[Federal Register Volume 80, Number 163 (Monday, August 24, 2015)]
[Notices]
[Pages 51314-51321]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-20852]
[[Page 51314]]
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
[Application No. D-11696]
Notice of Proposed Exemption Involving Deutsche Bank AG (Deutsche
Bank or the Applicant); Located in Frankfurt, Germany
AGENCY: Employee Benefits Security Administration, Labor.
ACTION: Notice of proposed temporary exemption.
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SUMMARY: This document contains a notice of pendency before the
Department of Labor (the Department) of a proposed temporary individual
exemption from certain prohibited transaction restrictions of the
Employee Retirement Income Security Act of 1974, as amended (ERISA),
and the Internal Revenue Code of 1986, as amended (the Code). The
proposed exemption, if granted, would affect the ability of certain
entities with specified relationships to Deutsche Bank to continue to
rely upon the relief provided by Prohibited Transaction Class Exemption
84-14.
DATES: Effective Date: If granted, this proposed exemption will be
effective for a period of nine months, beginning on the date (the
Conviction Date) that a judgment of conviction against Deutsche
Securities Korea Co. (Deutsche Securities Korea Co. or DSK) is entered
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.
DATES: Written comments and requests for a public hearing on the
proposed exemption should be submitted to the Department within seven
days from the date of publication of this Federal Register Notice.
ADDRESSES: Comments should state the nature of the person's interest in
the proposed exemption and the manner in which the person would be
adversely affected by the exemption, if granted. A request for a
hearing can be requested by any interested person who may be adversely
affected by an exemption. A request for a hearing must state: (1) The
name, address, telephone number, and email address of the person making
the request; (2) the nature of the person's interest in the exemption
and the manner in which the person would be adversely affected by the
exemption; and (3) a statement of the issues to be addressed and a
general description of the evidence to be presented at the hearing. The
Department will grant a request for a hearing made in accordance with
the requirements above where a hearing is necessary to fully explore
material factual issues identified by the person requesting the
hearing. A notice of such hearing shall be published by the Department
in the Federal Register. The Department may decline to hold a hearing
where: (1) The request for the hearing does not meet the requirements
above; (2) the only issues identified for exploration at the hearing
are matters of law; or (3) the factual issues identified can be fully
explored through the submission of evidence in written (including
electronic) form.
All written comments and requests for a public hearing concerning
the proposed exemption should be directed to the following addresses:
Office of Exemption Determinations, Employee Benefits Security
Administration, Suite 400, U.S. Department of Labor, 200 Constitution
Avenue NW., Washington, DC 20210, Attention: Application No. D-11696.
Interested persons may also submit comments and/or hearing requests to
EBSA via email to [email protected], by FAX to (202) 219-0204, or
online through http://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.
Warning: All comments received will be included in the public
record without change and may be made available online at http://www.regulations.gov, including any personal information provided,
unless the comment includes information claimed to be confidential or
other information whose disclosure is restricted by statute. If you
submit a comment, EBSA recommends that you include your name and other
contact information in the body of your comment, but DO NOT submit
information that you consider to be confidential, or otherwise
protected (such as Social Security number or an unlisted phone number)
or confidential business information that you do not want publicly
disclosed. However, if EBSA cannot read your comment due to technical
difficulties and cannot contact you for clarification, EBSA might not
be able to consider your comment. Additionally, the http://www.regulations.gov Web site 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 http://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.
FOR FURTHER INFORMATION CONTACT: Scott Ness, telephone (202) 693-8561,
Office of Exemption Determinations, Employee Benefits Security
Administration, U.S. Department of Labor (This is not a toll-free
number).
SUPPLEMENTARY INFORMATION: If this proposed exemption is granted, the
Department will require certain asset managers with specified
relationships to Deutsche Bank to satisfy additional conditions
designed to protect affected ERISA-covered plans and IRAs in order to
rely on the relief provided by Prohibited Transaction Class Exemption
84-14 (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)), in light of a judgment of
conviction, in Seoul Central District Court, against Deutsche
Securities Korea Co. on September 3, 2015, for spot/futures-linked
market price manipulation. The proposed exemption has been requested by
Deutsche Bank pursuant to section 408(a) of the ERISA and section
4975(c)(2) of the Code, and in accordance with the procedures set forth
in 29 CFR part 2570, subpart B (76 FR 66637, 66644, October 27, 2011).
Effective December 31, 1978, section 102 of the Reorganization Plan No.
4 of 1978, 5 U.S.C. App. at 672 (2006), transferred the authority of
the Secretary of the Treasury to issue administrative exemptions under
section 4975(c)(2) of the Code to the Secretary of Labor. Accordingly,
this notice of proposed exemption is being issued solely by the
Department.
The Department is proposing this temporary exemption to protect
plans that are managed by asset managers affiliated with DSK (the DB
QPAMs), from incurring the costs and expenses that would likely arise
if such managers are unable to rely on the relief provided by PTE 84-14
as of the Conviction Date, which is expected to be September 3, 2015.
