Notice2025-01244
Proposed Exemption From Certain Prohibited Transaction Restrictions Involving Northern Trust Corporation (Together With its Current and Future Affiliates, Northern or the Applicant) Located in Chicago, IL
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
January 21, 2025
Effective
March 5, 2025
Issuing agencies
Labor DepartmentEmployee Benefits Security Administration
Abstract
This document provides notice of the pendency before the Department of Labor (the Department) of a proposed individual exemption from certain prohibited transaction restrictions of the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code of 1986 (the Code). The proposed exemption would allow certain entities with specified relationships to Northern Trust Fiduciary Services (Guernsey) Limited (NTFS) (hereinafter, the Northern QPAMs, as further defined in section I(e) of the operative language) to rely on the exemptive relief provided by Prohibited Transaction Class Exemption 84-14 (PTE 84-14 or the QPAM Exemption), notwithstanding the judgment of conviction (the Conviction) against NTFS for aiding and abetting tax fraud entered in France in the Paris Court of Appeal, French Special Prosecutor No. 1120392066, French Investigative Judge No. JIRSIF/11/12.
Full Text
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<title>Federal Register, Volume 90 Issue 12 (Tuesday, January 21, 2025)</title>
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[Federal Register Volume 90, Number 12 (Tuesday, January 21, 2025)]
[Notices]
[Pages 7174-7190]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2025-01244]
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
[Exemption Application No. D-12101]
Proposed Exemption From Certain Prohibited Transaction
Restrictions Involving Northern Trust Corporation (Together With its
Current and Future Affiliates, Northern or the Applicant) Located in
Chicago, IL
AGENCY: Employee Benefits Security Administration, Labor.
ACTION: Notice of proposed exemption.
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SUMMARY: This document provides notice of the pendency before the
Department of Labor (the Department) of a proposed individual exemption
from certain prohibited transaction restrictions of the Employee
Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue
Code of 1986 (the Code). The proposed exemption would allow certain
entities with specified relationships to Northern Trust Fiduciary
Services (Guernsey) Limited (NTFS) (hereinafter, the Northern QPAMs, as
further defined in section I(e) of the operative language) to rely on
the exemptive relief provided by Prohibited Transaction Class Exemption
84-14 (PTE 84-14 or the QPAM Exemption), notwithstanding the judgment
of conviction (the Conviction) against NTFS for aiding and abetting tax
fraud entered in France in the Paris Court of Appeal, French Special
Prosecutor No. 1120392066, French Investigative Judge No. JIRSIF/11/12.
DATES:
Exemption date: This proposed exemption would be in effect for a
period of five years beginning on March 5, 2025, and ending on March 4,
2030 (the Exemption Period).
Comments due: Written comments and requests for a public hearing on
the proposed exemption should be submitted to the Department by March
7, 2025.
ADDRESSES: All written comments and requests for a hearing should be
submitted to the Employee Benefits Security Administration (EBSA),
Office of Exemption Determinations, Attention: Application No. D-12101
via
[[Page 7175]]
email to <a href="/cdn-cgi/l/email-protection#97f2bad8d2d3d7f3f8fbb9f0f8e1"><span class="__cf_email__" data-cfemail="afca82e0eaebefcbc0c381c8c0d9">[email protected]</span></a> or online through <a href="https://www.regulations.gov">https://www.regulations.gov</a>.
Any such comments or requests should be sent by the end of the
scheduled comment period. The application for exemption (the
Application) 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, reachable by telephone at
(202) 693-8673. See SUPPLEMENTARY INFORMATION below for additional
information regarding comments.
FOR FURTHER INFORMATION CONTACT: Anna Mpras Vaughan of the Department,
telephone (202) 693-8565. (This is not a toll-free number.)
SUPPLEMENTARY INFORMATION:
Comments: Persons are encouraged to submit all comments
electronically without submitting paper versions. Comments should state
the nature of the person's interest in the proposed exemption and how
the person would be adversely affected by the exemption, if granted.
Any person who may be adversely affected by an exemption can request a
hearing on the exemption. A request for a hearing must state: (1) The
name, address, telephone number, and email address of the person making
the request; (2) the nature of the person's interest in the exemption
and the manner in which the person would be adversely affected by the
exemption; and (3) a statement of the issues to be addressed and a
general description of the evidence to be presented at the hearing. The
Department will grant a request for a hearing made in accordance with
the requirements above where a hearing is necessary to fully explore
material factual issues identified by the person requesting the
hearing. The Department would publish a notice announcing such hearing
in the Federal Register. The Department may decline to hold a hearing
if: (1) the request for the hearing does not meet the requirements
above; (2) the only issues identified for exploration at the hearing
are matters of law; or (3) the factual issues identified can be fully
explored through the submission of evidence in written (including
electronic) form.
Warning: All comments received will be included in the public
record without change and may be made available online at <a href="https://www.regulations.gov">https://www.regulations.gov</a>, including any personal information provided,
unless the comment includes information claimed to be confidential or
other information whose disclosure is restricted by statute. If you
submit a comment, EBSA recommends that you include your name and other
contact information in the body of your comment, but DO NOT submit
information that you consider to be confidential, or otherwise
protected (such as 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="https://www.regulations.gov">https://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="https://www.regulations.gov">https://www.regulations.gov</a>, your email address will be
automatically captured and included as part of the comment that is
placed in the public record and made available on the internet.
Proposed Exemption
The Department is considering granting the exemption pursuant to
its authority under ERISA section 408(a) and Code section 4975(c)(2),
and in accordance with the Department's exemption procedures.\1\ If the
Department grants a final exemption, the Northern QPAMs will not be
precluded from relying on the QPAM Exemption \2\ notwithstanding the
Conviction, provided the conditions and definitions set forth in the
exemption are met.
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\1\ 29 CFR part 2570, subpart B (75 FR 66637, 66644, October 27,
2011).
\2\ 49 FR 9494 (March 13, 1984), as corrected at 50 FR 41430
(October 10, 1985), as amended at 70 FR 49305 (August 23, 2005), as
amended at 75 FR 38837 (July 6, 2010), and as amended at 89 FR 23090
(April 3, 2024).
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This proposed exemption would provide relief from certain
restrictions set forth in ERISA sections 406 and 407.\3\ It would not,
however, provide relief from any other violation of law. Furthermore,
the Department cautions that the relief in this proposed exemption
would terminate immediately if, among other things, Northern or an
affiliate of Northern (as defined in section VI(d) of PTE 84-14) \4\ is
convicted of a crime covered by section I(g) of PTE 84-14 (other than
the Conviction) or any other violation occurs during the Exemption
Period. Although Northern could apply for a new exemption in that
circumstance, the Department would not be obligated to grant the
exemption.
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\3\ For purposes of this proposed exemption, references to
specific provisions of ERISA Title I, unless otherwise specified,
should be read to refer as well to the corresponding provisions of
Code section 4975. Further, this proposed exemption, if granted,
does not provide relief from the requirements of, or specific
sections of, any law not noted above.
\4\ PTE 84-14 section VI(d) defines the term ``affiliate'' for
purposes of section I(g) as ``(1) Any person directly or indirectly
through one or more intermediaries, Controlling, Controlled by, or
under Common Control with the person, (2) Any director of, Relative
of, or partner in, any such person, (3) Any corporation,
partnership, trust or unincorporated enterprise of which such person
is an officer, director, or a 5 percent or more partner or owner,
and (4) Any employee or officer of the person who-(A) Is a highly
compensated employee (as defined in Code section 4975(e)(2)(H)) or
officer (earning 10 percent or more of the yearly wages of such
person), or (B) Has direct or indirect authority, responsibility or
control regarding the custody, management or disposition of plan
assets.'' For purposes of this definition, section VI(e) defines the
terms ``Controlling,'' ``Controlled by,'' ``under Common Control
with,'' and ``Controls'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
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The terms of this proposed exemption have been specifically
designed to permit a plan to terminate its relationship with Northern
or an Affiliate in an orderly and cost-effective fashion in the event
of an additional conviction of them or a plan fiduciary determines that
it otherwise prudent for a plan to terminate its relationship with
Northern.
Summary of Facts and Represenations \5\
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\5\ The Summary of Facts and Representations is based on the
Applicant's representations and does not reflect factual findings or
opinions of the Department, unless indicated otherwise. The
Department notes that the availability of this exemption, if
granted, is subject to the express condition that the material facts
and representations contained in the Application (D-12101) are true
and complete, and accurately describe all material terms of the
transactions covered by this exemption. If there is any material
change in a transaction covered by this exemption, or in a material
fact or representation described in the Application, the exemption
will cease to apply as of the date of such change.
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Northern Trust Corporation (Northern)
1. Northern is a financial holding company that provides investment
management, asset and fund administration, fiduciary, and banking
services for corporations, institutions, and affluent individuals.
Northern conducts business through various U.S. and non-U.S.
subsidiaries, including The Northern Trust Company (the Bank), an
Illinois bank headquartered in Chicago, Illinois.
Northern QPAMS
2. Northern has several U.S. and non-U.S. affiliates that provide
investment management services. The Northern
[[Page 7176]]
affiliates that currently manage assets of plans subject to Part 4 of
Title I of ERISA (i.e., an ERISA-covered plan) or Code section 4975
(i.e., an IRA; together, a Covered Plan), \6\ collective investment
trusts and other commingled funds on a discretionary basis, and that
routinely rely on the QPAM Exemption to provide relief for party-in-
interest transactions, are:
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\6\ In each case, a Covered Plan is an ERISA-covered plan or an
IRA with respect to which Northern relies on PTE 84-14, or with
respect to which Northern has expressly represented that the manager
qualifies as a QPAM or relies on the QPAM class exemption (PTE 84-14
or the QPAM Exemption). A Covered Plan does not include an ERISA-
covered plan or IRA to the extent that Northern has expressly
disclaimed reliance on QPAM status or PTE 84-14 in entering into a
contract, arrangement, or agreement with the ERISA-covered plan or
IRA.
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<bullet> The Northern Trust Company (the Bank) acts as trustee for
plans subject to Title I of ERISA and IRAs and other accounts subject
to ERISA or Code section 4975. The Bank also maintains ERISA-governed
collective investment trusts and commingled vehicles for investment of
plan assets.
<bullet> Northern Trust Investments, Inc. (NTI) is both an Illinois
bank regulated by the Illinois Department of Financial and Professional
Regulation and an investment adviser registered with the SEC under the
Advisers Act with its principal office in Chicago, Illinois. NTI
provides portfolio management services to corporations, public and
private pension plans, Taft-Hartley plans, charitable institutions,
foundations, endowments, municipalities, registered mutual funds,
collective investment trusts, private investment funds, trust programs,
individuals, wrap sponsors and other U.S. and international
institutions. As of December 31, 2023, NTI manages discretionary assets
of approximately $1,017 billion, including ERISA and IRA assets.
<bullet> 50 South Capital Advisors, LLC (50 South) is an investment
adviser registered with the SEC under the Advisers Act, with its
principal office in Chicago, Illinois. 50 South provides portfolio
management services to pooled investment vehicles including plan asset
funds. As of December 31, 2023, 50 South manages discretionary assets
of nearly $11.3 billion, including ERISA and IRA assets.
<bullet> Northern Trust Securities, Inc. (NTSI) is an investment
advisor registered with the SEC under the Advisers Act with its
principal office in Chicago, Illinois. NTSI provides portfolio
management services to separately managed accounts. As of October 28,
2024, NTSI manages discretionary assets of approximately $1.27 billion,
including ERISA and IRA assets.
