975 as a result of a QPAM's
inability to rely upon the relief in the QPAM Exemption;''
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52. Accordingly, it is unclear why the Covered Plans would incur
the Liquidation Costs and Additional Costs identified by the Applicant,
in the event relief were not granted. To the extent the Applicant does
not believe Covered Plans are contractually protected from these costs,
the Department requests comment from the Applicant identifying and
describing the extent to which the Liquidation Costs and/or Additional
Costs are outside the scope of Section III(k)(2), and the Applicant's
explanation of why such costs are outside the scope of Section
III(k)(2).
53. The Department also requests comments on whether there are
other potential costs or benefits associated with the failure to grant
retroactive relief that are not addressed by the questions above. For
example, what impact would the denial of retroactive relief have on the
willingness of parties to rely on the QPAM exemption in the future? To
what extent is the denial of retroactive relief proportionate or
disproportionate with the failure of the exemptions of PTE 2023-14? Are
there other issues or considerations that the Department should address
before making a determination on retroactive relief?
Audits of Credit Suisse
54. Newport Trust Company (Newport) conducted the audits of Credit
Suisse Asset Management, LLC (CSAM LLC) before the merger between UBS
and Credit Suisse AG. The most recent PTE 2022-01 required UBS to
submit to an audit by an independent auditor for the period of November
21, 2022, to June 11, 2023. In its audit report Newport determined that
CSAM was in compliance with the terms and conditions of PTE 2022-01.
Moreover, Newport had no recommendations to strengthen the Exemption
Review by the Compliance Officer or any new recommendations to
strengthen CSAM LLC's exemption compliance program, or any
recommendation specific to the Policies or Training.
55. Newport represents in its latest audit report that it conducted
a thorough due diligence process to conduct the audit and issue the
report for the covered period. Its examination involved ongoing contact
with representatives of CSAM, reviews of the Policies and Training,
testing of data related to Plan accounts, review of collected data,
testing of CSAM's operational compliance with the Policies and
Training, and preparation of the Audit Report.
In making its determinations, Newport:
(1) reviewed the following Policies and evaluated their adequacy
during the Covered Period--CSAM's ERISA Compliance Manual, including
appendices on PTE 2022-01, Parties in Interest, and QPAM Compliance
Guidance; ``Handling of ERISA Related MyIncidents Procedure;'' and
CSAM's best execution policy. Numerous CSAG risk policy
publications, including policies on data management, policies
governing interactions with and exchange of information with
regulators, government agencies, and legislative bodies; global
regulatory reporting accountability policy; records management
global policy; policy prohibiting certain persons serving as
employee, officers or directors of Credit Suisse affiliates.
(2) gathered and reviewed extensive documentation and
information from CSAM to determine compliance with the terms of the
exemption--including marketing materials, numerous internal and
external written correspondence, correspondence with regulators
(including Forms ADV for CSAM), financial documents, balance sheets,
records of best execution, internal announcements, compliance
records from CSAG compliance systems, trading records and
spreadsheets detailing corrections of trading errors; copies of
notices required under PTE 2022-01 and prior exemptions, personnel
files, sample internal documents, etc.
(3) reviewed updates to the Training program content and
anticipated content for upcoming online training;
(4) reviewed the Annual Exemption Review and report completed by
the Compliance Officer (``Annual Exemption Report'') and evaluated
its adequacy; and
(5) developed tests to evaluate CSAM's operational compliance
with the Policies, including manager independence, ERISA compliance,
communications with regulators and Plan/IRA clients, and Exemption
compliance and corrections during the Covered Period, with
particular focus on class actions and complying with limits on
employer securities.
Newport also validated that certain follow-up actions from its
preceding audit were completed.
Audits of UBS
56. Fiduciary Counselors Inc, (FCI) conducted the audits of UBS
QPAMs pursuant to PTE 2020-01. FCI confirmed that the UBS QPAMs
fulfilled the terms and conditions of the exemption during the audit
periods of February 20, 2020 through March 19, 2021; March 20, 2021 to
March 19, 2022; March 20, 2022 to March 19, 2023; and March 20, 2023 to
June 11, 2023. FCI also concluded that the QPAMs' policies and
procedures are reasonably designed to ensure that each QPAM continues
to operate in a manner complaint with ERISA and the requirements of the
exemption.
57. During the course of the audits performed since the effective
date of PTE 2020-01, Fiduciary Counselors Inc, reviewed the following:
(1) marketing materials directed to Covered Plans, investment
committee minutes, client complaints, compliant policies, broker
dealer reports, billing records, and consent forms for PTE 77-4,
Compliance Office Exemption Reports, ADV Forms, gifts and
entertainment policies, performance reports and disclosures;
(2) trading system, guideline breaches and ERISA breach
hardcoding process in trading system, any guideline breaches and
correspondence files associated with the breaches.
(3) client adoption process.
(4) compliance with the following PTE 84-14 requirements: power
to appoint rule, the 20% rule, that the counterparty is not a UBS
QPAM or a person related to the UBS QPAM, the transaction is not an
excluded transaction, shareholders' or partners' equity of the QPAM
is at least $1 million, and total client assets under management and
control of the QPAM/investment adviser is at least $85 million.
(5) whether required notices under PTE 2020-01 were sent timely
and appropriately, whether additional communications are sent
[[Page 49221]]
in a timely manner, and whether training was held in a timely
manner.
(6) proof of training, content of training; proof of ethics
training, training of new hires, conduct interviews with portfolio
managers regarding effectiveness of training and suggested
improvements, online training modules, training system and process
of assigning courses to employees and process for employees
completing assigned training.
(7) the written Exemption Report prepared by the Compliance
Officer for compliance with the requirements of PTE 2020-01.
58. FCI also validated that certain follow-up actions from its
preceding audit were completed. Namely, in its prior audit report, FCI
recommended that the UBS QPAMs develop processes to identify affiliates
of the party in interest with the authority to appoint or terminate the
QPAM or negotiate the terms of the QPAM's management agreement with the
plan.
New Conditions in the Proposed Exemption
59. By failing to comply with the audit requirement in PTE 2023-14,
the Applicant breached a core protective condition of the exemption. In
order to address this failure and to prevent its reoccurrence or the
occurrence of any additional failures, the Department is proposing to
add additional conditions to those it included in PTE 2023-14. The
first new proposed condition in Section III(v)(4) of the proposed
exemption would require each UBS QPAM to develop written processes that
clearly describe: (1) how the QPAM identifies and quantifies ``actual
losses'' for purposes of Section III(j)(2); and (2) how Covered Plans
may recover or avoid incurring the losses that the UBS QPAM must
indemnify or hold Covered Plans harmless from incurring pursuant to
Section III(j)(2). Each UBS QPAM must develop these processes within 30
days after the date the Department publishes a final exemption in the
Federal Register. Furthermore, the Department is adding clarifying
language to Section III(j)(2) to better articulate its longstanding
position regarding the scope of QPAMs' ``hold harmless'' obligations.
In this regard, the Department is adding text to clarify that a
``violation of any conditions of this exemption'' triggers the ``hold
harmless'' obligations of a QPAM under that section. That language also
appears in certain other places throughout the proposal where relevant.
