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By Sean Forbes
Sept. 3 — Deutsche Bank AG received a temporary exemption that allows asset managers affiliated with a South Korean subsidiary to continue serving retirement plans even if employees at the subsidiary are convicted of stock market manipulation.
The DOL granted the nine-month prohibited transaction exemption because without it, retirement plans and individual retirement accounts with assets managed by qualified professional asset managers affiliated with Deutsche Securities Korea Co. (DSK) “may incur substantial costs in being forced to liquidate and reinvest their portfolios, and hire new investment managers on short notice,” the department said in a notice issued Sept. 3.
A conviction against DSK was expected on or about Sept. 3 in Seoul Central District Court, South Korea. The company would be held liable for the alleged spot- and futures-linked market price manipulation under Korea's criminal vicarious liability provision, the DOL said when the exemption was proposed Aug. 21.
A DOL spokesman said the department didn't know whether the employees had been convicted Sept. 3.
The waiver allows the asset managers to continue relying on Prohibited Transaction Exemption 84-14, which 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, if the exemption's conditions are met.
The DSK-affiliated asset managers will be able to rely on the temporary exemption only if no individual involved with the alleged market manipulation activities is employed by one of the asset managers, if they meet requirements under PTE 84-14 and several other conditions, the DOL said.
Although PTE 84-14 dates to 1984, it was most recently amended in 2010 to allow financial institutions to act as qualified professional asset managers for their own plans.
“The DOL's expressed rationale really is right on,” Andrew L. Oringer, a partner at Dechert LLP in New York, said Sept. 3. “It would be of unclear benefit—and in some ways least of all to the plans at the heart of these protections—to force plan investors to consider terminating managers because of some legal violation with incredibly attenuated connection to the manager. Putting aside for the moment whether it would make any policy-based sense at all not to grant this exemption in light of the connection between the conviction in question and investment management, a failure to allow continued service would appear to hurt the very plans that the system is trying to protect.”
It isn’t clear whether the DOL is developing a broader policy regarding banks convicted of financial misbehavior, but “it certainly feels like they’re taking longer than they used to” to make a decision, said James S. Henry, managing director for the Sag Harbor Group, in Sag Harbor, N.Y.
According to a DOL official at a public hearing in January on Credit Suisse’s application for a PTE, the DOL makes some of its decisions quietly, Henry said. And often, the DOL isn’t required to make its decisions on the record, so “the whole process is kind of murky,” he said.
Although Deutsche Bank got a temporary reprieve for its South Korean affiliate, the DOL reiterated that it had “tentatively denied” a second request by the bank for a 10-year waiver tied to the allegations against DSK and allegations against another affiliate of the firm, DB Group Services UK Ltd.
The U.K. affiliate faces a wire fraud charge in connection with its alleged role in manipulating a key benchmark rate that banks charge each other for short-term loans, the London interbank offered rate (Libor). The department said that the exemption sought isn't in the interest of affected plans and individual retirement plans, and not protective of those plans and IRAs.
However, Deutsche Bank has asked the DOL for a conference so that it can provide additional information in support of the second request, the department said.
The department had mentioned the tentative rejection of that request in the Aug. 21 notice.
The DOL also recently tentatively rejected requests by UBS Group AG and Royal Bank of Scotland Group Plc to keep managing U.S. pension money. The banks, which admitted guilt earlier this year over manipulating foreign exchange or benchmark interest rates, were required to seek the department's permission to maintain their qualified professional asset manager status. Those banks have also asked for the opportunity to provide more information in support of their requests.
In April, the DOL granted an exemption to BNP Paribas SA despite the bank's guilty plea to criminal charges for conspiring with other banks and other entities located in or controlled by countries subject to U.S. sanctions, including Sudan, Iran and Cuba, to move more than $8.8 billion through the U.S. financial system on behalf of those entities in violation of U.S. sanctions laws.
In light of such cases, Oringer said it appears that the department is taking a cautious and precise approach to granting PTEs for institutions in such legal trouble.
“I think that over time the DOL has taken an increasingly more surgical approach to the question of what conditions should be imposed as a part of relief of this type,” he said.
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