3. According to the Applicant, the Northern QPAMs rely on the QPAM
Exemption for transaction that include, without limitation, global
fixed income, global equities, futures, options, swaps and other
derivatives, investments made by alternative plan asset funds,
including hedge funds, and similar instruments and strategies. The
issuing documents for many instruments state that the investment
manager is deemed to represent that it is relying, at least partially,
on PTE 84-14. The four QPAMs described above, and any future manager
affiliated with Northern that relies on the exemptive relief provided
in PTE 84-14 with respect to any Covered Plan, are hereinafter referred
to as the ``Northern QPAMs.''
The Convicted Entity: NTFS
4. Northern has an indirect wholly owned subsidiary, Northern,
NTFS, that is a limited liability company organized under the laws of
Guernsey. NTFS provides a wide range of services, including trust and
fiduciary services, to a global client base that includes institutional
clients (such as non-U.S. thrift savings and pension trusts of large
corporations) and private ultra-high net worth individual or family
office clients/trusts. The trust and company management and
administration services provided by NTFS include ongoing interaction
with the settlor and beneficiaries, investment managers and advisors,
and the settlor's legal counsel, among others. NTFS also may appoint
individual directors that are personnel of NTFS, if required, or more
commonly corporate directors (entities wholly owned by NTFS) to act as
the directors of some of the underlying holding companies owned by the
trusts for which NTFS acts as trustee. These holding companies hold
assets which could include cash, marketable securities, privately held
companies, art, real estate and other property. With respect to non-
U.S. thrift savings and pension trusts, NTFS may be appointed as
trustee and responsible for: (i) payments to beneficiaries of the trust
(i.e., employees of the company funding the trust); and (ii) auditing
the trust using external auditor(s) and providing annual tax filings
(depending on domicile). The Applicant represents that NTFS does not
act as a ``qualified professional asset manager'' (QPAM) or otherwise
provide investment management services to any accounts subject to ERISA
or Code section 4975 and does not act as a fiduciary to any ERISA plan
or IRA.
5. NTFS operates based on internal policies and procedures of
Northern and is subject to internal audits to ascertain compliance.
NTFS is managed by a board of directors, which meets at least
quarterly. In addition, the board has delegated certain powers to an
Appointment Committee for consideration of new or existing business, a
Fiduciary Committee for the review of the companies' fiduciary
activities and for consideration of the exercise of discretionary
powers by NTFS as trustee and a Risk Committee for consideration and
management of risks.
ERISA and Code Prohibited Transactions and PTE 84-14
6. The rules set forth in ERISA section 406 proscribe certain
``prohibited transactions'' between plans and parties in interest with
respect to those plans. ERISA section 3(14) defines parties in interest
with respect to a plan to include, among others, the plan fiduciary, a
sponsoring employer of the plan, a union whose members are covered by
the plan, service providers with respect to the plan, and certain of
their affiliates.\7\ The transactions prohibited by ERISA section
406(a) prohibit that are relevant to this proposed exemption are (1)
sales, leases, loans, or the provision of services between a party in
interest and a plan (or an entity whose assets are deemed to constitute
the assets of a plan), (2) the use of plan assets by or for the benefit
of a party in interest, or (3) a transfer of plan assets to a party in
interest.\8\
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\7\ Under the Code, such parties, or similar parties, are
referred to as ``disqualified persons.''
\8\ The prohibited transaction provisions also include certain
fiduciary prohibited transactions under ERISA section 406(b). These
include transactions involving fiduciary self-dealing, fiduciary
conflicts of interest, and kickbacks to fiduciaries.
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7. ERISA section 408(a) gives the Department the authority to grant
an exemption from such ``prohibited transactions'' if the Department
finds an exemption is: (a) administratively feasible for the
Department; (b) in the interests of the plan and of its participants
and beneficiaries; and (c) protective of the rights of participants and
beneficiaries.
8. PTE 84-14 exempts certain prohibited transactions between a
party in interest and an ``investment fund'' (as defined in section
VI(b) of PTE 84-14) in which a plan has an interest if the investment
manager satisfies the definition of ``qualified professional asset
manager'' (QPAM) and satisfies additional conditions of the
exemption.\9\
[[Page 7177]]
PTE 84-14 was developed and granted based on the premise that broad
relief could be afforded for all types of transactions in which a plan
engages only if the commitments and the investments of plan assets and
the negotiations leading thereto are the sole responsibility of an
independent discretionary manager.\10\
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\9\ PTE 84-14 was recently amended, effective June 17, 2024 to
among other things, (1) require a QPAM to provide a one-time notice
to the Department that the QPAM is relying upon the exemption; (2)
update the list of crimes enumerated under section I(g) to
explicitly include foreign crimes that are substantially equivalent
to the listed crimes; (3) expand the circumstances that may lead to
ineligibility; and (4) provide a one-year transition period to help
Covered Plans avoid or minimize possible negative impacts of
terminating or switching QPAMs or adjusting asset management
arrangements when a QPAM becomes ineligible pursuant to section I(g)
and allow QPAMs a reasonable period of time to seek an individual
exemption, if appropriate. See 89 FR 23090 (April 3, 2024).
\10\ See 75 FR 38837, 38839 (July 6, 2010).
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9. Section I(g) of PTE 84-14 prevents an entity that may otherwise
meet the definition of a QPAM from utilizing the exemptive relief
provided by the QPAM Exemption for itself and its client plans if that
entity, an ``affiliate'' thereof, or any direct or indirect five
percent or more owner of the QPAM has been either convicted or released
from imprisonment, whichever is later, because of criminal activity
described in section I(g), or otherwise violates section I(g), within
the 10 years immediately preceding a transaction. section I(g) was
included in PTE 84-14, in part, based on the Department's expectation
that QPAMs, and those who may be in a position to influence the QPAM's
policies, must maintain a high standard of integrity.\11\
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\11\ See 47 FR 56947 (December 21, 1982).
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Investigation for Tax Fraud
10. In 2010 and 2011, French prosecutors opened judicial
investigations questioning whether Guy Wildenstein and Alec Daniel
Armand Wildenstein (the Wildensteins), heirs to a set of trusts
established by family patriarch Daniel Wildenstein, had engaged in
money laundering, fraudulent organization of insolvency, forgery and/or
tax evasion in connection with their decision not to include trust
assets in French tax filings made following Daniel Wildenstein's death
in 2001. NTFS, as successor trustee to the trusts, was itself
investigated by French prosecutors.\12\
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\12\ In September 1999, Baring Trustees became the trustee of
these two trusts. Baring Trustees was acquired by Northern on March
31, 2005, and became NTFS by change of name effective on August 31,
2005. With respect to these trusts, the Applicant states that NTFS
was a directed trustee; as such, it was not involved in the
settlement of the trusts and was not involved in any of the family's
tax matters.
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11. On April 9, 2015, the investigating authorities for the
District Court of Paris issued an Order of Partial Discharge and
Referral before the Criminal Court (the Referral Order). The Referral
Order charged the Wildensteins with several counts of tax fraud for
failing to disclose, and pay taxes on, assets held in various trusts
following the 2001 death of their father, Daniel Wildenstein. One of
eight defendants in the Referral Order, NTFS, was charged with
violations of Articles 121-2, 121-6, and 121-7 of the French Criminal
Code, and Articles 1741 et 1745 of the French General Tax Code for
complicity in the Wildensteins' tax fraud based on assets held in trust
for certain beneficiaries, including the Wildensteins. The portion of
the case relevant to NTFS relates to assets held in two Guernsey trusts
for which NTFS served as successor trustee: the ``1989 Sonstrust'' (the
Sons Trust) and the ``1989 Davidtrust'' (the David Trust). The trusts
include properties located in Kenya, the British Virgin Islands, 740
Madison Avenue and 19 East 64th Street in New York City, shares of
Wildenstein and Co Inc., and of various art galleries.
12. As described in the Referral Order, on February 23, 1989,
Daniel Wildenstein established two trusts in Bermuda, the Sons Trust
and the David Trust with Bermuda Trust Company Limited was appointed as
trustee. The Sons Trust was incorporated for the benefit of the
children of Daniel Wildenstein, Guy and Alec, and of his second wife,
Sylvia Roth-Wildenstein. The David Trust was incorporated for the
benefit of the grandchildren of Daniel Wildenstein. Baring Brothers
(Guernsey) Limited replaced Bermuda Trust Company Limited as the
trustee in 1990, and it was itself replaced as trustee in September
1999 by Baring Trustees (Guernsey) Limited (Baring Trustees). The
Applicant states that, only in 2005, following the purchase of Baring
Asset Management's Financial Services Group (including Baring Trustees)
by the Northern Trust Corp, did Baring Trustees become Northern Trust
Fiduciary Services (Guernsey) Limited.
13. On October 21, 2001, Daniel Wildenstein died in Paris. On April
28, 2002, the Wildensteins filed an inheritance tax statement in
relation to their father Daniel Wildenstein's estate in France. The
statement did not identify the Sons Trust and the David Trust or the
assets held by these trusts. The Referral Order provides that the Sons
Trust and David Trust, as well as their assets, should have been
disclosed in the inheritance tax statement, because the trusts were
non-discretionary. The Referral Order provides that that these assets
in the Sons Trust and the David Trust are subject to French taxes, and
that an inheritance tax would have been imposed on these assets. In
this regard, the Referral Order provides:
<bullet> The assets placed within the trusts were held by
companies. The trusts hold a securities interest in these companies,
but the trustee does not have sufficient control of the companies or
the assets.
<bullet> Daniel Wildenstein was co-trustee, and during his lifetime
he could have asked the trustee to distribute all of the trusts' assets
to the beneficiaries.
<bullet> In addition to naming a trustee, the trust deeds also
named an individual to fulfill the role of ``protector'' of the trusts,
a Wildenstein family attorney who was financially dependent upon the
family.
<bullet> The protector permitted certain financial flows debited
from the Sons Trust bank account without the trustee's consent, and
these money flows were later re-characterized as loans.
<bullet> The trusts operated abnormally in some respects and there
was some commingling between the trusts' assets and Daniel
Wildenstein's assets.
<bullet> The trustee's fees were too low in relation to the value
of the assets in the trusts, and the assets were actually managed by
companies without supervision by the trustee.
14. The French authorities state that their investigation produced
sufficient information to allege that NTFS, in Guernsey, beginning in
September 1999, aided and abetted tax fraud committed in Paris by
Daniel Wildenstein's heirs by concealing a portion of the sums subject
to French estate taxes owed by the Wildensteins.\13\
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\13\ As described above, the Applicant notes that Baring
Trustees was the trustee of the Sons and David Trust until 2005.
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PTE 2016-11
15. The trial commenced on January 4, 2016. Due to the possibility
of a conviction that would lead to the loss of the Northern QPAMs'
ability to rely on PTE 84-14, the Applicant applied for and received a
temporary one year exemption from the Department effective as of the
date of judgment of conviction against NTFS for aiding and abetting tax
fraud to be entered in France in the District Court of Paris, French
Special Prosecutor No. 1120392066, French Investigative Judge No.
JIRSIF/11/12.\14\ The Department
[[Page 7178]]
granted PTE 2016-11 to protect Covered Plans from the harm that could
result from the Northern QPAMs' loss of relief under PTE 84-14 due to
the potential conviction of NTFS. Exemptive relief was provided for a
period of 12 months from the potential conviction date to provide the
Department with sufficient time to determine whether longer-term relief
was appropriate.
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\14\ PTE 2016-11, 81 FR 75150, 75152 (October 28, 2016).
``Conviction Date'' was defined, in relevant part, to mean the date
a judgment was rendered against NTFS in the District Court of Paris,
French Special Prosecutor No. 1120392066, French Investigative Judge
No. JIRSIF/11/12.
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16. On January 12, 2017, the Criminal Court of Paris acquitted all
prosecuted parties, including NTFS. The Paris District Court's verdict
was appealed by the French government to the Paris Court of Appeal.
