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New ERISA Exemption Permits Cross-Trading Between Index Funds and Other Passively Managed Accounts

February 01, 2002

By ERISA/Investment Management Practice Group

The U.S. Department of Labor has issued a long-awaited ERISA prohibited transaction exemption that permits investment managers to cross-trade equity and debt securities between passively managed index and model-driven funds, where at least one of the Funds involved in the trade is subject to ERISA. The exemption also coverscross-trades between such Funds and certain “large accounts” that engage investment managers to act as “trading advisers” in connection with a portfolio restructuring program. The class exemption, PTE 2002-12, does not cover cross-trades of securities involving “actively managed accounts” – i.e., accounts as to which the investment manager makes discretionary, subjective decisions with regard to the purchase and sale of securities. The DOL has indicated that it is continuing to consider what additional safeguards would be necessary for it to provide exemptive relief for actively managed accounts. Investment managers have long pursued an ERISA class exemption for both types of cross-trading, to permit ERISA accounts to participate in cross-trade programs in use for mutual fund and other non-ERISA separate accounts.