Exemptions from Certain Prohibited Transaction Restrictions, 61816-61921 [2017-27977]

Download as PDF 61816 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices DEPARTMENT OF LABOR the type proposed to the Secretary of Labor. Employee Benefits Security Administration Statutory Findings Exemptions from Certain Prohibited Transaction Restrictions Employee Benefits Security Administration, Labor. ACTION: Grant of individual exemptions. AGENCY: This document contains exemptions issued by the Department of Labor (the Department) from certain of the prohibited transaction restrictions of the Employee Retirement Income Security Act of 1974 (ERISA or the Act) and/or the Internal Revenue Code of 1986 (the Code). This notice includes the following: 2017–03, JPMorgan Chase & Co., D–11906; 2017–04, Deutsche Investment Management Americas Inc. (DIMA) and Certain Current and Future Asset Management Affiliates of Deutsche Bank AG, D–11908; 2017–05, Citigroup Inc., D–11909; 2017–06, Barclays Capital Inc., D–11910; 2017– 07, UBS Assets Management (Americas) Inc.; UBS Realty Investors LLC; UBS Hedge Fund Solutions LLC; UBS O’Connor LLC; and Certain Future Affiliates in UBS’s Asset Management and Wealth Management Americas Divisions, D–11907. SUPPLEMENTARY INFORMATION: A notice was published in the Federal Register of the pendency before the Department of a proposal to grant such exemption. The notice set forth a summary of facts and representations contained in the application for exemption and referred interested persons to the application for a complete statement of the facts and representations. The application has been available for public inspection at the Department in Washington, DC. The notice also invited interested persons to submit comments on the requested exemption to the Department. In addition the notice stated that any interested person might submit a written request that a public hearing be held (where appropriate). The applicant has represented that it has complied with the requirements of the notification to interested persons. One request for a hearing was received by the Department. Public comments were received by the Department as described in the granted exemption. The notice of proposed exemption was issued and the exemption is being granted solely by the Department because, 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 ethrower on DSK3G9T082PROD with NOTICES SUMMARY: VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 In accordance with section 408(a) of the Act and/or section 4975(c)(2) of the Code and the procedures set forth in 29 CFR part 2570, subpart B (76 FR 66637, 66644, October 27, 2011) 1 and based upon the entire record, the Department makes the following findings: (a) The exemption is administratively feasible; (b) The exemption is in the interests of the plan and its participants and beneficiaries; and (c) The exemption is protective of the rights of the participants and beneficiaries of the plan. JPMorgan Chase Co. (JPMC or the Applicant) Located in New York, New York [Prohibited Transaction Exemption 2017–03; Exemption Application No. D–11906] Discussion On November 21, 2016, the Department of Labor (the Department) published a notice of proposed exemption in the Federal Register at 81 FR 83372, for certain entities with specified relationships to JPMC to continue to rely upon the relief provided by PTE 84–14 for a period of five years,2 notwithstanding JPMC’s criminal conviction, as described herein. The Department is granting this exemption in order to ensure that Covered Plans 3 whose assets are managed by a JPMC Affiliated QPAM or JPMC Related QPAM may continue to benefit from the relief provided by PTE 84–14. The exemption is effective from 1 The Department has considered exemption applications received prior to December 27, 2011 under the exemption procedures set forth in 29 CFR part 2570, subpart B (55 FR 32836, 32847, August 10, 1990). 2 49 FR 9494 (March 13, 1984), as corrected at 50 FR 41430 (October 10, 1985), as amended at 70 FR 49305 (August 23, 2005) and as amended at 75 FR 38837 (July 6, 2010), hereinafter referred to as PTE 84–14 or the QPAM exemption. 3 The term ‘‘Covered Plan’’ is a plan subject to Part 4 of Title 1 of ERISA (‘‘ERISA-covered plan’’) or a plan subject to Section 4975 of the Code (‘‘IRA’’) with respect to which a JPMC Affiliated QPAM relies on PTE 84–14, or with respect to which a JPMC Affiliated QPAM (or any JPMC affiliate) has expressly represented that the manager qualifies as a QPAM or relies on the QPAM class exemption (PTE 84–14). A Covered Plan does not include an ERISA-covered Plan or IRA to the extent the JPMC Affiliated QPAM has expressly disclaimed reliance on QPAM status or PTE 84–14 in entering into its contract, arrangement, or agreement with the ERISA-covered plan or IRA. See further discussion in this Preamble under the heading Comment 8—Policies and Procedures Relating to Compliance with ERISA and the Code— Section I(h)(1)(ii)–(v). PO 00000 Frm 00002 Fmt 4701 Sfmt 4703 January 10, 2018 through January 9, 2023 (the Exemption Period). No relief from a violation of any other law is provided by this exemption, including any criminal conviction described in the proposed exemption. Furthermore, the Department cautions that the relief in this exemption will terminate immediately if, among other things, an entity within the JPMC corporate structure is convicted of a crime described in Section I(g) of PTE 84–14 (other than the Conviction) during the Exemption Period. The terms of this exemption have been specifically designed to promote conduct that adheres to basic fiduciary standards under ERISA and the Code. The exemption also aims to ensure that plans and IRAs can terminate relationships in an orderly and cost effective fashion in the event a plan or IRA fiduciary determines it is prudent for the plan or IRA to sever its relationship with an entity covered by the exemption. Written Comments The Department invited all interested persons to submit written comments and/or requests for a public hearing with respect to the notice of proposed exemption, published in the Federal Register at 81 FR 83372 on November 21, 2016. All comments and requests for a hearing were due by January 20, 2017.4 The Department received written comments from the Applicant, members of the U.S. Congress, and a number of plan and IRA clients of JPMC. After considering these submissions, the Department has determined to grant the exemption, with revisions, as described below. Comment 1—Term of the Exemption The Applicant requests that the Department extend the term of the exemption from five years to nine years from the Conviction Date. The Applicant states that the five year term is inconsistent with precedent and ‘‘appears punitive.’’ The Applicant further states that ‘‘exemptions should reflect the underlying facts that necessitated the exemption [and] [h]ere, those facts are as follows: JPMC was convicted of a single crime, based solely on the misconduct of a single individual who was not employed by the Applicant’s asset management businesses and who has been terminated by a firm that has dedicated and continues to dedicate significant resources to enhancing the relevant 4 The Department received additional comments from Applicant after the close of the comment period. E:\FR\FM\29DEN2.SGM 29DEN2 ethrower on DSK3G9T082PROD with NOTICES Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices controls to prevent future instances of similar misconduct.’’ The Applicant states that ‘‘the exemption imposes additional and burdensome requirements on the asset management businesses of the applicant-businesses entirely uninvolved with the criminal conduct.’’ Although the Applicant characterizes the conduct as involving the isolated actions of one individual, the Department does not agree with the apparent suggestion that the Applicant bears little or no responsibility for the criminal conduct. For example, JPMC’s Plea Agreement contains the following statement, under the heading Other Relevant Conduct: ‘‘the defendant [JPMC], through its currency traders and sales staff, also engaged in other currency trading and sales practices in conducting FX Spot Market transactions with customers via telephone, email, and/or electronic chat, to wit: (i) Intentionally working customers’ limit orders one or more levels, or ‘pips,’ away from the price confirmed with the customer; (ii) including sales markups, through the use of live hand signals or undisclosed prior internal arrangements or communications, to prices given to customers that communicated with sales staff on open phone lines; (iii) accepting limit orders from customers and then informing those customers that their orders could not be filled, in whole or in part, when in fact the defendant was able to fill the order but decided not to do so because the defendant expected it would be more profitable not to do so; and (iv) disclosing non-public information regarding the identity and trading activity of the defendant’s customers to other banks or other market participants, in order to generate revenue for the defendant at the expense of its customers.’’ In developing this exemption, the Department also considered statements made by other regulators. The Financial Conduct Authority’s (FCA) Final Notice states: ‘‘[d]uring the Relevant Period, JPMorgan did not exercise adequate and effective control over its G10 spot FX trading business. . . . The front office failed adequately to discharge these responsibilities with regard to obvious risks associated with confidentiality, conflicts of interest and trading conduct.’’ The Notice further states: ‘‘These failings occurred in circumstances where certain of those responsible for managing front office matters were aware of and/or at times involved in behaviors described above.’’ By way of further example, the Consent Order of the Office of the Comptroller of the Currency (OCC) states: ‘‘[t]he OCC’s examination VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 findings established that the Bank [the Applicant’s Corporate and Investment Banking line of business] had deficiencies in its internal controls and had engaged in unsafe or unsound banking practices with respect to the oversight and governance of the Bank’s FX trading business such that the Bank failed to detect and prevent the conduct set forth in paragraph twelve (12). The deficiencies and unsafe or unsound practices include the following: (a) The Bank’s oversight and governance of its FX trading business were weak and lacked adequate formal guidance to mitigate and manage risks related to market conduct in FX Trading with respect to sales, trading and supervisory employees in that business . . . .’’ The Department also notes the size of relevant fines imposed by various regulators: The Department of Justice imposed a $550 million fine; The Board of Governors of the Federal Reserve Board imposed a $342 million fine; and the OCC, the Commodity Futures Trading Commission, and the FCA imposed fines of $350 million, $310 million, and £222,166,000, respectively. This exemption is not punitive; instead, its five-year term and protective conditions reflect the Department’s intent to protect Covered Plans that entrust substantial assets to a JPMC Affiliated QPAM, despite the serious misconduct and supervisory failures described above. The limited term of this exemption gives the Department the opportunity to review the adherence by the JPMC Affiliated QPAMs to the conditions set out herein. If the Applicant seeks an extension of this exemption, the Department will examine whether the compliance and oversight changes mandated by various regulatory authorities are having the desired effect on JPMC entities. The relationship between the JPMC Affiliated QPAMs and the Applicant’s Corporate and Investment Banking line of business (CIB) is substantial. The Applicant states, ‘‘As of the date of the Applicant’s application, JPMC Affiliated QPAMs managed approximately $100 billion in plan assets through collective investment trusts that use the custody and administration services of the Applicant’s Corporate and Investment Banking line of business (CIB), operating through the Bank. Similarly, certain plans managed by JPMC Affiliated QPAMs through separate accounts have independently selected CIB (operating through the Bank) as their trustee and/or custodian, and transactions directed by JPMC Affiliated QPAMs on behalf of such plans would necessarily require the trustee/custodian to provide services for a direct or PO 00000 Frm 00003 Fmt 4701 Sfmt 4703 61817 indirect fee.’’ The Applicant also states, ‘‘Because of all of the services CIB necessarily provides to client accounts, the wording of this proposed exemption [that excludes the business line from providing services to funds managed by the Affiliated QPAMs] is tantamount to a denial.’’ Notwithstanding the above, as noted below, the Department has determined to revise this exemption to permit CIB to continue to provide services to funds managed by JPMC Affiliated QPAMs, based on the Department’s determination that the conditions set forth herein are sufficiently protective of the Covered Plans, and given the type of transactions covered by this exemption and the Applicant’s representations regarding the types of services provided by CIB. The Department notes that the JPMC Affiliated QPAMs’ substantial and substantive dependency on the JPMC CIB when managing plan and IRA assets also supports the Department’s conclusion that the conditions of the exemption are necessary and appropriate. Comment 2—Description of Criminal Conduct—Section I The prefatory language to Section I of the proposed exemption provides, ‘‘If the proposed five-year exemption is granted, certain asset managers with specified relationships to JPMC (the JPMC Affiliated QPAMs and the JPMC Related QPAMs, as defined further in Sections II(a) and II(b), respectively) will not be precluded from relying on the exemptive relief provided by Prohibited Transaction Class Exemption 84–14 (PTE 84–14 or the QPAM Exemption), notwithstanding the judgment of conviction against JPMC (the Conviction), as defined in Section II(e)), for engaging in a conspiracy to: (1) fix the price of, or (2) eliminate competition in the purchase or sale of the Euro/U.S. dollar currency pair exchanged in the Foreign Exchange (FX) Spot Market, for a period of five years beginning on the date the exemption is granted.’’ The Applicant requests that the description of the charged conduct—the clause beginning ‘‘for engaging in a conspiracy’’—be omitted. The Applicant states that this description is inaccurate and incomplete, will lead to disputes with counterparties to the detriment of plans, and will make it unlikely that plans will benefit from or be protected by this exemption. After consideration of the Applicant’s comment, the Department has revised the exemption in the manner requested by the Applicant. E:\FR\FM\29DEN2.SGM 29DEN2 61818 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices ethrower on DSK3G9T082PROD with NOTICES Comment 3—Knowing or Tacit Approval—Sections I(a) and I(c) Section I(a) of the proposed five-year exemption provides, ‘‘(a) Other than a single individual who worked for a nonfiduciary business within JPMorgan Chase Bank and who had no responsibility for, and exercised no authority in connection with, the management of plan assets, the JPMC Affiliated QPAMs and the JPMC Related QPAMs (including their officers, directors, agents other than JPMC, and employees of such QPAMs who had responsibility for, or exercised authority in connection with the management of plan assets) did not know of, did not have reason to know of, or participate in the criminal conduct that is the subject of the Conviction. For purposes of this paragraph (a), ‘participate in’ includes the knowing or tacit approval of the misconduct underlying the Conviction;’’ Section I(c) of the proposed exemption provides, ‘‘(c) The JPMC Affiliated QPAMs will not employ or knowingly engage any of the individuals that participated in the criminal conduct that is the subject of the Conviction. For the purposes of this paragraph (c), ‘participated in’ includes the knowing or tacit approval of the misconduct underlying Conviction;’’ The Applicant requests that the words ‘‘or tacit’’ in the phrase ‘‘knowing or tacit approval’’ be deleted in Sections I(a) and I(c). The Applicant states that the term tacit approval ‘‘is undefined and ambiguous, and potentially encompasses a broad range of conduct that could become the subject of disputes with counterparties.’’ After consideration of the Applicant’s comment, the Department has revised the condition in the manner requested by the Applicant. Comment 4—Receipt of Compensation—Section I(b) Section I(b) of the proposed five-year exemption provides, ‘‘(b) Other than a single individual who worked for a nonfiduciary business within JPMorgan Chase Bank and who had no responsibility for, and exercised no authority in connection with, the management of plan assets, the JPMC Affiliated QPAMs and the JPMC Related QPAMs (including their officers, directors, and agents other than JPMC, and employees of such JPMC QPAMs) did not receive direct compensation, or knowingly receive indirect compensation in connection with the criminal conduct that is the subject of the Conviction.’’ The Applicant states that Section I(b) is not practically workable because an VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 individual can receive compensation only if the entity he or she works for receives funds. The Applicant requests that this condition be modified to reflect that, although undefinable, a nonfiduciary business within JPMorgan Chase Bank may have indirectly received funds in connection with the criminal conduct that is the subject of the Conviction. The Applicant requests that the Department modify this condition as follows: The JPMC Affiliated QPAMs and the JPMC Related QPAMs (including their officers, directors, and agents other than JPMC, and employees of such JPMC 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, other than a nonfiduciary line of business within JPMorgan Chase Bank. The Department has revised the condition in the manner requested by the Applicant. As revised, the condition precludes relief if any asset management personnel of JPMC received direct compensation, or knowingly received indirect compensation, in connection with the criminal conduct that is the subject of the Conviction. Comment 5—Inclusion of ‘‘Investment Banking Division of JPMorgan Chase Bank’’—Sections I(d), I(g), and I(h)(1)(i) Section I(d)of the proposed five-year exemption provides, ‘‘(d) A JPMC Affiliated QPAM will not use its authority or influence to direct an ’investment fund’ (as defined in Section VI(b) of PTE 84–14), that is subject to ERISA or the Code and managed by such JPMC Affiliated QPAM, to enter into any transaction with JPMC or the Investment Banking Division of JPMorgan Chase Bank, or engage JPMC or the Investment Banking Division of JPMorgan Chase Bank 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; ’’ Section I(g)of the proposed five-year exemption provides, ‘‘(g) JPMC and the Investment Banking Division of JPMorgan Chase Bank will not provide discretionary asset management services to ERISA-covered plans or IRAs, and will not otherwise act as a fiduciary with respect to ERISA-covered plan or IRA assets; ’’ PO 00000 Frm 00004 Fmt 4701 Sfmt 4703 Section I(h)(1)(i) of the proposed fiveyear exemption provides, ‘‘(h)(1)(i) The asset management decisions of the JPMC Affiliated QPAM are conducted independently of JPMC’s management and business activities, including the corporate management and business activities of the Investment Banking Division of JPMorgan Chase Bank; ’’ The Applicant requests that these sections be revised to allow the Investment Banking Division of JPMorgan Chase Bank to provide services, including the following services, to investment funds managed by the JPMC Affiliated QPAMs: Safekeeping; settlement; administration; full service class action filing service; overdraft protection; sweep and deposit services; portfolio accounting and reporting services; payment processing services; and foreign custodial services. The Applicant states that not allowing the Investment Banking Division of JPMorgan Chase Bank to provide, or to continue to provide, these services would be harmful to more than a thousand plans. After considering the Applicant’s comment, the Department has revised the exemption in the manner requested by the Applicant such that the condition does not apply to the Investment Banking Division of JPMorgan Chase Bank. In addition, the Department has clarified that Section I(d) applies to an ‘‘investment fund’’ that is subject to ERISA or the Code and managed by such JPMC Affiliated QPAM with respect to Covered Plans. Finally, as requested by the Applicant, Section I(g) has been modified to clarify that JPMC will not violate this condition in the event that it inadvertently becomes an investment advice fiduciary and that JPMC can act as a fiduciary for plans that it sponsors for its own employees or employees of an affiliate. Comment 6—Exercising Authority Over Plan Assets—Section I(f) Section I(f)of the proposed five-year exemption provides, ‘‘(f) A JPMC Affiliated QPAM or a JPMC Related QPAM did not exercise authority over the assets of any plan subject to Part 4 of Title I of ERISA (an ERISA-covered plan) or section 4975 of the Code (an IRA) in a manner that it knew or should have known would: Further the criminal conduct that is the subject of the Conviction; or cause the JPMC QPAM or its affiliates or related parties to directly or indirectly profit from the criminal conduct that is the subject of the Conviction.’’ The Applicant requests that Section I(f) be deleted, stating that it is duplicative of Section I(b), ambiguous, E:\FR\FM\29DEN2.SGM 29DEN2 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices and not administrable or in the interests of plans. The Applicant states that the first clause of the condition does not differ in any material way from the very first and most basic condition of the exemption: That the asset management businesses of the Affiliated QPAMs did not know of or participate in the conduct that is the subject of the Conviction. The Applicant also states that the second clause of the condition which states, ‘‘or cause the JPMC QPAM or its affiliates or related parties to directly or indirectly profit from the criminal conduct,’’ is confusing and repetitive of the condition in section I(b). The Department declines to make the Applicant’s requested revisions. The Department does not view Condition I(f) (which relates to exercising authority) as ambiguous or duplicative of Section I(b) (which relates to compensation). Further, Condition I(f) is consistent with the Applicant’s prior representation that, ‘‘other than a single individual who worked for a nonfiduciary business within JPMorgan Chase Bank and who had no responsibility for, and exercised no authority in connection with, the management of plan assets, the Affiliated QPAMs did not participate in the Conduct and (ii) no current or former employee of JPMC or of any Affiliated QPAM who previously has been or who subsequently may be identified by JPMC, or any U.S. or nonU.S. regulatory or enforcement agencies, as having been responsible for the Conduct will have any involvement in providing asset management services to plans and IRAs or will be an officer, director, or employee of the Applicant or of any Affiliated QPAM.’’ However, for clarity, the Department has deleted the term ‘‘related parties.’’ 5 ethrower on DSK3G9T082PROD with NOTICES Comment 7—Time to Implement Policies and Training—Section I(h)(1)– (2) Section I(h) of the proposed five-year exemption provides, ‘‘(h)(1) Within four (4) months of the Conviction, each JPMC Affiliated QPAM must develop, implement, maintain, and follow written policies and procedures (the Policies). . . (2) Within four (4) months of the date of the Conviction, each JPMC Affiliated QPAM must develop and implement a program of training (the Training), conducted at least annually, for all relevant JPMC Affiliated QPAM asset/portfolio management, trading, legal, compliance, and internal audit personnel . . .’’ 5 See JPMC Exemption Application (May 20, 2015) at page 11. VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 The Applicant requests that the Department increase the development period associated with the Policies and Training Requirement (the Development Period) from four (4) months to six (6) months. The Applicant also seeks confirmation that, following the Development Period, it will have twelve (12) months to complete the Training for all relevant employees, and that it must do so again in every succeeding twelve (12) month period. In support of this request, the Applicant represents that JPMC Affiliated QPAMs manage assets for hundreds of ERISA-covered plans, through separate accounts; over a thousand plans, through collective investment trusts; and more than 160,000 IRAs, through various lines of business. The Applicant states that it may take up to six (6) months for all of these asset management staffs to satisfy the conditions set out in subparagraph(h) and then an additional twelve (12) months to accomplish all of the training. The Applicant further requests that Section I(h) be streamlined to match the requirements of PTE 2016– 15. The Department emphasizes that the JPMC QPAMs must comply with the Policies and Training requirements within both PTE 2016–15 and this exemption. To this end, the Department has revised the policies and training requirements of Section I(h) to conform with PTE 2016–15. The two exemptions now follow this timeline: (i) Each JPMC Affiliated QPAM must have developed the Policies and Training required by PTE 2016–15 by July 9, 2017; (ii) the first annual Training under PTE 2016– 15 must be completed by July 9, 2018; (iii) each JPMC Affiliated QPAM must develop the Policies and Training required by this exemption, as necessary, by July 9, 2018; and (iv) the first Training under this exemption must be completed by July 9, 2019. By the end of this 30-month period, asset/ portfolio management, trading, legal, compliance, and internal audit personnel who were employed from the start to the end of the period must have been trained twice. Comment 8—Policies and Procedures Relating to Compliance With ERISA and the Code—Section I(h)(1)(ii)–(v) Section I(h)(1)(ii)–(v) of the proposed five-year exemption provides,‘‘(h)(1) Within four (4) months of the Conviction, each JPMC Affiliated QPAM must develop, implement, maintain, and follow written policies and procedures (the Policies) requiring and reasonably designed to ensure that: . . . (ii) The JPMC Affiliated QPAM fully complies with ERISA’s fiduciary PO 00000 Frm 00005 Fmt 4701 Sfmt 4703 61819 duties, and with ERISA and the Code’s prohibited transaction provisions, and does not knowingly participate in any violation of these duties and provisions with respect to ERISA-covered plans and IRAs; (iii) The JPMC Affiliated QPAM does not knowingly participate in any other person’s violation of ERISA or the Code with respect to ERISA-covered plans and IRAs; (iv) Any filings or statements made by the JPMC Affiliated QPAM to regulators including, but not limited to, the Department, the Department of the Treasury, the Department of Justice, and the Pension Benefit Guaranty Corporation, on behalf of ERISAcovered plans or IRAs, are materially accurate and complete, to the best of such QPAM’s knowledge at that time; [and] (v) The JPMC Affiliated QPAM does not make material misrepresentations or omit material information in its communications with such regulators with respect to ERISA-covered plans or IRAs, or make material misrepresentations or omit material information in its communications with ERISA-covered plans and IRA clients.’’ The Applicant requests that these subparagraphs be stricken as duplicative and already mandated by statute. The Applicant states that these conditions could be read to apply the fiduciary duties of ERISA to IRAs, which it claims would be overly broad, punitive, and not rationally related to asset management under the exemption. In the event the Department declines to strike the above subsections, the Applicant requests the following revisions to subsections (ii)–(v): Subsection (ii): The Applicant requests that JPMC Affiliated QPAMs be required to comply with ERISA’s fiduciary duties, ‘‘with respect to ERISA-covered plans managed in reliance on PTE 84–14,’’ and with ERISA and the Code’s prohibited transaction provisions, ‘‘as applicable, with respect to ERISA-covered plans and IRAs managed in reliance on PTE 84–14.’’ Subsection (iii): The Applicant requests the removal of ‘‘or the Code,’’ and ‘‘IRAs.’’ With the Applicant’s requested revision, subsection (iii) would read, ‘‘The JPMC Affiliated QPAM does not knowingly participate in any other person’s violation of ERISA with respect to ERISA-covered plans.’’ Subsection (iv): The Applicant requests that the phrase, ‘‘on behalf of ERISA-covered plans or IRAs,’’ be changed to, ‘‘on behalf of ERISAcovered plans or IRAs for which a JPMC Affiliated QPAM provides asset E:\FR\FM\29DEN2.SGM 29DEN2 ethrower on DSK3G9T082PROD with NOTICES 61820 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices management or other discretionary fiduciary services in reliance on PTE 84–14.’’ Subsection (v): The Applicant requests that the subparagraph be revised to, ‘‘(v) The JPMC Affiliated QPAM does not intentionally make material misrepresentations or omit material information, to the best of such QPAM’s knowledge at that time, in its communications with ERISA-covered plans and IRA clients, the assets of which are managed by such JPMC Affiliated QPAM in reliance on PTE 84– 14.’’ In response to the Applicant’s comments, the Department has modified the Policies’ requirement of adherence to the fiduciary and prohibited transaction provisions of ERISA and the Code so that the Policies expressly focus on the provisions only to the extent ‘‘applicable’’ under ERISA and the Code. In general, however, the Department has otherwise retained the stringency and breadth of the Policies requirement, which is more than justified by the compliance and oversight failures exhibited by JPMC throughout the long period of time during which the criminal misconduct persisted. The specific elements of the Policies requirement as set forth in this exemption are essential to its protective purposes. In approving this exemption, the Department significantly relies upon conditions designed to ensure that those relying upon its terms for prohibited transaction relief will adopt a culture of compliance centered on basic fiduciary norms and standards of fair dealing, as reflected in the Policies. These standards are core protections of this exemption. The Department has made some additional changes, however, which should not detract from the Policies’ protective purpose. Thus, as requested by the Applicant, subsection (v) has been revised to contain the ‘‘to the best of QPAM’s knowledge at the time’’ concept found in subsection (iv); and the applicability of subsections (iv) and (v) has been narrowed to ERISA-covered plans and IRAs with respect to which a JPMC Affiliated QPAM relies on PTE 84–14, or with respect to which a JPMC Affiliated QPAM has expressly represented that the manager qualifies as a QPAM or relies on the QPAM class exemption in its dealings with the ERISA-covered plan or IRA (hereinafter, a Covered Plan). To the extent a JPMC QPAM would prefer not to be subject to this provision, however, it may expressly disclaim reliance on QPAM status or PTE 84–14 in entering into its contract with the Covered Plan. This VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 revision is consistent with the Department’s intent to protect ERISAcovered plans and IRAs that may have hired a JPMC Affiliated QPAM based on the manager’s express representation that it relies on or qualifies under PTE 84–14. As explained in more detail below, the Department will not strike a condition merely because it is also a statutory requirement. It is the express intent of the Department to preclude relief for a JPMC affiliated QPAM that fails to meet the requirements of this exemption, including those derived from basic standards codified in statute, as applicable. Comment 9—Correction of Violations and Failures To Comply—Section I(h)(1)(vii) Section I(h)(1)(vii) of the proposed five-year exemption provides, ‘‘Any violation of, or failure to comply with an item in subparagraphs (ii) through (vi), is corrected promptly upon discovery, and any such violation or compliance failure not promptly corrected is reported, upon the discovery of such 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 JPMC Affiliated QPAM, the independent auditor responsible for reviewing compliance with the Policies, and an appropriate fiduciary of any affected ERISA-covered plan or IRA that is independent of JPMC; however, with respect to any ERISA-covered plan or IRA sponsored by an ‘affiliate’ (as defined in Section VI(d) of PTE 84–14) of JPMC or beneficially owned by an employee of JPMC or its affiliates, such fiduciary does not need to be independent of JPMC. A JPMC Affiliated QPAM will not be treated as having failed to develop, implement, maintain, or follow the Policies, provided that it corrects any instance of noncompliance promptly 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).’’ The Applicant cites this condition as an example of how the Department made the proposed exemption ‘‘inexplicably’’ and ‘‘arbitrarily’’ more burdensome and onerous than other such exemptions it has granted previously. More specifically, the Applicant seeks several revisions to Section I(h)(vii), stating that its notification requirements are overbroad, and that terms such as ‘‘appropriate corporate officers’’ and ‘‘corrected promptly’’ are either vague or PO 00000 Frm 00006 Fmt 4701 Sfmt 4703 undefined. The Applicant requests that ‘‘subparagraphs (ii) through (vi)’’ be revised to read ‘‘subparagraphs (i) through (vi).’’ The Applicant also requests that the last sentence of the subparagraph (h) be revised, because it is ‘‘overly broad and does not meaningfully provide relief in instances where a violation or compliance failure is corrected.’’ The Applicant suggests the subparagraph (h) be revised to read, ‘‘Within sixty (60) days of discovery of any violation of, or failure to comply with, an item in subparagraphs (i) through (vi), the JPMC QPAM will formulate, in writing, a plan to address such violation or failure (a Correction Plan). To the extent any such Correction Plan is not formulated within sixty (60) days of discovery, the JPMC Affiliated QPAM will report in writing such violation of, or failure to comply with, the item in subparagraphs (i) through (vi) to the head of compliance . . . .’’ In response to the Applicant’s general comment, the Department has based the conditions of this exemption on both the particular facts of this case and its experience over time with previous exemptions. For the reasons set out herein, the Department has concluded that the specific conditions of this exemption are appropriate and give the Department a reasonable basis for concluding that the exemptions are appropriately protective of affected plans and IRAs. As noted above, a central aim of the exemption is to ensure that those relying upon the exemption for relief from the prohibited transaction rules will consistently act to promote a culture of fiduciary compliance, notwithstanding the conduct that violated Section I(g) of PTE 84–14. After considering the Applicant’s specific requests for revisions, however, the Department has replaced ‘‘appropriate corporate officers’’ with ‘‘the head of compliance and the General Counsel (or their functional equivalent) of the relevant line of business that engaged in the violation or failure.’’ The Department also will not condition the exemption on a requirement for notification of violations to an appropriate fiduciary of any affected ERISA-covered plan or IRA that is independent of JPMC. However, the Department is not revising the ‘‘subparagraphs (ii) through (vi)’’ reference to include ‘‘subparagraph (i)’’ because the Department intends to preclude relief to the extent a JPMC Affiliated QPAM fails to develop, implement, maintain, and follow written policies and procedures. Clearly, it is not enough merely to develop policies and procedures, E:\FR\FM\29DEN2.SGM 29DEN2 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices without also implementing, maintaining, and following the terms of those policies and procedures. Covered Plans do not benefit from the creation of strong policies and procedures, unless they are actually followed. The Department has revised the term ‘‘corrected promptly’’ for consistency with the Department’s intent that violations or compliance failures be corrected ‘‘as soon as reasonably possible upon discovery or as soon after the QPAM reasonably should have known of the noncompliance (whichever is earlier).’’ However, contrary to the Applicant’s suggestion, the Department intends to preclude relief to the extent violations or failures are not corrected as required by the exemption. Therefore, the Department has not adopted the Applicant’s proposed subparagraph (vii), which requires little more than the formulation of a correction plan, without any corresponding obligation to actually implement the plan. Comment 10—Training Incorporated in Policies—Section I(h)(2)(i) Section I(h)(2)(i) of the proposed fiveyear exemption provides, ‘‘. . . The Training must: (i) 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 five-year exemption (including any loss of exemptive relief provided herein), and prompt reporting of wrongdoing.’’ The Applicant states that the requirement in Section I(h)(2)(i) that the Training must be ‘‘set forth in’’ the Policies is impracticable and may cause significant logistical challenges over time. Accordingly, the Applicant requests that Section I(h)(2)(i) be revised as follows: ethrower on DSK3G9T082PROD with NOTICES ‘‘. . . The Training must, 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 permanent exemption (including any loss of exemptive relief provided herein), and prompt reporting of wrongdoing.’’ After considering this comment, the Department has revised the condition as requested by the Applicant. Comment 11—Training by Independent Professional—Section I(h)(2)(ii) Section I(h)(2)(ii) of the proposed fiveyear exemption provides, ‘‘. . . The Training must: . . . (ii) Be conducted by VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 an independent professional who has been prudently selected and who has appropriate technical training and proficiency with ERISA and the Code.’’ The Applicant requests that Section I(h)(2)(ii) be deleted, stating that requiring an independent professional is likely to be ‘‘counterproductive, a waste of time and resources, and less effective than using internal personnel who are familiar with Applicant’s processes and staff . . . .’’ Although the Department does not agree with the Applicant’s characterization that hiring an appropriate independent professional, prudently-selected, would be counterproductive and a waste of resources, the Department is persuaded that appropriate JPMC personnel, prudently selected, should be allowed to conduct the training, and has revised the condition accordingly. Comment 12—Audit—Section I(i)(1) Section I(i)(1) of the proposed fiveyear exemption requires that each JPMC Affiliated QPAM ‘‘submits to an audit conducted annually by an independent auditor, who has been prudently selected and who has appropriate technical training and proficiency with ERISA and the Code, to evaluate the adequacy of, and the JPMC Affiliated QPAM’s compliance with, the Policies and Training described herein. The audit requirement must be incorporated in the Policies. Each annual audit must cover a consecutive twelve (12) month period starting with the twelve (12) month period that begins on the effective date of the five-year exemption, and each annual audit must be completed no later than six (6) months after the period to which the audit applies;’’ The Applicant requests that the audit requirement be deleted from the exemption in its entirety. The Applicant states that requiring the audit of asset management units that were not accused of wrongdoing is unnecessary and essentially seeks to punish businesses that have not been convicted of a crime. The Applicant requests that, if the audit condition is not omitted, the annual audit should be performed by the Applicant’s Internal Audit function. The Applicant also requests the removal of the requirement mandating incorporation of the audit conditions into the Policies, as the Applicant believes such inclusion serves no purpose and does not further the interest of plans. Additionally, the Applicant requests the removal of the phrase ‘‘technical training and proficiency,’’ because it is redundant and undefined. PO 00000 Frm 00007 Fmt 4701 Sfmt 4703 61821 The Department declines to delete the audit requirement in its entirety. A recurring, independent, and prudently conducted audit of the JPMC Affiliated QPAMs is critical to ensuring the QPAMs’ compliance with the Policies and Training mandated by this exemption, and the adequacy of the Policies and Training. The required discipline of regular audits underpins the Department’s finding that the exemption should help prevent the sort of compliance failures that led to the Conviction and is protective of Covered Plans and their participants, beneficiaries, and beneficial owners, as applicable. The Department views the audit requirement as an integral component of the exemption, without which the Department would be unable to make its finding that the exemption is protective of Covered Plans and their participants, beneficiaries, and beneficial owners, as applicable. A recurring, independent audit of the JPMC Affiliated QPAMs is a critical means by which to verify the adequacy of, and compliance with, the Policies and Training mandated by this exemption. This exemption’s conditions are based, in part, on the Department’s assessment of the seriousness and duration of the misconduct that resulted in the violation of Section I(g) of PTE 84–14, as well as the apparent inadequacy of the controls and oversight mechanisms at JPMC to prevent the misconduct. The FCA’s Final Notice states: ‘‘[d]uring the Relevant Period, JPMorgan did not exercise adequate and effective control over its G10 spot FX trading business,’’ and that, ‘‘[t]he front office failed adequately to discharge these responsibilities with regard to obvious risks associated with confidentiality, conflicts of interest and trading conduct.’’ The OCC states: ‘‘the Bank had deficiencies in its internal controls and had engaged in unsafe or unsound banking practices with respect to the oversight and governance of the Bank’s FX trading business . . . .’’ Accordingly, the Department declines to delete the audit requirement in its entirety. The Department, however, recognizes that, notwithstanding JPMC’s oversight failures, only a small number of individuals at JPMC directly engaged in the misconduct at issue. Thus, the United States District Court for the District of Connecticut stated, in connection with the sentencing of JP Morgan Chase & Co., that ‘‘the conduct at issue here was engaged in by a very small number of individuals’’ and ‘‘we do not have banks who appear to have condoned conduct at any high-ranking E:\FR\FM\29DEN2.SGM 29DEN2 61822 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices ethrower on DSK3G9T082PROD with NOTICES level.’’ 6 Accordingly, the Department has determined to change the audit interval under this exemption, from annual to biennial. Section I(i)(1) of the exemption, therefore, now requires that each JPMC Affiliated QPAM ‘‘submits to an audit conducted every two years by an independent auditor.’’ Each audit must cover the preceding consecutive twelve (12) month period. The first audit must cover the period from July 10, 2018 through July 9, 2019, and must be completed by January 9, 2020. The second audit must cover the period from July 10, 2020 through July 9, 2021, and must be completed by January 9, 2022. In the event that the Exemption Period is extended or a new exemption is granted, the third audit would cover the period from July 10, 2022 through July 9, 2023, and would be completed by January 9, 2024, unless the Department chose to alter the audit requirement in the new or extended exemption; 7 The Department declines to revise Section I(i)(1) to permit the Applicant’s Internal Audit Department to carry out this exemption’s required audit functions, as such a revision would not be protective of Covered Plans. Auditor independence is essential to this exemption, as it allows for an impartial analysis of the JPMC Affiliated QPAMs. Permitting the Applicant’s Internal Audit Department to carry out this exemption’s required audit functions would be insufficiently protective of Covered Plans. The independence of the auditor is the cornerstone of the integrity of the audit process and is of primary importance to avoid conflicts of interest and any inappropriate influence on the auditor’s findings. The fundamental importance of auditor independence to the integrity of the audit process is well established. For example, the United States Securities and Exchange Commission (SEC) promulgated regulations at 17 CFR 210.2–01 to ensure auditors are independent of their clients, and under 17 CFR 240.10A–2, it is unlawful for an auditor not to be independent in certain circumstances. Likewise, the Public Company Accounting Oversight Board’s 6 See TRANSCRIPT of Proceedings: as to JP Morgan Chase & Co. (January 5, 2017 at pages 29– 30). 7 The third audit referenced above would not have to be completed until after the Exemption Period expires. If the Department ultimately decides to grant relief for an additional period, it could decide to alter the terms of the exemption, including the audit conditions (and the timing of the audit requirements). Nevertheless, the Applicant should anticipate that the Department will insist on strict compliance with the audit terms and schedule set forth above. As it considers any new exemption application, the Department may also contact the auditor for any information relevant to its determination. VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 (PCAOB) Rule 3520 states that a public accounting firm and its associated persons must be independent of the firm’s audit client. When working on an audit or attest engagement, the Association of Independent Certified Public Accountants’ (AICPA) Code of Professional Conduct, Objectivity and Independence Principle (AICPA, Professional Standards, ET section 0.300.050.01) states that members should be independent in fact and appearance. Moreover, ERISA section 103(a)(3)(A) requires an accountant hired by an employee benefit plan to examine the plan’s financial statements to be independent. Notwithstanding the Applicant’s representations regarding the staff size and internal policies of JPMC’s Internal Audit Department, serious misconduct occurred over an extended period of time at a JPMC entity. The Department also disagrees with the Applicant’s assertion that the phrase ‘‘technical training and proficiency’’ is redundant. The two terms are not synonymous, as a person may have taken technical training in a given subject matter but may not be proficient in that subject matter. The exemption requires that the auditor be both technically trained and proficient in ERISA as well as the Code. Accordingly, the Department declines to change the phrase ‘‘technical training and proficiency’’ as used in Section I(i)(1). The Department also declines to delete the requirement that the audit conditions be incorporated in the Policies. The audit requirement provides a critical independent check on compliance with this exemption’s conditions, and helps ensure that the basic protections set forth in the Policies are taken seriously. Accordingly, the specifics of the audit requirement are important components of the Policies. Their inclusion in the Policies promotes compliance and sends an important message to the institutions’ employees and agents, as well as to Covered Plan clients, that compliance with the policies and procedures will be subject to careful independent review. After consideration of the Applicant’s concerns regarding the annual audit, the Department is revising the audit condition to require an audit on at least a biennial basis. The Departments notes that if the audit uncovers material deficiencies with JPMC’s compliance with this exemption, then the Applicant should consider conducting an additional audit after making corrections to ensure that it remains in compliance with the exemption. In any event, the Department emphasizes that it retains the right to conduct its own PO 00000 Frm 00008 Fmt 4701 Sfmt 4703 investigation of compliance based on any such indicators of problems. Comment 13—Access to Business— Section I(i)(2) Section I(i)(2) of the proposed fiveyear exemption requires that ‘‘as permitted by law, each JPMC Affiliated QPAM and, if applicable JPMC, will grant the auditor unconditional access to its business . . .’’ The Applicant requests that the access granted by Section I(i)(2) be limited to: (1) Relevant materials reasonably necessary to conduct the audit; and (2) non-privileged materials that do not contain trade secrets. The Applicant argues that the ‘‘unconditional access’’ required by this condition is too broad and that the absence of specific exclusions could lead to confusion, dispute, and infringement on the JPMC Affiliated QPAMs’ right to protect privileged communications, confidential supervisory information with other regulators (for which the privilege is held by others), irrelevant materials, and trade secrets. In the Department’s view, to ensure a thorough and robust audit, the independent auditor must be granted access to information it deems necessary to make sound conclusions. Access to such information must be within the scope of the audit engagement and denied only to the extent any disclosure is not permitted by state or federal statute. Enumerating specific restrictions on the accessibility of certain information may have a dampening effect on the auditor’s ability to perform the procedures necessary to make valid conclusions and therefore undermine the effectiveness of the audit. The auditor’s access to such information, however, is limited to information relevant to the auditor’s objectives as specified by the terms of this exemption and to the extent disclosure is not prevented by state or federal statute, or involves communications subject to attorney client privilege. In this regard, the Department has modified Section I(i)(2) accordingly. Comment 14—Engagement Letter— Section I(i)(3) Section I(i)(3) of the proposed fiveyear exemption requires the auditor’s engagement to ‘‘specifically require the auditor to determine whether each JPMC Affiliated QPAM has developed, implemented, maintained, and followed the Policies . . . and has developed and implemented the Training, as required herein.’’ The Applicant requests that Section I(i)(3) be deleted in its entirety, stating E:\FR\FM\29DEN2.SGM 29DEN2 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices ethrower on DSK3G9T082PROD with NOTICES that it is unnecessarily duplicative of the substantive requirements of the exemption and that the Applicant will be bound by the conditions of the exemption, whether or not they also appear in the auditor’s engagement letter. The Department does not concur with the Applicant’s request. By including a statement of the audit’s intended purpose and required determinations in the auditor’s agreement, the Applicant ensures that both the auditor and the JPMC Affiliated QPAMs a have clear understanding of the purpose and expectations of the audit process. Therefore, the Department declines to omit Section I(i)(3) from the exemption. Comment 15—Auditor’s Test of Operational Compliance—Section I(i)(4) Section I(i)(4) of the proposed fiveyear exemption provides that, ‘‘[t]he auditor’s engagement must specifically require the auditor to test each JPMC Affiliated QPAM’s operational compliance with the Policies and Training’’ and ‘‘the auditor must test a sample of each QPAM’s transactions involving ERISA-covered Plans and IRAs sufficient in size and nature to afford the auditor a reasonable basis to determine operational compliance with the Policies and Training.’’ The Applicant requests that Section I(i)(4) be deleted in its entirety. The Applicant argues that this Section is unnecessarily duplicative, as other conditions of the exemption govern the audit’s scope, the auditor’s technical skill, and the prudence of the selection process. The Applicant also argues that the second sentence of Section I(i)(4) unnecessarily intrudes upon the auditor’s function and independence. Additionally, the Applicant states that auditors should be granted discretion as to when to sample transactions, as an auditor may not have the capacity to test significant data within the time periods required under this exemption. The Department declines to make the Applicant’s requested revisions with respect to Section I(i)(4). The inclusion of written audit parameters in the auditor’s engagement letter is necessary both to document expectations regarding the audit work and to ensure that the auditor can responsibly perform its important work. As stated above, clearly defined audit parameters will minimize any potential for dispute between the Applicant and the auditor. It is appropriate and necessary for the exemption to require a certain amount, and type, of audit work to be performed. Similarly, given the scope and number of relevant transactions, proper sampling is necessary for the auditor to VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 reach reasonable and reliable conclusions. Although the Department has declined to delete this section in its entirety, as requested by the Applicant, the Department has revised this condition for consistency with other conditions of this exemption which are tailored to the Department’s interest in protecting Covered Plans. Therefore, the condition now applies to Covered Plans (i.e., ERISA-covered plans and IRAs with respect to which the JPMC Affiliated QPAM relies on PTE 84–14 or has expressly represented that it qualifies as a QPAM or relies on the QPAM class exemption in its dealings with the ERISA-covered plan or IRA). The Department notes that Section I(i)(4) does not specify the number of transactions that the auditor must test, but rather requires, for each QPAM, that the auditor test a sample of each such QPAM’s transactions involving Covered Plans, ‘‘sufficient in size and nature to afford the auditor a reasonable basis to determine operational compliance with the Policies and Training.’’ Comment 16—Draft of the Audit Report—Section I(i)(5) Section I(i)(5) of the proposed fiveyear exemption requires that ‘‘. . . on or before the end of the relevant period described in Section I(i)(1) for completing the audit, the auditor must issue a written report (the Audit Report) to JPMC and the JPMC Affiliated QPAM . . .’’ The Applicant requests a modification of Section I(i)(5) that would allow the Applicant sufficient time to correct any findings of noncompliance by the auditor before the issuance of the final Audit Report and its provision to the Department. The Applicant states that permitting it to review a draft of the Audit Report well in advance of its submission to the Department would allow the Applicant to implement plans to correct any violations or findings of noncompliance identified by the auditor. The Applicant states that communication with the audited entity is an appropriate audit procedure which ensures that the auditor’s factual premises are correct. The Applicant also states that the time required to review the audit should be in advance of the Audit Report’s submission and should not take away from the six (6) months given to complete the audit and the thirty (30) days to submit the Audit Report to the Department. The Applicant therefore requests that Section I(i)(5) contain a provision: (1) Requiring the auditor to issue a draft Audit Report to the Applicant and the JPMC Affiliated QPAMs at the end of the period for the completion of the PO 00000 Frm 00009 Fmt 4701 Sfmt 4703 61823 audit, as described in Section I(i)(1); and (2) providing the Applicant and the JPMC Affiliated QPAM thirty (30) days to review such draft Audit Report. Additionally, the Applicant requests that the exemption allow the auditor to issue one consolidated Audit Report covering all the JPMC Affiliated QPAMs. The Department agrees that it is appropriate and beneficial for the auditor and the entity being audited to communicate during the audit process. Such communication allows for a dialog regarding, among other things, factual premises, findings, and conclusions. With regard to issues of noncompliance, communication should take place as soon as possible, but in no case later than five (5) days following the discovery of such noncompliance (see Section I(i)(6)) to allow time for the Applicant to provide additional information to the auditor and correct the noncompliance. However, the Department considers a requirement directing the auditor to provide a draft Audit Report to the audited entity in all cases to be inappropriate, as it is a matter best determined by the Applicant and the auditor. The Department notes that, while contemplating the time frames for completion and submission of the Audit Report, it did take into account the auditor’s procedural work and communications with the Applicant. The Applicant has not demonstrated the need for additional time to complete and submit the Audit Report. The Department therefore declines to modify Section I(i)(5) as requested by the Applicant. Lastly, the Department has accepted the Applicant’s recommendation that the auditor be allowed to issue one consolidated Audit Report and has modified Section I(i)(5) accordingly. Comment 17—Auditor’s Determination of Compliance—I(i)(5)(i) Section I(i)(5)(i) of the proposed fiveyear exemption provides, in part: ‘‘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 JPMC Affiliated QPAM must be promptly addressed by such JPMC Affiliated QPAM, and any action taken by such JPMC Affiliated QPAM to address such recommendations must be included in an addendum to the Audit Report (which addendum is completed prior to the certification described in Section I(i)(7) below).’’ The Applicant asserts that Section I(i)(5)(i) is arbitrary, capricious, and E:\FR\FM\29DEN2.SGM 29DEN2 ethrower on DSK3G9T082PROD with NOTICES 61824 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices ambiguous and requests that the term ‘‘promptly’’ be omitted from the condition because it will cause disputes over its meaning. The Applicant argues that this perceived ambiguity is problematic in this context because addressing the auditor’s recommendation could be a lengthy process. In addition, Section I(i)(5)(i) states: ‘‘Furthermore, the auditor must not rely on the Annual Report created by the compliance officer (the Compliance Officer) as described in Section I(m) below in lieu of independent determinations and testing performed by the auditor as required by Section I(i)(3) and (4) above.’’ The Applicant requests that this provision of Section I(i)(5) be deleted, as it imposes a counterproductive limitation on the auditor’s use of the Annual Review and usurps the auditor’s judgment regarding how to perform its role, and whether and when to rely upon any and all resources. The Applicant further states, that denying the auditor the opportunity to fully use its judgment as to which resources it will rely upon contradicts the underlying purpose of this exemption’s broader audit condition, especially in light of the requirements relating to the auditor’s selection and qualifications. Moreover, the Applicant states that the language of this condition will interfere with the workability of the exemption and its use by plans. To that end, the Applicant states that if counterparties cannot determine whether this requirement has been complied with, the exemption will not be used, to the detriment of plans. The Department acknowledges that the Applicant’s efforts to address the auditor’s recommendations regarding any inadequacy in the Policies and Training identified by the auditor, may take longer to implement than the time limits mandated by the proposed exemption. Accordingly, the Department is modifying Section I(i)(5)(i) to reflect the possibility that the JPMC Affiliated QPAMs’ efforts to address the auditor’s recommendations regarding inadequacies in the Policies and Training identified by the auditor, may not be completed by the submission date of the Audit Report and may require a written plan to address such items. However, any noncompliance identified by the auditor must be promptly addressed. The Department does not agree that the word ‘‘promptly’’ creates inappropriate ambiguity in the condition and declines to remove the word. The final sentence of Section I(i)(5)(i) expresses the Department’s intent that VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 the auditor not rely solely on the work of the Compliance Officer and the contents of the Annual Report in formulating its conclusions or findings. The auditor must perform its own independent testing to formulate its conclusions. This exemption does not prohibit the auditor from considering the Compliance Officer’s Annual Report in carrying out its audit function, including the formulation of an audit plan. This exemption, however, does prohibit the auditor from reaching conclusions that are exclusively based upon the contents of the Compliance Officer’s Annual Report. The Department has modified Section I(i)(5)(i) to more clearly reflect these views. Included with its comment on Section I(i)(5)(i), the Applicant requests the deletion of the Compliance Officer and Annual Review requirements set out in Section I(m). The Department’s response to this request is discussed below. Comment 18—Adequacy of the Annual Review—Section I(i)(5)(ii) Section I(i)(5)(ii) of the proposed fiveyear exemption provides that ‘‘[t]he Audit Report must include the auditor’s specific determinations regarding: . . . (ii) The adequacy of the Annual Review described in Section I(m) and the resources provided to the Compliance Officer in connection with such Annual Review.’’ The Applicant asserts that requiring the auditor to assess the adequacy of the resources provided to the Compliance Officer is overreaching and should be deleted. The Applicant states that, while the auditor function requires proficiency in ERISA, it does not require sophistication or expertise on resource allocation. According to the Applicant, the question of whether the Compliance Officer has met its obligations under this exemption will be subject to the auditor’s review. The Applicant states that if the auditor finds any deficiencies in the review, the Applicant will address such issues including any allocation of resources. As discussed in detail below, the Department views the Compliance Officer and the Annual Review as integral to ensuring compliance with the exemption. An independent assessment by the auditor of the adequacy of the Annual Review is essential to providing the Department with the assurance that the Applicant and the JPMC Affiliated QPAMs have given these matters the utmost priority and have taken the actions necessary to comply with the exemption. However, the Department agrees that the QPAMs need not require the auditor to opine on the adequacy of PO 00000 Frm 00010 Fmt 4701 Sfmt 4703 the resources allocated to the Compliance Officer and has modified Section I(i)(5)(ii) accordingly. If, however, the auditor observes compliance issues related to the Compliance Officer or available resources, it would be appropriate for the auditor to opine on those problems. Comment 19—Certification of the Audit—Section I(i)(7) Section I(i)(7) of the proposed fiveyear exemption provides, in part, that ‘‘. . . the General Counsel, or one of the three most senior executive officers of the JPMC Affiliated QPAM to which the Audit Report applies, must certify in writing, under penalties of perjury, that the officer has reviewed that Audit Report and this exemption; addressed, corrected, or remedied any inadequacy identified in the Audit Report . . .’’ The Applicant requests that this condition be modified to remove ambiguity, enhance workability, and avoid aspects that could be interpreted as punitive. The Applicant claims that the requirements of Section I(i)(7) should take into account JPMC’s business structure and allow the Applicant to determine which senior officers will review the Audit Report. The Applicant states that it would be preferable that an executive related to an asset/investment management business operating through the QPAM review the Audit Report. In this regard, the Applicant requests Section I(i)(7) be modified in part as follows: ‘‘the General Counsel or one of the three most senior executives of the line of business engaged in discretionary assets management activities through the JPMC Affiliated QPAM with respect to which the Audit Report applies . . .’’. The Department concurs that a senior executive officer with knowledge of the asset management business within the QPAM should be allowed to review the Audit Report, and has modified the language of Section I(i)(7), accordingly. The Applicant also requests that the timing of Section I(i)(7) be clarified. In this regard, the Applicant states that compliance with this condition would be impossible if, for example, a recommendation takes longer to implement than the 30-day period contemplated in Section I(i)(9) for the Audit Report to be certified and provided to the Department. While the Department does not view Section I(i)(7) as ambiguous, the Department is aware, as stated above, that the Applicant’s efforts to address the auditor’s recommendations regarding inadequacies in the Policies and Training identified by the auditor may take longer to implement than the E:\FR\FM\29DEN2.SGM 29DEN2 ethrower on DSK3G9T082PROD with NOTICES Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices timeframe to submit the certified Audit Report. With respect to this issue, the Department did not intend to limit corrective actions to those that could only be completed prior to the submission of the Audit Report. Therefore, the Department has modified Section I(i)(7) to reflect that the senior officer may certify that a written plan to address the inadequacies regarding the Policies and Training identified in the auditor’s Report is in place. The Applicant also states that this condition should clarify that it may appropriately ‘‘address’’ an inadequacy by noting that an alternative action to the auditor’s recommendation, or even no action, is a preferable means of protecting ERISA plan clients and IRAs. The Applicant states that this condition is intrusive, as it invites the auditor, through its conclusions and recommendations, to micromanage the business of the relevant JPMC QPAM. The Applicant claims that, with broad access to a JPMC Affiliated QPAM’s records, the auditor could identify any number of potential inadequacies, all of which the JPM Affiliated QPAM should not be required to accept unconditionally. As mentioned above, the Department has determined that it is necessary for the auditor to be afforded unfettered access to JPMC Affiliated QPAM records, to the extent that the analysis of such records falls within the twelve month period to which the audit relates. For the first audit required by this exemption, that period runs from January 10, 2018 through January 9, 2019. The conditions of this exemption do not prohibit the Applicant from disagreeing with the auditor with respect to whether certain practices fail to comply with the terms of this exemption. However, in those circumstances where the auditor is not persuaded to change its position on a matter the auditor considers noncompliant, the Applicant will be responsible to correct such matters. Nor do the conditions of this exemption prohibit the Applicant from disagreeing with the auditor with respect to the appropriate method for correcting or addressing issues of noncompliance. The Department would expect the Applicant and the auditor to have meaningful communications on such differences of opinion. In the event the Applicant chooses to apply a corrective method that differs from that recommended by the auditor, the Audit Report and the Addendum attached thereto should explain in detail the noncompliance, the auditor’s recommended action, the corrective method chosen, and, if applicable, why VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 the Applicant chose a corrective method different from that recommended by the auditor. Lastly, the Applicant requests deletion of the requirement in Section I(i)(7) for certification by the senior executive officer under penalties of perjury. The Applicant argues that this requirement is unnecessary and inappropriate as this exemption already requires accuracy in communications with regulators and clients. The Department declines to remove this requirement, which makes clear the importance of the correction process and creates a strong incentive going forward to take seriously the audit process—and compliance generally. Comment 20—Review and Certification of Audit Report—Section I(i)(8) Section I(i)(8) the proposed five-year exemption provides that ‘‘[t]he Risk Committee of JPMC’s Board of Directors is provided a copy of each Audit Report; and a senior executive officer with a direct reporting line to the highest ranking legal officer of JPMC must review the Audit Report for each JPMC Affiliated QPAM . . .’’ The Applicant requests that the requirement to provide the Audit Report to the Risk Committee of JPMC’s Board of Directors be omitted. The Applicant states that the Department, in imposing this condition, is acting beyond the scope of its authority. The Applicant also represents that this condition constitutes micromanaging by the Department and is inappropriate and unnecessary. The Applicant further states that this requirement does not protect plans and participants and is duplicative of other conditions contained in this exemption. The Applicant argues that a mandate by the Department concerning JPMC’s internal processes for handling information is outside the scope of the exemption and does not further the statutory goal of protecting plans. The Applicant requests that the exemption provide that the certifying reviewer be a senior executive officer. The Applicant further states that the exemption should not mandate that the certifying reviewer be a senior executive officer in the direct reporting line to the highest ranking legal officer of JPMC. Finally, the Applicant requests the requirement in Section I(i)(8) that the certification by the senior executive officer be made under penalty of perjury be deleted, as it is unnecessary. The Department notes that in its application and related materials, the Applicant has represented that it has established, or is in the process of establishing comprehensive changes to PO 00000 Frm 00011 Fmt 4701 Sfmt 4703 61825 processes and procedures that are, in part, intended to change the culture at JPMC from the top down. As represented by the Applicant, these changes are focused on enhancements in: (1) Supervision, controls, and governance; (2) compliance risk assessment; (3) transaction monitoring and communications surveillance; (4) compliance testing; and (5) internal audit.8 The Department has developed this exemption to ensure that the highest levels of management are aware of ongoing matters concerning JPMC, the JPMC Affiliated QPAMs, and compliance with this exemption. Requiring the provision of the Audit Report to the Board of Directors and certification by a senior executive officer in the reporting line of the highest legal compliance officer provides assurance that the highest levels of management within JPMC stay informed about JPMC’s and the JPMC Affiliated QPAMs’ compliance with the terms of this exemption. In the Department’s view, such officials are in the best position to ensure that any inadequacy identified by the auditor is appropriately addressed and that necessary changes to corporate policy are effectuated if and where necessary. Requiring certification under penalty of perjury is consistent with the Department’s longstanding view that basic requirements of compliance and integrity are fundamental to an entity’s ability to qualify as a QPAM. Comment 21—Availability of the Audit Report—Section I(i)(9) The Applicant claims that the requirements in Section I(i)(9) that ‘‘each JPMC Affiliated QPAM must make its Audit Report unconditionally available for examination by any duly authorized employee or representative of the Department, other relevant regulators, and any fiduciary of an ERISA-covered plan or IRA, the assets of which are managed by such JPMC Affiliated QPAM’’ is outside the scope of the exemption and is unnecessary. The Applicant states that the availability of the Audit Report should be limited to ERISA-covered plans and IRAs for which the Applicant relies on PTE 84–14. The Applicant argues that it is overly-broad, punitive and not related to the relief provided in the exemption to extend this condition to plans and IRAs for which the Affiliated JPMC QPAMs do not rely on PTE 84–14. Additionally, the Applicant requests that the Audit Report should be made 8 See JPMC Exemption Application (May 20, 2015) at page 12. E:\FR\FM\29DEN2.SGM 29DEN2 61826 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices ethrower on DSK3G9T082PROD with NOTICES available upon request and that any such provision of the Audit Report may be facilitated via electronic delivery. The Department does not agree that the condition in Section I(i)(9) is punitive. As the Applicant recognized in its application, ERISA-covered plans, IRAs, and counterparties routinely rely on QPAM status before entering into agreements with financial institutions, even if those institutions do not believe compliance with PTE 84–14 is strictly necessary for any particular transaction. Accordingly, the Department has an interest in ensuring that the conditions of this exemption broadly protect ERISA-covered plans and IRAs that have relied on QPAM status in deciding to enter into an agreement with the Applicant or the Affiliated JPMC QPAMs. Nevertheless, the Department has revised Section I(i)(9) to clarify that the JPMC Affiliated QPAMs are required to make the documents available to any fiduciary of a Covered Plan. The Audit Report, in any event, will be incorporated into the public record attributable to this exemption, under Exemption Application Number D– 11906, and, therefore, independently accessible by members of the public. Accordingly, the Department has determined to revise the condition by replacing the phrase ‘‘an ERISA-covered plan or IRA, the assets of which are managed by such JPMC Affiliated QPAM’’ with the term ‘‘Covered Plan’’ (as defined in Section II(c)). Lastly, the Department agrees that access to the Audit Report need only be upon request and such access can be electronic, and has revised the exemption accordingly. Comment 22—Engagement Agreements—Section I(i)(10) The Applicant claims that the requirement under Section I(i)(10)(B) which provides, ‘‘[e]ach JPMC Affiliated QPAM and the auditor must submit to OED . . . (B) any engagement agreement entered into with any other entity retained in connection with such QPAM’s compliance with the Training or Policies conditions of this five-year exemption, no later than six (6) months after the Conviction Date (and one month after the execution of any agreement thereafter)’’ should be omitted as it is unnecessary, punitive, and not in the interest of plans or their participants. The Applicant states that the terms of engagement between the JPMC Affiliated QPAMS and the auditor and trainer should be left to the discretion of the parties to such engagement agreements. The Applicant maintains that it is intrusive to mandate that every service provider contract that VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 relates to the Policies and the Training be provided to the Department. Additionally, the Applicant requests that the timeframe for provision of the auditor’s engagement be modified to no later than six (6) months after execution of such engagement agreement. In coordination with the Department’s modification of Section I(h)(2)(ii) to remove the requirement that the Training must be conducted by an independent professional, the Department has determined to remove the requirement in Section I(i)(10)(B) to provide to the Department the engagement agreements entered into with entities retained in connection with compliance with the Training or Policies conditions. Furthermore, to remove any confusion and uncertainty regarding the timing of the submission of the auditor’s engagement agreement, the Department has modified Section I(i)(10) to require that the auditor’s engagement agreement be submitted to the Office of Exemption Determinations no later than two (2) months after the engagement agreement is entered into by the Applicant and the independent auditor. Comment 23—Auditor’s Workpapers— Section I(i)(11) Section I(i)(11) the proposed five-year exemption provides that the ‘‘auditor must provide OED, upon request, all of the workpapers created and utilized in the course of the audit, including, but not limited to: The audit plan; audit testing; identification of any instance of noncompliance by the relevant JPMC Affiliated QPAM; and an explanation of any corrective or remedial action taken by the applicable JPMC Affiliated QPAM.’’ The Applicant states that Section I(i)(11) is duplicative and could cause the Applicant to lose the exemption due to the auditor’s actions or inaction. Additionally, the Applicant notes that this condition should account for workpapers which the auditor does not want to submit to the public file on the basis of confidentiality or privacy of information. The Applicant argues that such workpapers may contain information such as client data, employee personal information, and other sensitive information. The Applicant therefore requests that the Department exempt such workpapers in a manner that does not compromise the Department’s ability to review such workpapers. Finally, the Applicant claims that by stating ‘‘all of the workpapers’’ and then providing list of what ‘‘all’’ might encompass, the Department is being overzealous and duplicative. PO 00000 Frm 00012 Fmt 4701 Sfmt 4703 The Department acknowledges that certain information contained in the workpapers may be confidential and proprietary, and having that information in a public file may create needless or avoidable disclosure issues. The Department has determined to modify Section I(i)(11) to remove the requirement that the auditor provide the workpapers to OED,9 and instead require that the auditor provide access to the workpapers for the Department’s review and inspection. However, given the importance of the workpapers to the Department’s own review and the Applicant’s contractual relationship with the auditor, the Department declines to include, as requested by the Applicant, a statement in Section I(i)(11) that a failure on behalf of the auditor to meet this condition will not violate the exemption. Comment 24—Replacement of Auditor—Section I(i)(12) Section I(i)(12) of the proposed fiveyear exemption states that: ‘‘JPMC must notify the Department at least thirty (30) days prior to any substitution of an auditor . . . and that JPMC demonstrate[e] to the Department’s satisfaction that such new auditor is independent of JPMC, experienced in the matters that are the subject of the exemption, and capable of making the determination required by [the] exemption.’’ The Applicant requests that this Section I(i)(12) be deleted as it is inconsistent with the condition for the initial selection of an auditor and duplicative of other substantive terms of the exemption. Initially, the Applicant notes that permitting JPMC’s internal audit department to perform the audit functions required under this exemption would render this condition unnecessary. The Applicant states that requiring JPMC to demonstrate the independence and qualifications of the auditor prior to a substitution serves no useful purpose, given the audit process timeline laid out under this exemption. The Applicant states that, since the exemption does not grant the Department the authority to approve the initial auditor selection, likewise the Department should not have the authority to approve the selection of a subsequent auditor. The Applicant states that many circumstances which could necessitate an auditor change would not relate to compliance with the terms of the exemption. The Applicant 9 OED is the Office of Exemption Determinations within the Employee Benefits Security Administration agency of the United States Department of Labor. E:\FR\FM\29DEN2.SGM 29DEN2 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices ethrower on DSK3G9T082PROD with NOTICES states that if the Department’s concern is the removal of a critical auditor, this condition is not rationally related to such an issue. As explained above, the Department does not agree that the internal audit department of JPMC is the appropriate entity to perform the audit. The auditor’s independence is critical to the Department’s determination that the exemption protects Covered Plans. This exemption is not unique in requiring the Department be notified of changes to service providers (see, e.g., the requirement of Schedule C of the Form 5500 Annual Return/Report for the Plan Administrator of certain plans to report to the Department a termination of the plan’s auditor and/or enrolled actuary and to provide an explanation of the reasons for the termination, including a description of any material disputes or matters of disagreement concerning the termination). Furthermore, requiring the Applicant to notify the Department of the substitution of an auditor serves to ensure that the JPMC Affiliated QPAMs are attentive to the audit process and the protections it provides; and that the Department has the information it needs to review compliance. The Department has determined to modify Section I(i)(12) to remove the requirement for JPMC to demonstrate the independence and qualifications of the auditor, however, and requires instead that JPMC, no later than two months from the engagement of the replacement auditor, notify the Department of a change in auditor and of the reason(s) for the substitution including any material disputes between the terminated auditor and JPMC. JPMC’s fiduciary obligations with respect to the selection of the auditor, as well as the significant role a credible selection plays in reducing the need for more extensive oversight by the Department, should be sufficient to safeguard the selection process. Comments 25–26—Contracts With Plans and IRAs—Section I(j) Section I(j) of the proposed five-year exemption provides: ‘‘Effective as of the effective date of this five-year exemption, with respect to any arrangement, agreement, or contract between a JPMC Affiliated QPAM and an ERISA-covered plan or IRA for which a JPMC Affiliated QPAM provides asset management or other discretionary fiduciary services, each JPMC Affiliated QPAM agrees and warrants: (1) To comply with ERISA and the Code, as applicable with respect to such ERISA-covered plan or IRA; to refrain from engaging in prohibited transactions that are not otherwise VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 exempt (and to promptly correct any inadvertent prohibited transactions); and to comply with the standards of prudence and loyalty set forth in section 404 of ERISA, as applicable, with respect to each such ERISA-covered plan and IRA; (2) To indemnify and hold harmless the ERISA-covered plan or IRA for any damages resulting from a JPMC Affiliated QPAM’s violation of applicable laws, a JPMC Affiliated QPAM’s breach of contract, or any claim brought in connection with the failure of such JPMC Affiliated 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; (3) Not to require (or otherwise cause) the ERISA-covered plan or IRA to waive, limit, or qualify the liability of the JPMC Affiliated QPAM for violating ERISA or the Code or engaging in prohibited transactions; (4) Not to require the ERISA-covered plan or IRA (or sponsor of such ERISAcovered plan or beneficial owner of such IRA) to indemnify the JPMC Affiliated QPAM for violating ERISA or engaging in prohibited transactions, except for violations or prohibited transactions caused by an error, misrepresentation, or misconduct of a plan fiduciary or other party hired by the plan fiduciary who is independent of JPMC, and its affiliates; (5) Not to restrict the ability of such ERISA-covered plan or IRA to terminate or withdraw from its arrangement with the JPMC Affiliated QPAM (including 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 as a result of an actual lack of liquidity of the underlying assets, provided that such restrictions are applied consistently and in like manner to all such investors; (6) Not to impose any fees, penalties, or charges for such termination or withdrawal with the exception of reasonable fees, appropriately disclosed in advance, that are specifically designed to prevent generally recognized abusive investment practices or specifically designed to ensure equitable treatment of all investors in a pooled fund in the event such withdrawal or termination may have adverse consequences for all other investors, provided that such fees are PO 00000 Frm 00013 Fmt 4701 Sfmt 4703 61827 applied consistently and in like manner to all such investors; and (7) Not to include exculpatory provisions disclaiming or otherwise limiting liability of the JPMC Affiliated QPAM for a violation of such agreement’s terms, except 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 JPMC, and its affiliates; (8) Within four (4) months of the date of the Conviction, each JPMC Affiliated QPAM must provide a notice of its obligations under this Section I(j) to each ERISA-covered plan and IRA for which an JPMC Affiliated QPAM provides asset management or other discretionary fiduciary services. For all other prospective ERISA-covered plan and IRA clients for which a JPMC Affiliated QPAM provides asset management or other discretionary services, the JPMC Affiliated QPAM will agree in writing to its obligations under this Section I(j) in an updated investment management agreement between the JPMC Affiliated QPAM and such clients or other written contractual agreement’’. The Applicant states that Section I(j) of the proposed exemption is overbroad, entirely inappropriate, not rationallyrelated to asset management, inconsistent with the Administrative Procedure Act (the APA), an attempt to create a private right of action for IRAs, and punitive; that it should be limited to ERISA-covered plans and IRAs with respect to which the Applicant relies on the QPAM Exemption; and that it is not reasonably designed to protect plans or their participants. The Applicant also requests that the condition clarify that it supersedes the analogous condition in PTE 2016–15, so as not to impose duplicative requirements, and also be modified to read as follows: ‘‘This subparagraph supersedes Section I(i) of PTE 2016–15, as of the date of the exemption’s publication in the Federal Register. Effective as of the publication date, with respect to any arrangement, agreement, or contract between a JPMC Affiliated QPAM and an ERISA-covered plan or IRA for which a JPMC Affiliated QPAM provides asset management or other discretionary fiduciary services in reliance on PTE 84–14 . . . .’’ As explained above, ERISA-covered plans and IRAs routinely rely on QPAM status as a condition of entering into transactions with financial institutions, even with respect to transactions that do not require adherence to PTE 84–14. Indeed, the Applicant recognized this fact in its application (see, e.g., Applicant’s statement that ‘‘[w]hile E:\FR\FM\29DEN2.SGM 29DEN2 ethrower on DSK3G9T082PROD with NOTICES 61828 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices equity strategies rarely rely on the QPAM Exemption, plans invested in such strategies could decide to find other managers or pooled funds if the affiliated investment managers were no longer QPAMs’’). In addition, it may not always be clear whether the JPMC Affiliated QPAM intends to rely upon PTE 84–14 for any particular transaction. Accordingly, it is critical to ensure that protective conditions are in place to safeguard the interests of ERISA-covered plans and IRAs that are acting in reliance on the availability of this exemption, particularly those who may not have entered into the transaction in the first place, but for the Department’s grant of this exemption. The Department has a clear interest in protecting such Covered Plans that enter into an asset management agreement with a JPMC Affiliated QPAM in reliance on the manager’s qualification as a QPAM. Moreover, when a Covered Plan terminates its relationship with an asset manager, it may incur significant costs and expenses as its investments are unwound and in connection with finding a new asset manager. The Department rejects the view that it acts outside its authority by protecting ERISA-covered plans and IRAs that rely on JPMC’s asset managers’ eligibility for this exemption, and reemphasizes the seriousness of the criminal misconduct that caused JPMC to need this exemption. The Department may grant an exemption under Section 408(a) of ERISA or Section 4975(c)(2)(C) of the Code only to the extent the Secretary finds, among other things, that the exemption is protective of the affected plan(s) or IRA(s). As noted by regulators, personnel at JPMorgan Chase Bank, a QPAM, engaged in serious misconduct over an extended period of time at the expense of their own clients. This misconduct appears to have stemmed, in part, from deficiencies in control and oversight. Notwithstanding the misconduct, which resulted in violation of Section I(g) of PTE 84–14, the Department has granted this exemption based, in significant part, upon the inclusion of Section I(j)(1) in the exemption, which protects Covered Plans by, among other things, requiring JPMC Affiliated QPAMs to make an express commitment to their customers to adhere to the requirements of ERISA and the Code, as applicable. As previously indicated, the Department has concluded that a culture of compliance, centered on adherence to basic standards of fair dealing as set forth in this exemption, gives the Department a compelling basis for making the required statutory findings that the exemption is in the VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 interests of plan and IRA investors and protective of their rights. Absent such findings, the exemption would have been denied. In response to the Applicant’s comments, however, the Department has required an express commitment to comply with the fiduciary standards and prohibited transaction rules only to the extent these provisions are ‘‘applicable’’ under ERISA and the Code. This section, as modified, should serve its salutary purposes of promoting a culture of compliance and enhancing the ability of plans and IRA customers to sever their relationships with minimal injury in the event of noncompliance. This conclusion is reinforced, as well, by the limited nature of the relief granted by this exemption, which generally does not extend to transactions that involve selfdealing. In response to the Applicant’s comments, the Department also notes that nothing in ERISA or the Code prevents the Department from conditioning relief on express contractual commitments to adhere to the requirements set out herein. The QPAMs remain free to disclaim reliance on the exemption and to avoid such express contractual commitments. To the extent, however, that they hold themselves out as fiduciary QPAMs, they should be prepared to make an express commitment to their customers to adhere to the requirements of this exemption. This commitment strengthens and reinforces the likelihood of compliance, and helps ensure that, in the event of noncompliance, customers— particularly IRA customers—will be insulated from injuries caused by noncompliance. These protections also ensure that customers will be able to extricate themselves from transactions that become prohibited as a result of the QPAMs’ misconduct, without fear of sustaining additional losses as a result of the QPAMs’ actions. In this connection, however, the Department emphasizes that the only claims available to the QPAMs’ customers pursuant to these contractual commitments are those separately provided by ERISA or other state and federal laws that are not preempted by ERISA. As before, private litigants have only those causes of action specifically authorized by laws that exist independent of this exemption. Comment 27—Indemnity Provision— Section I(j)(2). Section I(j)(2) of the proposed fiveyear exemption provides that ‘‘[e]ffective as of the effective date of PO 00000 Frm 00014 Fmt 4701 Sfmt 4703 this five-year exemption, with respect to any arrangement, agreement, or contract between a JPMC Affiliated QPAM and an ERISA covered plan or IRA for which a JPMC Affiliated QPAM provides asset management or other discretionary fiduciary services, each JPMC Affiliated QPAM agrees and warrants: . . . (2) To indemnify and hold harmless the ERISA-covered plan or IRA for any damages resulting from a JPMC Affiliated QPAM’s violation of applicable laws, a JPMC Affiliated QPAM’s breach of contract, or any claim brought in connection with the failure of such JPMC Affiliated 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.’’ The Applicant requests that this condition be deleted because it is punitive, beyond the Department’s authority, and provides for damages that are excessive and/or not reasonably related to any conduct of the JPMC Affiliated QPAMs. In addition, the Applicant represents that the condition may operate in a manner that is fundamentally unfair because it is not limited to clients who are harmed through a direct, causal link to the loss of exemptive relief provided by PTE 84– 14. Also with respect to section I(j)(2), the Applicant requests clarifying language stating that the JPMC Affiliated QPAM indemnification obligations under this exemption do not extend to damages resulting from, or caused by forces beyond the control of JPMC, including certain acts of government authorities and acts of God. In this regard, the Applicant requests a revision of section I(j)(2) such that each JPMC Affiliated QPAM must agree and warrant to indemnify and hold harmless the ERISA-covered plan or IRA, ‘‘for any reasonable losses involving such arrangement, agreement or contract and resulting directly from a JPMC Affiliated QPAM’s violation of ERISA, or, to the extent the JPMC Affiliated QPAM relies on the exemptive relief provided by PTE 84–14 under the arrangement, agreement or contract for any explicit transactional exit costs of any instrument with respect to which PTE 84–14 was expressly relied upon and for which no other exemption is available, resulting directly and solely from the failure of such JPMC Affiliated 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 as a result of the Conviction.’’ As explained above, the intended purpose of this exemption is to protect E:\FR\FM\29DEN2.SGM 29DEN2 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices ERISA-covered plans and IRAs who entrust the JPMC Affiliated QPAMs with the management of their retirement assets. To this end, the Department believes that the protective purpose of this exemption is furthered by Section I(j)(2). The Department emphasizes that this condition is not punitive, but rather ensures that, when an ERISA-covered plan or IRA enters into an asset management agreement with a JPMC Affiliated QPAM in reliance on the manager’s qualification as a QPAM, it may expect adherence to basic fiduciary norms and standards of fair dealing, notwithstanding the prior conviction. The condition also ensures that the ERISA-covered plan or IRA will be able to disengage from that relationship in the event that the terms of this exemption are violated without undue injury. Accordingly, the Department has revised the applicability of this condition to more closely reflect this interest. In particular, the condition applies only to Covered Plans. As indicated above, if the asset manager would prefer not to be subject to these provisions as exemption conditions, it may expressly disclaim reliance on QPAM status or PTE 84–14 in entering into its contract with the ERISA-covered plan or IRA (in that case, however, it could not rely on the exemption for relief). The Department has made certain further changes to this condition upon consideration of the Applicant’s comment. These changes include: renumbering the condition for clarity; replacing ‘‘applicable laws’’ with clarifying language that conforms to the one-year exemption; and replacing ‘‘any damages’’ with ‘‘actual losses resulting directly from’’ certain acts or omissions of the JPMC Affiliated QPAMs. Because I(j)(2) extends only to actual losses resulting directly from the actions of the JPMC Affiliated QPAMs, it does not encompass losses solely caused by other parties, events, or acts of God. ethrower on DSK3G9T082PROD with NOTICES Comment 28—Limits on Liability— Section I(j)(3) and I(j)(7).10 Sections I(j)(3) and I(j)(7) of the proposed five-year exemption provide that ‘‘[e]ffective as of the effective date of this five-year exemption, with respect to any arrangement, agreement, or contract between a JPMC Affiliated QPAM and an ERISA-covered plan or IRA for which a JPMC Affiliated QPAM provides asset management or other discretionary fiduciary services, each 10 The Department has determined that subsection (4) is duplicative of the exemption’s prohibition on exculpatory clauses, described below. Thus, the subsection has been deleted. VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 JPMC Affiliated QPAM agrees and warrants: . . . (3) Not to require (or otherwise cause) the ERISA-covered plan or IRA to waive, limit, or qualify the liability of the JPMC Affiliated QPAM for violating ERISA or the Code or engaging in prohibited transactions; [and] . . . (7) Not to include exculpatory provisions disclaiming or otherwise limiting liability of the JPMC Affiliated QPAM for a violation of such agreement’s terms, except 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 JPMC, and its affiliates.’’ The Applicant requests that these conditions be deleted because they: duplicate the statutory requirements in ERISA and the Code, which ensure that the JPMC Affiliated QPAMs remain liable to their plan or IRA clients for the asset manager’s violations of the law; do not afford plans and IRAs any greater protection; and amount to unnecessary overregulation. To the extent there is a violation of a contract, the Applicant represents that adequate causes of action exist to remedy the issue. Alternatively, the Applicant requests that, if the Department declines to amend Section I(j)(7) as requested, this Section be revised to clarify that losses caused by counterparties, trading venues, or acts of terrorism, war, etc., are carved out of the QPAM’s liability. The Department declines to delete Section I(j)(3) from the final exemption. As the Applicant points out, ERISA already precludes ERISA fiduciaries from disclaiming obligations under ERISA. See ERISA section 410 (prohibiting exculpatory clauses as void against public policy). To the extent the exemption condition prevents the JPMC Affiliated QPAMs from including contractual provisions that are void as against public policy there is no legitimate basis for objection. Such exculpatory language should not be in the governing documents in the first place and is potentially misleading because it suggests disclaimer of obligations that may not be disclaimed. Outside the context of ERISA section 410, the provision’s requirement that the JPMC Affiliated QPAMs retain accountability for adherence to the basic obligations set forth in this exemption is justified by the misconduct that led to the Conviction as discussed above, and by the need to ensure that ERISAcovered plan and IRA customers may readily obtain redress and exit contracts with JPMC Affiliated QPAMs without harm in the event of violations. The Department has determined that Section I(j)(4), as proposed, is PO 00000 Frm 00015 Fmt 4701 Sfmt 4703 61829 duplicative of the exemption’s prohibition on exculpatory clauses, described below. Thus, that subsection has been deleted. Accordingly, the subsections in Section I(j) have been renumbered. The Department has modified Section I(j)(6) (formerly (j)(7)) to clarify that the prohibition on exculpatory provisions does not extend to losses that arise from an act or event not caused by JPMC. Nothing in this section alters the prohibition on exculpatory provisions set forth in ERISA Section 410. Comment 29—Termination and Withdrawal Restriction Under Sections I(j)(5) and I(j)(6) of the proposed five-year exemption, the JPMC Affiliated QPAMs agree: ‘‘. . . (5) Not to restrict the ability of such ERISAcovered plan or IRA to terminate or withdraw from its arrangement with the JPMC Affiliated QPAM (including 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 as a result of an actual lack of liquidity of the underlying assets, provided that such restrictions are applied consistently and in like manner to all such investors; [and] . . . (6) Not to impose any fees, penalties, or charges for such termination or withdrawal with the exception of reasonable fees, appropriately disclosed in advance, that are specifically designed to prevent generally recognized abusive investment practices or specifically designed to ensure equitable treatment of all investors in a pooled fund in the event such withdrawal or termination may have adverse consequences for all other investors, provided that such fees are applied consistently and in like manner to all such investors.’’ The Applicant represents that these conditions should be deleted because they are harmful to ERISA-covered plans and IRAs and their participants and beneficiaries, and are punitive to the Applicant. Withdrawal provisions, according to the Applicant, should be designed to protect all investors in a pooled fund or in a particular strategy. The Applicant states that the proposed restrictions here would disrupt the JPMC Affiliated QPAMs’ existing relationships with and contractual obligations to their clients, notwithstanding the fact that plans and IRAs have determined that such E:\FR\FM\29DEN2.SGM 29DEN2 ethrower on DSK3G9T082PROD with NOTICES 61830 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices relationships are in their best interests. The Applicant represents that lockup provisions are commonly used, designed to protect all investors in a pooled fund, and applied evenly to all investors. If conditions relating to withdrawal are not permitted, the Applicant asserts that ERISA-covered plans and IRAs will not be able to invest in their desired alternatives or strategies. The Applicant requests that, should these conditions be retained, they be modified as follows: Under renumbered Sections I(j)(4) and (j)(5), the JPMC Affiliated QPAMs agree: ‘‘. . . (4) Not to restrict the ability of such ERISAcovered plan or IRA to terminate or withdraw from its arrangement with the JPMC Affiliated 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; [and] . . . (5) Not to impose any fees, penalties, or charges for such termination or withdrawal with the exception of reasonable fees, appropriately disclosed in advance, that are specifically designed to prevent generally recognized abusive investment practices or specifically designed to ensure equitable treatment of all investors in a pooled fund in the event such withdrawal or termination may have adverse consequences for all other investors, provided that such fees are applied consistently and in like manner to all such investors.’’ The Department has revised renumbered Section I(j)(4) in partial satisfaction of the Applicant’s request. This section now provides, ’’Not to restrict the ability of such Covered Plan to terminate or withdraw from its arrangement with the JPMC Affiliated QPAM with respect to any investment in a separately managed account or pooled fund subject to ERISA and managed by such QPAM, with the exception of reasonable restrictions, appropriately disclosed in advance, that are specifically designed to ensure equitable treatment of all investors in a pooled fund in the event such withdrawal or termination may have adverse consequences for all other investors. In connection with any such arrangements involving investments in pooled funds subject to ERISA entered into after the effective date of this exemption, the adverse consequences must relate to of a lack of liquidity of VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 the underlying assets, valuation issues, or regulatory reasons that prevent the fund from promptly redeeming Covered Plan’s investment, and such restrictions must be applicable to all such investors and effective no longer than reasonably necessary to avoid the adverse consequences.’’ Renumbered Section I(j)(5) is consistent with the Applicant’s request. Comment 30—Updated Investment Management Agreement Section I(j)(8) of the proposed fiveyear exemption provides that ‘‘[w]ithin four (4) months of the date of the Conviction, each JPMC Affiliated QPAM must provide a notice of its obligations under this Section I(j) to each ERISAcovered plan and IRA for which an JPMC Affiliated QPAM provides asset management or other discretionary fiduciary services. For all other prospective ERISA-covered plan and IRA clients for which a JPMC Affiliated QPAM provides asset management or other discretionary services, the JPMC Affiliated QPAM will agree in writing to its obligations under this Section I(j) in an updated investment management agreement between the JPMC Affiliated QPAM and such clients or other written contractual agreement.’’ The Applicant represents that this condition is duplicative and ‘‘potentially inconsistent’’ with PTE 2016–15, and could cause the Applicant to lose the exemption through the actions of another. The Applicant requests that the Department publish a notice of technical correction to PTE 2016–15 to eliminate the notice to clients under that exemption so that only one notice with the final obligations will be provided to clients. The Applicant states that it should not be required to issue two sets of potentially inconsistent notices to clients. Instead, once the final exemption is published in the Federal Register, the Applicant suggests that the condition be modified to require that the notices, and the proposed and final exemptions, be sent to clients within six (6) months. The Applicant asserts that this request will alleviate client confusion. Alternatively, the Applicant requests that the Department modify renumbered Section I(j)(7) so that it will deem any notices and mailings under PTE 2016–15 to meet the requirements of the final exemption. In addition, the Applicant requests that the Department modify renumbered Section I(j)(7) to clarify that it is limited to agreements, arrangements, or contracts in which a JPMC Affiliated QPAM provides services in reliance on PTE 84–14, and where the Applicant has a direct PO 00000 Frm 00016 Fmt 4701 Sfmt 4703 contractual relationship with the plan or IRA. Finally, the Applicant represents that a bilateral investment management agreement containing the obligations under Section I(j) should not be required. If the client refuses to sign an updated agreement, the Applicant states that the JPMC Affiliated QPAM unintentionally may be in violation of this condition even where it has met the substantive requirements of Section I(j). The Applicant represents that its compliance with the exemption should not depend on action by its clients. Therefore, the Applicant requests that this requirement be eliminated, and that renumbered Section I(j)(7) be revised as follows to reflect the Applicant’s aforementioned changes: ‘‘Within six (6) months of the date of this exemption’s publication in the Federal Register, each JPMC Affiliated QPAM will provide a notice of its obligations under this Section I(j) to each ERISA-covered plan and IRA for which a JPMC Affiliated QPAM provides asset management or other discretionary fiduciary services in a direct contractual relationship and in reliance on PTE 84–14 as of the date of the notice. The Applicant shall be deemed to have met this condition if, with respect to any plan or IRA client, the Applicant met the requirements of PTE 2016–15. For all other ERISAcovered plan and IRA clients (i.e., those plans and IRAs that become direct contractual clients after the time the notice described in PTE 2016–15 is provided to existing clients) for which a JPMC Affiliated QPAM provides asset management or other discretionary services in reliance on PTE 84–14, the JPMC Affiliated QPAM will provide a notice of its obligations under this Section I(j) to such clients within six (6) months after the date of publication of this exemption.’’ 11 The Department declines to make a change to PTE 2016–15, since, among other things, the change the Applicant seeks is not a technical correction, but rather would require amending that exemption. Accordingly, the Applicant must fully comply with the terms of PTE 2016–15, including Section I(j). However, the Department has modified renumbered Section I(j)(7) for better coordination with PTE 2016–15. As modified, the exemption’s text now 11 In a letter to the Department dated March 7, 2017, the Applicant expresses similar concerns about the perceived inconsistencies, duplicative nature, and administrative challenges created by the client notification requirement in Section I(i) of PTE 2016–15 as well as in the proposed exemption. In the letter, the Applicant recommends that the notice be provided to clients only after the final exemption has been granted. This is consistent with the Applicant’s proposed revisions to renumbered Section I(j)(7). E:\FR\FM\29DEN2.SGM 29DEN2 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices ethrower on DSK3G9T082PROD with NOTICES provides that a notice that satisfies Section I(i)(2) of that exemption will satisfy renumbered Section I(j)(7) of this exemption, unless the notice contains any language that limits, or is inconsistent with, the scope of this exemption. As noted above, the Department has an interest in protecting an ERISAcovered plan or IRA that enters into an asset management agreement with a JPMC Affiliated QPAM in reliance on the manager’s qualification as a QPAM, regardless of whether the QPAM relies on the class exemption when managing the ERISA-covered plan’s or IRA’s assets. The Department has revised the applicability of this condition to more closely reflect this interest, and the condition now applies to Covered Plans. The Department has also modified the condition so that a JPMC Affiliated QPAM will not violate the condition solely because a Covered Plan refuses to sign an updated investment management agreement. In addition, the JPMC Affiliated QPAM must give notice of its obligations under Section I(j) to each Covered Plan by July 9, 2018, consistent with the applicant’s request for additional time to provide the notice. Comment 31—Notice to Plan Clients— Section I(k)(1) 12 Section I(k)(1) of the proposed fiveyear exemption provides that ‘‘[w]ithin thirty (30) days of the publication of this proposed five-year exemption in the Federal Register, each JPMC Affiliated QPAM will provide a notice of the proposed five-year exemption, along with a separate summary describing the facts that led to the Conviction (the Summary), which have 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 of an ERISA-covered plan and each beneficial owner of an IRA for which a JPMC Affiliated QPAM provides asset management or other discretionary services, or the sponsor of an investment fund in any case where a JPMC Affiliated QPAM acts only as a sub-advisor to the investment fund in which such ERISA-covered plan and IRA invests. In the event that this proposed five-year exemption is granted, the Federal Register copy of the notice of final five-year exemption must be delivered to such clients within sixty (60) days of its publication in the Federal Register, and may be delivered electronically (including by an 12 The Department has renumbered this condition as section I(k) in this exemption. VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 email that has a link to the exemption). Any prospective clients for which a JPMC Affiliated QPAM provides asset management or other discretionary services must receive the proposed and final five-year exemptions with the Summary and the Statement prior to, or contemporaneously with, the client’s receipt of a written asset management agreement from the JPMC Affiliated QPAM.’’ The Applicant requests that (k)(1) be changed to require each existing and prospective client with respect to which the Applicant has a direct contractual relationship and relies on the QPAM exemption, to be provided with a link to the proposed and final exemption within six (6) months after publication; and prospective clients after six (6) months should receive the proposed and final exemptions through any reasonable delivery method (such as a written notice of the applicable website where the exemptions can be found). The Applicant asserts that the provision, as proposed, is overbroad and punitive and not rationally related to the use of the QPAM Exemption. The Applicant also states that, for prospective clients, it is duplicative to provide the Summary and the copies of the proposal and final grant, which both state the same facts and will be burdensome to prospective clients due to the size of the asset management agreement. The Department notes that the proposed exemption provides details of the facts and circumstances underlying the Conviction not found in the Summary or this exemption. One of the purposes of such a complete disclosure is to ensure that all interested parties are aware of and attentive to the complete facts and circumstances surrounding JPMC’s application for exemption. Requiring the disclosure of the Summary, proposal, and grant provides the opportunity for all parties to have knowledge of these facts and circumstance. Notwithstanding this, the Department has modified the condition to clarify that disclosures may be provided electronically. Further, the notice requirement has been narrowed to ERISA-covered plans and IRAs that would benefit from this knowledge (i.e., Covered Plans). Comment 32—Notice to Non-Plan Clients—Section I(k)(2) Section I(k)(2) of the proposed fiveyear exemption provides, ‘‘[e]ach JPMC Affiliated QPAM will provide a Federal Register copy of the proposed five-year exemption, a Federal Register copy of the final five-year exemption; the Summary; and the Statement to each: PO 00000 Frm 00017 Fmt 4701 Sfmt 4703 61831 (A) Current Non-Plan Client within four (4) months of the effective date, if any, of a final five-year exemption; and (B) Future Non-Plan Client prior to, or contemporaneously with, the client’s receipt of a written asset management agreement from the JPMC Affiliated QPAM. For purposes of this subparagraph (2), a Current Non-Plan Client means a client of a JPMC Affiliated QPAM that: is neither an ERISA-covered plan nor an IRA; has assets managed by the JPMC Affiliated QPAM as of the effective date, if any, of a final five-year exemption; and has received a written representation (qualified or otherwise) from the JPMC Affiliated QPAM that such JPMC Affiliated QPAM qualifies as a QPAM or qualifies for the relief provided by PTE 84–14 . . . .’’ The Applicant requests that Section (I)(k)(2) be deleted in its entirety because, in its opinion, the provision is punitive and beyond the Department’s authority. The Applicant requests that any notice requirement be limited to ERISA-covered plans and IRAs that have a direct contractual relationship with a JPMC Affiliated QPAM and actually rely on PTE 84–14. Given the breadth of the notice requirements otherwise mandated by the exemption, and its decision to restrict the requirements to those arrangements for which QPAM status plays an integral role (i.e., the QPAM represents or relies upon its QPAM status), the Department has determined to delete this provision. Comment 33—Compliance Officer— Section I(m) Section I(m) of the proposed five-year exemption provides, in part, ‘‘JPMC designates a senior compliance officer (the Compliance Officer) who will be responsible for compliance with the Policies and Training requirements describe herein. The Compliance Officer must conduct an annual review (the Annual Review) to determine the adequacy and effectiveness of the implementation of the Policies and Training . . . .’’ The Applicant requests that the conditions relating to the Compliance Officer be deleted because they are punitive, inconsistent with precedent, and inconsistent with the APA. The Applicant states that the criminal conduct that necessitated the exemption did not involve in any way JPMC’s asset management business, and that the QPAMs already have very robust compliance departments. The Applicant states that it is duplicative to have another layer of compliance and the condition substitutes the Department’s E:\FR\FM\29DEN2.SGM 29DEN2 61832 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices ethrower on DSK3G9T082PROD with NOTICES judgment for that of the Applicant and its many other regulators. Furthermore, the Applicant states that the criminal conduct was the result of one single former FX trader, and that the inclusion of this condition is without any precedent, and is arbitrary and capricious. Finally, the Applicant states that every compliance officer is not a lawyer, and that the condition’s time frames are inconsistent, and not practicable. The Department is removing the requirement that the Compliance Officer be a legal professional (i.e., a lawyer), but declines to make the Applicant’s other requested changes. JPMC personnel engaged in serious misconduct that was not limited to one trader and that was caused, at least in part, by serious failures of compliance and oversight. The misconduct relevant to the development of this exemption spanned multiple years and involved repeated failures by JPMC personnel, in supervisory and oversight positions. The Department’s determination to grant this exemption is based in part on the Department’s view that an internal compliance officer with responsibility for the policies and procedures mandated by this exemption will provide the level of oversight necessary to ensure that such Policies and Training are properly implemented. Comment 34—Deferred Prosecution Agreement/Non-Prosecution Agreement—Section I(o) Section I(o) of the proposed five-year exemption provides, with respect to any Deferred Prosecution Agreement or Non-Prosecution Agreement: ‘‘During the effective period of the five-year exemption JPMC: (1) Immediately discloses to the Department any Deferred Prosecution Agreement (a DPA) or a Non-Prosecution Agreement (an NPA) with the U.S. Department of Justice, entered into by JPMC or any of its affiliates in connection with conduct described in Section I(g) of PTE 84–14 or section 411 of ERISA; and (2) Immediately provides the Department any information requested by the Department, as permitted by law, regarding the agreement and/or conduct and allegations that led to the agreement. After review of the information, the Department may require JPMC, its affiliates, or related parties, as specified by the Department, to submit a new application for the continued availability of relief as a condition of continuing to rely on this exemption. If the Department denies the relief requested in the new application, or does not grant such relief within twelve months of application, the relief VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 described herein is revoked as of the date of denial or as of the expiration of the twelve month period, whichever date is earlier.’’ The Applicant requests that this condition be deleted because it is punitive, and is inconsistent with the APA, statutory authority, and the Department’s own regulatory authority. The Applicant states that the condition contravenes the DOL’s exemption procedure regulation at 29 CFR part 2570, which requires that the Department propose a notice of termination of an exemption for public comment. The Applicant also states that the provision could create risk and uncertainty, including uncertainty for counterparties, with respect to the very transactions that this exemption is designed to prevent from suddenly expiring. According to the Applicant, the condition itself could have the effect of causing plans to terminate such transactions at significant cost. The Applicant also suggests that parties could enter into an NPA or a DPA for investigations where a bank is not convicted, and in some cases, not even charged with, a felony. The Applicant states further that the timing and factual basis of the NPA/DPA could be distant in time or place from the current plan management operations that should be the Department’s concern. Finally, the Applicant states that the provision is inconsistent with the anti-criminal provisions of Section I(g) of PTE 84–14 or section 411 of ERISA, which both require actual convictions, whereas an NPA/DPA is related to a decision by the DOJ not to prosecute. The Department in no way intended that this condition be read as providing for an automatic revocation of this exemption, and in light of the Applicant’s comments, has revised the condition accordingly. As revised, the condition simply requires that the Applicant notify the Department if and when it or any of its affiliates enter into a DPA or NPA with the U.S. Department of Justice for conduct described in section I(g) of PTE 84–14 or ERISA Section 411 and immediately provide the Department with any information requested by the Department, as permitted by law, regarding the agreement and/or conduct and allegations that led to the agreement. The Department retains the right to propose a withdrawal of the exemption pursuant to its procedures contained at 29 CFR 2570.50, should the circumstances warrant such action. PO 00000 Frm 00018 Fmt 4701 Sfmt 4703 Comment 35—Right to Copies of Policies and Procedures—Section I(p) Section I(p) of the proposed five-year exemption provides that, ‘‘[e]ach JPMC Affiliated QPAM, in its agreements with ERISA-covered plan and IRA clients, or in other written disclosures provided to ERISA-covered plan and IRA clients, within 60 days prior to the initial transaction upon which relief hereunder is relied, and then at least once annually, will clearly and prominently: Inform the ERISA-covered plan and IRA client that the client has the right to obtain copies of the QPAM’s written Policies adopted in accordance with the exemption.’’ The Applicant requests that this condition be deleted because it is impracticable, duplicative, and punitive, and not reasonably designed to be protective of plans and their participants. The Applicant states that it has over 300 policies and procedures that touch on ERISA and the Code and it is not reasonable to require the disclosure and provision of all the policies. Furthermore, the Applicant states that it cannot provide notice sixty (60) days prior to the time that the exemption is used because that date will precede the final exemption. Finally, the Applicant states that the number of notices required to be provided to clients is overly burdensome and excessive, and will lead to confusion and clients ignoring the mailings. The Department disagrees, in part, with the Applicant’s comment. Affording ERISA covered-plan and IRA clients a means by which to review and understand the Policies implemented in connection with this exemption is a vital protection that is fundamental to this exemption’s purpose. However, the Department has modified the condition so that the QPAMs, at their election, may instead provide Covered Plans disclosure that accurately describes or summarizes key components of the Policies, rather than provide the Policies in their entirety. The Department has also determined that such disclosure may be continuously maintained on a website, provided that the website link to the summary of the written Policies is clearly and prominently disclosed to those Covered Plan clients to whom this section applies. The Department also agrees with the Applicant that the timing requirement for disclosure should be revised and, accordingly, has modified the condition of Section I(p) to require notice regarding the information on the website within six months of the initial effective date of this exemption, and thereafter to the extent certain E:\FR\FM\29DEN2.SGM 29DEN2 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices ethrower on DSK3G9T082PROD with NOTICES material changes are made to the Policies. Comment 36—No-Fault Provision— Section I(q) Section I(q) of the proposed five-year exemption provides that, ‘‘[a] JPMC Affiliated QPAM or a JPMC Related QPAM will not fail to meet the terms of this exemption solely because a different JPMC Affiliated QPAM or JPMC Related QPAM fails to satisfy a condition for relief described in Sections I(c), (d), (h), (i), (j), (k), (l), (n) and (p).’’ The Applicant requests that the relief provided under Section I(q) be extended to cover Sections I(e), (f), (g), and (m). The Applicant states that the failure of one JPMC Affiliated QPAM to meet these conditions should not disqualify all other JPMC Affiliated QPAMs from reliance on this exemption. The Applicant also states that the auditor’s failure to fulfill its requirements under this exemption should not disqualify the JPMC Affiliated QPAMs from relying on the exemption. The Department declines to extend the relief provided under Section I(q) to Sections I(e), (f), (g), and (m). Section I(e) provides that any failure of a JPMC Affiliated QPAM or JPMC Related QPAM to comply with Section I(g) of PTE 84–14 arose solely from the Conviction. As set forth in the Applicant’s materials, the Conviction is the sole reason a new exemption is necessary for the JPMC Affiliated QPAMs. If there were a new or additional conviction of a crime described in Section I(g) of PTE 84–14, the Department would need to assess the misconduct, its scope, and its significance. Without such an assessment, the Department could not be confident of the adequacy of the conditions set forth herein with respect to the JPMC Affiliated QPAMs and Related QPAMs. Indeed, depending on the particular facts, a subsequent criminal conviction could be strong evidence of the inadequacy of this exemption’s conditions to protect Covered Plans. Further, as stated above, the Department is not obligated to grant further relief to the extent such a conviction occurs. Section I(f) provides that no JPMC Affiliated QPAM or JPMC Related QPAM exercised authority over the assets of any ERISA-covered plan or IRA in a manner that it knew or should have known would: further the criminal conduct that is the subject of the Conviction; or cause the JPMC QPAM or its affiliates or related parties to directly or indirectly profit from the criminal conduct that is the subject of the Conviction. The Applicant has, in its VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 application and in its response to questions raised by the Department, provided statements under penalty of perjury, that they are in compliance with this condition, and the Department relied upon those statements in granting this relief. Based on these statements, the Department determines that there is no reason to include relief from Section I(f) in Section I(q). Section I(g) requires two specific entities, JPMC and the Investment Bank of JPMorgan Chase Bank, refrain from providing investment management services to plans. Section I(m) requires JPMC to install a Compliance Officer to undertake various compliance and reporting obligations. Thus, with respect to Sections I(g) and (m), the obligations imposed extend exclusively to JPMC and the Investment Bank of JPMorgan Chase Bank. Consequently, if the relief under I(q) were extended to Sections I(g) and I(m), it would render them virtually meaningless. There would be little or no effective penalty for the failure to comply with the conditions, as the Affiliated and Related QPAMs would remain free to rely on the exemption’s terms. The Department also believes that the potential for disqualification of all JPMC Affiliated QPAMs under this agreement will serve as additional incentive for JPMC and JPMorgan Chase Bank to comply in good-faith with the provisions of Sections I(g) and (m). Finally, except as noted in Comment 23 above, the Department accepts the Applicant’s comment that failure of the auditor to comply with any of the conditions of the exemption, should not be treated as a failure by the JPMC Affiliated QPAMs to comply with the conditions of the exemption provided that such failure was not due to the actions or inactions of JPMC or its affiliates, and Section I(q) is amended, accordingly. Comment 37—Definition of Affiliated QPAM—Section II(a) Section II(a) of the proposed five-year exemption provides: ‘‘(a) The term ‘‘JPMC Affiliated QPAM’’ means a ‘‘qualified professional asset manager’’(as defined in Section VI(a) of PTE 84–14) that relies on the relief provided by PTE 84–14 and with respect to which JPMC is a current or future ‘‘affiliate’’ (as defined in Section VI(d)(1) of PTE 84–14). The term ‘‘JPMC Affiliated QPAM’’ excludes the parent entity, JPMC, the division implicated in the criminal conduct that is the subject of the Conviction.’’ The Applicant states that the last sentence of proposed Section II(a) contains an unintended error, as JPMC PO 00000 Frm 00019 Fmt 4701 Sfmt 4703 61833 is not a division but is the parent company in the affiliated group. The Department agrees with this comment and has modified the Section accordingly. The Department has reordered Section II, as described below. Comment 38—Definition of Conviction—Section II(e) Section II(e) of the proposed five-year exemption provides: ‘‘The term ‘Conviction’ means the judgment of conviction against JPMC for violation of the Sherman Antitrust Act, 15 U.S.C. 1, which is scheduled to be entered in the District Court for the District of Connecticut (the District Court) (Case Number 3:15-cr-79-SRU), in connection with JPMC, through one of its euro/U.S. dollar (EUR/USD) traders, entering into and engaging in a combination and conspiracy to fix, stabilize, maintain, increase or decrease the price of, and rig bids and offers for, the EUR/USD currency pair exchanged in the FX spot market by agreeing to eliminate competition in the purchase and sale of the EUR/USD currency pair in the United States and elsewhere. For all purposes under this exemption, ‘conduct’ of any person or entity that is the ‘subject of [a] Conviction’ encompasses any conduct of JPMC and/ or their personnel, that is described in the Plea Agreement, (including the Factual Statement), and other official regulatory or judicial factual findings that are a part of this record.’’ The Applicant states that this definition inaccurately paraphrases the Plea Agreement and significantly expands the conduct to which JPMC was charged and pleaded guilty. The Applicant states that it is neither appropriate nor accurate for the Department to expand the definition beyond the charge that was the subject of the Plea Agreement. After considering this comment, the Department has revised the definition accordingly. Comment 39—Notice to Interested Persons The Applicant requests that the Department confirm, and the Department so confirms, that the Applicant had 30 days after Federal Register publication of the proposal to notify interested persons. Comment 40—Summary of Facts and Representations The Applicant seeks certain clarifications to the Summary of Facts and Representations that the Department does not view as relevant to its determination whether to grant this exemption. Those requested E:\FR\FM\29DEN2.SGM 29DEN2 61834 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices any case where a JPMC Affiliated QPAM acts only as a sub-advisor to the investment fund in which such ERISAcovered plan and IRA invests. Comment of John Williams (December 7, 2016) Mr. Williams comments that it is unclear ‘‘how an entity which has been convicted of wrong-doing should be granted a 5-year exemption from regulations that it has already violated.’’ The Applicant responds that Mr. Williams’ statement is based on an erroneous view that the Applicant has entered into a guilty plea with the Department. With regard to the notice to interested persons, the Applicant states that Mr. Williams’ comment misconstrues, and improperly conflates, the criminal proceedings and the purpose of the proposed exemption. The Applicant states that it is not seeking, and the proposed exemption does not grant, relief from regulations that have already been violated. The Applicant further states that, although the JPMC Affiliated QPAMs did not participate in or know of the misconduct, the conviction of the non-asset manager affiliate would nevertheless disqualify the uninvolved asset managers from relying on the QPAM exemption. The Department reiterates that it determined that this exemption is protective of, and in the interest of, Covered Plans given the enhanced compliance and oversight requirements it imposes on JPMC Affiliated QPAMs. ethrower on DSK3G9T082PROD with NOTICES clarifications may be found as part of the public record for Application No. D– 11906, in a letter to the Department, dated January 20, 2017. Comment of Mark Levy (December 20, 2016) Mr. Levy, who states that he owns a Chase investment account, urges the Department not to ‘‘grant[ the Applicant] a ‘pass’ for their wrong doing [sic],’’ because ‘‘[n]o institution should be considered ‘too big’ to pay its share of imposed fines/penalties.’’ In response, the Applicant states that, among other things, JPMC is liable for approximately $1.9 billion in monetary penalties imposed by the Department of Justice and other regulators; and that the asset management businesses of the JPMC affiliated QPAMs had no involvement in, or knowledge of, the misconduct. The Department reiterates that this exemption is not punitive and is instead designed to protect Covered Plans. Comment of Lauri Robinson (December 12, 2016) Ms. Robinson states that it ‘‘is very difficult for laypersons to understand how I can be adversely affected by this,’’ and requests that the Department ‘‘make it easier to understand or elaborate on how it effects [sic] current IRAs.’’ Ms. Robinson believes that the Applicant ‘‘should have informed customers of the violation and 550 million dollar fine.’’ In response, the Applicant states that, among other things, the conviction was a matter of public record as of the date on which the plea agreement was entered, and that Ms. Robinson was notified, as an interested person, in accordance with the terms of the proposed exemption. The Department notes that each JPMC Affiliated QPAM must provide a notice of the exemption, along with a separate summary describing the facts that led to the Conviction, and a prominently displayed statement that the Conviction results in a failure to meet a condition in PTE 84–14, to each sponsor or beneficial owner of a Covered Plan, or the sponsor of an investment fund in VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 Comment of Dan Cable (December 22, 2016) Mr. Cable objects to the exemption in general by stating he does not believe that: (i) The Applicant is taking its criminal behavior seriously, (ii) the QPAM exemption is not customarily and routinely used, and (iii) the Applicant has not adequately demonstrated harm to clients if the exemption is not granted. In response, the Applicant states that, among other things, the Department of Justice, the District Court, and other applicable regulators already have imposed upon the Applicant certain monetary penalties and other sanctions intended to punish the Applicant and deter future wrongdoing. The Applicant states that it has taken responsibility for the conduct that was the basis of the plea agreement, that the JPMC Affiliated QPAMs had no involvement in the conduct, and that such conduct violated neither ERISA nor the Department’s regulations. As such, the Applicant states that Department should not use the exemption process to further punish these uninvolved asset managers, and that to do so would only harm the plan and IRA clients of the uninvolved JPMC Affiliated QPAMs. The commenter also expresses concern that the training and audit requirements of the proposed exemption are inadequate. In response, the Applicant disagrees and states that these proposed requirements are imposed on entities that had no involvement in the criminal conduct and that these requirements add to pre-existing robust and comprehensive training, audit, and PO 00000 Frm 00020 Fmt 4701 Sfmt 4703 compliance functions — both firm-wide and specific to the asset management businesses. The commenter also expresses concern that the JPMC Affiliated QPAMs benefited from the criminal conduct that is the subject of the Conviction. In response, the Applicant notes that the proposed exemption contains the following condition: ‘‘(b) Other than a single individual who worked for a non-fiduciary business within JPMorgan Chase Bank and who had no responsibility for, and exercised no authority in connection with, the management of plan assets, the JPMC Affiliated QPAMs and the JPMC Related QPAMs (including their officers, directors, agents other than JPMC, and employees of such JPMC QPAMs) did not receive direct compensation, or knowingly receive indirect compensation in connection with the criminal conduct that is the subject of the Conviction.’’ The Applicant states that it is able to and will comply with this condition. The commenter expresses skepticism that the JPMC Affiliated QPAMs will not ‘‘hire any of the crooks.’’ In response, the Applicant states that the proposed exemption contains the following condition: ‘‘The JPMC Affiliated QPAMs will not employ or knowingly engage any of the individuals that participated in the criminal conduct that is the subject of the Conviction.’’ The Applicant states that it is able to and will comply with this condition. The commenter states that the QPAM exemption is not routinely relied upon by the Applicant. According to the Applicant, practically all retirement plans expect their asset managers to use the QPAM exemption, and many counterparties expect representations from the Applicant that it applies. Finally, the commenter states that it is unclear how a client of the JPMC Affiliated QPAMs would be harmed in the event that the Department does not grant the requested exemption. In response, the Applicant states that the loss of QPAM status for the JPMC Affiliated QPAMs would have a very substantial impact, affecting a significant number of ERISA plans and IRAs. The Applicant notes that, as of the time its application was filed, the Applicant managed approximately $65.5 billion in assets for ERISA plans, and over $12 billion in IRA assets for over 32,000 IRAs. Comment of Sharon Bushman (December 26, 2016) The commenter, who states she is the holder of an IRA managed by the E:\FR\FM\29DEN2.SGM 29DEN2 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices Applicant, states that she does not understand the notice to interested persons, and requests that no action be taken on the exemption until a full explanation is provided regarding the implications for individual clients. In response, the Applicant states that the Department fully explained the purpose and effect of the exemption in the preamble to the Federal Register notice. As noted above, each JPMC Affiliated QPAM must provide a notice of the exemption, along with a separate summary describing the facts that led to the Conviction, and a prominently displayed statement that the Conviction results in a failure to meet a condition in PTE 84–14, to each sponsor or beneficial owner of a Covered Plan, or the sponsor of an investment fund in any case where a JPMC Affiliated QPAM acts only as a sub-advisor to the investment fund in which such ERISAcovered plan and IRA invests. ethrower on DSK3G9T082PROD with NOTICES Comment of Cynthia Beaver (January 18, 2017) The commenter states that she does not understand the notice to interested persons and requests clarification regarding whether she will be required to move her account if the exemption is not granted. If the exemption is granted, the commenter asks whether there will be adequate ‘‘outside oversight’’ to ensure that her account is safe. In response, the Applicant expresses the view that the proposed exemption’s conditions (taking into account the Applicant’s comments with respect to the proposal) are sufficient and are designed to protect clients such as the commenter from the any adverse effects of the JPMC Affiliated QPAMs losing the QPAM exemption. The Department notes that the exemption requires an extensive audit every two years by a qualified auditor who is independent of JPMC. Comment—Letter From House Committee on Financial Services The Department also received a comment letter from certain members of Congress (the Members) regarding this exemption, as well as regarding other QPAM-related proposed one year exemptions. In the letter, the Members stated that certain conditions contained in these proposed exemptions are crucial to protecting the investments of our nation’s workers and retirees, referring to proposed conditions which require each bank to: (a) Indemnify and hold harmless ERISA-covered plans and IRAs for any damages resulting from the future misconduct of such bank; and (b) disclose to the Department any Deferred Prosecution Agreement or a Non- VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 Prosecution Agreement with the U.S. Department of Justice. The Members also requested that the Department hold hearings in connection with the proposed exemptions. The Department acknowledges the Members’ concerns regarding the need for public discourse regarding proposed exemptions. To this end, the Department’s procedures regarding prohibited transaction exemption requests under ERISA (the Exemption Procedures) afford interested persons the opportunity to request a hearing. Specifically, section 2570.46(a) of the Exemption Procedures provides that, ‘‘[a]ny interested person who may be adversely affected by an exemption which the Department proposes to grant from the restrictions of section 406(b) of ERISA, section 4975(c)(1)(E) or (F) of the Code, or section 8477(c)(2) of FERSA may request a hearing before the Department within the period of time specified in the Federal Register notice of the proposed exemption.’’ The Exemption Procedures provide that ‘‘[t]he Department will grant a request for a hearing made in accordance with paragraph (a) of this section where a hearing is necessary to fully explore material factual issues identified by the person requesting the hearing.’’ The Exemption Procedures also provide that ‘‘[t]he Department may decline to hold a hearing where: (1) The request for the hearing does not meet the requirements of paragraph (a) of this section; (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.’’ 13 While the Members’ letter raises important policy issues, it does not appear to raise specific material factual issues. The Department previously explored a wide range of legal and policy issues regarding Section I(g) of the QPAM Exemption during a public hearing held on January 15, 2015 in connection with the Department’s proposed exemption involving Credit Suisse AG, and has determined that an additional hearing on these issues is not necessary. After giving full consideration to the record, the Department has decided to grant the exemption, as described above. The complete application file (Application No. D–11906) is available for public inspection in the Public Disclosure Room of the Employee Benefits Security Administration, Room N–1515, U.S. Department of Labor, 200 13 29 CFR part 2570, published at 76 FR 66653 (October 27, 2011). PO 00000 Frm 00021 Fmt 4701 Sfmt 4703 61835 Constitution Avenue NW, Washington, DC 20210. For a more complete statement of the facts and representations supporting the Department’s decision to grant this exemption, refer to the notice of proposed exemption published on November 21, 2016 at 81 FR 83372. Exemption Section I: Covered Transactions Certain entities with specified relationships to JPMC (hereinafter, the JPMC Affiliated QPAMs and the JPMC Related QPAMs, as defined in Sections II(g) and II(h), respectively) will not be precluded from relying on the exemptive relief provided by Prohibited Transaction Class Exemption 84–14 (PTE 84–14 or the QPAM Exemption), notwithstanding the Conviction, as defined in Section II(a), during the Exemption Period,14 provided that the following conditions are satisfied: (a) Other than a single individual who worked for a non-fiduciary business within JPMorgan Chase Bank and who had no responsibility for, and exercised no authority in connection with, the management of plan assets, the JPMC Affiliated QPAMs and the JPMC Related QPAMs (including their officers, directors, agents other than JPMC, and employees of such QPAMs who had responsibility for, or exercised authority in connection with the management of plan assets) did not know of, did not have reason to know of, or participate in the criminal conduct that is the subject of the Conviction. For purposes of this paragraph (a), ‘‘participate in’’ means the knowing approval of the misconduct underlying the Conviction; (b) Apart from a non-fiduciary line of business within JPMorgan Chase Bank, the JPMC Affiliated QPAMs and the JPMC Related QPAMs (including their officers, directors, and agents other than JPMC, and employees of such JPMC 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 JPMC Affiliated QPAMs will not employ or knowingly engage any of 14 Section I(g) of PTE 84–14 generally provides relief only if ‘‘[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 violation of the Sherman Antitrust Act, Title 15 United States Code, Section 1. E:\FR\FM\29DEN2.SGM 29DEN2 ethrower on DSK3G9T082PROD with NOTICES 61836 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices the individuals that participated in the criminal conduct that is the subject of the Conviction. For the purposes of this paragraph (c), ‘‘participated in’’ means the knowing approval of the misconduct underlying the Conviction; (d) At all times during the Exemption Period, no JPMC Affiliated QPAM will use its authority or influence to direct an ‘‘investment fund’’ (as defined in Section VI(b) of PTE 84–14), that is subject to ERISA or the Code and managed by such JPMC Affiliated QPAM with respect to one or more Covered Plans, to enter into any transaction with JPMC, or to engage JPMC 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 a JPMC Affiliated QPAM or a JPMC Related QPAM to satisfy Section I(g) of PTE 84–14 arose solely from the Conviction; (f) A JPMC Affiliated QPAM or a JPMC Related QPAM did not exercise authority over the assets of any plan subject to Part 4 of Title I of ERISA (an ERISA-covered plan) or section 4975 of the Code (an IRA) in a manner that it knew or should have known would: further the criminal conduct that is the subject of the Conviction; or cause the JPMC Affiliated QPAM, the JPMC Related QPAM, or their affiliates to directly or indirectly profit from the criminal conduct that is the subject of the Conviction; (g) Other than with respect to employee benefit plans maintained or sponsored for its own employees or the employees of an affiliate, JPMC will not act as a fiduciary within the meaning of section 3(21)(A)(i) or (iii) of ERISA, or section 4975(e)(3)(A) and (C) of the Code, with respect to ERISA-covered plan and IRA assets; provided, however, that JPMC will not be treated as violating the conditions of this exemption solely because it acted as an investment advice fiduciary within the meaning of section 3(21)(A)(ii) or section 4975(e)(3)(B) of the Code; (h)(1) By July 9, 2018, each JPMC Affiliated QPAM must develop, implement, maintain, and follow written policies and procedures (the Policies). The Policies must require, and must be reasonably designed to ensure that: (i) The asset management decisions of the JPMC Affiliated QPAM are conducted independently of the corporate management and business activities of JPMC; VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 (ii) The JPMC Affiliated 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 violation of these duties and provisions with respect to Covered Plans; (iii) The JPMC Affiliated 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 JPMC Affiliated QPAM to regulators, including, but not limited to, the Department, the Department of the Treasury, the Department of Justice, and the Pension Benefit Guaranty Corporation, on behalf of or in relation to Covered Plans are materially accurate and complete, to the best of such QPAM’s knowledge at that time; (v) To the best of the JPMC Affiliated QPAM’s knowledge at the time, the JPMC Affiliated QPAM does not make material misrepresentations or omit material information in its communications with such regulators with respect to Covered Plans; (vi) The JPMC Affiliated QPAM complies with the terms of this exemption; and (vii) Any violation of, or failure to comply with an item in subparagraphs (ii) through (vi), is corrected as soon as reasonably possible upon discovery, or as soon after the QPAM reasonably should have known of the noncompliance (whichever is earlier), and any such violation or compliance failure not so corrected is reported, upon the discovery of such failure to so correct, in writing, to the head of compliance and the General Counsel (or their functional equivalent) of the relevant line of business that engaged in the violation or failure, and the independent auditor responsible for reviewing compliance with the Policies. A JPMC Affiliated QPAM will not be treated as having failed to develop, implement, maintain, or follow the Policies, provided that it corrects any instance of noncompliance as soon as reasonably possible upon discovery, or as soon as reasonably possible after the QPAM reasonably should have known of the noncompliance (whichever is earlier), and provided that it adheres to the reporting requirements set forth in this subparagraph (vii); (2) By July 9, 2018, each JPMC Affiliated QPAM must develop a program of training (the Training), to be conducted at least annually, for all relevant JPMC Affiliated QPAM asset/ portfolio management, trading, legal, compliance, and internal audit PO 00000 Frm 00022 Fmt 4701 Sfmt 4703 personnel. The first Training under this Final Exemption must be completed by all relevant JPMC Affiliated QPAM personnel by July 9, 2019 (by the end of this 30-month period, asset/portfolio management, trading, legal, compliance, and internal audit personnel who were employed from the start to the end of the period must have been trained twice: the first time under PTE 2016–15; and the second time under this exemption). The Training must: (i) At a minimum, cover the Policies, ERISA and Code compliance (including applicable fiduciary duties and the prohibited transaction provisions), ethical conduct, the consequences for not complying with the conditions of this exemption (including any loss of exemptive relief provided herein), and prompt reporting of wrongdoing; and (ii) Be conducted by a professional who has been prudently selected and who has appropriate technical training and proficiency with ERISA and the Code; (i)(1) Each JPMC Affiliated QPAM submits to an audit conducted every two years by an independent auditor who has been prudently selected and who has appropriate technical training and proficiency with ERISA and the Code, to evaluate the adequacy of, and each JPMC Affiliated QPAM’s compliance with, the Policies and Training 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 July 10, 2018 through July 9, 2019, and must be completed by January 9, 2020. The second audit must cover the period from July 10, 2020 through July 9, 2021, and must be completed by January 9, 2022. In the event that the Exemption Period is extended or a new exemption is granted, the third audit would cover the period from July 10, 2022 through July 9, 2023, and would have to be completed by January 9, 2024 (unless the Department chooses to alter the biennial audit requirement in the new or extended exemption);’’ 15 (2) Within the scope of the audit and to the extent necessary for the auditor, 15 The third audit referenced above would not have to be completed until after the Exemption Period expires. If the Department ultimately decides to grant relief for an additional period, it could decide to alter the terms of the exemption, including the audit conditions (and the timing of the audit requirements). Nevertheless, the Applicant should anticipate that the Department will insist on strict compliance with the audit terms and schedule set forth above. As it considers any new exemption application, the Department may also contact the auditor for any information relevant to its determination. E:\FR\FM\29DEN2.SGM 29DEN2 ethrower on DSK3G9T082PROD with NOTICES Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices in its sole opinion, to complete its audit and comply with the conditions for relief described herein, and only to the extent such disclosure is not prevented by state or federal statute, or involves communications subject to attorney client privilege, each JPMC Affiliated QPAM and, if applicable, JPMC, will grant the auditor unconditional access to its business, including, but not limited to: its computer systems; business records; transactional data; workplace locations; training materials; and personnel. Such access is limited to information relevant to the auditor’s objectives as specified by the terms of this exemption; (3) The auditor’s engagement must specifically require the auditor to determine whether each JPMC Affiliated 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 JPMC Affiliated QPAM’s operational compliance with the Policies and Training. In this regard, the auditor must test, for each QPAM, a sample of such QPAM’s transactions involving Covered Plans, sufficient in size and nature to afford the auditor a reasonable basis to determine such QPAM’s operational compliance with the Policies and Training; (5) For each audit, on or before the end of the relevant period described in Section I(i)(1) for completing the audit, the auditor must issue a written report (the Audit Report) to JPMC and the JPMC Affiliated QPAM to which the audit applies that describes the procedures performed by the auditor during the course of its examination. The auditor, at its discretion, may issue a single consolidated Audit Report that covers all the JPMC Affiliated QPAMs. The Audit Report must include the auditor’s specific determinations regarding: (i) The adequacy of each JPMC Affiliated QPAM’s Policies and Training; each JPMC Affiliated QPAM’s compliance with the Policies and Training; the need, if any, to strengthen such Policies and Training; and any instance of the respective JPMC Affiliated QPAM’s noncompliance with the written Policies and Training described in Section I(h) above. The JPMC Affiliated QPAM must promptly address any noncompliance. The JPMC Affiliated QPAM must promptly address or prepare a written plan of action to address any determination by the auditor regarding the adequacy of the VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 Policies and Training and the auditor’s recommendations (if any) with respect to strengthening the Policies and Training of the respective Affiliated QPAM. Any action taken or the plan of action to be taken by the respective JPMC Affiliated QPAM must be included in an addendum to the Audit Report (such addendum must be completed prior to the certification described in Section I(i)(7) below). In the event such a plan of action to address the auditor’s recommendation regarding the adequacy of the Policies and Training is not completed by the time of submission of the Audit Report, the following period’s Audit Report must state whether the plan was satisfactorily completed. Any determination by the auditor that the respective JPMC Affiliated QPAM has implemented, maintained, and followed sufficient Policies and Training must not be based solely or in substantial part on an absence of evidence indicating noncompliance. In this last regard, any finding that a JPMC Affiliated QPAM has complied with the requirements under this subparagraph must be based on evidence that the particular JPMC Affiliated QPAM has actually implemented, maintained, and followed the Policies and Training required by this exemption. Furthermore, the auditor must not solely rely on the Annual Report created by the compliance officer (the Compliance Officer), as described in Section I(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 I(i)(3) and (4) above; and (ii) The adequacy of the most recent Annual Review described in Section I(m); (6) The auditor must notify the respective JPMC Affiliated QPAM of any instance of noncompliance identified by the auditor within five (5) business days after such noncompliance is identified by the auditor, regardless of whether the audit has been completed as of that date; (7) With respect to 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 JPMC Affiliated 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; that such JPMC Affiliated QPAM has addressed, corrected or remedied any noncompliance and inadequacy or has an appropriate written plan to address any inadequacy regarding the Policies PO 00000 Frm 00023 Fmt 4701 Sfmt 4703 61837 and Training identified in the Audit Report. Such 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; (8) The Risk Committee of JPMC’s Board of Directors is 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 JPMC must review the Audit Report for each JPMC Affiliated QPAM and must certify in writing, under penalty of perjury, that such officer has reviewed each Audit Report; (9) Each JPMC Affiliated QPAM provides its certified Audit Report, by regular mail to: Office of Exemption Determinations (OED), 200 Constitution Avenue NW, Suite 400, Washington, DC 20210; or by private carrier to: 122 C Street NW, Suite 400, Washington, DC 20001–2109. This delivery must take place no later than thirty (30) days following completion of the Audit Report. The Audit Report will be made part of the public record regarding this exemption. Furthermore, each JPMC Affiliated QPAM must make its Audit Report unconditionally available, electronically or otherwise, for examination upon request by any duly authorized employee or representative of the Department, other relevant regulators, and any fiduciary of a Covered Plan; (10) Each JPMC Affiliated QPAM and the auditor must submit to OED: Any engagement agreement(s) entered into pursuant to the engagement of the auditor under this exemption, no later than two (2) months after the execution of any such engagement agreement; (11) The auditor must provide the Department, upon request, for inspection and review, access to all the workpapers created and utilized in the course of the audit, provided such access and inspection is otherwise permitted by law; and (12) JPMC must notify the Department of a change in the independent auditor no later than two (2) months after the engagement of a substitute or subsequent auditor and must provide an explanation for the substitution or change including a description of any material disputes between the terminated auditor and JPMC; (j) As of January 10, 2018 and throughout the Exemption Period, with respect to any arrangement, agreement, or contract between a JPMC Affiliated E:\FR\FM\29DEN2.SGM 29DEN2 ethrower on DSK3G9T082PROD with NOTICES 61838 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices QPAM and a Covered-Plan, the JPMC Affiliated 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 inadvertent prohibited transactions); and to comply with the standards of prudence and loyalty set forth in section 404 of ERISA with respect to each such ERISA-covered plan and IRA to the extent that section is applicable; (2) To indemnify and hold harmless the Covered Plan for any actual losses resulting directly from a JPMC Affiliated 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 QPAM; or any claim arising out of the failure of such JPMC Affiliated 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. This condition applies only to actual losses caused by the JPMC Affiliated QPAM’s violations. (3) Not to require (or otherwise cause) the Covered Plan to waive, limit, or qualify the liability of the JPMC Affiliated QPAM for violating ERISA or the Code or engaging in prohibited transactions; (4) Not to restrict the ability of such Covered Plan to terminate or withdraw from its arrangement with the JPMC Affiliated QPAM with respect to any investment in a separately managed account or pooled fund subject to ERISA and managed by such QPAM, with the exception of reasonable restrictions, appropriately disclosed in advance, that are specifically designed to ensure equitable treatment of all investors in a pooled fund in the event such withdrawal or termination may have adverse consequences for all other investors. In connection with any such arrangements involving investments in pooled funds subject to ERISA entered into after the initial effective date of this exemption, the adverse consequences must relate to of a lack of liquidity of the underlying assets, valuation issues, or regulatory reasons that prevent the fund from promptly redeeming an ERISA-covered plan’s or IRA’s investment, and such restrictions must be applicable to all such investors and 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 VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 in advance, that are specifically designed to prevent generally recognized abusive investment practices or specifically designed to ensure equitable treatment of all investors in a pooled fund in the event such withdrawal or termination may have adverse consequences for all other investors, provided that such fees are applied consistently and in like manner to all such investors; and (6) Not to include exculpatory provisions disclaiming or otherwise limiting liability of the JPMC Affiliated QPAM for a violation of such agreement’s terms. To the extent consistent with Section 410 of ERISA, 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 JPMC and its affiliates, or damages arising from acts outside the control of the JPMC Affiliated QPAM; (7) By July 9, 2018, each JPMC Affiliated QPAM must provide a notice of its obligations under this Section I(j) to each Covered Plan. For all other prospective Covered Plans, the JPMC Affiliated QPAM will agree to its obligations under this Section I(j) in an updated investment management agreement between the JPMC Affiliated 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 2016–15 that meets the terms of this condition. Notwithstanding the above, a JPMC Affiliated QPAM will not violate the condition solely because a Plan or IRA refuses to sign an updated investment management agreement; (k) By March 10, 2018, each JPMC Affiliated QPAM will provide a notice of the exemption, along with a separate summary describing the facts that led to the Conviction (the Summary), which have 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, or the sponsor of an investment fund in any case where a JPMC Affiliated QPAM acts as a sub-advisor to the investment fund in which such ERISA-covered plan and IRA invests. Any prospective client for which a JPMC Affiliated QPAM relies on PTE 84–14 or has expressly represented that the manager qualifies as a QPAM or relies on the QPAM class exemption 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 PO 00000 Frm 00024 Fmt 4701 Sfmt 4703 agreement from the JPMC Affiliated QPAM. Disclosures may be delivered electronically. (l) The JPMC Affiliated QPAMs must comply with each condition of PTE 84– 14, as amended, with the sole exception of the violation of Section I(g) of PTE 84–14 that is attributable to the Conviction; (m)(1) By July 9, 2018, JPMC designates 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 annual review for each annual period beginning on January 10, 2018, (the Annual Review) 16 to determine the adequacy and effectiveness of the implementation of the Policies and Training. With respect to the Compliance Officer, the following conditions must be met: (i) The Compliance Officer must be a professional who has extensive experience with, and knowledge of, the regulation of financial services and products, including under ERISA and the Code; and (ii) The Compliance Officer must have a direct reporting line to the highestranking corporate officer in charge of legal compliance for asset management; (2) With respect to each Annual Review, the following conditions must be met: (i) The Annual Review includes a review of: Any compliance matter related to the Policies or Training that was identified by, or reported to, the Compliance Officer or others within the compliance and risk control function (or its equivalent) during the previous year; any material change in the relevant business activities of the JPMC Affiliated QPAMs; and any change to ERISA, the Code, or regulations related to fiduciary duties and the prohibited transaction provisions that may be applicable to the activities of the JPMC Affiliated QPAMs; (ii) The Compliance Officer prepares a written report for each Annual Review (each, an Annual Report) that (A) summarizes his or her material activities during the preceding year; (B) sets forth any instance of noncompliance discovered during the preceding year, and any related corrective action; (C) details any change to the Policies or Training to guard against any similar instance of noncompliance occurring again; and (D) makes recommendations, as necessary, for additional training, 16 Such Annual Review must be completed with respect to the annual periods ending January 9, 2019; January 9, 2020; January 9, 2021; January 9, 2022; and January 9, 2023. E:\FR\FM\29DEN2.SGM 29DEN2 ethrower on DSK3G9T082PROD with NOTICES Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices procedures, monitoring, or additional and/or changed processes or systems, and management’s actions on such recommendations; (iii) In each Annual Report, the Compliance Officer must certify in writing that to his or her knowledge: (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 preceding year and any related correction taken to date have been identified in the Annual Report; and (D) the JPMC Affiliated QPAMs have complied with the Policies and Training, and/or corrected (or is correcting) any instances of noncompliance in accordance with Section I(h) above; (iv) Each Annual Report must be provided to appropriate corporate officers of JPMC and each JPMC Affiliated QPAM to which such report relates; the head of compliance and the General Counsel (or their functional equivalent) of the relevant JPMC Affiliated QPAM; and must be made unconditionally available to the independent auditor described in Section I(i) above; (v) Each Annual Review, including the Compliance Officer’s written Annual Report, must be completed within three (3) months following the end of the period to which it relates; (n) Each JPMC Affiliated QPAM will maintain records necessary to demonstrate that the conditions of this exemption have been met, for six (6) years following the date of any transaction for which such JPMC Affiliated QPAM relies upon the relief in the exemption; (o) During the Exemption Period, JPMC: (1) Immediately discloses to the Department any Deferred Prosecution Agreement (a DPA) or a NonProsecution Agreement (an NPA) with the U.S. Department of Justice, entered into by JPMC or any of its affiliates in connection with conduct described in Section I(g) of PTE 84–14 or section 411 of ERISA; and (2) immediately provides the Department any information requested by the Department, as permitted by law, regarding the agreement and/or conduct and allegations that led to the agreement; (p) By July 9, 2018, each JPMC Affiliated QPAM, in its agreements with, or in other written disclosures provided to Covered Plans, will clearly and prominently inform Covered Plan clients of their right to obtain a copy of the Policies or a description (‘‘Summary Policies’’) which accurately summarizes VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 key components of the QPAM’s written Policies developed in connection with this exemption. If the Policies are thereafter changed, each Covered Plan client must receive a new disclosure within six (6) months following the end of the calendar year during which the Policies were changed.17 With respect to this requirement, the description may be continuously maintained on a website, provided that such website link to the Policies or the Summary Policies is clearly and prominently disclosed to each Covered Plan; and (q) A JPMC Affiliated QPAM or a JPMC Related QPAM will not fail to meet the terms of this exemption solely because a different JPMC Affiliated QPAM or JPMC Related QPAM fails to satisfy a condition for relief described in Sections I(c), (d), (h), (i), (j), (k), (l), (n) and (p); or if the independent auditor described in Section I(i) fails a provision of the exemption other than the requirement described in Section I(i)(11), provided that such failure did not result from any actions or inactions of JPMC or its affiliates. Section II: Definitions (a) The term ‘‘Conviction’’ means the judgment of conviction against JPMC for violation of the Sherman Antitrust Act, 15 U.S.C. 1, entered in the District Court for the District of Connecticut (the District Court) (case number 3:15–cr– 79–SRU). For all purposes under this exemption, ‘‘conduct’’ of any person or entity that is the ‘‘subject of [a] Conviction’’ encompasses the conduct described in Paragraph 4(g)–(i) of the Plea Agreement filed in the District Court in case number 3:15–cr–79–SRU; and (b) The term ‘‘Conviction Date’’ means the date of the judgment of the trial court. For avoidance of confusion, the Conviction Date is January 10, 2017, as set forth on page 3 of Dkt. 49, in case number 3:15–cr–79–SRU. (c) The term ‘‘Covered Plan’’ means a plan subject to Part 4 of Title 1 of ERISA (‘‘ERISA-covered plan’’) or a plan subject to Section 4975 of the Code (‘‘IRA’’) with respect to which a JPMC Affiliated QPAM relies on PTE 84–14, or with respect to which a JPMC Affiliated QPAM (or any JPMC affiliate) has expressly represented that the manager qualifies as a QPAM or relies on the QPAM class exemption (PTE 84– 14). A Covered Plan does not include an ERISA-covered Plan or IRA to the extent 17 In the event Applicant meets this disclosure requirement through Summary Policies, changes to the Policies shall not result in the requirement for a new disclosure unless, as a result of changes to the Policies, the Summary Policies are no longer accurate. PO 00000 Frm 00025 Fmt 4701 Sfmt 4703 61839 the JPMC Affiliated QPAM has expressly disclaimed reliance on QPAM status or PTE 84–14 in entering into its contract, arrangement, or agreement with the ERISA-covered plan or IRA; (d) The terms ‘‘ERISA-covered plan’’ and ‘‘IRA’’ mean, respectively, a plan subject to Part 4 of Title I of ERISA and a plan subject to section 4975 of the Code. (e) The term ‘‘Exemption Period’’ means January 10, 2018, through January 9, 2023; (f) The term ‘‘JPMC’’ means JPMorgan Chase and Co., the parent entity, but does not include any subsidiaries or other affiliates; (g) The term ‘‘JPMC Affiliated QPAM’’ means a ‘‘qualified professional asset manager,’’ as defined in Section VI(a) of PTE 84–14, that relies on the relief provided by PTE 84–14 and with respect to which JPMC is a current or future ‘‘affiliate’’ (as defined in Section VI(d)(1) of PTE 84–14). The term ‘‘JPMC Affiliated QPAM’’ excludes the parent entity, JPMC, the entity implicated in the criminal conduct that is the subject of the Conviction (h) The term ‘‘JPMC Related QPAM’’ means any current or future ‘‘qualified professional asset manager’’ (as defined in section VI(a) of PTE 84–14) that relies on the relief provided by PTE 84–14, and with respect to which JPMC owns a direct or indirect five percent or more interest, but with respect to which JPMC is not an ‘‘affiliate’’ (as defined in Section VI(d)(1) of PTE 84–14). Effective Date This exemption is effective on January 10, 2018. The term of the exemption is from January 10, 2018, through January 9, 2023 (the Exemption Period). Department’s Comment: The Department cautions that the relief in this exemption will terminate immediately if, among other things, an entity within the JPMC corporate structure is convicted of a crime described in Section I(g) of PTE 84–14 (other than the Conviction) during the Exemption Period. Although JPMC could apply for a new exemption in that circumstance, the Department would not be obligated to grant the exemption. The terms of this exemption have been specifically designed to permit plans to terminate their relationships in an orderly and cost effective fashion in the event of an additional conviction or a determination that it is otherwise prudent for a plan to terminate its relationship with an entity covered by the exemption. E:\FR\FM\29DEN2.SGM 29DEN2 61840 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices Further Information For more information on this exemption, contact Mr. Joseph Brennan of the Department, telephone (202) 693– 8456. (This is not a toll-free number.) Deutsche Investment Management Americas Inc. (DIMA) and Certain Current and Future Asset Management Affiliates of Deutsche Bank AG (collectively, the Applicant or the DB QPAMs), Located in New York, New York [Prohibited Transaction Exemption 2017–04; Exemption Application No. D–11908] ethrower on DSK3G9T082PROD with NOTICES Discussion On November 21, 2016, the Department of Labor (the Department) published a notice of proposed exemption in the Federal Register at 81 FR 83400, for certain entities with specified relationships to Deutsche Securities Korea, Co. (DSK) 18 or DB Group Services (UK) Limited (DB Group Services) 19 to continue to rely upon the relief provided by PTE 84–14 for a period of five years,20 notwithstanding certain criminal convictions, as described herein (the Convictions). The Department is granting this exemption to ensure that Covered Plans 21 with assets managed by an asset manager within the corporate family of Deutsche Bank AG (together with its current and future affiliates, Deutsche Bank) may continue to benefit from the relief provided by PTE 84–14. The effective date of this exemption is April 18, 2018, and the exemption is effective from April 18, 2018 through April 17, 2021 (the Exemption Period). No relief from a violation of any other law is provided by this exemption, including any criminal conviction 18 Deutsche Securities Korea, Co. is a South Korean ‘‘affiliate’’ (as defined in Section VI(c) of PTE 84–14) of Deutsche Bank AG. 19 DB Group Services (UK) Limited is United Kingdom-based ‘‘affiliate’’ (as defined in Section VI(c) of PTE 84–14) of Deutsche Bank AG. 20 (49 FR 9494, March 13, 1984), as corrected at 50 FR 41430 (October 10, 1985), as amended at 70 FR 49305 (August 23, 2005) and as amended at 75 FR 38837 (July 6, 2010), hereinafter referred to as PTE 84–14 or the QPAM exemption. 21 ‘‘Covered Plan’’ is a plan subject to Part 4 of Title 1 of ERISA (‘‘ERISA-covered plan’’) or a plan subject to section 4975 of the Code (‘‘IRA’’) with respect to which a DB QPAM relies on PTE 84–14, or with respect to which a DB QPAM (or any Deutsche Bank affiliate) has expressly represented that the manager qualifies as a QPAM or relies on the QPAM class exemption (PTE 84–14). A Covered Plan does not include an ERISA-covered plan or IRA to the extent the DB QPAM has expressly disclaimed reliance on the QPAM status or PTE 84– 14 in entering into its contract, arrangement, or agreement with the ERISA-covered plan or IRA. See further discussion in this preamble under the heading Comment 5—Policies and Procedures related to DB QPAM Disclosures—Section I(h)(1)(iv)–(v). VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 described in the proposed exemption. Furthermore, the Department cautions that the relief in this exemption will terminate immediately if, among other things, an entity within the Deutsche Bank corporate structure is convicted of a crime described in Section I(g) of PTE 84–14 (other than the Convictions) during the Exemption Period. The terms of this exemption are designed to promote adherence to basic fiduciary standards under ERISA and the Code. This exemption also aims to ensure that Covered Plans can terminate relationships in an orderly and cost effective fashion in the event the fiduciary of a Covered Plan determines it is prudent to terminate the relationship with a DB QPAM. Written Comments The Department invited all interested persons to submit written comments and/or requests for a public hearing with respect to the notice of proposed exemption, published in the Federal Register at 81 FR 83400 on November 21, 2016. All comments and requests for a hearing were due by January 5, 2017.22 The Department received written comments from the Applicant, members of the U.S. Congress, and a number of plan and IRA clients of Deutsche Bank. After considering these submissions, the Department has determined to grant the exemption, with revisions, as described below. The Applicant requests that the parenthetical explanation for ‘‘participated in’’ be deleted in both Section I(a) and I(c). The Applicant states that the language in both sections preceding the parentheticals is clear and unambiguous, rendering the parentheticals unnecessary. Alternatively, the Applicant requests that, should the parenthetical remain in the exemption, the Department removes the words ‘‘or tacit’’ in the phrase ‘‘knowing or tacit approval’’ in Sections I(a) and I(c). The Applicant states that the term ‘‘is undefined and ambiguous, and potentially encompasses a broad range of conduct that could become the subject of disputes with counterparties.’’ The Applicant also states that ‘‘tacit approval’’ should not be replaced with the term ‘‘condone’’ (as the Department did in paragraph (c) in the Final Temporary Exemption), as it is duplicative of and has the same meaning as ‘‘approve’’. The Department declines to delete the parenthetical explanations in Sections I(a) and I(c). Rather, after consideration, the Department removed ‘‘or tacit’’ from both conditions so that ‘‘participated in’’ means the ‘‘knowing approval of the misconduct underlying the Convictions.’’ Comment 2—Exercising Authority Over Plan Assets—Section I(f) Section I(f) of the proposed exemption provides, ‘‘(f) A DB QPAM did not Comment 1—Knowing or Tacit exercise authority over the assets of any Approval—Sections I(a) and I(c) plan subject to Part 4 of Title I of ERISA Section I(a) of the proposed (an ERISA-covered plan) or section 4975 exemption provides, ‘‘(a) The DB of the Code (an IRA) in a manner that QPAMs (including their officers, it knew or should have known would: directors, agents other than Deutsche further the criminal conduct that is the Bank, and employees of such DB subject of the Convictions; or cause the QPAMs) did not know of, have reason QPAM, affiliates, or related parties to to know of, or participate in the criminal directly or indirectly profit from the conduct of DSK and DB Group Services criminal conduct that is the subject of that is the subject of the Convictions (for the Convictions.’’ purposes of this Section I(a), Deutsche Bank requests that the ‘‘participate in’’ includes the knowing or phrase ‘‘related parties’’ in Condition tacit approval of the misconduct I(f) be deleted as the term ‘‘is undefined underlying the Convictions).’’ and could lead to confusion.’’ The Section I(c) of the proposed Applicant also states that this condition exemption provides, ‘‘(c) The DB may be interpreted as implicating the QPAMs will not employ or knowingly purchase, for a plan or IRA, of any engage any of the individuals that instrument linked to a benchmark rate. participated in the criminal conduct Deutsche Bank requests that the that is the subject of the Convictions (for Department add clarification language the purposes of this Section I(c), which ‘‘[provides] that this condition is ‘‘participated in’’ includes the knowing not violated solely because an ERISAor tacit approval of the misconduct covered plan or IRA managed by a DB underlying the Convictions).’’ QPAM purchased, sold or held an economic interest in a security or 22 The comment period was subsequently product, the value of which was tied to extended by the Department to January 17, 2017. a benchmark interest rate implicated in However, the Department received additional the conduct that is the subject of the comments from the Applicant after the close of the extended comment period. Convictions.’’ PO 00000 Frm 00026 Fmt 4701 Sfmt 4703 E:\FR\FM\29DEN2.SGM 29DEN2 ethrower on DSK3G9T082PROD with NOTICES Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices After consideration, the Department deleted the phrase ‘‘related parties’’ for clarity. However, the Department declines to make the Applicant’s other requested revisions. The Department does not view Condition I(f) (which relates to exercising authority) as confusing. Further, Condition I(f) is consistent with the Applicant’s prior representation that, with respect to the conviction of DB Group Services (UK) Limited (DB Group Services) for LIBOR manipulation (the US Conviction), ‘‘[no] current or former employee of [DB Group Services] or of any affiliated QPAM who previously has been or who subsequently may be identified by [DB Group Services], Deutsche Bank AG or any U.S. or non-U.S. regulatory or enforcement agencies as having been responsible for the [LIBOR-related misconduct] will be an officer, director, or employee of any Applicant or of any other current or future affiliated QPAM; and . . . no employee of [DB Group Services] or of any affiliated QPAM who was involved in the [LIBOR-related misconduct] had any, or will have any future, involvement in the current or future affiliated QPAMs’ asset management activities.’’ 23 With respect to the conviction of Deutsche Securities Korea Co. (DSK) for market manipulation (the Korean Conviction), the Applicant has represented that ‘‘Deutsche Bank’s [Asset & Wealth Management] Division had no involvement whatsoever in the conduct or compliance issues that formed the basis for the LIBOR and South Korea matters . . . .’’ 24 Furthermore, the Department does not believe that the proposed carve-out for transactions involving the sale, purchase or holding of instruments tied to a benchmark interest rate is necessary. The Applicant has informed the Department that, with respect to condition I(a), the Applicant can represent the following: ‘‘Other than certain individuals who worked for nonasset management business within DBSI and/or DBAG and [who] had no responsibility for, and exercised no authority in connection with, the management of plan assets, and are no longer employed by DBSI and DBAG, the DB QPAMs (including their officers, directors, agents other than Deutsche Bank, and employees of such DB QPAMs) did not know of, have reason to know of, or participate in the criminal conduct of DSK and DB Group 23 See DIMA Exemption Application (April 23, 2015), at 12–13. 24 See Deutsche Bank AG Submission to the Department of Labor in Further Support of Applications for Conditional Exemption (September 18, 2015), at 8. VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 Services that is the subject of the Convictions.’’ 25 The Department believes that this representation obviates the need for a carve-out, regardless of whether the instrument involved in the transaction is tied to a benchmark interest rate. In addition, the Department clarified that Section I(d) applies (a) to ‘‘investment funds’’ managed by the DB QPAM with respect to Covered Plans, and (b) at all times during the Exemption Period. Comment 3—Restriction on Provision of Discretionary Asset Management Services—Section I(g) Section I(g) of the proposed exemption provides, ‘‘(g) DSK and DB Group Services will not provide discretionary asset management services to ERISA-covered plans or IRAs, nor will otherwise act as a fiduciary with respect to ERISA-covered plan and IRA assets.’’ Deutsche Bank states that the phrase ‘‘otherwise act as a fiduciary’’ precludes DSK and DB Group Services from acting as a fiduciary in any way with respect to ERISA-covered plans and IRA assets, including under the Department’s new ‘‘Definition of the Term ‘Fiduciary’;’’ ‘‘Conflict of Interest Rule—Retirement Investment Advice,’’ 81 FR 200946 (April 8, 2016), and including with respect to DSK’s and DB Group Services’ own internal plans. Deutsche Bank represents that because DSK acts as a broker-dealer and may provide investment advice, such conduct will require DSK to acknowledge that it is acting as a fiduciary once the new fiduciary rule becomes effective, and this condition would make it impossible for plans to engage DSK for any services at all. The Applicant states that, while DSK and DB Group Services should not be permitted to act as discretionary asset managers of ERISA-covered plans and IRAs because of the crimes which led to the Convictions, the Department should not preclude ERISA-covered plans or IRAs from independently engaging DSK for other services or limit the activities of any entity other than those so convicted. The Applicant requests that ‘‘provide discretionary asset management services to ERISA-covered plans or IRAs, nor will otherwise act as a fiduciary with respect to ERISAcovered plan and IRA assets’’ be replaced with ‘‘act as fiduciaries within the meaning of ERISA Section 3(21)(A)(i) or (iii), or Code Section 4975(e)(3)(A) or (C), with respect to ERISA-covered plan and IRA assets.’’ 25 Applicant Submission to the Department (May 25, 2017), at 3. PO 00000 Frm 00027 Fmt 4701 Sfmt 4703 61841 Also, the Applicant requests that the Department provide a carve-out ‘‘with respect to employee benefit plans maintained or sponsored for their own employees or the employees of an affiliate.’’ Furthermore, Deutsche Bank states that it, like many foreign banks, uses foreign service companies, like DB Group Services, to hire and pay employees who then work for, and are supervised by, other entities in the Deutsche Bank controlled group. The Applicant represents that DB Group Services provides employees to Deutsche Bank asset management affiliates, and that these employees are then responsible for the employees’ training, supervision, compliance, etc., as if they were employed by such affiliates. Accordingly, Deutsche Bank requests confirmation that the fact that DB Group Services employs and pays such individual employees will not cause a DB QPAM to fail to meet this condition. Specifically, the Applicant requests that the Department qualify Section I(g) by ‘‘[providing] that DSK and DB Group Services will not be treated as violating this condition solely because they acted as investment advice fiduciaries within the meaning of ERISA Section 3(21)(A)(ii), or Section 4975(e)(3)(B) of the Code, or because DB Group Services employees may be double-hatted, seconded, supervised or otherwise subject to the control of a DB QPAM, including in a discretionary fiduciary capacity with respect to the DB QPAM clients.’’ The Department concurs with the Applicant, and has modified Section I(g) of the final exemption accordingly. The Department has also clarified that this condition does not apply with respect to employee benefit plans maintained or sponsored for their own employees or the employees of an affiliate of DSK or DB Group Services. Comment 4—Policies and Procedures Relating to Compliance With ERISA and the Code—Section I(h)(1)(ii)–(iii) Sections I(h)(1)(ii)–(iii) of the proposed exemption provide, ‘‘(h)(1) Each DB QPAM must immediately develop, implement, maintain, and follow written policies and procedures (the Policies) requiring and reasonably designed to ensure that: (ii) The DB QPAM fully complies with ERISA’s fiduciary duties and with ERISA and the Code’s prohibited transaction provisions, and does not knowingly participate in any violation of these duties and provisions with respect to ERISA-covered plans and IRAs; E:\FR\FM\29DEN2.SGM 29DEN2 ethrower on DSK3G9T082PROD with NOTICES 61842 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices (iii) The DB QPAM does not knowingly participate in any other person’s violation of ERISA or the Code with respect to ERISA-covered plans and IRAs;’’ The Applicant requests that the subparagraph I(h)(1)(iii) be stricken as duplicative. The Applicant states that the requirement that a DB QPAM ‘‘not knowingly participate in any other person’s violation’’ is ‘‘subsumed within the requirement’’ that such DB QPAM ‘‘not knowingly participate in any violation’’ of the duties and provisions set forth in ERISA and the Code (including Section 405 of ERISA). The Department declines to make this deletion. The specific elements of the Policies requirement as set forth in this exemption are essential to its protective purposes. In approving this exemption, the Department significantly relies upon conditions designed to ensure that those relying upon its terms for prohibited transaction relief will adopt a culture of compliance centered on basic fiduciary norms and standards of fair dealing, as reflected in the Policies. These standards are core protections of this exemption. The Department does not view subparagraph (iii) of Section I(h)(1), which relates to a DB QPAM’s compliance with ERISA or the Code, as duplicative of subparagraph (ii), which includes also a DB QPAM’s full compliance with ERISA’s fiduciary duties, and with ERISA and the Code’s prohibited transaction provisions. Subparagraph (ii) is based on the DB QPAM’s management of assets of Covered Plans. On the other hand, subparagraph (iii) focuses on the DB QPAM’s diligence in collaborating with third parties in the management of assets of Covered Plans. The Department modified the Policies’ requirement of adherence to the fiduciary and prohibited transaction provisions of ERISA and the Code in subparagraph (ii) so that the Policies expressly focus on the provisions only to the extent ‘‘in each such case as applicable with respect to each Covered Plan . . . .’’ In general, however, the Department has otherwise retained the stringency and breadth of the Policies requirement, which is more than justified by the compliance and oversight failures exhibited by Deutsche Bank throughout the long period of time during which the criminal misconduct persisted. The Department notes that it made minor revisions to reflect the fact that DB QPAMs may already have Policies under the previous exemption, in which case, they are required to ‘‘maintain’’ such Policies. VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 Comment 5—Policies and Procedures Related to DB QPAM Disclosures— Section I(h)(1)(iv)–(v) Sections I(h)(1)(iv)–(v) of the proposed exemption provide, ‘‘(h)(1) Each DB QPAM must immediately develop, implement, maintain, and follow written policies and procedures (the Policies) requiring and reasonably designed to ensure that: (iv) Any filings or statements made by the DB QPAM to regulators, including but not limited to, the Department, the Department of the Treasury, the Department of Justice, and the Pension Benefit Guaranty Corporation, on behalf of ERISA-covered plans or IRAs are materially accurate and complete, to the best of such QPAM’s knowledge at that time; (v) The DB QPAM does not make material misrepresentations or omit material information in its communications with such regulators with respect to ERISA-covered plans or IRAs, or make material misrepresentations or omit material information in its communications with ERISA-covered plan and IRA clients.’’ The Applicant states that Sections I(h)(1)(iv) I(h)(1)(v) are ‘‘overlapping, duplicative and extend beyond the scope of exemptive relief’’ to instances where the Applicant is not acting in reliance on PTE 84–14. The Applicant requests that the subparagraphs be limited to situations where the Applicant is relying on PTE 84–14 and this exemption. Also, Deutsche Bank states that the distinction between subparagraph (iv)’s requirement that information provided to regulators be materially accurate and complete and subparagraph (v)’s requirement that such communications may not have material misrepresentations or omissions is unclear, and suggests the reference in (v) be deleted. Finally, Deutsche Bank requests that the phrase ‘‘to the best of such QPAM’s knowledge at that time’’ should appear in subparagraph (h)(1)(v) as it does in subparagraph (h)(1)(iv), but is absent from condition (h)(1)(v). The Department notes that the Section I(h) requirement that the policies and procedures developed by the DB QPAM adhere to basic fiduciary norms is a protective measure that is necessary in light of the substantial compliance and oversight failures exhibited by Deutsche Bank throughout the long period of time during which the misconduct persisted. Notwithstanding this, the Department is revising the condition, in part, as requested by the Applicant. Subsection (v) has been revised to contain the ‘‘to the best of QPAM’s PO 00000 Frm 00028 Fmt 4701 Sfmt 4703 knowledge at the time’’ concept found in subsection (iv); and the applicability of subsections (iv) and (v) has been narrowed to ERISA-covered plans and IRAs with respect to which a DB QPAM relies on PTE 84–14, or with respect to which a DB QPAM has expressly represented that the manager qualifies as a QPAM or relies on the QPAM class exemption in its dealings with the ERISA-covered plan or IRA (hereinafter, a Covered Plan). To the extent a DB QPAM would prefer not to be subject to this provision, however, it may expressly disclaim reliance on QPAM status or PTE 84–14 in entering into its contract with an ERISA-covered plan or IRA, and such plan or IRA is not a Covered Plan.26 This revision is consistent with the Department’s intent to protect Covered Plans that may have hired a DB QPAM based on the understanding that the manager qualifies as a QPAM or relies on PTE 84–14. As noted in more detail below, the Department will not strike a condition merely because it is also a statutory requirement. It is the express intent of the Department to preclude relief for a DB QPAM that fails to meet the requirements of this exemption, including those derived from basic norms codified in statute, as applicable. Comment 6—Corrections of Violations and Failures To Comply—Section I(h)(1)(vii) Section I(h)(1)(vii) of the proposed exemption provides, ‘‘(vii) Any violation of, or failure to comply with, an item in subparagraphs (ii) through (vi), is corrected promptly upon discovery, and any such violation or compliance failure not promptly corrected is reported, upon the discovery of such 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 DB QPAM, the independent auditor responsible for reviewing compliance with the Policies, and an appropriate fiduciary of any affected ERISA-covered plan or IRA that is independent of Deutsche Bank; however, with respect to any ERISAcovered plan or IRA sponsored by an ‘affiliate’ (as defined in Section VI(d) of PTE 84–14) of Deutsche Bank or beneficially owned by an employee of Deutsche Bank or its affiliates, such fiduciary does not need to be independent of Deutsche Bank. A DB 26 Of course, neither may the QPAM rely on PTE 84–14 or this exemption with respect to any such ERISA-covered plan or IRA for which it has expressly disclaimed reliance on QPAM status or PTE 84–14. E:\FR\FM\29DEN2.SGM 29DEN2 ethrower on DSK3G9T082PROD with NOTICES Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices QPAM will not be treated as having failed to develop, implement, maintain, or follow the Policies, provided that it corrects any instance of noncompliance promptly 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).’’ The Applicant states that Section I(h)(1)(vii) extends beyond the scope necessary to ensure compliance with other requirements in condition (h). Deutsche Bank states that the reporting requirement is not needed given the ‘‘multiple, overlapping requirements’’ related to the Annual Review and the Audit Report. Deutsche Bank also references several ‘‘ambiguities’’ in subparagraph (vii). The Applicant states that the term ‘‘promptly’’ is undefined, and, as a result, it is unclear when a violation must be corrected and when the reporting obligation is triggered. Similarly, the phrases ‘‘appropriate corporate officers . . . of the relevant DB QPAM’’ and ‘‘appropriate fiduciary of any affected ERISA-covered plan or IRA’’ are undefined. The Applicant states that the last sentence of subparagraph (vii) does not provide meaningful relief because some corrections will take longer to complete than the exemption appears to permit. The Applicant suggests that the correction procedure provided in subparagraph (vii) should apply to any violation of or failure to comply with subparagraph (i) regarding the policy governing independence in asset management decisions as well. The Applicant further suggests that it should be allowed to correct any errors under the policy, as with the other errors. Deutsche Bank states that the Department has not explained why a failure under subparagraph (i), however inadvertent, should result in an automatic loss of the exemption. Deutsche Bank suggests the following language: ‘‘(vii) Within sixty (60) days of its discovery of any violation of, or failure to comply with, an item in subparagraphs (i) through (vi), such DB QPAM will formulate, in writing, a plan to address such violation or failure (a Correction Plan). To the extent any such Correction Plan is not formulated within sixty (60) days of the DB QPAM’s discovery of such violation or failure, the DB QPAM will report in writing such violation or failure to the head of compliance or the General Counsel (or their functional equivalents) of the relevant line of business that engaged in such violation or failure.’’ VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 The Department has based the conditions of this exemption on both the particular facts underlying the Convictions and its experience over time with previous exemptions. For the reasons set out herein, the Department has concluded that the specific conditions of this exemption are appropriate and give the Department a reasonable basis for concluding that the exemptions are appropriately protective of affected plans and IRAs. As noted above, a central aim of the exemption is to ensure that those relying upon the exemption for relief from the prohibited transaction rules will consistently act to promote a culture of fiduciary compliance, notwithstanding the conduct that violated Section I(g) of PTE 84–14. The Department does not agree with the Applicant’s contention that the Section I(h)(1)(vii) extends beyond the scope necessary to ensure compliance with other requirements in Section I(h), or that it is duplicative of the Annual Report and Audit Report requirements. The Department considers the Policies, and the DB QPAM’s compliance therewith, to be a fundamental component of exemptive relief, and this Section I(h)(1)(vii) emphasizes the importance of this compliance, including the correction process. Further the Department notes that the audits and Annual Reports are periodic and do not reflect the timeframe that this condition is intended to reflect. Regarding the Applicant’s requests for revisions, the Department is replacing ‘‘appropriate corporate officers’’ with ‘‘the head of compliance and the General Counsel (or their functional equivalent) of the relevant DB QPAM that engaged in the violation or failure.’’ The Department also will not condition the exemption on a requirement for notification of violations to an appropriate fiduciary of any affected ERISA-covered plan or IRA that is independent of Deutsche Bank. However, the Department is not revising the ‘‘subparagraphs (ii) through (vi)’’ reference to include ‘‘subparagraph (i)’’ because the Department intends to preclude relief to the extent a DB QPAM fails to develop, implement, maintain, and follow written policies and procedures. Clearly, it is not enough merely to develop policies and procedures, without also implementing, maintaining, and following the terms of those policies and procedures. Covered Plans do not benefit from the creation of strong policies and procedures, unless they are actually followed. The Department has revised the term ‘‘corrected promptly’’ for consistency with the Department’s intent that PO 00000 Frm 00029 Fmt 4701 Sfmt 4703 61843 violations or compliance failures be corrected ‘‘as soon as reasonably possible upon discovery or as soon after the QPAM reasonably should have known of the noncompliance (whichever is sooner).’’ However, the Department intends to preclude relief to the extent violations or failures are not corrected as required by the exemption. Therefore, the Department has not adopted the Applicant’s proposed subparagraph (vii), which requires little more than the formulation of a correction plan, without any corresponding obligation to actually implement the plan. Comment 7—Time to Implement Training—Section I(h)(2) The prefatory language in Section I(h)(2) provides, ‘‘(2) Each DB QPAM must immediately develop and implement a program of training (the Training), conducted at least annually, for all relevant DB QPAM asset/portfolio management, trading, legal, compliance, and internal audit personnel.’’ Deutsche Bank requests that, in order to avoid confusion over whether Applicant must train the same pool of employees multiple times in a year, the Department add a clarifying proviso to this requirement, specifically, at the end of the first sentence in the prefatory language: ‘‘(this condition in paragraph (h)(2) shall be deemed to be met with respect to any employee trained in accordance with the requirements of PTE 2016–12 or the temporary one-year exemption within the prior 12 months).’’ The Applicant states that it is also subject to a similar training requirement under the temporary exemption. Deutsche Bank represents that, during the period covered by PTE 2015–15, it trained more than 1,000 of its employees. The Department clarifies that, to the extent that the Training requirements in Section I(h)(2) of the exemption, and the corresponding requirements in PTE 2016–13 and PTE 2016–12 are consistent, such provisions should be harmonized so that the sequential exemptions do not inadvertently require multiple trainings per year. Consistent with this requested change in the prefatory language, the Department has added further clarity on the timeline with respect to the Training. The Department is specifying that ‘‘the first Training under this Exemption must be completed by all relevant DB QPAM personnel by April 17, 2019.’’ Furthermore, the Department specifies that, by April 17, 2019, asset/portfolio management, trading, legal, compliance, and internal audit personnel who were E:\FR\FM\29DEN2.SGM 29DEN2 61844 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices employed from April 18, 2017 through April 17, 2019 must have been trained at least twice: the first time under PTE 2016–13; and the second time under this exemption. The Department notes that it made minor revisions to reflect the fact that DB QPAMs may already have Training under the previous exemption, in which case, they are required to ‘‘maintain.’’ ethrower on DSK3G9T082PROD with NOTICES Comment 8—Training Set Forth in Policies—Section I(h)(2)(i) Section I(h)(2)(i) of the proposed exemption provides, ‘‘(2) Each DB QPAM must immediately develop and implement a program of training (the Training), conducted at least annually, for all relevant DB QPAM asset/portfolio management, trading, legal, compliance, and internal audit personnel. The Training must: (i) 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 exemption (including any loss of exemptive relief provided herein), and prompt reporting of wrongdoing;’’ The Applicant states that the requirement in Section I(h)(2)(i) that the Training must be ‘‘set forth in’’ the Policies may cause significant logistical challenges over time. The Applicant requests that the section be clarified, such that only the requirement of the Training should be set forth in the Policies. The Department concurs with the Applicant’s comment and has revised the condition accordingly. Comment 9—Training by Independent Professional—Section I(h)(2)(ii) Section I(h)(2)(ii) of the proposed exemption provides, ‘‘. . . The Training must: . . . (ii) Be conducted by an independent professional who has been prudently selected and who has appropriate technical and training and proficiency with ERISA and the Code.’’ The Applicant requests that Section I(h)(2)(ii) be deleted, stating that it is not necessary for the Department to specify who conducts the Training, what the professional’s background is, how the Training is conducted or when the independent auditor is required under Section I(i)(1) to evaluate the adequacy of DB QPAMs’ compliance with the Training requirement. Deutsche Bank further states that the requirement may be ‘‘counterproductive, as the most effective trainer may be someone with detailed knowledge of the DB QPAMs’ business and compliance practices that VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 an ‘independent’ trainer may lack.’’ Finally, Deutsche Bank states that the term ‘‘independent professional’’ is also undefined. Alternatively, Deutsche Bank suggests, the Training must ‘‘(ii) Be conducted by an individual(s) (either in person, remotely or electronically, such as through live or recorded webbased training) who has appropriate proficiency with ERISA and the Code.’’ Although the Department does not agree with the Applicant’s characterization that hiring an appropriate independent professional, prudently selected, would be counterproductive, the Department is persuaded that appropriate Deutsche Bank personnel, prudently selected, should be allowed to conduct the training, and has revised the condition accordingly. The Department declines to incorporate the Applicant’s requested language regarding the use of electronic or web-based methods in conducting the Training. The revised I(h)(2)(ii) now states that the Training ‘‘[b]e conducted by a professional who has been prudently selected and who has appropriate technical training and proficiency with ERISA and the Code.’’ Comment 10—Audit—Section I(i)(1) Section I(i)(1) of the proposed exemption requires that each Deutsche Bank QPAM ‘‘submits to an audit conducted annually by an independent auditor, who has been prudently selected and who has appropriate technical training and proficiency with ERISA and the Code. . . .’’ Section I(i)(1) also provides that ‘‘[t]he audit requirement must be incorporated in the Policies . . . .’’ The Applicant requests deletion of the requirement that the audit requirement be incorporated in the Policies, as its duplication in the Policies serves no apparent purpose. The Applicant further suggests that the auditor should be given discretion to define the precise audit period under this exemption (which may be more or less than 12 months), so as to avoid a short audit period in the event that this exemption is granted before the expiration of the first audit period under the final temporary exemption. To this end, the Applicant requests the following be added to the condition: ‘‘(provided that the first audit period hereunder may be longer or shorter than 12 months at the election of the auditor to avoid an unreasonably short audit period).’’ The Applicant requests that the reference to ‘‘appropriate technical training’’ be deleted, as it appears ‘‘duplicative of proficiency in ERISA.’’ The Department does not agree with the Applicant’s assertion that the phrase PO 00000 Frm 00030 Fmt 4701 Sfmt 4703 ‘‘technical training and proficiency’’ is duplicative. In this regard, the Department does not believe that the two terms are synonymous, as a person may have taken technical training in a given subject matter but may not be proficient in that subject matter. The exemption requires that the auditor be both technically trained and proficient in ERISA as well as the Code. Accordingly, the Department declines to change the phrase ‘‘technical training and proficiency’’ as used in Section I(i)(1). The Department also declines to delete the requirement that the audit conditions be incorporated in the Policies. The audit requirement provides a critical independent check on compliance with this exemption’s conditions, and helps ensure that the basic protections set forth in the Policies are taken seriously. Accordingly, the specifics of the audit requirement are important components of the Policies. Their inclusion in the Policies promotes compliance and sends an important message to the institutions’ employees and agents, as well as to Covered Plan clients, that compliance with the policies and procedures will be subject to careful independent review. The Department further declines to incorporate the Applicant’s suggested language regarding the timeline of the audit required by the temporary exemption. The audit required under the temporary exemption covers a period from October 24, 2016 until April 17, 2018, which is not an unreasonably short audit period. Each audit must cover the preceding 12-month period. The first audit must cover the period from April 18, 2018 through April 17, 2019, and must be completed by October 17, 2019. The second audit must cover the period from April 18, 2019 through April 17, 2020, and must be completed by October 17, 2020. In the event that the Exemption Period is extended or a new exemption is granted, the third audit would cover the period from April 18, 2020 through April 17, 2021, and would have to be completed by October 17, 2021, unless the Department chooses to alter the annual audit requirement in any potential new or extended exemption. Comment 11—Access to Business— Section I(i)(2) Section I(i)(2) of the proposed exemption requires that ‘‘as permitted by law, each DB QPAM and, if applicable Deutsche Bank, will grant the auditor unconditional access to its business . . . .’’ The Applicant requests that the access granted by Section I(i)(2) be limited to E:\FR\FM\29DEN2.SGM 29DEN2 ethrower on DSK3G9T082PROD with NOTICES Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices non-privileged materials relevant to the scope of exemptive relief that do not contain trade secrets. The Applicant states that, with the breadth of the ‘‘unconditional access’’ described in the proposed exemption, ‘‘the absence of a specific limitation could lead to confusion, disputes, and infringement on DB or a DB QPAM’s rights to protect its privileged communications and trade secrets or intrusion into activities falling outside the scope of exemptive relief.’’ The Applicant states that the condition, as written in the proposed exemption, leaves the determination of necessity solely to the auditor. The Applicant suggests the following revised condition: ‘‘(2) To the extent necessary for the auditor, in its sole opinion, to complete its audit and comply with the conditions for relief described herein, and as permitted by law, each DB QPAM and, if applicable, and solely to determine if the provisions of the exemption involving Deutsche Bank are met, Deutsche Bank, will grant the auditor unconditional access to its relevant business, including, but not limited to: Its relevant computer systems; relevant business records; transactional data relating to ERISA plans and IRAs managed by a DB QPAM in reliance on PTE 84–14 and this exemption; workplace locations; relevant training materials; and personnel (for avoidance of doubt, this condition does not require access to privileged, trade secret and other similarly sensitive business information).’’ In the Department’s view, to ensure a thorough and robust audit, the auditor must be granted access to information the auditor deems necessary for the auditor to make sound conclusions. Access to such information must be within the scope of the audit engagement and denied only to the extent any disclosure is not permitted by state or federal statute. Enumerating specific restrictions on the accessibility of certain information would have a dampening effect on the auditor’s ability to perform the procedures necessary to make valid conclusions and would therefore undermine the effectiveness of the audit. The auditor’s access to such information, however, is limited to information relevant to the auditor’s objectives as specified by the terms of this exemption and to the extent disclosure is not prevented by state or federal statute or involves communications subject to attorney client privilege. In this regard, the Department has modified Section I(i)(2) accordingly. VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 Comment 12—Auditor’s Test of Operational Compliance—Section I(i)(4) Section I(i)(4) of the proposed exemption provides that, ‘‘[t]he auditor’s engagement must specifically require the auditor to test each DB QPAM’s operational compliance with the Policies and Training’’ and ‘‘the auditor must test a sample of each QPAM’s transactions involving ERISAcovered Plans and IRAs sufficient in size and nature to afford the auditor a reasonable basis to determine operational compliance with the Policies and Training.’’ The Applicant requests that Section I(i)(4) be deleted in its entirety. The Applicant states that other conditions of the exemption govern the audit’s scope, the auditor’s technical skill, and the prudence of the selection process. The Applicant also states that the second sentence of Section I(i)(4) unnecessarily intrudes upon the auditor’s function and independence. The Applicant asserts that the Department should defer to the judgment of the auditor whether and when to sample transactions. The Department declines to make the Applicant’s requested revision with respect to Section I(i)(4). The requirements of this exemption concerning the content of the auditor’s engagement are necessary to ensure administrative feasibility and to protect Covered Plans. The inclusion of written audit parameters in the auditor’s engagement letter is necessary both to document expectations regarding the audit work and to ensure that the auditor can responsibly perform its important work. As stated above, clearly defined audit parameters will minimize any potential for dispute between the Applicant and the auditor. Also, given the scope and number of relevant transactions, proper sampling is necessary for the auditor to reach reasonable and reliable conclusions. Although the Department has declined to delete this section in its entirety, as requested by the Applicant, the Department has revised this condition for consistency with other conditions of this exemption which are tailored to the Department’s interest in protecting Covered Plans. Therefore, the condition now applies to Covered Plans (i.e., ERISA-covered plans and IRAs with respect to which the DB QPAM relies on PTE 84–14 or has expressly represented that it qualifies as a QPAM or relies on the QPAM class exemption in its dealings with the ERISA-covered plan or IRA). The Department notes that Section I(i)(4) does not specify the number of transactions that the auditor must test, PO 00000 Frm 00031 Fmt 4701 Sfmt 4703 61845 but rather requires, for each QPAM, that the auditor test a sample of such QPAM’s transactions involving Covered Plans, ‘‘sufficient in size and nature to afford the auditor a reasonable basis to determine operational compliance with the Policies and Training.’’ Comment 13—Auditor’s Determination of Compliance—I(i)(5)(i) Section I(i)(5)(i) of the proposed exemption provides, ‘‘(5) For each audit, on or before the end of the relevant period described in Section I(i)(1) for completing the audit, the auditor must issue a written report (the Audit Report) to Deutsche Bank and the DB QPAM to which the audit applies that describes the procedures performed by the auditor during the course of its examination. The Audit Report must include the auditor’s specific determinations regarding: (i) The adequacy of the DB QPAM’s Policies and Training; the DB QPAM’s compliance with the Policies and Training; the need, if any, to strengthen such Policies and Training; and any instance of the respective DB QPAM’s noncompliance with the written Policies and Training described in Section I(h) above. 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 DB QPAM must be promptly addressed by such DB QPAM, and any action taken by such DB QPAM to address such recommendations must be included in an addendum to the Audit Report (which addendum is completed prior to the certification described in Section I(i)(7) below). Any determination by the auditor that the respective DB 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 the DB QPAM has complied with the requirements under this subsection must be based on evidence that demonstrates the DB QPAM has actually implemented, maintained, and followed the Policies and Training required by this exemption. Furthermore, the auditor must not rely on the Annual Report created by the Compliance Officer as described in Section I(m) below in lieu of independent determinations and testing performed by the auditor as required by Section I(i)(3) and (4) above.’’ The Applicant requests deletion of the term ‘‘promptly’’ because it is undefined and will cause disputes over its E:\FR\FM\29DEN2.SGM 29DEN2 ethrower on DSK3G9T082PROD with NOTICES 61846 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices meaning. The Applicant states that this perceived ambiguity is problematic in this context because addressing the auditor’s recommendation could be a lengthy process. In addition, the Applicant requests that Section I(i)(5) be modified because it imposes a counterproductive limitation on the auditor’s use of the Annual Review and usurps the auditor’s judgment regarding how to perform its role. According to the Applicant, it is ‘‘unnecessary’’ for the Department to specify how the auditor performs its work in light of the requirements relating to the auditor’s selection and qualifications. The Applicant also states that denying the auditor the discretion to rely on the Annual Report undermines the protection the Annual Report gives plans, as the Annual Report may identify issues the auditor did not independently discover. To this end, the Applicant suggests the following revised sentence regarding the Auditor’s use of the Annual Report: ‘‘Furthermore, in conducting the required audit, the auditor may consider the Annual Report created by the Compliance Officer as described in Section I(m) below, as the auditor deems appropriate.’’ The Department acknowledges that the Applicant’s efforts to address the auditor’s recommendations regarding any inadequacy in the Policies and Training identified by the auditor, may take longer to implement than the time limits mandated by the proposed exemption. Accordingly, the Department is modifying Section I(i)(5)(i) to reflect the possibility that the DB QPAMs’ efforts to address the auditor’s recommendations regarding inadequacies in the Policies and Training identified by the auditor, may not be completed by the submission date of the Audit Report and may require a written plan to address such items. However, any noncompliance identified by the auditor must be promptly addressed. The Department does not agree that the word ‘‘promptly’’ creates inappropriate ambiguity in the condition and declines to remove the word. The final sentence of Section I(i)(5)(i) expresses the Department’s intent that the auditor not rely solely on the work of the Compliance Officer and the contents of the Annual Report in formulating its conclusions or findings. The Auditor must perform its own independent testing to formulate its conclusions. This exemption does not prohibit the Auditor from considering the Compliance Officer’s Annual Report in carrying out its audit function, including the formulation of an audit VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 plan. This exemption, however, does prohibit the Auditor from basing its conclusions exclusively on the contents of the Compliance Officer’s Annual Report. The Department has modified Section I(i)(5)(i) to more clearly reflect these views. Included with its comment on Section I(i)(5)(i), the Applicant notes its request for the deletion of the Compliance Officer and Annual Review requirements set out in Section I(m). The Department’s response to this request is discussed below. The Department also modified Section I(i)(5) to provide that ‘‘the auditor, at its discretion, may issue a single consolidated Audit Report which covers all the DB QPAMs.’’ The Department notes the potential logistical advantage and administrative feasibility with respect to the Department’s receipt of the audit report pursuant to Section I(i)(9) if there is one report encompassing all of the DB QPAMs. Comment 14—Adequacy of the Annual Review—Section I(i)(5)(ii) Section I(i)(5)(ii) of the proposed exemption provides that ‘‘[t]he Audit Report must include the auditor’s specific determinations regarding: . . . (ii) The adequacy of the Annual Review described in Section I(m) and the resources provided to the Compliance Officer in connection with such Annual Review.’’ The Applicant requests deletion of the Compliance Officer and Annual Review provisions in Section I(i)(5)(ii) of the proposed exemption. If the Compliance Officer and Annual Review provisions do remain in the exemption, the Applicant requests that the Annual Report is provided to the auditor, who then can make a determination as to the adequacy of the report. The Applicant also asserts that the proposed exemption contains multiple conditions relating to the auditor’s selection and qualifications, and the auditor should be trusted in its judgment. Accordingly, the Applicant argues that the phrase ‘‘and the resources provided to the Compliance officer in connection with such Annual Review’’ should be deleted, because, according to the Applicant, resource requests by the Compliance Officer should not translate into a public debate with the Department and the auditor on whether the DB QPAMs should be allowed to use PTE 84–14. The Applicant states that this condition interferes with the administrability of the exemption and its use by plans, if counterparties cannot understand the requirement or test whether it has been complied with. PO 00000 Frm 00032 Fmt 4701 Sfmt 4703 As discussed in detail below, the Department views the Compliance Officer and the Annual Review as integral to ensuring compliance with the exemption. A recurring, independent, and prudently conducted audit of the DB QPAMs is critical to ensuring the QPAMs’ compliance with the Policies and Training mandated by this exemption, and the adequacy of the Policies and Training. The required discipline of regular audits underpins the Department’s finding that the exemption is protective of plans and their participants, and should help prevent the sort of compliance failures that led to the Conviction. The Department agrees, however, that the auditor need not opine on the adequacy of the resources allocated to the Compliance Officer. Thus, the Department modified Section I(i)(5)(ii) accordingly. If, however, the auditor observes compliance issues related to the Compliance Officer or available resources, it would be appropriate for the auditor to opine on those problems. Comment 15—Certification of the Audit—Section I(i)(7) Section I(i)(7) of the proposed exemption provides, ‘‘(7) With respect to each Audit Report, the General Counsel, or one of the three most senior executive officers of the DB QPAM to which the Audit Report applies, must certify in writing, under penalty of perjury, that the officer has reviewed the Audit Report and this exemption; addressed, corrected, or remedied any inadequacy identified in the Audit Report; and determined that the Policies and Training in effect at the time of signing are adequate to ensure compliance with the conditions of this proposed five-year exemption and with the applicable provisions of ERISA and the Code.’’ The Applicant requests that this condition be modified to account for Deutsche Bank’s business structure and permit the Applicant to decide which senior officers should review the Audit Report. Deutsche Bank requests that the reviewing individual be ‘‘one of the three most senior officers with responsibility for the asset management business of the DB QPAM (or, to the extent no such senior officer has responsibility for the asset management business of the DB QPAM, one of the three most senior executives of the line of business engaged in discretionary asset management activities through the DB QPAM).’’ Deutsche Bank further requests that the timing of this provision be clarified, as remedying issues found during the course of the Audit may prove to be a lengthier process than the E:\FR\FM\29DEN2.SGM 29DEN2 ethrower on DSK3G9T082PROD with NOTICES Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices 30-day certification period as required in Section I(i)(9). The Applicant states that the provision should require only that a process for remedying issues should be initiated in a timely fashion. Deutsche Bank also requests that the condition clarify that ‘‘addressing’’ an inadequacy may constitute either accepting the auditor’s recommendation, pointing out that alternative action is appropriate, or disagreeing with the auditor. The Applicant states that the auditor is not a monitor or part of the Applicant’s management, and thus should not dictate how the Applicant runs its asset management business. The Applicant also requests the following addition to the condition: ‘‘For purposes of this condition, a DB QPAM does not fail to address a potential inadequacy identified by the auditor by proposing an alternative means of protecting relevant ERISA plan clients and IRAs.’’ The Applicant further requests deletion of the requirement that the Audit Report be certified under penalty of perjury. The Department concurs that a senior executive officer engaged in the asset management business within the QPAM should be allowed to review the Audit Report, and has modified the language of Section I(i)(7), accordingly. While the Department does not view Section I(i)(7) as ambiguous, the Department is aware, as stated above, that the Applicant’s efforts to address the auditor’s recommendations may take longer to implement than the timeframe to submit the certified Audit Report. With respect to this issue, the Department did not intend to limit corrective actions to those that could only be completed prior to the submission of the Audit Report. Therefore, the Department has modified Section I(i)(7) to reflect that the senior officer may certify that a written plan to address the inadequacies regarding the Policies and Training identified in the Auditor’s Report is in place. As mentioned above, the Department has determined that it is necessary for the Auditor to be afforded unfettered access to DB QPAM records, to the extent that the analysis of such records falls within the twelve-month period to which the audit relates. For the first audit required by this exemption, that period runs from April 18, 2018 through April 17, 2019. The conditions of this exemption do not prohibit the Applicant from disagreeing with the auditor with respect to whether certain practices fail to comply with the terms of this exemption. However, in those circumstances where the auditor is not VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 persuaded to change its position on a matter the auditor considers noncompliant, the Applicant will be responsible to correct such matters. Nor do the conditions of this exemption prohibit the Applicant from disagreeing with the auditor with respect to the appropriate method for correcting or addressing issues of noncompliance. The Department would expect the Applicant and the auditor to have meaningful communications on such differences of opinion. In the event the Applicant chooses to apply a corrective method that differs from that recommended by the Auditor, the Audit Report and the Addendum attached thereto should explain in detail the noncompliance, the auditor’s recommended action, the corrective method chosen, and why the Applicant chose a corrective method different from that recommended by the Auditor. The Department declines to remove the requirement for certification by the senior executive officer under penalty of perjury, which makes clear the importance of the correction process and creates a strong incentive to take seriously the audit process and compliance generally. Comment 16—Review and Certification of Audit Report—Section I(i)(8) Section I(i)(8) of the proposed exemption provides, ‘‘(8) The Risk Committee of Deutsche Bank’s Board of Directors is 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 Deutsche Bank must review the Audit Report for each DB QPAM and must certify in writing, under penalty of perjury, that such officer has reviewed each Audit Report.’’ In its comment, Deutsche Bank requests that the condition be revised to conform with Deutsche Bank’s corporate structure. Specifically, the Applicant states that Deutsche Bank’s Audit Committee would be an appropriate recipient of the Audit Report given Deutsche Bank’s current structure. The Applicant represents that ‘‘the Audit Committee supports the Supervisory Board in, among other things, the following matters: Monitoring the financial accounting process; the effectiveness of the risk management system, particularly of the internal control system and the internal audit system; the auditing of the financial statements, especially with regard to the auditor’s independence and the additional services provided by the auditor; and the Management Board’s prompt remediation—through suitable measures—of the deficiencies identified PO 00000 Frm 00033 Fmt 4701 Sfmt 4703 61847 by the auditor. Furthermore, the Audit Committee is informed about special audits, substantial complaints and other exceptional measures on the part of bank regulatory authorities.’’ The Applicant requests flexibility in determining which committee should review the Audit Report in the event of future corporate restructuring or transferring of responsibility. Deutsche Bank requests the following addition to the condition: ‘‘another committee as reasonably selected by the Supervisory Board.’’ Finally, the Applicant requests the requirement in Section I(i)(8) that the certification by the senior executive officer be made under penalty of perjury be deleted, as it is unnecessary. The Department is revising Section I(i)(8) of the exemption to require that ‘‘[t]he Audit Committee of Deutsche Bank’s Supervisory Board is provided a copy of each Audit Report; and a senior executive officer with a direct reporting line to the highest ranking compliance officer of Deutsche Bank must review the Audit Report for each DB QPAM and must certify in writing, under penalty of perjury, that such officer has reviewed each Audit Report.’’ Furthermore, the Department agrees to allow for flexibility in choosing the committee. In this regard, the exemption now requires notice to the Department prior to any change in the committee that receives the Audit Report. The Department has developed this exemption to ensure that the highest levels of management are aware of ongoing matters concerning Deutsche Bank, the DB QPAMs, and compliance with this exemption. Requiring the provision of the Audit Report to the Audit Committee and certification by a senior executive officer in the reporting line of the highest legal compliance officer provides assurance that the highest levels of management within Deutsche Bank stay informed about Deutsche Bank’s and the DB QPAMs’ compliance with the terms of this exemption. In the Department’s view, such officials are in the best position to ensure that any inadequacy identified by the auditor is appropriately addressed and that necessary changes to corporate policy are made if and where necessary. Requiring certification under penalty of perjury is consistent with the Department’s longstanding view that basic requirements of compliance and integrity are fundamental to an entity’s ability to qualify as a QPAM. Comment 17—Availability of the Audit Report—Section I(i)(9) Section I(i)(9) of the proposed exemption provides, ‘‘(9) Each DB E:\FR\FM\29DEN2.SGM 29DEN2 ethrower on DSK3G9T082PROD with NOTICES 61848 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices QPAM provides its certified Audit Report, by regular mail to: The Department’s Office of Exemption Determinations (OED), 200 Constitution Avenue NW, Suite 400, Washington, DC 20210, or by private carrier to: 122 C Street NW, Suite 400, Washington, DC 20001–2109, no later than 45 days following its completion. The Audit Report will be part of the public record regarding this exemption. Furthermore, each DB QPAM must make its Audit Report unconditionally available for examination by any duly authorized employee or representative of the Department, other relevant regulators, and any fiduciary of an ERISA-covered plan or IRA, the assets of which are managed by such DB QPAM;’’ The Applicant states that the availability of the Audit Report should be limited to ERISA-covered plans and IRAs for which the Applicant relies on PTE 84–14. The Applicant argues that it is overly-broad, punitive and not related to the relief provided in the exemption to extend this condition to plans and IRAs for which the DB QPAMs do not rely on PTE 84–14. The Department does not agree that the condition in Section I(i)(9) is punitive. As the Applicant recognized in its application, ERISA-covered plans, IRAs, and counterparties routinely rely on QPAM status before entering into agreements with financial institutions, even if those institutions do not believe compliance with PTE 84–14 is strictly necessary for any particular transaction. Accordingly, the Department has an interest in ensuring that the conditions of this exemption broadly protect ERISA-covered plans and IRAs that have relied on QPAM status in deciding to enter into an agreement with the Applicant or the DB QPAMs. Nevertheless, the Department has revised Section I(i)(9) to clarify that the DB QPAMs are required to make the documents available to any fiduciary of a Covered Plan. The Audit Report, in any event, will be incorporated into the public record attributable to this exemption, under Exemption Application Number D–11908, and, therefore, independently accessible by members of the public. Accordingly, the Department has determined to revise the condition by replacing the phrase ‘‘an ERISA-covered plan or IRA, the assets of which are managed by such DB QPAM’’ with the term ‘‘Covered Plan’’ (as defined in Section II(b)). Lastly, the Department is modifying the condition such that access to the Audit Report need only be upon request and such access can be electronic, and has revised the exemption accordingly. VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 Comment 18—Engagement Agreements—Section I(i)(10) Section I(i)(10) of the proposed exemption provides, ‘‘(10) Each DB QPAM and the auditor must submit to OED: (A) Any engagement agreement(s) entered into pursuant to the engagement of the auditor under this exemption; and (B) any engagement agreement entered into with any other entity retained in connection with such QPAM’s compliance with the Training or Policies conditions of this proposed exemption, no later than six (6) months after the effective date of this exemption (and one month after the execution of any agreement thereafter).’’ The Applicant requests deletion of clause (B) related to engagement agreements entered into with respect to the Training or Policies conditions. Deutsche Bank cites the multiple conditions in the exemption for the qualifications of the trainer, the contents of the Policies, and the auditor’s review of the adequacy of the Training and Policies, and submits that this condition duplicates part of the auditor’s role and is burdensome. The Applicant states that this condition as written could require filing of numerous consultant and service provider engagement letters associated with developing the Training and Policies. The Applicant asserts that there is no reason for the Department to see and review, and make available to the public, every service provider contract that could relate to policies, procedures or training. The Applicant further requests that any engagement agreements submitted to the Department be redacted to protect confidential business terms. In coordination with the Department’s modification of Section I(h)(2)(ii) to remove the requirement that the Training must be conducted by an independent professional, the Department has determined to remove the requirement in Section I(i)(10)(B) to provide to the Department the engagement agreements entered into with entities retained in connection with compliance with the Training or Policies conditions. Furthermore, to remove any confusion and uncertainty regarding the timing of the submission of the auditor’s engagement agreement, the Department has modified Section I(i)(10) to require that the auditor’s engagement agreement be submitted to the Office of Exemption Determinations no later than two (2) months after the execution of any such engagement agreement. PO 00000 Frm 00034 Fmt 4701 Sfmt 4703 Comment 19—Auditor’s Workpapers— Section I(i)(11) Section I(i)(11) of the proposed exemption provides, ‘‘(11) The auditor must provide OED, upon request, all of the workpapers created and utilized in the course of the audit, including, but not limited to: the audit plan; audit testing; identification of any instance of noncompliance by the relevant DB QPAM; and an explanation of any corrective or remedial action taken by the applicable DB QPAM.’’ The Applicant requests that this language be limited to ensure that any confidential or otherwise sensitive business information is redacted prior to any disclosure of the workpapers in a public file. The Applicant cites the sensitive information to which the auditor will have access, such as client information, marketing data, personal information of the QPAM’s employees, and other business details. The Applicant states that the condition can be limited to allow the auditor, and OED,27 to inspect such information without it being disclosed in the public record. Furthermore, the Applicant requests for all of the provisions in the exemption that relate to the auditor to make it clear that Applicant will not lose the benefit of the exemption for failures of the auditor. The Applicant requests that the Department either not include the workpapers as part of the public file, or provide that ‘‘any confidential business or personal information of the DB QPAMs, Deutsche Bank, and their clients (or the officers, directors, employees or agents thereof) reflected in the workpapers, including, without limitation, client communications, shall be redacted, and provided further that nothing herein shall be deemed to limit any authority the Department may otherwise have to inspect such information without making it part of the public file.’’ The Department acknowledges that certain information contained in the workpapers may be confidential and proprietary, and having that information in a public file may create needless or avoidable disclosure issues. The Department has determined to modify Section I(i)(11) to remove the requirement that the auditor provide the workpapers to OED, and instead require that the auditor provide access to the workpapers for the Department’s review and inspection. However, given the importance of the workpapers to the Department’s own review and the 27 OED is the Office of Exemption Determinations within the Employee Benefits Security Administration agency of the United States Department of Labor. E:\FR\FM\29DEN2.SGM 29DEN2 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices ethrower on DSK3G9T082PROD with NOTICES Applicant’s contractual relationship with the auditor, the Department declines to include, as requested by the Applicant, a statement in Section I(i)(11) that a failure on behalf of the auditor to meet this condition will not violate the exemption. months from the engagement of a substitute or subsequent auditor, notify the Department of a change in auditor and of the reason(s) for the substitution including any material disputes between the terminated auditor and Deutsche Bank. Comment 20—Replacement of the Auditor—Section I(i)(12) Section I(i)(12) of the proposed exemption provides, ‘‘(12) Deutsche Bank must notify the Department at least 30 days prior to any substitution of an auditor, except that no such replacement will meet the requirements of this paragraph unless and until Deutsche Bank demonstrates to the Department’s satisfaction that such new auditor is independent of Deutsche Bank, experienced in the matters that are the subject of the exemption and capable of making the determinations required of this exemption.’’ The Applicant requests that this condition be deleted, as the exemption requires the auditor to satisfy multiple conditions with respect to qualifications, and it serves no useful purpose to require the Applicant to demonstrate that the auditor satisfies such additional standards before substitution, particularly given the timeline of the audit process. The Applicant states that the Department has not required its approval of the initial choice of auditor. The Applicant states that there is a multitude of possible reasons that an auditor would need to be replaced, including the auditor being unable to complete an audit timely. This exemption is not unique in requiring the Department be notified of changes to service providers (See, e.g., the requirement of Schedule C of the Form 5500 Annual Return/Report for the Plan Administrator of certain plans to report to the Department a termination of the plan’s auditor and/or enrolled actuary and to provide an explanation of the reasons for the termination, including a description of any material disputes or matters of disagreement concerning the termination). Furthermore, requiring the Applicant to notify the Department of the substitution of an auditor serves to ensure that the DB QPAMs are attentive to the audit process and the protections it provides; and that the Department has the information it needs to review compliance. However, the Department has determined to modify Section I(i)(12) to remove the requirement for Deutsche Bank to demonstrate the independence and qualifications of the auditor, and requires instead that Deutsche Bank, no later than two Comment 21—Contracts with ERISACovered Plans and IRAs—Section I(j) The prefatory language to Section I(j) of the proposed exemption provides, ‘‘(j) Effective as of the effective date of this exemption, with respect to any arrangement, agreement, or contract between a DB QPAM and an ERISAcovered plan or IRA for which a DB QPAM provides asset management or other discretionary fiduciary services, each DB QPAM agrees and warrants:’’ In its comment, Deutsche Bank requests that this condition be limited to ERISA-covered plans and IRAs with respect to which the Applicant relies on PTE 84–14 and this exemption. Deutsche Bank states that extending this provision to ERISA-covered plans and IRAs for which the DB QPAMs do not rely on it is overly broad, punitive, and not related to asset management or the scope of the exemptive relief. As explained above, Plans and IRAs routinely rely on QPAM status as a condition of entering into transactions with financial institutions, even with respect to transactions that do not require adherence to PTE 84–14. As the Applicant represented to the Department on December 24, 2015, ‘‘plan investors may rely on the availability of the QPAM exemption even for pooled funds intended to qualify for an exception under the Department’s plan asset regulation. The QPAM exemption provides a broad, effective back-stop against non-exempt prohibited transactions in the event a pooled fund inadvertently ceases to meet the conditions of that exception.’’ In addition, it may not always be clear whether the DB QPAM intends to rely upon PTE 84–14 for any particular transaction. Accordingly, it is critical to ensure that protective conditions are in place to safeguard the interests of ERISA-covered plans and IRAs that are acting in reliance on the availability of this exemption, particularly those who may not have entered into the transaction in the first place, but for the Department’s grant of this exemption. The Department has a clear interest in protecting such ERISA-covered plans and IRAs that enter into an asset management agreement with a Deutsche Bank asset manager in reliance on the manager’s qualification as a QPAM. Moreover, when an ERISA-covered plan or IRA terminates its relationship with VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 PO 00000 Frm 00035 Fmt 4701 Sfmt 4703 61849 an asset manager, it may incur significant costs and expenses as its investments are unwound and in connection with finding a new asset manager. The Department has revised this condition for consistency with its interest in protecting ERISA-covered plans and IRAs that rely upon QPAM status. Therefore, the Department has substituted the term ‘‘Covered Plan’’ for ‘‘an ERISA-covered plan or IRA for which a DB QPAM provides asset management or other discretionary fiduciary services’’ to memorialize this interest so that the condition now applies to ERISA-covered plans and IRAs only when the Deutsche Bank asset manager relies on PTE 84–14 or has expressly represented that it qualifies as a QPAM or relies on the QPAM class exemption in its dealings with the ERISA-covered plan or IRA. To the extent a DB QPAM would prefer not to be subject to these conditions, however, it may expressly disclaim reliance on QPAM status or PTE 84–14 in entering into its contract with the ERISA-covered plan or IRA. Comment 22—Contracts with ERISACovered Plans and IRAs—Section I(j)(1) Section I(j)(1) of the proposed exemption provides, ‘‘(j) Effective as of the effective date of this exemption, with respect to any arrangement, agreement, or contract between a DB QPAM and an ERISA-covered plan or IRA for which a DB QPAM provides asset management or other discretionary fiduciary services, each DB QPAM agrees and warrants: (1) To comply with ERISA and the Code, as applicable with respect to such ERISA-covered plan or IRA; to refrain from engaging in prohibited transactions that are not otherwise exempt (and to promptly correct any inadvertent prohibited transactions); and to comply with the standards of prudence and loyalty set forth in section 404 of ERISA with respect to each such ERISA-covered plan and IRA;’’ In its comment, Deutsche Bank requests that Section I(j)(1) be deleted, as it constitutes an attempt to provide a private right of action for IRAs that Congress did not require. The Applicant states that the provision imposes legal requirements on IRAs, such as duties of prudence and loyalty, that Congress did not require; for plans subject to ERISA, this provision is entirely duplicative of the private right of action in ERISA. The Applicant states that the exemption proposes to change the enforcement of ERISA and the Code for all asset management clients and to create private rights of action above and beyond ERISA and the Code. The E:\FR\FM\29DEN2.SGM 29DEN2 ethrower on DSK3G9T082PROD with NOTICES 61850 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices Applicant states that this exemption did not arise out of a violation of ERISA, and the Department’s grant or denial of an exemption is not aimed at punishing institutions for criminal conduct under laws other than ERISA, especially when they have already been punished under those other laws. If this provision is not deleted, the Applicant requests that ‘‘promptly’’ be deleted for similar reasons as noted earlier, and that the condition be revised as follows: ‘‘(1) To comply with ERISA and the Code, as applicable, with respect to such ERISA-covered plan or IRA, [and] to refrain from engaging in prohibited transactions that are not otherwise exempt (and to correct any inadvertent prohibited transactions).’’ The Department rejects the view that it acts outside its authority by protecting ERISA-covered plans and IRAs that rely on Deutsche Bank’s asset managers’ eligibility for this exemption, and reemphasizes the seriousness of the criminal misconduct that created the need for this exemption. The Department may grant an exemption under section 408(a) of ERISA or section 4975(c)(2)(C) of the Code only to the extent the Secretary finds, among other things, that the exemption is protective of the affected ERISA-covered plan(s) and/or IRA(s) (i.e., the Covered Plans). As noted in the exemption application, personnel at Deutsche Bank, including at different Deutsche Bank divisions acting as QPAMs, engaged in serious misconduct over an extended period of time. This misconduct appears to have stemmed, in part, from deficiencies in control and oversight. Notwithstanding the misconduct, which resulted in violations of Section I(g) of PTE 84–14, the Department has determined that this exemption is protective of Covered Plans and in the interest of participants, beneficiaries, and beneficial owners of such Covered Plans. The Department made this determination based, in significant part, upon the protections of Section I(j) that require DB QPAMs to make an express commitment to Covered Plans to adhere to the requirements of ERISA and the Code, as applicable. As previously indicated, the Department has concluded that a culture of compliance, centered on adherence to basic standards of fair dealing as set forth in this exemption, gives the Department a compelling basis for making the required statutory findings that the exemption is in the interest of, and protects the rights of, participants, beneficiaries, and beneficial owners of Covered Plans. Absent such findings, the exemption would have been denied. VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 The Department does not accept the view that an exemption may not contain a condition, such as an obligation to adhere to basic fiduciary norms of prudence and loyalty, to the extent that it duplicates a statutory requirement. Nothing in the ERISA or the Code suggests that the Department is forbidden, in exercising its discretion to craft protective exemption conditions, from basing its conditions on protective conditions that Congress itself has adopted in related contexts. Nor has the Department created any new causes of action through this exemption. As before, private litigants would have only those causes of action specifically authorized by laws that exist independent of this exemption. The Department declines to delete the term ‘‘promptly’’ for the same reasons as noted previously. Furthermore, for the reasons set forth above, the Department has modified the clause ‘‘and to comply with the standards of prudence and loyalty set forth in section 404 of ERISA with respect to each such ERISAcovered plan and IRA.’’ Instead, with respect to this clause, the Department has required an express commitment to comply with the fiduciary standards and prohibited transaction rules only to the extent these provisions are ‘‘applicable’’ under ERISA and the Code. The revised terms, together with this exemption’s limited relief (e.g., this exemption generally does not extend to transactions that involve self-dealing) should serve to promote a culture of compliance and protect Covered Plans and their participants, beneficiaries, and beneficial owners. In response to the Applicant’s comments, the Department also notes that nothing in ERISA or the Code prevents the Department from conditioning relief on express contractual commitments to adhere to the requirements set out herein. The DB QPAMs remain free to disclaim reliance on the exemption and to avoid such express contractual commitments. To the extent, however, that they hold themselves out as fiduciary QPAMs, they should be prepared to make an express commitment to their customers to adhere to the requirements of this exemption. This commitment strengthens and reinforces the likelihood of compliance, and helps ensure that, in the event of noncompliance, Covered Plans are insulated from injuries caused by noncompliance. These protections also ensure that Covered Plans are able to extricate themselves from transactions that become prohibited as a result of the QPAMs’ misconduct, without fear of sustaining additional losses as a result PO 00000 Frm 00036 Fmt 4701 Sfmt 4703 of the QPAMs’ actions. In this connection, however, the Department emphasizes that the only claims available to the QPAMs’ Covered Plans customers pursuant to these contractual commitments are those separately provided by ERISA or other state and federal laws that are not preempted by ERISA. Comment 23—Indemnity and Limits on Liability—Sections I(j)(2), (3), (6), and (7) Sections I(j)(2), (3), (6) and (7) of the proposed exemption provide, ‘‘(j) Effective as of the effective date of this exemption, with respect to any arrangement, agreement, or contract between a DB QPAM and an ERISAcovered plan or IRA for which a DB QPAM provides asset management or other discretionary fiduciary services, each DB QPAM agrees and warrants: (2) Not to require (or otherwise cause) the ERISA-covered plan or IRA to waive, limit, or qualify the liability of the DB QPAM for violating ERISA or the Code or engaging in prohibited transactions; (3) Not to require the ERISA-covered plan or IRA (or sponsor of such ERISAcovered plan or beneficial owner of such IRA) to indemnify the DB QPAM for violating ERISA or engaging in prohibited transactions, except for violations or prohibited transactions caused by an error, misrepresentation, or misconduct of a plan fiduciary or other party hired by the plan fiduciary who is independent of Deutsche Bank; (6) Not to include exculpatory provisions disclaiming or otherwise limiting liability of the DB QPAM for a violation of such agreement’s terms, except 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 Deutsche Bank and its affiliates; and (7) To indemnify and hold harmless the ERISA—covered plan or IRA for any damages resulting from a violation of applicable laws, a breach of contract, or any claim arising out of the failure of such DB 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 Convictions;’’ In its comment, the Applicant requests that the indemnity required by Section I(j)(7) be deleted as it may operate in a manner that is fundamentally unfair. The Applicant views the indemnity provision as not being limited to clients who are harmed through a direct, causal link to the loss of the exemptive relief provided by PTE 84–14. According to the Applicant, the condition appears to protect plans and E:\FR\FM\29DEN2.SGM 29DEN2 ethrower on DSK3G9T082PROD with NOTICES Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices IRAs against damages well beyond those provided under Section 409(a) of ERISA, for all sort of harms, including those (i) that arise from violations and breaches by third parties, (ii) that arise only tenuously from the manager’s conduct, (iii) that may be grossly unreasonable in amount, (iv) for claims without merit and (v) for claims in connection with accounts that do not rely on the relief provided by PTE 84– 14. The Applicant requests that, if the Department decides to retain the provision, the Department should expressly tie the indemnity to damages with a proximate, causal connection to relevant conduct of the manager. The Applicant provides the following revisions: ‘‘(7) To indemnify and hold harmless the ERISA-covered plan or IRA for any reasonable damages involving such arrangement, agreement or contract and resulting directly from a violation of ERISA by such DB QPAM, or, to the extent the DB QPAM relies on the exemptive relief provided by PTE 84–14 and this exemption under the arrangement, agreement or contract, the failure of such DB QPAM to qualify for the exemptive relief provided by PTE 84–14 and this exemption as a result of a violation of Section I(g) of PTE 84–14 other than as a result of the Convictions. This condition does not require indemnification for indirect, special, consequential or punitive damages.’’ The Applicant contends that the other provisions enumerated above extend beyond the scope of relief and contain duplicative requirements, both internally and with respect to requirements that are already in ERISA. The Applicant states that the broad indemnity in subsection (7) substantively provides all of the protections contained in subsections (2), (3) and (6) (i.e., if the client is to be indemnified, it is confusing and unnecessary to restate that protection multiple times in multiple ways). The Applicant further states that if Section I(j)(7) remains, Sections I(j) (2), (3) and (6) should be deleted. Alternatively, if the Department decides to delete Section I(j)(7), while retaining Sections I(j)(3) and (6), Section I(j)(2) should be deleted because it is subsumed within the more detailed and qualified condition in Section I(j)(3). The Department has determined that Section I(j)(3), as proposed, is duplicative of the exemption’s prohibition on exculpatory clauses, described below, and has deleted subsection (j)(3). The Department has made certain further changes to this condition upon consideration of the Applicant’s comment. These changes VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 include: Renumbering the condition for clarity; replacing ‘‘applicable laws’’ with clarifying language that conforms to the one-year exemption; replacing ‘‘any damages’’ with ‘‘actual losses resulting directly from’’ certain acts or omissions of the DB QPAMs; and adding language which affirms that the obligations under this condition do not extend to damages caused by acts that are beyond the control of the DB QPAMS. However, with respect to the indemnification clause, now renumbered Section I(j)(2), the purpose of this exemption is to protect Covered Plans. Section I(j)(2) is essential to achieving that purpose. The Department emphasizes that this condition is not punitive, but rather ensures that, a Covered Plan may expect a DB QPAM to adhere to basic fiduciary norms and standards of fair dealing, notwithstanding the Convictions. The condition also ensures that Covered Plans have the ability to disengage from a relationship with a DB QPAM without undue injury if Deutsche Bank violates the terms of this exemption. Accordingly, the Department has revised the applicability of this condition to more closely reflect this interest. In particular, the condition applies to Covered Plans. As indicated above, if the asset manager would prefer not to be subject to these provisions as exemption conditions, it may expressly disclaim reliance on QPAM status or PTE 84–14 in entering into its contract with an ERISA-covered plan or IRA (in that case, however, it could not rely on the exemption for relief). The Department also modified former Section I(j)(6) (now I(j)(2)) to clarify that the prohibition on exculpatory provisions does not extend to losses that arise from an act or event not caused by Deutsche Bank. Nothing in this section alters the prohibition on exculpatory provisions set forth in ERISA Section 410. The Department declines to delete former Section I(j)(2), now (j)(3), from the final exemption. As the Applicant points out, ERISA already precludes ERISA fiduciaries from disclaiming obligations under ERISA. See ERISA section 410 (prohibiting exculpatory clauses as void against public policy). To the extent the exemption condition prevents the DB QPAMs from including contractual provisions that are void as against public policy there is no legitimate basis for objection. Such exculpatory language should not be in the governing documents in the first place and is potentially misleading because it suggests disclaimer of obligations that may not be disclaimed. PO 00000 Frm 00037 Fmt 4701 Sfmt 4703 61851 Outside the context of ERISA section 410, the provision’s requirement that the DB QPAMs retain accountability for adherence to the basic obligations set forth in this exemption is justified by the misconduct that led to the Convictions as discussed above, and by the need to ensure that Covered Plan customers may readily obtain redress and exit contracts with DB QPAMs without harm in the event of violations. Comment 24—Termination and Withdrawal Restrictions—Sections I(j)(4) and (5) Sections I(j)(4) and (5) of the proposed exemption provide, ‘‘(j) Effective as of the effective date of this exemption, with respect to any arrangement, agreement, or contract between a DB QPAM and an ERISA-covered plan or IRA for which a DB QPAM provides asset management or other discretionary fiduciary services, each DB QPAM agrees and warrants: (4) Not to restrict the ability of such ERISA-covered plan or IRA to terminate or withdraw from its arrangement with the DB QPAM (including 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 as a result of an actual lack of liquidity of the underlying assets, provided that such restrictions are applied consistently and in like manner to all such investors; (5) Not to impose any fees, penalties, or charges for such termination or withdrawal with the exception of reasonable fees, appropriately disclosed in advance, that are specifically designed to prevent generally recognized abusive investment practices or specifically designed to ensure equitable treatment of all investors in a pooled fund in the event such withdrawal or termination may have adverse consequences for all other investors, provided that such fees are applied consistently and in like manner to all such investors;’’ In its comment, the Applicant requests that Sections I(j)(4) and (5) be deleted entirely. The Applicant states that lockup provisions in facilitating the investment strategies are used to protect all investors in a pooled fund and applied evenhandedly to all investors. However, the Applicant states, the conditions would provide ERISAcovered plan and IRA clients investing E:\FR\FM\29DEN2.SGM 29DEN2 61852 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices ethrower on DSK3G9T082PROD with NOTICES in the fund with an advantage, to the detriment of public plans and other investors. The Applicant states that the conditions are unnecessary. If the Department declines to delete the provisions, the Applicant requests that they be revised to allow restrictions related to liquidity issues as well as those related to ensuring compliance with regulatory requirements, addressing valuation issues, and permitting the fund to pursue the investors’ chosen investment strategy. Specifically, with respect to subsection (j)(4), the Applicant requests that the language ‘‘as a result of an actual lack of liquidity of the underlying assets’’ be stricken from the condition. Furthermore, with respect to subsection (j)(5), the Applicant requests that ‘‘prevent generally recognized abusive investment practices or specifically designed to’’ be removed. The Department declines to delete Sections I(j)(4) and (5) from this exemption. The Department has revised subsection (j)(4) to further clarify the Department’s intent, but refuses to remove the concept entirely. Therefore, the Department has replaced ‘‘as a result of an actual lack of liquidity of the underlying assets, provided that such restrictions are applied consistently and in like manner to all such investors’’ with ‘‘In connection with any such arrangements involving investments in pooled funds subject to ERISA entered into after the effective date of this exemption, the adverse consequences must relate to of a lack of liquidity of the underlying assets, valuation issues, or regulatory reasons that prevent the fund from promptly redeeming an ERISA-covered plan’s or IRA’s investment, and such restrictions must be applicable to all such investors and effective no longer than reasonably necessary to avoid the adverse consequences.’’ Finally, the Department declines to make the Applicant’s requested change to subsection I(j)(5). Comment 25—Updated Investment Management Agreement—Section I(j)(8) Section I(j)(8) of the proposed exemption provides, ‘‘(8) Within four (4) months of the effective date of this proposed exemption, each DB QPAM must provide a notice of its obligations under this Section I(j) to each ERISAcovered plan and IRA for which the DB QPAM provides asset management or other discretionary fiduciary services. For all other prospective ERISA-covered plan and IRA clients for which a DB QPAM provides asset management or other discretionary fiduciary services, the DB QPAM must agree in writing to its obligations under this Section I(j) in VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 an updated investment management agreement or advisory agreement between the DB QPAM and such clients or other written contractual agreement.’’ The Applicant states that the provision is overly broad because it is not limited to ERISA-covered plans and IRAs for which DB QPAMs rely on PTE 84–14 and this exemption. The Applicant requests that this provision be limited to such ERISA-covered plan and IRA clients. The Applicant states that the four-month notice period is too short, and requests the Department extend the notice period to at least six months. The Applicant also requests that the Department provide a carve-out such that the Applicant does not need to provide any notices under this provision to existing clients to which it provided notice under Section I(j) of PTE 2016–13, assuming that the notice required in the current provision here is substantially similar to that required under PTE 2016–13. To this end, the Applicant requests the following language be added to this condition: ‘‘(For avoidance of doubt, notices provided to existing clients under Section I(j) of PTE 2016–13 will be deemed to satisfy this requirement).’’ Furthermore, the Applicant states that a bilateral management agreement containing the obligations under Section I(j) should not be mandated. The Applicant states that the DB QPAM would be in violation of this condition if a client refuses to sign the updated agreement. The Applicant asserts that its compliance with the exemption should not depend on action by its clients. Accordingly, the Applicant requests that this requirement be eliminated, and that this condition instead require the DB QPAMS to ‘‘provide a written notice of its obligations under this Section I(j)’’ to its prospective ERISA-covered plan and IRA clients. The Department has modified Section I(j)(8), now renumbered as Section I(j)(7), for better coordination with PTE 2016–13. As modified, the exemption’s text now provides that a notice that satisfies Section I(i)(2) of PTE 2016–13 will satisfy renumbered Section I(j)(7) of this exemption, unless the notice contains any language that limits, or is inconsistent with, the scope of this exemption. Additionally, the time period for providing the notice is now six months, although the Department has specified the exact six-month deadline for such notice, which is October 17, 2018. As noted above, the Department has an interest in protecting an ERISAcovered plan or IRA that enters into an PO 00000 Frm 00038 Fmt 4701 Sfmt 4703 asset management agreement with a Deutsche Bank asset manager in reliance on the manager’s qualification as a QPAM, regardless of whether the QPAM relies on the class exemption when managing the ERISA-covered plan’s or IRA’s assets. The Department has revised the applicability of this condition to more closely reflect this interest, and the condition now applies to ERISA-covered plans and IRAs for which a DB QPAM expressly represents that the manager qualifies as a QPAM or relies on the QPAM class exemption. The condition does not apply to an ERISA-covered plan or IRA with respect to which the Deutsche Bank asset manager has expressly disclaimed reliance on QPAM status or PTE 84–14 in entering into its contract with the ERISA-covered plan or IRA. The Department has also modified the condition such that a DB QPAM will not violate the condition solely because a Covered Plan refuses to sign an updated investment management agreement. Comment 26—Notice to Plan Clients— Section I(k)(1) Section I(k)(1) of the proposed exemption provides that, ‘‘(k)(1) Notice to ERISA-covered plan and IRA clients. Within fifteen (15) days of the publication of this proposed exemption in the Federal Register, each DB QPAM will provide a notice of the proposed exemption, along with a separate summary describing the facts that led to the Convictions (the Summary), which have been submitted to the Department, and a prominently displayed statement (the Statement) that each Conviction separately results in a failure to meet a condition in PTE 84–14, to each sponsor of an ERISAcovered plan and each beneficial owner of an IRA for which a DB QPAM provides asset management or other discretionary fiduciary services, or the sponsor of an investment fund in any case where a DB QPAM acts only as a sub-advisor to the investment fund in which such ERISA-covered plan and IRA invests. In the event that this proposed exemption is granted, the Federal Register copy of the notice of final exemption must be delivered to such clients within sixty (60) days of its publication in the Federal Register, and may be delivered electronically (including by an email that has a link to the exemption). Any prospective clients for which a DB QPAM provides asset management or other discretionary fiduciary services must receive the proposed and final exemptions with the Summary and the Statement prior to, or contemporaneously with, the client’s E:\FR\FM\29DEN2.SGM 29DEN2 ethrower on DSK3G9T082PROD with NOTICES Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices receipt of a written asset management agreement from the DB QPAM.’’ In its comment, the Applicant contends that this condition should be limited to ERISA-covered plans and IRAs with respect to which the Applicant relies on PTE 84–14 and this exemption, as not applying such a limitation is overly broad, punitive, and not related to the use of this exemption. Furthermore, the Applicant states it should not be required to provide to clients a separate summary of facts in addition to the notice of the proposed exemption, which contains the facts and representations set forth in the preamble and ‘‘is a far more fulsome and complete explanation.’’ The Applicant requests that the condition make clear that the condition may be satisfied through other documentation, such as a subscription agreement. The Applicant further requests flexibility with respect to the fifteen-day time-period for providing the notice, suggesting the following language be added: ‘‘or such longer period as agreed to with the Department.’’ The Applicant also requests that ‘‘the client’s receipt of a written asset management agreement’’ be replaced with ‘‘the client’s signing of a written asset management agreement (or other written documentation).’’ The Department notes that the proposed exemption provides details of the facts and circumstances underlying the conviction not found in the Summary or the final grant. One of the purposes of such a complete disclosure is to ensure that all interested parties are aware of and attentive to the complete facts and circumstances surrounding Deutsche Bank’s application for exemption. In this regard, these parties include clients that receive an asset management agreement, which is why the Department is not revising the provision in the manner requested. Requiring the disclosure of the Summary, proposal, and this final grant provides the opportunity for all parties to have knowledge of these facts and circumstances. Notwithstanding this, the Department has modified the condition to clarify that disclosures may be provided electronically. Further, the Department is narrowing the notice requirement to each ‘‘sponsor and beneficial owner of a Covered Plan.’’ Notice does not need to be given to a client with respect to whom a DB QPAM has expressly disclaimed reliance on QPAM status or reliance on PTE 84–14. With respect to the Applicant’s requested change regarding the timeframe, the Department believes that requiring that delivery be completed in 60 days following the publication of this VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 61853 audit, unfair and punitive. The Applicant states that no conduct by the DB QPAMs merits a separate Annual Review dedicated to ERISA. The Applicant asserts that the provision assumes facts unsupported by the record, namely: (1) That DB QPAMs will not comply with ERISA or the Code and applicable exemptions; (2) that their Comment 27—Notice to Non-Plan existing compliance structure, even Clients—Section I(k)(2) when enhanced by the conditions of Section I(k)(2) of the proposed this exemption and earlier ones, are exemption provides, ‘‘[e]ach DB QPAM insufficient; and (3) that the auditor is will provide a Federal Register copy either incapable of adequately testing of the proposed exemption, a Federal the DB QPAMs’ compliance with Register copy of the final exemption; ERISA, the Code and applicable the Summary; and the Statement to exemptions or the auditor cannot be each: (A) Current Non-Plan Client trusted to conduct this testing. The within four (4) months of the effective Applicant states that this provision also date, if any, of a final exemption; and appears in none of the earlier individual (B) Future Non-Plan Client prior to, or exemptions that allowed applicants to contemporaneously with, the client’s rely on PTE 84–14 notwithstanding a receipt of a written asset management criminal conviction violating Section agreement, or other written contractual I(g) of PTE 84–14. The Applicant asserts agreement, from the DB QPAM. For that the inclusion of this condition purposes of this subparagraph (2), a treats the Applicant unfairly and is Current Non-Plan Client means a client inconsistent with the Administrative of a DB QPAM that: Is neither an ERISA- Procedure Act and Section 408(a) of covered plan nor an IRA; has assets ERISA and Section 4975 of the Code. managed by the DB QPAM as of the Deutsche Bank states that, if the effective date, if any, of a final Department declines to delete Section exemption; and has received a written I(m), the provision should be modified representation (qualified or otherwise) so as to not interfere with the auditor, from the DB QPAM that such DB QPAM reduce the time that auditor has to qualifies as a QPAM or qualifies for the complete its work or impose on the DB relief provided by PTE 84–14. For QPAMs duplicative or irrelevant and, purposes of this subparagraph (2), a therefore, unnecessary conditions. Furthermore, the Applicant states that Future Non-Plan Client means a Department should not require the prospective client of a DB QPAM that: Is neither an ERISA-covered plan nor an Compliance Officer to complete substantially similar work that it IRA; has assets managed by the DB expects of the auditor in a substantially QPAM after the effective date, if any, of shorter timeframe. The Applicant states a final exemption; and has received a that the Compliance Officer should written representation (qualified or otherwise) from the DB QPAM that such report to an officer with familiarity with asset management, not some unrelated DB QPAM qualifies as a QPAM or business. The Applicant asserts that the qualifies for the relief provided by PTE Annual Review should be concerned 84–14.’’ only with the subject matter of this The Applicant requested that Section exemption, such as material compliance I(k)(2) be deleted in its entirety. Given with ERISA and the Code, and not gauge the breadth of the notice requirement the adequacy of the resources provided otherwise mandated by the exemption, to the Compliance Officer. and its decision to restrict the The Department discusses the requirement to those arrangements for Applicant’s overarching concerns with which QPAM status plays an integral Section I(m) in response to the role (i.e., the DB QPAM represents or individual changes to specific relies upon its QPAM status), the provisions below. Department has determined to delete Section I(m)(1)(ii) of the proposed this provision. exemption states, in relevant part, ‘‘(1) Comment 28—Compliance Officer— Deutsche Bank designates a senior Section I(m) compliance officer (the Compliance Officer) who will be responsible for Section I(m) of the proposed compliance with the Policies and exemption outlines the requirements Training requirements described herein. associated with appointment of a The Compliance Officer must conduct Compliance Officer and an an annual review (the Annual Review) accompanying Annual Review. In its comment, Deutsche Bank argues to determine the adequacy and effectiveness of the implementation of that Section I(m) is duplicative of the exemption in the Federal Register provides sufficient time for the Applicant to prepare the Summary and effect delivery. The Department has moved this 60-day requirement to the beginning of Section I(k) by specifying a specific date upon which notice should be completed, June 17, 2018. PO 00000 Frm 00039 Fmt 4701 Sfmt 4703 E:\FR\FM\29DEN2.SGM 29DEN2 ethrower on DSK3G9T082PROD with NOTICES 61854 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices the Policies and Training. With respect to the Compliance Officer, the following conditions must be met: (ii) The Compliance Officer must have a direct reporting line to the highestranking corporate officer in charge of legal compliance that is independent of Deutsche Bank’s other business lines;’’ With respect to subsection I(m)(1)(ii), the Applicant requests that ‘‘of legal compliance that is independent of Deutsche Bank’s other business lines’’ be replaced with ‘‘of compliance for asset management.’’ The Department has made changes in line with the Applicant’s request, but has not removed the word ‘‘legal.’’ Section I(m)(2) of the proposed exemption states, ‘‘(2) With respect to each Annual Review, the following conditions must be met: (i) The Annual Review includes a review of: Any compliance matter related to the Policies or Training that was identified by, or reported to, the Compliance Officer or others within the compliance and risk control function (or its equivalent) during the previous year; any material change in the business activities of the DB QPAMs; and any change to ERISA, the Code, or regulations related to fiduciary duties and the prohibited transaction provisions that may be applicable to the activities of the DB QPAMs;’’ With respect to this section, the Applicant requests: substituting ‘‘Any material compliance matter’’ for ‘‘Any compliance matter’’; deletion of ‘‘or others within the compliance and risk control function (or its equivalent);’’ and clarification that the Annual Review encompass ‘‘any material change in the business activities of the DB QPAMs that may impact their compliance with ERISA or Section 4975 of the Code.’’ The Department declines to add the word ‘‘material’’ due to the focused scope of the Annual Review on the Policies and Training required under this exemption. The Department also declines to delete the phrase ‘‘or others within the compliance and risk control function (or its equivalent)’’ because it is important that all relevant compliance matters be properly accounted for, not simply those that make their way to the Compliance Officer. The Department has added the word ‘‘relevant’’ to clarify that any changes to the QPAM’s business activities should be relevant to the scope and coverage of this exemption. Section I(m)(2)(ii) of the proposed exemption states, ‘‘The Compliance Officer prepares a written report for each Annual Review (each, an Annual Report) that (A) summarizes his or her material activities during the preceding VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 year; (B) sets forth any instance of noncompliance discovered during the preceding year, and any related corrective action; (C) details any change to the Policies or Training to guard against any similar instance of noncompliance occurring again; and (D) makes recommendations, as necessary, for additional training, procedures, monitoring, or additional and/or changed processes or systems, and management’s actions on such recommendations;’’ With respect to this section, the Applicant suggests that the Annual Report ‘‘(A) summarizes his or her material activities in connection with any compliance matter related to the Policies or Training during the preceding year; (B) sets forth any material instance of noncompliance related to the Policies or Training discovered during the preceding year, and any related corrective action; (C) details any material 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 relating to the Policies or Training, and management’s actions on such recommendations.’’ The Department declines to make these changes because Section (m)(1) properly sets out the scope of the Annual Review in that it is meant ‘‘to determine the adequacy and effectiveness of the implementation of the Policies and Training.’’ Any additional requirements outlined with respect to the Annual Review should be handled accordingly. Section I(m)(2)(iii) of the proposed exemption states, ‘‘In each Annual Report, the Compliance Officer must certify in writing that to his or her knowledge: (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 preceding year and any related correction taken to date have been identified in the Annual Report; (D) the DB QPAMs have complied with the Policies and Training in all respects, and/or corrected any instances of noncompliance in accordance with Section I(h) above; and (E) Deutsche Bank has provided the Compliance Officer with adequate resources, including, but not limited to, adequate staffing; PO 00000 Frm 00040 Fmt 4701 Sfmt 4703 With respect to this section, the Applicant requests that ‘‘certify in writing’’ be replaced with ‘‘state,’’ that ‘‘any known instances of noncompliance’’ be ‘‘related to the Policies or Training,’’ and that the review of whether ‘‘Deutsche Bank has provided the Compliance Officer with adequate resources, including, but not limited to, adequate staffing’’ be deleted. The Department has deleted paragraph (E) regarding staffing and resources, as requested by the Applicant, but has not made the other requested changes because these provisions are properly limited in scope to the Policies and Training as outlined in Section I(m)(1). Section I(m)(2)(v) of the proposed exemption states, ‘‘Each Annual Review, including the Compliance Officer’s written Annual Report, must be completed at least three (3) months in advance of the date on which each audit described in Section I(i) is scheduled to be completed;’’ With respect to this section, the Applicant requests that the Annual Review, including the Annual Report, be completed ‘‘at least one (1) month in advance of the date on which each audit described in Section I(i) is scheduled to be completed.’’ The Department has modified this section slightly so that it is no longer tied to completion of the audit, but rather the end of the period to which the Annual Report and Annual Review relates. Comment 29—Deferred Prosecution Agreement/Non-Prosecution Agreement—Section I(p) Section I(p) of the proposed exemption provides, ‘‘(p)(1) During the effective period of this exemption, Deutsche Bank immediately discloses to the Department any Deferred Prosecution Agreement (a DPA) or NonProsecution Agreement (an NPA) entered into by Deutsche Bank or any of its affiliates with the U.S Department of Justice, in connection with conduct described in Section I(g) of PTE 84–14 or section 411 of ERISA; and (2) Immediately provides the Department any information requested by the Department, as permitted by law, regarding such agreement and/or conduct and allegations that led to the agreement. After review of the information, the Department may require Deutsche Bank or its affiliates, as specified by the Department, to submit a new application for the continued availability of relief as a condition of continuing to rely on this exemption. If the Department denies the relief requested in the new application, E:\FR\FM\29DEN2.SGM 29DEN2 ethrower on DSK3G9T082PROD with NOTICES Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices or does not grant such relief within twelve (12) months of the application, the relief described herein is revoked as of the date of denial or as of the expiration of the twelve month period, whichever date is earlier;’’ In its comment, the Applicant requests that the Department delete Section I(p). The Applicant asserts that the condition does not meet the requirements of either the Administrative Procedure Act or the Department’s own regulations, specifically with regards to withdrawal or revocation of an exemption. The Applicant also takes issue with the substance of the Department’s proposed informal termination. Specifically, according to the Applicant, its inclusion in the exemption raises the risk of an immediate loss of exemptive relief and related uncertainty in connection with thousands of transactions and investments with respect to its plan asset clients. Deutsche Bank also contends that the timing of NPAs and DPAs is uncertain, as the activities under investigation also may be remote, historical, or unrelated to DB QPAMs’ activities. The Applicant notes that the condition does not build in any notice to plan fiduciaries, counterparties, or other parties in interest that rely on QPAM, and as such is not administrable or protective of plans. The Applicant asserts that Section I(p) is inconsistent with the anti-criminal rules of Section I(g) of PTE 84–14 and Section 411 of ERISA as neither NPAs nor DPAs rise to the level of convictions. Moreover, this condition establishes a precedent to be inserted into every one of these matters— regardless of how attenuated the conduct is from plans and participants, and even if it is clearly in the interest of plans and participants to keep the individual QPAM exemption in place, and not to have uncertainty around this outcome. The Applicant suggests revisions if the Department declines to delete the condition. Specifically, the Applicant seeks to clarify that the Applicant will ‘‘[provide] the Department any nonprivileged information requested by the Department, as permitted by law, regarding such agreement and/or conduct and allegations that led to the agreement.’’ Furthermore, the Applicant seeks deletion of the following: ‘‘After review of the information, the Department may require Deutsche Bank or its affiliates, as specified by the Department, to submit a new application for the continued availability of relief as a condition of continuing to rely on this exemption. If VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 the Department denies the relief requested in the new application, or does not grant such relief within twelve (12) months of the application, the relief described herein is revoked as of the date of denial or as of the expiration of the twelve month period, whichever date is earlier.’’ The Department in no way intended the condition to be read as providing for an automatic revocation of this exemption and, in light of the Applicant’s comments, has revised the condition accordingly. As revised, the condition simply requires that the Applicant notify the Department if and when it or any of its affiliates enter into a DPA or NPA with the U.S. Department of Justice for conduct described in section I(g) of PTE 84–14 or ERISA section 411 and immediately provide the Department with any information requested by the Department, as permitted by law, regarding the agreement and/or conduct and allegations that led to the agreement. The Department retains the right to propose a withdrawal of the exemption pursuant to its procedures contained at 29 CFR 2570.50, should the circumstances warrant such action. Regarding the Applicant’s comment that the timing and factual basis of the NPA or DPA could be far removed or distant in time or place from current plan management operations, the Department notes that entering into a DPA or NPA may reflect conduct that could have sustained a criminal conviction, and such conduct would be relevant to the Department’s determination whether to allow an entity to continue to rely on this exemption or to grant a subsequent exemption when this exemption expires. Such agreements are not entered into lightly and can stem from misconduct that reflects directly on the parties’ willingness and ability to adhere to the standards set forth herein. Similarly, such agreement can have a direct bearing on the efficacy of the affected institution’s policies and procedures in preventing misconduct, such as the policies and procedures mandated by this exemption. The Department declines to specify that the DB QPAMs need only provide ‘‘non-privileged information’’ upon request by the Department. As stated above, the Department will evaluate the conduct underlying the new DPA or NPA and will review all relevant information. Comment 30—Right to Copies of Policies and Procedures—Section I(q) Section I(q) of the proposed exemption provides, ‘‘(q) Each DB PO 00000 Frm 00041 Fmt 4701 Sfmt 4703 61855 QPAM, in its agreements with ERISAcovered plan and IRA clients, or in other written disclosures provided to ERISAcovered plan and IRA clients, within 60 days prior to the initial transaction upon which relief hereunder is relied, and then at least once annually, will clearly and prominently inform the ERISA-covered plan and IRA client that the client has the right to obtain copies of the QPAM’s written Policies adopted in accordance with this exemption.’’ In its comment, the Applicant states that there are difficulties in informing ERISA-covered plan and IRA clients within sixty (60) days prior to the period the exemption is relied on because the Applicant intends to rely on the exemptive relief provided hereunder as soon as possible to ensure efficient trading on behalf of ERISA plan and IRA clients. The Applicant requests that the initial informing of clients be ‘‘prior to or concurrently with the initial transaction upon which relief hereunder is relied.’’ The Applicant also states that the annual notification requirements represent another duplicative and overlapping notice requirement to clients, which are burdensome and potentially confusing to clients, and requests that the annual notification requirement be deleted. The Applicant argues that providing the client with the exemption notice, which in turn informs the client that it can request and receive the policies and procedures upon request should obviate the need for additional mailings. Affording ERISA-covered plan and IRA clients a means by which to review and understand the Policies implemented in connection with this exemption is a vital protection that is fundamental to this exemption’s purpose. However, the Department has modified the condition so that the QPAMs, at their election, may instead provide Covered Plans disclosure that accurately describes or summarizes key components of the Policies, rather than the policies in their entirety. The Department has also determined that such disclosure may be continuously maintained on a website, provided that the website link to the summary of the written Policies is clearly and prominently disclosed to those ERISAcovered plan and IRA clients to whom this section applies. The Department also agrees with the Applicant that the timing requirement for disclosure should be revised and, accordingly, has modified Section I(q) to require notice regarding the information on the website within 6 months of the effective date of this exemption (by October 17, 2018), and thereafter to the extent E:\FR\FM\29DEN2.SGM 29DEN2 61856 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices Comments 32 and 38—Definition of DB QPAM—Section II(b) Comment 31—Definition of Convictions—Section II(a) ethrower on DSK3G9T082PROD with NOTICES certain material changes are made to the Policies. Section II(b) of the proposed exemption provides, ‘‘(a) The term ‘DB QPAM’ means a ‘qualified professional asset manager’ (as defined in Section VI(a) of PTE 84–14) that relies on the relief provided by PTE 84–14 and with respect to which DSK or DK Group Services is a current or future ‘affiliate’ (as defined in Section VI(d) of PTE 84– 14). For purposes of this exemption, Deutsche Bank Securities, Inc. (DBSI), including all entities over which it exercises control; and Deutsche Bank AG, including all of its branches, are excluded from the definition of a DB QPAM’’ (footnote omitted). In its comment, the Applicant requests that the reference to Section VI(d) of PTE 84–14 be specified as Section VI(d)(1) because Deutsche Bank is seeking relief only for control ‘‘affiliates’’ as defined in Section VI(d)(1). The Department agrees this is the intended scope of relief and has revised the definition accordingly. The Applicant requests that Deutsche Bank Services Inc. (DBSI) be permitted to act as a QPAM. However, as noted in the proposal to this exemption, Deutsche Bank had previously advised the Department that ‘‘[t]he DB QPAMs (including their officers, directors, agents other than Deutsche Bank, and employees of such DB QPAMs) did not know of, have reason to know of, or participate in the criminal conduct of DSK that is the subject of the Conviction.’’ Then, in a letter to the Department dated July 15, 2016, Deutsche Bank raised the possibility that an individual (John Ripley), while employed at DBSI, may have known or had reason to know of the criminal conduct of DSK that is the subject of the Korean Conviction. Similarly, the Applicant further noted that, with respect to the LIBOR-related misconduct, ‘‘certain sell side employees of DBSI, the dual registrant, may have known about the conduct that is the subject of the plea agreement.’’ For nearly nine months, following the publication of PTE 2015–15, the Applicant failed to raise with the Department the ‘‘interpretive’’ issue regarding whether an individual or individuals employed at DBSI may have known or had reason to know of the criminal conduct at DSK, notwithstanding the previous representation, and whether DBSI was still eligible to act as a QPAM. Consequently, the Department is not persuaded that DBSI should be permitted to act as a QPAM. Section II(a) of the proposed exemption provides, ‘‘(a) The term ‘Convictions’ means (1) the judgment of conviction against DB Group Services, in Case 3:15–cr–00062–RNC to be entered in the United States District Court for the District of Connecticut to a single count of wire fraud, in violation of 18 U.S.C. 1343, and (2) the judgment of conviction against DSK entered on January 25, 2016, in Seoul Central District Court, relating to charges filed against DSK under Articles 176, 443, and 448 of South Korea’s Financial Investment Services and Capital Markets Act for spot/futures-linked market price manipulation. For all purposes under this exemption, ‘conduct’ of any person or entity that is the ‘subject of [a] Conviction’ encompasses any conduct of Deutsche Bank and/or their personnel, that is described in the Plea Agreement (including the Factual Statement thereto), Court judgments (including the judgment of the Seoul Central District Court), criminal complaint documents from the Financial Services Commission in Korea, and other official regulatory or judicial factual findings that are a part of this record,’’ In its comment, the Applicant states that this definition inaccurately paraphrases the Plea Agreement and Seoul Central District Court decision and significantly expands the conduct with respect to both the Conviction and the Korean Conviction. The Applicant requests that the language ‘‘any conduct of Deutsche Bank and/or their personnel, that is described in the Plea Agreement (including the Factual Statement thereto), Court judgments (including the judgment of the Seoul Central District Court), criminal complaint documents from the Financial Services Commission in Korea, and other official regulatory or judicial factual findings that are part of this record’’ be replaced with ‘‘the factual allegations described in Paragraph 13 of the Plea Agreement filed in the District Court in Case Number 3:15-cr-00062–RNC, and in the ’Criminal Acts’ section pertaining to ’Defendant DSK’ in the Decision of the Seoul Central District Court.’’ After considering this comment, the Department has revised the definition to be consistent with the definition of ‘‘Convictions’’ in the temporary exemption. VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 PO 00000 Frm 00042 Fmt 4701 Sfmt 4703 The Applicant also suggests that, while the Definition of QPAM could be revised to preclude relief for DSK and DB Group Services, Deutsche Bank AG should be permitted to act as a QPAM, stating that Deutsche Bank AG and its branches were not convicted of a crime, and excluding those entities is unfair given the scope of relief provided to other banks subject to a disqualifying conviction. The Applicant, however, has not demonstrated that the exemption’s existing conditions would adequately protect affected ERISAcovered plans and IRAs to the extent Deutsche Bank AG is permitted to act as a QPAM. Accordingly, the Department has not revised the exemption as requested. Comments 33, 35–37, 40—Summary of Facts and Representations The Applicant seeks certain factual updates and clarifications and statements regarding the Summary of Facts and Representations. The Department notes that the factual updates and clarifications may be found as part of the public record for Application No. D–11908, in its comment letter to the Department, dated January 17, 2017. Comment 34—DBSI The preamble to the proposed exemption states: ‘‘In a letter to the Department dated July 15, 2016, Deutsche Bank raised the possibility that an individual [John Ripley], while employed at DBSI, may have known or had reason to know of the criminal conduct of DSK that is the subject of the Korean Conviction.’’ (footnote omitted). The preamble also states that DB did not raise any ‘‘interpretive questions regarding Section I(a) of PTE 2015–15, or express any concerns regarding DBSI’s possible noncompliance, during the comment period for PTE 2015–15,’’ and that ‘‘a period of approximately nine months passed before Deutsche Bank raised an interpretive question regarding Section I(a) of PTE 2015–15.’’ In its comment letter, the Applicant contests the suggestion of the statements above that Deutsche Bank had failed to previously disclose Mr. Ripley’s knowledge of the conduct and his employment with DBSI to the Department. The Applicant asserts that it identified Mr. Ripley both as an employee of DBSI and a subject of the Korean case on numerous prior occasions, as far back as 2011. The Department referenced these disclosures by identifying Mr. Ripley, his employment at DBSI, and his involvement in the case in the proposed exemption on behalf of Deutsche Bank E:\FR\FM\29DEN2.SGM 29DEN2 ethrower on DSK3G9T082PROD with NOTICES Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices AG related to exemption application no. D–11696, at 80 FR 51314 (August 24, 2015) (the DSK Proposal). The Applicant contends that it did not raise any interpretative question on Section I(a) of PTE 2015–15 earlier because Deutsche Bank assumed that the Department would not impose an exemption condition that the Department knew Deutsche Bank could not meet. The Department acknowledges the disclosures by the Applicant regarding Mr. Ripley, his employment at DBSI, and his alleged role in the conduct underlying the Korean Conviction. However, the Department emphasizes that, despite the references to Mr. Ripley in the DSK Proposal and the proposed condition I(a) that the ‘‘[t]he DB QPAMs (including their officers, directors, agents other than Deutsche Bank, and employees of such DB QPAMs) did not know of, have reason to know of, or participate in the criminal conduct of DSK that is the subject of the Conviction,’’ the Applicant did not submit a comment highlighting this concern. The Department notes that, pursuant to the DSK Proposal, the Applicant had seven (7) days to submit a comment. It did not do so. Furthermore, following the grant of PTE 2015–15, if the Applicant believed that the Department had included ‘‘an exemption condition that . . . [Deutsche Bank] could not meet,’’ the Applicant could have asked the Department for clarification at any time. The Department further notes that, at the time of the grant of PTE 2015–15, the Department was processing Exemption Application no. D–11956, and was in regular contact with the Applicant regarding that submission. In fact, a tentative denial conference was held on November 9, 2015, between representatives of the Department and the Applicant, pursuant to a tentative denial letter dated July 16, 2015. In addition to the tentative denial conference, the Applicant submitted substantial information in support of the application, and to address the Department’s concerns raised both in the letter and at the November 9, 2015, conference. However, the Applicant did not raise this potential concern for approximately nine months and elaborated in the July 15, 2016 letter referenced in the summary of facts and representations in the proposed exemption. In the July 15, 2016, letter, the Applicant further noted that, with respect to the LIBOR-related misconduct, ‘‘certain sell side employees of DBSI, the dual registrant, may have known about the conduct that VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 is the subject of the plea agreement.’’ In a follow-up submission to the Department dated August 19, 2016, the Applicant represented that ‘‘[to] the best of the Applicant’s knowledge, no person employed by DBSI was determined to be responsible for the LIBOR misconduct, although one person who worked for the Bank may have been dual hatted to DBSI prior to 2008.’’ Comments 39, 41, 42—Technical Corrections in the Operative Language In Section II(i) of the exemption, formerly Section II(g) in the proposed exemption, the Department has replaced the term ‘‘Factual Statement’’ with ‘‘Agreed Statement of Facts.’’ The Department has also replaced the term ‘‘action’’ with ‘‘charge.’’ Finally, the Department has deleted the phrase ‘‘related to the manipulation of the London Interbank Offered Rate (LIBOR).’’ The Department notes that the modified Section II(i) in the exemption is consistent with Section II(g) in the temporary exemption. The Department has modified both the prefatory language of Section I and Section II(e) of the exemption to reflect the fact that the full name of DB Group Services is ‘‘DB Group Services (UK) Limited.’’ The Department has further modified the prefatory language of Section I to reflect the correct date of the Korean Conviction as January 25, 2016. The Department also notes that the defined terms in Section II have been reordered in their entirety so that they now appear in alphabetical order. Comment 43—Term of the Exemption In its comment, the Applicant requests that the Department extend the term of the exemption to the remaining 9 years. The Applicant states that the conduct underlying the Convictions was isolated and limited to business not related to Deutsche Bank’s asset management business, which is separate from the business of both DB Group Services and DSK. The Applicant further states that the Department historically has granted ten-year exemptions for cases involving serious criminal conduct and the present exemption should be disposed of in a like manner. The Applicant notes that the differences in the standards seem ‘‘arbitrary, and unrelated to the conduct,’’ as ‘‘the Department has departed from its historic practice of granting exemptions for similar circumstances with similar conditions.’’ The Applicant states that the Department has not provided an explanation for the conditions new to this exemption ‘‘other than its belief PO 00000 Frm 00043 Fmt 4701 Sfmt 4703 61857 that crimes are serious.’’ The Applicant states that ‘‘the exemption is not a proper place to further punish Applicant and it should not be treated more harshly than prior applicants.’’ Rather, the Applicant represents that it has entered into agreements with prosecutors and regulators and paid fines to address the subject misconduct. The Applicant asserts that ‘‘[tbhe exemption process is not an appropriate place to re-examine those resolutions.’’ The Applicant further states: ‘‘ERISA was not violated here, and the asset management and wealth management businesses were not implicated in the criminal proceedings. It is thus unfortunate that the Department has chosen to impose conditions that suggest that the DB affiliated asset managers have violated some provision of ERISA that requires punitive conditions moving forward. There is simply no reason that Applicant should not receive the traditional ten-year exemption that the Department has historically granted to applicants for QPAM exemptions.’’ The Applicant states that the crimes did not occur in asset management. Rather, the Applicant states that ’’[t]he auditor’s report, which will be available to plan fiduciaries and to the Department, will be a sufficient indicator of the DB QPAMs’ compliance with the exemption, without requiring reapplication after 5 years.’’ Although the Applicant characterizes the conduct as unrelated to Deutsche Bank’s asset management business, the Department does not agree with the apparent suggestion that the Applicant bears little or no responsibility for the criminal conduct, or that the misconduct amounted to mere isolated instances. This exemption was developed based on the Department’s view that the misconduct relevant to the Convictions occurred at Deutsche Bank entities. With respect to the Korean Conviction, the record includes the Decision by the Seoul Central District Court (the Korean Court) dated January 25, 2016. The Korean Court decision notes: ‘‘Defendant DSK could have anticipated and prevented in advance its officers and employees’ violation of the [Korean Financial Investment Services and Capital Markets Act] in light of the size of its business, the number of its officers and employees, and its past experiences of engaging in the financial investment business in Korea.’’ With respect to the US Conviction, the record includes the Plea Agreement between the DOJ and DB Group Services and the accompanying Agreed Statement of Facts, as well as the E:\FR\FM\29DEN2.SGM 29DEN2 ethrower on DSK3G9T082PROD with NOTICES 61858 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices Deferred Prosecution Agreement entered into by Deutsche Bank AG. The Plea Factual Statement states: ‘‘From at least 2003 through at least 2010, [Deutsche Bank] derivatives traders engaged in a scheme to defraud [Deutsche Bank’s] counterparties by secretly attempting to manipulate and manipulating U.S. Dollar, Yen, and Pound Sterling LIBOR, as well as EURIBOR [IBOR]. They carried out this scheme by attempting to manipulate and manipulating the various IBOR submissions. These derivatives traders requested that the [Deutsche Bank] IBOR submitters send in benchmark interest rates that would benefit the traders’ trading positions, rather than rates that complied with the definitions of the IBORs. These derivatives traders either requested a particular IBOR contribution for a particular tenor and currency, or requested that the rate submitter contribute a higher, lower, or unchanged rate for a particular tenor and currency . . . In the instances when the published benchmark interest rates were manipulated in [Deutsche Bank’s] favor due to [Deutsche Bank’s] manipulation of its own or other banks’ submissions, that manipulation benefitted DB derivatives traders, or minimized their losses, to the detriment of counterparties located in Connecticut and elsewhere, at least with respect to the particular transactions comprising the trading positions that the traders took into account in making their requests to the rate submitters. Certain [Deutsche Bank] pool and MMD derivatives traders who tried to manipulate LIBOR and EURIBOR submissions understood the features of the derivatives products tied to these benchmark interest rates; accordingly, they understood that to the extent they increased their profits or decreased their losses in certain transactions from their efforts to manipulate rates, their counterparties would suffer corresponding adverse financial consequences with respect to those particular transactions. The derivatives traders did not inform their counterparties that the traders were engaging in efforts to manipulate the IBORs to which the profitability of their trades was tied.’’ The Plea Factual Statement further states that ‘‘[t]his deceptive scheme involved efforts by [DB Group Services] derivatives traders to manipulate hundreds of IBORs.’’ The Deferred Prosecution Agreement further notes: ‘‘Although Deutsche Bank’s cooperation was often helpful, Deutsche Bank’s cooperation also fell short in some important respects. First, Deutsche Bank was slow to cooperate VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 fully with the Department’s investigation. For example, Deutsche Bank did not timely produce certain information, including key information related to Deutsche Bank’s Euro traders. As another example, in a telephone conversation, two executive level managers discussed knowing that the Department asked for relevant information and that the information had been withheld from the Department and other U.S. authorities while acknowledging they probably would have to give the information to the European Union. Second, Deutsche Bank was not, by comparison to previously settling institutions, proactive in its investigation and disclosure. For example, Deutsche Bank’s conduct included interbank coordination between it and other institutions, but it was the other institutions, not Deutsche Bank, that provided that information to the Department. Third, Deutsche Bank’s investigation was hampered by numerous unintentional but significant mistakes in the preservation, collection, and production of documents, audio, and data. For example, Deutsche Bank destroyed thousands of hours of potentially responsive audio recordings due to the negligent execution of certain discovery holds. As another example, Deutsche Bank discovered an important communications platform more than two years after receiving the Department’s initial request for information, which platform contained some of the most explicit documents. Fourth, Deutsche Bank caused the Department to be misinformed that the bank was not permitted to provide to the Department a report by Deutsche Bank’s primary domestic regulator, BaFin, that discussed shortcomings in Deutsche Bank’s internal investigation of IBOR related misconduct.’’ In developing this exemption, the Department also considered statements made by other regulators. The United Kingdom’s Financial Conduct Authority’s (FCA) Final Notice states: ‘‘The lack of appropriate systems to retrieve recorded Trader telephone calls and to map trading books and trades constituted a serious failure on the part of Deutsche Bank to [organize] and control its affairs responsibly and effectively, and to manage risks adequately . . . These failings demonstrate that there was a lack of appreciation within Deutsche Bank of the need to ensure systems are suitable for risk management and compliance purposes, enabling appropriate and timely investigations of potential Trader misconduct. The shortcomings of these PO 00000 Frm 00044 Fmt 4701 Sfmt 4703 particular systems came to light during the course of the Authority’s investigation, but these systems issues would have been equally problematic in relation to any internal or regulatory agency enquiries or investigations concerning the possible misconduct of individual Traders.’’ The Consent Order of the New York State Department of Financial Services states that, ‘‘[the] culture within the Bank valued increased profits with little regard to the integrity of the market.’’ The Consent Order of the United States Commodities Futures Trading Commission (CFTC) with Deutsche Bank states that, ‘‘Deutsche Bank engaged in this wrongful conduct even after the [CFTC] Division of Enforcement requested in April 2010 that Deutsche Bank conduct an internal investigation of its U.S. Dollar LIBOR submission practices. In fact, Deutsche Bank did not make meaningful improvements in its internal controls until mid-2011 and did not formalize a policy about conflicts of interest among traders and submitters relating to benchmark submissions until February, 2013.’’ The Department also notes the size of relevant fines imposed by various regulators: the Seoul Central District Court imposed a fine of KRW 43,695,371,124 on Deutsche Bank and KRW 1,183,362,400 on DSK; the Department of Justice imposed a $150 million fine on DB Group Services and a $625 million penalty on Deutsche Bank; the New York State Department of Financial Services imposed a penalty of $600 million; and the CFTC and the FCA imposed fines of $800 million and £226.8 million, respectively. After deliberating on all the considerations above, the Department decided the appropriate term for this exemption is three years. This exemption is not punitive. In the Department’s view, the 3-year term of this exemption and its numerous protective conditions reflect the Department’s intent to protect Covered Plans that entrust substantial assets with a Deutsche Bank asset manager, following serious misconduct, supervisory failures, and two criminal convictions. The limited term of this exemption gives the Department the opportunity to review the adherence by the DB QPAMs to the conditions set out herein. The Department has decided it is necessary to limit the term of relief to facilitate the Department’s ability to ensure that the circumstances that allowed the prior bad conduct to occur have been adequately addressed. Because two separate convictions within the Deutsche Bank corporate E:\FR\FM\29DEN2.SGM 29DEN2 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices structure create the need for this exemption, the Department has concluded that future review of the relief provided by this exemption should occur within a shorter timeframe. The Applicants may apply for an additional extension when they believe appropriate. Before granting an extension, however, the Department expects to carefully consider the efficacy of this exemption and any public comments on additional extensions, particularly including comments on how well the exemption has or has not worked to safeguard the interests of Covered Plans. If the Applicant seeks an extension of this exemption, the Department will examine whether the compliance and oversight changes mandated by various regulatory authorities are having their desired effect on Deutsche Bank entities. ethrower on DSK3G9T082PROD with NOTICES Section I(r) The Department, in order to avoid inadvertent violations of the exemption that are outside the Applicant’s control, has determined to modify Section I(r) such that a failure of the auditor to comply with any of the conditions in Section I(i) of the exemption, except for subsection I(i)(11), should not be treated as a failure by the DB QPAMs to comply with the conditions of the exemption provided that such failure was not due to the actions or inactions of Deutsche Bank or its affiliates, and Section I(r) is amended, accordingly. Comment—Letter From House Committee on Financial Services The Department also received a comment letter from certain members of Congress (the Members) regarding this exemption, as well as regarding other QPAM-related proposed one-year exemptions. In the letter, the Members recognized that certain conditions contained in these proposed exemptions are crucial in protecting the investments of workers and retirees. In particular, they referred to proposed conditions which require each bank to: (a) Indemnify and hold harmless ERISAcovered plans and IRAs for any damages resulting from the future misconduct of such bank; and (b) disclose to the Department any Deferred Prosecution Agreement or a Non-Prosecution Agreement with the U.S. Department of Justice. The Members also requested that the Department hold hearings in connection with the proposed exemptions. The Department acknowledges the Members’ concerns regarding the need for public discourse regarding proposed exemptions. To this end, the VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 Department’s procedures regarding prohibited transaction exemption requests under ERISA (the Exemption Procedures) afford interested persons the opportunity to request a hearing. Specifically, section 2570.46(a) of the Exemption Procedures provides that, ‘‘[a]ny interested person who may be adversely affected by an exemption which the Department proposes to grant relief from the restrictions of section 406(b) of ERISA, section 4975(c)(1)(E) or (F) of the Code, or section 8477(c)(2) of FERSA may request a hearing before the Department within the period of time specified in the Federal Register notice of the proposed exemption.’’ The Exemption Procedures provide that ‘‘[t]he Department will grant a request for a hearing made in accordance with paragraph (a) of this section where a hearing is necessary to fully explore material factual issues identified by the person requesting the hearing.’’ The Exemption Procedures also provide that ‘‘[t]he Department may decline to hold a hearing where: (1) The request for the hearing does not meet the requirements of paragraph (a) of this section; (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.’’ 28 While the Members’ letter raises policy issues, it does not appear to raise specific material factual issues. The Department previously explored a wide range of legal and policy issues regarding Section I(g) of the QPAM Exemption during a public hearing held on January 15, 2015 in connection with the Department’s proposed exemption involving Credit Suisse AG, and has determined that an additional hearing on these issues is not necessary. Public Comments The Department received three comments from two members of the public. One commenter, Theo Allen, objects to the Department’s proposed exemption on the basis that President Trump owes ‘‘hundreds of millions of dollars of debt to Deutsche Bank’’ and in his view, that debt should be ‘‘divested’’ before the exemption is granted. Arthur Lipson of Western Investment LLC (Western) submitted two comment letters regarding the proposed exemption. The first letter states that Western is a shareholder in two closedend funds managed by Deutsche Bank 28 29 CFR part 2570, published at 76 FR 66653 (October 27, 2011). PO 00000 Frm 00045 Fmt 4701 Sfmt 4703 61859 affiliates. He states that these funds are not subject to ERISA but are subject to the Investment Company Act of 1940, as amended. Mr. Lipson objects to a recent election of the closed-end fund trustees. Western sued the funds in connection with that election. Mr. Lipson’s second letter additionally states that Deutsche Bank should not be granted an exemption unless it ensures ‘‘compliance with the principle of directorial accountability in the funds that it manages.’’ Conclusion After giving full consideration to the record, the Department has decided to grant the exemption, as described above. The complete application file (Application No. D–11908) is available for public inspection in the Public Disclosure Room of the Employee Benefits Security Administration, Room N–1515, U.S. Department of Labor, 200 Constitution Avenue NW, Washington, DC 20210. For a more complete statement of the facts and representations supporting the Department’s decision to grant this exemption, refer to the notice of proposed exemption published on November 21, 2016 at 81 FR 83400. Exemption Section I: Covered Transactions Certain entities with specified relationships to Deutsche Bank AG (hereinafter, the DB QPAMs, as defined in Section II(d)) will not be precluded from relying on the exemptive relief provided by Prohibited Transaction Class Exemption 84–14 (PTE 84–14 or the QPAM Exemption), notwithstanding: (1) The ‘‘Korean Conviction’’ against Deutsche Securities Korea Co., a South Korean affiliate of Deutsche Bank AG (hereinafter, DSK, as defined in Section II(f)), entered on January 25, 2016; and (2) the ‘‘US Conviction’’ against DB Group Services (UK) Limited, an affiliate of Deutsche Bank based in the United Kingdom (hereinafter, DB Group Services, as further defined in Section II(e)), during the Exemption Period,29 provided that the following conditions are satisfied: (a) The DB QPAMs (including their officers, directors, agents other than Deutsche Bank, and employees of such QPAMs) did not know of, have reason to know of, or participate in the 29 Section I(g) of PTE 84–14 generally provides relief only if ‘‘[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 fraud. E:\FR\FM\29DEN2.SGM 29DEN2 ethrower on DSK3G9T082PROD with NOTICES 61860 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices criminal conduct of DSK and DB Group Services that is the subject of the Convictions. For purposes of this paragraph I(a), ‘‘participate in’’ means the knowing approval of the misconduct underlying the Convictions; (b) The DB QPAMs (including their officers, directors, and agents other than Deutsche Bank, and employees of such DB QPAMs) did not receive direct compensation, or knowingly receive indirect compensation, in connection with the criminal conduct that is the subject of the Convictions; (c) The DB QPAMs will not employ or knowingly engage any of the individuals that participated in the criminal conduct that is the subject of the Convictions. For the purposes of this paragraph (c), ‘‘participated in’’ means the knowing approval of the misconduct underlying the Convictions; (d) At all times during the Exemption Period, no DB QPAM will use its authority or influence to direct an ‘‘investment fund’’ (as defined in Section VI(b) of PTE 84–14), that is subject to ERISA or the Code and managed by such DB QPAM with respect to one or more Covered Plans, to enter into any transaction with DSK or DB Group Services, or to engage DSK or DB Group Services 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 DB QPAMs to satisfy Section I(g) of PTE 84–14 arose solely from the Convictions; (f) A DB QPAM did not exercise authority over the assets of any plan subject to Part 4 of Title I of ERISA (an ERISA-covered plan) or section 4975 of the Code (an IRA) in a manner that it knew or should have known would: Further the criminal conduct that is the subject of the Convictions; or cause the QPAM or their affiliates to directly or indirectly profit from the criminal conduct that is the subject of the Convictions; (g) Other than with respect to employee benefit plans maintained or sponsored for its own employees or the employees of an affiliate, DSK and DB Group Services will not act as fiduciaries within the meaning of section 3(21)(A)(i) or (iii) of ERISA, or section 4975(e)(3)(A) and (C) of the Code, with respect to ERISA-covered plan and IRA assets; provided, however, that DSK and DB Group Services will not be treated as violating the conditions of this exemption solely because they acted as investment advice VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 fiduciaries within the meaning of section 3(21)(A)(ii) of ERISA, or section 4975(e)(3)(B) of the Code, or because DB Group Services employees may be double-hatted, seconded, supervised or otherwise subject to the control of a DB QPAM, including in a discretionary fiduciary capacity with respect to the DB QPAM clients; (h)(1) Each DB QPAM must continue to maintain or immediately implement and follow written policies and procedures (the Policies). The Policies must require, and must be reasonably designed to ensure that: (i) The asset management decisions of the DB QPAM are conducted independently of the corporate management and business activities of DB Group Services and DSK; (ii) The DB QPAM fully complies with ERISA’s fiduciary duties and with ERISA and the Code’s prohibited transaction provisions, in each such case as applicable with respect to each Covered Plan, and does not knowingly participate in any violation of these duties and provisions with respect to Covered Plans; (iii) The DB 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 DB QPAM to regulators, including, but not limited to, the Department, the Department of the Treasury, the Department of Justice, and the Pension Benefit Guaranty Corporation, on behalf of or in relation to Covered Plans, are materially accurate and complete, to the best of such QPAM’s knowledge at that time; (v) To the best of the DB QPAM’s knowledge at the time, the DB QPAM does not make material misrepresentations or omit material information in its communications with such regulators with respect to ERISAcovered plans or IRAs with respect to Covered Plans; (vi) The DB QPAM complies with the terms of this exemption; and (vii) Any violation of, or failure to comply with an item in subparagraphs (ii) through (vi), is corrected as soon as reasonably possible upon discovery, or as soon after the QPAM reasonably should have known of the noncompliance (whichever is earlier), and any such violation or compliance failure not so corrected is reported, upon the discovery of such failure to so correct, in writing, to the head of compliance and the General Counsel (or their functional equivalent) of the relevant DB QPAM that engaged in the violation or failure, and the independent auditor responsible for PO 00000 Frm 00046 Fmt 4701 Sfmt 4703 reviewing compliance with the Policies. A DB QPAM will not be treated as having failed to develop, implement, maintain, or follow the Policies, provided that it corrects any instance of noncompliance as soon as reasonably possible upon discovery, or as soon as reasonably possible after the QPAM reasonably should have known of the noncompliance (whichever is earlier), and provided that it adheres to the reporting requirements set forth in this subparagraph (vii); (2) Each DB QPAM must develop and implement a program of training (the Training), to be conducted at least annually, for all relevant DB QPAM asset/portfolio management, trading, legal, compliance, and internal audit personnel. The first Training under this Final Exemption must be completed by all relevant DB QPAM personnel by April 18, 2019 (by the end of this 30month period, asset/portfolio management, trading, legal, compliance, and internal audit personnel who were employed from the start to the end of the period must have been trained twice: the first time under PTE 2016–13; and the second time under this exemption). The Training must: (i) At a minimum, cover the Policies, ERISA and Code compliance (including applicable fiduciary duties and the prohibited transaction provisions), ethical conduct, the consequences for not complying with the conditions of this exemption (including any loss of exemptive relief provided herein), and prompt reporting of wrongdoing; and (ii) Be conducted by a professional who has been prudently selected and who has appropriate technical training and proficiency with ERISA and the Code; (i)(1) Each DB QPAM submits to an audit conducted annually by an independent auditor, who has been prudently selected and who has appropriate technical training and proficiency with ERISA and the Code, to evaluate the adequacy of, and each DB QPAM’s compliance with, the Policies and Training described herein. The audit requirement must be incorporated in the Policies. Each annual audit must cover the preceding consecutive twelve (12) month period. The first audit must cover the period from April 18, 2018 through April 17, 2019, and must be completed by October 17, 2019. The second audit must cover the period from April 18, 2019 through April 17, 2020, and must be completed by October 17, 2020. In the event that the Exemption Period is extended or a new exemption is granted, the third audit would cover the period from April 18, 2020 through April 17, 2021, and would have to be E:\FR\FM\29DEN2.SGM 29DEN2 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices ethrower on DSK3G9T082PROD with NOTICES completed by October 17, 2021 (unless the Department chooses to alter the annual audit requirement in the new or extended exemption); 30 (2) Within the scope of the audit and to the extent necessary for the auditor, in its sole opinion, to complete its audit and comply with the conditions for relief described herein, and only to the extent such disclosure is not prevented by state or federal statute, or involves communications subject to attorney client privilege, each DB QPAM and, if applicable, Deutsche Bank, will grant the auditor unconditional access to its business, including, but not limited to: its computer systems; business records; transactional data; workplace locations; training materials; and personnel. Such access is limited to information relevant to the auditor’s objectives as specified by the terms of this exemption; (3) The auditor’s engagement must specifically require the auditor to determine whether each DB 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 DB QPAM’s operational compliance with the Policies and Training. In this regard, the auditor must test, for each QPAM, a sample of such QPAM’s transactions involving Covered Plans, sufficient in size and nature to afford the auditor a reasonable basis to determine such QPAM’s operational compliance with the Policies and Training; (5) For each audit, on or before the end of the relevant period described in Section I(i)(1) for completing the audit, the auditor must issue a written report (the Audit Report) to Deutsche Bank and the DB QPAM to which the audit applies that describes the procedures performed by the auditor during the course of its examination. The auditor, at its discretion, may issue a single consolidated Audit Report that covers all the DB QPAMs. The Audit Report must include the auditor’s specific determinations regarding: 30 The third audit referenced above would not have to be completed until after the Exemption Period expires. If the Department ultimately decides to grant relief for an additional period, it could decide to alter the terms of the exemption, including the audit conditions (and the timing of the audit requirements). Nevertheless, the Applicant should anticipate that the Department will insist on strict compliance with the audit terms and schedule set forth above. As it considers any new exemption application, the Department may also contact the auditor for any information relevant to its determination. VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 (i) The adequacy of each DB QPAM’s Policies and Training; each DB QPAM’s compliance with the Policies and Training; the need, if any, to strengthen such Policies and Training; and any instance of the respective DB QPAM’s noncompliance with the written Policies and Training described in Section I(h) above. The DB QPAM must promptly address any noncompliance. The DB QPAM must promptly address or prepare a written plan of action to address any determination of inadequacy 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 QPAM. Any action taken or the plan of action to be taken by the respective DB QPAM must be included in an addendum to the Audit Report (such addendum must be completed prior to the certification described in Section I(i)(7) below). In the event such a plan of action to address the auditor’s recommendation regarding the adequacy of the Policies and Training is not completed by the time of submission of the audit report, the following period’s audit report, must state whether the plan was satisfactorily completed. Any determination by the auditor that the respective DB 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 DB QPAM has complied with the requirements under this subparagraph must be based on evidence that the particular DB QPAM has actually implemented, maintained, and followed the Policies and Training required by this exemption. Furthermore, the auditor must not solely rely on the Annual Report created by the compliance officer (the Compliance Officer), as described in Section I(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 I(i)(3) and (4) above; (ii) The adequacy of the most recent Annual Review described in Section I(m); (6) The auditor must notify the respective DB 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 PO 00000 Frm 00047 Fmt 4701 Sfmt 4703 61861 of business engaged in discretionary asset management services through the DB 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; that such DB 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. Such 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; (8) The Audit Committee of Deutsche Bank’s Supervisory Board is 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 Deutsche Bank must review the Audit Report for each DB QPAM and must certify in writing, under penalty of perjury, that such officer has reviewed each Audit Report. Deutsche Bank must provide notice to the Department in the event of a switch in the committee to which the Audit Report will be provided; (9) Each DB QPAM provides its certified Audit Report, by regular mail to: Office of Exemption Determinations (OED), 200 Constitution Avenue NW, Suite 400, Washington, DC 20210; or by private carrier to: 122 C Street NW, Suite 400, Washington, DC 20001–2109. This delivery must take place no later than thirty (30) days following completion of the Audit Report. The Audit Report will be made part of the public record regarding this exemption. Furthermore, each DB QPAM must make its Audit Report unconditionally available, electronically or otherwise, for examination upon request by any duly authorized employee or representative of the Department, other relevant regulators, and any fiduciary of a Covered Plan; (10) Each DB QPAM and the auditor must submit to OED any engagement agreement(s) entered into pursuant to the engagement of the auditor under this exemption, no later than two (2) months after the execution of any such engagement agreement; (11) The auditor must provide the Department, upon request, for inspection and review, access to all the workpapers created and utilized in the course of the audit, provided such access and inspection is otherwise permitted by law; and E:\FR\FM\29DEN2.SGM 29DEN2 ethrower on DSK3G9T082PROD with NOTICES 61862 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices (12) Deutsche Bank must notify the Department of a change in the independent auditor no later than two (2) months after the engagement of a substitute or subsequent auditor and must provide an explanation for the substitution or change including a description of any material disputes between the terminated auditor and Deutsche Bank; (j) As of April 18, 2018 and throughout the Exemption Period, with respect to any arrangement, agreement, or contract between a DB QPAM and a Covered Plan, the DB 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 inadvertent prohibited transactions); and to comply with the standards of prudence and loyalty set forth in section 404 of ERISA, with respect to each such ERISA-covered plan and IRA to the extent that section is applicable; (2) To indemnify and hold harmless the Covered Plan for any actual losses resulting directly from a DB 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 QPAM; or any claim arising out of the failure of such DB 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 Convictions. This condition applies only to actual losses caused by the DB QPAM’s violations. (3) Not to require (or otherwise cause) the Covered Plan to waive, limit, or qualify the liability of the DB QPAM for violating ERISA or the Code or engaging in prohibited transactions; (4) Not to restrict the ability of such Covered Plan to terminate or withdraw from its arrangement with the DB QPAM with respect to any investment in a separately managed account or pooled fund subject to ERISA and managed by such QPAM, with the exception of reasonable restrictions, appropriately disclosed in advance, that are specifically designed to ensure equitable treatment of all investors in a pooled fund in the event such withdrawal or termination may have adverse consequences for all other investors. In connection with any such arrangements involving investments in pooled funds subject to ERISA entered into after the effective date of this exemption, the adverse consequences must relate to of a lack of liquidity of the underlying assets, valuation issues, VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 or regulatory reasons that prevent the fund from promptly redeeming an ERISA-covered plan’s or IRA’s investment, and such restrictions must be applicable to all such investors and effective no longer than reasonably necessary to avoid the adverse consequences; (5) Not to impose any fees, penalties, or charges for such termination or withdrawal with the exception of reasonable fees, appropriately disclosed in advance, that are specifically designed to prevent generally recognized abusive investment practices or specifically designed to ensure equitable treatment of all investors in a pooled fund in the event such withdrawal or termination may have adverse consequences for all other investors, provided that such fees are applied consistently and in like manner to all such investors; and (6) Not to include exculpatory provisions disclaiming or otherwise limiting liability of the DB QPAM for a violation of such agreement’s terms. To the extent consistent with Section 410 of ERISA, 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 Deutsche Bank, and its affiliates, or damages arising from acts outside the control of the DB QPAM; (7) By October 17, 2018, each DB QPAM must provide a notice of its obligations under this Section I(j) to each Covered Plan. For all other prospective Covered Plans, the DB QPAM will agree to its obligations under this Section I(j) in an updated investment management agreement between the DB 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 2016–13 that meets the terms of this condition. Notwithstanding the above, a DB QPAM will not violate the condition solely because a Plan or IRA refuses to sign an updated investment management agreement; (k) By June 17, 2018, each DB QPAM will provide a notice of the exemption, along with a separate summary describing the facts that led to the Convictions (the Summary), which have been submitted to the Department, and a prominently displayed statement (the Statement) that the Convictions result in a failure to meet a condition in PTE 84– 14, to each sponsor and beneficial owner of a Covered Plan, or the sponsor of an investment fund in any case where a DB QPAM acts as a sub-advisor to the PO 00000 Frm 00048 Fmt 4701 Sfmt 4703 investment fund in which such ERISAcovered plan and IRA invests. Any prospective client for which a DB QPAM relies on PTE 84–14 or has expressly represented that the manager qualifies as a QPAM or relies on the QPAM class exemption 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 DB QPAM. Disclosures may be delivered electronically. (l) The DB QPAMs must comply with each condition of PTE 84–14, as amended, with the sole exceptions of the violations of Section I(g) of PTE 84– 14 that are attributable to the Convictions; (m)(1) By October 17, 2018, Deutsche Bank designates 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 annual review for each annual period beginning on April 18, 2018, (the Annual Review) 31 to determine the adequacy and effectiveness of the implementation of the Policies and Training. With respect to the Compliance Officer, the following conditions must be met: (i) The Compliance Officer must be a legal 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 highestranking corporate officer in charge of legal compliance for asset management; (2) With respect to each Annual Review, the following conditions must be met: (i) The Annual Review includes a review of: Any compliance matter related to the Policies or Training that was identified by, or reported to, the Compliance Officer or others within the compliance and risk control function (or its equivalent) during the previous year; any material change in the relevant business activities of the DB QPAMs; and any change to ERISA, the Code, or regulations related to fiduciary duties and the prohibited transaction provisions that may be applicable to the activities of the DB QPAMs; (ii) The Compliance Officer prepares a written report for each Annual Review (each, an Annual Report) that (A) summarizes his or her material activities 31 Such Annual Review must be completed with respect to the annual periods ending April 17, 2019; April 17, 2020; and April 17, 2021. E:\FR\FM\29DEN2.SGM 29DEN2 ethrower on DSK3G9T082PROD with NOTICES Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices during the preceding year; (B) sets forth any instance of noncompliance discovered during the preceding year, and any related corrective action; (C) details any change to the Policies or Training to guard against any similar instance of noncompliance occurring again; and (D) makes recommendations, as necessary, for additional training, procedures, monitoring, or additional and/or changed processes or systems, and management’s actions on such recommendations; (iii) In each Annual Report, the Compliance Officer must certify in writing that to his or her knowledge: (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 preceding year and any related correction taken to date have been identified in the Annual Report; and (D) the DB QPAMs have complied with the Policies and Training, and/or corrected (or is correcting) any instances of noncompliance in accordance with Section I(h) above; (iv) Each Annual Report must be provided to appropriate corporate officers of Deutsche Bank and each DB QPAM to which such report relates; the head of compliance and the General Counsel (or their functional equivalent) of the relevant DB QPAM; and must be made unconditionally available to the independent auditor described in Section I(i) above; (v) Each Annual Review, including the Compliance Officer’s written Annual Report, must be completed within three (3) months following the end of the period to which it relates; (n) Deutsche Bank disgorged all of its profits generated by the spot/futureslinked market manipulation activities of DSK personnel that led to the Conviction against DSK entered on January 25, 2016, in Seoul Central District Court; (o) Each DB 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 such DB QPAM relies upon the relief in the exemption; (p) During the Exemption Period, Deutsche Bank: (1) Immediately discloses to the Department any Deferred Prosecution Agreement (a DPA) or a Non-Prosecution Agreement (an NPA) with the U.S. Department of Justice, entered into by Deutsche Bank or any of its affiliates in connection with conduct described in Section I(g) of PTE VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 84–14 or section 411 of ERISA; and (2) immediately provides the Department any information requested by the Department, as permitted by law, regarding the agreement and/or conduct and allegations that led to the agreement; (q) By October 17, 2018, each DB QPAM, in its agreements with, or in other written disclosures provided to Covered Plans, will clearly and prominently inform Covered Plan clients of their right to obtain a copy of the Policies or a description (Summary Policies) which accurately summarizes key components of the QPAM’s written Policies developed in connection with this exemption. If the Policies are thereafter changed, each Covered Plan client must receive a new disclosure within six (6) months following the end of the calendar year during which the Policies were changed.32 With respect to this requirement, the description may be continuously maintained on a website, provided that such website link to the Policies or the Summary Policies is clearly and prominently disclosed to each Covered Plan; and (r) A DB QPAM will not fail to meet the terms of this exemption, solely because a different DB QPAM fails to satisfy a condition for relief described in Sections I(c), (d), (h), (i), (j), (k), (l), (o), and (q); or if the independent auditor described in Section I(i) fails a provision of the exemption other than the requirement described in Section I(i)(11), provided that such failure did not result from any actions or inactions of Deutsche Bank or its affiliates. Section II: Definitions (a) The term ‘‘Convictions’’ means (1) the judgment of conviction against DB Group Services, in case number 3:15– cr–00062–RNC to be entered in the United States District Court for the District of Connecticut to a single count of wire fraud, in violation of 18 U.S.C. 1343, and (2) the judgment of conviction against DSK entered on January 25, 2016, in Seoul Central District Court, relating to charges filed against DSK under Articles 176, 443, and 448 of South Korea’s Financial Investment Services and Capital Markets Act for spot/futures-linked market price manipulation. For all purposes under this exemption, ‘‘conduct’’ of any person or entity that is the ‘‘subject of [a] Conviction’’ encompasses the factual allegations described in Paragraph 13 of 32 In the event the Applicant meets this disclosure requirement through Summary Policies, changes to the Policies shall not result in the requirement for a new disclosure unless, as a result of changes to the Policies, the Summary Policies are no longer accurate. PO 00000 Frm 00049 Fmt 4701 Sfmt 4703 61863 the Plea Agreement filed in the District Court in case number 3:15–cr–00062– RNC, and in the ‘‘Criminal Acts’’ section pertaining to ‘‘Defendant DSK’’ in the Decision of the Seoul Central District Court. (b) The term ‘‘Covered Plan’’ is a plan subject to Part 4 of Title 1 of ERISA (‘‘ERISA-covered plan’’) or a plan subject to Section 4975 of the Code (‘‘IRA’’) with respect to which a DB QPAM relies on PTE 84–14, or with respect to which a DB QPAM (or any Deutsche Bank affiliate) has expressly represented that the manager qualifies as a QPAM or relies on the QPAM class exemption (PTE 84–14). A Covered Plan does not include an ERISA-covered Plan or IRA to the extent the DB QPAM has expressly disclaimed reliance on QPAM status or PTE 84–14 in entering into its contract, arrangement, or agreement with the ERISA-covered plan or IRA. (c) The term ‘‘DB Group Services’’ means DB Group Services (UK) Limited, an ‘‘affiliate’’ of Deutsche Bank (as defined in Section VI(c) of PTE 84–14) based in the United Kingdom. (d) The term ‘‘DB QPAM’’ means a ‘‘qualified professional asset manager’’ (as defined in Section VI(a) 33 of PTE 84–14) that relies on the relief provided by PTE 84–14 and with respect to which DSK or DB Group Services is a current or future ‘‘affiliate’’ (as defined in Section VI(d)(1) of PTE 84–14). For purposes of this exemption, Deutsche Bank Securities, Inc. (DBSI), including all entities over which it exercises control; and Deutsche Bank AG, including all of its branches, are excluded from the definition of a DB QPAM. (e) The term ‘‘Deutsche Bank’’ means Deutsche Bank AG but, unless indicated otherwise, does not include its subsidiaries or affiliates. (f) The term ‘‘DSK’’ means Deutsche Securities Korea Co., a South Korean ‘‘affiliate’’ of Deutsche Bank (as defined in Section VI(c) of PTE 84–14). (g) The terms ‘‘ERISA-covered plan’’ and ‘‘IRA’’ mean, respectively, a plan subject to Part 4 of Title I of ERISA and a plan subject to section 4975 of the Code. (h) The term ‘‘Exemption Period’’ means April 18, 2018, through April 17, 2021. (i) The term ‘‘Plea Agreement’’ means the Plea Agreement (including the 33 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 that has acknowledged in a written management agreement that it is a fiduciary with respect to each plan that has retained the QPAM. E:\FR\FM\29DEN2.SGM 29DEN2 61864 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices Agreed Statement of Facts), dated April 23, 2015, between the Antitrust Division and Fraud Section of the Criminal Division of the U.S. Department of Justice (the DOJ) and DB Group Services resolving the charge brought by the DOJ in case number 3:15–cr–00062–RNC against DB Group Services for wire fraud in violation of Title 18, United States Code, Section 1343. Effective Date The effective date of this exemption is April 18, and the exemption will be effective from April 18, 2018, through April 17, 2021 (the Exemption Period). Department’s Comment: The Department cautions that the relief in this exemption will terminate immediately if an entity within the Deutsche Bank corporate structure is convicted of a crime described in Section I(g) of PTE 84–14 (other than the Convictions) during the Exemption Period. Although Deutsche Bank could apply for a new exemption in that circumstance, the Department would not be obligated to grant the exemption. The terms of this exemption have been specifically designed to permit plans to terminate their relationships in an orderly and cost effective fashion in the event of an additional conviction or a determination that it is otherwise prudent for a plan to terminate its relationship with an entity covered by the exemption. Further Information For more information on this exemption, contact Mr. Scott Ness of the Department, telephone (202) 693–8561. (This is not a toll-free number.) Citigroup Inc. (Citigroup or the Applicant) Located in New York, New York [Prohibited Transaction Exemption 2017–05; Exemption Application No. D–11909] ethrower on DSK3G9T082PROD with NOTICES Discussion On November 21, 2016, the Department of Labor (the Department) published a notice of proposed exemption in the Federal Register at 81 FR 83416, for certain entities with specified relationships to Citigroup to continue to rely upon the relief provided by PTE 84–14 for a period of five years,34 notwithstanding Citicorp’s criminal conviction, as described herein. The Department is granting this exemption in order to ensure that 34 (49 FR 9494, March 13, 1984), as corrected at 50 FR 41430 (October 10, 1985), as amended at 70 FR 49305 (August 23, 2005) and as amended at 75 FR 38837 (July 6, 2010), hereinafter referred to as PTE 84–14 or the QPAM Exemption. VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 Covered Plans 35 whose assets are managed by a Citigroup Affiliated QPAM or Citigroup Related QPAM may continue to benefit from the relief provided by PTE 84–14. This exemption is effective from January 10, 2018 through January 9, 2023 (the Exemption Period). No relief from a violation of any other law is provided by this exemption, including any criminal conviction described in the proposed exemption. Furthermore, the Department cautions that the relief in this exemption will terminate immediately if, among other things, an entity within the Citigroup corporate structure is convicted of a crime described in Section I(g) of PTE 84–14 (other than the Conviction) during the Exemption Period. The terms of this exemption have been specifically designed to promote conduct that adheres to basic fiduciary standards under ERISA and the Code. The exemption also aims to ensure that plans and IRAs can terminate relationships in an orderly and costeffective fashion in the event a plan or IRA fiduciary determines it is prudent for the plan or IRA to sever its relationship with an entity covered by the exemption. Written Comments The Department invited all interested persons to submit written comments and/or requests for a public hearing with respect to the notice of proposed exemption, published in the Federal Register at 81 FR 83416 on November 21, 2016. All comments and requests for a hearing were due by March 1, 2017.36 The Department received written comments from the Applicant, members of the U.S. Congress, and a number of plan and IRA clients of Citigroup. After considering these submissions, the Department has determined to grant the exemption, with revisions, as described below. Term of the Exemption and Conditions The Applicant requests that the exemption’s term and underlying 35 ‘‘Covered Plan’’ is a plan subject to Part 4 of Title 1 of ERISA (‘‘ERISA-covered plan’’) or a plan subject to Section 4975 of the Code (‘‘IRA’’), with respect to which a Citigroup Affiliated QPAM relies on PTE 84–14, or with respect to which a Citigroup Affiliated QPAM (or any Citigroup affiliate) has expressly represented that the manager qualifies as a QPAM or relies on the QPAM class exemption (PTE 84–14). A Covered Plan does not include an ERISA-covered Plan or IRA to the extent the Citigroup Affiliated QPAM has expressly disclaimed reliance on QPAM status or PTE 84–14 in entering into its contract, arrangement, or agreement with the ERISA covered plan or IRA. 36 The Department received additional comments from the Applicant, however, after the close of the comment period. PO 00000 Frm 00050 Fmt 4701 Sfmt 4703 conditions be revised to conform with certain exemptions issued by the Department prior to 2014. The Applicant cites 16 individual exemptions granted by the Department prior to 2014 involving financial institutions that could not satisfy Section I(g) of PTE 84–14 (the Pre-2014 Exemptions) because of criminal convictions. The Applicant states that the conditions included within the Pre2014 Exemptions remained materially unchanged during this time. The Applicant additionally cites PTE 2015– 06 and 2015–14 (the 2015 Exemptions) which, like the Pre-2014 Exemptions, permitted certain financial institutions to continue to rely upon the relief provided by PTE 84–14, notwithstanding judgments of conviction against such institutions. The Applicant states that, with respect to the 2015 Exemptions, the Department adopted certain additional conditions not previously included in the Pre-2014 Exemptions, including: (1) Shortening the period of relief from 10 years to 5 years; (2) particularized requirements relating to policies, procedures, and annual training; and (3) an annual audit requirement. The Applicant states that the public record underlying the 2015 Exemptions does not present any demonstrated deficiency with respect to the Pre-2014 Exemptions that warranted the adoption of these additional conditions in the 2015 Exemptions. Nor, according to the Applicant, are the 2015 Exemptions’ additional conditions explained by any change in relevant laws or guidance, or any distinction between the conduct that gave rise to the need for the 2015 Exemptions compared to the conduct that gave rise to the need for the Pre2014 Exemptions. The Applicant also cites a Presidential Memorandum and two Executive Orders: (1) Presidential Memorandum on Fiduciary Duty Rule, dated February 3, 2017; (2) Presidential Executive Order on Core Principles for Regulating the United States Financial System, dated February 3, 2017; and (3) Presidential Executive Order on Reducing Regulation and Controlling Regulatory Costs, dated January 30, 2017 (the Executive Orders). The Applicant states that these Executive Orders suggest a compelling reason for the Department to revert to the approach reflected in the Pre-2014 Exemptions. The Applicant further states that the individual exemptions granted by the Department in connection with criminal convictions fall into two different categories. In one category, the applicant’s underlying misconduct is integral to corporate business activity. E:\FR\FM\29DEN2.SGM 29DEN2 ethrower on DSK3G9T082PROD with NOTICES Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices In the other category, according to the Applicant, the applicant’s underlying misconduct is non-integral and isolated to a small number of employees. The Applicant states that the conduct underlying this exemption resembles the facts underlying those exemptions in which misconduct was non-integral and isolated to a small number of employees, as it was ‘‘limited to one London-based euro/U.S. dollar trader and the unit he worked in was distant and separate from the Applicant’s businesses that rely on PTE 84–14.’’ The Applicant states that, taken together and considered against the historical backdrop of the individual exemptions and Executive Orders summarized above, there are compelling reasons for the Department to revert to the approach reflected in the Pre-2014 Exemptions, including: (1) Extending the exemption from a 5-year term to a 9-year term, and (2) eliminating the independent audit and compliance officer requirements under the exemption. The Applicant states that the Department’s past practice for these types of exemptions has been to provide for ten-year relief and that the rationale for abbreviating the term in this exemption does not appear to be connected to the nature or severity of the misconduct at issue. The Department declines to extend the term of this exemption to ten years. Although the Applicant characterizes the conduct as involving the isolated actions of one individual, the Department does not agree with the apparent suggestion that the Applicant bears little or no responsibility for the criminal conduct. In considering the misconduct, the Department did not limit its analysis to the acts of the single trader identified by the Applicant. The Department also considered the period of time during which the misconduct persisted, the compliance and supervisory mechanisms within Citigroup that failed to detect and prevent the misconduct, and certain other relevant misconduct identified in Citicorp’s Plea Agreement. Citicorp’s Plea Agreement identifies misconduct that extended beyond the isolated acts of the single London-based euro/U.S. dollar trader. For example, Citicorp’s Plea Agreement contains the following statement under the heading Other Relevant Conduct: ‘‘the defendant [Citicorp], through its currency traders and sales staff, also engaged in other currency trading and sales practices in conducting FX Spot Market transactions with customers via telephone, email, and/or electronic chat, to wit: (i) Intentionally working customers’ limit orders one or more levels, or ‘‘pips,’’ VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 away from the price confirmed with the customer; (ii) including sales markup, through the use of live hand signals or undisclosed prior internal arrangements or communications, to prices given to customers that communicated with sales staff on open phone lines; (iii) accepting limit orders from customers and then informing those customers that their orders could not be filled, in whole or in part, when in fact the defendant was able to fill the order but decided not to do so because the defendant expected it would be more profitable not to do so; and (iv) disclosing non-public information regarding the identity and trading activity of the defendant’s customers to other banks or other market participants, in order to generate revenue for the defendant at the expense of its customers.’’ In developing this exemption, the Department also considered statements made by regulators concerning the compliance and supervisory mechanisms within Citigroup that failed to detect and prevent the misconduct. For example, the Financial Conduct Authority’s (FCA) Final Notice to Citibank N.A., states: ‘‘[d]uring the Relevant Period, Citi did not exercise adequate and effective control over its G10 spot FX trading business,’’ and, ‘‘[t]hese failings occurred in circumstances where certain of those responsible for managing front office matters were aware of and/or at times involved in behaviours described above.’’ The Notice further states: ‘‘They also occurred despite the fact that risks around confidentiality were highlighted when in August 2011 Citi became aware that a trader in its FX business outside London had inappropriately shared confidential client information in a chat room with a trader at another firm.’’ By way of further example, the Consent Order of the Office of the Comptroller of the Currency (OCC) states: ‘‘[t]he OCC’s examination findings established that the Bank had deficiencies in its internal controls and had engaged in unsafe or unsound banking practices with respect to the oversight and governance of the Bank’s FX Trading such that the Bank failed to detect and prevent the conduct. . . .’’ The OCC’s Consent Order also states that, ‘‘deficiencies and unsafe or unsound practices include the following: (a) The Bank’s compliance risk assessment lacked sufficient granularity and failed to identify the risks related to market conduct in FX Trading with respect to sales, trading and supervisory employees in that business; (b) The Bank’s transaction monitoring and communications surveillance were inadequate to detect PO 00000 Frm 00051 Fmt 4701 Sfmt 4703 61865 potential Employee market misconduct in FX Trading. . . .’’ With respect to the severity of the misconduct, the Department notes the magnitude of the relevant fines imposed by various regulators, which include: $925 million by the Department of Justice; $342 million by the Board of Governors of the Federal Reserve; $350 million by the OCC; $310 million by the Commodity Futures Trading Commission; and £225,575,000 by the FCA. The Department also notes that this exemption’s five-year term and protective conditions reflect the Department’s intent to protect Covered Plans that entrust substantial assets to a Citigroup Affiliated QPAM, despite the serious nature of the misconduct and the compliance and oversight failures exhibited by Citigroup throughout the extended period of time during which the criminal misconduct persisted. The term of this exemption gives the Department the opportunity to review the adherence by the Citigroup Affiliated QPAMs’ to the conditions set out herein. If the Applicant seeks to extend this exemption beyond this five year term, the Department will examine whether the compliance and oversight changes mandated by the various regulatory authorities are having the desired effect on the Citigroup entities. Description of Criminal Conduct— Sections I and II(e) The prefatory language to Section I of the proposed five-year exemption provides that, ‘‘the Citigroup Affiliated QPAMs and the Citigroup Related QPAMs, as defined in Sections II(f) and II(g), respectively, will not be precluded from relying on the exemptive relief provided by Prohibited Transaction Class Exemption 84–14 (PTE 84–14 or the QPAM Exemption), notwithstanding the judgment of conviction against Citicorp (the Conviction), as defined in Section II(a)), for engaging in a conspiracy to: (1) Fix the price of, or (2) eliminate competition in the purchase or sale of the euro/U.S. dollar currency pair exchanged in the Foreign Exchange (FX) Spot Market, for a period of five years beginning on the date the exemption is granted.’’ Section II(e) of the proposed five year exemption provides that, in relevant part, ‘‘[t]he term ‘Conviction’ means the judgment of conviction against Citigroup for violation of the Sherman Antitrust Act, 15 U.S.C. 1, which is scheduled to be entered in the District Court for the District of Connecticut (the District Court) (Case Number 3:15–cr– 78–SRU), in connection with Citigroup, through one of its euro/U.S. dollar E:\FR\FM\29DEN2.SGM 29DEN2 61866 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices ethrower on DSK3G9T082PROD with NOTICES (EUR/USD) traders, entering into and engaging in a combination and conspiracy to fix, stabilize, maintain, increase or decrease the price of, and rig bids and offers for, the EUR/USD currency pair exchanged in the FX spot market by agreeing to eliminate competition in the purchase and sale of the EUR/USD currency pair in the United States and elsewhere. For all purposes under this five-year, ‘conduct’ of any person or entity that is the ‘subject of [a] Conviction’ encompasses any conduct of Citigroup and/or their personnel, that is described in the Plea Agreement, (including the Factual Statement), and other official regulatory or judicial factual findings that are a part of this record.’’ The Applicant incorporates by reference its comment letter submitted to the Department in connection with PTE 2016–14 (PTE 2016–14 Comment Letter),37 in which the Applicant requested that references to the Conviction be limited to the actual judgment of conviction against Citicorp. The Applicant states that the references to the Conviction in the prefatory language of Section I and Section II would cause confusion for Plans and counterparties transacting with Plans. The Applicant also requests that the Department revise Section II(e) by replacing ‘‘Citigroup’’ with ‘‘Citicorp,’’ as Citicorp was the entity charged in connection with the Plea Agreement. After consideration of the Applicant’s comment, the Department has revised the exemption to provide that ‘‘[t]he term ‘Conviction’ means the judgment of conviction against Citicorp for violation of the Sherman Antitrust Act, 15 U.S.C. 1, entered in the District Court for the District of Connecticut (the District Court) (case number 3:15–cr–78 –SRU). For all purposes under this exemption, ‘conduct’ of any person or entity that is the ‘subject of [a] Conviction’ encompasses the conduct described in Paragraph 4(g)–(i) of the Plea Agreement filed in the District Court in case number 3:15–cr–78–SRU.’’ The Department has also revised Section II(e) by replacing ‘‘Citigroup’’ with ‘‘Citicorp.’’ The Department has also renumbered the definition of Conviction as Section II(a) in the final exemption. Knowing or Tacit Approval—Sections I(a) and I(c) Section I(a) of the proposed five-year exemption provides, ‘‘(a) Other than a single individual who worked for a nonfiduciary business within Citigroup’s 37 See Citigroup PTE 2016–14 Comment Letter, dated November 25, 2016. VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 Markets and Securities Services business, and who had no responsibility for, and exercised no authority in connection with, the management of plan assets, the Citigroup Affiliated QPAMs and the Citigroup Related QPAMs (including their officers, directors, agents other than Citicorp, and employees of such QPAMs who had responsibility for, or exercised authority in connection with the management of plan assets) did not know of, did not have reason to know of, or participate in the criminal conduct that is the subject of the Conviction (for purposes of this paragraph (a), ‘participate in’ includes the knowing or tacit approval of the misconduct underlying the Conviction).’’ With regard to Section I(a), the Applicant requests the deletion of the parenthetical, which reads, ‘‘(for purposes of this paragraph (a), ‘participate in’ includes the knowing or tacit approval of the misconduct underlying the Conviction).’’ 38 The Department declines to delete this definition of ‘‘participate in,’’ but has replaced ‘‘knowing or tacit approval,’’ with ‘‘knowing approval.’’ Section I(c) of the proposed exemption provides, ‘‘(c) The Citigroup Affiliated QPAMs will not employ or knowingly engage any of the individuals that participated in the criminal conduct that is the subject of the Conviction (for the purposes of this paragraph (c), ‘participated in’ includes the knowing or tacit approval of the misconduct underlying Conviction).’’ With regard to Section I(c), the Applicant requests that the definition of ‘‘participated in’’ be changed from, ‘‘the knowing or tacit approval of the misconduct underlying the Conviction’’ to, ‘‘approving or condoning the misconduct underlying the Conviction.’’ After consideration of the Applicant’s comment, the Department has revised Section I(c) in a manner that is consistent with Section I(a), as described above. Accordingly, the relevant part of Section I(c) now reads, ‘‘For the purposes of this paragraph (c), ‘participated in’ means the knowing approval of the misconduct underlying the Conviction.’’ Receipt of Compensation—Section I(b) Section I(b) of the proposed five-year exemption provides, ‘‘(b) Other than a single individual who worked for a nonfiduciary business within Citigroup’s Markets and Securities Services 38 Certain of the Applicant’s requested revisions, including its requested revision with respect to Section I(a), are reflected in a red-lined draft attachment which the Applicant provided to the Department with its comment letter. PO 00000 Frm 00052 Fmt 4701 Sfmt 4703 business, and who had no responsibility for, and exercised no authority in connection with, the management of plan assets, the Citigroup Affiliated QPAMs and the Citigroup Related QPAMs (including their officers, directors, and agents other than Citigroup, and employees of such Citigroup QPAMs) did not receive direct compensation, or knowingly receive indirect compensation in connection with the criminal conduct that is the subject of the Conviction.’’ The Applicant requests the replacement of ‘‘Citigroup’’ with ‘‘Citicorp’’ in the phrase, ‘‘(including their officers, directors, and agents other than Citigroup. . . .’’ After considering the Applicant’s comment, the Department has revised the exemption in the manner requested by the Applicant. Use of Authority or Influence—Section I(d) Section I(d) of the proposed exemption provides that, ‘‘(d) A Citigroup Affiliated QPAM will not use its authority or influence to direct an ‘investment fund’ (as defined in Section VI(b) of PTE 84–14), that is subject to ERISA or the Code and managed by such Citigroup Affiliated QPAM, to enter into any transaction with Citicorp or the Markets and Securities Services business of Citigroup, or to engage Citicorp or the Markets and Securities Services business of Citigroup, 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.’’ In the PTE 2014 Comment Letter, the Applicant represented that a sudden cessation of services by the Markets and Securities Services Business of Citigroup to affected plans, such as agency securities lending services, would be disruptive to such plans. In this regard, the Applicant seeks deletion of the condition’s reference to ‘‘the Markets and Securities Services Business of Citigroup.’’ After considering the Applicant’s comment, the Department has revised the exemption in the manner requested by the Applicant such that the condition does not apply to the Markets and Securities Services Business of Citigroup. The Department has also revised Section I(d) by clarifying that it applies to, ‘‘an ‘investment fund’. . . . managed by such Citigroup Affiliated QPAM with respect to Covered Plans.’’ This modification to Section I(d) reflects the Department’s interest in ensuring E:\FR\FM\29DEN2.SGM 29DEN2 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices that the conditions included herein broadly protect Covered Plans. ethrower on DSK3G9T082PROD with NOTICES Provision of Asset Management Services—Section I(g) Section I(g) of the proposed exemption provides that ‘‘(g) Citicorp and the Markets and Securities Services Business of Citigroup will not provide discretionary asset management services to ERISA-covered plans or IRAs, or otherwise act as a fiduciary with respect to ERISA-covered plan or IRA assets.’’ In the PTE 2016–14 Comment Letter, the Applicant represented that the function of the Markets and Securities Services Business of Citigroup may be deemed to involve fiduciary conduct and that requiring those services to be terminated suddenly would be disruptive to affected plans. The Applicant therefore seeks the deletion of the condition’s reference to the Markets and Securities Services Business of Citigroup. The Applicant also requests that Section I(g) be revised to read, ‘‘Other than with respect to employee benefit plans maintained or sponsored for their own employees or the employees of an affiliate, Citicorp will not act as a fiduciary within the meaning of ERISA Section 3(21)(A)(i) or (iii), or Code Section 4975(e)(3)(A) or (C), with respect to ERISA-covered plan and IRA assets; in accordance with this provision, Citicorp will not be treated as violating the conditions of this exemption solely because they acted as investment advice fiduciaries within the meaning of ERISA Section 3(21)(A)(ii) or Section 4975(e)(3)(B) of the Code.’’ After considering the Applicant’s comment regarding disruption and damages to affected ERISA-covered plans and IRAs, the Department has revised the exemption in the manner requested by the Applicant. Additionally, the Department has revised Section I(g) to clarify that Citigroup will not violate this condition in the event that it inadvertently becomes an investment advice fiduciary or acts as a fiduciary for plans that it sponsors for its own employees or employees of an affiliate. Policies and Procedures Relating to Compliance with ERISA and the Code— Section I(h)(1)–(2) Section I(h) of the proposed five-year exemption provides that, ‘‘(h)(1) Within four (4) months of the Conviction, each Citigroup Affiliated QPAM must develop, implement, maintain, and follow written policies and procedures (the Policies) . . . (2) Within four (4) months of the date of the Conviction, VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 each Citigroup Affiliated QPAM must develop and implement a program of training (the Training), conducted at least annually, for all relevant Citigroup Affiliated QPAM asset/portfolio management, trading, legal, compliance, and internal audit personnel. . . .’’ The Applicant requests that the Department increase the development period associated with the Policies and Training Requirements (the Development Period) from four (4) months to six (6) months from the date of the Conviction. The Applicant also requests clarification that a Citigroup Affiliated QPAM’s obligation to ‘‘develop’’ the Policies and Training under this section can be satisfied to the extent that such Citigroup Affiliated QPAM has developed Policies and Training independent of this exemption, including Policies and Training developed in connection with PTE 2016–14. The Applicant further requests that the Department clarify that the Applicant shall have up to twelve (12) months to train all relevant employees following the Development Period, and that such Training will then be conducted at least annually, in accordance with Section I(h)(2). The Department emphasizes that the Citigroup QPAMs must comply with the Policies and Training requirements within both PTE 2016–14 and this exemption. To this end, the Department has revised the policies and training requirements of Section I(h) to conform with PTE 2016–14. The two exemptions now follow this timeline: (i) Each Citigroup Affiliated QPAM must have developed the Policies and Training required by PTE 2016–14 by July 9, 2017; (ii) the first annual Training under PTE 2016–14 must be completed by July 9, 2018; (iii) each Citigroup Affiliated QPAM must develop the Policies and Training required by this exemption, as necessary, by July 9, 2018; and (iv) the first Training under this exemption must be completed by July 9, 2019. By the end of this 30-month period, asset/ portfolio management, trading, legal, compliance, and internal audit personnel who were employed from the start to the end of the period must have been trained twice. In addition, Section I(h)(1)(i) of the proposed five-year exemption provides that the Policies must be reasonably designed to ensure that: ‘‘(i) The asset management decisions of the Citigroup Affiliated QPAM are conducted independently of the corporate management and business activities, including the corporate management and business activities of the Markets PO 00000 Frm 00053 Fmt 4701 Sfmt 4703 61867 and Securities Services business of Citigroup.’’ The Applicant requests the deletion of the condition’s reference to the Markets and Securities Services Business of Citigroup. In the PTE 2016–14 Comment letter, the Applicant stated that such revision is necessary in order to avoid disruption to affected plans and IRAs. The Department concurs with this comment, and has revised the condition to state that, ‘‘[t]he Policies must require, and must be reasonably designed to ensure that: (i) The asset management decisions of the Citigroup Affiliated QPAM are conducted independently of the corporate, management, and business activities of Citigroup.’’ Section I(h)(1)(ii) of the proposed fiveyear exemption provides that the Policies must be reasonably designed to ensure that: ‘‘(ii) The Citigroup Affiliated QPAM fully complies with ERISA’s fiduciary duties, and with ERISA and the Code’s prohibited transaction provisions, and does not knowingly participate in any violation of these duties and provisions with respect to ERISA-covered plans and IRAs.’’ The Department has determined to revise Section I(h)(1)(ii) to clarify this exemption’s expectations regarding the substance of the Policies. In this regard, the Department has added the term, ‘‘as applicable with respect to each Covered Plan,’’ following the phrase, ‘‘ERISA’s fiduciary duties, and with ERISA and the Code’s prohibited transaction provisions.’’ Section I(h)(1)(iv) of the proposed five-year exemption provides that the Policies must be reasonably designed to ensure that: ‘‘(iv) Any filings or statements made by the Citigroup Affiliated QPAM to regulators, including, but not limited to, the Department, the Department of the Treasury, the Department of Justice, and the Pension Benefit Guaranty Corporation, on behalf of ERISAcovered plans or IRAs, are materially accurate and complete, to the best of such QPAM’s knowledge at that time.’’ The Department has determined to revise Section I(h)(1)(iv) to better coordinate with the other conditions of this exemption. In this regard, the Department has revised the condition to read, ‘‘. . . . on behalf of or in relation to Covered Plans. . . .’’ Section I(h)(1)(v) of the proposed fiveyear exemption provides that the Policies must be reasonably designed to ensure that: ‘‘(v) The Citigroup Affiliated QPAM does not make material misrepresentations or omit material information in its communications with E:\FR\FM\29DEN2.SGM 29DEN2 61868 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices such regulators with respect to ERISAcovered plans or IRAs, or make material misrepresentations or omit material information in its communications with ERISA-covered plans and IRA clients.’’ The Department has revised Section I(h)(1)(v) in the same manner as it revised Section I(h)(1)(iv). The Department has also revised Section I(h)(1)(v) by adding the following language to the beginning of the section: ‘‘To the best of the Citigroup Affiliated QPAM’s knowledge at the time. . . .’’ ethrower on DSK3G9T082PROD with NOTICES Incorporating the Training into the Policies—Section I(h)(2)(i) Section I(h)(2)(i) of the proposed fiveyear exemption provides, ‘‘. . . The Training must: (i) 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 five-year exemption (including any loss of exemptive relief provided herein), and prompt reporting of wrongdoing.’’ The Department has revised Section I(h)(2)(i) by removing the requirement that the Training must be set forth in the Policies. As revised, Section I(h)(2)(i) provides that the Training must, ‘‘(i) At a minimum, cover the Policies, ERISA and Code compliance (including applicable fiduciary duties and the prohibited transaction provisions), ethical conduct, the consequences for not complying with the conditions of this exemption (including any loss of exemptive relief provided herein), and prompt reporting of wrongdoing.’’ Training by Independent Professional— Section I(h)(2)(ii) Section I(h)(2)(ii) of the proposed fiveyear exemption provides that the Training must, ‘‘(ii) Be conducted by an independent professional who has been prudently selected and who has appropriate technical and training and proficiency with ERISA and the Code.’’ The Applicant requests that the requirement that the professional be ‘‘independent’’ be omitted, on the basis that the ‘‘independence’’ of the trainer will not enhance the quality or effectiveness of the training, and may in fact detract from it. In this regard, the Applicant states that the training will be monitored by the Compliance Officer, subject to annual review by the Compliance Officer (the Annual Review), and audited by the independent auditor. The Applicant states that a professional trainer who is familiar with the Applicant’s operations, culture, and management is VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 prevent the sort of compliance failures that led to the Conviction. The Department views the audit requirement as an integral component of the exemption, without which the Department would be unable to make its finding that the exemption is protective of Covered Plans and their participants, beneficiaries, and beneficial owners, as applicable. This exemption’s conditions are based, in part, on the Department’s assessment of the seriousness and duration of the misconduct that resulted in the violation of Section I(g) of PTE 84–14, as well as the apparent inadequacy of control and oversight mechanisms at Citigroup to prevent the misconduct. The Department, however, recognizes that, notwithstanding Citigroup’s oversight failures, only a small number of individuals at Citigroup directly engaged in the misconduct at issue. Thus, the United States District Court for the District of Connecticut stated, in connection with the sentencing of Citicorp, that: ‘‘the conduct at issue here was engaged in by a very small number of individuals,’’ Audit Requirement—Section I(i). and that, ‘‘we do not have banks who appear to have condoned conduct at any Section I(i)(1) of the proposed fivehigh-ranking level.’’ 39 year exemption provides that, ‘‘(i)(1) Accordingly, the Department has Each Citigroup Affiliated QPAM submits determined to change the audit interval to an audit conducted annually by an under this exemption from annual to independent auditor, who has been biennial. Section I(i)(1) of the prudently selected and who has exemption, therefore, now requires that appropriate technical training and proficiency with ERISA and the Code, to each Citigroup Affiliated QPAM submit ‘‘to an audit conducted every two years evaluate the adequacy of, and the Citigroup Affiliated QPAM’s compliance by an independent auditor.’’ Each audit must cover the preceding consecutive with, the Policies and Training twelve (12) month period. The first described herein.’’ audit must cover the period from July As stated above, the Applicant 10, 2018 through July 9, 2019, and must requests that the audit requirement be be completed by January 9, 2020. The deleted from the exemption in its second audit must cover the period from entirety. In support of its request, the July 10, 2020 through July 9, 2021, and Applicant states that the audit must be completed by January 9, 2022. requirement is burdensome, costly, and In the event that the Exemption Period redundant. The Applicant also states is extended or a new exemption is that it has comprehensive compliance and internal audit departments, and that granted, the third audit would cover the period from July 10, 2022 through July these departments should be 9, 2023, and would be completed by responsible for carrying out the audit January 9, 2024, unless the Department requirements under this exemption. The Department declines to delete the chose to alter the audit requirement in the new or extended exemption.40 audit requirement in its entirety. A recurring, independent, and prudently39 See TRANSCRIPT of Proceedings: as to conducted audit of the Citigroup Citicorp (January 5, 2017 at pages 29–30). Affiliated QPAMs is critical to ensuring 40 The third audit referenced above would not the QPAMs’ compliance with the have to be completed until after the Exemption Policies and Training mandated by this Period expires. If the Department ultimately decides to grant relief for an additional period, it could exemption, and the adequacy of the decide to alter the terms of the exemption, Policies and Training. The required including the audit conditions (and the timing of discipline of regular audits underpins the audit requirements). Nevertheless, the the Department’s finding that the Applicant should anticipate that the Department will insist on strict compliance with the audit terms exemption is protective of Covered and schedule set forth above. As it considers any Plans, their participants, beneficiaries, new exemption application, the Department may and beneficial owners, as applicable. also contact the auditor for any information relevant Strong independent audits should help to its determination. less likely to be independent, but is more likely to be effective in its role. The Applicant also states that the compliance and audit functions mandated under this exemption will provide adequate safeguards that are sufficient to address any concern arising from a lack of independence on the part of the professional trainer. In sum, the Applicant requests that it be permitted to implement the required training within the context of its own existing training regime. Although the Department disagrees with the Applicant’s assertion that hiring a prudently-selected, independent professional may in fact detract from the quality and effectiveness of the training required under this exemption, the Department is persuaded that Citigroup personnel who are prudently-selected and have appropriate technical training and proficiency with ERISA and the Code may conduct the training. The Department has revised the condition accordingly. PO 00000 Frm 00054 Fmt 4701 Sfmt 4703 E:\FR\FM\29DEN2.SGM 29DEN2 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices ethrower on DSK3G9T082PROD with NOTICES The Departments notes that if the audit uncovers material deficiencies with Citigroup’s compliance with this exemption, then the Applicant should consider conducting an additional audit after making corrections to ensure that it remains in compliance with the exemption. In any event, the Department emphasizes that it retains the right to conduct its own investigation of compliance based on any such indicators of problems. The Department declines to revise Section I(i) in a manner that would permit the Applicant’s Internal Audit Department to carry out this exemption’s required audit functions. Permitting the Applicant’s internal audit department to carry out this exemption’s required audit functions would be insufficiently protective of Covered Plans. Auditor independence is essential to this exemption, as it allows for an impartial analysis of the Citigroup Affiliated QPAMs. The independence of the auditor is the cornerstone of the integrity of the audit process and is of primary importance to avoid conflicts of interest and any inappropriate influence on the auditor’s findings. The fundamental importance of auditor independence to the integrity of the audit process is well established. For example, the United States Securities and Exchange Commission (SEC) promulgated regulations at 17 CFR 210.2–01 to ensure that auditors are independent of their clients, and under 17 CFR 240.10A–2, it is unlawful for an auditor not to be independent in certain circumstances. Likewise, the Public Accounting Oversight Board’s (PCAOB) Rule 3520 states that a public accounting firm and its associated persons must be independent of the firm’s audit clients. The Association of Independent Certified Public Accountants’ (AICPA) Code of Professional Conduct, Objectivity and Independence Principle (AICPA, Professional Standards, ET section 0.300.050.01) requires members working on an audit or attest engagement to be independent, in fact and appearance. Moreover, ERISA section 103(a)(3)(A) requires an accountant hired by an employee benefit plan to examine the plan’s financial statements to be independent. Entities Subject to Audit—Section I(i) Section I(i)(1) of the proposed fiveyear exemption provides, ‘‘(i)(1) Each Citigroup Affiliated QPAM submits to an audit conducted annually by an independent auditor. . . .’’ The Applicant requests that only the particular Citigroup Affiliated QPAMs and Citigroup Related QPAMs actually VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 relying upon PTE 84–14 and this exemption when providing services to, or engaging in transactions as an agent for, their clients, should be subject to the audit requirement under this exemption, and not every entity within the Citigroup-affiliated group that could be eligible to be a ‘‘qualified professional asset manager,’’ as defined in PTE 84–14. The Applicant also requests that Section I(i)(1) be revised to state that the Citigroup entities subject to the audit requirement are Citigroup Affiliated QPAM’s, ‘‘which the Applicant has identified in a certificate signed by the officer who will review and certify the Audit Report (as defined in Section I(i)(5)) pursuant to Section I(i)(8).’’ In support of its request, the Applicant states that the purpose of the independent audit is to ensure that Citigroup entities relying upon PTE 84– 14 are in compliance with the conditions of PTE 84–14 and the conditions of this exemption. The Applicant also states that it would identify the relevant entities to the independent auditor in a certificate signed by the compliance officer who will review the Audit Report. The Department has determined to revise Section I(i)(1) in the manner requested by the Applicant. The Department acknowledges that the independent auditor will need to be provided with the identities of the Citigroup Affiliated QPAMs to be audited and that the Applicant is best positioned to provide such information. The Department notes that Section I(i) requires the audit of each Citigroup entity that relies upon QPAM status, or expressly represents to ERISA-covered plan or IRA clients that it qualifies as a QPAM. Auditor Information Access—Section I(i)(2) Section I(i)(2) of the proposed fiveyear exemption provides, ‘‘(i)(2) To the extent necessary for the auditor, in its sole opinion, to complete its audit and comply with the conditions for relief described herein, and as permitted by law, each Citigroup Affiliated QPAM and, if applicable, Citigroup, will grant the auditor unconditional access to its business, including, but not limited to: its computer systems; business records; transactional data; workplace locations; training materials; and personnel.’’ The Applicant requests that the phrase ‘‘as permitted by law’’ be clarified by the addition of the following proviso: ‘‘provided, that the auditor shall not have access to any privileged information or confidential supervisory information.’’ The Applicant states that certain privileged or confidential PO 00000 Frm 00055 Fmt 4701 Sfmt 4703 61869 supervisory information which would be ‘‘permitted by law’’ to be shared with the auditor could result in the loss of the attorney-client or other privilege, or regulatory interest in maintaining confidentiality. The Applicant states that the purposes of the independent audit can be fully accomplished without requiring the Applicant to bear such costs. The Applicant also states that relevant privileges, and in particular, the attorney-client privilege, are based on important policy interests that routinely are thought to outweigh other critically important legal and social interests. In the Department’s view, to ensure a thorough and robust audit, the independent auditor must be granted access to information it deems necessary to make sound conclusions. The auditor’s access to such information must be within the scope of the audit engagement and denied only to the extent that such disclosure is not permitted by state or federal statute. Designating specific restrictions on information accessibility may hinder the auditor’s ability to perform the procedures necessary to make informed conclusions, thus undermining the effectiveness of the audit. The auditor’s access to such information, however, is limited to information relevant to the auditor’s objectives as specified by the terms of this exemption and to the extent disclosure is not prevented by state or federal statute or involves communications subject to attorney client privilege. In this regard, the Department has modified Section I(i)(2) accordingly. Audit Transaction Sampling—Section I(i)(4) Section I(i)(4) of the proposed fiveyear exemption provides, ‘‘(4) The auditor’s engagement must specifically require the auditor to test each Citigroup Affiliated QPAM’s operational compliance with the Policies and Training. In this regard, the auditor must test a sample of each QPAM’s transactions involving ERISA-covered plans and IRAs sufficient in size and nature to afford the auditor a reasonable basis to determine the operational compliance with the Policies and Training.’’ The Applicant requests that the Department clarify that audit ‘‘samples’’ pursuant to this condition need only apply to transactions undertaken in reliance on PTE 84–14. The Applicant states that the purpose of the independent audit is to confirm compliance with the conditions required under the exemption and permit the Applicant to continue to E:\FR\FM\29DEN2.SGM 29DEN2 61870 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices ethrower on DSK3G9T082PROD with NOTICES utilize PTE 84–14 on behalf of Covered Plans. The Department has revised this condition for consistency with other conditions of this exemption which are tailored to the Department’s interest in protecting Covered Plans. Therefore, the condition now applies only to Covered Plans. The Department additionally notes that Section I(i)(4) does not specify the number of transactions that the auditor must test, but rather requires, for each QPAM, that the auditor test a sample of each such QPAM’s transactions involving Covered Plans, ‘‘sufficient in size and nature to afford the auditor a reasonable basis to determine operational compliance with the Policies and Training.’’ Audit Report—Section I(i)(5) Section I(i)(5) of the proposed fiveyear exemption provides that, ‘‘[f]or each audit, on or before the end of the relevant period described in Section I(i)(1) for completing the audit, the auditor must issue a written report (the Audit Report) to Citigroup and the Citigroup Affiliated QPAM to which the audit applies that describes the procedures performed by the auditor during the course of its examination. The Audit Report must include the auditor’s specific determinations regarding: (i) The adequacy of the Citigroup Affiliated QPAM’s Policies and Training; the Citigroup Affiliated QPAM’s compliance with the Policies and Training; the need, if any, to strengthen such Policies and Training; and any instance of the respective Citigroup Affiliated QPAM’s noncompliance with the written Policies and Training described in Section I(h) above. 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 Citigroup Affiliated QPAM must be promptly addressed by such Citigroup Affiliated QPAM, and any action taken by such Citigroup Affiliated QPAM to address such recommendations must be included in an addendum to the Audit Report (which addendum is completed prior to the certification described in Section I(i)(7) below). Any determination by the auditor that the respective Citigroup Affiliated QPAM has implemented, maintained, and followed sufficient Policies and Training must not be based solely or in substantial part on an absence of evidence indicating noncompliance. In this last regard, any finding that the Citigroup Affiliated QPAM has VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 complied with the requirements under this subsection must be based on evidence that demonstrates the Citigroup Affiliated QPAM has actually implemented, maintained, and followed the Policies and Training required by this five-year exemption. Furthermore, the auditor must not solely rely on the Annual Report created by the compliance officer (the Compliance Officer) as described in Section I(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 I(i)(3) and (4) above; and (ii) The adequacy of the Annual Review described in Section I(m) and the resources provided to the Compliance Officer in connection with such Annual Review.’’ To improve consistency between the audit conditions of this exemption, the Department has modified Section I(i)(5) to clarify that the auditor may issue one consolidated Audit Report covering all the Citigroup QPAMS for the period of time being audited. The Department also acknowledges that the Citigroup Affiliated QPAMs’ efforts to address the auditor’s recommendations regarding any inadequacy in the Policies and Training identified by the auditor may take longer to implement than the time limits mandated by the proposed exemption. Accordingly, the Department is modifying Section I(i)(5)(i) to reflect the possibility that the Citigroup Affiliated QPAMs’ efforts to address the auditor’s recommendations regarding any inadequacy in the Policies and Training may not be completed by the submission date of the Audit Report and may involve a written plan to address such items. However, any noncompliance identified by the auditor must be promptly addressed. The revised Section also requires that if such a written plan of action to address the auditor’s recommendation as to the adequacy of the Polices and Training is not completed by the submission of the Audit Report, the following period’s Audit Report must state whether the plan was satisfactorily completed. Additionally, the Department has modified the final sentence in Section I(i)(5)(i) to more clearly express the Department’s intent that the auditor must not rely solely on the work of the Compliance Officer and the Compliance Officer’s Annual Report in formulating its conclusions or findings. The auditor must perform its own independent testing to formulate its conclusions. This exemption does not prohibit the auditor from considering the Compliance Officer’s Annual Report in carrying out its audit PO 00000 Frm 00056 Fmt 4701 Sfmt 4703 function, including its formulation of an audit plan. This exemption, however, does prohibit the auditor from reaching conclusions that are exclusively based upon the contents of the Compliance Officer’s Annual Report. Finally, while an independent assessment by the auditor of the adequacy of the Annual Review is essential to providing the Department with the assurance that the Applicant and the Citigroup QPAMs have given these matters the utmost priority and have taken the necessary actions to comply with the exemption, the Department has determined that the auditor should not be responsible for opining on the adequacy of the resources allocated to the Compliance Officer and has modified Section I(i)(5)(ii) accordingly. If, however, the auditor observes compliance issues related to the Compliance Officer or available resources, it would be appropriate for the auditor to opine on those problems. Certification of Audit Report—Section I(i)(7)–(8) Section I(i)(7) of the proposed fiveyear exemption provides that, ‘‘(7) With respect to each Audit Report, the General Counsel, or one of the three most senior executive officers of the Citigroup Affiliated QPAM to which the Audit Report applies, must certify in writing, under penalty of perjury, that the officer has reviewed the Audit Report and this exemption; addressed, corrected, or remedied any inadequacy identified in the Audit Report; and determined that the Policies and Training in effect at the time of signing are adequate to ensure compliance with the conditions of this proposed five-year exemption, and with the applicable provisions of ERISA and the Code.’’ Section I(i)(8) of the proposed fiveyear exemption provides, ‘‘(i)(8) The Risk Committee of Citigroup’s Board of Directors is 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 Citigroup must review the Audit Report for each Citigroup Affiliated QPAM and must certify in writing, under penalty of perjury, that such officer has reviewed each Audit Report.’’ With respect to Section I(i)(7), the Applicant requests clarification that the certifying official who must ‘‘certify in writing, under penalty of perjury, that the officer has reviewed the Audit Report and this exemption. . . .’’ should be the general counsel or one of the three most senior executive officers of the Citigroup Affiliated QPAM itself E:\FR\FM\29DEN2.SGM 29DEN2 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices (and not of the ultimate parent of the Citigroup-affiliated corporate group, Citigroup Inc.). With respect to Section I(i)(8), the Applicant requests that, ‘‘a senior executive officer with a direct reporting line to the highest ranking legal compliance officer of Citigroup,’’ be revised to, ‘‘a senior executive officer of Citigroup or one of its affiliates who reports directly to, or reports to another executive who reports directly to, the highest ranking compliance officer of Citigroup. . . .’’ The Department agrees that the obligation under Section I(i)(7) to review the Audit Report and identify and remedy deficiencies may be carried out by the general counsel or one of the three most senior executive officers of the Citigroup Affiliated QPAM itself. The Department also agrees that the obligation under Section I(i)(8) to review the Audit Report may be carried out by a senior executive officer of Citigroup or one of its affiliates who reports directly to, or reports to another executive who reports directly to, the highest ranking compliance officer of Citigroup. The Department has revised Sections I(i)(7) and (8) accordingly. Additionally, to coordinate with the revisions applied to Section I(i)(5), as discussed above, the Department has revised Section I(i)(7) to acknowledge that the Applicant’s efforts to address the auditor’s recommendations regarding inadequacies in the Policies and Training may take longer to implement than the required timeframe for submission of the certified Audit Report. In this regard, the Department did not intend to limit the Applicant’s ability to implement corrective measures by requiring that such efforts be completed prior to the submission of the Audit Report. Therefore, the Department has modified Section I(i)(7) to reflect that the senior executive officer may certify that a written plan to address the inadequacies regarding the Policies and Training identified in the auditor’s report is in place. ethrower on DSK3G9T082PROD with NOTICES Availability of the Audit Report— Section I(i)(9) Section I(i)(9) of the proposed exemption provides in part, ‘‘. . . each Citigroup Affiliated QPAM must make its Audit Report unconditionally available for examination by any duly authorized employee or representative of the Department, other relevant regulators, and any fiduciary of an ERISA-covered plan or IRA, the assets of which are managed by such Citigroup Affiliated QPAM in reliance of PTE 84– 14.’’ VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 Throughout this exemption, the Department has discussed its interest in ensuring that the conditions included herein broadly protect ERISA-covered plans and IRAs that enter into an asset management agreement with a Citigroup Affiliated QPAM in reliance on such QPAM’s qualification under PTE 84–14. However, the Department recognizes that, under certain circumstances, extending the Applicant’s disclosure obligations beyond the plan and IRA clients that this exemption is designed to protect does not contribute to this exemption’s intended purpose. With regard to Section I(i)(9), the Department has adopted revisions which require the Citigroup Affiliated QPAMs to make the Audit Report available to any fiduciary of a Covered Plan. Accordingly, the Department has revised this condition by replacing the phrase ‘‘an ERISAcovered plan or IRA, the assets of which are managed by such Citigroup Affiliated QPAM’’ with the term ‘‘Covered Plan’’ (as defined in Section II(b)). Lastly, the Department has revised Section I(i)(9) to require that access to the Audit Report need only be provided upon request and such access can be electronic. The Department notes that the Audit Report, in any event, will be incorporated into the public record attributable to this exemption, under Exemption Application Number D– 11909, and, therefore, independently accessible by members of the public. Engagement Agreements—Section I(i)(10) Section I(i)(10) of the proposed exemption provides that ‘‘[e]ach Citigroup Affiliated QPAM and the auditor must submit to OED: (A) any engagement agreement(s) entered into pursuant to the engagement of the auditor under this exemption; and (B) any engagement agreement entered into with any other entity retained in connection with such QPAM’s compliance with the Training or Policies conditions of this five-year exemption, no later than six (6) months after the Conviction Date (and one month after the execution of any agreement thereafter).’’ In coordination with the Department’s modification of Section I(h)(2)(ii), which permits prudently-selected Citigroup personnel to conduct the training, the Department has determined to remove the Section I(i)(10)(B) requirement for Citigroup Affiliated QPAMs and the auditor to provide the Department with engagement agreements entered into with entities retained in connection with the Training or Policies conditions. Furthermore, to remove any confusion and uncertainty regarding the timing of PO 00000 Frm 00057 Fmt 4701 Sfmt 4703 61871 the submission of the auditor’s engagement agreement, the Department has modified Section I(i)(10) to require that the auditor’s engagement agreement be submitted to the Office of Exemption Determinations no later than two (2) months after the engagement agreement is entered into by the Applicant and the independent auditor. Audit Workpapers—Section I(i)(11) Section I(i)(10) of the proposed exemption requires ‘‘[t]he auditor must provide OED, upon request, all of the workpapers created and utilized in the course of the audit, including, but not limited to: The audit plan; audit testing; identification of any instance of noncompliance by the relevant Citigroup Affiliated QPAM; and an explanation of any corrective or remedial action taken by the applicable Citigroup Affiliated QPAM.’’ The Department acknowledges that certain information contained in the audit workpapers may be confidential and proprietary, and that the inclusion of such information in the public file may create avoidable disclosure issues. The Department has modified Section I(i)(11) to remove the requirement that the auditor provide the workpapers to OED,41 and instead require that the auditor provide access to the workpapers for the Department’s review and inspection. Substitution of the Auditor—Section I(i)(12) Section I(i)(12) of the proposed exemption provides ‘‘Citigroup must notify the Department at least thirty (30) days prior to any substitution of an auditor, except that no such replacement will meet the requirements of this paragraph unless and until Citigroup demonstrates to the Department’s satisfaction that such new auditor is independent of Citigroup, experienced in the matters that are the subject of the exemption, and capable of making the determinations required of this exemption.’’ The Department has revised this condition for consistency with its interest in protecting Covered Plans. As revised, Section I(i)(12) now requires that Citigroup, no later than two (2) months following the engagement of a replacement auditor, must notify the Department of the auditor substitution and the reason(s) for the substitution, including any material disputes between the terminated auditor and Citigroup. The Department has also 41 OED is the Office of Exemption Determinations within the Employee Benefits Security Administration agency of the United States Department of Labor. E:\FR\FM\29DEN2.SGM 29DEN2 61872 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices revised Section I(i)(12) to remove the requirement for Citigroup to demonstrate the independence and qualifications of the auditor. Citigroup’s fiduciary obligations with respect to the selection of the auditor, as well as the significant role a credible selection plays in reducing the need for more extensive oversight by the Department, should be sufficient to safeguard the selection process. ethrower on DSK3G9T082PROD with NOTICES Contractual Commitments to Covered Plans—Section I(j) Section I(j) of the proposed five-year exemption provides, ‘‘(j) Effective as of the effective date of this five-year exemption, with respect to any arrangement, agreement, or contract between a Citigroup Affiliated QPAM and an ERISA-covered plan or IRA for which a Citigroup Affiliated QPAM provides asset management or other discretionary fiduciary services, each Citigroup Affiliated QPAM agrees and warrants: (1) To comply with ERISA and the Code, as applicable with respect to such ERISA-covered plan or IRA; to refrain from engaging in prohibited transactions that are not otherwise exempt (and to promptly correct any inadvertent prohibited transactions); and to comply with the standards of prudence and loyalty set forth in section 404 of ERISA, as applicable, with respect to each such ERISA-covered plan and IRA; (2) To indemnify and hold harmless the ERISA-covered plan or IRA for any damages resulting from a Citigroup Affiliated QPAM’s violation of applicable laws, a Citigroup Affiliated QPAM’s breach of contract, or any claim brought in connection with the failure of such Citigroup Affiliated 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; (3) Not to require (or otherwise cause) the ERISA-covered plan or IRA to waive, limit, or qualify the liability of the Citigroup Affiliated QPAM for violating ERISA or the Code or engaging in prohibited transactions; (4) Not to require the ERISA-covered plan or IRA (or sponsor of such ERISAcovered plan or beneficial owner of such IRA) to indemnify the Citigroup Affiliated QPAM for violating ERISA or engaging in prohibited transactions, except for violations or prohibited transactions caused by an error, misrepresentation, or misconduct of a plan fiduciary or other party hired by the plan fiduciary who is independent of Citigroup, and its affiliates; VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 (5) Not to restrict the ability of such ERISA-covered plan or IRA to terminate or withdraw from its arrangement with the Citigroup Affiliated QPAM (including 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 as a result of an actual lack of liquidity of the underlying assets, provided that such restrictions are applied consistently and in like manner to all such investors; (6) Not to impose any fees, penalties, or charges for such termination or withdrawal with the exception of reasonable fees, appropriately disclosed in advance, that are specifically designed to prevent generally recognized abusive investment practices or specifically designed to ensure equitable treatment of all investors in a pooled fund in the event such withdrawal or termination may have adverse consequences for all other investors, provided that such fees are applied consistently and in like manner to all such investors; (7) Not to include exculpatory provisions disclaiming or otherwise limiting liability of the Citigroup Affiliated QPAM for a violation of such agreement’s terms, except for liability caused by an error, misrepresentation, or misconduct of a plan fiduciary or other party hired by the plan fiduciary which is independent of Citigroup, and its affiliates; and (8) Within four (4) months of the date of the Conviction, each Citigroup Affiliated QPAM must provide a notice of its obligations under this Section I(j) to each ERISA-covered plan and IRA for which a Citigroup Affiliated QPAM provides asset management or other discretionary fiduciary services. For all other prospective ERISA-covered plan and IRA clients for which a Citigroup Affiliated QPAM provides asset management or other discretionary services, the Citigroup Affiliated QPAM will agree in writing to its obligations under this Section I(j) in an updated investment management agreement between the Citigroup Affiliated QPAM and such clients or other written contractual agreement.’’ The Applicant states that the creation of new contractual rights as contemplated under Section I(j) is inappropriate and unnecessary for the protection of ERISA-covered plan and PO 00000 Frm 00058 Fmt 4701 Sfmt 4703 IRA clients. The Applicant states that Section (j) would require the creation of new contractual commitments in favor of ERISA-covered Plan and IRA clients that would be substantially similar to the contractual commitments contemplated by the Best Interest Contract Exemption (the ‘‘BIC Exemption’’) published in the Federal Register on April 18, 2016. The Applicant states that the proposed extension of these BIC Exemption provisions to this exemption is inappropriate, because the BIC Exemption is intended to address circumstances in which a fiduciary may have a conflict of interest, while this exemption would apply only in contexts in which no such conflict exists. The Applicant further states that, under the circumstances, it is appropriate at a minimum for Section I(j) of the exemption to be revised to provide that in no circumstance shall the contractual commitments required therein extend beyond the contractual commitments required to be made to a fiduciary seeking to rely on the BIC Exemption, if any, as the BIC Exemption is in effect from time to time. The Applicant also requests that the requirements of Sect“on I(j) be limited to services that are rendered to Plan clients in reliance on PTE 84–14. Accordingly, the Applicant requests that Sect“on I(j) should be clarified by adding the phrase, ‘‘in reliance on PTE 84–14,’’ immediately following the phrase, ‘‘asset management or other discretionary fiduciary services,’’ in the leading paragraph and in two other places in Section I(j)(8). The Applicant states that the effect of the Exemption is to permit the Applicant to continue to use PTE 84–14 and that imposing conditions relating to conduct that is not connected to the relief being provided exceeds the statutory mandate of Section 408(a). The Department may grant an exemption under Section 408(a) of ERISA or Section 4975(c)(2)(C) of the Code only to the extent the Secretary finds, among other things, that the exemption is protective of the affected plan(s) or IRA(s). Notwithstanding the misconduct, which resulted in violation of Section I(g) of PTE 84–14, the Department has granted this exemption based, in significant part, upon the inclusion of Section I(j), which protects Covered Plans by, among other things, requiring the Citigroup Affiliated QPAMs to make express commitments to adhere to the requirements of ERISA and the Code, as applicable. As previously indicated, the Department has concluded that a culture of compliance, centered on E:\FR\FM\29DEN2.SGM 29DEN2 ethrower on DSK3G9T082PROD with NOTICES Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices adherence to basic standards of fair dealing as set forth in this exemption, gives the Department a compelling basis for making the required statutory findings that the exemption is in the interests of plan and IRA investors and protective of their rights. Absent such findings, the exemption would have been denied. The Department has required an express commitment to comply with the fiduciary standards and prohibited transaction rules only to the extent these provisions are ‘‘applicable’’ under ERISA and the Code. This section, as modified, should serve its salutary purposes of promoting a culture of compliance and enhancing the ability of plans and IRA customers to sever their relationships with minimal injury in the event of non-compliance. This conclusion is reinforced, as well, by the limited nature of the relief granted by this exemption, which generally does not extend to transactions that involve self-dealing. The Department notes that nothing in ERISA or the Code prevents the Department from conditioning relief on express contractual commitments to adhere to the requirements set out herein. The QPAMs remain free to disclaim reliance on the exemption and to avoid such express contractual commitments. To the extent, however, that they hold themselves out as fiduciary QPAMs, they should be prepared to make an express commitment to their customers to adhere to the requirements of this exemption. This commitment strengthens and reinforces the likelihood of compliance, and helps ensure that, in the event of noncompliance, customers, including IRA customers, will be insulated from injuries caused by non-compliance. These protections also ensure that customers will be able to extricate themselves from transactions that become prohibited as a result of the QPAMs’ misconduct, without fear of sustaining additional losses as a result of the QPAMs’ actions. In this connection, however, the Department emphasizes that the only claims available to the QPAMs’ customers pursuant to these contractual commitments are those separately provided by ERISA or other state and federal laws that are not preempted by ERISA. As before, private litigants have only those causes of action specifically authorized by laws that exist independent of this exemption. As explained above, ERISA-covered plans and IRAs routinely rely on QPAM status as a condition of entering into transactions with financial institutions, VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 even with respect to transactions that do not require adherence to PTE 84–14. In addition, it may not always be clear whether a Citigroup Affiliated QPAM intends to rely upon PTE 84–14 for any particular transaction. Accordingly, it is critical to ensure that protective conditions are in place to safeguard the interests of ERISA-covered plans and IRAs that are acting in reliance on the availability of this exemption, particularly with respect to plans and IRAs that may not have entered into a transaction in the first place, but for the Department’s grant of this exemption. The Department has revised this condition for consistency with its interest in protecting Covered Plans. The condition now applies to ERISAcovered plans and IRAs only when the Citigroup Affiliated QPAM relies on PTE 84–14 or has expressly represented that it qualifies as a QPAM or relies on the QPAM class exemption in its dealings with the ERISA-covered plan or IRA (i.e., a Covered Plan). To the extent a Citigroup QPAM would prefer not to be subject to these conditions, however, it may expressly disclaim reliance on QPAM status or PTE 84–14 in entering into its contract with the ERISA-covered plan or IRA. Contractual Commitments—Section I(j)(1) Section I(j)(1) of the proposed fiveyear exemption provides that each Citigroup Affiliated QPAM agrees and warrants: ‘‘(1) To comply with ERISA and the Code, as applicable with respect to such ERISA-covered plan or IRA; to refrain from engaging in prohibited transactions that are not otherwise exempt (and to promptly correct any inadvertent prohibited transactions); and to comply with the standards of prudence and loyalty set forth in section 404 of ERISA, as applicable, with respect to each such ERISA-covered plan and IRA.’’ The Applicant requests the phrase, ‘‘as applicable’’ be moved to follow the phrase, ‘‘. . . .with respect to such ERISA-covered plan or IRA.’’ The Department has determined to revise Section I(j)(1) by adding ‘‘to the extent that Section is applicable,’’ following the phrase, ‘‘with respect to each such ERISA-covered plan and IRA’’ at the end of the condition. As written, the text expressly focuses on provisions of ERISA and the Code only to the extent those provisions are applicable to the conduct at issue. Indemnity Provision—Section I(j)(2) Section I(j)(2) of the proposed fiveyear exemption provides that each Citigroup Affiliated QPAM agrees and PO 00000 Frm 00059 Fmt 4701 Sfmt 4703 61873 warrants: ‘‘(2) To indemnify and hold harmless the ERISA-covered plan or IRA for any damages resulting from a Citigroup Affiliated QPAM’s violation of applicable laws, a Citigroup Affiliated QPAM’s breach of contract, or any claim brought in connection with the failure of such Citigroup Affiliated 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.’’ The Applicant requests that Section I(j)(2) be revised to read: ‘‘To indemnify and hold harmless the ERISA-covered plan or IRA for any damages resulting from a violation of ERISA’s fiduciary duties and of ERISA and the Code’s prohibited transaction provisions, a breach of contract, or any claim arising out of the failure of such Citigroup Affiliated 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;’’ As explained above, the intended purpose of this exemption is to protect Covered Plans that entrust the Citigroup Affiliated QPAMs with the management of their retirement assets. To this end, the Department believes that the protective purpose of this exemption is furthered by Section I(j)(2). This condition ensures that, when a Covered Plan enters into an asset management agreement with a Citigroup Affiliated QPAM in reliance on the manager’s qualification as a QPAM, it may expect adherence to basic fiduciary norms and standards of fair dealing, notwithstanding the prior conviction. This condition also ensures that the Covered Plan will be able to disengage from that relationship without undue injury in the event that the terms of this exemption are violated. Accordingly, the Department has revised the applicability of this condition to more closely reflect this interest. In particular, the condition applies to Covered Plans. As indicated above, if the asset manager would prefer not to be subject to these provisions as exemption conditions, it may expressly disclaim reliance on QPAM status or PTE 84–14 in entering into its contract with an ERISA-covered plan or IRA (in that case, however, it could not rely on the exemption for relief). The Department has made certain further changes to this condition, which include: Replacing ‘‘applicable laws’’ with clarifying language that conforms to PTE 2016–14; and replacing ‘‘any damages’’ with ‘‘actual losses resulting directly from’’ certain acts or omissions of the Citigroup Affiliated QPAMs. Because I(j)(2) extends only to actual E:\FR\FM\29DEN2.SGM 29DEN2 61874 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices losses resulting directly from the actions of the Citigroup Affiliated QPAMs, it does not encompass losses solely caused by other parties, events, or acts of God. ethrower on DSK3G9T082PROD with NOTICES Contractual Commitments—Section I(j)(4) Section I(j)(4) of the proposed fiveyear exemption provides that each Citigroup Affiliated QPAM agrees and warrants: ‘‘(4) Not to require the ERISAcovered plan or IRA (or sponsor of such ERISA-covered plan or beneficial owner of such IRA) to indemnify the Citigroup Affiliated QPAM for violating ERISA or engaging in prohibited transactions, except for violations or prohibited transactions caused by an error, misrepresentation, or misconduct of a plan fiduciary or other party hired by the plan fiduciary who is independent of Citigroup, and its affiliates.’’ The Department has determined that Section I(j)(4), as proposed, is duplicative of the exemption’s prohibition on exculpatory clauses under Section I(j)(7). The Department therefore has deleted Section I(j)(4)and renumbered the subsequent subsections in Section I(j) accordingly. Contractual Commitments—Section I(j)(5) 42 Section I(j)(5) of the proposed fiveyear exemption provides that each Citigroup Affiliated QPAM agrees and warrants: ‘‘(5) Not to restrict the ability of such ERISA-covered plan or IRA to terminate or withdraw from its arrangement with the Citigroup Affiliated QPAM (including 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 as a result of an actual lack of liquidity of the underlying assets, provided that such restrictions are applied consistently and in like manner to all such investors.’’ The Applicant requests that I(j)(5) be revised by replacing, ‘‘including’’ with ‘‘with respect to,’’ and replacing, ‘‘as a result of an actual lack of liquidity of the underlying assets, provided that such restrictions are applied consistently and in like manner to all such investors;’’ with ‘‘in connection with any such arrangements involving investments in pooled funds subject to 42 The Department has renumbered this section as Section I(j)(4) in this final exemption. VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 ERISA entered into after the Conviction Date, the adverse consequences must relate to a lack of liquidity of the pooled fund’s underlying assets, valuation issues, or regulatory reasons that prevent the fund from immediately redeeming an ERISA-covered plan’s or IRA’s investment, and such restrictions are applicable to all such investors and effective no longer than reasonably necessary to avoid the adverse consequences.’’ The Department has modified this condition (renumbered in this exemption as Section I(j)(4)) to clarify the circumstances under which reasonable restrictions are necessary to protect the remaining investors in a pooled fund and to also clarify that, in any such event, the restrictions must be reasonable and last no longer than reasonably necessary to remedy the adverse consequences. The revised and renumber Section I(j)(4) provides, ’’Not to restrict the ability of such Covered Plan to terminate or withdraw from its arrangement with the Citigroup Affiliated QPAM with respect to any investment in a separately managed account or pooled fund subject to ERISA and managed by such QPAM, with the exception of reasonable restrictions, appropriately disclosed in advance, that are specifically designed to ensure equitable treatment of all investors in a pooled fund in the event such withdrawal or termination may have adverse consequences for all other investors. In connection with any such arrangements involving investments in pooled funds subject to ERISA entered into after the effective date of this exemption, the adverse consequences must relate to of a lack of liquidity of the underlying assets, valuation issues, or regulatory reasons that prevent the fund from promptly redeeming an ERISA-covered plan’s or IRA’s investment, and such restrictions must be applicable to all such investors and effective no longer than reasonably necessary to avoid the adverse consequences.’’ Limits on Liability—Section I(j)(7) Section I(j)(7) of the proposed fiveyear exemption provides that each Citigroup Affiliated QPAM agrees and warrants: ‘‘(j)(7) Not to include exculpatory provisions disclaiming or otherwise limiting liability of the Citigroup Affiliated QPAM for a violation of such agreement’s terms, except for liability caused by an error, misrepresentation, or misconduct of a plan fiduciary or other party hired by the plan fiduciary which is independent of Citigroup, and its affiliates.’’ PO 00000 Frm 00060 Fmt 4701 Sfmt 4703 The Department has modified Section I(j)(6) (formerly (j)(7)) to clarify that the prohibition on exculpatory provisions does not extend to losses that arise from an act or event not caused by Citigroup, and that nothing in this section alters the prohibition on exculpatory provisions set forth in ERISA Section 410. Notice and Updated Investment Management Agreement—Section I(j)(8) Section I(j)(8) of the proposed fiveyear exemption provides that, ‘‘(j)(8) Within four (4) months of the date of the Conviction, each Citigroup Affiliated QPAM must provide a notice of its obligations under this Section I(j) to each ERISA-covered plan and IRA for which a Citigroup Affiliated QPAM provides asset management or other discretionary fiduciary services. For all other prospective ERISA-covered plan and IRA clients for which a Citigroup Affiliated QPAM provides asset management or other discretionary services, the Citigroup Affiliated QPAM will agree in writing to its obligations under this Section I(j) in an updated investment management agreement between the Citigroup Affiliated QPAM and such clients or other written contractual agreement.’’ The Applicant requests that Section I(j)(8) be revised to extend the applicable notification period from 4 months to 6 months. The Applicant also requests that I(j)(8) be limited to ERISAcovered plans and IRAs for which a Citigroup Affiliated QPAM provides asset management or other discretionary fiduciary services ‘‘in reliance on PTE 84–14.’’ As noted above, the Department has an interest in protecting an ERISAcovered plan or IRA that enters into an asset management agreement with a Citigroup Affiliated QPAM in reliance on the manager’s qualification as a QPAM, regardless of whether the QPAM relies on the class exemption when managing such ERISA-covered plan’s or IRA’s assets. The Department has revised the applicability of this condition to more closely reflect this interest, and the condition now applies only to Covered Plans. The Department has also modified the condition so that a Citigroup Affiliated QPAM will not violate the condition solely because a Covered Plan refuses to sign an updated investment management agreement. In addition, the Department has revised Section I(j)(8) to provide that the Citigroup Affiliated QPAM must provide notice to each Covered Plan by July 9, 2018. E:\FR\FM\29DEN2.SGM 29DEN2 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices ethrower on DSK3G9T082PROD with NOTICES Notice to Covered Plan Clients—Section I(k)(1) 43 Section I(k)(1) of the proposed fiveyear exemption provides, in relevant part that, ‘‘Within fifteen (15) days of the publication of this proposed five-year exemption in the Federal Register, each Citigroup Affiliated QPAM will provide a notice of the proposed fiveyear exemption, along with a separate summary describing the facts that led to the Conviction (the Summary), which have 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,. . . . In the event that this proposed five-year exemption is granted, the Federal Register copy of the notice of final five-year exemption must be delivered to such clients within sixty (60) days of its publication in the Federal Register’’ The Applicant requests that Section I(k)(1) be revised to read, in relevant part, ‘‘Each Citigroup Affiliated QPAM has provided a notice of the proposed five-year exemption, along with a separate summary describing the facts that led to the Conviction (the Summary). . . . In addition, the Federal Register copy of the notice of final five-year exemption must be delivered to such clients within sixty (60) days of its publication in the Federal Register. . . .’’ The Department notes that the proposed exemption provides details of the facts and circumstances underlying the Conviction not found in the Summary or the final grant. One of the purposes of such a complete disclosure is to ensure that all interested parties are aware of, and attentive to, the complete facts and circumstances surrounding Citigroup’s application for exemption. Requiring the disclosure of the Summary, proposal, and grant provides the opportunity for all parties to have knowledge of these facts and circumstance. Notwithstanding this, the Department has modified the condition to clarify that disclosures under this condition may be provided electronically. Further, the notice requirement under this condition has been narrowed to ERISAcovered plans and IRAs that would benefit from this knowledge (i.e., Covered Plans). Notice to Non-Plan Clients—Section I(k)(2) Section I(k)(2) of the proposed fiveyear exemption provides, in relevant part that, ‘‘Each Citigroup Affiliated 43 The Department has renumbered this section as Section I(k) in this final exemption. VerDate Sep<11>2014 20:17 Dec 28, 2017 Jkt 244001 QPAM will provide a Federal Register copy of the proposed five-year exemption, a Federal Register copy of the final five-year exemption; the Summary; and the Statement to each: (A) Current Non-Plan Client within four (4) months of the effective date, if any, of a final five-year exemption; and (B) Future Non-Plan Client prior to, or contemporaneously with, the client’s receipt of a written asset management agreement from the Citigroup Affiliated QPAM.’’ Given the breadth of the notice requirements otherwise mandated by the exemption, and the decision to restrict such requirements to arrangements for which QPAM status plays an integral role (i.e., the QPAM represents or relies upon its QPAM status), the Department has determined to delete this provision. Compliance Officer—Section I(m) Section I(m)(1) of the proposed fiveyear exemption provides, ‘‘(m)(1) Citigroup designates a senior compliance officer (the Compliance Officer) who will be responsible for compliance with the Policies and Training requirements described herein. . . (i) The Compliance Officer must be a legal professional with 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 that is independent of Citigroup’s other business lines.’’ As stated above, the Applicant requests that the compliance officer requirement of Section I(m) be deleted from the exemption in its entirety. In support of its request, the Applicant states that this requirement is burdensome, costly, and redundant. The Applicant states that it has comprehensive compliance and internal audit departments that should be responsible for developing and implementing the necessary policies and procedures under this exemption. The Department declines to eliminate the compliance officer requirement under this exemption. Citigroup personnel engaged in serious misconduct that was caused, at least in part, by compliance and oversight failure. The Department’s determination to grant this exemption is based in part on the view that an internal compliance officer with responsibility for the Policies and Training mandated by this exemption will provide the level of oversight necessary to ensure that such Policies and Training are properly PO 00000 Frm 00061 Fmt 4701 Sfmt 4703 61875 developed and implemented throughout the term of this exemption. The Applicant also requests that Section I(m)(1) be clarified by deleting the word ‘‘legal’’ from the phrase ‘‘legal compliance’’ in clause (ii). In this regard, the Applicant states that the Citigroup’s compliance function is separate from its legal function. The Applicant also requests that Section I(m) be revised to clarify that the Compliance Officer will be a senior compliance officer of Citigroup Inc. or one of its affiliates, and that such senior compliance officer will be an officer who reports directly to, or reports to another compliance officer who reports directly to, Citigroup Inc.’s highest ranking compliance officer (whose title is currently Global Chief Compliance Officer of Citigroup Inc.). After consideration of the Applicant’s comment, the Department has revised Section I(m)(1) in the manner requested by the Applicant. Deferred Prosecution/Non-Prosecution Agreements—Section I(o) Section I(o) of the proposed five-year exemption provides, ‘‘(o) During the effective period of the five-year exemption, Citigroup: (1) Immediately discloses to the Department any Deferred Prosecution Agreement (a DPA) or a Non-Prosecution Agreement (an NPA) with the U.S. Department of Justice, entered into by Citigroup or any of its affiliates in connection with conduct described in Section I(g) of PTE 84–14 or section 411 of ERISA; and (2) Immediately provides the Department any information requested by the Department, as permitted by law, regarding the agreement and/or conduct and allegations that led to the agreement. The Department may, following its review of that information, require Citigroup or a party specified by the Department, to submit a new application for the continued availability of relief as a condition of continuing to rely on this exemption. If the Department denies the relief requested in that application, or does not grant such relief within twelve (12) months of the application, the relief described herein would be revoked as of the date of denial or as of the expiration of the twelve month period, whichever date is earlier.’’ The Applicant requests that Section I(o)(2) be revised to read substantially the same as Section I(l) of PTE–2016–14, subject to the following additional changes. The Applicant requests the replacement of the word ‘‘immediately’’ with ‘‘promptly’’ in subsections (1) and (2); the insertion of the word ‘‘reasonably’’ before the phrase E:\FR\FM\29DEN2.SGM 29DEN2 61876 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices ethrower on DSK3G9T082PROD with NOTICES ‘‘requested by the Department’’ in subsection (2); and the deletion of the final sentence of subsection (2), which reads ‘‘If the Department denies the relief requested in that application, or does not grant such relief within twelve (12) months of the application, the relief described herein would be revoked as of the date of denial or as of the expiration of the twelve month period, whichever date is earlier.’’ The Department in no way intended that this condition be read as providing for an automatic revocation of this exemption, and in light of the Applicant’s comments, has revised the condition accordingly. As revised, the condition requires that the Applicant notify the Department if and when it, or any of its affiliates enter into a DPA or NPA with the U.S. Department of Justice for conduct described in section I(g) of PTE 84–14 or ERISA section 411; and immediately provide, upon request by the Department, any information, as permitted by law, regarding the agreement and/or conduct and allegations that led to the agreement. The Department, however, retains the right to propose a withdrawal of the exemption pursuant to its procedures contained at 29 CFR 2570.50, should circumstances warrant such action. Right to Copies of Policies and Procedures—Section I(p) Section I(p) of the proposed five-year exemption provides that, ‘‘[e]ach Citigroup Affiliated QPAM, in its agreements with ERISA-covered plan and IRA clients, or in other written disclosures provided to ERISA-covered plan and IRA clients, within 60 days prior to the initial transaction upon which relief hereunder is relied, and then at least once annually, will clearly and prominently: Inform the ERISAcovered plan and IRA client that the client has the right to obtain copies of the QPAM’s written Policies adopted in accordance with the exemption.’’ Ensuring that ERISA covered-plan and IRA clients have a means by which to review and understand the Policies implemented in connection with this exemption is a vital protection that is fundamental to this exemption’s purpose. The Department has modified Section I(p) to provide that the Citigroup Affiliated QPAMs, at their election, may provide Covered Plans with a disclosure that accurately describes or summarizes key components of the Policies. As revised, Section I(p) does not require the Citigroup Affiliated QPAMs to provide the Policies in their entirety. The Department has also determined that such disclosure may be continuously VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 maintained on a website, provided that a website link to the summary of the written Policies is clearly and prominently disclosed to those Covered Plan clients to whom this section applies. The Department has also modified Section I(p) to require that the Citigroup Affiliated QPAMs provide notice regarding the information on the website within 60 days of the effective date of this exemption, and thereafter to the extent certain material changes are made to the Policies. New Definition of Citcorp In the PTE 2016–14 Comment Letter, the Applicant requested that the Department add a definition for the term ‘‘Citicorp’’ to read as: ‘‘The term ‘Citicorp’ means, a financial services holding company organized and existing under the laws of Delaware and does not include any subsidiaries or other affiliates.’’ After consideration of the Applicant’s comment, the Department has added a new Section II(e) to this exemption defining Citicorp in the manner requested by the Applicant. Summary of Facts and Representations The Applicant seeks certain clarifications to the Summary of Facts and Representations which the Department does not view as relevant to its determination whether to grant this exemption. Those requested clarifications may be found as part of the public record for Application No. D– 11909, in a letter to the Department, dated February 28, 2017. Letter From House Committee on Financial Services The Department also received a comment letter from certain members of Congress (the Members) regarding this exemption, as well as other QPAMrelated proposed one year exemptions. In the letter, the Members stated that certain conditions contained in these proposed exemptions are crucial to protecting the investments of our nation’s workers and retirees, referring to proposed conditions which require each bank to: (a) Indemnify and hold harmless ERISA-covered plans and IRAs for any damages resulting from the future misconduct of such bank; and (b) disclose to the Department any Deferred Prosecution Agreement or a NonProsecution Agreement with the U.S. Department of Justice. The Members also requested that the Department hold hearings in connection with the proposed exemptions. The Department acknowledges the Members’ concerns regarding the need for public discourse regarding proposed PO 00000 Frm 00062 Fmt 4701 Sfmt 4703 exemptions. To this end, the Department’s procedures regarding prohibited transaction exemption requests under ERISA (the Exemption Procedures) afford interested persons the opportunity to request a hearing. Specifically, section 2570.46(a) of the Exemption Procedures provides that, ‘‘[a]ny interested person who may be adversely affected by an exemption which the Department proposes to grant from the restrictions of section 406(b) of ERISA, section 4975(c)(1)(E) or (F) of the Code, or section 8477(c)(2) of FERSA may request a hearing before the Department within the period of time specified in the Federal Register notice of the proposed exemption.’’ The Exemption Procedures provide that ‘‘[t]he Department will grant a request for a hearing made in accordance with paragraph (a) of this section where a hearing is necessary to fully explore material factual issues identified by the person requesting the hearing.’’ The Exemption Procedures also provide that ‘‘[t]he Department may decline to hold a hearing where: (1) The request for the hearing does not meet the requirements of paragraph (a) of this section; (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.’’ 44 While the Members’ letter raises important policy issues, it does not appear to raise specific material factual issues. The Department previously explored a wide range of legal and policy issues regarding Section I(g) of the QPAM Exemption during a public hearing held on January 15, 2015 in connection with the Department’s proposed exemption involving Credit Suisse AG, and has determined that an additional hearing on these issues is not necessary. Comments From Interested Persons The Department also received comment letters from certain interested persons. With respect to each, the commenter sought a further explanation regarding the proposed exemption. After giving full consideration to the record, the Department has decided to grant the exemption, as described above. The complete application file (Application No. D–11909) is available for public inspection in the Public Disclosure Room of the Employee Benefits Security Administration, Room N–1515, U.S. Department of Labor, 200 44 29 CFR part 2570, published at 76 FR 66653, October 27, 2011. E:\FR\FM\29DEN2.SGM 29DEN2 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices Constitution Avenue NW, Washington, DC 20210. For a more complete statement of the facts and representations supporting the Department’s decision to grant this exemption, refer to the notice of proposed exemption published on November 21, 2016 at 81 FR 83416. Exemption ethrower on DSK3G9T082PROD with NOTICES Section I: Covered Transactions Certain entities with specified relationships to Citigroup (hereinafter, the Citigroup Affiliated QPAMs and the Citigroup Related QPAMs, as defined in Sections II(f) and II(g), respectively) will not be precluded from relying on the exemptive relief provided by Prohibited Transaction Class Exemption 84–14 (PTE 84–14 or the QPAM Exemption), notwithstanding the Conviction, as defined in Section II(a), during the Exemption Period,45 provided that the following conditions are satisfied: (a) Other than a single individual who worked for a non-fiduciary business within Citigroup’s Markets and Securities Services business, and who had no responsibility for, and exercised no authority in connection with, the management of plan assets, the Citigroup Affiliated QPAMs and the Citigroup Related QPAMs (including their officers, directors, agents other than Citicorp, and employees of such QPAMs who had responsibility for, or exercised authority in connection with the management of plan assets) did not know of, did not have reason to know of, or participate in the criminal conduct that is the subject of the Conviction. For purposes of this paragraph (a), ‘‘participate in’’ means the knowing approval of the misconduct underlying the Conviction; (b) Other than a single individual who worked for a non-fiduciary business within Citigroup’s Markets and Securities Services Business, and who had no responsibility for, and exercised no authority in connection with, the management of plan assets, the Citigroup Affiliated QPAMs and the Citigroup Related QPAMs (including their officers, directors, and agents other than Citicorp, and employees of such Citigroup QPAMs) did not receive direct compensation, or knowingly receive indirect compensation in connection 45 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 violation of the Sherman Antitrust Act, Title 15 United States Code, Section 1. VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 with the criminal conduct that is the subject of the Conviction; (c) The Citigroup Affiliated QPAMs will not employ or knowingly engage any of the individuals that participated in the criminal conduct that is the subject of the Conviction. For the purposes of this paragraph (c), ‘‘participated in’’ means the knowing approval of the misconduct underlying the Conviction; (d) At all times during the Exemption Period, no Citigroup Affiliated QPAM will use its authority or influence to direct an ‘‘investment fund’’ (as defined in Section VI(b) of PTE 84–14), that is subject to ERISA or the Code and managed by such Citigroup Affiliated QPAM in reliance on PTE 84–14, or with respect to which a Citigroup Affiliated QPAM has expressly represented to an ERISA-covered plan or IRA with assets invested in such ‘‘investment fund’’ that it qualifies as a QPAM or relies on PTE 84–14, to enter into any transaction with Citicorp, or to engage Citicorp 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 a Citigroup Affiliated QPAM or a Citigroup Related QPAM to satisfy Section I(g) of PTE 84– 14 arose solely from the Conviction; (f) A Citigroup Affiliated QPAM or a Citigroup Related QPAM did not exercise authority over the assets of any plan subject to Part 4 of Title I of ERISA (an ERISA-covered plan) or section 4975 of the Code (an IRA) in a manner that it knew or should have known would: Further the criminal conduct that is the subject of the Conviction; or cause the Citigroup Affiliated QPAM, the Citigroup Related QPAM, or their affiliates to directly or indirectly profit from the criminal conduct that is the subject of the Conviction; (g) Other than with respect to employee benefit plans maintained or sponsored for its own employees or the employees of an affiliate, Citicorp will not act as a fiduciary within the meaning of section 3(21)(A)(i) or (iii) of ERISA, or section 4975(e)(3)(A) and (C) of the Code, with respect to ERISAcovered plan and IRA assets; provided, however, that Citicorp will not be treated as violating the conditions of this exemption solely because it acted as an investment advice fiduciary within the meaning of section 3(21)(A)(ii) or section 4975(e)(3)(B) of the Code; (h)(1) By July 9, 2018, each Citigroup Affiliated QPAM must develop, PO 00000 Frm 00063 Fmt 4701 Sfmt 4703 61877 implement, maintain, and follow written policies and procedures (the Policies). The Policies must require, and must be reasonably designed to ensure that: (i) The asset management decisions of the Citigroup Affiliated QPAM are conducted independently of the corporate management and business activities of Citigroup; (ii) The Citigroup Affiliated 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 violation of these duties and provisions with respect to Covered Plans; (iii) The Citigroup Affiliated 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 Citigroup Affiliated QPAM to regulators, including, but not limited to, the Department, the Department of the Treasury, the Department of Justice, and the Pension Benefit Guaranty Corporation, on behalf of or in relation to Covered Plans, are materially accurate and complete, to the best of such QPAM’s knowledge at the time; (v) To the best of the Citigroup Affiliated QPAM’s knowledge at the time, the Citigroup Affiliated QPAM does not make material misrepresentations or omit material information in its communications with such regulators with respect to Covered Plans; (vi) The Citigroup Affiliated QPAM complies with the terms of this exemption; and (vii) Any violation of, or failure to comply with an item in subparagraphs (ii) through (vi), is corrected as soon as reasonably possible upon discovery, or as soon after the QPAM reasonably should have known of the noncompliance (whichever is earlier), and any such violation or compliance failure not so corrected is reported, upon the discovery of such failure to so correct, in writing, to the head of compliance and the General Counsel (or their functional equivalent) of the relevant line of business that engaged in the violation or failure, and the independent auditor responsible for reviewing compliance with the Policies. A Citigroup Affiliated QPAM will not be treated as having failed to develop, implement, maintain, or follow the Policies, provided that it corrects any instance of noncompliance as soon as reasonably possible upon discovery, or as soon as reasonably possible after the QPAM reasonably should have known E:\FR\FM\29DEN2.SGM 29DEN2 ethrower on DSK3G9T082PROD with NOTICES 61878 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices of the noncompliance (whichever is earlier), and provided that it adheres to the reporting requirements set forth in this subparagraph (vii); (2) By July 9, 2018, each Citigroup Affiliated QPAM must develop a program of training (the Training), to be conducted at least annually, for all relevant Citigroup Affiliated QPAM asset/portfolio management, trading, legal, compliance, and internal audit personnel. The first Training under this Final Exemption must be completed by all relevant Citigroup Affiliated QPAM personnel by July 9, 2019 (by the end of this 30-month period, asset/portfolio management, trading, legal, compliance, and internal audit personnel who were employed from the start to the end of the period must have been trained twice: The first time under PTE 2016– 15; and the second time under this exemption). The Training must: (i) At a minimum, cover the Policies, ERISA and Code compliance (including applicable fiduciary duties and the prohibited transaction provisions), ethical conduct, the consequences for not complying with the conditions of this exemption (including any loss of exemptive relief provided herein), and prompt reporting of wrongdoing; and (ii) Be conducted by a professional who has been prudently selected and who has appropriate technical training and proficiency with ERISA and the Code; (i)(1) Each Citigroup Affiliated QPAM, which the Applicant has identified in a certificate signed by the officer who will review and certify the Audit Report (as defined in Section I(i)(5)) pursuant to Section I(i)(8), submits to an audit conducted every two years by an independent auditor who has been prudently selected and who has appropriate technical training and proficiency with ERISA and the Code, to evaluate the adequacy of, and each Citigroup Affiliated QPAM’s compliance with, the Policies and Training 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 July 10, 2018 through July 9, 2019, and must be completed by January 9, 2020. The second audit must cover the period from July 10, 2020 through July 9, 2021, and must be completed by January 9, 2022. In the event that the Exemption Period is extended or a new exemption is granted, the third audit would cover the period from July 10, 2022 through July 9, 2023, and would have to be completed by January 9, 2024 (unless the Department chooses to alter the VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 biennial audit requirement in the new or extended exemption); (2) Within the scope of the audit and to the extent necessary for the auditor, in its sole opinion, to complete its audit and comply with the conditions for relief described herein, and only to the extent such disclosure is not prevented by state or federal statute, or involves communications subject to attorney client privilege, each Citigroup Affiliated QPAM and, if applicable, Citigroup, will grant the auditor unconditional access to its business, including, but not limited to: Its computer systems; business records; transactional data; workplace locations; training materials; and personnel. Such access is limited to information relevant to the auditor’s objectives as specified by the terms of this exemption; (3) The auditor’s engagement must specifically require the auditor to determine whether each Citigroup Affiliated 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 Citigroup Affiliated QPAM’s operational compliance with the Policies and Training. In this regard, the auditor must test, for each QPAM, a sample of such QPAM’s transactions involving Covered Plans, sufficient in size and nature to afford the auditor a reasonable basis to determine such QPAM’s operational compliance with the Policies and Training; (5) For each audit, on or before the end of the relevant period described in Section I(i)(1) for completing the audit, the auditor must issue a written report (the Audit Report) to Citigroup and the Citigroup Affiliated QPAM to which the audit applies that describes the procedures performed by the auditor during the course of its examination. The auditor, at its discretion, may issue a single consolidated Audit Report that covers all the Citigroup Affiliated QPAMs. The Audit Report must include the auditor’s specific determinations regarding: (i) The adequacy of each Citigroup Affiliated QPAM’s Policies and Training; each Citigroup Affiliated QPAM’s compliance with the Policies and Training; the need, if any, to strengthen such Policies and Training; and any instance of the respective Citigroup Affiliated QPAM’s noncompliance with the written Policies and Training described in Section I(h) above. The Citigroup Affiliated QPAM must properly address PO 00000 Frm 00064 Fmt 4701 Sfmt 4703 any noncompliance. The Citigroup Affiliate must 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 Citigroup Affiliated QPAM. Any action taken or the plan of action to be taken by the respective Citigroup Affiliated QPAM must be included in an addendum to the Audit Report (such addendum must be completed prior to the certification described in Section I(i)(7) below). In the event such a plan of action to address the auditor’s recommendation regarding the adequacy of the Policies and Training is not completed by the time of submission of the Audit Report, the following period’s Audit Report must state whether the plan was satisfactorily completed. Any determination by the auditor that the respective Citigroup Affiliated QPAM has implemented, maintained, and followed sufficient Policies and Training must not be based solely or in substantial part on an absence of evidence indicating noncompliance. In this last regard, any finding that a Citigroup Affiliated QPAM has complied with the requirements under this subsection must be based on evidence that the particular Citigroup Affiliated QPAM has actually implemented, maintained, and followed the Policies and Training required by this exemption. Furthermore, the auditor must not solely rely on the Annual Report created by the compliance officer (the Compliance Officer), as described in Section I(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 I(i)(3) and (4) above; and (ii) The adequacy of the most recent Annual Review described in Section I(m); (6) The auditor must notify the respective Citigroup Affiliated QPAM of any instance of noncompliance identified by the auditor within five (5) business days after such noncompliance is identified by the auditor, regardless of whether the audit has been completed as of that date; (7) With respect to each Audit Report, the General Counsel, or one of the three most senior executive officers of the Citigroup Affiliated QPAM to which the Audit Report applies, must certify in writing, under penalty of perjury, that the officer has reviewed the Audit Report and this exemption; that such Citigroup Affiliated QPAM has E:\FR\FM\29DEN2.SGM 29DEN2 ethrower on DSK3G9T082PROD with NOTICES Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices 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. Such 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; (8) The Risk Management Committee of Citigroup’s Board of Directors is provided a copy of each Audit Report; and a senior executive officer of Citigroup or one of its affiliates who reports directly to, or reports to another executive who reports directly to, the highest ranking compliance officer of Citigroup must review the Audit Report for each Citigroup Affiliated QPAM and must certify in writing, under penalty of perjury, that such officer has reviewed each Audit Report; (9) Each Citigroup Affiliated QPAM provides its certified Audit Report, by regular mail to: Office of Exemption Determinations (OED), 200 Constitution Avenue NW, Suite 400, Washington, DC 20210, or by private carrier to: 122 C Street NW, Suite 400, Washington, DC 20001–2109. This delivery must take place no later than thirty (30) days following completion of the Audit Report. The Audit Report will be made part of the public record regarding this exemption. Furthermore, each Citigroup Affiliated QPAM must make its Audit Report unconditionally available, electronically or otherwise, for examination upon request by any duly authorized employee or representative of the Department, other relevant regulators, and any fiduciary of a Covered Plan; (10) Each Citigroup Affiliated QPAM and the auditor must submit to OED: Any engagement agreement(s) entered into pursuant to the engagement of the auditor under this exemption, no later than two (2) months after the execution of any such engagement agreement; (11) The auditor must provide the Department, upon request, for inspection and review, access to all the workpapers created and utilized in the course of the audit, provided such access and inspection is otherwise permitted by law; and (12) Citigroup must notify the Department of a change in the independent auditor no later than two (2) months after the engagement of a substitute or subsequent auditor and must provide an explanation for the substitution or change including a description of any material disputes VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 between the terminated auditor and Citigroup; (j) As of January 10, 2018, and throughout the Exemption Period, with respect to any arrangement, agreement, or contract between a Citigroup Affiliated QPAM and a Covered Plan, the Citigroup Affiliated 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 inadvertent prohibited transactions); and to comply with the standards of prudence and loyalty set forth in section 404 of ERISA with respect to each such ERISA-covered plan and IRA to the extent that section is applicable; (2) To indemnify and hold harmless the Covered Plan for any actual losses resulting directly from a Citigroup Affiliated QPAM’s violation of ERISA’s fiduciary duties, as applicable, and the prohibited transaction provisions of ERISA and the Code, as applicable; a breach of contract by the QPAM; or any claim arising out of the failure of such Citigroup Affiliated 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. This condition applies only to actual losses caused by the Citigroup Affiliated QPAM’s violations; (3) Not to require (or otherwise cause) the Covered Plan to waive, limit, or qualify the liability of the Citigroup Affiliated QPAM for violating ERISA or the Code or engaging in prohibited transactions; (4) Not to restrict the ability of such Covered Plan to terminate or withdraw from its arrangement with the Citigroup Affiliated QPAM with respect to any investment in a separately managed account or pooled fund subject to ERISA and managed by such QPAM, with the exception of reasonable restrictions, appropriately disclosed in advance, that are specifically designed to ensure equitable treatment of all investors in a pooled fund in the event such withdrawal or termination may have adverse consequences for all other investors. In connection with any such arrangements involving investments in pooled funds subject to ERISA entered into after the effective date of this exemption, the adverse consequences must relate to of a lack of liquidity of the underlying assets, valuation issues, or regulatory reasons that prevent the fund from promptly redeeming an ERISA-covered plan’s or IRA’s investment, and such restrictions must be applicable to all such investors and PO 00000 Frm 00065 Fmt 4701 Sfmt 4703 61879 effective no longer than reasonably necessary to avoid the adverse consequences; (5) Not to impose any fees, penalties, or charges for such termination or withdrawal with the exception of reasonable fees, appropriately disclosed in advance, that are specifically designed to prevent generally recognized abusive investment practices or specifically designed to ensure equitable treatment of all investors in a pooled fund in the event such withdrawal or termination may have adverse consequences for all other investors, provided that such fees are applied consistently and in like manner to all such investors; (6) Not to include exculpatory provisions disclaiming or otherwise limiting liability of the Citigroup Affiliated QPAM for a violation of such agreement’s terms. To the extent consistent with Section 410 of ERISA, 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 Citigroup, and its affiliates, or damages arising from acts outside the control of the Citigroup Affiliated QPAM; (7) By July 9, 2018, each Citigroup Affiliated QPAM must provide a notice of its obligations under this Section I(j) to each Covered Plan. For all other prospective Covered Plans, the Citigroup Affiliated QPAM will agree to its obligations under this Section I(j) in an updated investment management agreement between the Citigroup Affiliated 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 2016–14 that meets the terms of this condition. Notwithstanding the above, a Citigroup Affiliated QPAM will not violate the condition solely because a Plan or IRA refuses to sign an updated investment management agreement; (k) By March 10, 2018, each Citigroup Affiliated QPAM will provide a notice of the exemption, along with a separate summary describing the facts that led to the Conviction (the Summary), which have 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, or the sponsor of an investment fund in any case where a Citigroup Affiliated QPAM acts as a sub-advisor to the investment fund in which such ERISAcovered plan and IRA invests. Any E:\FR\FM\29DEN2.SGM 29DEN2 ethrower on DSK3G9T082PROD with NOTICES 61880 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices prospective clients for which a Citigroup Affiliated QPAM relies on PTE 84–14 or has expressly represented that the manager qualifies as a QPAM or relies on the QPAM class exemption 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 Citigroup Affiliated QPAM. Disclosures may be delivered electronically. (l) The Citigroup Affiliated QPAMs must comply with each condition of PTE 84–14, as amended, with the sole exception of the violation of Section I(g) of PTE 84–14 that is attributable to the Conviction; (m)(1) By July 9, 2018, Citigroup designates 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 annual review for each annual period beginning on January 10, 2018 (the Annual Review) 46 to determine the adequacy and effectiveness of the implementation of the Policies and Training. With respect to the Compliance Officer, the following conditions must be met: (i) The Compliance Officer must be a professional who has extensive experience with, and knowledge of, the regulation of financial services and products, including under ERISA and the Code; and (ii) The Compliance Officer must be a senior compliance officer of Citigroup Inc. or one of its affiliates, and such senior compliance officer will be an officer who reports directly to, or reports to another compliance officer who reports directly to, Citigroup Inc.’s highest ranking compliance officer (whose title is currently Global Chief Compliance Officer of Citigroup Inc.); (2) With respect to each Annual Review, the following conditions must be met: (i) The Annual Review includes a review of: Any compliance matter related to the Policies or Training that was identified by, or reported to, the Compliance Officer or others within the compliance and risk control function (or its equivalent) during the previous year; any material change in the relevant business activities of the Citigroup Affiliated QPAMs; and any change to ERISA, the Code, or regulations related to fiduciary duties and the prohibited 46 Note that such Annual Review must be completed with respect to the annual periods ending January 9, 2019; January 9, 2020; January 9, 2021; January 9, 2022; and January 9; 2023. VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 transaction provisions that may be applicable to the activities of the Citigroup Affiliated QPAMs; (ii) The Compliance Officer prepares a written report for each Annual Review (each, an Annual Report) that (A) summarizes his or her material activities during the preceding year; (B) sets forth any instance of noncompliance discovered during the preceding year, and any related corrective action; (C) details any change to the Policies or Training to guard against any similar instance of noncompliance occurring again; and (D) makes recommendations, as necessary, for additional training, procedures, monitoring, or additional and/or changed processes or systems, and management’s actions on such recommendations; (iii) In each Annual Report, the Compliance Officer must certify in writing that to his or her knowledge: (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 preceding year and any related correction taken to date have been identified in the Annual Report; and (D) the Citigroup Affiliated QPAMs have complied with the Policies and Training and/or corrected (or is correcting) any instances of noncompliance in accordance with Section I(h) above; (iv) Each Annual Report must be provided to appropriate corporate officers of Citigroup and each Citigroup Affiliated QPAM to which such report relates; the head of compliance and the General Counsel (or their functional equivalent) of the relevant Citigroup Affiliated QPAM; and must be made unconditionally available to the independent auditor described in Section I(i) above; (v) Each Annual Review, including the Compliance Officer’s written Annual Report, must be completed within three (3) months following the end of the period to which it relates; (n) Each Citigroup Affiliated QPAM will maintain records necessary to demonstrate that the conditions of this exemption have been met, for six (6) years following the date of any transaction for which such Citigroup Affiliated QPAM relies upon the relief in the exemption; (o) During the Exemption Period, Citigroup: (1) Immediately discloses to the Department any Deferred Prosecution Agreement (a DPA) or a Non-Prosecution Agreement (an NPA) with the U.S. Department of Justice, entered into by Citigroup or any of its PO 00000 Frm 00066 Fmt 4701 Sfmt 4703 affiliates in connection with conduct described in Section I(g) of PTE 84–14 or section 411 of ERISA; and (2) immediately provides the Department any information requested by the Department, as permitted by law, regarding the agreement and/or conduct and allegations that led to the agreement; (p) By July 9, 2018, each Citigroup Affiliated QPAM, in its agreements with, or in other written disclosures provided to Covered Plans, will clearly and prominently inform Covered Plan clients of their right to obtain a copy of the Policies or a description (‘‘Summary Policies’’) which accurately summarizes key components of the QPAM’s written Policies developed in connection with this exemption. If the Policies are thereafter changed, each Covered Plan client must receive a new disclosure within six (6) months following the end of the calendar year during which the Policies were changed.47 With respect to this requirement, the description may be continuously maintained on a website, provided that such website link to the Policies or the Summary Policies is clearly and prominently disclosed to each Covered Plan; and (q) A Citigroup Affiliated QPAM or a Citigroup Related QPAM will not fail to meet the terms of this exemption, solely because a different Citigroup Affiliated QPAM or Citigroup Related QPAM fails to satisfy a condition for relief described in Sections I(c), (d), (h), (i), (j), (k), (l), (n) and (p); or if the independent auditor described in Section I(i) fails a provision of the exemption other than the requirement described in Section I(i)(11), provided that such failure did not result from any actions or inactions of Citigroup or its affiliates. Section II: Definitions (a) The term ‘‘Conviction’’ means the judgment of conviction against Citicorp for violation of the Sherman Antitrust Act, 15 U.S.C. 1, entered in the District Court for the District of Connecticut (the District Court) (Case Number 3:15-cr78–SRU). For all purposes under this exemption, ‘‘conduct’’ of any person or entity that is the ‘‘subject of [a] Conviction’’ encompasses the conduct described in Paragraph 4(g)-(i) of the Plea Agreement filed in the District Court in Case Number 3:15-cr-78–SRU; (b) The term ‘‘Covered Plan’’ is a plan subject to Part 4 of Title 1 of ERISA (‘‘ERISA-covered plan’’) or a plan 47 In the event Applicant meets this disclosure requirement through Summary Policies, changes to the Policies shall not result in the requirement for a new disclosure unless, as a result of changes to the Policies, the Summary Policies are no longer accurate. E:\FR\FM\29DEN2.SGM 29DEN2 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices ethrower on DSK3G9T082PROD with NOTICES subject to Section 4975 of the Code (‘‘IRA’’) with respect to which a Citigroup Affiliated QPAM relies on PTE 84–14, or with respect to which a Citigroup Affiliated QPAM (or any Citigroup affiliate) has expressly represented that the manager qualifies as a QPAM or relies on the QPAM class exemption (PTE 84–14). A Covered Plan does not include an ERISA-covered Plan or IRA to the extent the Citigroup Affiliated QPAM has expressly disclaimed reliance on QPAM status or PTE 84–14 in entering into its contract, arrangement, or agreement with the ERISA-covered plan or IRA. (c) The terms ‘‘ERISA-covered plan’’ and ‘‘IRA’’ mean, respectively, a plan subject to Part 4 of Title I of ERISA and a plan subject to section 4975 of the Code. (d) The term ‘‘Exemption Period’’ means January 10, 2018, through January 9, 2023. (e) The term ‘‘Citicorp’’ means Citicorp, a financial services holding company organized and existing under the laws of Delaware and does not include any subsidiaries or other affiliates. (f) The term ‘‘Citigroup Affiliated QPAM’’ means a ‘‘qualified professional asset manager’’ (as defined in Section VI(a) of PTE 84–14) that relies on the relief provided by PTE 84–14 and with respect to which Citigroup is a current or future ‘‘affiliate’’ (as defined in Section VI(d)(1) of PTE 84–14). The term ‘‘Citigroup Affiliated QPAM’’ excludes Citicorp, the entity implicated in the criminal conduct that is the subject of the Conviction. (g) The term ‘‘Citigroup Related QPAM’’ means any current or future ‘‘qualified professional asset manager’’ (as defined in section VI(a) of PTE 84– 14) that relies on the relief provided by PTE 84–14, and with respect to which Citigroup owns a direct or indirect five percent or more interest, but with respect to which Citigroup is not an ‘‘affiliate’’ (as defined in Section VI(d)(1) of PTE 84–14). Effective Date This exemption is effective on January 10, 2018. The term of the exemption is from January 10, 2018, through January 9, 2023 (the Exemption Period). Department’s Comment: The Department cautions that the relief in this exemption would terminate immediately if an entity within the Citigroup corporate structure is convicted of a crime described in Section I(g) of PTE 84–14 (other than the Conviction) during the effective period of the exemption. While such an entity could apply for a new exemption in that VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 circumstance, the Department would not be obligated to grant the exemption. The terms of this exemption have been specifically designed to permit plans to terminate their relationships in an orderly and cost effective fashion in the event of an additional conviction or a determination that it is otherwise prudent for a plan to terminate its relationship with an entity covered by the proposed exemption. Further Information For more information on this exemption, contact Mr. Joseph Brennan of the Department, telephone (202) 693– 8456. (This is not a toll-free number.) Barclays Capital Inc. (BCI or the Applicant) Located in New York, New York [Prohibited Transaction Exemption 2017–06; Exemption Application No. D–11910] Discussion On November 21, 2016, the Department of Labor (the Department) published a notice of proposed exemption in the Federal Register at 81 FR 83427, for certain entities with specified relationships to Barclays PLC (BPLC) to continue to rely upon the relief provided by PTE 84–14 for a period of five years,48 notwithstanding BPLC’s criminal conviction, as described herein. The Department is granting this exemption in order to ensure that Covered Plans 49 whose assets are managed by a Barclays Affiliated QPAM or Barclays Related QPAM may continue to benefit from the relief provided by PTE 84–14. This exemption is effective from January 10, 2018 through January 9, 2023 (the Exemption Period). No relief from a violation of any other law is provided by this exemption, including any criminal conviction described in the proposed exemption. 48 (49 FR 9494, March 13, 1984), as corrected at 50 FR 41430 (October 10, 1985), as amended at 70 FR 49305 (August 23, 2005) and as amended at 75 FR 38837 (July 6, 2010), hereinafter referred to as PTE 84–14 or the QPAM Exemption. 49 ‘‘Covered Plan’’ is a plan subject to Part 4 of Title 1 of ERISA (‘‘ERISA-covered plan’’) or a plan subject to section 4975 of the Code (‘‘IRA’’) with respect to which a Barclays Affiliated QPAM relies on PTE 84–14, or with respect to which a Barclays Affiliated QPAM (or any BPLC affiliate) has expressly represented that the manager qualifies as a QPAM or relies on the QPAM class exemption (PTE 84–14). A Covered Plan does not include an ERISA-covered Plan or IRA to the extent the Barclays Affiliated QPAM has expressly disclaimed reliance on QPAM status or PTE 84–14 in entering into its contract, arrangement or agreement with the ERISA-covered plan or IRA. See further discussion in this Preamble under the heading Comments 9, 10 & 11—Policies and Procedures Relating to Compliance with ERISA and the Code—Section (I)(ii)–(v). PO 00000 Frm 00067 Fmt 4701 Sfmt 4703 61881 Furthermore, the Department cautions that the relief in this exemption will terminate immediately if, among other things, an entity within the BPLC corporate structure is convicted of a crime described in Section I(g) of PTE 84–14 (other than the Conviction) during the Exemption Period. The terms of this exemption have been specifically designed to promote conduct that adheres to basic fiduciary standards under ERISA and the Code. The exemption also aims to ensure that plans and IRAs can terminate relationships in an orderly and cost effective fashion in the event a plan or IRA fiduciary determines it is prudent for the plan or IRA to sever its relationship with an entity covered by the exemption. Written Comments The Department invited all interested persons to submit written comments and/or requests for a public hearing with respect to the notice of proposed exemption, published in the Federal Register at 81 FR 83427 on November 21, 2016.50 All comments and requests for a hearing were due by January 5, 2017. The Department received written comments from the Applicant and members of the U.S. Congress. After considering these submissions, the Department has determined to grant the exemption, with revisions, as described below. Comment 1—Confirmation of the Comment Period Deadline The Applicant requests that the Department confirm that the reference in the preamble to the proposed exemption to comments being due within 30 days was unintentional and the deadline for comments was January 5, 2017. The Department so confirms. Comment 2—Term of the Exemption The Applicant requests that the Department extend the term of the exemption from five years to ten years from the Conviction Date, as defined in Section II(e). The Applicant states that the five-year term is inconsistent with precedent and that the ‘‘conduct that is the subject of BPLC’s conviction was described by the Department of Justice (DOJ) as ‘limited to a small part of [BPLC’s] operations;’ it involved only two traders; and it did not involve any of BPLC’s asset management units.’’ The Applicant further states that the limitation to five years is especially problematic given that the DOJ plea 50 The Department received additional comments from Applicant, however, after the close of the comment period. E:\FR\FM\29DEN2.SGM 29DEN2 ethrower on DSK3G9T082PROD with NOTICES 61882 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices agreement with BPLC marked the first time that DOJ awarded a sentencing credit for a company’s compliance and remediation efforts and that DOJ singled out BPLC for recognition and credit for its significant improvements to its compliance program and its ‘‘dramatic steps to change its corporate culture.’’ In addition, the Applicant states that DOJ called BPLC ‘‘a leader in its efforts toward remediation’’ and highlighted its ‘‘extraordinary dedication’’ to timely reporting of potential misconduct before it was under any reporting obligation, and that DOJ also lauded BPLC’s cooperation during the investigative phase, which it characterized as ‘‘uniquely helpful’’ and ‘‘of critical importance.’’ Although the Applicant characterizes the conduct as involving the isolated actions of two individuals, the Department does not agree with the apparent suggestion that the Applicant bears little or no responsibility for the criminal conduct. For example, the Department considered BPLC’s Plea Agreement, which includes the following statement, under the heading Other Relevant Conduct: ‘‘The defendant, through its currency traders and sales staff, also engaged in other currency trading and sales practices in conducting FX Spot Market transactions with customers via telephone, email, and/or electronic chat, to wit: (i) Intentionally working customers’ limit orders one or more levels, or ‘pips,’ away from the price confirmed with the customer; (ii) including sales markup, through the use of live hand signals or undisclosed prior internal arrangements or communications, to prices given to customers that communicated with sales staff on open phone lines; (iii) accepting limit orders from customers and then informing those customers that their orders could not be filled, in whole or in part, when in fact the defendant was able to fill the order but decided not to do so because the defendant expected it would be more profitable not to do so; and (iv) disclosing non-public information regarding the identity and trading activity of the defendant’s customers to other banks or other market participants, in order to generate revenue for the defendant at the expense of its customers.’’ In developing this exemption, the Department also considered relevant statements from regulators. For example, the Financial Conduct Authority’s (FCA) Final Notice states that, ‘‘[d]uring the Relevant Period, Barclays did not exercise adequate and effective control over its FX business. . . . The front office failed adequately to discharge these responsibilities with VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 regard to obvious risks associated with confidentiality, conflicts of interest and trading conduct.’’ The Notice further states: ‘‘These failings occurred in circumstances where certain of those responsible for managing front office matters were aware of and/or at times involved in behaviours described above.’’ By way of further example, the Order of the Commodities Futures Trading Commission (CFTC) states: ‘‘Barclays failed to adequately assess the risks associated with its FX traders participating in the fixing of certain FX benchmark rates. Barclays also lacked adequate internal controls in order to prevent its FX traders from engaging in improper communications with certain FX traders at other banks. Barclays lacked sufficient policies, procedures and training specifically governing participation in the trading around the FX benchmark rates and had inadequate policies pertaining to, or insufficient oversight of, its FX traders’ use of chat rooms or other electronic messaging.’’ The Department also notes the size of relevant fines imposed by various regulators: The Department of Justice imposed a $710 million fine; the Board of Governors of the Federal Reserve Board imposed a $342 million fine; and the Department of Financial Services, the Commodity Futures Trading Commission, and the FCA imposed fines of $485 million, $400 million, and £284,432,000, respectively. This exemption is not punitive. Instead, its five-year term and protective conditions reflect the Department’s intent to protect Covered Plans that entrust substantial assets to a Barclays Affiliated QPAM, despite the serious misconduct and supervisory failures described above. The limited term of this exemption gives the Department the opportunity to review the adherence by the Barclays Affiliated QPAMs to the conditions set out herein. If the Applicant seeks an extension of this exemption, the Department will examine whether the compliance and oversight changes mandated by various regulatory authorities are having their desired effect on BPLC entities. Comment 3—Conditions Unrelated to PTE 84–14 and Imposition of Onerous Requirements The Department addresses this general comment more fully below in response to certain specific issues that are related to this general comment. Comment 4—Description of Criminal Conduct—Section I The prefatory language to Section I of the proposed exemption provides, ‘‘If PO 00000 Frm 00068 Fmt 4701 Sfmt 4703 the proposed five-year exemption is granted, certain asset managers with specified relationships to BPLC (the Barclays Affiliated QPAMs and the Barclays Related QPAMs, as defined further in Sections II(a) and II(b), respectively) will not be precluded from relying on the exemptive relief provided by Prohibited Transaction Class Exemption 84–14 (PTE 84–14 or the QPAM Exemption),51 notwithstanding the judgment of conviction against BPLC (the Conviction), as defined in Section II(c)),52 for engaging in a conspiracy to: (1) Fix the price of, or (2) eliminate competition in the purchase or sale of the euro/U.S. dollar currency pair exchanged in the Foreign Exchange (FX) Spot Market, for a period of five years beginning on the date the exemption is granted.’’ The Applicant requests that the description of the charged conduct—the clause beginning ‘‘for engaging in a conspiracy’’—be omitted. The Applicant states that this description is inaccurate and incomplete, will lead to disputes with counterparties to the detriment of plans, and will make it unlikely that plans will benefit from or be protected by this exemption. After consideration of the Applicant’s comment, the Department has clarified the exemption’s description of BPLC’s criminal conduct. Comment 5—Knowing or Tacit Approval—Sections I(a) and I(c) Section I(a) of the proposed five-year exemption provides, ‘‘(a) Other than certain individuals who: Worked for a non-fiduciary business within BCI; had no responsibility for, and exercised no authority in connection with, the management of plan assets; and are no longer employed by BPLC, the Barclays Affiliated QPAMs and the Barclays Related QPAMs (including their officers, directors, agents other than BPLC, and employees of such QPAMs who had responsibility for, or exercised authority in connection with the management of plan assets) did not know of, did not have reason to know of, or participate in the criminal conduct that is the subject of the Conviction (for purposes 51 49 FR 9494 (March 13, 1984), as corrected at 50 FR 41430 (October 10, 1985), as amended at 70 FR 49305 (August 23, 2005), and as amended at 75 FR 38837 (July 6, 2010). 52 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 violation of the Sherman Antitrust Act, Title 15 United States Code, Section 1. E:\FR\FM\29DEN2.SGM 29DEN2 ethrower on DSK3G9T082PROD with NOTICES Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices of this paragraph (a), ‘‘participate in’’ includes the knowing or tacit approval of the misconduct underlying the Conviction).’’ Section I(c) of the proposed exemption provides, ‘‘(c) A Barclays Affiliated QPAM will not employ or knowingly engage any of the individuals that participated in the criminal conduct that is the subject of the Conviction (for purposes of this paragraph (c), ‘‘participated in’’ includes the knowing or tacit approval of the misconduct underlying the Conviction).’’ The Applicant requests that the words ‘‘or tacit’’ in the phrase ‘‘knowing or tacit approval’’ be deleted in Sections I(a) and I(c). The Applicant states that the term ‘‘tacit approval’’ ‘‘is undefined and ambiguous, and potentially encompasses a broad range of conduct that could become the subject of disputes with counterparties.’’ In addition, the Applicant states that the reference to the individuals being ‘‘no longer employed by BPLC’’ in Section I(a) implies that the individuals referenced in this condition were employed directly by BPLC. However, the Applicant states that, as outlined in Applicant’s December 6, 2016 letter to the Department, the two individuals referenced in Paragraph 4(g) of the Plea Agreement were employed by a service company subsidiary of a BPLC subsidiary. The Applicant suggests that Section I(a) be revised to read, ’’Other than certain individuals who: Worked for a nonfiduciary business of a BPLC subsidiary; had no responsibility for, and exercised no authority in connection with, the management of plan assets; and are no longer employed by the BPLC subsidiary, the Barclays Affiliated QPAMs (including their officers, directors, agents other than BPLC, and employees of such QPAMs who had responsibility for, or exercised authority in connection with the management of plan assets) did not know of, have reason to know of, or participate in the criminal conduct that is the subject of the Conviction (for purposes of this paragraph (a), ‘‘participate in’’ includes the knowing approval of the misconduct underlying the Conviction).’’ With respect to Condition I(a), after consideration of the Applicant’s comment, the Department has removed ‘‘or tacit’’ in the phrase ‘‘knowing or tacit approval’’ and removed the phrase ‘‘no longer employed by BPLC,’’ and accepted the Applicant’s suggested revision to replace ‘‘BCI’’ with ‘‘BPLC subsidiary’’ where remaining in the condition. However, the Department has not accepted the Applicant’s suggestion VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 to remove ‘‘Barclays Related QPAMs’’ from the condition. The Department intends to preclude relief to the extent a Barclays Related QPAM violates this condition. With respect to Condition I(c), the Department has revised the exemption in the manner requested by the Applicant. Comment 6—Inclusion of BCI—Sections I(d), I(g), and I(h)(1)(i) Section I(d) of the proposed five-year exemption provides, ‘‘A Barclays Affiliated QPAM will not use its authority or influence to direct an ‘‘investment fund,’’ (as defined in Section VI(b) of PTE 84–14) that is subject to ERISA or the Code and managed by such Barclays Affiliated QPAM to enter into any transaction with BPLC or BCI, or engage BPLC 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.’’ Section I(g) of the proposed five-year exemption provides, ‘‘(g) BPLC and BCI will not provide discretionary asset management services to ERISA-covered plans or IRAs, nor will otherwise act as a fiduciary with respect to ERISAcovered plan or IRA assets.’’ Section I(h)(1)(i) of the proposed fiveyear exemption provides, ‘‘(h)(1)(i) The asset management decisions of the Barclays Affiliated QPAM are conducted independently of the corporate management and business activities of BPLC and BCI.’’ The Applicant requests removal of the reference to ‘‘BCI’’ in this Section I(d), Section I(g), and Section I(h)(1)(i). Among other things, the Applicant states that as BCI is not the party to the Conviction, and therefore, the inclusion of BCI in this condition goes beyond the underlying Conviction. In addition, the Applicant states that, as noted in its December 6, 2016 letter to the Department, the two individuals referenced in Paragraph 4(g) of the Plea Agreement were employed by a service company subsidiary of a different BPLC subsidiary and were not ‘‘dual-hatted’’ to BCI. Further, the Applicant states that BCI was, and in the future is likely to be, the primary U.S. registered investment adviser of the Barclays Group, and any future investment management mandates would likely be undertaken by BCI. Thus, the Applicant states that not permitting an Affiliated QPAM to enter into a transaction with BCI is tantamount to a denial of the exemption. The Applicant also states that this condition would prevent BCI or PO 00000 Frm 00069 Fmt 4701 Sfmt 4703 61883 its parent entity from purchasing an asset manager and merging the asset manager into BCI, and would also prevent BCI from developing new lines of business providing asset management or securities lending businesses to plans. In response, the Department notes that the condition was developed based on a representation from the Applicant in a letter dated November 2, 2015. In that letter the Applicant stated that, ‘‘the Investment Bank division, where such conduct arose, and the Wealth and Investment Management division both operated through BCI, one of the QPAMs, at the time of the criminal conduct; however, as also noted above and discussed in the Application, the Wealth and Investment Management activities of BCI were operated separately from the Investment Bank division and the activities of the Investment Bank division that gave rise to the criminal conduct, and as such, it is important to distinguish the Wealth and Investment Management employees from the other BCI employees. The ‘Wealth and Investment Management employees’ were specifically mentioned because there were Investment Bank division employees of BCI who were involved in the criminal conduct that is the subject of the Plea Agreement.’’ Notwithstanding this, given the conditions required herein as discussed below, the Department has determined to revise the exemption in the manner requested by the Applicant, and has also clarified that paragraph (d) applies to an ‘‘investment fund’’ that is subject to ERISA or the Code and managed by such Barclays Affiliated QPAM with respect to Covered Plans. Comment 7—Exercising Authority Over Plan Assets—Section I(f) Section I(f) of the proposed five-year exemption provides, ‘‘(f) A Barclays Affiliated QPAM or a Barclays Related QPAM did not exercise authority over the assets of any plan subject to Part 4 of Title I of ERISA (an ERISA-covered plan) or section 4975 of the Code (an IRA) in a manner that it knew or should have known would: Further the criminal conduct that is the subject of the Conviction; or cause the Barclays Affiliated QPAM or the Barclays Related QPAM or its affiliates or related parties to directly or indirectly profit from the criminal conduct that is the subject of the Conviction.’’ The Applicant requests that the words ‘‘related parties’’ in the phrase ‘‘Barclays Affiliated QPAM or the Barclays Related QPAM, or its affiliates or related parties’’ be deleted, stating that the term E:\FR\FM\29DEN2.SGM 29DEN2 61884 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices ‘‘related parties’’ is undefined and could lead to confusion. For clarity, the Department has deleted the term ‘‘related parties.’’ ethrower on DSK3G9T082PROD with NOTICES Comment 8—See Comment 6 Re: Section I(g) Section I(g) of the proposed five-year exemption provides, ‘‘(g) BPLC and BCI will not provide discretionary asset management services to ERISA-covered plans or IRAs, nor will otherwise act as a fiduciary with respect to ERISAcovered plan or IRA assets.’’ The Applicant requests removal of the reference to ‘‘BCI’’ in this Section I(g), and for the reasons discussed above, the Department has determined to revise the exemption in the manner requested by the Applicant. Additionally, the Department modified this condition to clarify that BPLC will not violate this condition in the event that it inadvertently becomes an investment advice fiduciary and that BPLC can act as a fiduciary for plans that it sponsors for its own employees or employees of an affiliate. Comments 9, 10 & 11—Policies and Procedures Relating to Compliance With ERISA and the Code—Section I(h)(1)(ii)–(v) Section I(h)(1)(ii)–(iii) of the proposed five-year exemption provides, ’’(h)(1) Prior to a Barclays Affiliated QPAM’s engagement by any ERISA-covered plan or IRA for discretionary asset management services, where the QPAM represents that it qualifies as a QPAM, the Barclays Affiliated QPAM must develop, implement, maintain, and follow written policies and procedures (the Policies) requiring and reasonably designed to ensure that: . . . . (ii) The Barclays Affiliated QPAM fully complies with ERISA’s fiduciary duties and with ERISA and the Code’s prohibited transaction provisions, and does not knowingly participate in any violation of these duties and provisions with respect to ERISA-covered plans and IRAs; and (iii) The Barclays Affiliated QPAM does not knowingly participate in any other person’s violation of ERISA or the Code with respect to ERISA-covered plans and IRAs;’’ (iv) Any filings or statements made by the Barclays Affiliated QPAM to regulators including, but not limited to, the Department, the Department of the Treasury, the Department of Justice, and the Pension Benefit Guaranty Corporation, on behalf of ERISAcovered plans or IRAs, are materially accurate and complete, to the best of such QPAM’s knowledge at that time; [and] VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 (v) The Barclays Affiliated QPAM does not make material misrepresentations or omit material information in its communications with such regulators with respect to ERISAcovered plans or IRAs, or make material misrepresentations or omit material information in its communications with ERISA-covered plans and IRA clients.’’ The Applicant requests that these subparagraphs be stricken as duplicative and already mandated by statute. The Applicant states that these conditions should apply only with regard to filings or statements made on behalf of ERISAcovered plans or IRAs in connection with accounts for which the Barclays Affiliated QPAM relies on the relief provided by PTE 84–14. The Applicant states that the conditions should be tailored to PTE 84–14 in all instances. Subsection (iii): The Applicant requests that Section I(h)(1)(iii) be stricken. The Applicant states that, to the extent that Subsection I(h)(1)(iii) is intended to capture violations of ERISA or the Code that are not described in the preceding Subsection (such as ERISA disclosure requirements), such violations would not be within the scope of relief provided by the proposed exemption. Subsection (iv): The Applicant suggests that the condition be revised to read, ‘‘(iv) Any filings or statements made by the Barclays Affiliated QPAM to regulators, including, but not limited to, the Department, the Department of the Treasury, the Department of Justice, and the Pension Benefit Guaranty Corporation, on behalf of ERISAcovered plans or IRAs for which the Barclays Affiliated QPAM provides asset management or other discretionary fiduciary services in reliance on PTE 84–14, are materially accurate and complete, to the best of such QPAM’s knowledge at that time.’’ Subsection (v): The Applicant requests that the condition in Section I(h)(1)(v) incorporate language similar to Section I(h)(1)(iv), which provides that the condition extends ‘‘to the best of such QPAM’s knowledge at that time.’’ The requirement of Section I(h) that the policies and procedures developed by the Barclays Affiliated QPAM reflect basic fiduciary norms is a protective measure that is amply justified by the substantial compliance and oversight failures that resulted in the Conviction and fines, and in the need for this exemption, as detailed above. Accordingly, the Department has substantially retained the condition. It has, however, revised the condition’s scope to better match the Department’s protective intent. In particular, subsection (v) has been revised to PO 00000 Frm 00070 Fmt 4701 Sfmt 4703 contain the ‘‘to the best of such QPAM’s knowledge at that time’’ concept found in Subsection (iv); and the applicability of Subsections (iv) and (v) has been limited to Covered Plans. This revision is consistent with the Department’s intent to protect ERISA-covered Plans and IRAs that may hire a Barclays Affiliated QPAM based on the manager’s express representation that it relies on or qualifies under PTE 84–14. As noted in more detail below, the Department will not strike a condition merely because the condition is also a statutory requirement. It is the express intent of the Department to preclude relief for a Barclays Affiliated QPAM that fails to meet the requirements of this exemption, including those derived from basic standards codified in statute, as applicable. The Department does not view subparagraph (iii) of Section I(h)(1), which relates to compliance with ERISA or the Code, as duplicative of subparagraph (ii), which relates to compliance with, and knowing violations of, certain provisions of ERISA or the Code. However, the Department has modified the Policies’ requirement of adherence to the fiduciary and prohibited transaction provisions of ERISA and the Code so that the Policies expressly focus on the provisions only to the extent those provisions are ‘‘applicable’’ under ERISA and the Code. Comment 12—Correction of Violations and Failures to Comply—Section I(h)(1)(vii) Section I(h)(1)(vii) of the proposed five-year exemption provides that, ‘‘(h)(1) Prior to a Barclays Affiliated QPAM’s engagement by any ERISAcovered plan or IRA for discretionary asset management services, where the QPAM represents that it qualifies as a QPAM, the Barclays Affiliated QPAM must develop, implement, maintain, and follow written policies and procedures (the Policies) requiring and reasonably designed to ensure that: . . . (vii) Any violation of, or failure to comply with, an item in subparagraphs (ii) through (vi), is corrected promptly upon discovery, and any such violation or compliance failure not promptly corrected is reported, upon the discovery of such 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 Barclays Affiliated QPAM, the independent auditor responsible for reviewing compliance with the Policies, and an appropriate fiduciary of any affected ERISA-covered plan or IRA that E:\FR\FM\29DEN2.SGM 29DEN2 ethrower on DSK3G9T082PROD with NOTICES Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices is independent of BPLC; however, with respect to any ERISA-covered plan or IRA sponsored by an ‘affiliate’ (as defined in Section VI(d) of PTE 84–14) of BPLC or beneficially owned by an employee of BPLC or its affiliates, such fiduciary does not need to be independent of BPLC. A Barclays Affiliated QPAM will not be treated as having failed to develop, implement, maintain, or follow the Policies, provided that it corrects any instance of noncompliance promptly 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).’’ The Applicant cites this condition as an example of how the Department made the proposed exemption ‘‘inexplicably’’ and ‘‘arbitrarily’’ more burdensome and onerous than other such exemptions it has granted previously. More specifically, the Applicant seeks several revisions to Section I(h)(vii), stating that its notification requirements are overbroad and that the terms such as ‘‘promptly,’’ ‘‘appropriate corporate officers’’ and ‘‘appropriate fiduciary’’ are either vague or undefined. The Applicant requests that the ‘‘subparagraphs (ii) through (vi)’’ reference be revised to ‘‘subparagraphs (i) through (vi),’’ and that the language be revised to provide that this condition is satisfied where the issue is reported to the corporate officers specifically identified in the condition and, if the plan reporting provision is not removed, to a plan fiduciary that satisfies the requirement that it be independent of BPLC, other than with respect to the Applicant’s own plans. The Applicant requests also that the last sentence of the subparagraph be revised since it ‘‘does not meaningfully provide relief in instances where a violation or compliance failure is corrected.’’ The Applicant suggests the condition in Section I(h)(1)(vii) be revised to read, ‘‘(vii) Any violation of, or failure to comply with, an item in subparagraphs (i) through (vi), is corrected (or plans to correct are initiated) upon discovery, and any such violation or compliance failure not corrected (or a correction process initiated) is reported, upon the discovery of such failure to initiate correction efforts, in writing, to the head of compliance and the General Counsel (or their functional equivalent) of the relevant Barclays Affiliated QPAM. A Barclays Affiliated QPAM will not be treated as having failed to develop, implement, maintain, or follow the Policies, provided that it takes VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 corrective action as to 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).’’ In response to the Applicant’s general comment, the Department has based the conditions of this exemption on both the particular facts of this case and its experience over time with previous exemptions. For the reasons set out herein, the Department has concluded that the specific conditions of this exemption are appropriate and give the Department a reasonable basis for concluding that the conditions are appropriately protective of affected plans and IRAs. As noted above, a central aim of the exemption is to ensure that those relying upon the exemption for relief from the prohibited transaction rules will consistently act to promote a culture of fiduciary compliance, notwithstanding the conduct that violated Section I(g) of PTE 84–14. After considering the Applicant’s specific requests for revisions, however, the Department has replaced ‘‘appropriate corporate officers’’ with ‘‘the head of compliance and the General Counsel (or their functional equivalent) of the relevant line of business that engaged in the violation or failure.’’ The Department also will not condition the exemption on a requirement for notification of violations to an appropriate fiduciary of any affected Covered Plan that is independent of BPLC. However, the Department is not revising the ‘‘subparagraphs (ii) through (vi)’’ reference to include ‘‘subparagraph (i)’’ because the Department intends to preclude relief to the extent a Barclays Affiliated QPAM fails to develop, implement, maintain, and follow written policies and procedures. Clearly, it is not enough merely to develop policies and procedures, without also implementing, maintaining, and following the terms of those policies and procedures. Covered Plans do not benefit from the creation of strong policies and procedures, unless they are actually followed. The Department has revised the term ‘‘promptly’’ for consistency with the Department’s intent that violations or compliance failures be corrected ‘‘as soon as reasonably possible upon discovery or as soon after the QPAM reasonably should have known of the noncompliance (whichever is earlier).’’ However, contrary to the Applicant’s suggestion, the Department intends to preclude relief to the extent violations PO 00000 Frm 00071 Fmt 4701 Sfmt 4703 61885 or failures are not corrected as required by the exemption. Therefore, the Department has not adopted the Applicant’s proposed subparagraph (vii), which requires little more than a plan for corrective action, without any corresponding obligation to actually implement the action. Comment 13—Training Incorporated in Policies—Section I(h)(2)(i) Section I(h)(2)(i) of the proposed fiveyear exemption provides, ‘‘. . . The Training must: (i) 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 five-year exemption (including any loss of exemptive relief provided herein), and prompt reporting of wrongdoing.’’ The Applicant requests that the requirement in Section I(h)(2)(i) that the Training must ‘‘[b]e set forth in the Policies’’ be deleted. The Applicant states that the requirement could present logistical challenges as a Barclays Affiliated QPAM may update its Training and its Policies at different points in time. The Applicant further states that requiring that the former be incorporated into the latter merely increases the logistical burden and serves no useful purpose. After considering this comment, the Department has determined to revise the condition to address the Applicant’s concerns that it could present logistical challenges. Accordingly, the Department has revised the subsection to read that the Training must: ‘‘At a minimum, cover the Policies, ERISA and Code compliance (including applicable fiduciary duties and the prohibited transaction provisions), ethical conduct, the consequences for not complying with the conditions of this exemption (including any loss of exemptive relief provided herein), and prompt reporting of wrongdoing.’’ Comment 14—Training by Independent Professional—Section I(h)(2)(ii) Section I(h)(2)(ii) of the proposed fiveyear exemption provides, ‘‘The Training must: . . . (ii) Be conducted by an independent professional who has been prudently selected and who has appropriate technical training and proficiency with ERISA and the Code.’’ The Applicant requests that Section I(h)(2)(i) be deleted, stating that requiring an ‘‘independent professional’’ to conduct the training is likely to be ‘‘counterproductive, as the E:\FR\FM\29DEN2.SGM 29DEN2 61886 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices ethrower on DSK3G9T082PROD with NOTICES most effective trainer may be someone with detailed knowledge of the Barclays Affiliated QPAM’s business and compliance practices that an ‘independent’ trainer may lack.’’ Moreover, the Applicant states that the term ‘‘independent professional’’ is undefined, leading to potential confusion and disputes. Further, the Applicant states that the term ‘‘technical training’’ is duplicative of ‘‘proficiency’’ and is undefined. Therefore, the Applicant suggests eliminating that term, and requests that Section I(h)(2)(ii) be revised to read, ‘‘Be conducted by an individual with significant understanding and familiarity with asset management and trading practices and who has appropriate proficiency with ERISA and the Code.’’ The Department has partially accepted the Applicant’s request as to the suggested revision so that ‘‘independent professional’’ has been replaced with ‘‘individual with significant understanding and familiarity with asset management and trading practices’’ but has not removed the requirement that such person be prudently selected. Additionally, the Department disagrees with the Applicant’s assertion that the phrase ‘‘technical training and proficiency’’ is duplicative. In the Department’s view, the two terms are not synonymous, as a person may have taken technical training in a given subject matter but may not be proficient in that subject matter. Further, while the Department does not agree with the Applicant’s characterization that hiring an appropriate independent professional, prudently selected, would be ‘‘counterproductive,’’ the Department is persuaded that appropriate Barclays personnel, who are prudently selected, should be allowed to conduct the training, and has revised the condition accordingly. Comment 15—Audit—Section I(i)(1) Section I(i)(1) of the proposed fiveyear exemption requires that each ‘‘Barclays Affiliated QPAM submits to an audit conducted annually by an independent auditor, who has been prudently selected and who has appropriate technical training and proficiency with ERISA and the Code, to evaluate the adequacy of, and the Barclays Affiliated QPAM’s compliance with, the Policies and Training described herein. The audit requirement must be incorporated in the Policies. Each annual audit must cover a consecutive twelve (12) month period starting with the twelve (12) month period that begins on the date that a VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 Barclays Affiliated QPAM is first engaged by any ERISA-covered plan or IRA for discretionary asset management services reliant on PTE 84–14, and each annual audit must be completed no later than six (6) months after the period to which the audit applies.’’ The Applicant requests that the requirement that the audit requirement be incorporated in the Policies be deleted because it is already a condition of exemptive relief and incorporation into the Policies is, therefore, ‘‘duplicative’’ and appears to serve no useful purpose. In addition, the Applicant represents that the timing of the audit should factor into the timing of the proposed one-year exemption. The Applicant states that it is possible that the ‘‘date that a Barclays Affiliated QPAM is first engaged’’ could come before the effective date of the permanent exemption, rendering the timing unclear, and that the condition should clarify that the audit period will commence only after the effective date of this exemption. Further, the Applicant requests the elimination of the phrase ‘‘technical training,’’ because the term ‘‘technical training’’ is duplicative of ‘‘proficiency’’ and is undefined. The Department declines to make certain of the Applicant’s requested revisions. The Department views the audit requirement as an integral component of the exemption, without which the Department would be unable to make its finding that the exemption is protective of Covered Plans and their participants, beneficiaries, and beneficial owners, as applicable. A recurring, independent audit of the Barclays Affiliated QPAMs is a critical means by which to verify the adequacy of, and compliance with the Policies and Training mandated by this exemption. The Department disagrees with the Applicant’s assertion that the phrase ‘‘technical training and proficiency’’ is duplicative. In the Department’s view, the two terms are not synonymous, as a person may have taken technical training in a given subject matter but may not be proficient in that subject matter. The exemption requires that the auditor be both technically trained and proficient in ERISA as well as the Code. Accordingly, the Department declines to change the phrase ‘‘technical training and proficiency’’ as used in Section I(i)(1). The Department also declines to delete the requirement that the audit conditions be incorporated in the Policies. The audit requirement provides a critical independent check on compliance with this exemption’s PO 00000 Frm 00072 Fmt 4701 Sfmt 4703 conditions, and helps ensure that the basic protections set forth in the Policies are taken seriously. Accordingly, the specifics of the audit requirement are important components of the Policies. Their inclusion in the Policies promotes compliance and sends an important message to the institutions’ employees and agents, as well as to Covered Plan clients, that compliance with the policies and procedures will be subject to careful independent review. After consideration of the Applicant’s concerns regarding the annual audit, the Department is revising the audit condition to require an audit on a biennial basis. The Department notes that if the audit uncovers material deficiencies with the Applicant’s compliance with this exemption, then the Applicant should consider conducting an additional audit after making corrections to ensure that it remains in compliance with the exemption. In any event, the Department emphasizes that it retains the right to conduct its own investigation of compliance based on any indicators of problems. Finally, the Department has clarified the audit timing requirements. Comment 16—Access to Business— Section I(i)(2) Section I(i)(2) of the proposed fiveyear exemption requires that ‘‘as permitted by law, each Barclays Affiliated QPAM and, if applicable, BPLC, will grant the auditor unconditional access to its business. . . .’’ The Applicant requests that the access granted by Section I(i)(2) be limited to non-privileged materials that do not contain trade secrets. The Applicant represents that the existing limitations can be read not to exclude such materials and, given the breadth of the ‘‘unconditional access’’ described, the absence of a specific limitation could lead to confusion, disputes, and infringement on a Barclays Affiliated QPAM’s rights to protect its privileged communications and trade secrets. The Applicant suggests that the language read, ‘‘as permitted by law, each Barclays Affiliated QPAM and, if applicable and solely to determine if the provisions of the exemption involving BPLC are met, BPLC will grant the auditor unconditional access to its business. . . .’’ In the Department’s view, to ensure a thorough and robust audit, the auditor must be granted access to information the auditor deems necessary for the auditor to make sound conclusions. Access to such information must be within the scope of the audit E:\FR\FM\29DEN2.SGM 29DEN2 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices ethrower on DSK3G9T082PROD with NOTICES engagement and denied only to the extent any disclosure is not permitted by state or federal statute. Enumerating specific restrictions on the accessibility of certain information may have a dampening effect on the auditor’s ability to perform the procedures necessary to make valid conclusions and would therefore undermine the effectiveness of the audit. The auditor’s access to such information, however, is limited to information relevant to the auditor’s objectives as specified by the terms of the exemption and to the extent disclosure is not prevented by state or federal statute or involves communications subject to attorney client privilege. In this regard, the Department has modified Section I(i)(2) accordingly. The Department has modified Section I(i)(2) so that it begins with the phrase ‘‘Within the scope of the audit.’’ Comment 17—Engagement Letter— Section I(i)(3) Section I(i)(3) of the proposed fiveyear exemption requires the auditor’s engagement to ‘‘specifically require the auditor to determine whether each Barclays Affiliated QPAM has developed, implemented, maintained, and followed the Policies in accordance with the conditions of this five-year exemption, if granted, and has developed and implemented the Training, as required herein.’’ The Applicant requests that Section I(i)(3) be deleted in its entirety, stating that it is duplicative of the requirements in Section I(i)(1) of the exemption, which also sets forth requirements as to the auditor’s skill and the prudence of the selection process. Further, the Applicant suggests that it serves no useful purpose to mandate that the engagement letter repeat the requirements of the exemption and that such level of detail in the engagement is unnecessary in light of the detailed requirements of the exemption. The Department does not concur with the Applicant’s request. By including a statement of the audit’s intended purpose and required determinations in the auditor’s agreement, the Applicant ensures that both the auditor and the Barclays Affiliated QPAMs have a clear understanding of the purpose and expectations of the audit process. Therefore, the Department declines to omit Section I(i)(3) from the exemption. Comment 18—Auditor’s Test of Operational Compliance—Section I(i)(4) Section I(i)(4) of the proposed fiveyear exemption provides that, ‘‘[t]he auditor’s engagement must specifically require the auditor to test each Barclays VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 Affiliated QPAM’s operational compliance with the Policies and Training. In this regard, the auditor must test a sample of each QPAM’s transactions involving ERISA-covered plans and IRAs sufficient in size and nature to afford the auditor a reasonable basis to determine the operational compliance with the Policies and Training.’’ The Applicant requests that Section I(i)(4) be deleted in its entirety or, in the alternative, that the second sentence of the condition be deleted. As noted above, the Applicant states that Section I(i)(1) sets forth the scope of the audit and contains requirements as to the auditor’s technical skill and the prudence of the selection process. The Applicant suggests that, in light of these requirements, a condition mandating how the auditor must perform the audit is unnecessary. The Applicant states that there are only two firms that hold themselves out as having the capacity to handle these audits, and neither is a regular audit firm that can test significant data in the very short time frames provided in these exemptions. The Applicant represents that the Department should leave to the independent judgment of the auditor whether and when to sample transactions. The Applicant suggests that, if the subsection is not deleted, the condition in this subsection should read, ‘‘(4) The auditor’s engagement must specifically require the auditor to test each Barclays Affiliated QPAM’s operational compliance with the Policies and Training.’’ The Department declines to make the Applicant’s requested deletion or revision with respect to Section I(i)(4). The inclusion of written audit parameters in the auditor’s engagement letter is necessary both to document expectations regarding the audit work and to ensure that the auditor can responsibly perform its important work. As stated above, clearly defined audit parameters will minimize any potential for dispute between the Applicant and the auditor. It is appropriate and necessary for the exemption to require a certain amount, and type, of audit work to be performed. Similarly, given the scope and number of relevant transactions, proper sampling is critical to ensuring the auditor’s ability to reach reasonable conclusions. The Department notes that Section I(i)(4) does not specify the number of transactions that the auditor must test, but rather requires, for each QPAM, that the auditor test a sample of each QPAM’s transactions involving Covered Plans, ‘‘sufficient in size and nature to afford the auditor a reasonable basis to PO 00000 Frm 00073 Fmt 4701 Sfmt 4703 61887 determine operational compliance with the Policies and Training.’’ The Department has revised this provision, however, by limiting its applicability to Covered Plans. Comment 19—Auditor’s Determination of Compliance—I(i)(5)(i) Section I(i)(5)(i) of the proposed fiveyear exemption provides: ‘‘I(i)(5): For each audit, on or before the end of the relevant period described in Section I(i)(1) for completing the audit, the auditor must issue a written report (the Audit Report) to BPLC and the Barclays Affiliated QPAM to which the audit applies that describes the procedures performed by the auditor during the course of its examination. The Audit Report must include the auditor’s specific determinations regarding: (i) The adequacy of the Barclays Affiliated QPAM’s Policies and Training; the Barclays Affiliated QPAM’s compliance with the Policies and Training; the need, if any, to strengthen such Policies and Training; and any instance of the respective Barclays Affiliated QPAM’s noncompliance with the written Policies and Training described in Section I(h) above. 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 Barclays Affiliated QPAM must be promptly addressed by such Barclays Affiliated QPAM, and any action taken by such Barclays Affiliated QPAM to address such recommendations must be included in an addendum to the Audit Report (which addendum is completed prior to the certification described in Section I(i)(7) below). Any determination by the auditor that the respective Barclays Affiliated QPAM has implemented, maintained, and followed sufficient Policies and Training must not be based solely or in substantial part on an absence of evidence indicating noncompliance. In this last regard, any finding that the Barclays Affiliated QPAM has complied with the requirements under this Subsection must be based on evidence that demonstrates the Barclays Affiliated QPAM has actually implemented, maintained, and followed the Policies and Training required by this five-year exemption. Furthermore, the auditor must not rely on the Annual Report created by the compliance officer (the Compliance Officer) as described in Section I(m) below in lieu of independent determinations and testing performed by the auditor as required by Section I(i)(3) and (4) above.’’ E:\FR\FM\29DEN2.SGM 29DEN2 ethrower on DSK3G9T082PROD with NOTICES 61888 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices The Applicant states that compliance with this provision and other provisions involving the auditor are within the control of the auditor rather than the Applicant, and that a violation of this provision should therefore not result in Applicant losing the exemption. The Applicant requests that, if the condition is not deleted or reworded as suggested, the Department should add the following proviso to the end of subparagraphs I(i)(4), I(i)(6) and I(i)(11): ‘‘Any failure of the auditor to meet the conditions associated with the Audit Report shall not be deemed a violation of the exemption.’’ In addition, the Applicant requests that the requirement that an auditor’s recommendations be ‘‘promptly’’ addressed be deleted. The Applicant states that the term ‘‘promptly’’ is undefined and that the ambiguity is particularly problematic in this context as addressing an auditor’s recommendation could be a lengthy process (updating computerized trading systems, for example, could take months). Moreover, the Applicant states that the requirement that the auditor address the adequacy of the Annual Review required in Section I(m) is counterproductive and requests that this provision of Section I(i)(5) be deleted because ‘‘the DOJ has singled out Barclays’ extensive efforts to strengthen its already extensive internal controls.’’ The Applicant further states that the Department should not mandate how the auditor performs its work in light of the conditions in the proposed exemption relating to the auditor’s selection and qualifications. (See Subsection I(i)(1)). The Applicant states there is no reason to treat BPLC or the Barclays Affiliated QPAMs as recalcitrant entities and to impose conditions that the Department has not imposed in past cases as to applicants with extensive crimes or faulty internal processes. Moreover, the Applicant states that the language of this condition will interfere with the workability of the exemption and its use by plans. To that end, the Applicant states that if counterparties cannot understand the requirement or test whether it has been complied with, the exemption will not be used, to the detriment of plans and in violation of the statutory standard in section 408(a) of ERISA and Code section 4975. Therefore, the Applicant requests that the condition instead read: ‘‘I(i)(5): For each audit, on or before the end of the relevant period described in Section I(i)(1) for completing the audit, the auditor must issue a written report (the Audit Report) to BPLC and the Barclays Affiliated QPAM to which VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 the audit applies that describes the procedures performed by the auditor during the course of its examination. Any failure of the auditor to meet the conditions associated with the Audit Report shall not be deemed a violation of the exemption. The Audit Report must include the auditor’s specific determinations regarding: (i) The adequacy of the Barclays Affiliated QPAM’s Policies and Training; the Barclays Affiliated QPAM’s compliance with the Policies and Training; the need, if any, to strengthen such Policies and Training; and any instance of the respective Barclays Affiliated QPAM’s noncompliance with the written Policies and Training described in Section I(h) above. 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 Barclays Affiliated QPAM must be addressed by such Barclays Affiliated QPAM, and any action taken by such Barclays Affiliated QPAM to address such recommendations must be included in an addendum to the Audit Report (which addendum is completed prior to the certification described in Section I(i)(7) below). Any determination by the auditor that the respective Barclays Affiliated QPAM has implemented, maintained, and followed sufficient Policies and Training should be based on evidence that demonstrates the Barclays Affiliated QPAM has actually implemented, maintained, and followed the Policies and Training required by this permanent exemption.’’ The Department acknowledges that the Applicant’s efforts to address the auditor recommendations regarding any inadequacy in the Policies and Training identified by the auditor, may take longer to implement than the time limits mandated by the proposed exemption. Accordingly, the Department is modifying Section I(i)(5)(i) to reflect the possibility that the Barclays Affiliated QPAMs’ efforts to address the auditor’s recommendations regarding inadequacies in the Policies and Training identified by the auditor, may not be completed by the submission date of the Audit Report and may require a written plan to address such items. However, any noncompliance identified by the auditor must be promptly addressed. The Department does not agree that the word ‘‘promptly’’ creates ambiguity in the condition and declines to remove the word. However, the Department has revised the exemption such that, with the exception of Section I(i)(11), the failure of the PO 00000 Frm 00074 Fmt 4701 Sfmt 4703 auditor to meet the conditions associated with the Audit Report shall not be deemed a violation of the exemption. The final sentence of Section I(i)(5)(i) expresses the Department’s intent that the auditor must not rely solely on the work of the Compliance Officer and the Annual Report in formulating its conclusions or findings. The auditor must perform its own independent testing to formulate its conclusions. This exemption does not prohibit the auditor from considering the Compliance Officer’s Annual Report in carrying out its audit function, including its formulation of an audit plan. This exemption, however, does prohibit the auditor from reaching conclusions that are exclusively based upon the contents of the Compliance Officer’s Annual Report. The Department emphasizes that it is not mandating how the auditor performs its work. By the express terms of this exemption, the Auditor retains discretion as to how to perform an audit that complies with this exemption. The audit conditions are critical to the Department’s determination to grant this exemption. As noted above, the Department believes the audit conditions are amply justified by the substantial compliance and oversight failures that resulted in the Conviction and fines, and in the need for this exemption as detailed above. The Department has modified Section I(i)(5)(i) to more clearly reflect these views. Comment 20—Adequacy of the Annual Review—Section I(i)(5)(ii) Section I(i)(5)(ii) of the proposed fiveyear exemption provides that ‘‘[t]he Audit Report must include the auditor’s specific determinations regarding: . . . (ii) The adequacy of the Annual Review described in Section I(m) and the resources provided to the Compliance Officer in connection with such Annual Review.’’ The Applicant requests deletion of this condition. The Applicant states that the requirement that the auditor investigate the details of resources provided to the Compliance Officer is intrusive on the operation of the business. The Applicant further states that, assuming the Annual Report required by Subsection I(m)(2)(ii) remains part of the exemption, the auditor can assess the adequacy of the report itself. In addition, the Applicant states that the proposed exemption contains multiple conditions relating to the auditor’s selection and qualifications, and that, in light of these conditions, the auditor should be E:\FR\FM\29DEN2.SGM 29DEN2 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices ethrower on DSK3G9T082PROD with NOTICES trusted to exercise appropriate judgment. As discussed in detail below, the Department views the Compliance officer and the Annual Review as integral to ensuring compliance with the exemption. An independent assessment by the auditor of the adequacy of the Annual Review is essential to providing the Department with the assurance that the Applicant and the Barclays Affiliated QPAMs have given these matters the utmost priority and have taken the actions necessary to comply with the exemption. However, the Department agrees that the QPAMs need not require the auditor to opine on the adequacy of the resources allocated to the Compliance Officer and has modified Section I(i)(5)(ii) accordingly. If, however, the auditor observes compliance issues related to the Compliance Officer or available resources, it would be appropriate to opine on these problems. Comment 21—Auditor Notification to QPAM of Noncompliance—Section I(i)(6) Section I(i)(6) provides that ‘‘[t]he auditor must notify the respective Barclays Affiliated QPAM of any instance of noncompliance identified by the auditor within five (5) business days after such noncompliance is identified by the auditor, regardless of whether the audit has been completed as of that date.’’ The Applicant requests that this condition be deleted. The Applicant states that there is no reason why the QPAM needs this information within five business days and no indication is given as to what it is to do with the information once it has it. The Applicant also states that the auditor should be trusted to exercise discretion as to the timing of notification regarding instances of noncompliance, and asserts that requiring identification of every such instance, however technical the misstep, could be counter-productive, consume significant amounts of the auditor’s time, and in light of the very limited number of available auditors, cause many financial institutions needing audits to fail to meet the deadlines imposed by these exemptions simply because a qualified auditor is not available. Further, the Applicant states that compliance with this provision is within the control of the auditor rather than the Applicant. If the condition is not deleted, the Applicant suggests that the condition read: ‘‘The auditor must notify the respective Barclays Affiliated QPAM of any instance of noncompliance identified by the auditor within five (5) VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 business days after such noncompliance is identified by the auditor, regardless of whether the audit has been completed as of that date. Any failure of the auditor to meet this condition shall not be deemed a violation of the exemption.’’ In the Department’s view, it is important that notice of noncompliance be forthcoming and prompt. Accordingly, the Department declines to delete the condition. The Department also declines to include a statement in Section I(i)(6) that a failure on behalf of the auditor to meet this condition will not violate the exemption. However, the Department, as discussed below, has modified Section I(q) to address this issue. Comment 22—Certification of the Audit—Section I(i)(7) Section I(i)(7) of the proposed fiveyear exemption provides, ‘‘[w]ith respect to each Audit Report, the General Counsel or one of the three most senior executive officers of the Barclays Affiliated QPAM to which the Audit Report applies, must certify in writing, under penalty of perjury, that the officer has: Reviewed the Audit Report and this exemption, if granted; addressed, corrected, or remedied any inadequacy identified in the Audit Report; and determined that the Policies and Training in effect at the time of signing are adequate to ensure compliance with the conditions of this proposed five-year exemption, if granted, and with the applicable provisions of ERISA and the Code.’’ The Applicant requests that the timing of Section I(i)(7) be clarified. In this regard, the Applicant states that the certification must be completed within thirty days (see Subsection I(i)(9)), but that it may take longer to remedy identified issues. The Applicant states that this condition should clarify that ‘‘addressing’’ an inadequacy means, not only accepting the auditor’s recommendations, but can include pointing out alternative action, or even no action, is a preferable means of protecting ERISA plan clients and IRAs. In addition, the Applicant represents that the condition should reflect that the individual providing the certification may not be responsible for addressing, correcting, or remedying any inadequacy, and should clarify that the certification need only state that ‘‘the officer has caused the process for such addressing, correcting, or remedying to commence.’’ While the Department does not view Section I(i)(7) as ambiguous, the Department acknowledges that the Applicant’s efforts to address the auditor’s recommendations regarding PO 00000 Frm 00075 Fmt 4701 Sfmt 4703 61889 inadequacies in the Policies and Training identified by the auditor, may take longer to implement than the timeframe to submit the certified Audit Report. The Department did not intend to limit corrective actions to those that could only be completed prior to the submission of the Audit Report. Therefore, the Department has modified Section I(i)(7) to reflect that the senior officer may certify that a written plan to address the inadequacies regarding the Policies and Training identified in the auditor’s Report is in place. Further, the conditions of this exemption do not prohibit the Applicant from disagreeing with the auditor with respect to whether certain practices rise to the level of noncompliance with the terms of this exemption. However, in those circumstances where the auditor is not persuaded to change its position on a matter the auditor considers noncompliant, the Applicant will be responsible to correct such matters. Nor do the conditions of this exemption prohibit the Applicant from disagreeing with the auditor with respect to the appropriate method for correcting or addressing issues of noncompliance. The Department expects the Applicant and the auditor to have meaningful communications on any such differences of opinion. In the event the Applicant chooses to apply a corrective method that differs from that recommended by the auditor, the Audit Report and the Addendum attached thereto should explain in detail the noncompliance, the auditor’s recommended action, the corrective method chosen, and, if applicable, why the Applicant chose a corrective method different from that recommended by the auditor. Finally, while the individual providing the certification may not be responsible for directly addressing, correcting, or remedying any inadequacy, such individual is responsible for ensuring that such process has indeed addressed, corrected or remedied the identified inadequacy. Comment 23—Review and Certification of Audit Report—Section I(i)(8) Section I(i)(8) the proposed five-year exemption provides that ‘‘[t]he Risk Committee of BPLC’s Board of Directors is 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 BPLC must review the Audit Report for each Barclays Affiliated QPAM and must certify in writing, under penalty of perjury, that such officer has reviewed each Audit Report.’’ E:\FR\FM\29DEN2.SGM 29DEN2 ethrower on DSK3G9T082PROD with NOTICES 61890 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices The Applicant requests that the requirement to provide the Audit Report to the Risk Committee of BPLC’s Board of Directors be deleted. The Applicant states that mandating the internal process by which information is handled within the financial institution is beyond the scope of exemptive relief and is an unwarranted intrusion into the corporate governance processes of BPLC and the Barclays Affiliated QPAMs that does not advance the statutory goals set forth in ERISA section 408 and Code section 4975. In addition, the Applicant states that the reference to the ‘‘highest ranking legal compliance officer’’ is unclear because BPLC does not have an officer that appears to satisfy the description. The Applicant assumes that the reference is either to the highest ranking legal officer or the highest ranking compliance officer. The Department notes that in its application and related materials, the Applicant has represented that it has established, or is in the process of establishing, comprehensive changes to processes and procedures that are, in part, intended to change the culture at BPLC from the top down. As also represented by the Applicant, these changes are focused on enhancements in: (1) Supervision, controls, and governance; (2) risk management compliance assessment; (3) transaction monitoring and communications surveillance; (4) compliance testing; and (5) internal audit.53 The Department has developed this exemption to ensure that the highest levels of management are aware of ongoing matters concerning BPLC, the Barclays Affiliated QPAMs, and compliance with this exemption. Requiring the provision of the Audit Report to the Board of Directors and certification by a senior executive officer in the reporting line of the highest compliance officer provides assurance that the highest levels of management within BPLC stay informed about BPLC’s and the Barclays Affiliated QPAMs’ compliance with the terms of this exemption. In the Department’s view, such officials are in the best position to ensure that any inadequacy identified by the auditor is appropriately addressed and that necessary changes to corporate policy are effectuated where necessary. Requiring certification under penalty of perjury is consistent with the Department’s longstanding view that basic requirements of compliance and integrity are fundamental to an entity’s 53 See BCI Exemption Application (May 20, 2015) from pages 7 to 15. VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 ability to qualify as a QPAM. However, in accordance with the Applicant’s request, the Department has clarified the condition to refer to the ‘‘highest ranking compliance officer.’’ Comment 24—Availability of the Audit Report—Section I(i)(9) Section I(i)(9) of the proposed fiveyear exemption provides that, ‘‘Each Barclays Affiliated QPAM provides its certified Audit Report by regular mail to: The Department’s Office of Exemption Determinations (OED), 200 Constitution Avenue NW, Suite 400, Washington, DC 20210, or by private carrier to: 122 C Street NW, Suite 400, Washington, DC 20001–2109, no later than 30 days following its completion. The Audit Report will be part of the public record regarding this five-year exemption, if granted. Furthermore, each Barclays Affiliated QPAM must make its Audit Report unconditionally available for examination by any duly authorized employee or representative of the Department, other relevant regulators, and any fiduciary of an ERISA-covered plan or IRA, the assets of which are managed by such Barclays Affiliated QPAM.’’ The Applicant states that the scope of exemption should be limited to PTE 84– 14 in all instances and requests that this condition require that the Audit Report be available to plans managed by a QPAM in reliance on PTE 84–14. The Applicant states that this condition can be read to require that the Audit Report be available to asset management plan clients, regardless of whether the Barclays Affiliated QPAM relies on PTE 84–14 for such clients’ accounts. The Applicant suggests that the condition read: ‘‘Each Barclays Affiliated QPAM provides its certified Audit Report by regular mail to: The Department’s Office of Exemption Determinations (OED), 200 Constitution Avenue NW, Suite 400, Washington, DC 20210, or by private carrier to: 122 C Street NW, Suite 400, Washington, DC 20001–2109, no later than 30 days following its completion. The Audit Report will be part of the public record regarding this exemption. Furthermore, each Barclays Affiliated QPAM must make its Audit Report unconditionally available for examination by any duly authorized employee or representative of the Department, other relevant regulators, and any fiduciary of an ERISA-covered plan or IRA, the assets of which are managed by such Barclays Affiliated QPAM in reliance on PTE 84–14.’’ ERISA-covered plans and IRAs, routinely rely on QPAM status before entering into agreements with financial institutions, even if those institutions do PO 00000 Frm 00076 Fmt 4701 Sfmt 4703 not rely on PTE 84–14 when managing plan and IRA assets. Accordingly, the Department has an interest in ensuring that the conditions of this exemption broadly protect ERISA-covered plans and IRAs that have relied on QPAM status in deciding to enter into an agreement with the Applicant or the Barclays Affiliated QPAMs. Nevertheless, the Department has revised Section I(i)(9) to clarify that the Barclays Affiliated QPAMs are required to make the documents available to any fiduciary of a Covered Plan. The Audit Report, in any event, will be incorporated into the public record attributable to this exemption, under Exemption Application Number D– 11910, and, therefore, independently accessible by interested members of the public. Accordingly, the Department has determined to revise the condition by replacing the phrase ‘‘an ERISA-covered plan or IRA, the assets of which are managed by such Barclays Affiliated QPAM’’ with the term ‘‘Covered Plan’’ (as defined in Section II(f)). Lastly, the Department agrees that access to the Audit Report need only be upon request and such access or delivery can be made electronically, and it has revised the exemption accordingly. Comment 25—Engagement Agreements—Section I(i)(10) Section I(i)(10) of the proposed fiveyear exemption provides that, ‘‘Each Barclays Affiliated QPAM and the auditor must submit to OED: (A) Any engagement agreement(s) entered into pursuant to the engagement of the auditor under this five-year exemption, if granted; and (B) any engagement agreement entered into with any other entity retained in connection with such QPAM’s compliance with the Training or Policies conditions of this five-year exemption, if granted, no later than six (6) months after the Conviction Date (and one month after the execution of any agreement thereafter).’’ The Applicant requests deletion of the requirement under Section I(i)(10)(B) which provides, ‘‘[e]ach Barclays Affiliated QPAM and the auditor must submit to OED . . . (B) any engagement agreement entered into with any other entity retained in connection with such QPAM’s compliance with the Training or Policies conditions of this five-year exemption, no later than six (6) months after the Conviction Date (and one month after the execution of any agreement thereafter);’’. The Applicant states that the proposed exemption includes multiple conditions for the qualifications of the trainer (Subsection I(h)(2)(ii)), the contents of the Policies (Subsection E:\FR\FM\29DEN2.SGM 29DEN2 ethrower on DSK3G9T082PROD with NOTICES Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices I(h)(1)) and for the auditor’s review of the adequacy of the Training and Policies (Subsection I(i)(5)(i)). The Applicant represents that there is no reason for the Department to see and review, and make available to the public, every service provider contract that could cover policies, procedures or training. The Applicant states that no reason is given for the Department’s review of engagement letters for all legal and consulting services applicable to the policies, procedures and training. Additionally, the Applicant states that it should be permitted to delete or redact commercial terms from any engagement agreement submitted to the Department. Further, the Applicant requests that the timeframe for provision of the auditor’s engagement be modified to no later than six (6) months after the Barclays Affiliated QPAM’s engagement with an ERISA-covered plan or IRA for the provision of asset management or other discretionary fiduciary services (and one month after the execution of any agreement thereafter). Therefore, the Applicant suggests that the condition read: ‘‘Each Barclays Affiliated QPAM and the auditor must submit to OED: Any engagement agreement(s) entered into pursuant to the engagement of the auditor under this exemption no later than six (6) months after the Barclays Affiliated QPAM’s engagement with an ERISA-covered plan or IRA for the provision of asset management or other discretionary fiduciary services (and one month after the execution of any agreement thereafter). Commercial terms may be removed or redacted from the auditor engagement.’’ In coordination with the Department’s modification of Section I(h)(2)(ii) to remove the requirement that the Training must be conducted by an independent professional, the Department has determined to remove the requirement in Section I(i)(10)(B) to provide to the Department the engagement agreements entered into with entities retained in connection with compliance with the Training or Policies conditions. Furthermore, to remove any confusion or uncertainty regarding the timing of the submission of the auditor’s engagement agreement, the Department has modified Section I(i)(10) to require that the auditor’s engagement agreement be submitted to the Office of Exemption Determinations no later than two (2) months after the engagement agreement is entered into by the Applicant and the independent auditor. VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 Comment 26—Auditor’s Workpapers— Section I(i)(11) Section I(i)(11) of the proposed fiveyear exemption provides that the ‘‘auditor must provide OED, upon request, all of the workpapers created and utilized in the course of the audit, including, but not limited to: The audit plan; audit testing; identification of any instance of noncompliance by the relevant Barclays Affiliated QPAM; and an explanation of any corrective or remedial action taken by the applicable Barclays Affiliated QPAM.’’ The Applicant states that, as noted above in connection with Section I(i)(5), compliance with this provision is within the control of the auditor rather than the Applicant. The Applicant states that a violation of this provision should therefore not result in loss of the exemption. The Applicant also represents that this condition is unnecessary and duplicative. In addition, the Applicant requests that this condition be appropriately limited to ensure that any confidential or otherwise sensitive information is redacted prior to any disclosure of the workpapers in a public file. The Applicant states that the proposed exemption, as worded, requires that the auditor enjoy broad access to a Barclays Affiliated QPAM’s records. The Applicant further states that, while such access should be appropriately cabined, the auditor will still have access to sensitive information, such as client information, marketing data, personal information of the QPAM’s employees, and other details. Therefore, the Applicant requests that access be limited to allow the auditor, and OED,54 to inspect such information without its being disclosed in the public record. The Applicant suggests that this condition read: ‘‘The auditor must provide OED, upon request, all of the workpapers created and utilized in the course of the audit, provided that any confidential business or personal information of the Barclays Affiliated QPAMs, BPLC, and their clients (or the officers, directors, employees or agents thereof) reflected in the workpapers, including, without limitation, client communications, shall be redacted, and provided further that nothing herein shall be deemed to limit any authority the Department may otherwise have to inspect such information without making it part of the public file. Any failure of the auditor to meet this 54 OED is the Office of Exemption Determinations within the Employee Benefits Security Administration agency of the United States Department of Labor. PO 00000 Frm 00077 Fmt 4701 Sfmt 4703 61891 condition shall not be deemed a violation of the exemption.’’ The Department acknowledges that certain information contained in the workpapers may be confidential and proprietary, and having that information in a public file may create needless or avoidable disclosure issues. The Department has determined to modify Section I(i)(11) to remove the requirement that the auditor provide the workpapers to OED, and instead require that the auditor provide access to the workpapers for the Department’s review and inspection. However, given the importance of the workpapers to the Department’s own review and the Applicant’s contractual relationship with the auditor, the Department declines to include a statement in Section I(i)(11) that a failure on behalf of the auditor to meet this condition will not violate the exemption. Comment 27—Replacement of Auditor—Section I(i)(12) Section I(i)(12) of the proposed fiveyear exemption provides that, ‘‘BPLC must notify the Department at least thirty (30) days prior to any substitution of an auditor, except that no such replacement will meet the requirements of this paragraph unless and until BPLC demonstrates to the Department’s satisfaction that such new auditor is independent of BPLC, experienced in the matters that are the subject of the exemption, if granted, and capable of making the determinations required of this exemption, if granted.’’ The Applicant requests that this Section I(i)(12) be deleted, stating that the proposed exemption contains conditions requiring the auditor to satisfy multiple conditions and it serves no useful purpose to impose an additional requirement to demonstrate to the Department’s satisfaction that the auditor satisfies such standards before substitution, particularly given the timeline required for the audit process. The Applicant requests that if the condition is not deleted, the condition be modified to read: ‘‘BPLC must notify the Department at least thirty (30) days after terminating the engagement of the auditor, the reason for the termination, and provide the Department with the contract of the substitute auditor, the selection of which must satisfy the requirements of subparagraph (i)(1).’’ The Department notes that this exemption is not unique in requiring the Department be notified of changes to service providers (see, e.g., the requirement of Schedule C of the Form 5500 Annual Return/Report for the Plan Administrator of certain plans to report to the Department a termination of the E:\FR\FM\29DEN2.SGM 29DEN2 61892 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices should make clear that it supersedes the analogous condition in the Temporary Exemption to avoid imposing duplicative requirements. The Applicant suggests that this condition read: ‘‘This Subsection supersedes the analogous section of PTE 2016–16, as of the date of this exemption’s publication in the Federal Register. Effective as of the publication date, with respect to any arrangement, agreement, or contract between a Barclays Affiliated QPAM and an ERISA-covered plan or IRA under which a Barclays Affiliated QPAM provides asset management or other discretionary fiduciary services in reliance on PTE 84–14, each Barclays Affiliated QPAM agrees and warrants . . . .’’ ERISA-covered plans and IRAs routinely rely on QPAM status as a condition of entering into transactions with financial institutions, even with respect to transactions that do not necessarily require adherence to PTE 84–14. In addition, it may not always be clear whether or not the Barclays Affiliated QPAM intends to rely upon PTE 84–14 for any particular transaction. Accordingly, it is critical to ensure that protective conditions are in place to safeguard the interests of ERISA-covered plans and IRAs that are acting in reliance on the availability of this exemption and QPAM status, Comments 28–29—Contracts With Plans particularly those which may not have and IRAs—Section I(j)(1) entered into the transaction in the first Section I(j)(1) of the proposed fiveplace, but for the Department’s grant of year exemption provides: ‘‘Effective as this exemption. of the effective date of this five-year The Department has a clear interest in exemption, if granted, with respect to protecting such ERISA-covered plans any arrangement, agreement, or contract and IRAs that enter into an asset between a Barclays Affiliated QPAM management agreement with a Barclays and an ERISA-covered plan or IRA for Affiliated QPAM in reliance on the which a Barclays Affiliated QPAM manager’s qualification as a QPAM. provides asset management or other Moreover, when an ERISA-covered plan discretionary fiduciary services, each or IRA terminates its relationship with Barclays Affiliated QPAM agrees and an asset manager, it may incur warrants: (1) To comply with ERISA and significant costs and expenses as its the Code, as applicable with respect to investments are unwound and as it such ERISA- covered plan or IRA, to searches for and hires a new asset refrain from engaging in prohibited manager. The Department has revised this transactions that are not otherwise condition for consistency with its exempt (and to promptly correct any interest in protecting ERISA-covered inadvertent prohibited transactions); plans and IRAs that rely upon QPAM and to comply with the standards of prudence and loyalty set forth in section status. The condition now applies only to Covered Plans. 404 of ERISA with respect to each such The Department rejects the view that ERISA-covered plan and IRA.’’ it acts outside its authority by protecting The Applicant requests that Subsection I(j) provide that the contract ERISA-covered plans and IRAs that rely on Barclay’s Affiliated QPAMs’ requirements apply only to agreements eligibility for this exemption, and where a QPAM provides services in reemphasizes the seriousness of the reliance on PTE 84–14. The Applicant asserts, as noted above, that the scope of criminal misconduct that caused the Applicant to need this exemption. The exemptive relief in the proposed Department may grant an exemption exemption should in all instances be under section 408(a)(3) of ERISA or limited in this manner. In addition, the section 4975(c)(2)(C) of the Code only to Applicant states that the condition ethrower on DSK3G9T082PROD with NOTICES plan’s auditor and/or enrolled actuary and to provide an explanation of the reasons for the termination, including a description of any material disputes or matters of disagreement concerning the termination). Furthermore, requiring the Applicant to notify the Department of the substitution of an auditor serves to ensure that the Barclays Affiliated QPAMs are attentive to the audit process and the protections it provides; and that the Department has the information it needs to review compliance. The Department has decided, however, to modify Section I(i)(12) to remove the requirement for the Applicant to demonstrate the independence and qualifications of the auditor, however, and requires instead that the Applicant, no later than two months from the engagement of the replacement auditor, notify the Department of a change in auditor and of the reason(s) for the substitution including any material disputes between the terminated auditor and the Applicant. The Applicant’s fiduciary obligations with respect to the selection of the auditor, as well as the significant role a credible selection plays in reducing the need for more extensive oversight by the Department, should be sufficient to safeguard the selection process. VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 PO 00000 Frm 00078 Fmt 4701 Sfmt 4703 the extent the Secretary finds, among other things, that the exemption is protective of the affected plan or IRA. As noted above, BPLC personnel engaged in serious misconduct over an extended period and at the expense of their own clients. This misconduct appears to have stemmed, in part, from deficiencies in control and oversight. Notwithstanding the misconduct, which resulted in violation of Section I(g) of PTE 84–14, the Department has granted this exemption based, in significant part, upon the inclusion of Section I(j)(1) in the exemption, which protects Covered Plans by, among other things, requiring Barclays Affiliated QPAMs to make an express commitment to their customers to adhere to the requirements of ERISA and the Code, as applicable. As previously indicated, the Department has concluded that a culture of compliance, centered on adherence to basic standards of fair dealing as set forth in this exemption, gives the Department a compelling basis for making the required statutory findings that the exemption is in the interests of plan and IRA investors and protective of their rights. Absent such findings, the exemption would have been denied. In response to the Applicant’s comments, however, the Department has required an express commitment to comply with the fiduciary standards and prohibited transaction rules only to the extent these provisions are ‘‘applicable’’ under ERISA and the Code. This section, as modified, should serve its salutary purposes of promoting a culture of compliance and enhancing the ability of plans and IRA customers to sever their relationships with minimal injury in the event of noncompliance. This conclusion is reinforced, as well, by the limited nature of the relief granted by this exemption, which generally does not extend to transactions that involve selfdealing. In response to the Applicant’s comments, the Department also notes that nothing in ERISA or the Code prevents the Department from conditioning relief on express contractual commitments to adhere to the requirements set out herein. The QPAMs always remain free to disclaim reliance on the exemption and to avoid such express contractual commitments. To the extent, however, that they hold themselves out as fiduciary QPAMs, they should be prepared to make an express commitment to their customers to adhere to the requirements of this exemption. This commitment strengthens and reinforces the likelihood of compliance, and helps E:\FR\FM\29DEN2.SGM 29DEN2 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices ethrower on DSK3G9T082PROD with NOTICES ensure that, in the event of noncompliance, customers will be insulated from injuries caused by noncompliance. These protections also ensure that customers will be able to extricate themselves from transactions that become prohibited as a result of the QPAMs’ misconduct, without fear of sustaining additional losses as a result of the QPAMs’ actions. In this connection, however, the Department emphasizes that the only claims available to the QPAMs’ customers pursuant to these contractual commitments are those separately provided by ERISA or other state and federal laws that are not preempted by ERISA. As before, private litigants have only those causes of action specifically authorized by laws that exist independent of this exemption. Comment 30—Indemnity Provision— Section I(j)(2) Section I(j)(2) requires each Barclays Affiliated QPAM to agree and warrant ‘‘[t]o indemnify and hold harmless the ERISA-covered plan or IRA for any damages resulting from a Barclays Affiliated QPAM’s violation of applicable laws, a Barclays Affiliated QPAM’s breach of contract, or any claim brought in connection with the failure of such Barclays Affiliated 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.’’ The Applicant asserts that the provision is unfair because it is not limited to clients who are harmed through a direct, causal link to the loss of the exemptive relief provided by PTE 84–14 and the Applicant requests that the condition be deleted. In addition, the Applicant represents that the condition appears to allow plans and IRAs to seek to recover damages (i) that arise from violations and breaches by third parties, (ii) that arise only tenuously from the manager’s conduct, (iii) that may be grossly unreasonable in amount, (iv) for claims without merit and (v) for claims in connection with accounts that do not rely on the relief provided by PTE 84–14. If the Department declines to delete this condition, the Applicant requests, in the alternative, that the Department expressly tie the requirement to damages with a proximate causal connection to relevant conduct of the manager by rewording the condition as follows: ‘‘To indemnify and hold harmless the ERISA-covered plan or IRA for any reasonable damages involving such arrangement, agreement or contract and resulting directly from a violation of ERISA by such Barclays VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 Affiliated QPAM, or, to the extent the Barclays Affiliated QPAM relies on the exemptive relief provided by PTE 84–14 under the arrangement, agreement or contract, the failure of such Barclays Affiliated 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 as a result of the Conviction. This condition does not require indemnification of indirect, special, consequential or punitive damages.’’ As explained above, the intended purpose of this exemption is to protect ERISA-covered plans and IRAs that entrust the Barclays Affiliated QPAMs with the management of their retirement assets. To this end, it is the Department’s view that the protective purpose of this exemption is furthered by Section I(j)(2). The Department emphasizes that this condition is not punitive, but rather ensures that, when an ERISA-covered plan or IRA enters into an asset management agreement with a Barclays Affiliated QPAM in reliance on the manager’s qualification as a QPAM, it may expect adherence to basic fiduciary norms and standards of fair dealing, notwithstanding the prior conviction. The condition also ensures that the plan or IRA will be able to disengage from that relationship in the event that the terms of this exemption are violated without undue injury. However, the Department has revised the applicability of this condition to more closely reflect these interests. In particular, the condition applies only when the Barclays Affiliated QPAM relies on PTE 84–14 or has expressly represented that it qualifies as a QPAM or relies on the QPAM class exemption in its dealings with the plan or IRA. As indicated above, if the asset manager would prefer not to be subject to these provisions as exemption conditions, it may expressly disclaim reliance on QPAM status or PTE 84–14 in entering into its contract with the plan or IRA (in that case, however, it could not rely on the exemption for relief). The Department has also made certain further changes to this condition in consideration of the Applicant’s comment. These changes include: Renumbering the condition for clarity; replacing ‘‘applicable laws’’ with clarifying language that conforms to the one-year exemption; replacing ‘‘any damages’’ with ‘‘actual losses resulting directly from’’ certain acts or omissions of the Barclays Affiliated QPAMs; and adding language which affirms that the obligations under this condition do not extend to damages caused by acts that are beyond the control of the Barclays Affiliated QPAMS. PO 00000 Frm 00079 Fmt 4701 Sfmt 4703 61893 Comment 31—Limits on Liability— Section I(j)(2), I(j)(3) and I(j)(7) 55 Sections I(j)(2), I(j)(3) and I(j)(7) require that each Barclays Affiliated QPAM agree and warrant: . . . (2) To indemnify and hold harmless the ERISA-covered plan or IRA for any damages resulting from a Barclays Affiliated QPAM’s violation of applicable laws, a Barclays Affiliated QPAM’s breach of contract, or any claim brought in connection with the failure of such Barclays Affiliated 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; (3) Not to require (or otherwise cause) the ERISA-covered plan or IRA to waive, limit, or qualify the liability of the Barclays Affiliated QPAM for violating ERISA or the Code or engaging in prohibited transactions; [and] . . . (7) Not to include exculpatory provisions disclaiming or otherwise limiting liability of the Barclays Affiliated QPAM for a violation of such agreement’s terms, except 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 BPLC, and its affiliates.’’ The Applicant requests that these conditions be deleted because they contain duplicative requirements, which extend beyond the scope of relief. The Applicant states that the indemnification provision should be limited to ensure that it operates in a manner that is fair to the Applicant and its affiliates and that, with that change, the condition provides ample protection to clients. The Applicant states that Section I(j)(3) and Section I(j)(7) do not provide any additional protection. The Department declines to delete Section I(j)(3) from the final exemption. The Department notes that ERISA already precludes ERISA fiduciaries from disclaiming obligations under ERISA. See ERISA section 410 (prohibiting exculpatory clauses as void as against public policy). To the extent the exemption condition prevents the Barclays Affiliated QPAMs from including contractual provisions that are void as against public policy there is no legitimate basis for objection. Such exculpatory language should not be in the governing documents in the first place and is potentially misleading because it suggests disclaimer of obligations that may not be disclaimed. 55 The Department has determined that Subsection (4) is duplicative of the exemption’s prohibition on exculpatory clauses, described below. Thus, the subsection has been deleted. Section I(j) has been renumbered for clarity. E:\FR\FM\29DEN2.SGM 29DEN2 61894 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices ethrower on DSK3G9T082PROD with NOTICES Outside the context of ERISA section 410, the provision’s requirement that the Barclays Affiliated QPAMs retain accountability for their adherence to the basic obligations set forth in this exemption is more than justified by the misconduct that led to the fines and Conviction as discussed above, and by the need to ensure that Plan and IRA customers may readily obtain redress and exit contracts with Barclays Affiliated QPAMs without harm in the event of violations. The Department has modified Section I(j)(6) (formerly, Subsection (j)(7)) to clarify that the prohibition on exculpatory provisions does not extend to losses that arise from an act or event not caused by the Applicant. Also, nothing in this section alters the prohibition on exculpatory provisions set forth in ERISA section 410. Comment 32—Termination and Withdrawal Restriction—Section I(j)(5) and I(j)(6) Under Sections I(j)(5) and I(j)(6) of the proposed five-year exemption, the Barclays Affiliated QPAMs agree: ‘‘(5) Not to restrict the ability of such ERISAcovered plan or IRA to terminate or withdraw from its arrangement with the Barclays Affiliated QPAM (including 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 as a result of an actual lack of liquidity of the underlying assets, provided that such restrictions are applied consistently and in like manner to all such investors; [and] . . . (6) Not to impose any fees, penalties, or charges for such termination or withdrawal with the exception of reasonable fees, appropriately disclosed in advance, that are specifically designed to prevent generally recognized abusive investment practices or specifically designed to ensure equitable treatment of all investors in a pooled fund in the event such withdrawal or termination may have adverse consequences for all other investors, provided that such fees are applied consistently and in like manner to all such investors.’’ The Applicant represents that these conditions should be deleted because they are unnecessary. The Applicant notes that lockup conditions are commonly used, designed to protect all investors in a pooled fund, and applied VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 evenhandedly to all investors. Further, the Applicant states that the conditions, as worded, could provide ERISA plan clients and IRAs a privileged position, to the detriment of other investors. The Applicant requests that, should these conditions be retained, they be modified as follows: Under renumbered Sections I(j)(4) and (j)(5), the Barclays Affiliated QPAMs agree: ‘‘(4) Not to restrict the ability of such ERISAcovered plan or IRA to terminate or withdraw from its arrangement with the Barclays Affiliated QPAM with respect to any investment in a separately managed account or pooled fund subject to ERISA and managed by such QPAM, with the exception of reasonable restrictions, appropriately disclosed in advance, that are specifically designed to ensure equitable treatment of all investors in a pooled fund in the event such withdrawal or termination may have adverse consequences for all other investors. In connection with any such arrangements involving investments in pooled funds subject to ERISA entered into after the Conviction Date, the adverse consequences must relate to a lack of liquidity of the pooled fund’s underlying assets, valuation issues, or regulatory reasons that prevent the fund from immediately redeeming an ERISAcovered plan’s or IRA’s investment, and such restrictions are applicable to all such investors and effective no longer than reasonably necessary to avoid the adverse consequences; [and] . . . (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 ensure equitable treatment of all investors in a pooled fund in the event such withdrawal or termination may have adverse consequences for all other investors, provided that such fees are applied consistently and in like manner to all such investors.’’ The Department has revised renumbered Section I(j)(4) and has revised the condition to allow exceptions for a lack of liquidity of the pooled fund’s underlying assets, valuation issues, or regulatory reasons that prevent the fund from immediately redeeming an ERISA-covered plan’s or IRA’s investment in partial satisfaction of the Applicant’s request, but has retained the parenthetical that the restriction is not limited to a separatelymanaged account that is subject to ERISA or a pooled fund that is subject to ERISA. The Department has decided to retain Section I(i)5 as proposed. PO 00000 Frm 00080 Fmt 4701 Sfmt 4703 Comment 33—Updated Investment Management Agreement—Section I(j)(7) Section I(j)(8) of the proposed fiveyear exemption provides that each Barclays Affiliated QPAM agrees and warrants: ‘‘[w]ithin four (4) months of the date of the Conviction, each Barclays Affiliated QPAM must provide a notice of its obligations under this Section I(j) to each ERISA-covered plan and IRA for which a Barclays Affiliated QPAM provides asset management or other discretionary fiduciary services. For all other prospective ERISA-covered plan and IRA clients for which a Barclays Affiliated QPAM provides asset management or other discretionary services, the Barclays Affiliated QPAM will agree in writing to its obligations under this Section I(j) in an updated investment management agreement between the Barclays Affiliated QPAM and such clients or other written contractual agreement.’’ The Applicant represents that it and its affiliates do not currently provide asset management or other discretionary fiduciary services to ERISA-covered plans or IRAs. The Applicant states that, for that reason, the four-month notice has no purpose. The Applicant requests that this provision be modified to reflect that Barclays Affiliated QPAMs would in the future be required to provide notice prior to an engagement with an ERISA-covered plan or IRA subject to this exemption, consistent with Subsections (h)(1) and (h)(2). The Applicant notes that the timing of the notice was correct in the analogous provision of the Temporary Exemption. Moreover, the Applicant submits that the condition should be limited to plans for which the QPAM relies on PTE 84– 14. Finally, the Applicant submits that a contractual agreement is an improper vehicle as a client may attempt to modify proposed contractual terms. The Applicant suggests that the condition in renumbered Subsection (j)(7) read as follows: ‘‘Prior to a Barclays Affiliated QPAM’s engagement with an ERISA-covered plan or IRA for the provision of asset management or other discretionary fiduciary services, such Barclays Affiliated QPAM must provide a notice of its obligations under this Section I(j) to such ERISA-covered plan or IRA.’’ The Department has modified the condition to require that Barclays Affiliated QPAMs provide notice prior to an engagement with an ERISAcovered plan or IRA. Further, as noted above, the Department has an interest in protecting a plan or IRA that enters into an asset management agreement with a Barclays Affiliated QPAM in reliance on E:\FR\FM\29DEN2.SGM 29DEN2 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices ethrower on DSK3G9T082PROD with NOTICES the manager’s qualification as a QPAM, regardless of whether the QPAM relies on the class exemption when managing the plan’s or IRA’s assets. The Department has revised the applicability of this condition to more closely reflect this interest, and the condition now applies to Covered Plans. Comment 34—Notice to Plan Clients— Section I(k) Section I(k) of the proposed five-year exemption provides that ‘‘[e]ach BPLC affiliated asset manager provides each Future Covered Client with a Federal Register copy of the proposed five-year exemption, along with a separate summary describing the facts that led to the Conviction (the Summary), which have been submitted to the Department, and a prominently displayed statement that the Conviction resulted in a failure to meet a condition of PTE 84–14. The provision of these documents must occur prior to, or contemporaneously with, the client’s receipt of a written asset management agreement from the BPLC affiliated asset manager. For purposes of this paragraph, a ‘‘Future Covered Client’’ means a client of the BPLC affiliated asset manager that, beginning after the date, if any, that a final exemption is published in the Federal Register, has assets managed by such asset manager, and has received a representation from the asset manager that the asset manager is a QPAM, or qualifies for the relief provided by PTE 84–14.’’ The Applicant asserts that the condition is overbroad and should be deleted. The Applicant states, by its terms, it extends to clients for which the QPAM does not rely on PTE 84–14 and clients who are neither covered by ERISA or the prohibited transaction provisions of the Internal Revenue Code. Further, the Applicant states that, to the extent the condition is meant to extend to clients for which the QPAM relies on PTE 84–14, it duplicates the requirements of Subsection I(j)(8)). The Department declines to delete the condition. The Department notes that ERISA-covered plans and IRAs often rely on QPAM status as a condition of entering into transactions with financial institutions, even with respect to transactions that do not strictly require adherence to PTE 84–14. In addition, it may not always be clear whether the Barclays Affiliated QPAM intends to rely upon PTE 84–14 for any particular transaction. Accordingly, it is critical to ensure that protective conditions are in place to safeguard the interests of plans and IRAs that are acting in reliance on QPAM status or the availability of this exemption, particularly those who may VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 not have entered into the transaction in the first place, but for the Department’s grant of this exemption. Further, the Department has an interest in protecting plans and IRAs that enter into an asset management agreement with a Barclays Affiliated QPAM in reliance on the manager’s qualification as a QPAM. If a plan or IRA terminates its relationship with an asset manager, it may incur significant costs and expenses as its investments are unwound and as it searches for and hires a new asset manager. The Applicant also requests deletion of the requirement that a separate summary of facts be provided, as the facts are set out in the Federal Register notice. The Applicant suggests that the condition read as follows: ‘‘Notice to Future Covered Clients. Each Barclays Affiliated QPAM provides each Future Covered Client with a Federal Register copy of the final permanent exemption. The provision of this document must occur prior to, or contemporaneously with, the client’s receipt of a written asset management agreement from the Barclays Affiliated QPAM. For purposes of this paragraph, a ‘‘Future Covered Client’’ means an ERISA-covered Plan client or IRA client of the Barclays Affiliated QPAM that, beginning after the date, if any, that a final exemption is published in the Federal Register, for which a Barclays Affiliated QPAM will provide asset management or other discretionary fiduciary services in reliance on PTE 84–14.’’ The Department declines to make the requested changes. The exemption seeks to ensure that all interested parties are aware of and attentive to the complete facts and circumstances surrounding this application for exemption. The required disclosure of the proposal and grant ensures full disclosure of the relevant facts and circumstances, and the Summary highlights the important facts that led to the Conviction. Requiring the disclosure of the Summary, proposal, and grant provides the opportunity for all parties to have knowledge of these facts and circumstance. Notwithstanding this, the Department has modified the condition to clarify that disclosures may be provided electronically. Further, the notice requirement has been narrowed to ERISA-covered plans and IRAs that would benefit from this knowledge (i.e., Covered Plans). Notice does not need to be given to a client with respect to which a Barclays Affiliated QPAM has expressly disclaimed reliance on QPAM status or reliance on PTE 84–14. PO 00000 Frm 00081 Fmt 4701 Sfmt 4703 61895 Comment 35—QPAM Compliance with PTE 84–14 Conditions Except Section I(g); Section I(l) Section I(l) of the proposed five-year exemption provides that ‘‘[t]he Barclays QPAMs must comply with each condition of PTE 84–14, as amended, with the sole exception of the violation of Section I(g) of PTE 84–14 that is attributable to the Conviction.’’ The Applicant represents this condition contains an unintended error as ‘‘Barclays QPAM’’ is undefined. The Applicant suggests that the condition read: ‘‘The Barclays Affiliated QPAMs must comply with each condition of PTE 84–14, as amended, with the sole exception of the violation of Section I(g) of PTE 84–14 that is attributable to the Conviction.’’ The Department has revised the exemption in the manner requested by the Applicant. Comment 36—Compliance Officer Appointment and Reporting Line— Section I(m)(1)(ii) Section I(m)(1)(ii) of the proposed five-year exemption provides, ‘‘BPLC designates 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 annual review (the Annual Review) to determine the adequacy and effectiveness of the implementation of the Policies and Training. With respect to the Compliance Officer, the following conditions must be met: . . . (ii) The Compliance Officer must have a direct reporting line to the highestranking corporate officer in charge of legal compliance that is independent of BPLC’s other business lines.’’ The Applicant requests the deletion of conditions regarding appointment of the Compliance Officer and the Annual Review. The Applicant states that BPLC pleaded guilty to a single crime, based on the conduct of two individuals in London who had no responsibility for asset management. The Applicant claims that BPLC and its Affiliated QPAMs have very robust compliance departments and that BPLC’s compliance and remediation efforts were singled out for praise by DOJ and resulted in BPLC becoming the first corporate entity to receive sentencing credit for such efforts. The Applicant asserts that the Department’s imposition of additional compliance requirements is, under these circumstances, unwarranted and seemingly arbitrary. The Applicant states that the Department has not imposed a E:\FR\FM\29DEN2.SGM 29DEN2 61896 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices requirement like that in Subsection I(m) in granting past exemptions, and claims that there is no basis for imposing the requirement herein. The Applicant represents that Barclays should be trusted to determine how to comply with the exemption and its Policies and Training conditions, which are separately the subject of the audit requirement. In addition, the Applicant states that the reference to the ‘‘highest ranking corporate officer in charge of legal compliance’’ is unclear. The Applicant requests that if the condition is not deleted, that the condition read: ‘‘(m)(1) BPLC designates a compliance officer (the Compliance Officer) who will be responsible for compliance with the Policies and Training requirements described herein: . . . (ii) The Compliance Officer must have a direct reporting line to the highestranking corporate officer in charge of legal or compliance that is independent of BPLC’s other business lines.’’ The Department proposed the requirement of an internal compliance officer because of serious concerns regarding the Applicant’s compliance regime, as discussed above. The Department’s determination to grant this exemption is based in part on the Department’s view that an internal compliance officer with responsibility over the policies and procedures mandated by this exemption will provide a new level of oversight necessary to ensure that such Policies and Training are properly implemented. In response to the Applicant’s comment that the reference to the ‘‘highest ranking corporate officer in charge of legal compliance’’ is unclear, as noted above in Section I(i)(8), the Department has modified ‘‘highest ranking corporate officer in charge of legal compliance’’ to ‘‘highest ranking corporate officer in charge of compliance for asset management.’’ ethrower on DSK3G9T082PROD with NOTICES Comment 37—Distribution of Compliance Officer’s Annual Report— Section I(m)(2)(iv) Section I(m)(2)(iv) of the proposed five-year exemption provides, ‘‘[w]ith respect to each Annual Review, the following conditions must be met: . . . (iv) Each Annual Report must be provided to appropriate corporate officers of BPLC and each Barclays Affiliated QPAM to which such report relates; the head of compliance and the General Counsel (or their functional equivalent) of the relevant Barclays Affiliated QPAM; and must be made unconditionally available to the independent auditor described in Section I(i) above.’’ VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 To the extent the Annual Review and Annual Report conditions are not deleted, the Applicant requests deletion of the requirement that the Annual Report be provided to ‘‘appropriate corporate officers.’’ The Applicant states that this term is undefined and unclear. The Applicant states that the purpose of this condition is satisfied by providing the Report to the General Counsel (or their functional equivalent) who can determine what further internal distribution is necessary. If the condition is not deleted, the Applicant suggests that the condition read: ‘‘Each Annual Report must be provided to the head of compliance and the General Counsel (or their functional equivalent) of the relevant Barclays Affiliated QPAM and the General Counsel (or their functional equivalent) of BPLC; and must be made unconditionally available to the independent auditor described in Section I(i) above.’’ While the Department declines to delete the Annual Review and Annual Report conditions, after consideration of the Applicant’s comment, the Department has revised the exemption in the manner requested by the Applicant. Comment 38—Compliance Annual Review and Timing—Section I(m)(2)(v) Section I(m)(2)(v) of the proposed five-year exemption provides, ‘‘[w]ith respect to each Annual Review, the following conditions must be met: . . . (v) Each Annual Review, including the Compliance Officer’s written Annual Report, must be completed at least three (3) months in advance of the date on which each audit described in Section I(i) is scheduled to be completed.’’ To the extent the Annual Review and Annual Report requirements are not deleted, the Applicant requests that this condition be deleted or, at minimum, that the timing requirement be removed. The Applicant states that the compliance review process outlined in the proposed exemption is an extensive undertaking, and the proposed exemption envisions an iterative process in which the auditor communicates with the relevant QPAM upon discovery of issues. The Applicant states that the Department should not mandate each aspect of the Annual Review, to the extent the Annual Review requirement remains, and, in any case, the Annual Review should not be mandated to conclude well before the audit is completed. If the condition is not deleted, the Applicant suggests that the condition read: ‘‘(v) The first Annual Review, including the Compliance Officer’s written Annual Report, must be completed within twelve (12) months of PO 00000 Frm 00082 Fmt 4701 Sfmt 4703 the Effective Date and each successive Annual Review must be completed within twelve (12) months of the prior Annual Review.’’ The Department declines to delete the Annual Review and Annual Report conditions. The Department notes that the Annual Review and the Annual Report are integral to the auditor’s assessment of the Applicant’s compliance with the terms of the exemption. An independent assessment by the auditor of the adequacy of the Annual Review and the Annual Report is essential to providing appropriate assurances that the Applicant and the Barclays Affiliated QPAMs have taken their obligations under this exemption very seriously and have complied with those obligations. The Department has modified the time by which the Annual Review, including the Annual Report, is due, to three months following the period to which it relates. Comment 39—Deferred Prosecution Agreement/Non-Prosecution Agreement—Section I(o)(2) Section I(o)(2) of the proposed fiveyear exemption provides, with respect to any Deferred Prosecution Agreement or Non-Prosecution Agreement: ‘‘During the effective period of this five-year exemption, if granted, BPLC: (2) Immediately provides the Department any information requested by the Department, as permitted by law, regarding the agreement and/or conduct and allegations that led to the agreement. After review of the information, the Department may require BPLC, its affiliates, or related parties, as specified by the Department, to submit a new application for the continued availability of relief as a condition of continuing to rely on this exemption. If the Department denies the relief requested in the new application, or does not grant such relief within twelve (12) months of application, the relief described herein is revoked as of the date of denial or as of the expiration of the twelve (12) month period, whichever date is earlier.’’ The Applicant requests that the Department delete this condition. The Applicant states that the condition does not meet the requirements of either the Administrative Procedure Act (the APA) or the Department’s own regulations. The Applicant states that if the Department wishes to withdraw an exemption, it must publish its intent to withdraw for notice and comment in the Federal Register. See 5 U.S.C. 553 and 29 CFR 2570.50. The Applicant states that the proposed rule provides that the Department, at its option, can require the Applicant to ‘‘reapply’’ for an E:\FR\FM\29DEN2.SGM 29DEN2 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices ethrower on DSK3G9T082PROD with NOTICES exemption, and if the Department denies it or simply lets a year go by, the current exemption is terminated. However, the Applicant states that the APA and the Department’s own regulation require that an exemption may not be terminated unless the Department publishes the termination for notice and comment. The Applicant also objects that the condition could create risk and uncertainty for multiple loans, leases, swaps, forwards and other investments. In addition, the Applicant states that the timing of NPAs/DPAs is uncertain. If the condition is not deleted, the Applicant requests that the condition read as follows: ‘‘During the effective period of the permanent exemption BPLC: (1) Immediately discloses to the Department any Deferred Prosecution Agreement (a DPA) or a NonProsecution Agreement (an NPA) with the U.S. Department of Justice, entered into by Barclays or any of its affiliates in connection with conduct described in Section I(g) of PTE 84–14 or section 411 of ERISA; and (2) Immediately provides the Department any information requested by the Department, as permitted by law, regarding the agreement and/or conduct and allegations that led to the agreement.’’ The Department in no way intended that this condition to be read as providing for an automatic revocation of the exemption and has revised this condition accordingly. As revised, the condition simply requires that the Applicant notify the Department if and when it or any of its affiliates enter into a DPA or NPA with the U.S. Department of Justice for conduct described in section I(g) of PTE 84–14 or ERISA section 411 and immediately provide the Department with any information requested by the Department, as permitted by law, regarding the agreement and/or conduct and allegations that led to the agreement. The Department retains the right to propose a withdrawal of the exemption pursuant to its procedures contained at 29 CFR 2570.50, should the circumstances warrant such action. Comment 40—Right to Copies of Policies and Procedures—Section I(p) Section I(p) of the proposed five-year exemption provides that, ‘‘[e]ach Barclays Affiliated QPAM, in its agreements with ERISA-covered plan and IRA clients, or in other written disclosures provided to ERISA-covered plan and IRA clients, within 60 days prior to the initial transaction upon which relief hereunder is relied, and then at least once annually, will clearly and prominently: inform the ERISA- VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 covered plan and IRA client that the client has the right to obtain copies of the QPAM’s written Policies adopted in accordance with this exemption, if granted.’’ The Applicant requests that this condition be revised to permit clients to seek and obtain copies of the policies and procedures upon request. The Applicant states that this condition adds to the number of duplicative and overlapping notice requirements to clients, which is burdensome and may lead to confusion and clients ignoring these mailings. The Applicant also states that annual re-notification is excessive and only adds to these risks. Further, the Applicant states that the exemption, which the client will already have received, can make clear that clients can request and receive the policies and procedures upon request, removing any need for additional mailings. The Applicant suggests that the condition read: ‘‘ERISA-covered plan and IRA clients whose accounts are managed in reliance on PTE 84–14 shall be provided a copy of the QPAM’s written Policies adopted in accordance with the exemption upon request.’’ The Department disagrees, in part, with the Applicant’s comment. Affording ERISA-covered plan and IRA clients a means by which to review and understand the Policies is a vital protection that is fundamental to this exemption’s purpose. However, the Department has modified the condition so that the QPAMs, at their election, may instead provide Covered Plans a disclosure that accurately describes or summarizes key components of the Policies, rather than provide the Policies in their entirety. The Department has also determined that such disclosure may be continuously maintained on a website, provided that the website link to the summary of the written Policies is clearly and prominently disclosed to those ERISA-covered plan and IRA clients to whom this section applies. The Department also agrees with the Applicant that the timing requirement for notice should be revised and, accordingly, has modified the condition of Section I(p) to require notice regarding the information on the website be provided prior to or contemporaneously with a Barclays Affiliated QPAM’s engagement by any Covered Plan. The notice shall be provided in its agreements with, or in other written disclosures provided to any such Covered Plan. If the Policies are thereafter changed, each Covered Plan client must receive a new notice within six (6) months following the end of the calendar year during which the Policies were changed. PO 00000 Frm 00083 Fmt 4701 Sfmt 4703 61897 Comment 41—No-Fault Provision— Section I(q) Section I(q) the proposed five-year exemption provides that, ‘‘[a] Barclays Affiliated QPAM or a Barclays Related QPAM will not fail to meet the terms of this exemption, if granted, solely because a different Barclays Affiliated QPAM or a Barclays Related QPAM fails to satisfy a condition for relief described in Sections I(c), (d), (h), (i), (j), (k), (n) and (p).’’ The Applicant requests that this provision include references to the conditions described in Subsections I(e), (f), (g), and (m). The Applicant represents that it is important to advance the principle that a QPAM should not lose exemptive relief simply because a separate QPAM within the same corporate family has failed to satisfy a condition. Adding the Subsections listed above will ensure that the relief is meaningful here. Moreover, the Applicant represents that the failure of the auditor to meet a requirement of the exemption should not disqualify the QPAMs from using the exemption. The Applicant suggests that the condition read: ‘‘A Barclays Affiliated QPAM or a Barclays Related QPAM will not fail to meet the terms of this exemption solely because a different Barclays Affiliated QPAM or a Barclays Related QPAM fails to satisfy a condition for relief described in Sections I(c), (d), (e), (f), (g), (h), (i), (j), (k), (m), (n) and (p), or because the Auditor failed to meet a requirement of this exemption.’’ The Department declines to extend the relief provided under Section I(q) to Sections I(e), (f), (g), and (m). Section I(e) provides that any failure of a Barclays Affiliated QPAM or Barclays Related QPAM to comply with Section I(g) of PTE 84–14 arose solely from the Conviction. As set forth in the Applicant’s materials, the Conviction is the sole reason a new exemption is necessary for the Barclays Affiliated QPAMs. If there were a new or additional conviction of crime described in Section I(g) of PTE 84–14, the Department would need to assess the misconduct, its scope, and its significance. Without such an assessment, the Department could not be confident of the adequacy of the conditions set forth herein with respect to the Barclays Affiliated QPAMs and Related QPAMs. Indeed, depending on the particular facts, a subsequent conviction could be strong evidence of the inadequacy of this exemption’s conditions to protect Covered Plans. Further, as stated above, the Department E:\FR\FM\29DEN2.SGM 29DEN2 61898 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices ethrower on DSK3G9T082PROD with NOTICES is not obligated to grant further relief to the extent such a conviction occurs. Section I(f) provides that no Barclays Affiliated QPAM or Barclays Related QPAM exercised authority over the assets of any ERISA-covered plan or IRA in a manner that it knew or should have known would: Further the criminal conduct that is the subject of the Conviction; or cause the Barclays Affiliated QPAM or Barclays Related QPAM or its affiliates or related parties to directly or indirectly profit from the criminal conduct that is the subject of the Conviction. The Applicant has represented that the conduct that is the subject of the BPLC’s conviction ‘‘did not involve any of BLPC’s asset management units.’’ The Department is not persuaded that it should include relief from Section I(f) in Section I(q). Section I(g) requires BPLC to refrain from providing investment management services to plans, and Section I(m) requires a Compliance Officer to undertake various compliance and reporting obligations. Consequently, if the relief under I(q) were extended to Sections I(g) and I(m), it would render them virtually meaningless. There would be little or no effective penalty for the failure to comply with the conditions, as the Affiliated and Related QPAMs would remain free to rely on the exemption’s terms. The Department also is of the view that the potential for disqualification of all Barclays Affiliated QPAMs under this agreement will serve as additional incentive for these entities to comply in good-faith with the provisions of Sections I(g) and (m). However, the Department has determined to extend the relief in condition (l), which requires Barclays Affiliated QPAMs to comply with each condition of PTE 84–14, as amended, with the sole exception of the violation of Section I(g) of PTE 84–14 that is attributable to the Conviction. Finally, except as noted above, the Department accepts the Applicant’s comment that the failure of the auditor to comply with any of the conditions of the exemption should not be treated as a failure by the Barclays Affiliated QPAMs to comply with the conditions of the exemption, provided that such failure was not due to the actions or inactions of the Applicant or its affiliates, and Section I(q) is amended, accordingly, except as described above. Comment 42—Definition of Affiliated QPAM—Section II(a) Section II(a) of the proposed five-year exemption provides: ‘‘[T]he term ‘Barclays Affiliated QPAM’ means a ‘qualified professional asset manager’ (as defined in Section VI(a) of PTE 84– VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 14) that relies on the relief provided by PTE 84–14 and with respect to which BPLC is a current or future ‘affiliate’ (as defined in Section VI(d)(1) of PTE 84– 14). The term ‘Barclays Affiliated QPAM’ excludes the parent entity, BPLC and BCI’s Investment Bank division.’’ The Applicant states that BCI was not the subject of the Conviction, nor was its Investment Bank division the subject of the Conviction. The Applicant also represents that the division should not be excluded from the exemption, because BCI is an Affiliated QPAM in the BPLC Group, and excluding a BCI division from the benefits of PTE 84–14 would not only deter ordinary corporate transactions, such as the purchase of an asset management entity and its merging into BCI, it would prevent the development by BCI of new asset management lines of business. Moreover, the Applicant states that the Justice Department did not charge BCI, and thus did not determine that as a corporate entity, it was culpable of a crime. By excluding BCI’s Investment Bank division from the benefits of PTE 84–14, the Applicant represents that the Department is making that judgment in the place of the Justice Department and effectively debarring the entity from providing any fiduciary services at all. According to the Applicant, such a result is arbitrary and punitive. Therefore, the Applicant requests that the provision read as follows: ‘‘The term ‘Barclays Affiliated QPAM’ means a ‘qualified professional asset manager’’ (as defined in Section VI(a) of PTE 84– 14) that relies on the relief provided by PTE 84–14 and with respect to which BPLC is a current or future ‘affiliate’ (as defined in Section VI(d)(1) of PTE 84– 14). The term ‘Barclays Affiliated QPAM’ excludes BPLC.’’ The Department agrees with this comment and has modified Section II(a) accordingly. Comment 43—Definition of Conviction—Section II(e) Section II(e) of the proposed five-year exemption provides: ‘‘The term ‘Conviction’ means the judgment of conviction against BPLC in the United States District Court for the District of Connecticut (the Court), Case No. 3:15 –cr–00077–SRU–1, for participating in a combination and conspiracy to fix, stabilize, maintain, increase or decrease the price of, and rig bids and offers for, euro/U.S. dollar currency pairs exchanged in the foreign currency exchange spot market by agreeing to eliminate competition in the purchase and sale of such currency pairs in the United States and elsewhere, in PO 00000 Frm 00084 Fmt 4701 Sfmt 4703 violation of the Sherman Antitrust Act, 15 U.S.C. 1.’’ The Applicant states that the language in this definition paraphrases the Plea Agreement and expands the use of the term Conviction far beyond the conduct that is the subject of the Plea Agreement. The Applicant states that exemptions are narrowly construed and it is critical that both the asset managers using the exemption and plan counterparties understand precisely what the conditions mean. The Applicant states that, without that precision, it is difficult to know whether conditions regarding compensation, participation, and future hiring are met. The Applicant represents that this overly-broad language goes far beyond the Part I(g) disqualification and will cause the Applicant and counterparties to conclude that it is unusable. Finally, the Applicant states that the definition of ‘‘Conviction’’ in Subsection II(e) was accurate in the Temporary Exemption. Therefore, the Applicant requests that this definition read as follows: ‘‘The term ‘‘Conviction’’ means the judgment of conviction against BPLC for violation of the Sherman Antitrust Act, 15 U.S.C. 1, which is scheduled to be entered in the District Court for the District of Connecticut (the District Court), Case Number 3:15–cr–00077–SRU–1.’’ After considering this comment, the Department has revised the definition accordingly. The Department notes that Section II of the five-year exemption has been reordered to list the defined terms alphabetically; therefore, the term ‘‘Conviction’’ is now listed as Subsection II(d). Comments 44–46—Paragraph 2 of the Summary of Facts and Representations The Applicant seeks certain clarifications to the Summary of Facts and Representations that the Department does not view as relevant to its determination whether to grant this exemption. Those requested clarifications may be found as part of the public record for Application No. D– 11910, in a letter to the Department, dated January 5, 2017. Comment—Letter from House Committee on Financial Services The Department also received a comment letter from certain members of Congress (the Members) regarding this exemption, as well as the other QPAMrelated exemptions published in the Federal Register today. In the letter, the Members recognized that certain conditions contained in these proposed exemptions are crucial to protecting the investments of our nation’s workers and retirees, referring to proposed E:\FR\FM\29DEN2.SGM 29DEN2 ethrower on DSK3G9T082PROD with NOTICES Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices conditions which require each bank to: (a) Indemnify and hold harmless ERISAcovered plans and IRAs for any damages resulting from the future misconduct of such bank; and (b) disclose to the Department any Deferred Prosecution Agreement or a Non-Prosecution Agreement with the U.S. Department of Justice. The Members also requested that the Department hold hearings in connection with the proposed exemptions. The Department acknowledges the Members’ concerns regarding the need for public discourse regarding proposed exemptions. To this end, the Department’s procedures regarding prohibited transaction exemption requests under ERISA (the Exemption Procedures) afford interested persons the opportunity to request a hearing. Specifically, section 2570.46(a) of the Exemption Procedures provides that, ‘‘[a]ny interested person who may be adversely affected by an exemption which the Department proposes to grant from the restrictions of section 406(b) of ERISA, section 4975(c)(1)(E) or (F) of the Code, or section 8477(c)(2) of FERSA may request a hearing before the Department within the period of time specified in the Federal Register notice of the proposed exemption.’’ The Exemption Procedures provide that ‘‘[t]he Department will grant a request for a hearing made in accordance with paragraph (a) of this section where a hearing is necessary to fully explore material factual issues identified by the person requesting the hearing.’’ The Exemption Procedures also provide that ‘‘[t]he Department may decline to hold a hearing where: (1) The request for the hearing does not meet the requirements of paragraph (a) of this section; (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.’’ 56 The Department notes that while the Members’ letter raises policy issues, it does not appear to raise specific material factual issues. The Department previously explored a wide range of legal and policy issues regarding Section I(g) of the QPAM Exemption during a public hearing held on January 15, 2015 in connection with the Department’s proposed exemption involving Credit Suisse AG, and has determined that an additional hearing on these issues is not necessary. After giving full consideration to the record, the Department has decided to 56 29 CFR part 2570, published at 76 FR 66653, October 27, 2011. VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 grant the exemption, as described above. The complete application file (Application No. D–11910) is available for public inspection in the Public Disclosure Room of the Employee Benefits Security Administration, Room N–1515, U.S. Department of Labor, 200 Constitution Avenue NW, Washington, DC 20210. For a more complete statement of the facts and representations supporting the Department’s decision to grant this exemption, refer to the notice of proposed exemption published on November 21, 2016 at 81 FR 83427. Exemption Section I: Covered Transactions Certain entities with specified relationships to Barclays PLC (BPLC) (the Barclays Affiliated QPAMs and the Barclays Related QPAMs, as defined further in Sections II(a) and II(b), respectively) will not be precluded from relying on the exemptive relief provided by Prohibited Transaction Class Exemption 84–14 (PTE 84–14 or the QPAM Exemption), notwithstanding the Conviction, as defined in Section II(d), during the Exemption Period,57 provided that the following conditions are satisfied: (a) Other than certain individuals who: Worked for a non-fiduciary business of a BPLC subsidiary; had no responsibility for, and exercised no authority in connection with, the management of plan assets; and are no longer employed by the BPLC subsidiary, the Barclays Affiliated QPAMs and the Barclays Related QPAMs (including their officers, directors, agents other than BPLC, and employees of such QPAMs who had responsibility for, or exercised authority in connection with the management of plan assets) did not know of, did not have reason to know of, or participate in the criminal conduct that is the subject of the Conviction. For the purposes of this paragraph (a), ‘‘participate in’’ means the knowing approval of the misconduct underlying the Conviction; (b) Apart from a non-fiduciary line of business within BCI, the Barclays Affiliated QPAMs and the Barclays Related QPAMs (including their officers, directors, and agents other than BPLC, and employees of such Barclays 57 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 violation of the Sherman Antitrust Act, Title 15 United States Code, Section 1. PO 00000 Frm 00085 Fmt 4701 Sfmt 4703 61899 Affiliated QPAMs) 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 Barclays Affiliated QPAM will not employ or knowingly engage any of the individuals that participated in the criminal conduct that is the subject of the Conviction. For the purposes of this paragraph (c), ‘‘participated in’’ means the knowing approval of the misconduct underlying the Conviction; (d) At all times during the Exemption Period, no Barclays Affiliated QPAM will use its authority or influence to direct an ‘‘investment fund’’ (as defined in Section VI(b) of PTE 84–14), that is subject to ERISA or the Code and managed by such Barclays Affiliated QPAM in reliance on PTE 84–14, or with respect to which a Barclays Affiliated QPAM has expressly represented to an ERISA-covered plan or IRA with assets invested in such ‘‘investment fund’’ that it qualifies as a QPAM or relies on the QPAM class exemption, to enter into any transaction with BPLC, or to engage BPLC 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 a Barclays Affiliated QPAM or a Barclays Related QPAM to satisfy Section I(g) of PTE 84–14 arose solely from the Conviction; (f) A Barclays Affiliated QPAM or a Barclays Related QPAM did not exercise authority over the assets of any plan subject to Part 4 of Title I of ERISA (an ERISA-covered plan) or section 4975 of the Code (an IRA) in a manner that it knew or should have known would: Further the criminal conduct that is the subject of the Conviction; or cause the Barclays Affiliated QPAM, the Barclays Related QPAM or their affiliates to directly or indirectly profit from the criminal conduct that is the subject of the Conviction; (g) Other than with respect to employee benefit plans maintained or sponsored for its own employees or the employees of an affiliate, BPLC will not act as a fiduciary within the meaning of section 3(21)(A)(i) or (iii) of ERISA, or section 4975(e)(3)(A) and (C) of the Code, with respect to ERISA-covered plan and IRA assets; provided, however, that BPLC will not be treated as violating the conditions of this exemption solely because it acted as an investment advice fiduciary within the meaning of section 3(21)(A)(ii) or section 4975(e)(3)(B) of the Code; E:\FR\FM\29DEN2.SGM 29DEN2 ethrower on DSK3G9T082PROD with NOTICES 61900 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices (h)(1) Prior to a Barclays Affiliated QPAM’s engagement by an ERISAcovered plan or IRA for discretionary asset management services, where the QPAM relies upon PTE 84–14 or the QPAM represents that it qualifies as a QPAM, the Barclays Affiliated QPAM must develop, implement, maintain, and follow written policies and procedures (the Policies). The Policies must require and must be reasonably designed to ensure that: (i) The asset management decisions of the Barclays Affiliated QPAM are conducted independently of the corporate management and business activities of BPLC; (ii) The Barclays Affiliated 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 violation of these duties and provisions with respect to Covered Plans; (iii) The Barclays Affiliated 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 Barclays Affiliated QPAM to regulators, including, but not limited to, the Department, the Department of the Treasury, the Department of Justice, and the Pension Benefit Guaranty Corporation, on behalf of or in relation to Covered Plans, are materially accurate and complete, to the best of such QPAM’s knowledge at that time; (v) To the best of the Barclays Affiliated QPAM’s knowledge at the time, the Barclays Affiliated QPAM does not make material misrepresentations or omit material information in its communications with such regulators with respect to Covered Plans; (vi) The Barclays Affiliated QPAM complies with the terms of this exemption; and (vii) Any violation of, or failure to comply with an item in subparagraphs (ii) through (vi), is corrected as soon as reasonably possible upon discovery, or as soon after the QPAM reasonably should have known of the noncompliance (whichever is earlier), and any such violation or compliance failure not so corrected is reported, upon the discovery of such failure to so correct, in writing, to the head of compliance and the General Counsel (or their functional equivalent) of the relevant line of business that engaged in the violation or failure, and the independent auditor responsible for reviewing compliance with the Policies. A Barclays Affiliated QPAM will not be treated as having failed to develop, VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 implement, maintain, or follow the Policies, provided that it corrects any instance of noncompliance as soon as reasonably possible upon discovery, or as soon as reasonably possible after the QPAM reasonably should have known of the noncompliance (whichever is earlier), and provided that it adheres to the reporting requirements set forth in this subparagraph (vii); (2) Prior to a Barclays Affiliated QPAM’s engagement by a Covered Plan, each Barclays Affiliated QPAM must develop a program of training (the Training), to be conducted at least annually, for all relevant Barclays Affiliated QPAM asset/portfolio management, trading, legal, compliance, and internal audit personnel. The First Training under this exemption must be completed by all relevant Barclays personnel within eighteen months of the Barclay’s Affiliated QPAM’s engagement or representation, as described in this provision. The Training must: (i) At a minimum, cover the Policies, ERISA and Code compliance (including applicable fiduciary duties and the prohibited transaction provisions), ethical conduct, the consequences for not complying with the conditions of this exemption (including any loss of exemptive relief provided herein), and prompt reporting of wrongdoing; and (ii) Be conducted by an individual with significant understanding and familiarity with asset management and trading practices who has been prudently selected and who has appropriate technical training and proficiency with ERISA and the Code; (i)(1) Each Barclays Affiliated QPAM submits to an audit conducted every two years by an independent auditor, who has been prudently selected and who has appropriate technical training and proficiency with ERISA and the Code, to evaluate the adequacy of, and each Barclays Affiliated QPAM’s compliance with, the Policies and Training described herein. The audit requirement must be incorporated in the Policies. Each audit must cover a consecutive twelve (12) month period starting with the twelve (12) month period that begins on the date that a Barclays Affiliated QPAM is first engaged on or after January 10, 2018, by any Covered Plan. The second audit must cover a consecutive twelve month period that begins on the date that is twelve months after the date the first audit period ends. The third audit period must cover a consecutive twelve month period that begins on the date that is twelve months after the date the second audit period ends. Each biennial audit must be completed no later than six (6) months after the period to which PO 00000 Frm 00086 Fmt 4701 Sfmt 4703 the audit applies. No audit period is required to extend past July 9, 2023, and each biennial audit must be completed no later than six (6) months after the period to which the audit applies; (2) Within the scope of the audit and to the extent necessary for the auditor, in its sole opinion, to complete its audit and comply with the conditions for relief described herein, and only to the extent such disclosure is not prevented by state or federal statute, or involves communications subject to attorney client privilege, each Barclays Affiliated QPAM and, if applicable, BPLC, will grant the auditor unconditional access to its business, including, but not limited to: its computer systems; business records; transactional data; workplace locations; training materials; and personnel. Such access is limited to information relevant to the auditor’s objectives as specified by the terms of this exemption; (3) The auditor’s engagement must specifically require the auditor to determine whether each Barclays Affiliated 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 Barclays Affiliated QPAM’s operational compliance with the Policies and Training. In this regard, the auditor must test for each QPAM, a sample of such QPAM’s transactions involving Covered Plans, sufficient in size and nature to afford the auditor a reasonable basis to determine such QPAM’s operational compliance with the Policies and Training; (5) For each audit, on or before the end of the relevant period described in Section I(i)(1) for completing the audit, the auditor must issue a written report (the Audit Report) to BPLC and the Barclays Affiliated QPAM to which the audit applies that describes the procedures performed by the auditor during the course of its examination. The auditor, at their discretion, may issue a single consolidated Audit Report which covers all the Barclays Affiliated QPAMs. The Audit Report must include the auditor’s specific determinations regarding: (i) The adequacy of each Barclays Affiliated QPAM’s Policies and Training; each Barclays Affiliated QPAM’s compliance with the Policies and Training; the need, if any, to strengthen such Policies and Training; and any instance of the respective Barclays Affiliated QPAM’s noncompliance with the written E:\FR\FM\29DEN2.SGM 29DEN2 ethrower on DSK3G9T082PROD with NOTICES Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices Policies and Training described in Section I(h) above. The Barclays Affiliated QPAM must promptly address any noncompliance. The Barclays Affiliated QPAM must promptly address or prepare a written plan of action to address any determination by the auditor regarding the Policies and Training and the auditor’s recommendations (if any) with respect to strengthening the Policies and Training of the respective Barclays QPAM. Any action taken or the plan of action to be taken by the respective Barclays Affiliated QPAM must be included in an addendum to the Audit Report (which addendum must be completed prior to the certification described in Section I(i)(7) below). In the event such a plan of action to address the auditor’s recommendation regarding the adequacy of the Policies and Training is not completed by the time of submission of the Audit Report, the following period’s Audit Report must state whether the plan was satisfactorily completed. Any determination by the auditor that the respective Barclays Affiliated QPAM has implemented, maintained, and followed sufficient Policies and Training must not be based solely or in substantial part on an absence of evidence indicating noncompliance. In this last regard, any finding that a Barclays Affiliated QPAM has complied with the requirements under this subparagraph must be based on evidence that the particular Barclays Affiliated QPAM has actually implemented, maintained, and followed the Policies and Training required by this exemption. Furthermore, the auditor must not solely rely on the Annual Report created by the compliance officer (the Compliance Officer) as described in Section I(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 I(i)(3) and (4) above; and (ii) the adequacy of the most recent Annual Review described in Section I(m); (6) The auditor must notify the respective Barclays Affiliated QPAM of any instance of noncompliance identified by the auditor within five (5) business days after such noncompliance is identified by the auditor, regardless of whether the audit has been completed as of that date.; (7) With respect to each Audit Report, the General Counsel, or one of the three most senior executive officers of the Barclays Affiliated QPAM to which the Audit Report applies, must certify in writing, under penalty of perjury, that VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 the officer has reviewed the Audit Report and this exemption; that such Barclays Affiliated 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. Such 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; (8) The Risk Committee of BPLC’s Board of Directors is provided a copy of each Audit Report; and a senior executive officer with a direct reporting line to the highest ranking compliance officer of BPLC must review the Audit Report for each Barclays Affiliated QPAM and must certify in writing, under penalty of perjury, that such officer has reviewed each Audit Report; (9) Each Barclays Affiliated QPAM provides its certified Audit Report, by regular mail to: Office of Exemption Determinations (OED), 200 Constitution Avenue NW, Suite 400, Washington, DC 20210, or by private carrier to: 122 C Street NW, Suite 400, Washington, DC 20001–2109, no later than 30 days following its completion of the Audit Report. The Audit Report will be part of the public record regarding this exemption. Furthermore, each Barclays Affiliated QPAM must make its Audit Report unconditionally available, electronically or otherwise, for examination upon request by any duly authorized employee or representative of the Department, other relevant regulators, and any fiduciary of a Covered Plan; (10) Each Barclays Affiliated QPAM and the auditor must submit to OED: Any engagement agreement(s) entered into pursuant to the engagement of the auditor under this exemption, no later than two (2) months after the execution of any such engagement agreement; (11) The auditor must provide the Department, upon request, for inspection and review, access to all the workpapers created and utilized in the course of the audit provided such access and inspection is otherwise permitted by law; and (12) BPLC must notify the Department of a change in the independent auditor no later than two (2) months after the engagement of a substitute or subsequent auditor and must provide an explanation for the substitution or change including a description of any material disputes between the terminated auditor and BPLC; PO 00000 Frm 00087 Fmt 4701 Sfmt 4703 61901 (j) As of January 10, 2018 and throughout the Exemption Period, with respect to any arrangement, agreement, or contract between a Barclays Affiliated QPAM and a Covered Plan, the Barclays Affiliated 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 inadvertent prohibited transactions); and to comply with the standards of prudence and loyalty set forth in section 404 of ERISA with respect to each such ERISAcovered plan and IRA to the extent that section is applicable; (2) To indemnify and hold harmless the Covered Plan for any actual losses resulting directly from a Barclays Affiliated 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 QPAM; or any claim arising out of the failure of such Barclays Affiliated 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. This condition applies only to actual losses caused by the Barclays Affiliated QPAM’s violations; (3) Not to require (or otherwise cause) the Covered Plan to waive, limit, or qualify the liability of the Barclays Affiliated QPAM for violating ERISA or the Code or engaging in prohibited transactions; (4) Not to restrict the ability of such Covered Plan to terminate or withdraw from its arrangement with the Barclays Affiliated QPAM with respect to any investment in a separately managed account or pooled fund subject to ERISA and managed by such QPAM, with the exception of reasonable restrictions, appropriately disclosed in advance, that are specifically designed to ensure equitable treatment of all investors in a pooled fund in the event such withdrawal or termination may have adverse consequences for all other investors. In connection with any such arrangements involving investments in pooled funds subject to ERISA entered into after the effective date of this exemption, the adverse consequences must relate to of a lack of liquidity of the underlying assets, valuation issues, or regulatory reasons that prevent the fund from promptly redeeming an ERISA-covered plan’s or IRA’s investment, and such restrictions must be applicable to all such investors and effective no longer than reasonably necessary to avoid the adverse consequences; E:\FR\FM\29DEN2.SGM 29DEN2 ethrower on DSK3G9T082PROD with NOTICES 61902 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices (5) Not to impose any fees, penalties, or charges for such termination or withdrawal with the exception of reasonable fees, appropriately disclosed in advance, that are specifically designed to prevent generally recognized abusive investment practices or specifically designed to ensure equitable treatment of all investors in a pooled fund in the event such withdrawal or termination may have adverse consequences for all other investors, provided that such fees are applied consistently and in like manner to all such investors; and (6) Not to include exculpatory provisions disclaiming or otherwise limiting liability of the Barclays Affiliated QPAM for a violation of such agreement’s terms. To the extent consistent with Section 410 of ERISA, 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 BPLC, and its affiliates, or damages from acts outside the control of the Barclays Affiliated QPAM; (7) Prior to a Barclays Affiliated QPAM’s engagement with an ERISAcovered plan or IRA for the provision of asset management or other discretionary fiduciary services, such Barclays Affiliated QPAM must provide a notice of its obligations under this Section I(j) to each Covered Plan; (k) Any client for which a Barclays Affiliated QPAM relies on PTE 84–14 or has expressly represented that the manager qualifies as a QPAM or relies on the QPAM class exemption must receive the proposed and final exemptions, along with a separate summary describing the facts that led to the Conviction (the Summary), which have 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, prior to, or contemporaneously with, the client’s receipt of a written asset management agreement from the Barclays Affiliated QPAM. Disclosures may be delivered electronically; (l) The Barclays Affiliated QPAMs must comply with each condition of PTE 84–14, as amended, with the sole exception of the violation of Section I(g) of PTE 84–14 that is attributable to the Conviction; (m)(1) Within six months following the date of a Barclays Affiliated QPAM’s engagement by an ERISA-covered plan or IRA for discretionary asset management services, with respect to which the QPAM has represented that it qualifies as a QPAM or will rely on PTE VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 84–14, BPLC designates 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 annual review for each annual period beginning with the date of such engagement and the anniversary of such date (the Annual Review) to determine the adequacy and effectiveness of the implementation of the Policies and Training. With respect to the Compliance Officer, the following conditions must be met: (i) The Compliance Officer must be a professional who has extensive experience with, and knowledge of, the regulation of financial services and products, including under ERISA and the Code; and (ii) The Compliance Officer must have a direct reporting line to the highestranking corporate officer in charge of compliance for asset management; (2) With respect to each Annual Review, the following conditions must be met: (i) The Annual Review includes a review of: Any compliance matter related to the Policies or Training that was identified by, or reported to, the Compliance Officer or others within the compliance and risk control function (or its equivalent) during the previous year; any material change in the relevant business activities of the Barclays Affiliated QPAMs; and any change to ERISA, the Code, or regulations related to fiduciary duties and the prohibited transaction provisions that may be applicable to the activities of the Barclays Affiliated QPAMs; (ii) The Compliance Officer prepares a written report for each Annual Review (each, an Annual Report) that: (A) Summarizes his or her material activities during the preceding year; (B) sets forth any instance of noncompliance discovered during the preceding year, and any related corrective action; (C) details any change to the Policies or Training to guard against any similar instance of noncompliance occurring again; and (D) makes recommendations, as necessary, for additional training, procedures, monitoring, or additional and/or changed processes or systems, and management’s actions on such recommendations; (iii) In each Annual Report, the Compliance Officer must certify in writing that to his or her knowledge: (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; PO 00000 Frm 00088 Fmt 4701 Sfmt 4703 (C) any known instance of noncompliance during the preceding year and any related correction taken to date have been identified in the Annual Report; and (D) the Barclays Affiliated QPAMs have complied with the Policies and Training, and/or corrected (or is correcting) any instances of noncompliance in accordance with Section I(h) above; (iv) Each Annual Report must be provided to the appropriate corporate officers of BPLC and each Barclays Affiliated QPAM to which such report relates; the head of compliance and the General Counsel (or their functional equivalent) of the relevant Barclays Affiliated QPAM and the General Counsel (or their functional equivalent) of BPLC; and must be made unconditionally available to the independent auditor described in Section I(i) above; (v) Each Annual Review, including the Compliance Officer’s written Annual Report, must be completed no more than three (3) months following the end of the period to which it relates; (n) Each Barclays Affiliated QPAM will maintain records necessary to demonstrate that the conditions of this exemption have been met, for six (6) years following the date of any transaction for which such Barclays Affiliated QPAM relies upon the relief in the exemption; (o) During the Exemption Period, BPLC: (1) Immediately discloses to the Department any Deferred Prosecution Agreement (a DPA) or a NonProsecution Agreement (an NPA) with the U.S. Department of Justice, entered into by BPLC or any of its affiliates in connection with conduct described in Section I(g) of PTE 84–14 or section 411 of ERISA; and (2) immediately provides the Department any information requested by the Department, as permitted by law, regarding the agreement and/or conduct and allegations that led to the agreement; (p) Prior to or contemporaneously with a Barclays Affiliated QPAM’s engagement by any Covered Plan, each Barclays Affiliated QPAM will, in its agreements with, or in other written disclosures provided to any such Covered Plan, clearly and prominently inform such Covered Plan client of the right to obtain a copy of the Policies or a description (‘‘Summary Policies’’) which accurately summarizes key components of the QPAM’s written Policies developed in connection with this exemption. If the Policies are thereafter changed, each Covered Plan client must receive a new disclosure within six (6) months following the end of the calendar year during which the E:\FR\FM\29DEN2.SGM 29DEN2 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices Policies were changed.58 With respect to this requirement, the description may be continuously maintained on a website, provided that such website link to the Policies or the Summary Policies is clearly and prominently disclosed to each Covered Plan; and (q) A Barclays Affiliated QPAM or a Barclays Related QPAM will not fail to meet the terms of this exemption solely because a different Barclays Affiliated QPAM or Barclays Related QPAM fails to satisfy a condition for relief described in Sections I(c), (d), (h), (i), (j), (k), (l), (n) and (p); or the independent auditor described in Section I(i) fails a provision of the exemption other than the requirement described in Section I(i)(11), provided that such failure did not result from any actions or inactions of BPLC or its affiliates. ethrower on DSK3G9T082PROD with NOTICES Section II: Definitions (a) The term ‘‘BPLC’’ means, Barclays PLC, the parent entity, but does not include any subsidiaries or other affiliates. (b) The term ‘‘Barclays Affiliated QPAM’’ means a ‘‘qualified professional asset manager’’ (as defined in Section VI(a) of PTE 84–14) that relies on the relief provided by PTE 84–14 and with respect to which Barclays is a current or future ‘‘affiliate’’ (as defined in Section VI(d)(1) of PTE 84–14). The term ‘‘Barclays Affiliated QPAM’’ excludes the parent entity, BPLC; (c) The term ‘‘Barclays Related QPAM’’ means any current or future ‘‘qualified professional asset manager’’ (as defined in section VI(a) of PTE 84– 14) that relies on the relief provided by PTE 84–14, and with respect to which BPLC owns a direct or indirect five percent or more interest, but with respect to which BPLC is not an ‘‘affiliate’’ (as defined in Section VI(d)(1) of PTE 84–14). (d) The term ‘‘Conviction’’ means the judgment of conviction against BPLC for violation of the Sherman Antitrust Act, 15 U.S.C. 1, which is scheduled to be entered in the District Court for the District of Connecticut (the District Court), Case Number 3:15–cr–00077– SRU–1; (e) The term ‘‘Conviction Date’’ means the date of the judgment of the trial court. For avoidance of confusion, the Conviction Date is January 10, 2017, as set forth in Case Number 3:15-cr-00077– SRU; 58 In the event Applicant meets this disclosure requirement through Summary Policies, changes to the Policies shall not result in the requirement for a new disclosure unless, as a result of changes to the Policies, the Summary Policies are no longer accurate. VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 (f) The term ‘‘Covered Plan’’ means a plan subject to Part 4 of Title 1 of ERISA (‘‘ERISA-covered plan’’) or a plan subject to Section 4975 of the Code (‘‘IRA’’) with respect to which a Barclays Affiliated QPAM relies on PTE 84–14, or with respect to which a Barclays Affiliated QPAM (or any BPLC affiliate) has expressly represented that the manager qualifies as a QPAM or relies on the QPAM class exemption (PTE 84–14). A Covered Plan does not include an ERISA-covered Plan or IRA to the extent the Barclays Affiliated QPAM has expressly disclaimed reliance on QPAM status or PTE 84–14 in entering into its contract, arrangement or agreement with the ERISA-covered plan or IRA; (g) The terms ‘‘ERISA-covered plan’’ and ‘‘IRA’’ mean, respectively, a plan subject to Part 4 of Title I of ERISA and a plan subject to section 4975 of the Code; and (h) The term ‘‘Exemption Period’’ means January 10, 2018, through January 9, 2023. Effective Date This exemption is effective on January 10, 2018. The term of the exemption is from January 10, 2018, through January 9, 2023 (the Exemption Period). Department’s Comment: The Department cautions that the relief in this exemption will terminate immediately if, among other things, an entity within the BPLC corporate structure is convicted of a crime described in Section I(g) of PTE 84–14 (other than the Conviction) during the Exemption Period. Although the Applicant could apply for a new exemption in that circumstance, the Department would not be obligated to grant the exemption. The terms of this exemption have been specifically designed to permit plans to terminate their relationships in an orderly and cost effective fashion in the event of an additional conviction or a determination that it is otherwise prudent for a plan to terminate its relationship with an entity covered by the exemption. Further Information For more information on this exemption, contact Ms. Anna Vaughan of the Department, telephone (202) 693– 8565. (This is not a toll-free number.) PO 00000 Frm 00089 Fmt 4701 Sfmt 4703 61903 UBS Assets Management (Americas) Inc.; UBS Realty Investors LLC; UBS Hedge Fund Solutions LLC; UBS O’Connor LLC; and Certain Future Affiliates in UBS’s Asset Management and Wealth Management Americas Divisions (collectively, the Applicants or the UBS QPAMs) Located in Chicago, Illinois; Hartford, Connecticut; New York, New York; and Chicago, Illinois, Respectively [Prohibited Transaction Exemption 2017–07; Exemption Application No. D–11907] Discussion On November 21, 2016, the Department of Labor (the Department) published a notice of proposed exemption in the Federal Register at 81 FR 83385, for certain entities with specified relationships to UBS AG (hereinafter, the UBS QPAMs) to continue to rely on the relief provided by PTE 84–14 for a period of five years,59 notwithstanding the ‘‘2013 Conviction’’ of UBS Securities Japan Co., Ltd. and the ‘‘2017 Conviction’’ of UBS, AG (UBS) (collectively, the Convictions), as described herein. The Department is granting this exemption to ensure that Covered Plans 60 with assets managed by a UBS QPAM may continue to benefit from the relief provided by PTE 84–14. The effective date is January 10, 2018, and the exemption is effective from January 10, 2018 through January 9, 2021 (the Exemption Period). No relief from a violation of any other law is provided by this exemption, including any criminal conviction described in the proposed exemption. Furthermore, the Department cautions that the relief in this exemption will terminate immediately if, among other things, an entity within the UBS corporate structure is convicted of a crime described in Section I(g) of PTE 84–14 (other than the Convictions) during the Exemption Period. The terms 59 49 FR 9494 (March 13, 1984), as corrected at 50 FR 41430 (October 10, 1985), as amended at 70 FR 49305 (August 23, 2005) and as amended at 75 FR 38837 (July 6, 2010), hereinafter referred to as PTE 84–14 or the QPAM exemption. 60 ‘‘Covered Plan’’ is a plan subject to Part 4 of Title 1 of ERISA (‘‘ERISA-covered plan’’) or a plan subject to section 4975 of the Code (‘‘IRA’’) with respect to which a UBS QPAM relies on PTE 84– 14, or with respect to which a UBS QPAM (or any UBS affiliate) has expressly represented that the manager qualifies as a QPAM or relies on the QPAM class exemption (PTE 84–14). A Covered Plan does not include an ERISA-covered plan or IRA to the extent the UBS QPAM has expressly disclaimed reliance on the QPAM status or PTE 84– 14 in entering into its contract, arrangement, or agreement with the ERISA-covered plan or IRA. See further discussion in this Preamble under the heading Comment III A & B—Scope of Section I(j) & Covenants Regarding Compliance with ERISA— Section I(j)(1). E:\FR\FM\29DEN2.SGM 29DEN2 61904 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices of this exemption have been specifically designed to promote conduct that adheres to basic fiduciary standards under ERISA and the Code. The exemption also aims to ensure that Covered Plans can terminate relationships in an orderly and cost effective fashion in the event a Covered Plan fiduciary determines it is prudent to sever the relationship with a UBS QPAM. ethrower on DSK3G9T082PROD with NOTICES Written Comments The Department invited all interested persons to submit written comments and/or requests for a public hearing with respect to the notice of proposed exemption, published in the Federal Register at 81 FR 83385 on November 21, 2016. All comments and requests for hearing were due by January 5, 2016.61 The Department received written comments from UBS and members of the U.S. Congress. After considering these submissions, the Department has determined to grant the exemption, with revisions, as described below. Comment I—The Term of the Exemption The Applicant requests that the Department extend the term of the exemption from five years to nine years. UBS states that an exemption for less than nine years results in a reapplication requirement without additional meaningful protections. UBS states that if at any time the UBS QPAMs do not comply with all of the conditions under a nine year exemption, the relief provided will be lost. Hence, according to UBS, a nine year exemption is protective of affected ERISA-covered plans and IRAs. UBS also states that a five-year exemption period is not in the interest of the UBS QPAMs’ clients or participants and beneficiaries. UBS states that a five-year exemption period creates uncertainty for fiduciaries with the result that such fiduciaries may spend time and money to prepare for a change in investment managers in the event that UBS does not receive another exemption. UBS claims the record does not support a conclusion that a nine year exemption period is inconsistent with ERISA Section 408(a) and neither has the Department conveyed a basis for findings that warrant an exemption for less than nine years. UBS points to precedent established by previous 61 UBS requested and the Department granted an extension until January 23, 2017 to provide the Notice to Interested Persons. The comment period was therefore extended until February 27, 2017. The Department received additional comments from Applicant, however, after the close of the comment period. VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 individual QPAM exemptions in which the Department placed ‘‘particular importance’’ on the ‘‘degree to which the investment and compliance operations of the QPAM can be sufficiently isolated from the influence of ‘bad actors’.’’ (80 FR 20262, April 15, 2015). UBS states that ‘‘UBS QPAMs were not involved in the FX Misconduct or the misconduct that is subject of the Convictions.’’ UBS requests that, if the five-year exemption period is retained, the Department clarify the timing for an application to extend the relief, and for the Department to act on that application taking into account the notice-and-comment period. UBS also requests that the Department modify the exemption to allow for the continued reliance on the relief provided by a final exemption while any application to extend that relief beyond the initial 5year period is pending. In developing this exemption, the Department considered the NonProsecution Agreement between UBS and the U.S. Department of Justice (DOJ) dated December 18, 2012 (LIBOR NPA) and the Plea Agreement. When UBS entered into the LIBOR NPA, it agreed, among other things, not to commit any crime in violation of U.S. laws for a period of two years from the date of the LIBOR NPA in exchange for the DOJ agreeing not to prosecute UBS for any crimes related to the submission benchmark interest rates between 2001 and 2010. UBS also agreed to pay a monetary penalty of $500,000,000 and to take steps to further strengthen its internal controls, as required by certain other U.S. and non-U.S. regulatory agencies that had addressed the misconduct described in the LIBOR NPA. While UBS entered into the LIBOR NPA avoiding prosecution, UBS Securities Japan, a wholly owned subsidiary of UBS, pled guilty and was convicted (2013 Conviction) of one count of wire fraud in violation of Title 18, U.S. Code, sections 1343 and 2 62 arising out of UBS Security Japan’s fraudulent submission of Yen LIBOR rates between 2006 and 2009, and its participation in a scheme to defraud counterparties to interest rate derivatives trades executed on its behalf by secretly manipulating certain benchmark interest rates to which the 62 Section 1343 generally imposes criminal liability for fraud, including fines and/or imprisonment, when a person uses wire, radio, or television communication in interstate or foreign commerce. Section 2 generally imposes criminal liability on a person as a principal if that person aids, counsels, commands, induces, or willfully causes another person to engage in criminal activity. PO 00000 Frm 00090 Fmt 4701 Sfmt 4703 profitability of those trades was tied. As a result of the 2013 Conviction, QPAMs with certain corporate relationships to UBS and UBS Securities Japan were no longer able to rely on PTE 84–14. Following the publication of a notice of proposed exemption in the Federal Register and after a period of notice and comment, the Department published a final exemption on September 13, 2013 (PTE 2013–09).63 PTE 2013–09 among other conditions, required UBS to comply with each condition of PTE 84– 14, as amended.64 Both the LIBOR NPA and the Plea Agreement contain a Statement of Facts (SOF) that describes the circumstances of UBS’s scheme to defraud counterparties to interest rate derivatives transactions by secretly manipulating benchmark interest rates to which the profitability of those transactions was tied. The SOF describes the wide-ranging and systematic efforts, practiced nearly on a daily basis, by several UBS employees (a) to manipulate the YEN LIBOR in order to benefit UBS’s trading positions; (b) to use cash brokers to influence other Contributor Panel banks’ Yen LIBOR submissions; and (c) to collude directly with employees at other Contributor Panel banks to influence those banks’ Yen LIBOR submissions. DOJ determined UBS subsequently breached the LIBOR NPA when certain employees engaged in fraudulent and deceptive trading and sales practices in certain foreign exchange (FX) market transactions via telephone, email and/or electronic chat, to the detriment of UBS customers.65 These employees also colluded with other actors in certain FX markets in order to manipulate those markets. The Department considered the Factual Basis for Breach attached to the Plea Agreement which details that conduct (the FX Misconduct as defined in Section II(e)). That conduct included the following actions: Sales staff misrepresented to customers that markups were not added, when in fact they were; UBS personnel used a price level to ‘‘track’’ certain limit orders that was different from customer specified prices; UBS traders and salespeople used hand signals to fraudulently conceal markups from certain customers on ‘‘open-line’’ phone calls; and a UBS FX trader conspired with other financial 63 78 FR 56740 (September 13, 2013). I(h) of PTE 2013–09, at 78 FR 56741 (September 18, 2013). 65 The circumstances of UBS’s violation of the terms of the LIBOR NPA are described in detail in Exhibit 1 to the Plea Agreement, entitled ‘‘The Factual Basis for Breach of the Non-Prosecution Agreement’’ (the Factual Basis for Breach). 64 Section E:\FR\FM\29DEN2.SGM 29DEN2 ethrower on DSK3G9T082PROD with NOTICES Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices services firms acting as dealers in the FX spot market by agreeing to restrain competition in the purchase and sale of the Euro/U.S. dollar currency pair. The Factual Basis for Breach takes into account UBS’s three recent prior criminal resolutions: The 2012 LIBOR NPA; a February 2009 DOJ Tax Division deferred prosecution agreement for conspiracy to defraud the U.S. of tax revenue through secret Swiss bank accounts for U.S. taxpayers (in connection therewith, UBS agreed to pay a penalty of $780 million); a May 2011 DOJ non-prosecution agreement with the DOJ Antitrust Division to resolve allegations of bid-rigging in the municipal bond derivatives market (in connection therewith, UBS agreed to pay a penalty of $160 million). DOJ also noted that UBS’s compliance programs and remedial efforts following the LIBOR NPA failed to detect the collusive and deceptive conduct in the FX markets until a published article in the news media called attention to the matter. As a result of its breach of the LIBOR NPA and the resulting 2017 Conviction, UBS lost exemptive relief under both PTE 84–14 and its individual exemption, PTE 2013–09. In developing this exemption, the Department also considered statements from a number of regulators about the FX Misconduct. The Financial Conduct Authority’s (FCA) Final Notice dated November 11, 2014 states: ‘‘During the Relevant Period, UBS did not exercise adequate and effective control over its G10 spot FX trading business. . . . The front office failed adequately to discharge these responsibilities with regard to obvious risks associated with confidentiality, conflicts of interest and trading conduct.’’ That notice also states: ‘‘These failings occurred in circumstances where certain of those responsible for managing front office matters were aware of and/or at times involved in behaviors described above.’’ The Unites States Commodity and Futures Trading Commission’s (CFTC) Order dated November 11, 2014 states: ‘‘During the Relevant Period, UBS failed to adequately address the risks associated with its FX traders participating in the fixing of certain FX benchmark rates. UBS also lacked adequate internal controls in order to prevent its FX traders from engaging in improper communications with certain FX traders at other banks. UBS lacked sufficient policies, procedures and training specifically governing participation in trading around the FX benchmark rates. . . .’’ The Department also considered the size of relevant fines imposed: The Department of Justice imposed $500 VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 million and $203 million fines; the Board of Governors of the Federal Reserve Board imposed a $324 million fine; and the CFTC and the FCA imposed fines of $290 million and £223,814,000, respectively. In light of the severity of the misconduct, the repeated criminal violations, and the breach of a previous exemption, which was itself necessitated by criminal conduct, the Department has concluded that it is appropriate to grant a more limited term of relief than the five-year period it originally proposed. As a result, the Department has concluded that a threeyear term is appropriate for this exemption. A three-year term and the exemption’s protective conditions reflect the Department’s intent to protect Covered Plans that entrust substantial assets with a UBS QPAM, following serious misconduct, supervisory failures, repeated criminal convictions, and a violation of a previous exemption granted under similar circumstances (PTE 2013–09). The Department intends that the three-year term will give the Department the opportunity to review the adherence by the UBS QPAMs to the conditions set out herein. The shortened three-year period reflects the fundamental importance of the Applicants’ prompt efforts to adopt supervisory mechanisms, policies, and procedures that safeguard plans and IRAs, and guard against the risk of further misconduct. The Applicants may apply for an additional extension at such time as they believe appropriate. Before granting an extension, however, the Department expects to consider carefully the efficacy of this exemption and any public comments on additional extensions, particularly including comments on how well the exemption has or has not worked to safeguard the interests of Covered Plans. Comment II—Non-Prosecution and Deferred-Prosecution Agreements— Section I(q) Section I(q) of the proposed exemption provides that ‘‘[d]uring the effective period of this five-year exemption UBS: (1) Immediately discloses to the Department any Deferred Prosecution Agreement (a DPA) or Non-Prosecution Agreement (an NPA) that UBS or any of its affiliates enters into with the U.S. Department of Justice, to the extent such DPA or NPA involves conduct described in Section I(g) of PTE 84–14 or section 411 of ERISA; and (2) immediately provides the Department any information requested by the Department, as permitted by law, regarding the agreement and/or the conduct and PO 00000 Frm 00091 Fmt 4701 Sfmt 4703 61905 allegations that led to the agreement. After review of the information, the Department may require UBS, its affiliates, or related parties, as specified by the Department, to submit a new application for the continued availability of relief as a condition of continuing to rely on this exemption. If the Department denies the relief requested in the new application, or does not grant such relief within twelve months of application, the relief described herein is revoked as of the date of denial or as of the expiration of the twelve month period, whichever date is earlier.’’ UBS requests that section I(q) be deleted or revised to omit the paragraph regarding possible revocation of the exemption due to a new NPA or DPA. UBS states that this condition is unprecedented, highly problematic, and inappropriate for several reasons. The first reason is that the condition treats an NPA or a DPA as equivalent to a criminal conviction under PTE 84–14, Section I(g) in contradiction of guidance in Advisory Opinion Number 2013– 05A, which confirms that the ‘‘sole judicial action’’ that triggers the disqualification under Section I(g) is a ‘‘criminal conviction.’’ UBS notes that Section I(g) of this exemption provides that the Department may require UBS to submit a new application for relief following an NPA or a DPA and the condition provides for the automatic revocation of the exemption if the Department fails to grant the new application within twelve months of its submission. According to UBS, this creates the situation where exemptive relief could be lost irrespective of the merits of the new application solely as a result of the Department’s failure to timely act. UBS states this outcome would be arbitrary and could cause the UBS QPAMs’ plan clients to make substantial expenditures to immediately replace the UBS QPAMs if the Department fails to timely act on a new application. UBS asserts that this result is not reconcilable with the statement in the Proposed Exemption that the Department designed certain conditions that would ‘‘permit plans to terminate their relationships in an orderly and cost effective fashion.’’ Additionally, according to UBS, such a revocation of a previously-granted exemption would be in direct violation of the Department’s exemption regulations at 29 CFR 2570.50(b). Those regulations provide that before revoking or modifying an exemption the Department must: (1) Publish a notice of proposed action in the Federal Register; (2) provide interested persons with an opportunity to comment on the E:\FR\FM\29DEN2.SGM 29DEN2 ethrower on DSK3G9T082PROD with NOTICES 61906 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices proposed revocation or modification; (3) notify the applicant of the proposed action and the reasons therefore before publishing such notice; and (4) provide the applicant the opportunity to comment on the proposed revocation or modification subsequent to the publication of the notice. UBS argues that these procedural protections would not be available to the UBS QPAMs as a result of a revocation due to the Department’s failure to act on the ‘‘new’’ application. Finally, UBS states that the Department failed to identify any substantive standard that would apply to the evaluation of such a new application. UBS suggests that the revocation of the exemption therefore could be based on a UBS QPAM affiliate’s NPA or DPA that does not relate to conduct involving the UBS QPAMs or their personnel or does not raise concerns regarding the QPAMs’ independence from such affiliate. UBS is concerned this condition authorizes revocation of the exemption regardless of whether the underlying conduct or circumstances surrounding such an NPA or DPA calls into question the Department’s original findings made under Section 408 of ERISA. Finally, UBS states that this condition is unnecessary because the Department already has the authority to modify or revoke the exemption if its original findings were called into question due to a UBS QPAM affiliate’s DPA or NPA. UBS requests that if the condition is not omitted from the exemption, that word ‘‘immediately’’ be deleted and replaced with the insertion of the phrase ‘‘as soon as reasonably practicable, the entry into’’ before the term ‘‘any Deferred Prosecution Agreement (a DPA).’’ UBS also requests that the parenthetical ‘‘(as defined in Section VI(d) of PTE 84–14)’’ be added after the word ‘‘affiliate.’’ Additionally, UBS requests that the term ‘‘non-privileged’’ be placed before the word ‘‘information’’ and the phrase as soon ‘‘as reasonably practicable’’ be inserted before ‘‘as permitted by law.’’ Lastly, UBS requests that the phrase ‘‘and allegations that led to’’ be deleted and replaced by inserting the word ‘‘underlying’’ before the phrase ‘‘the agreement’’ at the end of the Section. The Department in no way intended to provide for an automatic revocation of this exemption and, in light of UBS’s comments, has revised the condition accordingly. As revised, the condition simply requires UBS to notify the Department if and when it or any of its affiliates enter into a DPA or a NPA with the U.S. Department of Justice for conduct described in section I(g) of PTE VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 84–14 or ERISA section 411 and immediately provide the Department with any information requested by the Department, as permitted by law, regarding the agreement and/or conduct and allegations that led to the agreement. The Department retains the right to propose a withdrawal of this exemption pursuant to its procedures contained at 29 CFR 2570.50, should the circumstances warrant such action. Additionally, as requested by the applicant, the Department has added the parenthetical ‘‘(as defined in Section VI(d) of PTE 84–14)’’ to clarify the term ‘‘affiliate.’’ Comment III A & B—Scope of Section I(j) & Covenants Regarding Compliance with ERISA—Section I(j)(1) Section I(j) of the proposed exemption provides that: ‘‘Effective as of the effective date of this five-year exemption, with respect to any arrangement, agreement, or contract between a UBS QPAM and an ERISAcovered plan or IRA for which such UBS QPAM provides asset management or other discretionary fiduciary services, each UBS QPAM agrees and warrants: (1) [t]o comply with ERISA and the Code, as applicable with respect to such ERISA-covered plan or IRA; to refrain from engaging in prohibited transactions that are not otherwise exempt (and to promptly correct any inadvertent prohibited transactions); and to comply with the standards of prudence and loyalty set forth in section 404 of ERISA, as applicable; (2) Not to require (or otherwise cause) the ERISA-covered plan or IRA to waive, limit, or qualify the liability of the UBS QPAM for violating ERISA or the Code or engaging in prohibited transactions; (3) Not to require the ERISA-covered plan or IRA (or sponsor of such ERISAcovered plan or beneficial owner of such IRA) to indemnify the UBS QPAM for violating ERISA or engaging in prohibited transactions, except for violations or prohibited transactions caused by an error, misrepresentation, or misconduct of a plan fiduciary or other party hired by the plan fiduciary who is independent of UBS; (4) Not to restrict the ability of such ERISA-covered plan or IRA to terminate or withdraw from its arrangement with the UBS QPAM (including 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 PO 00000 Frm 00092 Fmt 4701 Sfmt 4703 adverse consequences for all other investors as a result of an actual lack of liquidity of the underlying assets, provided that such restrictions are applied consistently and in like manner to all such investors; (5) Not to impose any fees, penalties, or charges for such termination or withdrawal with the exception of reasonable fees, appropriately disclosed in advance, that are specifically designed to prevent generally recognized abusive investment practices or specifically designed to ensure equitable treatment of all investors in a pooled fund in the event such withdrawal or termination may have adverse consequences for all other investors, provided that such fees are applied consistently and in like manner to all such investors; (6) Not to include exculpatory provisions disclaiming or otherwise limiting liability of the UBS QPAM for a violation of such agreement’s terms, except for liability caused by an error, misrepresentation, or misconduct of a plan fiduciary or other party hired by the plan fiduciary who is independent of UBS and its affiliates; and (7) To indemnify and hold harmless the ERISA-covered plan and IRA for any damages resulting from a violation of applicable laws, a UBS QPAM’s breach of contract, or any claim arising out of the failure of such UBS 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 Convictions; (8) Within four (4) months of the effective date of this proposed five-year exemption, each UBS QPAM must provide a notice of its obligations under this Section I(j) to each ERISA-covered plan and IRA for which the UBS QPAM provides asset management or other discretionary fiduciary services. For all other prospective ERISA-covered plan and IRA clients for which a UBS QPAM provides asset management or other discretionary fiduciary services, the UBS QPAM will agree in writing to its obligations under this Section I(j) in an updated investment management agreement or advisory agreement between the UBS QPAM and such clients or other written contractual agreement.’’ According to UBS, extending Section I(j) and other conditions to circumstances in which the QPAMs do not rely on PTE 84–14 would exceed the proper scope of Section 408 of ERISA and the Department’s exemption regulations, which are properly limited to protecting plans or IRAs involved in transactions that require use of PTE 84– 14. Accordingly, UBS requests that E:\FR\FM\29DEN2.SGM 29DEN2 ethrower on DSK3G9T082PROD with NOTICES Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices Section I(j) be revised to include the phrases ‘‘pursuant to’’ and ‘‘in reliance on PTE 84–14.’’ UBS also states that it interprets the clause ‘‘to comply with the standards of prudence and loyalty set forth in section 404 of ERISA, as applicable’’ to have the same meaning as the same condition in PTE 2016–17,66 which was previously granted to the UBS QPAMs. UBS interprets the language of Section I(j)(1) as ‘‘requiring the UBS QPAMs to agree to comply with Section 404 of ERISA only to the extent that Section 404 is otherwise ‘‘applicable’’ to the ERISAcovered plan or IRA, such that most IRAs would not be subject to this provision because they are not subject to Title I of ERISA.’’ UBS also states that if the Department contemplates that this clause would require the UBS QPAMs to contractually agree to comply with the duties set forth in Section 404 of ERISA with respect to all IRAs, such a requirement would be inappropriate. UBS represents that ‘‘including such a requirement in a final exemption would introduce significant uncertainty as to what standards should apply to IRAs not subject to Title I of ERISA.’’ UBS argues that ‘‘requiring the UBS QPAMs to contractually agree to treat IRAs as possessing rights that do not apply to them under ERISA would also be inconsistent with the requirements for exemptions under ERISA Section 408.’’ According to UBS, section 408 of ERISA requires that the Department make a determination that an exemption is protective of the ‘‘existing’’ rights of participants and beneficiaries. Additionally, UBS claims that the last clause of Section I(j)(1) of PTE 2016–17 which states ‘‘with respect to each such ERISA-covered plan and IRA’’ is redundant of the first clause of Section I(j)(1) of PTE 2016–17 and has, accordingly, requested deletion of the clause. ERISA-covered plans and IRAs routinely rely on QPAM status as a condition of entering into transactions with financial institutions, even with respect to transactions which do not strictly require adherence to PTE 84–14. According to the Applicant’s own application, ‘‘[e]ven where the QPAM exemption is not strictly required (e.g., for most purchases of publicly-traded stocks), many ERISA plan fiduciaries take great comfort in their managers qualifying for QPAM status and will not use managers that do not so qualify.’’ 66 81 FR 94049 (December 22, 2016). PTE 2016– 17 is a temporary exemption in respect of Exemption Application No. D–11863 for UBS QPAMs to rely on the exemptive relief provided by PTE 84–14, notwithstanding the Convictions, for up to twelve months from January 5, 2017. VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 Furthermore, in the report dated August 26, 2015 prepared by John Minahan, Ph.D. and provided to the Department by UBS in support of UBS QPAMs’ application for exemption, Dr. Minahan states that ‘‘[b]ecause of the importance of the QPAM designation, if the UBS QPAMs are denied an exemption and can longer act as QPAMs, plan fiduciaries are likely to conclude that they have no choice but to change managers. This is also true for plan clients with investment strategies that do not depend on the QPAM exemption. Fiduciaries of either category of plans are likely to view a denial of an exemption as reflective of the Department’s view that the UBS QPAMS should not be trusted to act as an investment manager for benefit plan assets, regardless of whether other prohibited transaction exemptions may be available.’’ The Department notes that it may not always be clear whether or not a UBS QPAM intends to rely upon PTE 84–14 for any particular transaction. Accordingly, it is critical to ensure that protective conditions are in place to safeguard the interests of ERISA-covered plans and IRAs that are acting in reliance on the availability of this exemption, particularly those who may not have entered into the transaction in the first place, but for the Department’s grant of this exemption. The Department has a clear interest in protecting ERISA-covered plans and IRAs that enter into an asset management agreement with a UBS QPAM in reliance of the manager’s qualification as a QPAM. Moreover, when an ERISA-covered plan or IRA terminates its relationship with an asset manager, it may incur significant costs and expenses as its investments are unwound and as it works to place investments with a new asset manager. After considering UBS’s comments, the Department has revised this condition. The condition now applies to ERISA-covered plans and IRAs only when the UBS asset manager relies on PTE 84–14 or has expressly represented that it qualifies as a QPAM or relies on the QPAM class exemption in its dealings with the ERISA-covered plan or IRA (hereinafter, a Covered Plan). To the extent a UBS QPAM would prefer not to be subject to these conditions, however, it may expressly disclaim reliance on QPAM status or PTE 84–14 in entering into its contract with an ERISA-covered plan or IRA. In that case, the plan or IRA is not a Covered Plan.67 67 Of course, the UBS QPAM could not claim exemptive relief under PTE 84–14 or this exemption with respect to any ERISA-covered plan PO 00000 Frm 00093 Fmt 4701 Sfmt 4703 61907 The Department rejects the view that it acts outside the scope of its authority by protecting ERISA-covered plans and IRAs that rely on UBS QPAMs’ eligibility for this exemption, and reemphasizes the seriousness of the criminal misconduct that caused the UBS QPAMs to need this exemption as well as the FX Misconduct. The Department may grant an exemption under Section 408(a) of ERISA or Code section 4975(c)(2)(C) only to the extent the Secretary finds, among other things, that the exemption is protective of the affected plan(s) or IRA(s). As noted by regulators, personnel at UBS engaged in serious misconduct over an extended period of time at the expense of their own clients. This misconduct appears to have stemmed, in part, from deficiencies in control and oversight. Notwithstanding the misconduct, which resulted in violation of Section I(g) of PTE 84–14, the Department has determined that this exemption is protective of Covered Plans and in the interest of participants, beneficiaries, and beneficial owners of such Covered Plans. The Department made this determination based, in significant part, upon the protections of Section I(j) that require UBS QPAMs to make an express commitment to Covered Plans to adhere to the requirements of ERISA and the Code, as applicable. As previously indicated, the Department has concluded that a culture of compliance, centered on adherence to basic standards of fair dealing as set forth in this exemption, gives the Department a compelling basis for making the required statutory findings that the exemption is in the interest of, and protects the rights of participants, beneficiaries, and beneficial owners of Covered Plans. Absent such a compelling basis, the exemption would have been denied. In response to UBS’s comments, however, the Department required an express commitment to comply with the fiduciary standards and prohibited transaction rules only to the extent these provisions are ‘‘applicable’’ under ERISA and the Code. The revised terms, together with this exemption’s limited relief (e.g., this exemption generally does not extend to transactions that involve self-dealing) should serve to promote a culture of compliance and protect Covered Plans and their participants, beneficiaries, and beneficial owners. In response to UBS’s comments, the Department also notes that nothing in ERISA or the Code prevents the or IRA for which it so expressly disclaims reliance on QPAM status or PTE 84–14. E:\FR\FM\29DEN2.SGM 29DEN2 61908 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices ethrower on DSK3G9T082PROD with NOTICES Department from conditioning relief on express contractual commitments to adhere to the requirements set out herein. The QPAMs remain free to disclaim reliance on the exemption and to avoid such express contractual commitments. To the extent, however, that they hold themselves out as fiduciary QPAMs, they should be prepared to make an express commitment to their customers to adhere to the requirements of this exemption. This commitment strengthens and reinforces the likelihood of compliance, and helps ensure that, in the event of noncompliance, Covered Plans are insulated from injuries caused by noncompliance. These protections also ensure that Covered Plans are able to extricate themselves from transactions that become prohibited as a result of the QPAMs’ misconduct, without fear of sustaining additional losses as a result of the QPAMs’ actions. In this connection, however, the Department emphasizes that the only claims available to the QPAMs’ Covered Plan customers pursuant to these contractual commitments are those separately provided by ERISA or other state and federal laws that are not preempted by ERISA. Comment III C—Indemnification Requirements—Section I(j)(6) and Revision to Sections I(j)(5) and (3) Section I(j)(7) of the proposed exemption provides that: ‘‘Effective as of the effective date of this five-year exemption, with respect to any arrangement, agreement, or contract between a UBS QPAM and an ERISAcovered plan or IRA for which such UBS QPAM provides asset management or other discretionary fiduciary services, each UBS QPAM agrees and warrants: . . . (7)[t]o indemnify and hold harmless the ERISA-covered plan and IRA for any damages resulting from a violation of applicable laws, a UBS QPAM’s breach of contract, or any claim arising out of the failure of such UBS 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 Convictions.’’ UBS states that Section I(j)(7) of the proposed exemption is overbroad because it could be interpreted to require the UBS QPAMs to indemnify plans for types of damages, such as punitive or consequential damages, that are impermissible under ERISA and/or that are not attributable to any act or omission of UBS or the QPAMs. Thus, UBS requests clarification that any such damages must be reasonable; related to the arrangement, agreement or contract; VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 exclude indirect, special, consequential, or punitive damages; and result directly from the failure of the UBS QPAM. Additionally, UBS has requested that the phrase ‘‘applicable laws’’ in Section I(j)(7) of the proposed exemption be replaced with ‘‘ERISA’s fiduciary duties and of ERISA and Code’s prohibited transaction provisions.’’ As explained above, the purpose of this exemption is to protect Covered Plans. Section I(j)(6) (this Section has been renumbered so that Section I(j)(7) of the proposed exemption is now Section I(j)(6) in this exemption) is essential to achieving that purpose. Section I(j)(6) ensures that a Covered Plan may expect a UBS QPAM to adhere to basic fiduciary norms and standards of fair dealing, notwithstanding the Conviction. The condition also ensures that Covered Plans have the ability to disengage from a relationship with a UBS QPAM without undue injury if UBS violates the terms of this exemption. Accordingly, the Department has revised the applicability of this condition to more closely reflect this interest. In particular, the condition applies only to Covered Plans. As indicated above, if the asset manager would prefer not to be subject to these provisions as exemption conditions, it may expressly disclaim reliance on QPAM status or PTE 84–14 in entering into its contract with the Plan or IRA (in that case, however, it could not rely on the exemption for relief). The Department made further changes upon consideration of UBS’s comments, however. These changes include: Renumbering the condition for clarity; replacing ‘‘applicable laws’’ with clarifying language that conforms to the one-year exemption, PTE 2016–17; and replacing ‘‘any damages’’ with ‘‘actual losses resulting directly from’’ certain acts or omissions of the UBS QPAMs. Because Section I(j)(6) extends only to actual losses resulting directly from the actions of the UBS QPAMs, it does not encompass losses solely caused by other parties, events, or acts of God. Section I(j)(6) of the proposed exemption provides ‘‘Effective as of the effective date of this five-year exemption, with respect to any arrangement, agreement, or contract between a UBS QPAM and an ERISAcovered plan or IRA for which such UBS QPAM provides asset management or other discretionary fiduciary services, each UBS QPAM agrees and warrants: . . . Not to include exculpatory provisions disclaiming or otherwise limiting liability of the UBS QPAM for a violation of such agreement’s terms, except for liability caused by an error, misrepresentation, or misconduct of a PO 00000 Frm 00094 Fmt 4701 Sfmt 4703 plan fiduciary or other party hired by the plan fiduciary who is independent of UBS, and its affiliates.’’ In coordination with the modifications to Section I(j)(6) (formerly Section I(j)(7)) discussed above, the Department modified Section I(j)(5) (formerly I(j)(6) in the proposed exemption) to clarify that the prohibition on exculpatory provisions does not extend to losses that arise from an act or event not caused by UBS and that nothing in this section alters the prohibition on exculpatory provisions set forth in ERISA Section 410. Section I(j)(3) of the proposed exemption provides that ‘‘Effective as of the effective date of this five-year exemption, with respect to any arrangement, agreement, or contract between a UBS QPAM and an ERISAcovered plan or IRA for which such UBS QPAM provides asset management or other discretionary fiduciary services, each UBS QPAM agrees and warrants: . . . (3) [n]ot to require the ERISAcovered plan or IRA (or sponsor of such ERISA-covered plan or beneficial owner of such IRA) to indemnify the UBS QPAM for violating ERISA or engaging in prohibited transactions, except for violations or prohibited transactions caused by an error, misrepresentation, or misconduct of a plan fiduciary or other party hired by the plan fiduciary who is independent of UBS.’’ The Department determined that Section I(j)(3), as proposed, is duplicative of the exemption’s prohibition on exculpatory clauses in Section I(j)(5) (previously Section I(j)(6) in the proposed exemption) and, accordingly, has deleted the condition. Therefore, as previously stated, Section I(j) has been renumbered accordingly. Comment IV—Definition of FX Misconduct—Section II(e) Section I(e) of the proposed exemption provides: ‘‘The term ‘‘FX Misconduct’’ means the conduct engaged in by UBS personnel described in Exhibit 1 of the Plea Agreement (Factual Basis for Breach) entered into between UBS AG and the Department of Justice Criminal Division, on May 20, 2015 in connection with Case Number 3:15–cr–00076–RNC filed in the US District Court for the District of Connecticut.’’ UBS represents that the proposed exemption’s definition of FX Misconduct should be limited to the collusive conduct described in Paragraph 15 of Exhibit 1 to the May 20, 2015 Plea Agreement. The Applicant argues that ‘‘UBS was not charged with the other conduct described in Exhibit 1—referred to as the ‘unilateral’ or ‘sales’ conduct and was not required to E:\FR\FM\29DEN2.SGM 29DEN2 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices ethrower on DSK3G9T082PROD with NOTICES admit this conduct was criminal in nature.’’ UBS claims that an individual QPAM exemption applicant has never been required to make representations regarding this type of conduct. UBS further argues that in excluding the ‘‘unilateral’’ conduct from the temporary exemptions granted to each of the other banks which were charged with FX-related crimes, unlike UBS, the Department determined that including such conduct would improperly expand the definition ‘‘beyond that which is described as criminal in the Plea Agreement.’’ Therefore, UBS argues that references to the ‘‘unilateral’’ conduct should be deleted from the UBS final exemption and from the definition of FX Misconduct. The Department declines to make the requested change to the definition of FX Misconduct. As stated in the Factual Basis for Breach (Exhibit 1 to the May 20, 2015 Plea Agreement), DOJ determined that UBS violated the 2012 Non-Prosecution Agreement (the LIBOR NPA) relating to UBS’s fraudulent submission of LIBOR rates and declared a breach of the LIBOR NPA due to a finding that certain UBS employees engaged in fraudulent and deceptive currency trading and sales practices, as well as collusive conduct in certain FX markets. Limiting the definition of the FX Misconduct to include only the collusive behavior specifically described in paragraph 15 of Exhibit 1 of the Plea Agreement would not appropriately reflect the misconduct of UBS employees in regard to the FX markets that DOJ considered in determining there was a breach of the LIBOR NPA which led to the Plea Agreement and the 2017 Conviction. Just as important, the Department believes the FX Misconduct, along with the criminal conduct that is the subject of the Convictions, is relevant to a determination of the protections necessary to assure that the interests of Covered Plans (and their participants, beneficiaries, and beneficial owners) are protected. This exemption is designed to protect Covered Plans and is based on the entirety of the record that describes in detail the FX misconduct, not just part. Comment V—Deadlines for Completion of the Annual Audits and Annual Reviews—Section I(i)(1) and I(m)(v) Section I(i)(1) of the proposed exemption provides in part that ‘‘[e]ach annual audit must cover a consecutive twelve month period starting with the twelve month period that begins on the date of the Conviction Date (the Initial Audit Period)’’ and that ‘‘[e]ach annual audit must be completed no later than VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 six (6) months after the period to which the audit applies.’’ Section I(m)(v) of the Proposed Exemption provides that ‘‘[e]ach annual review, including the Compliance Officer’s written Annual Report, must be completed at least three (3) months in advance of the date on which each audit described in Section I(i) is scheduled to be completed.’’ UBS represents that while it supports the notion of providing sufficient time in between the completion of the Annual Review and the Annual Audit to allow for the auditor to review the report on the Annual Review, the timing for the Audit and Annual Review would require UBS to conduct the Annual Reviews on a different time schedule than the UBS QPAMs currently follow for the completion of a similar internal review required by the Investment Advisors Act. UBS states that review for the Investment Advisors Act is generally completed on or around the beginning of June of each year. UBS contends that conducting both annual reviews on the same schedule would improve the effectiveness of the Annual Review and achieve substantial efficiencies. Therefore, UBS requests that Section I(i)(1) be revised to provide that (a) the Initial Audit Period cover the fourteenmonth period from January 10, 2017 through March 9, 2018, with the audit to be completed six months later (i.e., by September 9, 2018), and (b) the first Annual Review is to be completed three months before the completion of that audit (i.e., by June 9, 2018). UBS states that, thereafter, the annual audits should cover consecutive twelve-month periods (e.g., March 10, 2018 through March 9, 2019), with the same deadlines for completion of the audits and Annual Reviews (i.e., by September 9th and June 9th, respectively, of each year). The Department agrees that it would be beneficial and efficient for the time frame for the Annual Review to coordinate with the time frame for the compliance review conducted by the UBS QPAMs for other regulators. Therefore, the Department has modified Section I(i)(1) to provide that the Initial Audit Period is the consecutive fourteen-month period beginning on January 10, 2017. Each subsequent audit must cover consecutive twelve-month periods beginning at the end of the Initial Audit Period. Section I(i)(1) has also been modified, as requested, to confirm that for the time period from September 18, 2016 until the January 10, 2017 conviction date, the audit requirements in Section (g) of PTE 2013–09 remained in effect. Accordingly, the audit of such final time period under PTE 2013–09 had to have been completed and submitted within PO 00000 Frm 00095 Fmt 4701 Sfmt 4703 61909 six (6) months of January 10, 2017 (that is, by July 9, 2017). This final audit required under PTE 2013–09 has been completed and the corresponding Audit Report has been submitted to the Department. Comment VI—Deadline for Implementation of the Required Policies and Training—Sections: I(h)(1) and (2) Section I(h)(1) of the proposed exemption provides that: ‘‘[E]ach UBS QPAM must immediately develop, implement, maintain, and follow written policies and procedures (the Policies) requiring and reasonably designed to ensure that: . . .’’ Section I(h)(2) provides: ‘‘[E]ach UBS QPAM must immediately develop and implement a program of training (the Training), conducted at least annually, for all relevant UBS QPAM asset/portfolio management, trading, legal, compliance, and internal audit personnel. The Training must:’’ UBS represents that PTE 2016–17 requires the UBS QPAMs to develop and implement the required policies, procedures, and training program within 6 months of the date of conviction while the proposed exemption requires the UBS QPAMs to ‘‘immediately’’ comply with these conditions which are substantially similar to those in the PTE 2016–17. UBS requests that Sections I(h)(1) and (2) in a final exemption be revised to require compliance by the dates set forth in Sections I(h)(1) and (2) of PTE 2016–17 in order to avoid any conflict between the conditions in PTE 2016–17 and the final exemption in the event a final exemption is granted before the occurrence of the 6-month deadline provided for in the PTE 2016–17. The Department emphasizes that the UBS QPAMs must comply with the Policies and Training requirements within both PTE 2016–17 and this exemption. The Department has determined not to revise Section I(h)(1) and I(h)(2) as requested by UBS. However, the Department has made minor revisions to reflect the fact that UBS QPAMs may already have Policies and Training under the previous exemption, in which case, they are required to ‘‘maintain’’ such Policies or Training. Comment VII A—Notices to Plan Clients and Notices to Interested Persons— Section I(k)(1) Section I(k)(1) of the proposed exemption provides that: ‘‘Notice to ERISA-covered plan and IRA clients. Within fifteen (15) days of the publication of this proposed five-year exemption in the Federal Register, E:\FR\FM\29DEN2.SGM 29DEN2 ethrower on DSK3G9T082PROD with NOTICES 61910 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices each UBS QPAM will provide a notice of the proposed five-year exemption, along with a separate summary describing the facts that led to the Convictions (the Summary), which have been submitted to the Department, and a prominently displayed statement (the Statement) that each Conviction separately results in a failure to meet a condition in PTE 84–14, to each sponsor of an ERISA-covered plan and each beneficial owner of an IRA for which a UBS QPAM provides asset management or other discretionary fiduciary services, or the sponsor of an investment fund in any case where a UBS QPAM acts only as a sub-advisor to the investment fund in which such ERISA-covered plan and IRA invests. In the event that this proposed five-year exemption is granted, the Federal Register copy of the notice of final five-year exemption must be delivered to such clients within sixty (60) days of its publication in the Federal Register, and may be delivered electronically (including by an email that has a link to the five-year exemption). Any prospective clients for which a UBS QPAM provides asset management or other discretionary fiduciary services must receive the proposed and final five-year exemptions with the Summary and the Statement prior to, or contemporaneously with, the client’s receipt of a written asset management agreement from the UBS QPAM.’’ UBS requests that Section I(k)(1) be revised to require the notice only be provided to each sponsor of an ERISAcovered plan and each beneficial owner of an IRA for which the UBS QPAMS provides asset management or discretionary fiduciary services in reliance on PTE 84–14. UBS also requests that Section I(k)(1) of the Exemption be revised to reflect the later date by which a certain number of plans and IRAs were provided with notice of the Proposed Exemption, as agreed to by the Department. Lastly, UBS requests that the Department confirm that the declaration required by 29 CFR 2570.43(c) will reflect that later date. The Department has narrowed the notice requirement to include only ERISA-covered plans and IRAs that would benefit from this knowledge (i.e. Covered Plans). The Department confirms that the UBS QPAMs had 63 days after the proposed exemption was published in the Federal Register to notify interested persons and the declaration required by 29 CFR 2570.43(c) should reflect the January 23, 2017 date. VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 Comment VII B—Notices to ‘‘Non-Plan Clients’’—Section I(k)(2) Section I(k)(2) of the proposed exemption provides that: ‘‘Each UBS QPAM will provide a Federal Register copy of the proposed five-year exemption, a Federal Register copy of the final five-year exemption; the Summary; and the Statement to each: (A) Current Non-Plan Client within four (4) months of the effective date, if any, of a final five-year exemption; and (B) Future Non-Plan Client prior to, or contemporaneously with, the client’s receipt of a written asset management agreement, or other written contractual agreement, from the UBS QPAM. For purposes of this subparagraph (2), a Current Non-Plan Client means a client of a UBS QPAM that: Is neither an ERISA-covered plan nor an IRA; has assets managed by the UBS QPAM as of the effective date, if any, of a final fiveyear exemption; and has received a written representation (qualified or otherwise) from the UBS QPAM that such UBS QPAM qualifies as a QPAM or qualifies for the relief provided by PTE 84–14. . . .’’ UBS requests that the Department omit this requirement. UBS represents that the scope of exemptive relief, as contemplated by Section 408 of ERISA and the Department’s regulations, is limited to plans and IRAs that are affected by the exemption. Therefore, it argues, a condition requiring notice be provided to UBS QPAM clients that are not ERISA-covered plans or IRAs and do not utilize PTE 84–14 would be outside the scope of Section 408 of ERISA. Given the breadth of the notice requirement otherwise mandated by the exemption, and its decision to restrict the requirement to those arrangements for which QPAM status plays an integral role (i.e., the QPAM represents or relies upon its QPAM status), the Department has decided to delete this provision. Comment VIII—Distribution of Audit Reports to Board Committees—Section I(i)(8) Section I(i)(8) of the proposed exemption provides that: ‘‘The Risk Committee, the Audit Committee, and the Corporate Culture and Responsibility Committee of UBS’s Board of Directors are provided a copy of each Audit Report; and a senior executive officer of UBS’s Compliance and Operational Risk Control function must review the Audit Report for each UBS QPAM and must certify in writing, under penalty of perjury, that such officer has reviewed each Audit Report;’’ PO 00000 Frm 00096 Fmt 4701 Sfmt 4703 UBS requests that the Department revise this condition to allow UBS’s Board of Directors to select which committee (or committees) is provided a copy of each Audit Report. UBS agrees that the results of the annual audit should be communicated to the highest level of UBS’s governance structure, but which committee receives the Audit Report is a matter of internal governance best determined by the UBS Board of Directors. UBS claims that this condition could become unworkable if the Board’s committee structure and/or the responsibilities of the Board’s committees were to change. Alternatively, UBS requests that Section I(i)(8) be modified to limit the requirement to provide a copy of the Audit Report to the Risk Committee of UBS’s Board of Directors. In light of the importance of ensuring proper review of the Audit Report, the Department declines to alter this provision to permit UBS’s Board of Directors to decide, in its discretion, which committee receives the Audit Report. However, after review of the record, the Department has revised Section I(i)(8) to reflect that only the Risk Committee of the UBS Board Directors must be provided a copy of the Audit Report. Section I(i)(4)—Auditor Testing Operational Compliance Section I(i)(4) of the proposed exemption requires the auditor to ‘‘test each UBS QPAM’s operational compliance with the Policies and Training. In this regard, the auditor must test a sample of each QPAM’s transactions involving ERISA-covered plans and IRAs sufficient in size and nature to afford the auditor a reasonable basis to determine the operational compliance with the Policies and Training.’’ UBS has requested that this Section be modified to include the phrase ‘‘in reliance on PTE 84–14’’ following the phrase ‘‘involving ERISAcovered plans and IRAs.’’ The Department revised this condition for consistency with other conditions of this exemption that are tailored to the Department’s interest in protecting Covered Plans. Additional Audit Requirement Revisions—Sections I(i)(2), I(i)(5), I(i)(7), I(i)(9), I(i)(11), I(i)(12) In addition to the revisions to the audit requirement for Section I(i)(1), I(i)(4), and i(i)(8) described above, the Department, on its own motion, determined to make revisions to the following Sections to enhance the workability of the audit and the exemption: E:\FR\FM\29DEN2.SGM 29DEN2 ethrower on DSK3G9T082PROD with NOTICES Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices Section I(i)(2) of the proposed exemption provides that ‘‘[t]o the extent necessary for the auditor, in its sole opinion, to complete its audit and comply with the conditions for relief described herein, and as permitted by law, each UBS QPAM and, if applicable, UBS, will grant the auditor unconditional access to its business, including, but not limited to: Its computer systems; business records; transactional data; workplace locations; training materials; and personnel.’’ In the Department’s view, to ensure a thorough and robust audit, the independent auditor must be granted access to information it deems necessary to make sound conclusions. However, access to such information must be within the scope of the audit engagement and limited to information relevant to the auditor’s objectives as specified by the terms of this exemption and denied only to the extent any disclosure is not permitted by state or federal statute or involves communications subject to attorney client privilege. The Department has modified Section I(i)(2)accordingly. Section I(i)(5) of the proposed exemption provides that ‘‘[f]or each audit, on or before the end of the relevant period described in Section I(i)(1) for completing the audit, the auditor must issue a written report (the Audit Report) to UBS and the UBS QPAM to which the audit applies that describes the procedures performed by the auditor during the course of its examination. The Audit Report must include the auditor’s specific determinations regarding: (i) The adequacy of the UBS QPAM’s Policies and Training; the UBS QPAM’s compliance with the Policies and Training; the need, if any, to strengthen such Policies and Training; and any instance of the respective UBS QPAM’s noncompliance with the written Policies and Training described in Section I(h) above. 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 UBS QPAM must be promptly addressed by such UBS QPAM, and any action taken by such UBS QPAM to address such recommendations must be included in an addendum to the Audit Report (which addendum is completed prior to the certification described in Section I(i)(7) below). Any determination by the auditor that the respective UBS QPAM has implemented, maintained, and followed sufficient Policies and Training must not be based solely or in substantial part on an absence of VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 evidence indicating noncompliance. In this last regard, any finding that the UBS QPAM has complied with the requirements under this subsection must be based on evidence that demonstrates the UBS QPAM has actually implemented, maintained, and followed the Policies and Training required by this five-year exemption. Furthermore, the auditor must not rely on the Annual Report created by the Compliance Officer as described in Section I(m) below in lieu of independent determinations and testing performed by the auditor as required by Section I(i)(3) and (4) above; and (ii) The adequacy of the Annual Review described in Section I(m) and the resources provided to the Compliance officer in connection with such Annual Review; The Department modified Section I(i)(5) to clarify that the auditor may issue one consolidated Audit Report covering all the UBS QPAMS for the period of time being audited. The Department acknowledges that the UBS QPAMs’ efforts to address the auditor’s recommendations regarding any inadequacy in the Policies and Training identified by the auditor may take longer to implement than the time limits mandated by the proposed exemption. Accordingly, the Department is modifying Section I(i)(5)(i) to reflect the possibility that the UBS QPAMs’ efforts to address the auditor’s recommendations regarding any inadequacy in the Policies and Training may not be completed by the submission date of the Audit Report and may involve a written plan to address such items. However, any noncompliance identified by the auditor must be promptly addressed. The revised Section also requires that if such a plan of action to address the auditor’s recommendation as to the adequacy of the Policies and Training is not completed by the submission of the Audit Report, the following period’s Audit Report, must state whether the plan was satisfactorily completed. Additionally, the Department has modified the final sentence in Section I(i)(5)(i) to more clearly express the Department’s intent that the auditor must not rely solely on the work of the Compliance Officer and the Annual Report in formulating its conclusions or findings. The Auditor must perform its own independent testing to formulate its conclusions. This exemption does not prohibit the auditor from considering the Compliance Officer’s Annual Report in carrying out its audit function, including its formulation of an audit plan. This exemption, however, does prohibit the auditor from reaching PO 00000 Frm 00097 Fmt 4701 Sfmt 4703 61911 conclusions that are exclusively based upon the contents of the Compliance Officer’s Annual Report. While an independent assessment by the auditor of the adequacy of the Annual Review is essential to providing the Department with the assurance that the Applicant and the UBS QPAMs have given these matters the utmost priority and have taken the necessary actions to comply with the exemption, the Department has determined that the auditor should not be responsible for opining on the adequacy of the resources allocated to the Compliance Officer and on its own motion, has modified Section I(i)(5)(ii) accordingly. Section I(i)(7) of the proposed exemption provides that ‘‘[w]ith respect to each Audit Report, the General Counsel, or one of the three most senior executive officers of the UBS QPAM to which the Audit Report applies, must certify in writing, under penalty of perjury, that the officer has reviewed the Audit Report and this five-year exemption; addressed, corrected, or remedied any inadequacy identified in the Audit Report; and determined that the Policies and Training in effect at the time of signing are adequate to ensure compliance with the conditions of this proposed five-year exemption and with the applicable provisions of ERISA and the Code.’’ UBS requested that the Department add the phrase ‘‘to the best of such officer’s knowledge at the time’’ to this condition. The Department has revised Section I(i)(7) as requested by clarifying that the certification be made to the best of such officer’s knowledge at the time. Furthermore, in coordination with the changes to Section I(i)(5)(i) discussed above, the Department revised Section I(i)(7) to acknowledge that the Applicant’s efforts to address the auditor’s recommendations regarding inadequacies in the Policies and Training identified by the auditor, may take longer to implement than the timeframe to submit the certified Audit Report. With respect to this issue, the Department did not intend to limit corrective actions to those that could only be completed prior to the submission of the Audit Report. Therefore, the Department has modified Section I(i)(7) to reflect that the senior officer may certify that a written plan to address the inadequacies regarding the Policies and Training identified in the Audit Report is in place. Section I(i)(9) of the proposed exemption provides that ‘‘[e]ach UBS QPAM must provide its certified Audit Report, by regular mail to: the Department’s Office of Exemption Determinations (OED), 200 Constitution E:\FR\FM\29DEN2.SGM 29DEN2 ethrower on DSK3G9T082PROD with NOTICES 61912 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices Avenue NW, Suite 400, Washington DC 20210, or by private carrier to: 122 C Street NW, Suite 400, Washington, DC 20001–2109, no later than 45 days following its completion. The Audit Report will be part of the public record regarding this five-year exemption. Furthermore, each UBS QPAM must make its Audit Report unconditionally available for examination by any duly authorized employee or representative of the Department, other relevant regulators, and any fiduciary of an ERISA-covered plan or IRA, the assets of which are managed by such UBS QPAM.’’ While the Department has an interest in ensuring that the conditions of this exemption broadly protect ERISA-covered plans and IRAs that have relied on QPAM status in deciding to enter into an agreement with the UBS QPAMs, the Department has revised Section I(i)(9) to clarify that the UBS QPAMs are required to make the documents available to any fiduciary of a Covered Plan. Additionally, the Department decided to require that the Audit Report be provided to the Department within 30 days following its completion. The Audit Report, in any event, will be incorporated into the public record attributable to this exemption, under Exemption Application Number D–11907, and, therefore, independently accessible by members of the public. Accordingly, the Department has decided to revise the condition by replacing the phrase ‘‘an ERISA-covered plan or IRA, the assets of which are managed by such UBS QPAM’’ with the term ‘‘Covered Plan’’ (as defined in Section II(b)). Lastly, the Department agrees that access to the Audit Report need only be upon request and such access can be electronic, and has revised the exemption accordingly. Section I(i)(10) of the proposed exemption provides that ‘‘[e]ach UBS QPAM and the auditor must submit to OED: (A) any engagement agreement entered into pursuant to the engagement of the auditor under this five-year exemption; and (B) any engagement agreement entered into with any other entity retained in connection with such QPAM’s compliance with the Training or Policies conditions of this proposed five-year exemption, no later than six (6) months after the effective date of this five-year exemption (and one month after the execution of any agreement thereafter).’’ To remove any confusion and uncertainty regarding the timing of the submission of the auditor’s and other entity’s engagement agreements, the Department has modified Section I(i)(10) to require that the auditor’s engagement agreement and the VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 engagement agreements with other entities retained in connection with such UBS QPAM’s compliance with the Training or Policies be submitted to the OED no later than two (2) months after the engagement agreement is entered into by the Applicant and the independent auditor or other entity. Section I(i)(11) of the proposed exemption requires that, ‘‘[t]he auditor must provide OED, upon request, all of the workpapers created and utilized in the course of the audit, including, but not limited to: The audit plan; audit testing; identification of any instance of noncompliance by the relevant UBS QPAM; and an explanation of any corrective or remedial action taken by the applicable UBS QPAM.’’ The Department acknowledges that certain information contained in the audit workpapers may be confidential and proprietary, and having that information in the public file may create needless or avoidable disclosure issues. Therefore, the Department has determined to modify Section I(i)(11) to remove the requirement that the auditor provide the workpapers to OED, and instead require that the auditor provide access to the workpapers for the Department’s review and inspection. Section I(i)(12) of the proposed fiveyear exemption requires that ‘‘UBS must notify the Department at least 30 days prior to any substitution of an auditor, except that no such replacement will meet the requirements of this paragraph unless and until UBS demonstrates to the Department’s satisfaction that such new auditor is independent of UBS, experienced in the matters that are the subject of the five-year exemption and capable of making the determinations required of this five-year exemption.’’ The Department decided to remove the requirement for UBS to demonstrate the independence and qualifications of the auditor to the Department. The exemption requires instead that UBS, no later than two (2) months from the engagement of the replacement auditor, notify the Department of a change in auditor and of the reason(s) for the substitution including any material disputes between the terminated auditor and UBS. UBS’s fiduciary obligations with respect to the selection of the auditor, as well as the significant role a credible selection plays in reducing the need for more extensive oversight by the Department, should be sufficient to safeguard the selection process. No-Fault Provision—Failure of Auditor—Section I(s) Section I(s) of the proposed exemption provides that ‘‘[a] UBS QPAM will not fail to meet the terms of PO 00000 Frm 00098 Fmt 4701 Sfmt 4703 this five-year exemption, solely because a different UBS QPAM fails to satisfy a condition for relief under this five-year exemption described in Sections I(c), (d), (h), (i), (j), (k), (l), (p), and (r).’’ The Department modified this condition so the failure of the auditor to comply with any of the conditions of the exemption, with the exception of Section I(i)(11) regarding access to the auditor’s workpapers, will not be treated as a failure by the UBS QPAMs to comply with the conditions of the exemption provided that such failure was not due to the actions or inactions of UBS or its affiliates. Comment IX—Additional Requested Revisions In granting PTE 2016–17, the Department made several modifications to the proposed temporary exemption both at the request of UBS and on the Department’s own initiative. UBS requested that the Department make the revisions that were made in PTE 2016– 17 to the corresponding conditions in this exemption and additional revisions to certain of these Sections. The Department has addressed these requests as follows: Knowing or Tacit Approval—Section I(a) and I(c) Section I(a) of the proposed exemption provides, ‘‘[t]he UBS QPAMs (including their officers, directors, agents other than UBS, and employees of such UBS QPAMs) did not know of, have reason to know of, or participate in: (1) the FX Misconduct; or (2) the criminal conduct that is the subject of the Convictions (for the purposes of this Section I(a), ‘‘participate in’’ includes the knowing or tacit approval of the FX Misconduct or the misconduct that is the subject of the Convictions).’’ Section I(c) of the proposed exemption provides, ‘‘[t]he UBS QPAMs will not employ or knowingly engage any of the individuals that participated in: (1) the FX Misconduct or (2) the criminal conduct that is the subject of the Convictions (for the purposes of this Section I(c), ‘‘participated in’’ includes the knowing or tacit approval of the FX Misconduct or the misconduct that is the subject of the Convictions).’’ UBS requests that the words ‘‘or tacit’’ in the phrase ‘‘knowing or tacit approval’’ be deleted in Sections I(a) and I(c) and be replaced with ‘‘knowing approval’’ in a final exemption, to avoid any ambiguity or confusion as to the definition of ‘‘participate in.’’ After consideration of UBS’s comments, the Department revised the condition in the manner requested by the Applicant. E:\FR\FM\29DEN2.SGM 29DEN2 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices ethrower on DSK3G9T082PROD with NOTICES Receipt of Compensation—Section I(b) Section I(b) of the proposed exemption provides, ‘‘[t]he UBS QPAMs (including their officers, directors, agents other than UBS, and employees of such UBS QPAMs) did not receive direct compensation, or knowingly receive indirect compensation, in connection with: (1) the FX Misconduct; or (2) the criminal conduct that is the subject of the Convictions.’’ UBS requests that the Department replace ‘‘receive direct compensation, or knowingly receive indirect compensation’’ with ‘‘knowingly receive compensation.’’ UBS claims this change is consistent with the underlying purpose of the condition and avoids any ambiguity or confusion regarding the meaning of ‘‘direct’’ and ‘‘indirect compensation.’’ The Department does not agree that the terms ‘‘direct and ‘‘indirect’’ create ambiguity or confusion and has not made the requested revision. It is the Department’s intent to preclude relief herein if any asset management personnel of the UBS QPAMs received direct compensation, or knowingly received indirect compensation, in connection with the FX Misconduct or the criminal conduct that is the subject of the Convictions and therefore has not revised Section I(b). UBS QPAM Will Not Use Its Authority or Influence—Section I(d) Section I(d) of the proposed exemption provides that ‘‘[a] UBS QPAM will not use its authority or influence to direct an ‘‘investment fund’’ (as defined in Section VI(b) of PTE 84–14), that is subject to ERISA or the Code and managed by such UBS QPAM to enter into any transaction with UBS or UBS Securities Japan or engage UBS or UBS Securities Japan 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.’’ UBS has requested that the phrase ‘‘in reliance on PTE 84–14’’ be added to this condition following the phrase ‘‘managed by such UBS QPAM.’’ After considering the Applicant’s comment, the Department has revised the exemption to clarify that Section I(d) applies to ‘‘investment funds’’ managed by the UBS QPAM with respect to Covered Plans. Provision of Asset Management Services—Section I(g) Section I(g) provides that ‘‘UBS and UBS Securities Japan will not provide VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 discretionary asset management services to ERISA-covered plans or IRAs, nor will otherwise act as a fiduciary with respect to ERISA-covered plan or IRA assets.’’ UBS requested that the Department modify Section I(g) in conformity with PTE 2016–17 to clarify that UBS and UBS Securities Japan will not violate this condition in the event that they inadvertently become investment advice fiduciaries and that UBS can act as a fiduciary for plans that it sponsors for its own employees or employees of an affiliate. The Department has modified Section I(g) accordingly. Termination and Withdrawal Restrictions—Section I(j)(3) Under Section I(j)(4) of the proposed exemption, the UBS QPAMs agree: ‘‘[n]ot to restrict the ability of such ERISA-covered plan or IRA to terminate or withdraw from its arrangement with the UBS QPAM (including 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 as a result of an actual lack of liquidity of the underlying assets, provided that such restrictions are applied consistently and in like manner to all such investors.’’ UBS requested that the Department revise Section I(j)(3) (formerly Section I(j)(4) in the proposed exemption) to be consistent with the language used for this condition in PTE 2016–17. Consistent with PTE 2016–17, the Department has revised Section I(j)(4) clarifying the circumstances under which reasonable restrictions are necessary to protect the remaining investors in a pooled fund and to also clarify that in any such event the restrictions must be reasonable and last no longer than reasonably necessary to remedy the adverse consequences. Notice of Obligations—Section I(j)(7) Section I(j)(8) of the proposed exemption provides that ‘‘[w]ithin four (4) months of the effective date of this proposed five-year exemption, each UBS QPAM must provide a notice of its obligations under this Section I(j) to each ERISA-covered plan and IRA for which the UBS QPAM provides asset management or other discretionary fiduciary services. For all other prospective ERISA-covered plan and IRA clients for which a UBS QPAM PO 00000 Frm 00099 Fmt 4701 Sfmt 4703 61913 provides asset management or other discretionary fiduciary services, the UBS QPAM will agree in writing to its obligations under this Section I(j) in an updated investment management agreement or advisory agreement between the UBS QPAM and such clients or other written contractual agreement.’’ In addition to requesting that Section I(j)(8) of the proposed exemption be revised to reflect the changes made in PTE 2016–17, UBS requests that that the requirement in Section I(j)(8) be limited to ERISAcovered plans and IRAs for which the UBS QPAM provides asset management or other discretionary fiduciary services in reliance on PTE 84–14 and that the phrase ‘‘all other prospective’’ be replaced with the word ‘‘new.’’ As previously noted, this Section has been renumbered so that Section I(j)(8) of the proposed exemption is now Section I(j)(7) in this exemption. As noted above, the Department has an interest in protecting an ERISAcovered plan or IRA that enters into an asset management agreement with a UBS QPAM in reliance on the manager’s qualification as a QPAM, regardless of whether the QPAM relies on the class exemption when managing the assets of the ERISA-covered plan or IRA. The Department has revised the applicability of this condition to more closely reflect this interest, and the condition now applies to Covered Plans. The Department has also modified the condition so that a UBS QPAM will not violate the condition solely because a Covered Plan refuses to sign an updated investment management agreement. Furthermore, the condition has been modified to coordinate with PTE 2016– 17, so that a notice that satisfies Section I(j)(8) of that exemption will satisfy renumbered Section I(j)(7) of this exemption, unless the notice contains any language that limits, or is inconsistent with, the scope of this exemption. The Department declines to replace the phrase ‘‘all other prospective’’ with the word ‘‘new.’’ The Department’s intention for the sentence beginning ‘‘[f]or all other prospective’’ in Section I(j)(8) of the proposed exemption was to ensure that prospective clients for which a UBS QPAM does not yet provide asset management of other fiduciary services are informed of the UBS QPAM’s obligations under Section I(j). Consistent with the request by UBS, the condition has been modified so that the notice must be provided July 9, 2018. E:\FR\FM\29DEN2.SGM 29DEN2 61914 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices ethrower on DSK3G9T082PROD with NOTICES Policies and Procedures Relating to Compliance With ERISA and the Code— Sections I(h)(I)(1)(ii)–(v) Section I(h)(1)(ii)–(v) of the proposed exemption provide, ‘‘(h)(1) [e]ach UBS QPAM must immediately develop, implement, maintain, and follow written policies and procedures (the Policies) requiring and reasonably designed to ensure that: . . . (ii) The UBS QPAM fully complies with ERISA’s fiduciary duties, and with ERISA and the Code’s prohibited transaction provisions, and does not knowingly participate in any violation of these duties and provisions with respect to ERISA-covered plans and IRAs; (iii) The UBS QPAM does not knowingly participate in any other person’s violation of ERISA or the Code with respect to ERISA-covered plans and IRAs; (iv) Any filings or statements made by the UBS 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 ERISA-covered plans or IRAs are materially accurate and complete, to the best of such QPAM’s knowledge at that time; (v)[t]he UBS QPAM does not make material misrepresentations or omit material information in its communications with such regulators with respect to ERISA-covered plans or IRAs, or make material misrepresentations or omit material information in its communications with ERISA-covered plan and IRA clients.’’ UBS requests that Section I(h)(1)(v) be revised to add language similar to that found in Section I(h)(1)(iv), indicating that the UBS QPAMs must implement policies designed to avoid any such misrepresentations ‘‘to the best of such QPAM’s knowledge at the time.’’ The Department has modified the Policies’ requirement of adherence to the fiduciary and prohibited transaction provisions of ERISA and the Code so that the Policies expressly focus on the provisions only to the extent ‘‘applicable’’ under ERISA and the Code. In general, however, the Department has otherwise retained the stringency and breadth of the Policies requirement, which is more than justified by the repeated compliance and oversight failures exhibited by UBS throughout the period of time during which the criminal misconduct persisted. The specific elements of the Policies requirement as set forth in this exemption are essential to its protective VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 purposes. In approving this exemption, the Department significantly relies upon conditions designed to ensure that those relying upon its term for prohibited transaction relief will adopt a culture of compliance centered on the basic principles and obligations set forth in the Policies requirement. These standards are core protections of this exemption. The Department has made some additional changes, however, which should not detract from the Policies’ protective purpose. Thus, as requested by UBS, subsection (v) has been revised to contain the ‘‘to the best of QPAM’s knowledge at the time’’ concept found in subsection (iv). Additionally, the applicability of subsections (iv) and (v) has been narrowed to Covered Plans. To the extent a UBS QPAM would prefer not to be subject to this provision, however, it may expressly disclaim reliance on QPAM status or PTE 84–14 in entering into its contract with the Covered Plan. This revision is consistent with the Department’s intent to protect ERISA-covered plans and IRAs that have hired a UBS QPAM in reliance on PTE 84–14 or based on the manager’s express representation that it relies on or qualifies under PTE 84–14. Correction of Violations and Failures To Comply—Section I(h)(vii) Section I(h)(1)(vii) of the proposed exemption provides that ‘‘[a]ny violation of, or failure to comply with, an item in subparagraphs (ii) through (vi), is corrected promptly upon discovery, and any such violation or compliance failure not promptly corrected is reported, upon discovery of such 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 UBS QPAM, the independent auditor responsible for reviewing compliance with the Policies, and an appropriate fiduciary of any affected ERISA-covered plan or IRA that is independent of UBS; however, with respect to any ERISA-covered plan or IRA sponsored by an ‘‘affiliate’’ (as defined in Section VI(d) of PTE 84–14) of UBS or beneficially owned by an employee of UBS or its affiliates, such fiduciary does not need to be independent of UBS. A UBS QPAM will not be treated as having failed to develop, implement, maintain, or follow the Policies, provided that it corrects any instance of noncompliance promptly when discovered, or when it reasonably should have known of the noncompliance (whichever is earlier), and provided that it adheres to the PO 00000 Frm 00100 Fmt 4701 Sfmt 4703 reporting requirements set forth in this subparagraph (vii).’’ UBS requests that this section be revised to clarify that any compliance failures that are discovered must be promptly corrected ‘‘to the extent possible’’ and to limit the second clause of the last sentence to any ‘‘material’’ ‘‘instance of non-compliance’’ that the UBS QPAM ‘‘reasonably should have known about.’’ The Department has based the conditions of this exemption on both the particular facts of the UBS cases and its experience over time with previous exemptions. For the reasons set out herein, the Department has concluded that the specific conditions of this exemption are appropriate and give the Department a reasonable basis for concluding that the exemptions are appropriately protective of affected plans and IRAs. As noted above, a central aim of the exemption is to ensure that those relying upon the exemption for relief from the prohibited transaction rules will consistently act to promote a culture of fiduciary compliance, notwithstanding the conduct that violated Section I(g) of PTE 84–14. While the Department declines to narrow and qualify this subparagraph (vii) with the specific language revision requested by UBS, after consideration, the Department will not condition the exemption on a requirement for notification of violations to an appropriate fiduciary of any affected ERISA-covered plan or IRA that is independent of UBS. Additionally, the Department has revised the term ‘‘corrected promptly’’ for consistency with the Department’s intent that violations or compliance failures be corrected ‘‘as soon as reasonably possible upon discovery or as soon after the QPAM reasonably should have known of the noncompliance (whichever is earlier).’’ However, the Department intends to preclude relief to the extent violations or failures are not corrected as required by the exemption. Compliance Officer Certification— Section I(m)(2)(iii) Section I(m)(2)(iii) of the proposes exemption provides: ‘‘In each Annual Report, the Compliance Officer must certify in writing that to his or her knowledge: (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 preceding year and any related correction taken to date have been E:\FR\FM\29DEN2.SGM 29DEN2 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices transaction that is conducted in reliance on the exemption. UBS represents that the 60 advance notice would effectively place a ‘‘freeze’’ on the management of new clients accounts and therefore could deprive ERISA-covered Plans and IRA clients the opportunity to enter into beneficial transactions during the 60day period, such as time-sensitive transactions to transition new clients’ existing investments to new investments or transactions designed to reduce clients’ risk exposure. UBS also claims that complying with a 60-day advance notice requirement would be impossible with regard to existing UBS QPAM clients who may have committed to or entered into transactions in reliance on this exemption. For example, UBS represents that some clients may have entered into transactions which are scheduled to occur simultaneously with the granting of this exemption, rendering it impossible for a QPAM to give sixty (60) days prior notice. Additionally, UBS requests that the phrase ‘‘to which such UBS QPAM intends to provide services in reliance upon this exemption’’ be added to this condition. Affording Covered Plans a means by which to review and understand the Policies implemented in connection with this exemption is a vital protection that is fundamental to this exemption’s purpose. However, the Department has modified the condition so that the UBS QPAMs, at their election, may instead provide Covered Plans a disclosure that accurately describes or summarizes key components of the Policies, rather than provide the Policies in their entirety. Notice of Right To Obtain Copy of The Department has also determined Policies—Section I(r) that such disclosure may be Section I(r) of the proposed continuously maintained on a website, exemption provides that, ‘‘[e]ach UBS provided that the website link to the QPAM, in its agreements with ERISAsummary of the written Policies is covered plan and IRA clients, or in other clearly and prominently disclosed to written disclosures provided to ERISAthose Covered Plan clients to whom this covered plan and IRA clients, within 60 section applies. The Department also days prior to the initial transaction agrees with the Applicant that the upon which relief hereunder is relied, timing requirement for disclosure and then at least once annually, will should be revised and, accordingly, has clearly and prominently: inform the modified the condition of Section I(p) to ERISA-covered plan or IRA client that require notice regarding the information the client has the right to obtain copies on the website within 60 days of the of the QPAM’s written Policies adopted effective date of this exemption, and in accordance with this five-year thereafter to the extent certain material exemption.’’ changes are made to the Policies. UBS argues that the requirement to Definition of ‘‘Convictions’’ and provide the disclosure in Section I(r) ‘‘Conviction Date’’—Section II(a) and sixty (60) days prior to a transaction II(d) entered into in reliance on this Section II(a) of the proposed exemption is not in the interest of UBS’s exemption provides that ‘‘The term current or future ERISA-covered plan ‘Convictions’ means the 2013 and IRA clients. UBS therefore requests that Section I(r) be revised to remove the Conviction and the 2016 Conviction. The term ‘‘2013 Conviction’’ means the requirement that the notification be judgment of conviction against UBS made 60 days prior to the initial ethrower on DSK3G9T082PROD with NOTICES identified in the Annual Report; (D) the UBS QPAMs have complied with the Policies and Training in all respects, and/or corrected any instances of noncompliance in accordance with Section I(h) above; and (E) UBS has provided the Compliance Officer with adequate resources, including, but not limited to, adequate staffing.’’ UBS seeks to have Section I(m)(2)(iii) revised to clarify that the certifications must be made to the best of the Compliance Officer’s knowledge at the time based on the Annual Review. UBS also requests that Section I(m)(2)(iii)(D) be revised to require the Compliance Officer certify that the UBS QPAM has corrected ‘‘to the extent possible’’ any ‘‘known’’ instances of noncompliance. The Department has accepted UBS’s request in part and has revised this condition accordingly. Accordingly, Section I(m)(iii) has been modified to require the Compliance Officer to certify in writing ‘‘to the best of his or her knowledge at the time’’ and Section I(m)(2)(iii)(D) has be modified to add the word ‘‘known’’ before the word ‘‘instances.’’ However, the Department has declined to narrow Section I(m)(iii)(D) by adding the phrase ‘‘to the extent’’ possible. The Department notes this subparagraph requires that the noncompliance is corrected in accordance with Section I(h) and Section I(h) has been revised to allow for such correction to occur ‘‘as soon as reasonably possible upon discovery or as soon after the QPAM reasonably should have known of the noncompliance (whichever is earlier).’’ VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 PO 00000 Frm 00101 Fmt 4701 Sfmt 4703 61915 Securities Japan Co. Ltd. in Case Number 3:12–cr–00268–RNC in the U.S. District Court for the District of Connecticut for one count of wire fraud in violation of Title 18, United Sates Code, sections 1343 and 2 in connection with submission of YEN London Interbank Offered Rates and other benchmark interest rates. The term ‘2016 Conviction’ means the anticipated judgment of conviction against UBS AG in Case Number 3:15–cr–00076–RNC in the U.S. District Court for the District of Connecticut for one count of wire fraud in violation of Title 18, United States Code, Sections 1343 and 2 in connection with UBS’s submission of Yen London Interbank Offered Rates and other benchmark interest rates between 2001 and 2010. For all purposes under this proposed five-year exemption, ‘conduct’ of any person or entity that is the ‘subject of [a] Conviction’ encompasses any conduct of UBS and/or their personnel, that is described in the Plea Agreement, (including Exhibits 1 and 3 attached thereto), and other official regulatory or judicial factual findings that are a part of this record.’’ UBS has requested the definition of ‘‘convictions’’ in Section II(a) be revised to reflect the corresponding changes made in PTE 2016–17 and to reflect that the ‘‘2016 Conviction’’ occurred in 2017 and should therefore be referred to as the ‘‘2017 Conviction.’’ UBS also requested that the definition of ‘‘Conviction Date’’ in Section II(d) be revised to ‘‘January 5, 2017.’’ The Department concurs with UBS and has revised the definition of the term ‘‘Convictions’’ in Section II(a) to be consistent with the definition provided in Section II(a) of PTE 2016–17 and has revised Sections II(a) and II(d) to replace the phrase ‘‘2016 Conviction’’ with ‘‘2017 Conviction.’’ Additionally, the Department has deleted the references to ‘‘Conviction Date’’ within the exemption. The Department notes that PTE 84–14 references the ‘‘the date of the judgment of the trial court.’’ Because that date is January 10, 2017, the compliance dates in this exemption are determined with reference to January 10, 2017. Definition of ‘‘UBS QPAM’’—Section II(b) Section II(b) of the proposed exemption provides in part that ‘‘[t]he term ‘UBS QPAM’ excludes the parent entity, UBS AG and UBS Securities Japan.’’ UBS has requested that the term ‘‘the parent entity’’ be deleted from this Section. The Department has made the requested revision and removed the E:\FR\FM\29DEN2.SGM 29DEN2 61916 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices ethrower on DSK3G9T082PROD with NOTICES term ‘‘the parent entity’’ from Section II(B). Comment—Letter from House Committee on Financial Services The Department also received a comment letter from certain members of Congress (the Members) regarding this exemption, as well as regarding other QPAM-related proposed one year exemptions. In the letter, the Members stated that certain conditions contained in these proposed exemptions are crucial to protecting the investments of our nation’s workers and retirees, referring to proposed conditions which require each bank to: (a) Indemnify and hold harmless ERISA-covered plans and IRAs for any damages resulting from the future misconduct of such bank; and (b) disclose to the Department any Deferred Prosecution Agreement or a NonProsecution Agreement with the U.S. Department of Justice. The Members also requested that the Department hold hearings in connection with the proposed exemptions. The Department acknowledges the Members’ concerns regarding the need for public discourse regarding proposed exemptions. To this end, the Department’s procedures regarding prohibited transaction exemption requests under ERISA (the Exemption Procedures) afford interested persons the opportunity to request a hearing. Specifically, section 2570.46(a) of the Exemption Procedures provides that, ‘‘[a]ny interested person who may be adversely affected by an exemption which the Department proposes to grant from the restrictions of section 406(b) of ERISA, section 4975(c)(1)(E) or (F) of the Code, or section 8477(c)(2) of FERSA may request a hearing before the Department within the period of time specified in the Federal Register notice of the proposed exemption.’’ The Exemption Procedures provide that ‘‘[t]he Department will grant a request for a hearing made in accordance with paragraph (a) of this section where a hearing is necessary to fully explore material factual issues identified by the person requesting the hearing.’’ The Exemption Procedures also provide that ‘‘[t]he Department may decline to hold a hearing where: (1) The request for the hearing does not meet the requirements of paragraph (a) of this section; (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.’’ 68 68 29 CFR part 2570, published at 76 FR 66653 (October 27, 2011). VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 While the Members’ letter raises important policy issues, it does not appear to raise specific material factual issues. The Department previously explored a wide range of legal and policy issues regarding Section I(g) of the QPAM Exemption during a public hearing held on January 15, 2015 in connection with the Department’s proposed exemption involving Credit Suisse AG, and has determined that an additional hearing on these issues is not necessary. After giving full consideration to the record, the Department has decided to grant the exemption, as described above. The complete application file (Application No. D–11907) is available for public inspection in the Public Disclosure Room of the Employee Benefits Security Administration, Room N–1515, U.S. Department of Labor, 200 Constitution Avenue NW, Washington, DC 20210. For a more complete statement of the facts and representations supporting the Department’s decision to grant this exemption, refer to the notice of proposed exemption published on November 21, 2016 at 81 FR 83385. Exemption Section I: Covered Transactions Certain entities with specified relationships to UBS, AG (hereinafter, the UBS QPAMs as defined in Section II(h)) will not be precluded from relying on the exemptive relief provided by Prohibited Transaction Class Exemption 84–14 (PTE 84–14 or the QPAM Exemption),69 notwithstanding the 2013 Conviction against UBS Securities Japan Co., Ltd. and the 2017 Conviction against UBS, AG (collectively the Convictions, as defined in Section II(a)),70 during the Exemption Period, provided that the following conditions are satisfied: (a) The UBS QPAMs (including their officers, directors, agents other than UBS, and employees of such UBS QPAMs) did not know of, did not have reason to know of, or participate in: (1) The FX Misconduct; or (2) the criminal conduct that is the subject of the Convictions (for the purposes of this Section I(a), ‘‘participate in’’ includes 69 49 FR 9494 (March 13, 1984), as corrected at 50 FR 41430 (October 10, 1985), as amended at 70 FR 49305 (August 23, 2005), and as amended at 75 FR 38837 (July 6, 2010). 70 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 criminal activity therein described. PO 00000 Frm 00102 Fmt 4701 Sfmt 4703 the knowing approval of the FX Misconduct or the misconduct that is the subject of the Convictions); (b) The UBS QPAMs (including their officers, directors, agents other than UBS, and employees of such UBS QPAMs) did not receive direct compensation, or knowingly receive indirect compensation, in connection with: (1) The FX Misconduct; or (2) the criminal conduct that is the subject of the Convictions; (c) The UBS QPAMs will not employ or knowingly engage any of the individuals that participated in: (1) The FX Misconduct or (2) the criminal conduct that is the subject of the Convictions (for the purposes of this Section I(c), ‘‘participated in’’ includes the knowing approval of the FX Misconduct or the misconduct that is the subject of the Convictions); (d) At all times during the Exemption Period, no UBS QPAM will use its authority or influence to direct an ‘‘investment fund’’ (as defined in Section VI(b) of PTE 84–14) that is subject to ERISA or the Code and managed by such UBS QPAM with respect to one of more Covered Plans, to enter into any transaction with UBS or UBS Securities Japan or engage UBS or UBS Securities Japan 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 UBS QPAMs to satisfy Section I(g) of PTE 84–14 arose solely from the Convictions; (f) A UBS QPAM did not exercise authority over the assets of any plan subject to Part 4 of Title I of ERISA (an ERISA-covered plan) or section 4975 of the Code (an IRA) in a manner that it knew or should have known would: Further the FX Misconduct or the criminal conduct that is the subject of the Convictions; or cause the UBS QPAM, its affiliates or related parties to directly or indirectly profit from the FX Misconduct or the criminal conduct that is the subject of the Convictions; (g) Other than with respect to employee benefit plans maintained or sponsored for its own employees or the employees of an affiliate, UBS and UBS Securities Japan will not act as a fiduciary within the meaning of section 3(21)(A)(i) or (iii) of ERISA, or section 4975(e)(3)(A) and (C) of the Code, with respect to ERISA-covered plan and IRA assets; provided, however, that UBS and UBS Securities Japan will not be treated as violating the conditions of this exemption solely because it acted as an E:\FR\FM\29DEN2.SGM 29DEN2 ethrower on DSK3G9T082PROD with NOTICES Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices investment advice fiduciary within the meaning of section 3(21)(A)(ii) or section 4975(e)(3)(B) of the Code; (h)(1) Each UBS QPAM must continue to maintain or immediately implement and follow written policies and procedures (the Policies). The Policies must require, and must be reasonably designed to ensure that: (i) The asset management decisions of the UBS QPAM are conducted independently of UBS’s corporate management and business activities, including the corporate management and business activities of the Investment Bank division and UBS Securities Japan; (ii) The UBS QPAM fully complies with ERISA’s fiduciary duties, and with ERISA and the Code’s prohibited transaction provisions, in such case as applicable, and does not knowingly participate in any violation of these duties and provisions with respect to Covered Plans; (iii) The UBS 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 UBS 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 UBS QPAM’s knowledge at that time, the UBS QPAM does not make material misrepresentations or omit material information in its communications with such regulators with respect to Covered Plans; (vi) The UBS QPAM complies with the terms of this exemption; and (vii) Any violation of, or failure to comply with an item in subparagraphs (ii) through (vi), is corrected as soon as reasonably possible upon discovery, or as soon after the QPAM reasonably should have known of the noncompliance (whichever is earlier), and any such violation or compliance failure not so corrected is reported, upon the discovery of such failure to so correct, in writing, to appropriate corporate officers, the head of compliance and the General Counsel (or their functional equivalent) of the relevant UBS QPAM, and the independent auditor responsible for reviewing compliance with the Policies. A UBS QPAM will not be treated as having failed to develop, implement, maintain, or follow the Policies, provided that it corrects any instance of noncompliance as soon as reasonably VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 possible upon discovery, or as soon as reasonably possible after the QPAM reasonably should have known of the noncompliance (whichever is earlier), and provided that it adheres to the reporting requirements set forth in this subparagraph (vii); (2) Each UBS QPAM must develop and implement a program of training (the Training), conducted at least annually, for all relevant UBS QPAM asset/portfolio management, trading, legal, compliance, and internal audit personnel. The Training must: (i) At a minimum, cover the Policies, ERISA and Code compliance (including applicable fiduciary duties and the prohibited transaction provisions), ethical conduct, the consequences for not complying with the conditions of this exemption (including any loss of exemptive relief provided herein), and prompt reporting of wrongdoing; and (ii) Be conducted by an independent professional who has been prudently selected and who has appropriate technical training and proficiency with ERISA and the Code; (i)(1) Each UBS QPAM submits to an audit conducted annually by an independent auditor, who has been prudently selected and who has appropriate technical training and proficiency with ERISA and the Code, to evaluate the adequacy of, and each UBS QPAM’s compliance with, the Policies and Training described herein. The audit requirement must be incorporated in the Policies. The first annual audit must cover a fourteen-month period that begins on January 10, 2017 (the Initial Audit Period) and all subsequent audits must cover consecutive twelve month periods commencing upon the end of the Initial Audit Period.71 The Initial Audit Period shall cover the period of time during which PTE 2016–17 72 is effective and a portion of the time during which this exemption is effective and the audit terms contained in this Section I(i) will supersede the terms of 71 The final audit under this exemption would not have to be completed until after the Exemption Period expires. If the Department ultimately decides to grant relief for an additional period, it could decide to alter the terms of the exemption, including the audit conditions (and the timing of the audit requirements). Nevertheless, the Applicant should anticipate that the Department will insist on strict compliance with the audit terms and schedule set forth above. As it considers any new exemption application, the Department may also contact the auditor for any information relevant to its determination. 72 81 FR 94049 (December 22, 2016). PTE 2016– 17 is a temporary exemption in respect of Exemption Application No. D–11863 that permits UBS QPAMs to rely on the exemptive relief provided by PTE 84–14, notwithstanding the Convictions, for up to twelve months from Conviction Date. PO 00000 Frm 00103 Fmt 4701 Sfmt 4703 61917 Section I(i) of PTE 2016–17 except as otherwise provided in this exemption. In determining compliance with the conditions for relief in PTE 2016–17 and this exemption, including the Policies and Training requirements, for purposes of conducting the audit, the auditor will rely on the conditions for exemptive relief as then applicable to the respective periods under audit. Additionally, the Department confirms that, for the final audit under PTE 2013– 9 covering the time period from September 18, 2016 until the January 10, 2017 conviction date, the audit requirements in Section(g) of PTE 2013– 09 remained in effect. Accordingly, the audit of such final time period under PTE 2013–09 had to have been completed and submitted within six (6) months of January 10, 2017, and it has, in fact, been submitted to the Department; (2) Within the scope of the audit and to the extent necessary for the auditor, in its sole opinion, to complete its audit and comply with the conditions for relief described herein, and only to the extent such disclosure is not prevented by state or federal statute, or involves communications subject to attorney client privilege, each UBS QPAM and, if applicable, UBS, will grant the auditor unconditional access to its business, including, but not limited to: Its computer systems; business records; transactional data; workplace locations; training materials; and personnel. Such access is limited to information relevant to the auditor’s objectives as specified by the terms of this exemption; (3) The auditor’s engagement must specifically require the auditor to determine whether each UBS 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 UBS QPAM’s operational compliance with the Policies and Training. In this regard, the auditor must test, for each UBS QPAM, a sample of such QPAM’s transactions involving Covered Plans, sufficient in size and nature to afford the auditor a reasonable basis to determine such QPAM’s operational compliance with the Policies and Training; (5) For each audit, on or before the end of the relevant period described in Section I(i)(1) for completing the audit, the auditor must issue a written report (the Audit Report) to UBS and the UBS QPAM to which the audit applies that describes the procedures performed by the auditor during the course of its E:\FR\FM\29DEN2.SGM 29DEN2 ethrower on DSK3G9T082PROD with NOTICES 61918 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices examination. The auditor, at its discretion, may issue a single consolidated Audit Report that covers all the UBS QPAMs. The Audit Report must include the auditor’s specific determinations regarding: (i) The adequacy of each UBS QPAM’s Policies and Training; each UBS QPAM’s compliance with the Policies and Training; the need, if any, to strengthen such Policies and Training; and any instance of the respective UBS QPAM’s noncompliance with the written Policies and Training described in Section I(h) above. The UBS QPAM must promptly address any noncompliance. The UBS QPAM must promptly address or prepare a written plan of action to address any determination of inadequacy 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 UBS QPAM. Any action taken or the plan of action to be taken by the respective UBS QPAM must be included in an addendum to the Audit Report (such addendum must be completed prior to the certification described in Section I(i)(7) below). In the event such a plan of action to address the auditor’s recommendation regarding the adequacy of the Policies and Training is not completed by the time of submission of the Audit Report, the following period’s Audit Report must state whether the plan was satisfactorily completed. Any determination by the auditor that the respective UBS 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 UBS QPAM has complied with the requirements under this subparagraph must be based on evidence that the particular UBS QPAM has actually implemented, maintained, and followed the Policies and Training required by this exemption. Furthermore, the auditor must not solely rely on the Annual Report created by the compliance officer (the Compliance Officer), as described in Section I(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 I(i)(3) and (4) above; and (ii) The adequacy of the Annual Review described in Section I(m); (6) The auditor must notify the respective UBS QPAM of any instance of noncompliance identified by the auditor within five (5) business days VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 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 UBS QPAM to which the Audit Report applies, must certify in writing, under penalty of perjury, that the officer has reviewed the Audit Report and this exemption; that, such UBS QPAM has addressed, corrected, remedied any noncompliance and inadequacy or has an appropriate written plan to address any inadequacy regarding the Policies and Training identified in the Audit Report. Such certification must also include the signatory’s determination, that the Policies and Training in effect at the time of signing are adequate to ensure compliance with the conditions of this exemption and with the applicable provisions of ERISA and the Code; (8) The Risk Committee of UBS’s Board of Directors is provided a copy of each Audit Report; and a senior executive officer of UBS’s Compliance and Operational Risk Control function must review the Audit Report for each UBS QPAM and must certify in writing, under penalty of perjury, that such officer has reviewed each Audit Report; (9) Each UBS QPAM provides its certified Audit Report, by regular mail to: Office of Exemption Determinations (OED), 200 Constitution Avenue NW, Suite 400, Washington, DC 20210; or by private carrier to: 122 C Street NW, Suite 400, Washington, DC 20001–2109. This delivery must take place no later than 30 days following completion of the Audit Report. The Audit Report will be made part of the public record regarding this exemption. Furthermore, each UBS QPAM must make its Audit Report unconditionally available, electronically or otherwise, for examination upon request by any duly authorized employee or representative of the Department, other relevant regulators, and any fiduciary of a Covered Plan; (10) Each UBS QPAM and the auditor must submit to OED any engagement agreement(s) entered into pursuant to the engagement of the auditor under this exemption. Further, each UBS QPAM must submit to OED any engagement entered into with any other person or entity retained in connection with such QPAM’s compliance with the Training or Policies conditions of 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, for PO 00000 Frm 00104 Fmt 4701 Sfmt 4703 inspection and review, access to all the workpapers created and utilized in the course of the audit, provided such access and inspection is otherwise permitted by law; and (12) UBS must notify the Department of a change in the independent auditor no later than two (2) months after the engagement of a substitute or subsequent auditor and must provide an explanation for the substitution or change including a description of any material disputes between the terminated auditor and UBS; (j) As of January 10, 2018 and throughout the Exemption Period, with respect to any arrangement, agreement, or contract between a UBS QPAM and a Covered Plan, the UBS 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 inadvertent prohibited transactions); and to comply with the standards of prudence and loyalty set forth in section 404 of ERISA with respect to each such ERISA-covered plan and IRA to the extent that section 404 is applicable; (2) Not to require (or otherwise cause) the Covered Plan to waive, limit, or qualify the liability of the UBS QPAM for violating ERISA or the Code or engaging in prohibited transactions; (3) Not to restrict the ability of such Covered Plan to terminate or withdraw from its arrangement with the UBS QPAM with respect to any investment in a separately managed account or pooled fund subject to ERISA and managed by such QPAM, with the exception of reasonable restrictions, appropriately disclosed in advance, that are specifically designed to ensure equitable treatment of all investors in a pooled fund in the event such withdrawal or termination may have adverse consequences for all other investors. In connection with any such arrangements involving investments in pooled funds subject to ERISA entered into after the effective date of this exemption, the adverse consequences must relate to of a lack of liquidity of the underlying assets, valuation issues, or regulatory reasons that prevent the fund from promptly redeeming an ERISA-covered plan’s or IRA’s investment, and such restrictions must be applicable to all such investors and effective no longer than reasonably necessary to avoid the adverse consequences; (4) Not to impose any fees, penalties, or charges for such termination or withdrawal with the exception of E:\FR\FM\29DEN2.SGM 29DEN2 ethrower on DSK3G9T082PROD with NOTICES Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices reasonable fees, appropriately disclosed in advance, that are specifically designed to prevent generally recognized abusive investment practices or specifically designed to ensure equitable treatment of all investors in a pooled fund in the event such withdrawal or termination may have adverse consequences for all other investors, provided that such fees are applied consistently and in like manner to all such investors; (5) Not to include exculpatory provisions disclaiming or otherwise limiting liability of the UBS QPAM for a violation of such agreement’s terms. To the extent consistent with Section 410 of ERISA, however, this provision does not prohibit disclaimers for liability caused by an error, misrepresentation, or misconduct of a plan fiduciary or other party hired by the plan fiduciary who is independent of UBS, and its affiliates, or damages arising from acts outside the control of the UBS QPAM; and (6) To indemnify and hold harmless the Covered Plan for any actual losses resulting directly from a UBS 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 QPAM, or any claim arising out of the failure of such UBS 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. This condition applies only to actual losses caused by the UBS QPAM’s violations; (7) By July 9, 2018, each UBS QPAM must provide a notice of its obligations under this Section I(j) to each Covered Plan. For all other prospective Covered Plans, the UBS QPAM will agree to its obligations under this Section I(j) in an updated investment management agreement between the UBS 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– 17 that meets the terms of this condition. Notwithstanding the above, a UBS QPAM will not violate the condition solely because a Plan or IRA refuses to sign an updated investment management agreement. (k) By March 10, 2018, each UBS QPAM will provide a notice of the exemption, along with a separate summary describing the facts that led to the Convictions (the Summary), which have been submitted to the Department, and a prominently displayed statement (the Statement) that each Conviction separately results in a failure to meet a condition in PTE 84–14, to each sponsor VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 and beneficial owner of a Covered Plan, or the sponsor of an investment fund in any case where a UBS QPAM acts as a sub-advisor to the investment fund in which such ERISA-covered plan and IRA invests. Any prospective client for which a UBS QPAM relies on PTE 84– 14 or has expressly represented that the manager qualifies as a QPAM or relies on the QPAM class exemption 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 UBS QPAM. Disclosures may be delivered electronically; (l) The UBS QPAMs must comply with each condition of PTE 84–14, as amended, with the sole exceptions of the violations of Section I(g) of PTE 84– 14 that are attributable to the Convictions; (m)(1) By July 9, 2018, UBS designates 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 annual review for each period corresponding to the audit periods set forth in Section I(i)(1) (including the Initial Audit Period) (the Annual Review) 73 to determine the adequacy and effectiveness of the implementation of the Policies and Training. With respect to the Compliance Officer, the following conditions must be met: (i) The Compliance Officer must be a legal 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 has a dual-reporting line within UBS’s Compliance and Operational Risk Control (C&ORC) function: (A) A divisional reporting line to the Head of Compliance and Operational Risk Control, Asset Management, and (B) a regional reporting line to the Head of Americas Compliance and Operational Risk Control. The C&ORC function will be organizationally independent of UBS’s business divisions—including Asset Management and the Investment Bank—and is led by the Global Head of C&ORC, who will report directly to UBS’s Chief Risk Officer; (2) With respect to each Annual Review, the following conditions must be met: 73 Note that such Annual Review must be completed with respect to the annual periods ending January 9, 2019; January 9, 2020; and January 9, 2021. PO 00000 Frm 00105 Fmt 4701 Sfmt 4703 61919 (i) The Annual Review includes a review of: Any compliance matter related to the Policies or Training that was identified by, or reported to, the Compliance Officer or others within the C&ORC function during the previous year; any material change in the relevant business activities of the UBS QPAMs; and any change to ERISA, the Code, or regulations related to fiduciary duties and the prohibited transaction provisions that may be applicable to the activities of the UBS QPAMs; (ii) The Compliance Officer prepares a written report for each Annual Review (each, an Annual Report) that (A) summarizes his or her material activities during the preceding year; (B) sets forth any instance of noncompliance discovered during the preceding year, and any related corrective action; (C) details any change to the Policies or Training to guard against any similar instance of noncompliance occurring again; and (D) makes recommendations, as necessary, for additional training, procedures, monitoring, or additional and/or changed processes or systems, and management’s actions on such recommendations; (iii) In each Annual Report, the Compliance Officer must certify in writing that to the best of his or her knowledge at the time: (A) The report is accurate; (B) the Policies and Training are working in a manner which is reasonably designed to ensure that the Policies and Training requirements described herein are met; (C) any known instance of noncompliance during the preceding year and any related correction taken to date have been identified in the Annual Report; and (D) the UBS QPAMs have complied with the Policies and Training, and/or corrected (or are correcting) any known instances of noncompliance in accordance with Section I(h) above; (iv) Each Annual Report must be provided to appropriate corporate officers of UBS and each UBS QPAM to which such report relates; the head of Compliance and the General Counsel (or their functional equivalent) of the relevant UBS QPAM; and must be made unconditionally available to the independent auditor described in Section I(i) above; (v) Each Annual Review, including the Compliance Officer’s written Annual Report, must be completed within at least three (3) months following the end of the period to which it relates; (n) UBS imposes its internal procedures, controls, and protocols on UBS Securities Japan to: (1) Reduce the likelihood of any recurrence of conduct that that is the subject of the 2013 E:\FR\FM\29DEN2.SGM 29DEN2 ethrower on DSK3G9T082PROD with NOTICES 61920 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices Conviction, and (2) comply in all material respects with the Business Improvement Order, dated December 16, 2011, issued by the Japanese Financial Services Authority; (o) UBS complies in all material respects with the audit and monitoring procedures imposed on UBS by the U.S. Commodity Futures Trading Commission Order, dated December 19, 2012; (p) Each UBS 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 such UBS QPAM relies upon the relief in the exemption; (q) During the Exemption Period, UBS: (1) Immediately discloses to the Department any Deferred Prosecution Agreement (a DPA) or Non-Prosecution Agreement (an NPA) with the U.S. Department of Justice, entered into by UBS or any of its affiliates (as defined in Section VI(d) of PTE 84–14) in connection with conduct described in Section I(g) of PTE 84–14 or section 411 of ERISA; and (2) immediately provides the Department any information requested by the Department, as permitted by law, regarding the agreement and/or conduct and allegations that led to the agreement; (r) By July 09, 2018, each UBS QPAM, in its agreements with, or in other written disclosures provided to Covered Plans, will clearly and prominently inform Covered Plan clients of their right to obtain a copy of the Policies or a description (Summary Policies) which accurately summarizes key components of the UBS QPAM’s written Policies developed in connection with this exemption. If the Policies are thereafter changed, each Covered Plan client must receive a new disclosure within six (6) months following the end of the calendar year during which the Policies were changed.74 With respect to this requirement, the description may be continuously maintained on a website, provided that such website link to the Policies or Summary Policies is clearly and prominently disclosed to each Covered Plan; and (s) A UBS QPAM will not fail to meet the terms of this exemption, solely because a different UBS QPAM fails to satisfy a condition for relief described in Sections I(c), (d), (h), (i), (j), (k), (l), (p), and (r); or if the independent auditor described in Section I(i) fails a provision 74 In the event Applicant meets this disclosure requirement through Summary Policies, changes to the Policies shall not result in the requirement for a new disclosure unless, as a result of changes to the Policies, the Summary Policies are no longer accurate. VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 of the exemption other than the requirement described in Section I(i)(11), provided that such failure did not result from any actions or inactions of UBS or its affiliates. Section II: Definitions (a) The term ‘‘Convictions’’ means the 2013 Conviction and the 2017 Conviction. The term ‘‘2013 Conviction’’ means the judgment of conviction against UBS Securities Japan Co. Ltd. in case number 3:12–cr–00268– RNC in the U.S. District Court for the District of Connecticut for one count of wire fraud in violation of Title 18, United States Code, sections 1343 and 2 in connection with submission of YEN London Interbank Offered Rates and other benchmark interest rates. The term ‘‘2017 Conviction’’ means the judgment of conviction against UBS, AG in case number 3:15–cr–00076–RNC in the U.S. District Court for the District of Connecticut for one count of wire fraud in violation of Title 18, United States Code, Sections 1343 and 2 in connection with UBS’s submission of Yen London Interbank Offered Rates and other benchmark interest rates between 2001 and 2010. For all purposes under this exemption, ‘‘conduct’’ of any person or entity that is the ‘‘subject of the Convictions’’ encompasses any conduct of UBS and/ or their personnel, that is described in (i) Exhibit 3 to the Plea Agreement entered into between UBS, AG and the Department of Justice Criminal Division, on May 20, 2015, in connection with case number 3:15–cr–00076–RNC, and (ii) Exhibits 3 and 4 to the Plea Agreement entered into between UBS Securities Japan and the Department of Justice Criminal Division, on December 19, 2012, in connection with case number 3:12–cr–00268–RNC; (b) The term ‘‘Covered Plan’’ means an ERISA-covered plan or an IRA with respect to which a UBS QPAM relies on PTE 84–14, or with respect to which a UBS QPAM (or any UBS affiliate) has expressly represented that the manager qualifies as a QPAM or relies on the QPAM class exemption, but not with respect to any arrangement, agreement, or contract between a UBS QPAM and an ERISA-covered plan or IRA with respect to which the UBS QPAM has expressly disclaimed reliance on the QPAM status or PTE 84–14 in entering into its contract with the ERISA covered plan or IRA. (c) The terms ‘‘ERISA-covered plan’’ and ‘‘IRA’’ mean, respectively, a plan subject to Part 4 of Title I of ERISA and a plan subject to section 4975 of the Code. PO 00000 Frm 00106 Fmt 4701 Sfmt 4703 (d) The term ‘‘Exemption Period’’ means January 10, 2018, through January 9, 2021; (e) The term ‘‘FX Misconduct’’ means the conduct engaged in by UBS personnel described in Exhibit 1 of the Plea Agreement (Factual Basis for Breach) entered into between UBS, AG and the Department of Justice Criminal Division, on May 20, 2015 in connection with Case Number 3:15–cr–00076–RNC filed in the US District Court for the District of Connecticut. (f) The term ‘‘Plea Agreement’’ means the Plea Agreement (including Exhibits 1 and 3 attached thereto) entered into between UBS, AG and the Department of Justice Criminal Division, on May 20, 2015 in connection with Case Number 3:15-cr-00076–RNC filed in the US District Court for the District of Connecticut. (g) The term ‘‘UBS’’ means UBS, AG. (h) The term ‘‘UBS QPAM’’ means UBS Asset Management (Americas) Inc., UBS Realty Investors LLC, UBS Hedge Fund Solutions LLC, UBS O’Connor LLC, and any future entity within the Asset Management or the Wealth Management Americas divisions of UBS, AG that qualifies as a ‘‘qualified professional asset manager’’ (as defined in Section VI(a) 75 of PTE 84–14) and that relies on the relief provided by PTE 84–14 or represents to ERISA-covered plans and IRAs that it qualifies as a QPAM and with respect to which UBS, AG is an ‘‘affiliate’’ (as defined in Part VI(d) of PTE 84–14). The term ‘‘UBS QPAM’’ excludes UBS, AG and UBS Securities Japan. (i) The term ‘‘UBS Securities Japan’’ means UBS Securities Japan Co. Ltd, a wholly-owned subsidiary of UBS incorporated under the laws of Japan. Effective Date This exemption is effective January 10, 2018, and the term of the exemption is from January 10, 2018, through January 9, 2021 (the Exemption Period). Department’s Comment: The Department cautions that the relief in this exemption will terminate immediately if, among other things, an entity within the UBS corporate structure is convicted of a crime described in Section I(g) of PTE 84–14 (other than the Convictions) during the Exemption Period. Although UBS could apply for a new exemption in that 75 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. E:\FR\FM\29DEN2.SGM 29DEN2 Federal Register / Vol. 82, No. 249 / Friday, December 29, 2017 / Notices circumstance, the Department would not be obligated to grant the exemption. The terms of this exemption have been specifically designed to permit plans to terminate their relationships in an orderly and cost effective fashion in the event of an additional conviction or a determination that it is otherwise prudent for a plan to terminate its relationship with an entity covered by the exemption. Further Information For more information on this exemption, contact Brian Mica, telephone (202) 693–8402, Office of Exemption Determinations, Employee Benefits Security Administration, U.S. Department of Labor (this is not a tollfree number). General Information ethrower on DSK3G9T082PROD with NOTICES The attention of interested persons is directed to the following: VerDate Sep<11>2014 18:59 Dec 28, 2017 Jkt 244001 (1) The fact that a transaction is the subject of an exemption under section 408(a) of the Act and/or section 4975(c)(2) of the Code does not relieve a fiduciary or other party in interest or disqualified person from certain other provisions to which the exemption does not apply and the general fiduciary responsibility provisions of section 404 of the Act, which among other things require a fiduciary to discharge his duties respecting the plan solely in the interest of the participants and beneficiaries of the plan and in a prudent fashion in accordance with section 404(a)(1)(B) of the Act; nor does it affect the requirement of section 401(a) of the Code that the plan must operate for the exclusive benefit of the employees of the employer maintaining the plan and their beneficiaries; (2) These exemptions are supplemental to and not in derogation of, any other provisions of the Act and/ PO 00000 Frm 00107 Fmt 4701 Sfmt 9990 61921 or the Code, including statutory or administrative exemptions and transactional 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 (3) The availability of these exemptions is subject to the express condition that the material facts and representations contained in the application accurately describes all material terms of the transaction which is the subject of the exemption. Signed at Washington, DC, this 21st day of December, 2017. Lyssa E. Hall, Director of Exemption Determinations, Employee Benefits Security Administration, U.S. Department of Labor. [FR Doc. 2017–27977 Filed 12–28–17; 8:45 am] BILLING CODE 4510–29–P E:\FR\FM\29DEN2.SGM 29DEN2