Because NTFS was not convicted, the ``Effective Date'' under PTE 2016-
11 did not occur. On June 29, 2018, following a retrial in March 2018,
the Paris Court of Appeal upheld the District Court's acquittal of all
prosecuted parties.\15\ The French government appealed again to the
Court of Cassation, the highest court in France. In January 2021 the
Court of Cassation quashed the appellate court's judgment.\16\ From
September to October 2023, the case was tried a third time, in front of
a different panel of the Paris Court of Appeal.
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\15\ The Court of Appeals found that the offenses were time-
barred and that there was no legal basis for the offense of tax
fraud in relation to the Wildensteins' inheritance.
\16\ The Court of Cassation found: (1) that the offenses were
not time barred and (2) that there was a legal obligation under
French law to declare assets held in certain (but not all) types of
trusts. Namely, the legal requirement to declare trust assets
applies to trusts where the settlor had not divested themselves of
the trust assets during their lifetime.
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17. Ultimately, on March 5, 2024, the Paris Court of Appeal
rendered a judgment of conviction (the Conviction) against all
defendants, including NTFS. NTFS was ordered by the court to pay a fine
of [euro]187,500 in conjunction with the judgment. The Applicant
represents that the US dollar equivalent of this fine is $203,445 as of
March 5, 2024, and $204,197 as of November 5, 2024.\17\
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\17\ The Applicant represents that it used the currency
converter from Oanda FX Data Services, located at <a href="https://www.oanda.com/currency-converter/en/">https://www.oanda.com/currency-converter/en/</a> to calculate these figures.
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18. When the Paris Court of Appeal rendered a judgment of
Conviction against NTFS, PTE 84-14 section I(g) was triggered.\18\ PTE
2016-11 was technically inapplicable because its definition of
``Conviction'' referred to the District Court of Paris, instead of the
Paris Court of Appeal, and did not include that the judgment of
conviction could be entered by another court of competent
jurisdiction.\19\
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\18\ On March 5, 2024, NTFS appealed the verdict to the Court of
Cassation. According to the Applicant, under French law, until the
Conviction is final, there is no conviction, and NTFS continues to
be presumed innocent. The Applicant states that the judgment, as
well as its effects including the fine and joint and several
liability, will be stayed pending the outcome of the appeal.
However, under section I(g) of PTE 84-14 as in effect on the date of
the Conviction, ``. . . a person shall be deemed to have been
``convicted'' from the date of the judgment of the trial court,
regardless of whether that judgment remains under appeal.''
\19\ See 81 FR 75152 (October 28, 2016).
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19. On April 4, 2024, the Department issued a technical correction
to PTE 2016-11.\20\ The technical correction changed the definition of
the term ``Conviction'' in PTE 2016-11 by replacing ``the District
Court of Paris, French Special Prosecutor No. 1120392066, French
Investigative Judge No. JIRSIF/11/12'' with ``the Court of Appeal,
French Special Prosecutor No. 1120392066, French Investigative Judge
No. JIRSIF/11/12 or another court of competent jurisdiction.'' PTE
2016-11, as corrected, is effective for a period of one year from the
date of the Conviction, ending March 4, 2025. The one-year exemption
gives the Department time to consider whether a longer term (5 years)
exemption is appropriate based on the facts of the conviction and to
more fully develop the record upon which relief, if any, would be
based. Upon the expiration of the one-year exemption on March 4, 2025,
the Applicant cannot rely on the QPAM Exemption without this five-year
relief, regardless of whether or not the Applicant appeals the judgment
of Conviction.
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\20\ See 89 FR 23612.
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This Exemption Request
20. The Applicant requests exemptive relief that would permit the
Northern QPAMs to continue to rely on the relief provided by the QPAM
Exemption, notwithstanding the disqualifying conviction, for the
remaining nine-year period of disqualification upon the expiration of
PTE 2016-11. The Department has determined to propose relief for five
years, beginning on March 5, 2025, and ending on March 4, 2030, so that
it may reevaluate the effectiveness of the protective conditions for
relief as well as whether the QPAMs, and those in position to influence
them, have continued to maintain a high standard of integrity.
21. According to the Applicant, the Northern QPAMs' investment
management business operations are separate from NTFS, and from the
activities of NTFS that are the subject of criminal charges under
French law.\21\ The Northern QPAMs have dedicated systems, management,
risk and compliance officers, that are separate from and independent of
NTFS. The investment management businesses of the Northern QPAMs are
subject to codes of conduct, and Northern QPAM personnel engage in
training, designed to ensure that such businesses understand and abide
by their fiduciary duties in accordance with applicable law. The codes
of conduct create information barriers designed to prevent employees of
the Northern QPAMs from gaining access to inside information that an
affiliate may have acquired or developed in connection with the
investment banking, treasury services or other investor services
business activities. These codes of conduct apply to employees,
officers, and directors of Northern QPAMs. The Applicant also maintains
an employee hotline for employees to express any concerns of wrongdoing
anonymously.
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\21\ As described below, the conditions for relief provide that
no investment management services may be provided by NTFS to ERISA-
covered plans or IRAs.
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22. The Applicant represents that no NTFS employees (or former
employees of Baring Trustees) were investigated or charged, nor were
any other corporate entities related to NTFS investigated or charged.
The Applicant states that the individual who appears to have been the
primary contact for the Wildenstein business after NTFS acquired Baring
Trustees was a former employee of Baring Trustees who was not charged
in the French proceeding and who left NTFS in January 2006, shortly
after the acquisition. Further, the Applicant represents that all
personnel involved in working on the Wildenstein accounts, regardless
of whether they were implicated in the conduct that became the subject
of the Conviction, either left Baring Trustees prior to its acquisition
by NTFS in 2005 or shortly thereafter, and none of these persons is
employed by NTFS or other Northern affiliates today.
23. The Applicant states that Northern's review of the files has
not identified any wrongdoing on the part of former NTFS staff, nor are
any current or former NTFS (or Baring Trustees) employees among the six
individuals charged by the French prosecutors in connection with the
Wildenstein business.
24. The Applicant represents that new policies, procedures and
training came into effect since Northern's acquisition of Baring
Trustees in 2005. Upon becoming a part of the Northern organization,
Baring Trustees was renamed NTFS and became subject to Northern's own
internal control procedures designed to prevent improper activities.
The Applicant represents that NTFS has complied (and
[[Page 7179]]
will continue to comply) with all applicable legal and regulatory
requirements, including but not limited to requirements potentially
linked to the conduct underlying the charges against NTFS.
25. The Applicant further represents that resources dedicated to
maintaining risk and compliance procedures have been enhanced
significantly since Northern's acquisition of Baring Trustees in 2005.
Hundreds of new risk and compliance personnel have been hired by
Northern in that period. For example, according to the Applicant, at
the time of the acquisition of Baring Trustees (and the Wildenstein
relationship) in 2005, Northern had five full-time equivalent employees
handling compliance with anti-money laundering (AML) regulations; as of
December 31, 2015, that number had increased to 78 full-time equivalent
employees.
26. The Applicant represents that it maintains a system of internal
controls to ensure ongoing compliance with AML and know-your-client
(KYC) related regulations. One of the key controls is the
implementation of risk-based, comprehensive customer due diligence
policies, procedures and processes for all customers, particularly
those that present a high risk for money laundering or terrorist
financing. Northern has also adopted Global Minimum Standards for
Customer Due Diligence for its clients as a critical part of its Global
AML/Economic Sanctions Compliance Program.
27. The Applicant represents that it has new systems for evaluating
new clients or acquisitions. Northern represents that it assesses the
money laundering and related risks of each new client relationship.
Northern represents that it has developed a Global Anti-Money
Laundering & Combating the Financing of Terrorism Risk Rating Policy &
Methodology to evaluate new client/business relationships and assess
their money laundering risk and related risks. In addition, Northern
represents that it utilizes a Client Relationship Form to collect the
information necessary to assess the client risk rating. Clients will
initially be risk rated during the client take-on process and
subsequently as the client profile changes.
Hardship to Covered Plans
28. Overview of loss of QPAM. The Applicant represents that without
the ability to use PTE 84-14 (i.e., the QPAM Exemption), it would be
difficult for Northern and its affiliates that currently manage the
assets of Covered Plans, collective investment trusts and other
commingled funds, on a discretionary basis, to efficiently engage in a
variety of routine transactions on behalf of Covered Plan clients with
counterparties, because many such counterparties could be a service
provider to such Covered Plans. The Applicant states that
counterparties are familiar and comfortable with PTE 84-14, as it is
generally the most commonly used prohibited transaction exemption for
asset managers of ERISA covered Plans or IRAs. The Applicant states
that market participants, both clients and counterparties, routinely
expect an investment manager of Covered Plan clients to represent that
it qualifies as a QPAM--even if such a representation may not
technically be required in a particular circumstance or for a
particular transaction.
29. The Applicant represents that Northern QPAMs have entered into
and could enter into contracts in the future that require the Northern
QPAMs to meet the conditions in PTE 84-14 on behalf of Covered Plan
clients and on behalf of collective trusts and other funds subject to
ERISA. These contracts include contracts entered into by Northern QPAMs
on behalf of or as investment adviser for Covered Plans, collective
trusts and other funds subject to ERISA for certain outstanding
transactions, including, but not limited to the purchase and sale of
debt and equity securities (both foreign and domestic, both registered
and issued pursuant to Rule 144A or otherwise); asset-backed
securities, commodities, real estate financing and leasing
arrangements; and certain derivative transactions (e.g., futures,
forwards, swaps, and options). The Applicant states that loss of the
Northern QPAMs' ability to rely upon PTE 84-14 could cause considerable
harm to Covered Plan clients. For example, the Applicant states that
counterparties could seek to terminate existing contracts, and certain
derivative transactions and other contractual agreements could
terminate automatically and immediately without notice or action.
30. In addition, the Applicant represents that its Covered Plan
clients that continue to retain the Northern QPAMs could be prohibited
from engaging in certain transactions that would be beneficial to such
Covered Plan clients on a going forward basis, such as hedging
transactions using over-the-counter options or derivatives or certain
fixed income transactions (e.g., 144A debt securities).\22\ The
Applicant states that it is unable to quantify the harm to Covered
Plans for not being able to engage in hedging transactions or invest in
certain fixed income products. Nonetheless, the Applicant represents
that these types of transactions are key to managing both risk and
returns of a given investment portfolio.\23\ Further, the Applicant
states that even if other exemptions were acceptable to such
counterparties, the cost of the transaction could increase to reflect
the increased risk of compliance with respect to new exemptions that
are unfamiliar to counterparties, to the detriment of Covered Plan
clients.\24\
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\22\ Rule 144A of the Securities Act of 1933, as amended (the
``Securities Act'') provides a safe harbor from the registration
requirements of the Securities Act of 1933 for certain private
resales of certain securities, including foreign securities, to
qualified institutional buyers (QIBs), which generally are large
institutional investors that own at least $100 million in investable
assets.
\23\ The Applicant states that a common reason to engage in
hedging transactions and fixed income transactions, and why the
inability to engage in these transactions could be specifically
harmful to Covered Plans, would be to provide protection against
market risk, where fixed income and hedging transactions are used to
manage unknown risks of interest rate fluctuation and market
volatility for a specific period of time, while providing a
specified return. The Applicant represents that it is not able to
quantify the potential harms to Covered Plans if relief for these
transactions are no longer available, because the market risks are
unknown. The Applicant states that another reason to engage in
hedging and fixed income transactions would be to address
circumstances where there are limited available securities, such as
the use of hedging transactions where a Covered Plan has long-term
liabilities, and there are insufficient long-term, fixed-income
securities available in the marketplace to provide the required
returns over the specified period. The Applicant states that it is
not able to ascertain which long-term, fixed-income securities will
have limited availability at any given time, and thus the Applicant
is not able to quantify the potential harms to Covered Plans.
