Proposed Exemption for Certain Prohibited Transaction Restrictions Involving TT International Asset Management Ltd (TTI or the Applicant) Located in London, United Kingdom, 88115-88126 [2023-27937]

Agencies

• Employee Benefits Security Administration
• DEPARTMENT OF LABOR

[Federal Register Volume 88, Number 243 (Wednesday, December 20, 2023)]
[Notices]
[Pages 88115-88126]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-27937]


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DEPARTMENT OF LABOR

Employee Benefits Security Administration

[Exemption Application No. D-12096]


Proposed Exemption for Certain Prohibited Transaction 
Restrictions Involving TT International Asset Management Ltd (TTI or 
the Applicant) Located in London, United Kingdom

AGENCY: Employee Benefits Security Administration, Labor.

ACTION: Notice of proposed exemption.

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SUMMARY: This document provides notice of the pendency before the 
Department of Labor (the Department) of a proposed individual exemption 
from certain of the prohibited transaction restrictions of the Employee 
Retirement Income Security Act of 1974 (ERISA) and/or the Internal 
Revenue Code of 1986 (the Code). If this proposed exemption is granted, 
TT International Asset Management Ltd (TTI) will not be precluded from 
relying on the exemptive relief provided by Prohibited Transaction 
Class Exemption 84-14 (PTE 84-14 or the QPAM Exemption), 
notwithstanding the conviction of SMBC Nikko Securities, Inc. (Nikko 
Tokyo) in Tokyo District Court for attempting to peg, fix or stabilize 
the prices of certain Japanese equity securities that Nikko Tokyo was 
attempting to place in a block offering that occurred on February 13, 
2023 (the Conviction).

DATES: If granted, the exemption will be in effect for a period of five 
years, beginning on February 13, 2024, and ending on February 12, 2029. 
Written comments and requests for a public hearing on the proposed 
exemption should be submitted to the Department by February 5, 2024.

ADDRESSES: All written comments and requests for a hearing should be 
submitted to the Employee Benefits Security Administration (EBSA), 
Office of Exemption Determinations, Attention: Application No. D-12096, 
via email to [email protected] or online through https://www.regulations.gov. Any such comments or requests should be sent by 
the end of the scheduled comment period. The application for exemption 
and the comments received will be available for public inspection in 
the Public Disclosure Room of the Employee Benefits Security 
Administration, U.S. Department of Labor, Room N-1515, 200 Constitution 
Avenue NW, Washington, DC 20210. See SUPPLEMENTARY INFORMATION below 
for additional information regarding comments.

FOR FURTHER INFORMATION CONTACT: Mr. Joseph Brennan of the Department 
at (202) 693-8456. (This is not a toll-free number.)

SUPPLEMENTARY INFORMATION:

Comments

    Persons are encouraged to submit all comments electronically and 
not to follow with paper copies. Comments should state the nature of 
the person's interest in the proposed exemption and how the person 
would be adversely affected by the exemption, if granted. Any person 
who may be adversely affected by an exemption can request a hearing on 
the exemption. A request for a hearing must state: (1) the name, 
address, telephone number, and email address of the person making the 
request; (2) the nature of the person's interest in the exemption and 
the manner in which the person would be adversely affected by the 
exemption; and (3) a statement of the issues to be addressed and a 
general description of the evidence to be presented at the hearing. The 
Department will grant a request for a hearing made in accordance with 
the requirements above where a hearing is necessary to fully explore 
material factual issues identified by the requestor, and a notice of 
such hearing will be published by the Department in the Federal 
Register. The Department may decline to hold a hearing if: (1) the 
request for the hearing does not meet the requirements stated above; 
(2) the only issues identified for exploration at the hearing are 
matters of law; or (3) the factual issues identified in the request can 
be fully explored through the submission of evidence in written 
(including electronic) form.
    Warning: All comments received will be included in the public 
record without change and may be made available online at https://www.regulations.gov, including any personal information provided, 
unless the comment includes information claimed to be confidential or 
information whose disclosure is restricted by statute. If you submit a 
comment, EBSA recommends that you include your name and other contact 
information in the body of your comment, but DO NOT submit information 
that you consider to be confidential, or otherwise protected (such as a 
Social Security number or an unlisted phone number) or confidential 
business information that you do not want publicly disclosed. If EBSA 
cannot read your comment due to technical difficulties and cannot 
contact you for clarification, EBSA might not be able to consider your 
comment.
    Additionally, the https://www.regulations.gov website is an 
``anonymous access'' system, which means EBSA will not know your 
identity or contact information unless you provide it in the body of 
your comment. If you send an email directly to EBSA without going 
through https://www.regulations.gov, your email address will be 
automatically captured and included as part of the comment that is 
placed in the public record and made available on the internet.

Proposed Exemption

    This proposed exemption would provide relief from certain 
restrictions

[[Page 88116]]

set forth in ERISA sections 406 and 407.\1\ It would not, however, 
provide relief from any other violation of law. Furthermore, the 
Department cautions that the relief in this proposed exemption would 
terminate immediately if, among other things, TTI or an affiliate of 
TTI (as defined in Section VI(d) of PTE 84-14) \2\ is convicted of a 
crime covered by Section I(g) of PTE 84-14 (other than the Conviction) 
during the Exemption Period. Although TTI could apply for a new 
exemption in that circumstance, the Department would not be obligated 
to grant the exemption.
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    \1\ For purposes of this proposed exemption, references to 
specific provisions of ERISA Title I, unless otherwise specified, 
should be read to refer as well to the corresponding provisions of 
Code section 4975. Further, this proposed exemption, if granted, 
does not provide relief from the requirements of, or specific 
sections of, any law not noted above. Accordingly, TTI is 
responsible for ensuring compliance with any other laws applicable 
to the transactions described herein.
    \2\ Section VI(d) of PTE 84-14 defines the term ``affiliate'' 
for purposes of Section I(g) as ``(1) Any person directly or 
indirectly through one or more intermediaries, controlling, 
controlled by, or under common control with the person, (2) Any 
director of, relative of, or partner in, any such person, (3) Any 
corporation, partnership, trust or unincorporated enterprise of 
which such person is an officer, director, or a 5 percent or more 
partner or owner, and (4) Any employee or officer of the person 
who--(A) Is a highly compensated employee (as defined in Section 
4975(e)(2)(H) of the Code) or officer (earning 10 percent or more of 
the yearly wages of such person), or (B) Has direct or indirect 
authority, responsibility or control regarding the custody, 
management or disposition of plan assets.''
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    The terms of this proposed exemption have been specifically 
designed to permit a plan to terminate its relationship in an orderly 
and cost-effective fashion in the event of an additional conviction of 
TTI or a TTI affiliate, or a determination by the plan that it is 
otherwise prudent to terminate its relationship with TTI.

Summary of Facts and Representations 3
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    \3\ The Summary of Facts and Representations is based on TTI's 
representations provided in its exemption application and does not 
reflect factual findings or opinions of the Department unless 
indicated otherwise. The Department notes that the availability of 
this exemption is subject to the express condition that the material 
facts and representations contained in application D-12096 are true 
and complete at all times, and accurately describe all material 
terms of the transactions covered by the exemption. If there is any 
material change in a transaction covered by the exemption, or in a 
material fact or representation described in the application, the 
exemption will cease to apply as of the date of the change.
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Background