60. The second new proposed condition in Section III(t) provides
that if the independent auditor or UBS or its affiliates learns of any
material noncompliance with a condition of this exemption, UBS must
send a notice (a Violation Notice) to all affected Covered Plans and
the Department that prominently and conspicuously states or describes:
(1) UBS, or the UBS QPAM, as applicable, failed to meet the terms of
this exemption (and describe the failure); (2) the extent to which UBS
QPAMs have potentially been operating without an exemption due to the
failure; (3) whether UBS plans to apply for retroactive relief from the
Department for this failed condition; (4) any further transactions
engaged in by the UBS QPAMs on behalf of Covered Plans that may be non-
exempt prohibited transactions unless the Department grants retroactive
relief for the period in which the transactions occurred; and (5) UBS
must indemnify and hold harmless the Covered Plan for: any actual
losses resulting directly from the QPAM's failure to comply with any
conditions of this exemption, ERISA's fiduciary duties and of the
prohibited transaction provisions of ERISA and the Code, a breach of
contract by the QPAM, or any claim arising out of the failure of such
QPAM to qualify for the exemptive relief provided by PTE 84-14 as a
result of a violation of PTE 84-14 Section I(g), other than a
Conviction covered under the exemption. The Violation Notice must be
sent to all affected Covered Plans and the Department within 14 days of
discovering the violation. The Department's objective in proposing a
requirement that UBS send the Violation Notice to its Covered Plan
clients is to provide the Covered Plan clients with the opportunity to
make informed and prudent decisions regarding the protection of plan
assets. The Department requests comment on whether the Violation Notice
is sufficiently protective of the interests of the Client Plans and
their participants and beneficiaries. In that context, the Department
is interested in receiving comments discussing whether additional
disclosure or a requirement for additional oversight by an independent
fiduciary may be necessary to ensure that the exemption is sufficiently
protective of the Client Plans and their participants and
beneficiaries.
The Proposed Exemption
61. As stated above, the Department is proposing this exemption to
protect Covered Plans from the costs and harms that would arise if the
UBS QPAMs no longer were able to rely on the relief provided in PTE 84-
14. If the proposed exemption is granted, the UBS QPAMs would not be
precluded from relying on the exemptive relief provided by PTE 84-14,
notwithstanding the Covered Convictions.\27\ This proposed exemption
would be effective for a five-year period beginning on June 12, 2024,
and ending on June 11, 2029, if the Applicant satisfies the
requirements of the Proposed Exemption at all times.
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\27\ Section I(g) of PTE 84-14 generally provides that a QPAM is
ineligible to rely on PTE 84-14 for 10 years following a Criminal
Conviction, or participation in Prohibited Misconduct (as both are
defined in PTE 84-14), of the QPAM, any affiliate thereof, or any
direct or indirect owner of a five percent or more interest in the
QPAM, subject to the Ineligibility Date in Section I(h).
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Expiration of Exemption
62. If UBS satisfies all the conditions of this exemption, its
relief under this exemption as proposed will expire on June 11, 2029.
UBS and its underlying entities, as well as Covered Plan fiduciaries,
are cautioned that the Department may not extend this five-year
exemption following its expiration due to the significant number of
convictions and the seriousness of the underlying conduct of the
tainted entities within the UBS corporate umbrella following the five
year term unless, among other things, UBS submits a complete and
accurate application with detailed written information to the
Department by December 14, 2027. This will ensure that the Department
has sufficient time to analyze the exemption application to ensure it
provides sufficient information for the Department to make its findings
under ERISA Section 408(a), publish a notice of proposed exemption with
a sufficient notice and comment period, consider comments received on
the proposed exemption, and publish a notice of final exemption (if
appropriate based on the entire record).
Summary of the Exemption's Protective Conditions
63. 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 benefit
from the transactions described in PTE 84-14.\28\ The Department notes
that this exemption includes most of the conditions it imposed upon
CSAG and UBS in their most recent individual exemption, PTE 2023-14,
but the Department has made
[[Page 49222]]
minor changes and added additional conditions that are described below.
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\28\ The Department notes that this is a summary of the
conditions intended for the convenience of a reader; however, the
governing conditions for the exemptive relief are those reflected in
the operative text in Section III of the proposed exemption.
---------------------------------------------------------------------------
64. Misconduct Entity. Notwithstanding that the 2013 UBS Conviction
is no longer within the 10-year period of disqualification period under
Section I(g), the proposal requires that the UBS QPAMs continue to be
completely insulated from any aspect of the business activities of UBS
Securities Japan. Because the same criminal activity (which relates to
the fraudulent submission of Yen LIBOR rates during roughly the same
time period) underpins both the 2013 UBS Conviction, and the 2017 UBS
Conviction, there is not a valid reason for the Department to require
the UBS QPAMs to be insulated from UBS while it permits the UBS QPAMs
to engage in transactions with UBS Securities Japan. Therefore, the
Department has broadened the definition of ``Misconduct Entity'' in PTE
2023-14 to include UBS Securities Japan. Furthermore, although the FX
Misconduct itself did not violate Section I(g), the misconduct led to
the DOJ's determination that UBS had breached the LIBOR NPA. The FX
Misconduct was itself egregious enough to raise concerns that the UBS
QPAMs should be completely insulated from any entity involved in that
misconduct. However, because UBS is already a Misconduct Entity by
virtue of the 2017 UBS Conviction, no updates to the definition is
required.
65. Criminal Activity. For reasons similar to those articulated in
the prior paragraph, the Department has determined that each instance
of the Criminal Activity is equally concerning notwithstanding that the
2013 UBS Conviction and the FX Misconduct do not in themselves trigger
a disqualification of the UBS QPAMs from relying on PTE 84-14. As such,
the Department has drafted certain exemption conditions to ensure that
the UBS QPAMs continue to be fully insulated from the personnel that
were involved in the misconduct related to the Criminal Activity.
Therefore, the Department maintains in the proposal the approach it
took in the PTE 2023-14 conditions where it refers to the Covered
Convictions and the FX Misconduct. However, the Department uses the
defined term Criminal Activity in this proposal, because the 2013 UBS
Conviction is technically no longer included in the definition of
``Covered Convictions'' due to the expiration of the ten-year
ineligibility period.
66. UBS Seconded Employees. In prior exemptions, UBS and Credit
Suisse had requested a carve-out from the exemption conditions for
services provided by individuals that are considered to be employed by
a Misconduct Entity for payroll and certain administrative purposes.
Applicants in those exemptions referred to these employees as being
``seconded'' or ``double-hatted.'' The Department has proposed a new
definition of ``UBS Seconded Employee'' in Section I(j) of the proposal
to avoid using ambiguous terms such as ``double-hatted'' and to ensure
that no employees of Misconduct Entities are involved in the UBS QPAMs'
business activities, except to the extent that such employees are
subject to the control and supervision of the UBS QPAMs. The new
definition of UBS Seconded Employee is included in the conditions where
references to ``double-hatted'' and ``seconded'' employees previously
appeared in PTE 2023-14. New Section I(j) provides that a ``UBS
Seconded Employee'' means ``an individual nominally employed by UBS who
performs work on behalf of a UBS QPAM; provided that such UBS QPAM is
solely responsible for the management and control of the employee's job
activities performed on behalf of such QPAM. Notwithstanding the
preceding sentence, the UBS QPAM must be solely responsible for the
establishment of the employee's job duties and terms of employment
(including compensation, promotions, and benefits) and must have
supervisory responsibility with respect to, among other things, the
employee's performance, training, and disciplinary actions.'' The
Department is requesting that the Applicant's comment includes a
representation that demonstrates how this arrangement remains
protective of Covered Plans following the merger.
67. The UBS QPAMs (including their officers, directors, agents
(with very narrow exceptions), employees of such QPAMs, and UBS
Seconded Employees) must not have known, have reason to know of, nor
participated in the criminal conduct that is the subject of any of the
Criminal Activity. Each UBS QPAM (and its officers, directors, etc.)
must meet this condition with respect to each element of Criminal
Activity regardless of whether the misconduct occurred within the
QPAM's corporate umbrella at the time it occurred. Further, any other
party engaged on behalf of the UBS QPAMs who had responsibility for or
exercised authority in connection with the management of plan assets
must not have known, had reason to know of, nor participated in the
Criminal Activity. Again, each Affiliated and Related QPAM (and their
officers, directors, etc.) must comply with this prohibition,
regardless of whether the criminal misconduct occurred within the
QPAM's corporate umbrella at the time the Criminal Activity occurred.
