[Federal Register Volume 62, Number 26 (Friday, February 7, 1997)]
[Notices]
[Pages 5855-5857]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-3030]
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Prohibited Transaction Exemption 97-11; Application D-09707]
Class Exemption for the Receipt of Certain Investment Services by
Individuals for Whose Benefit Individual Retirement Accounts or
Retirement Plans for Self-Employed Individuals Have Been Established or
Maintained
AGENCY: Pension and Welfare Benefits Administration, U.S. Department of
Labor.
ACTION: Grant of class exemption.
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SUMMARY: This document contains a final class exemption from the
prohibited transaction restrictions of the Employee Retirement Income
Security Act of 1974 (ERISA) and the Internal Revenue Code of 1986 (the
Code). The class exemption permits the receipt of services at reduced
or no cost by an individual for whose benefit an individual retirement
account (IRA) or, it self-employed, a Keogh Plan is established or
maintained, or by members of his or her family, from a broker-dealer,
provided that the conditions of the exemption are met. The exemption
affects individuals with beneficial interests in such plans who receive
such services as well as the broker-dealers who provide such services.
EFFECTIVE DATE: February 7, 1997.
FOR FURTHER INFORMATION CONTACT: Allison Padams, Office of Exemption
Determinations, Pension and Welfare Benefits Administration, U.S.
Department of Labor, (202) 219-8971, (This is not a toll-free number);
or Paul D. Mannina, Plan Benefits Security Division, Office of
Solicitor, U.S. Department of Labor (202) 219-9141, (This is not a
toll-free number).
SUPPLEMENTARY INFORMATION: On July 31, 1996, the Department of Labor
(the Department) published a notice in the Federal Register (61 FR
39996) of the pendency of a proposed class exemption from the
restrictions of sections 406(a)(1)(D) and 406(b) of ERISA and the
sanctions resulting from the application of sections 4975 (a) and (b),
4975(c)(3) and 408(e)(2) of the Code by reason of section 4975(c)(1)
(D), (E) and (F) of the Code. This exemption was requested in an
exemption application filed on behalf of the Securities Industry
Association (the SIA or the Applicant). The application was filed
pursuant to section 408(a) of ERISA and section 4975(c)(2) of the Code
and in accordance with the procedures set forth in 29 CFR part 2570,
subpart B, (55 FR 32836, August 10, 1990.) \1\
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\1\ Section 102 of Reorganization Plan No. 4 of 1978 (43 FR
47713, October 17, 1978) generally 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.
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The notice of pendency gave interested persons an opportunity to
comment or request a public hearing on the proposal. No requests for a
public hearing were received by the Department. Two public comments
were received by the Department. Upon consideration of the record as a
whole, the Department has determined to grant the proposed exemption
subject to certain modifications. These modifications and the comments
are discussed below.
Discussion of the Comments Received
One commenter sought clarification of the language in the preamble
to the notice of proposed exemption which addressed the Investment
Company Institute's inquiry as to whether the exemption would provide
relief for a relationship brokerage program whereby a broker-dealer
offers reduced sales charges with respect to the purchase of investment
company shares as the size of the purchase increases. In this regard, a
broker-dealer would aggregate total purchases of all of a customer's
accounts, including IRAs and Keogh Plans. Thus, a broker-dealer would
set a schedule of commissions or rates that vary according to the size
of the transaction. Specifically, the commenter requests that the
Department clarify that the exemption covers ``rights of accumulation''
programs as described in the National Association of Securities
Dealers' Rules of Fair Practice in which a broker dealer takes into
account both a customer's present purchases of shares and the aggregate
quantity of securities previously purchased by the customer. The
Department notes that such programs would be covered by the exemption
provided that all the conditions of the exemption are satisfied.
In addition, the commenter requests that the Department reconsider
its views stated in footnote 8 of the Preamble relating to ``letter of
intent programs'' in which broker-dealers reduce sales commissions
based on the aggregate of a customer's actual purchases and anticipated
purchases over a specified period of time, as agreed to by the customer
(the Target Amount). The commenter states that the letter of intent is
not a binding obligation on the customer to purchase the Target Amount.