In this regard, Section I(g) of PTE 84-14 precludes a person who may
otherwise meet the definition of a QPAM from relying on the relief
[[Page 51315]]
provided by that class exemption if that person or its ``affiliate''
has, within 10 years immediately preceding the transaction, been either
convicted or released from imprisonment, whichever is later, as a
result of certain specified criminal activity described therein. This
exemption, if granted, preserves the ability of DB QPAMs to continue to
rely on the relief provided by PTE 84-14, notwithstanding a criminal
conviction of DSK for market manipulation, for a period of nine months
beginning on the Conviction Date, as long as the conditions herein are
met.
Following Deutsche Bank's submission of Exemption Application D-
11696, which is the subject of this proposed exemption (the First
Request), Deutsche Bank made a separate exemption request, in Exemption
Application D-11856 (the Second Request). The Second Request seeks
exemptive relief for DB QPAMs to continue to rely on PTE 84-14 for a
period of ten years, notwithstanding both: The criminal conviction of
DSK for market manipulation; and the criminal conviction of a Deutsche
Bank affiliate, DB Group Services UK Limited, for one count of wire
fraud in connection with its alleged role in manipulating LIBOR.
The Department has tentatively denied the Second Request, upon
initially determining that the exemption sought is not in the interest
of affected plans and IRAs, and not protective of those plans and IRAs.
Fiduciaries of plans and IRAs with assets managed by a DB QPAM should
be aware that if the Department makes a final decision not to propose
the Second Request, the DB QPAMs will be unable to rely on the relief
set forth in PTE 84-14 upon the earlier of the day that follows the
nine month term of this exemption, if granted, or the date any of the
conditions herein are not met. The Department notes that Deutsche Bank
has requested a conference to afford Deutsche Bank the opportunity to
provide additional information in connection with its request. The
Department notes further that the Department may change its position
based on this additional information, or upon additional analysis. This
temporary exemption, if granted, requires, among other things, that
each DB QPAM agree not to restrict the ability of each ERISA-covered
plan or IRA to terminate or withdraw from its arrangement with the DB
QPAM, with certain limited exceptions.
Summary of Facts and Representations
Background
1. Deutsche Bank AG (together with its current and future
affiliates, Deutsche Bank or the Applicant) is a German banking
corporation and a commercial bank. Deutsche Bank, with and through its
affiliates, subsidiaries, and branches, provides globally a wide range
of banking, fiduciary, recordkeeping, custodial, brokerage and
investment services to, among others, corporations, institutions,
governments, employee benefit plans, government retirement plans and
private investors. Deutsche Bank had [euro]68.4 billion in total
shareholders' equity and [euro]1,709 billion in total assets as of
December 31, 2014.\1\
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\1\ The Applicant represents that its audited financial
statements are expressed in Euros and are not converted to dollars.
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2. Deutsche Securities Korea Co. (DSK), an indirect wholly-owned
subsidiary of Deutsche Bank, is a broker-dealer organized in Korea and
supervised by the Financial Supervisory Service in Korea. The Absolute
Strategy Group (ASG) of Deutsche Bank's Hong Kong Branch (DB HK)
conducts index arbitrage trading for proprietary accounts in Asian
markets, including Korea.
The Applicant represents that index arbitrage trading is a trading
strategy through which an investor such as Deutsche Bank seeks to earn
a return by identifying and exploiting a difference between the value
of futures contracts in respect of a relevant equity index and the spot
value of the index, as determined by the current market price of the
constituent stocks. For instance, where the futures contracts are
deemed to be overpriced by reference to the spot value of the index
(i.e., if the premium is sufficiently large), then the trader may take
a long position in the physical stock and a corresponding short
position in the futures or options. The combined position is described
as hedged. Since the trader has a long position in one market and a
short position in the other market, the profit from one (stocks) will
be offset by the loss in the other (futures). The trader is largely
indifferent to market direction.
The Applicant represents that ASG pursued an index arbitrage
trading strategy in various Asian markets, including Korea. In Korea,
the index arbitrage position involved the Korean Composite Stock Price
Index (KOSPI 200 Index), which reflects stocks commonly traded on the
Korea Exchange (KRX).
3. On November 11, 2010, ASG unwound an arbitrage position on the
KOSPI 200 Index through DSK. The ``unwind'' included a sale of $2.1
billion worth of stocks in the KRX during the final 10 minutes of
trading (i.e., the closing auction period) and comprised 88% of the
volume of stock traded during this period. This large volume sale
contributed to a drop of the KOSPI 200 Index by 2.7%.
Prior to the unwinding, but after the decision to unwind was made,
ASG had taken certain derivative positions, including put options on
the KOSPI 200 Index. Thus, ASG earned a profit when the KOSPI 200 Index
declined as a result of the unwind trades (the derivative positions and
unwind trades cumulatively referred to as the Trades). DSK had also
purchased put options on that day that resulted in it earning a profit
as a result of the drop of the KOSPI 200 Index. The aggregate amount of
profit earned from such Trades was approximately $40 million, which, as
discussed below, Deutsche Bank subsequently disgorged.