68. The proposed exemption continues the requirement from PTE 2023-
14 that no UBS QPAM (including their officers, directors, agents other
than one of the entities subject to a Covered Conviction, employees of
such QPAMs, and UBS Seconded Employees) received direct compensation,
or knowingly received indirect compensation, in connection with the
criminal conduct that is the subject of the Criminal Activity. Further,
no other party engaged on behalf of the UBS QPAMs who had
responsibility for, or exercised authority in connection with the
management of plan assets received direct compensation, or knowingly
received indirect compensation, in connection with the criminal conduct
of that is the subject of the subject of the Criminal Activity.
69. The protective conditions contained in this proposed exemption
include a requirement that precludes each Affiliated QPAM from
employing or knowingly engaging any of the individuals who participated
in the criminal conduct underlying the Criminal Activity. This means
that no individual who participated in criminal misconduct at either
UBS, UBS Securities Japan, UBS France, CSAG, or CSSEL (each, a
Misconduct Entity) may be employed by any Affiliated QPAM, regardless
of whether the Misconduct Entity was outside the QPAM's corporate
umbrella at the time of the misconduct. A UBS QPAM also must not have
exercised authority over the assets of any Covered Plan client in a
manner that it knew or should have known would further the criminal
conduct underlying the Criminal Activity; or cause the UBS QPAM or its
affiliates to directly or indirectly profit from the criminal conduct
underlying the Criminal Activity.
70. Under this exemption, no Affiliated QPAM will use its authority
or influence to direct an ``investment fund'' (as defined in Section
VI(b) of PTE 84-14) that is subject to ERISA or the Code and managed by
such Affiliated QPAM with respect to one or more Covered Plans, to
enter into any transaction with a Misconduct Entity or to engage a
Misconduct Entity 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. This
condition provides exceptions for the provision of:
[[Page 49223]]
(1) certain sub-custodial services by an affiliate of UBS that is
selected by an unaffiliated global custodian that, in turn, is selected
by someone other than a UBS QPAM; and (2) services provided by UBS
Seconded Employees. Further, other than with respect to employee
benefit plans maintained or sponsored for its own employees or the
employees of an affiliate, a Misconduct Entity may 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.
71. Each Affiliated QPAM must continue to maintain, adjust to the
extent necessary, implement, and follow written policies and procedures
(the Policies) that are reasonably designed to ensure that: (a) the
asset management decisions of the Affiliated QPAM are conducted
independently of each Misconduct Entity's corporate management and
business activities; (b) the Affiliated QPAMs fully comply with ERISA's
fiduciary duties and with ERISA's and the Code's prohibited transaction
provisions; (c) the Affiliated QPAMs do not knowingly participate in
any other person's violation of ERISA or the Code with respect to
Covered Plans; (d) any filings or statements made by the Affiliated
QPAMs to regulators on behalf of, or in relation to, Covered Plans are
materially accurate and complete; (e) the Affiliated QPAMs do not make
material misrepresentations or omit material information in their
communications with such regulators, or in their communications with
Covered Plans; and (f) the Affiliated QPAMs comply with the terms of
the exemption.
72. This proposed exemption requires each Affiliated QPAM to
maintain, adjust to the extent necessary, and implement a training
program (the Training) that will be conducted at least annually for all
relevant asset/portfolio management, trading, legal, compliance, and
internal audit personnel. The Training must cover, at a minimum, the
Policies, ERISA and Code compliance, ethical conduct, the consequences
that would result from not complying with the proposed exemption
conditions, and the requirement to promptly report wrongdoing.
73. This proposed exemption requires each Affiliated QPAM to
continue to engage an independent auditor annually to evaluate the
adequacy of, and the QPAM's compliance with, the Policies and Training
required by the exemption. The independent auditor must be prudently
selected by the Affiliated QPAMs and have appropriate technical
training and proficiency with ERISA and the Code to perform the tasks
required by the exemption. The Affiliated QPAMs must grant the auditor
unconditional access to their business, and the auditor's engagement
must specifically require the auditor to test each Affiliated QPAM's
operational compliance with the Policies and Training.
74. The independent auditor must issue a written audit report (the
Audit Report) annually to UBS and the Affiliated QPAM to which the
audit applies, that describes the procedures performed by the auditor
in connection with its examination. Further, the Affiliated QPAMs must
promptly address any instance of noncompliance identified by the
auditor and must promptly address or prepare a written plan of action
to address any determination as to the adequacy of the Policies and
Training and the auditor's recommendations, if any, with respect to
strengthening the Policies and Training of the respective Affiliated
QPAM. The Audit Report must be provided to the Department annually by
the Affiliated QPAM, and the Department will make the Audit Report part
of the public record each year regarding this five-year exemption.
75. This proposed exemption further requires the General Counsel,
or one of the three most senior executive officers of the Affiliated
QPAM to which the Audit Report applies, to certify in writing and under
penalty of perjury that the officer has reviewed the Audit Report and
the exemption, and the Affiliated QPAM has addressed, corrected, and
remedied (or has an appropriate written plan to address) any identified
instance of noncompliance or inadequacy regarding the Policies and
Training identified in the Audit Report.
76. With respect to any arrangement, agreement, or contract between
an Affiliated QPAM and a Covered Plan, this proposal requires each
Affiliated QPAM to agree and warrant: (a) to comply with ERISA and the
Code, including the standards of prudence and loyalty set forth in
ERISA section 404; (b) to refrain from engaging in prohibited
transactions that are not otherwise exempt; (c) to indemnify and hold
harmless the Covered Plan for any actual losses resulting directly
from, among other things, the Affiliated QPAM's violation of the
conditions for this exemption, prohibited transactions, and ERISA's
fiduciary duties; (d) with narrow exceptions, to not restrict the
ability of such Covered Plan to terminate or withdraw from its
arrangement with the Affiliated QPAM with respect to any investment in
a separately managed account or pooled fund subject to ERISA and
managed by such QPAM; (e) with narrow exceptions, to not impose any
fees, penalties, or charges for such termination or withdrawal; and (f)
to not include exculpatory provisions disclaiming or otherwise limiting
the liability of the Affiliated QPAM for a violation of such
agreement's terms.
77. Each Affiliated QPAM must provide a notice of its obligations
under this exemption to each applicable Covered Plan, by the dates
specified in the exemption. Each Affiliated QPAM also must provide to
each applicable sponsor and beneficial ]owner of a Covered Plan a copy
of the proposal and final notice of the exemption as published in the
Federal Register, a separate summary describing the facts that led to
each Conviction, and a prominently displayed statement that each
Conviction results in a failure to meet a condition in PTE 84-14 and an
individual exemption, which must be identified, by the dates specified
in the exemption.
78. This proposed exemption requires each Affiliated QPAM to
maintain a designated senior compliance officer (the Compliance
Officer) who will be responsible for compliance with the Policies and
Training requirements described in this proposed exemption. The
Compliance Officer must conduct a review, for the twelve-month period
specified below (the Exemption Review), to determine the adequacy and
effectiveness of the implementation of the Policies and Training and
issue a written report (the Exemption Report) on the findings.
79. This proposed exemption requires UBS to impose internal
procedures, controls, and protocols on each Misconduct Entity to reduce
the likelihood of any recurrence of conduct that is the subject of the
Criminal Activity.
Statutory Findings
80. ERISA section 408(a) provides, in part, that the Department may
not grant an exemption unless the Department finds that the exemption
is administratively feasible, in the interest of affected plans and of
their participants and beneficiaries, and protective of the rights of
such participants and beneficiaries. These criteria are discussed
below.
81. ``Administratively Feasible.'' The Department has tentatively
determined that the proposal is administratively feasible for the
Department, because among other things, a qualified independent auditor
will be engaged by the Affiliated QPAM to perform an in-depth annual
audit covering each Affiliated QPAM's compliance with the
[[Page 49224]]
terms of the exemption, and a corresponding written audit report will
be provided to the Department and be made available to the public.