Agencies

[Federal Register Volume 82, Number 249 (Friday, December 29, 2017)]
[Notices]
[Pages 61816-61921]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-27977]



[[Page 61815]]

Vol. 82

Friday,

No. 249

December 29, 2017

Part II





Department of Labor





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Employee Benefits Security Administration





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Exemptions from Certain Prohibited Transaction Restrictions; Notice

Federal Register / Vol. 82 , No. 249 / Friday, December 29, 2017 / 
Notices

[[Page 61816]]


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DEPARTMENT OF LABOR

Employee Benefits Security Administration


Exemptions from Certain Prohibited Transaction Restrictions

AGENCY: Employee Benefits Security Administration, Labor.

ACTION: Grant of individual exemptions.

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SUMMARY: This document contains exemptions issued by the Department of 
Labor (the Department) from certain of the prohibited transaction 
restrictions of the Employee Retirement Income Security Act of 1974 
(ERISA or the Act) and/or the Internal Revenue Code of 1986 (the Code). 
This notice includes the following: 2017-03, JPMorgan Chase & Co., D-
11906; 2017-04, Deutsche Investment Management Americas Inc. (DIMA) and 
Certain Current and Future Asset Management Affiliates of Deutsche Bank 
AG, D-11908; 2017-05, Citigroup Inc., D-11909; 2017-06, Barclays 
Capital Inc., D-11910; 2017-07, UBS Assets Management (Americas) Inc.; 
UBS Realty Investors LLC; UBS Hedge Fund Solutions LLC; UBS O'Connor 
LLC; and Certain Future Affiliates in UBS's Asset Management and Wealth 
Management Americas Divisions, D-11907.

SUPPLEMENTARY INFORMATION: A notice was published in the Federal 
Register of the pendency before the Department of a proposal to grant 
such exemption. The notice set forth a summary of facts and 
representations contained in the application for exemption and referred 
interested persons to the application for a complete statement of the 
facts and representations. The application has been available for 
public inspection at the Department in Washington, DC. The notice also 
invited interested persons to submit comments on the requested 
exemption to the Department. In addition the notice stated that any 
interested person might submit a written request that a public hearing 
be held (where appropriate). The applicant has represented that it has 
complied with the requirements of the notification to interested 
persons. One request for a hearing was received by the Department. 
Public comments were received by the Department as described in the 
granted exemption.
    The notice of proposed exemption was issued and the exemption is 
being granted solely by the Department because, 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 proposed to the Secretary of Labor.

Statutory Findings

    In accordance with section 408(a) of the Act and/or section 
4975(c)(2) of the Code and the procedures set forth in 29 CFR part 
2570, subpart B (76 FR 66637, 66644, October 27, 2011) \1\ and based 
upon the entire record, the Department makes the following findings:
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    \1\ The Department has considered exemption applications 
received prior to December 27, 2011 under the exemption procedures 
set forth in 29 CFR part 2570, subpart B (55 FR 32836, 32847, August 
10, 1990).
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    (a) The exemption is administratively feasible;
    (b) The exemption is in the interests of the plan and its 
participants and beneficiaries; and
    (c) The exemption is protective of the rights of the participants 
and beneficiaries of the plan.

JPMorgan Chase Co. (JPMC or the Applicant) Located in New York, New 
York

[Prohibited Transaction Exemption 2017-03; Exemption Application No. D-
11906]

Discussion

    On November 21, 2016, the Department of Labor (the Department) 
published a notice of proposed exemption in the Federal Register at 81 
FR 83372, for certain entities with specified relationships to JPMC to 
continue to rely upon the relief provided by PTE 84-14 for a period of 
five years,\2\ notwithstanding JPMC's criminal conviction, as described 
herein. The Department is granting this exemption in order to ensure 
that Covered Plans \3\ whose assets are managed by a JPMC Affiliated 
QPAM or JPMC Related QPAM may continue to benefit from the relief 
provided by PTE 84-14. The exemption is effective from January 10, 2018 
through January 9, 2023 (the Exemption Period).
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    \2\ 49 FR 9494 (March 13, 1984), as corrected at 50 FR 41430 
(October 10, 1985), as amended at 70 FR 49305 (August 23, 2005) and 
as amended at 75 FR 38837 (July 6, 2010), hereinafter referred to as 
PTE 84-14 or the QPAM exemption.
    \3\ The term ``Covered Plan'' is a plan subject to Part 4 of 
Title 1 of ERISA (``ERISA-covered plan'') or a plan subject to 
Section 4975 of the Code (``IRA'') with respect to which a JPMC 
Affiliated QPAM relies on PTE 84-14, or with respect to which a JPMC 
Affiliated QPAM (or any JPMC affiliate) has expressly represented 
that the manager qualifies as a QPAM or relies on the QPAM class 
exemption (PTE 84-14). A Covered Plan does not include an ERISA-
covered Plan or IRA to the extent the JPMC Affiliated QPAM has 
expressly disclaimed reliance on QPAM status or PTE 84-14 in 
entering into its contract, arrangement, or agreement with the 
ERISA-covered plan or IRA. See further discussion in this Preamble 
under the heading Comment 8--Policies and Procedures Relating to 
Compliance with ERISA and the Code--Section I(h)(1)(ii)-(v).
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    No relief from a violation of any other law is provided by this 
exemption, including any criminal conviction described in the proposed 
exemption. Furthermore, the Department cautions that the relief in this 
exemption will terminate immediately if, among other things, an entity 
within the JPMC corporate structure is convicted of a crime described 
in Section I(g) of PTE 84-14 (other than the Conviction) during the 
Exemption Period. The terms of this exemption have been specifically 
designed to promote conduct that adheres to basic fiduciary standards 
under ERISA and the Code. The exemption also aims to ensure that plans 
and IRAs can terminate relationships in an orderly and cost effective 
fashion in the event a plan or IRA fiduciary determines it is prudent 
for the plan or IRA to sever its relationship with an entity covered by 
the exemption.

Written Comments

    The Department invited all interested persons to submit written 
comments and/or requests for a public hearing with respect to the 
notice of proposed exemption, published in the Federal Register at 81 
FR 83372 on November 21, 2016. All comments and requests for a hearing 
were due by January 20, 2017.\4\ The Department received written 
comments from the Applicant, members of the U.S. Congress, and a number 
of plan and IRA clients of JPMC. After considering these submissions, 
the Department has determined to grant the exemption, with revisions, 
as described below.
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    \4\ The Department received additional comments from Applicant 
after the close of the comment period.
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Comment 1--Term of the Exemption
    The Applicant requests that the Department extend the term of the 
exemption from five years to nine years from the Conviction Date. The 
Applicant states that the five year term is inconsistent with precedent 
and ``appears punitive.'' The Applicant further states that 
``exemptions should reflect the underlying facts that necessitated the 
exemption [and] [h]ere, those facts are as follows: JPMC was convicted 
of a single crime, based solely on the misconduct of a single 
individual who was not employed by the Applicant's asset management 
businesses and who has been terminated by a firm that has dedicated and 
continues to dedicate significant resources to enhancing the relevant

[[Page 61817]]

controls to prevent future instances of similar misconduct.'' The 
Applicant states that ``the exemption imposes additional and burdensome 
requirements on the asset management businesses of the applicant-
businesses entirely uninvolved with the criminal conduct.''
    Although the Applicant characterizes the conduct as involving the 
isolated actions of one individual, the Department does not agree with 
the apparent suggestion that the Applicant bears little or no 
responsibility for the criminal conduct. For example, JPMC's Plea 
Agreement contains the following statement, under the heading Other 
Relevant Conduct: ``the defendant [JPMC], through its currency traders 
and sales staff, also engaged in other currency trading and sales 
practices in conducting FX Spot Market transactions with customers via 
telephone, email, and/or electronic chat, to wit: (i) Intentionally 
working customers' limit orders one or more levels, or `pips,' away 
from the price confirmed with the customer; (ii) including sales 
markups, through the use of live hand signals or undisclosed prior 
internal arrangements or communications, to prices given to customers 
that communicated with sales staff on open phone lines; (iii) accepting 
limit orders from customers and then informing those customers that 
their orders could not be filled, in whole or in part, when in fact the 
defendant was able to fill the order but decided not to do so because 
the defendant expected it would be more profitable not to do so; and 
(iv) disclosing non-public information regarding the identity and 
trading activity of the defendant's customers to other banks or other 
market participants, in order to generate revenue for the defendant at 
the expense of its customers.''
    In developing this exemption, the Department also considered 
statements made by other regulators. The Financial Conduct Authority's 
(FCA) Final Notice states: ``[d]uring the Relevant Period, JPMorgan did 
not exercise adequate and effective control over its G10 spot FX 
trading business. . . . The front office failed adequately to discharge 
these responsibilities with regard to obvious risks associated with 
confidentiality, conflicts of interest and trading conduct.'' The 
Notice further states: ``These failings occurred in circumstances where 
certain of those responsible for managing front office matters were 
aware of and/or at times involved in behaviors described above.''
    By way of further example, the Consent Order of the Office of the 
Comptroller of the Currency (OCC) states: ``[t]he OCC's examination 
findings established that the Bank [the Applicant's Corporate and 
Investment Banking line of business] had deficiencies in its internal 
controls and had engaged in unsafe or unsound banking practices with 
respect to the oversight and governance of the Bank's FX trading 
business such that the Bank failed to detect and prevent the conduct 
set forth in paragraph twelve (12). The deficiencies and unsafe or 
unsound practices include the following: (a) The Bank's oversight and 
governance of its FX trading business were weak and lacked adequate 
formal guidance to mitigate and manage risks related to market conduct 
in FX Trading with respect to sales, trading and supervisory employees 
in that business . . . .''
    The Department also notes the size of relevant fines imposed by 
various regulators: The Department of Justice imposed a $550 million 
fine; The Board of Governors of the Federal Reserve Board imposed a 
$342 million fine; and the OCC, the Commodity Futures Trading 
Commission, and the FCA imposed fines of $350 million, $310 million, 
and [pound]222,166,000, respectively.
    This exemption is not punitive; instead, its five-year term and 
protective conditions reflect the Department's intent to protect 
Covered Plans that entrust substantial assets to a JPMC Affiliated 
QPAM, despite the serious misconduct and supervisory failures described 
above. The limited term of this exemption gives the Department the 
opportunity to review the adherence by the JPMC Affiliated QPAMs to the 
conditions set out herein. If the Applicant seeks an extension of this 
exemption, the Department will examine whether the compliance and 
oversight changes mandated by various regulatory authorities are having 
the desired effect on JPMC entities.
    The relationship between the JPMC Affiliated QPAMs and the 
Applicant's Corporate and Investment Banking line of business (CIB) is 
substantial. The Applicant states, ``As of the date of the Applicant's 
application, JPMC Affiliated QPAMs managed approximately $100 billion 
in plan assets through collective investment trusts that use the 
custody and administration services of the Applicant's Corporate and 
Investment Banking line of business (CIB), operating through the Bank. 
Similarly, certain plans managed by JPMC Affiliated QPAMs through 
separate accounts have independently selected CIB (operating through 
the Bank) as their trustee and/or custodian, and transactions directed 
by JPMC Affiliated QPAMs on behalf of such plans would necessarily 
require the trustee/custodian to provide services for a direct or 
indirect fee.'' The Applicant also states, ``Because of all of the 
services CIB necessarily provides to client accounts, the wording of 
this proposed exemption [that excludes the business line from providing 
services to funds managed by the Affiliated QPAMs] is tantamount to a 
denial.''
    Notwithstanding the above, as noted below, the Department has 
determined to revise this exemption to permit CIB to continue to 
provide services to funds managed by JPMC Affiliated QPAMs, based on 
the Department's determination that the conditions set forth herein are 
sufficiently protective of the Covered Plans, and given the type of 
transactions covered by this exemption and the Applicant's 
representations regarding the types of services provided by CIB. The 
Department notes that the JPMC Affiliated QPAMs' substantial and 
substantive dependency on the JPMC CIB when managing plan and IRA 
assets also supports the Department's conclusion that the conditions of 
the exemption are necessary and appropriate.
Comment 2--Description of Criminal Conduct--Section I
    The prefatory language to Section I of the proposed exemption 
provides, ``If the proposed five-year exemption is granted, certain 
asset managers with specified relationships to JPMC (the JPMC 
Affiliated QPAMs and the JPMC Related QPAMs, as defined further in 
Sections II(a) and II(b), respectively) will not be precluded from 
relying on the exemptive relief provided by Prohibited Transaction 
Class Exemption 84-14 (PTE 84-14 or the QPAM Exemption), 
notwithstanding the judgment of conviction against JPMC (the 
Conviction), as defined in Section II(e)), for engaging in a conspiracy 
to: (1) fix the price of, or (2) eliminate competition in the purchase 
or sale of the Euro/U.S. dollar currency pair exchanged in the Foreign 
Exchange (FX) Spot Market, for a period of five years beginning on the 
date the exemption is granted.''
    The Applicant requests that the description of the charged 
conduct--the clause beginning ``for engaging in a conspiracy''--be 
omitted. The Applicant states that this description is inaccurate and 
incomplete, will lead to disputes with counterparties to the detriment 
of plans, and will make it unlikely that plans will benefit from or be 
protected by this exemption.
    After consideration of the Applicant's comment, the Department has 
revised the exemption in the manner requested by the Applicant.