Rather, if the customer holds
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less than the Target Amount in his accounts at the end of the specified
period, the sales charge is adjusted upward for the shares purchased
during such period, and the customer is required to pay the same sales
charge he would have paid if he had not participated in the letter of
intent program. For example, an individual purchases shares of a mutual
fund under a letter of intent program which requires the individual to
purchase a total of $100,000 of mutual fund shares within 13 months of
the initial purchase. The individual makes an initial purchase of
$2,000 for his or her IRA account. In addition, the individual makes a
$3,000 purchase for a non-IRA/Keogh account and pays a reduced sales
charge associated with both purchases. An escrow arrangement is
established with regard to the $5,000 in purchases to secure payment of
the higher sales charge in the event the investor fails to purchase the
intended number of shares during the specified period. During the 13-
month period, the individual only purchases another $5,000 amount for
his non-IRA/Keogh account. In accordance with the program, an unreduced
sales charge must be reinstated. the broker-dealer would assess each
account its prorata share of the reinstated sales charge. Thus, the IRA
would only pay 20% of the total amount of money owed for the reinstated
sales charge (the IRA purchased $2,000 of the total $10,000 purchased
or 20%). The commenter represents that under letter of intent programs,
IRA and Keogh Plans would be treated as favorably as any other type of
account that a broker-dealer includes in the letter of intent program.
Based upon the commenter's assertion that the IRA and Keogh Plans only
will be assessed that portion of the reinstated sales charges related
to the IRA and Keogh Plan purchases, the Department is of the view that
letter of intent programs would be covered by the class exemption.
Another commenter urged the Department to modify the definition of
an individual retirement account to include simple retirement accounts
as described in section 408(p) of the Code. The Small Business Job
Protection Act of 1996 (Pub. L. 104-188), effective for taxable years
beginning after December 31, 1996, amended section 408 of the Code to
permit simple retirement accounts. In this regard, the commenter states
that section 408(p)(7) provides that participants of simple employee
pensions have the unrestricted authority to transfer their account
balances without cost or penalty to simple retirement accounts
sponsored by different financial institutions. The Department finds
merit in this comment and has modified section III(b) of the exemption
to include simple retirement accounts. The same commenter urges the
Department to clarify the definition of account value to include
insured investment accounts or insured savings accounts. According to
the commenter, such accounts are established in a separate bank and are
insured by a federal deposit agency. Broker-dealers establish insured
savings accounts whereby the uninvested cash in a clients account is
swept into a separate bank account for a client rather than into a
money market fund. Clients may select such an account as a sweep
vehicle because the assets in the bank account are insured by federal
deposit insurance up to the maximum permitted by law. In this regard,
the commenter represents that a separate program may be maintained for
the broker-dealer's retirement account clients. In response to the
comment, the Department has clarified section III(d) to include
accounts that are insured by a federal deposit insurance agency and
that constitute deposits as that term is defined in section 29 CFR
2550.408(b)-4(c)(3).
General Information
The attention of interested persons is directed to the following:
(1) In accordance with section 408(a) of ERISA and section
4975(c)(2) of the Code, and based upon the entire record, the
Department finds that the exemption is administratively feasible, in
the interests of the IRAs and Keogh Plans and their participants and
beneficiaries and protective of the rights of participants and
beneficiaries of such plans.
(2) The exemption is supplemental to, and not in derogation of, any
other provisions of ERISA and the Code including statutory or
administrative exemptions and transitional rules. Furthermore, the fact
that a transaction is subject to an administrative exemption is not
dispositive of whether the transaction is in fact a prohibited
transaction.
(3) The exemption is applicable to a transaction only if the
conditions specified in the class exemption are met.
Exemption
Accordingly, the following exemption is granted under the authority
of section 408(a) of ERISA and section 4975(c)(2) of the Code and in
accordance with the procedures set forth in 29 CFR part 2570, subpart
B. [55 FR 32836, August 10, 1990].
Section I: Covered Transactions
Effective February 7, 1997, the restrictions of sections
406(a)(1)(D) and 406(b) of ERISA and the sanctions resulting from the
application of section 4975 of the Code, including the loss of
exemption of an IRA pursuant to section 408(e)(2)(A) of the Code, by
reason of section 4975(c)(1)(D), (E) and (F) of the Code, shall not
apply to the receipt of services at reduced or no cost by an individual
for whose benefit an IRA or, if self-employed, a Keogh Plan, is
established or maintained, or by members of his or her family, from a
broker-dealer registered under the Securities Exchange Act of 1934
pursuant to an arrangement in which the account value of, or the fees
incurred for services provided to, the IRA or Keogh Plan is taken into
account for purposes of determining eligibility to receive such
services, provided that each condition of Section II of this exemption
is satisfied.