Further, detailed periodic reports will be made to the Department and
to Covered Plan fiduciaries.
82. ``In the interest of.'' The Department has tentatively
determined that the proposed exemption is in the interests of the
participants and beneficiaries of affected Covered Plans. The
Department understands based on representations from the Applicant,
that if the requested exemption is denied, Covered Plans may be forced
to find other managers and may be deprived of the investment management
services that these plans expected to receive when they appointed these
managers. Loss of the exemption 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, even after the disclosures
of the earlier Covered Convictions, the 2013 UBS Conviction, and the FX
Misconduct pursuant to the individual exemptions the managers
previously received. Additionally, the independent audit, while
untimely performed, found no other violation by the UBS QPAMs of the
terms of PTE 2023-14.
83. ``Protective of.'' The Department has tentatively determined
that the proposed exemption is protective of the interests of the
participants and beneficiaries of affected Covered Plans. As described
above, the proposed exemption imposes a suite of affirmative
requirements and obligations upon the Affiliated QPAMs that include but
are not limited to: (a) the maintenance of the Policies; (b) the
maintenance 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 the Affiliated QPAMs; (e) specific
notices and disclosures concerning the circumstances necessitating the
need for exemptive relief and the Affiliated QPAMs' obligations under
this proposed exemption; and (f) the designation of a Compliance
Officer with responsibility to ensure compliance with the Policies and
Training requirements under this proposed exemption, and the Compliance
Officer's completion of an Exemption Review and corresponding Exemption
Report. The Department notes that this exemption includes all
conditions imposed upon UBS in PTE 2023-14 as well as certain
modifications described above designed to enhance the protections
required for Covered Plans.
Summary
84. This proposed five-year exemption would provide prospective
relief from certain restrictions set forth in ERISA section 406 and
Code Section 4975(c)(1). No relief or waiver of a violation of any
other law is provided by the exemption. The relief in this proposed
five-year exemption would terminate in the event that an entity within
the UBS corporate structure is convicted of any crime covered by PTE
84-14 Section I(g) (other than a Covered Conviction), or any term of
PTE 84-14, as amended, is violated. In such event, and as described
above, the UBS QPAMs would have to comply with the requirements of
amended PTE 84-14 for additional relief.
85. When interpreting and implementing this exemption, the
Applicant and the relevant QPAM should resolve any ambiguities
considering the exemption's protective purposes. To the extent
additional clarification is necessary, these persons or entities should
contact EBSA's Office of Exemption Determinations by email (e-
<a href="/cdn-cgi/l/email-protection" class="__cf_email__" data-cfemail="8ae5efeecaeee5e6a4ede5fc">[email protected]</a>) or phone (202-693-8540).
86. Based on the conditions that are included in this proposed
exemption, the Department has tentatively determined that the
prospective relief sought by the Applicant would satisfy the statutory
requirements for an individual exemption under ERISA section 408(a) and
Code section 4975(c)(2) if the Applicant submits sufficient additional
information the Department is requiring the Applicant to provide in its
comment response to this proposed exemption.
87. This exemption proposes conditions that would apply during the
five-year period from June 12, 2024, to June 11, 2029. In addition, and
as explained in detail above, the Department seeks comments on whether
to include retroactive relief for the period between June 12, 2023 to
June 12, 2024 (the PTE 2023-14 Period). In order for the Department to
determine whether UBS should receive retroactive relief during the PTE
2023-14 Period, UBS must provide a detailed statement in a comment to
this proposed exemption that demonstrates a grant of retroactive relief
would be consistent with the Department's requirements for such relief
as set forth in 29 CFR 2570.35(d) during the PTE 2023-14 Period.
Notice to Interested Persons
UBS will provide notice of this proposed exemption to its Covered
Plan clients by first class mail or email within two days after the
publication of the notice of proposed exemption in the Federal
Register. The notice of this proposed of exemption will contain a
supplemental statement, as required pursuant to 29 CFR 2570.43(a)(2)
and a Summary the Proposed Exemption which includes information
regarding the non-compliance in the PTE 2023-14 Period. The
supplemental statement will inform interested persons of their right to
comment on and to request a hearing with respect to the pending
exemption. Written comments and hearing requests are due within 32 days
after publication of this notice of proposed exemption in the Federal
Register. The Department will make all comments 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 Social Security number or an unlisted phone number)
or confidential business information that you do not want publicly
disclosed. All comments may be posted on the internet and can be
retrieved by most internet search engines.
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under ERISA section 408(a) and/or Code section 4975(c)(2) does not
relieve a fiduciary or other party in interest or disqualified person
from certain other provisions of ERISA and/or the Code, including any
prohibited transaction provisions to which the exemption does not apply
and the general fiduciary responsibility provisions of ERISA section
404, which, among other things, require a fiduciary to discharge his
duties respecting the plan solely in the interest of the participants
and beneficiaries of the plan and in a prudent fashion in accordance
with ERISA section 404(a)(1)(B); nor does it affect the requirement of
Code section 401(a) that 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
[[Page 49225]]
protective of the rights of participants and beneficiaries of the plan;
(3) The proposed exemption, if granted, will be supplemental to,
and not in derogation of, any other provisions of ERISA and/or the
Code, including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction; and
(4) The proposed exemption, if granted, will be subject to the
express condition that the material facts and representations contained
in each application are true and complete, and that each application
accurately describes all material terms of the transaction which is the
subject of the exemption.
Proposed Five-Year Exemption
The Department is considering granting this 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 29 CFR part 2570, subpart B (89 FR 4662, January 24,
2024)).\29\ 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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\29\ For purposes of the five-year exemption, references to
ERISA section 406, unless otherwise specified, should be read to
refer as well to the corresponding provisions of Code section 4975.
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Section I. Definitions
(a) Names of Certain Corporate Entities:
(1) The term ``CSAG'' means Credit Suisse AG, which was 100% owned
by Credit Suisse Group AG, before UBS AG acquired Credit Suisse Group
AG.
(2) The term ``CSAM LLC'' means Credit Suisse Asset Management,
LLC. On May 1, 2024, CSAM LLC was merged into UBS Americas, with UBS
Americas as the surviving entity.
(3) The term ``CSSEL'' means Credit Suisse Securities (Europe)
Limited an indirectly a wholly owned subsidiary of UBS Group AG.
(4) The term ``UBS'' means UBS AG which is a wholly owned
subsidiary of UBS Group AG.
(5) The term ``UBS Americas'' means UBS Asset Management (Americas)
LLC and is wholly owned by UBS Americas, Inc., a wholly owned
subsidiary of UBS AG.
(6) The term ``UBS Europe'' means UBS Europe SE. UBS Europe is the
successor to UBS (France) S.A. UBS (France) S.A. was a wholly owned
subsidiary of UBS under the laws of France until 2023. In July of 2023,
UBS France S.A. merged into UBS Europe and set up a branch in France
called UBS Europe SE France Branch.
(7) The term ``UBS Hedge Fund Solutions LLC'' was formerly known as
UBS Alternative and Quantitative Investments, LLC and is wholly owned
by UBS Americas Holding LLC, a wholly owned subsidiary of UBS.
(8) The term ``UBS Securities Japan'' means UBS Securities Japan
Co. Ltd, a wholly owned subsidiary of UBS incorporated under the laws
of Japan.
(b) The term ``Affiliated QPAM'' means: UBS Americas and UBS Hedge
Fund Solutions LLC, and any future entity within the Asset Management
or the Global Wealth Management Americas U.S. divisions of UBS that
qualifies as a ``qualified professional asset manager'' (as defined in
Section VI(a) of PTE 84-14) and that relies on the relief provided by
PTE 84-14, and with respect to which UBS is an ``affiliate'' (as
defined in Part VI(d) of PTE 84-14).\30\ The term Affiliated QPAM
excludes a Misconduct Entity.