    1. The Sumitomo Mitsui Banking Corporation group (SMBC) is a 
Japanese financial services firm that conducts activities across a wide 
range of financial sectors, including banking, asset management, 
securities trading, leasing, credit card lending, and consumer finance. 
SMBC provides asset management services through two subsidiaries. The 
first is TTI, which is managed independently of the broader SMBC group. 
The second is Sumitomo Mitsui DS Asset Management Company, Limited, an 
investment manager headquartered in Tokyo. The SMBC group also conducts 
securities market activities through the SMBC Nikko Securities 
franchise. As relevant to this proposed exemption, that includes Nikko 
Tokyo, a Japanese broker-dealer.
    2. TTI is a global investment firm headquartered in London, UK that 
manages approximately $7.1 billion in assets. TTI and its subsidiaries 
\4\ have operations in the United States, Hong Kong, and Japan. TTI was 
wholly acquired by Sumitomo Mitsui Financial Group, Inc. (SMFG) on 
February 28, 2020, and is currently a member of the SMBC Group. Since 
the acquisition, TTI has remained a stand-alone business with distinct 
reporting lines, governance structures, and control frameworks.
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    \4\ TTI subsidiaries include TT International Investment 
Management LLP, TT International (Hong Kong) Ltd, TT Crosby Ltd, and 
TT International Advisors Inc.
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    3. TTI is an SEC-registered investment advisor that specializes in 
managing portfolios for institutional investors, including ERISA-
covered Plans (Covered Plans),\5\ public retirement plans, and other 
collective investment vehicles through a variety of equity long-only 
and long/short strategies across a broad range of industry sectors and 
geographies.
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    \5\ The term ``Covered Plan'' means a plan subject to Part IV of 
Title I of ERISA (an ``ERISA-covered plan'') or a plan subject to 
Code section 4975 (an ``IRA''), in each case, with respect to which 
TTI relies on PTE 84-14, or with respect to which TTI has expressly 
represented that the manager qualifies as a QPAM or relies on PTE 
84-14. A Covered Plan does not include an ERISA-covered plan or IRA 
to the extent that TTI has expressly disclaimed reliance on QPAM 
status or PTE 84-14 in entering into a contract, arrangement, or 
agreement with the ERISA-covered plan or IRA.
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    4. In offering investment management services, TTI operates as a 
QPAM in reliance on PTE 84-14.\6\ TTI advises four segregated ERISA 
accounts on behalf of the ERISA-covered plans of two major U.S. 
employers \7\ and operates three segregated accounts for public pension 
plans, which currently hold approximately $466.4 million in assets.\8\ 
TTI also manages three funds as ERISA ``plan asset'' funds: the TT 
Emerging Markets Opportunities Fund II Limited, which is operational 
and holds ERISA assets; the TT Environmental Solutions Equity Master 
Fund II Limited, which is in the process of being launched; and the TT 
Non-U.S. Equity Master Fund Limited, which is operational but does not 
hold any ERISA assets.
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    \6\ Currently, TTI is the only member of the SMBC group that 
relies on the QPAM Exemption.
    \7\ Together, these two ERISA-covered plans currently hold 
approximately $352.7 million in assets.
    \8\ Although the public pension plans are not statutory ERISA 
assets, TTI has committed to those plans to follow the same rules 
and operate under the same restrictions as ERISA plans. Accordingly, 
these plans are operated in compliance with ERISA and utilize the 
QPAM exemption.
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ERISA and Code Prohibited Transactions and PTE 84-14

    5. The rules set forth in ERISA section 406 and Code section 
4975(c)(1) proscribe certain ``prohibited transactions'' between plans 
and certain parties in interest with respect to those plans.\9\ ERISA 
section 3(14) defines parties in interest with respect to a plan to 
include, among others, the plan fiduciary, a sponsoring employer of the 
plan, a union whose members are covered by the plan, service providers 
with respect to the plan, and certain of their affiliates.\10\ The 
prohibited transaction provisions under ERISA section 406(a) and Code 
section 4975(c)(1) prohibit, in relevant part, (1) sales, leases, 
loans, or the provision of services between a party in interest and a 
plan (or an entity whose assets are deemed to constitute the assets of 
a plan), (2) the use of plan assets by or for the benefit of a party in 
interest, or (3) a transfer of plan assets to a party in interest.\11\
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    \9\ For purposes of the Summary of Facts and Representations, 
references to specific provisions of Title I of ERISA, unless 
otherwise specified, refer also to the corresponding provisions of 
the Code.
    \10\ Under the Code, such parties, or similar parties, are 
referred to as ``disqualified persons.''
    \11\ The prohibited transaction provisions also include certain 
fiduciary prohibited transactions under ERISA Section 406(b). These 
include transactions involving fiduciary self-dealing, fiduciary 
conflicts of interest, and kickbacks to fiduciaries.
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    6. Under the authority of ERISA section 408(a) and Code section 
4975(c)(2), the Department has the authority to grant an exemption from 
such ``prohibited transactions'' in accordance with the procedures set 
forth in its exemption procedure regulation if the Department finds 
that an exemption is: (a) administratively feasible, (b) in the 
interests of the plan and of its participants and beneficiaries, and 
(c) protective of the rights of the plan's participants and 
beneficiaries.\12\
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    \12\ The Department's exemption procedure regulation is codified 
at 29 CFR part 2570, subpart B (76 FR 66637, 66644, October 27, 
2011).
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    7. PTE 84-14 exempts certain prohibited transactions between a 
party in interest and an ``investment fund'' (as defined in Section 
VI(b) of PTE 84-14)

[[Page 88117]]

in which a plan has an interest if the investment manager managing the 
investment fund satisfies the definition of a ``qualified professional 
asset manager'' (QPAM) and satisfies additional conditions of the 
exemption. PTE 84-14 was developed and granted based on the essential 
premise that broad relief could be afforded for all types of 
transactions in which a plan engages only if the commitments and the 
investments of plan assets and the negotiations leading thereto are the 
sole responsibility of an independent, discretionary manager.\13\
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    \13\ See 75 FR 38837, 38839 (July 6, 2010).
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    8. Section I(g) of PTE 84-14 prevents an entity that may otherwise 
meet the QPAM definition from utilizing the exemptive relief provided 
by the QPAM Exemption for itself and its client plans if that entity, 
an ``affiliate'' thereof, or any direct or indirect five percent or 
more owner in the QPAM has been either convicted or released from 
imprisonment, whichever is later, as a result of criminal activity 
described in Section I(g) within the 10 years immediately preceding a 
transaction. Section I(g) was included in PTE 84-14, in part, based on 
the Department's expectation that a QPAM, and those who may be in a 
position to influence the QPAM's policies, maintain a high standard of 
integrity.\14\
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    \14\ 49 FR 9494 (March 13, 1984), as corrected at 50 FR 41430 
(October 10, 1985), as amended at 70 FR 49305 (August 23, 2005), and 
as amended at 75 FR 38837 (July 6, 2010).
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Nikko Tokyo Conviction and PTE 84-14 Disqualification

    9. On February 13, 2023, Nikko Tokyo and four of its officers and 
employees were convicted in Tokyo District Court of violating Japan's 
Financial Instruments and Exchange Act (the FIEA) for attempting to 
peg, fix, or stabilize \15\ the prices of certain Japanese equity 
securities that Nikko Tokyo was attempting to place in a block offering 
(the Conviction). Nikko Tokyo was convicted of 10 violations of the 
FIEA and was ordered to pay a [yen]700 million fine (approximately $5.3 
million) and a surcharge of approximately [yen]4.5 billion 
(approximately $33.7 million).
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    \15\ According to the Applicant, the unofficial English-language 
translation of Article 159, paragraph 3 of the FIEA, available on 
the Japanese Financial Services Agency website, provides that no 
person may ``conduct a series of Sales and Purchase of Securities, 
etc. or make offer, Entrustment, etc. or Accepting an Entrustment, 
etc. therefore in violation of a Cabinet Order for the purpose of 
pegging, fixing or stabilizing prices of Listed Financial 
Instruments, etc. in a Financial Instruments Exchange Market or 
prices of Over-the-Counter Traded Securities in an Over-the-Counter 
Securities Market.''
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    A block offering is a type of limited public offering that is 
common in Japan whereby a dealer typically applies a spread to the 
price at which it purchases the shares from the seller and the price at 
which it sells them in the block offering. Between December 2019 and 
November 2021, Nikko Tokyo, through the actions of relevant officers, 
purchased shares of five issuers for its own account in an attempt to 
peg, fix, or stabilize the prices of those securities in anticipation 
of a block offer. This activity was intended to ensure that the price 
of the securities being sold through the block offering did not decline 
significantly, which would have potentially harmed Nikko Tokyo's 
interests.\16\
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    \16\ The Tokyo Public Prosecutor alleged that these 
``stabilization transactions'' violated Article 197 Paragraph 1, 
Item 5, Article 159, Paragraph 3, and Article 207, Paragraph 1, Item 
1 of the FIEA and Article 60 of the Penal Code.
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Nikko Tokyo Affiliation and Loss of QPAM Status

    10. Both TTI and Nikko Tokyo are direct subsidiaries of SMFG and 
thus are affiliates for the purposes of Section I(g) of the QPAM 
Exemption. When the Tokyo District Court sentenced Nikko Tokyo in 
connection with the Conviction, Section I(g) of PTE 84-14 was 
triggered, and TTI became ineligible to rely on the QPAM Exemption to 
service its Plan clients, without receiving an individual prohibited 
transaction exemption from the Department.