[[Page 61818]]

Comment 3--Knowing or Tacit Approval--Sections I(a) and I(c)
    Section I(a) of the proposed five-year exemption provides, ``(a) 
Other than a single individual who worked for a non-fiduciary business 
within JPMorgan Chase Bank and who had no responsibility for, and 
exercised no authority in connection with, the management of plan 
assets, the JPMC Affiliated QPAMs and the JPMC Related QPAMs (including 
their officers, directors, agents other than JPMC, and employees of 
such QPAMs who had responsibility for, or exercised authority in 
connection with the management of plan assets) did not know of, did not 
have reason to know of, or participate in the criminal conduct that is 
the subject of the Conviction. For purposes of this paragraph (a), 
`participate in' includes the knowing or tacit approval of the 
misconduct underlying the Conviction;''
    Section I(c) of the proposed exemption provides, ``(c) The JPMC 
Affiliated QPAMs will not employ or knowingly engage any of the 
individuals that participated in the criminal conduct that is the 
subject of the Conviction. For the purposes of this paragraph (c), 
`participated in' includes the knowing or tacit approval of the 
misconduct underlying Conviction;''
    The Applicant requests that the words ``or tacit'' in the phrase 
``knowing or tacit approval'' be deleted in Sections I(a) and I(c). The 
Applicant states that the term tacit approval ``is undefined and 
ambiguous, and potentially encompasses a broad range of conduct that 
could become the subject of disputes with counterparties.''
    After consideration of the Applicant's comment, the Department has 
revised the condition in the manner requested by the Applicant.
Comment 4--Receipt of Compensation--Section I(b)
    Section I(b) of the proposed five-year exemption provides, ``(b) 
Other than a single individual who worked for a non-fiduciary business 
within JPMorgan Chase Bank and who had no responsibility for, and 
exercised no authority in connection with, the management of plan 
assets, the JPMC Affiliated QPAMs and the JPMC Related QPAMs (including 
their officers, directors, and agents other than JPMC, and employees of 
such JPMC QPAMs) did not receive direct compensation, or knowingly 
receive indirect compensation in connection with the criminal conduct 
that is the subject of the Conviction.''
    The Applicant states that Section I(b) is not practically workable 
because an individual can receive compensation only if the entity he or 
she works for receives funds. The Applicant requests that this 
condition be modified to reflect that, although undefinable, a non-
fiduciary business within JPMorgan Chase Bank may have indirectly 
received funds in connection with the criminal conduct that is the 
subject of the Conviction. The Applicant requests that the Department 
modify this condition as follows:
    The JPMC Affiliated QPAMs and the JPMC Related QPAMs (including 
their officers, directors, and agents other than JPMC, and employees of 
such JPMC 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, other 
than a non-fiduciary line of business within JPMorgan Chase Bank.
    The Department has revised the condition in the manner requested by 
the Applicant. As revised, the condition precludes relief if any asset 
management personnel of JPMC received direct compensation, or knowingly 
received indirect compensation, in connection with the criminal conduct 
that is the subject of the Conviction.
Comment 5--Inclusion of ``Investment Banking Division of JPMorgan Chase 
Bank''--Sections I(d), I(g), and I(h)(1)(i)
    Section I(d)of the proposed five-year exemption provides, ``(d) A 
JPMC Affiliated QPAM will not use its authority or influence to direct 
an 'investment fund' (as defined in Section VI(b) of PTE 84-14), that 
is subject to ERISA or the Code and managed by such JPMC Affiliated 
QPAM, to enter into any transaction with JPMC or the Investment Banking 
Division of JPMorgan Chase Bank, or engage JPMC or the Investment 
Banking Division of JPMorgan Chase Bank 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; ''
    Section I(g)of the proposed five-year exemption provides, ``(g) 
JPMC and the Investment Banking Division of JPMorgan Chase Bank will 
not provide discretionary asset management services to ERISA-covered 
plans or IRAs, and will not otherwise act as a fiduciary with respect 
to ERISA-covered plan or IRA assets; ''
    Section I(h)(1)(i) of the proposed five-year exemption provides, 
``(h)(1)(i) The asset management decisions of the JPMC Affiliated QPAM 
are conducted independently of JPMC's management and business 
activities, including the corporate management and business activities 
of the Investment Banking Division of JPMorgan Chase Bank; ''
    The Applicant requests that these sections be revised to allow the 
Investment Banking Division of JPMorgan Chase Bank to provide services, 
including the following services, to investment funds managed by the 
JPMC Affiliated QPAMs: Safekeeping; settlement; administration; full 
service class action filing service; overdraft protection; sweep and 
deposit services; portfolio accounting and reporting services; payment 
processing services; and foreign custodial services. The Applicant 
states that not allowing the Investment Banking Division of JPMorgan 
Chase Bank to provide, or to continue to provide, these services would 
be harmful to more than a thousand plans.
    After considering the Applicant's comment, the Department has 
revised the exemption in the manner requested by the Applicant such 
that the condition does not apply to the Investment Banking Division of 
JPMorgan Chase Bank. In addition, the Department has clarified that 
Section I(d) applies to an ``investment fund'' that is subject to ERISA 
or the Code and managed by such JPMC Affiliated QPAM with respect to 
Covered Plans. Finally, as requested by the Applicant, Section I(g) has 
been modified to clarify that JPMC will not violate this condition in 
the event that it inadvertently becomes an investment advice fiduciary 
and that JPMC can act as a fiduciary for plans that it sponsors for its 
own employees or employees of an affiliate.
Comment 6--Exercising Authority Over Plan Assets--Section I(f)
    Section I(f)of the proposed five-year exemption provides, ``(f) A 
JPMC Affiliated QPAM or a JPMC Related QPAM did not exercise authority 
over the assets of any plan subject to Part 4 of Title I of ERISA (an 
ERISA-covered plan) or section 4975 of the Code (an IRA) in a manner 
that it knew or should have known would: Further the criminal conduct 
that is the subject of the Conviction; or cause the JPMC QPAM or its 
affiliates or related parties to directly or indirectly profit from the 
criminal conduct that is the subject of the Conviction.''
    The Applicant requests that Section I(f) be deleted, stating that 
it is duplicative of Section I(b), ambiguous,

[[Page 61819]]

and not administrable or in the interests of plans. The Applicant 
states that the first clause of the condition does not differ in any 
material way from the very first and most basic condition of the 
exemption: That the asset management businesses of the Affiliated QPAMs 
did not know of or participate in the conduct that is the subject of 
the Conviction. The Applicant also states that the second clause of the 
condition which states, ``or cause the JPMC QPAM or its affiliates or 
related parties to directly or indirectly profit from the criminal 
conduct,'' is confusing and repetitive of the condition in section 
I(b).
    The Department declines to make the Applicant's requested 
revisions. The Department does not view Condition I(f) (which relates 
to exercising authority) as ambiguous or duplicative of Section I(b) 
(which relates to compensation). Further, Condition I(f) is consistent 
with the Applicant's prior representation that, ``other than a single 
individual who worked for a nonfiduciary business within JPMorgan Chase 
Bank and who had no responsibility for, and exercised no authority in 
connection with, the management of plan assets, the Affiliated QPAMs 
did not participate in the Conduct and (ii) no current or former 
employee of JPMC or of any Affiliated QPAM who previously has been or 
who subsequently may be identified by JPMC, or any U.S. or non-U.S. 
regulatory or enforcement agencies, as having been responsible for the 
Conduct will have any involvement in providing asset management 
services to plans and IRAs or will be an officer, director, or employee 
of the Applicant or of any Affiliated QPAM.'' However, for clarity, the 
Department has deleted the term ``related parties.'' \5\
---------------------------------------------------------------------------

    \5\ See JPMC Exemption Application (May 20, 2015) at page 11.
---------------------------------------------------------------------------

Comment 7--Time to Implement Policies and Training--Section I(h)(1)-(2)
    Section I(h) of the proposed five-year exemption provides, ``(h)(1) 
Within four (4) months of the Conviction, each JPMC Affiliated QPAM 
must develop, implement, maintain, and follow written policies and 
procedures (the Policies). . . (2) Within four (4) months of the date 
of the Conviction, each JPMC Affiliated QPAM must develop and implement 
a program of training (the Training), conducted at least annually, for 
all relevant JPMC Affiliated QPAM asset/portfolio management, trading, 
legal, compliance, and internal audit personnel . . .''
    The Applicant requests that the Department increase the development 
period associated with the Policies and Training Requirement (the 
Development Period) from four (4) months to six (6) months. The 
Applicant also seeks confirmation that, following the Development 
Period, it will have twelve (12) months to complete the Training for 
all relevant employees, and that it must do so again in every 
succeeding twelve (12) month period. In support of this request, the 
Applicant represents that JPMC Affiliated QPAMs manage assets for 
hundreds of ERISA-covered plans, through separate accounts; over a 
thousand plans, through collective investment trusts; and more than 
160,000 IRAs, through various lines of business. The Applicant states 
that it may take up to six (6) months for all of these asset management 
staffs to satisfy the conditions set out in subparagraph(h) and then an 
additional twelve (12) months to accomplish all of the training. The 
Applicant further requests that Section I(h) be streamlined to match 
the requirements of PTE 2016-15.
    The Department emphasizes that the JPMC QPAMs must comply with the 
Policies and Training requirements within both PTE 2016-15 and this 
exemption. To this end, the Department has revised the policies and 
training requirements of Section I(h) to conform with PTE 2016-15. The 
two exemptions now follow this timeline: (i) Each JPMC Affiliated QPAM 
must have developed the Policies and Training required by PTE 2016-15 
by July 9, 2017; (ii) the first annual Training under PTE 2016-15 must 
be completed by July 9, 2018; (iii) each JPMC Affiliated QPAM must 
develop the Policies and Training required by this exemption, as 
necessary, by July 9, 2018; and (iv) the first Training under this 
exemption must be completed by July 9, 2019. By the end of this 30-
month period, asset/portfolio management, trading, legal, compliance, 
and internal audit personnel who were employed from the start to the 
end of the period must have been trained twice.
Comment 8--Policies and Procedures Relating to Compliance With ERISA 
and the Code--Section I(h)(1)(ii)-(v)
    Section I(h)(1)(ii)-(v) of the proposed five-year exemption 
provides,``(h)(1) Within four (4) months of the Conviction, each JPMC 
Affiliated QPAM must develop, implement, maintain, and follow written 
policies and procedures (the Policies) requiring and reasonably 
designed to ensure that:
    . . . (ii) The JPMC Affiliated QPAM fully complies with ERISA's 
fiduciary duties, and with ERISA and the Code's prohibited transaction 
provisions, and does not knowingly participate in any violation of 
these duties and provisions with respect to ERISA-covered plans and 
IRAs;
    (iii) The JPMC Affiliated QPAM does not knowingly participate in 
any other person's violation of ERISA or the Code with respect to 
ERISA-covered plans and IRAs;
    (iv) Any filings or statements made by the JPMC Affiliated QPAM to 
regulators including, but not limited to, the Department, the 
Department of the Treasury, the Department of Justice, and the Pension 
Benefit Guaranty Corporation, on behalf of ERISA-covered plans or IRAs, 
are materially accurate and complete, to the best of such QPAM's 
knowledge at that time; [and]
    (v) The JPMC Affiliated QPAM does not make material 
misrepresentations or omit material information in its communications 
with such regulators with respect to ERISA-covered plans or IRAs, or 
make material misrepresentations or omit material information in its 
communications with ERISA-covered plans and IRA clients.''
    The Applicant requests that these subparagraphs be stricken as 
duplicative and already mandated by statute. The Applicant states that 
these conditions could be read to apply the fiduciary duties of ERISA 
to IRAs, which it claims would be overly broad, punitive, and not 
rationally related to asset management under the exemption. In the 
event the Department declines to strike the above subsections, the 
Applicant requests the following revisions to subsections (ii)-(v):
    Subsection (ii): The Applicant requests that JPMC Affiliated QPAMs 
be required to comply with ERISA's fiduciary duties, ``with respect to 
ERISA-covered plans managed in reliance on PTE 84-14,'' and with ERISA 
and the Code's prohibited transaction provisions, ``as applicable, with 
respect to ERISA-covered plans and IRAs managed in reliance on PTE 84-
14.''
    Subsection (iii): The Applicant requests the removal of ``or the 
Code,'' and ``IRAs.'' With the Applicant's requested revision, 
subsection (iii) would read, ``The JPMC Affiliated QPAM does not 
knowingly participate in any other person's violation of ERISA with 
respect to ERISA-covered plans.''
    Subsection (iv): The Applicant requests that the phrase, ``on 
behalf of ERISA-covered plans or IRAs,'' be changed to, ``on behalf of 
ERISA-covered plans or IRAs for which a JPMC Affiliated QPAM provides 
asset

[[Page 61820]]

management or other discretionary fiduciary services in reliance on PTE 
84-14.''
    Subsection (v): The Applicant requests that the subparagraph be 
revised to, ``(v) The JPMC Affiliated QPAM does not intentionally make 
material misrepresentations or omit material information, to the best 
of such QPAM's knowledge at that time, in its communications with 
ERISA-covered plans and IRA clients, the assets of which are managed by 
such JPMC Affiliated QPAM in reliance on PTE 84-14.''
    In response to the Applicant's comments, the Department has 
modified the Policies' requirement of adherence to the fiduciary and 
prohibited transaction provisions of ERISA and the Code so that the 
Policies expressly focus on the provisions only to the extent 
``applicable'' under ERISA and the Code. In general, however, the 
Department has otherwise retained the stringency and breadth of the 
Policies requirement, which is more than justified by the compliance 
and oversight failures exhibited by JPMC throughout the long period of 
time during which the criminal misconduct persisted.
    The specific elements of the Policies requirement as set forth in 
this exemption are essential to its protective purposes. In approving 
this exemption, the Department significantly relies upon conditions 
designed to ensure that those relying upon its terms for prohibited 
transaction relief will adopt a culture of compliance centered on basic 
fiduciary norms and standards of fair dealing, as reflected in the 
Policies. These standards are core protections of this exemption.
    The Department has made some additional changes, however, which 
should not detract from the Policies' protective purpose. Thus, as 
requested by the Applicant, subsection (v) has been revised to contain 
the ``to the best of QPAM's knowledge at the time'' concept found in 
subsection (iv); and the applicability of subsections (iv) and (v) has 
been narrowed to ERISA-covered plans and IRAs with respect to which a 
JPMC Affiliated QPAM relies on PTE 84-14, or with respect to which a 
JPMC Affiliated QPAM has expressly represented that the manager 
qualifies as a QPAM or relies on the QPAM class exemption in its 
dealings with the ERISA-covered plan or IRA (hereinafter, a Covered 
Plan). To the extent a JPMC QPAM would prefer not to be subject to this 
provision, however, it may expressly disclaim reliance on QPAM status 
or PTE 84-14 in entering into its contract with the Covered Plan. This 
revision is consistent with the Department's intent to protect ERISA-
covered plans and IRAs that may have hired a JPMC Affiliated QPAM based 
on the manager's express representation that it relies on or qualifies 
under PTE 84-14.
    As explained in more detail below, the Department will not strike a 
condition merely because it is also a statutory requirement. It is the 
express intent of the Department to preclude relief for a JPMC 
affiliated QPAM that fails to meet the requirements of this exemption, 
including those derived from basic standards codified in statute, as 
applicable.
Comment 9--Correction of Violations and Failures To Comply--Section 
I(h)(1)(vii)
    Section I(h)(1)(vii) of the proposed five-year exemption provides, 
``Any violation of, or failure to comply with an item in subparagraphs 
(ii) through (vi), is corrected promptly upon discovery, and any such 
violation or compliance failure not promptly corrected is reported, 
upon the discovery of such 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 JPMC 
Affiliated QPAM, the independent auditor responsible for reviewing 
compliance with the Policies, and an appropriate fiduciary of any 
affected ERISA-covered plan or IRA that is independent of JPMC; 
however, with respect to any ERISA-covered plan or IRA sponsored by an 
`affiliate' (as defined in Section VI(d) of PTE 84-14) of JPMC or 
beneficially owned by an employee of JPMC or its affiliates, such 
fiduciary does not need to be independent of JPMC. A JPMC Affiliated 
QPAM will not be treated as having failed to develop, implement, 
maintain, or follow the Policies, provided that it corrects any 
instance of noncompliance promptly 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).''
    The Applicant cites this condition as an example of how the 
Department made the proposed exemption ``inexplicably'' and 
``arbitrarily'' more burdensome and onerous than other such exemptions 
it has granted previously. More specifically, the Applicant seeks 
several revisions to Section I(h)(vii), stating that its notification 
requirements are overbroad, and that terms such as ``appropriate 
corporate officers'' and ``corrected promptly'' are either vague or 
undefined. The Applicant requests that ``subparagraphs (ii) through 
(vi)'' be revised to read ``subparagraphs (i) through (vi).'' The 
Applicant also requests that the last sentence of the subparagraph (h) 
be revised, because it is ``overly broad and does not meaningfully 
provide relief in instances where a violation or compliance failure is 
corrected.'' The Applicant suggests the subparagraph (h) be revised to 
read, ``Within sixty (60) days of discovery of any violation of, or 
failure to comply with, an item in subparagraphs (i) through (vi), the 
JPMC QPAM will formulate, in writing, a plan to address such violation 
or failure (a Correction Plan). To the extent any such Correction Plan 
is not formulated within sixty (60) days of discovery, the JPMC 
Affiliated QPAM will report in writing such violation of, or failure to 
comply with, the item in subparagraphs (i) through (vi) to the head of 
compliance . . . .''
    In response to the Applicant's general comment, the Department has 
based the conditions of this exemption on both the particular facts of 
this case and its experience over time with previous exemptions. For 
the reasons set out herein, the Department has concluded that the 
specific conditions of this exemption are appropriate and give the 
Department a reasonable basis for concluding that the exemptions are 
appropriately protective of affected plans and IRAs. As noted above, a 
central aim of the exemption is to ensure that those relying upon the 
exemption for relief from the prohibited transaction rules will 
consistently act to promote a culture of fiduciary compliance, 
notwithstanding the conduct that violated Section I(g) of PTE 84-14.
    After considering the Applicant's specific requests for revisions, 
however, the Department has replaced ``appropriate corporate officers'' 
with ``the head of compliance and the General Counsel (or their 
functional equivalent) of the relevant line of business that engaged in 
the violation or failure.'' The Department also will not condition the 
exemption on a requirement for notification of violations to an 
appropriate fiduciary of any affected ERISA-covered plan or IRA that is 
independent of JPMC.
    However, the Department is not revising the ``subparagraphs (ii) 
through (vi)'' reference to include ``subparagraph (i)'' because the 
Department intends to preclude relief to the extent a JPMC Affiliated 
QPAM fails to develop, implement, maintain, and follow written policies 
and procedures. Clearly, it is not enough merely to develop policies 
and procedures,

[[Page 61821]]

without also implementing, maintaining, and following the terms of 
those policies and procedures. Covered Plans do not benefit from the 
creation of strong policies and procedures, unless they are actually 
followed.
    The Department has revised the term ``corrected promptly'' for 
consistency with the Department's intent that violations or compliance 
failures be corrected ``as soon as reasonably possible upon discovery 
or as soon after the QPAM reasonably should have known of the 
noncompliance (whichever is earlier).'' However, contrary to the 
Applicant's suggestion, the Department intends to preclude relief to 
the extent violations or failures are not corrected as required by the 
exemption. Therefore, the Department has not adopted the Applicant's 
proposed subparagraph (vii), which requires little more than the 
formulation of a correction plan, without any corresponding obligation 
to actually implement the plan.
Comment 10--Training Incorporated in Policies--Section I(h)(2)(i)
    Section I(h)(2)(i) of the proposed five-year exemption provides, 
``. . . The Training must: (i) 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 five-year exemption (including any loss of exemptive relief 
provided herein), and prompt reporting of wrongdoing.''
    The Applicant states that the requirement in Section I(h)(2)(i) 
that the Training must be ``set forth in'' the Policies is 
impracticable and may cause significant logistical challenges over 
time. Accordingly, the Applicant requests that Section I(h)(2)(i) be 
revised as follows:

    ``. . . The Training must, 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 permanent 
exemption (including any loss of exemptive relief provided herein), 
and prompt reporting of wrongdoing.''

    After considering this comment, the Department has revised the 
condition as requested by the Applicant.
Comment 11--Training by Independent Professional--Section I(h)(2)(ii)
    Section I(h)(2)(ii) of the proposed five-year exemption provides, 
``. . . The Training must: . . . (ii) Be conducted by an independent 
professional who has been prudently selected and who has appropriate 
technical training and proficiency with ERISA and the Code.''
    The Applicant requests that Section I(h)(2)(ii) be deleted, stating 
that requiring an independent professional is likely to be 
``counterproductive, a waste of time and resources, and less effective 
than using internal personnel who are familiar with Applicant's 
processes and staff . . . .''
    Although the Department does not agree with the Applicant's 
characterization that hiring an appropriate independent professional, 
prudently-selected, would be counterproductive and a waste of 
resources, the Department is persuaded that appropriate JPMC personnel, 
prudently selected, should be allowed to conduct the training, and has 
revised the condition accordingly.
Comment 12--Audit--Section I(i)(1)
    Section I(i)(1) of the proposed five-year exemption requires that 
each JPMC Affiliated QPAM ``submits to an audit conducted annually by 
an independent auditor, who has been prudently selected and who has 
appropriate technical training and proficiency with ERISA and the Code, 
to evaluate the adequacy of, and the JPMC Affiliated QPAM's compliance 
with, the Policies and Training described herein. The audit requirement 
must be incorporated in the Policies. Each annual audit must cover a 
consecutive twelve (12) month period starting with the twelve (12) 
month period that begins on the effective date of the five-year 
exemption, and each annual audit must be completed no later than six 
(6) months after the period to which the audit applies;''
    The Applicant requests that the audit requirement be deleted from 
the exemption in its entirety. The Applicant states that requiring the 
audit of asset management units that were not accused of wrongdoing is 
unnecessary and essentially seeks to punish businesses that have not 
been convicted of a crime. The Applicant requests that, if the audit 
condition is not omitted, the annual audit should be performed by the 
Applicant's Internal Audit function. The Applicant also requests the 
removal of the requirement mandating incorporation of the audit 
conditions into the Policies, as the Applicant believes such inclusion 
serves no purpose and does not further the interest of plans. 
Additionally, the Applicant requests the removal of the phrase 
``technical training and proficiency,'' because it is redundant and 
undefined.
    The Department declines to delete the audit requirement in its 
entirety. A recurring, independent, and prudently conducted audit of 
the JPMC Affiliated QPAMs is critical to ensuring the QPAMs' compliance 
with the Policies and Training mandated by this exemption, and the 
adequacy of the Policies and Training. The required discipline of 
regular audits underpins the Department's finding that the exemption 
should help prevent the sort of compliance failures that led to the 
Conviction and is protective of Covered Plans and their participants, 
beneficiaries, and beneficial owners, as applicable.
    The Department views the audit requirement as an integral component 
of the exemption, without which the Department would be unable to make 
its finding that the exemption is protective of Covered Plans and their 
participants, beneficiaries, and beneficial owners, as applicable. A 
recurring, independent audit of the JPMC Affiliated QPAMs is a critical 
means by which to verify the adequacy of, and compliance with, the 
Policies and Training mandated by this exemption.
    This exemption's conditions are based, in part, on the Department's 
assessment of the seriousness and duration of the misconduct that 
resulted in the violation of Section I(g) of PTE 84-14, as well as the 
apparent inadequacy of the controls and oversight mechanisms at JPMC to 
prevent the misconduct. The FCA's Final Notice states: ``[d]uring the 
Relevant Period, JPMorgan did not exercise adequate and effective 
control over its G10 spot FX trading business,'' and that, ``[t]he 
front office failed adequately to discharge these responsibilities with 
regard to obvious risks associated with confidentiality, conflicts of 
interest and trading conduct.'' The OCC states: ``the Bank had 
deficiencies in its internal controls and had engaged in unsafe or 
unsound banking practices with respect to the oversight and governance 
of the Bank's FX trading business . . . .'' Accordingly, the Department 
declines to delete the audit requirement in its entirety.
    The Department, however, recognizes that, notwithstanding JPMC's 
oversight failures, only a small number of individuals at JPMC directly 
engaged in the misconduct at issue. Thus, the United States District 
Court for the District of Connecticut stated, in connection with the 
sentencing of JP Morgan Chase & Co., that ``the conduct at issue here 
was engaged in by a very small number of individuals'' and ``we do not 
have banks who appear to have condoned conduct at any high-ranking

[[Page 61822]]

level.'' \6\ Accordingly, the Department has determined to change the 
audit interval under this exemption, from annual to biennial. Section 
I(i)(1) of the exemption, therefore, now requires that each JPMC 
Affiliated QPAM ``submits to an audit conducted every two years by an 
independent auditor.'' Each audit must cover the preceding consecutive 
twelve (12) month period. The first audit must cover the period from 
July 10, 2018 through July 9, 2019, and must be completed by January 9, 
2020. The second audit must cover the period from July 10, 2020 through 
July 9, 2021, and must be completed by January 9, 2022. In the event 
that the Exemption Period is extended or a new exemption is granted, 
the third audit would cover the period from July 10, 2022 through July 
9, 2023, and would be completed by January 9, 2024, unless the 
Department chose to alter the audit requirement in the new or extended 
exemption; \7\
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    \6\ See TRANSCRIPT of Proceedings: as to JP Morgan Chase & Co. 
(January 5, 2017 at pages 29-30).
    \7\ The third audit referenced above would not have to be 
completed until after the Exemption Period expires. If the 
Department ultimately decides to grant relief for an additional 
period, it could decide to alter the terms of the exemption, 
including the audit conditions (and the timing of the audit 
requirements). Nevertheless, the Applicant should anticipate that 
the Department will insist on strict compliance with the audit terms 
and schedule set forth above. As it considers any new exemption 
application, the Department may also contact the auditor for any 
information relevant to its determination.
---------------------------------------------------------------------------

    The Department declines to revise Section I(i)(1) to permit the 
Applicant's Internal Audit Department to carry out this exemption's 
required audit functions, as such a revision would not be protective of 
Covered Plans. Auditor independence is essential to this exemption, as 
it allows for an impartial analysis of the JPMC Affiliated QPAMs. 
Permitting the Applicant's Internal Audit Department to carry out this 
exemption's required audit functions would be insufficiently protective 
of Covered Plans. The independence of the auditor is the cornerstone of 
the integrity of the audit process and is of primary importance to 
avoid conflicts of interest and any inappropriate influence on the 
auditor's findings. The fundamental importance of auditor independence 
to the integrity of the audit process is well established. For example, 
the United States Securities and Exchange Commission (SEC) promulgated 
regulations at 17 CFR 210.2-01 to ensure auditors are independent of 
their clients, and under 17 CFR 240.10A-2, it is unlawful for an 
auditor not to be independent in certain circumstances. Likewise, the 
Public Company Accounting Oversight Board's (PCAOB) Rule 3520 states 
that a public accounting firm and its associated persons must be 
independent of the firm's audit client. When working on an audit or 
attest engagement, the Association of Independent Certified Public 
Accountants' (AICPA) Code of Professional Conduct, Objectivity and 
Independence Principle (AICPA, Professional Standards, ET section 
0.300.050.01) states that members should be independent in fact and 
appearance. Moreover, ERISA section 103(a)(3)(A) requires an accountant 
hired by an employee benefit plan to examine the plan's financial 
statements to be independent. Notwithstanding the Applicant's 
representations regarding the staff size and internal policies of 
JPMC's Internal Audit Department, serious misconduct occurred over an 
extended period of time at a JPMC entity.
    The Department also disagrees with the Applicant's assertion that 
the phrase ``technical training and proficiency'' is redundant. The two 
terms are not synonymous, as a person may have taken technical training 
in a given subject matter but may not be proficient in that subject 
matter. The exemption requires that the auditor be both technically 
trained and proficient in ERISA as well as the Code. Accordingly, the 
Department declines to change the phrase ``technical training and 
proficiency'' as used in Section I(i)(1).
    The Department also declines to delete the requirement that the 
audit conditions be incorporated in the Policies. The audit requirement 
provides a critical independent check on compliance with this 
exemption's conditions, and helps ensure that the basic protections set 
forth in the Policies are taken seriously. Accordingly, the specifics 
of the audit requirement are important components of the Policies. 
Their inclusion in the Policies promotes compliance and sends an 
important message to the institutions' employees and agents, as well as 
to Covered Plan clients, that compliance with the policies and 
procedures will be subject to careful independent review.
    After consideration of the Applicant's concerns regarding the 
annual audit, the Department is revising the audit condition to require 
an audit on at least a biennial basis. The Departments notes that if 
the audit uncovers material deficiencies with JPMC's compliance with 
this exemption, then the Applicant should consider conducting an 
additional audit after making corrections to ensure that it remains in 
compliance with the exemption. In any event, the Department emphasizes 
that it retains the right to conduct its own investigation of 
compliance based on any such indicators of problems.
Comment 13--Access to Business--Section I(i)(2)
    Section I(i)(2) of the proposed five-year exemption requires that 
``as permitted by law, each JPMC Affiliated QPAM and, if applicable 
JPMC, will grant the auditor unconditional access to its business . . 
.''
    The Applicant requests that the access granted by Section I(i)(2) 
be limited to: (1) Relevant materials reasonably necessary to conduct 
the audit; and (2) non-privileged materials that do not contain trade 
secrets. The Applicant argues that the ``unconditional access'' 
required by this condition is too broad and that the absence of 
specific exclusions could lead to confusion, dispute, and infringement 
on the JPMC Affiliated QPAMs' right to protect privileged 
communications, confidential supervisory information with other 
regulators (for which the privilege is held by others), irrelevant 
materials, and trade secrets.
    In the Department's view, to ensure a thorough and robust audit, 
the independent auditor must be granted access to information it deems 
necessary to make sound conclusions. Access to such information must be 
within the scope of the audit engagement and denied only to the extent 
any disclosure is not permitted by state or federal statute. 
Enumerating specific restrictions on the accessibility of certain 
information may have a dampening effect on the auditor's ability to 
perform the procedures necessary to make valid conclusions and 
therefore undermine the effectiveness of the audit. The auditor's 
access to such information, however, is limited to information relevant 
to the auditor's objectives as specified by the terms of this exemption 
and to the extent disclosure is not prevented by state or federal 
statute, or involves communications subject to attorney client 
privilege. In this regard, the Department has modified Section I(i)(2) 
accordingly.
Comment 14--Engagement Letter--Section I(i)(3)
    Section I(i)(3) of the proposed five-year exemption requires the 
auditor's engagement to ``specifically require the auditor to determine 
whether each JPMC Affiliated QPAM has developed, implemented, 
maintained, and followed the Policies . . . and has developed and 
implemented the Training, as required herein.''
    The Applicant requests that Section I(i)(3) be deleted in its 
entirety, stating

[[Page 61823]]

that it is unnecessarily duplicative of the substantive requirements of 
the exemption and that the Applicant will be bound by the conditions of 
the exemption, whether or not they also appear in the auditor's 
engagement letter.
    The Department does not concur with the Applicant's request. By 
including a statement of the audit's intended purpose and required 
determinations in the auditor's agreement, the Applicant ensures that 
both the auditor and the JPMC Affiliated QPAMs a have clear 
understanding of the purpose and expectations of the audit process. 
Therefore, the Department declines to omit Section I(i)(3) from the 
exemption.
Comment 15--Auditor's Test of Operational Compliance--Section I(i)(4)
    Section I(i)(4) of the proposed five-year exemption provides that, 
``[t]he auditor's engagement must specifically require the auditor to 
test each JPMC Affiliated QPAM's operational compliance with the 
Policies and Training'' and ``the auditor must test a sample of each 
QPAM's transactions involving ERISA-covered Plans and IRAs sufficient 
in size and nature to afford the auditor a reasonable basis to 
determine operational compliance with the Policies and Training.''
    The Applicant requests that Section I(i)(4) be deleted in its 
entirety. The Applicant argues that this Section is unnecessarily 
duplicative, as other conditions of the exemption govern the audit's 
scope, the auditor's technical skill, and the prudence of the selection 
process. The Applicant also argues that the second sentence of Section 
I(i)(4) unnecessarily intrudes upon the auditor's function and 
independence. Additionally, the Applicant states that auditors should 
be granted discretion as to when to sample transactions, as an auditor 
may not have the capacity to test significant data within the time 
periods required under this exemption.
    The Department declines to make the Applicant's requested revisions 
with respect to Section I(i)(4). The inclusion of written audit 
parameters in the auditor's engagement letter is necessary both to 
document expectations regarding the audit work and to ensure that the 
auditor can responsibly perform its important work. As stated above, 
clearly defined audit parameters will minimize any potential for 
dispute between the Applicant and the auditor. It is appropriate and 
necessary for the exemption to require a certain amount, and type, of 
audit work to be performed. Similarly, given the scope and number of 
relevant transactions, proper sampling is necessary for the auditor to 
reach reasonable and reliable conclusions. Although the Department has 
declined to delete this section in its entirety, as requested by the 
Applicant, the Department has revised this condition for consistency 
with other conditions of this exemption which are tailored to the 
Department's interest in protecting Covered Plans. Therefore, the 
condition now applies to Covered Plans (i.e., ERISA-covered plans and 
IRAs with respect to which the JPMC Affiliated QPAM relies on PTE 84-14 
or has expressly represented that it qualifies as a QPAM or relies on 
the QPAM class exemption in its dealings with the ERISA-covered plan or 
IRA).
    The Department notes that Section I(i)(4) does not specify the 
number of transactions that the auditor must test, but rather requires, 
for each QPAM, that the auditor test a sample of each such QPAM's 
transactions involving Covered Plans, ``sufficient in size and nature 
to afford the auditor a reasonable basis to determine operational 
compliance with the Policies and Training.''
Comment 16--Draft of the Audit Report--Section I(i)(5)
    Section I(i)(5) of the proposed five-year exemption requires that 
``. . . on or before the end of the relevant period described in 
Section I(i)(1) for completing the audit, the auditor must issue a 
written report (the Audit Report) to JPMC and the JPMC Affiliated QPAM 
. . .''
    The Applicant requests a modification of Section I(i)(5) that would 
allow the Applicant sufficient time to correct any findings of 
noncompliance by the auditor before the issuance of the final Audit 
Report and its provision to the Department. The Applicant states that 
permitting it to review a draft of the Audit Report well in advance of 
its submission to the Department would allow the Applicant to implement 
plans to correct any violations or findings of noncompliance identified 
by the auditor. The Applicant states that communication with the 
audited entity is an appropriate audit procedure which ensures that the 
auditor's factual premises are correct. The Applicant also states that 
the time required to review the audit should be in advance of the Audit 
Report's submission and should not take away from the six (6) months 
given to complete the audit and the thirty (30) days to submit the 
Audit Report to the Department. The Applicant therefore requests that 
Section I(i)(5) contain a provision: (1) Requiring the auditor to issue 
a draft Audit Report to the Applicant and the JPMC Affiliated QPAMs at 
the end of the period for the completion of the audit, as described in 
Section I(i)(1); and (2) providing the Applicant and the JPMC 
Affiliated QPAM thirty (30) days to review such draft Audit Report. 
Additionally, the Applicant requests that the exemption allow the 
auditor to issue one consolidated Audit Report covering all the JPMC 
Affiliated QPAMs.
    The Department agrees that it is appropriate and beneficial for the 
auditor and the entity being audited to communicate during the audit 
process. Such communication allows for a dialog regarding, among other 
things, factual premises, findings, and conclusions. With regard to 
issues of noncompliance, communication should take place as soon as 
possible, but in no case later than five (5) days following the 
discovery of such noncompliance (see Section I(i)(6)) to allow time for 
the Applicant to provide additional information to the auditor and 
correct the noncompliance. However, the Department considers a 
requirement directing the auditor to provide a draft Audit Report to 
the audited entity in all cases to be inappropriate, as it is a matter 
best determined by the Applicant and the auditor. The Department notes 
that, while contemplating the time frames for completion and submission 
of the Audit Report, it did take into account the auditor's procedural 
work and communications with the Applicant. The Applicant has not 
demonstrated the need for additional time to complete and submit the 
Audit Report. The Department therefore declines to modify Section 
I(i)(5) as requested by the Applicant.
    Lastly, the Department has accepted the Applicant's recommendation 
that the auditor be allowed to issue one consolidated Audit Report and 
has modified Section I(i)(5) accordingly.
Comment 17--Auditor's Determination of Compliance--I(i)(5)(i)
    Section I(i)(5)(i) of the proposed five-year exemption provides, in 
part: ``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 
JPMC Affiliated QPAM must be promptly addressed by such JPMC Affiliated 
QPAM, and any action taken by such JPMC Affiliated QPAM to address such 
recommendations must be included in an addendum to the Audit Report 
(which addendum is completed prior to the certification described in 
Section I(i)(7) below).''
    The Applicant asserts that Section I(i)(5)(i) is arbitrary, 
capricious, and

[[Page 61824]]

ambiguous and requests that the term ``promptly'' be omitted from the 
condition because it will cause disputes over its meaning. The 
Applicant argues that this perceived ambiguity is problematic in this 
context because addressing the auditor's recommendation could be a 
lengthy process.
    In addition, Section I(i)(5)(i) states: ``Furthermore, the auditor 
must not rely on the Annual Report created by the compliance officer 
(the Compliance Officer) as described in Section I(m) below in lieu of 
independent determinations and testing performed by the auditor as 
required by Section I(i)(3) and (4) above.''
    The Applicant requests that this provision of Section I(i)(5) be 
deleted, as it imposes a counterproductive limitation on the auditor's 
use of the Annual Review and usurps the auditor's judgment regarding 
how to perform its role, and whether and when to rely upon any and all 
resources. The Applicant further states, that denying the auditor the 
opportunity to fully use its judgment as to which resources it will 
rely upon contradicts the underlying purpose of this exemption's 
broader audit condition, especially in light of the requirements 
relating to the auditor's selection and qualifications. Moreover, the 
Applicant states that the language of this condition will interfere 
with the workability of the exemption and its use by plans. To that 
end, the Applicant states that if counterparties cannot determine 
whether this requirement has been complied with, the exemption will not 
be used, to the detriment of plans.
    The Department acknowledges that the Applicant's efforts to address 
the auditor's recommendations regarding any inadequacy in the Policies 
and Training identified by the auditor, may take longer to implement 
than the time limits mandated by the proposed exemption. Accordingly, 
the Department is modifying Section I(i)(5)(i) to reflect the 
possibility that the JPMC Affiliated QPAMs' efforts to address the 
auditor's recommendations regarding inadequacies in the Policies and 
Training identified by the auditor, may not be completed by the 
submission date of the Audit Report and may require a written plan to 
address such items. However, any noncompliance identified by the 
auditor must be promptly addressed. The Department does not agree that 
the word ``promptly'' creates inappropriate ambiguity in the condition 
and declines to remove the word.
    The final sentence of Section I(i)(5)(i) expresses the Department's 
intent that the auditor not rely solely on the work of the Compliance 
Officer and the contents of the Annual Report in formulating its 
conclusions or findings. The auditor must perform its own independent 
testing to formulate its conclusions. This exemption does not prohibit 
the auditor from considering the Compliance Officer's Annual Report in 
carrying out its audit function, including the formulation of an audit 
plan. This exemption, however, does prohibit the auditor from reaching 
conclusions that are exclusively based upon the contents of the 
Compliance Officer's Annual Report. The Department has modified Section 
I(i)(5)(i) to more clearly reflect these views.
    Included with its comment on Section I(i)(5)(i), the Applicant 
requests the deletion of the Compliance Officer and Annual Review 
requirements set out in Section I(m). The Department's response to this 
request is discussed below.
Comment 18--Adequacy of the Annual Review--Section I(i)(5)(ii)
    Section I(i)(5)(ii) of the proposed five-year exemption provides 
that ``[t]he Audit Report must include the auditor's specific 
determinations regarding: . . . (ii) The adequacy of the Annual Review 
described in Section I(m) and the resources provided to the Compliance 
Officer in connection with such Annual Review.''
    The Applicant asserts that requiring the auditor to assess the 
adequacy of the resources provided to the Compliance Officer is 
overreaching and should be deleted. The Applicant states that, while 
the auditor function requires proficiency in ERISA, it does not require 
sophistication or expertise on resource allocation. According to the 
Applicant, the question of whether the Compliance Officer has met its 
obligations under this exemption will be subject to the auditor's 
review. The Applicant states that if the auditor finds any deficiencies 
in the review, the Applicant will address such issues including any 
allocation of resources.
    As discussed in detail below, the Department views the Compliance 
Officer and the Annual Review as integral to ensuring compliance with 
the exemption. An independent assessment by the auditor of the adequacy 
of the Annual Review is essential to providing the Department with the 
assurance that the Applicant and the JPMC Affiliated QPAMs have given 
these matters the utmost priority and have taken the actions necessary 
to comply with the exemption. However, the Department agrees that the 
QPAMs need not require the auditor to opine on the adequacy of the 
resources allocated to the Compliance Officer and has modified Section 
I(i)(5)(ii) accordingly. If, however, the auditor observes compliance 
issues related to the Compliance Officer or available resources, it 
would be appropriate for the auditor to opine on those problems.
Comment 19--Certification of the Audit--Section I(i)(7)
    Section I(i)(7) of the proposed five-year exemption provides, in 
part, that ``. . . the General Counsel, or one of the three most senior 
executive officers of the JPMC Affiliated QPAM to which the Audit 
Report applies, must certify in writing, under penalties of perjury, 
that the officer has reviewed that Audit Report and this exemption; 
addressed, corrected, or remedied any inadequacy identified in the 
Audit Report . . .''
    The Applicant requests that this condition be modified to remove 
ambiguity, enhance workability, and avoid aspects that could be 
interpreted as punitive. The Applicant claims that the requirements of 
Section I(i)(7) should take into account JPMC's business structure and 
allow the Applicant to determine which senior officers will review the 
Audit Report. The Applicant states that it would be preferable that an 
executive related to an asset/investment management business operating 
through the QPAM review the Audit Report. In this regard, the Applicant 
requests Section I(i)(7) be modified in part as follows: ``the General 
Counsel or one of the three most senior executives of the line of 
business engaged in discretionary assets management activities through 
the JPMC Affiliated QPAM with respect to which the Audit Report applies 
. . .''.
    The Department concurs that a senior executive officer with 
knowledge of the asset management business within the QPAM should be 
allowed to review the Audit Report, and has modified the language of 
Section I(i)(7), accordingly.
    The Applicant also requests that the timing of Section I(i)(7) be 
clarified. In this regard, the Applicant states that compliance with 
this condition would be impossible if, for example, a recommendation 
takes longer to implement than the 30-day period contemplated in 
Section I(i)(9) for the Audit Report to be certified and provided to 
the Department.
    While the Department does not view Section I(i)(7) as ambiguous, 
the Department is aware, as stated above, that the Applicant's efforts 
to address the auditor's recommendations regarding inadequacies in the 
Policies and Training identified by the auditor may take longer to 
implement than the

[[Page 61825]]

timeframe to submit the certified Audit Report. With respect to this 
issue, the Department did not intend to limit corrective actions to 
those that could only be completed prior to the submission of the Audit 
Report. Therefore, the Department has modified Section I(i)(7) to 
reflect that the senior officer may certify that a written plan to 
address the inadequacies regarding the Policies and Training identified 
in the auditor's Report is in place.
    The Applicant also states that this condition should clarify that 
it may appropriately ``address'' an inadequacy by noting that an 
alternative action to the auditor's recommendation, or even no action, 
is a preferable means of protecting ERISA plan clients and IRAs. The 
Applicant states that this condition is intrusive, as it invites the 
auditor, through its conclusions and recommendations, to micromanage 
the business of the relevant JPMC QPAM. The Applicant claims that, with 
broad access to a JPMC Affiliated QPAM's records, the auditor could 
identify any number of potential inadequacies, all of which the JPM 
Affiliated QPAM should not be required to accept unconditionally.
    As mentioned above, the Department has determined that it is 
necessary for the auditor to be afforded unfettered access to JPMC 
Affiliated QPAM records, to the extent that the analysis of such 
records falls within the twelve month period to which the audit 
relates. For the first audit required by this exemption, that period 
runs from January 10, 2018 through January 9, 2019. The conditions of 
this exemption do not prohibit the Applicant from disagreeing with the 
auditor with respect to whether certain practices fail to comply with 
the terms of this exemption. However, in those circumstances where the 
auditor is not persuaded to change its position on a matter the auditor 
considers noncompliant, the Applicant will be responsible to correct 
such matters. Nor do the conditions of this exemption prohibit the 
Applicant from disagreeing with the auditor with respect to the 
appropriate method for correcting or addressing issues of 
noncompliance. The Department would expect the Applicant and the 
auditor to have meaningful communications on such differences of 
opinion. In the event the Applicant chooses to apply a corrective 
method that differs from that recommended by the auditor, the Audit 
Report and the Addendum attached thereto should explain in detail the 
noncompliance, the auditor's recommended action, the corrective method 
chosen, and, if applicable, why the Applicant chose a corrective method 
different from that recommended by the auditor.
    Lastly, the Applicant requests deletion of the requirement in 
Section I(i)(7) for certification by the senior executive officer under 
penalties of perjury. The Applicant argues that this requirement is 
unnecessary and inappropriate as this exemption already requires 
accuracy in communications with regulators and clients.
    The Department declines to remove this requirement, which makes 
clear the importance of the correction process and creates a strong 
incentive going forward to take seriously the audit process--and 
compliance generally.
Comment 20--Review and Certification of Audit Report--Section I(i)(8)
    Section I(i)(8) the proposed five-year exemption provides that 
``[t]he Risk Committee of JPMC's Board of Directors is provided a copy 
of each Audit Report; and a senior executive officer with a direct 
reporting line to the highest ranking legal officer of JPMC must review 
the Audit Report for each JPMC Affiliated QPAM . . .''
    The Applicant requests that the requirement to provide the Audit 
Report to the Risk Committee of JPMC's Board of Directors be omitted. 
The Applicant states that the Department, in imposing this condition, 
is acting beyond the scope of its authority. The Applicant also 
represents that this condition constitutes micromanaging by the 
Department and is inappropriate and unnecessary. The Applicant further 
states that this requirement does not protect plans and participants 
and is duplicative of other conditions contained in this exemption. The 
Applicant argues that a mandate by the Department concerning JPMC's 
internal processes for handling information is outside the scope of the 
exemption and does not further the statutory goal of protecting plans.
    The Applicant requests that the exemption provide that the 
certifying reviewer be a senior executive officer. The Applicant 
further states that the exemption should not mandate that the 
certifying reviewer be a senior executive officer in the direct 
reporting line to the highest ranking legal officer of JPMC.
    Finally, the Applicant requests the requirement in Section I(i)(8) 
that the certification by the senior executive officer be made under 
penalty of perjury be deleted, as it is unnecessary.
    The Department notes that in its application and related materials, 
the Applicant has represented that it has established, or is in the 
process of establishing comprehensive changes to processes and 
procedures that are, in part, intended to change the culture at JPMC 
from the top down. As represented by the Applicant, these changes are 
focused on enhancements in: (1) Supervision, controls, and governance; 
(2) compliance risk assessment; (3) transaction monitoring and 
communications surveillance; (4) compliance testing; and (5) internal 
audit.\8\
---------------------------------------------------------------------------

    \8\ See JPMC Exemption Application (May 20, 2015) at page 12.
---------------------------------------------------------------------------

    The Department has developed this exemption to ensure that the 
highest levels of management are aware of on-going matters concerning 
JPMC, the JPMC Affiliated QPAMs, and compliance with this exemption. 
Requiring the provision of the Audit Report to the Board of Directors 
and certification by a senior executive officer in the reporting line 
of the highest legal compliance officer provides assurance that the 
highest levels of management within JPMC stay informed about JPMC's and 
the JPMC Affiliated QPAMs' compliance with the terms of this exemption. 
In the Department's view, such officials are in the best position to 
ensure that any inadequacy identified by the auditor is appropriately 
addressed and that necessary changes to corporate policy are 
effectuated if and where necessary. Requiring certification under 
penalty of perjury is consistent with the Department's longstanding 
view that basic requirements of compliance and integrity are 
fundamental to an entity's ability to qualify as a QPAM.
Comment 21--Availability of the Audit Report--Section I(i)(9)
    The Applicant claims that the requirements in Section I(i)(9) that 
``each JPMC Affiliated QPAM must make its Audit Report unconditionally 
available for examination by any duly authorized employee or 
representative of the Department, other relevant regulators, and any 
fiduciary of an ERISA-covered plan or IRA, the assets of which are 
managed by such JPMC Affiliated QPAM'' is outside the scope of the 
exemption and is unnecessary. The Applicant states that the 
availability of the Audit Report should be limited to ERISA-covered 
plans and IRAs for which the Applicant relies on PTE 84-14. The 
Applicant argues that it is overly-broad, punitive and not related to 
the relief provided in the exemption to extend this condition to plans 
and IRAs for which the Affiliated JPMC QPAMs do not rely on PTE 84-14. 
Additionally, the Applicant requests that the Audit Report should be 
made

[[Page 61826]]

available upon request and that any such provision of the Audit Report 
may be facilitated via electronic delivery.
    The Department does not agree that the condition in Section I(i)(9) 
is punitive. As the Applicant recognized in its application, ERISA-
covered plans, IRAs, and counterparties routinely rely on QPAM status 
before entering into agreements with financial institutions, even if 
those institutions do not believe compliance with PTE 84-14 is strictly 
necessary for any particular transaction. Accordingly, the Department 
has an interest in ensuring that the conditions of this exemption 
broadly protect ERISA-covered plans and IRAs that have relied on QPAM 
status in deciding to enter into an agreement with the Applicant or the 
Affiliated JPMC QPAMs.
    Nevertheless, the Department has revised Section I(i)(9) to clarify 
that the JPMC Affiliated QPAMs are required to make the documents 
available to any fiduciary of a Covered Plan. The Audit Report, in any 
event, will be incorporated into the public record attributable to this 
exemption, under Exemption Application Number D-11906, and, therefore, 
independently accessible by members of the public. Accordingly, the 
Department has determined to revise the condition by replacing the 
phrase ``an ERISA-covered plan or IRA, the assets of which are managed 
by such JPMC Affiliated QPAM'' with the term ``Covered Plan'' (as 
defined in Section II(c)). Lastly, the Department agrees that access to 
the Audit Report need only be upon request and such access can be 
electronic, and has revised the exemption accordingly.
Comment 22--Engagement Agreements--Section I(i)(10)
    The Applicant claims that the requirement under Section I(i)(10)(B) 
which provides, ``[e]ach JPMC Affiliated QPAM and the auditor must 
submit to OED . . . (B) any engagement agreement entered into with any 
other entity retained in connection with such QPAM's compliance with 
the Training or Policies conditions of this five-year exemption, no 
later than six (6) months after the Conviction Date (and one month 
after the execution of any agreement thereafter)'' should be omitted as 
it is unnecessary, punitive, and not in the interest of plans or their 
participants. The Applicant states that the terms of engagement between 
the JPMC Affiliated QPAMS and the auditor and trainer should be left to 
the discretion of the parties to such engagement agreements. The 
Applicant maintains that it is intrusive to mandate that every service 
provider contract that relates to the Policies and the Training be 
provided to the Department. Additionally, the Applicant requests that 
the timeframe for provision of the auditor's engagement be modified to 
no later than six (6) months after execution of such engagement 
agreement.
    In coordination with the Department's modification of Section 
I(h)(2)(ii) to remove the requirement that the Training must be 
conducted by an independent professional, the Department has determined 
to remove the requirement in Section I(i)(10)(B) to provide to the 
Department the engagement agreements entered into with entities 
retained in connection with compliance with the Training or Policies 
conditions. Furthermore, to remove any confusion and uncertainty 
regarding the timing of the submission of the auditor's engagement 
agreement, the Department has modified Section I(i)(10) to require that 
the auditor's engagement agreement be submitted to the Office of 
Exemption Determinations no later than two (2) months after the 
engagement agreement is entered into by the Applicant and the 
independent auditor.
Comment 23--Auditor's Workpapers--Section I(i)(11)
    Section I(i)(11) the proposed five-year exemption provides that the 
``auditor must provide OED, upon request, all of the workpapers created 
and utilized in the course of the audit, including, but not limited to: 
The audit plan; audit testing; identification of any instance of 
noncompliance by the relevant JPMC Affiliated QPAM; and an explanation 
of any corrective or remedial action taken by the applicable JPMC 
Affiliated QPAM.'' The Applicant states that Section I(i)(11) is 
duplicative and could cause the Applicant to lose the exemption due to 
the auditor's actions or inaction. Additionally, the Applicant notes 
that this condition should account for workpapers which the auditor 
does not want to submit to the public file on the basis of 
confidentiality or privacy of information. The Applicant argues that 
such workpapers may contain information such as client data, employee 
personal information, and other sensitive information. The Applicant 
therefore requests that the Department exempt such workpapers in a 
manner that does not compromise the Department's ability to review such 
workpapers. Finally, the Applicant claims that by stating ``all of the 
workpapers'' and then providing list of what ``all'' might encompass, 
the Department is being overzealous and duplicative.
    The Department acknowledges that certain information contained in 
the workpapers may be confidential and proprietary, and having that 
information in a public file may create needless or avoidable 
disclosure issues. The Department has determined to modify Section 
I(i)(11) to remove the requirement that the auditor provide the 
workpapers to OED,\9\ and instead require that the auditor provide 
access to the workpapers for the Department's review and inspection. 
However, given the importance of the workpapers to the Department's own 
review and the Applicant's contractual relationship with the auditor, 
the Department declines to include, as requested by the Applicant, a 
statement in Section I(i)(11) that a failure on behalf of the auditor 
to meet this condition will not violate the exemption.
---------------------------------------------------------------------------

    \9\ OED is the Office of Exemption Determinations within the 
Employee Benefits Security Administration agency of the United 
States Department of Labor.
---------------------------------------------------------------------------

Comment 24--Replacement of Auditor--Section I(i)(12)
    Section I(i)(12) of the proposed five-year exemption states that: 
``JPMC must notify the Department at least thirty (30) days prior to 
any substitution of an auditor . . . and that JPMC demonstrate[e] to 
the Department's satisfaction that such new auditor is independent of 
JPMC, experienced in the matters that are the subject of the exemption, 
and capable of making the determination required by [the] exemption.''
    The Applicant requests that this Section I(i)(12) be deleted as it 
is inconsistent with the condition for the initial selection of an 
auditor and duplicative of other substantive terms of the exemption. 
Initially, the Applicant notes that permitting JPMC's internal audit 
department to perform the audit functions required under this exemption 
would render this condition unnecessary. The Applicant states that 
requiring JPMC to demonstrate the independence and qualifications of 
the auditor prior to a substitution serves no useful purpose, given the 
audit process timeline laid out under this exemption. The Applicant 
states that, since the exemption does not grant the Department the 
authority to approve the initial auditor selection, likewise the 
Department should not have the authority to approve the selection of a 
subsequent auditor. The Applicant states that many circumstances which 
could necessitate an auditor change would not relate to compliance with 
the terms of the exemption. The Applicant

[[Page 61827]]

states that if the Department's concern is the removal of a critical 
auditor, this condition is not rationally related to such an issue.
    As explained above, the Department does not agree that the internal 
audit department of JPMC is the appropriate entity to perform the 
audit. The auditor's independence is critical to the Department's 
determination that the exemption protects Covered Plans. This exemption 
is not unique in requiring the Department be notified of changes to 
service providers (see, e.g., the requirement of Schedule C of the Form 
5500 Annual Return/Report for the Plan Administrator of certain plans 
to report to the Department a termination of the plan's auditor and/or 
enrolled actuary and to provide an explanation of the reasons for the 
termination, including a description of any material disputes or 
matters of disagreement concerning the termination). Furthermore, 
requiring the Applicant to notify the Department of the substitution of 
an auditor serves to ensure that the JPMC Affiliated QPAMs are 
attentive to the audit process and the protections it provides; and 
that the Department has the information it needs to review compliance. 
The Department has determined to modify Section I(i)(12) to remove the 
requirement for JPMC to demonstrate the independence and qualifications 
of the auditor, however, and requires instead that JPMC, no later than 
two months from the engagement of the replacement auditor, notify the 
Department of a change in auditor and of the reason(s) for the 
substitution including any material disputes between the terminated 
auditor and JPMC. JPMC's fiduciary obligations with respect to the 
selection of the auditor, as well as the significant role a credible 
selection plays in reducing the need for more extensive oversight by 
the Department, should be sufficient to safeguard the selection 
process.
Comments 25-26--Contracts With Plans and IRAs--Section I(j)
    Section I(j) of the proposed five-year exemption provides: 
``Effective as of the effective date of this five-year exemption, with 
respect to any arrangement, agreement, or contract between a JPMC 
Affiliated QPAM and an ERISA-covered plan or IRA for which a JPMC 
Affiliated QPAM provides asset management or other discretionary 
fiduciary services, each JPMC Affiliated QPAM agrees and warrants:
    (1) To comply with ERISA and the Code, as applicable with respect 
to such ERISA-covered plan or IRA; to refrain from engaging in 
prohibited transactions that are not otherwise exempt (and to promptly 
correct any inadvertent prohibited transactions); and to comply with 
the standards of prudence and loyalty set forth in section 404 of 
ERISA, as applicable, with respect to each such ERISA-covered plan and 
IRA;
    (2) To indemnify and hold harmless the ERISA-covered plan or IRA 
for any damages resulting from a JPMC Affiliated QPAM's violation of 
applicable laws, a JPMC Affiliated QPAM's breach of contract, or any 
claim brought in connection with the failure of such JPMC Affiliated 
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;
    (3) Not to require (or otherwise cause) the ERISA-covered plan or 
IRA to waive, limit, or qualify the liability of the JPMC Affiliated 
QPAM for violating ERISA or the Code or engaging in prohibited 
transactions;
    (4) Not to require the ERISA-covered plan or IRA (or sponsor of 
such ERISA-covered plan or beneficial owner of such IRA) to indemnify 
the JPMC Affiliated QPAM for violating ERISA or engaging in prohibited 
transactions, except for violations or prohibited transactions caused 
by an error, misrepresentation, or misconduct of a plan fiduciary or 
other party hired by the plan fiduciary who is independent of JPMC, and 
its affiliates;
    (5) Not to restrict the ability of such ERISA-covered plan or IRA 
to terminate or withdraw from its arrangement with the JPMC Affiliated 
QPAM (including 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 as a 
result of an actual lack of liquidity of the underlying assets, 
provided that such restrictions are applied consistently and in like 
manner to all such investors;
    (6) Not to impose any fees, penalties, or charges for such 
termination or withdrawal with the exception of reasonable fees, 
appropriately disclosed in advance, that are specifically designed to 
prevent generally recognized abusive investment practices or 
specifically designed to ensure equitable treatment of all investors in 
a pooled fund in the event such withdrawal or termination may have 
adverse consequences for all other investors, provided that such fees 
are applied consistently and in like manner to all such investors; and
    (7) Not to include exculpatory provisions disclaiming or otherwise 
limiting liability of the JPMC Affiliated QPAM for a violation of such 
agreement's terms, except 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 JPMC, and its 
affiliates;
    (8) Within four (4) months of the date of the Conviction, each JPMC 
Affiliated QPAM must provide a notice of its obligations under this 
Section I(j) to each ERISA-covered plan and IRA for which an JPMC 
Affiliated QPAM provides asset management or other discretionary 
fiduciary services. For all other prospective ERISA-covered plan and 
IRA clients for which a JPMC Affiliated QPAM provides asset management 
or other discretionary services, the JPMC Affiliated QPAM will agree in 
writing to its obligations under this Section I(j) in an updated 
investment management agreement between the JPMC Affiliated QPAM and 
such clients or other written contractual agreement''.
    The Applicant states that Section I(j) of the proposed exemption is 
overbroad, entirely inappropriate, not rationally-related to asset 
management, inconsistent with the Administrative Procedure Act (the 
APA), an attempt to create a private right of action for IRAs, and 
punitive; that it should be limited to ERISA-covered plans and IRAs 
with respect to which the Applicant relies on the QPAM Exemption; and 
that it is not reasonably designed to protect plans or their 
participants. The Applicant also requests that the condition clarify 
that it supersedes the analogous condition in PTE 2016-15, so as not to 
impose duplicative requirements, and also be modified to read as 
follows: ``This subparagraph supersedes Section I(i) of PTE 2016-15, as 
of the date of the exemption's publication in the Federal Register. 
Effective as of the publication date, with respect to any arrangement, 
agreement, or contract between a JPMC Affiliated QPAM and an ERISA-
covered plan or IRA for which a JPMC Affiliated QPAM provides asset 
management or other discretionary fiduciary services in reliance on PTE 
84-14 . . . .''
    As explained above, ERISA-covered plans and IRAs routinely rely on 
QPAM status as a condition of entering into transactions with financial 
institutions, even with respect to transactions that do not require 
adherence to PTE 84-14. Indeed, the Applicant recognized this fact in 
its application (see, e.g., Applicant's statement that ``[w]hile

[[Page 61828]]

equity strategies rarely rely on the QPAM Exemption, plans invested in 
such strategies could decide to find other managers or pooled funds if 
the affiliated investment managers were no longer QPAMs''). In 
addition, it may not always be clear whether the JPMC Affiliated QPAM 
intends to rely upon PTE 84-14 for any particular transaction. 
Accordingly, it is critical to ensure that protective conditions are in 
place to safeguard the interests of ERISA-covered plans and IRAs that 
are acting in reliance on the availability of this exemption, 
particularly those who may not have entered into the transaction in the 
first place, but for the Department's grant of this exemption.
    The Department has a clear interest in protecting such Covered 
Plans that enter into an asset management agreement with a JPMC 
Affiliated QPAM in reliance on the manager's qualification as a QPAM. 
Moreover, when a Covered Plan terminates its relationship with an asset 
manager, it may incur significant costs and expenses as its investments 
are unwound and in connection with finding a new asset manager. The 
Department rejects the view that it acts outside its authority by 
protecting ERISA-covered plans and IRAs that rely on JPMC's asset 
managers' eligibility for this exemption, and reemphasizes the 
seriousness of the criminal misconduct that caused JPMC to need this 
exemption. The Department may grant an exemption under Section 408(a) 
of ERISA or Section 4975(c)(2)(C) of the Code only to the extent the 
Secretary finds, among other things, that the exemption is protective 
of the affected plan(s) or IRA(s). As noted by regulators, personnel at 
JPMorgan Chase Bank, a QPAM, engaged in serious misconduct over an 
extended period of time at the expense of their own clients. This 
misconduct appears to have stemmed, in part, from deficiencies in 
control and oversight.
    Notwithstanding the misconduct, which resulted in violation of 
Section I(g) of PTE 84-14, the Department has granted this exemption 
based, in significant part, upon the inclusion of Section I(j)(1) in 
the exemption, which protects Covered Plans by, among other things, 
requiring JPMC Affiliated QPAMs to make an express commitment to their 
customers to adhere to the requirements of ERISA and the Code, as 
applicable. As previously indicated, the Department has concluded that 
a culture of compliance, centered on adherence to basic standards of 
fair dealing as set forth in this exemption, gives the Department a 
compelling basis for making the required statutory findings that the 
exemption is in the interests of plan and IRA investors and protective 
of their rights. Absent such findings, the exemption would have been 
denied.
    In response to the Applicant's comments, however, the Department 
has required an express commitment to comply with the fiduciary 
standards and prohibited transaction rules only to the extent these 
provisions are ``applicable'' under ERISA and the Code. This section, 
as modified, should serve its salutary purposes of promoting a culture 
of compliance and enhancing the ability of plans and IRA customers to 
sever their relationships with minimal injury in the event of non-
compliance. This conclusion is reinforced, as well, by the limited 
nature of the relief granted by this exemption, which generally does 
not extend to transactions that involve self-dealing.
    In response to the Applicant's comments, the Department also notes 
that nothing in ERISA or the Code prevents the Department from 
conditioning relief on express contractual commitments to adhere to the 
requirements set out herein. The QPAMs remain free to disclaim reliance 
on the exemption and to avoid such express contractual commitments. To 
the extent, however, that they hold themselves out as fiduciary QPAMs, 
they should be prepared to make an express commitment to their 
customers to adhere to the requirements of this exemption. This 
commitment strengthens and reinforces the likelihood of compliance, and 
helps ensure that, in the event of noncompliance, customers--
particularly IRA customers--will be insulated from injuries caused by 
non-compliance. These protections also ensure that customers will be 
able to extricate themselves from transactions that become prohibited 
as a result of the QPAMs' misconduct, without fear of sustaining 
additional losses as a result of the QPAMs' actions. In this 
connection, however, the Department emphasizes that the only claims 
available to the QPAMs' customers pursuant to these contractual 
commitments are those separately provided by ERISA or other state and 
federal laws that are not preempted by ERISA. As before, private 
litigants have only those causes of action specifically authorized by 
laws that exist independent of this exemption.
Comment 27--Indemnity Provision--Section I(j)(2).
    Section I(j)(2) of the proposed five-year exemption provides that 
``[e]ffective as of the effective date of this five-year exemption, 
with respect to any arrangement, agreement, or contract between a JPMC 
Affiliated QPAM and an ERISA covered plan or IRA for which a JPMC 
Affiliated QPAM provides asset management or other discretionary 
fiduciary services, each JPMC Affiliated QPAM agrees and warrants: . . 
. (2) To indemnify and hold harmless the ERISA-covered plan or IRA for 
any damages resulting from a JPMC Affiliated QPAM's violation of 
applicable laws, a JPMC Affiliated QPAM's breach of contract, or any 
claim brought in connection with the failure of such JPMC Affiliated 
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.''
    The Applicant requests that this condition be deleted because it is 
punitive, beyond the Department's authority, and provides for damages 
that are excessive and/or not reasonably related to any conduct of the 
JPMC Affiliated QPAMs. In addition, the Applicant represents that the 
condition may operate in a manner that is fundamentally unfair because 
it is not limited to clients who are harmed through a direct, causal 
link to the loss of exemptive relief provided by PTE 84-14.
    Also with respect to section I(j)(2), the Applicant requests 
clarifying language stating that the JPMC Affiliated QPAM 
indemnification obligations under this exemption do not extend to 
damages resulting from, or caused by forces beyond the control of JPMC, 
including certain acts of government authorities and acts of God.
    In this regard, the Applicant requests a revision of section 
I(j)(2) such that each JPMC Affiliated QPAM must agree and warrant to 
indemnify and hold harmless the ERISA-covered plan or IRA, ``for any 
reasonable losses involving such arrangement, agreement or contract and 
resulting directly from a JPMC Affiliated QPAM's violation of ERISA, 
or, to the extent the JPMC Affiliated QPAM relies on the exemptive 
relief provided by PTE 84-14 under the arrangement, agreement or 
contract for any explicit transactional exit costs of any instrument 
with respect to which PTE 84-14 was expressly relied upon and for which 
no other exemption is available, resulting directly and solely from the 
failure of such JPMC Affiliated 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 as a result of the Conviction.''
    As explained above, the intended purpose of this exemption is to 
protect

[[Page 61829]]

ERISA-covered plans and IRAs who entrust the JPMC Affiliated QPAMs with 
the management of their retirement assets. To this end, the Department 
believes that the protective purpose of this exemption is furthered by 
Section I(j)(2). The Department emphasizes that this condition is not 
punitive, but rather ensures that, when an ERISA-covered plan or IRA 
enters into an asset management agreement with a JPMC Affiliated QPAM 
in reliance on the manager's qualification as a QPAM, it may expect 
adherence to basic fiduciary norms and standards of fair dealing, 
notwithstanding the prior conviction. The condition also ensures that 
the ERISA-covered plan or IRA will be able to disengage from that 
relationship in the event that the terms of this exemption are violated 
without undue injury. Accordingly, the Department has revised the 
applicability of this condition to more closely reflect this interest. 
In particular, the condition applies only to Covered Plans. As 
indicated above, if the asset manager would prefer not to be subject to 
these provisions as exemption conditions, it may expressly disclaim 
reliance on QPAM status or PTE 84-14 in entering into its contract with 
the ERISA-covered plan or IRA (in that case, however, it could not rely 
on the exemption for relief). The Department has made certain further 
changes to this condition upon consideration of the Applicant's 
comment. These changes include: renumbering the condition for clarity; 
replacing ``applicable laws'' with clarifying language that conforms to 
the one-year exemption; and replacing ``any damages'' with ``actual 
losses resulting directly from'' certain acts or omissions of the JPMC 
Affiliated QPAMs. Because I(j)(2) extends only to actual losses 
resulting directly from the actions of the JPMC Affiliated QPAMs, it 
does not encompass losses solely caused by other parties, events, or 
acts of God.
Comment 28--Limits on Liability--Section I(j)(3) and I(j)(7).\10\
---------------------------------------------------------------------------

    \10\ The Department has determined that subsection (4) is 
duplicative of the exemption's prohibition on exculpatory clauses, 
described below. Thus, the subsection has been deleted.
---------------------------------------------------------------------------

    Sections I(j)(3) and I(j)(7) of the proposed five-year exemption 
provide that ``[e]ffective as of the effective date of this five-year 
exemption, with respect to any arrangement, agreement, or contract 
between a JPMC Affiliated QPAM and an ERISA-covered plan or IRA for 
which a JPMC Affiliated QPAM provides asset management or other 
discretionary fiduciary services, each JPMC Affiliated QPAM agrees and 
warrants:
    . . . (3) Not to require (or otherwise cause) the ERISA-covered 
plan or IRA to waive, limit, or qualify the liability of the JPMC 
Affiliated QPAM for violating ERISA or the Code or engaging in 
prohibited transactions; [and] . . . (7) Not to include exculpatory 
provisions disclaiming or otherwise limiting liability of the JPMC 
Affiliated QPAM for a violation of such agreement's terms, except 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 JPMC, and its affiliates.''
    The Applicant requests that these conditions be deleted because 
they: duplicate the statutory requirements in ERISA and the Code, which 
ensure that the JPMC Affiliated QPAMs remain liable to their plan or 
IRA clients for the asset manager's violations of the law; do not 
afford plans and IRAs any greater protection; and amount to unnecessary 
overregulation. To the extent there is a violation of a contract, the 
Applicant represents that adequate causes of action exist to remedy the 
issue.
    Alternatively, the Applicant requests that, if the Department 
declines to amend Section I(j)(7) as requested, this Section be revised 
to clarify that losses caused by counterparties, trading venues, or 
acts of terrorism, war, etc., are carved out of the QPAM's liability.
    The Department declines to delete Section I(j)(3) from the final 
exemption. As the Applicant points out, ERISA already precludes ERISA 
fiduciaries from disclaiming obligations under ERISA. See ERISA section 
410 (prohibiting exculpatory clauses as void against public policy). To 
the extent the exemption condition prevents the JPMC Affiliated QPAMs 
from including contractual provisions that are void as against public 
policy there is no legitimate basis for objection. Such exculpatory 
language should not be in the governing documents in the first place 
and is potentially misleading because it suggests disclaimer of 
obligations that may not be disclaimed.
    Outside the context of ERISA section 410, the provision's 
requirement that the JPMC Affiliated QPAMs retain accountability for 
adherence to the basic obligations set forth in this exemption is 
justified by the misconduct that led to the Conviction as discussed 
above, and by the need to ensure that ERISA-covered plan and IRA 
customers may readily obtain redress and exit contracts with JPMC 
Affiliated QPAMs without harm in the event of violations.
    The Department has determined that Section I(j)(4), as proposed, is 
duplicative of the exemption's prohibition on exculpatory clauses, 
described below. Thus, that subsection has been deleted. Accordingly, 
the subsections in Section I(j) have been renumbered.
    The Department has modified Section I(j)(6) (formerly (j)(7)) to 
clarify that the prohibition on exculpatory provisions does not extend 
to losses that arise from an act or event not caused by JPMC. Nothing 
in this section alters the prohibition on exculpatory provisions set 
forth in ERISA Section 410.
Comment 29--Termination and Withdrawal Restriction
    Under Sections I(j)(5) and I(j)(6) of the proposed five-year 
exemption, the JPMC Affiliated QPAMs agree: ``. . . (5) Not to restrict 
the ability of such ERISA-covered plan or IRA to terminate or withdraw 
from its arrangement with the JPMC Affiliated QPAM (including 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 as a result of an actual lack of 
liquidity of the underlying assets, provided that such restrictions are 
applied consistently and in like manner to all such investors; [and] . 
. . (6) Not to impose any fees, penalties, or charges for such 
termination or withdrawal with the exception of reasonable fees, 
appropriately disclosed in advance, that are specifically designed to 
prevent generally recognized abusive investment practices or 
specifically designed to ensure equitable treatment of all investors in 
a pooled fund in the event such withdrawal or termination may have 
adverse consequences for all other investors, provided that such fees 
are applied consistently and in like manner to all such investors.''
    The Applicant represents that these conditions should be deleted 
because they are harmful to ERISA-covered plans and IRAs and their 
participants and beneficiaries, and are punitive to the Applicant. 
Withdrawal provisions, according to the Applicant, should be designed 
to protect all investors in a pooled fund or in a particular strategy. 
The Applicant states that the proposed restrictions here would disrupt 
the JPMC Affiliated QPAMs' existing relationships with and contractual 
obligations to their clients, notwithstanding the fact that plans and 
IRAs have determined that such

[[Page 61830]]

relationships are in their best interests. The Applicant represents 
that lockup provisions are commonly used, designed to protect all 
investors in a pooled fund, and applied evenly to all investors. If 
conditions relating to withdrawal are not permitted, the Applicant 
asserts that ERISA-covered plans and IRAs will not be able to invest in 
their desired alternatives or strategies.
    The Applicant requests that, should these conditions be retained, 
they be modified as follows: Under renumbered Sections I(j)(4) and 
(j)(5), the JPMC Affiliated QPAMs agree: ``. . . (4) Not to restrict 
the ability of such ERISA-covered plan or IRA to terminate or withdraw 
from its arrangement with the JPMC Affiliated 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; [and] . . . (5) Not to impose any 
fees, penalties, or charges for such termination or withdrawal with the 
exception of reasonable fees, appropriately disclosed in advance, that 
are specifically designed to prevent generally recognized abusive 
investment practices or specifically designed to ensure equitable 
treatment of all investors in a pooled fund in the event such 
withdrawal or termination may have adverse consequences for all other 
investors, provided that such fees are applied consistently and in like 
manner to all such investors.''
    The Department has revised renumbered Section I(j)(4) in partial 
satisfaction of the Applicant's request. This section now provides, 
''Not to restrict the ability of such Covered Plan to terminate or 
withdraw from its arrangement with the JPMC Affiliated QPAM with 
respect to any investment in a separately managed account or pooled 
fund subject to ERISA and managed by such QPAM, with the exception of 
reasonable restrictions, appropriately disclosed in advance, that are 
specifically designed to ensure equitable treatment of all investors in 
a pooled fund in the event such withdrawal or termination may have 
adverse consequences for all other investors. In connection with any 
such arrangements involving investments in pooled funds subject to 
ERISA entered into after the effective date of this exemption, the 
adverse consequences must relate to of a lack of liquidity of the 
underlying assets, valuation issues, or regulatory reasons that prevent 
the fund from promptly redeeming Covered Plan's investment, and such 
restrictions must be applicable to all such investors and effective no 
longer than reasonably necessary to avoid the adverse consequences.''
    Renumbered Section I(j)(5) is consistent with the Applicant's 
request.
Comment 30--Updated Investment Management Agreement
    Section I(j)(8) of the proposed five-year exemption provides that 
``[w]ithin four (4) months of the date of the Conviction, each JPMC 
Affiliated QPAM must provide a notice of its obligations under this 
Section I(j) to each ERISA-covered plan and IRA for which an JPMC 
Affiliated QPAM provides asset management or other discretionary 
fiduciary services. For all other prospective ERISA-covered plan and 
IRA clients for which a JPMC Affiliated QPAM provides asset management 
or other discretionary services, the JPMC Affiliated QPAM will agree in 
writing to its obligations under this Section I(j) in an updated 
investment management agreement between the JPMC Affiliated QPAM and 
such clients or other written contractual agreement.''
    The Applicant represents that this condition is duplicative and 
``potentially inconsistent'' with PTE 2016-15, and could cause the 
Applicant to lose the exemption through the actions of another. The 
Applicant requests that the Department publish a notice of technical 
correction to PTE 2016-15 to eliminate the notice to clients under that 
exemption so that only one notice with the final obligations will be 
provided to clients. The Applicant states that it should not be 
required to issue two sets of potentially inconsistent notices to 
clients. Instead, once the final exemption is published in the Federal 
Register, the Applicant suggests that the condition be modified to 
require that the notices, and the proposed and final exemptions, be 
sent to clients within six (6) months. The Applicant asserts that this 
request will alleviate client confusion. Alternatively, the Applicant 
requests that the Department modify renumbered Section I(j)(7) so that 
it will deem any notices and mailings under PTE 2016-15 to meet the 
requirements of the final exemption. In addition, the Applicant 
requests that the Department modify renumbered Section I(j)(7) to 
clarify that it is limited to agreements, arrangements, or contracts in 
which a JPMC Affiliated QPAM provides services in reliance on PTE 84-
14, and where the Applicant has a direct contractual relationship with 
the plan or IRA. Finally, the Applicant represents that a bilateral 
investment management agreement containing the obligations under 
Section I(j) should not be required. If the client refuses to sign an 
updated agreement, the Applicant states that the JPMC Affiliated QPAM 
unintentionally may be in violation of this condition even where it has 
met the substantive requirements of Section I(j). The Applicant 
represents that its compliance with the exemption should not depend on 
action by its clients. Therefore, the Applicant requests that this 
requirement be eliminated, and that renumbered Section I(j)(7) be 
revised as follows to reflect the Applicant's aforementioned changes: 
``Within six (6) months of the date of this exemption's publication in 
the Federal Register, each JPMC Affiliated QPAM will provide a notice 
of its obligations under this Section I(j) to each ERISA-covered plan 
and IRA for which a JPMC Affiliated QPAM provides asset management or 
other discretionary fiduciary services in a direct contractual 
relationship and in reliance on PTE 84-14 as of the date of the notice. 
The Applicant shall be deemed to have met this condition if, with 
respect to any plan or IRA client, the Applicant met the requirements 
of PTE 2016-15. For all other ERISA-covered plan and IRA clients (i.e., 
those plans and IRAs that become direct contractual clients after the 
time the notice described in PTE 2016-15 is provided to existing 
clients) for which a JPMC Affiliated QPAM provides asset management or 
other discretionary services in reliance on PTE 84-14, the JPMC 
Affiliated QPAM will provide a notice of its obligations under this 
Section I(j) to such clients within six (6) months after the date of 
publication of this exemption.'' \11\
---------------------------------------------------------------------------

    \11\ In a letter to the Department dated March 7, 2017, the 
Applicant expresses similar concerns about the perceived 
inconsistencies, duplicative nature, and administrative challenges 
created by the client notification requirement in Section I(i) of 
PTE 2016-15 as well as in the proposed exemption. In the letter, the 
Applicant recommends that the notice be provided to clients only 
after the final exemption has been granted. This is consistent with 
the Applicant's proposed revisions to renumbered Section I(j)(7).
---------------------------------------------------------------------------

    The Department declines to make a change to PTE 2016-15, since, 
among other things, the change the Applicant seeks is not a technical 
correction, but rather would require amending that exemption. 
Accordingly, the Applicant must fully comply with the terms of PTE 
2016-15, including Section I(j). However, the Department has modified 
renumbered Section I(j)(7) for better coordination with PTE 2016-15. As 
modified, the exemption's text now

[[Page 61831]]

provides that a notice that satisfies Section I(i)(2) of that exemption 
will satisfy renumbered Section I(j)(7) of this exemption, unless the 
notice contains any language that limits, or is inconsistent with, the 
scope of this exemption.
    As noted above, the Department has an interest in protecting an 
ERISA-covered plan or IRA that enters into an asset management 
agreement with a JPMC Affiliated QPAM in reliance on the manager's 
qualification as a QPAM, regardless of whether the QPAM relies on the 
class exemption when managing the ERISA-covered plan's or IRA's assets. 
The Department has revised the applicability of this condition to more 
closely reflect this interest, and the condition now applies to Covered 
Plans. The Department has also modified the condition so that a JPMC 
Affiliated QPAM will not violate the condition solely because a Covered 
Plan refuses to sign an updated investment management agreement. In 
addition, the JPMC Affiliated QPAM must give notice of its obligations 
under Section I(j) to each Covered Plan by July 9, 2018, consistent 
with the applicant's request for additional time to provide the notice.
Comment 31--Notice to Plan Clients--Section I(k)(1) \12\
---------------------------------------------------------------------------

    \12\ The Department has renumbered this condition as section 
I(k) in this exemption.
---------------------------------------------------------------------------

    Section I(k)(1) of the proposed five-year exemption provides that 
``[w]ithin thirty (30) days of the publication of this proposed five-
year exemption in the Federal Register, each JPMC Affiliated QPAM will 
provide a notice of the proposed five-year exemption, along with a 
separate summary describing the facts that led to the Conviction (the 
Summary), which have 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 
of an ERISA-covered plan and each beneficial owner of an IRA for which 
a JPMC Affiliated QPAM provides asset management or other discretionary 
services, or the sponsor of an investment fund in any case where a JPMC 
Affiliated QPAM acts only as a sub-advisor to the investment fund in 
which such ERISA-covered plan and IRA invests. In the event that this 
proposed five-year exemption is granted, the Federal Register copy of 
the notice of final five-year exemption must be delivered to such 
clients within sixty (60) days of its publication in the Federal 
Register, and may be delivered electronically (including by an email 
that has a link to the exemption). Any prospective clients for which a 
JPMC Affiliated QPAM provides asset management or other discretionary 
services must receive the proposed and final five-year exemptions with 
the Summary and the Statement prior to, or contemporaneously with, the 
client's receipt of a written asset management agreement from the JPMC 
Affiliated QPAM.''
    The Applicant requests that (k)(1) be changed to require each 
existing and prospective client with respect to which the Applicant has 
a direct contractual relationship and relies on the QPAM exemption, to 
be provided with a link to the proposed and final exemption within six 
(6) months after publication; and prospective clients after six (6) 
months should receive the proposed and final exemptions through any 
reasonable delivery method (such as a written notice of the applicable 
website where the exemptions can be found). The Applicant asserts that 
the provision, as proposed, is overbroad and punitive and not 
rationally related to the use of the QPAM Exemption. The Applicant also 
states that, for prospective clients, it is duplicative to provide the 
Summary and the copies of the proposal and final grant, which both 
state the same facts and will be burdensome to prospective clients due 
to the size of the asset management agreement.
    The Department notes that the proposed exemption provides details 
of the facts and circumstances underlying the Conviction not found in 
the Summary or this exemption. One of the purposes of such a complete 
disclosure is to ensure that all interested parties are aware of and 
attentive to the complete facts and circumstances surrounding JPMC's 
application for exemption. Requiring the disclosure of the Summary, 
proposal, and grant provides the opportunity for all parties to have 
knowledge of these facts and circumstance. Notwithstanding this, the 
Department has modified the condition to clarify that disclosures may 
be provided electronically. Further, the notice requirement has been 
narrowed to ERISA-covered plans and IRAs that would benefit from this 
knowledge (i.e., Covered Plans).
Comment 32--Notice to Non-Plan Clients--Section I(k)(2)
    Section I(k)(2) of the proposed five-year exemption provides, 
``[e]ach JPMC Affiliated QPAM will provide a Federal Register copy of 
the proposed five-year exemption, a Federal Register copy of the final 
five-year exemption; the Summary; and the Statement to each: (A) 
Current Non-Plan Client within four (4) months of the effective date, 
if any, of a final five-year exemption; and (B) Future Non-Plan Client 
prior to, or contemporaneously with, the client's receipt of a written 
asset management agreement from the JPMC Affiliated QPAM. For purposes 
of this subparagraph (2), a Current Non-Plan Client means a client of a 
JPMC Affiliated QPAM that: is neither an ERISA-covered plan nor an IRA; 
has assets managed by the JPMC Affiliated QPAM as of the effective 
date, if any, of a final five-year exemption; and has received a 
written representation (qualified or otherwise) from the JPMC 
Affiliated QPAM that such JPMC Affiliated QPAM qualifies as a QPAM or 
qualifies for the relief provided by PTE 84-14 . . . .''
    The Applicant requests that Section (I)(k)(2) be deleted in its 
entirety because, in its opinion, the provision is punitive and beyond 
the Department's authority. The Applicant requests that any notice 
requirement be limited to ERISA-covered plans and IRAs that have a 
direct contractual relationship with a JPMC Affiliated QPAM and 
actually rely on PTE 84-14.
    Given the breadth of the notice requirements otherwise mandated by 
the exemption, and its decision to restrict the requirements to those 
arrangements for which QPAM status plays an integral role (i.e., the 
QPAM represents or relies upon its QPAM status), the Department has 
determined to delete this provision.
Comment 33--Compliance Officer--Section I(m)
    Section I(m) of the proposed five-year exemption provides, in part, 
``JPMC designates a senior compliance officer (the Compliance Officer) 
who will be responsible for compliance with the Policies and Training 
requirements describe herein. The Compliance Officer must conduct an 
annual review (the Annual Review) to determine the adequacy and 
effectiveness of the implementation of the Policies and Training . . . 
.''
    The Applicant requests that the conditions relating to the 
Compliance Officer be deleted because they are punitive, inconsistent 
with precedent, and inconsistent with the APA. The Applicant states 
that the criminal conduct that necessitated the exemption did not 
involve in any way JPMC's asset management business, and that the QPAMs 
already have very robust compliance departments. The Applicant states 
that it is duplicative to have another layer of compliance and the 
condition substitutes the Department's

[[Page 61832]]

judgment for that of the Applicant and its many other regulators. 
Furthermore, the Applicant states that the criminal conduct was the 
result of one single former FX trader, and that the inclusion of this 
condition is without any precedent, and is arbitrary and capricious. 
Finally, the Applicant states that every compliance officer is not a 
lawyer, and that the condition's time frames are inconsistent, and not 
practicable.
    The Department is removing the requirement that the Compliance 
Officer be a legal professional (i.e., a lawyer), but declines to make 
the Applicant's other requested changes. JPMC personnel engaged in 
serious misconduct that was not limited to one trader and that was 
caused, at least in part, by serious failures of compliance and 
oversight. The misconduct relevant to the development of this exemption 
spanned multiple years and involved repeated failures by JPMC 
personnel, in supervisory and oversight positions. The Department's 
determination to grant this exemption is based in part on the 
Department's view that an internal compliance officer with 
responsibility for the policies and procedures mandated by this 
exemption will provide the level of oversight necessary to ensure that 
such Policies and Training are properly implemented.
Comment 34--Deferred Prosecution Agreement/Non-Prosecution Agreement--
Section I(o)
    Section I(o) of the proposed five-year exemption provides, with 
respect to any Deferred Prosecution Agreement or Non-Prosecution 
Agreement: ``During the effective period of the five-year exemption 
JPMC: (1) Immediately discloses to the Department any Deferred 
Prosecution Agreement (a DPA) or a Non-Prosecution Agreement (an NPA) 
with the U.S. Department of Justice, entered into by JPMC or any of its 
affiliates in connection with conduct described in Section I(g) of PTE 
84-14 or section 411 of ERISA; and (2) Immediately provides the 
Department any information requested by the Department, as permitted by 
law, regarding the agreement and/or conduct and allegations that led to 
the agreement. After review of the information, the Department may 
require JPMC, its affiliates, or related parties, as specified by the 
Department, to submit a new application for the continued availability 
of relief as a condition of continuing to rely on this exemption. If 
the Department denies the relief requested in the new application, or 
does not grant such relief within twelve months of application, the 
relief described herein is revoked as of the date of denial or as of 
the expiration of the twelve month period, whichever date is earlier.''
    The Applicant requests that this condition be deleted because it is 
punitive, and is inconsistent with the APA, statutory authority, and 
the Department's own regulatory authority. The Applicant states that 
the condition contravenes the DOL's exemption procedure regulation at 
29 CFR part 2570, which requires that the Department propose a notice 
of termination of an exemption for public comment. The Applicant also 
states that the provision could create risk and uncertainty, including 
uncertainty for counterparties, with respect to the very transactions 
that this exemption is designed to prevent from suddenly expiring. 
According to the Applicant, the condition itself could have the effect 
of causing plans to terminate such transactions at significant cost. 
The Applicant also suggests that parties could enter into an NPA or a 
DPA for investigations where a bank is not convicted, and in some 
cases, not even charged with, a felony. The Applicant states further 
that the timing and factual basis of the NPA/DPA could be distant in 
time or place from the current plan management operations that should 
be the Department's concern. Finally, the Applicant states that the 
provision is inconsistent with the anti-criminal provisions of Section 
I(g) of PTE 84-14 or section 411 of ERISA, which both require actual 
convictions, whereas an NPA/DPA is related to a decision by the DOJ not 
to prosecute.
    The Department in no way intended that this condition be read as 
providing for an automatic revocation of this exemption, and in light 
of the Applicant's comments, has revised the condition accordingly. As 
revised, the condition simply requires that the Applicant notify the 
Department if and when it or any of its affiliates enter into a DPA or 
NPA with the U.S. Department of Justice for conduct described in 
section I(g) of PTE 84-14 or ERISA Section 411 and immediately provide 
the Department with any information requested by the Department, as 
permitted by law, regarding the agreement and/or conduct and 
allegations that led to the agreement. The Department retains the right 
to propose a withdrawal of the exemption pursuant to its procedures 
contained at 29 CFR 2570.50, should the circumstances warrant such 
action.
Comment 35--Right to Copies of Policies and Procedures--Section I(p)
    Section I(p) of the proposed five-year exemption provides that, 
``[e]ach JPMC Affiliated QPAM, in its agreements with ERISA-covered 
plan and IRA clients, or in other written disclosures provided to 
ERISA-covered plan and IRA clients, within 60 days prior to the initial 
transaction upon which relief hereunder is relied, and then at least 
once annually, will clearly and prominently: Inform the ERISA-covered 
plan and IRA client that the client has the right to obtain copies of 
the QPAM's written Policies adopted in accordance with the exemption.''
    The Applicant requests that this condition be deleted because it is 
impracticable, duplicative, and punitive, and not reasonably designed 
to be protective of plans and their participants. The Applicant states 
that it has over 300 policies and procedures that touch on ERISA and 
the Code and it is not reasonable to require the disclosure and 
provision of all the policies. Furthermore, the Applicant states that 
it cannot provide notice sixty (60) days prior to the time that the 
exemption is used because that date will precede the final exemption. 
Finally, the Applicant states that the number of notices required to be 
provided to clients is overly burdensome and excessive, and will lead 
to confusion and clients ignoring the mailings.
    The Department disagrees, in part, with the Applicant's comment. 
Affording ERISA covered-plan and IRA clients a means by which to review 
and understand the Policies implemented in connection with this 
exemption is a vital protection that is fundamental to this exemption's 
purpose. However, the Department has modified the condition so that the 
QPAMs, at their election, may instead provide Covered Plans disclosure 
that accurately describes or summarizes key components of the Policies, 
rather than provide the Policies in their entirety. The Department has 
also determined that such disclosure may be continuously maintained on 
a website, provided that the website link to the summary of the written 
Policies is clearly and prominently disclosed to those Covered Plan 
clients to whom this section applies. The Department also agrees with 
the Applicant that the timing requirement for disclosure should be 
revised and, accordingly, has modified the condition of Section I(p) to 
require notice regarding the information on the website within six 
months of the initial effective date of this exemption, and thereafter 
to the extent certain

[[Page 61833]]

material changes are made to the Policies.
Comment 36--No-Fault Provision--Section I(q)
    Section I(q) of the proposed five-year exemption provides that, 
``[a] JPMC Affiliated QPAM or a JPMC Related QPAM will not fail to meet 
the terms of this exemption solely because a different JPMC Affiliated 
QPAM or JPMC Related QPAM fails to satisfy a condition for relief 
described in Sections I(c), (d), (h), (i), (j), (k), (l), (n) and 
(p).''
    The Applicant requests that the relief provided under Section I(q) 
be extended to cover Sections I(e), (f), (g), and (m). The Applicant 
states that the failure of one JPMC Affiliated QPAM to meet these 
conditions should not disqualify all other JPMC Affiliated QPAMs from 
reliance on this exemption. The Applicant also states that the 
auditor's failure to fulfill its requirements under this exemption 
should not disqualify the JPMC Affiliated QPAMs from relying on the 
exemption.
    The Department declines to extend the relief provided under Section 
I(q) to Sections I(e), (f), (g), and (m).
    Section I(e) provides that any failure of a JPMC Affiliated QPAM or 
JPMC Related QPAM to comply with Section I(g) of PTE 84-14 arose solely 
from the Conviction. As set forth in the Applicant's materials, the 
Conviction is the sole reason a new exemption is necessary for the JPMC 
Affiliated QPAMs. If there were a new or additional conviction of a 
crime described in Section I(g) of PTE 84-14, the Department would need 
to assess the misconduct, its scope, and its significance. Without such 
an assessment, the Department could not be confident of the adequacy of 
the conditions set forth herein with respect to the JPMC Affiliated 
QPAMs and Related QPAMs. Indeed, depending on the particular facts, a 
subsequent criminal conviction could be strong evidence of the 
inadequacy of this exemption's conditions to protect Covered Plans. 
Further, as stated above, the Department is not obligated to grant 
further relief to the extent such a conviction occurs.
    Section I(f) provides that no JPMC Affiliated QPAM or JPMC Related 
QPAM exercised authority over the assets of any ERISA-covered plan or 
IRA in a manner that it knew or should have known would: further the 
criminal conduct that is the subject of the Conviction; or cause the 
JPMC QPAM or its affiliates or related parties to directly or 
indirectly profit from the criminal conduct that is the subject of the 
Conviction. The Applicant has, in its application and in its response 
to questions raised by the Department, provided statements under 
penalty of perjury, that they are in compliance with this condition, 
and the Department relied upon those statements in granting this 
relief. Based on these statements, the Department determines that there 
is no reason to include relief from Section I(f) in Section I(q).
    Section I(g) requires two specific entities, JPMC and the 
Investment Bank of JPMorgan Chase Bank, refrain from providing 
investment management services to plans. Section I(m) requires JPMC to 
install a Compliance Officer to undertake various compliance and 
reporting obligations. Thus, with respect to Sections I(g) and (m), the 
obligations imposed extend exclusively to JPMC and the Investment Bank 
of JPMorgan Chase Bank. Consequently, if the relief under I(q) were 
extended to Sections I(g) and I(m), it would render them virtually 
meaningless. There would be little or no effective penalty for the 
failure to comply with the conditions, as the Affiliated and Related 
QPAMs would remain free to rely on the exemption's terms. The 
Department also believes that the potential for disqualification of all 
JPMC Affiliated QPAMs under this agreement will serve as additional 
incentive for JPMC and JPMorgan Chase Bank to comply in good-faith with 
the provisions of Sections I(g) and (m).
    Finally, except as noted in Comment 23 above, the Department 
accepts the Applicant's comment that failure of the auditor to comply 
with any of the conditions of the exemption, should not be treated as a 
failure by the JPMC Affiliated QPAMs to comply with the conditions of 
the exemption provided that such failure was not due to the actions or 
inactions of JPMC or its affiliates, and Section I(q) is amended, 
accordingly.
Comment 37--Definition of Affiliated QPAM--Section II(a)
    Section II(a) of the proposed five-year exemption provides: ``(a) 
The term ``JPMC Affiliated QPAM'' means a ``qualified professional 
asset manager''(as defined in Section VI(a) of PTE 84-14) that relies 
on the relief provided by PTE 84-14 and with respect to which JPMC is a 
current or future ``affiliate'' (as defined in Section VI(d)(1) of PTE 
84-14). The term ``JPMC Affiliated QPAM'' excludes the parent entity, 
JPMC, the division implicated in the criminal conduct that is the 
subject of the Conviction.''
    The Applicant states that the last sentence of proposed Section 
II(a) contains an unintended error, as JPMC is not a division but is 
the parent company in the affiliated group.
    The Department agrees with this comment and has modified the 
Section accordingly. The Department has reordered Section II, as 
described below.
Comment 38--Definition of Conviction--Section II(e)
    Section II(e) of the proposed five-year exemption provides: ``The 
term `Conviction' means the judgment of conviction against JPMC for 
violation of the Sherman Antitrust Act, 15 U.S.C. 1, which is scheduled 
to be entered in the District Court for the District of Connecticut 
(the District Court) (Case Number 3:15-cr-79-SRU), in connection with 
JPMC, through one of its euro/U.S. dollar (EUR/USD) traders, entering 
into and engaging in a combination and conspiracy to fix, stabilize, 
maintain, increase or decrease the price of, and rig bids and offers 
for, the EUR/USD currency pair exchanged in the FX spot market by 
agreeing to eliminate competition in the purchase and sale of the EUR/
USD currency pair in the United States and elsewhere. For all purposes 
under this exemption, `conduct' of any person or entity that is the 
`subject of [a] Conviction' encompasses any conduct of JPMC and/or 
their personnel, that is described in the Plea Agreement, (including 
the Factual Statement), and other official regulatory or judicial 
factual findings that are a part of this record.''
    The Applicant states that this definition inaccurately paraphrases 
the Plea Agreement and significantly expands the conduct to which JPMC 
was charged and pleaded guilty. The Applicant states that it is neither 
appropriate nor accurate for the Department to expand the definition 
beyond the charge that was the subject of the Plea Agreement.
    After considering this comment, the Department has revised the 
definition accordingly.
Comment 39--Notice to Interested Persons
    The Applicant requests that the Department confirm, and the 
Department so confirms, that the Applicant had 30 days after Federal 
Register publication of the proposal to notify interested persons.
Comment 40--Summary of Facts and Representations
    The Applicant seeks certain clarifications to the Summary of Facts 
and Representations that the Department does not view as relevant to 
its determination whether to grant this exemption. Those requested

[[Page 61834]]

clarifications may be found as part of the public record for 
Application No. D-11906, in a letter to the Department, dated January 
20, 2017.
Comment of John Williams (December 7, 2016)
    Mr. Williams comments that it is unclear ``how an entity which has 
been convicted of wrong-doing should be granted a 5-year exemption from 
regulations that it has already violated.''
    The Applicant responds that Mr. Williams' statement is based on an 
erroneous view that the Applicant has entered into a guilty plea with 
the Department. With regard to the notice to interested persons, the 
Applicant states that Mr. Williams' comment misconstrues, and 
improperly conflates, the criminal proceedings and the purpose of the 
proposed exemption. The Applicant states that it is not seeking, and 
the proposed exemption does not grant, relief from regulations that 
have already been violated. The Applicant further states that, although 
the JPMC Affiliated QPAMs did not participate in or know of the 
misconduct, the conviction of the non-asset manager affiliate would 
nevertheless disqualify the uninvolved asset managers from relying on 
the QPAM exemption. The Department reiterates that it determined that 
this exemption is protective of, and in the interest of, Covered Plans 
given the enhanced compliance and oversight requirements it imposes on 
JPMC Affiliated QPAMs.
Comment of Lauri Robinson (December 12, 2016)
    Ms. Robinson states that it ``is very difficult for laypersons to 
understand how I can be adversely affected by this,'' and requests that 
the Department ``make it easier to understand or elaborate on how it 
effects [sic] current IRAs.'' Ms. Robinson believes that the Applicant 
``should have informed customers of the violation and 550 million 
dollar fine.''
    In response, the Applicant states that, among other things, the 
conviction was a matter of public record as of the date on which the 
plea agreement was entered, and that Ms. Robinson was notified, as an 
interested person, in accordance with the terms of the proposed 
exemption.
    The Department notes that each JPMC Affiliated QPAM must provide a 
notice of the exemption, along with a separate summary describing the 
facts that led to the Conviction, and a prominently displayed statement 
that the Conviction results in a failure to meet a condition in PTE 84-
14, to each sponsor or beneficial owner of a Covered Plan, or the 
sponsor of an investment fund in any case where a JPMC Affiliated QPAM 
acts only as a sub-advisor to the investment fund in which such ERISA-
covered plan and IRA invests.
Comment of Mark Levy (December 20, 2016)
    Mr. Levy, who states that he owns a Chase investment account, urges 
the Department not to ``grant[ the Applicant] a `pass' for their wrong 
doing [sic],'' because ``[n]o institution should be considered `too 
big' to pay its share of imposed fines/penalties.''
    In response, the Applicant states that, among other things, JPMC is 
liable for approximately $1.9 billion in monetary penalties imposed by 
the Department of Justice and other regulators; and that the asset 
management businesses of the JPMC affiliated QPAMs had no involvement 
in, or knowledge of, the misconduct. The Department reiterates that 
this exemption is not punitive and is instead designed to protect 
Covered Plans.
Comment of Dan Cable (December 22, 2016)
    Mr. Cable objects to the exemption in general by stating he does 
not believe that: (i) The Applicant is taking its criminal behavior 
seriously, (ii) the QPAM exemption is not customarily and routinely 
used, and (iii) the Applicant has not adequately demonstrated harm to 
clients if the exemption is not granted.
    In response, the Applicant states that, among other things, the 
Department of Justice, the District Court, and other applicable 
regulators already have imposed upon the Applicant certain monetary 
penalties and other sanctions intended to punish the Applicant and 
deter future wrongdoing. The Applicant states that it has taken 
responsibility for the conduct that was the basis of the plea 
agreement, that the JPMC Affiliated QPAMs had no involvement in the 
conduct, and that such conduct violated neither ERISA nor the 
Department's regulations. As such, the Applicant states that Department 
should not use the exemption process to further punish these uninvolved 
asset managers, and that to do so would only harm the plan and IRA 
clients of the uninvolved JPMC Affiliated QPAMs.
    The commenter also expresses concern that the training and audit 
requirements of the proposed exemption are inadequate. In response, the 
Applicant disagrees and states that these proposed requirements are 
imposed on entities that had no involvement in the criminal conduct and 
that these requirements add to pre-existing robust and comprehensive 
training, audit, and compliance functions -- both firm-wide and 
specific to the asset management businesses.
    The commenter also expresses concern that the JPMC Affiliated QPAMs 
benefited from the criminal conduct that is the subject of the 
Conviction. In response, the Applicant notes that the proposed 
exemption contains the following condition: ``(b) Other than a single 
individual who worked for a non-fiduciary business within JPMorgan 
Chase Bank and who had no responsibility for, and exercised no 
authority in connection with, the management of plan assets, the JPMC 
Affiliated QPAMs and the JPMC Related QPAMs (including their officers, 
directors, agents other than JPMC, and employees of such JPMC QPAMs) 
did not receive direct compensation, or knowingly receive indirect 
compensation in connection with the criminal conduct that is the 
subject of the Conviction.'' The Applicant states that it is able to 
and will comply with this condition.
    The commenter expresses skepticism that the JPMC Affiliated QPAMs 
will not ``hire any of the crooks.'' In response, the Applicant states 
that the proposed exemption contains the following condition: ``The 
JPMC Affiliated QPAMs will not employ or knowingly engage any of the 
individuals that participated in the criminal conduct that is the 
subject of the Conviction.'' The Applicant states that it is able to 
and will comply with this condition.
    The commenter states that the QPAM exemption is not routinely 
relied upon by the Applicant. According to the Applicant, practically 
all retirement plans expect their asset managers to use the QPAM 
exemption, and many counterparties expect representations from the 
Applicant that it applies.
    Finally, the commenter states that it is unclear how a client of 
the JPMC Affiliated QPAMs would be harmed in the event that the 
Department does not grant the requested exemption. In response, the 
Applicant states that the loss of QPAM status for the JPMC Affiliated 
QPAMs would have a very substantial impact, affecting a significant 
number of ERISA plans and IRAs. The Applicant notes that, as of the 
time its application was filed, the Applicant managed approximately 
$65.5 billion in assets for ERISA plans, and over $12 billion in IRA 
assets for over 32,000 IRAs.
Comment of Sharon Bushman (December 26, 2016)
    The commenter, who states she is the holder of an IRA managed by 
the

[[Page 61835]]

Applicant, states that she does not understand the notice to interested 
persons, and requests that no action be taken on the exemption until a 
full explanation is provided regarding the implications for individual 
clients. In response, the Applicant states that the Department fully 
explained the purpose and effect of the exemption in the preamble to 
the Federal Register notice.
    As noted above, each JPMC Affiliated QPAM must provide a notice of 
the exemption, along with a separate summary describing the facts that 
led to the Conviction, and a prominently displayed statement that the 
Conviction results in a failure to meet a condition in PTE 84-14, to 
each sponsor or beneficial owner of a Covered Plan, or the sponsor of 
an investment fund in any case where a JPMC Affiliated QPAM acts only 
as a sub-advisor to the investment fund in which such ERISA-covered 
plan and IRA invests.
Comment of Cynthia Beaver (January 18, 2017)
    The commenter states that she does not understand the notice to 
interested persons and requests clarification regarding whether she 
will be required to move her account if the exemption is not granted. 
If the exemption is granted, the commenter asks whether there will be 
adequate ``outside oversight'' to ensure that her account is safe.
    In response, the Applicant expresses the view that the proposed 
exemption's conditions (taking into account the Applicant's comments 
with respect to the proposal) are sufficient and are designed to 
protect clients such as the commenter from the any adverse effects of 
the JPMC Affiliated QPAMs losing the QPAM exemption.
    The Department notes that the exemption requires an extensive audit 
every two years by a qualified auditor who is independent of JPMC.
Comment--Letter From House Committee on Financial Services
    The Department also received a comment letter from certain members 
of Congress (the Members) regarding this exemption, as well as 
regarding other QPAM-related proposed one year exemptions. In the 
letter, the Members stated that certain conditions contained in these 
proposed exemptions are crucial to protecting the investments of our 
nation's workers and retirees, referring to proposed conditions which 
require each bank to: (a) Indemnify and hold harmless ERISA-covered 
plans and IRAs for any damages resulting from the future misconduct of 
such bank; and (b) disclose to the Department any Deferred Prosecution 
Agreement or a Non-Prosecution Agreement with the U.S. Department of 
Justice. The Members also requested that the Department hold hearings 
in connection with the proposed exemptions.
    The Department acknowledges the Members' concerns regarding the 
need for public discourse regarding proposed exemptions. To this end, 
the Department's procedures regarding prohibited transaction exemption 
requests under ERISA (the Exemption Procedures) afford interested 
persons the opportunity to request a hearing. Specifically, section 
2570.46(a) of the Exemption Procedures provides that, ``[a]ny 
interested person who may be adversely affected by an exemption which 
the Department proposes to grant from the restrictions of section 
406(b) of ERISA, section 4975(c)(1)(E) or (F) of the Code, or section 
8477(c)(2) of FERSA may request a hearing before the Department within 
the period of time specified in the Federal Register notice of the 
proposed exemption.'' The Exemption Procedures provide that ``[t]he 
Department will grant a request for a hearing made in accordance with 
paragraph (a) of this section where a hearing is necessary to fully 
explore material factual issues identified by the person requesting the 
hearing.'' The Exemption Procedures also provide that ``[t]he 
Department may decline to hold a hearing where: (1) The request for the 
hearing does not meet the requirements of paragraph (a) of this 
section; (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.'' \13\
---------------------------------------------------------------------------

    \13\ 29 CFR part 2570, published at 76 FR 66653 (October 27, 
2011).
---------------------------------------------------------------------------

    While the Members' letter raises important policy issues, it does 
not appear to raise specific material factual issues. The Department 
previously explored a wide range of legal and policy issues regarding 
Section I(g) of the QPAM Exemption during a public hearing held on 
January 15, 2015 in connection with the Department's proposed exemption 
involving Credit Suisse AG, and has determined that an additional 
hearing on these issues is not necessary.
    After giving full consideration to the record, the Department has 
decided to grant the exemption, as described above. The complete 
application file (Application No. D-11906) is available for public 
inspection in the Public Disclosure Room of the Employee Benefits 
Security Administration, Room N-1515, U.S. Department of Labor, 200 
Constitution Avenue NW, Washington, DC 20210.
    For a more complete statement of the facts and representations 
supporting the Department's decision to grant this exemption, refer to 
the notice of proposed exemption published on November 21, 2016 at 81 
FR 83372.

Exemption

Section I: Covered Transactions
    Certain entities with specified relationships to JPMC (hereinafter, 
the JPMC Affiliated QPAMs and the JPMC Related QPAMs, as defined in 
Sections II(g) and II(h), respectively) will not be precluded from 
relying on the exemptive relief provided by Prohibited Transaction 
Class Exemption 84-14 (PTE 84-14 or the QPAM Exemption), 
notwithstanding the Conviction, as defined in Section II(a), during the 
Exemption Period,\14\ provided that the following conditions are 
satisfied:
---------------------------------------------------------------------------

    \14\ Section I(g) of PTE 84-14 generally provides relief only if 
``[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 violation of the Sherman 
Antitrust Act, Title 15 United States Code, Section 1.
---------------------------------------------------------------------------

    (a) Other than a single individual who worked for a non-fiduciary 
business within JPMorgan Chase Bank and who had no responsibility for, 
and exercised no authority in connection with, the management of plan 
assets, the JPMC Affiliated QPAMs and the JPMC Related QPAMs (including 
their officers, directors, agents other than JPMC, and employees of 
such QPAMs who had responsibility for, or exercised authority in 
connection with the management of plan assets) did not know of, did not 
have reason to know of, or participate in the criminal conduct that is 
the subject of the Conviction. For purposes of this paragraph (a), 
``participate in'' means the knowing approval of the misconduct 
underlying the Conviction;
    (b) Apart from a non-fiduciary line of business within JPMorgan 
Chase Bank, the JPMC Affiliated QPAMs and the JPMC Related QPAMs 
(including their officers, directors, and agents other than JPMC, and 
employees of such JPMC 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 JPMC Affiliated QPAMs will not employ or knowingly engage 
any of

[[Page 61836]]

the individuals that participated in the criminal conduct that is the 
subject of the Conviction. For the purposes of this paragraph (c), 
``participated in'' means the knowing approval of the misconduct 
underlying the Conviction;
    (d) At all times during the Exemption Period, no JPMC Affiliated 
QPAM will use its authority or influence to direct an ``investment 
fund'' (as defined in Section VI(b) of PTE 84-14), that is subject to 
ERISA or the Code and managed by such JPMC Affiliated QPAM with respect 
to one or more Covered Plans, to enter into any transaction with JPMC, 
or to engage JPMC 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 a JPMC Affiliated QPAM or a JPMC Related QPAM to 
satisfy Section I(g) of PTE 84-14 arose solely from the Conviction;
    (f) A JPMC Affiliated QPAM or a JPMC Related QPAM did not exercise 
authority over the assets of any plan subject to Part 4 of Title I of 
ERISA (an ERISA-covered plan) or section 4975 of the Code (an IRA) in a 
manner that it knew or should have known would: further the criminal 
conduct that is the subject of the Conviction; or cause the JPMC 
Affiliated QPAM, the JPMC Related QPAM, or their affiliates to directly 
or indirectly profit from the criminal conduct that is the subject of 
the Conviction;
    (g) Other than with respect to employee benefit plans maintained or 
sponsored for its own employees or the employees of an affiliate, JPMC 
will not act as a fiduciary within the meaning of section 3(21)(A)(i) 
or (iii) of ERISA, or section 4975(e)(3)(A) and (C) of the Code, with 
respect to ERISA-covered plan and IRA assets; provided, however, that 
JPMC will not be treated as violating the conditions of this exemption 
solely because it acted as an investment advice fiduciary within the 
meaning of section 3(21)(A)(ii) or section 4975(e)(3)(B) of the Code;
    (h)(1) By July 9, 2018, each JPMC Affiliated QPAM must develop, 
implement, maintain, and follow written policies and procedures (the 
Policies). The Policies must require, and must be reasonably designed 
to ensure that:
    (i) The asset management decisions of the JPMC Affiliated QPAM are 
conducted independently of the corporate management and business 
activities of JPMC;
    (ii) The JPMC Affiliated 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 violation of these duties and provisions with 
respect to Covered Plans;
    (iii) The JPMC Affiliated 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 JPMC Affiliated QPAM to 
regulators, including, but not limited to, the Department, the 
Department of the Treasury, the Department of Justice, and the Pension 
Benefit Guaranty Corporation, on behalf of or in relation to Covered 
Plans are materially accurate and complete, to the best of such QPAM's 
knowledge at that time;
    (v) To the best of the JPMC Affiliated QPAM's knowledge at the 
time, the JPMC Affiliated QPAM does not make material 
misrepresentations or omit material information in its communications 
with such regulators with respect to Covered Plans;
    (vi) The JPMC Affiliated QPAM complies with the terms of this 
exemption; and
    (vii) Any violation of, or failure to comply with an item in 
subparagraphs (ii) through (vi), is corrected as soon as reasonably 
possible upon discovery, or as soon after the QPAM reasonably should 
have known of the noncompliance (whichever is earlier), and any such 
violation or compliance failure not so corrected is reported, upon the 
discovery of such failure to so correct, in writing, to the head of 
compliance and the General Counsel (or their functional equivalent) of 
the relevant line of business that engaged in the violation or failure, 
and the independent auditor responsible for reviewing compliance with 
the Policies. A JPMC Affiliated QPAM will not be treated as having 
failed to develop, implement, maintain, or follow the Policies, 
provided that it corrects any instance of noncompliance as soon as 
reasonably possible upon discovery, or as soon as reasonably possible 
after the QPAM reasonably should have known of the noncompliance 
(whichever is earlier), and provided that it adheres to the reporting 
requirements set forth in this subparagraph (vii);
    (2) By July 9, 2018, each JPMC Affiliated QPAM must develop a 
program of training (the Training), to be conducted at least annually, 
for all relevant JPMC Affiliated QPAM asset/portfolio management, 
trading, legal, compliance, and internal audit personnel. The first 
Training under this Final Exemption must be completed by all relevant 
JPMC Affiliated QPAM personnel by July 9, 2019 (by the end of this 30-
month period, asset/portfolio management, trading, legal, compliance, 
and internal audit personnel who were employed from the start to the 
end of the period must have been trained twice: the first time under 
PTE 2016-15; and the second time under this exemption). The Training 
must:
    (i) At a minimum, cover the Policies, ERISA and Code compliance 
(including applicable fiduciary duties and the prohibited transaction 
provisions), ethical conduct, the consequences for not complying with 
the conditions of this exemption (including any loss of exemptive 
relief provided herein), and prompt reporting of wrongdoing; and
    (ii) Be conducted by a professional who has been prudently selected 
and who has appropriate technical training and proficiency with ERISA 
and the Code;
    (i)(1) Each JPMC Affiliated QPAM submits to an audit conducted 
every two years by an independent auditor who has been prudently 
selected and who has appropriate technical training and proficiency 
with ERISA and the Code, to evaluate the adequacy of, and each JPMC 
Affiliated QPAM's compliance with, the Policies and Training 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 July 10, 2018 
through July 9, 2019, and must be completed by January 9, 2020. The 
second audit must cover the period from July 10, 2020 through July 9, 
2021, and must be completed by January 9, 2022. In the event that the 
Exemption Period is extended or a new exemption is granted, the third 
audit would cover the period from July 10, 2022 through July 9, 2023, 
and would have to be completed by January 9, 2024 (unless the 
Department chooses to alter the biennial audit requirement in the new 
or extended exemption);'' \15\
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    \15\ The third audit referenced above would not have to be 
completed until after the Exemption Period expires. If the 
Department ultimately decides to grant relief for an additional 
period, it could decide to alter the terms of the exemption, 
including the audit conditions (and the timing of the audit 
requirements). Nevertheless, the Applicant should anticipate that 
the Department will insist on strict compliance with the audit terms 
and schedule set forth above. As it considers any new exemption 
application, the Department may also contact the auditor for any 
information relevant to its determination.
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    (2) Within the scope of the audit and to the extent necessary for 
the auditor,

[[Page 61837]]

in its sole opinion, to complete its audit and comply with the 
conditions for relief described herein, and only to the extent such 
disclosure is not prevented by state or federal statute, or involves 
communications subject to attorney client privilege, each JPMC 
Affiliated QPAM and, if applicable, JPMC, will grant the auditor 
unconditional access to its business, including, but not limited to: 
its computer systems; business records; transactional data; workplace 
locations; training materials; and personnel. Such access is limited to 
information relevant to the auditor's objectives as specified by the 
terms of this exemption;
    (3) The auditor's engagement must specifically require the auditor 
to determine whether each JPMC Affiliated 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 JPMC Affiliated QPAM's operational compliance with the 
Policies and Training. In this regard, the auditor must test, for each 
QPAM, a sample of such QPAM's transactions involving Covered Plans, 
sufficient in size and nature to afford the auditor a reasonable basis 
to determine such QPAM's operational compliance with the Policies and 
Training;
    (5) For each audit, on or before the end of the relevant period 
described in Section I(i)(1) for completing the audit, the auditor must 
issue a written report (the Audit Report) to JPMC and the JPMC 
Affiliated QPAM to which the audit applies that describes the 
procedures performed by the auditor during the course of its 
examination. The auditor, at its discretion, may issue a single 
consolidated Audit Report that covers all the JPMC Affiliated QPAMs. 
The Audit Report must include the auditor's specific determinations 
regarding:
    (i) The adequacy of each JPMC Affiliated QPAM's Policies and 
Training; each JPMC Affiliated QPAM's compliance with the Policies and 
Training; the need, if any, to strengthen such Policies and Training; 
and any instance of the respective JPMC Affiliated QPAM's noncompliance 
with the written Policies and Training described in Section I(h) above. 
The JPMC Affiliated QPAM must promptly address any noncompliance. The 
JPMC Affiliated QPAM must 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 Affiliated QPAM. Any action taken or the plan of action to 
be taken by the respective JPMC Affiliated QPAM must be included in an 
addendum to the Audit Report (such addendum must be completed prior to 
the certification described in Section I(i)(7) below). In the event 
such a plan of action to address the auditor's recommendation regarding 
the adequacy of the Policies and Training is not completed by the time 
of submission of the Audit Report, the following period's Audit Report 
must state whether the plan was satisfactorily completed. Any 
determination by the auditor that the respective JPMC Affiliated QPAM 
has implemented, maintained, and followed sufficient Policies and 
Training must not be based solely or in substantial part on an absence 
of evidence indicating noncompliance. In this last regard, any finding 
that a JPMC Affiliated QPAM has complied with the requirements under 
this subparagraph must be based on evidence that the particular JPMC 
Affiliated QPAM has actually implemented, maintained, and followed the 
Policies and Training required by this exemption. Furthermore, the 
auditor must not solely rely on the Annual Report created by the 
compliance officer (the Compliance Officer), as described in Section 
I(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 I(i)(3) and (4) above; and
    (ii) The adequacy of the most recent Annual Review described in 
Section I(m);
    (6) The auditor must notify the respective JPMC Affiliated QPAM of 
any instance of noncompliance identified by the auditor within five (5) 
business days after such noncompliance is identified by the auditor, 
regardless of whether the audit has been completed as of that date;
    (7) With respect to 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 JPMC 
Affiliated 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; that such JPMC Affiliated 
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. 
Such 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;
    (8) The Risk Committee of JPMC's Board of Directors is 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 JPMC 
must review the Audit Report for each JPMC Affiliated QPAM and must 
certify in writing, under penalty of perjury, that such officer has 
reviewed each Audit Report;
    (9) Each JPMC Affiliated QPAM provides its certified Audit Report, 
by regular mail to: Office of Exemption Determinations (OED), 200 
Constitution Avenue NW, Suite 400, Washington, DC 20210; or by private 
carrier to: 122 C Street NW, Suite 400, Washington, DC 20001-2109. This 
delivery must take place no later than thirty (30) days following 
completion of the Audit Report. The Audit Report will be made part of 
the public record regarding this exemption. Furthermore, each JPMC 
Affiliated QPAM must make its Audit Report unconditionally available, 
electronically or otherwise, for examination upon request by any duly 
authorized employee or representative of the Department, other relevant 
regulators, and any fiduciary of a Covered Plan;
    (10) Each JPMC Affiliated QPAM and the auditor must submit to OED: 
Any engagement agreement(s) entered into pursuant to the engagement of 
the auditor under this exemption, no later than two (2) months after 
the execution of any such engagement agreement;
    (11) The auditor must provide the Department, upon request, for 
inspection and review, access to all the workpapers created and 
utilized in the course of the audit, provided such access and 
inspection is otherwise permitted by law; and
    (12) JPMC must notify the Department of a change in the independent 
auditor no later than two (2) months after the engagement of a 
substitute or subsequent auditor and must provide an explanation for 
the substitution or change including a description of any material 
disputes between the terminated auditor and JPMC;
    (j) As of January 10, 2018 and throughout the Exemption Period, 
with respect to any arrangement, agreement, or contract between a JPMC 
Affiliated

[[Page 61838]]

QPAM and a Covered-Plan, the JPMC Affiliated 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 
inadvertent prohibited transactions); and to comply with the standards 
of prudence and loyalty set forth in section 404 of ERISA with respect 
to each such ERISA-covered plan and IRA to the extent that section is 
applicable;
    (2) To indemnify and hold harmless the Covered Plan for any actual 
losses resulting directly from a JPMC Affiliated 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 QPAM; or any claim arising out of the failure of 
such JPMC Affiliated 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. This condition applies only to actual losses 
caused by the JPMC Affiliated QPAM's violations.
    (3) Not to require (or otherwise cause) the Covered Plan to waive, 
limit, or qualify the liability of the JPMC Affiliated QPAM for 
violating ERISA or the Code or engaging in prohibited transactions;
    (4) Not to restrict the ability of such Covered Plan to terminate 
or withdraw from its arrangement with the JPMC Affiliated QPAM with 
respect to any investment in a separately managed account or pooled 
fund subject to ERISA and managed by such QPAM, with the exception of 
reasonable restrictions, appropriately disclosed in advance, that are 
specifically designed to ensure equitable treatment of all investors in 
a pooled fund in the event such withdrawal or termination may have 
adverse consequences for all other investors. In connection with any 
such arrangements involving investments in pooled funds subject to 
ERISA entered into after the initial effective date of this exemption, 
the adverse consequences must relate to of a lack of liquidity of the 
underlying assets, valuation issues, or regulatory reasons that prevent 
the fund from promptly redeeming an ERISA-covered plan's or IRA's 
investment, and such restrictions must be applicable to all such 
investors and effective no longer than reasonably necessary to avoid 
the adverse consequences;
    (5) Not to impose any fees, penalties, or charges for such 
termination or withdrawal with the exception of reasonable fees, 
appropriately disclosed in advance, that are specifically designed to 
prevent generally recognized abusive investment practices or 
specifically designed to ensure equitable treatment of all investors in 
a pooled fund in the event such withdrawal or termination may have 
adverse consequences for all other investors, provided that such fees 
are applied consistently and in like manner to all such investors; and
    (6) Not to include exculpatory provisions disclaiming or otherwise 
limiting liability of the JPMC Affiliated QPAM for a violation of such 
agreement's terms. To the extent consistent with Section 410 of ERISA, 
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 JPMC and its affiliates, or damages arising from acts outside the 
control of the JPMC Affiliated QPAM;
    (7) By July 9, 2018, each JPMC Affiliated QPAM must provide a 
notice of its obligations under this Section I(j) to each Covered Plan. 
For all other prospective Covered Plans, the JPMC Affiliated QPAM will 
agree to its obligations under this Section I(j) in an updated 
investment management agreement between the JPMC Affiliated 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 2016-15 that meets the terms of this condition. 
Notwithstanding the above, a JPMC Affiliated QPAM will not violate the 
condition solely because a Plan or IRA refuses to sign an updated 
investment management agreement;
    (k) By March 10, 2018, each JPMC Affiliated QPAM will provide a 
notice of the exemption, along with a separate summary describing the 
facts that led to the Conviction (the Summary), which have 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, 
or the sponsor of an investment fund in any case where a JPMC 
Affiliated QPAM acts as a sub-advisor to the investment fund in which 
such ERISA-covered plan and IRA invests. Any prospective client for 
which a JPMC Affiliated QPAM relies on PTE 84-14 or has expressly 
represented that the manager qualifies as a QPAM or relies on the QPAM 
class exemption 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 JPMC 
Affiliated QPAM. Disclosures may be delivered electronically.
    (l) The JPMC Affiliated QPAMs must comply with each condition of 
PTE 84-14, as amended, with the sole exception of the violation of 
Section I(g) of PTE 84-14 that is attributable to the Conviction;
    (m)(1) By July 9, 2018, JPMC designates 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 annual review for each annual period beginning 
on January 10, 2018, (the Annual Review) \16\ to determine the adequacy 
and effectiveness of the implementation of the Policies and Training. 
With respect to the Compliance Officer, the following conditions must 
be met:
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    \16\ Such Annual Review must be completed with respect to the 
annual periods ending January 9, 2019; January 9, 2020; January 9, 
2021; January 9, 2022; and January 9, 2023.
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    (i) The Compliance Officer must be a professional who has extensive 
experience with, and knowledge of, the regulation of financial services 
and products, including under ERISA and the Code; and
    (ii) The Compliance Officer must have a direct reporting line to 
the highest-ranking corporate officer in charge of legal compliance for 
asset management;
    (2) With respect to each Annual Review, the following conditions 
must be met:
    (i) The Annual Review includes a review of: Any compliance matter 
related to the Policies or Training that was identified by, or reported 
to, the Compliance Officer or others within the compliance and risk 
control function (or its equivalent) during the previous year; any 
material change in the relevant business activities of the JPMC 
Affiliated QPAMs; and any change to ERISA, the Code, or regulations 
related to fiduciary duties and the prohibited transaction provisions 
that may be applicable to the activities of the JPMC Affiliated QPAMs;
    (ii) The Compliance Officer prepares a written report for each 
Annual Review (each, an Annual Report) that (A) summarizes his or her 
material activities during the preceding year; (B) sets forth any 
instance of noncompliance discovered during the preceding year, and any 
related corrective action; (C) details any change to the Policies or 
Training to guard against any similar instance of noncompliance 
occurring again; and (D) makes recommendations, as necessary, for 
additional training,

[[Page 61839]]

procedures, monitoring, or additional and/or changed processes or 
systems, and management's actions on such recommendations;
    (iii) In each Annual Report, the Compliance Officer must certify in 
writing that to his or her knowledge: (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 preceding year and any related correction taken to date have 
been identified in the Annual Report; and (D) the JPMC Affiliated QPAMs 
have complied with the Policies and Training, and/or corrected (or is 
correcting) any instances of noncompliance in accordance with Section 
I(h) above;
    (iv) Each Annual Report must be provided to appropriate corporate 
officers of JPMC and each JPMC Affiliated QPAM to which such report 
relates; the head of compliance and the General Counsel (or their 
functional equivalent) of the relevant JPMC Affiliated QPAM; and must 
be made unconditionally available to the independent auditor described 
in Section I(i) above;
    (v) Each Annual Review, including the Compliance Officer's written 
Annual Report, must be completed within three (3) months following the 
end of the period to which it relates;
    (n) Each JPMC Affiliated QPAM will maintain records necessary to 
demonstrate that the conditions of this exemption have been met, for 
six (6) years following the date of any transaction for which such JPMC 
Affiliated QPAM relies upon the relief in the exemption;
    (o) During the Exemption Period, JPMC: (1) Immediately discloses to 
the Department any Deferred Prosecution Agreement (a DPA) or a Non-
Prosecution Agreement (an NPA) with the U.S. Department of Justice, 
entered into by JPMC or any of its affiliates in connection with 
conduct described in Section I(g) of PTE 84-14 or section 411 of ERISA; 
and (2) immediately provides the Department any information requested 
by the Department, as permitted by law, regarding the agreement and/or 
conduct and allegations that led to the agreement;
    (p) By July 9, 2018, each JPMC Affiliated QPAM, in its agreements 
with, or in other written disclosures provided to Covered Plans, will 
clearly and prominently inform Covered Plan clients of their right to 
obtain a copy of the Policies or a description (``Summary Policies'') 
which accurately summarizes key components of the QPAM's written 
Policies developed in connection with this exemption. If the Policies 
are thereafter changed, each Covered Plan client must receive a new 
disclosure within six (6) months following the end of the calendar year 
during which the Policies were changed.\17\ With respect to this 
requirement, the description may be continuously maintained on a 
website, provided that such website link to the Policies or the Summary 
Policies is clearly and prominently disclosed to each Covered Plan; and
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    \17\ In the event Applicant meets this disclosure requirement 
through Summary Policies, changes to the Policies shall not result 
in the requirement for a new disclosure unless, as a result of 
changes to the Policies, the Summary Policies are no longer 
accurate.
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    (q) A JPMC Affiliated QPAM or a JPMC Related QPAM will not fail to 
meet the terms of this exemption solely because a different JPMC 
Affiliated QPAM or JPMC Related QPAM fails to satisfy a condition for 
relief described in Sections I(c), (d), (h), (i), (j), (k), (l), (n) 
and (p); or if the independent auditor described in Section I(i) fails 
a provision of the exemption other than the requirement described in 
Section I(i)(11), provided that such failure did not result from any 
actions or inactions of JPMC or its affiliates.
Section II: Definitions
    (a) The term ``Conviction'' means the judgment of conviction 
against JPMC for violation of the Sherman Antitrust Act, 15 U.S.C. 1, 
entered in the District Court for the District of Connecticut (the 
District Court) (case number 3:15-cr-79-SRU). For all purposes under 
this exemption, ``conduct'' of any person or entity that is the 
``subject of [a] Conviction'' encompasses the conduct described in 
Paragraph 4(g)-(i) of the Plea Agreement filed in the District Court in 
case number 3:15-cr-79-SRU; and
    (b) The term ``Conviction Date'' means the date of the judgment of 
the trial court. For avoidance of confusion, the Conviction Date is 
January 10, 2017, as set forth on page 3 of Dkt. 49, in case number 
3:15-cr-79-SRU.
    (c) The term ``Covered Plan'' means a plan subject to Part 4 of 
Title 1 of ERISA (``ERISA-covered plan'') or a plan subject to Section 
4975 of the Code (``IRA'') with respect to which a JPMC Affiliated QPAM 
relies on PTE 84-14, or with respect to which a JPMC Affiliated QPAM 
(or any JPMC affiliate) has expressly represented that the manager 
qualifies as a QPAM or relies on the QPAM class exemption (PTE 84-14). 
A Covered Plan does not include an ERISA-covered Plan or IRA to the 
extent the JPMC Affiliated QPAM has expressly disclaimed reliance on 
QPAM status or PTE 84-14 in entering into its contract, arrangement, or 
agreement with the ERISA-covered plan or IRA;
    (d) The terms ``ERISA-covered plan'' and ``IRA'' mean, 
respectively, a plan subject to Part 4 of Title I of ERISA and a plan 
subject to section 4975 of the Code.
    (e) The term ``Exemption Period'' means January 10, 2018, through 
January 9, 2023;
    (f) The term ``JPMC'' means JPMorgan Chase and Co., the parent 
entity, but does not include any subsidiaries or other affiliates;
    (g) The term ``JPMC Affiliated QPAM'' means a ``qualified 
professional asset manager,'' as defined in Section VI(a) of PTE 84-14, 
that relies on the relief provided by PTE 84-14 and with respect to 
which JPMC is a current or future ``affiliate'' (as defined in Section 
VI(d)(1) of PTE 84-14). The term ``JPMC Affiliated QPAM'' excludes the 
parent entity, JPMC, the entity implicated in the criminal conduct that 
is the subject of the Conviction
    (h) The term ``JPMC Related QPAM'' means any current or future 
``qualified professional asset manager'' (as defined in section VI(a) 
of PTE 84-14) that relies on the relief provided by PTE 84-14, and with 
respect to which JPMC owns a direct or indirect five percent or more 
interest, but with respect to which JPMC is not an ``affiliate'' (as 
defined in Section VI(d)(1) of PTE 84-14).

Effective Date

    This exemption is effective on January 10, 2018. The term of the 
exemption is from January 10, 2018, through January 9, 2023 (the 
Exemption Period).
    Department's Comment: The Department cautions that the relief in 
this exemption will terminate immediately if, among other things, an 
entity within the JPMC corporate structure is convicted of a crime 
described in Section I(g) of PTE 84-14 (other than the Conviction) 
during the Exemption Period. Although JPMC could apply for a new 
exemption in that circumstance, the Department would not be obligated 
to grant the exemption. The terms of this exemption have been 
specifically designed to permit plans to terminate their relationships 
in an orderly and cost effective fashion in the event of an additional 
conviction or a determination that it is otherwise prudent for a plan 
to terminate its relationship with an entity covered by the exemption.

[[Page 61840]]

Further Information

    For more information on this exemption, contact Mr. Joseph Brennan 
of the Department, telephone (202) 693-8456. (This is not a toll-free 
number.)

Deutsche Investment Management Americas Inc. (DIMA) and Certain Current 
and Future Asset Management Affiliates of Deutsche Bank AG 
(collectively, the Applicant or the DB QPAMs), Located in New York, New 
York

[Prohibited Transaction Exemption 2017-04; Exemption Application No. D-
11908]

Discussion

    On November 21, 2016, the Department of Labor (the Department) 
published a notice of proposed exemption in the Federal Register at 81 
FR 83400, for certain entities with specified relationships to Deutsche 
Securities Korea, Co. (DSK) \18\ or DB Group Services (UK) Limited (DB 
Group Services) \19\ to continue to rely upon the relief provided by 
PTE 84-14 for a period of five years,\20\ notwithstanding certain 
criminal convictions, as described herein (the Convictions).
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    \18\ Deutsche Securities Korea, Co. is a South Korean 
``affiliate'' (as defined in Section VI(c) of PTE 84-14) of Deutsche 
Bank AG.
    \19\ DB Group Services (UK) Limited is United Kingdom-based 
``affiliate'' (as defined in Section VI(c) of PTE 84-14) of Deutsche 
Bank AG.
    \20\ (49 FR 9494, March 13, 1984), as corrected at 50 FR 41430 
(October 10, 1985), as amended at 70 FR 49305 (August 23, 2005) and 
as amended at 75 FR 38837 (July 6, 2010), hereinafter referred to as 
PTE 84-14 or the QPAM exemption.
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    The Department is granting this exemption to ensure that Covered 
Plans \21\ with assets managed by an asset manager within the corporate 
family of Deutsche Bank AG (together with its current and future 
affiliates, Deutsche Bank) may continue to benefit from the relief 
provided by PTE 84-14. The effective date of this exemption is April 
18, 2018, and the exemption is effective from April 18, 2018 through 
April 17, 2021 (the Exemption Period).
---------------------------------------------------------------------------

    \21\ ``Covered Plan'' is a plan subject to Part 4 of Title 1 of 
ERISA (``ERISA-covered plan'') or a plan subject to section 4975 of 
the Code (``IRA'') with respect to which a DB QPAM relies on PTE 84-
14, or with respect to which a DB QPAM (or any Deutsche Bank 
affiliate) has expressly represented that the manager qualifies as a 
QPAM or relies on the QPAM class exemption (PTE 84-14). A Covered 
Plan does not include an ERISA-covered plan or IRA to the extent the 
DB QPAM has expressly disclaimed reliance on the QPAM status or PTE 
84-14 in entering into its contract, arrangement, or agreement with 
the ERISA-covered plan or IRA. See further discussion in this 
preamble under the heading Comment 5--Policies and Procedures 
related to DB QPAM Disclosures--Section I(h)(1)(iv)-(v).
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    No relief from a violation of any other law is provided by this 
exemption, including any criminal conviction described in the proposed 
exemption. Furthermore, the Department cautions that the relief in this 
exemption will terminate immediately if, among other things, an entity 
within the Deutsche Bank corporate structure is convicted of a crime 
described in Section I(g) of PTE 84-14 (other than the Convictions) 
during the Exemption Period. The terms of this exemption are designed 
to promote adherence to basic fiduciary standards under ERISA and the 
Code. This exemption also aims to ensure that Covered Plans can 
terminate relationships in an orderly and cost effective fashion in the 
event the fiduciary of a Covered Plan determines it is prudent to 
terminate the relationship with a DB QPAM.

Written Comments

    The Department invited all interested persons to submit written 
comments and/or requests for a public hearing with respect to the 
notice of proposed exemption, published in the Federal Register at 81 
FR 83400 on November 21, 2016. All comments and requests for a hearing 
were due by January 5, 2017.\22\ The Department received written 
comments from the Applicant, members of the U.S. Congress, and a number 
of plan and IRA clients of Deutsche Bank. After considering these 
submissions, the Department has determined to grant the exemption, with 
revisions, as described below.
---------------------------------------------------------------------------

    \22\ The comment period was subsequently extended by the 
Department to January 17, 2017. However, the Department received 
additional comments from the Applicant after the close of the 
extended comment period.
---------------------------------------------------------------------------

Comment 1--Knowing or Tacit Approval--Sections I(a) and I(c)
    Section I(a) of the proposed exemption provides, ``(a) The DB QPAMs 
(including their officers, directors, agents other than Deutsche Bank, 
and employees of such DB QPAMs) did not know of, have reason to know 
of, or participate in the criminal conduct of DSK and DB Group Services 
that is the subject of the Convictions (for purposes of this Section 
I(a), ``participate in'' includes the knowing or tacit approval of the 
misconduct underlying the Convictions).''
    Section I(c) of the proposed exemption provides, ``(c) The DB QPAMs 
will not employ or knowingly engage any of the individuals that 
participated in the criminal conduct that is the subject of the 
Convictions (for the purposes of this Section I(c), ``participated in'' 
includes the knowing or tacit approval of the misconduct underlying the 
Convictions).''
    The Applicant requests that the parenthetical explanation for 
``participated in'' be deleted in both Section I(a) and I(c). The 
Applicant states that the language in both sections preceding the 
parentheticals is clear and unambiguous, rendering the parentheticals 
unnecessary. Alternatively, the Applicant requests that, should the 
parenthetical remain in the exemption, the Department removes the words 
``or tacit'' in the phrase ``knowing or tacit approval'' in Sections 
I(a) and I(c). The Applicant states that the term ``is undefined and 
ambiguous, and potentially encompasses a broad range of conduct that 
could become the subject of disputes with counterparties.'' The 
Applicant also states that ``tacit approval'' should not be replaced 
with the term ``condone'' (as the Department did in paragraph (c) in 
the Final Temporary Exemption), as it is duplicative of and has the 
same meaning as ``approve''.
    The Department declines to delete the parenthetical explanations in 
Sections I(a) and I(c). Rather, after consideration, the Department 
removed ``or tacit'' from both conditions so that ``participated in'' 
means the ``knowing approval of the misconduct underlying the 
Convictions.''
Comment 2--Exercising Authority Over Plan Assets--Section I(f)
    Section I(f) of the proposed exemption provides, ``(f) A DB QPAM 
did not exercise authority over the assets of any plan subject to Part 
4 of Title I of ERISA (an ERISA-covered plan) or section 4975 of the 
Code (an IRA) in a manner that it knew or should have known would: 
further the criminal conduct that is the subject of the Convictions; or 
cause the QPAM, affiliates, or related parties to directly or 
indirectly profit from the criminal conduct that is the subject of the 
Convictions.''
    Deutsche Bank requests that the phrase ``related parties'' in 
Condition I(f) be deleted as the term ``is undefined and could lead to 
confusion.'' The Applicant also states that this condition may be 
interpreted as implicating the purchase, for a plan or IRA, of any 
instrument linked to a benchmark rate. Deutsche Bank requests that the 
Department add clarification language which ``[provides] that this 
condition is not violated solely because an ERISA-covered plan or IRA 
managed by a DB QPAM purchased, sold or held an economic interest in a 
security or product, the value of which was tied to a benchmark 
interest rate implicated in the conduct that is the subject of the 
Convictions.''