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\30\ UBS represents that UBS O'Connor LLC and UBS Realty
Investors LLC are entities under the UBS corporate umbrella that
currently offer investment products which are accessible by ERISA-
covered plans, but do not currently rely on Class PTE 84-14 when
managing those products.
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(c) The term ``Criminal Activity'' means the Covered Convictions,
the 2013 UBS Conviction, and the FX Misconduct.
(d) The term ``Covered Convictions'' means (1) the judgment of
conviction against CSAG for one count of conspiracy to violate section
7206(2) of the Internal Revenue Code in violation of Title 18, United
States Code, Section 371, that was entered in the District Court for
the Eastern District of Virginia in Case Number 1:14-cr-188-RBS, on
November 21, 2014 (the ``2014 CSAG Conviction''); (2) the judgment of
conviction against CSSEL in Case Number 1:21-cr-00520-WFK (the ``2022
CSSEL Conviction''); (3) the judgment of conviction against UBS in case
number 3:15-cr-00076-RNC in the U.S. District Court for the District of
Connecticut for one count of wire fraud in violation of Title 18,
United States Code, Sections 1343 and 2 in connection with UBS's
submission of Yen London Interbank Offered Rates and other benchmark
interest rates between 2001 and 2010; and (4) the judgment of
conviction on February 20, 2019, against UBS and UBS France in case
Number 1105592033 in the French First Instance Court (the ``2019 UBS
France Conviction'').
(e) The term ``2013 UBS Conviction'' means the judgment of
conviction against UBS Securities Japan Co. Ltd. in case number 3:12 cr
00268 RNC in the U.S. District Court of the District of Connecticut for
one count of wire fraud in violation of Title 18, United States Code,
sections 1343 and 2 in connection with submission of YEN London
Interbank Offered Rates and other benchmark interest rates.
(f) The term ``FX Misconduct'' means the conduct engaged in by UBS
personnel described in Exhibit 1 of the Plea Agreement (Factual Basis
for Breach) entered into between UBS and the Department of Justice
Criminal Division, on May 20, 2015, in connection with Case Number
3:15-cr-00076-RNC filed in the US District Court for the District of
Connecticut.
(g) 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 an
Affiliated QPAM relies on PTE 84-14, or with respect to which an
Affiliated QPAM (or any UBS affiliate) 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 the
Affiliated QPAM 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. Notwithstanding the above, an Affiliated
QPAM may disclaim reliance on QPAM status or PTE 84-14 in a written
modification of a contract, arrangement, or agreement with an ERISA-
covered plan or IRA, where: the modification is made in a bilateral
document signed by the client; the client's attention is specifically
directed toward the disclaimer; and the client is advised in writing
that, with respect to any transaction involving the client's assets,
the Affiliated QPAM will not represent that it is a QPAM, and will not
rely on the relief described in PTE 84-14.
(h) The term ``Exemption Period'' means the period beginning on
June 12, 2024, and ending on June 11, 2029;
(i) The term ``Misconduct Entity'' means any one of the following:
an entity subject to one of the Covered Convictions, i.e., UBS, UBS
France (recently merged into UBS Europe), CSAG and CSSEL; the entity
subject to the 2013 UBS Conviction, i.e., UBS Securities Japan; or an
entity that was
[[Page 49226]]
the subject of the FX Misconduct, i.e., UBS.
(j) The term ``Related QPAM'' means any current or future
``qualified professional asset manager'' (as defined in Section VI(a)
of PTE 84-14) that relies on the relief provided by PTE 84-14, and with
respect to which UBS owns a direct or indirect five (5) percent or more
interest, but with respect to which a Misconduct Entity is not an
``affiliate'' (as defined in section VI(d)(1) of PTE 84-14). The term
``Related QPAM'' excludes a Misconduct Entity.
(k) The term ``best knowledge,'' ``to the best of one's
knowledge,'' ``best knowledge at that time,'' and other similar ``best
knowledge'' terms shall include matters that are known to the
applicable individual or should be known to such individual upon the
exercise of such individual's due diligence required under the
circumstances, and, with respect to an entity other than a natural
person, such term includes matters that are known to the directors and
officers of the entity or should be known to such individuals upon the
exercise of such individuals' due diligence required under the
circumstances.
(l) The term ``UBS Seconded Employee'' means, an individual
nominally employed by a Misconduct Entity who performs work on behalf
of a UBS QPAM; provided that such UBS QPAM is solely responsible for
the management and control of the employee's job activities performed
on behalf of such QPAM. Notwithstanding the preceding sentence, the UBS
QPAM must be solely responsible for the establishment of the employee's
job duties and terms of employment (including compensation, promotions,
and benefits); and must have supervisory responsibility with respect
to, among other things, the employee's performance, training, and
disciplinary actions.
(m) The term ``UBS QPAMs'' means, individually or collectively, the
Affiliated QPAMs and/or the Related QPAMs.
(n) The ``conduct'' of any person or entity that is the ``subject
of'' the Criminal Activity encompasses any misconduct of CSAG, CSSEL,
UBS, UBS France (later merged with UBS Europe), UBS Securities Japan,
and/or their personnel: (i) that is described in Exhibit 3 to the Plea
Agreement entered into between UBS and the Department of Justice
Criminal Division, on May 20, 2015, in connection with case number
3:15-cr-00076-RNC; (ii) that is described in Exhibits 3 and 4 to the
Plea Agreement entered into between UBS Securities Japan and the
Department of Justice Criminal Division, on December 19, 2012, in
connection with case number 3:12-cr-00268-RNC; (iii) that is described
in Exhibit 1 of the Plea Agreement (Factual Basis for Breach) entered
into between UBS and the Department of Justice Criminal Division, on
May 20, 2015, in connection with Case Number 3:15-cr-00076-RNC filed in
the US District Court for the District of Connecticut; (iv) that is the
basis of the 2019 UBS France Conviction; and (v) that is the subject of
the 2014 CSAG Conviction and the 2022 CSSEL Conviction described in
Section I(c)(1) and (c)(2).
(o) The term ``participate in'' when used to describe an individual
or entity's participation in the Criminal Activity refers not only to
active participation in the Criminal Activity but also includes an
individual or entity's knowledge or approval of the Criminal Activity,
without taking active steps to prohibit such conduct, such as reporting
the conduct to the individual's supervisors, and to the Board of
Directors.
Section II. Covered Transactions
If this proposed exemption is granted, the UBS QPAMs would not be
precluded from relying on the exemptive relief provided by Prohibited
Transaction Exemption 84-14 (PTE 84-14) \31\ during the Exemption
Period, notwithstanding the ``Covered Convictions,'' provided that the
definitions in Section I and the conditions in Section III are
satisfied.
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\31\ 49 FR 9494 (March 13, 1984), as corrected at 50 FR 41430,
(Oct. 10, 1985), as amended at 70 FR 49305 (Aug. 23, 2005), as
amended at 75 FR 38837 (July 6, 2010), and as amended at 89 FR 23090
(April 3, 2024).
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Section III. Conditions
(a) The UBS QPAMs (including their officers, directors, agents
other than the Misconduct Entities, employees of such QPAMs, and UBS
Seconded Employees) did not know or did not have reason to know of and
did not participate in the conduct underlying the Criminal Activity.
Further, any other party engaged on behalf of the UBS QPAMs 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 underlying the Criminal
Activity.