PTE 2023-13

    11. On October 19, 2022, TTI requested an individual exemption for 
TTI and its Covered Plan clients to continue to utilize the relief in 
PTE 84-14, notwithstanding the then-anticipated Conviction of Nikko 
Tokyo. In support of its exemption request, TTI asserted that: there 
has always been a complete separation in operations between TTI and 
Nikko Tokyo; Nikko Tokyo is a remote foreign affiliate of TTI with 
wholly separate businesses, operations, management, systems, premises, 
and legal and compliance personnel; TTI was not involved in any way in 
the Misconduct; and the Misconduct did not involve any ERISA assets. In 
its exemption application, TTI requested: (1) a five-year term of 
relief and (2) an exemption that would cover TTI and TTI's current and 
future affiliates and related entities.
    12. On April 28, 2023, the Department granted PTE 2023-13,\17\ 
which permitted TTI to continue to rely upon the relief provided in the 
QPAM exemption for a one-year period from the date of the Conviction. 
The Department declined TTI's request for a longer five-year exemption 
term and instead proposed a limited one-year term that applies 
exclusively to TTI, so the Department retained the ability to review 
TTI's adherence to the conditions set out in the one-year exemption 
before considering longer-term relief.
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    \17\ See PTE 2023-13, 88 FR 26336 (April 28, 2023).
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Conditions of PTE 2023-13

    13. PTE 2023-13 contains a set of conditions that are designed to 
protect those Covered Plans that entrust their assets to TTI despite 
the serious nature of the criminal misconduct underlying the Conviction 
of Nikko Tokyo. Under PTE 2023-13, TTI must: \18\
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    \18\ The following paragraphs do not discuss all of the 
conditions set out in PTE 2023-13. For the complete set of 
conditions, see PTE 2023-13.
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     Develop, implement, maintain, and follow written policies 
(the Policies) that are reasonably designed to ensure that, among other 
things: the asset management decisions of TTI are conducted 
independently of Nikko Tokyo; TTI fully complies with ERISA's fiduciary 
duties; and any filings or statements made by TTI to regulators are 
materially accurate and complete.
     Develop and implement a training program (the Training) 
conducted by a prudently selected independent professional that covers 
the Policies, ERISA and Code compliance, ethical conduct, the 
consequences for not complying with the conditions of the exemption, 
and the duty to promptly report wrongdoing.
     Submit to an audit conducted by a prudently selected 
independent auditor (the Auditor) who completes a written report (the 
Audit Report) assessing the adequacy of TTI's Policies and Training, 
TTI's compliance with the Policies and Training, the need, if any, to 
strengthen the Policies and Training; and any instance(s) of 
noncompliance by TTI.\19\
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    \19\ Further, certain TTI senior personnel must review the Audit 
Report, make certain certifications, and take corrective actions 
when necessary.
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     Agree and warrant to Covered Plan clients that it will: 
(a) comply with ERISA and the Code; (b) refrain from engaging in 
prohibited transactions that are not otherwise exempt (and promptly 
correct any inadvertent prohibited transactions); and (c) comply with 
the standards of prudence and loyalty set forth in ERISA section 404.
     Agree and warrant: (a) to indemnify and hold harmless 
Covered Plans for certain damages; (b) not to require (or otherwise 
cause) Covered Plans to

[[Page 88118]]

waive, limit, or qualify the liability of TTI for violating ERISA or 
the Code or engaging in prohibited transactions; (c) not to restrict 
the ability of Covered Plans to terminate or withdraw from their 
arrangement with TTI except for reasonable restrictions disclosed in 
advance; and (d) not to impose any fees, penalties, or charges for such 
termination or withdrawal, except for reasonable fees.
     Designate a senior compliance officer (the Compliance 
Officer) to conduct a twelve-month review to determine the adequacy and 
effectiveness of TTI's implementation of the Policies and Training (the 
Review).

PTE 2023-13 Compliance

    14. TTI states that it has complied with the conditions of PTE 
2023-13 and, therefore, should be permitted to continue to rely upon 
PTE 84-14 through the remainder of its 10-year Section I(g) 
ineligibility period in order to avoid substantial costs and other 
disruptions that would occur if TTI no could no longer act as a QPAM. 
TTI represents that it has taken the following concrete steps to comply 
with the requirements of PTE 2023-13.
    15. Adoption of Comprehensive Policies. TTI states that it has 
developed and implemented specific policies (the ERISA Policies) that 
ensure that asset management decisions of TTI are conducted 
independently of Nikko Tokyo. TTI states that its ERISA Policies 
promote compliance with ERISA's fiduciary duties and prohibited 
transaction provisions, including with respect to co-fiduciary 
liability, and ensure accuracy in communications with regulators and 
Covered Plan clients. TTI further states that its ERISA Policies 
include required monitoring to ensure compliance with the specific 
terms of PTE 2023-13 and the prompt identification and correction of 
any Policy violations.
    TTI states that it maintains policies and procedures that are 
reasonably designed to ensure that all TTI personnel comply with 
applicable regulations and act in the best interests of TTI's clients, 
including ERISA plan participants. TTI represents that it does not 
share trading decisions and investment strategies for its clients with 
personnel outside of TTI's asset management businesses and does not 
consult with other parts of the SMBC group in connection with 
investment decisions it makes on behalf of its clients.
    16. Implementation of a Training Program. TTI represents that it 
has implemented a comprehensive, mandatory training program for all 
relevant TTI asset/portfolio management, trading, legal, compliance, 
and internal audit personnel (the ERISA Training). TTI submits that 
initial ERISA Training sessions under PTE 2023-13 have been completed, 
with mandatory attendance for relevant personnel. Two WilmerHale 
partners who are experienced in ERISA training and the regulatory 
compliance of asset managers taught the ERISA Training course on August 
8, 2023, with a simultaneous broadcast in TTI's London office. TTI 
states that required personnel who were unable to attend the live 
training have completed the training via a recording of the live 
session. TTI represents further that it has made electronic training 
modules available for new relevant personnel and that follow-ups are 
made to ensure that all relevant personnel complete the Training.
    17. Disclosure to Client and Amendment of Client Agreements. TTI 
represents that it has provided its Covered Plan clients with a copy of 
PTE 2023-13, a summary of TTI's written ERISA Policies developed in 
connection therewith, a summary of the conduct leading to the 
Conviction, and notice that the requirements of the QPAM Exemption were 
not satisfied as a result of the Conviction. TTI states further that it 
has amended its agreements with Covered Plan clients to allow for the 
termination of the relationship with TTI without penalty to the Covered 
Plan clients, and to incorporate all other conditions of PTE 2023-13. 
TTI notes that, throughout this process, no Covered Plan client has 
decided to terminate its relationship with TTI.
    18. Strengthening of Compliance within TTI. TTI represents that it 
has designated its Chief Compliance Officer as the initial Compliance 
Officer under PTE 2023-13. TTI states that its Chief Compliance Officer 
now oversees the ERISA Policies and ERISA Training and ensures that 
each conforms to the requirements set out in PTE 2023-13. TTI states 
that by designating its Chief Compliance Officer to this role, it is 
ensuring that the Compliance Officer will have a direct reporting line 
to senior management.
    19. Strengthening of Compliance within the SMBC Group. The 
Applicant states that TTI and the SMBC group have strengthened their 
group-wide coordination regarding potentially disqualifying conduct, in 
order to ensure compliance with the conditions of PTE 2023-13, 
including identification of deferred prosecution or non-prosecution 
agreements. Further, to prevent the possibility of reoccurrence, Nikko 
Tokyo has ceased block offerings while completing remedial measures 
supervised by Japanese regulators, including a verification process to 
assess whether the root causes of the problems have been addressed.
    20. Note on the Audit. PTE 2023-13 requires TTI to undergo an audit 
that covers the one-year period of February 13, 2023, through February 
12, 2024. The audit report must be completed by August 12, 2024. TTI 
represents that it has engaged Newport Trust Company to carry out the 
independent auditor functions required under PTE 2023-13 and this 
exemption if it is granted by the Department.

Remedial Efforts by Nikko Tokyo and SMFG

    21. According to the Applicant, Nikko Tokyo has taken significant 
steps to address the issues that led to the Conviction and has enhanced 
its policies and procedures related to proprietary trading and enhanced 
its surveillance over that activity, including hiring additional 
compliance officers. In addition, Nikko Tokyo refused to renew its 
employment contracts with each of the four executive officers who were 
alleged to have been involved in the misconduct underlying the 
Conviction and has dismissed the remaining two employees on 
disciplinary grounds.

Separation of TTI and Nikko Tokyo

    22. TTI states that: none of the misconduct underlying the Nikko 
Tokyo Conviction involved TTI or the SMBC group's asset management 
businesses; none of TTI's personnel was involved in the misconduct; and 
none of the individual officers or employees of Nikko Tokyo had any 
role at TTI. According to the Applicant, TTI and Nikko Tokyo have 
separate businesses, operations, management teams, systems, premises, 
and legal and compliance personnel. Since its acquisition by SMFG on 
February 28, 2020, TTI has remained a stand-alone business with 
distinct reporting lines, governance structures, and control 
frameworks. Further, TTI is not directly owned by or in the same 
vertical ownership chain as Nikko Tokyo, and TTI and Nikko Tokyo do not 
share personnel or office space.
    23. The Applicant states that although TTI's seven-member board of 
directors includes four representatives from the SMBC group, TTI's 
Management Committee provides direct oversight of TTI's business.\20\ 
Day-to-day management at TTI is conducted by a

