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April 16, 2007

Money Managers Get More Internal Crossing

By Peter Chapman

New rules from the Department of Labor (DOL) could lead to more trades getting done within the walls of money management firms, rather than out in the marketplace.

Beginning this month, money managers handling orders from some pension plans governed by the Employee Retirement Income Security Act (ERISA) can cross some of those orders internally.

It's something pension plans and money managers have been clamoring for since 1974, when ERISA became law.

This so-called "cross-trading" was authorized by last year's Pension Protection Act and just codified by Labor's Employee Benefits Security Administration (EBSA).

The new rule permits pension plans with more than $100 million in assets to authorize money managers to cross their buy or sell orders against other orders on the managers' blotters, as long as certain stipulations are met.

The rule applies to orders for securities in actively managed portfolios. It complements an exemption to ERISA regulations granted five years ago that permitted managers of passive portfolios to cross-trade orders from ERISA accounts.

As of 2001, the last year for which data is available, only about 4,000 plans had total assets of more than $100 million-less than 1 percent of the approximately 730,000 pension plans. But those 4,000 plans controlled about three-quarters of the total $4 trillion in assets managed by the nation's pension plans.

Money managers, pension plans and industry groups have lobbied the Department of Labor for years for the right to cross orders internally. They claim cross-trading will save pension plans hundreds of millions of dollars per year. The regulator resisted, citing fears that plans will get bad fills as unscrupulous money managers favor certain clients over others.

The Investment Company Institute, for one, applauded last year's move, but is pushing EBSA to go even further. It wants EBSA to allow smaller plans to be able to authorize cross-trading.