(b) The UBS QPAMs (including their officers, directors, agents
other than the Misconduct Entities, employees of such QPAMs, and UBS
Seconded Employees) did not receive direct compensation, or knowingly
receive indirect compensation, in connection with the criminal conduct
that is the subject of the Criminal Activity. Further, any other party
engaged on behalf of the UBS QPAMs 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 Activity;
(c) The Affiliated QPAMs do not currently and will not in the
future employ or knowingly engage any of the individuals who
participated in the criminal conduct underlying the Criminal Activity;
(d) At all times during the Exemption Period, no Affiliated QPAM
will use its authority or influence to direct an ``investment fund''
(as defined in Section VI(b) of PTE 84-14) that is subject to ERISA or
the Code and managed by such Affiliated QPAM with respect to one or
more Covered Plans, to enter into any transaction with a Misconduct
Entity or to engage a Misconduct Entity 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. An Affiliated QPAM will not fail this condition
solely because:
(1) A UBS (or successor) affiliate serves as a local sub-custodian
that is selected by an unaffiliated global custodian that, in turn, is
selected by someone other than a UBS QPAM; or
(2) Services are provided by UBS Seconded Employees;
(e) Any failure of an Affiliated QPAM to satisfy Section I(g) of
PTE 84-14 arose solely from the Covered Convictions;
(f) A UBS QPAM did not exercise authority over the assets of any
plan subject to Part 4 of Title I of ERISA (an ``ERISA-covered plan'')
or Code section 4975 (an ``IRA'') in a manner that it knew or should
have known would further the criminal conduct underlying the Criminal
Activity; or cause the UBS QPAM or its affiliates to directly or
indirectly profit from the criminal conduct underlying the Criminal
Activity;
(g) No Misconduct Entity will 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 ERISA-covered Plan and IRA assets, except that each
may act as such a fiduciary with respect to employee benefit plans
sponsored for its own employees or employees of an affiliate. No
Misconduct Entity will be treated as violating the conditions of the
[[Page 49227]]
exemption solely because it acted as an investment advice fiduciary
within the meaning of ERISA section 3(21)(A)(ii) or Code section
4975(e)(3)(B);
(h)(1) Each Affiliated QPAM must maintain, adjust (to the extent
necessary), implement, and follow the written policies and procedures
described below (Policies).\32\ The Policies must require and must be
reasonably designed to ensure that:
---------------------------------------------------------------------------
\32\ This exemption does not preclude the UBS QPAMs and CS
Affiliated QPAM from maintaining separate Policies provided that the
Policies comply with this exemption.
---------------------------------------------------------------------------
(i) The asset management decisions of the QPAM are conducted
independently of the corporate and management and business activities
of each Misconduct Entity, and without considering any fee a related
local sub-custodian may receive from those decisions. This condition
does not preclude an Affiliated QPAM, as defined in Section I(b)(1),
from receiving publicly available research and other widely available
information from a UBS affiliate;
(ii) The QPAM fully complies with ERISA's fiduciary duties, and
with ERISA and the Code's prohibited transaction provisions, in each
case as applicable with respect to each Covered Plan, and does not
knowingly participate in any violation of these duties and provisions
with respect to Covered Plans;
(iii) The QPAM does not knowingly participate in any other person's
violation of ERISA or the Code with respect to Covered Plans;
(iv) Any filings or statements made by the QPAM to regulators,
including but not limited to, the Department, the Department of the
Treasury, the Department of Justice, and the Pension Benefit Guaranty
Corporation, on behalf of or in relation to Covered Plans, are
materially accurate and complete, to the best of such QPAM's knowledge
at that time;
(v) To the best of its knowledge at that time, the QPAM 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; and
(vi) The QPAM complies with the terms of this five-year exemption;
(2) Any violation of, or failure to comply with an item in
subparagraphs (h)(1)(ii) through (vi), is corrected as soon as
reasonably possible upon discovery, or as soon after the QPAM
reasonably should have known of the noncompliance (whichever is
earlier), and any such violation or compliance failure not so corrected
is reported, upon the discovery of such failure to so correct, in
writing. This report must be made to the head of compliance and the
general counsel (or their functional equivalent) of the relevant QPAM
that engaged in the violation or failure, and the independent auditor
responsible for reviewing compliance with the Policies. A QPAM will not
be treated as having failed to develop, implement, maintain, or follow
the Policies, if it corrects any instance of noncompliance as soon as
reasonably possible upon discovery, or as soon as reasonably possible
after the QPAM reasonably should have known of the noncompliance
(whichever is earlier), and provided that it adheres to the reporting
requirements set forth in this subparagraph (2);
(3) Each Affiliated QPAM must maintain, adjust (to the extent
necessary), and implement or continue a program of training during the
Exemption Period (the Training) that is conducted at least annually for
all relevant Affiliated QPAM asset/portfolio management, trading,
legal, compliance, and internal audit personnel.\33\ The Training must:
---------------------------------------------------------------------------
\33\ The exemption does not preclude an UBS QPAM from
maintaining separate training programs provided each training
program complies with this exemption.
---------------------------------------------------------------------------
(i) At a minimum, cover the Policies, ERISA and Code compliance
(including applicable fiduciary duties and the prohibited transaction
provisions), ethical conduct, the consequences for not complying with
the conditions of this exemption (including any loss of exemptive
relief provided herein), and the requirement for prompt reporting of
wrongdoing;
(ii) Be conducted by a professional who has been prudently selected
and who has appropriate technical training and proficiency with ERISA
and the Code to perform the tasks required by this exemption; and
(iii) Be conducted in-person, electronically, or via a website;
(i)(1) Each Affiliated QPAM submits to an audit 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 each Affiliated QPAM's compliance
with, the Policies and Training described above in Section (h). The
audit requirement must be incorporated in the Policies. The initial
audit under this exemption must cover the period that begins on June
12, 2024, and ends on June 11, 2025, and the audit must be completed by
Thursday, December 11, 2025. The second audit must cover the period
that begins on June 12, 2025, and ends on June 11, 2026, and must be
completed by Friday, December 11, 2026. The third audit must cover the
period that begins on June 12, 2026, and ends on June 11, 2027, and
must be completed by Monday, December 13, 2027. The fourth audit must
cover the period that begins on June 12, 2027, and ends on June 11,
2028, and must be completed by Monday, December 11, 2028. The fifth
audit must cover the period that begins on June 12, 2028, and ends on
June 11, 2029, and must be completed by Tuesday, December 11, 2029.