[[Page 88119]]

dedicated management team with support from other TTI committees, 
including the Operations Committee, Product Committee, Valuation 
Committee, and ESG Committee. In addition, TTI has dedicated 
independent legal, risk, and compliance teams, as well as its own 
control framework and compliance infrastructure.\21\
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    \20\ The board of directors is responsible for, among other 
things, setting strategic objectives, approving major initiatives, 
and ensuring the company has adopted and implemented a compliance 
infrastructure that is reasonably designed to meet its regulatory 
obligations.
    \21\ This includes TTI's Code of Ethics, which sets forth TTI's 
expectation that all personnel will ``[o]bserve the highest 
standards of integrity'' and ensure that TTI maintains its ``strong 
reputation for regulatory compliance and high professional 
standards.'' This Code of Ethics also addresses prohibitions on 
market abuse and restrictions on personal trading.
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    24. According to the Applicant, TTI personnel remain fully and 
independently responsible for TTI's material functions, including 
portfolio and risk management activities, investment and trading 
decisions, compliance, marketing, and the provision of client services. 
In addition, dedicated TTI personnel perform all day-to-day functions 
related to TTI's business as an investment adviser, including 
onboarding customers, managing customer accounts, and executing trading 
decisions.
    25. TTI states that it has detailed policies setting forth its 
process for handling ERISA assets, identifying and addressing conflicts 
of interest, best execution, and compliance with applicable anti-money 
laundering requirements. TTI also states that it has a dedicated 
Compliance Manual that sets forth, among other things, firm policies 
related to whistleblowing, handling internal and external complaints, 
client onboarding, and the process for approving new products or 
instruments.
    26. Finally, TTI states that Nikko Tokyo is not a QPAM, does not 
manage any ERISA assets, and that no ERISA assets were involved in the 
Misconduct underlying the Nikko Tokyo Conviction. Further, TTI has not 
engaged in trading activity with Nikko Tokyo on behalf of ERISA 
accounts at any point since TTI became affiliated with Nikko Tokyo.

Hardship to Covered Plans

    27. TTI represents that Covered Plans would suffer certain 
hardships if TTI loses its eligibility to rely on the QPAM Exemption. 
TTI's representations regarding these hardships are set forth below in 
paragraphs 28 through 37.
    28. According to the Applicant, loss of the QPAM Exemption would 
severely limit the investment transactions available to the accounts 
that TTI manages on behalf of Covered Plans, hindering TTI's ability to 
efficiently manage the strategies for which it contracted with Covered 
Plan clients. Further, if TTI were ineligible to rely on the QPAM 
Exemption, it could receive less advantageous pricing for transactions 
it engages in on behalf of Covered Plans.
    29. TTI states that it has extensively reviewed its investment 
activity and concluded that, as a practical matter, the QPAM Exemption 
is the only exemption available to provide relief for certain types of 
investment transactions it enters into on behalf of Covered Plans. TTI 
states that counterparties to the swaps and other transactions in which 
TTI-managed accounts engage require compliance with, and a 
representation as to satisfaction of the conditions of, the QPAM 
Exemption. In light of market reliance on QPAM Exemption, the Applicant 
submits that it would not be possible for TTI to effectively manage its 
strategies for ERISA clients, absent the grant of exemptive relief.
    TTI states that considering the nature of emerging market 
investments and swap, options, and other derivative transactions, 
Covered Plan clients and counterparties are reluctant to utilize more 
recent alternative exemptions, such as the service provider exemption 
under ERISA section 408(b)(17). This reluctance is due to uncertainty 
about the application of the adequate consideration requirements of the 
statutory exemption and the resulting possibility that the use of the 
exemption could later be challenged by the Department on those grounds.
    30. TTI states that it relies on the QPAM Exemption to conduct a 
variety of transactions on behalf of Covered Plans, including buying 
and selling equity securities; preferred stock; American Depository 
Receipts, and related options; U.S. and foreign fixed-income 
instruments, including unregistered offerings; various derivatives, 
including futures, options on futures, and swaps; and foreign exchange 
products, including spot currencies, forwards, and swaps. TTI also 
relies upon the QPAM Exemption for the purchase and sale of both 
foreign and domestic equity securities, registered and sold under Rule 
144A or otherwise (e.g., traditional private placement).
    31. TTI represents that if it loses its ability to rely upon the 
QPAM Exemption, it would no longer be able to hedge currency for its 
private and public plan asset clients, preventing it from managing 
absolute and relative currency risk for such clients in such clients' 
best interests. TTI states that it specializes in international and 
emerging market strategies that depend on TTI's ability to translate 
and maintain the value of Covered Plan investments from the local 
currency in which the investment is made into U.S. dollars, the 
benchmark currency in which performance is measured. To limit plan risk 
exposure to the underlying securities without simultaneously exposing 
them to the risk of currency fluctuation, TTI makes substantial use of 
foreign exchange (FX) hedges by using forward transactions and other FX 
derivatives. If this proposed exemption is not granted, TTI states that 
nearly $900 million in ERISA plans and separately managed accounts for 
private and public employers would likely be affected, either directly 
or as a result of TTI's inability to effectively hedge risk.
    32. For all but one of the ERISA funds that TTI manages, virtually 
all assets are either actively or dynamically hedged based on exposures 
and market conditions.\22\ As of November 3, 2022, approximately 16% of 
the assets under management (AUM) in each of the four segregated ERISA 
accounts that TTI manages on behalf of the ERISA plans of two major 
U.S. employers are hedged with respect to Indian, Taiwanese, and 
Chinese currency, which translates to approximately $35 million in 
hedges. Further, the TT Emerging Markets Opportunities Fund II has over 
the past year hedged risks associated with British, Indian, Taiwanese, 
Chinese, Mexican, and Polish currencies. Without these positions, the 
Applicant states that TT Emerging Markets Opportunities Fund II would 
have incurred nearly $5.5 million in losses due to unhedged FX 
exposures, negatively impacting overall returns.
---------------------------------------------------------------------------

    \22\ The actual percentage of AUM in each fund that is hedged at 
any given time varies.
---------------------------------------------------------------------------

    33. TTI represents that the loss of the QPAM Exemption would also 
impact TTI's agreements with the swap dealers it executes these hedges 
with pursuant to International Swaps and Derivatives Association 
Agreements (ISDA Agreements). ISDA agreements require TTI to represent 
that it meets all conditions of the QPAM Exemption, and a breach of 
this representation would entitle the counterparty to terminate the 
transaction. The Applicant states that, as a practical matter, swap 
dealers would be nearly certain to exercise their right to terminate 
because TTI's loss of the QPAM Exemption would increase the swap 
dealers' exposure to risk. Thus, these agreements would be unwound and 
TTI would no longer be able to employ the hedging activities on which 
its strategies depend. If these ISDA

[[Page 88120]]

Agreements were terminated, TTI states that it would immediately need 
to unwind approximately $73,784,388 million in hedges.\23\
---------------------------------------------------------------------------

    \23\ The approximate total FX forward exposure of TTI's public 
and private plan asset accounts as of November 10, 2022, is $330 
million.
---------------------------------------------------------------------------

    34. TTI submits that if this proposed exemption is not granted, 
Covered Plans could incur significant costs, including transaction 
costs, costs associated with finding and evaluating other managers, and 
costs associated with reinvesting assets with those new managers. TTI 
states that it has longstanding relationships with its ERISA plan 
clients and if this exemption were denied, these plans would need to 
undertake significant work to find an alternative manager.\24\ These 
costs, according to TTI include the following: (a) consultant fees, 
legal fees, and other due diligence expenses associated with 
identifying new managers; (b) transaction costs associated with a 
change in investment manager, including the sale and purchase of 
portfolio investments to accommodate the investment policies and 
strategy of the new manager, and the cost of entering into new 
custodial arrangements; and (c) lost investment opportunities as a 
result of the change in investment managers.
---------------------------------------------------------------------------

    \24\ TTI represents that it has managed ERISA assets for a major 
U.S. financial institution since at least 2015. TTI also states that 
it has managed ERISA assets for a large aerospace company since at 
least 2018.
---------------------------------------------------------------------------