\24\ The Applicant represents that historically, counterparties
engaging in certain hedging and securitized transactions have
required that Covered Plans be able to rely on the QPAM Exemption in
connection with such transactions. Further, the Applicant states
that generally, counterparties to a Covered Plan have not agreed to
allow the Covered Plan to rely on other potentially available
prohibited transaction exemptions (e.g., ERISA section 408(b)(17))
because of the perceived risk related to satisfying the conditions
of such other prohibited transaction exemptions. The Applicant
states that if it were unable to use the QPAM Exemption in such
transactions, it expects that the counterparties who view prohibited
transaction exemptions (other than the QPAM Exemption) to be riskier
could (a) increase the costs of such transactions to reflect the
increased compliance risk or (b) not engage in such transactions
with Covered Plans at all. The Applicant states that because this
harm is counterparty dependent, the Applicant is unable to quantify
the potential harm to Covered Plans.
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31. Overview of Costs. The Applicant represents that if the
Department does not grant the requested exemption, fiduciaries of
Covered Plan clients may seek other investment managers, at significant
disruption and cost to the Covered Plan clients and ultimately to their
participants and beneficiaries. The
[[Page 7180]]
Applicant states that these issues are described below:
<bullet> Time: The process of transitioning to a new investment
manager is typically lengthy and would likely involve numerous steps
each of which could last several months--including retaining a
consultant, creating the requests for proposal, evaluating requests for
proposal, meeting with prospective investment managers, negotiating
contracts and ultimately transitioning assets.
<bullet> Costs: There are various costs involved in transitioning
to a new investment manager.\25\ Some of those costs are described in
more detail below.
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\25\ Notwithstanding that the Applicant's representations
regarding certain costs to Covered Plans if Northern QPAMs are
unable to rely on PTE 84-14, the proposed exemption would require
the Northern QPAMs to indemnify Covered Plans for ``actual losses''
that include transition costs. See discussion below.
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<bullet> Investment consultant costs: Covered Plans generally incur
tens of thousands of dollars in consulting fees in connection with
searching for and transitioning to a new investment manager. The costs
depend on numerous factors, including the consultants retained, as well
as the strategy and/or purpose for which they are being retained. Costs
are estimated as follows: \26\
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\26\ The Applicant states that these estimates are based on
Northern's general industry knowledge.
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[cir] $25,000 to $75,000 for the replacement of an individual
manager or single investment product, or
[cir] $30,000 to $100,000 for the replacement of an ``outsourced
chief investment officer'' (OCIO) or ``manager of managers.'' The
Applicant states that Northern currently has 47 OCIO clients that would
presumably select another investment manager should the Northern QPAMs
no longer be able to rely on the QPAM Exemption
<bullet> Legal costs: Covered Plans generally incur tens of
thousands of dollars in legal fees in connection with transitioning to
a new investment manager. The costs depend on numerous factors,
including the billing rate, the ability to negotiate and the complexity
of the agreement. Assuming a $1,000 blended legal rate (and ignoring
any potential alternative fee arrangements), legal costs are estimated
to range from $5,000 to $30,000 to transition to a new investment
manager. Legal costs with respect to alternative investments can range
from $15,0000 to $150,000 per investment, depending on the type of
alternative investment and the law firm retained.
<bullet> Investing costs: The investing costs, or the costs of
selling and reinvesting a Covered Plan's assets, differ based on the
asset class, as further described below.
32. Costs Relating to Transitioning an Equity Portfolio. The
Applicant states that trading costs related to an equity portfolio
consist of explicit fees and implicit costs. The Applicant states that
explicit fees include stamp and exchange fees and commissions. The
Applicant also states that implicit costs include bid-ask spreads of
assets traded on a principal basis.
33. The Applicant represents that it estimates the costs of
transitioning the equity investment portfolio, categorized by geography
of equity, as follows: \27\
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\27\ The Applicant states that these estimates are its internal
calculations based on the estimated size of the notional portfolio
multiplied by the estimated basis points. In this regard, the
Applicant states that trade-related costs were calculated based on
the total asset size of equity collective investment funds of $279
billion. The Applicant states that there is an additional $40
billion of assets invested in Northern QPAMs common funds and
through separately managed accounts. In addition, the Applicant
states that the ``Total Trading-Related Cost'' figures do not
include potential volatility costs, and there could be unknown
additional expenses if clients are out of the market for a period of
time. Further, the Applicant states that ``Commissions'' are $0.05
per share for U.S. securities and 1.5 basis points for non-U.S.
securities.
----------------------------------------------------------------------------------------------------------------
Explicit fees Implicit costs
------------------------------------------------ Total trading-
Geography of equity Stamp and related costs
exchange fees Commissions Bid ask spread
----------------------------------------------------------------------------------------------------------------
US.............................................. $5,426,400 $14,000,000 $178,500,000 $197,926,400
Americas (excluding US)......................... 226,540 701,017 3,619,000 4,546,557
EMEA............................................ 460,460 4,265,763 19,162,000 23,888,223
APAC............................................ 20,326,130 3,833,220 27,499,000 51,658,350
----------------------------------------------------------------------------------------------------------------
34. Additionally, the Applicant states that many Covered Plan
clients employ a transition manager for large asset movements. The
Applicant states that in such cases, the following transition
management costs could apply to the following portfolio types: \28\
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\28\ The Applicant states that these figures are internal
calculations based on the estimated size of the notional portfolio
multiplied by the estimated basis points. The Applicant states that
the ``Costs'' are measured in terms of implementation shortfall,
which measures the difference between the decision price and the net
execution price (including commissions, fees, etc.).
------------------------------------------------------------------------
Class of equity Costs
------------------------------------------------------------------------
US...................................................... $230,257,370
Emerging Markets........................................ 47,624,262
Global (excluding US)................................... 298,687,332
Global.................................................. 1,489,917
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35. Costs Relating to Transitioning a Fixed Income Portfolio. The
Applicant states that trading-related costs relating to a fixed income
portfolio transition are implicit costs. The Applicant states that it
estimates that the costs of transitioning the fixed income investment
portfolio categorized by whether the type of fixed income has low
trading costs or high trading costs, are as follows:\29\
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\29\ Trading-related costs were calculated based on the total
asset size of fixed income collective investment funds of $127
billion, and by categorizing the portfolios into lower trading costs
portfolios with total trading costs below 0.10% and higher trading
cost portfolios with total trading costs exceeding 0.10%. The
Applicant states that there is an additional $11 billion of Covered
Plan assets invested in Northern QPAM's common funds and through
separately managed accounts.
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Total trading-
Class of fixed income \30\ related costs
------------------------------------------------------------------------
Low Trading Costs Portfolio............................. $54,520,000
Higher Trading Costs Portfolio.......................... 33,250,000
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36. Costs Relating to Transitioning an Alternative Investment
(Private Equity and Hedge) Portfolio. The Applicant states that 50
South provides discretionary asset management services to six ERISA
accounts through funds of one and pooled funds subject to ERISA.\31\
The Applicant states that each
[[Page 7181]]
of the two largest ERISA accounts managed by 50 South has $150 million
attributable to Covered Plan clients. In total, the Applicant states
that Covered Plan clients own $519 million of assets under management
within these 50 South-managed ERISA accounts.
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\30\ The Applicant states that low trading costs portfolios
include investment grade bonds and emerging market sovereign debt,
while high trading cost portfolios include leverage finance and
emerging market corporate debt.
\31\ 50 South also provides discretionary and asset management
services to other non-ERISA accounts.
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37. The Applicant states that Covered Plan clients expend between
six and eighteen months to select alternative investment managers. When
new investment managers are finally selected, Covered Plans may be
forced to sell their holdings in the Applicant's funds on the secondary
market. The Applicant states that there are unique transaction costs
relating to private equity fund-of-funds that are sold on the secondary
market. The Applicant states that because interests in private funds
are not available on the public markets, Covered Plans typically engage
specialized investment banks to run auction processes to sell private
equity holdings. The Applicant states that the use of an investment
bank ensures transparent price discovery and price maximization for the
assets, consistent with the fiduciary requirements for Covered Plans.
The Applicant states that investment banks typically charge an advisory
fee equal to 50 to 200 basis points of the total exposure sold on the
secondary market, which could result in costs ranging from $2,121,708
to $8,486,830 for Covered Plan clients investing in 50 South's
applicable funds. The Applicant states that in addition to the direct
transaction expenses typically associated with a secondary sale,
sellers of private equity fund-of-funds typically experience a 22.5% to
30% discount on net asset value for the early liquidation, which could
result in an economic loss ranging from $49,319,123 to $65,758,831 for
Covered Plan clients investing in 50 South's applicable funds.
38. Other Disruptions: The Applicant states that in some cases,
Covered Plan clients may find it difficult to transition to a new
investment manager, specifically with respect to certain strategies.
The Applicant states that below are examples of such disruptions.
<bullet> Pooled Funds: The Northern QPAMs' inability to rely upon
PTE 84-14 could result in significant, unplanned redemptions from
pooled funds, which would in turn frustrate the QPAMs' efforts to
effectively manage the pooled funds' assets and harm remaining plan
investors by increasing the expense ratios of such pooled funds. In
this regard, the Applicant states that pooled funds incur both fixed
and variable expenses. The Applicant represents that unlike variable
expenses, fixed expenses (e.g., accounting, regulatory and legal fees)
remain the same regardless of the amount of assets in the pooled fund.
The Applicant states that such fixed expenses are shared amongst the
investors in the Covered Plans. Therefore, the Applicant states that if
some, but not all, Covered Plan investors seek to withdraw from a
pooled fund, the remaining investors will bear a greater portion of the
fixed expenses. The Applicant states that because it cannot anticipate
the extent to which Covered Plan investors will withdraw, it cannot
quantify this harm with specificity.
<bullet> Opening Custody Accounts: When an investment manager is
hired to manage a separately managed account, it will need to open
custody accounts in applicable jurisdictions. There are several
jurisdictions where it can take a considerable amount of time to open
custody accounts (e.g., India). There are other jurisdictions where it
may not be possible to open a new custody account. In this regard, the
Applicant states that during the time period in which a Covered Plan is
opening a new custody account (the lapse period), such Covered Plan may
not be able to be invested in accordance with the Covered Plan's chosen
investment strategy. The Applicant states that the potential harm
cannot be quantified because it would require the Applicant to predict
and compare the investment returns of (x) the securities that the
Covered Plan actually invests during the lapse period, with (y) the
alternative securities in which the Covered Plan desired to invest
during the lapse period. The Applicant state that these are forward-
looking variables over which the Applicant has no control.
Department's Request for Comment and Notes Regarding Harms to Plans in
Paragraphs 31 Through 38
The Department requests the Applicant to provide a clear
description regarding their estimates of costs to Covered Plans in its
comment letter. In this regard, the Applicant should describe:
(1) the amount of Covered Plan assets that are likely to be subject
to the costs described above and an explanation of the Applicant's
assumptions or methodologies in connection with such figures. For
example: ``50% of the Covered Plan assets will be likely to incur such
costs because. . . .''
(2) the likelihood of the costs occurring, for each of the
transition costs described above. For example: with respect to Covered
Plans' Alternative Investments, how likely are Covered Plans to leave
Northern Trust for a different manager; with respect to violating
representations as to QPAM status in an offering document, the
Applicant should provide information regarding how likely that is to
occur; etc.
(3) the circumstances under which the transition costs described in
the tables above are being incurred (e.g., are these transition costs
that the Applicant contends would be incurred by Covered Plans to
remedy contractual violations due to loss of QPAM status, costs due to
Covered Plans seeking to use a different investment manager that can
rely on QPAM, etc.).
(4) the extent to which any of the asserted costs reflect the
QPAMs' imposition of additional charges or fees on Covered Plans
resulting from the loss of QPAM status, and the cause of such
additional charges or fees.