4. The Seoul Central District Prosecutor's Office (the Korean
Prosecutors) alleges that the Trades constitute spot/futures-linked
market manipulation, a criminal violation under Korean securities law.
In this regard, the Korean Prosecutors allege that ASG unwound its cash
position of certain securities listed on the KRX(spot) through DSK, and
caused a fluctuation in the market price of securities related to
exchange-traded derivatives (the put options) for the purpose of
gaining unfair profit from such exchange-traded derivatives. On August
19, 2011, the Korean Prosecutors indicted DSK and four individuals on
charges of stock market manipulation to gain unfair profits.\2\ Two of
the individuals, Derek Ong and Bertrand Dattas, worked for ASG at DB
HK. Mr. Ong was a Managing Director and head of ASG, with power and
authority with respect to the KOSPI 200 Index arbitrage trading
conducted by Deutsche Bank. Mr. Dattas served as a Director of ASG and
was responsible for the direct operations of the KOSPI 200 Index
arbitrage trading. Philip Lonergan, the third individual, was employed
by Deutsche Bank Services (Jersey) Limited. At the time of the
transaction, Mr. Lonergan was seconded to DB HK and served as Head of
Global Market Equity, Trading and Risk. Mr. Lonergan served as Mr.
Ong's regional superior and was in charge of risk management
[[Page 51316]]
for his team. The fourth individual charged, Do-Joon Park, was employed
by DSK, serving as a Managing Director of Global Equity Derivatives
(GED) at DSK and was in charge of the index arbitrage trading using
DSK's book that had been integrated into and managed by ASG. Mr. Park
was also a de facto chief officer of equity and derivative product
operations of DSK.
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\2\ Specifically, the charges allege that DSK violated certain
provisions of Articles 176, 443, and 448 of the Financial Investment
Services and Capital Markets Act (FSCMA) and the individuals
violated certain provisions of Articles 176, 443, and 447 of the
FSCMA.
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The Korean Prosecutors' case against DSK is based on Korea's
criminal vicarious liability provision, under which DSK may be held
vicariously liable for an act of its employee (i.e., Mr. Park) if it
failed to exercise due care in the appointment and supervision of its
employees.\3\ The trial commenced proceedings in January 2012 in Seoul
Central District Court (the Court), and a guilty verdict is expected to
occur on September 3, 2015.\4\ In this regard, it is expected that, on
that date, the Court will enter its judgment against the defendants,
thereby convicting DSK of such crimes (the Conviction).
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\3\ Article 448 of the FSCMA allows for charges against an
employer stemming from vicarious liability for the actions of its
employees.
\4\ The Applicant notes that the hearing during which the guilty
verdict is expected to occur is scheduled for September 4, 2015 in
Korea, but because of time zone differences, the hearing will be on
September 3, 2015 in United States time zones.
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Failure To Comply With Section I(g) of PTE 84-14 and Proposed Relief
5. PTE 84-14 is a class exemption that permits certain transactions
between a party in interest with respect to an employee benefit plan
and an investment fund in which the plan has an interest and which is
managed by a ``qualified professional asset manager'' (QPAM), if the
conditions of the exemption are satisfied. These conditions include
Section I(g), which precludes a person who may otherwise meet the
definition of a QPAM from relying on the relief provided by PTE 84-14
if that person or its ``affiliate'' \5\ has, within 10 years
immediately preceding the transaction, been either convicted or
released from imprisonment, whichever is later, as a result of certain
specified criminal activity described therein.\6\ As noted in the
preamble to the proposed class exemption, a QPAM, and those who may be
in a position to influence its policies, are expected to maintain a
high standard of integrity.\7\
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\5\ 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.''
\6\ For purposes of Section I(g) of PTE 84-14, a person shall be
deemed to have been ``convicted'' from the date of the judgment of
the trial court, regardless of whether that judgment stands on
appeal.
\7\ See 47 FR 56945 at 56946.
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6. The Applicant represents that certain current and future
``affiliates'' of DSK, as that term is defined in section VI(d) of PTE
84-14, may act as QPAMs in reliance on the relief provided in PTE 84-14
(these entities are collectively referred to as the ``DB QPAMs''). The
DB QPAMs are currently comprised of several wholly-owned direct and
indirect subsidiaries of Deutsche Bank including: (1) Deutsche
Investment Management Americas, Inc.; (2) Deutsche Bank Securities
Inc., which is a dual-registrant with the SEC under the Advisers Act as
an investment adviser and broker-dealer; (3) RREEF America L.L.C., a
Delaware limited liability company and investment adviser registered
with the SEC under the Advisers Act; (4) Deutsche Bank Trust Company
Americas, a corporation organized under the laws of the State of New
York and supervised by the New York State Department of Financial
Services, a member of the Federal Reserve and an FDIC-insured bank; (5)
Deutsche Bank National Trust Company, a national banking association,
organized under the laws of the United States and supervised by the
Office of the Comptroller of the Currency, and a member of the Federal
Reserve; (6) Deutsche Bank Trust Company, NA, a national banking
association, organized under the laws of the United States and
supervised by the OCC; (7) Deutsche Alternative Asset Management
(Global) Limited, a London-based investment adviser registered with the
SEC under the Advisers Act; (8) Deutsche Investments Australia Limited,
a Sydney, Australia-based investment adviser registered with the SEC
under the Advisers Act; (9) DeAWM Trust Company (DTC), a limited
purpose trust company organized under the laws of New Hampshire and
subject to supervision of the New Hampshire Banking Department; and the
four following entities which currently do not rely on PTE 84-14 for
the management of any ERISA plan or IRA assets, but may in the future:
(10) Deutsche Asset Management (Hong Kong) Ltd.; (11) Deutsche Asset
Management International GmbH; (12) DB Investment Managers, Inc.; and
(13) Deutsche Bank AG, New York Branch.