    The Applicant states that, given the sophistication of TTI's 
investment strategies, Covered Plan clients would likely engage in a 
full RFP process that could take several months to complete. TTI states 
that plans generally incur tens of thousands of dollars in consulting 
and legal fees in connection with a search for a new manager and that 
consultants may charge more for searches involving specialized 
strategies, such as TTI's international, emerging markets, and 
environmentally conscious portfolios.
    35. TTI represents that terminating management agreements and 
liquidating associated positions can have a significant impact on both 
transaction fees and the market value of the underlying assets. This is 
particularly true for many of TTI's strategies, which focus on 
international and emerging markets and may occasionally involve 
investments in illiquid foreign securities and related derivatives that 
have large bid-ask spreads, infrequent trading, and/or low trading 
volumes.
    TTI states that for U.S. Equity Strategies, assuming average market 
conditions, the liquidation costs over a 30-day liquidation timeframe 
might range from 20 to 40 basis points; for significantly shorter 
liquidation periods, and depending on the strategy, the range could be 
30 to 50 basis points. In addition, commission fees and transactions 
would likely average an additional 4 basis points.
    For International and Emerging Markets Equity, TTI relies on the 
QPAM Exemption to buy and sell certain international and emerging 
markets equity securities. International, and particularly emerging, 
equity markets are typically less liquid than their domestic 
counterparts and incur higher transaction costs. Assuming average 
market conditions, the liquidation costs for equity strategies over a 
30-day liquidation timeframe might range from 30 to 50 basis points; 
for significantly shorter liquidation periods, the range could be 40 to 
80 basis points, depending on the strategy. In addition, there would 
also be an additional average of 10 basis points in commission fees on 
the transactions.
    36. For futures, options, and cleared and bilateral swaps, TTI 
relies on the QPAM Exemption to buy and sell these products, which 
certain strategies rely on to hedge risk and obtain certain exposures 
on an economic basis. Without the ability to invest in these 
instruments, plans would no longer have access to a tool that managers 
routinely use to protect against losses caused by market volatility. If 
the QPAM Exemption were lost, TTI estimates that its clients could 
incur average weighted liquidation costs of approximately 5 basis 
points of the total market value of these products.
    37. In the case of foreign currency exposure, Covered Plans that 
invest in global strategies would be disadvantaged were they to lose 
the ability to hedge currency risk. If the QPAM Exemption were lost, 
TTI estimates that its clients could incur average weighted liquidation 
costs of approximately 5 basis points of the total market value in 
fixed income products.
    38. TTI also provides estimated liquidation as dollar cost 
estimates. TTI's estimate of liquidation costs is of the emerging 
market equity portfolios only, which represents the predominant 
strategy for ERISA Clients. TTI states that its estimates on equity 
liquidation costs below are based on the gross values of the portfolio, 
utilizing the basis point figures, without analysis as to the specific 
portfolio components.

----------------------------------------------------------------------------------------------------------------
                                    Emerging market  Min. 30-day equity      Max. 30-day      Min. intermediate
           ERISA client            portfolio AUM at   liquidation cost    liquidation cost     liquidation cost
                                        12/7/23           (30 bps)            (50 bps)             (40 bps)
----------------------------------------------------------------------------------------------------------------
1................................       $54,845,803             164,537             274,229              219,383
2................................       172,160,384             516,481             860,801              688,641
3................................       102,787,100             308,361             513,935              411,148
(Plan Asset Fund)................       441,117,644           1,323,352           2,205,588            1,764,470
                                  ------------------------------------------------------------------------------
    Total........................       770,910,931           2,312,731           3,854,553            3,083,642
----------------------------------------------------------------------------------------------------------------


----------------------------------------------------------------------------------------------------------------
                                                      Max. intermediate                      Liquidation cost of
                    ERISA client                       liquidation cost    Commission fees    currency hedge (50
                                                           (80 bps)            (10 bps)              bps)
----------------------------------------------------------------------------------------------------------------
1..................................................             $438,766            $54,845              $27,788
2..................................................            1,377,283            172,160               86,914
3..................................................              822,296            102,787               51,982
Plan Asset Fund....................................            3,528,941            441,117              202,235
                                                    ------------------------------------------------------------
    Total..........................................            6,167,286            770,909              368,919
----------------------------------------------------------------------------------------------------------------


[[Page 88121]]

Term of Relief Requested

    39. In its exemption application, TTI requested a nine-year 
exemption that would carry TTI through the end of the Section I(g) 10-
year disqualification period triggered by the Conviction. The 
Department is declining to include a nine-year term with this exemption 
and instead has proposed a five-year term. With this limited term of 
relief, the Department is reserving the right to review TTI's adherence 
to the conditions set out in this exemption before granting additional 
relief that would carry TTI through the end of its disqualification 
period. To continue to rely upon the QPAM Exemption beyond the five-
year term of this exemption, TTI will have to submit another exemption 
application to the Department.
    40. In developing administrative exemptions under ERISA section 
408(a), the Department implements its statutory directive to grant only 
exemptions that are appropriately protective and in the interest of 
affected plans and IRAs. The Department is proposing this exemption 
with conditions that would protect Covered Plans (and their 
participants and beneficiaries) and allow them to continue to utilize 
the services of TTI if they determine that it is prudent to do so. If 
this proposed exemption is granted as proposed, it would allow Covered 
Plans to avoid costs and disruption to investment strategies that may 
arise if such Covered Plans are forced, on short notice, to hire a 
different QPAM or asset manager because TTI is no longer able to rely 
on the relief provided by PTE 84-14 due to the Conviction.
    41. This proposed exemption includes a suite of conditions that are 
similar to those conditions set out under PTE 2023-13 and requires TTI 
to: continue to implement, maintain, and follow its ERISA Policies and 
ERISA Training; submit to an annual independent audit performed by a 
prudently selected independent auditor; agree and warrant to Covered 
Plan clients that it will, among other things, comply with ERISA and 
the Code and refrain from engaging in prohibited transactions that are 
not otherwise exempt; agree and warrant to indemnify and hold harmless 
Covered Plans for certain damages, not to require (or otherwise cause) 
Covered Plans to waive, limit, or qualify the liability of TTI, and not 
to restrict the ability of Covered Plans to terminate or withdraw from 
their arrangement with TTI, except for reasonable restrictions, or 
impose any fees, penalties, or charges for such termination or 
withdrawal, except for reasonable fees. This proposed exemption also 
contains extensive notice requirements and obligates TTI to ensure that 
a qualified senior compliance officer continues to conduct annual 
reviews to determine the adequacy and effectiveness of TTI's 
implementation of the Policies and Training.
    42. Finally, the Department notes that relief under this proposed 
exemption is limited solely to TTI and no other affiliates of TTI, 
SMBC, or SMFG, as the term affiliate is defined in PTE 84-14.

Statutory Findings

    43. Based on the conditions included in this proposed exemption, 
the Department has tentatively determined that the relief sought by TTI 
would satisfy the statutory requirements for an exemption under ERISA 
section 408(a).
    44. The Proposed Exemption is ``Administratively Feasible.'' The 
Department has tentatively determined that the proposed exemption is 
administratively feasible for the Department because, among other 
things, a qualified independent auditor would be required to perform an 
in-depth audit covering TTI's compliance with the terms of the 
exemption, and a corresponding written audit report would be provided 
to the Department and be made available to the public. The Department 
notes that the independent audit will incentivize TTI to comply with 
conditions set out herein while reducing the immediate need for direct 
review and oversight by the Department.
    45. The Proposed Exemption is ``In the Interest of the Covered 
Plans and their Participants and Beneficiaries.'' The Department has 
tentatively determined that the proposed exemption is in the interests 
of the participants and beneficiaries of affected Covered Plans because 
of the likely costs that plans would incur if the exemption were denied 
and the benefits of permitting plans to continue to rely upon TTI's 
services with the additional protections set forth in this exemption.
    46. The Proposed Exemption Is ``Protective of the Rights of Covered 
Plan Participants and Beneficiaries.'' The Department has tentatively 
determined that the proposed exemption is protective of the rights of 
participants and beneficiaries of Covered Plans. As described above, 
the proposed exemption is subject to a suite of conditions that 
include, but are not limited to: (a) the maintenance of the Policies; 
(b) the continued implementation of the Training; (c) a robust audit 
conducted by a qualified independent auditor; (d) the provision of 
certain agreements and warranties by TTI to Covered Plans; (e) specific 
notices and disclosures that inform Covered Plans of the circumstances 
necessitating the need for exemptive relief and TTI's obligations under 
this exemption; and (f) the designation of a Compliance Officer who 
must ensure that TTI continues to comply with the Policies and Training 
requirements of this exemption. Further, the Department notes that the 
disqualifying conduct occurred at an entity (Nikko Tokyo) that is 
completely separate from TTI.

Summary

    47. This proposed exemption would provide relief from certain of 
the restrictions set forth in ERISA section 406 and Code section 
4975(c)(1). No relief or waiver of a violation of any other law would 
be provided by this proposed exemption. The relief set forth in this 
proposed exemption would terminate immediately if, among other things, 
an entity within the TTI corporate structure were convicted of any 
crime covered by Section I(g) of PTE 84-14 (other than the Conviction). 
While TTI could request a new individual prohibited transaction 
exemption in that event, the Department would not be obligated to grant 
such a request. Consistent with this proposed exemption, the 
Department's consideration of additional exemptive relief is subject to 
the findings required under ERISA section 408(a) and Code section 
4975(c)(2).
    48. When interpreting and implementing this exemption, TTI should 
resolve any ambiguities in favor of the exemption's protective 
purposes. To the extent additional clarification is necessary, TTI and 
others should contact EBSA's Office of Exemption Determinations at 202-
693-8540.
    49. Based on the conditions that are included in this proposed 
exemption, the Department has tentatively determined that the relief 
sought by TTI would satisfy the statutory requirements for an 
individual exemption under ERISA Section 408(a) and Code Section 
4975(c)(2).

Notice to Interested Persons

    Notice of the proposed exemption will be provided to all interested 
persons within fifteen (15) days of the publication of the notice of 
proposed five-year exemption in the Federal Register. The notice will 
be provided to all interested persons in the manner approved by the 
Department and will contain the documents described therein and a 
supplemental statement, as required pursuant to 29 CFR 2570.43(a)(2). 
The supplemental statement will inform interested persons of their 
right to comment on and to request a hearing with respect to the

[[Page 88122]]

pending exemption. All written comments and/or requests for a hearing 
must be received by the Department within forty-five (45) days of the 
date of publication of this proposed five-year exemption in the Federal 
Register. All comments will be made available to the public.