[[Page 61841]]

    After consideration, the Department deleted the phrase ``related 
parties'' for clarity. However, the Department declines to make the 
Applicant's other requested revisions. The Department does not view 
Condition I(f) (which relates to exercising authority) as confusing. 
Further, Condition I(f) is consistent with the Applicant's prior 
representation that, with respect to the conviction of DB Group 
Services (UK) Limited (DB Group Services) for LIBOR manipulation (the 
US Conviction), ``[no] current or former employee of [DB Group 
Services] or of any affiliated QPAM who previously has been or who 
subsequently may be identified by [DB Group Services], Deutsche Bank AG 
or any U.S. or non-U.S. regulatory or enforcement agencies as having 
been responsible for the [LIBOR-related misconduct] will be an officer, 
director, or employee of any Applicant or of any other current or 
future affiliated QPAM; and . . . no employee of [DB Group Services] or 
of any affiliated QPAM who was involved in the [LIBOR-related 
misconduct] had any, or will have any future, involvement in the 
current or future affiliated QPAMs' asset management activities.'' \23\ 
With respect to the conviction of Deutsche Securities Korea Co. (DSK) 
for market manipulation (the Korean Conviction), the Applicant has 
represented that ``Deutsche Bank's [Asset & Wealth Management] Division 
had no involvement whatsoever in the conduct or compliance issues that 
formed the basis for the LIBOR and South Korea matters . . . .'' \24\
---------------------------------------------------------------------------

    \23\ See DIMA Exemption Application (April 23, 2015), at 12-13.
    \24\ See Deutsche Bank AG Submission to the Department of Labor 
in Further Support of Applications for Conditional Exemption 
(September 18, 2015), at 8.
---------------------------------------------------------------------------

    Furthermore, the Department does not believe that the proposed 
carve-out for transactions involving the sale, purchase or holding of 
instruments tied to a benchmark interest rate is necessary. The 
Applicant has informed the Department that, with respect to condition 
I(a), the Applicant can represent the following: ``Other than certain 
individuals who worked for non-asset management business within DBSI 
and/or DBAG and [who] had no responsibility for, and exercised no 
authority in connection with, the management of plan assets, and are no 
longer employed by DBSI and DBAG, the DB QPAMs (including their 
officers, directors, agents other than Deutsche Bank, and employees of 
such DB QPAMs) did not know of, have reason to know of, or participate 
in the criminal conduct of DSK and DB Group Services that is the 
subject of the Convictions.'' \25\ The Department believes that this 
representation obviates the need for a carve-out, regardless of whether 
the instrument involved in the transaction is tied to a benchmark 
interest rate.
---------------------------------------------------------------------------

    \25\ Applicant Submission to the Department (May 25, 2017), at 
3.
---------------------------------------------------------------------------

    In addition, the Department clarified that Section I(d) applies (a) 
to ``investment funds'' managed by the DB QPAM with respect to Covered 
Plans, and (b) at all times during the Exemption Period.
Comment 3--Restriction on Provision of Discretionary Asset Management 
Services--Section I(g)
    Section I(g) of the proposed exemption provides, ``(g) DSK and DB 
Group Services will not provide discretionary asset management services 
to ERISA-covered plans or IRAs, nor will otherwise act as a fiduciary 
with respect to ERISA-covered plan and IRA assets.''
    Deutsche Bank states that the phrase ``otherwise act as a 
fiduciary'' precludes DSK and DB Group Services from acting as a 
fiduciary in any way with respect to ERISA-covered plans and IRA 
assets, including under the Department's new ``Definition of the Term 
`Fiduciary';'' ``Conflict of Interest Rule--Retirement Investment 
Advice,'' 81 FR 200946 (April 8, 2016), and including with respect to 
DSK's and DB Group Services' own internal plans. Deutsche Bank 
represents that because DSK acts as a broker-dealer and may provide 
investment advice, such conduct will require DSK to acknowledge that it 
is acting as a fiduciary once the new fiduciary rule becomes effective, 
and this condition would make it impossible for plans to engage DSK for 
any services at all. The Applicant states that, while DSK and DB Group 
Services should not be permitted to act as discretionary asset managers 
of ERISA-covered plans and IRAs because of the crimes which led to the 
Convictions, the Department should not preclude ERISA-covered plans or 
IRAs from independently engaging DSK for other services or limit the 
activities of any entity other than those so convicted. The Applicant 
requests that ``provide discretionary asset management services to 
ERISA-covered plans or IRAs, nor will otherwise act as a fiduciary with 
respect to ERISA-covered plan and IRA assets'' be replaced with ``act 
as fiduciaries within the meaning of ERISA Section 3(21)(A)(i) or 
(iii), or Code Section 4975(e)(3)(A) or (C), with respect to ERISA-
covered plan and IRA assets.'' Also, the Applicant requests that the 
Department provide a carve-out ``with respect to employee benefit plans 
maintained or sponsored for their own employees or the employees of an 
affiliate.''
    Furthermore, Deutsche Bank states that it, like many foreign banks, 
uses foreign service companies, like DB Group Services, to hire and pay 
employees who then work for, and are supervised by, other entities in 
the Deutsche Bank controlled group. The Applicant represents that DB 
Group Services provides employees to Deutsche Bank asset management 
affiliates, and that these employees are then responsible for the 
employees' training, supervision, compliance, etc., as if they were 
employed by such affiliates. Accordingly, Deutsche Bank requests 
confirmation that the fact that DB Group Services employs and pays such 
individual employees will not cause a DB QPAM to fail to meet this 
condition. Specifically, the Applicant requests that the Department 
qualify Section I(g) by ``[providing] that DSK and DB Group Services 
will not be treated as violating this condition solely because they 
acted as investment advice fiduciaries within the meaning of ERISA 
Section 3(21)(A)(ii), or Section 4975(e)(3)(B) of the Code, or because 
DB Group Services employees may be double-hatted, seconded, supervised 
or otherwise subject to the control of a DB QPAM, including in a 
discretionary fiduciary capacity with respect to the DB QPAM clients.''
    The Department concurs with the Applicant, and has modified Section 
I(g) of the final exemption accordingly.
    The Department has also clarified that this condition does not 
apply with respect to employee benefit plans maintained or sponsored 
for their own employees or the employees of an affiliate of DSK or DB 
Group Services.
Comment 4--Policies and Procedures Relating to Compliance With ERISA 
and the Code--Section I(h)(1)(ii)-(iii)
    Sections I(h)(1)(ii)-(iii) of the proposed exemption provide, 
``(h)(1) Each DB QPAM must immediately develop, implement, maintain, 
and follow written policies and procedures (the Policies) requiring and 
reasonably designed to ensure that:
    (ii) The DB QPAM fully complies with ERISA's fiduciary duties and 
with ERISA and the Code's prohibited transaction provisions, and does 
not knowingly participate in any violation of these duties and 
provisions with respect to ERISA-covered plans and IRAs;

[[Page 61842]]

    (iii) The DB QPAM does not knowingly participate in any other 
person's violation of ERISA or the Code with respect to ERISA-covered 
plans and IRAs;''
    The Applicant requests that the subparagraph I(h)(1)(iii) be 
stricken as duplicative. The Applicant states that the requirement that 
a DB QPAM ``not knowingly participate in any other person's violation'' 
is ``subsumed within the requirement'' that such DB QPAM ``not 
knowingly participate in any violation'' of the duties and provisions 
set forth in ERISA and the Code (including Section 405 of ERISA).
    The Department declines to make this deletion. The specific 
elements of the Policies requirement as set forth in this exemption are 
essential to its protective purposes. In approving this exemption, the 
Department significantly relies upon conditions designed to ensure that 
those relying upon its terms for prohibited transaction relief will 
adopt a culture of compliance centered on basic fiduciary norms and 
standards of fair dealing, as reflected in the Policies. These 
standards are core protections of this exemption. The Department does 
not view subparagraph (iii) of Section I(h)(1), which relates to a DB 
QPAM's compliance with ERISA or the Code, as duplicative of 
subparagraph (ii), which includes also a DB QPAM's full compliance with 
ERISA's fiduciary duties, and with ERISA and the Code's prohibited 
transaction provisions. Subparagraph (ii) is based on the DB QPAM's 
management of assets of Covered Plans. On the other hand, subparagraph 
(iii) focuses on the DB QPAM's diligence in collaborating with third 
parties in the management of assets of Covered Plans.
    The Department modified the Policies' requirement of adherence to 
the fiduciary and prohibited transaction provisions of ERISA and the 
Code in subparagraph (ii) so that the Policies expressly focus on the 
provisions only to the extent ``in each such case as applicable with 
respect to each Covered Plan . . . .'' In general, however, the 
Department has otherwise retained the stringency and breadth of the 
Policies requirement, which is more than justified by the compliance 
and oversight failures exhibited by Deutsche Bank throughout the long 
period of time during which the criminal misconduct persisted. The 
Department notes that it made minor revisions to reflect the fact that 
DB QPAMs may already have Policies under the previous exemption, in 
which case, they are required to ``maintain'' such Policies.
Comment 5--Policies and Procedures Related to DB QPAM Disclosures--
Section I(h)(1)(iv)-(v)
    Sections I(h)(1)(iv)-(v) of the proposed exemption provide, 
``(h)(1) Each DB QPAM must immediately develop, implement, maintain, 
and follow written policies and procedures (the Policies) requiring and 
reasonably designed to ensure that:
    (iv) Any filings or statements made by the DB QPAM to regulators, 
including but not limited to, the Department, the Department of the 
Treasury, the Department of Justice, and the Pension Benefit Guaranty 
Corporation, on behalf of ERISA-covered plans or IRAs are materially 
accurate and complete, to the best of such QPAM's knowledge at that 
time;
    (v) The DB QPAM does not make material misrepresentations or omit 
material information in its communications with such regulators with 
respect to ERISA-covered plans or IRAs, or make material 
misrepresentations or omit material information in its communications 
with ERISA-covered plan and IRA clients.''
    The Applicant states that Sections I(h)(1)(iv) I(h)(1)(v) are 
``overlapping, duplicative and extend beyond the scope of exemptive 
relief'' to instances where the Applicant is not acting in reliance on 
PTE 84-14. The Applicant requests that the subparagraphs be limited to 
situations where the Applicant is relying on PTE 84-14 and this 
exemption. Also, Deutsche Bank states that the distinction between 
subparagraph (iv)'s requirement that information provided to regulators 
be materially accurate and complete and subparagraph (v)'s requirement 
that such communications may not have material misrepresentations or 
omissions is unclear, and suggests the reference in (v) be deleted. 
Finally, Deutsche Bank requests that the phrase ``to the best of such 
QPAM's knowledge at that time'' should appear in subparagraph (h)(1)(v) 
as it does in subparagraph (h)(1)(iv), but is absent from condition 
(h)(1)(v).
    The Department notes that the Section I(h) requirement that the 
policies and procedures developed by the DB QPAM adhere to basic 
fiduciary norms is a protective measure that is necessary in light of 
the substantial compliance and oversight failures exhibited by Deutsche 
Bank throughout the long period of time during which the misconduct 
persisted. Notwithstanding this, the Department is revising the 
condition, in part, as requested by the Applicant.
    Subsection (v) has been revised to contain the ``to the best of 
QPAM's knowledge at the time'' concept found in subsection (iv); and 
the applicability of subsections (iv) and (v) has been narrowed to 
ERISA-covered plans and IRAs with respect to which a DB QPAM relies on 
PTE 84-14, or with respect to which a DB QPAM has expressly represented 
that the manager qualifies as a QPAM or relies on the QPAM class 
exemption in its dealings with the ERISA-covered plan or IRA 
(hereinafter, a Covered Plan). To the extent a DB QPAM would prefer not 
to be subject to this provision, however, it may expressly disclaim 
reliance on QPAM status or PTE 84-14 in entering into its contract with 
an ERISA-covered plan or IRA, and such plan or IRA is not a Covered 
Plan.\26\ This revision is consistent with the Department's intent to 
protect Covered Plans that may have hired a DB QPAM based on the 
understanding that the manager qualifies as a QPAM or relies on PTE 84-
14.
---------------------------------------------------------------------------

    \26\ Of course, neither may the QPAM rely on PTE 84-14 or this 
exemption with respect to any such ERISA-covered plan or IRA for 
which it has expressly disclaimed reliance on QPAM status or PTE 84-
14.
---------------------------------------------------------------------------

    As noted in more detail below, the Department will not strike a 
condition merely because it is also a statutory requirement. It is the 
express intent of the Department to preclude relief for a DB QPAM that 
fails to meet the requirements of this exemption, including those 
derived from basic norms codified in statute, as applicable.
Comment 6--Corrections of Violations and Failures To Comply--Section 
I(h)(1)(vii)
    Section I(h)(1)(vii) of the proposed exemption provides, ``(vii) 
Any violation of, or failure to comply with, an item in subparagraphs 
(ii) through (vi), is corrected promptly upon discovery, and any such 
violation or compliance failure not promptly corrected is reported, 
upon the discovery of such 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 DB QPAM, the 
independent auditor responsible for reviewing compliance with the 
Policies, and an appropriate fiduciary of any affected ERISA-covered 
plan or IRA that is independent of Deutsche Bank; however, with respect 
to any ERISA-covered plan or IRA sponsored by an `affiliate' (as 
defined in Section VI(d) of PTE 84-14) of Deutsche Bank or beneficially 
owned by an employee of Deutsche Bank or its affiliates, such fiduciary 
does not need to be independent of Deutsche Bank. A DB

[[Page 61843]]

QPAM will not be treated as having failed to develop, implement, 
maintain, or follow the Policies, provided that it corrects any 
instance of noncompliance promptly 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).''
    The Applicant states that Section I(h)(1)(vii) extends beyond the 
scope necessary to ensure compliance with other requirements in 
condition (h). Deutsche Bank states that the reporting requirement is 
not needed given the ``multiple, overlapping requirements'' related to 
the Annual Review and the Audit Report.
    Deutsche Bank also references several ``ambiguities'' in 
subparagraph (vii). The Applicant states that the term ``promptly'' is 
undefined, and, as a result, it is unclear when a violation must be 
corrected and when the reporting obligation is triggered. Similarly, 
the phrases ``appropriate corporate officers . . . of the relevant DB 
QPAM'' and ``appropriate fiduciary of any affected ERISA-covered plan 
or IRA'' are undefined. The Applicant states that the last sentence of 
subparagraph (vii) does not provide meaningful relief because some 
corrections will take longer to complete than the exemption appears to 
permit.
    The Applicant suggests that the correction procedure provided in 
subparagraph (vii) should apply to any violation of or failure to 
comply with subparagraph (i) regarding the policy governing 
independence in asset management decisions as well. The Applicant 
further suggests that it should be allowed to correct any errors under 
the policy, as with the other errors. Deutsche Bank states that the 
Department has not explained why a failure under subparagraph (i), 
however inadvertent, should result in an automatic loss of the 
exemption.
    Deutsche Bank suggests the following language: ``(vii) Within sixty 
(60) days of its discovery of any violation of, or failure to comply 
with, an item in subparagraphs (i) through (vi), such DB QPAM will 
formulate, in writing, a plan to address such violation or failure (a 
Correction Plan). To the extent any such Correction Plan is not 
formulated within sixty (60) days of the DB QPAM's discovery of such 
violation or failure, the DB QPAM will report in writing such violation 
or failure to the head of compliance or the General Counsel (or their 
functional equivalents) of the relevant line of business that engaged 
in such violation or failure.''
    The Department has based the conditions of this exemption on both 
the particular facts underlying the Convictions and its experience over 
time with previous exemptions. For the reasons set out herein, the 
Department has concluded that the specific conditions of this exemption 
are appropriate and give the Department a reasonable basis for 
concluding that the exemptions are appropriately protective of affected 
plans and IRAs. As noted above, a central aim of the exemption is to 
ensure that those relying upon the exemption for relief from the 
prohibited transaction rules will consistently act to promote a culture 
of fiduciary compliance, notwithstanding the conduct that violated 
Section I(g) of PTE 84-14.
    The Department does not agree with the Applicant's contention that 
the Section I(h)(1)(vii) extends beyond the scope necessary to ensure 
compliance with other requirements in Section I(h), or that it is 
duplicative of the Annual Report and Audit Report requirements. The 
Department considers the Policies, and the DB QPAM's compliance 
therewith, to be a fundamental component of exemptive relief, and this 
Section I(h)(1)(vii) emphasizes the importance of this compliance, 
including the correction process. Further the Department notes that the 
audits and Annual Reports are periodic and do not reflect the timeframe 
that this condition is intended to reflect.
    Regarding the Applicant's requests for revisions, the Department is 
replacing ``appropriate corporate officers'' with ``the head of 
compliance and the General Counsel (or their functional equivalent) of 
the relevant DB QPAM that engaged in the violation or failure.'' The 
Department also will not condition the exemption on a requirement for 
notification of violations to an appropriate fiduciary of any affected 
ERISA-covered plan or IRA that is independent of Deutsche Bank.
    However, the Department is not revising the ``subparagraphs (ii) 
through (vi)'' reference to include ``subparagraph (i)'' because the 
Department intends to preclude relief to the extent a DB QPAM fails to 
develop, implement, maintain, and follow written policies and 
procedures. Clearly, it is not enough merely to develop policies and 
procedures, without also implementing, maintaining, and following the 
terms of those policies and procedures. Covered Plans do not benefit 
from the creation of strong policies and procedures, unless they are 
actually followed.
    The Department has revised the term ``corrected promptly'' for 
consistency with the Department's intent that violations or compliance 
failures be corrected ``as soon as reasonably possible upon discovery 
or as soon after the QPAM reasonably should have known of the 
noncompliance (whichever is sooner).'' However, the Department intends 
to preclude relief to the extent violations or failures are not 
corrected as required by the exemption. Therefore, the Department has 
not adopted the Applicant's proposed subparagraph (vii), which requires 
little more than the formulation of a correction plan, without any 
corresponding obligation to actually implement the plan.
Comment 7--Time to Implement Training--Section I(h)(2)
    The prefatory language in Section I(h)(2) provides, ``(2) Each DB 
QPAM must immediately develop and implement a program of training (the 
Training), conducted at least annually, for all relevant DB QPAM asset/
portfolio management, trading, legal, compliance, and internal audit 
personnel.''
    Deutsche Bank requests that, in order to avoid confusion over 
whether Applicant must train the same pool of employees multiple times 
in a year, the Department add a clarifying proviso to this requirement, 
specifically, at the end of the first sentence in the prefatory 
language: ``(this condition in paragraph (h)(2) shall be deemed to be 
met with respect to any employee trained in accordance with the 
requirements of PTE 2016-12 or the temporary one-year exemption within 
the prior 12 months).'' The Applicant states that it is also subject to 
a similar training requirement under the temporary exemption. Deutsche 
Bank represents that, during the period covered by PTE 2015-15, it 
trained more than 1,000 of its employees.
    The Department clarifies that, to the extent that the Training 
requirements in Section I(h)(2) of the exemption, and the corresponding 
requirements in PTE 2016-13 and PTE 2016-12 are consistent, such 
provisions should be harmonized so that the sequential exemptions do 
not inadvertently require multiple trainings per year. Consistent with 
this requested change in the prefatory language, the Department has 
added further clarity on the timeline with respect to the Training. The 
Department is specifying that ``the first Training under this Exemption 
must be completed by all relevant DB QPAM personnel by April 17, 
2019.'' Furthermore, the Department specifies that, by April 17, 2019, 
asset/portfolio management, trading, legal, compliance, and internal 
audit personnel who were

[[Page 61844]]

employed from April 18, 2017 through April 17, 2019 must have been 
trained at least twice: the first time under PTE 2016-13; and the 
second time under this exemption. The Department notes that it made 
minor revisions to reflect the fact that DB QPAMs may already have 
Training under the previous exemption, in which case, they are required 
to ``maintain.''
Comment 8--Training Set Forth in Policies--Section I(h)(2)(i)
    Section I(h)(2)(i) of the proposed exemption provides, ``(2) Each 
DB QPAM must immediately develop and implement a program of training 
(the Training), conducted at least annually, for all relevant DB QPAM 
asset/portfolio management, trading, legal, compliance, and internal 
audit personnel. The Training must:
    (i) 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 exemption 
(including any loss of exemptive relief provided herein), and prompt 
reporting of wrongdoing;''
    The Applicant states that the requirement in Section I(h)(2)(i) 
that the Training must be ``set forth in'' the Policies may cause 
significant logistical challenges over time. The Applicant requests 
that the section be clarified, such that only the requirement of the 
Training should be set forth in the Policies.
    The Department concurs with the Applicant's comment and has revised 
the condition accordingly.
Comment 9--Training by Independent Professional--Section I(h)(2)(ii)
    Section I(h)(2)(ii) of the proposed exemption provides, ``. . . The 
Training must: . . . (ii) Be conducted by an independent professional 
who has been prudently selected and who has appropriate technical and 
training and proficiency with ERISA and the Code.''
    The Applicant requests that Section I(h)(2)(ii) be deleted, stating 
that it is not necessary for the Department to specify who conducts the 
Training, what the professional's background is, how the Training is 
conducted or when the independent auditor is required under Section 
I(i)(1) to evaluate the adequacy of DB QPAMs' compliance with the 
Training requirement. Deutsche Bank further states that the requirement 
may be ``counterproductive, as the most effective trainer may be 
someone with detailed knowledge of the DB QPAMs' business and 
compliance practices that an `independent' trainer may lack.'' Finally, 
Deutsche Bank states that the term ``independent professional'' is also 
undefined. Alternatively, Deutsche Bank suggests, the Training must 
``(ii) Be conducted by an individual(s) (either in person, remotely or 
electronically, such as through live or recorded web-based training) 
who has appropriate proficiency with ERISA and the Code.''
    Although the Department does not agree with the Applicant's 
characterization that hiring an appropriate independent professional, 
prudently selected, would be counterproductive, the Department is 
persuaded that appropriate Deutsche Bank personnel, prudently selected, 
should be allowed to conduct the training, and has revised the 
condition accordingly. The Department declines to incorporate the 
Applicant's requested language regarding the use of electronic or web-
based methods in conducting the Training. The revised I(h)(2)(ii) now 
states that the Training ``[b]e conducted by a professional who has 
been prudently selected and who has appropriate technical training and 
proficiency with ERISA and the Code.''
Comment 10--Audit--Section I(i)(1)
    Section I(i)(1) of the proposed exemption requires that each 
Deutsche Bank QPAM ``submits to an audit conducted annually by an 
independent auditor, who has been prudently selected and who has 
appropriate technical training and proficiency with ERISA and the Code. 
. . .'' Section I(i)(1) also provides that ``[t]he audit requirement 
must be incorporated in the Policies . . . .''
    The Applicant requests deletion of the requirement that the audit 
requirement be incorporated in the Policies, as its duplication in the 
Policies serves no apparent purpose. The Applicant further suggests 
that the auditor should be given discretion to define the precise audit 
period under this exemption (which may be more or less than 12 months), 
so as to avoid a short audit period in the event that this exemption is 
granted before the expiration of the first audit period under the final 
temporary exemption. To this end, the Applicant requests the following 
be added to the condition: ``(provided that the first audit period 
hereunder may be longer or shorter than 12 months at the election of 
the auditor to avoid an unreasonably short audit period).'' The 
Applicant requests that the reference to ``appropriate technical 
training'' be deleted, as it appears ``duplicative of proficiency in 
ERISA.''
    The Department does not agree with the Applicant's assertion that 
the phrase ``technical training and proficiency'' is duplicative. In 
this regard, the Department does not believe that the two terms are 
synonymous, as a person may have taken technical training in a given 
subject matter but may not be proficient in that subject matter. The 
exemption requires that the auditor be both technically trained and 
proficient in ERISA as well as the Code. Accordingly, the Department 
declines to change the phrase ``technical training and proficiency'' as 
used in Section I(i)(1).
    The Department also declines to delete the requirement that the 
audit conditions be incorporated in the Policies. The audit requirement 
provides a critical independent check on compliance with this 
exemption's conditions, and helps ensure that the basic protections set 
forth in the Policies are taken seriously. Accordingly, the specifics 
of the audit requirement are important components of the Policies. 
Their inclusion in the Policies promotes compliance and sends an 
important message to the institutions' employees and agents, as well as 
to Covered Plan clients, that compliance with the policies and 
procedures will be subject to careful independent review.
    The Department further declines to incorporate the Applicant's 
suggested language regarding the timeline of the audit required by the 
temporary exemption. The audit required under the temporary exemption 
covers a period from October 24, 2016 until April 17, 2018, which is 
not an unreasonably short audit period.
    Each audit must cover the preceding 12-month period. The first 
audit must cover the period from April 18, 2018 through April 17, 2019, 
and must be completed by October 17, 2019. The second audit must cover 
the period from April 18, 2019 through April 17, 2020, and must be 
completed by October 17, 2020. In the event that the Exemption Period 
is extended or a new exemption is granted, the third audit would cover 
the period from April 18, 2020 through April 17, 2021, and would have 
to be completed by October 17, 2021, unless the Department chooses to 
alter the annual audit requirement in any potential new or extended 
exemption.
Comment 11--Access to Business--Section I(i)(2)
    Section I(i)(2) of the proposed exemption requires that ``as 
permitted by law, each DB QPAM and, if applicable Deutsche Bank, will 
grant the auditor unconditional access to its business . . . .''
    The Applicant requests that the access granted by Section I(i)(2) 
be limited to

[[Page 61845]]

non-privileged materials relevant to the scope of exemptive relief that 
do not contain trade secrets. The Applicant states that, with the 
breadth of the ``unconditional access'' described in the proposed 
exemption, ``the absence of a specific limitation could lead to 
confusion, disputes, and infringement on DB or a DB QPAM's rights to 
protect its privileged communications and trade secrets or intrusion 
into activities falling outside the scope of exemptive relief.'' The 
Applicant states that the condition, as written in the proposed 
exemption, leaves the determination of necessity solely to the auditor. 
The Applicant suggests the following revised condition: ``(2) To the 
extent necessary for the auditor, in its sole opinion, to complete its 
audit and comply with the conditions for relief described herein, and 
as permitted by law, each DB QPAM and, if applicable, and solely to 
determine if the provisions of the exemption involving Deutsche Bank 
are met, Deutsche Bank, will grant the auditor unconditional access to 
its relevant business, including, but not limited to: Its relevant 
computer systems; relevant business records; transactional data 
relating to ERISA plans and IRAs managed by a DB QPAM in reliance on 
PTE 84-14 and this exemption; workplace locations; relevant training 
materials; and personnel (for avoidance of doubt, this condition does 
not require access to privileged, trade secret and other similarly 
sensitive business information).''
    In the Department's view, to ensure a thorough and robust audit, 
the auditor must be granted access to information the auditor deems 
necessary for the auditor to make sound conclusions. Access to such 
information must be within the scope of the audit engagement and denied 
only to the extent any disclosure is not permitted by state or federal 
statute. Enumerating specific restrictions on the accessibility of 
certain information would have a dampening effect on the auditor's 
ability to perform the procedures necessary to make valid conclusions 
and would therefore undermine the effectiveness of the audit. The 
auditor's access to such information, however, is limited to 
information relevant to the auditor's objectives as specified by the 
terms of this exemption and to the extent disclosure is not prevented 
by state or federal statute or involves communications subject to 
attorney client privilege. In this regard, the Department has modified 
Section I(i)(2) accordingly.
Comment 12--Auditor's Test of Operational Compliance--Section I(i)(4)
    Section I(i)(4) of the proposed exemption provides that, ``[t]he 
auditor's engagement must specifically require the auditor to test each 
DB QPAM's operational compliance with the Policies and Training'' and 
``the auditor must test a sample of each QPAM's transactions involving 
ERISA-covered Plans and IRAs sufficient in size and nature to afford 
the auditor a reasonable basis to determine operational compliance with 
the Policies and Training.''
    The Applicant requests that Section I(i)(4) be deleted in its 
entirety. The Applicant states that other conditions of the exemption 
govern the audit's scope, the auditor's technical skill, and the 
prudence of the selection process. The Applicant also states that the 
second sentence of Section I(i)(4) unnecessarily intrudes upon the 
auditor's function and independence. The Applicant asserts that the 
Department should defer to the judgment of the auditor whether and when 
to sample transactions.
    The Department declines to make the Applicant's requested revision 
with respect to Section I(i)(4). The requirements of this exemption 
concerning the content of the auditor's engagement are necessary to 
ensure administrative feasibility and to protect Covered Plans. The 
inclusion of written audit parameters in the auditor's engagement 
letter is necessary both to document expectations regarding the audit 
work and to ensure that the auditor can responsibly perform its 
important work. As stated above, clearly defined audit parameters will 
minimize any potential for dispute between the Applicant and the 
auditor. Also, given the scope and number of relevant transactions, 
proper sampling is necessary for the auditor to reach reasonable and 
reliable conclusions. Although the Department has declined to delete 
this section in its entirety, as requested by the Applicant, the 
Department has revised this condition for consistency with other 
conditions of this exemption which are tailored to the Department's 
interest in protecting Covered Plans. Therefore, the condition now 
applies to Covered Plans (i.e., ERISA-covered plans and IRAs with 
respect to which the DB QPAM relies on PTE 84-14 or has expressly 
represented that it qualifies as a QPAM or relies on the QPAM class 
exemption in its dealings with the ERISA-covered plan or IRA).
    The Department notes that Section I(i)(4) does not specify the 
number of transactions that the auditor must test, but rather requires, 
for each QPAM, that the auditor test a sample of such QPAM's 
transactions involving Covered Plans, ``sufficient in size and nature 
to afford the auditor a reasonable basis to determine operational 
compliance with the Policies and Training.''
Comment 13--Auditor's Determination of Compliance--I(i)(5)(i)
    Section I(i)(5)(i) of the proposed exemption provides, ``(5) For 
each audit, on or before the end of the relevant period described in 
Section I(i)(1) for completing the audit, the auditor must issue a 
written report (the Audit Report) to Deutsche Bank and the DB QPAM to 
which the audit applies that describes the procedures performed by the 
auditor during the course of its examination. The Audit Report must 
include the auditor's specific determinations regarding:
    (i) The adequacy of the DB QPAM's Policies and Training; the DB 
QPAM's compliance with the Policies and Training; the need, if any, to 
strengthen such Policies and Training; and any instance of the 
respective DB QPAM's noncompliance with the written Policies and 
Training described in Section I(h) above. 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 DB QPAM must be promptly 
addressed by such DB QPAM, and any action taken by such DB QPAM to 
address such recommendations must be included in an addendum to the 
Audit Report (which addendum is completed prior to the certification 
described in Section I(i)(7) below). Any determination by the auditor 
that the respective DB 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 the DB QPAM has complied with the 
requirements under this subsection must be based on evidence that 
demonstrates the DB QPAM has actually implemented, maintained, and 
followed the Policies and Training required by this exemption. 
Furthermore, the auditor must not rely on the Annual Report created by 
the Compliance Officer as described in Section I(m) below in lieu of 
independent determinations and testing performed by the auditor as 
required by Section I(i)(3) and (4) above.''
    The Applicant requests deletion of the term ``promptly'' because it 
is undefined and will cause disputes over its

[[Page 61846]]

meaning. The Applicant states that this perceived ambiguity is 
problematic in this context because addressing the auditor's 
recommendation could be a lengthy process.
    In addition, the Applicant requests that Section I(i)(5) be 
modified because it imposes a counterproductive limitation on the 
auditor's use of the Annual Review and usurps the auditor's judgment 
regarding how to perform its role. According to the Applicant, it is 
``unnecessary'' for the Department to specify how the auditor performs 
its work in light of the requirements relating to the auditor's 
selection and qualifications. The Applicant also states that denying 
the auditor the discretion to rely on the Annual Report undermines the 
protection the Annual Report gives plans, as the Annual Report may 
identify issues the auditor did not independently discover. To this 
end, the Applicant suggests the following revised sentence regarding 
the Auditor's use of the Annual Report: ``Furthermore, in conducting 
the required audit, the auditor may consider the Annual Report created 
by the Compliance Officer as described in Section I(m) below, as the 
auditor deems appropriate.''
    The Department acknowledges that the Applicant's efforts to address 
the auditor's recommendations regarding any inadequacy in the Policies 
and Training identified by the auditor, may take longer to implement 
than the time limits mandated by the proposed exemption. Accordingly, 
the Department is modifying Section I(i)(5)(i) to reflect the 
possibility that the DB QPAMs' efforts to address the auditor's 
recommendations regarding inadequacies in the Policies and Training 
identified by the auditor, may not be completed by the submission date 
of the Audit Report and may require a written plan to address such 
items. However, any noncompliance identified by the auditor must be 
promptly addressed. The Department does not agree that the word 
``promptly'' creates inappropriate ambiguity in the condition and 
declines to remove the word.
    The final sentence of Section I(i)(5)(i) expresses the Department's 
intent that the auditor not rely solely on the work of the Compliance 
Officer and the contents of the Annual Report in formulating its 
conclusions or findings. The Auditor must perform its own independent 
testing to formulate its conclusions. This exemption does not prohibit 
the Auditor from considering the Compliance Officer's Annual Report in 
carrying out its audit function, including the formulation of an audit 
plan. This exemption, however, does prohibit the Auditor from basing 
its conclusions exclusively on the contents of the Compliance Officer's 
Annual Report. The Department has modified Section I(i)(5)(i) to more 
clearly reflect these views.
    Included with its comment on Section I(i)(5)(i), the Applicant 
notes its request for the deletion of the Compliance Officer and Annual 
Review requirements set out in Section I(m). The Department's response 
to this request is discussed below.
    The Department also modified Section I(i)(5) to provide that ``the 
auditor, at its discretion, may issue a single consolidated Audit 
Report which covers all the DB QPAMs.'' The Department notes the 
potential logistical advantage and administrative feasibility with 
respect to the Department's receipt of the audit report pursuant to 
Section I(i)(9) if there is one report encompassing all of the DB 
QPAMs.
Comment 14--Adequacy of the Annual Review--Section I(i)(5)(ii)
    Section I(i)(5)(ii) of the proposed exemption provides that ``[t]he 
Audit Report must include the auditor's specific determinations 
regarding: . . . (ii) The adequacy of the Annual Review described in 
Section I(m) and the resources provided to the Compliance Officer in 
connection with such Annual Review.''
    The Applicant requests deletion of the Compliance Officer and 
Annual Review provisions in Section I(i)(5)(ii) of the proposed 
exemption. If the Compliance Officer and Annual Review provisions do 
remain in the exemption, the Applicant requests that the Annual Report 
is provided to the auditor, who then can make a determination as to the 
adequacy of the report.
    The Applicant also asserts that the proposed exemption contains 
multiple conditions relating to the auditor's selection and 
qualifications, and the auditor should be trusted in its judgment. 
Accordingly, the Applicant argues that the phrase ``and the resources 
provided to the Compliance officer in connection with such Annual 
Review'' should be deleted, because, according to the Applicant, 
resource requests by the Compliance Officer should not translate into a 
public debate with the Department and the auditor on whether the DB 
QPAMs should be allowed to use PTE 84-14. The Applicant states that 
this condition interferes with the administrability of the exemption 
and its use by plans, if counterparties cannot understand the 
requirement or test whether it has been complied with.
    As discussed in detail below, the Department views the Compliance 
Officer and the Annual Review as integral to ensuring compliance with 
the exemption. A recurring, independent, and prudently conducted audit 
of the DB QPAMs is critical to ensuring the QPAMs' compliance with the 
Policies and Training mandated by this exemption, and the adequacy of 
the Policies and Training. The required discipline of regular audits 
underpins the Department's finding that the exemption is protective of 
plans and their participants, and should help prevent the sort of 
compliance failures that led to the Conviction. The Department agrees, 
however, that the auditor need not opine on the adequacy of the 
resources allocated to the Compliance Officer. Thus, the Department 
modified Section I(i)(5)(ii) accordingly. If, however, the auditor 
observes compliance issues related to the Compliance Officer or 
available resources, it would be appropriate for the auditor to opine 
on those problems.
Comment 15--Certification of the Audit--Section I(i)(7)
    Section I(i)(7) of the proposed exemption provides, ``(7) With 
respect to each Audit Report, the General Counsel, or one of the three 
most senior executive officers of the DB QPAM to which the Audit Report 
applies, must certify in writing, under penalty of perjury, that the 
officer has reviewed the Audit Report and this exemption; addressed, 
corrected, or remedied any inadequacy identified in the Audit Report; 
and determined that the Policies and Training in effect at the time of 
signing are adequate to ensure compliance with the conditions of this 
proposed five-year exemption and with the applicable provisions of 
ERISA and the Code.''
    The Applicant requests that this condition be modified to account 
for Deutsche Bank's business structure and permit the Applicant to 
decide which senior officers should review the Audit Report. Deutsche 
Bank requests that the reviewing individual be ``one of the three most 
senior officers with responsibility for the asset management business 
of the DB QPAM (or, to the extent no such senior officer has 
responsibility for the asset management business of the DB QPAM, one of 
the three most senior executives of the line of business engaged in 
discretionary asset management activities through the DB QPAM).'' 
Deutsche Bank further requests that the timing of this provision be 
clarified, as remedying issues found during the course of the Audit may 
prove to be a lengthier process than the

[[Page 61847]]

30-day certification period as required in Section I(i)(9). The 
Applicant states that the provision should require only that a process 
for remedying issues should be initiated in a timely fashion.
    Deutsche Bank also requests that the condition clarify that 
``addressing'' an inadequacy may constitute either accepting the 
auditor's recommendation, pointing out that alternative action is 
appropriate, or disagreeing with the auditor. The Applicant states that 
the auditor is not a monitor or part of the Applicant's management, and 
thus should not dictate how the Applicant runs its asset management 
business.
    The Applicant also requests the following addition to the 
condition: ``For purposes of this condition, a DB QPAM does not fail to 
address a potential inadequacy identified by the auditor by proposing 
an alternative means of protecting relevant ERISA plan clients and 
IRAs.''
    The Applicant further requests deletion of the requirement that the 
Audit Report be certified under penalty of perjury.
    The Department concurs that a senior executive officer engaged in 
the asset management business within the QPAM should be allowed to 
review the Audit Report, and has modified the language of Section 
I(i)(7), accordingly.
    While the Department does not view Section I(i)(7) as ambiguous, 
the Department is aware, as stated above, that the Applicant's efforts 
to address the auditor's recommendations may take longer to implement 
than the timeframe to submit the certified Audit Report. With respect 
to this issue, the Department did not intend to limit corrective 
actions to those that could only be completed prior to the submission 
of the Audit Report. Therefore, the Department has modified Section 
I(i)(7) to reflect that the senior officer may certify that a written 
plan to address the inadequacies regarding the Policies and Training 
identified in the Auditor's Report is in place.
    As mentioned above, the Department has determined that it is 
necessary for the Auditor to be afforded unfettered access to DB QPAM 
records, to the extent that the analysis of such records falls within 
the twelve-month period to which the audit relates. For the first audit 
required by this exemption, that period runs from April 18, 2018 
through April 17, 2019. The conditions of this exemption do not 
prohibit the Applicant from disagreeing with the auditor with respect 
to whether certain practices fail to comply with the terms of this 
exemption. However, in those circumstances where the auditor is not 
persuaded to change its position on a matter the auditor considers 
noncompliant, the Applicant will be responsible to correct such 
matters. Nor do the conditions of this exemption prohibit the Applicant 
from disagreeing with the auditor with respect to the appropriate 
method for correcting or addressing issues of noncompliance. The 
Department would expect the Applicant and the auditor to have 
meaningful communications on such differences of opinion. In the event 
the Applicant chooses to apply a corrective method that differs from 
that recommended by the Auditor, the Audit Report and the Addendum 
attached thereto should explain in detail the noncompliance, the 
auditor's recommended action, the corrective method chosen, and why the 
Applicant chose a corrective method different from that recommended by 
the Auditor. The Department declines to remove the requirement for 
certification by the senior executive officer under penalty of perjury, 
which makes clear the importance of the correction process and creates 
a strong incentive to take seriously the audit process and compliance 
generally.
Comment 16--Review and Certification of Audit Report--Section I(i)(8)
    Section I(i)(8) of the proposed exemption provides, ``(8) The Risk 
Committee of Deutsche Bank's Board of Directors is 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 
Deutsche Bank must review the Audit Report for each DB QPAM and must 
certify in writing, under penalty of perjury, that such officer has 
reviewed each Audit Report.''
    In its comment, Deutsche Bank requests that the condition be 
revised to conform with Deutsche Bank's corporate structure. 
Specifically, the Applicant states that Deutsche Bank's Audit Committee 
would be an appropriate recipient of the Audit Report given Deutsche 
Bank's current structure. The Applicant represents that ``the Audit 
Committee supports the Supervisory Board in, among other things, the 
following matters: Monitoring the financial accounting process; the 
effectiveness of the risk management system, particularly of the 
internal control system and the internal audit system; the auditing of 
the financial statements, especially with regard to the auditor's 
independence and the additional services provided by the auditor; and 
the Management Board's prompt remediation--through suitable measures--
of the deficiencies identified by the auditor. Furthermore, the Audit 
Committee is informed about special audits, substantial complaints and 
other exceptional measures on the part of bank regulatory 
authorities.''
    The Applicant requests flexibility in determining which committee 
should review the Audit Report in the event of future corporate 
restructuring or transferring of responsibility. Deutsche Bank requests 
the following addition to the condition: ``another committee as 
reasonably selected by the Supervisory Board.''
    Finally, the Applicant requests the requirement in Section I(i)(8) 
that the certification by the senior executive officer be made under 
penalty of perjury be deleted, as it is unnecessary.
    The Department is revising Section I(i)(8) of the exemption to 
require that ``[t]he Audit Committee of Deutsche Bank's Supervisory 
Board is provided a copy of each Audit Report; and a senior executive 
officer with a direct reporting line to the highest ranking compliance 
officer of Deutsche Bank must review the Audit Report for each DB QPAM 
and must certify in writing, under penalty of perjury, that such 
officer has reviewed each Audit Report.'' Furthermore, the Department 
agrees to allow for flexibility in choosing the committee. In this 
regard, the exemption now requires notice to the Department prior to 
any change in the committee that receives the Audit Report.
    The Department has developed this exemption to ensure that the 
highest levels of management are aware of ongoing matters concerning 
Deutsche Bank, the DB QPAMs, and compliance with this exemption. 
Requiring the provision of the Audit Report to the Audit Committee and 
certification by a senior executive officer in the reporting line of 
the highest legal compliance officer provides assurance that the 
highest levels of management within Deutsche Bank stay informed about 
Deutsche Bank's and the DB QPAMs' compliance with the terms of this 
exemption. In the Department's view, such officials are in the best 
position to ensure that any inadequacy identified by the auditor is 
appropriately addressed and that necessary changes to corporate policy 
are made if and where necessary. Requiring certification under penalty 
of perjury is consistent with the Department's longstanding view that 
basic requirements of compliance and integrity are fundamental to an 
entity's ability to qualify as a QPAM.
Comment 17--Availability of the Audit Report--Section I(i)(9)
    Section I(i)(9) of the proposed exemption provides, ``(9) Each DB

[[Page 61848]]

QPAM provides its certified Audit Report, by regular mail to: The 
Department's Office of Exemption Determinations (OED), 200 Constitution 
Avenue NW, Suite 400, Washington, DC 20210, or by private carrier to: 
122 C Street NW, Suite 400, Washington, DC 20001-2109, no later than 45 
days following its completion. The Audit Report will be part of the 
public record regarding this exemption. Furthermore, each DB QPAM must 
make its Audit Report unconditionally available for examination by any 
duly authorized employee or representative of the Department, other 
relevant regulators, and any fiduciary of an ERISA-covered plan or IRA, 
the assets of which are managed by such DB QPAM;''
    The Applicant states that the availability of the Audit Report 
should be limited to ERISA-covered plans and IRAs for which the 
Applicant relies on PTE 84-14. The Applicant argues that it is overly-
broad, punitive and not related to the relief provided in the exemption 
to extend this condition to plans and IRAs for which the DB QPAMs do 
not rely on PTE 84-14.
    The Department does not agree that the condition in Section I(i)(9) 
is punitive. As the Applicant recognized in its application, ERISA-
covered plans, IRAs, and counterparties routinely rely on QPAM status 
before entering into agreements with financial institutions, even if 
those institutions do not believe compliance with PTE 84-14 is strictly 
necessary for any particular transaction. Accordingly, the Department 
has an interest in ensuring that the conditions of this exemption 
broadly protect ERISA-covered plans and IRAs that have relied on QPAM 
status in deciding to enter into an agreement with the Applicant or the 
DB QPAMs.
    Nevertheless, the Department has revised Section I(i)(9) to clarify 
that the DB QPAMs are required to make the documents available to any 
fiduciary of a Covered Plan. The Audit Report, in any event, will be 
incorporated into the public record attributable to this exemption, 
under Exemption Application Number D-11908, and, therefore, 
independently accessible by members of the public. Accordingly, the 
Department has determined to revise the condition by replacing the 
phrase ``an ERISA-covered plan or IRA, the assets of which are managed 
by such DB QPAM'' with the term ``Covered Plan'' (as defined in Section 
II(b)). Lastly, the Department is modifying the condition such that 
access to the Audit Report need only be upon request and such access 
can be electronic, and has revised the exemption accordingly.
Comment 18--Engagement Agreements--Section I(i)(10)
    Section I(i)(10) of the proposed exemption provides, ``(10) Each DB 
QPAM and the auditor must submit to OED: (A) Any engagement 
agreement(s) entered into pursuant to the engagement of the auditor 
under this exemption; and (B) any engagement agreement entered into 
with any other entity retained in connection with such QPAM's 
compliance with the Training or Policies conditions of this proposed 
exemption, no later than six (6) months after the effective date of 
this exemption (and one month after the execution of any agreement 
thereafter).''
    The Applicant requests deletion of clause (B) related to engagement 
agreements entered into with respect to the Training or Policies 
conditions. Deutsche Bank cites the multiple conditions in the 
exemption for the qualifications of the trainer, the contents of the 
Policies, and the auditor's review of the adequacy of the Training and 
Policies, and submits that this condition duplicates part of the 
auditor's role and is burdensome. The Applicant states that this 
condition as written could require filing of numerous consultant and 
service provider engagement letters associated with developing the 
Training and Policies. The Applicant asserts that there is no reason 
for the Department to see and review, and make available to the public, 
every service provider contract that could relate to policies, 
procedures or training. The Applicant further requests that any 
engagement agreements submitted to the Department be redacted to 
protect confidential business terms.
    In coordination with the Department's modification of Section 
I(h)(2)(ii) to remove the requirement that the Training must be 
conducted by an independent professional, the Department has determined 
to remove the requirement in Section I(i)(10)(B) to provide to the 
Department the engagement agreements entered into with entities 
retained in connection with compliance with the Training or Policies 
conditions.
    Furthermore, to remove any confusion and uncertainty regarding the 
timing of the submission of the auditor's engagement agreement, the 
Department has modified Section I(i)(10) to require that the auditor's 
engagement agreement be submitted to the Office of Exemption 
Determinations no later than two (2) months after the execution of any 
such engagement agreement.
Comment 19--Auditor's Workpapers--Section I(i)(11)
    Section I(i)(11) of the proposed exemption provides, ``(11) The 
auditor must provide OED, upon request, all of the workpapers created 
and utilized in the course of the audit, including, but not limited to: 
the audit plan; audit testing; identification of any instance of 
noncompliance by the relevant DB QPAM; and an explanation of any 
corrective or remedial action taken by the applicable DB QPAM.''
    The Applicant requests that this language be limited to ensure that 
any confidential or otherwise sensitive business information is 
redacted prior to any disclosure of the workpapers in a public file. 
The Applicant cites the sensitive information to which the auditor will 
have access, such as client information, marketing data, personal 
information of the QPAM's employees, and other business details. The 
Applicant states that the condition can be limited to allow the 
auditor, and OED,\27\ to inspect such information without it being 
disclosed in the public record. Furthermore, the Applicant requests for 
all of the provisions in the exemption that relate to the auditor to 
make it clear that Applicant will not lose the benefit of the exemption 
for failures of the auditor. The Applicant requests that the Department 
either not include the workpapers as part of the public file, or 
provide that ``any confidential business or personal information of the 
DB QPAMs, Deutsche Bank, and their clients (or the officers, directors, 
employees or agents thereof) reflected in the workpapers, including, 
without limitation, client communications, shall be redacted, and 
provided further that nothing herein shall be deemed to limit any 
authority the Department may otherwise have to inspect such information 
without making it part of the public file.''
---------------------------------------------------------------------------

    \27\ OED is the Office of Exemption Determinations within the 
Employee Benefits Security Administration agency of the United 
States Department of Labor.
---------------------------------------------------------------------------

    The Department acknowledges that certain information contained in 
the workpapers may be confidential and proprietary, and having that 
information in a public file may create needless or avoidable 
disclosure issues. The Department has determined to modify Section 
I(i)(11) to remove the requirement that the auditor provide the 
workpapers to OED, and instead require that the auditor provide access 
to the workpapers for the Department's review and inspection. However, 
given the importance of the workpapers to the Department's own review 
and the

[[Page 61849]]

Applicant's contractual relationship with the auditor, the Department 
declines to include, as requested by the Applicant, a statement in 
Section I(i)(11) that a failure on behalf of the auditor to meet this 
condition will not violate the exemption.
Comment 20--Replacement of the Auditor--Section I(i)(12)
    Section I(i)(12) of the proposed exemption provides, ``(12) 
Deutsche Bank must notify the Department at least 30 days prior to any 
substitution of an auditor, except that no such replacement will meet 
the requirements of this paragraph unless and until Deutsche Bank 
demonstrates to the Department's satisfaction that such new auditor is 
independent of Deutsche Bank, experienced in the matters that are the 
subject of the exemption and capable of making the determinations 
required of this exemption.''
    The Applicant requests that this condition be deleted, as the 
exemption requires the auditor to satisfy multiple conditions with 
respect to qualifications, and it serves no useful purpose to require 
the Applicant to demonstrate that the auditor satisfies such additional 
standards before substitution, particularly given the timeline of the 
audit process. The Applicant states that the Department has not 
required its approval of the initial choice of auditor. The Applicant 
states that there is a multitude of possible reasons that an auditor 
would need to be replaced, including the auditor being unable to 
complete an audit timely.
    This exemption is not unique in requiring the Department be 
notified of changes to service providers (See, e.g., the requirement of 
Schedule C of the Form 5500 Annual Return/Report for the Plan 
Administrator of certain plans to report to the Department a 
termination of the plan's auditor and/or enrolled actuary and to 
provide an explanation of the reasons for the termination, including a 
description of any material disputes or matters of disagreement 
concerning the termination). Furthermore, requiring the Applicant to 
notify the Department of the substitution of an auditor serves to 
ensure that the DB QPAMs are attentive to the audit process and the 
protections it provides; and that the Department has the information it 
needs to review compliance. However, the Department has determined to 
modify Section I(i)(12) to remove the requirement for Deutsche Bank to 
demonstrate the independence and qualifications of the auditor, and 
requires instead that Deutsche Bank, no later than two months from the 
engagement of a substitute or subsequent auditor, notify the Department 
of a change in auditor and of the reason(s) for the substitution 
including any material disputes between the terminated auditor and 
Deutsche Bank.
Comment 21--Contracts with ERISA-Covered Plans and IRAs--Section I(j)
    The prefatory language to Section I(j) of the proposed exemption 
provides, ``(j) Effective as of the effective date of this exemption, 
with respect to any arrangement, agreement, or contract between a DB 
QPAM and an ERISA-covered plan or IRA for which a DB QPAM provides 
asset management or other discretionary fiduciary services, each DB 
QPAM agrees and warrants:''
    In its comment, Deutsche Bank requests that this condition be 
limited to ERISA-covered plans and IRAs with respect to which the 
Applicant relies on PTE 84-14 and this exemption. Deutsche Bank states 
that extending this provision to ERISA-covered plans and IRAs for which 
the DB QPAMs do not rely on it is overly broad, punitive, and not 
related to asset management or the scope of the exemptive relief.
    As explained above, Plans and IRAs routinely rely on QPAM status as 
a condition of entering into transactions with financial institutions, 
even with respect to transactions that do not require adherence to PTE 
84-14. As the Applicant represented to the Department on December 24, 
2015, ``plan investors may rely on the availability of the QPAM 
exemption even for pooled funds intended to qualify for an exception 
under the Department's plan asset regulation. The QPAM exemption 
provides a broad, effective back-stop against non-exempt prohibited 
transactions in the event a pooled fund inadvertently ceases to meet 
the conditions of that exception.'' In addition, it may not always be 
clear whether the DB QPAM intends to rely upon PTE 84-14 for any 
particular transaction. Accordingly, it is critical to ensure that 
protective conditions are in place to safeguard the interests of ERISA-
covered plans and IRAs that are acting in reliance on the availability 
of this exemption, particularly those who may not have entered into the 
transaction in the first place, but for the Department's grant of this 
exemption.
    The Department has a clear interest in protecting such ERISA-
covered plans and IRAs that enter into an asset management agreement 
with a Deutsche Bank asset manager in reliance on the manager's 
qualification as a QPAM. Moreover, when an ERISA-covered plan or IRA 
terminates its relationship with an asset manager, it may incur 
significant costs and expenses as its investments are unwound and in 
connection with finding a new asset manager. The Department has revised 
this condition for consistency with its interest in protecting ERISA-
covered plans and IRAs that rely upon QPAM status. Therefore, the 
Department has substituted the term ``Covered Plan'' for ``an ERISA-
covered plan or IRA for which a DB QPAM provides asset management or 
other discretionary fiduciary services'' to memorialize this interest 
so that the condition now applies to ERISA-covered plans and IRAs only 
when the Deutsche Bank asset manager relies on PTE 84-14 or has 
expressly represented that it qualifies as a QPAM or relies on the QPAM 
class exemption in its dealings with the ERISA-covered plan or IRA.
    To the extent a DB QPAM would prefer not to be subject to these 
conditions, however, it may expressly disclaim reliance on QPAM status 
or PTE 84-14 in entering into its contract with the ERISA-covered plan 
or IRA.
Comment 22--Contracts with ERISA-Covered Plans and IRAs--Section 
I(j)(1)
    Section I(j)(1) of the proposed exemption provides, ``(j) Effective 
as of the effective date of this exemption, with respect to any 
arrangement, agreement, or contract between a DB QPAM and an ERISA-
covered plan or IRA for which a DB QPAM provides asset management or 
other discretionary fiduciary services, each DB QPAM agrees and 
warrants:
    (1) To comply with ERISA and the Code, as applicable with respect 
to such ERISA-covered plan or IRA; to refrain from engaging in 
prohibited transactions that are not otherwise exempt (and to promptly 
correct any inadvertent prohibited transactions); and to comply with 
the standards of prudence and loyalty set forth in section 404 of ERISA 
with respect to each such ERISA-covered plan and IRA;''
    In its comment, Deutsche Bank requests that Section I(j)(1) be 
deleted, as it constitutes an attempt to provide a private right of 
action for IRAs that Congress did not require. The Applicant states 
that the provision imposes legal requirements on IRAs, such as duties 
of prudence and loyalty, that Congress did not require; for plans 
subject to ERISA, this provision is entirely duplicative of the private 
right of action in ERISA. The Applicant states that the exemption 
proposes to change the enforcement of ERISA and the Code for all asset 
management clients and to create private rights of action above and 
beyond ERISA and the Code. The

[[Page 61850]]

Applicant states that this exemption did not arise out of a violation 
of ERISA, and the Department's grant or denial of an exemption is not 
aimed at punishing institutions for criminal conduct under laws other 
than ERISA, especially when they have already been punished under those 
other laws.
    If this provision is not deleted, the Applicant requests that 
``promptly'' be deleted for similar reasons as noted earlier, and that 
the condition be revised as follows: ``(1) To comply with ERISA and the 
Code, as applicable, with respect to such ERISA-covered plan or IRA, 
[and] to refrain from engaging in prohibited transactions that are not 
otherwise exempt (and to correct any inadvertent prohibited 
transactions).''
    The Department rejects the view that it acts outside its authority 
by protecting ERISA-covered plans and IRAs that rely on Deutsche Bank's 
asset managers' eligibility for this exemption, and reemphasizes the 
seriousness of the criminal misconduct that created the need for this 
exemption. The Department may grant an exemption under section 408(a) 
of ERISA or section 4975(c)(2)(C) of the Code only to the extent the 
Secretary finds, among other things, that the exemption is protective 
of the affected ERISA-covered plan(s) and/or IRA(s) (i.e., the Covered 
Plans). As noted in the exemption application, personnel at Deutsche 
Bank, including at different Deutsche Bank divisions acting as QPAMs, 
engaged in serious misconduct over an extended period of time. This 
misconduct appears to have stemmed, in part, from deficiencies in 
control and oversight.
    Notwithstanding the misconduct, which resulted in violations of 
Section I(g) of PTE 84-14, the Department has determined that this 
exemption is protective of Covered Plans and in the interest of 
participants, beneficiaries, and beneficial owners of such Covered 
Plans. The Department made this determination based, in significant 
part, upon the protections of Section I(j) that require DB QPAMs to 
make an express commitment to Covered Plans to adhere to the 
requirements of ERISA and the Code, as applicable. As previously 
indicated, the Department has concluded that a culture of compliance, 
centered on adherence to basic standards of fair dealing as set forth 
in this exemption, gives the Department a compelling basis for making 
the required statutory findings that the exemption is in the interest 
of, and protects the rights of, participants, beneficiaries, and 
beneficial owners of Covered Plans. Absent such findings, the exemption 
would have been denied.
    The Department does not accept the view that an exemption may not 
contain a condition, such as an obligation to adhere to basic fiduciary 
norms of prudence and loyalty, to the extent that it duplicates a 
statutory requirement. Nothing in the ERISA or the Code suggests that 
the Department is forbidden, in exercising its discretion to craft 
protective exemption conditions, from basing its conditions on 
protective conditions that Congress itself has adopted in related 
contexts. Nor has the Department created any new causes of action 
through this exemption. As before, private litigants would have only 
those causes of action specifically authorized by laws that exist 
independent of this exemption.
    The Department declines to delete the term ``promptly'' for the 
same reasons as noted previously. Furthermore, for the reasons set 
forth above, the Department has modified the clause ``and to comply 
with the standards of prudence and loyalty set forth in section 404 of 
ERISA with respect to each such ERISA-covered plan and IRA.'' Instead, 
with respect to this clause, the Department has required an express 
commitment to comply with the fiduciary standards and prohibited 
transaction rules only to the extent these provisions are 
``applicable'' under ERISA and the Code. The revised terms, together 
with this exemption's limited relief (e.g., this exemption generally 
does not extend to transactions that involve self-dealing) should serve 
to promote a culture of compliance and protect Covered Plans and their 
participants, beneficiaries, and beneficial owners.
    In response to the Applicant's comments, the Department also notes 
that nothing in ERISA or the Code prevents the Department from 
conditioning relief on express contractual commitments to adhere to the 
requirements set out herein. The DB QPAMs remain free to disclaim 
reliance on the exemption and to avoid such express contractual 
commitments. To the extent, however, that they hold themselves out as 
fiduciary QPAMs, they should be prepared to make an express commitment 
to their customers to adhere to the requirements of this exemption. 
This commitment strengthens and reinforces the likelihood of 
compliance, and helps ensure that, in the event of noncompliance, 
Covered Plans are insulated from injuries caused by noncompliance. 
These protections also ensure that Covered Plans are able to extricate 
themselves from transactions that become prohibited as a result of the 
QPAMs' misconduct, without fear of sustaining additional losses as a 
result of the QPAMs' actions. In this connection, however, the 
Department emphasizes that the only claims available to the QPAMs' 
Covered Plans customers pursuant to these contractual commitments are 
those separately provided by ERISA or other state and federal laws that 
are not preempted by ERISA.
Comment 23--Indemnity and Limits on Liability--Sections I(j)(2), (3), 
(6), and (7)
    Sections I(j)(2), (3), (6) and (7) of the proposed exemption 
provide, ``(j) Effective as of the effective date of this exemption, 
with respect to any arrangement, agreement, or contract between a DB 
QPAM and an ERISA-covered plan or IRA for which a DB QPAM provides 
asset management or other discretionary fiduciary services, each DB 
QPAM agrees and warrants:
    (2) Not to require (or otherwise cause) the ERISA-covered plan or 
IRA to waive, limit, or qualify the liability of the DB QPAM for 
violating ERISA or the Code or engaging in prohibited transactions;
    (3) Not to require the ERISA-covered plan or IRA (or sponsor of 
such ERISA-covered plan or beneficial owner of such IRA) to indemnify 
the DB QPAM for violating ERISA or engaging in prohibited transactions, 
except for violations or prohibited transactions caused by an error, 
misrepresentation, or misconduct of a plan fiduciary or other party 
hired by the plan fiduciary who is independent of Deutsche Bank;
    (6) Not to include exculpatory provisions disclaiming or otherwise 
limiting liability of the DB QPAM for a violation of such agreement's 
terms, except 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 Deutsche Bank and its affiliates; and
    (7) To indemnify and hold harmless the ERISA--covered plan or IRA 
for any damages resulting from a violation of applicable laws, a breach 
of contract, or any claim arising out of the failure of such DB 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 Convictions;''
    In its comment, the Applicant requests that the indemnity required 
by Section I(j)(7) be deleted as it may operate in a manner that is 
fundamentally unfair. The Applicant views the indemnity provision as 
not being limited to clients who are harmed through a direct, causal 
link to the loss of the exemptive relief provided by PTE 84-14. 
According to the Applicant, the condition appears to protect plans and

[[Page 61851]]

IRAs against damages well beyond those provided under Section 409(a) of 
ERISA, for all sort of harms, including those (i) that arise from 
violations and breaches by third parties, (ii) that arise only 
tenuously from the manager's conduct, (iii) that may be grossly 
unreasonable in amount, (iv) for claims without merit and (v) for 
claims in connection with accounts that do not rely on the relief 
provided by PTE 84-14.
    The Applicant requests that, if the Department decides to retain 
the provision, the Department should expressly tie the indemnity to 
damages with a proximate, causal connection to relevant conduct of the 
manager. The Applicant provides the following revisions: ``(7) To 
indemnify and hold harmless the ERISA-covered plan or IRA for any 
reasonable damages involving such arrangement, agreement or contract 
and resulting directly from a violation of ERISA by such DB QPAM, or, 
to the extent the DB QPAM relies on the exemptive relief provided by 
PTE 84-14 and this exemption under the arrangement, agreement or 
contract, the failure of such DB QPAM to qualify for the exemptive 
relief provided by PTE 84-14 and this exemption as a result of a 
violation of Section I(g) of PTE 84-14 other than as a result of the 
Convictions. This condition does not require indemnification for 
indirect, special, consequential or punitive damages.''
    The Applicant contends that the other provisions enumerated above 
extend beyond the scope of relief and contain duplicative requirements, 
both internally and with respect to requirements that are already in 
ERISA. The Applicant states that the broad indemnity in subsection (7) 
substantively provides all of the protections contained in subsections 
(2), (3) and (6) (i.e., if the client is to be indemnified, it is 
confusing and unnecessary to restate that protection multiple times in 
multiple ways). The Applicant further states that if Section I(j)(7) 
remains, Sections I(j) (2), (3) and (6) should be deleted. 
Alternatively, if the Department decides to delete Section I(j)(7), 
while retaining Sections I(j)(3) and (6), Section I(j)(2) should be 
deleted because it is subsumed within the more detailed and qualified 
condition in Section I(j)(3).
    The Department has determined that Section I(j)(3), as proposed, is 
duplicative of the exemption's prohibition on exculpatory clauses, 
described below, and has deleted subsection (j)(3). The Department has 
made certain further changes to this condition upon consideration of 
the Applicant's comment. These changes include: Renumbering the 
condition for clarity; replacing ``applicable laws'' with clarifying 
language that conforms to the one-year exemption; replacing ``any 
damages'' with ``actual losses resulting directly from'' certain acts 
or omissions of the DB QPAMs; and adding language which affirms that 
the obligations under this condition do not extend to damages caused by 
acts that are beyond the control of the DB QPAMS. However, with respect 
to the indemnification clause, now renumbered Section I(j)(2), the 
purpose of this exemption is to protect Covered Plans. Section I(j)(2) 
is essential to achieving that purpose. The Department emphasizes that 
this condition is not punitive, but rather ensures that, a Covered Plan 
may expect a DB QPAM to adhere to basic fiduciary norms and standards 
of fair dealing, notwithstanding the Convictions. The condition also 
ensures that Covered Plans have the ability to disengage from a 
relationship with a DB QPAM without undue injury if Deutsche Bank 
violates the terms of this exemption. Accordingly, the Department has 
revised the applicability of this condition to more closely reflect 
this interest. In particular, the condition applies to Covered Plans. 
As indicated above, if the asset manager would prefer not to be subject 
to these provisions as exemption conditions, it may expressly disclaim 
reliance on QPAM status or PTE 84-14 in entering into its contract with 
an ERISA-covered plan or IRA (in that case, however, it could not rely 
on the exemption for relief).
    The Department also modified former Section I(j)(6) (now I(j)(2)) 
to clarify that the prohibition on exculpatory provisions does not 
extend to losses that arise from an act or event not caused by Deutsche 
Bank. Nothing in this section alters the prohibition on exculpatory 
provisions set forth in ERISA Section 410.
    The Department declines to delete former Section I(j)(2), now 
(j)(3), from the final exemption. As the Applicant points out, ERISA 
already precludes ERISA fiduciaries from disclaiming obligations under 
ERISA. See ERISA section 410 (prohibiting exculpatory clauses as void 
against public policy). To the extent the exemption condition prevents 
the DB QPAMs from including contractual provisions that are void as 
against public policy there is no legitimate basis for objection. Such 
exculpatory language should not be in the governing documents in the 
first place and is potentially misleading because it suggests 
disclaimer of obligations that may not be disclaimed.
    Outside the context of ERISA section 410, the provision's 
requirement that the DB QPAMs retain accountability for adherence to 
the basic obligations set forth in this exemption is justified by the 
misconduct that led to the Convictions as discussed above, and by the 
need to ensure that Covered Plan customers may readily obtain redress 
and exit contracts with DB QPAMs without harm in the event of 
violations.
Comment 24--Termination and Withdrawal Restrictions--Sections I(j)(4) 
and (5)
    Sections I(j)(4) and (5) of the proposed exemption provide, ``(j) 
Effective as of the effective date of this exemption, with respect to 
any arrangement, agreement, or contract between a DB QPAM and an ERISA-
covered plan or IRA for which a DB QPAM provides asset management or 
other discretionary fiduciary services, each DB QPAM agrees and 
warrants:
    (4) Not to restrict the ability of such ERISA-covered plan or IRA 
to terminate or withdraw from its arrangement with the DB QPAM 
(including 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 as a result of an actual 
lack of liquidity of the underlying assets, provided that such 
restrictions are applied consistently and in like manner to all such 
investors;
    (5) Not to impose any fees, penalties, or charges for such 
termination or withdrawal with the exception of reasonable fees, 
appropriately disclosed in advance, that are specifically designed to 
prevent generally recognized abusive investment practices or 
specifically designed to ensure equitable treatment of all investors in 
a pooled fund in the event such withdrawal or termination may have 
adverse consequences for all other investors, provided that such fees 
are applied consistently and in like manner to all such investors;''
    In its comment, the Applicant requests that Sections I(j)(4) and 
(5) be deleted entirely. The Applicant states that lockup provisions in 
facilitating the investment strategies are used to protect all 
investors in a pooled fund and applied evenhandedly to all investors. 
However, the Applicant states, the conditions would provide ERISA-
covered plan and IRA clients investing

[[Page 61852]]

in the fund with an advantage, to the detriment of public plans and 
other investors. The Applicant states that the conditions are 
unnecessary. If the Department declines to delete the provisions, the 
Applicant requests that they be revised to allow restrictions related 
to liquidity issues as well as those related to ensuring compliance 
with regulatory requirements, addressing valuation issues, and 
permitting the fund to pursue the investors' chosen investment 
strategy. Specifically, with respect to subsection (j)(4), the 
Applicant requests that the language ``as a result of an actual lack of 
liquidity of the underlying assets'' be stricken from the condition. 
Furthermore, with respect to subsection (j)(5), the Applicant requests 
that ``prevent generally recognized abusive investment practices or 
specifically designed to'' be removed.
    The Department declines to delete Sections I(j)(4) and (5) from 
this exemption. The Department has revised subsection (j)(4) to further 
clarify the Department's intent, but refuses to remove the concept 
entirely. Therefore, the Department has replaced ``as a result of an 
actual lack of liquidity of the underlying assets, provided that such 
restrictions are applied consistently and in like manner to all such 
investors'' with ``In connection with any such arrangements involving 
investments in pooled funds subject to ERISA entered into after the 
effective date of this exemption, the adverse consequences must relate 
to of a lack of liquidity of the underlying assets, valuation issues, 
or regulatory reasons that prevent the fund from promptly redeeming an 
ERISA-covered plan's or IRA's investment, and such restrictions must be 
applicable to all such investors and effective no longer than 
reasonably necessary to avoid the adverse consequences.'' Finally, the 
Department declines to make the Applicant's requested change to 
subsection I(j)(5).
Comment 25--Updated Investment Management Agreement--Section I(j)(8)
    Section I(j)(8) of the proposed exemption provides, ``(8) Within 
four (4) months of the effective date of this proposed exemption, each 
DB QPAM must provide a notice of its obligations under this Section 
I(j) to each ERISA-covered plan and IRA for which the DB QPAM provides 
asset management or other discretionary fiduciary services. For all 
other prospective ERISA-covered plan and IRA clients for which a DB 
QPAM provides asset management or other discretionary fiduciary 
services, the DB QPAM must agree in writing to its obligations under 
this Section I(j) in an updated investment management agreement or 
advisory agreement between the DB QPAM and such clients or other 
written contractual agreement.''
    The Applicant states that the provision is overly broad because it 
is not limited to ERISA-covered plans and IRAs for which DB QPAMs rely 
on PTE 84-14 and this exemption. The Applicant requests that this 
provision be limited to such ERISA-covered plan and IRA clients. The 
Applicant states that the four-month notice period is too short, and 
requests the Department extend the notice period to at least six 
months.
    The Applicant also requests that the Department provide a carve-out 
such that the Applicant does not need to provide any notices under this 
provision to existing clients to which it provided notice under Section 
I(j) of PTE 2016-13, assuming that the notice required in the current 
provision here is substantially similar to that required under PTE 
2016-13. To this end, the Applicant requests the following language be 
added to this condition: ``(For avoidance of doubt, notices provided to 
existing clients under Section I(j) of PTE 2016-13 will be deemed to 
satisfy this requirement).''
    Furthermore, the Applicant states that a bilateral management 
agreement containing the obligations under Section I(j) should not be 
mandated. The Applicant states that the DB QPAM would be in violation 
of this condition if a client refuses to sign the updated agreement. 
The Applicant asserts that its compliance with the exemption should not 
depend on action by its clients. Accordingly, the Applicant requests 
that this requirement be eliminated, and that this condition instead 
require the DB QPAMS to ``provide a written notice of its obligations 
under this Section I(j)'' to its prospective ERISA-covered plan and IRA 
clients.
    The Department has modified Section I(j)(8), now renumbered as 
Section I(j)(7), for better coordination with PTE 2016-13. As modified, 
the exemption's text now provides that a notice that satisfies Section 
I(i)(2) of PTE 2016-13 will satisfy renumbered Section I(j)(7) of this 
exemption, unless the notice contains any language that limits, or is 
inconsistent with, the scope of this exemption. Additionally, the time 
period for providing the notice is now six months, although the 
Department has specified the exact six-month deadline for such notice, 
which is October 17, 2018.
    As noted above, the Department has an interest in protecting an 
ERISA-covered plan or IRA that enters into an asset management 
agreement with a Deutsche Bank asset manager in reliance on the 
manager's qualification as a QPAM, regardless of whether the QPAM 
relies on the class exemption when managing the ERISA-covered plan's or 
IRA's assets. The Department has revised the applicability of this 
condition to more closely reflect this interest, and the condition now 
applies to ERISA-covered plans and IRAs for which a DB QPAM expressly 
represents that the manager qualifies as a QPAM or relies on the QPAM 
class exemption. The condition does not apply to an ERISA-covered plan 
or IRA with respect to which the Deutsche Bank asset manager has 
expressly disclaimed reliance on QPAM status or PTE 84-14 in entering 
into its contract with the ERISA-covered plan or IRA. The Department 
has also modified the condition such that a DB QPAM will not violate 
the condition solely because a Covered Plan refuses to sign an updated 
investment management agreement.
Comment 26--Notice to Plan Clients--Section I(k)(1)
    Section I(k)(1) of the proposed exemption provides that, ``(k)(1) 
Notice to ERISA-covered plan and IRA clients. Within fifteen (15) days 
of the publication of this proposed exemption in the Federal Register, 
each DB QPAM will provide a notice of the proposed exemption, along 
with a separate summary describing the facts that led to the 
Convictions (the Summary), which have been submitted to the Department, 
and a prominently displayed statement (the Statement) that each 
Conviction separately results in a failure to meet a condition in PTE 
84-14, to each sponsor of an ERISA-covered plan and each beneficial 
owner of an IRA for which a DB QPAM provides asset management or other 
discretionary fiduciary services, or the sponsor of an investment fund 
in any case where a DB QPAM acts only as a sub-advisor to the 
investment fund in which such ERISA-covered plan and IRA invests. In 
the event that this proposed exemption is granted, the Federal Register 
copy of the notice of final exemption must be delivered to such clients 
within sixty (60) days of its publication in the Federal Register, and 
may be delivered electronically (including by an email that has a link 
to the exemption). Any prospective clients for which a DB QPAM provides 
asset management or other discretionary fiduciary services must receive 
the proposed and final exemptions with the Summary and the Statement 
prior to, or contemporaneously with, the client's

[[Page 61853]]

receipt of a written asset management agreement from the DB QPAM.''
    In its comment, the Applicant contends that this condition should 
be limited to ERISA-covered plans and IRAs with respect to which the 
Applicant relies on PTE 84-14 and this exemption, as not applying such 
a limitation is overly broad, punitive, and not related to the use of 
this exemption. Furthermore, the Applicant states it should not be 
required to provide to clients a separate summary of facts in addition 
to the notice of the proposed exemption, which contains the facts and 
representations set forth in the preamble and ``is a far more fulsome 
and complete explanation.'' The Applicant requests that the condition 
make clear that the condition may be satisfied through other 
documentation, such as a subscription agreement. The Applicant further 
requests flexibility with respect to the fifteen-day time-period for 
providing the notice, suggesting the following language be added: ``or 
such longer period as agreed to with the Department.'' The Applicant 
also requests that ``the client's receipt of a written asset management 
agreement'' be replaced with ``the client's signing of a written asset 
management agreement (or other written documentation).''
    The Department notes that the proposed exemption provides details 
of the facts and circumstances underlying the conviction not found in 
the Summary or the final grant. One of the purposes of such a complete 
disclosure is to ensure that all interested parties are aware of and 
attentive to the complete facts and circumstances surrounding Deutsche 
Bank's application for exemption. In this regard, these parties include 
clients that receive an asset management agreement, which is why the 
Department is not revising the provision in the manner requested. 
Requiring the disclosure of the Summary, proposal, and this final grant 
provides the opportunity for all parties to have knowledge of these 
facts and circumstances. Notwithstanding this, the Department has 
modified the condition to clarify that disclosures may be provided 
electronically. Further, the Department is narrowing the notice 
requirement to each ``sponsor and beneficial owner of a Covered Plan.'' 
Notice does not need to be given to a client with respect to whom a DB 
QPAM has expressly disclaimed reliance on QPAM status or reliance on 
PTE 84-14.
    With respect to the Applicant's requested change regarding the 
timeframe, the Department believes that requiring that delivery be 
completed in 60 days following the publication of this exemption in the 
Federal Register provides sufficient time for the Applicant to prepare 
the Summary and effect delivery. The Department has moved this 60-day 
requirement to the beginning of Section I(k) by specifying a specific 
date upon which notice should be completed, June 17, 2018.
Comment 27--Notice to Non-Plan Clients--Section I(k)(2)
    Section I(k)(2) of the proposed exemption provides, ``[e]ach DB 
QPAM will provide a Federal Register copy of the proposed exemption, a 
Federal Register copy of the final exemption; the Summary; and the 
Statement to each: (A) Current Non-Plan Client within four (4) months 
of the effective date, if any, of a final exemption; and (B) Future 
Non-Plan Client prior to, or contemporaneously with, the client's 
receipt of a written asset management agreement, or other written 
contractual agreement, from the DB QPAM. For purposes of this 
subparagraph (2), a Current Non-Plan Client means a client of a DB QPAM 
that: Is neither an ERISA-covered plan nor an IRA; has assets managed 
by the DB QPAM as of the effective date, if any, of a final exemption; 
and has received a written representation (qualified or otherwise) from 
the DB QPAM that such DB QPAM qualifies as a QPAM or qualifies for the 
relief provided by PTE 84-14. For purposes of this subparagraph (2), a 
Future Non-Plan Client means a prospective client of a DB QPAM that: Is 
neither an ERISA-covered plan nor an IRA; has assets managed by the DB 
QPAM after the effective date, if any, of a final exemption; and has 
received a written representation (qualified or otherwise) from the DB 
QPAM that such DB QPAM qualifies as a QPAM or qualifies for the relief 
provided by PTE 84-14.''
    The Applicant requested that Section I(k)(2) be deleted in its 
entirety. Given the breadth of the notice requirement otherwise 
mandated by the exemption, and its decision to restrict the requirement 
to those arrangements for which QPAM status plays an integral role 
(i.e., the DB QPAM represents or relies upon its QPAM status), the 
Department has determined to delete this provision.
Comment 28--Compliance Officer--Section I(m)
    Section I(m) of the proposed exemption outlines the requirements 
associated with appointment of a Compliance Officer and an accompanying 
Annual Review.
    In its comment, Deutsche Bank argues that Section I(m) is 
duplicative of the audit, unfair and punitive. The Applicant states 
that no conduct by the DB QPAMs merits a separate Annual Review 
dedicated to ERISA. The Applicant asserts that the provision assumes 
facts unsupported by the record, namely: (1) That DB QPAMs will not 
comply with ERISA or the Code and applicable exemptions; (2) that their 
existing compliance structure, even when enhanced by the conditions of 
this exemption and earlier ones, are insufficient; and (3) that the 
auditor is either incapable of adequately testing the DB QPAMs' 
compliance with ERISA, the Code and applicable exemptions or the 
auditor cannot be trusted to conduct this testing. The Applicant states 
that this provision also appears in none of the earlier individual 
exemptions that allowed applicants to rely on PTE 84-14 notwithstanding 
a criminal conviction violating Section I(g) of PTE 84-14. The 
Applicant asserts that the inclusion of this condition treats the 
Applicant unfairly and is inconsistent with the Administrative 
Procedure Act and Section 408(a) of ERISA and Section 4975 of the Code.
    Deutsche Bank states that, if the Department declines to delete 
Section I(m), the provision should be modified so as to not interfere 
with the auditor, reduce the time that auditor has to complete its work 
or impose on the DB QPAMs duplicative or irrelevant and, therefore, 
unnecessary conditions. Furthermore, the Applicant states that 
Department should not require the Compliance Officer to complete 
substantially similar work that it expects of the auditor in a 
substantially shorter timeframe. The Applicant states that the 
Compliance Officer should report to an officer with familiarity with 
asset management, not some unrelated business. The Applicant asserts 
that the Annual Review should be concerned only with the subject matter 
of this exemption, such as material compliance with ERISA and the Code, 
and not gauge the adequacy of the resources provided to the Compliance 
Officer.
    The Department discusses the Applicant's overarching concerns with 
Section I(m) in response to the individual changes to specific 
provisions below.
    Section I(m)(1)(ii) of the proposed exemption states, in relevant 
part, ``(1) Deutsche Bank designates 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 annual review (the Annual Review) to determine 
the adequacy and effectiveness of the implementation of

[[Page 61854]]

the Policies and Training. With respect to the Compliance Officer, the 
following conditions must be met:
    (ii) The Compliance Officer must have a direct reporting line to 
the highest-ranking corporate officer in charge of legal compliance 
that is independent of Deutsche Bank's other business lines;''
    With respect to subsection I(m)(1)(ii), the Applicant requests that 
``of legal compliance that is independent of Deutsche Bank's other 
business lines'' be replaced with ``of compliance for asset 
management.'' The Department has made changes in line with the 
Applicant's request, but has not removed the word ``legal.''
    Section I(m)(2) of the proposed exemption states, ``(2) With 
respect to each Annual Review, the following conditions must be met:
    (i) The Annual Review includes a review of: Any compliance matter 
related to the Policies or Training that was identified by, or reported 
to, the Compliance Officer or others within the compliance and risk 
control function (or its equivalent) during the previous year; any 
material change in the business activities of the DB QPAMs; and any 
change to ERISA, the Code, or regulations related to fiduciary duties 
and the prohibited transaction provisions that may be applicable to the 
activities of the DB QPAMs;''
    With respect to this section, the Applicant requests: substituting 
``Any material compliance matter'' for ``Any compliance matter''; 
deletion of ``or others within the compliance and risk control function 
(or its equivalent);'' and clarification that the Annual Review 
encompass ``any material change in the business activities of the DB 
QPAMs that may impact their compliance with ERISA or Section 4975 of 
the Code.''
    The Department declines to add the word ``material'' due to the 
focused scope of the Annual Review on the Policies and Training 
required under this exemption. The Department also declines to delete 
the phrase ``or others within the compliance and risk control function 
(or its equivalent)'' because it is important that all relevant 
compliance matters be properly accounted for, not simply those that 
make their way to the Compliance Officer. The Department has added the 
word ``relevant'' to clarify that any changes to the QPAM's business 
activities should be relevant to the scope and coverage of this 
exemption.
    Section I(m)(2)(ii) of the proposed exemption states, ``The 
Compliance Officer prepares a written report for each Annual Review 
(each, an Annual Report) that (A) summarizes his or her material 
activities during the preceding year; (B) sets forth any instance of 
noncompliance discovered during the preceding year, and any related 
corrective action; (C) details any change to the Policies or Training 
to guard against any similar instance of noncompliance occurring again; 
and (D) makes recommendations, as necessary, for additional training, 
procedures, monitoring, or additional and/or changed processes or 
systems, and management's actions on such recommendations;''
    With respect to this section, the Applicant suggests that the 
Annual Report ``(A) summarizes his or her material activities in 
connection with any compliance matter related to the Policies or 
Training during the preceding year; (B) sets forth any material 
instance of noncompliance related to the Policies or Training 
discovered during the preceding year, and any related corrective 
action; (C) details any material 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 relating to the Policies or Training, and management's actions 
on such recommendations.''
    The Department declines to make these changes because Section 
(m)(1) properly sets out the scope of the Annual Review in that it is 
meant ``to determine the adequacy and effectiveness of the 
implementation of the Policies and Training.'' Any additional 
requirements outlined with respect to the Annual Review should be 
handled accordingly.
    Section I(m)(2)(iii) of the proposed exemption states, ``In each 
Annual Report, the Compliance Officer must certify in writing that to 
his or her knowledge: (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 preceding year and 
any related correction taken to date have been identified in the Annual 
Report; (D) the DB QPAMs have complied with the Policies and Training 
in all respects, and/or corrected any instances of noncompliance in 
accordance with Section I(h) above; and (E) Deutsche Bank has provided 
the Compliance Officer with adequate resources, including, but not 
limited to, adequate staffing;
    With respect to this section, the Applicant requests that ``certify 
in writing'' be replaced with ``state,'' that ``any known instances of 
noncompliance'' be ``related to the Policies or Training,'' and that 
the review of whether ``Deutsche Bank has provided the Compliance 
Officer with adequate resources, including, but not limited to, 
adequate staffing'' be deleted.
    The Department has deleted paragraph (E) regarding staffing and 
resources, as requested by the Applicant, but has not made the other 
requested changes because these provisions are properly limited in 
scope to the Policies and Training as outlined in Section I(m)(1).
    Section I(m)(2)(v) of the proposed exemption states, ``Each Annual 
Review, including the Compliance Officer's written Annual Report, must 
be completed at least three (3) months in advance of the date on which 
each audit described in Section I(i) is scheduled to be completed;''
    With respect to this section, the Applicant requests that the 
Annual Review, including the Annual Report, be completed ``at least one 
(1) month in advance of the date on which each audit described in 
Section I(i) is scheduled to be completed.''
    The Department has modified this section slightly so that it is no 
longer tied to completion of the audit, but rather the end of the 
period to which the Annual Report and Annual Review relates.
Comment 29--Deferred Prosecution Agreement/Non-Prosecution Agreement--
Section I(p)
    Section I(p) of the proposed exemption provides, ``(p)(1) During 
the effective period of this exemption, Deutsche Bank immediately 
discloses to the Department any Deferred Prosecution Agreement (a DPA) 
or Non-Prosecution Agreement (an NPA) entered into by Deutsche Bank or 
any of its affiliates with the U.S Department of Justice, in connection 
with conduct described in Section I(g) of PTE 84-14 or section 411 of 
ERISA; and (2) Immediately provides the Department any information 
requested by the Department, as permitted by law, regarding such 
agreement and/or conduct and allegations that led to the agreement. 
After review of the information, the Department may require Deutsche 
Bank or its affiliates, as specified by the Department, to submit a new 
application for the continued availability of relief as a condition of 
continuing to rely on this exemption. If the Department denies the 
relief requested in the new application,

[[Page 61855]]

or does not grant such relief within twelve (12) months of the 
application, the relief described herein is revoked as of the date of 
denial or as of the expiration of the twelve month period, whichever 
date is earlier;''
    In its comment, the Applicant requests that the Department delete 
Section I(p). The Applicant asserts that the condition does not meet 
the requirements of either the Administrative Procedure Act or the 
Department's own regulations, specifically with regards to withdrawal 
or revocation of an exemption. The Applicant also takes issue with the 
substance of the Department's proposed informal termination. 
Specifically, according to the Applicant, its inclusion in the 
exemption raises the risk of an immediate loss of exemptive relief and 
related uncertainty in connection with thousands of transactions and 
investments with respect to its plan asset clients.
    Deutsche Bank also contends that the timing of NPAs and DPAs is 
uncertain, as the activities under investigation also may be remote, 
historical, or unrelated to DB QPAMs' activities. The Applicant notes 
that the condition does not build in any notice to plan fiduciaries, 
counterparties, or other parties in interest that rely on QPAM, and as 
such is not administrable or protective of plans.
    The Applicant asserts that Section I(p) is inconsistent with the 
anti-criminal rules of Section I(g) of PTE 84-14 and Section 411 of 
ERISA as neither NPAs nor DPAs rise to the level of convictions. 
Moreover, this condition establishes a precedent to be inserted into 
every one of these matters--regardless of how attenuated the conduct is 
from plans and participants, and even if it is clearly in the interest 
of plans and participants to keep the individual QPAM exemption in 
place, and not to have uncertainty around this outcome.
    The Applicant suggests revisions if the Department declines to 
delete the condition. Specifically, the Applicant seeks to clarify that 
the Applicant will ``[provide] the Department any non-privileged 
information requested by the Department, as permitted by law, regarding 
such agreement and/or conduct and allegations that led to the 
agreement.'' Furthermore, the Applicant seeks deletion of the 
following: ``After review of the information, the Department may 
require Deutsche Bank or its affiliates, as specified by the 
Department, to submit a new application for the continued availability 
of relief as a condition of continuing to rely on this exemption. If 
the Department denies the relief requested in the new application, or 
does not grant such relief within twelve (12) months of the 
application, the relief described herein is revoked as of the date of 
denial or as of the expiration of the twelve month period, whichever 
date is earlier.''
    The Department in no way intended the condition to be read as 
providing for an automatic revocation of this exemption and, in light 
of the Applicant's comments, has revised the condition accordingly. As 
revised, the condition simply requires that the Applicant notify the 
Department if and when it or any of its affiliates enter into a DPA or 
NPA with the U.S. Department of Justice for conduct described in 
section I(g) of PTE 84-14 or ERISA section 411 and immediately provide 
the Department with any information requested by the Department, as 
permitted by law, regarding the agreement and/or conduct and 
allegations that led to the agreement. The Department retains the right 
to propose a withdrawal of the exemption pursuant to its procedures 
contained at 29 CFR 2570.50, should the circumstances warrant such 
action.
    Regarding the Applicant's comment that the timing and factual basis 
of the NPA or DPA could be far removed or distant in time or place from 
current plan management operations, the Department notes that entering 
into a DPA or NPA may reflect conduct that could have sustained a 
criminal conviction, and such conduct would be relevant to the 
Department's determination whether to allow an entity to continue to 
rely on this exemption or to grant a subsequent exemption when this 
exemption expires. Such agreements are not entered into lightly and can 
stem from misconduct that reflects directly on the parties' willingness 
and ability to adhere to the standards set forth herein. Similarly, 
such agreement can have a direct bearing on the efficacy of the 
affected institution's policies and procedures in preventing 
misconduct, such as the policies and procedures mandated by this 
exemption.
    The Department declines to specify that the DB QPAMs need only 
provide ``non-privileged information'' upon request by the Department. 
As stated above, the Department will evaluate the conduct underlying 
the new DPA or NPA and will review all relevant information.
Comment 30--Right to Copies of Policies and Procedures--Section I(q)
    Section I(q) of the proposed exemption provides, ``(q) Each DB 
QPAM, in its agreements with ERISA-covered plan and IRA clients, or in 
other written disclosures provided to ERISA-covered plan and IRA 
clients, within 60 days prior to the initial transaction upon which 
relief hereunder is relied, and then at least once annually, will 
clearly and prominently inform the ERISA-covered plan and IRA client 
that the client has the right to obtain copies of the QPAM's written 
Policies adopted in accordance with this exemption.''
    In its comment, the Applicant states that there are difficulties in 
informing ERISA-covered plan and IRA clients within sixty (60) days 
prior to the period the exemption is relied on because the Applicant 
intends to rely on the exemptive relief provided hereunder as soon as 
possible to ensure efficient trading on behalf of ERISA plan and IRA 
clients. The Applicant requests that the initial informing of clients 
be ``prior to or concurrently with the initial transaction upon which 
relief hereunder is relied.'' The Applicant also states that the annual 
notification requirements represent another duplicative and overlapping 
notice requirement to clients, which are burdensome and potentially 
confusing to clients, and requests that the annual notification 
requirement be deleted. The Applicant argues that providing the client 
with the exemption notice, which in turn informs the client that it can 
request and receive the policies and procedures upon request should 
obviate the need for additional mailings.
    Affording ERISA-covered plan and IRA clients a means by which to 
review and understand the Policies implemented in connection with this 
exemption is a vital protection that is fundamental to this exemption's 
purpose. However, the Department has modified the condition so that the 
QPAMs, at their election, may instead provide Covered Plans disclosure 
that accurately describes or summarizes key components of the Policies, 
rather than the policies in their entirety. The Department has also 
determined that such disclosure may be continuously maintained on a 
website, provided that the website link to the summary of the written 
Policies is clearly and prominently disclosed to those ERISA-covered 
plan and IRA clients to whom this section applies. The Department also 
agrees with the Applicant that the timing requirement for disclosure 
should be revised and, accordingly, has modified Section I(q) to 
require notice regarding the information on the website within 6 months 
of the effective date of this exemption (by October 17, 2018), and 
thereafter to the extent

[[Page 61856]]

certain material changes are made to the Policies.
Comment 31--Definition of Convictions--Section II(a)
    Section II(a) of the proposed exemption provides, ``(a) The term 
`Convictions' means (1) the judgment of conviction against DB Group 
Services, in Case 3:15-cr-00062-RNC to be entered in the United States 
District Court for the District of Connecticut to a single count of 
wire fraud, in violation of 18 U.S.C. 1343, and (2) the judgment of 
conviction against DSK entered on January 25, 2016, in Seoul Central 
District Court, relating to charges filed against DSK under Articles 
176, 443, and 448 of South Korea's Financial Investment Services and 
Capital Markets Act for spot/futures-linked market price manipulation. 
For all purposes under this exemption, `conduct' of any person or 
entity that is the `subject of [a] Conviction' encompasses any conduct 
of Deutsche Bank and/or their personnel, that is described in the Plea 
Agreement (including the Factual Statement thereto), Court judgments 
(including the judgment of the Seoul Central District Court), criminal 
complaint documents from the Financial Services Commission in Korea, 
and other official regulatory or judicial factual findings that are a 
part of this record,''
    In its comment, the Applicant states that this definition 
inaccurately paraphrases the Plea Agreement and Seoul Central District 
Court decision and significantly expands the conduct with respect to 
both the Conviction and the Korean Conviction. The Applicant requests 
that the language ``any conduct of Deutsche Bank and/or their 
personnel, that is described in the Plea Agreement (including the 
Factual Statement thereto), Court judgments (including the judgment of 
the Seoul Central District Court), criminal complaint documents from 
the Financial Services Commission in Korea, and other official 
regulatory or judicial factual findings that are part of this record'' 
be replaced with ``the factual allegations described in Paragraph 13 of 
the Plea Agreement filed in the District Court in Case Number 3:15-cr-
00062-RNC, and in the 'Criminal Acts' section pertaining to 'Defendant 
DSK' in the Decision of the Seoul Central District Court.''
    After considering this comment, the Department has revised the 
definition to be consistent with the definition of ``Convictions'' in 
the temporary exemption.
Comments 32 and 38--Definition of DB QPAM--Section II(b)
    Section II(b) of the proposed exemption provides, ``(a) The term 
`DB QPAM' means a `qualified professional asset manager' (as defined in 
Section VI(a) of PTE 84-14) that relies on the relief provided by PTE 
84-14 and with respect to which DSK or DK Group Services is a current 
or future `affiliate' (as defined in Section VI(d) of PTE 84-14). For 
purposes of this exemption, Deutsche Bank Securities, Inc. (DBSI), 
including all entities over which it exercises control; and Deutsche 
Bank AG, including all of its branches, are excluded from the 
definition of a DB QPAM'' (footnote omitted).
    In its comment, the Applicant requests that the reference to 
Section VI(d) of PTE 84-14 be specified as Section VI(d)(1) because 
Deutsche Bank is seeking relief only for control ``affiliates'' as 
defined in Section VI(d)(1). The Department agrees this is the intended 
scope of relief and has revised the definition accordingly.
    The Applicant requests that Deutsche Bank Services Inc. (DBSI) be 
permitted to act as a QPAM. However, as noted in the proposal to this 
exemption, Deutsche Bank had previously advised the Department that 
``[t]he DB QPAMs (including their officers, directors, agents other 
than Deutsche Bank, and employees of such DB QPAMs) did not know of, 
have reason to know of, or participate in the criminal conduct of DSK 
that is the subject of the Conviction.'' Then, in a letter to the 
Department dated July 15, 2016, Deutsche Bank raised the possibility 
that an individual (John Ripley), while employed at DBSI, may have 
known or had reason to know of the criminal conduct of DSK that is the 
subject of the Korean Conviction. Similarly, the Applicant further 
noted that, with respect to the LIBOR-related misconduct, ``certain 
sell side employees of DBSI, the dual registrant, may have known about 
the conduct that is the subject of the plea agreement.''
    For nearly nine months, following the publication of PTE 2015-15, 
the Applicant failed to raise with the Department the ``interpretive'' 
issue regarding whether an individual or individuals employed at DBSI 
may have known or had reason to know of the criminal conduct at DSK, 
notwithstanding the previous representation, and whether DBSI was still 
eligible to act as a QPAM. Consequently, the Department is not 
persuaded that DBSI should be permitted to act as a QPAM.
    The Applicant also suggests that, while the Definition of QPAM 
could be revised to preclude relief for DSK and DB Group Services, 
Deutsche Bank AG should be permitted to act as a QPAM, stating that 
Deutsche Bank AG and its branches were not convicted of a crime, and 
excluding those entities is unfair given the scope of relief provided 
to other banks subject to a disqualifying conviction. The Applicant, 
however, has not demonstrated that the exemption's existing conditions 
would adequately protect affected ERISA-covered plans and IRAs to the 
extent Deutsche Bank AG is permitted to act as a QPAM. Accordingly, the 
Department has not revised the exemption as requested.
Comments 33, 35-37, 40--Summary of Facts and Representations
    The Applicant seeks certain factual updates and clarifications and 
statements regarding the Summary of Facts and Representations. The 
Department notes that the factual updates and clarifications may be 
found as part of the public record for Application No. D-11908, in its 
comment letter to the Department, dated January 17, 2017.
Comment 34--DBSI
    The preamble to the proposed exemption states: ``In a letter to the 
Department dated July 15, 2016, Deutsche Bank raised the possibility 
that an individual [John Ripley], while employed at DBSI, may have 
known or had reason to know of the criminal conduct of DSK that is the 
subject of the Korean Conviction.'' (footnote omitted). The preamble 
also states that DB did not raise any ``interpretive questions 
regarding Section I(a) of PTE 2015-15, or express any concerns 
regarding DBSI's possible noncompliance, during the comment period for 
PTE 2015-15,'' and that ``a period of approximately nine months passed 
before Deutsche Bank raised an interpretive question regarding Section 
I(a) of PTE 2015-15.''
    In its comment letter, the Applicant contests the suggestion of the 
statements above that Deutsche Bank had failed to previously disclose 
Mr. Ripley's knowledge of the conduct and his employment with DBSI to 
the Department. The Applicant asserts that it identified Mr. Ripley 
both as an employee of DBSI and a subject of the Korean case on 
numerous prior occasions, as far back as 2011. The Department 
referenced these disclosures by identifying Mr. Ripley, his employment 
at DBSI, and his involvement in the case in the proposed exemption on 
behalf of Deutsche Bank

[[Page 61857]]

AG related to exemption application no. D-11696, at 80 FR 51314 (August 
24, 2015) (the DSK Proposal). The Applicant contends that it did not 
raise any interpretative question on Section I(a) of PTE 2015-15 
earlier because Deutsche Bank assumed that the Department would not 
impose an exemption condition that the Department knew Deutsche Bank 
could not meet.
    The Department acknowledges the disclosures by the Applicant 
regarding Mr. Ripley, his employment at DBSI, and his alleged role in 
the conduct underlying the Korean Conviction. However, the Department 
emphasizes that, despite the references to Mr. Ripley in the DSK 
Proposal and the proposed condition I(a) that the ``[t]he DB QPAMs 
(including their officers, directors, agents other than Deutsche Bank, 
and employees of such DB QPAMs) did not know of, have reason to know 
of, or participate in the criminal conduct of DSK that is the subject 
of the Conviction,'' the Applicant did not submit a comment 
highlighting this concern. The Department notes that, pursuant to the 
DSK Proposal, the Applicant had seven (7) days to submit a comment. It 
did not do so. Furthermore, following the grant of PTE 2015-15, if the 
Applicant believed that the Department had included ``an exemption 
condition that . . . [Deutsche Bank] could not meet,'' the Applicant 
could have asked the Department for clarification at any time. The 
Department further notes that, at the time of the grant of PTE 2015-15, 
the Department was processing Exemption Application no. D-11956, and 
was in regular contact with the Applicant regarding that submission. In 
fact, a tentative denial conference was held on November 9, 2015, 
between representatives of the Department and the Applicant, pursuant 
to a tentative denial letter dated July 16, 2015. In addition to the 
tentative denial conference, the Applicant submitted substantial 
information in support of the application, and to address the 
Department's concerns raised both in the letter and at the November 9, 
2015, conference. However, the Applicant did not raise this potential 
concern for approximately nine months and elaborated in the July 15, 
2016 letter referenced in the summary of facts and representations in 
the proposed exemption.
    In the July 15, 2016, letter, the Applicant further noted that, 
with respect to the LIBOR-related misconduct, ``certain sell side 
employees of DBSI, the dual registrant, may have known about the 
conduct that is the subject of the plea agreement.'' In a follow-up 
submission to the Department dated August 19, 2016, the Applicant 
represented that ``[to] the best of the Applicant's knowledge, no 
person employed by DBSI was determined to be responsible for the LIBOR 
misconduct, although one person who worked for the Bank may have been 
dual hatted to DBSI prior to 2008.''
Comments 39, 41, 42--Technical Corrections in the Operative Language
    In Section II(i) of the exemption, formerly Section II(g) in the 
proposed exemption, the Department has replaced the term ``Factual 
Statement'' with ``Agreed Statement of Facts.'' The Department has also 
replaced the term ``action'' with ``charge.'' Finally, the Department 
has deleted the phrase ``related to the manipulation of the London 
Interbank Offered Rate (LIBOR).'' The Department notes that the 
modified Section II(i) in the exemption is consistent with Section 
II(g) in the temporary exemption.
    The Department has modified both the prefatory language of Section 
I and Section II(e) of the exemption to reflect the fact that the full 
name of DB Group Services is ``DB Group Services (UK) Limited.''
    The Department has further modified the prefatory language of 
Section I to reflect the correct date of the Korean Conviction as 
January 25, 2016.
    The Department also notes that the defined terms in Section II have 
been reordered in their entirety so that they now appear in 
alphabetical order.
Comment 43--Term of the Exemption
    In its comment, the Applicant requests that the Department extend 
the term of the exemption to the remaining 9 years. The Applicant 
states that the conduct underlying the Convictions was isolated and 
limited to business not related to Deutsche Bank's asset management 
business, which is separate from the business of both DB Group Services 
and DSK. The Applicant further states that the Department historically 
has granted ten-year exemptions for cases involving serious criminal 
conduct and the present exemption should be disposed of in a like 
manner. The Applicant notes that the differences in the standards seem 
``arbitrary, and unrelated to the conduct,'' as ``the Department has 
departed from its historic practice of granting exemptions for similar 
circumstances with similar conditions.'' The Applicant states that the 
Department has not provided an explanation for the conditions new to 
this exemption ``other than its belief that crimes are serious.'' The 
Applicant states that ``the exemption is not a proper place to further 
punish Applicant and it should not be treated more harshly than prior 
applicants.'' Rather, the Applicant represents that it has entered into 
agreements with prosecutors and regulators and paid fines to address 
the subject misconduct. The Applicant asserts that ``[t{time} he 
exemption process is not an appropriate place to re-examine those 
resolutions.''
    The Applicant further states: ``ERISA was not violated here, and 
the asset management and wealth management businesses were not 
implicated in the criminal proceedings. It is thus unfortunate that the 
Department has chosen to impose conditions that suggest that the DB 
affiliated asset managers have violated some provision of ERISA that 
requires punitive conditions moving forward. There is simply no reason 
that Applicant should not receive the traditional ten-year exemption 
that the Department has historically granted to applicants for QPAM 
exemptions.'' The Applicant states that the crimes did not occur in 
asset management. Rather, the Applicant states that ''[t]he auditor's 
report, which will be available to plan fiduciaries and to the 
Department, will be a sufficient indicator of the DB QPAMs' compliance 
with the exemption, without requiring reapplication after 5 years.''
    Although the Applicant characterizes the conduct as unrelated to 
Deutsche Bank's asset management business, the Department does not 
agree with the apparent suggestion that the Applicant bears little or 
no responsibility for the criminal conduct, or that the misconduct 
amounted to mere isolated instances. This exemption was developed based 
on the Department's view that the misconduct relevant to the 
Convictions occurred at Deutsche Bank entities. With respect to the 
Korean Conviction, the record includes the Decision by the Seoul 
Central District Court (the Korean Court) dated January 25, 2016. The 
Korean Court decision notes: ``Defendant DSK could have anticipated and 
prevented in advance its officers and employees' violation of the 
[Korean Financial Investment Services and Capital Markets Act] in light 
of the size of its business, the number of its officers and employees, 
and its past experiences of engaging in the financial investment 
business in Korea.''
    With respect to the US Conviction, the record includes the Plea 
Agreement between the DOJ and DB Group Services and the accompanying 
Agreed Statement of Facts, as well as the

[[Page 61858]]

Deferred Prosecution Agreement entered into by Deutsche Bank AG. The 
Plea Factual Statement states: ``From at least 2003 through at least 
2010, [Deutsche Bank] derivatives traders engaged in a scheme to 
defraud [Deutsche Bank's] counterparties by secretly attempting to 
manipulate and manipulating U.S. Dollar, Yen, and Pound Sterling LIBOR, 
as well as EURIBOR [IBOR]. They carried out this scheme by attempting 
to manipulate and manipulating the various IBOR submissions. These 
derivatives traders requested that the [Deutsche Bank] IBOR submitters 
send in benchmark interest rates that would benefit the traders' 
trading positions, rather than rates that complied with the definitions 
of the IBORs. These derivatives traders either requested a particular 
IBOR contribution for a particular tenor and currency, or requested 
that the rate submitter contribute a higher, lower, or unchanged rate 
for a particular tenor and currency . . . In the instances when the 
published benchmark interest rates were manipulated in [Deutsche 
Bank's] favor due to [Deutsche Bank's] manipulation of its own or other 
banks' submissions, that manipulation benefitted DB derivatives 
traders, or minimized their losses, to the detriment of counterparties 
located in Connecticut and elsewhere, at least with respect to the 
particular transactions comprising the trading positions that the 
traders took into account in making their requests to the rate 
submitters. Certain [Deutsche Bank] pool and MMD derivatives traders 
who tried to manipulate LIBOR and EURIBOR submissions understood the 
features of the derivatives products tied to these benchmark interest 
rates; accordingly, they understood that to the extent they increased 
their profits or decreased their losses in certain transactions from 
their efforts to manipulate rates, their counterparties would suffer 
corresponding adverse financial consequences with respect to those 
particular transactions. The derivatives traders did not inform their 
counterparties that the traders were engaging in efforts to manipulate 
the IBORs to which the profitability of their trades was tied.'' The 
Plea Factual Statement further states that ``[t]his deceptive scheme 
involved efforts by [DB Group Services] derivatives traders to 
manipulate hundreds of IBORs.''
    The Deferred Prosecution Agreement further notes: ``Although 
Deutsche Bank's cooperation was often helpful, Deutsche Bank's 
cooperation also fell short in some important respects. First, Deutsche 
Bank was slow to cooperate fully with the Department's investigation. 
For example, Deutsche Bank did not timely produce certain information, 
including key information related to Deutsche Bank's Euro traders. As 
another example, in a telephone conversation, two executive level 
managers discussed knowing that the Department asked for relevant 
information and that the information had been withheld from the 
Department and other U.S. authorities while acknowledging they probably 
would have to give the information to the European Union. Second, 
Deutsche Bank was not, by comparison to previously settling 
institutions, proactive in its investigation and disclosure. For 
example, Deutsche Bank's conduct included interbank coordination 
between it and other institutions, but it was the other institutions, 
not Deutsche Bank, that provided that information to the Department. 
Third, Deutsche Bank's investigation was hampered by numerous 
unintentional but significant mistakes in the preservation, collection, 
and production of documents, audio, and data. For example, Deutsche 
Bank destroyed thousands of hours of potentially responsive audio 
recordings due to the negligent execution of certain discovery holds. 
As another example, Deutsche Bank discovered an important 
communications platform more than two years after receiving the 
Department's initial request for information, which platform contained 
some of the most explicit documents. Fourth, Deutsche Bank caused the 
Department to be misinformed that the bank was not permitted to provide 
to the Department a report by Deutsche Bank's primary domestic 
regulator, BaFin, that discussed shortcomings in Deutsche Bank's 
internal investigation of IBOR related misconduct.''
    In developing this exemption, the Department also considered 
statements made by other regulators. The United Kingdom's Financial 
Conduct Authority's (FCA) Final Notice states: ``The lack of 
appropriate systems to retrieve recorded Trader telephone calls and to 
map trading books and trades constituted a serious failure on the part 
of Deutsche Bank to [organize] and control its affairs responsibly and 
effectively, and to manage risks adequately . . . These failings 
demonstrate that there was a lack of appreciation within Deutsche Bank 
of the need to ensure systems are suitable for risk management and 
compliance purposes, enabling appropriate and timely investigations of 
potential Trader misconduct. The shortcomings of these particular 
systems came to light during the course of the Authority's 
investigation, but these systems issues would have been equally 
problematic in relation to any internal or regulatory agency enquiries 
or investigations concerning the possible misconduct of individual 
Traders.''
    The Consent Order of the New York State Department of Financial 
Services states that, ``[the] culture within the Bank valued increased 
profits with little regard to the integrity of the market.''
    The Consent Order of the United States Commodities Futures Trading 
Commission (CFTC) with Deutsche Bank states that, ``Deutsche Bank 
engaged in this wrongful conduct even after the [CFTC] Division of 
Enforcement requested in April 2010 that Deutsche Bank conduct an 
internal investigation of its U.S. Dollar LIBOR submission practices. 
In fact, Deutsche Bank did not make meaningful improvements in its 
internal controls until mid-2011 and did not formalize a policy about 
conflicts of interest among traders and submitters relating to 
benchmark submissions until February, 2013.''
    The Department also notes the size of relevant fines imposed by 
various regulators: the Seoul Central District Court imposed a fine of 
KRW 43,695,371,124 on Deutsche Bank and KRW 1,183,362,400 on DSK; the 
Department of Justice imposed a $150 million fine on DB Group Services 
and a $625 million penalty on Deutsche Bank; the New York State 
Department of Financial Services imposed a penalty of $600 million; and 
the CFTC and the FCA imposed fines of $800 million and [pound]226.8 
million, respectively.
    After deliberating on all the considerations above, the Department 
decided the appropriate term for this exemption is three years. This 
exemption is not punitive. In the Department's view, the 3-year term of 
this exemption and its numerous protective conditions reflect the 
Department's intent to protect Covered Plans that entrust substantial 
assets with a Deutsche Bank asset manager, following serious 
misconduct, supervisory failures, and two criminal convictions. The 
limited term of this exemption gives the Department the opportunity to 
review the adherence by the DB QPAMs to the conditions set out herein. 
The Department has decided it is necessary to limit the term of relief 
to facilitate the Department's ability to ensure that the circumstances 
that allowed the prior bad conduct to occur have been adequately 
addressed. Because two separate convictions within the Deutsche Bank 
corporate

[[Page 61859]]

structure create the need for this exemption, the Department has 
concluded that future review of the relief provided by this exemption 
should occur within a shorter timeframe.
    The Applicants may apply for an additional extension when they 
believe appropriate. Before granting an extension, however, the 
Department expects to carefully consider the efficacy of this exemption 
and any public comments on additional extensions, particularly 
including comments on how well the exemption has or has not worked to 
safeguard the interests of Covered Plans. If the Applicant seeks an 
extension of this exemption, the Department will examine whether the 
compliance and oversight changes mandated by various regulatory 
authorities are having their desired effect on Deutsche Bank entities.
Section I(r)
    The Department, in order to avoid inadvertent violations of the 
exemption that are outside the Applicant's control, has determined to 
modify Section I(r) such that a failure of the auditor to comply with 
any of the conditions in Section I(i) of the exemption, except for 
subsection I(i)(11), should not be treated as a failure by the DB QPAMs 
to comply with the conditions of the exemption provided that such 
failure was not due to the actions or inactions of Deutsche Bank or its 
affiliates, and Section I(r) is amended, accordingly.
Comment--Letter From House Committee on Financial Services
    The Department also received a comment letter from certain members 
of Congress (the Members) regarding this exemption, as well as 
regarding other QPAM-related proposed one-year exemptions. In the 
letter, the Members recognized that certain conditions contained in 
these proposed exemptions are crucial in protecting the investments of 
workers and retirees. In particular, they referred to proposed 
conditions which require each bank to: (a) Indemnify and hold harmless 
ERISA-covered plans and IRAs for any damages resulting from the future 
misconduct of such bank; and (b) disclose to the Department any 
Deferred Prosecution Agreement or a Non-Prosecution Agreement with the 
U.S. Department of Justice. The Members also requested that the 
Department hold hearings in connection with the proposed exemptions.
    The Department acknowledges the Members' concerns regarding the 
need for public discourse regarding proposed exemptions. To this end, 
the Department's procedures regarding prohibited transaction exemption 
requests under ERISA (the Exemption Procedures) afford interested 
persons the opportunity to request a hearing. Specifically, section 
2570.46(a) of the Exemption Procedures provides that, ``[a]ny 
interested person who may be adversely affected by an exemption which 
the Department proposes to grant relief from the restrictions of 
section 406(b) of ERISA, section 4975(c)(1)(E) or (F) of the Code, or 
section 8477(c)(2) of FERSA may request a hearing before the Department 
within the period of time specified in the Federal Register notice of 
the proposed exemption.'' The Exemption Procedures provide that ``[t]he 
Department will grant a request for a hearing made in accordance with 
paragraph (a) of this section where a hearing is necessary to fully 
explore material factual issues identified by the person requesting the 
hearing.'' The Exemption Procedures also provide that ``[t]he 
Department may decline to hold a hearing where: (1) The request for the 
hearing does not meet the requirements of paragraph (a) of this 
section; (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.'' \28\
---------------------------------------------------------------------------

    \28\ 29 CFR part 2570, published at 76 FR 66653 (October 27, 
2011).
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    While the Members' letter raises policy issues, it does not appear 
to raise specific material factual issues. The Department previously 
explored a wide range of legal and policy issues regarding Section I(g) 
of the QPAM Exemption during a public hearing held on January 15, 2015 
in connection with the Department's proposed exemption involving Credit 
Suisse AG, and has determined that an additional hearing on these 
issues is not necessary.

Public Comments

    The Department received three comments from two members of the 
public.
    One commenter, Theo Allen, objects to the Department's proposed 
exemption on the basis that President Trump owes ``hundreds of millions 
of dollars of debt to Deutsche Bank'' and in his view, that debt should 
be ``divested'' before the exemption is granted.
    Arthur Lipson of Western Investment LLC (Western) submitted two 
comment letters regarding the proposed exemption. The first letter 
states that Western is a shareholder in two closed-end funds managed by 
Deutsche Bank affiliates. He states that these funds are not subject to 
ERISA but are subject to the Investment Company Act of 1940, as 
amended. Mr. Lipson objects to a recent election of the closed-end fund 
trustees. Western sued the funds in connection with that election.
    Mr. Lipson's second letter additionally states that Deutsche Bank 
should not be granted an exemption unless it ensures ``compliance with 
the principle of directorial accountability in the funds that it 
manages.''

Conclusion

    After giving full consideration to the record, the Department has 
decided to grant the exemption, as described above. The complete 
application file (Application No. D-11908) is available for public 
inspection in the Public Disclosure Room of the Employee Benefits 
Security Administration, Room N-1515, U.S. Department of Labor, 200 
Constitution Avenue NW, Washington, DC 20210.
    For a more complete statement of the facts and representations 
supporting the Department's decision to grant this exemption, refer to 
the notice of proposed exemption published on November 21, 2016 at 81 
FR 83400.

Exemption

Section I: Covered Transactions
    Certain entities with specified relationships to Deutsche Bank AG 
(hereinafter, the DB QPAMs, as defined in Section II(d)) will not be 
precluded from relying on the exemptive relief provided by Prohibited 
Transaction Class Exemption 84-14 (PTE 84-14 or the QPAM Exemption), 
notwithstanding: (1) The ``Korean Conviction'' against Deutsche 
Securities Korea Co., a South Korean affiliate of Deutsche Bank AG 
(hereinafter, DSK, as defined in Section II(f)), entered on January 25, 
2016; and (2) the ``US Conviction'' against DB Group Services (UK) 
Limited, an affiliate of Deutsche Bank based in the United Kingdom 
(hereinafter, DB Group Services, as further defined in Section II(e)), 
during the Exemption Period,\29\ provided that the following conditions 
are satisfied:
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    \29\ Section I(g) of PTE 84-14 generally provides relief only if 
``[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 fraud.
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    (a) The DB QPAMs (including their officers, directors, agents other 
than Deutsche Bank, and employees of such QPAMs) did not know of, have 
reason to know of, or participate in the

[[Page 61860]]

criminal conduct of DSK and DB Group Services that is the subject of 
the Convictions. For purposes of this paragraph I(a), ``participate 
in'' means the knowing approval of the misconduct underlying the 
Convictions;
    (b) The DB QPAMs (including their officers, directors, and agents 
other than Deutsche Bank, and employees of such DB QPAMs) did not 
receive direct compensation, or knowingly receive indirect 
compensation, in connection with the criminal conduct that is the 
subject of the Convictions;
    (c) The DB QPAMs will not employ or knowingly engage any of the 
individuals that participated in the criminal conduct that is the 
subject of the Convictions. For the purposes of this paragraph (c), 
``participated in'' means the knowing approval of the misconduct 
underlying the Convictions;
    (d) At all times during the Exemption Period, no DB QPAM will use 
its authority or influence to direct an ``investment fund'' (as defined 
in Section VI(b) of PTE 84-14), that is subject to ERISA or the Code 
and managed by such DB QPAM with respect to one or more Covered Plans, 
to enter into any transaction with DSK or DB Group Services, or to 
engage DSK or DB Group Services 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 DB QPAMs to satisfy Section I(g) of PTE 84-
14 arose solely from the Convictions;
    (f) A DB QPAM did not exercise authority over the assets of any 
plan subject to Part 4 of Title I of ERISA (an ERISA-covered plan) or 
section 4975 of the Code (an IRA) in a manner that it knew or should 
have known would: Further the criminal conduct that is the subject of 
the Convictions; or cause the QPAM or their affiliates to directly or 
indirectly profit from the criminal conduct that is the subject of the 
Convictions;
    (g) Other than with respect to employee benefit plans maintained or 
sponsored for its own employees or the employees of an affiliate, DSK 
and DB Group Services will not act as fiduciaries within the meaning of 
section 3(21)(A)(i) or (iii) of ERISA, or section 4975(e)(3)(A) and (C) 
of the Code, with respect to ERISA-covered plan and IRA assets; 
provided, however, that DSK and DB Group Services will not be treated 
as violating the conditions of this exemption solely because they acted 
as investment advice fiduciaries within the meaning of section 
3(21)(A)(ii) of ERISA, or section 4975(e)(3)(B) of the Code, or because 
DB Group Services employees may be double-hatted, seconded, supervised 
or otherwise subject to the control of a DB QPAM, including in a 
discretionary fiduciary capacity with respect to the DB QPAM clients;
    (h)(1) Each DB QPAM must continue to maintain or immediately 
implement and follow written policies and procedures (the Policies). 
The Policies must require, and must be reasonably designed to ensure 
that:
    (i) The asset management decisions of the DB QPAM are conducted 
independently of the corporate management and business activities of DB 
Group Services and DSK;
    (ii) The DB QPAM fully complies with ERISA's fiduciary duties and 
with ERISA and the Code's prohibited transaction provisions, in each 
such case as applicable with respect to each Covered Plan, and does not 
knowingly participate in any violation of these duties and provisions 
with respect to Covered Plans;
    (iii) The DB 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 DB QPAM to regulators, 
including, but not limited to, the Department, the Department of the 
Treasury, the Department of Justice, and the Pension Benefit Guaranty 
Corporation, on behalf of or in relation to Covered Plans, are 
materially accurate and complete, to the best of such QPAM's knowledge 
at that time;
    (v) To the best of the DB QPAM's knowledge at the time, the DB QPAM 
does not make material misrepresentations or omit material information 
in its communications with such regulators with respect to ERISA-
covered plans or IRAs with respect to Covered Plans;
    (vi) The DB QPAM complies with the terms of this exemption; and
    (vii) Any violation of, or failure to comply with an item in 
subparagraphs (ii) through (vi), is corrected as soon as reasonably 
possible upon discovery, or as soon after the QPAM reasonably should 
have known of the noncompliance (whichever is earlier), and any such 
violation or compliance failure not so corrected is reported, upon the 
discovery of such failure to so correct, in writing, to the head of 
compliance and the General Counsel (or their functional equivalent) of 
the relevant DB QPAM that engaged in the violation or failure, and the 
independent auditor responsible for reviewing compliance with the 
Policies. A DB QPAM will not be treated as having failed to develop, 
implement, maintain, or follow the Policies, provided that it corrects 
any instance of noncompliance as soon as reasonably possible upon 
discovery, or as soon as reasonably possible after the QPAM reasonably 
should have known of the noncompliance (whichever is earlier), and 
provided that it adheres to the reporting requirements set forth in 
this subparagraph (vii);
    (2) Each DB QPAM must develop and implement a program of training 
(the Training), to be conducted at least annually, for all relevant DB 
QPAM asset/portfolio management, trading, legal, compliance, and 
internal audit personnel. The first Training under this Final Exemption 
must be completed by all relevant DB QPAM personnel by April 18, 2019 
(by the end of this 30-month period, asset/portfolio management, 
trading, legal, compliance, and internal audit personnel who were 
employed from the start to the end of the period must have been trained 
twice: the first time under PTE 2016-13; and the second time under this 
exemption). The Training must:
    (i) At a minimum, cover the Policies, ERISA and Code compliance 
(including applicable fiduciary duties and the prohibited transaction 
provisions), ethical conduct, the consequences for not complying with 
the conditions of this exemption (including any loss of exemptive 
relief provided herein), and prompt reporting of wrongdoing; and
    (ii) Be conducted by a professional who has been prudently selected 
and who has appropriate technical training and proficiency with ERISA 
and the Code;
    (i)(1) Each DB QPAM submits to an audit conducted annually by an 
independent auditor, who has been prudently selected and who has 
appropriate technical training and proficiency with ERISA and the Code, 
to evaluate the adequacy of, and each DB QPAM's compliance with, the 
Policies and Training described herein. The audit requirement must be 
incorporated in the Policies. Each annual audit must cover the 
preceding consecutive twelve (12) month period. The first audit must 
cover the period from April 18, 2018 through April 17, 2019, and must 
be completed by October 17, 2019. The second audit must cover the 
period from April 18, 2019 through April 17, 2020, and must be 
completed by October 17, 2020. In the event that the Exemption Period 
is extended or a new exemption is granted, the third audit would cover 
the period from April 18, 2020 through April 17, 2021, and would have 
to be

[[Page 61861]]

completed by October 17, 2021 (unless the Department chooses to alter 
the annual audit requirement in the new or extended exemption); \30\
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    \30\ The third audit referenced above would not have to be 
completed until after the Exemption Period expires. If the 
Department ultimately decides to grant relief for an additional 
period, it could decide to alter the terms of the exemption, 
including the audit conditions (and the timing of the audit 
requirements). Nevertheless, the Applicant should anticipate that 
the Department will insist on strict compliance with the audit terms 
and schedule set forth above. As it considers any new exemption 
application, the Department may also contact the auditor for any 
information relevant to its determination.
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    (2) Within the scope of the audit and to the extent necessary for 
the auditor, in its sole opinion, to complete its audit and comply with 
the conditions for relief described herein, and only to the extent such 
disclosure is not prevented by state or federal statute, or involves 
communications subject to attorney client privilege, each DB QPAM and, 
if applicable, Deutsche Bank, will grant the auditor unconditional 
access to its business, including, but not limited to: its computer 
systems; business records; transactional data; workplace locations; 
training materials; and personnel. Such access is limited to 
information relevant to the auditor's objectives as specified by the 
terms of this exemption;
    (3) The auditor's engagement must specifically require the auditor 
to determine whether each DB 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 DB QPAM's operational compliance with the Policies and 
Training. In this regard, the auditor must test, for each QPAM, a 
sample of such QPAM's transactions involving Covered Plans, sufficient 
in size and nature to afford the auditor a reasonable basis to 
determine such QPAM's operational compliance with the Policies and 
Training;
    (5) For each audit, on or before the end of the relevant period 
described in Section I(i)(1) for completing the audit, the auditor must 
issue a written report (the Audit Report) to Deutsche Bank and the DB 
QPAM to which the audit applies that describes the procedures performed 
by the auditor during the course of its examination. The auditor, at 
its discretion, may issue a single consolidated Audit Report that 
covers all the DB QPAMs. The Audit Report must include the auditor's 
specific determinations regarding:
    (i) The adequacy of each DB QPAM's Policies and Training; each DB 
QPAM's compliance with the Policies and Training; the need, if any, to 
strengthen such Policies and Training; and any instance of the 
respective DB QPAM's noncompliance with the written Policies and 
Training described in Section I(h) above. The DB QPAM must promptly 
address any noncompliance. The DB QPAM must promptly address or prepare 
a written plan of action to address any determination of inadequacy 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 QPAM. Any action taken or the 
plan of action to be taken by the respective DB QPAM must be included 
in an addendum to the Audit Report (such addendum must be completed 
prior to the certification described in Section I(i)(7) below). In the 
event such a plan of action to address the auditor's recommendation 
regarding the adequacy of the Policies and Training is not completed by 
the time of submission of the audit report, the following period's 
audit report, must state whether the plan was satisfactorily completed. 
Any determination by the auditor that the respective DB 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 DB QPAM has complied with the requirements under this 
subparagraph must be based on evidence that the particular DB QPAM has 
actually implemented, maintained, and followed the Policies and 
Training required by this exemption. Furthermore, the auditor must not 
solely rely on the Annual Report created by the compliance officer (the 
Compliance Officer), as described in Section I(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 I(i)(3) and (4) 
above;
    (ii) The adequacy of the most recent Annual Review described in 
Section I(m);
    (6) The auditor must notify the respective DB 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 DB 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; that such DB 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. Such 
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;
    (8) The Audit Committee of Deutsche Bank's Supervisory Board is 
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 Deutsche Bank must review the Audit Report for each DB QPAM 
and must certify in writing, under penalty of perjury, that such 
officer has reviewed each Audit Report. Deutsche Bank must provide 
notice to the Department in the event of a switch in the committee to 
which the Audit Report will be provided;
    (9) Each DB QPAM provides its certified Audit Report, by regular 
mail to: Office of Exemption Determinations (OED), 200 Constitution 
Avenue NW, Suite 400, Washington, DC 20210; or by private carrier to: 
122 C Street NW, Suite 400, Washington, DC 20001-2109. This delivery 
must take place no later than thirty (30) days following completion of 
the Audit Report. The Audit Report will be made part of the public 
record regarding this exemption. Furthermore, each DB QPAM must make 
its Audit Report unconditionally available, electronically or 
otherwise, for examination upon request by any duly authorized employee 
or representative of the Department, other relevant regulators, and any 
fiduciary of a Covered Plan;
    (10) Each DB QPAM and the auditor must submit to OED any engagement 
agreement(s) entered into pursuant to the engagement of the auditor 
under this exemption, no later than two (2) months after the execution 
of any such engagement agreement;
    (11) The auditor must provide the Department, upon request, for 
inspection and review, access to all the workpapers created and 
utilized in the course of the audit, provided such access and 
inspection is otherwise permitted by law; and

[[Page 61862]]

    (12) Deutsche Bank must notify the Department of a change in the 
independent auditor no later than two (2) months after the engagement 
of a substitute or subsequent auditor and must provide an explanation 
for the substitution or change including a description of any material 
disputes between the terminated auditor and Deutsche Bank;
    (j) As of April 18, 2018 and throughout the Exemption Period, with 
respect to any arrangement, agreement, or contract between a DB QPAM 
and a Covered Plan, the DB 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 
inadvertent prohibited transactions); and to comply with the standards 
of prudence and loyalty set forth in section 404 of ERISA, with respect 
to each such ERISA-covered plan and IRA to the extent that section is 
applicable;
    (2) To indemnify and hold harmless the Covered Plan for any actual 
losses resulting directly from a DB 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 QPAM; or any claim arising out of the failure of such DB 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 Convictions. This 
condition applies only to actual losses caused by the DB QPAM's 
violations.
    (3) Not to require (or otherwise cause) the Covered Plan to waive, 
limit, or qualify the liability of the DB QPAM for violating ERISA or 
the Code or engaging in prohibited transactions;
    (4) Not to restrict the ability of such Covered Plan to terminate 
or withdraw from its arrangement with the DB QPAM with respect to any 
investment in a separately managed account or pooled fund subject to 
ERISA and managed by such QPAM, with the exception of reasonable 
restrictions, appropriately disclosed in advance, that are specifically 
designed to ensure equitable treatment of all investors in a pooled 
fund in the event such withdrawal or termination may have adverse 
consequences for all other investors. In connection with any such 
arrangements involving investments in pooled funds subject to ERISA 
entered into after the effective date of this exemption, the adverse 
consequences must relate to of a lack of liquidity of the underlying 
assets, valuation issues, or regulatory reasons that prevent the fund 
from promptly redeeming an ERISA-covered plan's or IRA's investment, 
and such restrictions must be applicable to all such investors and 
effective no longer than reasonably necessary to avoid the adverse 
consequences;
    (5) Not to impose any fees, penalties, or charges for such 
termination or withdrawal with the exception of reasonable fees, 
appropriately disclosed in advance, that are specifically designed to 
prevent generally recognized abusive investment practices or 
specifically designed to ensure equitable treatment of all investors in 
a pooled fund in the event such withdrawal or termination may have 
adverse consequences for all other investors, provided that such fees 
are applied consistently and in like manner to all such investors; and
    (6) Not to include exculpatory provisions disclaiming or otherwise 
limiting liability of the DB QPAM for a violation of such agreement's 
terms. To the extent consistent with Section 410 of ERISA, 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 Deutsche Bank, 
and its affiliates, or damages arising from acts outside the control of 
the DB QPAM;
    (7) By October 17, 2018, each DB QPAM must provide a notice of its 
obligations under this Section I(j) to each Covered Plan. For all other 
prospective Covered Plans, the DB QPAM will agree to its obligations 
under this Section I(j) in an updated investment management agreement 
between the DB 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 2016-13 that meets the terms of this 
condition. Notwithstanding the above, a DB QPAM will not violate the 
condition solely because a Plan or IRA refuses to sign an updated 
investment management agreement;
    (k) By June 17, 2018, each DB QPAM will provide a notice of the 
exemption, along with a separate summary describing the facts that led 
to the Convictions (the Summary), which have been submitted to the 
Department, and a prominently displayed statement (the Statement) that 
the Convictions result in a failure to meet a condition in PTE 84-14, 
to each sponsor and beneficial owner of a Covered Plan, or the sponsor 
of an investment fund in any case where a DB QPAM acts as a sub-advisor 
to the investment fund in which such ERISA-covered plan and IRA 
invests. Any prospective client for which a DB QPAM relies on PTE 84-14 
or has expressly represented that the manager qualifies as a QPAM or 
relies on the QPAM class exemption 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 DB QPAM. Disclosures may be delivered 
electronically.
    (l) The DB QPAMs must comply with each condition of PTE 84-14, as 
amended, with the sole exceptions of the violations of Section I(g) of 
PTE 84-14 that are attributable to the Convictions;
    (m)(1) By October 17, 2018, Deutsche Bank designates 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 annual review for each 
annual period beginning on April 18, 2018, (the Annual Review) \31\ to 
determine the adequacy and effectiveness of the implementation of the 
Policies and Training. With respect to the Compliance Officer, the 
following conditions must be met:
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    \31\ Such Annual Review must be completed with respect to the 
annual periods ending April 17, 2019; April 17, 2020; and April 17, 
2021.
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    (i) The Compliance Officer must be a legal 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 each Annual Review, the following conditions 
must be met:
    (i) The Annual Review includes a review of: Any compliance matter 
related to the Policies or Training that was identified by, or reported 
to, the Compliance Officer or others within the compliance and risk 
control function (or its equivalent) during the previous year; any 
material change in the relevant business activities of the DB QPAMs; 
and any change to ERISA, the Code, or regulations related to fiduciary 
duties and the prohibited transaction provisions that may be applicable 
to the activities of the DB QPAMs;
    (ii) The Compliance Officer prepares a written report for each 
Annual Review (each, an Annual Report) that (A) summarizes his or her 
material activities

[[Page 61863]]

during the preceding year; (B) sets forth any instance of noncompliance 
discovered during the preceding year, and any related corrective 
action; (C) details any change to the Policies or Training to guard 
against any similar instance of noncompliance occurring again; and (D) 
makes recommendations, as necessary, for additional training, 
procedures, monitoring, or additional and/or changed processes or 
systems, and management's actions on such recommendations;
    (iii) In each Annual Report, the Compliance Officer must certify in 
writing that to his or her knowledge: (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 preceding year and any related correction taken to date have 
been identified in the Annual Report; and (D) the DB QPAMs have 
complied with the Policies and Training, and/or corrected (or is 
correcting) any instances of noncompliance in accordance with Section 
I(h) above;
    (iv) Each Annual Report must be provided to appropriate corporate 
officers of Deutsche Bank and each DB QPAM to which such report 
relates; the head of compliance and the General Counsel (or their 
functional equivalent) of the relevant DB QPAM; and must be made 
unconditionally available to the independent auditor described in 
Section I(i) above;
    (v) Each Annual Review, including the Compliance Officer's written 
Annual Report, must be completed within three (3) months following the 
end of the period to which it relates;
    (n) Deutsche Bank disgorged all of its profits generated by the 
spot/futures-linked market manipulation activities of DSK personnel 
that led to the Conviction against DSK entered on January 25, 2016, in 
Seoul Central District Court;
    (o) Each DB 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 such DB QPAM relies 
upon the relief in the exemption;
    (p) During the Exemption Period, Deutsche Bank: (1) Immediately 
discloses to the Department any Deferred Prosecution Agreement (a DPA) 
or a Non-Prosecution Agreement (an NPA) with the U.S. Department of 
Justice, entered into by Deutsche Bank or any of its affiliates in 
connection with conduct described in Section I(g) of PTE 84-14 or 
section 411 of ERISA; and (2) immediately provides the Department any 
information requested by the Department, as permitted by law, regarding 
the agreement and/or conduct and allegations that led to the agreement;
    (q) By October 17, 2018, each DB QPAM, in its agreements with, or 
in other written disclosures provided to Covered Plans, will clearly 
and prominently inform Covered Plan clients of their right to obtain a 
copy of the Policies or a description (Summary Policies) which 
accurately summarizes key components of the QPAM's written Policies 
developed in connection with this exemption. If the Policies are 
thereafter changed, each Covered Plan client must receive a new 
disclosure within six (6) months following the end of the calendar year 
during which the Policies were changed.\32\ With respect to this 
requirement, the description may be continuously maintained on a 
website, provided that such website link to the Policies or the Summary 
Policies is clearly and prominently disclosed to each Covered Plan; and
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    \32\ In the event the Applicant meets this disclosure 
requirement through Summary Policies, changes to the Policies shall 
not result in the requirement for a new disclosure unless, as a 
result of changes to the Policies, the Summary Policies are no 
longer accurate.
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    (r) A DB QPAM will not fail to meet the terms of this exemption, 
solely because a different DB QPAM fails to satisfy a condition for 
relief described in Sections I(c), (d), (h), (i), (j), (k), (l), (o), 
and (q); or if the independent auditor described in Section I(i) fails 
a provision of the exemption other than the requirement described in 
Section I(i)(11), provided that such failure did not result from any 
actions or inactions of Deutsche Bank or its affiliates.
Section II: Definitions
    (a) The term ``Convictions'' means (1) the judgment of conviction 
against DB Group Services, in case number 3:15-cr-00062-RNC to be 
entered in the United States District Court for the District of 
Connecticut to a single count of wire fraud, in violation of 18 U.S.C. 
1343, and (2) the judgment of conviction against DSK entered on January 
25, 2016, in Seoul Central District Court, relating to charges filed 
against DSK under Articles 176, 443, and 448 of South Korea's Financial 
Investment Services and Capital Markets Act for spot/futures-linked 
market price manipulation. For all purposes under this exemption, 
``conduct'' of any person or entity that is the ``subject of [a] 
Conviction'' encompasses the factual allegations described in Paragraph 
13 of the Plea Agreement filed in the District Court in case number 
3:15-cr-00062-RNC, and in the ``Criminal Acts'' section pertaining to 
``Defendant DSK'' in the Decision of the Seoul Central District Court.
    (b) The term ``Covered Plan'' is a plan subject to Part 4 of Title 
1 of ERISA (``ERISA-covered plan'') or a plan subject to Section 4975 
of the Code (``IRA'') with respect to which a DB QPAM relies on PTE 84-
14, or with respect to which a DB QPAM (or any Deutsche Bank affiliate) 
has expressly represented that the manager qualifies as a QPAM or 
relies on the QPAM class exemption (PTE 84-14). A Covered Plan does not 
include an ERISA-covered Plan or IRA to the extent the DB QPAM has 
expressly disclaimed reliance on QPAM status or PTE 84-14 in entering 
into its contract, arrangement, or agreement with the ERISA-covered 
plan or IRA.
    (c) The term ``DB Group Services'' means DB Group Services (UK) 
Limited, an ``affiliate'' of Deutsche Bank (as defined in Section VI(c) 
of PTE 84-14) based in the United Kingdom.
    (d) The term ``DB QPAM'' means a ``qualified professional asset 
manager'' (as defined in Section VI(a) \33\ of PTE 84-14) that relies 
on the relief provided by PTE 84-14 and with respect to which DSK or DB 
Group Services is a current or future ``affiliate'' (as defined in 
Section VI(d)(1) of PTE 84-14). For purposes of this exemption, 
Deutsche Bank Securities, Inc. (DBSI), including all entities over 
which it exercises control; and Deutsche Bank AG, including all of its 
branches, are excluded from the definition of a DB QPAM.
---------------------------------------------------------------------------

    \33\ 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 that has acknowledged 
in a written management agreement that it is a fiduciary with 
respect to each plan that has retained the QPAM.
---------------------------------------------------------------------------

    (e) The term ``Deutsche Bank'' means Deutsche Bank AG but, unless 
indicated otherwise, does not include its subsidiaries or affiliates.
    (f) The term ``DSK'' means Deutsche Securities Korea Co., a South 
Korean ``affiliate'' of Deutsche Bank (as defined in Section VI(c) of 
PTE 84-14).
    (g) The terms ``ERISA-covered plan'' and ``IRA'' mean, 
respectively, a plan subject to Part 4 of Title I of ERISA and a plan 
subject to section 4975 of the Code.
    (h) The term ``Exemption Period'' means April 18, 2018, through 
April 17, 2021.
    (i) The term ``Plea Agreement'' means the Plea Agreement (including 
the

[[Page 61864]]

Agreed Statement of Facts), dated April 23, 2015, between the Antitrust 
Division and Fraud Section of the Criminal Division of the U.S. 
Department of Justice (the DOJ) and DB Group Services resolving the 
charge brought by the DOJ in case number 3:15-cr-00062-RNC against DB 
Group Services for wire fraud in violation of Title 18, United States 
Code, Section 1343.

Effective Date

    The effective date of this exemption is April 18, and the exemption 
will be effective from April 18, 2018, through April 17, 2021 (the 
Exemption Period).
    Department's Comment: The Department cautions that the relief in 
this exemption will terminate immediately if an entity within the 
Deutsche Bank corporate structure is convicted of a crime described in 
Section I(g) of PTE 84-14 (other than the Convictions) during the 
Exemption Period. Although Deutsche Bank could apply for a new 
exemption in that circumstance, the Department would not be obligated 
to grant the exemption. The terms of this exemption have been 
specifically designed to permit plans to terminate their relationships 
in an orderly and cost effective fashion in the event of an additional 
conviction or a determination that it is otherwise prudent for a plan 
to terminate its relationship with an entity covered by the exemption.

Further Information

    For more information on this exemption, contact Mr. Scott Ness of 
the Department, telephone (202) 693-8561. (This is not a toll-free 
number.)

Citigroup Inc. (Citigroup or the Applicant) Located in New York, New 
York

[Prohibited Transaction Exemption 2017-05; Exemption Application No. D-
11909]

Discussion

    On November 21, 2016, the Department of Labor (the Department) 
published a notice of proposed exemption in the Federal Register at 81 
FR 83416, for certain entities with specified relationships to 
Citigroup to continue to rely upon the relief provided by PTE 84-14 for 
a period of five years,\34\ notwithstanding Citicorp's criminal 
conviction, as described herein. The Department is granting this 
exemption in order to ensure that Covered Plans \35\ whose assets are 
managed by a Citigroup Affiliated QPAM or Citigroup Related QPAM may 
continue to benefit from the relief provided by PTE 84-14. This 
exemption is effective from January 10, 2018 through January 9, 2023 
(the Exemption Period).
---------------------------------------------------------------------------

    \34\ (49 FR 9494, March 13, 1984), as corrected at 50 FR 41430 
(October 10, 1985), as amended at 70 FR 49305 (August 23, 2005) and 
as amended at 75 FR 38837 (July 6, 2010), hereinafter referred to as 
PTE 84-14 or the QPAM Exemption.
    \35\ ``Covered Plan'' is a plan subject to Part 4 of Title 1 of 
ERISA (``ERISA-covered plan'') or a plan subject to Section 4975 of 
the Code (``IRA''), with respect to which a Citigroup Affiliated 
QPAM relies on PTE 84-14, or with respect to which a Citigroup 
Affiliated QPAM (or any Citigroup affiliate) has expressly 
represented that the manager qualifies as a QPAM or relies on the 
QPAM class exemption (PTE 84-14). A Covered Plan does not include an 
ERISA-covered Plan or IRA to the extent the Citigroup Affiliated 
QPAM has expressly disclaimed reliance on QPAM status or PTE 84-14 
in entering into its contract, arrangement, or agreement with the 
ERISA covered plan or IRA.
---------------------------------------------------------------------------

    No relief from a violation of any other law is provided by this 
exemption, including any criminal conviction described in the proposed 
exemption. Furthermore, the Department cautions that the relief in this 
exemption will terminate immediately if, among other things, an entity 
within the Citigroup corporate structure is convicted of a crime 
described in Section I(g) of PTE 84-14 (other than the Conviction) 
during the Exemption Period. The terms of this exemption have been 
specifically designed to promote conduct that adheres to basic 
fiduciary standards under ERISA and the Code. The exemption also aims 
to ensure that plans and IRAs can terminate relationships in an orderly 
and cost-effective fashion in the event a plan or IRA fiduciary 
determines it is prudent for the plan or IRA to sever its relationship 
with an entity covered by the exemption.

Written Comments

    The Department invited all interested persons to submit written 
comments and/or requests for a public hearing with respect to the 
notice of proposed exemption, published in the Federal Register at 81 
FR 83416 on November 21, 2016. All comments and requests for a hearing 
were due by March 1, 2017.\36\ The Department received written comments 
from the Applicant, members of the U.S. Congress, and a number of plan 
and IRA clients of Citigroup. After considering these submissions, the 
Department has determined to grant the exemption, with revisions, as 
described below.
---------------------------------------------------------------------------

    \36\ The Department received additional comments from the 
Applicant, however, after the close of the comment period.
---------------------------------------------------------------------------

Term of the Exemption and Conditions
    The Applicant requests that the exemption's term and underlying 
conditions be revised to conform with certain exemptions issued by the 
Department prior to 2014. The Applicant cites 16 individual exemptions 
granted by the Department prior to 2014 involving financial 
institutions that could not satisfy Section I(g) of PTE 84-14 (the Pre-
2014 Exemptions) because of criminal convictions. The Applicant states 
that the conditions included within the Pre-2014 Exemptions remained 
materially unchanged during this time. The Applicant additionally cites 
PTE 2015-06 and 2015-14 (the 2015 Exemptions) which, like the Pre-2014 
Exemptions, permitted certain financial institutions to continue to 
rely upon the relief provided by PTE 84-14, notwithstanding judgments 
of conviction against such institutions.
    The Applicant states that, with respect to the 2015 Exemptions, the 
Department adopted certain additional conditions not previously 
included in the Pre-2014 Exemptions, including: (1) Shortening the 
period of relief from 10 years to 5 years; (2) particularized 
requirements relating to policies, procedures, and annual training; and 
(3) an annual audit requirement. The Applicant states that the public 
record underlying the 2015 Exemptions does not present any demonstrated 
deficiency with respect to the Pre-2014 Exemptions that warranted the 
adoption of these additional conditions in the 2015 Exemptions. Nor, 
according to the Applicant, are the 2015 Exemptions' additional 
conditions explained by any change in relevant laws or guidance, or any 
distinction between the conduct that gave rise to the need for the 2015 
Exemptions compared to the conduct that gave rise to the need for the 
Pre-2014 Exemptions.
    The Applicant also cites a Presidential Memorandum and two 
Executive Orders: (1) Presidential Memorandum on Fiduciary Duty Rule, 
dated February 3, 2017; (2) Presidential Executive Order on Core 
Principles for Regulating the United States Financial System, dated 
February 3, 2017; and (3) Presidential Executive Order on Reducing 
Regulation and Controlling Regulatory Costs, dated January 30, 2017 
(the Executive Orders). The Applicant states that these Executive 
Orders suggest a compelling reason for the Department to revert to the 
approach reflected in the Pre-2014 Exemptions.
    The Applicant further states that the individual exemptions granted 
by the Department in connection with criminal convictions fall into two 
different categories. In one category, the applicant's underlying 
misconduct is integral to corporate business activity.

[[Page 61865]]

In the other category, according to the Applicant, the applicant's 
underlying misconduct is non-integral and isolated to a small number of 
employees. The Applicant states that the conduct underlying this 
exemption resembles the facts underlying those exemptions in which 
misconduct was non-integral and isolated to a small number of 
employees, as it was ``limited to one London-based euro/U.S. dollar 
trader and the unit he worked in was distant and separate from the 
Applicant's businesses that rely on PTE 84-14.''
    The Applicant states that, taken together and considered against 
the historical backdrop of the individual exemptions and Executive 
Orders summarized above, there are compelling reasons for the 
Department to revert to the approach reflected in the Pre-2014 
Exemptions, including: (1) Extending the exemption from a 5-year term 
to a 9-year term, and (2) eliminating the independent audit and 
compliance officer requirements under the exemption. The Applicant 
states that the Department's past practice for these types of 
exemptions has been to provide for ten-year relief and that the 
rationale for abbreviating the term in this exemption does not appear 
to be connected to the nature or severity of the misconduct at issue.
    The Department declines to extend the term of this exemption to ten 
years. Although the Applicant characterizes the conduct as involving 
the isolated actions of one individual, the Department does not agree 
with the apparent suggestion that the Applicant bears little or no 
responsibility for the criminal conduct. In considering the misconduct, 
the Department did not limit its analysis to the acts of the single 
trader identified by the Applicant. The Department also considered the 
period of time during which the misconduct persisted, the compliance 
and supervisory mechanisms within Citigroup that failed to detect and 
prevent the misconduct, and certain other relevant misconduct 
identified in Citicorp's Plea Agreement.
    Citicorp's Plea Agreement identifies misconduct that extended 
beyond the isolated acts of the single London-based euro/U.S. dollar 
trader. For example, Citicorp's Plea Agreement contains the following 
statement under the heading Other Relevant Conduct: ``the defendant 
[Citicorp], through its currency traders and sales staff, also engaged 
in other currency trading and sales practices in conducting FX Spot 
Market transactions with customers via telephone, email, and/or 
electronic chat, to wit: (i) Intentionally working customers' limit 
orders one or more levels, or ``pips,'' away from the price confirmed 
with the customer; (ii) including sales markup, through the use of live 
hand signals or undisclosed prior internal arrangements or 
communications, to prices given to customers that communicated with 
sales staff on open phone lines; (iii) accepting limit orders from 
customers and then informing those customers that their orders could 
not be filled, in whole or in part, when in fact the defendant was able 
to fill the order but decided not to do so because the defendant 
expected it would be more profitable not to do so; and (iv) disclosing 
non-public information regarding the identity and trading activity of 
the defendant's customers to other banks or other market participants, 
in order to generate revenue for the defendant at the expense of its 
customers.''
    In developing this exemption, the Department also considered 
statements made by regulators concerning the compliance and supervisory 
mechanisms within Citigroup that failed to detect and prevent the 
misconduct. For example, the Financial Conduct Authority's (FCA) Final 
Notice to Citibank N.A., states: ``[d]uring the Relevant Period, Citi 
did not exercise adequate and effective control over its G10 spot FX 
trading business,'' and, ``[t]hese failings occurred in circumstances 
where certain of those responsible for managing front office matters 
were aware of and/or at times involved in behaviours described above.'' 
The Notice further states: ``They also occurred despite the fact that 
risks around confidentiality were highlighted when in August 2011 Citi 
became aware that a trader in its FX business outside London had 
inappropriately shared confidential client information in a chat room 
with a trader at another firm.''
    By way of further example, the Consent Order of the Office of the 
Comptroller of the Currency (OCC) states: ``[t]he OCC's examination 
findings established that the Bank had deficiencies in its internal 
controls and had engaged in unsafe or unsound banking practices with 
respect to the oversight and governance of the Bank's FX Trading such 
that the Bank failed to detect and prevent the conduct. . . .'' The 
OCC's Consent Order also states that, ``deficiencies and unsafe or 
unsound practices include the following: (a) The Bank's compliance risk 
assessment lacked sufficient granularity and failed to identify the 
risks related to market conduct in FX Trading with respect to sales, 
trading and supervisory employees in that business; (b) The Bank's 
transaction monitoring and communications surveillance were inadequate 
to detect potential Employee market misconduct in FX Trading. . . .''
    With respect to the severity of the misconduct, the Department 
notes the magnitude of the relevant fines imposed by various 
regulators, which include: $925 million by the Department of Justice; 
$342 million by the Board of Governors of the Federal Reserve; $350 
million by the OCC; $310 million by the Commodity Futures Trading 
Commission; and [pound]225,575,000 by the FCA.
    The Department also notes that this exemption's five-year term and 
protective conditions reflect the Department's intent to protect 
Covered Plans that entrust substantial assets to a Citigroup Affiliated 
QPAM, despite the serious nature of the misconduct and the compliance 
and oversight failures exhibited by Citigroup throughout the extended 
period of time during which the criminal misconduct persisted. The term 
of this exemption gives the Department the opportunity to review the 
adherence by the Citigroup Affiliated QPAMs' to the conditions set out 
herein. If the Applicant seeks to extend this exemption beyond this 
five year term, the Department will examine whether the compliance and 
oversight changes mandated by the various regulatory authorities are 
having the desired effect on the Citigroup entities.
Description of Criminal Conduct--Sections I and II(e)
    The prefatory language to Section I of the proposed five-year 
exemption provides that, ``the Citigroup Affiliated QPAMs and the 
Citigroup Related QPAMs, as defined in Sections II(f) and II(g), 
respectively, will not be precluded from relying on the exemptive 
relief provided by Prohibited Transaction Class Exemption 84-14 (PTE 
84-14 or the QPAM Exemption), notwithstanding the judgment of 
conviction against Citicorp (the Conviction), as defined in Section 
II(a)), for engaging in a conspiracy to: (1) Fix the price of, or (2) 
eliminate competition in the purchase or sale of the euro/U.S. dollar 
currency pair exchanged in the Foreign Exchange (FX) Spot Market, for a 
period of five years beginning on the date the exemption is granted.''
    Section II(e) of the proposed five year exemption provides that, in 
relevant part, ``[t]he term `Conviction' means the judgment of 
conviction against Citigroup for violation of the Sherman Antitrust 
Act, 15 U.S.C. 1, which is scheduled to be entered in the District 
Court for the District of Connecticut (the District Court) (Case Number 
3:15-cr-78-SRU), in connection with Citigroup, through one of its euro/
U.S. dollar

[[Page 61866]]

(EUR/USD) traders, entering into and engaging in a combination and 
conspiracy to fix, stabilize, maintain, increase or decrease the price 
of, and rig bids and offers for, the EUR/USD currency pair exchanged in 
the FX spot market by agreeing to eliminate competition in the purchase 
and sale of the EUR/USD currency pair in the United States and 
elsewhere. For all purposes under this five-year, `conduct' of any 
person or entity that is the `subject of [a] Conviction' encompasses 
any conduct of Citigroup and/or their personnel, that is described in 
the Plea Agreement, (including the Factual Statement), and other 
official regulatory or judicial factual findings that are a part of 
this record.''
    The Applicant incorporates by reference its comment letter 
submitted to the Department in connection with PTE 2016-14 (PTE 2016-14 
Comment Letter),\37\ in which the Applicant requested that references 
to the Conviction be limited to the actual judgment of conviction 
against Citicorp. The Applicant states that the references to the 
Conviction in the prefatory language of Section I and Section II would 
cause confusion for Plans and counterparties transacting with Plans. 
The Applicant also requests that the Department revise Section II(e) by 
replacing ``Citigroup'' with ``Citicorp,'' as Citicorp was the entity 
charged in connection with the Plea Agreement.
---------------------------------------------------------------------------

    \37\ See Citigroup PTE 2016-14 Comment Letter, dated November 
25, 2016.
---------------------------------------------------------------------------

    After consideration of the Applicant's comment, the Department has 
revised the exemption to provide that ``[t]he term `Conviction' means 
the judgment of conviction against Citicorp for violation of the 
Sherman Antitrust Act, 15 U.S.C. 1, entered in the District Court for 
the District of Connecticut (the District Court) (case number 3:15-cr-
78-SRU). For all purposes under this exemption, `conduct' of any person 
or entity that is the `subject of [a] Conviction' encompasses the 
conduct described in Paragraph 4(g)-(i) of the Plea Agreement filed in 
the District Court in case number 3:15-cr-78-SRU.'' The Department has 
also revised Section II(e) by replacing ``Citigroup'' with 
``Citicorp.'' The Department has also renumbered the definition of 
Conviction as Section II(a) in the final exemption.
Knowing or Tacit Approval--Sections I(a) and I(c)
    Section I(a) of the proposed five-year exemption provides, ``(a) 
Other than a single individual who worked for a non-fiduciary business 
within Citigroup's Markets and Securities Services business, and who 
had no responsibility for, and exercised no authority in connection 
with, the management of plan assets, the Citigroup Affiliated QPAMs and 
the Citigroup Related QPAMs (including their officers, directors, 
agents other than Citicorp, and employees of such QPAMs who had 
responsibility for, or exercised authority in connection with the 
management of plan assets) did not know of, did not have reason to know 
of, or participate in the criminal conduct that is the subject of the 
Conviction (for purposes of this paragraph (a), `participate in' 
includes the knowing or tacit approval of the misconduct underlying the 
Conviction).''
    With regard to Section I(a), the Applicant requests the deletion of 
the parenthetical, which reads, ``(for purposes of this paragraph (a), 
`participate in' includes the knowing or tacit approval of the 
misconduct underlying the Conviction).'' \38\ The Department declines 
to delete this definition of ``participate in,'' but has replaced 
``knowing or tacit approval,'' with ``knowing approval.''
---------------------------------------------------------------------------

    \38\ Certain of the Applicant's requested revisions, including 
its requested revision with respect to Section I(a), are reflected 
in a red-lined draft attachment which the Applicant provided to the 
Department with its comment letter.
---------------------------------------------------------------------------

    Section I(c) of the proposed exemption provides, ``(c) The 
Citigroup Affiliated QPAMs will not employ or knowingly engage any of 
the individuals that participated in the criminal conduct that is the 
subject of the Conviction (for the purposes of this paragraph (c), 
`participated in' includes the knowing or tacit approval of the 
misconduct underlying Conviction).''
    With regard to Section I(c), the Applicant requests that the 
definition of ``participated in'' be changed from, ``the knowing or 
tacit approval of the misconduct underlying the Conviction'' to, 
``approving or condoning the misconduct underlying the Conviction.''
    After consideration of the Applicant's comment, the Department has 
revised Section I(c) in a manner that is consistent with Section I(a), 
as described above. Accordingly, the relevant part of Section I(c) now 
reads, ``For the purposes of this paragraph (c), `participated in' 
means the knowing approval of the misconduct underlying the 
Conviction.''
Receipt of Compensation--Section I(b)
    Section I(b) of the proposed five-year exemption provides, ``(b) 
Other than a single individual who worked for a non-fiduciary business 
within Citigroup's Markets and Securities Services business, and who 
had no responsibility for, and exercised no authority in connection 
with, the management of plan assets, the Citigroup Affiliated QPAMs and 
the Citigroup Related QPAMs (including their officers, directors, and 
agents other than Citigroup, and employees of such Citigroup QPAMs) did 
not receive direct compensation, or knowingly receive indirect 
compensation in connection with the criminal conduct that is the 
subject of the Conviction.''
    The Applicant requests the replacement of ``Citigroup'' with 
``Citicorp'' in the phrase, ``(including their officers, directors, and 
agents other than Citigroup. . . .'' After considering the Applicant's 
comment, the Department has revised the exemption in the manner 
requested by the Applicant.
Use of Authority or Influence--Section I(d)
    Section I(d) of the proposed exemption provides that, ``(d) A 
Citigroup Affiliated QPAM will not use its authority or influence to 
direct an `investment fund' (as defined in Section VI(b) of PTE 84-14), 
that is subject to ERISA or the Code and managed by such Citigroup 
Affiliated QPAM, to enter into any transaction with Citicorp or the 
Markets and Securities Services business of Citigroup, or to engage 
Citicorp or the Markets and Securities Services business of Citigroup, 
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.''
    In the PTE 2014 Comment Letter, the Applicant represented that a 
sudden cessation of services by the Markets and Securities Services 
Business of Citigroup to affected plans, such as agency securities 
lending services, would be disruptive to such plans. In this regard, 
the Applicant seeks deletion of the condition's reference to ``the 
Markets and Securities Services Business of Citigroup.''
    After considering the Applicant's comment, the Department has 
revised the exemption in the manner requested by the Applicant such 
that the condition does not apply to the Markets and Securities 
Services Business of Citigroup. The Department has also revised Section 
I(d) by clarifying that it applies to, ``an `investment fund'. . . . 
managed by such Citigroup Affiliated QPAM with respect to Covered 
Plans.'' This modification to Section I(d) reflects the Department's 
interest in ensuring

[[Page 61867]]

that the conditions included herein broadly protect Covered Plans.
Provision of Asset Management Services--Section I(g)
    Section I(g) of the proposed exemption provides that ``(g) Citicorp 
and the Markets and Securities Services Business of Citigroup will not 
provide discretionary asset management services to ERISA-covered plans 
or IRAs, or otherwise act as a fiduciary with respect to ERISA-covered 
plan or IRA assets.''
    In the PTE 2016-14 Comment Letter, the Applicant represented that 
the function of the Markets and Securities Services Business of 
Citigroup may be deemed to involve fiduciary conduct and that requiring 
those services to be terminated suddenly would be disruptive to 
affected plans. The Applicant therefore seeks the deletion of the 
condition's reference to the Markets and Securities Services Business 
of Citigroup.
    The Applicant also requests that Section I(g) be revised to read, 
``Other than with respect to employee benefit plans maintained or 
sponsored for their own employees or the employees of an affiliate, 
Citicorp will not act as a fiduciary within the meaning of ERISA 
Section 3(21)(A)(i) or (iii), or Code Section 4975(e)(3)(A) or (C), 
with respect to ERISA-covered plan and IRA assets; in accordance with 
this provision, Citicorp will not be treated as violating the 
conditions of this exemption solely because they acted as investment 
advice fiduciaries within the meaning of ERISA Section 3(21)(A)(ii) or 
Section 4975(e)(3)(B) of the Code.''
    After considering the Applicant's comment regarding disruption and 
damages to affected ERISA-covered plans and IRAs, the Department has 
revised the exemption in the manner requested by the Applicant. 
Additionally, the Department has revised Section I(g) to clarify that 
Citigroup will not violate this condition in the event that it 
inadvertently becomes an investment advice fiduciary or acts as a 
fiduciary for plans that it sponsors for its own employees or employees 
of an affiliate.
Policies and Procedures Relating to Compliance with ERISA and the 
Code--Section I(h)(1)-(2)
    Section I(h) of the proposed five-year exemption provides that, 
``(h)(1) Within four (4) months of the Conviction, each Citigroup 
Affiliated QPAM must develop, implement, maintain, and follow written 
policies and procedures (the Policies) . . . (2) Within four (4) months 
of the date of the Conviction, each Citigroup Affiliated QPAM must 
develop and implement a program of training (the Training), conducted 
at least annually, for all relevant Citigroup Affiliated QPAM asset/
portfolio management, trading, legal, compliance, and internal audit 
personnel. . . .''
    The Applicant requests that the Department increase the development 
period associated with the Policies and Training Requirements (the 
Development Period) from four (4) months to six (6) months from the 
date of the Conviction. The Applicant also requests clarification that 
a Citigroup Affiliated QPAM's obligation to ``develop'' the Policies 
and Training under this section can be satisfied to the extent that 
such Citigroup Affiliated QPAM has developed Policies and Training 
independent of this exemption, including Policies and Training 
developed in connection with PTE 2016-14. The Applicant further 
requests that the Department clarify that the Applicant shall have up 
to twelve (12) months to train all relevant employees following the 
Development Period, and that such Training will then be conducted at 
least annually, in accordance with Section I(h)(2).
    The Department emphasizes that the Citigroup QPAMs must comply with 
the Policies and Training requirements within both PTE 2016-14 and this 
exemption. To this end, the Department has revised the policies and 
training requirements of Section I(h) to conform with PTE 2016-14. The 
two exemptions now follow this timeline: (i) Each Citigroup Affiliated 
QPAM must have developed the Policies and Training required by PTE 
2016-14 by July 9, 2017; (ii) the first annual Training under PTE 2016-
14 must be completed by July 9, 2018; (iii) each Citigroup Affiliated 
QPAM must develop the Policies and Training required by this exemption, 
as necessary, by July 9, 2018; and (iv) the first Training under this 
exemption must be completed by July 9, 2019. By the end of this 30-
month period, asset/portfolio management, trading, legal, compliance, 
and internal audit personnel who were employed from the start to the 
end of the period must have been trained twice.
    In addition, Section I(h)(1)(i) of the proposed five-year exemption 
provides that the Policies must be reasonably designed to ensure that: 
``(i) The asset management decisions of the Citigroup Affiliated QPAM 
are conducted independently of the corporate management and business 
activities, including the corporate management and business activities 
of the Markets and Securities Services business of Citigroup.''
    The Applicant requests the deletion of the condition's reference to 
the Markets and Securities Services Business of Citigroup. In the PTE 
2016-14 Comment letter, the Applicant stated that such revision is 
necessary in order to avoid disruption to affected plans and IRAs. The 
Department concurs with this comment, and has revised the condition to 
state that, ``[t]he Policies must require, and must be reasonably 
designed to ensure that: (i) The asset management decisions of the 
Citigroup Affiliated QPAM are conducted independently of the corporate, 
management, and business activities of Citigroup.''
    Section I(h)(1)(ii) of the proposed five-year exemption provides 
that the Policies must be reasonably designed to ensure that: ``(ii) 
The Citigroup Affiliated QPAM fully complies with ERISA's fiduciary 
duties, and with ERISA and the Code's prohibited transaction 
provisions, and does not knowingly participate in any violation of 
these duties and provisions with respect to ERISA-covered plans and 
IRAs.''
    The Department has determined to revise Section I(h)(1)(ii) to 
clarify this exemption's expectations regarding the substance of the 
Policies. In this regard, the Department has added the term, ``as 
applicable with respect to each Covered Plan,'' following the phrase, 
``ERISA's fiduciary duties, and with ERISA and the Code's prohibited 
transaction provisions.''
    Section I(h)(1)(iv) of the proposed five-year exemption provides 
that the Policies must be reasonably designed to ensure that: ``(iv) 
Any filings or statements made by the Citigroup Affiliated QPAM to 
regulators, including, but not limited to, the Department, the 
Department of the Treasury, the Department of Justice, and the Pension 
Benefit Guaranty Corporation, on behalf of ERISA-covered plans or IRAs, 
are materially accurate and complete, to the best of such QPAM's 
knowledge at that time.''
    The Department has determined to revise Section I(h)(1)(iv) to 
better coordinate with the other conditions of this exemption. In this 
regard, the Department has revised the condition to read, ``. . . . on 
behalf of or in relation to Covered Plans. . . .''
    Section I(h)(1)(v) of the proposed five-year exemption provides 
that the Policies must be reasonably designed to ensure that: ``(v) The 
Citigroup Affiliated QPAM does not make material misrepresentations or 
omit material information in its communications with

[[Page 61868]]

such regulators with respect to ERISA-covered plans or IRAs, or make 
material misrepresentations or omit material information in its 
communications with ERISA-covered plans and IRA clients.''
    The Department has revised Section I(h)(1)(v) in the same manner as 
it revised Section I(h)(1)(iv). The Department has also revised Section 
I(h)(1)(v) by adding the following language to the beginning of the 
section: ``To the best of the Citigroup Affiliated QPAM's knowledge at 
the time. . . .''
Incorporating the Training into the Policies--Section I(h)(2)(i)
    Section I(h)(2)(i) of the proposed five-year exemption provides, 
``. . . The Training must: (i) 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 five-year exemption (including any loss of exemptive relief 
provided herein), and prompt reporting of wrongdoing.''
    The Department has revised Section I(h)(2)(i) by removing the 
requirement that the Training must be set forth in the Policies. As 
revised, Section I(h)(2)(i) provides that the Training must, ``(i) At a 
minimum, cover the Policies, ERISA and Code compliance (including 
applicable fiduciary duties and the prohibited transaction provisions), 
ethical conduct, the consequences for not complying with the conditions 
of this exemption (including any loss of exemptive relief provided 
herein), and prompt reporting of wrongdoing.''
Training by Independent Professional--Section I(h)(2)(ii)
    Section I(h)(2)(ii) of the proposed five-year exemption provides 
that the Training must, ``(ii) Be conducted by an independent 
professional who has been prudently selected and who has appropriate 
technical and training and proficiency with ERISA and the Code.''
    The Applicant requests that the requirement that the professional 
be ``independent'' be omitted, on the basis that the ``independence'' 
of the trainer will not enhance the quality or effectiveness of the 
training, and may in fact detract from it. In this regard, the 
Applicant states that the training will be monitored by the Compliance 
Officer, subject to annual review by the Compliance Officer (the Annual 
Review), and audited by the independent auditor. The Applicant states 
that a professional trainer who is familiar with the Applicant's 
operations, culture, and management is less likely to be independent, 
but is more likely to be effective in its role. The Applicant also 
states that the compliance and audit functions mandated under this 
exemption will provide adequate safeguards that are sufficient to 
address any concern arising from a lack of independence on the part of 
the professional trainer. In sum, the Applicant requests that it be 
permitted to implement the required training within the context of its 
own existing training regime.
    Although the Department disagrees with the Applicant's assertion 
that hiring a prudently-selected, independent professional may in fact 
detract from the quality and effectiveness of the training required 
under this exemption, the Department is persuaded that Citigroup 
personnel who are prudently-selected and have appropriate technical 
training and proficiency with ERISA and the Code may conduct the 
training. The Department has revised the condition accordingly.
Audit Requirement--Section I(i).
    Section I(i)(1) of the proposed five-year exemption provides that, 
``(i)(1) Each Citigroup Affiliated QPAM submits to an audit conducted 
annually by an independent auditor, who has been prudently selected and 
who has appropriate technical training and proficiency with ERISA and 
the Code, to evaluate the adequacy of, and the Citigroup Affiliated 
QPAM's compliance with, the Policies and Training described herein.''
    As stated above, the Applicant requests that the audit requirement 
be deleted from the exemption in its entirety. In support of its 
request, the Applicant states that the audit requirement is burdensome, 
costly, and redundant. The Applicant also states that it has 
comprehensive compliance and internal audit departments, and that these 
departments should be responsible for carrying out the audit 
requirements under this exemption.
    The Department declines to delete the audit requirement in its 
entirety. A recurring, independent, and prudently-conducted audit of 
the Citigroup Affiliated QPAMs is critical to ensuring the QPAMs' 
compliance with the Policies and Training mandated by this exemption, 
and the adequacy of the Policies and Training. The required discipline 
of regular audits underpins the Department's finding that the exemption 
is protective of Covered Plans, their participants, beneficiaries, and 
beneficial owners, as applicable. Strong independent audits should help 
prevent the sort of compliance failures that led to the Conviction.
    The Department views the audit requirement as an integral component 
of the exemption, without which the Department would be unable to make 
its finding that the exemption is protective of Covered Plans and their 
participants, beneficiaries, and beneficial owners, as applicable. This 
exemption's conditions are based, in part, on the Department's 
assessment of the seriousness and duration of the misconduct that 
resulted in the violation of Section I(g) of PTE 84-14, as well as the 
apparent inadequacy of control and oversight mechanisms at Citigroup to 
prevent the misconduct. The Department, however, recognizes that, 
notwithstanding Citigroup's oversight failures, only a small number of 
individuals at Citigroup directly engaged in the misconduct at issue. 
Thus, the United States District Court for the District of Connecticut 
stated, in connection with the sentencing of Citicorp, that: ``the 
conduct at issue here was engaged in by a very small number of 
individuals,'' and that, ``we do not have banks who appear to have 
condoned conduct at any high-ranking level.'' \39\
---------------------------------------------------------------------------

    \39\ See TRANSCRIPT of Proceedings: as to Citicorp (January 5, 
2017 at pages 29-30).
---------------------------------------------------------------------------

    Accordingly, the Department has determined to change the audit 
interval under this exemption from annual to biennial. Section I(i)(1) 
of the exemption, therefore, now requires that each Citigroup 
Affiliated QPAM submit ``to an audit conducted every two years by an 
independent auditor.'' Each audit must cover the preceding consecutive 
twelve (12) month period. The first audit must cover the period from 
July 10, 2018 through July 9, 2019, and must be completed by January 9, 
2020. The second audit must cover the period from July 10, 2020 through 
July 9, 2021, and must be completed by January 9, 2022. In the event 
that the Exemption Period is extended or a new exemption is granted, 
the third audit would cover the period from July 10, 2022 through July 
9, 2023, and would be completed by January 9, 2024, unless the 
Department chose to alter the audit requirement in the new or extended 
exemption.\40\
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    \40\ The third audit referenced above would not have to be 
completed until after the Exemption Period expires. If the 
Department ultimately decides to grant relief for an additional 
period, it could decide to alter the terms of the exemption, 
including the audit conditions (and the timing of the audit 
requirements). Nevertheless, the Applicant should anticipate that 
the Department will insist on strict compliance with the audit terms 
and schedule set forth above. As it considers any new exemption 
application, the Department may also contact the auditor for any 
information relevant to its determination.