Deutsche Bank notes that discretionary asset management services
are provided to ERISA plans, IRAs and others under the following Asset
& Wealth Management business lines, each of which may be served by one
or more of the DB QPAMs: (1) Wealth Management--Private Client Services
($104.7 million in ERISA assets, and $469.7 million in IRA assets); (2)
Wealth Management--Private Bank ($67.6 million in ERISA assets, $153.1
million in IRA assets and $2 million in ERISA-like assets); (3) Active
Management ($271.4 million in ERISA assets); (4) Alternative and Real
Assets ($757.9 million in ERISA assets); (5) Alternatives & Fund
Solutions (no current ERISA or IRA assets); and (6) Passive Management
(no current ERISA or IRA assets). In addition, according to Deutsche
Bank, the Alternatives and Real Assets business manages, on a
discretionary basis, $6.2 billion in governmental plan assets, most of
which are contractually subject to ERISA standards. Finally, DTC
manages the DWS Stock Index Fund, a collective investment trust with
$192 million in assets as of March 31, 2015. The Applicant represents
that none of the DB QPAMs are subsidiaries of DSK, and that, with the
exception of Deutsche Bank AG (the corporate parent to all the
aforementioned entities), DSK is not a subsidiary of any of the DB
QPAMs.
7. Pursuant to Section I(g) of PTE 84-14, to the extent the
Conviction occurs on September 3, 2015, as expected, the DB QPAMs will
no longer be able to rely on PTE 84-14 as of that date. Therefore, the
Applicant has requested an exemption to enable the DB QPAMs to continue
to rely on the exemptive relief provided by PTE 84-14, notwithstanding
the Conviction and its resultant failure to satisfy Section I(g) of PTE
84-14.\8\
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\8\ The Applicant represents that there is an ongoing regulatory
investigation into the matter in Hong Kong, but the Applicant is not
aware of any indication that this investigation is leading to
potential criminal indictments in Hong Kong.
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Remedial Measures To Address Criminal Conduct of DSK
8. The Applicant represents that it has voluntarily disgorged its
profits generated from exercising derivative positions and put options
in connection with the activity associated with the impending
Conviction. DSK also suspended its proprietary trading from April 2011
to 2012, and thereafter DSK could only engage in some proprietary
trading (but not index arbitrage
[[Page 51317]]
trading).\9\ Further, in response to the actions of the Korean
Prosecutors, Deutsche Bank enhanced its compliance measures and
implemented additional measures in order to ensure compliance with
applicable laws in Korea and Hong Kong, as well as within other
jurisdictions where the Applicant conducts business.
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\9\ The Applicant notes that DSK was never permitted to trade on
behalf of Deutsche Bank.
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The Applicant states further that Mr. Ong and Mr. Dattas were
terminated for cause by DB HK on December 6, 2011, and Mr. Lonergan was
terminated on January 31, 2012. John Ripley, a New York-based employee
of Deutsche Bank Securities Inc. who was not indicted, was also
terminated in October 2011.\10\ In addition, Mr. Park was suspended for
six months due to Korean administrative sanctions, and remains on
indefinite administrative leave. As discussed below, this proposed
exemption, if granted, is only available to the extent that no
individual involved with the spot/futures-linked market manipulation
activities that led to the Conviction is employed by a DB QPAM.
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\10\ According to the Korean prosecutors, Mr. Ripley served as a
Head of Global ASG of Deutsche Bank, AG, and was a functional
superior to Mr. Ong. Mr. Ripley was suspected of having advised to
unwind all the KOSPI 200 index arbitrage trading for the purpose of
management of the ending profits and losses of Global ASK and
approved Mr. Ong's request to establish the speculative positions in
the course of the unwinding. Though the Korean prosecutors named Mr.
Ripley as a suspect, he was not named in the August 19, 2011, Writ
of Indictment.