(5) an explanation of the extent to which the costs described
herein are not likely to be covered by the QPAMs indemnification
obligations under section III(j)(2), described in more detail below,
and an explanation why such costs are not attributable to the
Applicant's violation of exemption conditions.
Condition (j)(2) of the proposed exemption requires Northern QPAMs
to ``indemnify and hold harmless'' Covered Plans for ``actual losses
resulting directly from the Northern QPAM's violation of any conditions
of this exemption, an Northern 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 Northern
QPAM; or any claim arising out of the failure of such Northern QPAM to
qualify for the exemptive relief provided by PTE 84-14 as a result of a
violation of section I(g) of PTE 84-14 other than the Conviction.''
Furthermore, the Department notes that, to the extent Covered Plans
``feel forced'' to transition to new asset managers because the
Northern QPAMs can no longer rely on PTE 84-14, the liquidation and
additional costs arising from the transition constitute actual losses
resulting directly from the failure of such QPAM to qualify for the
exemptive relief provided by PTE 84-14 as a result of violation of
section I(g) of PTE 84-14. If a plan's fiduciary is compelled to
replace a Northern asset manager as a result of a violation of section
I(g) and the asset manager's loss of QPAM status, the affected plan is
entitled to indemnification of its associated losses, including the
transitional expenses necessary to effectuate the switch to a qualified
QPAM.
[[Page 7182]]
The Exemption's Protective Conditions
39. This proposed exemption contains conditions that are similar to
the conditions in the Department's recent exemptions from the
prohibitions of section I(g) of PTE 84-14. The Department is able to
make its findings under ERISA section 408(a) only with the imposition
of these conditions, and only if every condition is adhered to in good
faith by the Applicant and the Northern QPAMs.\32\ Several of this
proposed exemption's conditions are designed to ensure that the
Northern QPAMs were not involved in the conduct that gave rise to the
Conviction. Accordingly, this proposal does not provide prohibited
transaction relief if the Northern QPAMs knew of, had reason to know
of, participated in, approved of, or profited from the conduct that
gave rise to the Conviction.\33\ No other party engaged on behalf of
the Northern QPAMs who had responsibility for, or exercised authority
in connection with the management of plan assets may have known or have
had reason to know of, and did not participate in, the criminal conduct
that is the subject of the Conviction.\34\ Nor is relief available if a
Northern QPAM exercised any authority over plan assets in a manner that
it knew or should have known would further the criminal conduct that is
the subject of the Conviction or cause the Northern QPAM or its
affiliates to directly or indirectly profit from the criminal conduct
that is the subject of the Conviction.
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\32\ This preamble contains a general description of the
conditions for the benefit of the reader. See the operative
conditions below for more detail. In the event of any inconsistency
between the description in this preamble and the operative
conditions contained below, the operative conditions are
controlling.
\33\ For clarity, references to the Northern QPAMs include their
officers, directors, agents other than NTFS, and employees of such
QPAMs.
\34\ ``Participate in'' for purposes of the conditions refers
not only to active participation in the misconduct of NTFS that is
the subject of the Conviction, but also includes the knowing or
tacit approval of the misconduct underlying the Conviction or
knowledge of such conduct without taking active steps to prohibit
it, including reporting the conduct to such individual's
supervisors, and to Northern's board of directors.
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40. Further, the Northern QPAMs may not employ or knowingly engage
any of the individuals that participated in the criminal conduct
attributable to the Conviction. \35\ The Northern QPAMs (including
their officers, directors, agents other than NTFS, and employees of
such Northern QPAMs), any other party engaged on behalf of the Northern
QPAMs who had responsibility for, or exercised authority in connection
with, the management of plan assets, must not have received direct
compensation or knowingly received indirect compensation in connection
with the criminal conduct that is the subject of the Conviction.
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\35\ The Department expects the Northern QPAMs to rigorously
ensure that the individuals associated with the criminal conduct of
NTFS will not be employed or knowingly engaged by such QPAMs.
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41. The proposal further provides that no Northern QPAM will use
its authority or influence to direct an ``investment fund'' that is
subject to ERISA or the Code and managed by such Northern QPAM in
reliance on PTE 84-14, or with respect to which a Northern QPAM has
expressly represented to a Covered Plan that it qualifies as a QPAM or
relies on PTE 84-14, to enter into any transaction with NTFS 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.
42. If the Department grants this exemption, it will terminate
immediately if an affiliate of the Northern QPAM (as defined in section
VI(d) of PTE 84-14) violates section I(g) of PTE 84-14 (other than with
respect to the Conviction). Also, NTFS 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.
43. The proposed exemption requires each Northern QPAM to implement
and follow certain written policies and (the Policies). The Policies
must require and be reasonably designed to ensure, among other things,
that: (i) the Northern QPAMs' asset management decisions are conducted
independently of the management and business activities of Northern,
including NTFS and Northern's non-asset management affiliates; (ii) the
Northern QPAMs fully comply with ERISA's fiduciary duties and with
ERISA and the Code's prohibited transaction provisions, as applicable
with respect to each Covered Plan,; (iii) the Northern QPAMs do 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 Northern QPAMs to regulators on behalf of or in relation to
Covered Plans are materially accurate and complete; (v) the Northern
QPAMs do not make material misrepresentations or omit material
information in communications with such regulators with respect to
Covered Plans; (vi) the Northern QPAMs comply with the terms of the
exemption; and (vii) any violation of or failure to comply with any of
these items is corrected promptly upon discovery, and any such
violation or compliance failure not so corrected must be reported in
writing to appropriate corporate officers, the head of compliance and
the QPAM's general counsel (or their functional equivalent) of the
relevant Northern QPAM, and an appropriate fiduciary of any affected
Covered Plan where such fiduciary is independent of Northern.\36\
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\36\ A Northern QPAM will not be treated as having failed to
develop, implement, maintain, or follow the Policies, provided that
it corrects any instance of noncompliance when discovered or when it
reasonably should have known of the noncompliance (whichever is
earlier), and provided that it adheres to the reporting requirements
described herein.
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44. This proposed exemption mandates training (Training) conducted
at least annually during the Exemption Period. In this regard, all
relevant Northern QPAM asset/portfolio management, trading, legal,
compliance, and internal audit personnel must be trained during the
Exemption Period. Among other things, the Training must cover at a
minimum, the Policies, ERISA and Code compliance, ethical conduct, the
consequences for not complying with the exemption conditions (including
any loss of the exemptive relief provided herein) and the requirement
for prompt reporting of wrongdoing. The Training may be conducted
electronically and must be conducted by a professional who has been
prudently selected and has appropriate technical training and
proficiency with ERISA and the Code.
45. Under this proposed exemption each Northern QPAM must submit to
an audit conducted every two years by an independent auditor, which
covers the prior consecutive 12 months. Among other things, the auditor
must test a sample of each Northern QPAM's transactions involving
Covered Plans that are sufficient in size, number and nature to afford
the auditor a reasonable basis to determine such QPAM's operational
compliance with the Policies and Training. The auditor's conclusions
cannot be based solely on the written report created by the Compliance
Officer (the Exemption Report), described below, in lieu of independent
determinations and testing performed by the auditor.
46. The written report issued by the auditor (the Audit Report)
must be certified by the respective general counsel or one of the three
most senior executive officers of the line of business engaged in
discretionary asset management services through the Northern QPAM with
respect to which the Audit Report applies. A copy of the
[[Page 7183]]
Audit Report must be provided to Northern's Board of Directors. A
senior executive officer who has a direct reporting line to Northern's
highest ranking legal compliance officer must review the Audit Report
for each Northern QPAM and certify in writing and under penalty of
perjury that such officer has reviewed each Audit Report.
47. This proposed exemption requires the Northern QPAM to agree and
warrant with respect to any arrangement, agreement, or contract between
a Northern QPAM and a Covered Plan that, throughout the effective
period of the exemption, the Northern QPAM will: (i) comply with ERISA
and the Code, as applicable with respect to the Covered Plan; (ii)
refrain from engaging in prohibited transactions that are not otherwise
exempt (and to promptly correct any prohibited transactions); and (iii)
comply with the standards of prudence and loyalty set forth in ERISA
section 404 with respect to each such ERISA-covered plan. Each Northern
QPAM must also agree and warrant to indemnify and hold harmless the
Covered Plan for any actual losses resulting directly from any of the
following: (a) a Northern QPAM's violation of any conditions of this
exemption; (b) a Northern QPAM's violation of ERISA's fiduciary duties
and/or the prohibited transaction provisions of ERISA and the Code as
applicable; (c) a breach of contract by the Northern QPAM; or (d) any
claim arising out of the failure of the Northern QPAM to qualify for
the exemptive relief provided by PTE 84-14 as a result of a violation
of section I(g) of the exemption other than the Conviction. This
condition applies to actual losses caused by the Northern QPAM,
including but 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 because of a
Northern QPAM's inability to rely upon the relief in the QPAM
Exemption. The definition of ``actual losses'' used in this proposed
exemption allows fiduciaries of Covered Plans to prudently manage and
make the best decisions on behalf of their plans without needing to
consider the costs caused by a Northern QPAM's or its affiliate's
misconduct, including costs associated with unwinding transactions and
transitioning plan assets to a new asset manager, because these costs
will be borne by the Northern QPAM and not the Covered Plan.\37\
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\37\ The Department notes that with respect to the notice of
obligations requirement in section III(j)(7), all Covered Plans must
receive a notice that includes the definition of actual losses as
provided in section III(j)(2) of this proposed exemption.
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48. The proposed exemption also requires the Northern QPAM to agree
and warrant with respect to any arrangement, agreement, or contract
between a Northern QPAM and a Covered Plan that it will not require or
cause the Covered Plan to waive, limit, or qualify the liability of the
Northern QPAM for violating ERISA or the Code or engaging in prohibited
transactions; restrict a Covered Plan from terminating or withdrawing
from its arrangement with the Northern QPAM, with the exception of
reasonable restrictions 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; impose fees, penalties, or charges for such termination or
withdrawal with the exception of reasonable fees specifically designed
to prevent abusive investment practices or ensure equitable treatment
of all investors in a pooled fund; or generally include exculpatory
provisions disclaiming or otherwise limiting the liability of the
Northern QPAM for a violation of such agreement's terms.
49. This proposed exemption contains specific notice requirements.
Each Northern QPAM must provide a notice regarding the proposed
exemption and a separate summary describing the facts that led to each
Conviction (the Summary), which must be submitted to the Department,
and a prominently displayed statement (the Statement) that each
Conviction results in a failure to meet a condition in PTE 84-14, to
each sponsor and beneficial owner of a Covered Plan that entered into a
written asset or investment management agreement with a Northern QPAM.
The notice, Summary, and Statement must be provided before or
contemporaneously with the client's receipt of a written asset
management agreement from the Northern QPAM. If the Department grants
an exemption, the clients must receive a Federal Register copy of the
notice of final exemption within sixty (60) days of this exemption's
effective date. The notice may be delivered electronically (including
by an email containing a link to this exemption).
50. The proposed exemption requires each Northern QPAM to maintain
records necessary to demonstrate that the exemption conditions have
been met for six (6) years following the date of any transaction for
which the Northern QPAM relies upon the relief provided in the
exemption. The proposed exemption mandates that each Northern QPAM must
designate a senior compliance officer (the Compliance Officer) who will
be responsible for compliance with the Policies and Training
requirements described herein. The Compliance Officer must conduct an
exemption review (the Exemption Review) to determine the adequacy and
effectiveness of the implementation of the Policies and Training. The
Compliance Officer must be a professional with extensive relevant
experience with a reporting line to the highest-ranking corporate
officer in charge of legal compliance for asset management for the
applicable Northern QPAM. At a minimum, the Exemption Review must
include review of the following items: (i) any compliance matter
related to the Policies or Training that was identified by, or reported
to, the Compliance Officer during the previous year; (ii) any material
change in the relevant business activities of the Northern QPAMs; and
(iii) any change to ERISA, the Code, or regulations that may be
applicable to the activities of the Northern QPAMs.