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[[Page 61869]]

    The Departments notes that if the audit uncovers material 
deficiencies with Citigroup's compliance with this exemption, then the 
Applicant should consider conducting an additional audit after making 
corrections to ensure that it remains in compliance with the exemption. 
In any event, the Department emphasizes that it retains the right to 
conduct its own investigation of compliance based on any such 
indicators of problems.
    The Department declines to revise Section I(i) in a manner that 
would permit the Applicant's Internal Audit Department to carry out 
this exemption's required audit functions. Permitting the Applicant's 
internal audit department to carry out this exemption's required audit 
functions would be insufficiently protective of Covered Plans. Auditor 
independence is essential to this exemption, as it allows for an 
impartial analysis of the Citigroup Affiliated QPAMs. The independence 
of the auditor is the cornerstone of the integrity of the audit process 
and is of primary importance to avoid conflicts of interest and any 
inappropriate influence on the auditor's findings.
    The fundamental importance of auditor independence to the integrity 
of the audit process is well established. For example, the United 
States Securities and Exchange Commission (SEC) promulgated regulations 
at 17 CFR 210.2-01 to ensure that auditors are independent of their 
clients, and under 17 CFR 240.10A-2, it is unlawful for an auditor not 
to be independent in certain circumstances. Likewise, the Public 
Accounting Oversight Board's (PCAOB) Rule 3520 states that a public 
accounting firm and its associated persons must be independent of the 
firm's audit clients. The Association of Independent Certified Public 
Accountants' (AICPA) Code of Professional Conduct, Objectivity and 
Independence Principle (AICPA, Professional Standards, ET section 
0.300.050.01) requires members working on an audit or attest engagement 
to be independent, in fact and appearance. Moreover, ERISA section 
103(a)(3)(A) requires an accountant hired by an employee benefit plan 
to examine the plan's financial statements to be independent.
Entities Subject to Audit--Section I(i)
    Section I(i)(1) of the proposed five-year exemption provides, 
``(i)(1) Each Citigroup Affiliated QPAM submits to an audit conducted 
annually by an independent auditor. . . .''
    The Applicant requests that only the particular Citigroup 
Affiliated QPAMs and Citigroup Related QPAMs actually relying upon PTE 
84-14 and this exemption when providing services to, or engaging in 
transactions as an agent for, their clients, should be subject to the 
audit requirement under this exemption, and not every entity within the 
Citigroup-affiliated group that could be eligible to be a ``qualified 
professional asset manager,'' as defined in PTE 84-14. The Applicant 
also requests that Section I(i)(1) be revised to state that the 
Citigroup entities subject to the audit requirement are Citigroup 
Affiliated QPAM's, ``which the Applicant has identified in a 
certificate signed by the officer who will review and certify the Audit 
Report (as defined in Section I(i)(5)) pursuant to Section I(i)(8).'' 
In support of its request, the Applicant states that the purpose of the 
independent audit is to ensure that Citigroup entities relying upon PTE 
84-14 are in compliance with the conditions of PTE 84-14 and the 
conditions of this exemption. The Applicant also states that it would 
identify the relevant entities to the independent auditor in a 
certificate signed by the compliance officer who will review the Audit 
Report.
    The Department has determined to revise Section I(i)(1) in the 
manner requested by the Applicant. The Department acknowledges that the 
independent auditor will need to be provided with the identities of the 
Citigroup Affiliated QPAMs to be audited and that the Applicant is best 
positioned to provide such information. The Department notes that 
Section I(i) requires the audit of each Citigroup entity that relies 
upon QPAM status, or expressly represents to ERISA-covered plan or IRA 
clients that it qualifies as a QPAM.
Auditor Information Access--Section I(i)(2)
    Section I(i)(2) of the proposed five-year exemption provides, 
``(i)(2) To the extent necessary for the auditor, in its sole opinion, 
to complete its audit and comply with the conditions for relief 
described herein, and as permitted by law, each Citigroup Affiliated 
QPAM and, if applicable, Citigroup, will grant the auditor 
unconditional access to its business, including, but not limited to: 
its computer systems; business records; transactional data; workplace 
locations; training materials; and personnel.''
    The Applicant requests that the phrase ``as permitted by law'' be 
clarified by the addition of the following proviso: ``provided, that 
the auditor shall not have access to any privileged information or 
confidential supervisory information.'' The Applicant states that 
certain privileged or confidential supervisory information which would 
be ``permitted by law'' to be shared with the auditor could result in 
the loss of the attorney-client or other privilege, or regulatory 
interest in maintaining confidentiality. The Applicant states that the 
purposes of the independent audit can be fully accomplished without 
requiring the Applicant to bear such costs. The Applicant also states 
that relevant privileges, and in particular, the attorney-client 
privilege, are based on important policy interests that routinely are 
thought to outweigh other critically important legal and social 
interests.
    In the Department's view, to ensure a thorough and robust audit, 
the independent auditor must be granted access to information it deems 
necessary to make sound conclusions. The auditor's access to such 
information must be within the scope of the audit engagement and denied 
only to the extent that such disclosure is not permitted by state or 
federal statute. Designating specific restrictions on information 
accessibility may hinder the auditor's ability to perform the 
procedures necessary to make informed conclusions, thus undermining the 
effectiveness of the audit. The auditor's access to such information, 
however, is limited to information relevant to the auditor's objectives 
as specified by the terms of this exemption and to the extent 
disclosure is not prevented by state or federal statute or involves 
communications subject to attorney client privilege. In this regard, 
the Department has modified Section I(i)(2) accordingly.
Audit Transaction Sampling--Section I(i)(4)
    Section I(i)(4) of the proposed five-year exemption provides, ``(4) 
The auditor's engagement must specifically require the auditor to test 
each Citigroup Affiliated QPAM's operational compliance with the 
Policies and Training. In this regard, the auditor must test a sample 
of each QPAM's transactions involving ERISA-covered plans and IRAs 
sufficient in size and nature to afford the auditor a reasonable basis 
to determine the operational compliance with the Policies and 
Training.''
    The Applicant requests that the Department clarify that audit 
``samples'' pursuant to this condition need only apply to transactions 
undertaken in reliance on PTE 84-14. The Applicant states that the 
purpose of the independent audit is to confirm compliance with the 
conditions required under the exemption and permit the Applicant to 
continue to

[[Page 61870]]

utilize PTE 84-14 on behalf of Covered Plans.
    The Department has revised this condition for consistency with 
other conditions of this exemption which are tailored to the 
Department's interest in protecting Covered Plans. Therefore, the 
condition now applies only to Covered Plans. The Department 
additionally notes that Section I(i)(4) does not specify the number of 
transactions that the auditor must test, but rather requires, for each 
QPAM, that the auditor test a sample of each such QPAM's transactions 
involving Covered Plans, ``sufficient in size and nature to afford the 
auditor a reasonable basis to determine operational compliance with the 
Policies and Training.''
Audit Report--Section I(i)(5)
    Section I(i)(5) of the proposed five-year exemption provides that, 
``[f]or each audit, on or before the end of the relevant period 
described in Section I(i)(1) for completing the audit, the auditor must 
issue a written report (the Audit Report) to Citigroup and the 
Citigroup Affiliated QPAM to which the audit applies that describes the 
procedures performed by the auditor during the course of its 
examination. The Audit Report must include the auditor's specific 
determinations regarding:
     (i) The adequacy of the Citigroup Affiliated QPAM's Policies and 
Training; the Citigroup Affiliated QPAM's compliance with the Policies 
and Training; the need, if any, to strengthen such Policies and 
Training; and any instance of the respective Citigroup Affiliated 
QPAM's noncompliance with the written Policies and Training described 
in Section I(h) above. 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 Citigroup Affiliated QPAM must be promptly addressed by such 
Citigroup Affiliated QPAM, and any action taken by such Citigroup 
Affiliated QPAM to address such recommendations must be included in an 
addendum to the Audit Report (which addendum is completed prior to the 
certification described in Section I(i)(7) below). Any determination by 
the auditor that the respective Citigroup Affiliated QPAM has 
implemented, maintained, and followed sufficient Policies and Training 
must not be based solely or in substantial part on an absence of 
evidence indicating noncompliance. In this last regard, any finding 
that the Citigroup Affiliated QPAM has complied with the requirements 
under this subsection must be based on evidence that demonstrates the 
Citigroup Affiliated QPAM has actually implemented, maintained, and 
followed the Policies and Training required by this five-year 
exemption. Furthermore, the auditor must not solely rely on the Annual 
Report created by the compliance officer (the Compliance Officer) as 
described in Section I(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 I(i)(3) and (4) above; and
     (ii) The adequacy of the Annual Review described in Section I(m) 
and the resources provided to the Compliance Officer in connection with 
such Annual Review.''
    To improve consistency between the audit conditions of this 
exemption, the Department has modified Section I(i)(5) to clarify that 
the auditor may issue one consolidated Audit Report covering all the 
Citigroup QPAMS for the period of time being audited. The Department 
also acknowledges that the Citigroup Affiliated QPAMs' efforts to 
address the auditor's recommendations regarding any inadequacy in the 
Policies and Training identified by the auditor may take longer to 
implement than the time limits mandated by the proposed exemption. 
Accordingly, the Department is modifying Section I(i)(5)(i) to reflect 
the possibility that the Citigroup Affiliated QPAMs' efforts to address 
the auditor's recommendations regarding any inadequacy in the Policies 
and Training may not be completed by the submission date of the Audit 
Report and may involve a written plan to address such items. However, 
any noncompliance identified by the auditor must be promptly addressed.
    The revised Section also requires that if such a written plan of 
action to address the auditor's recommendation as to the adequacy of 
the Polices and Training is not completed by the submission of the 
Audit Report, the following period's Audit Report must state whether 
the plan was satisfactorily completed. Additionally, the Department has 
modified the final sentence in Section I(i)(5)(i) to more clearly 
express the Department's intent that the auditor must not rely solely 
on the work of the Compliance Officer and the Compliance Officer's 
Annual Report in formulating its conclusions or findings. The auditor 
must perform its own independent testing to formulate its conclusions. 
This exemption does not prohibit the auditor from considering the 
Compliance Officer's Annual Report in carrying out its audit function, 
including its formulation of an audit plan. This exemption, however, 
does prohibit the auditor from reaching conclusions that are 
exclusively based upon the contents of the Compliance Officer's Annual 
Report.
    Finally, while an independent assessment by the auditor of the 
adequacy of the Annual Review is essential to providing the Department 
with the assurance that the Applicant and the Citigroup QPAMs have 
given these matters the utmost priority and have taken the necessary 
actions to comply with the exemption, the Department has determined 
that the auditor should not be responsible for opining on the adequacy 
of the resources allocated to the Compliance Officer and has modified 
Section I(i)(5)(ii) accordingly. If, however, the auditor observes 
compliance issues related to the Compliance Officer or available 
resources, it would be appropriate for the auditor to opine on those 
problems.
Certification of Audit Report--Section I(i)(7)-(8)
    Section I(i)(7) of the proposed five-year exemption provides that, 
``(7) With respect to each Audit Report, the General Counsel, or one of 
the three most senior executive officers of the Citigroup Affiliated 
QPAM to which the Audit Report applies, must certify in writing, under 
penalty of perjury, that the officer has reviewed the Audit Report and 
this exemption; addressed, corrected, or remedied any inadequacy 
identified in the Audit Report; and determined that the Policies and 
Training in effect at the time of signing are adequate to ensure 
compliance with the conditions of this proposed five-year exemption, 
and with the applicable provisions of ERISA and the Code.''
    Section I(i)(8) of the proposed five-year exemption provides, 
``(i)(8) The Risk Committee of Citigroup's Board of Directors is 
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 Citigroup must review the Audit Report for each Citigroup 
Affiliated QPAM and must certify in writing, under penalty of perjury, 
that such officer has reviewed each Audit Report.''
    With respect to Section I(i)(7), the Applicant requests 
clarification that the certifying official who must ``certify in 
writing, under penalty of perjury, that the officer has reviewed the 
Audit Report and this exemption. . . .'' should be the general counsel 
or one of the three most senior executive officers of the Citigroup 
Affiliated QPAM itself

[[Page 61871]]

(and not of the ultimate parent of the Citigroup-affiliated corporate 
group, Citigroup Inc.).
    With respect to Section I(i)(8), the Applicant requests that, ``a 
senior executive officer with a direct reporting line to the highest 
ranking legal compliance officer of Citigroup,'' be revised to, ``a 
senior executive officer of Citigroup or one of its affiliates who 
reports directly to, or reports to another executive who reports 
directly to, the highest ranking compliance officer of Citigroup. . . 
.''
    The Department agrees that the obligation under Section I(i)(7) to 
review the Audit Report and identify and remedy deficiencies may be 
carried out by the general counsel or one of the three most senior 
executive officers of the Citigroup Affiliated QPAM itself. The 
Department also agrees that the obligation under Section I(i)(8) to 
review the Audit Report may be carried out by a senior executive 
officer of Citigroup or one of its affiliates who reports directly to, 
or reports to another executive who reports directly to, the highest 
ranking compliance officer of Citigroup. The Department has revised 
Sections I(i)(7) and (8) accordingly.
    Additionally, to coordinate with the revisions applied to Section 
I(i)(5), as discussed above, the Department has revised Section I(i)(7) 
to acknowledge that the Applicant's efforts to address the auditor's 
recommendations regarding inadequacies in the Policies and Training may 
take longer to implement than the required timeframe for submission of 
the certified Audit Report. In this regard, the Department did not 
intend to limit the Applicant's ability to implement corrective 
measures by requiring that such efforts be completed prior to the 
submission of the Audit Report. Therefore, the Department has modified 
Section I(i)(7) to reflect that the senior executive officer may 
certify that a written plan to address the inadequacies regarding the 
Policies and Training identified in the auditor's report is in place.
Availability of the Audit Report--Section I(i)(9)
    Section I(i)(9) of the proposed exemption provides in part, ``. . . 
each Citigroup Affiliated QPAM must make its Audit Report 
unconditionally available for examination by any duly authorized 
employee or representative of the Department, other relevant 
regulators, and any fiduciary of an ERISA-covered plan or IRA, the 
assets of which are managed by such Citigroup Affiliated QPAM in 
reliance of PTE 84-14.''
    Throughout this exemption, the Department has discussed its 
interest in ensuring that the conditions included herein broadly 
protect ERISA-covered plans and IRAs that enter into an asset 
management agreement with a Citigroup Affiliated QPAM in reliance on 
such QPAM's qualification under PTE 84-14. However, the Department 
recognizes that, under certain circumstances, extending the Applicant's 
disclosure obligations beyond the plan and IRA clients that this 
exemption is designed to protect does not contribute to this 
exemption's intended purpose. With regard to Section I(i)(9), the 
Department has adopted revisions which require the Citigroup Affiliated 
QPAMs to make the Audit Report available to any fiduciary of a Covered 
Plan. Accordingly, the Department has revised this condition by 
replacing the phrase ``an ERISA-covered plan or IRA, the assets of 
which are managed by such Citigroup Affiliated QPAM'' with the term 
``Covered Plan'' (as defined in Section II(b)). Lastly, the Department 
has revised Section I(i)(9) to require that access to the Audit Report 
need only be provided upon request and such access can be electronic. 
The Department notes that the Audit Report, in any event, will be 
incorporated into the public record attributable to this exemption, 
under Exemption Application Number D-11909, and, therefore, 
independently accessible by members of the public.
Engagement Agreements--Section I(i)(10)
    Section I(i)(10) of the proposed exemption provides that ``[e]ach 
Citigroup Affiliated QPAM and the auditor must submit to OED: (A) any 
engagement agreement(s) entered into pursuant to the engagement of the 
auditor under this exemption; and (B) any engagement agreement entered 
into with any other entity retained in connection with such QPAM's 
compliance with the Training or Policies conditions of this five-year 
exemption, no later than six (6) months after the Conviction Date (and 
one month after the execution of any agreement thereafter).''
    In coordination with the Department's modification of Section 
I(h)(2)(ii), which permits prudently-selected Citigroup personnel to 
conduct the training, the Department has determined to remove the 
Section I(i)(10)(B) requirement for Citigroup Affiliated QPAMs and the 
auditor to provide the Department with engagement agreements entered 
into with entities retained in connection with the Training or Policies 
conditions. Furthermore, to remove any confusion and uncertainty 
regarding the timing of the submission of the auditor's engagement 
agreement, the Department has modified Section I(i)(10) to require that 
the auditor's engagement agreement be submitted to the Office of 
Exemption Determinations no later than two (2) months after the 
engagement agreement is entered into by the Applicant and the 
independent auditor.
Audit Workpapers--Section I(i)(11)
    Section I(i)(10) of the proposed exemption requires ``[t]he auditor 
must provide OED, upon request, all of the workpapers created and 
utilized in the course of the audit, including, but not limited to: The 
audit plan; audit testing; identification of any instance of 
noncompliance by the relevant Citigroup Affiliated QPAM; and an 
explanation of any corrective or remedial action taken by the 
applicable Citigroup Affiliated QPAM.''
    The Department acknowledges that certain information contained in 
the audit workpapers may be confidential and proprietary, and that the 
inclusion of such information in the public file may create avoidable 
disclosure issues. The Department has modified Section I(i)(11) to 
remove the requirement that the auditor provide the workpapers to 
OED,\41\ and instead require that the auditor provide access to the 
workpapers for the Department's review and inspection.
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    \41\ OED is the Office of Exemption Determinations within the 
Employee Benefits Security Administration agency of the United 
States Department of Labor.
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Substitution of the Auditor--Section I(i)(12)
    Section I(i)(12) of the proposed exemption provides ``Citigroup 
must notify the Department at least thirty (30) days prior to any 
substitution of an auditor, except that no such replacement will meet 
the requirements of this paragraph unless and until Citigroup 
demonstrates to the Department's satisfaction that such new auditor is 
independent of Citigroup, experienced in the matters that are the 
subject of the exemption, and capable of making the determinations 
required of this exemption.''
    The Department has revised this condition for consistency with its 
interest in protecting Covered Plans. As revised, Section I(i)(12) now 
requires that Citigroup, no later than two (2) months following the 
engagement of a replacement auditor, must notify the Department of the 
auditor substitution and the reason(s) for the substitution, including 
any material disputes between the terminated auditor and Citigroup. The 
Department has also

[[Page 61872]]

revised Section I(i)(12) to remove the requirement for Citigroup to 
demonstrate the independence and qualifications of the auditor. 
Citigroup's fiduciary obligations with respect to the selection of the 
auditor, as well as the significant role a credible selection plays in 
reducing the need for more extensive oversight by the Department, 
should be sufficient to safeguard the selection process.
Contractual Commitments to Covered Plans--Section I(j)
    Section I(j) of the proposed five-year exemption provides, ``(j) 
Effective as of the effective date of this five-year exemption, with 
respect to any arrangement, agreement, or contract between a Citigroup 
Affiliated QPAM and an ERISA-covered plan or IRA for which a Citigroup 
Affiliated QPAM provides asset management or other discretionary 
fiduciary services, each Citigroup Affiliated QPAM agrees and warrants:
    (1) To comply with ERISA and the Code, as applicable with respect 
to such ERISA-covered plan or IRA; to refrain from engaging in 
prohibited transactions that are not otherwise exempt (and to promptly 
correct any inadvertent prohibited transactions); and to comply with 
the standards of prudence and loyalty set forth in section 404 of 
ERISA, as applicable, with respect to each such ERISA-covered plan and 
IRA;
    (2) To indemnify and hold harmless the ERISA-covered plan or IRA 
for any damages resulting from a Citigroup Affiliated QPAM's violation 
of applicable laws, a Citigroup Affiliated QPAM's breach of contract, 
or any claim brought in connection with the failure of such Citigroup 
Affiliated 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;
    (3) Not to require (or otherwise cause) the ERISA-covered plan or 
IRA to waive, limit, or qualify the liability of the Citigroup 
Affiliated QPAM for violating ERISA or the Code or engaging in 
prohibited transactions;
    (4) Not to require the ERISA-covered plan or IRA (or sponsor of 
such ERISA-covered plan or beneficial owner of such IRA) to indemnify 
the Citigroup Affiliated QPAM for violating ERISA or engaging in 
prohibited transactions, except for violations or prohibited 
transactions caused by an error, misrepresentation, or misconduct of a 
plan fiduciary or other party hired by the plan fiduciary who is 
independent of Citigroup, and its affiliates;
    (5) Not to restrict the ability of such ERISA-covered plan or IRA 
to terminate or withdraw from its arrangement with the Citigroup 
Affiliated QPAM (including 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 as a 
result of an actual lack of liquidity of the underlying assets, 
provided that such restrictions are applied consistently and in like 
manner to all such investors;
    (6) Not to impose any fees, penalties, or charges for such 
termination or withdrawal with the exception of reasonable fees, 
appropriately disclosed in advance, that are specifically designed to 
prevent generally recognized abusive investment practices or 
specifically designed to ensure equitable treatment of all investors in 
a pooled fund in the event such withdrawal or termination may have 
adverse consequences for all other investors, provided that such fees 
are applied consistently and in like manner to all such investors;
    (7) Not to include exculpatory provisions disclaiming or otherwise 
limiting liability of the Citigroup Affiliated QPAM for a violation of 
such agreement's terms, except for liability caused by an error, 
misrepresentation, or misconduct of a plan fiduciary or other party 
hired by the plan fiduciary which is independent of Citigroup, and its 
affiliates; and
    (8) Within four (4) months of the date of the Conviction, each 
Citigroup Affiliated QPAM must provide a notice of its obligations 
under this Section I(j) to each ERISA-covered plan and IRA for which a 
Citigroup Affiliated QPAM provides asset management or other 
discretionary fiduciary services. For all other prospective ERISA-
covered plan and IRA clients for which a Citigroup Affiliated QPAM 
provides asset management or other discretionary services, the 
Citigroup Affiliated QPAM will agree in writing to its obligations 
under this Section I(j) in an updated investment management agreement 
between the Citigroup Affiliated QPAM and such clients or other written 
contractual agreement.''
    The Applicant states that the creation of new contractual rights as 
contemplated under Section I(j) is inappropriate and unnecessary for 
the protection of ERISA-covered plan and IRA clients. The Applicant 
states that Section (j) would require the creation of new contractual 
commitments in favor of ERISA-covered Plan and IRA clients that would 
be substantially similar to the contractual commitments contemplated by 
the Best Interest Contract Exemption (the ``BIC Exemption'') published 
in the Federal Register on April 18, 2016. The Applicant states that 
the proposed extension of these BIC Exemption provisions to this 
exemption is inappropriate, because the BIC Exemption is intended to 
address circumstances in which a fiduciary may have a conflict of 
interest, while this exemption would apply only in contexts in which no 
such conflict exists. The Applicant further states that, under the 
circumstances, it is appropriate at a minimum for Section I(j) of the 
exemption to be revised to provide that in no circumstance shall the 
contractual commitments required therein extend beyond the contractual 
commitments required to be made to a fiduciary seeking to rely on the 
BIC Exemption, if any, as the BIC Exemption is in effect from time to 
time.
    The Applicant also requests that the requirements of Sect[iukcy]on 
I(j) be limited to services that are rendered to Plan clients in 
reliance on PTE 84-14. Accordingly, the Applicant requests that 
Sect[iukcy]on I(j) should be clarified by adding the phrase, ``in 
reliance on PTE 84-14,'' immediately following the phrase, ``asset 
management or other discretionary fiduciary services,'' in the leading 
paragraph and in two other places in Section I(j)(8). The Applicant 
states that the effect of the Exemption is to permit the Applicant to 
continue to use PTE 84-14 and that imposing conditions relating to 
conduct that is not connected to the relief being provided exceeds the 
statutory mandate of Section 408(a).
    The Department may grant an exemption under Section 408(a) of ERISA 
or Section 4975(c)(2)(C) of the Code only to the extent the Secretary 
finds, among other things, that the exemption is protective of the 
affected plan(s) or IRA(s). Notwithstanding the misconduct, which 
resulted in violation of Section I(g) of PTE 84-14, the Department has 
granted this exemption based, in significant part, upon the inclusion 
of Section I(j), which protects Covered Plans by, among other things, 
requiring the Citigroup Affiliated QPAMs to make express commitments to 
adhere to the requirements of ERISA and the Code, as applicable.
    As previously indicated, the Department has concluded that a 
culture of compliance, centered on

[[Page 61873]]

adherence to basic standards of fair dealing as set forth in this 
exemption, gives the Department a compelling basis for making the 
required statutory findings that the exemption is in the interests of 
plan and IRA investors and protective of their rights. Absent such 
findings, the exemption would have been denied.
    The Department has required an express commitment to comply with 
the fiduciary standards and prohibited transaction rules only to the 
extent these provisions are ``applicable'' under ERISA and the Code. 
This section, as modified, should serve its salutary purposes of 
promoting a culture of compliance and enhancing the ability of plans 
and IRA customers to sever their relationships with minimal injury in 
the event of non-compliance. This conclusion is reinforced, as well, by 
the limited nature of the relief granted by this exemption, which 
generally does not extend to transactions that involve self-dealing.
    The Department notes that nothing in ERISA or the Code prevents the 
Department from conditioning relief on express contractual commitments 
to adhere to the requirements set out herein. The QPAMs remain free to 
disclaim reliance on the exemption and to avoid such express 
contractual commitments. To the extent, however, that they hold 
themselves out as fiduciary QPAMs, they should be prepared to make an 
express commitment to their customers to adhere to the requirements of 
this exemption. This commitment strengthens and reinforces the 
likelihood of compliance, and helps ensure that, in the event of 
noncompliance, customers, including IRA customers, will be insulated 
from injuries caused by non-compliance.
    These protections also ensure that customers will be able to 
extricate themselves from transactions that become prohibited as a 
result of the QPAMs' misconduct, without fear of sustaining additional 
losses as a result of the QPAMs' actions. In this connection, however, 
the Department emphasizes that the only claims available to the QPAMs' 
customers pursuant to these contractual commitments are those 
separately provided by ERISA or other state and federal laws that are 
not preempted by ERISA. As before, private litigants have only those 
causes of action specifically authorized by laws that exist independent 
of this exemption.
    As explained above, ERISA-covered plans and IRAs routinely rely on 
QPAM status as a condition of entering into transactions with financial 
institutions, even with respect to transactions that do not require 
adherence to PTE 84-14. In addition, it may not always be clear whether 
a Citigroup Affiliated QPAM intends to rely upon PTE 84-14 for any 
particular transaction. Accordingly, it is critical to ensure that 
protective conditions are in place to safeguard the interests of ERISA-
covered plans and IRAs that are acting in reliance on the availability 
of this exemption, particularly with respect to plans and IRAs that may 
not have entered into a transaction in the first place, but for the 
Department's grant of this exemption.
    The Department has revised this condition for consistency with its 
interest in protecting Covered Plans. The condition now applies to 
ERISA-covered plans and IRAs only when the Citigroup Affiliated QPAM 
relies on PTE 84-14 or has expressly represented that it qualifies as a 
QPAM or relies on the QPAM class exemption in its dealings with the 
ERISA-covered plan or IRA (i.e., a Covered Plan). To the extent a 
Citigroup QPAM would prefer not to be subject to these conditions, 
however, it may expressly disclaim reliance on QPAM status or PTE 84-14 
in entering into its contract with the ERISA-covered plan or IRA.
Contractual Commitments--Section I(j)(1)
    Section I(j)(1) of the proposed five-year exemption provides that 
each Citigroup Affiliated QPAM agrees and warrants: ``(1) To comply 
with ERISA and the Code, as applicable with respect to such ERISA-
covered plan or IRA; to refrain from engaging in prohibited 
transactions that are not otherwise exempt (and to promptly correct any 
inadvertent prohibited transactions); and to comply with the standards 
of prudence and loyalty set forth in section 404 of ERISA, as 
applicable, with respect to each such ERISA-covered plan and IRA.''
    The Applicant requests the phrase, ``as applicable'' be moved to 
follow the phrase, ``. . . .with respect to such ERISA-covered plan or 
IRA.'' The Department has determined to revise Section I(j)(1) by 
adding ``to the extent that Section is applicable,'' following the 
phrase, ``with respect to each such ERISA-covered plan and IRA'' at the 
end of the condition. As written, the text expressly focuses on 
provisions of ERISA and the Code only to the extent those provisions 
are applicable to the conduct at issue.
Indemnity Provision--Section I(j)(2)
    Section I(j)(2) of the proposed five-year exemption provides that 
each Citigroup Affiliated QPAM agrees and warrants: ``(2) To indemnify 
and hold harmless the ERISA-covered plan or IRA for any damages 
resulting from a Citigroup Affiliated QPAM's violation of applicable 
laws, a Citigroup Affiliated QPAM's breach of contract, or any claim 
brought in connection with the failure of such Citigroup Affiliated 
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.''
    The Applicant requests that Section I(j)(2) be revised to read: 
``To indemnify and hold harmless the ERISA-covered plan or IRA for any 
damages resulting from a violation of ERISA's fiduciary duties and of 
ERISA and the Code's prohibited transaction provisions, a breach of 
contract, or any claim arising out of the failure of such Citigroup 
Affiliated 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;''
    As explained above, the intended purpose of this exemption is to 
protect Covered Plans that entrust the Citigroup Affiliated QPAMs with 
the management of their retirement assets. To this end, the Department 
believes that the protective purpose of this exemption is furthered by 
Section I(j)(2). This condition ensures that, when a Covered Plan 
enters into an asset management agreement with a Citigroup Affiliated 
QPAM in reliance on the manager's qualification as a QPAM, it may 
expect adherence to basic fiduciary norms and standards of fair 
dealing, notwithstanding the prior conviction. This condition also 
ensures that the Covered Plan will be able to disengage from that 
relationship without undue injury in the event that the terms of this 
exemption are violated.
    Accordingly, the Department has revised the applicability of this 
condition to more closely reflect this interest. In particular, the 
condition applies to Covered Plans. As indicated above, if the asset 
manager would prefer not to be subject to these provisions as exemption 
conditions, it may expressly disclaim reliance on QPAM status or PTE 
84-14 in entering into its contract with an ERISA-covered plan or IRA 
(in that case, however, it could not rely on the exemption for relief). 
The Department has made certain further changes to this condition, 
which include: Replacing ``applicable laws'' with clarifying language 
that conforms to PTE 2016-14; and replacing ``any damages'' with 
``actual losses resulting directly from'' certain acts or omissions of 
the Citigroup Affiliated QPAMs. Because I(j)(2) extends only to actual

[[Page 61874]]

losses resulting directly from the actions of the Citigroup Affiliated 
QPAMs, it does not encompass losses solely caused by other parties, 
events, or acts of God.
Contractual Commitments--Section I(j)(4)
    Section I(j)(4) of the proposed five-year exemption provides that 
each Citigroup Affiliated QPAM agrees and warrants: ``(4) Not to 
require the ERISA-covered plan or IRA (or sponsor of such ERISA-covered 
plan or beneficial owner of such IRA) to indemnify the Citigroup 
Affiliated QPAM for violating ERISA or engaging in prohibited 
transactions, except for violations or prohibited transactions caused 
by an error, misrepresentation, or misconduct of a plan fiduciary or 
other party hired by the plan fiduciary who is independent of 
Citigroup, and its affiliates.''
    The Department has determined that Section I(j)(4), as proposed, is 
duplicative of the exemption's prohibition on exculpatory clauses under 
Section I(j)(7). The Department therefore has deleted Section 
I(j)(4)and renumbered the subsequent subsections in Section I(j) 
accordingly.
Contractual Commitments--Section I(j)(5) \42\
---------------------------------------------------------------------------

    \42\ The Department has renumbered this section as Section 
I(j)(4) in this final exemption.
---------------------------------------------------------------------------

    Section I(j)(5) of the proposed five-year exemption provides that 
each Citigroup Affiliated QPAM agrees and warrants: ``(5) Not to 
restrict the ability of such ERISA-covered plan or IRA to terminate or 
withdraw from its arrangement with the Citigroup Affiliated QPAM 
(including 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 as a result of an actual 
lack of liquidity of the underlying assets, provided that such 
restrictions are applied consistently and in like manner to all such 
investors.''
    The Applicant requests that I(j)(5) be revised by replacing, 
``including'' with ``with respect to,'' and replacing, ``as a result of 
an actual lack of liquidity of the underlying assets, provided that 
such restrictions are applied consistently and in like manner to all 
such investors;'' with ``in connection with any such arrangements 
involving investments in pooled funds subject to ERISA entered into 
after the Conviction Date, the adverse consequences must relate to a 
lack of liquidity of the pooled fund's underlying assets, valuation 
issues, or regulatory reasons that prevent the fund from immediately 
redeeming an ERISA-covered plan's or IRA's investment, and such 
restrictions are applicable to all such investors and effective no 
longer than reasonably necessary to avoid the adverse consequences.''
    The Department has modified this condition (renumbered in this 
exemption as Section I(j)(4)) to clarify the circumstances under which 
reasonable restrictions are necessary to protect the remaining 
investors in a pooled fund and to also clarify that, in any such event, 
the restrictions must be reasonable and last no longer than reasonably 
necessary to remedy the adverse consequences. The revised and renumber 
Section I(j)(4) provides, ''Not to restrict the ability of such Covered 
Plan to terminate or withdraw from its arrangement with the Citigroup 
Affiliated QPAM with respect to any investment in a separately managed 
account or pooled fund subject to ERISA and managed by such QPAM, with 
the exception of reasonable restrictions, appropriately disclosed in 
advance, that are specifically designed to ensure equitable treatment 
of all investors in a pooled fund in the event such withdrawal or 
termination may have adverse consequences for all other investors. In 
connection with any such arrangements involving investments in pooled 
funds subject to ERISA entered into after the effective date of this 
exemption, the adverse consequences must relate to of a lack of 
liquidity of the underlying assets, valuation issues, or regulatory 
reasons that prevent the fund from promptly redeeming an ERISA-covered 
plan's or IRA's investment, and such restrictions must be applicable to 
all such investors and effective no longer than reasonably necessary to 
avoid the adverse consequences.''
Limits on Liability--Section I(j)(7)
    Section I(j)(7) of the proposed five-year exemption provides that 
each Citigroup Affiliated QPAM agrees and warrants: ``(j)(7) Not to 
include exculpatory provisions disclaiming or otherwise limiting 
liability of the Citigroup Affiliated QPAM for a violation of such 
agreement's terms, except for liability caused by an error, 
misrepresentation, or misconduct of a plan fiduciary or other party 
hired by the plan fiduciary which is independent of Citigroup, and its 
affiliates.''
    The Department has modified Section I(j)(6) (formerly (j)(7)) to 
clarify that the prohibition on exculpatory provisions does not extend 
to losses that arise from an act or event not caused by Citigroup, and 
that nothing in this section alters the prohibition on exculpatory 
provisions set forth in ERISA Section 410.
Notice and Updated Investment Management Agreement--Section I(j)(8)
    Section I(j)(8) of the proposed five-year exemption provides that, 
``(j)(8) Within four (4) months of the date of the Conviction, each 
Citigroup Affiliated QPAM must provide a notice of its obligations 
under this Section I(j) to each ERISA-covered plan and IRA for which a 
Citigroup Affiliated QPAM provides asset management or other 
discretionary fiduciary services. For all other prospective ERISA-
covered plan and IRA clients for which a Citigroup Affiliated QPAM 
provides asset management or other discretionary services, the 
Citigroup Affiliated QPAM will agree in writing to its obligations 
under this Section I(j) in an updated investment management agreement 
between the Citigroup Affiliated QPAM and such clients or other written 
contractual agreement.''
    The Applicant requests that Section I(j)(8) be revised to extend 
the applicable notification period from 4 months to 6 months. The 
Applicant also requests that I(j)(8) be limited to ERISA-covered plans 
and IRAs for which a Citigroup Affiliated QPAM provides asset 
management or other discretionary fiduciary services ``in reliance on 
PTE 84-14.''
    As noted above, the Department has an interest in protecting an 
ERISA-covered plan or IRA that enters into an asset management 
agreement with a Citigroup Affiliated QPAM in reliance on the manager's 
qualification as a QPAM, regardless of whether the QPAM relies on the 
class exemption when managing such ERISA-covered plan's or IRA's 
assets. The Department has revised the applicability of this condition 
to more closely reflect this interest, and the condition now applies 
only to Covered Plans. The Department has also modified the condition 
so that a Citigroup Affiliated QPAM will not violate the condition 
solely because a Covered Plan refuses to sign an updated investment 
management agreement. In addition, the Department has revised Section 
I(j)(8) to provide that the Citigroup Affiliated QPAM must provide 
notice to each Covered Plan by July 9, 2018.

[[Page 61875]]

Notice to Covered Plan Clients--Section I(k)(1) \43\
---------------------------------------------------------------------------

    \43\ The Department has renumbered this section as Section I(k) 
in this final exemption.
---------------------------------------------------------------------------

    Section I(k)(1) of the proposed five-year exemption provides, in 
relevant part that, ``Within fifteen (15) days of the publication of 
this proposed five-year exemption in the Federal Register, each 
Citigroup Affiliated QPAM will provide a notice of the proposed five-
year exemption, along with a separate summary describing the facts that 
led to the Conviction (the Summary), which have 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,. 
. . . In the event that this proposed five-year exemption is granted, 
the Federal Register copy of the notice of final five-year exemption 
must be delivered to such clients within sixty (60) days of its 
publication in the Federal Register''
    The Applicant requests that Section I(k)(1) be revised to read, in 
relevant part, ``Each Citigroup Affiliated QPAM has provided a notice 
of the proposed five-year exemption, along with a separate summary 
describing the facts that led to the Conviction (the Summary). . . . In 
addition, the Federal Register copy of the notice of final five-year 
exemption must be delivered to such clients within sixty (60) days of 
its publication in the Federal Register. . . .''
    The Department notes that the proposed exemption provides details 
of the facts and circumstances underlying the Conviction not found in 
the Summary or the final grant. One of the purposes of such a complete 
disclosure is to ensure that all interested parties are aware of, and 
attentive to, the complete facts and circumstances surrounding 
Citigroup's application for exemption. Requiring the disclosure of the 
Summary, proposal, and grant provides the opportunity for all parties 
to have knowledge of these facts and circumstance.
    Notwithstanding this, the Department has modified the condition to 
clarify that disclosures under this condition may be provided 
electronically. Further, the notice requirement under this condition 
has been narrowed to ERISA-covered plans and IRAs that would benefit 
from this knowledge (i.e., Covered Plans).
Notice to Non-Plan Clients--Section I(k)(2)
    Section I(k)(2) of the proposed five-year exemption provides, in 
relevant part that, ``Each Citigroup Affiliated QPAM will provide a 
Federal Register copy of the proposed five-year exemption, a Federal 
Register copy of the final five-year exemption; the Summary; and the 
Statement to each: (A) Current Non-Plan Client within four (4) months 
of the effective date, if any, of a final five-year exemption; and (B) 
Future Non-Plan Client prior to, or contemporaneously with, the 
client's receipt of a written asset management agreement from the 
Citigroup Affiliated QPAM.''
    Given the breadth of the notice requirements otherwise mandated by 
the exemption, and the decision to restrict such requirements to 
arrangements for which QPAM status plays an integral role (i.e., the 
QPAM represents or relies upon its QPAM status), the Department has 
determined to delete this provision.
Compliance Officer--Section I(m)
    Section I(m)(1) of the proposed five-year exemption provides, 
``(m)(1) Citigroup designates a senior compliance officer (the 
Compliance Officer) who will be responsible for compliance with the 
Policies and Training requirements described herein. . . (i) The 
Compliance Officer must be a legal professional with 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 that is 
independent of Citigroup's other business lines.''
    As stated above, the Applicant requests that the compliance officer 
requirement of Section I(m) be deleted from the exemption in its 
entirety. In support of its request, the Applicant states that this 
requirement is burdensome, costly, and redundant. The Applicant states 
that it has comprehensive compliance and internal audit departments 
that should be responsible for developing and implementing the 
necessary policies and procedures under this exemption.
    The Department declines to eliminate the compliance officer 
requirement under this exemption. Citigroup personnel engaged in 
serious misconduct that was caused, at least in part, by compliance and 
oversight failure. The Department's determination to grant this 
exemption is based in part on the view that an internal compliance 
officer with responsibility for the Policies and Training mandated by 
this exemption will provide the level of oversight necessary to ensure 
that such Policies and Training are properly developed and implemented 
throughout the term of this exemption.
    The Applicant also requests that Section I(m)(1) be clarified by 
deleting the word ``legal'' from the phrase ``legal compliance'' in 
clause (ii). In this regard, the Applicant states that the Citigroup's 
compliance function is separate from its legal function. The Applicant 
also requests that Section I(m) be revised to clarify that the 
Compliance Officer will be a senior compliance officer of Citigroup 
Inc. or one of its affiliates, and that such senior compliance officer 
will be an officer who reports directly to, or reports to another 
compliance officer who reports directly to, Citigroup Inc.'s highest 
ranking compliance officer (whose title is currently Global Chief 
Compliance Officer of Citigroup Inc.).
    After consideration of the Applicant's comment, the Department has 
revised Section I(m)(1) in the manner requested by the Applicant.
Deferred Prosecution/Non-Prosecution Agreements--Section I(o)
    Section I(o) of the proposed five-year exemption provides, ``(o) 
During the effective period of the five-year exemption, Citigroup: (1) 
Immediately discloses to the Department any Deferred Prosecution 
Agreement (a DPA) or a Non-Prosecution Agreement (an NPA) with the U.S. 
Department of Justice, entered into by Citigroup or any of its 
affiliates in connection with conduct described in Section I(g) of PTE 
84-14 or section 411 of ERISA; and (2) Immediately provides the 
Department any information requested by the Department, as permitted by 
law, regarding the agreement and/or conduct and allegations that led to 
the agreement. The Department may, following its review of that 
information, require Citigroup or a party specified by the Department, 
to submit a new application for the continued availability of relief as 
a condition of continuing to rely on this exemption. If the Department 
denies the relief requested in that application, or does not grant such 
relief within twelve (12) months of the application, the relief 
described herein would be revoked as of the date of denial or as of the 
expiration of the twelve month period, whichever date is earlier.''
    The Applicant requests that Section I(o)(2) be revised to read 
substantially the same as Section I(l) of PTE-2016-14, subject to the 
following additional changes. The Applicant requests the replacement of 
the word ``immediately'' with ``promptly'' in subsections (1) and (2); 
the insertion of the word ``reasonably'' before the phrase

[[Page 61876]]

``requested by the Department'' in subsection (2); and the deletion of 
the final sentence of subsection (2), which reads ``If the Department 
denies the relief requested in that application, or does not grant such 
relief within twelve (12) months of the application, the relief 
described herein would be revoked as of the date of denial or as of the 
expiration of the twelve month period, whichever date is earlier.''
    The Department in no way intended that this condition be read as 
providing for an automatic revocation of this exemption, and in light 
of the Applicant's comments, has revised the condition accordingly. As 
revised, the condition requires that the Applicant notify the 
Department if and when it, or any of its affiliates enter into a DPA or 
NPA with the U.S. Department of Justice for conduct described in 
section I(g) of PTE 84-14 or ERISA section 411; and immediately 
provide, upon request by the Department, any information, as permitted 
by law, regarding the agreement and/or conduct and allegations that led 
to the agreement. The Department, however, retains the right to propose 
a withdrawal of the exemption pursuant to its procedures contained at 
29 CFR 2570.50, should circumstances warrant such action.
Right to Copies of Policies and Procedures--Section I(p)
    Section I(p) of the proposed five-year exemption provides that, 
``[e]ach Citigroup Affiliated QPAM, in its agreements with ERISA-
covered plan and IRA clients, or in other written disclosures provided 
to ERISA-covered plan and IRA clients, within 60 days prior to the 
initial transaction upon which relief hereunder is relied, and then at 
least once annually, will clearly and prominently: Inform the ERISA-
covered plan and IRA client that the client has the right to obtain 
copies of the QPAM's written Policies adopted in accordance with the 
exemption.''
    Ensuring that ERISA covered-plan and IRA clients have a means by 
which to review and understand the Policies implemented in connection 
with this exemption is a vital protection that is fundamental to this 
exemption's purpose. The Department has modified Section I(p) to 
provide that the Citigroup Affiliated QPAMs, at their election, may 
provide Covered Plans with a disclosure that accurately describes or 
summarizes key components of the Policies. As revised, Section I(p) 
does not require the Citigroup Affiliated QPAMs to provide the Policies 
in their entirety. The Department has also determined that such 
disclosure may be continuously maintained on a website, provided that a 
website link to the summary of the written Policies is clearly and 
prominently disclosed to those Covered Plan clients to whom this 
section applies. The Department has also modified Section I(p) to 
require that the Citigroup Affiliated QPAMs provide notice regarding 
the information on the website within 60 days of the effective date of 
this exemption, and thereafter to the extent certain material changes 
are made to the Policies.
New Definition of Citcorp
    In the PTE 2016-14 Comment Letter, the Applicant requested that the 
Department add a definition for the term ``Citicorp'' to read as: ``The 
term `Citicorp' means, a financial services holding company organized 
and existing under the laws of Delaware and does not include any 
subsidiaries or other affiliates.'' After consideration of the 
Applicant's comment, the Department has added a new Section II(e) to 
this exemption defining Citicorp in the manner requested by the 
Applicant.
Summary of Facts and Representations
    The Applicant seeks certain clarifications to the Summary of Facts 
and Representations which the Department does not view as relevant to 
its determination whether to grant this exemption. Those requested 
clarifications may be found as part of the public record for 
Application No. D-11909, in a letter to the Department, dated February 
28, 2017.
Letter From House Committee on Financial Services
    The Department also received a comment letter from certain members 
of Congress (the Members) regarding this exemption, as well as other 
QPAM-related proposed one year exemptions. In the letter, the Members 
stated that certain conditions contained in these proposed exemptions 
are crucial to protecting the investments of our nation's workers and 
retirees, referring to proposed conditions which require each bank to: 
(a) Indemnify and hold harmless ERISA-covered plans and IRAs for any 
damages resulting from the future misconduct of such bank; and (b) 
disclose to the Department any Deferred Prosecution Agreement or a Non-
Prosecution Agreement with the U.S. Department of Justice. The Members 
also requested that the Department hold hearings in connection with the 
proposed exemptions.
    The Department acknowledges the Members' concerns regarding the 
need for public discourse regarding proposed exemptions. To this end, 
the Department's procedures regarding prohibited transaction exemption 
requests under ERISA (the Exemption Procedures) afford interested 
persons the opportunity to request a hearing. Specifically, section 
2570.46(a) of the Exemption Procedures provides that, ``[a]ny 
interested person who may be adversely affected by an exemption which 
the Department proposes to grant from the restrictions of section 
406(b) of ERISA, section 4975(c)(1)(E) or (F) of the Code, or section 
8477(c)(2) of FERSA may request a hearing before the Department within 
the period of time specified in the Federal Register notice of the 
proposed exemption.'' The Exemption Procedures provide that ``[t]he 
Department will grant a request for a hearing made in accordance with 
paragraph (a) of this section where a hearing is necessary to fully 
explore material factual issues identified by the person requesting the 
hearing.'' The Exemption Procedures also provide that ``[t]he 
Department may decline to hold a hearing where: (1) The request for the 
hearing does not meet the requirements of paragraph (a) of this 
section; (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.'' \44\
---------------------------------------------------------------------------

    \44\ 29 CFR part 2570, published at 76 FR 66653, October 27, 
2011.
---------------------------------------------------------------------------

    While the Members' letter raises important policy issues, it does 
not appear to raise specific material factual issues. The Department 
previously explored a wide range of legal and policy issues regarding 
Section I(g) of the QPAM Exemption during a public hearing held on 
January 15, 2015 in connection with the Department's proposed exemption 
involving Credit Suisse AG, and has determined that an additional 
hearing on these issues is not necessary.
Comments From Interested Persons
    The Department also received comment letters from certain 
interested persons. With respect to each, the commenter sought a 
further explanation regarding the proposed exemption.
    After giving full consideration to the record, the Department has 
decided to grant the exemption, as described above. The complete 
application file (Application No. D-11909) is available for public 
inspection in the Public Disclosure Room of the Employee Benefits 
Security Administration, Room N-1515, U.S. Department of Labor, 200

[[Page 61877]]

Constitution Avenue NW, Washington, DC 20210.
    For a more complete statement of the facts and representations 
supporting the Department's decision to grant this exemption, refer to 
the notice of proposed exemption published on November 21, 2016 at 81 
FR 83416.

Exemption

Section I: Covered Transactions
    Certain entities with specified relationships to Citigroup 
(hereinafter, the Citigroup Affiliated QPAMs and the Citigroup Related 
QPAMs, as defined in Sections II(f) and II(g), respectively) will not 
be precluded from relying on the exemptive relief provided by 
Prohibited Transaction Class Exemption 84-14 (PTE 84-14 or the QPAM 
Exemption), notwithstanding the Conviction, as defined in Section 
II(a), during the Exemption Period,\45\ provided that the following 
conditions are satisfied:
---------------------------------------------------------------------------

    \45\ 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 violation of the 
Sherman Antitrust Act, Title 15 United States Code, Section 1.
---------------------------------------------------------------------------

    (a) Other than a single individual who worked for a non-fiduciary 
business within Citigroup's Markets and Securities Services business, 
and who had no responsibility for, and exercised no authority in 
connection with, the management of plan assets, the Citigroup 
Affiliated QPAMs and the Citigroup Related QPAMs (including their 
officers, directors, agents other than Citicorp, and employees of such 
QPAMs who had responsibility for, or exercised authority in connection 
with the management of plan assets) did not know of, did not have 
reason to know of, or participate in the criminal conduct that is the 
subject of the Conviction. For purposes of this paragraph (a), 
``participate in'' means the knowing approval of the misconduct 
underlying the Conviction;
    (b) Other than a single individual who worked for a non-fiduciary 
business within Citigroup's Markets and Securities Services Business, 
and who had no responsibility for, and exercised no authority in 
connection with, the management of plan assets, the Citigroup 
Affiliated QPAMs and the Citigroup Related QPAMs (including their 
officers, directors, and agents other than Citicorp, and employees of 
such Citigroup QPAMs) 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 Citigroup Affiliated QPAMs will not employ or knowingly 
engage any of the individuals that participated in the criminal conduct 
that is the subject of the Conviction. For the purposes of this 
paragraph (c), ``participated in'' means the knowing approval of the 
misconduct underlying the Conviction;
    (d) At all times during the Exemption Period, no Citigroup 
Affiliated QPAM will use its authority or influence to direct an 
``investment fund'' (as defined in Section VI(b) of PTE 84-14), that is 
subject to ERISA or the Code and managed by such Citigroup Affiliated 
QPAM in reliance on PTE 84-14, or with respect to which a Citigroup 
Affiliated QPAM has expressly represented to an ERISA-covered plan or 
IRA with assets invested in such ``investment fund'' that it qualifies 
as a QPAM or relies on PTE 84-14, to enter into any transaction with 
Citicorp, or to engage Citicorp 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 a Citigroup Affiliated QPAM or a Citigroup 
Related QPAM to satisfy Section I(g) of PTE 84-14 arose solely from the 
Conviction;
    (f) A Citigroup Affiliated QPAM or a Citigroup Related QPAM did not 
exercise authority over the assets of any plan subject to Part 4 of 
Title I of ERISA (an ERISA-covered plan) or section 4975 of the Code 
(an IRA) in a manner that it knew or should have known would: Further 
the criminal conduct that is the subject of the Conviction; or cause 
the Citigroup Affiliated QPAM, the Citigroup Related QPAM, or their 
affiliates to directly or indirectly profit from the criminal conduct 
that is the subject of the Conviction;
    (g) Other than with respect to employee benefit plans maintained or 
sponsored for its own employees or the employees of an affiliate, 
Citicorp will not act as a fiduciary within the meaning of section 
3(21)(A)(i) or (iii) of ERISA, or section 4975(e)(3)(A) and (C) of the 
Code, with respect to ERISA-covered plan and IRA assets; provided, 
however, that Citicorp will not be treated as violating the conditions 
of this exemption solely because it acted as an investment advice 
fiduciary within the meaning of section 3(21)(A)(ii) or section 
4975(e)(3)(B) of the Code;
    (h)(1) By July 9, 2018, each Citigroup Affiliated QPAM must 
develop, implement, maintain, and follow written policies and 
procedures (the Policies). The Policies must require, and must be 
reasonably designed to ensure that:
    (i) The asset management decisions of the Citigroup Affiliated QPAM 
are conducted independently of the corporate management and business 
activities of Citigroup;
    (ii) The Citigroup Affiliated 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 violation of these duties and 
provisions with respect to Covered Plans;
    (iii) The Citigroup Affiliated 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 Citigroup Affiliated 
QPAM to regulators, including, but not limited to, the Department, the 
Department of the Treasury, the Department of Justice, and the Pension 
Benefit Guaranty Corporation, on behalf of or in relation to Covered 
Plans, are materially accurate and complete, to the best of such QPAM's 
knowledge at the time;
    (v) To the best of the Citigroup Affiliated QPAM's knowledge at the 
time, the Citigroup Affiliated QPAM does not make material 
misrepresentations or omit material information in its communications 
with such regulators with respect to Covered Plans;
    (vi) The Citigroup Affiliated QPAM complies with the terms of this 
exemption; and
    (vii) Any violation of, or failure to comply with an item in 
subparagraphs (ii) through (vi), is corrected as soon as reasonably 
possible upon discovery, or as soon after the QPAM reasonably should 
have known of the noncompliance (whichever is earlier), and any such 
violation or compliance failure not so corrected is reported, upon the 
discovery of such failure to so correct, in writing, to the head of 
compliance and the General Counsel (or their functional equivalent) of 
the relevant line of business that engaged in the violation or failure, 
and the independent auditor responsible for reviewing compliance with 
the Policies. A Citigroup Affiliated QPAM will not be treated as having 
failed to develop, implement, maintain, or follow the Policies, 
provided that it corrects any instance of noncompliance as soon as 
reasonably possible upon discovery, or as soon as reasonably possible 
after the QPAM reasonably should have known

[[Page 61878]]

of the noncompliance (whichever is earlier), and provided that it 
adheres to the reporting requirements set forth in this subparagraph 
(vii);
    (2) By July 9, 2018, each Citigroup Affiliated QPAM must develop a 
program of training (the Training), to be conducted at least annually, 
for all relevant Citigroup Affiliated QPAM asset/portfolio management, 
trading, legal, compliance, and internal audit personnel. The first 
Training under this Final Exemption must be completed by all relevant 
Citigroup Affiliated QPAM personnel by July 9, 2019 (by the end of this 
30-month period, asset/portfolio management, trading, legal, 
compliance, and internal audit personnel who were employed from the 
start to the end of the period must have been trained twice: The first 
time under PTE 2016-15; and the second time under this exemption). The 
Training must:
    (i) At a minimum, cover the Policies, ERISA and Code compliance 
(including applicable fiduciary duties and the prohibited transaction 
provisions), ethical conduct, the consequences for not complying with 
the conditions of this exemption (including any loss of exemptive 
relief provided herein), and prompt reporting of wrongdoing; and
    (ii) Be conducted by a professional who has been prudently selected 
and who has appropriate technical training and proficiency with ERISA 
and the Code;
    (i)(1) Each Citigroup Affiliated QPAM, which the Applicant has 
identified in a certificate signed by the officer who will review and 
certify the Audit Report (as defined in Section I(i)(5)) pursuant to 
Section I(i)(8), submits to an audit conducted every two years by an 
independent auditor who has been prudently selected and who has 
appropriate technical training and proficiency with ERISA and the Code, 
to evaluate the adequacy of, and each Citigroup Affiliated QPAM's 
compliance with, the Policies and Training 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 July 10, 2018 through July 9, 2019, and must 
be completed by January 9, 2020. The second audit must cover the period 
from July 10, 2020 through July 9, 2021, and must be completed by 
January 9, 2022. In the event that the Exemption Period is extended or 
a new exemption is granted, the third audit would cover the period from 
July 10, 2022 through July 9, 2023, and would have to be completed by 
January 9, 2024 (unless the Department chooses to alter the biennial 
audit requirement in the new or extended exemption);
    (2) Within the scope of the audit and to the extent necessary for 
the auditor, in its sole opinion, to complete its audit and comply with 
the conditions for relief described herein, and only to the extent such 
disclosure is not prevented by state or federal statute, or involves 
communications subject to attorney client privilege, each Citigroup 
Affiliated QPAM and, if applicable, Citigroup, will grant the auditor 
unconditional access to its business, including, but not limited to: 
Its computer systems; business records; transactional data; workplace 
locations; training materials; and personnel. Such access is limited to 
information relevant to the auditor's objectives as specified by the 
terms of this exemption;
    (3) The auditor's engagement must specifically require the auditor 
to determine whether each Citigroup Affiliated 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 Citigroup Affiliated QPAM's operational compliance with 
the Policies and Training. In this regard, the auditor must test, for 
each QPAM, a sample of such QPAM's transactions involving Covered 
Plans, sufficient in size and nature to afford the auditor a reasonable 
basis to determine such QPAM's operational compliance with the Policies 
and Training;
    (5) For each audit, on or before the end of the relevant period 
described in Section I(i)(1) for completing the audit, the auditor must 
issue a written report (the Audit Report) to Citigroup and the 
Citigroup Affiliated QPAM to which the audit applies that describes the 
procedures performed by the auditor during the course of its 
examination. The auditor, at its discretion, may issue a single 
consolidated Audit Report that covers all the Citigroup Affiliated 
QPAMs. The Audit Report must include the auditor's specific 
determinations regarding:
    (i) The adequacy of each Citigroup Affiliated QPAM's Policies and 
Training; each Citigroup Affiliated QPAM's compliance with the Policies 
and Training; the need, if any, to strengthen such Policies and 
Training; and any instance of the respective Citigroup Affiliated 
QPAM's noncompliance with the written Policies and Training described 
in Section I(h) above. The Citigroup Affiliated QPAM must properly 
address any noncompliance. The Citigroup Affiliate must 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 Citigroup 
Affiliated QPAM. Any action taken or the plan of action to be taken by 
the respective Citigroup Affiliated QPAM must be included in an 
addendum to the Audit Report (such addendum must be completed prior to 
the certification described in Section I(i)(7) below). In the event 
such a plan of action to address the auditor's recommendation regarding 
the adequacy of the Policies and Training is not completed by the time 
of submission of the Audit Report, the following period's Audit Report 
must state whether the plan was satisfactorily completed. Any 
determination by the auditor that the respective Citigroup Affiliated 
QPAM has implemented, maintained, and followed sufficient Policies and 
Training must not be based solely or in substantial part on an absence 
of evidence indicating noncompliance. In this last regard, any finding 
that a Citigroup Affiliated QPAM has complied with the requirements 
under this subsection must be based on evidence that the particular 
Citigroup Affiliated QPAM has actually implemented, maintained, and 
followed the Policies and Training required by this exemption. 
Furthermore, the auditor must not solely rely on the Annual Report 
created by the compliance officer (the Compliance Officer), as 
described in Section I(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 I(i)(3) and (4) above; and
    (ii) The adequacy of the most recent Annual Review described in 
Section I(m);
    (6) The auditor must notify the respective Citigroup Affiliated 
QPAM of any instance of noncompliance identified by the auditor within 
five (5) business days after such noncompliance is identified by the 
auditor, regardless of whether the audit has been completed as of that 
date;
    (7) With respect to each Audit Report, the General Counsel, or one 
of the three most senior executive officers of the Citigroup Affiliated 
QPAM to which the Audit Report applies, must certify in writing, under 
penalty of perjury, that the officer has reviewed the Audit Report and 
this exemption; that such Citigroup Affiliated QPAM has

[[Page 61879]]

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. Such 
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;
    (8) The Risk Management Committee of Citigroup's Board of Directors 
is provided a copy of each Audit Report; and a senior executive officer 
of Citigroup or one of its affiliates who reports directly to, or 
reports to another executive who reports directly to, the highest 
ranking compliance officer of Citigroup must review the Audit Report 
for each Citigroup Affiliated QPAM and must certify in writing, under 
penalty of perjury, that such officer has reviewed each Audit Report;
    (9) Each Citigroup Affiliated QPAM provides its certified Audit 
Report, by regular mail to: Office of Exemption Determinations (OED), 
200 Constitution Avenue NW, Suite 400, Washington, DC 20210, or by 
private carrier to: 122 C Street NW, Suite 400, Washington, DC 20001-
2109. This delivery must take place no later than thirty (30) days 
following completion of the Audit Report. The Audit Report will be made 
part of the public record regarding this exemption. Furthermore, each 
Citigroup Affiliated QPAM must make its Audit Report unconditionally 
available, electronically or otherwise, for examination upon request by 
any duly authorized employee or representative of the Department, other 
relevant regulators, and any fiduciary of a Covered Plan;
    (10) Each Citigroup Affiliated QPAM and the auditor must submit to 
OED: Any engagement agreement(s) entered into pursuant to the 
engagement of the auditor under this exemption, no later than two (2) 
months after the execution of any such engagement agreement;
    (11) The auditor must provide the Department, upon request, for 
inspection and review, access to all the workpapers created and 
utilized in the course of the audit, provided such access and 
inspection is otherwise permitted by law; and
    (12) Citigroup must notify the Department of a change in the 
independent auditor no later than two (2) months after the engagement 
of a substitute or subsequent auditor and must provide an explanation 
for the substitution or change including a description of any material 
disputes between the terminated auditor and Citigroup;
    (j) As of January 10, 2018, and throughout the Exemption Period, 
with respect to any arrangement, agreement, or contract between a 
Citigroup Affiliated QPAM and a Covered Plan, the Citigroup Affiliated 
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 
inadvertent prohibited transactions); and to comply with the standards 
of prudence and loyalty set forth in section 404 of ERISA with respect 
to each such ERISA-covered plan and IRA to the extent that section is 
applicable;
    (2) To indemnify and hold harmless the Covered Plan for any actual 
losses resulting directly from a Citigroup Affiliated QPAM's violation 
of ERISA's fiduciary duties, as applicable, and the prohibited 
transaction provisions of ERISA and the Code, as applicable; a breach 
of contract by the QPAM; or any claim arising out of the failure of 
such Citigroup Affiliated 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. This condition applies only to actual 
losses caused by the Citigroup Affiliated QPAM's violations;
    (3) Not to require (or otherwise cause) the Covered Plan to waive, 
limit, or qualify the liability of the Citigroup Affiliated QPAM for 
violating ERISA or the Code or engaging in prohibited transactions;
    (4) Not to restrict the ability of such Covered Plan to terminate 
or withdraw from its arrangement with the Citigroup Affiliated QPAM 
with respect to any investment in a separately managed account or 
pooled fund subject to ERISA and managed by such QPAM, with the 
exception of reasonable restrictions, appropriately disclosed in 
advance, that are specifically designed to ensure equitable treatment 
of all investors in a pooled fund in the event such withdrawal or 
termination may have adverse consequences for all other investors. In 
connection with any such arrangements involving investments in pooled 
funds subject to ERISA entered into after the effective date of this 
exemption, the adverse consequences must relate to of a lack of 
liquidity of the underlying assets, valuation issues, or regulatory 
reasons that prevent the fund from promptly redeeming an ERISA-covered 
plan's or IRA's investment, and such restrictions must be applicable to 
all such investors and effective no longer than reasonably necessary to 
avoid the adverse consequences;
    (5) Not to impose any fees, penalties, or charges for such 
termination or withdrawal with the exception of reasonable fees, 
appropriately disclosed in advance, that are specifically designed to 
prevent generally recognized abusive investment practices or 
specifically designed to ensure equitable treatment of all investors in 
a pooled fund in the event such withdrawal or termination may have 
adverse consequences for all other investors, provided that such fees 
are applied consistently and in like manner to all such investors;
    (6) Not to include exculpatory provisions disclaiming or otherwise 
limiting liability of the Citigroup Affiliated QPAM for a violation of 
such agreement's terms. To the extent consistent with Section 410 of 
ERISA, 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 Citigroup, and its affiliates, or damages arising from 
acts outside the control of the Citigroup Affiliated QPAM;
    (7) By July 9, 2018, each Citigroup Affiliated QPAM must provide a 
notice of its obligations under this Section I(j) to each Covered Plan. 
For all other prospective Covered Plans, the Citigroup Affiliated QPAM 
will agree to its obligations under this Section I(j) in an updated 
investment management agreement between the Citigroup Affiliated 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 2016-14 that meets the terms of this condition. 
Notwithstanding the above, a Citigroup Affiliated QPAM will not violate 
the condition solely because a Plan or IRA refuses to sign an updated 
investment management agreement;
    (k) By March 10, 2018, each Citigroup Affiliated QPAM will provide 
a notice of the exemption, along with a separate summary describing the 
facts that led to the Conviction (the Summary), which have 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, 
or the sponsor of an investment fund in any case where a Citigroup 
Affiliated QPAM acts as a sub-advisor to the investment fund in which 
such ERISA-covered plan and IRA invests. Any

[[Page 61880]]

prospective clients for which a Citigroup Affiliated QPAM relies on PTE 
84-14 or has expressly represented that the manager qualifies as a QPAM 
or relies on the QPAM class exemption 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 Citigroup Affiliated QPAM. Disclosures 
may be delivered electronically.
    (l) The Citigroup Affiliated QPAMs must comply with each condition 
of PTE 84-14, as amended, with the sole exception of the violation of 
Section I(g) of PTE 84-14 that is attributable to the Conviction;
    (m)(1) By July 9, 2018, Citigroup designates 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 annual review for each annual period 
beginning on January 10, 2018 (the Annual Review) \46\ to determine the 
adequacy and effectiveness of the implementation of the Policies and 
Training. With respect to the Compliance Officer, the following 
conditions must be met:
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    \46\ Note that such Annual Review must be completed with respect 
to the annual periods ending January 9, 2019; January 9, 2020; 
January 9, 2021; January 9, 2022; and January 9; 2023.
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    (i) The Compliance Officer must be a professional who has extensive 
experience with, and knowledge of, the regulation of financial services 
and products, including under ERISA and the Code; and
    (ii) The Compliance Officer must be a senior compliance officer of 
Citigroup Inc. or one of its affiliates, and such senior compliance 
officer will be an officer who reports directly to, or reports to 
another compliance officer who reports directly to, Citigroup Inc.'s 
highest ranking compliance officer (whose title is currently Global 
Chief Compliance Officer of Citigroup Inc.);
    (2) With respect to each Annual Review, the following conditions 
must be met:
    (i) The Annual Review includes a review of: Any compliance matter 
related to the Policies or Training that was identified by, or reported 
to, the Compliance Officer or others within the compliance and risk 
control function (or its equivalent) during the previous year; any 
material change in the relevant business activities of the Citigroup 
Affiliated QPAMs; and any change to ERISA, the Code, or regulations 
related to fiduciary duties and the prohibited transaction provisions 
that may be applicable to the activities of the Citigroup Affiliated 
QPAMs;
    (ii) The Compliance Officer prepares a written report for each 
Annual Review (each, an Annual Report) that (A) summarizes his or her 
material activities during the preceding year; (B) sets forth any 
instance of noncompliance discovered during the preceding year, and any 
related corrective action; (C) details any change to the Policies or 
Training to guard against any similar instance of noncompliance 
occurring again; and (D) makes recommendations, as necessary, for 
additional training, procedures, monitoring, or additional and/or 
changed processes or systems, and management's actions on such 
recommendations;
    (iii) In each Annual Report, the Compliance Officer must certify in 
writing that to his or her knowledge: (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 preceding year and any related correction taken to date have 
been identified in the Annual Report; and (D) the Citigroup Affiliated 
QPAMs have complied with the Policies and Training and/or corrected (or 
is correcting) any instances of noncompliance in accordance with 
Section I(h) above;
    (iv) Each Annual Report must be provided to appropriate corporate 
officers of Citigroup and each Citigroup Affiliated QPAM to which such 
report relates; the head of compliance and the General Counsel (or 
their functional equivalent) of the relevant Citigroup Affiliated QPAM; 
and must be made unconditionally available to the independent auditor 
described in Section I(i) above;
    (v) Each Annual Review, including the Compliance Officer's written 
Annual Report, must be completed within three (3) months following the 
end of the period to which it relates;
    (n) Each Citigroup Affiliated QPAM will maintain records necessary 
to demonstrate that the conditions of this exemption have been met, for 
six (6) years following the date of any transaction for which such 
Citigroup Affiliated QPAM relies upon the relief in the exemption;
    (o) During the Exemption Period, Citigroup: (1) Immediately 
discloses to the Department any Deferred Prosecution Agreement (a DPA) 
or a Non-Prosecution Agreement (an NPA) with the U.S. Department of 
Justice, entered into by Citigroup or any of its affiliates in 
connection with conduct described in Section I(g) of PTE 84-14 or 
section 411 of ERISA; and (2) immediately provides the Department any 
information requested by the Department, as permitted by law, regarding 
the agreement and/or conduct and allegations that led to the agreement;
    (p) By July 9, 2018, each Citigroup Affiliated QPAM, in its 
agreements with, or in other written disclosures provided to Covered 
Plans, will clearly and prominently inform Covered Plan clients of 
their right to obtain a copy of the Policies or a description 
(``Summary Policies'') which accurately summarizes key components of 
the QPAM's written Policies developed in connection with this 
exemption. If the Policies are thereafter changed, each Covered Plan 
client must receive a new disclosure within six (6) months following 
the end of the calendar year during which the Policies were 
changed.\47\ With respect to this requirement, the description may be 
continuously maintained on a website, provided that such website link 
to the Policies or the Summary Policies is clearly and prominently 
disclosed to each Covered Plan; and
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    \47\ In the event Applicant meets this disclosure requirement 
through Summary Policies, changes to the Policies shall not result 
in the requirement for a new disclosure unless, as a result of 
changes to the Policies, the Summary Policies are no longer 
accurate.
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    (q) A Citigroup Affiliated QPAM or a Citigroup Related QPAM will 
not fail to meet the terms of this exemption, solely because a 
different Citigroup Affiliated QPAM or Citigroup Related QPAM fails to 
satisfy a condition for relief described in Sections I(c), (d), (h), 
(i), (j), (k), (l), (n) and (p); or if the independent auditor 
described in Section I(i) fails a provision of the exemption other than 
the requirement described in Section I(i)(11), provided that such 
failure did not result from any actions or inactions of Citigroup or 
its affiliates.
Section II: Definitions
    (a) The term ``Conviction'' means the judgment of conviction 
against Citicorp for violation of the Sherman Antitrust Act, 15 U.S.C. 
1, entered in the District Court for the District of Connecticut (the 
District Court) (Case Number 3:15-cr-78-SRU). For all purposes under 
this exemption, ``conduct'' of any person or entity that is the 
``subject of [a] Conviction'' encompasses the conduct described in 
Paragraph 4(g)-(i) of the Plea Agreement filed in the District Court in 
Case Number 3:15-cr-78-SRU;
    (b) The term ``Covered Plan'' is a plan subject to Part 4 of Title 
1 of ERISA (``ERISA-covered plan'') or a plan

[[Page 61881]]

subject to Section 4975 of the Code (``IRA'') with respect to which a 
Citigroup Affiliated QPAM relies on PTE 84-14, or with respect to which 
a Citigroup Affiliated QPAM (or any Citigroup affiliate) has expressly 
represented that the manager qualifies as a QPAM or relies on the QPAM 
class exemption (PTE 84-14). A Covered Plan does not include an ERISA-
covered Plan or IRA to the extent the Citigroup Affiliated QPAM has 
expressly disclaimed reliance on QPAM status or PTE 84-14 in entering 
into its contract, arrangement, or agreement with the ERISA-covered 
plan or IRA.
    (c) The terms ``ERISA-covered plan'' and ``IRA'' mean, 
respectively, a plan subject to Part 4 of Title I of ERISA and a plan 
subject to section 4975 of the Code.
    (d) The term ``Exemption Period'' means January 10, 2018, through 
January 9, 2023.
    (e) The term ``Citicorp'' means Citicorp, a financial services 
holding company organized and existing under the laws of Delaware and 
does not include any subsidiaries or other affiliates.
    (f) The term ``Citigroup Affiliated QPAM'' means a ``qualified 
professional asset manager'' (as defined in Section VI(a) of PTE 84-14) 
that relies on the relief provided by PTE 84-14 and with respect to 
which Citigroup is a current or future ``affiliate'' (as defined in 
Section VI(d)(1) of PTE 84-14). The term ``Citigroup Affiliated QPAM'' 
excludes Citicorp, the entity implicated in the criminal conduct that 
is the subject of the Conviction.
    (g) The term ``Citigroup Related QPAM'' means any current or future 
``qualified professional asset manager'' (as defined in section VI(a) 
of PTE 84-14) that relies on the relief provided by PTE 84-14, and with 
respect to which Citigroup owns a direct or indirect five percent or 
more interest, but with respect to which Citigroup is not an 
``affiliate'' (as defined in Section VI(d)(1) of PTE 84-14).

Effective Date

    This exemption is effective on January 10, 2018. The term of the 
exemption is from January 10, 2018, through January 9, 2023 (the 
Exemption Period).
    Department's Comment: The Department cautions that the relief in 
this exemption would terminate immediately if an entity within the 
Citigroup corporate structure is convicted of a crime described in 
Section I(g) of PTE 84-14 (other than the Conviction) during the 
effective period of the exemption. While such an entity could apply for 
a new exemption in that circumstance, the Department would not be 
obligated to grant the exemption. The terms of this exemption have been 
specifically designed to permit plans to terminate their relationships 
in an orderly and cost effective fashion in the event of an additional 
conviction or a determination that it is otherwise prudent for a plan 
to terminate its relationship with an entity covered by the proposed 
exemption.

Further Information

    For more information on this exemption, contact Mr. Joseph Brennan 
of the Department, telephone (202) 693-8456. (This is not a toll-free 
number.)

Barclays Capital Inc. (BCI or the Applicant) Located in New York, New 
York

[Prohibited Transaction Exemption 2017-06; Exemption Application No. D-
11910]

Discussion

    On November 21, 2016, the Department of Labor (the Department) 
published a notice of proposed exemption in the Federal Register at 81 
FR 83427, for certain entities with specified relationships to Barclays 
PLC (BPLC) to continue to rely upon the relief provided by PTE 84-14 
for a period of five years,\48\ notwithstanding BPLC's criminal 
conviction, as described herein. The Department is granting this 
exemption in order to ensure that Covered Plans \49\ whose assets are 
managed by a Barclays Affiliated QPAM or Barclays Related QPAM may 
continue to benefit from the relief provided by PTE 84-14. This 
exemption is effective from January 10, 2018 through January 9, 2023 
(the Exemption Period).
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    \48\ (49 FR 9494, March 13, 1984), as corrected at 50 FR 41430 
(October 10, 1985), as amended at 70 FR 49305 (August 23, 2005) and 
as amended at 75 FR 38837 (July 6, 2010), hereinafter referred to as 
PTE 84-14 or the QPAM Exemption.
    \49\ ``Covered Plan'' is a plan subject to Part 4 of Title 1 of 
ERISA (``ERISA-covered plan'') or a plan subject to section 4975 of 
the Code (``IRA'') with respect to which a Barclays Affiliated QPAM 
relies on PTE 84-14, or with respect to which a Barclays Affiliated 
QPAM (or any BPLC affiliate) has expressly represented that the 
manager qualifies as a QPAM or relies on the QPAM class exemption 
(PTE 84-14). A Covered Plan does not include an ERISA-covered Plan 
or IRA to the extent the Barclays Affiliated QPAM has expressly 
disclaimed reliance on QPAM status or PTE 84-14 in entering into its 
contract, arrangement or agreement with the ERISA-covered plan or 
IRA. See further discussion in this Preamble under the heading 
Comments 9, 10 & 11--Policies and Procedures Relating to Compliance 
with ERISA and the Code--Section (I)(ii)-(v).
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    No relief from a violation of any other law is provided by this 
exemption, including any criminal conviction described in the proposed 
exemption. Furthermore, the Department cautions that the relief in this 
exemption will terminate immediately if, among other things, an entity 
within the BPLC corporate structure is convicted of a crime described 
in Section I(g) of PTE 84-14 (other than the Conviction) during the 
Exemption Period. The terms of this exemption have been specifically 
designed to promote conduct that adheres to basic fiduciary standards 
under ERISA and the Code. The exemption also aims to ensure that plans 
and IRAs can terminate relationships in an orderly and cost effective 
fashion in the event a plan or IRA fiduciary determines it is prudent 
for the plan or IRA to sever its relationship with an entity covered by 
the exemption.

Written Comments

    The Department invited all interested persons to submit written 
comments and/or requests for a public hearing with respect to the 
notice of proposed exemption, published in the Federal Register at 81 
FR 83427 on November 21, 2016.\50\ All comments and requests for a 
hearing were due by January 5, 2017. The Department received written 
comments from the Applicant and members of the U.S. Congress. After 
considering these submissions, the Department has determined to grant 
the exemption, with revisions, as described below.
---------------------------------------------------------------------------

    \50\ The Department received additional comments from Applicant, 
however, after the close of the comment period.
---------------------------------------------------------------------------

Comment 1--Confirmation of the Comment Period Deadline
    The Applicant requests that the Department confirm that the 
reference in the preamble to the proposed exemption to comments being 
due within 30 days was unintentional and the deadline for comments was 
January 5, 2017. The Department so confirms.
Comment 2--Term of the Exemption
    The Applicant requests that the Department extend the term of the 
exemption from five years to ten years from the Conviction Date, as 
defined in Section II(e). The Applicant states that the five-year term 
is inconsistent with precedent and that the ``conduct that is the 
subject of BPLC's conviction was described by the Department of Justice 
(DOJ) as `limited to a small part of [BPLC's] operations;' it involved 
only two traders; and it did not involve any of BPLC's asset management 
units.'' The Applicant further states that the limitation to five years 
is especially problematic given that the DOJ plea

[[Page 61882]]

agreement with BPLC marked the first time that DOJ awarded a sentencing 
credit for a company's compliance and remediation efforts and that DOJ 
singled out BPLC for recognition and credit for its significant 
improvements to its compliance program and its ``dramatic steps to 
change its corporate culture.'' In addition, the Applicant states that 
DOJ called BPLC ``a leader in its efforts toward remediation'' and 
highlighted its ``extraordinary dedication'' to timely reporting of 
potential misconduct before it was under any reporting obligation, and 
that DOJ also lauded BPLC's cooperation during the investigative phase, 
which it characterized as ``uniquely helpful'' and ``of critical 
importance.''
    Although the Applicant characterizes the conduct as involving the 
isolated actions of two individuals, the Department does not agree with 
the apparent suggestion that the Applicant bears little or no 
responsibility for the criminal conduct. For example, the Department 
considered BPLC's Plea Agreement, which includes the following 
statement, under the heading Other Relevant Conduct: ``The defendant, 
through its currency traders and sales staff, also engaged in other 
currency trading and sales practices in conducting FX Spot Market 
transactions with customers via telephone, email, and/or electronic 
chat, to wit: (i) Intentionally working customers' limit orders one or 
more levels, or `pips,' away from the price confirmed with the 
customer; (ii) including sales markup, through the use of live hand 
signals or undisclosed prior internal arrangements or communications, 
to prices given to customers that communicated with sales staff on open 
phone lines; (iii) accepting limit orders from customers and then 
informing those customers that their orders could not be filled, in 
whole or in part, when in fact the defendant was able to fill the order 
but decided not to do so because the defendant expected it would be 
more profitable not to do so; and (iv) disclosing non-public 
information regarding the identity and trading activity of the 
defendant's customers to other banks or other market participants, in 
order to generate revenue for the defendant at the expense of its 
customers.''
    In developing this exemption, the Department also considered 
relevant statements from regulators. For example, the Financial Conduct 
Authority's (FCA) Final Notice states that, ``[d]uring the Relevant 
Period, Barclays did not exercise adequate and effective control over 
its FX business. . . . The front office failed adequately to discharge 
these responsibilities with regard to obvious risks associated with 
confidentiality, conflicts of interest and trading conduct.'' The 
Notice further states: ``These failings occurred in circumstances where 
certain of those responsible for managing front office matters were 
aware of and/or at times involved in behaviours described above.''
    By way of further example, the Order of the Commodities Futures 
Trading Commission (CFTC) states: ``Barclays failed to adequately 
assess the risks associated with its FX traders participating in the 
fixing of certain FX benchmark rates. Barclays also lacked adequate 
internal controls in order to prevent its FX traders from engaging in 
improper communications with certain FX traders at other banks. 
Barclays lacked sufficient policies, procedures and training 
specifically governing participation in the trading around the FX 
benchmark rates and had inadequate policies pertaining to, or 
insufficient oversight of, its FX traders' use of chat rooms or other 
electronic messaging.''
    The Department also notes the size of relevant fines imposed by 
various regulators: The Department of Justice imposed a $710 million 
fine; the Board of Governors of the Federal Reserve Board imposed a 
$342 million fine; and the Department of Financial Services, the 
Commodity Futures Trading Commission, and the FCA imposed fines of $485 
million, $400 million, and [pound]284,432,000, respectively.
    This exemption is not punitive. Instead, its five-year term and 
protective conditions reflect the Department's intent to protect 
Covered Plans that entrust substantial assets to a Barclays Affiliated 
QPAM, despite the serious misconduct and supervisory failures described 
above. The limited term of this exemption gives the Department the 
opportunity to review the adherence by the Barclays Affiliated QPAMs to 
the conditions set out herein. If the Applicant seeks an extension of 
this exemption, the Department will examine whether the compliance and 
oversight changes mandated by various regulatory authorities are having 
their desired effect on BPLC entities.
Comment 3--Conditions Unrelated to PTE 84-14 and Imposition of Onerous 
Requirements
    The Department addresses this general comment more fully below in 
response to certain specific issues that are related to this general 
comment.
Comment 4--Description of Criminal Conduct--Section I
    The prefatory language to Section I of the proposed exemption 
provides, ``If the proposed five-year exemption is granted, certain 
asset managers with specified relationships to BPLC (the Barclays 
Affiliated QPAMs and the Barclays Related QPAMs, as defined further in 
Sections II(a) and II(b), respectively) will not be precluded from 
relying on the exemptive relief provided by Prohibited Transaction 
Class Exemption 84-14 (PTE 84-14 or the QPAM Exemption),\51\ 
notwithstanding the judgment of conviction against BPLC (the 
Conviction), as defined in Section II(c)),\52\ for engaging in a 
conspiracy to: (1) Fix the price of, or (2) eliminate competition in 
the purchase or sale of the euro/U.S. dollar currency pair exchanged in 
the Foreign Exchange (FX) Spot Market, for a period of five years 
beginning on the date the exemption is granted.''
---------------------------------------------------------------------------

    \51\ 49 FR 9494 (March 13, 1984), as corrected at 50 FR 41430 
(October 10, 1985), as amended at 70 FR 49305 (August 23, 2005), and 
as amended at 75 FR 38837 (July 6, 2010).
    \52\ 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 violation of the Sherman 
Antitrust Act, Title 15 United States Code, Section 1.
---------------------------------------------------------------------------

    The Applicant requests that the description of the charged 
conduct--the clause beginning ``for engaging in a conspiracy''--be 
omitted. The Applicant states that this description is inaccurate and 
incomplete, will lead to disputes with counterparties to the detriment 
of plans, and will make it unlikely that plans will benefit from or be 
protected by this exemption.
    After consideration of the Applicant's comment, the Department has 
clarified the exemption's description of BPLC's criminal conduct.
Comment 5--Knowing or Tacit Approval--Sections I(a) and I(c)
    Section I(a) of the proposed five-year exemption provides, ``(a) 
Other than certain individuals who: Worked for a non-fiduciary business 
within BCI; had no responsibility for, and exercised no authority in 
connection with, the management of plan assets; and are no longer 
employed by BPLC, the Barclays Affiliated QPAMs and the Barclays 
Related QPAMs (including their officers, directors, agents other than 
BPLC, and employees of such QPAMs who had responsibility for, or 
exercised authority in connection with the management of plan assets) 
did not know of, did not have reason to know of, or participate in the 
criminal conduct that is the subject of the Conviction (for purposes

[[Page 61883]]

of this paragraph (a), ``participate in'' includes the knowing or tacit 
approval of the misconduct underlying the Conviction).''
    Section I(c) of the proposed exemption provides, ``(c) A Barclays 
Affiliated QPAM will not employ or knowingly engage any of the 
individuals that participated in the criminal conduct that is the 
subject of the Conviction (for purposes of this paragraph (c), 
``participated in'' includes the knowing or tacit approval of the 
misconduct underlying the Conviction).''
    The Applicant requests that the words ``or tacit'' in the phrase 
``knowing or tacit approval'' be deleted in Sections I(a) and I(c). The 
Applicant states that the term ``tacit approval'' ``is undefined and 
ambiguous, and potentially encompasses a broad range of conduct that 
could become the subject of disputes with counterparties.'' In 
addition, the Applicant states that the reference to the individuals 
being ``no longer employed by BPLC'' in Section I(a) implies that the 
individuals referenced in this condition were employed directly by 
BPLC. However, the Applicant states that, as outlined in Applicant's 
December 6, 2016 letter to the Department, the two individuals 
referenced in Paragraph 4(g) of the Plea Agreement were employed by a 
service company subsidiary of a BPLC subsidiary. The Applicant suggests 
that Section I(a) be revised to read, ''Other than certain individuals 
who: Worked for a nonfiduciary business of a BPLC subsidiary; had no 
responsibility for, and exercised no authority in connection with, the 
management of plan assets; and are no longer employed by the BPLC 
subsidiary, the Barclays Affiliated QPAMs (including their officers, 
directors, agents other than BPLC, and employees of such QPAMs who had 
responsibility for, or exercised authority in connection with the 
management of plan assets) did not know of, have reason to know of, or 
participate in the criminal conduct that is the subject of the 
Conviction (for purposes of this paragraph (a), ``participate in'' 
includes the knowing approval of the misconduct underlying the 
Conviction).''
    With respect to Condition I(a), after consideration of the 
Applicant's comment, the Department has removed ``or tacit'' in the 
phrase ``knowing or tacit approval'' and removed the phrase ``no longer 
employed by BPLC,'' and accepted the Applicant's suggested revision to 
replace ``BCI'' with ``BPLC subsidiary'' where remaining in the 
condition. However, the Department has not accepted the Applicant's 
suggestion to remove ``Barclays Related QPAMs'' from the condition. The 
Department intends to preclude relief to the extent a Barclays Related 
QPAM violates this condition. With respect to Condition I(c), the 
Department has revised the exemption in the manner requested by the 
Applicant.
Comment 6--Inclusion of BCI--Sections I(d), I(g), and I(h)(1)(i)
    Section I(d) of the proposed five-year exemption provides, ``A 
Barclays Affiliated QPAM will not use its authority or influence to 
direct an ``investment fund,'' (as defined in Section VI(b) of PTE 84-
14) that is subject to ERISA or the Code and managed by such Barclays 
Affiliated QPAM to enter into any transaction with BPLC or BCI, or 
engage BPLC 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.''
    Section I(g) of the proposed five-year exemption provides, ``(g) 
BPLC and BCI will not provide discretionary asset management services 
to ERISA-covered plans or IRAs, nor will otherwise act as a fiduciary 
with respect to ERISA-covered plan or IRA assets.''
    Section I(h)(1)(i) of the proposed five-year exemption provides, 
``(h)(1)(i) The asset management decisions of the Barclays Affiliated 
QPAM are conducted independently of the corporate management and 
business activities of BPLC and BCI.''
    The Applicant requests removal of the reference to ``BCI'' in this 
Section I(d), Section I(g), and Section I(h)(1)(i). Among other things, 
the Applicant states that as BCI is not the party to the Conviction, 
and therefore, the inclusion of BCI in this condition goes beyond the 
underlying Conviction. In addition, the Applicant states that, as noted 
in its December 6, 2016 letter to the Department, the two individuals 
referenced in Paragraph 4(g) of the Plea Agreement were employed by a 
service company subsidiary of a different BPLC subsidiary and were not 
``dual-hatted'' to BCI. Further, the Applicant states that BCI was, and 
in the future is likely to be, the primary U.S. registered investment 
adviser of the Barclays Group, and any future investment management 
mandates would likely be undertaken by BCI. Thus, the Applicant states 
that not permitting an Affiliated QPAM to enter into a transaction with 
BCI is tantamount to a denial of the exemption. The Applicant also 
states that this condition would prevent BCI or its parent entity from 
purchasing an asset manager and merging the asset manager into BCI, and 
would also prevent BCI from developing new lines of business providing 
asset management or securities lending businesses to plans.
    In response, the Department notes that the condition was developed 
based on a representation from the Applicant in a letter dated November 
2, 2015. In that letter the Applicant stated that, ``the Investment 
Bank division, where such conduct arose, and the Wealth and Investment 
Management division both operated through BCI, one of the QPAMs, at the 
time of the criminal conduct; however, as also noted above and 
discussed in the Application, the Wealth and Investment Management 
activities of BCI were operated separately from the Investment Bank 
division and the activities of the Investment Bank division that gave 
rise to the criminal conduct, and as such, it is important to 
distinguish the Wealth and Investment Management employees from the 
other BCI employees. The `Wealth and Investment Management employees' 
were specifically mentioned because there were Investment Bank division 
employees of BCI who were involved in the criminal conduct that is the 
subject of the Plea Agreement.''
    Notwithstanding this, given the conditions required herein as 
discussed below, the Department has determined to revise the exemption 
in the manner requested by the Applicant, and has also clarified that 
paragraph (d) applies to an ``investment fund'' that is subject to 
ERISA or the Code and managed by such Barclays Affiliated QPAM with 
respect to Covered Plans.
Comment 7--Exercising Authority Over Plan Assets--Section I(f)
    Section I(f) of the proposed five-year exemption provides, ``(f) A 
Barclays Affiliated QPAM or a Barclays Related QPAM did not exercise 
authority over the assets of any plan subject to Part 4 of Title I of 
ERISA (an ERISA-covered plan) or section 4975 of the Code (an IRA) in a 
manner that it knew or should have known would: Further the criminal 
conduct that is the subject of the Conviction; or cause the Barclays 
Affiliated QPAM or the Barclays Related QPAM or its affiliates or 
related parties to directly or indirectly profit from the criminal 
conduct that is the subject of the Conviction.''
    The Applicant requests that the words ``related parties'' in the 
phrase ``Barclays Affiliated QPAM or the Barclays Related QPAM, or its 
affiliates or related parties'' be deleted, stating that the term

[[Page 61884]]

``related parties'' is undefined and could lead to confusion.
    For clarity, the Department has deleted the term ``related 
parties.''
Comment 8--See Comment 6 Re: Section I(g)
    Section I(g) of the proposed five-year exemption provides, ``(g) 
BPLC and BCI will not provide discretionary asset management services 
to ERISA-covered plans or IRAs, nor will otherwise act as a fiduciary 
with respect to ERISA-covered plan or IRA assets.''
    The Applicant requests removal of the reference to ``BCI'' in this 
Section I(g), and for the reasons discussed above, the Department has 
determined to revise the exemption in the manner requested by the 
Applicant. Additionally, the Department modified this condition to 
clarify that BPLC will not violate this condition in the event that it 
inadvertently becomes an investment advice fiduciary and that BPLC can 
act as a fiduciary for plans that it sponsors for its own employees or 
employees of an affiliate.
Comments 9, 10 & 11--Policies and Procedures Relating to Compliance 
With ERISA and the Code--Section I(h)(1)(ii)-(v)
    Section I(h)(1)(ii)-(iii) of the proposed five-year exemption 
provides, ''(h)(1) Prior to a Barclays Affiliated QPAM's engagement by 
any ERISA-covered plan or IRA for discretionary asset management 
services, where the QPAM represents that it qualifies as a QPAM, the 
Barclays Affiliated QPAM must develop, implement, maintain, and follow 
written policies and procedures (the Policies) requiring and reasonably 
designed to ensure that: . . . .
    (ii) The Barclays Affiliated QPAM fully complies with ERISA's 
fiduciary duties and with ERISA and the Code's prohibited transaction 
provisions, and does not knowingly participate in any violation of 
these duties and provisions with respect to ERISA-covered plans and 
IRAs; and
    (iii) The Barclays Affiliated QPAM does not knowingly participate 
in any other person's violation of ERISA or the Code with respect to 
ERISA-covered plans and IRAs;''
    (iv) Any filings or statements made by the Barclays Affiliated QPAM 
to regulators including, but not limited to, the Department, the 
Department of the Treasury, the Department of Justice, and the Pension 
Benefit Guaranty Corporation, on behalf of ERISA-covered plans or IRAs, 
are materially accurate and complete, to the best of such QPAM's 
knowledge at that time; [and]
    (v) The Barclays Affiliated QPAM does not make material 
misrepresentations or omit material information in its communications 
with such regulators with respect to ERISA-covered plans or IRAs, or 
make material misrepresentations or omit material information in its 
communications with ERISA-covered plans and IRA clients.''
    The Applicant requests that these subparagraphs be stricken as 
duplicative and already mandated by statute. The Applicant states that 
these conditions should apply only with regard to filings or statements 
made on behalf of ERISA-covered plans or IRAs in connection with 
accounts for which the Barclays Affiliated QPAM relies on the relief 
provided by PTE 84-14. The Applicant states that the conditions should 
be tailored to PTE 84-14 in all instances.
    Subsection (iii): The Applicant requests that Section I(h)(1)(iii) 
be stricken. The Applicant states that, to the extent that Subsection 
I(h)(1)(iii) is intended to capture violations of ERISA or the Code 
that are not described in the preceding Subsection (such as ERISA 
disclosure requirements), such violations would not be within the scope 
of relief provided by the proposed exemption.
    Subsection (iv): The Applicant suggests that the condition be 
revised to read, ``(iv) Any filings or statements made by the Barclays 
Affiliated QPAM to regulators, including, but not limited to, the 
Department, the Department of the Treasury, the Department of Justice, 
and the Pension Benefit Guaranty Corporation, on behalf of ERISA-
covered plans or IRAs for which the Barclays Affiliated QPAM provides 
asset management or other discretionary fiduciary services in reliance 
on PTE 84-14, are materially accurate and complete, to the best of such 
QPAM's knowledge at that time.''
    Subsection (v): The Applicant requests that the condition in 
Section I(h)(1)(v) incorporate language similar to Section I(h)(1)(iv), 
which provides that the condition extends ``to the best of such QPAM's 
knowledge at that time.''
    The requirement of Section I(h) that the policies and procedures 
developed by the Barclays Affiliated QPAM reflect basic fiduciary norms 
is a protective measure that is amply justified by the substantial 
compliance and oversight failures that resulted in the Conviction and 
fines, and in the need for this exemption, as detailed above. 
Accordingly, the Department has substantially retained the condition. 
It has, however, revised the condition's scope to better match the 
Department's protective intent. In particular, subsection (v) has been 
revised to contain the ``to the best of such QPAM's knowledge at that 
time'' concept found in Subsection (iv); and the applicability of 
Subsections (iv) and (v) has been limited to Covered Plans. This 
revision is consistent with the Department's intent to protect ERISA-
covered Plans and IRAs that may hire a Barclays Affiliated QPAM based 
on the manager's express representation that it relies on or qualifies 
under PTE 84-14.
    As noted in more detail below, the Department will not strike a 
condition merely because the condition is also a statutory requirement. 
It is the express intent of the Department to preclude relief for a 
Barclays Affiliated QPAM that fails to meet the requirements of this 
exemption, including those derived from basic standards codified in 
statute, as applicable.
    The Department does not view subparagraph (iii) of Section I(h)(1), 
which relates to compliance with ERISA or the Code, as duplicative of 
subparagraph (ii), which relates to compliance with, and knowing 
violations of, certain provisions of ERISA or the Code. However, the 
Department has modified the Policies' requirement of adherence to the 
fiduciary and prohibited transaction provisions of ERISA and the Code 
so that the Policies expressly focus on the provisions only to the 
extent those provisions are ``applicable'' under ERISA and the Code.
Comment 12--Correction of Violations and Failures to Comply--Section 
I(h)(1)(vii)
    Section I(h)(1)(vii) of the proposed five-year exemption provides 
that, ``(h)(1) Prior to a Barclays Affiliated QPAM's engagement by any 
ERISA-covered plan or IRA for discretionary asset management services, 
where the QPAM represents that it qualifies as a QPAM, the Barclays 
Affiliated QPAM must develop, implement, maintain, and follow written 
policies and procedures (the Policies) requiring and reasonably 
designed to ensure that: . . .
    (vii) Any violation of, or failure to comply with, an item in 
subparagraphs (ii) through (vi), is corrected promptly upon discovery, 
and any such violation or compliance failure not promptly corrected is 
reported, upon the discovery of such 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 
Barclays Affiliated QPAM, the independent auditor responsible for 
reviewing compliance with the Policies, and an appropriate fiduciary of 
any affected ERISA-covered plan or IRA that

[[Page 61885]]

is independent of BPLC; however, with respect to any ERISA-covered plan 
or IRA sponsored by an `affiliate' (as defined in Section VI(d) of PTE 
84-14) of BPLC or beneficially owned by an employee of BPLC or its 
affiliates, such fiduciary does not need to be independent of BPLC. A 
Barclays Affiliated QPAM will not be treated as having failed to 
develop, implement, maintain, or follow the Policies, provided that it 
corrects any instance of noncompliance promptly 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).''
    The Applicant cites this condition as an example of how the 
Department made the proposed exemption ``inexplicably'' and 
``arbitrarily'' more burdensome and onerous than other such exemptions 
it has granted previously. More specifically, the Applicant seeks 
several revisions to Section I(h)(vii), stating that its notification 
requirements are overbroad and that the terms such as ``promptly,'' 
``appropriate corporate officers'' and ``appropriate fiduciary'' are 
either vague or undefined. The Applicant requests that the 
``subparagraphs (ii) through (vi)'' reference be revised to 
``subparagraphs (i) through (vi),'' and that the language be revised to 
provide that this condition is satisfied where the issue is reported to 
the corporate officers specifically identified in the condition and, if 
the plan reporting provision is not removed, to a plan fiduciary that 
satisfies the requirement that it be independent of BPLC, other than 
with respect to the Applicant's own plans. The Applicant requests also 
that the last sentence of the subparagraph be revised since it ``does 
not meaningfully provide relief in instances where a violation or 
compliance failure is corrected.''
    The Applicant suggests the condition in Section I(h)(1)(vii) be 
revised to read, ``(vii) Any violation of, or failure to comply with, 
an item in subparagraphs (i) through (vi), is corrected (or plans to 
correct are initiated) upon discovery, and any such violation or 
compliance failure not corrected (or a correction process initiated) is 
reported, upon the discovery of such failure to initiate correction 
efforts, in writing, to the head of compliance and the General Counsel 
(or their functional equivalent) of the relevant Barclays Affiliated 
QPAM. A Barclays Affiliated QPAM will not be treated as having failed 
to develop, implement, maintain, or follow the Policies, provided that 
it takes corrective action as to 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).''
    In response to the Applicant's general comment, the Department has 
based the conditions of this exemption on both the particular facts of 
this case and its experience over time with previous exemptions. For 
the reasons set out herein, the Department has concluded that the 
specific conditions of this exemption are appropriate and give the 
Department a reasonable basis for concluding that the conditions are 
appropriately protective of affected plans and IRAs. As noted above, a 
central aim of the exemption is to ensure that those relying upon the 
exemption for relief from the prohibited transaction rules will 
consistently act to promote a culture of fiduciary compliance, 
notwithstanding the conduct that violated Section I(g) of PTE 84-14.
    After considering the Applicant's specific requests for revisions, 
however, the Department has replaced ``appropriate corporate officers'' 
with ``the head of compliance and the General Counsel (or their 
functional equivalent) of the relevant line of business that engaged in 
the violation or failure.'' The Department also will not condition the 
exemption on a requirement for notification of violations to an 
appropriate fiduciary of any affected Covered Plan that is independent 
of BPLC.
    However, the Department is not revising the ``subparagraphs (ii) 
through (vi)'' reference to include ``subparagraph (i)'' because the 
Department intends to preclude relief to the extent a Barclays 
Affiliated QPAM fails to develop, implement, maintain, and follow 
written policies and procedures. Clearly, it is not enough merely to 
develop policies and procedures, without also implementing, 
maintaining, and following the terms of those policies and procedures. 
Covered Plans do not benefit from the creation of strong policies and 
procedures, unless they are actually followed.
    The Department has revised the term ``promptly'' for consistency 
with the Department's intent that violations or compliance failures be 
corrected ``as soon as reasonably possible upon discovery or as soon 
after the QPAM reasonably should have known of the noncompliance 
(whichever is earlier).'' However, contrary to the Applicant's 
suggestion, the Department intends to preclude relief to the extent 
violations or failures are not corrected as required by the exemption. 
Therefore, the Department has not adopted the Applicant's proposed 
subparagraph (vii), which requires little more than a plan for 
corrective action, without any corresponding obligation to actually 
implement the action.
Comment 13--Training Incorporated in Policies--Section I(h)(2)(i)
    Section I(h)(2)(i) of the proposed five-year exemption provides, 
``. . . The Training must: (i) 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 five-year exemption (including any loss of exemptive relief 
provided herein), and prompt reporting of wrongdoing.''
    The Applicant requests that the requirement in Section I(h)(2)(i) 
that the Training must ``[b]e set forth in the Policies'' be deleted. 
The Applicant states that the requirement could present logistical 
challenges as a Barclays Affiliated QPAM may update its Training and 
its Policies at different points in time. The Applicant further states 
that requiring that the former be incorporated into the latter merely 
increases the logistical burden and serves no useful purpose.
    After considering this comment, the Department has determined to 
revise the condition to address the Applicant's concerns that it could 
present logistical challenges.
    Accordingly, the Department has revised the subsection to read that 
the Training must: ``At a minimum, cover the Policies, ERISA and Code 
compliance (including applicable fiduciary duties and the prohibited 
transaction provisions), ethical conduct, the consequences for not 
complying with the conditions of this exemption (including any loss of 
exemptive relief provided herein), and prompt reporting of 
wrongdoing.''
Comment 14--Training by Independent Professional--Section I(h)(2)(ii)
    Section I(h)(2)(ii) of the proposed five-year exemption provides, 
``The Training must: . . . (ii) Be conducted by an independent 
professional who has been prudently selected and who has appropriate 
technical training and proficiency with ERISA and the Code.''
    The Applicant requests that Section I(h)(2)(i) be deleted, stating 
that requiring an ``independent professional'' to conduct the training 
is likely to be ``counterproductive, as the

[[Page 61886]]

most effective trainer may be someone with detailed knowledge of the 
Barclays Affiliated QPAM's business and compliance practices that an 
`independent' trainer may lack.'' Moreover, the Applicant states that 
the term ``independent professional'' is undefined, leading to 
potential confusion and disputes. Further, the Applicant states that 
the term ``technical training'' is duplicative of ``proficiency'' and 
is undefined. Therefore, the Applicant suggests eliminating that term, 
and requests that Section I(h)(2)(ii) be revised to read, ``Be 
conducted by an individual with significant understanding and 
familiarity with asset management and trading practices and who has 
appropriate proficiency with ERISA and the Code.''
    The Department has partially accepted the Applicant's request as to 
the suggested revision so that ``independent professional'' has been 
replaced with ``individual with significant understanding and 
familiarity with asset management and trading practices'' but has not 
removed the requirement that such person be prudently selected. 
Additionally, the Department disagrees with the Applicant's assertion 
that the phrase ``technical training and proficiency'' is duplicative. 
In the Department's view, the two terms are not synonymous, as a person 
may have taken technical training in a given subject matter but may not 
be proficient in that subject matter.
    Further, while the Department does not agree with the Applicant's 
characterization that hiring an appropriate independent professional, 
prudently selected, would be ``counterproductive,'' the Department is 
persuaded that appropriate Barclays personnel, who are prudently 
selected, should be allowed to conduct the training, and has revised 
the condition accordingly.
Comment 15--Audit--Section I(i)(1)
    Section I(i)(1) of the proposed five-year exemption requires that 
each ``Barclays Affiliated QPAM submits to an audit conducted annually 
by an independent auditor, who has been prudently selected and who has 
appropriate technical training and proficiency with ERISA and the Code, 
to evaluate the adequacy of, and the Barclays Affiliated QPAM's 
compliance with, the Policies and Training described herein. The audit 
requirement must be incorporated in the Policies. Each annual audit 
must cover a consecutive twelve (12) month period starting with the 
twelve (12) month period that begins on the date that a Barclays 
Affiliated QPAM is first engaged by any ERISA-covered plan or IRA for 
discretionary asset management services reliant on PTE 84-14, and each 
annual audit must be completed no later than six (6) months after the 
period to which the audit applies.''
    The Applicant requests that the requirement that the audit 
requirement be incorporated in the Policies be deleted because it is 
already a condition of exemptive relief and incorporation into the 
Policies is, therefore, ``duplicative'' and appears to serve no useful 
purpose. In addition, the Applicant represents that the timing of the 
audit should factor into the timing of the proposed one-year exemption. 
The Applicant states that it is possible that the ``date that a 
Barclays Affiliated QPAM is first engaged'' could come before the 
effective date of the permanent exemption, rendering the timing 
unclear, and that the condition should clarify that the audit period 
will commence only after the effective date of this exemption. Further, 
the Applicant requests the elimination of the phrase ``technical 
training,'' because the term ``technical training'' is duplicative of 
``proficiency'' and is undefined.
    The Department declines to make certain of the Applicant's 
requested revisions. The Department views the audit requirement as an 
integral component of the exemption, without which the Department would 
be unable to make its finding that the exemption is protective of 
Covered Plans and their participants, beneficiaries, and beneficial 
owners, as applicable. A recurring, independent audit of the Barclays 
Affiliated QPAMs is a critical means by which to verify the adequacy 
of, and compliance with the Policies and Training mandated by this 
exemption.
    The Department disagrees with the Applicant's assertion that the 
phrase ``technical training and proficiency'' is duplicative. In the 
Department's view, the two terms are not synonymous, as a person may 
have taken technical training in a given subject matter but may not be 
proficient in that subject matter. The exemption requires that the 
auditor be both technically trained and proficient in ERISA as well as 
the Code. Accordingly, the Department declines to change the phrase 
``technical training and proficiency'' as used in Section I(i)(1).
    The Department also declines to delete the requirement that the 
audit conditions be incorporated in the Policies. The audit requirement 
provides a critical independent check on compliance with this 
exemption's conditions, and helps ensure that the basic protections set 
forth in the Policies are taken seriously. Accordingly, the specifics 
of the audit requirement are important components of the Policies. 
Their inclusion in the Policies promotes compliance and sends an 
important message to the institutions' employees and agents, as well as 
to Covered Plan clients, that compliance with the policies and 
procedures will be subject to careful independent review.
    After consideration of the Applicant's concerns regarding the 
annual audit, the Department is revising the audit condition to require 
an audit on a biennial basis. The Department notes that if the audit 
uncovers material deficiencies with the Applicant's compliance with 
this exemption, then the Applicant should consider conducting an 
additional audit after making corrections to ensure that it remains in 
compliance with the exemption. In any event, the Department emphasizes 
that it retains the right to conduct its own investigation of 
compliance based on any indicators of problems. Finally, the Department 
has clarified the audit timing requirements.
Comment 16--Access to Business--Section I(i)(2)
    Section I(i)(2) of the proposed five-year exemption requires that 
``as permitted by law, each Barclays Affiliated QPAM and, if 
applicable, BPLC, will grant the auditor unconditional access to its 
business. . . .''
    The Applicant requests that the access granted by Section I(i)(2) 
be limited to non-privileged materials that do not contain trade 
secrets. The Applicant represents that the existing limitations can be 
read not to exclude such materials and, given the breadth of the 
``unconditional access'' described, the absence of a specific 
limitation could lead to confusion, disputes, and infringement on a 
Barclays Affiliated QPAM's rights to protect its privileged 
communications and trade secrets. The Applicant suggests that the 
language read, ``as permitted by law, each Barclays Affiliated QPAM 
and, if applicable and solely to determine if the provisions of the 
exemption involving BPLC are met, BPLC will grant the auditor 
unconditional access to its business. . . .''
    In the Department's view, to ensure a thorough and robust audit, 
the auditor must be granted access to information the auditor deems 
necessary for the auditor to make sound conclusions. Access to such 
information must be within the scope of the audit

[[Page 61887]]

engagement and denied only to the extent any disclosure is not 
permitted by state or federal statute. Enumerating specific 
restrictions on the accessibility of certain information may have a 
dampening effect on the auditor's ability to perform the procedures 
necessary to make valid conclusions and would therefore undermine the 
effectiveness of the audit. The auditor's access to such information, 
however, is limited to information relevant to the auditor's objectives 
as specified by the terms of the exemption and to the extent disclosure 
is not prevented by state or federal statute or involves communications 
subject to attorney client privilege. In this regard, the Department 
has modified Section I(i)(2) accordingly.
    The Department has modified Section I(i)(2) so that it begins with 
the phrase ``Within the scope of the audit.''
Comment 17--Engagement Letter--Section I(i)(3)
    Section I(i)(3) of the proposed five-year exemption requires the 
auditor's engagement to ``specifically require the auditor to determine 
whether each Barclays Affiliated QPAM has developed, implemented, 
maintained, and followed the Policies in accordance with the conditions 
of this five-year exemption, if granted, and has developed and 
implemented the Training, as required herein.''
    The Applicant requests that Section I(i)(3) be deleted in its 
entirety, stating that it is duplicative of the requirements in Section 
I(i)(1) of the exemption, which also sets forth requirements as to the 
auditor's skill and the prudence of the selection process. Further, the 
Applicant suggests that it serves no useful purpose to mandate that the 
engagement letter repeat the requirements of the exemption and that 
such level of detail in the engagement is unnecessary in light of the 
detailed requirements of the exemption.
    The Department does not concur with the Applicant's request. By 
including a statement of the audit's intended purpose and required 
determinations in the auditor's agreement, the Applicant ensures that 
both the auditor and the Barclays Affiliated QPAMs have a clear 
understanding of the purpose and expectations of the audit process. 
Therefore, the Department declines to omit Section I(i)(3) from the 
exemption.
Comment 18--Auditor's Test of Operational Compliance--Section I(i)(4)
    Section I(i)(4) of the proposed five-year exemption provides that, 
``[t]he auditor's engagement must specifically require the auditor to 
test each Barclays Affiliated QPAM's operational compliance with the 
Policies and Training. In this regard, the auditor must test a sample 
of each QPAM's transactions involving ERISA-covered plans and IRAs 
sufficient in size and nature to afford the auditor a reasonable basis 
to determine the operational compliance with the Policies and 
Training.''
    The Applicant requests that Section I(i)(4) be deleted in its 
entirety or, in the alternative, that the second sentence of the 
condition be deleted. As noted above, the Applicant states that Section 
I(i)(1) sets forth the scope of the audit and contains requirements as 
to the auditor's technical skill and the prudence of the selection 
process. The Applicant suggests that, in light of these requirements, a 
condition mandating how the auditor must perform the audit is 
unnecessary. The Applicant states that there are only two firms that 
hold themselves out as having the capacity to handle these audits, and 
neither is a regular audit firm that can test significant data in the 
very short time frames provided in these exemptions. The Applicant 
represents that the Department should leave to the independent judgment 
of the auditor whether and when to sample transactions. The Applicant 
suggests that, if the subsection is not deleted, the condition in this 
subsection should read, ``(4) The auditor's engagement must 
specifically require the auditor to test each Barclays Affiliated 
QPAM's operational compliance with the Policies and Training.''
    The Department declines to make the Applicant's requested deletion 
or revision with respect to Section I(i)(4). The inclusion of written 
audit parameters in the auditor's engagement letter is necessary both 
to document expectations regarding the audit work and to ensure that 
the auditor can responsibly perform its important work. As stated 
above, clearly defined audit parameters will minimize any potential for 
dispute between the Applicant and the auditor. It is appropriate and 
necessary for the exemption to require a certain amount, and type, of 
audit work to be performed. Similarly, given the scope and number of 
relevant transactions, proper sampling is critical to ensuring the 
auditor's ability to reach reasonable conclusions.
    The Department notes that Section I(i)(4) does not specify the 
number of transactions that the auditor must test, but rather requires, 
for each QPAM, that the auditor test a sample of each QPAM's 
transactions involving Covered Plans, ``sufficient in size and nature 
to afford the auditor a reasonable basis to determine operational 
compliance with the Policies and Training.'' The Department has revised 
this provision, however, by limiting its applicability to Covered 
Plans.
Comment 19--Auditor's Determination of Compliance--I(i)(5)(i)
    Section I(i)(5)(i) of the proposed five-year exemption provides: 
``I(i)(5): For each audit, on or before the end of the relevant period 
described in Section I(i)(1) for completing the audit, the auditor must 
issue a written report (the Audit Report) to BPLC and the Barclays 
Affiliated QPAM to which the audit applies that describes the 
procedures performed by the auditor during the course of its 
examination. The Audit Report must include the auditor's specific 
determinations regarding:
    (i) The adequacy of the Barclays Affiliated QPAM's Policies and 
Training; the Barclays Affiliated QPAM's compliance with the Policies 
and Training; the need, if any, to strengthen such Policies and 
Training; and any instance of the respective Barclays Affiliated QPAM's 
noncompliance with the written Policies and Training described in 
Section I(h) above. 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 Barclays Affiliated QPAM must be promptly addressed by such 
Barclays Affiliated QPAM, and any action taken by such Barclays 
Affiliated QPAM to address such recommendations must be included in an 
addendum to the Audit Report (which addendum is completed prior to the 
certification described in Section I(i)(7) below). Any determination by 
the auditor that the respective Barclays Affiliated QPAM has 
implemented, maintained, and followed sufficient Policies and Training 
must not be based solely or in substantial part on an absence of 
evidence indicating noncompliance. In this last regard, any finding 
that the Barclays Affiliated QPAM has complied with the requirements 
under this Subsection must be based on evidence that demonstrates the 
Barclays Affiliated QPAM has actually implemented, maintained, and 
followed the Policies and Training required by this five-year 
exemption. Furthermore, the auditor must not rely on the Annual Report 
created by the compliance officer (the Compliance Officer) as described 
in Section I(m) below in lieu of independent determinations and testing 
performed by the auditor as required by Section I(i)(3) and (4) 
above.''

[[Page 61888]]

    The Applicant states that compliance with this provision and other 
provisions involving the auditor are within the control of the auditor 
rather than the Applicant, and that a violation of this provision 
should therefore not result in Applicant losing the exemption. The 
Applicant requests that, if the condition is not deleted or reworded as 
suggested, the Department should add the following proviso to the end 
of subparagraphs I(i)(4), I(i)(6) and I(i)(11): ``Any failure of the 
auditor to meet the conditions associated with the Audit Report shall 
not be deemed a violation of the exemption.''
    In addition, the Applicant requests that the requirement that an 
auditor's recommendations be ``promptly'' addressed be deleted. The 
Applicant states that the term ``promptly'' is undefined and that the 
ambiguity is particularly problematic in this context as addressing an 
auditor's recommendation could be a lengthy process (updating 
computerized trading systems, for example, could take months).
    Moreover, the Applicant states that the requirement that the 
auditor address the adequacy of the Annual Review required in Section 
I(m) is counterproductive and requests that this provision of Section 
I(i)(5) be deleted because ``the DOJ has singled out Barclays' 
extensive efforts to strengthen its already extensive internal 
controls.'' The Applicant further states that the Department should not 
mandate how the auditor performs its work in light of the conditions in 
the proposed exemption relating to the auditor's selection and 
qualifications. (See Subsection I(i)(1)). The Applicant states there is 
no reason to treat BPLC or the Barclays Affiliated QPAMs as 
recalcitrant entities and to impose conditions that the Department has 
not imposed in past cases as to applicants with extensive crimes or 
faulty internal processes. Moreover, the Applicant states that the 
language of this condition will interfere with the workability of the 
exemption and its use by plans. To that end, the Applicant states that 
if counterparties cannot understand the requirement or test whether it 
has been complied with, the exemption will not be used, to the 
detriment of plans and in violation of the statutory standard in 
section 408(a) of ERISA and Code section 4975. Therefore, the Applicant 
requests that the condition instead read:
    ``I(i)(5): For each audit, on or before the end of the relevant 
period described in Section I(i)(1) for completing the audit, the 
auditor must issue a written report (the Audit Report) to BPLC and the 
Barclays Affiliated QPAM to which the audit applies that describes the 
procedures performed by the auditor during the course of its 
examination. Any failure of the auditor to meet the conditions 
associated with the Audit Report shall not be deemed a violation of the 
exemption. The Audit Report must include the auditor's specific 
determinations regarding:
    (i) The adequacy of the Barclays Affiliated QPAM's Policies and 
Training; the Barclays Affiliated QPAM's compliance with the Policies 
and Training; the need, if any, to strengthen such Policies and 
Training; and any instance of the respective Barclays Affiliated QPAM's 
noncompliance with the written Policies and Training described in 
Section I(h) above. 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 Barclays Affiliated QPAM must be addressed by such Barclays 
Affiliated QPAM, and any action taken by such Barclays Affiliated QPAM 
to address such recommendations must be included in an addendum to the 
Audit Report (which addendum is completed prior to the certification 
described in Section I(i)(7) below). Any determination by the auditor 
that the respective Barclays Affiliated QPAM has implemented, 
maintained, and followed sufficient Policies and Training should be 
based on evidence that demonstrates the Barclays Affiliated QPAM has 
actually implemented, maintained, and followed the Policies and 
Training required by this permanent exemption.''
    The Department acknowledges that the Applicant's efforts to address 
the auditor recommendations regarding any inadequacy in the Policies 
and Training identified by the auditor, may take longer to implement 
than the time limits mandated by the proposed exemption. Accordingly, 
the Department is modifying Section I(i)(5)(i) to reflect the 
possibility that the Barclays Affiliated QPAMs' efforts to address the 
auditor's recommendations regarding inadequacies in the Policies and 
Training identified by the auditor, may not be completed by the 
submission date of the Audit Report and may require a written plan to 
address such items. However, any noncompliance identified by the 
auditor must be promptly addressed. The Department does not agree that 
the word ``promptly'' creates ambiguity in the condition and declines 
to remove the word. However, the Department has revised the exemption 
such that, with the exception of Section I(i)(11), the failure of the 
auditor to meet the conditions associated with the Audit Report shall 
not be deemed a violation of the exemption.
    The final sentence of Section I(i)(5)(i) expresses the Department's 
intent that the auditor must not rely solely on the work of the 
Compliance Officer and the Annual Report in formulating its conclusions 
or findings. The auditor must perform its own independent testing to 
formulate its conclusions. This exemption does not prohibit the auditor 
from considering the Compliance Officer's Annual Report in carrying out 
its audit function, including its formulation of an audit plan. This 
exemption, however, does prohibit the auditor from reaching conclusions 
that are exclusively based upon the contents of the Compliance 
Officer's Annual Report.
    The Department emphasizes that it is not mandating how the auditor 
performs its work. By the express terms of this exemption, the Auditor 
retains discretion as to how to perform an audit that complies with 
this exemption. The audit conditions are critical to the Department's 
determination to grant this exemption. As noted above, the Department 
believes the audit conditions are amply justified by the substantial 
compliance and oversight failures that resulted in the Conviction and 
fines, and in the need for this exemption as detailed above.
    The Department has modified Section I(i)(5)(i) to more clearly 
reflect these views.
Comment 20--Adequacy of the Annual Review--Section I(i)(5)(ii)
    Section I(i)(5)(ii) of the proposed five-year exemption provides 
that ``[t]he Audit Report must include the auditor's specific 
determinations regarding: . . . (ii) The adequacy of the Annual Review 
described in Section I(m) and the resources provided to the Compliance 
Officer in connection with such Annual Review.''
    The Applicant requests deletion of this condition. The Applicant 
states that the requirement that the auditor investigate the details of 
resources provided to the Compliance Officer is intrusive on the 
operation of the business. The Applicant further states that, assuming 
the Annual Report required by Subsection I(m)(2)(ii) remains part of 
the exemption, the auditor can assess the adequacy of the report 
itself. In addition, the Applicant states that the proposed exemption 
contains multiple conditions relating to the auditor's selection and 
qualifications, and that, in light of these conditions, the auditor 
should be

[[Page 61889]]

trusted to exercise appropriate judgment.
    As discussed in detail below, the Department views the Compliance 
officer and the Annual Review as integral to ensuring compliance with 
the exemption. An independent assessment by the auditor of the adequacy 
of the Annual Review is essential to providing the Department with the 
assurance that the Applicant and the Barclays Affiliated QPAMs have 
given these matters the utmost priority and have taken the actions 
necessary to comply with the exemption. However, the Department agrees 
that the QPAMs need not require the auditor to opine on the adequacy of 
the resources allocated to the Compliance Officer and has modified 
Section I(i)(5)(ii) accordingly. If, however, the auditor observes 
compliance issues related to the Compliance Officer or available 
resources, it would be appropriate to opine on these problems.
Comment 21--Auditor Notification to QPAM of Noncompliance--Section 
I(i)(6)
    Section I(i)(6) provides that ``[t]he auditor must notify the 
respective Barclays Affiliated QPAM of any instance of noncompliance 
identified by the auditor within five (5) business days after such 
noncompliance is identified by the auditor, regardless of whether the 
audit has been completed as of that date.''
    The Applicant requests that this condition be deleted. The 
Applicant states that there is no reason why the QPAM needs this 
information within five business days and no indication is given as to 
what it is to do with the information once it has it. The Applicant 
also states that the auditor should be trusted to exercise discretion 
as to the timing of notification regarding instances of noncompliance, 
and asserts that requiring identification of every such instance, 
however technical the misstep, could be counter-productive, consume 
significant amounts of the auditor's time, and in light of the very 
limited number of available auditors, cause many financial institutions 
needing audits to fail to meet the deadlines imposed by these 
exemptions simply because a qualified auditor is not available. 
Further, the Applicant states that compliance with this provision is 
within the control of the auditor rather than the Applicant. If the 
condition is not deleted, the Applicant suggests that the condition 
read:
    ``The auditor must notify the respective Barclays Affiliated QPAM 
of any instance of noncompliance identified by the auditor within five 
(5) business days after such noncompliance is identified by the 
auditor, regardless of whether the audit has been completed as of that 
date. Any failure of the auditor to meet this condition shall not be 
deemed a violation of the exemption.''
    In the Department's view, it is important that notice of 
noncompliance be forthcoming and prompt. Accordingly, the Department 
declines to delete the condition. The Department also declines to 
include a statement in Section I(i)(6) that a failure on behalf of the 
auditor to meet this condition will not violate the exemption. However, 
the Department, as discussed below, has modified Section I(q) to 
address this issue.
Comment 22--Certification of the Audit--Section I(i)(7)
    Section I(i)(7) of the proposed five-year exemption provides, 
``[w]ith respect to each Audit Report, the General Counsel or one of 
the three most senior executive officers of the Barclays Affiliated 
QPAM to which the Audit Report applies, must certify in writing, under 
penalty of perjury, that the officer has: Reviewed the Audit Report and 
this exemption, if granted; addressed, corrected, or remedied any 
inadequacy identified in the Audit Report; and determined that the 
Policies and Training in effect at the time of signing are adequate to 
ensure compliance with the conditions of this proposed five-year 
exemption, if granted, and with the applicable provisions of ERISA and 
the Code.''
    The Applicant requests that the timing of Section I(i)(7) be 
clarified. In this regard, the Applicant states that the certification 
must be completed within thirty days (see Subsection I(i)(9)), but that 
it may take longer to remedy identified issues. The Applicant states 
that this condition should clarify that ``addressing'' an inadequacy 
means, not only accepting the auditor's recommendations, but can 
include pointing out alternative action, or even no action, is a 
preferable means of protecting ERISA plan clients and IRAs. In 
addition, the Applicant represents that the condition should reflect 
that the individual providing the certification may not be responsible 
for addressing, correcting, or remedying any inadequacy, and should 
clarify that the certification need only state that ``the officer has 
caused the process for such addressing, correcting, or remedying to 
commence.''
    While the Department does not view Section I(i)(7) as ambiguous, 
the Department acknowledges that the Applicant's efforts to address the 
auditor's recommendations regarding inadequacies in the Policies and 
Training identified by the auditor, may take longer to implement than 
the timeframe to submit the certified Audit Report. The Department did 
not intend to limit corrective actions to those that could only be 
completed prior to the submission of the Audit Report. Therefore, the 
Department has modified Section I(i)(7) to reflect that the senior 
officer may certify that a written plan to address the inadequacies 
regarding the Policies and Training identified in the auditor's Report 
is in place.
    Further, the conditions of this exemption do not prohibit the 
Applicant from disagreeing with the auditor with respect to whether 
certain practices rise to the level of noncompliance with the terms of 
this exemption. However, in those circumstances where the auditor is 
not persuaded to change its position on a matter the auditor considers 
noncompliant, the Applicant will be responsible to correct such 
matters. Nor do the conditions of this exemption prohibit the Applicant 
from disagreeing with the auditor with respect to the appropriate 
method for correcting or addressing issues of noncompliance. The 
Department expects the Applicant and the auditor to have meaningful 
communications on any such differences of opinion. In the event the 
Applicant chooses to apply a corrective method that differs from that 
recommended by the auditor, the Audit Report and the Addendum attached 
thereto should explain in detail the noncompliance, the auditor's 
recommended action, the corrective method chosen, and, if applicable, 
why the Applicant chose a corrective method different from that 
recommended by the auditor. Finally, while the individual providing the 
certification may not be responsible for directly addressing, 
correcting, or remedying any inadequacy, such individual is responsible 
for ensuring that such process has indeed addressed, corrected or 
remedied the identified inadequacy.
Comment 23--Review and Certification of Audit Report--Section I(i)(8)
    Section I(i)(8) the proposed five-year exemption provides that 
``[t]he Risk Committee of BPLC's Board of Directors is 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 BPLC 
must review the Audit Report for each Barclays Affiliated QPAM and must 
certify in writing, under penalty of perjury, that such officer has 
reviewed each Audit Report.''

[[Page 61890]]

    The Applicant requests that the requirement to provide the Audit 
Report to the Risk Committee of BPLC's Board of Directors be deleted. 
The Applicant states that mandating the internal process by which 
information is handled within the financial institution is beyond the 
scope of exemptive relief and is an unwarranted intrusion into the 
corporate governance processes of BPLC and the Barclays Affiliated 
QPAMs that does not advance the statutory goals set forth in ERISA 
section 408 and Code section 4975.
    In addition, the Applicant states that the reference to the 
``highest ranking legal compliance officer'' is unclear because BPLC 
does not have an officer that appears to satisfy the description. The 
Applicant assumes that the reference is either to the highest ranking 
legal officer or the highest ranking compliance officer.
    The Department notes that in its application and related materials, 
the Applicant has represented that it has established, or is in the 
process of establishing, comprehensive changes to processes and 
procedures that are, in part, intended to change the culture at BPLC 
from the top down. As also represented by the Applicant, these changes 
are focused on enhancements in: (1) Supervision, controls, and 
governance; (2) risk management compliance assessment; (3) transaction 
monitoring and communications surveillance; (4) compliance testing; and 
(5) internal audit.\53\
---------------------------------------------------------------------------

    \53\ See BCI Exemption Application (May 20, 2015) from pages 7 
to 15.
---------------------------------------------------------------------------

    The Department has developed this exemption to ensure that the 
highest levels of management are aware of ongoing matters concerning 
BPLC, the Barclays Affiliated QPAMs, and compliance with this 
exemption. Requiring the provision of the Audit Report to the Board of 
Directors and certification by a senior executive officer in the 
reporting line of the highest compliance officer provides assurance 
that the highest levels of management within BPLC stay informed about 
BPLC's and the Barclays Affiliated QPAMs' compliance with the terms of 
this exemption. In the Department's view, such officials are in the 
best position to ensure that any inadequacy identified by the auditor 
is appropriately addressed and that necessary changes to corporate 
policy are effectuated where necessary. Requiring certification under 
penalty of perjury is consistent with the Department's longstanding 
view that basic requirements of compliance and integrity are 
fundamental to an entity's ability to qualify as a QPAM. However, in 
accordance with the Applicant's request, the Department has clarified 
the condition to refer to the ``highest ranking compliance officer.''
Comment 24--Availability of the Audit Report--Section I(i)(9)
    Section I(i)(9) of the proposed five-year exemption provides that, 
``Each Barclays Affiliated QPAM provides its certified Audit Report by 
regular mail to: The Department's Office of Exemption Determinations 
(OED), 200 Constitution Avenue NW, Suite 400, Washington, DC 20210, or 
by private carrier to: 122 C Street NW, Suite 400, Washington, DC 
20001-2109, no later than 30 days following its completion. The Audit 
Report will be part of the public record regarding this five-year 
exemption, if granted. Furthermore, each Barclays Affiliated QPAM must 
make its Audit Report unconditionally available for examination by any 
duly authorized employee or representative of the Department, other 
relevant regulators, and any fiduciary of an ERISA-covered plan or IRA, 
the assets of which are managed by such Barclays Affiliated QPAM.''
    The Applicant states that the scope of exemption should be limited 
to PTE 84-14 in all instances and requests that this condition require 
that the Audit Report be available to plans managed by a QPAM in 
reliance on PTE 84-14. The Applicant states that this condition can be 
read to require that the Audit Report be available to asset management 
plan clients, regardless of whether the Barclays Affiliated QPAM relies 
on PTE 84-14 for such clients' accounts. The Applicant suggests that 
the condition read: ``Each Barclays Affiliated QPAM provides its 
certified Audit Report by regular mail to: The Department's Office of 
Exemption Determinations (OED), 200 Constitution Avenue NW, Suite 400, 
Washington, DC 20210, or by private carrier to: 122 C Street NW, Suite 
400, Washington, DC 20001-2109, no later than 30 days following its 
completion. The Audit Report will be part of the public record 
regarding this exemption. Furthermore, each Barclays Affiliated QPAM 
must make its Audit Report unconditionally available for examination by 
any duly authorized employee or representative of the Department, other 
relevant regulators, and any fiduciary of an ERISA-covered plan or IRA, 
the assets of which are managed by such Barclays Affiliated QPAM in 
reliance on PTE 84-14.''
    ERISA-covered plans and IRAs, routinely rely on QPAM status before 
entering into agreements with financial institutions, even if those 
institutions do not rely on PTE 84-14 when managing plan and IRA 
assets. Accordingly, the Department has an interest in ensuring that 
the conditions of this exemption broadly protect ERISA-covered plans 
and IRAs that have relied on QPAM status in deciding to enter into an 
agreement with the Applicant or the Barclays Affiliated QPAMs.
    Nevertheless, the Department has revised Section I(i)(9) to clarify 
that the Barclays Affiliated QPAMs are required to make the documents 
available to any fiduciary of a Covered Plan. The Audit Report, in any 
event, will be incorporated into the public record attributable to this 
exemption, under Exemption Application Number D-11910, and, therefore, 
independently accessible by interested members of the public. 
Accordingly, the Department has determined to revise the condition by 
replacing the phrase ``an ERISA-covered plan or IRA, the assets of 
which are managed by such Barclays Affiliated QPAM'' with the term 
``Covered Plan'' (as defined in Section II(f)). Lastly, the Department 
agrees that access to the Audit Report need only be upon request and 
such access or delivery can be made electronically, and it has revised 
the exemption accordingly.
Comment 25--Engagement Agreements--Section I(i)(10)
    Section I(i)(10) of the proposed five-year exemption provides that, 
``Each Barclays Affiliated QPAM and the auditor must submit to OED: (A) 
Any engagement agreement(s) entered into pursuant to the engagement of 
the auditor under this five-year exemption, if granted; and (B) any 
engagement agreement entered into with any other entity retained in 
connection with such QPAM's compliance with the Training or Policies 
conditions of this five-year exemption, if granted, no later than six 
(6) months after the Conviction Date (and one month after the execution 
of any agreement thereafter).''
    The Applicant requests deletion of the requirement under Section 
I(i)(10)(B) which provides, ``[e]ach Barclays Affiliated QPAM and the 
auditor must submit to OED . . . (B) any engagement agreement entered 
into with any other entity retained in connection with such QPAM's 
compliance with the Training or Policies conditions of this five-year 
exemption, no later than six (6) months after the Conviction Date (and 
one month after the execution of any agreement thereafter);''.
    The Applicant states that the proposed exemption includes multiple 
conditions for the qualifications of the trainer (Subsection 
I(h)(2)(ii)), the contents of the Policies (Subsection

[[Page 61891]]

I(h)(1)) and for the auditor's review of the adequacy of the Training 
and Policies (Subsection I(i)(5)(i)). The Applicant represents that 
there is no reason for the Department to see and review, and make 
available to the public, every service provider contract that could 
cover policies, procedures or training. The Applicant states that no 
reason is given for the Department's review of engagement letters for 
all legal and consulting services applicable to the policies, 
procedures and training. Additionally, the Applicant states that it 
should be permitted to delete or redact commercial terms from any 
engagement agreement submitted to the Department. Further, the 
Applicant requests that the timeframe for provision of the auditor's 
engagement be modified to no later than six (6) months after the 
Barclays Affiliated QPAM's engagement with an ERISA-covered plan or IRA 
for the provision of asset management or other discretionary fiduciary 
services (and one month after the execution of any agreement 
thereafter). Therefore, the Applicant suggests that the condition read: 
``Each Barclays Affiliated QPAM and the auditor must submit to OED: Any 
engagement agreement(s) entered into pursuant to the engagement of the 
auditor under this exemption no later than six (6) months after the 
Barclays Affiliated QPAM's engagement with an ERISA-covered plan or IRA 
for the provision of asset management or other discretionary fiduciary 
services (and one month after the execution of any agreement 
thereafter). Commercial terms may be removed or redacted from the 
auditor engagement.''
    In coordination with the Department's modification of Section 
I(h)(2)(ii) to remove the requirement that the Training must be 
conducted by an independent professional, the Department has determined 
to remove the requirement in Section I(i)(10)(B) to provide to the 
Department the engagement agreements entered into with entities 
retained in connection with compliance with the Training or Policies 
conditions. Furthermore, to remove any confusion or uncertainty 
regarding the timing of the submission of the auditor's engagement 
agreement, the Department has modified Section I(i)(10) to require that 
the auditor's engagement agreement be submitted to the Office of 
Exemption Determinations no later than two (2) months after the 
engagement agreement is entered into by the Applicant and the 
independent auditor.
Comment 26--Auditor's Workpapers--Section I(i)(11)
    Section I(i)(11) of the proposed five-year exemption provides that 
the ``auditor must provide OED, upon request, all of the workpapers 
created and utilized in the course of the audit, including, but not 
limited to: The audit plan; audit testing; identification of any 
instance of noncompliance by the relevant Barclays Affiliated QPAM; and 
an explanation of any corrective or remedial action taken by the 
applicable Barclays Affiliated QPAM.''
    The Applicant states that, as noted above in connection with 
Section I(i)(5), compliance with this provision is within the control 
of the auditor rather than the Applicant. The Applicant states that a 
violation of this provision should therefore not result in loss of the 
exemption. The Applicant also represents that this condition is 
unnecessary and duplicative. In addition, the Applicant requests that 
this condition be appropriately limited to ensure that any confidential 
or otherwise sensitive information is redacted prior to any disclosure 
of the workpapers in a public file. The Applicant states that the 
proposed exemption, as worded, requires that the auditor enjoy broad 
access to a Barclays Affiliated QPAM's records. The Applicant further 
states that, while such access should be appropriately cabined, the 
auditor will still have access to sensitive information, such as client 
information, marketing data, personal information of the QPAM's 
employees, and other details.
    Therefore, the Applicant requests that access be limited to allow 
the auditor, and OED,\54\ to inspect such information without its being 
disclosed in the public record. The Applicant suggests that this 
condition read: ``The auditor must provide OED, upon request, all of 
the workpapers created and utilized in the course of the audit, 
provided that any confidential business or personal information of the 
Barclays Affiliated QPAMs, BPLC, and their clients (or the officers, 
directors, employees or agents thereof) reflected in the workpapers, 
including, without limitation, client communications, shall be 
redacted, and provided further that nothing herein shall be deemed to 
limit any authority the Department may otherwise have to inspect such 
information without making it part of the public file. Any failure of 
the auditor to meet this condition shall not be deemed a violation of 
the exemption.''
---------------------------------------------------------------------------

    \54\ OED is the Office of Exemption Determinations within the 
Employee Benefits Security Administration agency of the United 
States Department of Labor.
---------------------------------------------------------------------------

    The Department acknowledges that certain information contained in 
the workpapers may be confidential and proprietary, and having that 
information in a public file may create needless or avoidable 
disclosure issues. The Department has determined to modify Section 
I(i)(11) to remove the requirement that the auditor provide the 
workpapers to OED, and instead require that the auditor provide access 
to the workpapers for the Department's review and inspection. However, 
given the importance of the workpapers to the Department's own review 
and the Applicant's contractual relationship with the auditor, the 
Department declines to include a statement in Section I(i)(11) that a 
failure on behalf of the auditor to meet this condition will not 
violate the exemption.
Comment 27--Replacement of Auditor--Section I(i)(12)
    Section I(i)(12) of the proposed five-year exemption provides that, 
``BPLC must notify the Department at least thirty (30) days prior to 
any substitution of an auditor, except that no such replacement will 
meet the requirements of this paragraph unless and until BPLC 
demonstrates to the Department's satisfaction that such new auditor is 
independent of BPLC, experienced in the matters that are the subject of 
the exemption, if granted, and capable of making the determinations 
required of this exemption, if granted.''
    The Applicant requests that this Section I(i)(12) be deleted, 
stating that the proposed exemption contains conditions requiring the 
auditor to satisfy multiple conditions and it serves no useful purpose 
to impose an additional requirement to demonstrate to the Department's 
satisfaction that the auditor satisfies such standards before 
substitution, particularly given the timeline required for the audit 
process. The Applicant requests that if the condition is not deleted, 
the condition be modified to read: ``BPLC must notify the Department at 
least thirty (30) days after terminating the engagement of the auditor, 
the reason for the termination, and provide the Department with the 
contract of the substitute auditor, the selection of which must satisfy 
the requirements of subparagraph (i)(1).''
    The Department notes that this exemption is not unique in requiring 
the Department be notified of changes to service providers (see, e.g., 
the requirement of Schedule C of the Form 5500 Annual Return/Report for 
the Plan Administrator of certain plans to report to the Department a 
termination of the

[[Page 61892]]

plan's auditor and/or enrolled actuary and to provide an explanation of 
the reasons for the termination, including a description of any 
material disputes or matters of disagreement concerning the 
termination). Furthermore, requiring the Applicant to notify the 
Department of the substitution of an auditor serves to ensure that the 
Barclays Affiliated QPAMs are attentive to the audit process and the 
protections it provides; and that the Department has the information it 
needs to review compliance. The Department has decided, however, to 
modify Section I(i)(12) to remove the requirement for the Applicant to 
demonstrate the independence and qualifications of the auditor, 
however, and requires instead that the Applicant, no later than two 
months from the engagement of the replacement auditor, notify the 
Department of a change in auditor and of the reason(s) for the 
substitution including any material disputes between the terminated 
auditor and the Applicant. The Applicant's fiduciary obligations with 
respect to the selection of the auditor, as well as the significant 
role a credible selection plays in reducing the need for more extensive 
oversight by the Department, should be sufficient to safeguard the 
selection process.
Comments 28-29--Contracts With Plans and IRAs--Section I(j)(1)
    Section I(j)(1) of the proposed five-year exemption provides: 
``Effective as of the effective date of this five-year exemption, if 
granted, with respect to any arrangement, agreement, or contract 
between a Barclays Affiliated QPAM and an ERISA-covered plan or IRA for 
which a Barclays Affiliated QPAM provides asset management or other 
discretionary fiduciary services, each Barclays Affiliated QPAM agrees 
and warrants: (1) To comply with ERISA and the Code, as applicable with 
respect to such ERISA- covered plan or IRA, to refrain from engaging in 
prohibited transactions that are not otherwise exempt (and to promptly 
correct any inadvertent prohibited transactions); and to comply with 
the standards of prudence and loyalty set forth in section 404 of ERISA 
with respect to each such ERISA-covered plan and IRA.''
    The Applicant requests that Subsection I(j) provide that the 
contract requirements apply only to agreements where a QPAM provides 
services in reliance on PTE 84-14. The Applicant asserts, as noted 
above, that the scope of exemptive relief in the proposed exemption 
should in all instances be limited in this manner. In addition, the 
Applicant states that the condition should make clear that it 
supersedes the analogous condition in the Temporary Exemption to avoid 
imposing duplicative requirements. The Applicant suggests that this 
condition read: ``This Subsection supersedes the analogous section of 
PTE 2016-16, as of the date of this exemption's publication in the 
Federal Register. Effective as of the publication date, with respect to 
any arrangement, agreement, or contract between a Barclays Affiliated 
QPAM and an ERISA-covered plan or IRA under which a Barclays Affiliated 
QPAM provides asset management or other discretionary fiduciary 
services in reliance on PTE 84-14, each Barclays Affiliated QPAM agrees 
and warrants . . . .''
    ERISA-covered plans and IRAs routinely rely on QPAM status as a 
condition of entering into transactions with financial institutions, 
even with respect to transactions that do not necessarily require 
adherence to PTE 84-14. In addition, it may not always be clear whether 
or not the Barclays Affiliated QPAM intends to rely upon PTE 84-14 for 
any particular transaction. Accordingly, it is critical to ensure that 
protective conditions are in place to safeguard the interests of ERISA-
covered plans and IRAs that are acting in reliance on the availability 
of this exemption and QPAM status, particularly those which may not 
have entered into the transaction in the first place, but for the 
Department's grant of this exemption.
    The Department has a clear interest in protecting such ERISA-
covered plans and IRAs that enter into an asset management agreement 
with a Barclays Affiliated QPAM in reliance on the manager's 
qualification as a QPAM. Moreover, when an ERISA-covered plan or IRA 
terminates its relationship with an asset manager, it may incur 
significant costs and expenses as its investments are unwound and as it 
searches for and hires a new asset manager.
    The Department has revised this condition for consistency with its 
interest in protecting ERISA-covered plans and IRAs that rely upon QPAM 
status. The condition now applies only to Covered Plans.
    The Department rejects the view that it acts outside its authority 
by protecting ERISA-covered plans and IRAs that rely on Barclay's 
Affiliated QPAMs' eligibility for this exemption, and reemphasizes the 
seriousness of the criminal misconduct that caused the Applicant to 
need this exemption. The Department may grant an exemption under 
section 408(a)(3) of ERISA or section 4975(c)(2)(C) of the Code only to 
the extent the Secretary finds, among other things, that the exemption 
is protective of the affected plan or IRA. As noted above, BPLC 
personnel engaged in serious misconduct over an extended period and at 
the expense of their own clients. This misconduct appears to have 
stemmed, in part, from deficiencies in control and oversight.
    Notwithstanding the misconduct, which resulted in violation of 
Section I(g) of PTE 84-14, the Department has granted this exemption 
based, in significant part, upon the inclusion of Section I(j)(1) in 
the exemption, which protects Covered Plans by, among other things, 
requiring Barclays Affiliated QPAMs to make an express commitment to 
their customers to adhere to the requirements of ERISA and the Code, as 
applicable. As previously indicated, the Department has concluded that 
a culture of compliance, centered on adherence to basic standards of 
fair dealing as set forth in this exemption, gives the Department a 
compelling basis for making the required statutory findings that the 
exemption is in the interests of plan and IRA investors and protective 
of their rights. Absent such findings, the exemption would have been 
denied.
    In response to the Applicant's comments, however, the Department 
has required an express commitment to comply with the fiduciary 
standards and prohibited transaction rules only to the extent these 
provisions are ``applicable'' under ERISA and the Code. This section, 
as modified, should serve its salutary purposes of promoting a culture 
of compliance and enhancing the ability of plans and IRA customers to 
sever their relationships with minimal injury in the event of 
noncompliance. This conclusion is reinforced, as well, by the limited 
nature of the relief granted by this exemption, which generally does 
not extend to transactions that involve self-dealing.
    In response to the Applicant's comments, the Department also notes 
that nothing in ERISA or the Code prevents the Department from 
conditioning relief on express contractual commitments to adhere to the 
requirements set out herein. The QPAMs always remain free to disclaim 
reliance on the exemption and to avoid such express contractual 
commitments. To the extent, however, that they hold themselves out as 
fiduciary QPAMs, they should be prepared to make an express commitment 
to their customers to adhere to the requirements of this exemption. 
This commitment strengthens and reinforces the likelihood of 
compliance, and helps

[[Page 61893]]

ensure that, in the event of noncompliance, customers will be insulated 
from injuries caused by noncompliance. These protections also ensure 
that customers will be able to extricate themselves from transactions 
that become prohibited as a result of the QPAMs' misconduct, without 
fear of sustaining additional losses as a result of the QPAMs' actions. 
In this connection, however, the Department emphasizes that the only 
claims available to the QPAMs' customers pursuant to these contractual 
commitments are those separately provided by ERISA or other state and 
federal laws that are not preempted by ERISA. As before, private 
litigants have only those causes of action specifically authorized by 
laws that exist independent of this exemption.
Comment 30--Indemnity Provision--Section I(j)(2)
    Section I(j)(2) requires each Barclays Affiliated QPAM to agree and 
warrant ``[t]o indemnify and hold harmless the ERISA-covered plan or 
IRA for any damages resulting from a Barclays Affiliated QPAM's 
violation of applicable laws, a Barclays Affiliated QPAM's breach of 
contract, or any claim brought in connection with the failure of such 
Barclays Affiliated 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.''
    The Applicant asserts that the provision is unfair because it is 
not limited to clients who are harmed through a direct, causal link to 
the loss of the exemptive relief provided by PTE 84-14 and the 
Applicant requests that the condition be deleted. In addition, the 
Applicant represents that the condition appears to allow plans and IRAs 
to seek to recover damages (i) that arise from violations and breaches 
by third parties, (ii) that arise only tenuously from the manager's 
conduct, (iii) that may be grossly unreasonable in amount, (iv) for 
claims without merit and (v) for claims in connection with accounts 
that do not rely on the relief provided by PTE 84-14. If the Department 
declines to delete this condition, the Applicant requests, in the 
alternative, that the Department expressly tie the requirement to 
damages with a proximate causal connection to relevant conduct of the 
manager by rewording the condition as follows: ``To indemnify and hold 
harmless the ERISA-covered plan or IRA for any reasonable damages 
involving such arrangement, agreement or contract and resulting 
directly from a violation of ERISA by such Barclays Affiliated QPAM, 
or, to the extent the Barclays Affiliated QPAM relies on the exemptive 
relief provided by PTE 84-14 under the arrangement, agreement or 
contract, the failure of such Barclays Affiliated 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 as a result of the Conviction. 
This condition does not require indemnification of indirect, special, 
consequential or punitive damages.''
    As explained above, the intended purpose of this exemption is to 
protect ERISA-covered plans and IRAs that entrust the Barclays 
Affiliated QPAMs with the management of their retirement assets. To 
this end, it is the Department's view that the protective purpose of 
this exemption is furthered by Section I(j)(2). The Department 
emphasizes that this condition is not punitive, but rather ensures 
that, when an ERISA-covered plan or IRA enters into an asset management 
agreement with a Barclays Affiliated QPAM in reliance on the manager's 
qualification as a QPAM, it may expect adherence to basic fiduciary 
norms and standards of fair dealing, notwithstanding the prior 
conviction. The condition also ensures that the plan or IRA will be 
able to disengage from that relationship in the event that the terms of 
this exemption are violated without undue injury.
    However, the Department has revised the applicability of this 
condition to more closely reflect these interests. In particular, the 
condition applies only when the Barclays Affiliated QPAM relies on PTE 
84-14 or has expressly represented that it qualifies as a QPAM or 
relies on the QPAM class exemption in its dealings with the plan or 
IRA. As indicated above, if the asset manager would prefer not to be 
subject to these provisions as exemption conditions, it may expressly 
disclaim reliance on QPAM status or PTE 84-14 in entering into its 
contract with the plan or IRA (in that case, however, it could not rely 
on the exemption for relief).
    The Department has also made certain further changes to this 
condition in consideration of the Applicant's comment. These changes 
include: Renumbering the condition for clarity; replacing ``applicable 
laws'' with clarifying language that conforms to the one-year 
exemption; replacing ``any damages'' with ``actual losses resulting 
directly from'' certain acts or omissions of the Barclays Affiliated 
QPAMs; and adding language which affirms that the obligations under 
this condition do not extend to damages caused by acts that are beyond 
the control of the Barclays Affiliated QPAMS.
Comment 31--Limits on Liability--Section I(j)(2), I(j)(3) and I(j)(7) 
\55\
---------------------------------------------------------------------------

    \55\ The Department has determined that Subsection (4) is 
duplicative of the exemption's prohibition on exculpatory clauses, 
described below. Thus, the subsection has been deleted. Section I(j) 
has been renumbered for clarity.
---------------------------------------------------------------------------

    Sections I(j)(2), I(j)(3) and I(j)(7) require that each Barclays 
Affiliated QPAM agree and warrant:
. . . (2) To indemnify and hold harmless the ERISA-covered plan or IRA 
for any damages resulting from a Barclays Affiliated QPAM's violation 
of applicable laws, a Barclays Affiliated QPAM's breach of contract, or 
any claim brought in connection with the failure of such Barclays 
Affiliated 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; (3) Not to require (or otherwise cause) the ERISA-
covered plan or IRA to waive, limit, or qualify the liability of the 
Barclays Affiliated QPAM for violating ERISA or the Code or engaging in 
prohibited transactions; [and] . . . (7) Not to include exculpatory 
provisions disclaiming or otherwise limiting liability of the Barclays 
Affiliated QPAM for a violation of such agreement's terms, except 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 BPLC, and its affiliates.''
    The Applicant requests that these conditions be deleted because 
they contain duplicative requirements, which extend beyond the scope of 
relief. The Applicant states that the indemnification provision should 
be limited to ensure that it operates in a manner that is fair to the 
Applicant and its affiliates and that, with that change, the condition 
provides ample protection to clients. The Applicant states that Section 
I(j)(3) and Section I(j)(7) do not provide any additional protection.
    The Department declines to delete Section I(j)(3) from the final 
exemption. The Department notes that ERISA already precludes ERISA 
fiduciaries from disclaiming obligations under ERISA. See ERISA section 
410 (prohibiting exculpatory clauses as void as against public policy). 
To the extent the exemption condition prevents the Barclays Affiliated 
QPAMs from including contractual provisions that are void as against 
public policy there is no legitimate basis for objection. Such 
exculpatory language should not be in the governing documents in the 
first place and is potentially misleading because it suggests 
disclaimer of obligations that may not be disclaimed.