Warning

    If you submit a comment, EBSA recommends that you include your name 
and other contact information in the body of your comment, but DO NOT 
submit information that you consider to be confidential, or otherwise 
protected (such as a Social Security number or an unlisted phone 
number) or confidential business information that you do not want 
publicly disclosed. All comments may be posted on the internet and can 
be retrieved by most internet search engines.

General Information

    The attention of interested persons is directed to the following:
    (1) The fact that a transaction is the subject of an exemption 
under ERISA section 408(a) and/or Code section 4975(c)(2) does not 
relieve a fiduciary or other party in interest or disqualified person 
from certain other provisions of ERISA and/or the Code, including any 
prohibited transaction provisions to which the exemption does not apply 
and the general fiduciary responsibility provisions of ERISA section 
404, which, among other things, require a fiduciary to discharge their 
duties respecting the plan solely in the interest of the participants 
and beneficiaries of the plan and in a prudent fashion in accordance 
with ERISA section 404(a)(1)(B); nor does it affect the requirement of 
Code section 401(a) that the plan must operate for the exclusive 
benefit of the employees of the employer maintaining the plan and their 
beneficiaries;
    (2) Before an exemption may be granted under ERISA section 408(a) 
and/or Code section 4975(c)(2), the Department must find that the 
exemption is administratively feasible, in the interests of the plan 
and of its participants and beneficiaries, and protective of the rights 
of participants and beneficiaries of the plan;
    (3) The proposed exemption would be supplemental to, and not in 
derogation of, any other provisions of ERISA and/or the Code, including 
statutory or administrative exemptions and transitional rules. 
Furthermore, the fact that a transaction is subject to an 
administrative or statutory exemption is not dispositive of whether the 
transaction is, in fact, a prohibited transaction; and
    (4) The proposed exemption would be subject to the express 
condition that the material facts and representations contained in the 
application are true and complete at all times and that the application 
accurately describes all material terms of the transactions that are 
the subject of the exemption.

Proposed Exemption

    The Department is considering granting a five-year exemption under 
the authority of ERISA section 408(a) and Internal Revenue Code (or 
Code) section 4975(c)(2), and in accordance with the procedures set 
forth in the exemption procedure regulation.\25\
---------------------------------------------------------------------------

    \25\ 29 CFR part 2570, subpart B (76 FR 66637, 66644, October 
27, 2011). Effective December 31, 1978, section 102 of 
Reorganization Plan No. 4 of 1978, 5 U.S.C. App. 1 (1996), 
transferred the authority of the Secretary of the Treasury to issue 
exemptions of the type requested to the Secretary of Labor. 
Therefore, this notice of proposed exemption is issued solely by the 
Department.
---------------------------------------------------------------------------

Section I. Definitions

    (a) The term ``Conviction'' means the judgment of conviction 
against SMBC Nikko Securities, Inc. (Nikko Tokyo) in Tokyo District 
Court for attempting to peg, fix or stabilize the prices of certain 
Japanese equity securities that Nikko Tokyo was attempting to place in 
a block offering that occurred on February 13, 2023.
    (b) The term ``Covered Plan'' means a plan subject to Part IV of 
title I of ERISA (an ``ERISA-covered plan'') or a plan subject to Code 
section 4975 (an ``IRA''), in each case, with respect to which TTI 
relies on PTE 84-14, or with respect to which TTI has expressly 
represented that the manager qualifies as a QPAM or relies on the QPAM 
class exemption (PTE 84-14 or the QPAM Exemption). A Covered Plan does 
not include an ERISA-covered plan or IRA to the extent that TTI has 
expressly disclaimed reliance on QPAM status or PTE 84-14 in entering 
into a contract, arrangement, or agreement with the ERISA-covered plan 
or IRA.
    (c) The term ``Exemption Period'' means the five-year period 
beginning on February 13, 2024, and ending on February 12, 2029.
    (d) The term ``TTI'' means TT International Asset Management Ltd, 
and does not include SMBC Nikko Securities, Inc. (Nikko Tokyo), or any 
other entity affiliated with TT International Asset Management Ltd.

Section II. Covered Transactions

    Under this proposed exemption, TTI would not be precluded from 
relying on the exemptive relief provided by Prohibited Transaction 
Class Exemption 84-14 (PTE 84-14 or the QPAM Exemption) notwithstanding 
the Conviction, as defined in Section I(a), during the Exemption 
Period, as defined in Section I(c), provided that the conditions set 
forth in Section III below are satisfied.

Section III. Conditions

    (a) TTI (including its officers, directors, agents other than Nikko 
Tokyo, and employees) did not know of, did not have reason to know of, 
and did not participate in the criminal conduct that is the subject of 
the Conviction. Further, any other party engaged on behalf of TTI who 
had responsibility for or exercised authority in connection with the 
management of plan assets did not know or have reason to know of and 
did not participate in the criminal conduct that is the subject of the 
Conviction. For purposes of this proposed exemption, ``participate in'' 
refers not only to active participation in the criminal conduct of 
Nikko Tokyo that is the subject of the Conviction, but also to knowing 
approval of the criminal conduct or knowledge of such conduct without 
taking active steps to prohibit it, including reporting the conduct to 
such individual's supervisors, and to TTI's Board of Directors;
    (b) TTI (including its officers, directors, employees, and agents, 
other than Nikko Tokyo) did not receive direct compensation, or 
knowingly receive indirect compensation, in connection with the 
criminal conduct that is the subject of the Conviction. Further, any 
other party engaged on behalf of TTI who had responsibility for, or 
exercised authority in connection with the management of plan assets 
did not receive direct compensation, or knowingly receive indirect 
compensation, in connection with the criminal conduct that is the 
subject of the Conviction;
    (c) TTI does not currently and will not in the future employ or 
knowingly engage any of the individuals who participated in the 
criminal conduct that is the subject of the Conviction;
    (d) At all times during the Exemption Period, TTI will not use its 
authority or influence to direct an ``investment fund'' (as defined in 
Section VI(b) of PTE 84-14) that is subject to ERISA or the Code and 
managed by TTI in reliance on PTE 84-14, or with respect to which TTI 
has expressly represented to a Covered Plan that it qualifies as a QPAM 
or relies on the QPAM Exemption, to enter into any transaction with 
Nikko Tokyo, or to engage Nikko Tokyo to provide any service to such

[[Page 88123]]