Section II: Conditions
(a) The IRA or Keogh Plan whose account value or whose fees are
taken into account for purposes of determining eligibility to receive
services under the arrangement is established and maintained for the
exclusive benefit of the participant covered under the IRA or Keogh
Plan, his or her spouse or their beneficiaries.
(b) The services offered under the relationship brokerage
arrangement must be of the type that the broker-dealer itself could
offer consistent with all applicable federal and state laws regulating
broker-dealers.
(c) The services offered under the arrangement are provided by the
broker-dealer (or an affiliate of the broker-dealer in the ordinary
course of the broker-dealer's business to customers who qualify for
reduced or no cost services, but do not maintain IRAs or Keogh Plans
with the broker-dealer.
(d) For purposes of determining eligibility to receive services,
the arrangement satisfies one of the following:
(i) Eligibility requirements based on the account value of the IRA
or Keogh Plan are as favorable as any such requirements based on the
value of any other type of account which the broker-dealer includes to
determine eligibility; and
(ii) Eligibility requirements based on the amount of fees incurred
by the IRA or Keogh Plan are as favorable as any requirements based on
the amount of fees incurred by any other type of
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account which the broker-dealer includes to determine eligibility.
(e) The combined total of all fees for the provision of services to
the IRA or Keogh Plan is not in excess of reasonable compensation
within the meaning of section 4975(d)(2) of the Code.
(f) The investment performance of the IRA or Keogh Plan investment
is no less favorable than the investment performance of an identical
investment(s) that could have been made at the same time by a customer
of the broker-dealer who is not eligible for (or who does not receive)
reduced or no cost services.
(g) The services offered under the arrangement to the IRA or Keogh
Plan customer must be the same as are offered to non-IRA or non-Keogh
Plan customers with account values of the same amount or the same
amount of fees generated.
Section III: Definitions
The following definitions apply to this exemption:
(a) The term ``broker-dealer'' means a broker-dealer registered
under the Securities Exchange Act of 1934.
(b) The term ``IRA'' means an individual retirement account
described in Code section 408(a). For purposes of this exemption, the
term IRA shall not include an IRA which is an employee benefit plan
covered by Title I of ERISA, except for a Simplified Employee Pension
(SEP) described in section 408(k) of the Code or a Simple Retirement
Account described in section 408(p) of the Code which provides
participants with the unrestricted authority to transfer their balances
to IRAs or Simple Retirement Accounts sponsored by different financial
institutions.
(c) The term ``Keogh Plan'' means a pension, profit-sharing, or
stock bonus plan qualified under Code section 401(a) and exempt from
taxation under Code section 501(a) under which some or all of the
participants are employees described in section 401(c) of the Code. For
purposes of this exemption, the term Keogh Plan shall not include a
Keogh Plan which is an employee benefit plan covered by Title I of
ERISA.
(d) The term ``account value'' means investments in cash or
securities held in the account for which market quotations are readily
available. For purposes of this exemption, the term cash shall include
savings accounts that are insured by a federal deposit insurance agency
that constitute deposits as that term is defined in section 29 CFR
2550.408b-4(c)(3). The term account value shall not include investments
in securities that are offered by the broker-dealer [or its affiliate]
exclusively to IRAs and Keogh Plans.
(e) An affiliate of a broker-dealer includes any person directly or
indirectly controlling, controlled by, or under common control with the
broker-dealer. The term control means the power to exercise a
controlling influence over the management or policies of a person other
than an individual.
(f) The term ``members of his or her family'' refers to
beneficiaries of the individual for whose benefit the IRA or Keogh Plan
is established or maintained, who would be members of the family as
that term is defined in Code section 4975(e)(6), or a brother, a
sister, or spouse of a brother or sister.
(g) The term ``service'' includes incidental products of a de
minimis value which are directly related to the provision of services
covered by the exemption.
(h) The term ``fees'' means commissions and other fees received by
the broker-dealer from the IRA or Keogh Plan for the provision of
services, including, but not limited to, brokerage commissions,
investment management fees, custodial fees, and administrative fees.
Signed at Washington, DC, this 31st day of January 1997.
Alan D. Lebowitz,
Deputy Assistant Secretary for Program Operations, Pension and Welfare
Benefits Administration, U.S. Department of Labor.
[FR Doc. 97-3030 Filed 2-6-97; 8:45 am]
BILLING CODE 4510-29-M