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Statutory Findings--In the Interests of Affected Plans and IRAs
9. Deutsche Bank states that, in the absence of exemptive relief,
affected ERISA-covered Plans and IRAs may incur substantial harm,
because such Plans and IRAs will immediately lose their ability to use
their chosen investment managers for transactions otherwise covered by
PTE 84-14. In this regard, according to Deutsche Bank, Plans and IRAs
would incur costs in searching for new managers, issuing requests for
proposals (for which consultants could charge between $15,000 and
$40,000 for the strategies offered by the DB QPAMs), conducting due
diligence (including meetings with potential managers and credit
analysts), seeking investment committee approvals and negotiating and/
or drafting new investment management agreements, investment guidelines
and related trading documentation with broker-dealers and other
counterparties. Deutsche Bank suggests that the selection of new
managers could potentially take several months or longer, resulting in
a number of collateral costs including the opportunity costs of missed
investments, lower returns from investing in cash pending long term
reinvestment, fewer trading counterparties and more limited or costly
temporary investment alternatives.
Deutsche Bank represents that ERISA plans and IRAs would also incur
direct transaction costs in liquidating and reinvesting their
portfolios, ranging from 2.5 to 25 basis points (excluding core real
estate), resulting in approximately $5 to $7 million in expenses.
Further, the Applicant states that an unplanned liquidation of the
Alternatives and Real Assets business' direct real estate portfolios
may result in portfolio discounts of 10-20% of gross asset value, along
with 30 to 100 basis points in direct transaction costs, resulting in
an estimated total cost to plan investors of between $281 million and
$723 million, depending on the liquidation period.
Upon considering Deutsche Bank's representations, the Department
has tentatively determined that the proposed exemption is in the
interest of affected plans and IRAs.
Statutory Findings--Protective of the Rights of Participants of
Affected Plans and IRAs
10. The Department has also tentatively determined that the
proposed exemption contains safeguards that are sufficient to protect
affected plans and IRAs. Many of these conditions are directed at the
DB QPAMs; however, additional conditions are imposed on Deutsche Bank,
and others are directed at DSK. Regarding the conditions in this
exemption aimed at the DB QPAMs, each DB QPAM must immediately develop,
implement, maintain, and follow robust written policies (the Policies)
and training requirements (the Training). The Policies, which are
described in more detail in the operative language of the proposed
exemption below, are generally designed to, among other things: ensure
the independence of the DB QPAMs from Deutsche Bank and its other
affiliates such as DSK; require the strict legal compliance of the DB
QPAMs with ERISA, the Code and the prohibited transaction rules; ensure
truthfulness and transparency with respect to statements made by DB
QPAMs to regulators; and ensure compliance with the terms of this
exemption, if granted. The Training, which is also described in more
detail in the operative language of the proposed exemption below, is
designed to cover the Policies, ERISA and Code compliance, ethical
conduct, the consequences for not complying with the conditions of this
exemption, and prompt reporting of wrongdoing.
In order to verify the DB QPAMs' compliance with the Policies and
Training requirements of the proposed exemption, and the conditions for
relief, each DB QPAM will be subject to an audit conducted by an
independent auditor, who has been prudently selected and who has
appropriate technical training and proficiency with ERISA to evaluate
the adequacy of, and compliance with, the Policies and Training, and
the conditions for relief described herein. Furthermore, to the extent
necessary for the auditor, in its sole opinion, to complete its audit
and comply with the conditions for relief described herein, each 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. The auditor's engagement
shall specifically require the auditor to determine whether each DB
QPAM has developed, implemented, maintained, and followed Policies in
accordance with the conditions of this exemption and developed and
implemented the Training, as required herein, and it shall specifically
require the auditor to test each DB QPAM's operational compliance with
the Policies and Training.
Furthermore, for each audit, the auditor shall 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 shall include
the auditor's specific determinations regarding: The adequacy of, and
compliance with, the Policies and Training; the auditor's
recommendations (if any) with respect to strengthening such Policies
and Training; and any instances of the respective DB QPAM's
noncompliance with the written Policies and Training described above.
Furthermore, any determinations made 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 shall be promptly addressed by such DB QPAM, and any
actions taken by such DB QPAM to address such recommendations shall be
included in an addendum to the Audit Report. The auditor is required to
notify the
[[Page 51318]]
respective DB QPAM of any instances of noncompliance identified by the
auditor. 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
inadequacies 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 exemption and with the
applicable provisions of ERISA and the Code. Moreover, an executive
officer of Deutsche Bank must review the Audit Report for each DB QPAM
and certify in writing, under penalty of perjury, that such officer has
reviewed each Audit Report.
The DB QPAMs are required to give the Department copies of the
Audit Report, any engagement agreement(s) entered into pursuant to the
engagement of the auditor under this exemption, if granted, and any
engagement agreement entered into with any other entities retained in
connection with such QPAM's compliance with the Training or Policies
conditions of this exemption, no later than three (3) months after the
date of the Conviction (and one month after the execution of any
agreement thereafter). Furthermore, the DB QPAMs are required to give
the Department copies of the auditor's workpapers upon request. In
addition, Deutsche Bank must notify the Department at least 30 days
prior to any substitution of the auditor, and must demonstrate to the
Department's satisfaction that the replacement 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.