investment fund, for a direct or indirect fee borne by such investment 
fund, regardless of whether such transaction or service may otherwise 
be within the scope of relief provided by an administrative or 
statutory exemption;
    (e) Any failure of TTI to satisfy Section I(g) of PTE 84-14 arose 
solely from the Conviction;
    (f) TTI did not exercise authority over the assets of any Covered 
Plan in a manner that it knew or should have known would further the 
criminal conduct that is the subject of the Conviction or cause TTI or 
its affiliates to directly or indirectly profit from the criminal 
conduct that is the subject of the Conviction;
    (g) Other than with respect to employee benefit plans maintained or 
sponsored for its own employees or the employees of an affiliate, Nikko 
Tokyo will not act as a fiduciary within the meaning of ERISA section 
3(21)(A)(i) or (iii), or Code section 4975(e)(3)(A) and (C), with 
respect to Covered Plan assets.
    (h)(1) TTI must continue to implement, maintain, adjust (to the 
extent necessary), and follow the written policies and procedures (the 
Policies). The Policies must require and be reasonably designed to 
ensure that:
    (i) The asset management decisions of TTI are conducted 
independently of the corporate management and business activities of 
Nikko Tokyo;
    (ii) TTI fully complies with ERISA's fiduciary duties and with 
ERISA and the Code's prohibited transaction provisions, as applicable 
with respect to each Covered Plan, and does not knowingly participate 
in any violation of these duties and provisions with respect to Covered 
Plans;
    (iii) TTI does not knowingly participate in any other person's 
violation of ERISA or the Code with respect to Covered Plans;
    (iv) Any filings or statements made by TTI to regulators, 
including, but not limited to, the Department of Labor (the 
Department), the Department of the Treasury, the Department of Justice, 
and the Pension Benefit Guaranty Corporation, on behalf of or in 
relation to Covered Plans, are materially accurate and complete to the 
best of such QPAM's knowledge at that time;
    (v) To the best of TTI's knowledge at the time, TTI does not make 
material misrepresentations or omit material information in its 
communications with such regulators with respect to Covered Plans or 
make material misrepresentations or omit material information in its 
communications with Covered Plans;
    (vi) TTI complies with the terms of this exemption; and
    (vii) Any violation of or failure to comply with an item in 
subparagraphs (ii) through (vi) is corrected as soon as reasonably 
possible upon discovery or as soon after TTI reasonably should have 
known of the noncompliance (whichever is earlier), and any such 
violation or compliance failure not so corrected is reported, upon the 
discovery of such failure to so correct, in writing, to the head of 
compliance and the general counsel (or their functional equivalent) of 
TTI, and the independent auditor responsible for reviewing compliance 
with the Policies. TTI will not be treated as having failed to develop, 
implement, maintain, or follow the Policies, provided it corrects any 
instance of noncompliance as soon as reasonably possible upon 
discovery, or as soon as reasonably possible after TTI reasonably 
should have known of the noncompliance (whichever is earlier), and 
provided it adheres to the reporting requirements set forth in this 
subparagraph (vii);
    (2) TTI must continue to implement an annual training program (the 
Training) during the Exemption Period for all relevant TTI asset/
portfolio management, trading, legal, compliance, and internal audit 
personnel. The Training required under this exemption may be conducted 
electronically and must: (a) at a minimum, cover the Policies, ERISA 
and Code compliance (including applicable fiduciary duties and the 
prohibited transaction provisions), ethical conduct, the consequences 
for not complying with the conditions of this exemption (including any 
loss of exemptive relief provided herein), and prompt reporting of 
wrongdoing; and (b) be conducted by a professional who has been 
prudently selected and who has appropriate technical training and 
proficiency with ERISA and the Code to perform the tasks required by 
this exemption;
    (i)(1) TTI must submit to biannual audits conducted by an 
independent auditor who has been prudently selected and who has 
appropriate technical training and proficiency with ERISA and the Code, 
to evaluate the adequacy of and TTI's compliance with the Policies and 
Training conditions described herein. The audit requirement must be 
incorporated into the Policies. The first audit covered under this 
exemption must cover the period of February 13, 2025, through February 
12, 2026, and must be completed by August 12, 2026. The second audit 
covered under this exemption must cover the period of February 13, 
2027, through February 12, 2028, and must be completed by August 12, 
2028.
    (2) Within the scope of the audit and to the extent necessary for 
the auditor, in its sole opinion, to complete its audit and comply with 
the conditions for relief described herein, TTI will grant the auditor 
unconditional access to its businesses, including, but not limited to: 
its computer systems; business records; transactional data; workplace 
locations; training materials; and personnel. Such access will be 
provided only to the extent that it is not prevented by state or 
federal statute, or involves communications subject to attorney client 
privilege, and may be limited to information relevant to the auditor's 
objectives as specified by the terms of this exemption;
    (3) The auditor's engagement must specifically require the auditor 
to determine whether TTI has developed, implemented, maintained, and 
followed the Policies in accordance with the conditions of the 
exemption, and has developed and implemented the Training, as required 
herein;
    (4) The auditor's engagement must specifically require the auditor 
to test TTI's operational compliance with the Policies and Training 
conditions. In this regard, the auditor must test, for TTI, 
transactions involving Covered Plans sufficient in size, number, and 
nature to afford the auditor a reasonable basis to determine TTI's 
operational compliance with the Policies and Training;
    (5) Before the end of the relevant period for completing the audit, 
the auditor must issue a written report (the Audit Report) to TTI that 
describes the procedures performed by the auditor during the course of 
its examination. The Audit Report must include the auditor's specific 
determinations regarding:
    (i) the adequacy of TTI's Policies and Training; TTI's compliance 
with the Policies and Training conditions; the need, if any, to 
strengthen such Policies and Training; and any instance of TTI's 
noncompliance with the written Policies and Training described in 
Section III(h) above. TTI must promptly address any noncompliance and 
promptly address or prepare a written plan of action to address any 
determination by the auditor regarding the adequacy of the Policies and 
Training and the auditor's recommendations (if any) with respect to 
strengthening the Policies and Training. Any action taken, or the plan 
of action to be taken by TTI must be included in an addendum to the 
Audit Report (and such addendum must be completed before the 
certification described in Section III(i)(7) below). In the event such 
a plan of action to address the auditor's recommendation

[[Page 88124]]

regarding the adequacy of the Policies and Training is not completed by 
the time the Audit Report is submitted, the following period's Audit 
Report must state whether the plan was satisfactorily completed. Any 
determination by the auditor that TTI has implemented, maintained, and 
followed sufficient Policies and Training must not be based solely or 
in substantial part on an absence of evidence indicating noncompliance. 
In this last regard, any finding that TTI has complied with the 
requirements under this subparagraph must be based on evidence that TTI 
has actually implemented, maintained, and followed the Policies and 
Training required by the exemption. Furthermore, the auditor must not 
solely rely on the Report created by the compliance officer (the 
Compliance Officer), as described in Section III(m) below, as the basis 
for the auditor's conclusions in lieu of independent determinations and 
testing performed by the auditor, as required by Section III(i)(3) and 
(4) above; and
    (ii) The adequacy of the Review described in Section III(m);
    (6) The auditor must notify TTI of any instance of noncompliance 
identified by the auditor within five (5) business days after such 
noncompliance is identified by the auditor, regardless of whether the 
audit has been completed as of that date;
    (7) With respect to the Audit Report, the general counsel, or one 
of the three most senior executive officers of TTI must certify in 
writing, under penalty of perjury, that the officer has reviewed the 
Audit Report and the exemption and that to the best of such officer's 
knowledge at the time, TTI has addressed, corrected or remedied any 
noncompliance and inadequacy, or has an appropriate written plan to 
address any inadequacy regarding the Policies and Training identified 
in the Audit Report. The certification must also include the 
signatory's determination that the Policies and Training in effect at 
the time of signing are adequate to ensure compliance with the 
conditions of this exemption and with the applicable provisions of 
ERISA and the Code. Notwithstanding the above, no person, including any 
person identified by Japanese authorities, who knew of, or should have 
known of, or participated in, any misconduct underlying the Conviction, 
by any party, may provide the certification required by the exemption, 
unless the person took active documented steps to stop the misconduct 
underlying the Conviction;
    (8) TTI's Board of Directors must be provided a copy of the Audit 
Report and the joint general manager of SMFG's Corporate Planning 
Department must review the Audit Report for TTI and certify in writing, 
under penalty of perjury, that such officer has reviewed the Audit 
Report. With respect to this subsection (8), such certifying joint 
general manager must not have known of, had reason to know of, or 
participated in, any misconduct underlying the Conviction, unless such 
person took active documented steps to stop the misconduct underlying 
the Conviction.
    (9) TTI must provide its certified Audit Report, by electronic mail 
to [email protected]. This delivery must take place no later than thirty 
(30) days following completion of the Audit Report. The Audit Report 
will be made part of the public record regarding this exemption. 
Furthermore, TTI must make its Audit Report unconditionally available, 
electronically or otherwise, for examination upon request by any duly 
authorized employee or representative of the Department, other relevant 
regulators, and any fiduciary of a Covered Plan;
    (10) TTI and the auditor must submit to [email protected], any 
engagement agreement(s) entered into pursuant to the engagement of the 
auditor under the exemption no later than two (2) months after the 
execution of any such engagement agreement;
    (11) The auditor must provide the Department, upon request, access 
to all the workpapers it created and utilized in the course of the 
audit for inspection and review, provided such access and inspection is 
otherwise permitted by law; and
    (12) TTI must notify the Department of a change in the independent 
auditor no later than 60 days after the engagement of a substitute or 
subsequent auditor and must provide an explanation for the substitution 
or change including a description of any material disputes between the 
terminated auditor and TTI;
    (j) Throughout the Exemption Period, with respect to any 
arrangement, agreement, or contract between TTI and a Covered Plan, TTI 
agrees and warrants:
    (1) To comply with ERISA and the Code, as applicable with respect 
to such Covered Plan; to refrain from engaging in prohibited 
transactions that are not otherwise exempt (and to promptly correct any 
prohibited transactions); and to comply with the standards of prudence 
and loyalty set forth in ERISA section 404 with respect to each such 
Covered Plan, to the extent that section is applicable;
    (2) To indemnify and hold harmless the Covered Plan with respect 
to: any actual losses resulting directly from TTI's violation of 
ERISA's fiduciary duties, as applicable, and of the prohibited 
transaction provisions of ERISA and the Code, as applicable; a breach 
of contract by TTI; or any claim arising out of the failure of TTI to 
qualify for the exemptive relief provided by PTE 84-14 as a result of a 
violation of Section I(g) of PTE 84-14, other than the Conviction. This 
condition applies only to actual losses caused by TTI's violations. 
Actual losses include losses and related costs arising from unwinding 
transactions with third parties and from transitioning Plan assets to 
an alternative asset manager as well as costs associated with any 
exposure to excise taxes under Code section 4975 because of TTI's 
inability to rely upon the relief in the QPAM Exemption.
    (3) Not to require (or otherwise cause) the Covered Plan to waive, 
limit, or qualify the liability of TTI for violating ERISA or the Code 
or engaging in prohibited transactions;
    (4) Not to restrict the ability of the Covered Plan to terminate or 
withdraw from its arrangement with TTI with respect to any investment 
in a separately managed account or pooled fund subject to ERISA and 
managed by TTI, with the exception of reasonable restrictions, 
appropriately disclosed in advance, that are specifically designed to 
ensure equitable treatment of all investors in a pooled fund in the 
event such withdrawal or termination may have adverse consequences for 
all other investors. In connection with any of these arrangements 
involving investments in pooled funds subject to ERISA entered into 
after the effective date of this exemption, the adverse consequences 
must relate to a lack of liquidity of the underlying assets, valuation 
issues, or regulatory reasons that prevent the fund from promptly 
redeeming a Covered Plan's investment, and the restrictions must be 
applicable to all such investors and effective no longer than 
reasonably necessary to avoid the adverse consequences;
    (5) Not to impose any fees, penalties, or charges for such 
termination or withdrawal with the exception of reasonable fees, 
appropriately disclosed in advance, that are specifically designed to 
prevent generally recognized abusive investment practices or 
specifically designed to ensure equitable treatment of all investors in 
a pooled fund in the event the withdrawal or termination may have 
adverse consequences for all other investors, provided that such fees 
are applied consistently and in like manner to all such investors;