51. The Compliance Officer must prepare a written report (i.e., the
Exemption Report) that (A) summarizes their material activities during
the effective period of the exemption; (B) sets forth any instance of
noncompliance discovered, and any related corrective action; (C)
details any change to the Policies or Training to guard against any
similar instance of noncompliance occurring again; and (D) makes
recommendations, as necessary, for additional training, procedures,
monitoring, or additional and/or changed processes or systems, and
management's actions in response to such recommendations. In each
Exemption Report, the Compliance Officer must certify in writing that,
among other things, to the best of their knowledge at the time, the
report is accurate, and note whether the Northern QPAMs have complied
with the Policies and Training, and/or corrected (or are correcting)
any instances of noncompliance.
52. The Exemption Report must be (i) provided to the appropriate
corporate officers of each Northern QPAM to which such report relates
and to the head of compliance and the general counsel (or their
functional equivalent) of the relevant Northern QPAM, and (ii) made
unconditionally available to the independent auditor. The Exemption
Review, including the Compliance
[[Page 7184]]
Officer's written Exemption Report, must be completed within 90 days
following the end of the period to which it relates. \38\
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\38\ The Department notes that section I(l) of PTE 2016-11
required Northern to disclose to the Department any Deferred
Prosecution Agreement (DPA) or a Non-Prosecution Agreement (NPA)
with the U.S. Department of Justice, entered into by Northern or any
of its affiliates in connection with conduct described in section
I(g) of PTE 84-14 and/or ERISA section 411; and provide the
Department any information requested by the Department, as permitted
by law. The Department has determined not to include the same
condition in this proposed exemption, because a DPA or NPA is now
included in the list of disqualifying events under section I(g) of
PTE 84-14, effective as of June 17, 2024.
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53. The proposed exemption also mandates that, within 60 days of
the effective date of the exemption, each Northern QPAM clearly and
promptly informs Covered Plan clients of their right to obtain a copy
of the Policies or a description (the Summary Policies) which
accurately summarizes key components of the Northern 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 180 days following the end of the calendar year
during which the Policies were changed.\39\ With respect to this
requirement, the description may be continuously maintained on a
website, provided that such website's link to the Policies or Summary
Policies is clearly and prominently disclosed to each Covered Plan.
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\39\ If the Applicant satisfies this disclosure requirement
through Summary Policies, changes to the Policies will not require
new disclosure to Covered Plans unless the Summary Policies are no
longer accurate because of the changes.
---------------------------------------------------------------------------
54. Each Northern QPAM must impose its internal procedures,
controls, and protocols to reduce the likelihood of any recurrence of
conduct that is the subject of the Conviction, and each Northern QPAM
must provide the Department with the records necessary to demonstrate
that each condition of this exemption has been met within 30 days of a
request by the Department. With respect to an asset manager that
becomes an Northern QPAM after the effective date of the exemption by
virtue of being acquired (in whole or in part) by Northern or a
subsidiary or affiliate of Northern (a ``newly-acquired Northern
QPAM''), the newly-acquired Northern QPAM would not be precluded from
relying on the exemptive relief provided by PTE 84-14 notwithstanding
the Conviction as of the closing date for the acquisition; however, the
operative terms of the exemption shall not apply to the newly-acquired
Northern QPAM until a date that is six (6) months after the closing
date for the acquisition. To that end, the newly acquired Northern QPAM
will initially submit to an audit pursuant to section III(i) of this
exemption as of the first audit period that begins following the
closing date for the acquisition. The period covered by the audit must
begin on the date on which the Northern QPAM was acquired.
55. Finally, all the material facts and representations set forth
in the Summary of Facts and Representations must be true and accurate
at all times.
Statutory Findings--Administratively Feasible
56. The Department has tentatively determined that this proposed
exemption would be administratively feasible because, among other
things, a qualified independent auditor would be required to perform
in-depth audit(s) covering each Northern QPAM's compliance with the
exemption, and draft a corresponding written audit report that would be
available to the public. The Department notes that the independent
audit will provide an incentive for and a measure of compliance with
the exemption conditions, while reducing the immediate need for review
and oversight by the Department.
Statutory Findings--In the Interests of the Covered Plans
57. The Department has tentatively determined that the proposed
exemption would be in the interests of the participants and
beneficiaries of each affected Covered Plan because of the likely costs
the plans would incur if the exemption were denied and the benefits of
permitting plans to continue to rely upon the Northern QPAM's services
with the additional protections set forth in this exemption.
Statutory Findings--Protective of the Rights of Participants of the
Covered Plans
58. The Department has tentatively determined that this proposed
exemption would be protective of Covered Plans. The exemption would be
subject to a suite of protective conditions that the Department has
determined provide ample protections for the rights of Covered Plans
and their participants and beneficiaries that are managed by QPAMs that
have experienced a disqualifying event similar to the one experienced
by the Northern QPAMs. The Department notes, however, that in the event
the Northern QPAMs become subject to another disqualifying event under
PTE 84-14, the Department would be forced to reconsider whether relief
is appropriate for the Northern QPAMs, and whether the conditions for
relief hereunder are/were adequate to protect Covered Plans. The
Department also takes note of the Applicant's representation that the
criminal conduct relating to the Wildensteins occurred prior to the
acquisition of Baring Trustees by Northern Trust, and that Baring
Trustees, currently known as NTFS, is now subject to Northern Trust's
policies and compliance procedures. The Department further notes the
Applicant's representation that no one involved in taking on the
Wildenstein business or that had any dealings with such matters at the
time of the misconduct described in the Conviction works for NTFS. In
addition, under this proposed exemption, exemptive relief would begin
on March 5, 2025, and it has a limited prospective term of five (5)
years, which permits the Department to re-evaluate the Northern QPAMs'
adherence to the condition for relief under this exemption, and to
determine whether or not to continue to provide the relief hereunder.
Summary
59. Given the revised and new conditions described above, the
Department has tentatively determined that the relief sought by the
Applicants satisfies the statutory requirements for an exemption under
ERISA section 408(a) and Code section 4975(c)(2). The proposed
exemption provides relief from certain of the restrictions set forth in
section 406 and 407 of ERISA. The proposed exemption does not provide
relief from any other violation of law, including any criminal
conviction not expressly described herein. Any criminal conviction not
expressly described herein, or other violation of section I(g) of PTE
84-14 that is attributable to the Applicant would result in the
applicant's loss of this exemption.
Notice to Interested Persons
Notice of the proposed exemption will be provided to all interested
persons within fifteen (15) days of the publication of the notice of
proposed exemption in the Federal Register. The notice will be provided
to all interested persons in the manner approved by the Department and
will contain the documents described therein and a supplemental
statement required by 29 CFR 2570.43(a)(2). The supplemental statement
will inform interested persons of their right to comment on and to
request a hearing with respect to the pending exemption. All written
comments and/or requests for a hearing
[[Page 7185]]
must be received by the Department within forty-five (45) days of the
date of publication of this proposed exemption in the Federal Register.
All comments will be made available to the public.
Warning: If you submit a comment, EBSA recommends that you include
your name and other contact information in the body of your comment,
but DO NOT submit information that you consider to be confidential, or
otherwise protected (such as Social Security number or an unlisted
phone number) or confidential business information that you do not want
publicly disclosed. All comments may be posted on the internet and can
be retrieved by most internet search engines.
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under ERISA section 408(a) and/or Code section 4975(c)(2) does not
relieve a fiduciary or other party in interest or disqualified person
from certain other provisions of ERISA and/or the Code, including any
prohibited transaction provisions to which the exemption does not apply
and the general fiduciary responsibility provisions of ERISA section
404, which, among other things, require a fiduciary to discharge their
duties respecting the plan solely in the interest of the plan and its
participants and beneficiaries and in a prudent manner in accordance
with ERISA section 404(a)(1)(B); nor does it affect the requirement of
Code section 401(a) that the plan must operate for the exclusive
benefit of the employees of the employer maintaining the plan and their
beneficiaries;
(2) Before an exemption may be granted under ERISA section 408(a)
and/or Code section 4975(c)(2), the Department must find that the
exemption is administratively feasible, in the interests of the plan
and of its participants and beneficiaries, and protective of the rights
of participants and beneficiaries of the plan;
(3) The exemption would be supplemental to, and not in derogation
of, any other provisions of ERISA and/or the Code, including statutory
or administrative exemptions and transitional rules. Furthermore, the
fact that a transaction is subject to an administrative or statutory
exemption is not dispositive of whether the transaction is, in fact, a
prohibited transaction; and
(4) The exemption would be subject to the express condition that
the material facts and representations contained in the Application are
true and complete at all times and that the Application accurately
describes all material terms of the transactions which are the subject
of the exemption.
Proposed Exemption
Based on the facts and representations set forth in the application
for exemption, the Department is proposing to grant an exemption under
the authority of ERISA section 408(a) and Code section 4975(c)(2) in
accordance with the procedures set forth in 29 CFR part 2570, subpart B
(76 FR 66637, 66644, October 27, 2011). Effective December 31, 1978,
section 102 of Reorganization Plan No. 4 of 1978, 5 U.S.C. App. 1
(1996), transferred the authority of the Secretary of the Treasury to
issue exemptions of the type requested to the Secretary of Labor.
Therefore, this notice of proposed exemption is issued solely by the
Department.
Section I. Definitions
(a) The term ``Conviction'' means the judgment of conviction
against NTFS for aiding and abetting tax fraud entered in France in the
Court of Appeal, French Special Prosecutor No. 1120392066, French
Investigative Judge No. JIRSIF/11/12, or to be entered in another court
of competent jurisdiction;
(b) The term ``Covered Plan'' means a plan subject to Part IV of
Title I of ERISA (an ``ERISA-covered plan'') or a plan subject to Code
section 4975 (an ``IRA''), in each case, with respect to which Northern
relies on PTE 84-14, or with respect to which Northern has expressly
represented that the manager qualifies as a QPAM or relies on the QPAM
class exemption (PTE 84-14 or the QPAM Exemption). A Covered Plan does
not include an ERISA-covered plan or IRA to the extent that Northern
has expressly disclaimed reliance on QPAM status or PTE 84-14 in
entering into a contract, arrangement, or agreement with the ERISA-
covered plan or IRA;
(c) The term ``Exemption Period'' means a period of five years,
beginning on March 5, 2025 and ending on March 4, 2030;
(d) The term ``Northern'' means Northern Trust Corporation,
together with its current and future affiliates;
(e) The term ``Northern QPAM'' means a ``qualified professional
asset manager'' (as defined in PTE 84-14 section VI(a)) \40\ that
relies on the relief provided by PTE 84-14 and with respect to which
NTFS is a current or future ``affiliate'' (as defined in PTE 84-14
section VI(d)); and the Northern QPAMs do not and must not include
NTFS.
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\40\ In general terms, a QPAM is an independent fiduciary that
is a bank, savings and loan association, insurance company, or
investment adviser that meets certain equity or net worth
requirements and other licensure requirements and that has
acknowledged in a written management agreement that it is a
fiduciary with respect to each plan that has retained the QPAM
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(f) The term ``NTFS'' means Northern Trust Fiduciary Services
(Guernsey) ltd., an affiliate'' of Northern (as defined in PTE 84-14
section VI(c)) located in Guernsey;
(g) The terms ``participate,'' and ``participate in,'' when used to
describe a person's role in the criminal conduct described in this
exemption, refer not only to a person's active participation in the
misconduct of NTFS that is the subject of the Conviction, but also
includes the knowing or tacit approval of the misconduct underlying the
Conviction or knowledge of such conduct without taking active steps to
prohibit it, including reporting the conduct to such individual's
supervisors, and to Northern's board of directors.