Notwithstanding the audit periods described above, the audit required
under PTE 2023-14 must be completed for the prior period of June 12,
2023, through June 11, 2024 and delivered to the Department in
accordance with the terms of that exemption. The prior exemption audit
report(s) must be submitted in accordance with section III(i)(9) below;
(2) Within the scope of the audit and to the extent necessary for
the auditor, in its sole opinion, to complete its audit and comply with
the conditions for relief described herein, and only to the extent such
disclosure is not prevented by state or federal statute, or involves
communications subject to attorney-client privilege, each Affiliated
QPAM and, if applicable, UBS, must grant the auditor unconditional
access to its business, including, but not limited to: its computer
systems; business records; transactional data; workplace locations;
training materials; and personnel. Such access is limited to
information relevant to the auditor's objectives as specified by the
terms of this exemption;
(3) The auditor's engagement must specifically require the auditor
to determine whether each Affiliated QPAM has developed, implemented,
maintained, and followed the Policies in accordance with the conditions
of this one-year exemption, and has developed and implemented the
Training, as required herein;
(4) The auditor's engagement must specifically require the auditor
to test each Affiliated QPAM's operational compliance with the Policies
and Training. In this regard, the auditor must test, for each
Affiliated QPAM, a sample of such Affiliated QPAM's transactions
involving Covered Plans, sufficient in size and nature to afford the
auditor a reasonable basis to determine such Affiliated QPAM's
operational compliance with the Policies and Training;
(5) For the audit, on or before the end of the relevant period
described in
[[Page 49228]]
Section III(i)(1) for completing the audit, the auditor must issue a
written report (the Audit Report) to UBS and the Affiliated QPAM to
which the audit applies that describes the procedures performed by the
auditor in connection with its examination. The auditor, at its
discretion, may issue a single consolidated Audit Report that covers
all the Affiliated QPAMs. The Audit Report must include the auditor's
specific determinations regarding:
(i) The adequacy of each Affiliated QPAM's Policies and Training;
each Affiliated QPAM's compliance with the Policies and Training; the
need, if any, to strengthen such Policies and Training; and any
instance of the respective Affiliated QPAM's noncompliance with the
written Policies and Training described in Section III(h) above. The
Affiliated QPAM must promptly address any noncompliance and must
promptly address or prepare a written plan of action to address any
determination as to the adequacy of the Policies and Training and the
auditor's recommendations (if any) with respect to strengthening the
Policies and Training of the respective Affiliated QPAM. Any action
taken or the plan of action to be taken by the respective Affiliated
QPAM must be included in an addendum to the Audit Report (such addendum
must be completed prior to 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 of submission of the Audit
Report, the following period's Audit Report must state whether the plan
was satisfactorily completed. Any determination by the auditor that an
Affiliated QPAM has implemented, maintained, and followed sufficient
Policies and Training must not be based solely or in substantial part
on an absence of evidence indicating noncompliance. In this last
regard, any finding that an Affiliated QPAM has complied with the
requirements under this subparagraph must be based on evidence that
each Affiliated QPAM has implemented, maintained, and followed the
Policies and Training required by this exemption. Furthermore, the
auditor must not solely rely on the Exemption Report created by 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 Exemption Review described in Section
III(m);
(6) The auditor must notify the respective Affiliated QPAM of any
instance of noncompliance identified by the auditor within five (5)
business days after such noncompliance is identified by the auditor,
regardless of whether the audit has been completed as of that date;
(7) With respect to the Audit Report, the General Counsel, or one
of the three most senior executive officers of the Affiliated QPAM to
which the Audit Report applies, must certify in writing, under penalty
of perjury, that the officer has reviewed the Audit Report and this
exemption; that, to the best of such officer's knowledge at the time,
such Affiliated QPAM has addressed, corrected, and remedied any
noncompliance and inadequacy or has an appropriate written plan to
address any inadequacy regarding the Policies and Training identified
in the Audit Report. Such certification must also include the
signatory's determination that, to the best of such officer's knowledge
at the time, the Policies and Training in effect at the time of signing
are adequate to ensure compliance with the conditions of this exemption
and with the applicable provisions of ERISA and the Code;
(8) The Risk Committee of UBS's Board of Directors is provided a
copy of the Audit Report; and a senior executive officer of UBS's
Compliance and Operational Risk Control function must review the Audit
Report for each Affiliated QPAM and must certify in writing, under
penalty of perjury, that such officer has reviewed the Audit Report;
(9) Each Affiliated QPAM provides its certified Audit Report, by
regular mail to: Office of Exemption Determinations (OED), 200
Constitution Avenue NW, Washington, DC 20001; or via email to <a href="/cdn-cgi/l/email-protection#b1d49cfef4f5f1d5dedd9fd6dec7"><span class="__cf_email__" data-cfemail="680d45272d2c280c0704460f071e">[email protected]</span></a>. This delivery must take place no later than 45 days
following completion of the Audit Report. The Audit Reports will be
made part of the public record regarding this five-year exemption.
Furthermore, each Affiliated QPAM must make its Audit Reports
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) The auditor must provide the Department, upon request, for
inspection and review, access to all the workpapers created and used in
connection with the audit, provided such access and inspection is
otherwise permitted by law;
(11) UBS must notify OED no later than August 12, 2024, of the
auditor selected to complete audits required by Section III(i)(1) above
for the periods covering June 12, 2024, through June 11, 2029. Any
engagement agreement with an auditor to perform the audit required by
this exemption that is entered into subsequent to the effective date of
this exemption must be submitted to OED no later than two months after
the execution of such agreement;
(12) For only the initial audit required by Section III(i)(1) above
for the period covering June 12, 2024, through June 11, 2025, the
auditor must consult with the auditors who performed the audits
required pursuant to PTE 2023-14 for the period of June 12, 2023,
through June 11, 2024, unless such auditor is the same auditor selected
under paragraph 11 of this subsection. UBS must notify OED if for any
reason the consultation required by this paragraph 12 cannot occur and
must provide an explanation for why the consultation cannot occur. Such
consultation may, but need not, occur for subsequent audits;
(13) UBS must notify the Department of a change in the independent
auditor no later than two months after the engagement of a substitute
or subsequent auditor and must provide an explanation for the
substitution or change including a description of any material disputes
between the terminated auditor and UBS;
(j) As of the effective date of this five-year exemption, with
respect to any arrangement, agreement, or contract between an
Affiliated QPAM and a Covered Plan, the QPAM agrees and warrants to
Covered Plans:
(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
ERISA-covered plan and IRA to the extent that ERISA section 404 is
applicable;
(2) To indemnify and hold harmless the Covered Plan for any actual
losses resulting directly from the QPAM's violation of any conditions
of this exemption, ERISA's fiduciary duties, as applicable, and of the
prohibited transaction provisions of ERISA and the Code, as applicable;
a breach of contract by the QPAM; or any claim arising out of the
failure of such QPAM to qualify for the exemptive relief provided by
PTE 84-14 as a result of a violation of Section I(g) of PTE 84-14,
other than a Conviction covered under this exemption. The term ``actual
losses'' includes, but is not limited to, losses
[[Page 49229]]
and related costs arising from unwinding transactions with third
parties and from transitioning Plan assets to an alternative asset
manager as well as costs associated with any exposure to excise taxes
under Code section 4975 as a result of a QPAM's inability to rely upon
the relief in PTE 84-14;
(3) Not to require (or otherwise cause) the Covered Plan to waive,
limit, or qualify the liability of the QPAM for violating ERISA or the
Code for engaging in prohibited transactions;
(4) Not to restrict the ability of the Covered Plan to terminate or
withdraw from its arrangement with the QPAM, with respect to any
investment in a separately-managed account or pooled fund subject to
ERISA and managed by such QPAM, with the exception of reasonable
restrictions, appropriately disclosed in advance, that are specifically
designed to ensure equitable treatment of all investors in a pooled
fund in the event such withdrawal or termination may have adverse
consequences for all other investors. In connection with any such
arrangement 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 an ERISA-covered plan's or IRA's investment,
and such restrictions must be applicable to all such investors and be
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 such withdrawal or termination may have
adverse consequences for all other investors, provided that such fees
are applied consistently and in a like manner to all such investors;
(6) Not to include exculpatory provisions disclaiming or otherwise
limiting liability of the QPAM for a violation of such agreement's
terms. To the extent consistent with ERISA section 410, however, this
provision does not prohibit disclaimers for liability caused by an
error, misrepresentation, or misconduct of a plan fiduciary or other
party hired by the plan fiduciary who is independent of UBS (and
affiliates), or damages arising from acts outside the control of the
Affiliated QPAM; and
(7) Within 120 days after the effective date of this five-year
exemption, each QPAM must provide a notice of its obligations under
this Section III(j) to each Covered Plan. For prospective Covered Plans
that enter into a written asset or investment management agreement with
a QPAM on or after a date that is 120 days after the effective date of
this exemption, the QPAM must agree to its obligations under this
Section III(j) in an updated investment management agreement between
the QPAM and such clients or other written contractual agreement.
Notwithstanding the above, a QPAM will not violate the condition solely
because a Covered Plan refuses to sign an updated investment management
agreement. For new Covered Plans that were provided an investment
management agreement prior to the effective date of this exemption,
returning it within 120 days after the effective date of this
exemption, and that signed investment management agreement requires
amendment to meet the terms of the exemption, the QPAM may provide the
new Covered Plan with amendments that need not be signed with any
documents required by this subsection (j) within ten (10) business days
after receipt of the signed agreement.