[[Page 88125]]

    (6) Not to include exculpatory provisions disclaiming or otherwise 
limiting the liability of TTI for a violation of such agreement's 
terms. To the extent consistent with ERISA section 410, however, this 
provision does not prohibit disclaimers for liability caused by an 
error, misrepresentation, or misconduct of a plan fiduciary or other 
party hired by the plan fiduciary who is independent of TTI and its 
affiliates, or damages arising from acts outside the control of TTI; 
and
    (7) TTI must provide a notice of its obligations under this Section 
III(j) to each Covered Plan. For all other prospective Covered Plans, 
TTI must agree to its obligations under this Section III(j) in an 
updated investment management agreement between TTI and such clients or 
other written contractual agreement. Notwithstanding the above, TTI 
will not violate this condition solely because a Covered Plan refuses 
to sign an updated investment management agreement;
    (k) Within 60 days after the effective date of this exemption, TTI 
provides notice of the exemption as published in the Federal Register, 
along with a separate summary describing the facts that led to the 
Conviction (the Summary), which has been submitted to the Department, 
and a prominently displayed statement (the Statement) that the 
Conviction results in a failure to meet a condition in PTE 84-14 to 
each sponsor and beneficial owner of a Covered Plan that has entered 
into a written asset or investment management agreement with TTI. All 
prospective Covered Plan clients that enter into a written asset or 
investment management agreement with TTI after a date that is 60 days 
after the effective date of this exemption must receive a copy of the 
notice of the exemption, the Summary, and the Statement before, or 
contemporaneously with, the Covered Plan's receipt of a written asset 
or investment management agreement from TTI. The notices may be 
delivered electronically (including by an email that has a link to the 
exemption). Notwithstanding the above, TTI will not violate the 
condition solely because a Covered Plan refuses to sign an updated 
investment management agreement.
    (l) TTI must comply with each condition of PTE 84-14, as amended, 
with the sole exception of the violation of Section I(g) of PTE 84-14 
that is attributable to the Conviction. If an affiliate of TTI (as 
defined in Section VI(d) of PTE 84-14) is convicted of a crime 
described in Section I(g) of PTE 84-14 (other than the Conviction) 
during the Exemption Period, relief in the exemption would terminate 
immediately;
    (m)(1) TTI must continue to designate a senior compliance officer 
(the Compliance Officer) to be responsible for compliance with the 
Policies and Training requirements described herein. The Compliance 
Officer previously designated by TTI under PTE 2023-13 may continue to 
serve in the role of Compliance Officer provided they meet all the 
requirements of this Section (m)(1). Notwithstanding the above, no 
person, including any person referenced in the indictment that gave 
rise to the Conviction, who knew of, or should have known of, or 
participated in, any misconduct described in the indictment, by any 
party, may be involved with the designation or responsibilities 
required by this condition unless the person took active documented 
steps to stop the misconduct. The Compliance Officer must conduct a 
review of the Exemption Period (the Exemption Review), to determine the 
adequacy and effectiveness of TTI's implementation of the Policies and 
Training. With respect to the Compliance Officer, the following 
conditions must be met:
    (i) The Compliance Officer must be a professional who has extensive 
experience with, and knowledge of, the regulation of financial services 
and products, including under ERISA and the Code; and
    (ii) The Compliance Officer must have a direct reporting line to 
the highest-ranking corporate officer in charge of legal compliance for 
asset management.
    (2) With respect to the Exemption Review, the following conditions 
must be met:
    (i) The Exemption Review must include a review of TTI's compliance 
with and effectiveness of the Policies and Training and of the 
following: any compliance matter related to the Policies or Training 
that was identified by, or reported to, the Compliance Officer or 
others within the compliance and risk control function (or its 
equivalent) during the previous year; any material change in the 
relevant business activities of TTI; and any change to ERISA, the Code, 
or regulations related to fiduciary duties and the prohibited 
transaction provisions that may be applicable to the activities of TTI;
    (ii) The Compliance Officer prepares a written report for the 
Exemption Review (an Exemption Report) that (A) summarizes their 
material activities during the Exemption Period; (B) sets forth any 
instance of noncompliance discovered during the Exemption Period, and 
any related corrective action; (C) details any change to the Policies 
or Training to guard against any similar instance of noncompliance 
occurring again; and (D) makes recommendations, as necessary, for 
additional training, procedures, monitoring, or additional and/or 
changed processes or systems, and management's actions in response to 
such recommendations;
    (iii) In the Exemption Report, the Compliance Officer must certify 
in writing that to the best of their knowledge at the time: (A) the 
report is accurate; (B) the Policies and Training are working in a 
manner which is reasonably designed to ensure that the Policies and 
Training requirements described herein are met; (C) any known instance 
of noncompliance during the prior year, and any related correction 
taken to date, has been identified in the Exemption Report; and (D) TTI 
complied with the Policies and Training, and/or corrected (or are 
correcting) any known instances of noncompliance in accordance with 
Section III(h) above;
    (iv) The Exemption Report must be provided to appropriate corporate 
officers of TTI; the head of compliance and the general counsel (or 
their functional equivalent) of TTI; and must be made unconditionally 
available to the independent auditor described above;
    (v) The Exemption Review, including the Compliance Officer's 
written Report, must be completed within 90 days following the end of 
the period to which it relates.
    (n) TTI imposes internal procedures, controls, and protocols to 
reduce the likelihood of any recurrence of conduct that is the subject 
of the Conviction;
    (o) Nikko Tokyo complies in all material respects with any 
requirements imposed by a U.S. regulatory authority in connection with 
the Conviction;
    (p) TTI maintains records necessary to demonstrate that the 
conditions of the exemption have been met for six (6) years following 
the date of any transaction for which TTI relies upon the relief in 
this exemption;
    (q) During the Exemption Period, TTI must: (1) immediately disclose 
to the Department any Deferred Prosecution Agreement (a DPA) or Non-
Prosecution Agreement (an NPA) with the U.S. Department of Justice, 
entered into by TTI or any of its affiliates (as defined in Section 
VI(d) of PTE 84-14) in connection with the conduct described in Section 
I(g) of PTE 84-14 or ERISA section 411; and (2) immediately provide the 
Department with any information requested by the Department, as 
permitted by law, regarding the agreement and/or conduct

[[Page 88126]]

and allegations that led to the agreement;
    (r) Within 60 days after the effective date of the exemption, TTI, 
in its agreements with, or in other written disclosures provided to 
Covered Plans, will clearly and prominently inform Covered Plan clients 
of their right to obtain a copy of the Policies or a description 
(Summary Policies) which accurately summarizes key components of TTI's 
written Policies developed in connection with this exemption. If the 
Policies are thereafter changed, each Covered Plan client must receive 
a new disclosure within 180 days following the end of the calendar year 
during which the Policies were changed. If TTI meets this disclosure 
requirement through Summary Policies, changes to the Policies shall not 
result in the requirement for a new disclosure unless, as a result of 
changes to the Policies, the Summary Policies are no longer accurate. 
With respect to this requirement, the description may be continuously 
maintained on a website, provided that such website link to the 
Policies or Summary Policies is clearly and prominently disclosed to 
each Covered Plan;
    (s) TTI must provide the Department with the records necessary to 
demonstrate that each condition of this exemption has been met within 
30 days of a request by the Department; and
    (t) All the material facts and representations set forth in the 
Summary of Facts and Representations are true and accurate at all 
times.
    Effective Date: If the Department grants this proposed exemption, 
it would be in effect for a five-year period beginning on February 13, 
2024, and ending on February 12, 2029.

    Signed at Washington, DC.
George Christopher Cosby,
Director, Office of Exemption Determinations, Employee Benefits 
Security Administration, U.S. Department of Labor.
[FR Doc. 2023-27937 Filed 12-19-23; 8:45 am]
BILLING CODE 4510-29-P