[[Page 61894]]

    Outside the context of ERISA section 410, the provision's 
requirement that the Barclays Affiliated QPAMs retain accountability 
for their adherence to the basic obligations set forth in this 
exemption is more than justified by the misconduct that led to the 
fines and Conviction as discussed above, and by the need to ensure that 
Plan and IRA customers may readily obtain redress and exit contracts 
with Barclays Affiliated QPAMs without harm in the event of violations.
    The Department has modified Section I(j)(6) (formerly, Subsection 
(j)(7)) to clarify that the prohibition on exculpatory provisions does 
not extend to losses that arise from an act or event not caused by the 
Applicant. Also, nothing in this section alters the prohibition on 
exculpatory provisions set forth in ERISA section 410.
Comment 32--Termination and Withdrawal Restriction--Section I(j)(5) and 
I(j)(6)
    Under Sections I(j)(5) and I(j)(6) of the proposed five-year 
exemption, the Barclays Affiliated QPAMs agree: ``(5) Not to restrict 
the ability of such ERISA-covered plan or IRA to terminate or withdraw 
from its arrangement with the Barclays Affiliated QPAM (including 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 as a result of an actual lack of 
liquidity of the underlying assets, provided that such restrictions are 
applied consistently and in like manner to all such investors;
    [and] . . . (6) Not to impose any fees, penalties, or charges for 
such termination or withdrawal with the exception of reasonable fees, 
appropriately disclosed in advance, that are specifically designed to 
prevent generally recognized abusive investment practices or 
specifically designed to ensure equitable treatment of all investors in 
a pooled fund in the event such withdrawal or termination may have 
adverse consequences for all other investors, provided that such fees 
are applied consistently and in like manner to all such investors.''
    The Applicant represents that these conditions should be deleted 
because they are unnecessary. The Applicant notes that lockup 
conditions are commonly used, designed to protect all investors in a 
pooled fund, and applied evenhandedly to all investors. Further, the 
Applicant states that the conditions, as worded, could provide ERISA 
plan clients and IRAs a privileged position, to the detriment of other 
investors.
    The Applicant requests that, should these conditions be retained, 
they be modified as follows: Under renumbered Sections I(j)(4) and 
(j)(5), the Barclays Affiliated QPAMs agree: ``(4) Not to restrict the 
ability of such ERISA-covered plan or IRA to terminate or withdraw from 
its arrangement with the Barclays Affiliated QPAM with respect to any 
investment in a separately managed account or pooled fund subject to 
ERISA and managed by such QPAM, with the exception of reasonable 
restrictions, appropriately disclosed in advance, that are specifically 
designed to ensure equitable treatment of all investors in a pooled 
fund in the event such withdrawal or termination may have adverse 
consequences for all other investors. In connection with any such 
arrangements involving investments in pooled funds subject to ERISA 
entered into after the Conviction Date, the adverse consequences must 
relate to a lack of liquidity of the pooled fund's underlying assets, 
valuation issues, or regulatory reasons that prevent the fund from 
immediately redeeming an ERISA-covered plan's or IRA's investment, and 
such restrictions are applicable to all such investors and effective no 
longer than reasonably necessary to avoid the adverse consequences; 
[and] . . . (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 
ensure equitable treatment of all investors in a pooled fund in the 
event such withdrawal or termination may have adverse consequences for 
all other investors, provided that such fees are applied consistently 
and in like manner to all such investors.''
    The Department has revised renumbered Section I(j)(4) and has 
revised the condition to allow exceptions for a lack of liquidity of 
the pooled fund's underlying assets, valuation issues, or regulatory 
reasons that prevent the fund from immediately redeeming an ERISA-
covered plan's or IRA's investment in partial satisfaction of the 
Applicant's request, but has retained the parenthetical that the 
restriction is not limited to a separately-managed account that is 
subject to ERISA or a pooled fund that is subject to ERISA. The 
Department has decided to retain Section I(i)5 as proposed.
Comment 33--Updated Investment Management Agreement--Section I(j)(7)
    Section I(j)(8) of the proposed five-year exemption provides that 
each Barclays Affiliated QPAM agrees and warrants: ``[w]ithin four (4) 
months of the date of the Conviction, each Barclays Affiliated QPAM 
must provide a notice of its obligations under this Section I(j) to 
each ERISA-covered plan and IRA for which a Barclays Affiliated QPAM 
provides asset management or other discretionary fiduciary services. 
For all other prospective ERISA-covered plan and IRA clients for which 
a Barclays Affiliated QPAM provides asset management or other 
discretionary services, the Barclays Affiliated QPAM will agree in 
writing to its obligations under this Section I(j) in an updated 
investment management agreement between the Barclays Affiliated QPAM 
and such clients or other written contractual agreement.''
    The Applicant represents that it and its affiliates do not 
currently provide asset management or other discretionary fiduciary 
services to ERISA-covered plans or IRAs. The Applicant states that, for 
that reason, the four-month notice has no purpose. The Applicant 
requests that this provision be modified to reflect that Barclays 
Affiliated QPAMs would in the future be required to provide notice 
prior to an engagement with an ERISA-covered plan or IRA subject to 
this exemption, consistent with Subsections (h)(1) and (h)(2). The 
Applicant notes that the timing of the notice was correct in the 
analogous provision of the Temporary Exemption. Moreover, the Applicant 
submits that the condition should be limited to plans for which the 
QPAM relies on PTE 84-14. Finally, the Applicant submits that a 
contractual agreement is an improper vehicle as a client may attempt to 
modify proposed contractual terms.
    The Applicant suggests that the condition in renumbered Subsection 
(j)(7) read as follows: ``Prior to a Barclays Affiliated QPAM's 
engagement with an ERISA-covered plan or IRA for the provision of asset 
management or other discretionary fiduciary services, such Barclays 
Affiliated QPAM must provide a notice of its obligations under this 
Section I(j) to such ERISA-covered plan or IRA.''
    The Department has modified the condition to require that Barclays 
Affiliated QPAMs provide notice prior to an engagement with an ERISA-
covered plan or IRA. Further, as noted above, the Department has an 
interest in protecting a plan or IRA that enters into an asset 
management agreement with a Barclays Affiliated QPAM in reliance on

[[Page 61895]]

the manager's qualification as a QPAM, regardless of whether the QPAM 
relies on the class exemption when managing the plan's or IRA's assets. 
The Department has revised the applicability of this condition to more 
closely reflect this interest, and the condition now applies to Covered 
Plans.
Comment 34--Notice to Plan Clients--Section I(k)
    Section I(k) of the proposed five-year exemption provides that 
``[e]ach BPLC affiliated asset manager provides each Future Covered 
Client with a Federal Register copy of the proposed five-year 
exemption, along with a separate summary describing the facts that led 
to the Conviction (the Summary), which have been submitted to the 
Department, and a prominently displayed statement that the Conviction 
resulted in a failure to meet a condition of PTE 84-14. The provision 
of these documents must occur prior to, or contemporaneously with, the 
client's receipt of a written asset management agreement from the BPLC 
affiliated asset manager. For purposes of this paragraph, a ``Future 
Covered Client'' means a client of the BPLC affiliated asset manager 
that, beginning after the date, if any, that a final exemption is 
published in the Federal Register, has assets managed by such asset 
manager, and has received a representation from the asset manager that 
the asset manager is a QPAM, or qualifies for the relief provided by 
PTE 84-14.''
    The Applicant asserts that the condition is overbroad and should be 
deleted. The Applicant states, by its terms, it extends to clients for 
which the QPAM does not rely on PTE 84-14 and clients who are neither 
covered by ERISA or the prohibited transaction provisions of the 
Internal Revenue Code. Further, the Applicant states that, to the 
extent the condition is meant to extend to clients for which the QPAM 
relies on PTE 84-14, it duplicates the requirements of Subsection 
I(j)(8)).
    The Department declines to delete the condition. The Department 
notes that ERISA-covered plans and IRAs often rely on QPAM status as a 
condition of entering into transactions with financial institutions, 
even with respect to transactions that do not strictly require 
adherence to PTE 84-14. In addition, it may not always be clear whether 
the Barclays Affiliated QPAM intends to rely upon PTE 84-14 for any 
particular transaction. Accordingly, it is critical to ensure that 
protective conditions are in place to safeguard the interests of plans 
and IRAs that are acting in reliance on QPAM status or the availability 
of this exemption, particularly those who may not have entered into the 
transaction in the first place, but for the Department's grant of this 
exemption. Further, the Department has an interest in protecting plans 
and IRAs that enter into an asset management agreement with a Barclays 
Affiliated QPAM in reliance on the manager's qualification as a QPAM. 
If a plan or IRA terminates its relationship with an asset manager, it 
may incur significant costs and expenses as its investments are unwound 
and as it searches for and hires a new asset manager.
    The Applicant also requests deletion of the requirement that a 
separate summary of facts be provided, as the facts are set out in the 
Federal Register notice. The Applicant suggests that the condition read 
as follows: ``Notice to Future Covered Clients. Each Barclays 
Affiliated QPAM provides each Future Covered Client with a Federal 
Register copy of the final permanent exemption. The provision of this 
document must occur prior to, or contemporaneously with, the client's 
receipt of a written asset management agreement from the Barclays 
Affiliated QPAM. For purposes of this paragraph, a ``Future Covered 
Client'' means an ERISA-covered Plan client or IRA client of the 
Barclays Affiliated QPAM that, beginning after the date, if any, that a 
final exemption is published in the Federal Register, for which a 
Barclays Affiliated QPAM will provide asset management or other 
discretionary fiduciary services in reliance on PTE 84-14.''
    The Department declines to make the requested changes. The 
exemption seeks to ensure that all interested parties are aware of and 
attentive to the complete facts and circumstances surrounding this 
application for exemption. The required disclosure of the proposal and 
grant ensures full disclosure of the relevant facts and circumstances, 
and the Summary highlights the important facts that led to the 
Conviction. Requiring the disclosure of the Summary, proposal, and 
grant provides the opportunity for all parties to have knowledge of 
these facts and circumstance. Notwithstanding this, the Department has 
modified the condition to clarify that disclosures may be provided 
electronically. Further, the notice requirement has been narrowed to 
ERISA-covered plans and IRAs that would benefit from this knowledge 
(i.e., Covered Plans). Notice does not need to be given to a client 
with respect to which a Barclays Affiliated QPAM has expressly 
disclaimed reliance on QPAM status or reliance on PTE 84-14.
Comment 35--QPAM Compliance with PTE 84-14 Conditions Except Section 
I(g); Section I(l)
    Section I(l) of the proposed five-year exemption provides that 
``[t]he Barclays QPAMs must comply with each condition of PTE 84-14, as 
amended, with the sole exception of the violation of Section I(g) of 
PTE 84-14 that is attributable to the Conviction.''
    The Applicant represents this condition contains an unintended 
error as ``Barclays QPAM'' is undefined. The Applicant suggests that 
the condition read: ``The Barclays Affiliated QPAMs must comply with 
each condition of PTE 84-14, as amended, with the sole exception of the 
violation of Section I(g) of PTE 84-14 that is attributable to the 
Conviction.''
    The Department has revised the exemption in the manner requested by 
the Applicant.
Comment 36--Compliance Officer Appointment and Reporting Line--Section 
I(m)(1)(ii)
    Section I(m)(1)(ii) of the proposed five-year exemption provides, 
``BPLC designates 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 
annual review (the Annual Review) to determine the adequacy and 
effectiveness of the implementation of the Policies and Training. With 
respect to the Compliance Officer, the following conditions must be 
met: . . .
    (ii) The Compliance Officer must have a direct reporting line to 
the highest-ranking corporate officer in charge of legal compliance 
that is independent of BPLC's other business lines.''
    The Applicant requests the deletion of conditions regarding 
appointment of the Compliance Officer and the Annual Review. The 
Applicant states that BPLC pleaded guilty to a single crime, based on 
the conduct of two individuals in London who had no responsibility for 
asset management. The Applicant claims that BPLC and its Affiliated 
QPAMs have very robust compliance departments and that BPLC's 
compliance and remediation efforts were singled out for praise by DOJ 
and resulted in BPLC becoming the first corporate entity to receive 
sentencing credit for such efforts. The Applicant asserts that the 
Department's imposition of additional compliance requirements is, under 
these circumstances, unwarranted and seemingly arbitrary. The Applicant 
states that the Department has not imposed a

[[Page 61896]]

requirement like that in Subsection I(m) in granting past exemptions, 
and claims that there is no basis for imposing the requirement herein. 
The Applicant represents that Barclays should be trusted to determine 
how to comply with the exemption and its Policies and Training 
conditions, which are separately the subject of the audit requirement. 
In addition, the Applicant states that the reference to the ``highest 
ranking corporate officer in charge of legal compliance'' is unclear. 
The Applicant requests that if the condition is not deleted, that the 
condition read: ``(m)(1) BPLC designates a compliance officer (the 
Compliance Officer) who will be responsible for compliance with the 
Policies and Training requirements described herein: . . .
    (ii) The Compliance Officer must have a direct reporting line to 
the highest-ranking corporate officer in charge of legal or compliance 
that is independent of BPLC's other business lines.''
    The Department proposed the requirement of an internal compliance 
officer because of serious concerns regarding the Applicant's 
compliance regime, as discussed above. The Department's determination 
to grant this exemption is based in part on the Department's view that 
an internal compliance officer with responsibility over the policies 
and procedures mandated by this exemption will provide a new level of 
oversight necessary to ensure that such Policies and Training are 
properly implemented. In response to the Applicant's comment that the 
reference to the ``highest ranking corporate officer in charge of legal 
compliance'' is unclear, as noted above in Section I(i)(8), the 
Department has modified ``highest ranking corporate officer in charge 
of legal compliance'' to ``highest ranking corporate officer in charge 
of compliance for asset management.''
Comment 37--Distribution of Compliance Officer's Annual Report--Section 
I(m)(2)(iv)
    Section I(m)(2)(iv) of the proposed five-year exemption provides, 
``[w]ith respect to each Annual Review, the following conditions must 
be met: . . .
    (iv) Each Annual Report must be provided to appropriate corporate 
officers of BPLC and each Barclays Affiliated QPAM to which such report 
relates; the head of compliance and the General Counsel (or their 
functional equivalent) of the relevant Barclays Affiliated QPAM; and 
must be made unconditionally available to the independent auditor 
described in Section I(i) above.''
    To the extent the Annual Review and Annual Report conditions are 
not deleted, the Applicant requests deletion of the requirement that 
the Annual Report be provided to ``appropriate corporate officers.'' 
The Applicant states that this term is undefined and unclear. The 
Applicant states that the purpose of this condition is satisfied by 
providing the Report to the General Counsel (or their functional 
equivalent) who can determine what further internal distribution is 
necessary. If the condition is not deleted, the Applicant suggests that 
the condition read: ``Each Annual Report must be provided to the head 
of compliance and the General Counsel (or their functional equivalent) 
of the relevant Barclays Affiliated QPAM and the General Counsel (or 
their functional equivalent) of BPLC; and must be made unconditionally 
available to the independent auditor described in Section I(i) above.''
    While the Department declines to delete the Annual Review and 
Annual Report conditions, after consideration of the Applicant's 
comment, the Department has revised the exemption in the manner 
requested by the Applicant.
Comment 38--Compliance Annual Review and Timing--Section I(m)(2)(v)
    Section I(m)(2)(v) of the proposed five-year exemption provides, 
``[w]ith respect to each Annual Review, the following conditions must 
be met: . . . (v) Each Annual Review, including the Compliance 
Officer's written Annual Report, must be completed at least three (3) 
months in advance of the date on which each audit described in Section 
I(i) is scheduled to be completed.''
    To the extent the Annual Review and Annual Report requirements are 
not deleted, the Applicant requests that this condition be deleted or, 
at minimum, that the timing requirement be removed. The Applicant 
states that the compliance review process outlined in the proposed 
exemption is an extensive undertaking, and the proposed exemption 
envisions an iterative process in which the auditor communicates with 
the relevant QPAM upon discovery of issues. The Applicant states that 
the Department should not mandate each aspect of the Annual Review, to 
the extent the Annual Review requirement remains, and, in any case, the 
Annual Review should not be mandated to conclude well before the audit 
is completed. If the condition is not deleted, the Applicant suggests 
that the condition read: ``(v) The first Annual Review, including the 
Compliance Officer's written Annual Report, must be completed within 
twelve (12) months of the Effective Date and each successive Annual 
Review must be completed within twelve (12) months of the prior Annual 
Review.''
    The Department declines to delete the Annual Review and Annual 
Report conditions. The Department notes that the Annual Review and the 
Annual Report are integral to the auditor's assessment of the 
Applicant's compliance with the terms of the exemption. An independent 
assessment by the auditor of the adequacy of the Annual Review and the 
Annual Report is essential to providing appropriate assurances that the 
Applicant and the Barclays Affiliated QPAMs have taken their 
obligations under this exemption very seriously and have complied with 
those obligations. The Department has modified the time by which the 
Annual Review, including the Annual Report, is due, to three months 
following the period to which it relates.
Comment 39--Deferred Prosecution Agreement/Non-Prosecution Agreement--
Section I(o)(2)
    Section I(o)(2) of the proposed five-year exemption provides, with 
respect to any Deferred Prosecution Agreement or Non-Prosecution 
Agreement: ``During the effective period of this five-year exemption, 
if granted, BPLC: (2) Immediately provides the Department any 
information requested by the Department, as permitted by law, regarding 
the agreement and/or conduct and allegations that led to the agreement. 
After review of the information, the Department may require BPLC, its 
affiliates, or related parties, as specified by the Department, to 
submit a new application for the continued availability of relief as a 
condition of continuing to rely on this exemption. If the Department 
denies the relief requested in the new application, or does not grant 
such relief within twelve (12) months of application, the relief 
described herein is revoked as of the date of denial or as of the 
expiration of the twelve (12) month period, whichever date is 
earlier.''
    The Applicant requests that the Department delete this condition. 
The Applicant states that the condition does not meet the requirements 
of either the Administrative Procedure Act (the APA) or the 
Department's own regulations. The Applicant states that if the 
Department wishes to withdraw an exemption, it must publish its intent 
to withdraw for notice and comment in the Federal Register. See 5 
U.S.C. 553 and 29 CFR 2570.50. The Applicant states that the proposed 
rule provides that the Department, at its option, can require the 
Applicant to ``reapply'' for an

[[Page 61897]]

exemption, and if the Department denies it or simply lets a year go by, 
the current exemption is terminated. However, the Applicant states that 
the APA and the Department's own regulation require that an exemption 
may not be terminated unless the Department publishes the termination 
for notice and comment.
    The Applicant also objects that the condition could create risk and 
uncertainty for multiple loans, leases, swaps, forwards and other 
investments. In addition, the Applicant states that the timing of NPAs/
DPAs is uncertain. If the condition is not deleted, the Applicant 
requests that the condition read as follows: ``During the effective 
period of the permanent exemption BPLC: (1) Immediately discloses to 
the Department any Deferred Prosecution Agreement (a DPA) or a Non-
Prosecution Agreement (an NPA) with the U.S. Department of Justice, 
entered into by Barclays or any of its affiliates in connection with 
conduct described in Section I(g) of PTE 84-14 or section 411 of ERISA; 
and (2) Immediately provides the Department any information requested 
by the Department, as permitted by law, regarding the agreement and/or 
conduct and allegations that led to the agreement.''
    The Department in no way intended that this condition to be read as 
providing for an automatic revocation of the exemption and has revised 
this condition accordingly. As revised, the condition simply requires 
that the Applicant notify the Department if and when it or any of its 
affiliates enter into a DPA or NPA with the U.S. Department of Justice 
for conduct described in section I(g) of PTE 84-14 or ERISA section 411 
and immediately provide the Department with any information requested 
by the Department, as permitted by law, regarding the agreement and/or 
conduct and allegations that led to the agreement. The Department 
retains the right to propose a withdrawal of the exemption pursuant to 
its procedures contained at 29 CFR 2570.50, should the circumstances 
warrant such action.
Comment 40--Right to Copies of Policies and Procedures--Section I(p)
    Section I(p) of the proposed five-year exemption provides that, 
``[e]ach Barclays Affiliated QPAM, in its agreements with ERISA-covered 
plan and IRA clients, or in other written disclosures provided to 
ERISA-covered plan and IRA clients, within 60 days prior to the initial 
transaction upon which relief hereunder is relied, and then at least 
once annually, will clearly and prominently: inform the ERISA-covered 
plan and IRA client that the client has the right to obtain copies of 
the QPAM's written Policies adopted in accordance with this exemption, 
if granted.''
    The Applicant requests that this condition be revised to permit 
clients to seek and obtain copies of the policies and procedures upon 
request. The Applicant states that this condition adds to the number of 
duplicative and overlapping notice requirements to clients, which is 
burdensome and may lead to confusion and clients ignoring these 
mailings. The Applicant also states that annual re-notification is 
excessive and only adds to these risks. Further, the Applicant states 
that the exemption, which the client will already have received, can 
make clear that clients can request and receive the policies and 
procedures upon request, removing any need for additional mailings. The 
Applicant suggests that the condition read: ``ERISA-covered plan and 
IRA clients whose accounts are managed in reliance on PTE 84-14 shall 
be provided a copy of the QPAM's written Policies adopted in accordance 
with the exemption upon request.''
    The Department disagrees, in part, with the Applicant's comment. 
Affording ERISA-covered plan and IRA clients a means by which to review 
and understand the Policies is a vital protection that is fundamental 
to this exemption's purpose. However, the Department has modified the 
condition so that the QPAMs, at their election, may instead provide 
Covered Plans a disclosure that accurately describes or summarizes key 
components of the Policies, rather than provide the Policies in their 
entirety. The Department has also determined that such disclosure may 
be continuously maintained on a website, provided that the website link 
to the summary of the written Policies is clearly and prominently 
disclosed to those ERISA-covered plan and IRA clients to whom this 
section applies. The Department also agrees with the Applicant that the 
timing requirement for notice should be revised and, accordingly, has 
modified the condition of Section I(p) to require notice regarding the 
information on the website be provided prior to or contemporaneously 
with a Barclays Affiliated QPAM's engagement by any Covered Plan. The 
notice shall be provided in its agreements with, or in other written 
disclosures provided to any such Covered Plan. If the Policies are 
thereafter changed, each Covered Plan client must receive a new notice 
within six (6) months following the end of the calendar year during 
which the Policies were changed.
Comment 41--No-Fault Provision--Section I(q)
    Section I(q) the proposed five-year exemption provides that, ``[a] 
Barclays Affiliated QPAM or a Barclays Related QPAM will not fail to 
meet the terms of this exemption, if granted, solely because a 
different Barclays Affiliated QPAM or a Barclays Related QPAM fails to 
satisfy a condition for relief described in Sections I(c), (d), (h), 
(i), (j), (k), (n) and (p).''
    The Applicant requests that this provision include references to 
the conditions described in Subsections I(e), (f), (g), and (m). The 
Applicant represents that it is important to advance the principle that 
a QPAM should not lose exemptive relief simply because a separate QPAM 
within the same corporate family has failed to satisfy a condition. 
Adding the Subsections listed above will ensure that the relief is 
meaningful here. Moreover, the Applicant represents that the failure of 
the auditor to meet a requirement of the exemption should not 
disqualify the QPAMs from using the exemption. The Applicant suggests 
that the condition read: ``A Barclays Affiliated QPAM or a Barclays 
Related QPAM will not fail to meet the terms of this exemption solely 
because a different Barclays Affiliated QPAM or a Barclays Related QPAM 
fails to satisfy a condition for relief described in Sections I(c), 
(d), (e), (f), (g), (h), (i), (j), (k), (m), (n) and (p), or because 
the Auditor failed to meet a requirement of this exemption.''
    The Department declines to extend the relief provided under Section 
I(q) to Sections I(e), (f), (g), and (m).
    Section I(e) provides that any failure of a Barclays Affiliated 
QPAM or Barclays Related QPAM to comply with Section I(g) of PTE 84-14 
arose solely from the Conviction. As set forth in the Applicant's 
materials, the Conviction is the sole reason a new exemption is 
necessary for the Barclays Affiliated QPAMs. If there were a new or 
additional conviction of crime described in Section I(g) of PTE 84-14, 
the Department would need to assess the misconduct, its scope, and its 
significance. Without such an assessment, the Department could not be 
confident of the adequacy of the conditions set forth herein with 
respect to the Barclays Affiliated QPAMs and Related QPAMs. Indeed, 
depending on the particular facts, a subsequent conviction could be 
strong evidence of the inadequacy of this exemption's conditions to 
protect Covered Plans. Further, as stated above, the Department

[[Page 61898]]

is not obligated to grant further relief to the extent such a 
conviction occurs.
    Section I(f) provides that no Barclays Affiliated QPAM or Barclays 
Related QPAM exercised authority over the assets of any ERISA-covered 
plan or IRA in a manner that it knew or should have known would: 
Further the criminal conduct that is the subject of the Conviction; or 
cause the Barclays Affiliated QPAM or Barclays Related QPAM or its 
affiliates or related parties to directly or indirectly profit from the 
criminal conduct that is the subject of the Conviction. The Applicant 
has represented that the conduct that is the subject of the BPLC's 
conviction ``did not involve any of BLPC's asset management units.'' 
The Department is not persuaded that it should include relief from 
Section I(f) in Section I(q).
    Section I(g) requires BPLC to refrain from providing investment 
management services to plans, and Section I(m) requires a Compliance 
Officer to undertake various compliance and reporting obligations. 
Consequently, if the relief under I(q) were extended to Sections I(g) 
and I(m), it would render them virtually meaningless. There would be 
little or no effective penalty for the failure to comply with the 
conditions, as the Affiliated and Related QPAMs would remain free to 
rely on the exemption's terms. The Department also is of the view that 
the potential for disqualification of all Barclays Affiliated QPAMs 
under this agreement will serve as additional incentive for these 
entities to comply in good-faith with the provisions of Sections I(g) 
and (m).
    However, the Department has determined to extend the relief in 
condition (l), which requires Barclays Affiliated QPAMs to comply with 
each condition of PTE 84-14, as amended, with the sole exception of the 
violation of Section I(g) of PTE 84-14 that is attributable to the 
Conviction. Finally, except as noted above, the Department accepts the 
Applicant's comment that the failure of the auditor to comply with any 
of the conditions of the exemption should not be treated as a failure 
by the Barclays Affiliated QPAMs to comply with the conditions of the 
exemption, provided that such failure was not due to the actions or 
inactions of the Applicant or its affiliates, and Section I(q) is 
amended, accordingly, except as described above.
Comment 42--Definition of Affiliated QPAM--Section II(a)
    Section II(a) of the proposed five-year exemption provides: ``[T]he 
term `Barclays Affiliated QPAM' means a `qualified professional asset 
manager' (as defined in Section VI(a) of PTE 84-14) that relies on the 
relief provided by PTE 84-14 and with respect to which BPLC is a 
current or future `affiliate' (as defined in Section VI(d)(1) of PTE 
84-14). The term `Barclays Affiliated QPAM' excludes the parent entity, 
BPLC and BCI's Investment Bank division.''
    The Applicant states that BCI was not the subject of the 
Conviction, nor was its Investment Bank division the subject of the 
Conviction. The Applicant also represents that the division should not 
be excluded from the exemption, because BCI is an Affiliated QPAM in 
the BPLC Group, and excluding a BCI division from the benefits of PTE 
84-14 would not only deter ordinary corporate transactions, such as the 
purchase of an asset management entity and its merging into BCI, it 
would prevent the development by BCI of new asset management lines of 
business. Moreover, the Applicant states that the Justice Department 
did not charge BCI, and thus did not determine that as a corporate 
entity, it was culpable of a crime. By excluding BCI's Investment Bank 
division from the benefits of PTE 84-14, the Applicant represents that 
the Department is making that judgment in the place of the Justice 
Department and effectively debarring the entity from providing any 
fiduciary services at all. According to the Applicant, such a result is 
arbitrary and punitive. Therefore, the Applicant requests that the 
provision read as follows: ``The term `Barclays Affiliated QPAM' means 
a `qualified professional asset manager'' (as defined in Section VI(a) 
of PTE 84-14) that relies on the relief provided by PTE 84-14 and with 
respect to which BPLC is a current or future `affiliate' (as defined in 
Section VI(d)(1) of PTE 84-14). The term `Barclays Affiliated QPAM' 
excludes BPLC.''
    The Department agrees with this comment and has modified Section 
II(a) accordingly.
Comment 43--Definition of Conviction--Section II(e)
    Section II(e) of the proposed five-year exemption provides: ``The 
term `Conviction' means the judgment of conviction against BPLC in the 
United States District Court for the District of Connecticut (the 
Court), Case No. 3:15-cr-00077-SRU-1, for participating in a 
combination and conspiracy to fix, stabilize, maintain, increase or 
decrease the price of, and rig bids and offers for, euro/U.S. dollar 
currency pairs exchanged in the foreign currency exchange spot market 
by agreeing to eliminate competition in the purchase and sale of such 
currency pairs in the United States and elsewhere, in violation of the 
Sherman Antitrust Act, 15 U.S.C. 1.''
    The Applicant states that the language in this definition 
paraphrases the Plea Agreement and expands the use of the term 
Conviction far beyond the conduct that is the subject of the Plea 
Agreement. The Applicant states that exemptions are narrowly construed 
and it is critical that both the asset managers using the exemption and 
plan counterparties understand precisely what the conditions mean. The 
Applicant states that, without that precision, it is difficult to know 
whether conditions regarding compensation, participation, and future 
hiring are met. The Applicant represents that this overly-broad 
language goes far beyond the Part I(g) disqualification and will cause 
the Applicant and counterparties to conclude that it is unusable. 
Finally, the Applicant states that the definition of ``Conviction'' in 
Subsection II(e) was accurate in the Temporary Exemption. Therefore, 
the Applicant requests that this definition read as follows: ``The term 
``Conviction'' means the judgment of conviction against BPLC for 
violation of the Sherman Antitrust Act, 15 U.S.C. 1, which is scheduled 
to be entered in the District Court for the District of Connecticut 
(the District Court), Case Number 3:15-cr-00077-SRU-1.''
    After considering this comment, the Department has revised the 
definition accordingly. The Department notes that Section II of the 
five-year exemption has been reordered to list the defined terms 
alphabetically; therefore, the term ``Conviction'' is now listed as 
Subsection II(d).
Comments 44-46--Paragraph 2 of the Summary of Facts and Representations
    The Applicant seeks certain clarifications to the Summary of Facts 
and Representations that the Department does not view as relevant to 
its determination whether to grant this exemption. Those requested 
clarifications may be found as part of the public record for 
Application No. D-11910, in a letter to the Department, dated January 
5, 2017.
Comment--Letter from House Committee on Financial Services
    The Department also received a comment letter from certain members 
of Congress (the Members) regarding this exemption, as well as the 
other QPAM-related exemptions published in the Federal Register today. 
In the letter, the Members recognized that certain conditions contained 
in these proposed exemptions are crucial to protecting the investments 
of our nation's workers and retirees, referring to proposed

[[Page 61899]]

conditions which require each bank to: (a) Indemnify and hold harmless 
ERISA-covered plans and IRAs for any damages resulting from the future 
misconduct of such bank; and (b) disclose to the Department any 
Deferred Prosecution Agreement or a Non-Prosecution Agreement with the 
U.S. Department of Justice. The Members also requested that the 
Department hold hearings in connection with the proposed exemptions.
    The Department acknowledges the Members' concerns regarding the 
need for public discourse regarding proposed exemptions. To this end, 
the Department's procedures regarding prohibited transaction exemption 
requests under ERISA (the Exemption Procedures) afford interested 
persons the opportunity to request a hearing. Specifically, section 
2570.46(a) of the Exemption Procedures provides that, ``[a]ny 
interested person who may be adversely affected by an exemption which 
the Department proposes to grant from the restrictions of section 
406(b) of ERISA, section 4975(c)(1)(E) or (F) of the Code, or section 
8477(c)(2) of FERSA may request a hearing before the Department within 
the period of time specified in the Federal Register notice of the 
proposed exemption.'' The Exemption Procedures provide that ``[t]he 
Department will grant a request for a hearing made in accordance with 
paragraph (a) of this section where a hearing is necessary to fully 
explore material factual issues identified by the person requesting the 
hearing.'' The Exemption Procedures also provide that ``[t]he 
Department may decline to hold a hearing where: (1) The request for the 
hearing does not meet the requirements of paragraph (a) of this 
section; (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.'' \56\
---------------------------------------------------------------------------

    \56\ 29 CFR part 2570, published at 76 FR 66653, October 27, 
2011.
---------------------------------------------------------------------------

    The Department notes that while the Members' letter raises policy 
issues, it does not appear to raise specific material factual issues. 
The Department previously explored a wide range of legal and policy 
issues regarding Section I(g) of the QPAM Exemption during a public 
hearing held on January 15, 2015 in connection with the Department's 
proposed exemption involving Credit Suisse AG, and has determined that 
an additional hearing on these issues is not necessary.
    After giving full consideration to the record, the Department has 
decided to grant the exemption, as described above. The complete 
application file (Application No. D-11910) is available for public 
inspection in the Public Disclosure Room of the Employee Benefits 
Security Administration, Room N-1515, U.S. Department of Labor, 200 
Constitution Avenue NW, Washington, DC 20210.
    For a more complete statement of the facts and representations 
supporting the Department's decision to grant this exemption, refer to 
the notice of proposed exemption published on November 21, 2016 at 81 
FR 83427.

Exemption

Section I: Covered Transactions
    Certain entities with specified relationships to Barclays PLC 
(BPLC) (the Barclays Affiliated QPAMs and the Barclays Related QPAMs, 
as defined further in Sections II(a) and II(b), respectively) will not 
be precluded from relying on the exemptive relief provided by 
Prohibited Transaction Class Exemption 84-14 (PTE 84-14 or the QPAM 
Exemption), notwithstanding the Conviction, as defined in Section 
II(d), during the Exemption Period,\57\ provided that the following 
conditions are satisfied:
---------------------------------------------------------------------------

    \57\ 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 violation of the Sherman 
Antitrust Act, Title 15 United States Code, Section 1.
---------------------------------------------------------------------------

    (a) Other than certain individuals who: Worked for a non-fiduciary 
business of a BPLC subsidiary; had no responsibility for, and exercised 
no authority in connection with, the management of plan assets; and are 
no longer employed by the BPLC subsidiary, the Barclays Affiliated 
QPAMs and the Barclays Related QPAMs (including their officers, 
directors, agents other than BPLC, and employees of such QPAMs who had 
responsibility for, or exercised authority in connection with the 
management of plan assets) did not know of, did not have reason to know 
of, or participate in the criminal conduct that is the subject of the 
Conviction. For the purposes of this paragraph (a), ``participate in'' 
means the knowing approval of the misconduct underlying the Conviction;
    (b) Apart from a non-fiduciary line of business within BCI, the 
Barclays Affiliated QPAMs and the Barclays Related QPAMs (including 
their officers, directors, and agents other than BPLC, and employees of 
such Barclays Affiliated QPAMs) 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 Barclays Affiliated QPAM will not employ or knowingly 
engage any of the individuals that participated in the criminal conduct 
that is the subject of the Conviction. For the purposes of this 
paragraph (c), ``participated in'' means the knowing approval of the 
misconduct underlying the Conviction;
    (d) At all times during the Exemption Period, no Barclays 
Affiliated QPAM will use its authority or influence to direct an 
``investment fund'' (as defined in Section VI(b) of PTE 84-14), that is 
subject to ERISA or the Code and managed by such Barclays Affiliated 
QPAM in reliance on PTE 84-14, or with respect to which a Barclays 
Affiliated QPAM has expressly represented to an ERISA-covered plan or 
IRA with assets invested in such ``investment fund'' that it qualifies 
as a QPAM or relies on the QPAM class exemption, to enter into any 
transaction with BPLC, or to engage BPLC 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 a Barclays Affiliated QPAM or a Barclays Related 
QPAM to satisfy Section I(g) of PTE 84-14 arose solely from the 
Conviction;
    (f) A Barclays Affiliated QPAM or a Barclays Related QPAM did not 
exercise authority over the assets of any plan subject to Part 4 of 
Title I of ERISA (an ERISA-covered plan) or section 4975 of the Code 
(an IRA) in a manner that it knew or should have known would: Further 
the criminal conduct that is the subject of the Conviction; or cause 
the Barclays Affiliated QPAM, the Barclays Related QPAM or their 
affiliates to directly or indirectly profit from the criminal conduct 
that is the subject of the Conviction;
    (g) Other than with respect to employee benefit plans maintained or 
sponsored for its own employees or the employees of an affiliate, BPLC 
will not act as a fiduciary within the meaning of section 3(21)(A)(i) 
or (iii) of ERISA, or section 4975(e)(3)(A) and (C) of the Code, with 
respect to ERISA-covered plan and IRA assets; provided, however, that 
BPLC will not be treated as violating the conditions of this exemption 
solely because it acted as an investment advice fiduciary within the 
meaning of section 3(21)(A)(ii) or section 4975(e)(3)(B) of the Code;

[[Page 61900]]

    (h)(1) Prior to a Barclays Affiliated QPAM's engagement by an 
ERISA-covered plan or IRA for discretionary asset management services, 
where the QPAM relies upon PTE 84-14 or the QPAM represents that it 
qualifies as a QPAM, the Barclays Affiliated QPAM must develop, 
implement, maintain, and follow written policies and procedures (the 
Policies). The Policies must require and must be reasonably designed to 
ensure that:
    (i) The asset management decisions of the Barclays Affiliated QPAM 
are conducted independently of the corporate management and business 
activities of BPLC;
    (ii) The Barclays Affiliated 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 violation of these duties and 
provisions with respect to Covered Plans;
    (iii) The Barclays Affiliated 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 Barclays Affiliated QPAM 
to regulators, including, but not limited to, the Department, the 
Department of the Treasury, the Department of Justice, and the Pension 
Benefit Guaranty Corporation, on behalf of or in relation to Covered 
Plans, are materially accurate and complete, to the best of such QPAM's 
knowledge at that time;
    (v) To the best of the Barclays Affiliated QPAM's knowledge at the 
time, the Barclays Affiliated QPAM does not make material 
misrepresentations or omit material information in its communications 
with such regulators with respect to Covered Plans;
    (vi) The Barclays Affiliated QPAM complies with the terms of this 
exemption; and
    (vii) Any violation of, or failure to comply with an item in 
subparagraphs (ii) through (vi), is corrected as soon as reasonably 
possible upon discovery, or as soon after the QPAM reasonably should 
have known of the noncompliance (whichever is earlier), and any such 
violation or compliance failure not so corrected is reported, upon the 
discovery of such failure to so correct, in writing, to the head of 
compliance and the General Counsel (or their functional equivalent) of 
the relevant line of business that engaged in the violation or failure, 
and the independent auditor responsible for reviewing compliance with 
the Policies. A Barclays Affiliated QPAM will not be treated as having 
failed to develop, implement, maintain, or follow the Policies, 
provided that it corrects any instance of noncompliance as soon as 
reasonably possible upon discovery, or as soon as reasonably possible 
after the QPAM reasonably should have known of the noncompliance 
(whichever is earlier), and provided that it adheres to the reporting 
requirements set forth in this subparagraph (vii);
    (2) Prior to a Barclays Affiliated QPAM's engagement by a Covered 
Plan, each Barclays Affiliated QPAM must develop a program of training 
(the Training), to be conducted at least annually, for all relevant 
Barclays Affiliated QPAM asset/portfolio management, trading, legal, 
compliance, and internal audit personnel. The First Training under this 
exemption must be completed by all relevant Barclays personnel within 
eighteen months of the Barclay's Affiliated QPAM's engagement or 
representation, as described in this provision. The Training must:
    (i) At a minimum, cover the Policies, ERISA and Code compliance 
(including applicable fiduciary duties and the prohibited transaction 
provisions), ethical conduct, the consequences for not complying with 
the conditions of this exemption (including any loss of exemptive 
relief provided herein), and prompt reporting of wrongdoing; and
    (ii) Be conducted by an individual with significant understanding 
and familiarity with asset management and trading practices who has 
been prudently selected and who has appropriate technical training and 
proficiency with ERISA and the Code;
    (i)(1) Each Barclays Affiliated QPAM submits to an audit conducted 
every two years by an independent auditor, who has been prudently 
selected and who has appropriate technical training and proficiency 
with ERISA and the Code, to evaluate the adequacy of, and each Barclays 
Affiliated QPAM's compliance with, the Policies and Training described 
herein. The audit requirement must be incorporated in the Policies. 
Each audit must cover a consecutive twelve (12) month period starting 
with the twelve (12) month period that begins on the date that a 
Barclays Affiliated QPAM is first engaged on or after January 10, 2018, 
by any Covered Plan. The second audit must cover a consecutive twelve 
month period that begins on the date that is twelve months after the 
date the first audit period ends. The third audit period must cover a 
consecutive twelve month period that begins on the date that is twelve 
months after the date the second audit period ends. Each biennial audit 
must be completed no later than six (6) months after the period to 
which the audit applies. No audit period is required to extend past 
July 9, 2023, and each biennial audit must be completed no later than 
six (6) months after the period to which the audit applies;
    (2) Within the scope of the audit and to the extent necessary for 
the auditor, in its sole opinion, to complete its audit and comply with 
the conditions for relief described herein, and only to the extent such 
disclosure is not prevented by state or federal statute, or involves 
communications subject to attorney client privilege, each Barclays 
Affiliated QPAM and, if applicable, BPLC, will grant the auditor 
unconditional access to its business, including, but not limited to: 
its computer systems; business records; transactional data; workplace 
locations; training materials; and personnel. Such access is limited to 
information relevant to the auditor's objectives as specified by the 
terms of this exemption;
    (3) The auditor's engagement must specifically require the auditor 
to determine whether each Barclays Affiliated 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 Barclays Affiliated QPAM's operational compliance with the 
Policies and Training. In this regard, the auditor must test for each 
QPAM, a sample of such QPAM's transactions involving Covered Plans, 
sufficient in size and nature to afford the auditor a reasonable basis 
to determine such QPAM's operational compliance with the Policies and 
Training;
    (5) For each audit, on or before the end of the relevant period 
described in Section I(i)(1) for completing the audit, the auditor must 
issue a written report (the Audit Report) to BPLC and the Barclays 
Affiliated QPAM to which the audit applies that describes the 
procedures performed by the auditor during the course of its 
examination. The auditor, at their discretion, may issue a single 
consolidated Audit Report which covers all the Barclays Affiliated 
QPAMs. The Audit Report must include the auditor's specific 
determinations regarding:
    (i) The adequacy of each Barclays Affiliated QPAM's Policies and 
Training; each Barclays Affiliated QPAM's compliance with the Policies 
and Training; the need, if any, to strengthen such Policies and 
Training; and any instance of the respective Barclays Affiliated QPAM's 
noncompliance with the written

[[Page 61901]]

Policies and Training described in Section I(h) above. The Barclays 
Affiliated QPAM must promptly address any noncompliance. The Barclays 
Affiliated QPAM must promptly address or prepare a written plan of 
action to address any determination by the auditor regarding the 
Policies and Training and the auditor's recommendations (if any) with 
respect to strengthening the Policies and Training of the respective 
Barclays QPAM. Any action taken or the plan of action to be taken by 
the respective Barclays Affiliated QPAM must be included in an addendum 
to the Audit Report (which addendum must be completed prior to the 
certification described in Section I(i)(7) below). In the event such a 
plan of action to address the auditor's recommendation regarding the 
adequacy of the Policies and Training is not completed by the time of 
submission of the Audit Report, the following period's Audit Report 
must state whether the plan was satisfactorily completed. Any 
determination by the auditor that the respective Barclays Affiliated 
QPAM has implemented, maintained, and followed sufficient Policies and 
Training must not be based solely or in substantial part on an absence 
of evidence indicating noncompliance. In this last regard, any finding 
that a Barclays Affiliated QPAM has complied with the requirements 
under this subparagraph must be based on evidence that the particular 
Barclays Affiliated QPAM has actually implemented, maintained, and 
followed the Policies and Training required by this exemption. 
Furthermore, the auditor must not solely rely on the Annual Report 
created by the compliance officer (the Compliance Officer) as described 
in Section I(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 I(i)(3) and (4) above; and
    (ii) the adequacy of the most recent Annual Review described in 
Section I(m);
    (6) The auditor must notify the respective Barclays Affiliated QPAM 
of any instance of noncompliance identified by the auditor within five 
(5) business days after such noncompliance is identified by the 
auditor, regardless of whether the audit has been completed as of that 
date.;
    (7) With respect to each Audit Report, the General Counsel, or one 
of the three most senior executive officers of the Barclays Affiliated 
QPAM to which the Audit Report applies, must certify in writing, under 
penalty of perjury, that the officer has reviewed the Audit Report and 
this exemption; that such Barclays Affiliated 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. Such 
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;
    (8) The Risk Committee of BPLC's Board of Directors is provided a 
copy of each Audit Report; and a senior executive officer with a direct 
reporting line to the highest ranking compliance officer of BPLC must 
review the Audit Report for each Barclays Affiliated QPAM and must 
certify in writing, under penalty of perjury, that such officer has 
reviewed each Audit Report;
    (9) Each Barclays Affiliated QPAM provides its certified Audit 
Report, by regular mail to: Office of Exemption Determinations (OED), 
200 Constitution Avenue NW, Suite 400, Washington, DC 20210, or by 
private carrier to: 122 C Street NW, Suite 400, Washington, DC 20001-
2109, no later than 30 days following its completion of the Audit 
Report. The Audit Report will be part of the public record regarding 
this exemption. Furthermore, each Barclays Affiliated QPAM must make 
its Audit Report unconditionally available, electronically or 
otherwise, for examination upon request by any duly authorized employee 
or representative of the Department, other relevant regulators, and any 
fiduciary of a Covered Plan;
    (10) Each Barclays Affiliated QPAM and the auditor must submit to 
OED: Any engagement agreement(s) entered into pursuant to the 
engagement of the auditor under this exemption, no later than two (2) 
months after the execution of any such engagement agreement;
    (11) The auditor must provide the Department, upon request, for 
inspection and review, access to all the workpapers created and 
utilized in the course of the audit provided such access and inspection 
is otherwise permitted by law; and
    (12) BPLC must notify the Department of a change in the independent 
auditor no later than two (2) months after the engagement of a 
substitute or subsequent auditor and must provide an explanation for 
the substitution or change including a description of any material 
disputes between the terminated auditor and BPLC;
    (j) As of January 10, 2018 and throughout the Exemption Period, 
with respect to any arrangement, agreement, or contract between a 
Barclays Affiliated QPAM and a Covered Plan, the Barclays Affiliated 
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 
inadvertent prohibited transactions); and to comply with the standards 
of prudence and loyalty set forth in section 404 of ERISA with respect 
to each such ERISA-covered plan and IRA to the extent that section is 
applicable;
    (2) To indemnify and hold harmless the Covered Plan for any actual 
losses resulting directly from a Barclays Affiliated 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 QPAM; or any claim arising out of the failure of 
such Barclays Affiliated 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. This condition applies only to actual 
losses caused by the Barclays Affiliated QPAM's violations;
    (3) Not to require (or otherwise cause) the Covered Plan to waive, 
limit, or qualify the liability of the Barclays Affiliated QPAM for 
violating ERISA or the Code or engaging in prohibited transactions;
    (4) Not to restrict the ability of such Covered Plan to terminate 
or withdraw from its arrangement with the Barclays Affiliated QPAM with 
respect to any investment in a separately managed account or pooled 
fund subject to ERISA and managed by such QPAM, with the exception of 
reasonable restrictions, appropriately disclosed in advance, that are 
specifically designed to ensure equitable treatment of all investors in 
a pooled fund in the event such withdrawal or termination may have 
adverse consequences for all other investors. In connection with any 
such arrangements involving investments in pooled funds subject to 
ERISA entered into after the effective date of this exemption, the 
adverse consequences must relate to of a lack of liquidity of the 
underlying assets, valuation issues, or regulatory reasons that prevent 
the fund from promptly redeeming an ERISA-covered plan's or IRA's 
investment, and such restrictions must be applicable to all such 
investors and effective no longer than reasonably necessary to avoid 
the adverse consequences;

[[Page 61902]]

    (5) Not to impose any fees, penalties, or charges for such 
termination or withdrawal with the exception of reasonable fees, 
appropriately disclosed in advance, that are specifically designed to 
prevent generally recognized abusive investment practices or 
specifically designed to ensure equitable treatment of all investors in 
a pooled fund in the event such withdrawal or termination may have 
adverse consequences for all other investors, provided that such fees 
are applied consistently and in like manner to all such investors; and
    (6) Not to include exculpatory provisions disclaiming or otherwise 
limiting liability of the Barclays Affiliated QPAM for a violation of 
such agreement's terms. To the extent consistent with Section 410 of 
ERISA, 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 BPLC, and its affiliates, or damages from acts outside 
the control of the Barclays Affiliated QPAM;
    (7) Prior to a Barclays Affiliated QPAM's engagement with an ERISA-
covered plan or IRA for the provision of asset management or other 
discretionary fiduciary services, such Barclays Affiliated QPAM must 
provide a notice of its obligations under this Section I(j) to each 
Covered Plan;
    (k) Any client for which a Barclays Affiliated QPAM relies on PTE 
84-14 or has expressly represented that the manager qualifies as a QPAM 
or relies on the QPAM class exemption must receive the proposed and 
final exemptions, along with a separate summary describing the facts 
that led to the Conviction (the Summary), which have 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, prior to, or contemporaneously with, the client's receipt of a 
written asset management agreement from the Barclays Affiliated QPAM. 
Disclosures may be delivered electronically;
    (l) The Barclays Affiliated QPAMs must comply with each condition 
of PTE 84-14, as amended, with the sole exception of the violation of 
Section I(g) of PTE 84-14 that is attributable to the Conviction;
    (m)(1) Within six months following the date of a Barclays 
Affiliated QPAM's engagement by an ERISA-covered plan or IRA for 
discretionary asset management services, with respect to which the QPAM 
has represented that it qualifies as a QPAM or will rely on PTE 84-14, 
BPLC designates 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 
annual review for each annual period beginning with the date of such 
engagement and the anniversary of such date (the Annual Review) to 
determine the adequacy and effectiveness of the implementation of the 
Policies and Training. With respect to the Compliance Officer, the 
following conditions must be met:
    (i) The Compliance Officer must be a professional who has extensive 
experience with, and knowledge of, the regulation of financial services 
and products, including under ERISA and the Code; and
    (ii) The Compliance Officer must have a direct reporting line to 
the highest-ranking corporate officer in charge of compliance for asset 
management;
    (2) With respect to each Annual Review, the following conditions 
must be met:
    (i) The Annual Review includes a review of: Any compliance matter 
related to the Policies or Training that was identified by, or reported 
to, the Compliance Officer or others within the compliance and risk 
control function (or its equivalent) during the previous year; any 
material change in the relevant business activities of the Barclays 
Affiliated QPAMs; and any change to ERISA, the Code, or regulations 
related to fiduciary duties and the prohibited transaction provisions 
that may be applicable to the activities of the Barclays Affiliated 
QPAMs;
    (ii) The Compliance Officer prepares a written report for each 
Annual Review (each, an Annual Report) that: (A) Summarizes his or her 
material activities during the preceding year; (B) sets forth any 
instance of noncompliance discovered during the preceding year, and any 
related corrective action; (C) details any change to the Policies or 
Training to guard against any similar instance of noncompliance 
occurring again; and (D) makes recommendations, as necessary, for 
additional training, procedures, monitoring, or additional and/or 
changed processes or systems, and management's actions on such 
recommendations;
    (iii) In each Annual Report, the Compliance Officer must certify in 
writing that to his or her knowledge: (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 preceding year and any related correction taken to date have 
been identified in the Annual Report; and (D) the Barclays Affiliated 
QPAMs have complied with the Policies and Training, and/or corrected 
(or is correcting) any instances of noncompliance in accordance with 
Section I(h) above;
    (iv) Each Annual Report must be provided to the appropriate 
corporate officers of BPLC and each Barclays Affiliated QPAM to which 
such report relates; the head of compliance and the General Counsel (or 
their functional equivalent) of the relevant Barclays Affiliated QPAM 
and the General Counsel (or their functional equivalent) of BPLC; and 
must be made unconditionally available to the independent auditor 
described in Section I(i) above;
    (v) Each Annual Review, including the Compliance Officer's written 
Annual Report, must be completed no more than three (3) months 
following the end of the period to which it relates;
    (n) Each Barclays Affiliated QPAM will maintain records necessary 
to demonstrate that the conditions of this exemption have been met, for 
six (6) years following the date of any transaction for which such 
Barclays Affiliated QPAM relies upon the relief in the exemption;
    (o) During the Exemption Period, BPLC: (1) Immediately discloses to 
the Department any Deferred Prosecution Agreement (a DPA) or a Non-
Prosecution Agreement (an NPA) with the U.S. Department of Justice, 
entered into by BPLC or any of its affiliates in connection with 
conduct described in Section I(g) of PTE 84-14 or section 411 of ERISA; 
and (2) immediately provides the Department any information requested 
by the Department, as permitted by law, regarding the agreement and/or 
conduct and allegations that led to the agreement;
    (p) Prior to or contemporaneously with a Barclays Affiliated QPAM's 
engagement by any Covered Plan, each Barclays Affiliated QPAM will, in 
its agreements with, or in other written disclosures provided to any 
such Covered Plan, clearly and prominently inform such Covered Plan 
client of the right to obtain a copy of the Policies or a description 
(``Summary Policies'') which accurately summarizes key components of 
the QPAM's written Policies developed in connection with this 
exemption. If the Policies are thereafter changed, each Covered Plan 
client must receive a new disclosure within six (6) months following 
the end of the calendar year during which the

[[Page 61903]]

Policies were changed.\58\ With respect to this requirement, the 
description may be continuously maintained on a website, provided that 
such website link to the Policies or the Summary Policies is clearly 
and prominently disclosed to each Covered Plan; and
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    \58\ In the event Applicant meets this disclosure requirement 
through Summary Policies, changes to the Policies shall not result 
in the requirement for a new disclosure unless, as a result of 
changes to the Policies, the Summary Policies are no longer 
accurate.
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    (q) A Barclays Affiliated QPAM or a Barclays Related QPAM will not 
fail to meet the terms of this exemption solely because a different 
Barclays Affiliated QPAM or Barclays Related QPAM fails to satisfy a 
condition for relief described in Sections I(c), (d), (h), (i), (j), 
(k), (l), (n) and (p); or the independent auditor described in Section 
I(i) fails a provision of the exemption other than the requirement 
described in Section I(i)(11), provided that such failure did not 
result from any actions or inactions of BPLC or its affiliates.
Section II: Definitions
    (a) The term ``BPLC'' means, Barclays PLC, the parent entity, but 
does not include any subsidiaries or other affiliates.
    (b) The term ``Barclays Affiliated QPAM'' means a ``qualified 
professional asset manager'' (as defined in Section VI(a) of PTE 84-14) 
that relies on the relief provided by PTE 84-14 and with respect to 
which Barclays is a current or future ``affiliate'' (as defined in 
Section VI(d)(1) of PTE 84-14). The term ``Barclays Affiliated QPAM'' 
excludes the parent entity, BPLC;
    (c) The term ``Barclays Related QPAM'' means any current or future 
``qualified professional asset manager'' (as defined in section VI(a) 
of PTE 84-14) that relies on the relief provided by PTE 84-14, and with 
respect to which BPLC owns a direct or indirect five percent or more 
interest, but with respect to which BPLC is not an ``affiliate'' (as 
defined in Section VI(d)(1) of PTE 84-14).
    (d) The term ``Conviction'' means the judgment of conviction 
against BPLC for violation of the Sherman Antitrust Act, 15 U.S.C. 1, 
which is scheduled to be entered in the District Court for the District 
of Connecticut (the District Court), Case Number 3:15-cr-00077-SRU-1;
    (e) The term ``Conviction Date'' means the date of the judgment of 
the trial court. For avoidance of confusion, the Conviction Date is 
January 10, 2017, as set forth in Case Number 3:15-cr-00077-SRU;
    (f) The term ``Covered Plan'' means a plan subject to Part 4 of 
Title 1 of ERISA (``ERISA-covered plan'') or a plan subject to Section 
4975 of the Code (``IRA'') with respect to which a Barclays Affiliated 
QPAM relies on PTE 84-14, or with respect to which a Barclays 
Affiliated QPAM (or any BPLC affiliate) has expressly represented that 
the manager qualifies as a QPAM or relies on the QPAM class exemption 
(PTE 84-14). A Covered Plan does not include an ERISA-covered Plan or 
IRA to the extent the Barclays Affiliated QPAM has expressly disclaimed 
reliance on QPAM status or PTE 84-14 in entering into its contract, 
arrangement or agreement with the ERISA-covered plan or IRA;
    (g) The terms ``ERISA-covered plan'' and ``IRA'' mean, 
respectively, a plan subject to Part 4 of Title I of ERISA and a plan 
subject to section 4975 of the Code; and
    (h) The term ``Exemption Period'' means January 10, 2018, through 
January 9, 2023.

Effective Date

    This exemption is effective on January 10, 2018. The term of the 
exemption is from January 10, 2018, through January 9, 2023 (the 
Exemption Period).
    Department's Comment: The Department cautions that the relief in 
this exemption will terminate immediately if, among other things, an 
entity within the BPLC corporate structure is convicted of a crime 
described in Section I(g) of PTE 84-14 (other than the Conviction) 
during the Exemption Period. Although the Applicant could apply for a 
new exemption in that circumstance, the Department would not be 
obligated to grant the exemption. The terms of this exemption have been 
specifically designed to permit plans to terminate their relationships 
in an orderly and cost effective fashion in the event of an additional 
conviction or a determination that it is otherwise prudent for a plan 
to terminate its relationship with an entity covered by the exemption.

Further Information

    For more information on this exemption, contact Ms. Anna Vaughan of 
the Department, telephone (202) 693-8565. (This is not a toll-free 
number.)

UBS Assets Management (Americas) Inc.; UBS Realty Investors LLC; UBS 
Hedge Fund Solutions LLC; UBS O'Connor LLC; and Certain Future 
Affiliates in UBS's Asset Management and Wealth Management Americas 
Divisions (collectively, the Applicants or the UBS QPAMs) Located in 
Chicago, Illinois; Hartford, Connecticut; New York, New York; and 
Chicago, Illinois, Respectively

[Prohibited Transaction Exemption 2017-07; Exemption Application No. D-
11907]

Discussion

    On November 21, 2016, the Department of Labor (the Department) 
published a notice of proposed exemption in the Federal Register at 81 
FR 83385, for certain entities with specified relationships to UBS AG 
(hereinafter, the UBS QPAMs) to continue to rely on the relief provided 
by PTE 84-14 for a period of five years,\59\ notwithstanding the ``2013 
Conviction'' of UBS Securities Japan Co., Ltd. and the ``2017 
Conviction'' of UBS, AG (UBS) (collectively, the Convictions), as 
described herein.
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    \59\ 49 FR 9494 (March 13, 1984), as corrected at 50 FR 41430 
(October 10, 1985), as amended at 70 FR 49305 (August 23, 2005) and 
as amended at 75 FR 38837 (July 6, 2010), hereinafter referred to as 
PTE 84-14 or the QPAM exemption.
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    The Department is granting this exemption to ensure that Covered 
Plans \60\ with assets managed by a UBS QPAM may continue to benefit 
from the relief provided by PTE 84-14. The effective date is January 
10, 2018, and the exemption is effective from January 10, 2018 through 
January 9, 2021 (the Exemption Period).
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    \60\ ``Covered Plan'' is a plan subject to Part 4 of Title 1 of 
ERISA (``ERISA-covered plan'') or a plan subject to section 4975 of 
the Code (``IRA'') with respect to which a UBS QPAM relies on PTE 
84-14, or with respect to which a UBS QPAM (or any UBS affiliate) 
has expressly represented that the manager qualifies as a QPAM or 
relies on the QPAM class exemption (PTE 84-14). A Covered Plan does 
not include an ERISA-covered plan or IRA to the extent the UBS QPAM 
has expressly disclaimed reliance on the QPAM status or PTE 84-14 in 
entering into its contract, arrangement, or agreement with the 
ERISA-covered plan or IRA. See further discussion in this Preamble 
under the heading Comment III A & B--Scope of Section I(j) & 
Covenants Regarding Compliance with ERISA--Section I(j)(1).
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    No relief from a violation of any other law is provided by this 
exemption, including any criminal conviction described in the proposed 
exemption. Furthermore, the Department cautions that the relief in this 
exemption will terminate immediately if, among other things, an entity 
within the UBS corporate structure is convicted of a crime described in 
Section I(g) of PTE 84-14 (other than the Convictions) during the 
Exemption Period. The terms

[[Page 61904]]

of this exemption have been specifically designed to promote conduct 
that adheres to basic fiduciary standards under ERISA and the Code. The 
exemption also aims to ensure that Covered Plans can terminate 
relationships in an orderly and cost effective fashion in the event a 
Covered Plan fiduciary determines it is prudent to sever the 
relationship with a UBS QPAM.

Written Comments

    The Department invited all interested persons to submit written 
comments and/or requests for a public hearing with respect to the 
notice of proposed exemption, published in the Federal Register at 81 
FR 83385 on November 21, 2016. All comments and requests for hearing 
were due by January 5, 2016.\61\ The Department received written 
comments from UBS and members of the U.S. Congress. After considering 
these submissions, the Department has determined to grant the 
exemption, with revisions, as described below.
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    \61\ UBS requested and the Department granted an extension until 
January 23, 2017 to provide the Notice to Interested Persons. The 
comment period was therefore extended until February 27, 2017. The 
Department received additional comments from Applicant, however, 
after the close of the comment period.
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Comment I--The Term of the Exemption
    The Applicant requests that the Department extend the term of the 
exemption from five years to nine years. UBS states that an exemption 
for less than nine years results in a reapplication requirement without 
additional meaningful protections. UBS states that if at any time the 
UBS QPAMs do not comply with all of the conditions under a nine year 
exemption, the relief provided will be lost. Hence, according to UBS, a 
nine year exemption is protective of affected ERISA-covered plans and 
IRAs. UBS also states that a five-year exemption period is not in the 
interest of the UBS QPAMs' clients or participants and beneficiaries. 
UBS states that a five-year exemption period creates uncertainty for 
fiduciaries with the result that such fiduciaries may spend time and 
money to prepare for a change in investment managers in the event that 
UBS does not receive another exemption. UBS claims the record does not 
support a conclusion that a nine year exemption period is inconsistent 
with ERISA Section 408(a) and neither has the Department conveyed a 
basis for findings that warrant an exemption for less than nine years. 
UBS points to precedent established by previous individual QPAM 
exemptions in which the Department placed ``particular importance'' on 
the ``degree to which the investment and compliance operations of the 
QPAM can be sufficiently isolated from the influence of `bad actors'.'' 
(80 FR 20262, April 15, 2015). UBS states that ``UBS QPAMs were not 
involved in the FX Misconduct or the misconduct that is subject of the 
Convictions.'' UBS requests that, if the five-year exemption period is 
retained, the Department clarify the timing for an application to 
extend the relief, and for the Department to act on that application 
taking into account the notice-and-comment period. UBS also requests 
that the Department modify the exemption to allow for the continued 
reliance on the relief provided by a final exemption while any 
application to extend that relief beyond the initial 5-year period is 
pending.
    In developing this exemption, the Department considered the Non-
Prosecution Agreement between UBS and the U.S. Department of Justice 
(DOJ) dated December 18, 2012 (LIBOR NPA) and the Plea Agreement. When 
UBS entered into the LIBOR NPA, it agreed, among other things, not to 
commit any crime in violation of U.S. laws for a period of two years 
from the date of the LIBOR NPA in exchange for the DOJ agreeing not to 
prosecute UBS for any crimes related to the submission benchmark 
interest rates between 2001 and 2010. UBS also agreed to pay a monetary 
penalty of $500,000,000 and to take steps to further strengthen its 
internal controls, as required by certain other U.S. and non-U.S. 
regulatory agencies that had addressed the misconduct described in the 
LIBOR NPA.
    While UBS entered into the LIBOR NPA avoiding prosecution, UBS 
Securities Japan, a wholly owned subsidiary of UBS, pled guilty and was 
convicted (2013 Conviction) of one count of wire fraud in violation of 
Title 18, U.S. Code, sections 1343 and 2 \62\ arising out of UBS 
Security Japan's fraudulent submission of Yen LIBOR rates between 2006 
and 2009, and its participation in a scheme to defraud counterparties 
to interest rate derivatives trades executed on its behalf by secretly 
manipulating certain benchmark interest rates to which the 
profitability of those trades was tied. As a result of the 2013 
Conviction, QPAMs with certain corporate relationships to UBS and UBS 
Securities Japan were no longer able to rely on PTE 84-14. Following 
the publication of a notice of proposed exemption in the Federal 
Register and after a period of notice and comment, the Department 
published a final exemption on September 13, 2013 (PTE 2013-09).\63\ 
PTE 2013-09 among other conditions, required UBS to comply with each 
condition of PTE 84-14, as amended.\64\
---------------------------------------------------------------------------

    \62\ Section 1343 generally imposes criminal liability for 
fraud, including fines and/or imprisonment, when a person uses wire, 
radio, or television communication in interstate or foreign 
commerce. Section 2 generally imposes criminal liability on a person 
as a principal if that person aids, counsels, commands, induces, or 
willfully causes another person to engage in criminal activity.
    \63\ 78 FR 56740 (September 13, 2013).
    \64\ Section I(h) of PTE 2013-09, at 78 FR 56741 (September 18, 
2013).
---------------------------------------------------------------------------

    Both the LIBOR NPA and the Plea Agreement contain a Statement of 
Facts (SOF) that describes the circumstances of UBS's scheme to defraud 
counterparties to interest rate derivatives transactions by secretly 
manipulating benchmark interest rates to which the profitability of 
those transactions was tied. The SOF describes the wide-ranging and 
systematic efforts, practiced nearly on a daily basis, by several UBS 
employees (a) to manipulate the YEN LIBOR in order to benefit UBS's 
trading positions; (b) to use cash brokers to influence other 
Contributor Panel banks' Yen LIBOR submissions; and (c) to collude 
directly with employees at other Contributor Panel banks to influence 
those banks' Yen LIBOR submissions.
    DOJ determined UBS subsequently breached the LIBOR NPA when certain 
employees engaged in fraudulent and deceptive trading and sales 
practices in certain foreign exchange (FX) market transactions via 
telephone, email and/or electronic chat, to the detriment of UBS 
customers.\65\ These employees also colluded with other actors in 
certain FX markets in order to manipulate those markets.
---------------------------------------------------------------------------

    \65\ The circumstances of UBS's violation of the terms of the 
LIBOR NPA are described in detail in Exhibit 1 to the Plea 
Agreement, entitled ``The Factual Basis for Breach of the Non-
Prosecution Agreement'' (the Factual Basis for Breach).
---------------------------------------------------------------------------

    The Department considered the Factual Basis for Breach attached to 
the Plea Agreement which details that conduct (the FX Misconduct as 
defined in Section II(e)). That conduct included the following actions: 
Sales staff misrepresented to customers that markups were not added, 
when in fact they were; UBS personnel used a price level to ``track'' 
certain limit orders that was different from customer specified prices; 
UBS traders and salespeople used hand signals to fraudulently conceal 
markups from certain customers on ``open-line'' phone calls; and a UBS 
FX trader conspired with other financial

[[Page 61905]]

services firms acting as dealers in the FX spot market by agreeing to 
restrain competition in the purchase and sale of the Euro/U.S. dollar 
currency pair. The Factual Basis for Breach takes into account UBS's 
three recent prior criminal resolutions: The 2012 LIBOR NPA; a February 
2009 DOJ Tax Division deferred prosecution agreement for conspiracy to 
defraud the U.S. of tax revenue through secret Swiss bank accounts for 
U.S. taxpayers (in connection therewith, UBS agreed to pay a penalty of 
$780 million); a May 2011 DOJ non-prosecution agreement with the DOJ 
Antitrust Division to resolve allegations of bid-rigging in the 
municipal bond derivatives market (in connection therewith, UBS agreed 
to pay a penalty of $160 million). DOJ also noted that UBS's compliance 
programs and remedial efforts following the LIBOR NPA failed to detect 
the collusive and deceptive conduct in the FX markets until a published 
article in the news media called attention to the matter. As a result 
of its breach of the LIBOR NPA and the resulting 2017 Conviction, UBS 
lost exemptive relief under both PTE 84-14 and its individual 
exemption, PTE 2013-09.
    In developing this exemption, the Department also considered 
statements from a number of regulators about the FX Misconduct. The 
Financial Conduct Authority's (FCA) Final Notice dated November 11, 
2014 states: ``During the Relevant Period, UBS did not exercise 
adequate and effective control over its G10 spot FX trading business. . 
. . The front office failed adequately to discharge these 
responsibilities with regard to obvious risks associated with 
confidentiality, conflicts of interest and trading conduct.'' That 
notice also states: ``These failings occurred in circumstances where 
certain of those responsible for managing front office matters were 
aware of and/or at times involved in behaviors described above.'' The 
Unites States Commodity and Futures Trading Commission's (CFTC) Order 
dated November 11, 2014 states: ``During the Relevant Period, UBS 
failed to adequately address the risks associated with its FX traders 
participating in the fixing of certain FX benchmark rates. UBS also 
lacked adequate internal controls in order to prevent its FX traders 
from engaging in improper communications with certain FX traders at 
other banks. UBS lacked sufficient policies, procedures and training 
specifically governing participation in trading around the FX benchmark 
rates. . . .''
    The Department also considered the size of relevant fines imposed: 
The Department of Justice imposed $500 million and $203 million fines; 
the Board of Governors of the Federal Reserve Board imposed a $324 
million fine; and the CFTC and the FCA imposed fines of $290 million 
and [pound]223,814,000, respectively.
    In light of the severity of the misconduct, the repeated criminal 
violations, and the breach of a previous exemption, which was itself 
necessitated by criminal conduct, the Department has concluded that it 
is appropriate to grant a more limited term of relief than the five-
year period it originally proposed. As a result, the Department has 
concluded that a three-year term is appropriate for this exemption. A 
three-year term and the exemption's protective conditions reflect the 
Department's intent to protect Covered Plans that entrust substantial 
assets with a UBS QPAM, following serious misconduct, supervisory 
failures, repeated criminal convictions, and a violation of a previous 
exemption granted under similar circumstances (PTE 2013-09). The 
Department intends that the three-year term will give the Department 
the opportunity to review the adherence by the UBS QPAMs to the 
conditions set out herein. The shortened three-year period reflects the 
fundamental importance of the Applicants' prompt efforts to adopt 
supervisory mechanisms, policies, and procedures that safeguard plans 
and IRAs, and guard against the risk of further misconduct. The 
Applicants may apply for an additional extension at such time as they 
believe appropriate. Before granting an extension, however, the 
Department expects to consider carefully the efficacy of this exemption 
and any public comments on additional extensions, particularly 
including comments on how well the exemption has or has not worked to 
safeguard the interests of Covered Plans.
Comment II--Non-Prosecution and Deferred-Prosecution Agreements--
Section I(q)
    Section I(q) of the proposed exemption provides that ``[d]uring the 
effective period of this five-year exemption UBS: (1) Immediately 
discloses to the Department any Deferred Prosecution Agreement (a DPA) 
or Non-Prosecution Agreement (an NPA) that UBS or any of its affiliates 
enters into with the U.S. Department of Justice, to the extent such DPA 
or NPA involves conduct described in Section I(g) of PTE 84-14 or 
section 411 of ERISA; and (2) immediately provides the Department any 
information requested by the Department, as permitted by law, regarding 
the agreement and/or the conduct and allegations that led to the 
agreement. After review of the information, the Department may require 
UBS, its affiliates, or related parties, as specified by the 
Department, to submit a new application for the continued availability 
of relief as a condition of continuing to rely on this exemption. If 
the Department denies the relief requested in the new application, or 
does not grant such relief within twelve months of application, the 
relief described herein is revoked as of the date of denial or as of 
the expiration of the twelve month period, whichever date is earlier.''
    UBS requests that section I(q) be deleted or revised to omit the 
paragraph regarding possible revocation of the exemption due to a new 
NPA or DPA. UBS states that this condition is unprecedented, highly 
problematic, and inappropriate for several reasons. The first reason is 
that the condition treats an NPA or a DPA as equivalent to a criminal 
conviction under PTE 84-14, Section I(g) in contradiction of guidance 
in Advisory Opinion Number 2013-05A, which confirms that the ``sole 
judicial action'' that triggers the disqualification under Section I(g) 
is a ``criminal conviction.'' UBS notes that Section I(g) of this 
exemption provides that the Department may require UBS to submit a new 
application for relief following an NPA or a DPA and the condition 
provides for the automatic revocation of the exemption if the 
Department fails to grant the new application within twelve months of 
its submission. According to UBS, this creates the situation where 
exemptive relief could be lost irrespective of the merits of the new 
application solely as a result of the Department's failure to timely 
act. UBS states this outcome would be arbitrary and could cause the UBS 
QPAMs' plan clients to make substantial expenditures to immediately 
replace the UBS QPAMs if the Department fails to timely act on a new 
application. UBS asserts that this result is not reconcilable with the 
statement in the Proposed Exemption that the Department designed 
certain conditions that would ``permit plans to terminate their 
relationships in an orderly and cost effective fashion.''
    Additionally, according to UBS, such a revocation of a previously-
granted exemption would be in direct violation of the Department's 
exemption regulations at 29 CFR 2570.50(b). Those regulations provide 
that before revoking or modifying an exemption the Department must: (1) 
Publish a notice of proposed action in the Federal Register; (2) 
provide interested persons with an opportunity to comment on the

[[Page 61906]]

proposed revocation or modification; (3) notify the applicant of the 
proposed action and the reasons therefore before publishing such 
notice; and (4) provide the applicant the opportunity to comment on the 
proposed revocation or modification subsequent to the publication of 
the notice. UBS argues that these procedural protections would not be 
available to the UBS QPAMs as a result of a revocation due to the 
Department's failure to act on the ``new'' application.
    Finally, UBS states that the Department failed to identify any 
substantive standard that would apply to the evaluation of such a new 
application. UBS suggests that the revocation of the exemption 
therefore could be based on a UBS QPAM affiliate's NPA or DPA that does 
not relate to conduct involving the UBS QPAMs or their personnel or 
does not raise concerns regarding the QPAMs' independence from such 
affiliate. UBS is concerned this condition authorizes revocation of the 
exemption regardless of whether the underlying conduct or circumstances 
surrounding such an NPA or DPA calls into question the Department's 
original findings made under Section 408 of ERISA. Finally, UBS states 
that this condition is unnecessary because the Department already has 
the authority to modify or revoke the exemption if its original 
findings were called into question due to a UBS QPAM affiliate's DPA or 
NPA.
    UBS requests that if the condition is not omitted from the 
exemption, that word ``immediately'' be deleted and replaced with the 
insertion of the phrase ``as soon as reasonably practicable, the entry 
into'' before the term ``any Deferred Prosecution Agreement (a DPA).'' 
UBS also requests that the parenthetical ``(as defined in Section VI(d) 
of PTE 84-14)'' be added after the word ``affiliate.'' Additionally, 
UBS requests that the term ``non-privileged'' be placed before the word 
``information'' and the phrase as soon ``as reasonably practicable'' be 
inserted before ``as permitted by law.'' Lastly, UBS requests that the 
phrase ``and allegations that led to'' be deleted and replaced by 
inserting the word ``underlying'' before the phrase ``the agreement'' 
at the end of the Section.
    The Department in no way intended to provide for an automatic 
revocation of this exemption and, in light of UBS's comments, has 
revised the condition accordingly. As revised, the condition simply 
requires UBS to notify the Department if and when it or any of its 
affiliates enter into a DPA or a NPA with the U.S. Department of 
Justice for conduct described in section I(g) of PTE 84-14 or ERISA 
section 411 and immediately provide the Department with any information 
requested by the Department, as permitted by law, regarding the 
agreement and/or conduct and allegations that led to the agreement. The 
Department retains the right to propose a withdrawal of this exemption 
pursuant to its procedures contained at 29 CFR 2570.50, should the 
circumstances warrant such action. Additionally, as requested by the 
applicant, the Department has added the parenthetical ``(as defined in 
Section VI(d) of PTE 84-14)'' to clarify the term ``affiliate.''
Comment III A & B--Scope of Section I(j) & Covenants Regarding 
Compliance with ERISA--Section I(j)(1)
    Section I(j) of the proposed exemption provides that: ``Effective 
as of the effective date of this five-year exemption, with respect to 
any arrangement, agreement, or contract between a UBS QPAM and an 
ERISA-covered plan or IRA for which such UBS QPAM provides asset 
management or other discretionary fiduciary services, each UBS QPAM 
agrees and warrants:
    (1) [t]o comply with ERISA and the Code, as applicable with respect 
to such ERISA-covered plan or IRA; to refrain from engaging in 
prohibited transactions that are not otherwise exempt (and to promptly 
correct any inadvertent prohibited transactions); and to comply with 
the standards of prudence and loyalty set forth in section 404 of 
ERISA, as applicable;
    (2) Not to require (or otherwise cause) the ERISA-covered plan or 
IRA to waive, limit, or qualify the liability of the UBS QPAM for 
violating ERISA or the Code or engaging in prohibited transactions;
    (3) Not to require the ERISA-covered plan or IRA (or sponsor of 
such ERISA-covered plan or beneficial owner of such IRA) to indemnify 
the UBS QPAM for violating ERISA or engaging in prohibited 
transactions, except for violations or prohibited transactions caused 
by an error, misrepresentation, or misconduct of a plan fiduciary or 
other party hired by the plan fiduciary who is independent of UBS;
    (4) Not to restrict the ability of such ERISA-covered plan or IRA 
to terminate or withdraw from its arrangement with the UBS QPAM 
(including 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 as a result of an actual 
lack of liquidity of the underlying assets, provided that such 
restrictions are applied consistently and in like manner to all such 
investors;
    (5) Not to impose any fees, penalties, or charges for such 
termination or withdrawal with the exception of reasonable fees, 
appropriately disclosed in advance, that are specifically designed to 
prevent generally recognized abusive investment practices or 
specifically designed to ensure equitable treatment of all investors in 
a pooled fund in the event such withdrawal or termination may have 
adverse consequences for all other investors, provided that such fees 
are applied consistently and in like manner to all such investors;
    (6) Not to include exculpatory provisions disclaiming or otherwise 
limiting liability of the UBS QPAM for a violation of such agreement's 
terms, except for liability caused by an error, misrepresentation, or 
misconduct of a plan fiduciary or other party hired by the plan 
fiduciary who is independent of UBS and its affiliates; and
    (7) To indemnify and hold harmless the ERISA-covered plan and IRA 
for any damages resulting from a violation of applicable laws, a UBS 
QPAM's breach of contract, or any claim arising out of the failure of 
such UBS 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 
Convictions;
    (8) Within four (4) months of the effective date of this proposed 
five-year exemption, each UBS QPAM must provide a notice of its 
obligations under this Section I(j) to each ERISA-covered plan and IRA 
for which the UBS QPAM provides asset management or other discretionary 
fiduciary services. For all other prospective ERISA-covered plan and 
IRA clients for which a UBS QPAM provides asset management or other 
discretionary fiduciary services, the UBS QPAM will agree in writing to 
its obligations under this Section I(j) in an updated investment 
management agreement or advisory agreement between the UBS QPAM and 
such clients or other written contractual agreement.''
    According to UBS, extending Section I(j) and other conditions to 
circumstances in which the QPAMs do not rely on PTE 84-14 would exceed 
the proper scope of Section 408 of ERISA and the Department's exemption 
regulations, which are properly limited to protecting plans or IRAs 
involved in transactions that require use of PTE 84-14. Accordingly, 
UBS requests that

[[Page 61907]]

Section I(j) be revised to include the phrases ``pursuant to'' and ``in 
reliance on PTE 84-14.''
    UBS also states that it interprets the clause ``to comply with the 
standards of prudence and loyalty set forth in section 404 of ERISA, as 
applicable'' to have the same meaning as the same condition in PTE 
2016-17,\66\ which was previously granted to the UBS QPAMs. UBS 
interprets the language of Section I(j)(1) as ``requiring the UBS QPAMs 
to agree to comply with Section 404 of ERISA only to the extent that 
Section 404 is otherwise ``applicable'' to the ERISA-covered plan or 
IRA, such that most IRAs would not be subject to this provision because 
they are not subject to Title I of ERISA.'' UBS also states that if the 
Department contemplates that this clause would require the UBS QPAMs to 
contractually agree to comply with the duties set forth in Section 404 
of ERISA with respect to all IRAs, such a requirement would be 
inappropriate. UBS represents that ``including such a requirement in a 
final exemption would introduce significant uncertainty as to what 
standards should apply to IRAs not subject to Title I of ERISA.'' UBS 
argues that ``requiring the UBS QPAMs to contractually agree to treat 
IRAs as possessing rights that do not apply to them under ERISA would 
also be inconsistent with the requirements for exemptions under ERISA 
Section 408.'' According to UBS, section 408 of ERISA requires that the 
Department make a determination that an exemption is protective of the 
``existing'' rights of participants and beneficiaries. Additionally, 
UBS claims that the last clause of Section I(j)(1) of PTE 2016-17 which 
states ``with respect to each such ERISA-covered plan and IRA'' is 
redundant of the first clause of Section I(j)(1) of PTE 2016-17 and 
has, accordingly, requested deletion of the clause.
---------------------------------------------------------------------------

    \66\ 81 FR 94049 (December 22, 2016). PTE 2016-17 is a temporary 
exemption in respect of Exemption Application No. D-11863 for UBS 
QPAMs to rely on the exemptive relief provided by PTE 84-14, 
notwithstanding the Convictions, for up to twelve months from 
January 5, 2017.
---------------------------------------------------------------------------

    ERISA-covered plans and IRAs routinely rely on QPAM status as a 
condition of entering into transactions with financial institutions, 
even with respect to transactions which do not strictly require 
adherence to PTE 84-14. According to the Applicant's own application, 
``[e]ven where the QPAM exemption is not strictly required (e.g., for 
most purchases of publicly-traded stocks), many ERISA plan fiduciaries 
take great comfort in their managers qualifying for QPAM status and 
will not use managers that do not so qualify.'' Furthermore, in the 
report dated August 26, 2015 prepared by John Minahan, Ph.D. and 
provided to the Department by UBS in support of UBS QPAMs' application 
for exemption, Dr. Minahan states that ``[b]ecause of the importance of 
the QPAM designation, if the UBS QPAMs are denied an exemption and can 
longer act as QPAMs, plan fiduciaries are likely to conclude that they 
have no choice but to change managers. This is also true for plan 
clients with investment strategies that do not depend on the QPAM 
exemption. Fiduciaries of either category of plans are likely to view a 
denial of an exemption as reflective of the Department's view that the 
UBS QPAMS should not be trusted to act as an investment manager for 
benefit plan assets, regardless of whether other prohibited transaction 
exemptions may be available.''
    The Department notes that it may not always be clear whether or not 
a UBS QPAM intends to rely upon PTE 84-14 for any particular 
transaction. Accordingly, it is critical to ensure that protective 
conditions are in place to safeguard the interests of ERISA-covered 
plans and IRAs that are acting in reliance on the availability of this 
exemption, particularly those who may not have entered into the 
transaction in the first place, but for the Department's grant of this 
exemption.
    The Department has a clear interest in protecting ERISA-covered 
plans and IRAs that enter into an asset management agreement with a UBS 
QPAM in reliance of the manager's qualification as a QPAM. Moreover, 
when an ERISA-covered plan or IRA terminates its relationship with an 
asset manager, it may incur significant costs and expenses as its 
investments are unwound and as it works to place investments with a new 
asset manager.
    After considering UBS's comments, the Department has revised this 
condition. The condition now applies to ERISA-covered plans and IRAs 
only when the UBS asset manager relies on PTE 84-14 or has expressly 
represented that it qualifies as a QPAM or relies on the QPAM class 
exemption in its dealings with the ERISA-covered plan or IRA 
(hereinafter, a Covered Plan). To the extent a UBS QPAM would prefer 
not to be subject to these conditions, however, it may expressly 
disclaim reliance on QPAM status or PTE 84-14 in entering into its 
contract with an ERISA-covered plan or IRA. In that case, the plan or 
IRA is not a Covered Plan.\67\
---------------------------------------------------------------------------

    \67\ Of course, the UBS QPAM could not claim exemptive relief 
under PTE 84-14 or this exemption with respect to any ERISA-covered 
plan or IRA for which it so expressly disclaims reliance on QPAM 
status or PTE 84-14.
---------------------------------------------------------------------------

    The Department rejects the view that it acts outside the scope of 
its authority by protecting ERISA-covered plans and IRAs that rely on 
UBS QPAMs' eligibility for this exemption, and reemphasizes the 
seriousness of the criminal misconduct that caused the UBS QPAMs to 
need this exemption as well as the FX Misconduct. The Department may 
grant an exemption under Section 408(a) of ERISA or Code section 
4975(c)(2)(C) only to the extent the Secretary finds, among other 
things, that the exemption is protective of the affected plan(s) or 
IRA(s). As noted by regulators, personnel at UBS engaged in serious 
misconduct over an extended period of time at the expense of their own 
clients. This misconduct appears to have stemmed, in part, from 
deficiencies in control and oversight.
    Notwithstanding the misconduct, which resulted in violation of 
Section I(g) of PTE 84-14, the Department has determined that this 
exemption is protective of Covered Plans and in the interest of 
participants, beneficiaries, and beneficial owners of such Covered 
Plans. The Department made this determination based, in significant 
part, upon the protections of Section I(j) that require UBS QPAMs to 
make an express commitment to Covered Plans to adhere to the 
requirements of ERISA and the Code, as applicable. As previously 
indicated, the Department has concluded that a culture of compliance, 
centered on adherence to basic standards of fair dealing as set forth 
in this exemption, gives the Department a compelling basis for making 
the required statutory findings that the exemption is in the interest 
of, and protects the rights of participants, beneficiaries, and 
beneficial owners of Covered Plans. Absent such a compelling basis, the 
exemption would have been denied.
    In response to UBS's comments, however, the Department required an 
express commitment to comply with the fiduciary standards and 
prohibited transaction rules only to the extent these provisions are 
``applicable'' under ERISA and the Code. The revised terms, together 
with this exemption's limited relief (e.g., this exemption generally 
does not extend to transactions that involve self-dealing) should serve 
to promote a culture of compliance and protect Covered Plans and their 
participants, beneficiaries, and beneficial owners.
    In response to UBS's comments, the Department also notes that 
nothing in ERISA or the Code prevents the

[[Page 61908]]

Department from conditioning relief on express contractual commitments 
to adhere to the requirements set out herein. The QPAMs remain free to 
disclaim reliance on the exemption and to avoid such express 
contractual commitments. To the extent, however, that they hold 
themselves out as fiduciary QPAMs, they should be prepared to make an 
express commitment to their customers to adhere to the requirements of 
this exemption. This commitment strengthens and reinforces the 
likelihood of compliance, and helps ensure that, in the event of 
noncompliance, Covered Plans are insulated from injuries caused by 
noncompliance. These protections also ensure that Covered Plans are 
able to extricate themselves from transactions that become prohibited 
as a result of the QPAMs' misconduct, without fear of sustaining 
additional losses as a result of the QPAMs' actions. In this 
connection, however, the Department emphasizes that the only claims 
available to the QPAMs' Covered Plan customers pursuant to these 
contractual commitments are those separately provided by ERISA or other 
state and federal laws that are not preempted by ERISA.

Comment III C--Indemnification Requirements--Section I(j)(6) and 
Revision to Sections I(j)(5) and (3)

    Section I(j)(7) of the proposed exemption provides that: 
``Effective as of the effective date of this five-year exemption, with 
respect to any arrangement, agreement, or contract between a UBS QPAM 
and an ERISA-covered plan or IRA for which such UBS QPAM provides asset 
management or other discretionary fiduciary services, each UBS QPAM 
agrees and warrants: . . . (7)[t]o indemnify and hold harmless the 
ERISA-covered plan and IRA for any damages resulting from a violation 
of applicable laws, a UBS QPAM's breach of contract, or any claim 
arising out of the failure of such UBS 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 Convictions.''
    UBS states that Section I(j)(7) of the proposed exemption is 
overbroad because it could be interpreted to require the UBS QPAMs to 
indemnify plans for types of damages, such as punitive or consequential 
damages, that are impermissible under ERISA and/or that are not 
attributable to any act or omission of UBS or the QPAMs. Thus, UBS 
requests clarification that any such damages must be reasonable; 
related to the arrangement, agreement or contract; exclude indirect, 
special, consequential, or punitive damages; and result directly from 
the failure of the UBS QPAM. Additionally, UBS has requested that the 
phrase ``applicable laws'' in Section I(j)(7) of the proposed exemption 
be replaced with ``ERISA's fiduciary duties and of ERISA and Code's 
prohibited transaction provisions.''
    As explained above, the purpose of this exemption is to protect 
Covered Plans. Section I(j)(6) (this Section has been renumbered so 
that Section I(j)(7) of the proposed exemption is now Section I(j)(6) 
in this exemption) is essential to achieving that purpose. Section 
I(j)(6) ensures that a Covered Plan may expect a UBS QPAM to adhere to 
basic fiduciary norms and standards of fair dealing, notwithstanding 
the Conviction. The condition also ensures that Covered Plans have the 
ability to disengage from a relationship with a UBS QPAM without undue 
injury if UBS violates the terms of this exemption. Accordingly, the 
Department has revised the applicability of this condition to more 
closely reflect this interest. In particular, the condition applies 
only to Covered Plans. As indicated above, if the asset manager would 
prefer not to be subject to these provisions as exemption conditions, 
it may expressly disclaim reliance on QPAM status or PTE 84-14 in 
entering into its contract with the Plan or IRA (in that case, however, 
it could not rely on the exemption for relief).
    The Department made further changes upon consideration of UBS's 
comments, however. These changes include: Renumbering the condition for 
clarity; replacing ``applicable laws'' with clarifying language that 
conforms to the one-year exemption, PTE 2016-17; and replacing ``any 
damages'' with ``actual losses resulting directly from'' certain acts 
or omissions of the UBS QPAMs. Because Section I(j)(6) extends only to 
actual losses resulting directly from the actions of the UBS QPAMs, it 
does not encompass losses solely caused by other parties, events, or 
acts of God.
    Section I(j)(6) of the proposed exemption provides ``Effective as 
of the effective date of this five-year exemption, with respect to any 
arrangement, agreement, or contract between a UBS QPAM and an ERISA-
covered plan or IRA for which such UBS QPAM provides asset management 
or other discretionary fiduciary services, each UBS QPAM agrees and 
warrants: . . . Not to include exculpatory provisions disclaiming or 
otherwise limiting liability of the UBS QPAM for a violation of such 
agreement's terms, except for liability caused by an error, 
misrepresentation, or misconduct of a plan fiduciary or other party 
hired by the plan fiduciary who is independent of UBS, and its 
affiliates.''
    In coordination with the modifications to Section I(j)(6) (formerly 
Section I(j)(7)) discussed above, the Department modified Section 
I(j)(5) (formerly I(j)(6) in the proposed exemption) to clarify that 
the prohibition on exculpatory provisions does not extend to losses 
that arise from an act or event not caused by UBS and that nothing in 
this section alters the prohibition on exculpatory provisions set forth 
in ERISA Section 410.
    Section I(j)(3) of the proposed exemption provides that ``Effective 
as of the effective date of this five-year exemption, with respect to 
any arrangement, agreement, or contract between a UBS QPAM and an 
ERISA-covered plan or IRA for which such UBS QPAM provides asset 
management or other discretionary fiduciary services, each UBS QPAM 
agrees and warrants: . . . (3) [n]ot to require the ERISA-covered plan 
or IRA (or sponsor of such ERISA-covered plan or beneficial owner of 
such IRA) to indemnify the UBS QPAM for violating ERISA or engaging in 
prohibited transactions, except for violations or prohibited 
transactions caused by an error, misrepresentation, or misconduct of a 
plan fiduciary or other party hired by the plan fiduciary who is 
independent of UBS.''
    The Department determined that Section I(j)(3), as proposed, is 
duplicative of the exemption's prohibition on exculpatory clauses in 
Section I(j)(5) (previously Section I(j)(6) in the proposed exemption) 
and, accordingly, has deleted the condition. Therefore, as previously 
stated, Section I(j) has been renumbered accordingly.
Comment IV--Definition of FX Misconduct--Section II(e)
    Section I(e) of the proposed exemption provides: ``The term ``FX 
Misconduct'' means the conduct engaged in by UBS personnel described in 
Exhibit 1 of the Plea Agreement (Factual Basis for Breach) entered into 
between UBS AG and the Department of Justice Criminal Division, on May 
20, 2015 in connection with Case Number 3:15-cr-00076-RNC filed in the 
US District Court for the District of Connecticut.'' UBS represents 
that the proposed exemption's definition of FX Misconduct should be 
limited to the collusive conduct described in Paragraph 15 of Exhibit 1 
to the May 20, 2015 Plea Agreement. The Applicant argues that ``UBS was 
not charged with the other conduct described in Exhibit 1--referred to 
as the `unilateral' or `sales' conduct and was not required to

[[Page 61909]]

admit this conduct was criminal in nature.'' UBS claims that an 
individual QPAM exemption applicant has never been required to make 
representations regarding this type of conduct. UBS further argues that 
in excluding the ``unilateral'' conduct from the temporary exemptions 
granted to each of the other banks which were charged with FX-related 
crimes, unlike UBS, the Department determined that including such 
conduct would improperly expand the definition ``beyond that which is 
described as criminal in the Plea Agreement.'' Therefore, UBS argues 
that references to the ``unilateral'' conduct should be deleted from 
the UBS final exemption and from the definition of FX Misconduct.
    The Department declines to make the requested change to the 
definition of FX Misconduct. As stated in the Factual Basis for Breach 
(Exhibit 1 to the May 20, 2015 Plea Agreement), DOJ determined that UBS 
violated the 2012 Non-Prosecution Agreement (the LIBOR NPA) relating to 
UBS's fraudulent submission of LIBOR rates and declared a breach of the 
LIBOR NPA due to a finding that certain UBS employees engaged in 
fraudulent and deceptive currency trading and sales practices, as well 
as collusive conduct in certain FX markets. Limiting the definition of 
the FX Misconduct to include only the collusive behavior specifically 
described in paragraph 15 of Exhibit 1 of the Plea Agreement would not 
appropriately reflect the misconduct of UBS employees in regard to the 
FX markets that DOJ considered in determining there was a breach of the 
LIBOR NPA which led to the Plea Agreement and the 2017 Conviction. Just 
as important, the Department believes the FX Misconduct, along with the 
criminal conduct that is the subject of the Convictions, is relevant to 
a determination of the protections necessary to assure that the 
interests of Covered Plans (and their participants, beneficiaries, and 
beneficial owners) are protected. This exemption is designed to protect 
Covered Plans and is based on the entirety of the record that describes 
in detail the FX misconduct, not just part.
Comment V--Deadlines for Completion of the Annual Audits and Annual 
Reviews--Section I(i)(1) and I(m)(v)
    Section I(i)(1) of the proposed exemption provides in part that 
``[e]ach annual audit must cover a consecutive twelve month period 
starting with the twelve month period that begins on the date of the 
Conviction Date (the Initial Audit Period)'' and that ``[e]ach annual 
audit must be completed no later than six (6) months after the period 
to which the audit applies.'' Section I(m)(v) of the Proposed Exemption 
provides that ``[e]ach annual review, including the Compliance 
Officer's written Annual Report, must be completed at least three (3) 
months in advance of the date on which each audit described in Section 
I(i) is scheduled to be completed.''
    UBS represents that while it supports the notion of providing 
sufficient time in between the completion of the Annual Review and the 
Annual Audit to allow for the auditor to review the report on the 
Annual Review, the timing for the Audit and Annual Review would require 
UBS to conduct the Annual Reviews on a different time schedule than the 
UBS QPAMs currently follow for the completion of a similar internal 
review required by the Investment Advisors Act. UBS states that review 
for the Investment Advisors Act is generally completed on or around the 
beginning of June of each year. UBS contends that conducting both 
annual reviews on the same schedule would improve the effectiveness of 
the Annual Review and achieve substantial efficiencies. Therefore, UBS 
requests that Section I(i)(1) be revised to provide that (a) the 
Initial Audit Period cover the fourteen-month period from January 10, 
2017 through March 9, 2018, with the audit to be completed six months 
later (i.e., by September 9, 2018), and (b) the first Annual Review is 
to be completed three months before the completion of that audit (i.e., 
by June 9, 2018). UBS states that, thereafter, the annual audits should 
cover consecutive twelve-month periods (e.g., March 10, 2018 through 
March 9, 2019), with the same deadlines for completion of the audits 
and Annual Reviews (i.e., by September 9th and June 9th, respectively, 
of each year).
    The Department agrees that it would be beneficial and efficient for 
the time frame for the Annual Review to coordinate with the time frame 
for the compliance review conducted by the UBS QPAMs for other 
regulators. Therefore, the Department has modified Section I(i)(1) to 
provide that the Initial Audit Period is the consecutive fourteen-month 
period beginning on January 10, 2017. Each subsequent audit must cover 
consecutive twelve-month periods beginning at the end of the Initial 
Audit Period. Section I(i)(1) has also been modified, as requested, to 
confirm that for the time period from September 18, 2016 until the 
January 10, 2017 conviction date, the audit requirements in Section (g) 
of PTE 2013-09 remained in effect. Accordingly, the audit of such final 
time period under PTE 2013-09 had to have been completed and submitted 
within six (6) months of January 10, 2017 (that is, by July 9, 2017). 
This final audit required under PTE 2013-09 has been completed and the 
corresponding Audit Report has been submitted to the Department.
Comment VI--Deadline for Implementation of the Required Policies and 
Training--Sections: I(h)(1) and (2)
    Section I(h)(1) of the proposed exemption provides that: ``[E]ach 
UBS QPAM must immediately develop, implement, maintain, and follow 
written policies and procedures (the Policies) requiring and reasonably 
designed to ensure that: . . .'' Section I(h)(2) provides: ``[E]ach UBS 
QPAM must immediately develop and implement a program of training (the 
Training), conducted at least annually, for all relevant UBS QPAM 
asset/portfolio management, trading, legal, compliance, and internal 
audit personnel. The Training must:''
    UBS represents that PTE 2016-17 requires the UBS QPAMs to develop 
and implement the required policies, procedures, and training program 
within 6 months of the date of conviction while the proposed exemption 
requires the UBS QPAMs to ``immediately'' comply with these conditions 
which are substantially similar to those in the PTE 2016-17. UBS 
requests that Sections I(h)(1) and (2) in a final exemption be revised 
to require compliance by the dates set forth in Sections I(h)(1) and 
(2) of PTE 2016-17 in order to avoid any conflict between the 
conditions in PTE 2016-17 and the final exemption in the event a final 
exemption is granted before the occurrence of the 6-month deadline 
provided for in the PTE 2016-17.
    The Department emphasizes that the UBS QPAMs must comply with the 
Policies and Training requirements within both PTE 2016-17 and this 
exemption. The Department has determined not to revise Section I(h)(1) 
and I(h)(2) as requested by UBS. However, the Department has made minor 
revisions to reflect the fact that UBS QPAMs may already have Policies 
and Training under the previous exemption, in which case, they are 
required to ``maintain'' such Policies or Training.
Comment VII A--Notices to Plan Clients and Notices to Interested 
Persons--Section I(k)(1)
    Section I(k)(1) of the proposed exemption provides that: ``Notice 
to ERISA-covered plan and IRA clients. Within fifteen (15) days of the 
publication of this proposed five-year exemption in the Federal 
Register,

[[Page 61910]]

each UBS QPAM will provide a notice of the proposed five-year 
exemption, along with a separate summary describing the facts that led 
to the Convictions (the Summary), which have been submitted to the 
Department, and a prominently displayed statement (the Statement) that 
each Conviction separately results in a failure to meet a condition in 
PTE 84-14, to each sponsor of an ERISA-covered plan and each beneficial 
owner of an IRA for which a UBS QPAM provides asset management or other 
discretionary fiduciary services, or the sponsor of an investment fund 
in any case where a UBS QPAM acts only as a sub-advisor to the 
investment fund in which such ERISA-covered plan and IRA invests. In 
the event that this proposed five-year exemption is granted, the 
Federal Register copy of the notice of final five-year exemption must 
be delivered to such clients within sixty (60) days of its publication 
in the Federal Register, and may be delivered electronically (including 
by an email that has a link to the five-year exemption). Any 
prospective clients for which a UBS QPAM provides asset management or 
other discretionary fiduciary services must receive the proposed and 
final five-year exemptions with the Summary and the Statement prior to, 
or contemporaneously with, the client's receipt of a written asset 
management agreement from the UBS QPAM.''
    UBS requests that Section I(k)(1) be revised to require the notice 
only be provided to each sponsor of an ERISA-covered plan and each 
beneficial owner of an IRA for which the UBS QPAMS provides asset 
management or discretionary fiduciary services in reliance on PTE 84-
14. UBS also requests that Section I(k)(1) of the Exemption be revised 
to reflect the later date by which a certain number of plans and IRAs 
were provided with notice of the Proposed Exemption, as agreed to by 
the Department. Lastly, UBS requests that the Department confirm that 
the declaration required by 29 CFR 2570.43(c) will reflect that later 
date.
    The Department has narrowed the notice requirement to include only 
ERISA-covered plans and IRAs that would benefit from this knowledge 
(i.e. Covered Plans). The Department confirms that the UBS QPAMs had 63 
days after the proposed exemption was published in the Federal Register 
to notify interested persons and the declaration required by 29 CFR 
2570.43(c) should reflect the January 23, 2017 date.
Comment VII B--Notices to ``Non-Plan Clients''--Section I(k)(2)
    Section I(k)(2) of the proposed exemption provides that: ``Each UBS 
QPAM will provide a Federal Register copy of the proposed five-year 
exemption, a Federal Register copy of the final five-year exemption; 
the Summary; and the Statement to each: (A) Current Non-Plan Client 
within four (4) months of the effective date, if any, of a final five-
year exemption; and (B) Future Non-Plan Client prior to, or 
contemporaneously with, the client's receipt of a written asset 
management agreement, or other written contractual agreement, from the 
UBS QPAM. For purposes of this subparagraph (2), a Current Non-Plan 
Client means a client of a UBS QPAM that: Is neither an ERISA-covered 
plan nor an IRA; has assets managed by the UBS QPAM as of the effective 
date, if any, of a final five-year exemption; and has received a 
written representation (qualified or otherwise) from the UBS QPAM that 
such UBS QPAM qualifies as a QPAM or qualifies for the relief provided 
by PTE 84-14. . . .''
    UBS requests that the Department omit this requirement. UBS 
represents that the scope of exemptive relief, as contemplated by 
Section 408 of ERISA and the Department's regulations, is limited to 
plans and IRAs that are affected by the exemption. Therefore, it 
argues, a condition requiring notice be provided to UBS QPAM clients 
that are not ERISA-covered plans or IRAs and do not utilize PTE 84-14 
would be outside the scope of Section 408 of ERISA.
    Given the breadth of the notice requirement otherwise mandated by 
the exemption, and its decision to restrict the requirement to those 
arrangements for which QPAM status plays an integral role (i.e., the 
QPAM represents or relies upon its QPAM status), the Department has 
decided to delete this provision.
Comment VIII--Distribution of Audit Reports to Board Committees--
Section I(i)(8)
    Section I(i)(8) of the proposed exemption provides that: ``The Risk 
Committee, the Audit Committee, and the Corporate Culture and 
Responsibility Committee of UBS's Board of Directors are provided a 
copy of each Audit Report; and a senior executive officer of UBS's 
Compliance and Operational Risk Control function must review the Audit 
Report for each UBS QPAM and must certify in writing, under penalty of 
perjury, that such officer has reviewed each Audit Report;''
    UBS requests that the Department revise this condition to allow 
UBS's Board of Directors to select which committee (or committees) is 
provided a copy of each Audit Report. UBS agrees that the results of 
the annual audit should be communicated to the highest level of UBS's 
governance structure, but which committee receives the Audit Report is 
a matter of internal governance best determined by the UBS Board of 
Directors. UBS claims that this condition could become unworkable if 
the Board's committee structure and/or the responsibilities of the 
Board's committees were to change. Alternatively, UBS requests that 
Section I(i)(8) be modified to limit the requirement to provide a copy 
of the Audit Report to the Risk Committee of UBS's Board of Directors.
    In light of the importance of ensuring proper review of the Audit 
Report, the Department declines to alter this provision to permit UBS's 
Board of Directors to decide, in its discretion, which committee 
receives the Audit Report. However, after review of the record, the 
Department has revised Section I(i)(8) to reflect that only the Risk 
Committee of the UBS Board Directors must be provided a copy of the 
Audit Report.
Section I(i)(4)--Auditor Testing Operational Compliance
    Section I(i)(4) of the proposed exemption requires the auditor to 
``test each UBS QPAM's operational compliance with the Policies and 
Training. In this regard, the auditor must test a sample of each QPAM's 
transactions involving ERISA-covered plans and IRAs sufficient in size 
and nature to afford the auditor a reasonable basis to determine the 
operational compliance with the Policies and Training.'' UBS has 
requested that this Section be modified to include the phrase ``in 
reliance on PTE 84-14'' following the phrase ``involving ERISA-covered 
plans and IRAs.''
    The Department revised this condition for consistency with other 
conditions of this exemption that are tailored to the Department's 
interest in protecting Covered Plans.
Additional Audit Requirement Revisions--Sections I(i)(2), I(i)(5), 
I(i)(7), I(i)(9), I(i)(11), I(i)(12)
    In addition to the revisions to the audit requirement for Section 
I(i)(1), I(i)(4), and i(i)(8) described above, the Department, on its 
own motion, determined to make revisions to the following Sections to 
enhance the workability of the audit and the exemption:

[[Page 61911]]

    Section I(i)(2) of the proposed exemption provides that ``[t]o the 
extent necessary for the auditor, in its sole opinion, to complete its 
audit and comply with the conditions for relief described herein, and 
as permitted by law, each UBS QPAM and, if applicable, UBS, will grant 
the auditor unconditional access to its business, including, but not 
limited to: Its computer systems; business records; transactional data; 
workplace locations; training materials; and personnel.'' In the 
Department's view, to ensure a thorough and robust audit, the 
independent auditor must be granted access to information it deems 
necessary to make sound conclusions. However, access to such 
information must be within the scope of the audit engagement and 
limited to information relevant to the auditor's objectives as 
specified by the terms of this exemption and denied only to the extent 
any disclosure is not permitted by state or federal statute or involves 
communications subject to attorney client privilege. The Department has 
modified Section I(i)(2)accordingly.
    Section I(i)(5) of the proposed exemption provides that ``[f]or 
each audit, on or before the end of the relevant period described in 
Section I(i)(1) for completing the audit, the auditor must issue a 
written report (the Audit Report) to UBS and the UBS QPAM to which the 
audit applies that describes the procedures performed by the auditor 
during the course of its examination. The Audit Report must include the 
auditor's specific determinations regarding:
    (i) The adequacy of the UBS QPAM's Policies and Training; the UBS 
QPAM's compliance with the Policies and Training; the need, if any, to 
strengthen such Policies and Training; and any instance of the 
respective UBS QPAM's noncompliance with the written Policies and 
Training described in Section I(h) above. 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 UBS QPAM must be promptly 
addressed by such UBS QPAM, and any action taken by such UBS QPAM to 
address such recommendations must be included in an addendum to the 
Audit Report (which addendum is completed prior to the certification 
described in Section I(i)(7) below). Any determination by the auditor 
that the respective UBS 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 the UBS QPAM has complied with the 
requirements under this subsection must be based on evidence that 
demonstrates the UBS QPAM has actually implemented, maintained, and 
followed the Policies and Training required by this five-year 
exemption. Furthermore, the auditor must not rely on the Annual Report 
created by the Compliance Officer as described in Section I(m) below in 
lieu of independent determinations and testing performed by the auditor 
as required by Section I(i)(3) and (4) above; and
    (ii) The adequacy of the Annual Review described in Section I(m) 
and the resources provided to the Compliance officer in connection with 
such Annual Review;
    The Department modified Section I(i)(5) to clarify that the auditor 
may issue one consolidated Audit Report covering all the UBS QPAMS for 
the period of time being audited.
    The Department acknowledges that the UBS QPAMs' efforts to address 
the auditor's recommendations regarding any inadequacy in the Policies 
and Training identified by the auditor may take longer to implement 
than the time limits mandated by the proposed exemption. Accordingly, 
the Department is modifying Section I(i)(5)(i) to reflect the 
possibility that the UBS QPAMs' efforts to address the auditor's 
recommendations regarding any inadequacy in the Policies and Training 
may not be completed by the submission date of the Audit Report and may 
involve a written plan to address such items. However, any 
noncompliance identified by the auditor must be promptly addressed. The 
revised Section also requires that if such a plan of action to address 
the auditor's recommendation as to the adequacy of the Policies and 
Training is not completed by the submission of the Audit Report, the 
following period's Audit Report, must state whether the plan was 
satisfactorily completed. Additionally, the Department has modified the 
final sentence in Section I(i)(5)(i) to more clearly express the 
Department's intent that the auditor must not rely solely on the work 
of the Compliance Officer and the Annual Report in formulating its 
conclusions or findings. The Auditor must perform its own independent 
testing to formulate its conclusions. This exemption does not prohibit 
the auditor from considering the Compliance Officer's Annual Report in 
carrying out its audit function, including its formulation of an audit 
plan. This exemption, however, does prohibit the auditor from reaching 
conclusions that are exclusively based upon the contents of the 
Compliance Officer's Annual Report.
    While an independent assessment by the auditor of the adequacy of 
the Annual Review is essential to providing the Department with the 
assurance that the Applicant and the UBS QPAMs have given these matters 
the utmost priority and have taken the necessary actions to comply with 
the exemption, the Department has determined that the auditor should 
not be responsible for opining on the adequacy of the resources 
allocated to the Compliance Officer and on its own motion, has modified 
Section I(i)(5)(ii) accordingly.
    Section I(i)(7) of the proposed exemption provides that ``[w]ith 
respect to each Audit Report, the General Counsel, or one of the three 
most senior executive officers of the UBS QPAM to which the Audit 
Report applies, must certify in writing, under penalty of perjury, that 
the officer has reviewed the Audit Report and this five-year exemption; 
addressed, corrected, or remedied any inadequacy identified in the 
Audit Report; and determined that the Policies and Training in effect 
at the time of signing are adequate to ensure compliance with the 
conditions of this proposed five-year exemption and with the applicable 
provisions of ERISA and the Code.'' UBS requested that the Department 
add the phrase ``to the best of such officer's knowledge at the time'' 
to this condition. The Department has revised Section I(i)(7) as 
requested by clarifying that the certification be made to the best of 
such officer's knowledge at the time.
    Furthermore, in coordination with the changes to Section I(i)(5)(i) 
discussed above, the Department revised Section I(i)(7) to acknowledge 
that the Applicant's efforts to address the auditor's recommendations 
regarding inadequacies in the Policies and Training identified by the 
auditor, may take longer to implement than the timeframe to submit the 
certified Audit Report. With respect to this issue, the Department did 
not intend to limit corrective actions to those that could only be 
completed prior to the submission of the Audit Report. Therefore, the 
Department has modified Section I(i)(7) to reflect that the senior 
officer may certify that a written plan to address the inadequacies 
regarding the Policies and Training identified in the Audit Report is 
in place.
    Section I(i)(9) of the proposed exemption provides that ``[e]ach 
UBS QPAM must provide its certified Audit Report, by regular mail to: 
the Department's Office of Exemption Determinations (OED), 200 
Constitution

[[Page 61912]]

Avenue NW, Suite 400, Washington DC 20210, or by private carrier to: 
122 C Street NW, Suite 400, Washington, DC 20001-2109, no later than 45 
days following its completion. The Audit Report will be part of the 
public record regarding this five-year exemption. Furthermore, each UBS 
QPAM must make its Audit Report unconditionally available for 
examination by any duly authorized employee or representative of the 
Department, other relevant regulators, and any fiduciary of an ERISA-
covered plan or IRA, the assets of which are managed by such UBS 
QPAM.'' While the Department has an interest in ensuring that the 
conditions of this exemption broadly protect ERISA-covered plans and 
IRAs that have relied on QPAM status in deciding to enter into an 
agreement with the UBS QPAMs, the Department has revised Section 
I(i)(9) to clarify that the UBS QPAMs are required to make the 
documents available to any fiduciary of a Covered Plan. Additionally, 
the Department decided to require that the Audit Report be provided to 
the Department within 30 days following its completion. The Audit 
Report, in any event, will be incorporated into the public record 
attributable to this exemption, under Exemption Application Number D-
11907, and, therefore, independently accessible by members of the 
public. Accordingly, the Department has decided to revise the condition 
by replacing the phrase ``an ERISA-covered plan or IRA, the assets of 
which are managed by such UBS QPAM'' with the term ``Covered Plan'' (as 
defined in Section II(b)). Lastly, the Department agrees that access to 
the Audit Report need only be upon request and such access can be 
electronic, and has revised the exemption accordingly.
    Section I(i)(10) of the proposed exemption provides that ``[e]ach 
UBS QPAM and the auditor must submit to OED: (A) any engagement 
agreement entered into pursuant to the engagement of the auditor under 
this five-year exemption; and (B) any engagement agreement entered into 
with any other entity retained in connection with such QPAM's 
compliance with the Training or Policies conditions of this proposed 
five-year exemption, no later than six (6) months after the effective 
date of this five-year exemption (and one month after the execution of 
any agreement thereafter).'' To remove any confusion and uncertainty 
regarding the timing of the submission of the auditor's and other 
entity's engagement agreements, the Department has modified Section 
I(i)(10) to require that the auditor's engagement agreement and the 
engagement agreements with other entities retained in connection with 
such UBS QPAM's compliance with the Training or Policies be submitted 
to the OED no later than two (2) months after the engagement agreement 
is entered into by the Applicant and the independent auditor or other 
entity.
    Section I(i)(11) of the proposed exemption requires that, ``[t]he 
auditor must provide OED, upon request, all of the workpapers created 
and utilized in the course of the audit, including, but not limited to: 
The audit plan; audit testing; identification of any instance of 
noncompliance by the relevant UBS QPAM; and an explanation of any 
corrective or remedial action taken by the applicable UBS QPAM.'' The 
Department acknowledges that certain information contained in the audit 
workpapers may be confidential and proprietary, and having that 
information in the public file may create needless or avoidable 
disclosure issues. Therefore, the Department has determined to modify 
Section I(i)(11) to remove the requirement that the auditor provide the 
workpapers to OED, and instead require that the auditor provide access 
to the workpapers for the Department's review and inspection.
    Section I(i)(12) of the proposed five-year exemption requires that 
``UBS must notify the Department at least 30 days prior to any 
substitution of an auditor, except that no such replacement will meet 
the requirements of this paragraph unless and until UBS demonstrates to 
the Department's satisfaction that such new auditor is independent of 
UBS, experienced in the matters that are the subject of the five-year 
exemption and capable of making the determinations required of this 
five-year exemption.''
    The Department decided to remove the requirement for UBS to 
demonstrate the independence and qualifications of the auditor to the 
Department. The exemption requires instead that UBS, no later than two 
(2) months from the engagement of the replacement auditor, notify the 
Department of a change in auditor and of the reason(s) for the 
substitution including any material disputes between the terminated 
auditor and UBS. UBS's fiduciary obligations with respect to the 
selection of the auditor, as well as the significant role a credible 
selection plays in reducing the need for more extensive oversight by 
the Department, should be sufficient to safeguard the selection 
process.
No-Fault Provision--Failure of Auditor--Section I(s)
    Section I(s) of the proposed exemption provides that ``[a] UBS QPAM 
will not fail to meet the terms of this five-year exemption, solely 
because a different UBS QPAM fails to satisfy a condition for relief 
under this five-year exemption described in Sections I(c), (d), (h), 
(i), (j), (k), (l), (p), and (r).'' The Department modified this 
condition so the failure of the auditor to comply with any of the 
conditions of the exemption, with the exception of Section I(i)(11) 
regarding access to the auditor's workpapers, will not be treated as a 
failure by the UBS QPAMs to comply with the conditions of the exemption 
provided that such failure was not due to the actions or inactions of 
UBS or its affiliates.
Comment IX--Additional Requested Revisions
    In granting PTE 2016-17, the Department made several modifications 
to the proposed temporary exemption both at the request of UBS and on 
the Department's own initiative. UBS requested that the Department make 
the revisions that were made in PTE 2016-17 to the corresponding 
conditions in this exemption and additional revisions to certain of 
these Sections. The Department has addressed these requests as follows:
Knowing or Tacit Approval--Section I(a) and I(c)
    Section I(a) of the proposed exemption provides, ``[t]he UBS QPAMs 
(including their officers, directors, agents other than UBS, and 
employees of such UBS QPAMs) did not know of, have reason to know of, 
or participate in: (1) the FX Misconduct; or (2) the criminal conduct 
that is the subject of the Convictions (for the purposes of this 
Section I(a), ``participate in'' includes the knowing or tacit approval 
of the FX Misconduct or the misconduct that is the subject of the 
Convictions).''
    Section I(c) of the proposed exemption provides, ``[t]he UBS QPAMs 
will not employ or knowingly engage any of the individuals that 
participated in: (1) the FX Misconduct or (2) the criminal conduct that 
is the subject of the Convictions (for the purposes of this Section 
I(c), ``participated in'' includes the knowing or tacit approval of the 
FX Misconduct or the misconduct that is the subject of the 
Convictions).''
    UBS requests that the words ``or tacit'' in the phrase ``knowing or 
tacit approval'' be deleted in Sections I(a) and I(c) and be replaced 
with ``knowing approval'' in a final exemption, to avoid any ambiguity 
or confusion as to the definition of ``participate in.''
    After consideration of UBS's comments, the Department revised the 
condition in the manner requested by the Applicant.

[[Page 61913]]

Receipt of Compensation--Section I(b)
    Section I(b) of the proposed exemption provides, ``[t]he UBS QPAMs 
(including their officers, directors, agents other than UBS, and 
employees of such UBS QPAMs) did not receive direct compensation, or 
knowingly receive indirect compensation, in connection with: (1) the FX 
Misconduct; or (2) the criminal conduct that is the subject of the 
Convictions.''
    UBS requests that the Department replace ``receive direct 
compensation, or knowingly receive indirect compensation'' with 
``knowingly receive compensation.'' UBS claims this change is 
consistent with the underlying purpose of the condition and avoids any 
ambiguity or confusion regarding the meaning of ``direct'' and 
``indirect compensation.''
    The Department does not agree that the terms ``direct and 
``indirect'' create ambiguity or confusion and has not made the 
requested revision. It is the Department's intent to preclude relief 
herein if any asset management personnel of the UBS QPAMs received 
direct compensation, or knowingly received indirect compensation, in 
connection with the FX Misconduct or the criminal conduct that is the 
subject of the Convictions and therefore has not revised Section I(b).
UBS QPAM Will Not Use Its Authority or Influence--Section I(d)
    Section I(d) of the proposed exemption provides that ``[a] UBS QPAM 
will not use its authority or influence to direct an ``investment 
fund'' (as defined in Section VI(b) of PTE 84-14), that is subject to 
ERISA or the Code and managed by such UBS QPAM to enter into any 
transaction with UBS or UBS Securities Japan or engage UBS or UBS 
Securities Japan 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.'' UBS 
has requested that the phrase ``in reliance on PTE 84-14'' be added to 
this condition following the phrase ``managed by such UBS QPAM.''
    After considering the Applicant's comment, the Department has 
revised the exemption to clarify that Section I(d) applies to 
``investment funds'' managed by the UBS QPAM with respect to Covered 
Plans.
Provision of Asset Management Services--Section I(g)
    Section I(g) provides that ``UBS and UBS Securities Japan will not 
provide discretionary asset management services to ERISA-covered plans 
or IRAs, nor will otherwise act as a fiduciary with respect to ERISA-
covered plan or IRA assets.'' UBS requested that the Department modify 
Section I(g) in conformity with PTE 2016-17 to clarify that UBS and UBS 
Securities Japan will not violate this condition in the event that they 
inadvertently become investment advice fiduciaries and that UBS can act 
as a fiduciary for plans that it sponsors for its own employees or 
employees of an affiliate. The Department has modified Section I(g) 
accordingly.
Termination and Withdrawal Restrictions--Section I(j)(3)
    Under Section I(j)(4) of the proposed exemption, the UBS QPAMs 
agree: ``[n]ot to restrict the ability of such ERISA-covered plan or 
IRA to terminate or withdraw from its arrangement with the UBS QPAM 
(including 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 as a result of an actual 
lack of liquidity of the underlying assets, provided that such 
restrictions are applied consistently and in like manner to all such 
investors.''
    UBS requested that the Department revise Section I(j)(3) (formerly 
Section I(j)(4) in the proposed exemption) to be consistent with the 
language used for this condition in PTE 2016-17. Consistent with PTE 
2016-17, the Department has revised Section I(j)(4) clarifying the 
circumstances under which reasonable restrictions are necessary to 
protect the remaining investors in a pooled fund and to also clarify 
that in any such event the restrictions must be reasonable and last no 
longer than reasonably necessary to remedy the adverse consequences.
Notice of Obligations--Section I(j)(7)
    Section I(j)(8) of the proposed exemption provides that ``[w]ithin 
four (4) months of the effective date of this proposed five-year 
exemption, each UBS QPAM must provide a notice of its obligations under 
this Section I(j) to each ERISA-covered plan and IRA for which the UBS 
QPAM provides asset management or other discretionary fiduciary 
services. For all other prospective ERISA-covered plan and IRA clients 
for which a UBS QPAM provides asset management or other discretionary 
fiduciary services, the UBS QPAM will agree in writing to its 
obligations under this Section I(j) in an updated investment management 
agreement or advisory agreement between the UBS QPAM and such clients 
or other written contractual agreement.'' In addition to requesting 
that Section I(j)(8) of the proposed exemption be revised to reflect 
the changes made in PTE 2016-17, UBS requests that that the requirement 
in Section I(j)(8) be limited to ERISA-covered plans and IRAs for which 
the UBS QPAM provides asset management or other discretionary fiduciary 
services in reliance on PTE 84-14 and that the phrase ``all other 
prospective'' be replaced with the word ``new.''
    As previously noted, this Section has been renumbered so that 
Section I(j)(8) of the proposed exemption is now Section I(j)(7) in 
this exemption.
    As noted above, the Department has an interest in protecting an 
ERISA-covered plan or IRA that enters into an asset management 
agreement with a UBS QPAM in reliance on the manager's qualification as 
a QPAM, regardless of whether the QPAM relies on the class exemption 
when managing the assets of the ERISA-covered plan or IRA. The 
Department has revised the applicability of this condition to more 
closely reflect this interest, and the condition now applies to Covered 
Plans. The Department has also modified the condition so that a UBS 
QPAM will not violate the condition solely because a Covered Plan 
refuses to sign an updated investment management agreement. 
Furthermore, the condition has been modified to coordinate with PTE 
2016-17, so that a notice that satisfies Section I(j)(8) of that 
exemption will satisfy renumbered Section I(j)(7) of this exemption, 
unless the notice contains any language that limits, or is inconsistent 
with, the scope of this exemption. The Department declines to replace 
the phrase ``all other prospective'' with the word ``new.'' The 
Department's intention for the sentence beginning ``[f]or all other 
prospective'' in Section I(j)(8) of the proposed exemption was to 
ensure that prospective clients for which a UBS QPAM does not yet 
provide asset management of other fiduciary services are informed of 
the UBS QPAM's obligations under Section I(j). Consistent with the 
request by UBS, the condition has been modified so that the notice must 
be provided July 9, 2018.

[[Page 61914]]

Policies and Procedures Relating to Compliance With ERISA and the 
Code--Sections I(h)(I)(1)(ii)-(v)

    Section I(h)(1)(ii)-(v) of the proposed exemption provide, ``(h)(1) 
[e]ach UBS QPAM must immediately develop, implement, maintain, and 
follow written policies and procedures (the Policies) requiring and 
reasonably designed to ensure that: . . .
    (ii) The UBS QPAM fully complies with ERISA's fiduciary duties, and 
with ERISA and the Code's prohibited transaction provisions, and does 
not knowingly participate in any violation of these duties and 
provisions with respect to ERISA-covered plans and IRAs;
    (iii) The UBS QPAM does not knowingly participate in any other 
person's violation of ERISA or the Code with respect to ERISA-covered 
plans and IRAs;
    (iv) Any filings or statements made by the UBS 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 ERISA-covered plans or IRAs are 
materially accurate and complete, to the best of such QPAM's knowledge 
at that time;
    (v)[t]he UBS QPAM does not make material misrepresentations or omit 
material information in its communications with such regulators with 
respect to ERISA-covered plans or IRAs, or make material 
misrepresentations or omit material information in its communications 
with ERISA-covered plan and IRA clients.''
    UBS requests that Section I(h)(1)(v) be revised to add language 
similar to that found in Section I(h)(1)(iv), indicating that the UBS 
QPAMs must implement policies designed to avoid any such 
misrepresentations ``to the best of such QPAM's knowledge at the 
time.''
    The Department has modified the Policies' requirement of adherence 
to the fiduciary and prohibited transaction provisions of ERISA and the 
Code so that the Policies expressly focus on the provisions only to the 
extent ``applicable'' under ERISA and the Code. In general, however, 
the Department has otherwise retained the stringency and breadth of the 
Policies requirement, which is more than justified by the repeated 
compliance and oversight failures exhibited by UBS throughout the 
period of time during which the criminal misconduct persisted.
    The specific elements of the Policies requirement as set forth in 
this exemption are essential to its protective purposes. In approving 
this exemption, the Department significantly relies upon conditions 
designed to ensure that those relying upon its term for prohibited 
transaction relief will adopt a culture of compliance centered on the 
basic principles and obligations set forth in the Policies requirement. 
These standards are core protections of this exemption.
    The Department has made some additional changes, however, which 
should not detract from the Policies' protective purpose. Thus, as 
requested by UBS, subsection (v) has been revised to contain the ``to 
the best of QPAM's knowledge at the time'' concept found in subsection 
(iv). Additionally, the applicability of subsections (iv) and (v) has 
been narrowed to Covered Plans. To the extent a UBS QPAM would prefer 
not to be subject to this provision, however, it may expressly disclaim 
reliance on QPAM status or PTE 84-14 in entering into its contract with 
the Covered Plan. This revision is consistent with the Department's 
intent to protect ERISA-covered plans and IRAs that have hired a UBS 
QPAM in reliance on PTE 84-14 or based on the manager's express 
representation that it relies on or qualifies under PTE 84-14.
Correction of Violations and Failures To Comply--Section I(h)(vii)
    Section I(h)(1)(vii) of the proposed exemption provides that 
``[a]ny violation of, or failure to comply with, an item in 
subparagraphs (ii) through (vi), is corrected promptly upon discovery, 
and any such violation or compliance failure not promptly corrected is 
reported, upon discovery of such 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 
UBS QPAM, the independent auditor responsible for reviewing compliance 
with the Policies, and an appropriate fiduciary of any affected ERISA-
covered plan or IRA that is independent of UBS; however, with respect 
to any ERISA-covered plan or IRA sponsored by an ``affiliate'' (as 
defined in Section VI(d) of PTE 84-14) of UBS or beneficially owned by 
an employee of UBS or its affiliates, such fiduciary does not need to 
be independent of UBS. A UBS QPAM will not be treated as having failed 
to develop, implement, maintain, or follow the Policies, provided that 
it corrects any instance of noncompliance promptly 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).''
    UBS requests that this section be revised to clarify that any 
compliance failures that are discovered must be promptly corrected ``to 
the extent possible'' and to limit the second clause of the last 
sentence to any ``material'' ``instance of non-compliance'' that the 
UBS QPAM ``reasonably should have known about.''
    The Department has based the conditions of this exemption on both 
the particular facts of the UBS cases and its experience over time with 
previous exemptions. For the reasons set out herein, the Department has 
concluded that the specific conditions of this exemption are 
appropriate and give the Department a reasonable basis for concluding 
that the exemptions are appropriately protective of affected plans and 
IRAs. As noted above, a central aim of the exemption is to ensure that 
those relying upon the exemption for relief from the prohibited 
transaction rules will consistently act to promote a culture of 
fiduciary compliance, notwithstanding the conduct that violated Section 
I(g) of PTE 84-14.
    While the Department declines to narrow and qualify this 
subparagraph (vii) with the specific language revision requested by 
UBS, after consideration, the Department will not condition the 
exemption on a requirement for notification of violations to an 
appropriate fiduciary of any affected ERISA-covered plan or IRA that is 
independent of UBS. Additionally, the Department has revised the term 
``corrected promptly'' for consistency with the Department's intent 
that violations or compliance failures be corrected ``as soon as 
reasonably possible upon discovery or as soon after the QPAM reasonably 
should have known of the noncompliance (whichever is earlier).'' 
However, the Department intends to preclude relief to the extent 
violations or failures are not corrected as required by the exemption.
Compliance Officer Certification--Section I(m)(2)(iii)
    Section I(m)(2)(iii) of the proposes exemption provides: ``In each 
Annual Report, the Compliance Officer must certify in writing that to 
his or her knowledge: (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 preceding year and 
any related correction taken to date have been

[[Page 61915]]

identified in the Annual Report; (D) the UBS QPAMs have complied with 
the Policies and Training in all respects, and/or corrected any 
instances of noncompliance in accordance with Section I(h) above; and 
(E) UBS has provided the Compliance Officer with adequate resources, 
including, but not limited to, adequate staffing.'' UBS seeks to have 
Section I(m)(2)(iii) revised to clarify that the certifications must be 
made to the best of the Compliance Officer's knowledge at the time 
based on the Annual Review. UBS also requests that Section 
I(m)(2)(iii)(D) be revised to require the Compliance Officer certify 
that the UBS QPAM has corrected ``to the extent possible'' any 
``known'' instances of noncompliance.
    The Department has accepted UBS's request in part and has revised 
this condition accordingly. Accordingly, Section I(m)(iii) has been 
modified to require the Compliance Officer to certify in writing ``to 
the best of his or her knowledge at the time'' and Section 
I(m)(2)(iii)(D) has be modified to add the word ``known'' before the 
word ``instances.'' However, the Department has declined to narrow 
Section I(m)(iii)(D) by adding the phrase ``to the extent'' possible. 
The Department notes this subparagraph requires that the noncompliance 
is corrected in accordance with Section I(h) and Section I(h) has been 
revised to allow for such correction to occur ``as soon as reasonably 
possible upon discovery or as soon after the QPAM reasonably should 
have known of the noncompliance (whichever is earlier).''
Notice of Right To Obtain Copy of Policies--Section I(r)
    Section I(r) of the proposed exemption provides that, ``[e]ach UBS 
QPAM, in its agreements with ERISA-covered plan and IRA clients, or in 
other written disclosures provided to ERISA-covered plan and IRA 
clients, within 60 days prior to the initial transaction upon which 
relief hereunder is relied, and then at least once annually, will 
clearly and prominently: inform the ERISA-covered plan or IRA client 
that the client has the right to obtain copies of the QPAM's written 
Policies adopted in accordance with this five-year exemption.''
    UBS argues that the requirement to provide the disclosure in 
Section I(r) sixty (60) days prior to a transaction entered into in 
reliance on this exemption is not in the interest of UBS's current or 
future ERISA-covered plan and IRA clients. UBS therefore requests that 
Section I(r) be revised to remove the requirement that the notification 
be made 60 days prior to the initial transaction that is conducted in 
reliance on the exemption. UBS represents that the 60 advance notice 
would effectively place a ``freeze'' on the management of new clients 
accounts and therefore could deprive ERISA-covered Plans and IRA 
clients the opportunity to enter into beneficial transactions during 
the 60-day period, such as time-sensitive transactions to transition 
new clients' existing investments to new investments or transactions 
designed to reduce clients' risk exposure. UBS also claims that 
complying with a 60-day advance notice requirement would be impossible 
with regard to existing UBS QPAM clients who may have committed to or 
entered into transactions in reliance on this exemption. For example, 
UBS represents that some clients may have entered into transactions 
which are scheduled to occur simultaneously with the granting of this 
exemption, rendering it impossible for a QPAM to give sixty (60) days 
prior notice. Additionally, UBS requests that the phrase ``to which 
such UBS QPAM intends to provide services in reliance upon this 
exemption'' be added to this condition.
    Affording Covered Plans a means by which to review and understand 
the Policies implemented in connection with this exemption is a vital 
protection that is fundamental to this exemption's purpose. However, 
the Department has modified the condition so that the UBS QPAMs, at 
their election, may instead provide Covered Plans a disclosure that 
accurately describes or summarizes key components of the Policies, 
rather than provide the Policies in their entirety. The Department has 
also determined that such disclosure may be continuously maintained on 
a website, provided that the website link to the summary of the written 
Policies is clearly and prominently disclosed to those Covered Plan 
clients to whom this section applies. The Department also agrees with 
the Applicant that the timing requirement for disclosure should be 
revised and, accordingly, has modified the condition of Section I(p) to 
require notice regarding the information on the website within 60 days 
of the effective date of this exemption, and thereafter to the extent 
certain material changes are made to the Policies.
Definition of ``Convictions'' and ``Conviction Date''--Section II(a) 
and II(d)
    Section II(a) of the proposed exemption provides that ``The term 
`Convictions' means the 2013 Conviction and the 2016 Conviction. The 
term ``2013 Conviction'' means the judgment of conviction against UBS 
Securities Japan Co. Ltd. in Case Number 3:12-cr-00268-RNC in the U.S. 
District Court for the District of Connecticut for one count of wire 
fraud in violation of Title 18, United Sates Code, sections 1343 and 2 
in connection with submission of YEN London Interbank Offered Rates and 
other benchmark interest rates. The term `2016 Conviction' means the 
anticipated judgment of conviction against UBS AG in Case Number 3:15-
cr-00076-RNC in the U.S. District Court for the District of Connecticut 
for one count of wire fraud in violation of Title 18, United States 
Code, Sections 1343 and 2 in connection with UBS's submission of Yen 
London Interbank Offered Rates and other benchmark interest rates 
between 2001 and 2010. For all purposes under this proposed five-year 
exemption, `conduct' of any person or entity that is the `subject of 
[a] Conviction' encompasses any conduct of UBS and/or their personnel, 
that is described in the Plea Agreement, (including Exhibits 1 and 3 
attached thereto), and other official regulatory or judicial factual 
findings that are a part of this record.'' UBS has requested the 
definition of ``convictions'' in Section II(a) be revised to reflect 
the corresponding changes made in PTE 2016-17 and to reflect that the 
``2016 Conviction'' occurred in 2017 and should therefore be referred 
to as the ``2017 Conviction.'' UBS also requested that the definition 
of ``Conviction Date'' in Section II(d) be revised to ``January 5, 
2017.''
    The Department concurs with UBS and has revised the definition of 
the term ``Convictions'' in Section II(a) to be consistent with the 
definition provided in Section II(a) of PTE 2016-17 and has revised 
Sections II(a) and II(d) to replace the phrase ``2016 Conviction'' with 
``2017 Conviction.'' Additionally, the Department has deleted the 
references to ``Conviction Date'' within the exemption. The Department 
notes that PTE 84-14 references the ``the date of the judgment of the 
trial court.'' Because that date is January 10, 2017, the compliance 
dates in this exemption are determined with reference to January 10, 
2017.
Definition of ``UBS QPAM''--Section II(b)
    Section II(b) of the proposed exemption provides in part that 
``[t]he term `UBS QPAM' excludes the parent entity, UBS AG and UBS 
Securities Japan.'' UBS has requested that the term ``the parent 
entity'' be deleted from this Section. The Department has made the 
requested revision and removed the

[[Page 61916]]

term ``the parent entity'' from Section II(B).
Comment--Letter from House Committee on Financial Services
    The Department also received a comment letter from certain members 
of Congress (the Members) regarding this exemption, as well as 
regarding other QPAM-related proposed one year exemptions. In the 
letter, the Members stated that certain conditions contained in these 
proposed exemptions are crucial to protecting the investments of our 
nation's workers and retirees, referring to proposed conditions which 
require each bank to: (a) Indemnify and hold harmless ERISA-covered 
plans and IRAs for any damages resulting from the future misconduct of 
such bank; and (b) disclose to the Department any Deferred Prosecution 
Agreement or a Non-Prosecution Agreement with the U.S. Department of 
Justice. The Members also requested that the Department hold hearings 
in connection with the proposed exemptions.
    The Department acknowledges the Members' concerns regarding the 
need for public discourse regarding proposed exemptions. To this end, 
the Department's procedures regarding prohibited transaction exemption 
requests under ERISA (the Exemption Procedures) afford interested 
persons the opportunity to request a hearing. Specifically, section 
2570.46(a) of the Exemption Procedures provides that, ``[a]ny 
interested person who may be adversely affected by an exemption which 
the Department proposes to grant from the restrictions of section 
406(b) of ERISA, section 4975(c)(1)(E) or (F) of the Code, or section 
8477(c)(2) of FERSA may request a hearing before the Department within 
the period of time specified in the Federal Register notice of the 
proposed exemption.'' The Exemption Procedures provide that ``[t]he 
Department will grant a request for a hearing made in accordance with 
paragraph (a) of this section where a hearing is necessary to fully 
explore material factual issues identified by the person requesting the 
hearing.'' The Exemption Procedures also provide that ``[t]he 
Department may decline to hold a hearing where: (1) The request for the 
hearing does not meet the requirements of paragraph (a) of this 
section; (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.'' \68\
---------------------------------------------------------------------------

    \68\ 29 CFR part 2570, published at 76 FR 66653 (October 27, 
2011).
---------------------------------------------------------------------------

    While the Members' letter raises important policy issues, it does 
not appear to raise specific material factual issues. The Department 
previously explored a wide range of legal and policy issues regarding 
Section I(g) of the QPAM Exemption during a public hearing held on 
January 15, 2015 in connection with the Department's proposed exemption 
involving Credit Suisse AG, and has determined that an additional 
hearing on these issues is not necessary.
    After giving full consideration to the record, the Department has 
decided to grant the exemption, as described above. The complete 
application file (Application No. D-11907) is available for public 
inspection in the Public Disclosure Room of the Employee Benefits 
Security Administration, Room N-1515, U.S. Department of Labor, 200 
Constitution Avenue NW, Washington, DC 20210.
    For a more complete statement of the facts and representations 
supporting the Department's decision to grant this exemption, refer to 
the notice of proposed exemption published on November 21, 2016 at 81 
FR 83385.

Exemption

Section I: Covered Transactions
    Certain entities with specified relationships to UBS, AG 
(hereinafter, the UBS QPAMs as defined in Section II(h)) will not be 
precluded from relying on the exemptive relief provided by Prohibited 
Transaction Class Exemption 84-14 (PTE 84-14 or the QPAM 
Exemption),\69\ notwithstanding the 2013 Conviction against UBS 
Securities Japan Co., Ltd. and the 2017 Conviction against UBS, AG 
(collectively the Convictions, as defined in Section II(a)),\70\ during 
the Exemption Period, provided that the following conditions are 
satisfied:
---------------------------------------------------------------------------

    \69\ 49 FR 9494 (March 13, 1984), as corrected at 50 FR 41430 
(October 10, 1985), as amended at 70 FR 49305 (August 23, 2005), and 
as amended at 75 FR 38837 (July 6, 2010).
    \70\ 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 criminal activity therein described.
---------------------------------------------------------------------------

    (a) The UBS QPAMs (including their officers, directors, agents 
other than UBS, and employees of such UBS QPAMs) did not know of, did 
not have reason to know of, or participate in: (1) The FX Misconduct; 
or (2) the criminal conduct that is the subject of the Convictions (for 
the purposes of this Section I(a), ``participate in'' includes the 
knowing approval of the FX Misconduct or the misconduct that is the 
subject of the Convictions);
    (b) The UBS QPAMs (including their officers, directors, agents 
other than UBS, and employees of such UBS QPAMs) did not receive direct 
compensation, or knowingly receive indirect compensation, in connection 
with: (1) The FX Misconduct; or (2) the criminal conduct that is the 
subject of the Convictions;
    (c) The UBS QPAMs will not employ or knowingly engage any of the 
individuals that participated in: (1) The FX Misconduct or (2) the 
criminal conduct that is the subject of the Convictions (for the 
purposes of this Section I(c), ``participated in'' includes the knowing 
approval of the FX Misconduct or the misconduct that is the subject of 
the Convictions);
    (d) At all times during the Exemption Period, no UBS QPAM will use 
its authority or influence to direct an ``investment fund'' (as defined 
in Section VI(b) of PTE 84-14) that is subject to ERISA or the Code and 
managed by such UBS QPAM with respect to one of more Covered Plans, to 
enter into any transaction with UBS or UBS Securities Japan or engage 
UBS or UBS Securities Japan 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 UBS QPAMs to satisfy Section I(g) of PTE 84-
14 arose solely from the Convictions;
    (f) A UBS QPAM did not exercise authority over the assets of any 
plan subject to Part 4 of Title I of ERISA (an ERISA-covered plan) or 
section 4975 of the Code (an IRA) in a manner that it knew or should 
have known would: Further the FX Misconduct or the criminal conduct 
that is the subject of the Convictions; or cause the UBS QPAM, its 
affiliates or related parties to directly or indirectly profit from the 
FX Misconduct or the criminal conduct that is the subject of the 
Convictions;
    (g) Other than with respect to employee benefit plans maintained or 
sponsored for its own employees or the employees of an affiliate, UBS 
and UBS Securities Japan will not act as a fiduciary within the meaning 
of section 3(21)(A)(i) or (iii) of ERISA, or section 4975(e)(3)(A) and 
(C) of the Code, with respect to ERISA-covered plan and IRA assets; 
provided, however, that UBS and UBS Securities Japan will not be 
treated as violating the conditions of this exemption solely because it 
acted as an

[[Page 61917]]

investment advice fiduciary within the meaning of section 3(21)(A)(ii) 
or section 4975(e)(3)(B) of the Code;
    (h)(1) Each UBS QPAM must continue to maintain or immediately 
implement and follow written policies and procedures (the Policies). 
The Policies must require, and must be reasonably designed to ensure 
that:
    (i) The asset management decisions of the UBS QPAM are conducted 
independently of UBS's corporate management and business activities, 
including the corporate management and business activities of the 
Investment Bank division and UBS Securities Japan;
    (ii) The UBS QPAM fully complies with ERISA's fiduciary duties, and 
with ERISA and the Code's prohibited transaction provisions, in such 
case as applicable, and does not knowingly participate in any violation 
of these duties and provisions with respect to Covered Plans;
    (iii) The UBS 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 UBS 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 UBS QPAM's knowledge at that time, the UBS 
QPAM does not make material misrepresentations or omit material 
information in its communications with such regulators with respect to 
Covered Plans;
    (vi) The UBS QPAM complies with the terms of this exemption; and
    (vii) Any violation of, or failure to comply with an item in 
subparagraphs (ii) through (vi), is corrected as soon as reasonably 
possible upon discovery, or as soon after the QPAM reasonably should 
have known of the noncompliance (whichever is earlier), and any such 
violation or compliance failure not so corrected is reported, upon the 
discovery of such failure to so correct, in writing, to appropriate 
corporate officers, the head of compliance and the General Counsel (or 
their functional equivalent) of the relevant UBS QPAM, and the 
independent auditor responsible for reviewing compliance with the 
Policies. A UBS QPAM will not be treated as having failed to develop, 
implement, maintain, or follow the Policies, provided that it corrects 
any instance of noncompliance as soon as reasonably possible upon 
discovery, or as soon as reasonably possible after the QPAM reasonably 
should have known of the noncompliance (whichever is earlier), and 
provided that it adheres to the reporting requirements set forth in 
this subparagraph (vii);
    (2) Each UBS QPAM must develop and implement a program of training 
(the Training), conducted at least annually, for all relevant UBS QPAM 
asset/portfolio management, trading, legal, compliance, and internal 
audit personnel. The Training must:
    (i) At a minimum, cover the Policies, ERISA and Code compliance 
(including applicable fiduciary duties and the prohibited transaction 
provisions), ethical conduct, the consequences for not complying with 
the conditions of this exemption (including any loss of exemptive 
relief provided herein), and prompt reporting of wrongdoing; and
    (ii) Be conducted by an independent professional who has been 
prudently selected and who has appropriate technical training and 
proficiency with ERISA and the Code;
    (i)(1) Each UBS QPAM submits to an audit conducted annually by an 
independent auditor, who has been prudently selected and who has 
appropriate technical training and proficiency with ERISA and the Code, 
to evaluate the adequacy of, and each UBS QPAM's compliance with, the 
Policies and Training described herein. The audit requirement must be 
incorporated in the Policies. The first annual audit must cover a 
fourteen-month period that begins on January 10, 2017 (the Initial 
Audit Period) and all subsequent audits must cover consecutive twelve 
month periods commencing upon the end of the Initial Audit Period.\71\ 
The Initial Audit Period shall cover the period of time during which 
PTE 2016-17 \72\ is effective and a portion of the time during which 
this exemption is effective and the audit terms contained in this 
Section I(i) will supersede the terms of Section I(i) of PTE 2016-17 
except as otherwise provided in this exemption. In determining 
compliance with the conditions for relief in PTE 2016-17 and this 
exemption, including the Policies and Training requirements, for 
purposes of conducting the audit, the auditor will rely on the 
conditions for exemptive relief as then applicable to the respective 
periods under audit. Additionally, the Department confirms that, for 
the final audit under PTE 2013-9 covering the time period from 
September 18, 2016 until the January 10, 2017 conviction date, the 
audit requirements in Section(g) of PTE 2013-09 remained in effect. 
Accordingly, the audit of such final time period under PTE 2013-09 had 
to have been completed and submitted within six (6) months of January 
10, 2017, and it has, in fact, been submitted to the Department;
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    \71\ The final audit under this exemption would not have to be 
completed until after the Exemption Period expires. If the 
Department ultimately decides to grant relief for an additional 
period, it could decide to alter the terms of the exemption, 
including the audit conditions (and the timing of the audit 
requirements). Nevertheless, the Applicant should anticipate that 
the Department will insist on strict compliance with the audit terms 
and schedule set forth above. As it considers any new exemption 
application, the Department may also contact the auditor for any 
information relevant to its determination.
    \72\ 81 FR 94049 (December 22, 2016). PTE 2016-17 is a temporary 
exemption in respect of Exemption Application No. D-11863 that 
permits UBS QPAMs to rely on the exemptive relief provided by PTE 
84-14, notwithstanding the Convictions, for up to twelve months from 
Conviction Date.
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    (2) Within the scope of the audit and to the extent necessary for 
the auditor, in its sole opinion, to complete its audit and comply with 
the conditions for relief described herein, and only to the extent such 
disclosure is not prevented by state or federal statute, or involves 
communications subject to attorney client privilege, each UBS QPAM and, 
if applicable, UBS, will grant the auditor unconditional access to its 
business, including, but not limited to: Its computer systems; business 
records; transactional data; workplace locations; training materials; 
and personnel. Such access is limited to information relevant to the 
auditor's objectives as specified by the terms of this exemption;
    (3) The auditor's engagement must specifically require the auditor 
to determine whether each UBS 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 UBS QPAM's operational compliance with the Policies and 
Training. In this regard, the auditor must test, for each UBS QPAM, a 
sample of such QPAM's transactions involving Covered Plans, sufficient 
in size and nature to afford the auditor a reasonable basis to 
determine such QPAM's operational compliance with the Policies and 
Training;
    (5) For each audit, on or before the end of the relevant period 
described in Section I(i)(1) for completing the audit, the auditor must 
issue a written report (the Audit Report) to UBS and the UBS QPAM to 
which the audit applies that describes the procedures performed by the 
auditor during the course of its

[[Page 61918]]

examination. The auditor, at its discretion, may issue a single 
consolidated Audit Report that covers all the UBS QPAMs. The Audit 
Report must include the auditor's specific determinations regarding:
    (i) The adequacy of each UBS QPAM's Policies and Training; each UBS 
QPAM's compliance with the Policies and Training; the need, if any, to 
strengthen such Policies and Training; and any instance of the 
respective UBS QPAM's noncompliance with the written Policies and 
Training described in Section I(h) above. The UBS QPAM must promptly 
address any noncompliance. The UBS QPAM must promptly address or 
prepare a written plan of action to address any determination of 
inadequacy 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 UBS QPAM. Any 
action taken or the plan of action to be taken by the respective UBS 
QPAM must be included in an addendum to the Audit Report (such addendum 
must be completed prior to the certification described in Section 
I(i)(7) below). In the event such a plan of action to address the 
auditor's recommendation regarding the adequacy of the Policies and 
Training is not completed by the time of submission of the Audit 
Report, the following period's Audit Report must state whether the plan 
was satisfactorily completed. Any determination by the auditor that the 
respective UBS 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 UBS QPAM has complied with the 
requirements under this subparagraph must be based on evidence that the 
particular UBS QPAM has actually implemented, maintained, and followed 
the Policies and Training required by this exemption. Furthermore, the 
auditor must not solely rely on the Annual Report created by the 
compliance officer (the Compliance Officer), as described in Section 
I(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 I(i)(3) and (4) above; and
    (ii) The adequacy of the Annual Review described in Section I(m);
    (6) The auditor must notify the respective UBS 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 UBS QPAM to which 
the Audit Report applies, must certify in writing, under penalty of 
perjury, that the officer has reviewed the Audit Report and this 
exemption; that, such UBS QPAM has addressed, corrected, remedied any 
noncompliance and inadequacy or has an appropriate written plan to 
address any inadequacy regarding the Policies and Training identified 
in the Audit Report. Such certification must also include the 
signatory's determination, that the Policies and Training in effect at 
the time of signing are adequate to ensure compliance with the 
conditions of this exemption and with the applicable provisions of 
ERISA and the Code;
    (8) The Risk Committee of UBS's Board of Directors is provided a 
copy of each Audit Report; and a senior executive officer of UBS's 
Compliance and Operational Risk Control function must review the Audit 
Report for each UBS QPAM and must certify in writing, under penalty of 
perjury, that such officer has reviewed each Audit Report;
    (9) Each UBS QPAM provides its certified Audit Report, by regular 
mail to: Office of Exemption Determinations (OED), 200 Constitution 
Avenue NW, Suite 400, Washington, DC 20210; or by private carrier to: 
122 C Street NW, Suite 400, Washington, DC 20001-2109. This delivery 
must take place no later than 30 days following completion of the Audit 
Report. The Audit Report will be made part of the public record 
regarding this exemption. Furthermore, each UBS QPAM must make its 
Audit Report unconditionally available, electronically or otherwise, 
for examination upon request by any duly authorized employee or 
representative of the Department, other relevant regulators, and any 
fiduciary of a Covered Plan;
    (10) Each UBS QPAM and the auditor must submit to OED any 
engagement agreement(s) entered into pursuant to the engagement of the 
auditor under this exemption. Further, each UBS QPAM must submit to OED 
any engagement entered into with any other person or entity retained in 
connection with such QPAM's compliance with the Training or Policies 
conditions of 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, for 
inspection and review, access to all the workpapers created and 
utilized in the course of the audit, provided such access and 
inspection is otherwise permitted by law; and
    (12) UBS must notify the Department of a change in the independent 
auditor no later than two (2) months after the engagement of a 
substitute or subsequent auditor and must provide an explanation for 
the substitution or change including a description of any material 
disputes between the terminated auditor and UBS;
    (j) As of January 10, 2018 and throughout the Exemption Period, 
with respect to any arrangement, agreement, or contract between a UBS 
QPAM and a Covered Plan, the UBS 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 
inadvertent prohibited transactions); and to comply with the standards 
of prudence and loyalty set forth in section 404 of ERISA with respect 
to each such ERISA-covered plan and IRA to the extent that section 404 
is applicable;
    (2) Not to require (or otherwise cause) the Covered Plan to waive, 
limit, or qualify the liability of the UBS QPAM for violating ERISA or 
the Code or engaging in prohibited transactions;
    (3) Not to restrict the ability of such Covered Plan to terminate 
or withdraw from its arrangement with the UBS QPAM with respect to any 
investment in a separately managed account or pooled fund subject to 
ERISA and managed by such QPAM, with the exception of reasonable 
restrictions, appropriately disclosed in advance, that are specifically 
designed to ensure equitable treatment of all investors in a pooled 
fund in the event such withdrawal or termination may have adverse 
consequences for all other investors. In connection with any such 
arrangements involving investments in pooled funds subject to ERISA 
entered into after the effective date of this exemption, the adverse 
consequences must relate to of a lack of liquidity of the underlying 
assets, valuation issues, or regulatory reasons that prevent the fund 
from promptly redeeming an ERISA-covered plan's or IRA's investment, 
and such restrictions must be applicable to all such investors and 
effective no longer than reasonably necessary to avoid the adverse 
consequences;
    (4) Not to impose any fees, penalties, or charges for such 
termination or withdrawal with the exception of

[[Page 61919]]

reasonable fees, appropriately disclosed in advance, that are 
specifically designed to prevent generally recognized abusive 
investment practices or specifically designed to ensure equitable 
treatment of all investors in a pooled fund in the event such 
withdrawal or termination may have adverse consequences for all other 
investors, provided that such fees are applied consistently and in like 
manner to all such investors;
    (5) Not to include exculpatory provisions disclaiming or otherwise 
limiting liability of the UBS QPAM for a violation of such agreement's 
terms. To the extent consistent with Section 410 of ERISA, however, 
this provision does not prohibit disclaimers for liability caused by an 
error, misrepresentation, or misconduct of a plan fiduciary or other 
party hired by the plan fiduciary who is independent of UBS, and its 
affiliates, or damages arising from acts outside the control of the UBS 
QPAM; and
    (6) To indemnify and hold harmless the Covered Plan for any actual 
losses resulting directly from a UBS 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 QPAM, or any claim arising out of the failure of such UBS 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. 
This condition applies only to actual losses caused by the UBS QPAM's 
violations;
    (7) By July 9, 2018, each UBS QPAM must provide a notice of its 
obligations under this Section I(j) to each Covered Plan. For all other 
prospective Covered Plans, the UBS QPAM will agree to its obligations 
under this Section I(j) in an updated investment management agreement 
between the UBS 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 2016-17 that meets the terms of this 
condition. Notwithstanding the above, a UBS QPAM will not violate the 
condition solely because a Plan or IRA refuses to sign an updated 
investment management agreement.
    (k) By March 10, 2018, each UBS QPAM will provide a notice of the 
exemption, along with a separate summary describing the facts that led 
to the Convictions (the Summary), which have been submitted to the 
Department, and a prominently displayed statement (the Statement) that 
each Conviction separately results in a failure to meet a condition in 
PTE 84-14, to each sponsor and beneficial owner of a Covered Plan, or 
the sponsor of an investment fund in any case where a UBS QPAM acts as 
a sub-advisor to the investment fund in which such ERISA-covered plan 
and IRA invests. Any prospective client for which a UBS QPAM relies on 
PTE 84-14 or has expressly represented that the manager qualifies as a 
QPAM or relies on the QPAM class exemption 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 UBS QPAM. Disclosures may be delivered 
electronically;
    (l) The UBS QPAMs must comply with each condition of PTE 84-14, as 
amended, with the sole exceptions of the violations of Section I(g) of 
PTE 84-14 that are attributable to the Convictions;
    (m)(1) By July 9, 2018, UBS designates 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 annual review for each period corresponding to 
the audit periods set forth in Section I(i)(1) (including the Initial 
Audit Period) (the Annual Review) \73\ to determine the adequacy and 
effectiveness of the implementation of the Policies and Training. With 
respect to the Compliance Officer, the following conditions must be 
met:
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    \73\ Note that such Annual Review must be completed with respect 
to the annual periods ending January 9, 2019; January 9, 2020; and 
January 9, 2021.
---------------------------------------------------------------------------

    (i) The Compliance Officer must be a legal 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 has a dual-reporting line within UBS's 
Compliance and Operational Risk Control (C&ORC) function: (A) A 
divisional reporting line to the Head of Compliance and Operational 
Risk Control, Asset Management, and (B) a regional reporting line to 
the Head of Americas Compliance and Operational Risk Control. The C&ORC 
function will be organizationally independent of UBS's business 
divisions--including Asset Management and the Investment Bank--and is 
led by the Global Head of C&ORC, who will report directly to UBS's 
Chief Risk Officer;
    (2) With respect to each Annual Review, the following conditions 
must be met:
    (i) The Annual Review includes a review of: Any compliance matter 
related to the Policies or Training that was identified by, or reported 
to, the Compliance Officer or others within the C&ORC function during 
the previous year; any material change in the relevant business 
activities of the UBS QPAMs; and any change to ERISA, the Code, or 
regulations related to fiduciary duties and the prohibited transaction 
provisions that may be applicable to the activities of the UBS QPAMs;
    (ii) The Compliance Officer prepares a written report for each 
Annual Review (each, an Annual Report) that (A) summarizes his or her 
material activities during the preceding year; (B) sets forth any 
instance of noncompliance discovered during the preceding year, and any 
related corrective action; (C) details any change to the Policies or 
Training to guard against any similar instance of noncompliance 
occurring again; and (D) makes recommendations, as necessary, for 
additional training, procedures, monitoring, or additional and/or 
changed processes or systems, and management's actions on such 
recommendations;
    (iii) In each Annual Report, the Compliance Officer must certify in 
writing that to the best of his or her knowledge at the time: (A) The 
report is accurate; (B) the Policies and Training are working in a 
manner which is reasonably designed to ensure that the Policies and 
Training requirements described herein are met; (C) any known instance 
of noncompliance during the preceding year and any related correction 
taken to date have been identified in the Annual Report; and (D) the 
UBS QPAMs have complied with the Policies and Training, and/or 
corrected (or are correcting) any known instances of noncompliance in 
accordance with Section I(h) above;
    (iv) Each Annual Report must be provided to appropriate corporate 
officers of UBS and each UBS QPAM to which such report relates; the 
head of Compliance and the General Counsel (or their functional 
equivalent) of the relevant UBS QPAM; and must be made unconditionally 
available to the independent auditor described in Section I(i) above;
    (v) Each Annual Review, including the Compliance Officer's written 
Annual Report, must be completed within at least three (3) months 
following the end of the period to which it relates;
    (n) UBS imposes its internal procedures, controls, and protocols on 
UBS Securities Japan to: (1) Reduce the likelihood of any recurrence of 
conduct that that is the subject of the 2013

[[Page 61920]]

Conviction, and (2) comply in all material respects with the Business 
Improvement Order, dated December 16, 2011, issued by the Japanese 
Financial Services Authority;
    (o) UBS complies in all material respects with the audit and 
monitoring procedures imposed on UBS by the U.S. Commodity Futures 
Trading Commission Order, dated December 19, 2012;
    (p) Each UBS 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 such UBS QPAM relies 
upon the relief in the exemption;
    (q) During the Exemption Period, UBS: (1) Immediately discloses to 
the Department any Deferred Prosecution Agreement (a DPA) or Non-
Prosecution Agreement (an NPA) with the U.S. Department of Justice, 
entered into by UBS or any of its affiliates (as defined in Section 
VI(d) of PTE 84-14) in connection with conduct described in Section 
I(g) of PTE 84-14 or section 411 of ERISA; and (2) immediately provides 
the Department any information requested by the Department, as 
permitted by law, regarding the agreement and/or conduct and 
allegations that led to the agreement;
    (r) By July 09, 2018, each UBS QPAM, in its agreements with, or in 
other written disclosures provided to Covered Plans, will clearly and 
prominently inform Covered Plan clients of their right to obtain a copy 
of the Policies or a description (Summary Policies) which accurately 
summarizes key components of the UBS QPAM's written Policies developed 
in connection with this exemption. If the Policies are thereafter 
changed, each Covered Plan client must receive a new disclosure within 
six (6) months following the end of the calendar year during which the 
Policies were changed.\74\ With respect to this requirement, the 
description may be continuously maintained on a website, provided that 
such website link to the Policies or Summary Policies is clearly and 
prominently disclosed to each Covered Plan; and
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    \74\ In the event Applicant meets this disclosure requirement 
through Summary Policies, changes to the Policies shall not result 
in the requirement for a new disclosure unless, as a result of 
changes to the Policies, the Summary Policies are no longer 
accurate.
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    (s) A UBS QPAM will not fail to meet the terms of this exemption, 
solely because a different UBS QPAM fails to satisfy a condition for 
relief described in Sections I(c), (d), (h), (i), (j), (k), (l), (p), 
and (r); or if the independent auditor described in Section I(i) fails 
a provision of the exemption other than the requirement described in 
Section I(i)(11), provided that such failure did not result from any 
actions or inactions of UBS or its affiliates.
Section II: Definitions
    (a) The term ``Convictions'' means the 2013 Conviction and the 2017 
Conviction. The term ``2013 Conviction'' means the judgment of 
conviction against UBS Securities Japan Co. Ltd. in case number 3:12-
cr-00268-RNC in the U.S. District Court for the District of Connecticut 
for one count of wire fraud in violation of Title 18, United States 
Code, sections 1343 and 2 in connection with submission of YEN London 
Interbank Offered Rates and other benchmark interest rates. The term 
``2017 Conviction'' means the judgment of conviction against UBS, AG in 
case number 3:15-cr-00076-RNC in the U.S. District Court for the 
District of Connecticut for one count of wire fraud in violation of 
Title 18, United States Code, Sections 1343 and 2 in connection with 
UBS's submission of Yen London Interbank Offered Rates and other 
benchmark interest rates between 2001 and 2010. For all purposes under 
this exemption, ``conduct'' of any person or entity that is the 
``subject of the Convictions'' encompasses any conduct of UBS and/or 
their personnel, that is described in (i) Exhibit 3 to the Plea 
Agreement entered into between UBS, AG and the Department of Justice 
Criminal Division, on May 20, 2015, in connection with case number 
3:15-cr-00076-RNC, and (ii) Exhibits 3 and 4 to the Plea Agreement 
entered into between UBS Securities Japan and the Department of Justice 
Criminal Division, on December 19, 2012, in connection with case number 
3:12-cr-00268-RNC;
    (b) The term ``Covered Plan'' means an ERISA-covered plan or an IRA 
with respect to which a UBS QPAM relies on PTE 84-14, or with respect 
to which a UBS QPAM (or any UBS affiliate) has expressly represented 
that the manager qualifies as a QPAM or relies on the QPAM class 
exemption, but not with respect to any arrangement, agreement, or 
contract between a UBS QPAM and an ERISA-covered plan or IRA with 
respect to which the UBS QPAM has expressly disclaimed reliance on the 
QPAM status or PTE 84-14 in entering into its contract with the ERISA 
covered plan or IRA.
    (c) The terms ``ERISA-covered plan'' and ``IRA'' mean, 
respectively, a plan subject to Part 4 of Title I of ERISA and a plan 
subject to section 4975 of the Code.
    (d) The term ``Exemption Period'' means January 10, 2018, through 
January 9, 2021;
    (e) The term ``FX Misconduct'' means the conduct engaged in by UBS 
personnel described in Exhibit 1 of the Plea Agreement (Factual Basis 
for Breach) entered into between UBS, AG and the Department of Justice 
Criminal Division, on May 20, 2015 in connection with Case Number 3:15-
cr-00076-RNC filed in the US District Court for the District of 
Connecticut.
    (f) The term ``Plea Agreement'' means the Plea Agreement (including 
Exhibits 1 and 3 attached thereto) entered into between UBS, AG and the 
Department of Justice Criminal Division, on May 20, 2015 in connection 
with Case Number 3:15-cr-00076-RNC filed in the US District Court for 
the District of Connecticut.
    (g) The term ``UBS'' means UBS, AG.
    (h) The term ``UBS QPAM'' means UBS Asset Management (Americas) 
Inc., UBS Realty Investors LLC, UBS Hedge Fund Solutions LLC, UBS 
O'Connor LLC, and any future entity within the Asset Management or the 
Wealth Management Americas divisions of UBS, AG that qualifies as a 
``qualified professional asset manager'' (as defined in Section VI(a) 
\75\ of PTE 84-14) and that relies on the relief provided by PTE 84-14 
or represents to ERISA-covered plans and IRAs that it qualifies as a 
QPAM and with respect to which UBS, AG is an ``affiliate'' (as defined 
in Part VI(d) of PTE 84-14). The term ``UBS QPAM'' excludes UBS, AG and 
UBS Securities Japan.
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    \75\ 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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    (i) The term ``UBS Securities Japan'' means UBS Securities Japan 
Co. Ltd, a wholly-owned subsidiary of UBS incorporated under the laws 
of Japan.

Effective Date

    This exemption is effective January 10, 2018, and the term of the 
exemption is from January 10, 2018, through January 9, 2021 (the 
Exemption Period).
    Department's Comment: The Department cautions that the relief in 
this exemption will terminate immediately if, among other things, an 
entity within the UBS corporate structure is convicted of a crime 
described in Section I(g) of PTE 84-14 (other than the Convictions) 
during the Exemption Period. Although UBS could apply for a new 
exemption in that

[[Page 61921]]

circumstance, the Department would not be obligated to grant the 
exemption. The terms of this exemption have been specifically designed 
to permit plans to terminate their relationships in an orderly and cost 
effective fashion in the event of an additional conviction or a 
determination that it is otherwise prudent for a plan to terminate its 
relationship with an entity covered by the exemption.

Further Information

    For more information on this exemption, contact Brian Mica, 
telephone (202) 693-8402, Office of Exemption Determinations, Employee 
Benefits Security Administration, U.S. Department of Labor (this is not 
a toll-free number).

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 section 408(a) of the Act and/or section 4975(c)(2) of the Code 
does not relieve a fiduciary or other party in interest or disqualified 
person from certain other provisions to which the exemption does not 
apply and the general fiduciary responsibility provisions of section 
404 of the Act, which among other things require a fiduciary to 
discharge his duties respecting the plan solely in the interest of the 
participants and beneficiaries of the plan and in a prudent fashion in 
accordance with section 404(a)(1)(B) of the Act; nor does it affect the 
requirement of section 401(a) of the Code that the plan must operate 
for the exclusive benefit of the employees of the employer maintaining 
the plan and their beneficiaries;
    (2) These exemptions are supplemental to and not in derogation of, 
any other provisions of the Act and/or the Code, including statutory or 
administrative exemptions and transactional 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
    (3) The availability of these exemptions is subject to the express 
condition that the material facts and representations contained in the 
application accurately describes all material terms of the transaction 
which is the subject of the exemption.

    Signed at Washington, DC, this 21st day of December, 2017.
Lyssa E. Hall,
Director of Exemption Determinations, Employee Benefits Security 
Administration, U.S. Department of Labor.
[FR Doc. 2017-27977 Filed 12-28-17; 8:45 am]
 BILLING CODE 4510-29-P

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