Under the terms of the exemption, if granted, the DB QPAMs must
also agree to certain terms and undertakings with each ERISA-covered
plan or IRA for which a DB QPAM provides asset management or other
discretionary fiduciary services, including, generally: (1) Compliance
with ERISA and the Code and avoidance of non-exempt prohibited
transactions; (2) not to waive, limit, or qualify certain liabilities
of the DB QPAM; (3) not to require indemnification of the DB QPAM for
violating ERISA or engaging in prohibited transactions; and (4) with
minor exceptions, not to restrict the ability of ERISA-covered plan or
IRA clients to terminate or withdraw from their arrangement with the DB
QPAM or, to impose any fees, penalties, or charges for such termination
or withdrawal. Each DB QPAM will provide a notice describing the above-
described terms and undertakings to each such ERISA-covered plan or IRA
within two (2) months of the date of publication of a notice of
exemption in the Federal Register, if granted.
Under the terms of this proposed exemption, each DB QPAM must:
Maintain records necessary to demonstrate that the conditions herein
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, if
granted; comply with each condition of PTE 84-14, as amended, with the
sole exception of the violation of Section I(g) that is attributable to
the Conviction; ensure that none of the individuals that engaged in the
conduct that led to the Conviction are employed by the DB QPAM; and
provide a notice of the proposed exemption, and if granted, a notice of
final exemption, along with a separate summary (which has been
submitted to the Department) 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
of an ERISA-covered plan and each beneficial owner of an IRA invested
in an investment fund managed by a DB QPAM, or the sponsor of an
investment fund in any case where a DB QPAM acts only as a sub-advisor
to the investment fund.
Lastly, regarding the DB QPAMs, relief under this exemption, if
granted, is only available to the extent: Such QPAMs, including their
officers, directors, agents other than Deutsche Bank, and employees,
did not know of, have reason to know of, or participate in the criminal
conduct of DSK that is the subject of the Conviction; any failure of
those QPAMs to satisfy Section I(g) of PTE 84-14 arose solely from the
Conviction; such QPAMs did not directly receive compensation in
connection with, the criminal conduct that is the subject of the
Conviction; and none of those QPAMs used its authority or influence to
direct an ``investment fund'' (as defined in Section VI(b) of PTE 84-
14) that is subject to ERISA and managed by such DB QPAM to enter into
any transaction with DSK, or engage DSK to provide additional services
to such investment fund, for a direct or indirect fee borne by such
investment fund, regardless of whether such transactions or services
may otherwise be within the scope of relief provided by an
administrative or statutory exemption. However, a DB QPAM will not fail
to meet the terms of this exemption solely because a different DB QPAM
fails to satisfy the conditions for relief under this exemption
described in Sections I(d), (e), (f), (g), (h), and (k).
Regarding conditions herein directed at Deutsche Bank, prior to
engaging in a transaction covered by this exemption, if granted,
Deutsche Bank must have previously disgorged all of its profits
generated from exercising derivative positions and put options in
connection with the activity associated with the impending Conviction.
Deutsche Bank must also impose internal procedures, controls, and
protocols on DSK designed to reduce the likelihood of any recurrence of
the conduct that is the subject of the Conviction, to the extent
permitted by local law.
Regarding conditions herein aimed at DSK, DSK may not provide
fiduciary services to ERISA-covered Plans or IRAs, or otherwise
exercise discretionary control over plan assets. Further, none of the
DB QPAMs may be subsidiaries of DSK, and DSK may not be a subsidiary of
any of the DB QPAMs. Finally, the criminal conduct of DSK that is the
subject of the Conviction must not have directly or indirectly involved
the assets of any plan subject to Part 4 of Title I of ERISA or section
4975 of the Code.
Statutory Findings--Administratively Feasible
11. The Applicant represents that the proposed exemption is
administratively feasible. The Applicant represents that the requested
exemption does not require the Department's oversight of the Conviction
described herein because DSK does not provide any fiduciary or QPAM
services to ERISA-covered plans and IRAs and that no ERISA or IRA
assets were involved in the Conviction.
Notice to Interested Persons
Notice of the proposed exemption will be provided to all interested
persons within two days of the publication of the notice of proposed
exemption in the Federal Register. The notice will be provided to all
interested persons in the manner agreed upon by the Applicant and the
Department. Such notice will contain a copy of the notice of proposed
exemption, as published in the Federal Register, 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 pending
exemption. Written comments and hearing requests are due within seven
days of the
[[Page 51319]]
publication of the notice of proposed exemption in the Federal
Register.
All comments will be made available to the public. Warning: If you
submit a comment, EBSA recommends that you include your name and other
contact information in the body of your comment, but DO NOT submit
information that you consider to be confidential, or otherwise
protected (such as Social Security number or an unlisted phone number)
or confidential business information that you do not want publicly
disclosed. All comments may be posted on the Internet and can be
retrieved by most Internet search engines.
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of ERISA 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 of the ERISA and/or the Code,
including any prohibited transaction provisions to which the exemption
does not apply and the general fiduciary responsibility provisions of
section 404 of the ERISA, 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 ERISA;
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) Before an exemption may be granted under section 408(a) of the
ERISA and/or section 4975(c)(2) of the Code, 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, if granted, will be supplemental to,
and not in derogation of, any other provisions of the ERISA and/or the
Code, including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction; and
(4) The proposed exemption, if granted, will be subject to the
express condition that the material facts and representations contained
in the application are true and complete, and that the application
accurately describes all material terms of the transaction which is the
subject of the exemption.
