Case Study: Prior to recent statutory relief for the provision of foreign exchange, developed and introduced to industry use of negative consent for the approval of Foreign Exchange trades.

Posted by


While custody banks had always routinely provided foreign exchange to other institutional investors, the Department of Labor had taken the position that it constituted a sale of currency from the bank to its ERISA-plan client which constituted a “party-in-interest” prohibited transaction. Banks were prohibited from providing a routine and essential service for ERISA plan clients. In 1994, when relief was finally provided by the Department of Labor (DOL), it only extended to transactions individually directed and approved in writing by independent plan fiduciaries—routine transactions were not permitted based on standing instructions.

Solution Provided:

As in-house counsel to a major custody bank, I devised a procedure to automate the provision of foreign exchange to clients in a way that would comply with the DOL’s exemption for directed foreign exchange transactions. Under the procedure, each morning, the bank would, in writing, propose all terms for pending foreign exchange transactions to its clients, including ERISA clients. Under the procedure, which was agreed to, in writing, by each client participating in the program, the bank would proceed with the transactions as proposed, based on “negative” or “implied” consent, unless the client objected by a set time each morning. An “opinion of counsel” was issued by a major DC law firm, and shared with other custody banks, establishing a new industry practice.


The procedure was broadly adopted by major custody banks, enabling them to capture income from the provision of routine of foreign exchange to ERISA clients at fair rates approved by plan fiduciaries. When the DOL issued relief for “standing instructions” in 1998, they were broadly regarded as being problematic, but the industry had broadly adopted procedures which worked. (The problems with the DOL’s 1998 relief for “standing instructions” were effectively acknowledged when definitive relief was provided for foreign exchange transactions in the Pension Reform Act of 2006.)

Category : Case Studies