(h) Wherever found, any reference in this exemption to ``the best
knowledge'' of a party, ``best of [a party's] knowledge,'' and similar
formulations of the ``best knowledge'' standard, will be deemed to mean
the actual knowledge of the party and the knowledge which they would
have had if they had conducted their reasonable due diligence required
under the circumstances into the relevant subject matter. If a
condition of the exemption requires an individual to provide
certification pursuant to their ``best knowledge,'' then such
individual, in order to make such certification, must perform their
reasonable due diligence required under the circumstances to determine
whether the information such individual is certifying is complete and
accurate in all respects. Furthermore, with respect to an entity other
than a natural person, the ``best knowledge'' of the entity 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.
Section II. Covered Transactions
If the proposed exemption is granted, certain entities with
specified relationships to NTFS (i.e., the Northern QPAMs, as defined
above) will not be precluded from relying on the exemptive relief
provided by Prohibited Transaction Class Exemption 84-14 (PTE 84-
14),\41\ notwithstanding the
[[Page 7186]]
Conviction (as defined above),\42\ during the Exemption Period,
provided that the conditions in section III are satisfied.
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\41\ 49 FR 9494 (March 13, 1984), as corrected at 50 FR 41430,
(October 10, 1985), as amended at 70 FR 49305(August 23, 2005), as
amended at 75 FR 38837 (July 6, 2010), and as amended at 89 FR 23090
(April 3, 2024).
\42\ Section I(g) of PTE 84-14 generally provides that
``[n]either the QPAM nor any affiliate thereof . . . nor any owner .
. . of a 5 percent or more interest in the QPAM is a person who
within the 10 years immediately preceding the transaction has been
either convicted or released from imprisonment, whichever is later,
as a result of'' certain felonies including income tax evasion, and
aiding and abetting tax evasion.''
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Section III. Conditions
(a) The Northern QPAMs (including their officers, directors, agents
other than NTFS, and employees of such Northern QPAMs) did not know of,
have reason to know of, or participate in the criminal conduct of NTFS
that is the subject of the Conviction. Further, any other party engaged
on behalf of the Northern 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 that is the subject of the Conviction;
(b) The Northern QPAMs (including their officers, directors, agents
other than NTFS, and employees of such Northern QPAMs) did not receive
direct compensation, or knowingly receive indirect compensation, in
connection with the criminal conduct that is the subject of the
Conviction. Further, any other party engaged on behalf of the Northern
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 conduct that is the subject of the Conviction;
(c) The Northern QPAMs will not employ or knowingly engage any of
the individuals that participated in the criminal conduct that is the
subject of the Conviction;
(d) At all times during the Exemption Period, no Northern QPAM will
use its authority or influence to direct an ``investment fund,'' (as
defined in PTE 84-14 section VI(b)) that is subject to ERISA or the
Code and managed by such Northern QPAM in reliance on PTE 84-14, or
with respect to which a Northern QPAM has expressly represented to a
Covered Plan that it qualifies as a QPAM or relies on the QPAM
Exemption, to enter into any transaction with NTFS or engage NTFS to
provide any service to such investment fund, for a direct or indirect
fee borne by such investment fund, regardless of whether such
transaction or service may otherwise be within the scope of relief
provided by an administrative or statutory exemption;
(e) Any failure of the Northern QPAMs to satisfy PTE 84-14 section
I(g) arose solely from the Conviction;
(f) No Northern QPAM exercised authority over the assets of any
Covered Plan in a manner that it knew or should have known would
further the criminal conduct that is the subject of the Conviction or
cause a Northern QPAM or its affiliates to directly or indirectly
profit from the criminal conduct that is the subject of the Conviction;
(g) NTFS has not provided and will not provide discretionary asset
management services to Covered Plans, nor will it otherwise act as a
fiduciary within the meaning of ERISA section 3(21)A)(i) or (iii), or
Code section 4975(e)(3)(A) and (C), with respect to Covered Plan
assets;
(h)(1) Each Northern QPAM will continue to implement, maintain,
adjust (to the extent necessary), and follow written policies (the
Policies) requiring and reasonably designed to ensure that:
(i) The asset management decisions of each Northern QPAM are
conducted independently of the management and business activities of
Northern, including NTFS and Northern's non-asset management
affiliates;
(ii) The Northern QPAM fully complies with ERISA's fiduciary duties
and with ERISA and the Code's prohibited transaction provisions, as
applicable with respect to each Covered Plan, and does not knowingly
participate in any violations of these duties and provisions with
respect to Covered Plans;
(iii) The Northern 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 Northern QPAM to
regulators, including but not limited to, the Department of Labor, 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 the Northern QPAM's knowledge at the time, the
Northern 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;
(vi) The Northern QPAM complies with the terms of this exemption,
if granted; and
(vii) Any violation of, or failure to comply with, an item in
subparagraph (ii) through (vi), is corrected promptly upon discovery,
and any such violation or compliance failure not promptly corrected is
reported, upon discovering the failure to promptly correct, in writing,
to appropriate corporate officers, the head of compliance and the
General Counsel (or their functional equivalent) of the relevant
Northern QPAM, and an appropriate fiduciary of any affected Covered
Plan where such fiduciary is independent of Northern; however, with
respect to any Covered Plan sponsored by an ``affiliate'' (as defined
in PTE 84-14 section VI(d)) of Northern or beneficially owned by an
employee of Northern or its affiliates, such fiduciary does not need to
be independent of Northern. A Northern QPAM will not be treated as
having failed to develop, implement, maintain, or follow the Policies,
provided that it corrects any instance of noncompliance when discovered
or when it reasonably should have known of the noncompliance (whichever
is earlier), and provided that it adheres to the reporting requirements
set forth in this subparagraph (vii);
(2) Each Northern QPAM must continue to implement a program of
training (the Training), conducted at least annually during the
Exemption Period, for all relevant Northern QPAM asset/portfolio
management, trading, legal, compliance, and internal audit personnel
during the Exemption Period. The Training may be conducted
electronically and must: (a) be set forth in the Policies and 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 temporary exemption (including any loss of exemptive relief
provided herein), and prompt reporting of wrongdoing; (b) be conducted
by a professional who has been prudently selected and who has
appropriate training and proficiency with ERISA and the Code to perform
the tasks required by this exemption; and (c) be verified, through in-
training knowledge checks, ``graduation'' tests, and/or other
technological tools designed to confirm that personnel fully and in
good faith participate in the Training.
(i)(1) Each Northern QPAM must submit to an audit conducted every
two years by an independent auditor who has been prudently selected and
who
[[Page 7187]]
has appropriate technical training and proficiency with ERISA and the
Code, to evaluate the adequacy of and each Northern QPAM's compliance
with the Policies and Training conditions described herein. The audit
requirement must be incorporated in the Policies. Each audit must cover
the preceding consecutive twelve (12) month period. The first audit
must cover the period from March 5, 2025 (at the end of the period of
protection granted under PTE 2016-11), through March 4, 2026, and must
be completed by September 4, 2026. The second audit must cover the
period from March 5, 2027, through March 4, 2028, and must be completed
by September 4, 2028. The third audit must cover the period from March
5, 2029, through March 4, 2030, and must be completed by September 4,
2030;
(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, each Northern QPAM and, if
applicable, Northern, will grant the auditor unconditional access to
its businesses, including, but not limited to: its computer systems;
business records; transactional data; workplace locations; training
materials; and personnel. Such access will be provided only to the
extent that it is not prevented by State or Federal statute, or
involves communications subject to attorney client privilege and may be
limited to information relevant to the auditor's objectives as
specified by the terms of this exemption;
(3) The auditor's engagement must specifically require the auditor
to determine whether each Northern QPAM has developed, implemented,
maintained, and followed the Policies in accordance with the conditions
of this exemption, and has developed and implemented the Training, as
required herein;
(4) The auditor's engagement must specifically require the auditor
to test each Northern QPAM's operational compliance with the Policies
and Training conditions. In this regard, the auditor must test, for
each QPAM, a sample of the QPAM's transactions involving Covered Plans.
The sample must include transactions that are sufficient in size,
number and nature to afford the auditor a reasonable basis to determine
the QPAM's operational compliance with the Policies and Training;
(5) For each audit, on or before the end of the relevant period for
completing the audit described in section III(i)(1), the auditor must
issue a written report (the Audit Report) to Northern and the Northern
QPAM to which the audit applies that describes the procedures performed
by the auditor during the course of its examination. At its discretion,
the auditor may issue a single consolidated Audit Report that covers
all the Northern QPAMs. The Audit Report must include the auditor's
specific determinations regarding:
(i) the adequacy of each Northern QPAM's Policies and Training;
each Northern QPAM's compliance with the Policies and Training
conditions; the need, if any, to strengthen such Policies and Training;
and any instance of the respective Northern QPAM's noncompliance with
the written Policies and Training described in section III(h) above.
The Northern QPAM must promptly address any noncompliance and promptly
address or prepare a written plan of action to address any
determination by the auditor regarding the adequacy of the Policies and
Training and the auditor's recommendations (if any) with respect to
strengthening the Policies and Training of the respective Northern
QPAM. Any action taken, or the plan of action to be taken, by the
respective Northern QPAM must be included in an addendum to the Audit
Report (and such addendum must be completed before the certification
described in section III(i)(7) below). In the event such a plan of
action to address the auditor's recommendation regarding the adequacy
of the Policies and Training is not completed by the time the Audit
Report is submitted, the following period's Audit Report must state
whether the plan was satisfactorily completed. Any determination by the
auditor that the respective Northern QPAM has implemented, maintained,
and followed sufficient Policies and Training must not be based solely
or in substantial part on an absence of evidence indicating
noncompliance. In this last regard, any finding that a Northern QPAM
has complied with the requirements under this subparagraph must be
based on evidence that the particular Northern QPAM has actually
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
(Compliance Officer), as described in section III(m) below, as the
basis for the auditor's conclusions in lieu of independent
determinations and testing performed by the auditor, as required by
section III(i)(3) and (4) above; and
(ii) The adequacy of the most recent Exemption Review described in
section III(m);
(6) The auditor must notify the respective Northern QPAM of any
instance of noncompliance identified by the auditor within five (5)
business days after such noncompliance is identified by the auditor,
regardless of whether the audit has been completed as of that date;
(7) With respect to each Audit Report, the general counsel, or one
of the three most senior executive officers of the line of business
engaged in discretionary asset management services through the Northern
QPAM with respect 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 and that to the best of such officer's
knowledge at the time, the Northern QPAM has addressed, corrected or
remedied any noncompliance and inadequacy, or has an appropriate
written plan to address any inadequacy regarding the Policies and
Training identified in the Audit Report. The certification must also
include the signatory's determination that the Policies and Training in
effect at the time of signing are adequate to ensure compliance with
the conditions of this exemption and with the applicable provisions of
ERISA and the Code. Notwithstanding the above, no person who
participated in the criminal conduct that is the subject of the
Conviction may provide the certification required by this exemption,
unless the person took active documented steps to stop the misconduct
underlying the Conviction;
(8) Northern's Board of Directors must be provided a copy of each
Audit Report, and a senior executive officer with a direct reporting
line to the highest-ranking legal compliance officer of Northern must
review the Audit Report for each Northern QPAM and certify in writing,
under penalty of perjury, that such officer has reviewed each Audit
Report. With respect to this subsection (8), such certifying senior
executive officer must not have known of, had reason to know of, or
participated in, any misconduct underlying the Conviction, unless such
person took active documented steps to stop the misconduct underlying
the Conviction;
(9) Each Northern QPAM provides its certified Audit Report, by
electronic mail to <a href="/cdn-cgi/l/email-protection" class="__cf_email__" data-cfemail="94f1b9fbf1f0d4f0fbf8baf3fbe2">[email protected]</a>. This delivery must take place no
later than forty-five (45) days following completion of the Audit
Report. The Audit Report will be made part of the public record
regarding this exemption. Furthermore, each Northern QPAM must make its
Audit Report unconditionally available, electronically or otherwise,
for
[[Page 7188]]
examination upon request by any duly authorized employee or
representative of the Department, other relevant regulators, and any
fiduciary of a Covered Plan;
(10) Each Northern QPAM and the auditor must submit to e-
<a href="/cdn-cgi/l/email-protection" class="__cf_email__" data-cfemail="bdd2d8d9fdd9d2d193dad2cb">[email protected]</a> any engagement agreement(s) executed pursuant to the
engagement of the auditor under this exemption no later than two (2)
months after the execution of any such engagement agreement;
(11) The auditor must provide the Department, upon request access
to all the workpapers it created and utilized in the course of the
audit, for inspection and review, provided such access and inspection
is otherwise permitted by law; and
(12) Northern must notify the Department of a change in the
independent auditor no later than 60 days after the engagement of a
substitute or subsequent auditor and must provide an explanation for
the substitution or change including a description of any material
disputes between the terminated auditor and Northern;
(j) Throughout the Exemption Period, with respect to any
arrangement, agreement, or contract between a Northern QPAM and a
Covered Plan, each Northern QPAM agrees and warrants:
(1) To comply with ERISA and the Code, as applicable with respect
to such Covered Plan; to refrain from engaging in prohibited
transactions that are not otherwise exempt (and to promptly correct any
prohibited transactions in accordance with applicable rules under ERISA
and the Code); and to comply with the standards of prudence and loyalty
set forth in ERISA section 404 with respect to each such Covered Plan,
to the extent that section is applicable;
(2) To indemnify and hold harmless the Covered Plan for any actual
losses resulting directly from the Northern QPAM's violation of any
conditions of this exemption, a Northern 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 Northern QPAM; or any claim arising out of the failure of such
Northern QPAM to qualify for the exemptive relief provided by PTE 84-14
as a result of a violation of section I(g) of PTE 84-14 other than the
Conviction. Actual losses include, but are 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 Northern QPAM's inability to rely upon
the relief in the QPAM Exemption.