Proposed Exemption
The Department is considering granting an exemption under the
authority of section 408(a) of the Employee Retirement Income Security
Act of 1974, as amended (ERISA or the Act) and section 4975(c)(2) of
the Internal Revenue Code of 1986, as amended (the Code) and in
accordance with the procedures set forth in 29 CFR part 2570, subpart B
(76 FR 66637, 66644, October 27, 2011).\11\
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\11\ For purposes of this proposed exemption, references to the
provisions of Title I of the Act, unless otherwise specified, refer
also to the corresponding provisions of the Code.
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Section I: Covered Transactions
If the proposed exemption is granted, the DB QPAMs (as defined in
Section (II(b)) shall not be precluded from relying on the exemptive
relief provided by Prohibited Transaction Exemption (PTE) 84-14,\12\
notwithstanding the Conviction (as defined in Section II(a)),\13\
provided that the following conditions are satisfied:
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\12\ 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).
\13\ Section I(g) of PTE 84-14 generally provides that
``[n]either the QPAM nor any affiliate thereof . . . nor any owner .
. . of a 5 percent or more interest in the QPAM is a person who
within the 10 years immediately preceding the transaction has been
either convicted or released from imprisonment, whichever is later,
as a result of'' certain felonies including income tax evasion and
conspiracy or attempt to commit income tax evasion.
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(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
that is the subject of the Conviction;
(b) Any failure of the DB QPAMs to satisfy Section I(g) of PTE 84-
14 arose solely from the Conviction;
(c) The DB QPAMs did not directly receive compensation in
connection with, the criminal conduct that is the subject of the
Conviction;
(d) A DB 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 and managed by such DB QPAM to enter into any
transaction with DSK or engage DSK to provide additional services to
such investment fund, for a direct or indirect fee borne by such
investment fund regardless of whether such transactions or services may
otherwise be within the scope of relief provided by an administrative
or statutory exemption;
(e)(1) Each DB QPAM immediately develops, implements, maintains,
and follows written policies (the Policies) requiring and reasonably
designed to ensure that: (i) The asset management decisions of the DB
QPAM are conducted independently of Deutsche Bank's management and
business activities; (ii) the DB QPAM fully complies with ERISA's
fiduciary duties and ERISA and the Code's prohibited transaction
provisions and does not knowingly participate in any violations of
these duties and provisions with respect to ERISA-covered plans and
IRAs; (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; (iv) any filings or statements made by the DB 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) 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; (vi) the DB
QPAM complies with the terms of this exemption, if granted; and (vii)
any violations of or failure to comply with items (ii) through (vi) are
corrected promptly upon discovery and any such violations or compliance
failures not promptly corrected are reported, upon discovering the
failure to promptly correct, in writing to appropriate corporate
officers, the head of Compliance and the General Counsel of the
relevant DB QPAM (or their functional equivalent), the independent
auditor responsible for reviewing compliance with the Policies, and a
fiduciary of any affected ERISA-covered plan or IRA where such
fiduciary 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; DB QPAMs will not be treated
as having
[[Page 51320]]
failed to develop, implement, maintain, or follow the Policies,
provided that they correct any instances of noncompliance promptly when
discovered or when they reasonably should have known of the
noncompliance (whichever is earlier), and provided that they adhere to
the reporting requirements set forth in this item (vii);
(2) Each DB QPAM immediately develops and implements a program of
training (the Training), conducted at least annually for relevant DB
QPAM asset management, legal, compliance, and internal audit personnel;
the Training shall 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) and ethical
conduct, the consequences for not complying with the conditions of this
exemption, (including the loss of the exemptive relief provided
herein), and prompt reporting of wrongdoing;
(f)(1) Each DB QPAM submits to an audit conducted by an independent
auditor, who has been prudently selected and who has appropriate
technical training and proficiency with ERISA to evaluate the adequacy
of, and compliance with, the Policies and Training described herein;
the audit requirement must be incorporated in the Policies. The audit
must cover the 9 month period during which this proposed exemption, if
granted, is effective, and must be completed no later than three (3)
months after the period to which the audit applies;
(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, 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;
(3) The auditor's engagement shall specifically require the auditor
to determine whether each DB QPAM has developed, implemented,
maintained, and followed Policies in accordance with the conditions of
this exemption and developed and implemented the Training, as required
herein;
(4) The auditor's engagement shall specifically require the auditor
to test each DB QPAM's operational compliance with the Policies and
Training;
(5) For each audit, the auditor shall 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 shall include the
auditor's specific determinations regarding the adequacy of, and
compliance with, the Policies and Training; the auditor's
recommendations (if any) with respect to strengthening such Policies
and Training; and any instances of the respective DB QPAM's
noncompliance with the written Policies and Training described in
paragraph (e) above. Any determinations made 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 shall be promptly addressed by such
DB QPAM, and any actions taken by such DB QPAM to address such
recommendations shall be included in an addendum to the Audit Report.