(k) Within 60 days after the publication date of the notice of
final exemption in the Federal Register, each Affiliated QPAM provides
notice of the proposed and final exemption as published in the Federal
Register, along with a summary describing the facts that led to the
Covered Convictions (the Summary), which has been submitted to the
Department, and a prominently displayed statement (the Statement) that
the Covered Convictions result 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 an
Affiliated QPAM, or the sponsor of an investment fund in any case where
an Affiliated QPAM acts as a sub-adviser to the investment fund in
which such ERISA-covered plan and IRA invests. The Summary will be
submitted to OED before it is distributed by each Affiliated QPAM. All
prospective Covered Plan clients that enter into a written asset or
investment management agreement with an Affiliated QPAM 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 the Affiliated
QPAM. The notices may be delivered electronically (including by an
email that has a link to the one-year exemption).
(l)(1) The Affiliated QPAMs must comply with each condition of PTE
84-14, as amended, with the sole exception of the violation of Section
I(g) of PTE 84-14 that is attributable to the Covered Convictions. If,
during the Exemption Period, an entity within UBS's corporate structure
is convicted of a crime described in Section I(g) of PTE 84-14 (other
than the Covered Convictions), relief in this exemption would terminate
immediately.
(m)(1) Within 60 days after the date of publication of the
exemption, each Affiliated QPAM must designate a senior compliance
officer (the Compliance Officer) who will be responsible for compliance
with the Policies and Training requirements described herein. For
purposes of this condition (m), each relevant line of business within
an Affiliated QPAM may designate its own Compliance Officer(s).
Notwithstanding the above, the appointed Compliance Officer must not be
a person who: (i) participated in the criminal conduct underlying the
Criminal Activity, or knew of, or (ii) had reason to know of, the
Criminal Activity without taking active documented steps to stop the
misconduct;
The Compliance Officer must conduct a review of each twelve-month
period of the Exemption Period (the Exemption Review), to determine the
adequacy and effectiveness of the implementation of the Policies and
Training.\34\ With respect to the Compliance Officer, the following
conditions must be met:
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\34\ Pursuant to PTE 2023-14, the Compliance Officer also must
conduct and complete an exemption review within three months of June
11, 2024.
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(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 compliance for the
applicable Affiliated QPAM.
(2) With respect to the Exemption Review, the following conditions
must be met:
(i) The Annual Exemption Review includes a review of the Affiliated
QPAM's compliance with and effectiveness of the Policies and Training
and of the following: any
[[Page 49230]]
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
time period; the most recent Audit Report issued pursuant to this
exemption or PTE 2023-14; any material change in the relevant business
activities of the Affiliated QPAMs; and any change to ERISA, the Code,
or regulations related to fiduciary duties and the prohibited
transaction provisions that may be applicable to the activities of the
Affiliated QPAMs;
(ii) The Compliance Officer prepares a written report for the
Exemption Review (an Exemption Report) that (A) summarizes their
material activities during the prior year; (B) sets forth any instance
of noncompliance discovered during the prior year, and any related
corrective action; (C) details any change to the Policies or Training
to guard against any similar instance of noncompliance occurring again;
and (D) makes recommendations, as necessary, for additional training,
procedures, monitoring, or additional and/or changed processes or
systems, and management's actions on such recommendations;
(iii) In the Exemption Report, the Compliance Officer must certify
in writing that to the best of his or her 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) the
Affiliated QPAMs have 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 UBS and to each Affiliated QPAM to which such report
relates, and to the head of compliance and the general counsel (or
their functional equivalent) of UBS, and the relevant Affiliated QPAM.
The Exemption Report 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 Annual Exemption Report, must cover the Exemption Period, and
the Annual Review, including the Compliance Officer's written Report,
must be completed within three (3) months following the end of the
period to which it relates;
(n) UBS imposes its internal procedures, controls, and protocols on
each Misconduct Entity to reduce the likelihood of any recurrence of
conduct that is the subject of the Criminal Activity;
(o) Relief in this exemption will terminate on the date that is six
months following the date that a U.S. regulatory authority makes a
final decision that UBS or an affiliate of either failed to comply in
all material respects with any requirement imposed by such regulatory
authority in connection with the Covered Convictions;
(p) Each Affiliated QPAM will maintain records necessary to
demonstrate that the conditions of this exemption have been met for six
(6) years following the date of any transaction for which the
Affiliated QPAM relies upon the relief in this exemption;
(q) During the Exemption Period, UBS 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 UBS 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 section 411 of ERISA via email addressed to <a href="/cdn-cgi/l/email-protection#26430b6963626642494a08414950"><span class="__cf_email__" data-cfemail="c2a7ef8d878682a6adaeeca5adb4">[email protected]</span></a>; 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
via email addressed to <a href="/cdn-cgi/l/email-protection#c5a0e88a808185a1aaa9eba2aab3"><span class="__cf_email__" data-cfemail="395c14767c7d795d5655175e564f">[email protected]</span></a>;
(r) Within 60 days after the effective date of this exemption, each
Affiliated QPAM, 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 the QPAM's written Policies developed in
connection with this exemption. If the Policies are thereafter changed,
each Covered Plan client must receive a new disclosure within six (6)
months following the end of the calendar year during which the Policies
were changed.\35\ 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;
---------------------------------------------------------------------------
\35\ If the Applicant meets this disclosure requirement through
Summary Policies, changes to the Policies shall not result in the
requirement for a new disclosure unless, as a result of changes to
the Policies, the Summary Policies are no longer accurate.
---------------------------------------------------------------------------
(s) An Affiliated QPAM will not fail to meet the terms of this
five-year exemption solely because a different Affiliated QPAM fails to
satisfy a condition for relief described in Section III(c), (d), (h),
(i), (j), (k), (m), (p), or (r); or if the independent auditor
described in Section III(i) fails to comply with a provision of the
exemption other than the requirement described in Section III(i)(11),
provided that such failure did not result from any actions or inactions
of UBS or its affiliates; and
(t) If the independent auditor or UBS or its affiliates learns of
any material noncompliance with a condition of this exemption, UBS must
send a notice (a ``Violation Notice'') to all affected Covered Plans
and the Department that prominently and conspicuously states or
describes: (1) UBS, or the UBS QPAM, as applicable, failed to meet the
terms of this exemption (and describe the failure), (2) the extent to
which UBS QPAMs have potentially been operating without an exemption
due to the failure, (3) whether UBS plans to apply for retroactive
relief from the Department for this failed condition; (4) any further
transactions engaged in by the UBS QPAMs on behalf of Covered Plans
that may be non-exempt prohibited transactions unless the Department
grants retroactive relief for the period in which the transactions
occurred; and (5) UBS must indemnify and hold harmless the Covered Plan
for: any actual losses resulting directly from the QPAM's failure to
comply with any conditions of this exemption, ERISA's fiduciary duties
and of the prohibited transaction provisions of ERISA and the Code, a
breach of contract by the QPAM, or any claim arising out of the failure
of such QPAM to qualify for the exemptive relief provided by PTE 84-14
as a result of a violation of PTE 84-14 Section I(g), other than a
Conviction covered under the exemption. The Violation Notice must be
sent to all affected Covered Plans and the Department within 14 days of
discovering the violation.
(u) All the material facts and representations set forth in the
Summary of Facts and Representations are true and accurate at all
times.
(v) Each UBS QPAM to develop written processes that clearly
describe: (1) how the QPAM identifies and quantifies ``actual losses''
for purposes of Section III(j)(2); and (2) how Covered Plans may
recover or avoid incurring the losses that the UBS QPAM must indemnify
or hold Covered Plans harmless from incurring pursuant to Section
III(j)(2). Each UBS QPAM must
[[Page 49231]]
develop these processes within 30 days after the date the Department
publishes a final exemption in the Federal Register.
Applicability Date: This exemption will be in effect for the period
beginning on June 12, 2024 and ending on June 11, 2029.
Signed at Washington, DC, this 5th day of June 2024.
George Christopher Cosby,
Director, Office of Exemption Determinations, Employee Benefits
Security Administration, U.S. Department of Labor.
[FR Doc. 2024-12746 Filed 6-10-24; 8:45 am]
BILLING CODE 4510-29-P
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</html>Indexed from Federal Register on June 11, 2024.
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.