(3) Not to require (or otherwise cause) the Covered Plan to waive,
limit, or qualify the liability of the Northern QPAM for violating
ERISA or the Code or engaging in prohibited transactions;
(4) Not to restrict the ability of the Covered Plan to terminate or
withdraw from its arrangement with the Northern QPAM with respect to
any investment in a separately managed account or pooled fund subject
to ERISA and managed by such QPAM, with the exception of reasonable
restrictions, appropriately disclosed in advance, that are specifically
designed to ensure equitable treatment of all investors in a pooled
fund in the event such withdrawal or termination may have adverse
consequences for all other investors. In connection with any of these
arrangements involving investments in pooled funds subject to ERISA
entered into after the effective date of this exemption, the adverse
consequences must relate to a lack of liquidity of the underlying
assets, valuation issues, or regulatory reasons that prevent the fund
from promptly redeeming a Covered Plan's investment, and such
restrictions must be applicable to all such investors in the pooled
fund on equal terms and effective no longer than reasonably necessary
to avoid the adverse consequences;
(5) Not to impose any fees, penalties, or charges for such
termination or withdrawal with the exception of reasonable fees,
appropriately disclosed in advance, that are specifically designed to
prevent generally recognized abusive investment practices or
specifically designed to ensure equitable treatment of all investors in
a pooled fund in the event the withdrawal or termination may have
adverse consequences for all other investors, provided that such fees
are applied consistently and in like manner to all such investors;
(6) Not to include exculpatory provisions disclaiming or otherwise
limiting the liability of the Northern 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 the Northern QPAM and its affiliates, or damages arising from acts
outside the control of the Northern QPAM; and
(7) Within 60 calendar days after this exemption's effective date,
each Northern QPAM must provide a notice of its obligations under this
section III(j) to each Covered Plan, including for avoidance of doubt
the definition of actual losses as provided in clause (2) above. For
Covered Plans that enter into a written asset or investment management
agreement with a Northern QPAM on or after 60 calendar days from this
exemption's effective date, the Northern QPAM must agree to its
obligations under this section III(j) in an updated investment
management agreement between the Northern QPAM and such clients or
other written contractual agreement. This condition will be deemed met
for each Covered Plan that received a notice pursuant to PTE 2016-11
that meets the terms of this condition. This condition will also be met
where the Northern QPAM has already agreed to the same obligations
required by this section III(j) in an updated investment management
agreement between the Northern QPAM and a Covered Plan.
(k) Within 60 days after the effective date of this exemption, each
Northern QPAM provides notice of the exemption as published in the
Federal Register, along with a separate summary describing the facts
that led to the Conviction (the Summary), which has been submitted to
the Department, and a prominently displayed statement (the Statement)
that the Conviction results in a failure to meet a condition in PTE 84-
14 to each sponsor and beneficial owner of a Covered Plan that has
entered into a written asset or investment management agreement with
the Northern QPAM. All prospective Covered Plan clients that enter into
a written asset or investment management agreement with the Northern
QPAM (including a participation or subscription agreement in a pooled
fund managed by an Northern QPAM) after a date that is 60 days after
the effective date of this exemption must receive must receive the
proposed and final exemptions with the Summary and the Statement prior
to, or contemporaneously with, the client's receipt of a written asset
management agreement from the Northern QPAM (for avoidance of doubt,
all Covered Plan clients of an Northern QPAM during the Exemption
Period must receive the disclosures described in this section by the
later of (i) 60 days after the effective date of the exemption or (ii)
the date that a Covered Plan client enters into a written asset or
investment management agreement with an Northern QPAM). Disclosures
required under this paragraph (k) may be delivered electronically
(including by an email that has a link to this exemption.
[[Page 7189]]
Notwithstanding the above paragraph, a Northern QPAM will not violate
the condition solely because a Covered Plan refuses to sign an updated
investment management agreement;
(l) The Northern QPAMs must comply with each condition of PTE 84-
14, as amended, with the sole exceptions of the violations of PTE 84-14
section I(g) that are attributable to the Conviction. If an affiliate
of the Northern QPAM (as defined in section VI(d) of PTE 84-14) is
convicted of a crime described in PTE 84-14 section I(g) (other than
the Conviction) during the Exemption Period, this exemption will
terminate immediately;
(m)(1) Within 60 days after the date of publication of the
exemption, each Northern QPAM must designate a senior compliance
officer (i.e., the Compliance Officer) to be responsible for compliance
with the Policies and Training requirements described herein. No person
who participated in the criminal conduct that is the subject of the
Conviction, may be involved with the designation or responsibilities
required by this condition unless the person took active documented
steps to stop the misconduct. The Compliance Officer must conduct a
review of each twelve-month period comprising the Exemption Period
(each an Exemption Review), to determine the adequacy and effectiveness
of the Northern QPAM's implementation of the Policies and Training.
With respect to the Compliance Officer, the following conditions must
be met:
(i) The Compliance Officer must be a professional who has extensive
experience with, and knowledge of, the regulation of financial services
and products, including under ERISA and the Code; and
(ii) The Compliance Officer must have a direct reporting line to
the highest-ranking corporate officer in charge of legal compliance for
asset management.
(2) With respect to the Exemption Review, the following conditions
must be met:
(i) The Exemption Review must include a review of the Northern
QPAM's compliance with and effectiveness of the Policies and Training
and of the following: any compliance matter related to the Policies or
Training that was identified by, or reported to, the Compliance Officer
or others within the compliance and risk control function (or its
equivalent) during the twelve-month period under review; the most
recent Audit Report issued pursuant to this exemption; any material
change in the relevant business activities of the Northern QPAM; 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 Northern QPAM;
(ii) The Compliance Officer prepares a written report for the
Exemption Review (an Exemption Report) that (A) summarizes their
material activities during the twelve-month period under review; (B)
sets forth any instance of noncompliance discovered during the twelve-
month period under review, and any related corrective action; (C)
details any change to the Policies or Training to guard against any
similar instance of noncompliance occurring again; and (D) makes
recommendations, as necessary, for additional training, procedures,
monitoring, or additional and/or changed processes or systems, and
management's actions in response to such recommendations;
(iii) In the Exemption Report, the Compliance Officer must certify
in writing that to the best of their knowledge at the time: (A) the
report is accurate; (B) the Policies and Training are working in a
manner which is reasonably designed to ensure that the Policies and
Training requirements described herein are met; (C) any known instance
of noncompliance during the twelve-month period under review and any
prior period, and any related correction taken to date, has been
identified in the Exemption Report; and (D) the Northern QPAM 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 the Northern QPAM; the head of compliance and the general
counsel (or their functional equivalent) of the Northern QPAM; and must
be made unconditionally available to the independent auditor described
above; and
(v) The Exemption Review, including the Compliance Officer's
written Report, must be completed within 90 days following the end of
the period to which it relates;
(n) Each Northern 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
Northern QPAM relies upon the relief in the exemption;
(o) Within 60 days after the effective date of the exemption, each
Northern 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 such Northern 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 180 days
following the end of the calendar year during which the Policies were
changed. If the Northern QPAM meets this disclosure requirement through
Summary Policies, changes to the Policies shall not result in the
requirement for a new disclosure unless, as a result of changes to the
Policies, the Summary Policies are no longer accurate. With respect to
this requirement, the description may be continuously maintained on a
website, provided that such website link to the Policies or Summary
Policies is clearly and prominently disclosed to each Covered Plan;
(q) A Northern QPAM will not fail to meet the terms of this
exemption, solely because a different Northern QPAM fails to satisfy a
condition for relief under this exemption, described in sections
III(c), (d), (h), (i), (j), (k), (l), (m), (n), and (o) 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 Northern or its affiliates.
(r) Each Northern QPAM imposes internal procedures, controls, and
protocols to reduce the likelihood of any recurrence of conduct that is
the subject of the Conviction;
(s) All the material facts and representations set forth in the
Summary of Facts and Representations are true and accurate at all
times; and
(t) With respect to an asset manager that becomes an Northern QPAM
after the effective date of the exemption by virtue of being acquired
(in whole or in part) by Northern or a subsidiary or affiliate of
Northern (a ``newly-acquired Northern QPAM''), the newly-acquired
Northern QPAM would not be precluded from relying on the exemptive
relief provided by PTE 84-14 notwithstanding the Conviction as of the
closing date for the acquisition; however, the operative terms of the
exemption shall not apply to the newly-acquired Northern QPAM until a
date that is six (6) months after the closing date for the acquisition.
To that end, the newly acquired Northern QPAM will initially submit to
an audit pursuant to section III(i) of this exemption as of the first
audit period that begins following the closing date for the
acquisition. The
[[Page 7190]]
period covered by the audit must begin on the date on which the
Northern QPAM was acquired;
(t) Relief in this exemption will terminate on the date that is 12
months following the date that a U.S. regulatory authority makes a
final decision that Northern or an affiliate failed to comply in all
material respects with any requirement imposed by such regulatory
authority in connection with the Conviction; and
(u) Each Northern QPAM must provide the Department with the records
necessary to demonstrate that each condition of this exemption has been
met within 30 days of a request by the Department.
Exemption Date: This exemption will be in effect beginning on March
5, 2025, and ending on March 4, 2030.
Signed at Washington, DC.
George Christopher Cosby,
Director, Office of Exemption Determinations, Employee Benefits
Security Administration, U.S. Department of Labor.
[FR Doc. 2025-01244 Filed 1-17-25; 8:45 am]
BILLING CODE 4510-29-P
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</html>Indexed from Federal Register on January 21, 2025.
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.