Any determinations by the auditor that the respective DB QPAM has
implemented, maintained, and followed sufficient Policies and Training
shall 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, and not solely on evidence that
demonstrates that the DB QPAM has not violated ERISA;
(6) The auditor shall notify the respective DB QPAM of any
instances 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 DB QPAM to which the
Audit Report applies certifies in writing, under penalty of perjury,
that the officer has reviewed the Audit Report and this exemption;
addressed, corrected, or remedied any inadequacies 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 exemption and with the applicable provisions of
ERISA and the Code;
(8) An executive officer of Deutsche Bank reviews the Audit Report
for each DB QPAM and certifies in writing, under penalty of perjury,
that such officer has reviewed each Audit Report;
(9) Each DB QPAM provides its certified Audit Report to the
Department's Office of Exemption Determinations (OED), 200 Constitution
Avenue NW., Suite 400, Washington DC 20210, no later than 30 days
following its completion, and each DB QPAM makes 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;
(10) Each DB QPAM and the auditor will 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 entities retained in connection with such QPAM's
compliance with the Training or Policies conditions of this exemption,
no later than three (3) months after the date of the Conviction (and
one month after the execution of any agreement thereafter);
(11) The auditor shall 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 instances of noncompliance by the relevant DB QPAM, and an
explanation of any corrective or remedial actions taken by the
applicable DB QPAM; and
(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;
(g) With respect to each ERISA-covered plan or IRA for which a DB
QPAM provides asset management or other discretionary fiduciary
services, each DB QPAM agrees: (1) To comply with ERISA and the Code,
as applicable with respect to such ERISA-covered plan or IRA, and
refrain from engaging in prohibited transactions that are not otherwise
exempt; (2) not 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
[[Page 51321]]
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; (4)
not to restrict the ability of such ERISA-covered plan or IRA to
terminate or withdraw from its arrangement with the DB 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,
provided that such restrictions are applied consistently and in like
manner to all such 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. Within two (2) months of the date of
publication of a notice of exemption in the Federal Register, if
granted, each DB QPAM will provide a notice to such effect to each
ERISA-covered plan or IRA for which a DB QPAM provides asset management
or other discretionary fiduciary services;
(h) Each DB QPAM will maintain records necessary to demonstrate
that the conditions of this exemption, if granted, 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; and
(i) The DB QPAMs comply with each condition of PTE 84-14, as
amended, with the sole exception of the violation of Section I(g) that
is attributable to the Conviction;
(j) The DB QPAMs will not employ any of the individuals that
engaged in the spot/futures-linked market manipulation activities that
led to the Conviction;
(k) The DB QPAMs will provide a notice of the proposed exemption,
and if granted, a notice of final exemption, along with a separate
summary describing the facts that led to the Conviction as well as a
statement that Deutsche Bank has made a separate exemption request, in
application D-11856, in connection with the potential conviction of DB
Group Services UK Limited for one count of wire fraud in connection
with DB Group Services UK Limited's role in manipulating LIBOR, which
has been submitted to the Department, and a prominently displayed
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 invested in an investment fund managed by a
DB QPAM, or the sponsor of an investment fund in any case where a DB
QPAM acts only as a sub-advisor to the investment fund;
(l) Deutsche Bank disgorged all of its profits generated by the
spot/futures-linked market manipulation activities of DSK personnel
that led to the Conviction;
(m) Deutsche Bank imposes internal procedures, controls, and
protocols on DSK designed to reduce the likelihood of any recurrence of
the conduct that is the subject of the Conviction, to the extent
permitted by local law;
(n) DSK has not, and will not, provide fiduciary or QPAM services
to ERISA-covered Plans or IRAs, and will not otherwise exercise
discretionary control over plan assets;
(o) No DB QPAM is a subsidiary of DSK, and DSK is not a subsidiary
of any DB QPAM;
(p) The criminal conduct of DSK that is the subject of the
Conviction did not directly or indirectly involve the assets of any
plan subject to Part 4 of Title I of ERISA or section 4975 of the Code;
and
(q) A DB QPAM will not fail to meet the terms of this exemption
solely because a different DB QPAM fails to satisfy the conditions for
relief under this exemption described in Sections I(d), (e), (f), (g),
(h), (i), and (k).
Section II: Definitions
(a) The term ``Conviction'' means the judgment of conviction
against DSK to be entered on or about September 3, 2015, 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;
(b) The term ``DB QPAM'' means a ``qualified professional asset
manager'' (as defined in section VI(a) \14\ of PTE 84-14) that relies
on the relief provided by PTE 84-14 and with respect to which DSK is a
current or future ``affiliate'' (as defined in section VI(d) of PTE 84-
14); and
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\14\ 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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(c) 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).
Signed at Washington, DC, this 19th day of August, 2015.
Lyssa Hall,
Director of Exemption Determinations, Employee Benefits Security
Administration, U.S. Department of Labor.
[FR Doc. 2015-20852 Filed 8-21-15; 8:45 am]
BILLING CODE 4510-29-P