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Secretary of Labor Thomas E. Perez
Proposed Amendment to Prohibited Transaction Exemption 97-11 (PTE 97-11) for the Receipt of Certain Investment Services by Individuals for Whose Benefit Individual Retirement Accounts or Retirement Plans for Self-Employed Individuals [Notices] [06/18/2002]

EBSA (Formerly PWBA) Federal Register Notice

Proposed Amendment to Prohibited Transaction Exemption 97-11 (PTE 97-11) for the Receipt of Certain Investment Services by Individuals for Whose Benefit Individual Retirement Accounts or Retirement Plans for Self-Employed Individuals [06/18/2002]

[PDF Version]

Volume 67, Number 117, Page 41504-41506

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DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

[Application No.: D-10934]

 
Proposed Amendment to Prohibited Transaction Exemption 97-11 (PTE 
97-11) 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, Department of 
Labor.

ACTION: Notice of proposed amendment to PTE 97-11.

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SUMMARY: This document contains a notice of pendency before the 
Department of Labor (the Department) of a proposed amendment to PTE 97-
11. PTE 97-11 is a class exemption that permits the receipt of services 
at reduced or no cost by an individual for whose benefit an individual 
retirement account (IRA) \1\ or, if 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 proposed amendment, if adopted, would affect individuals with 
beneficial interests in such plans who receive such services as well as 
the broker-dealers who provide such services.
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    \1\ In Advisory Opinion 98-03A (March 6, 1998), the Department 
stated that a Roth IRA which satisfies the definition of an 
individual retirement plan contained in section 7701(a)(37)(A) of 
the Code is an ``individual retirement account'' described in 
section 408(a) of the Code. Therefore, a Roth IRA which is not an 
employee benefit plan covered by Title I of ERISA (except for 
certain Simplified Employee Pensions and Simple Retirement Accounts 
described in section 408(k) and 408(p) of the Code, respectively) 
would be covered by the relief provided in PTE 97-11, if all 
conditions therein are met. In this regard, the Department wishes to 
clarify that this proposed modification of section III(b) of PTE 97-
11 would include Roth individual retirement annuities described in 
section 7701(a)(37)(B) of the Code.

DATES: If adopted, the proposed amendment would be effective as of 
January 1, 1998. Written comments and requests for a public hearing 
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should be received by the Department on or before August 2, 2002.

ADDRESSES: All written comments and requests for a public hearing 
(preferably three copies) should be addressed to the U.S. Department of 
Labor, Office of Exemption Determinations, Pension and Welfare Benefits 
Administration, Room N-5649, 200 Constitution Avenue, NW, Washington, 
DC 20210, (Attention: D-10934). Interested persons are also invited to 
submit comments and/or hearing requests to PWBA via email to 
moffittb@pwba.dol.gov or by fax to (202) 219-0204 by the end of the 
comment period.

FOR FURTHER INFORMATION CONTACT: Ms. Allison Padams Lavigne or Mr. 
Christopher Motta, Office of Exemption Determinations, Pension and 
Welfare Benefits Administration, U.S. Department of Labor, (202) 693-
8540, (this is not a toll-free number).

SUPPLEMENTARY INFORMATION: Notice is hereby given of the pendency 
before the Department of a proposed amendment to PTE 97-11 (62 FR 5855, 
February 7, 1997 as amended, 64 FR 11042, March 8, 1999). PTE 97-11 
provides relief 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.\2\ The 
amendment to PTE 97-11 was requested in an exemption application dated 
September 26, 2000, filed on behalf of American Funds Distributors, 
Inc. (AFD), a broker-dealer registered under the Securities Exchange 
Act of 1934. The Department is proposing this amendment in response to 
AFD's application.
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    \2\ Section 102 of Reorganization Plan No. 4 of 1978 (43 FR 
47713, October 17, 1978 (5 U.S.C. App. 1 (1996)) 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 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 2570, subpart B (55 FR 32836, (August 10, 1990)).
    PTE 97-11 permits the receipt of services at reduced or no cost by 
an individual for whose benefit an IRA or 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/are taken into account 
for purposes of determining eligibility to receive such services, 
provided that certain conditions are

[[Page 41505]]

met. In the preamble to the proposal to PTE 97-11 (61 FR 39996 (1996)), 
the Department noted that programs in which broker-dealers offer 
reduced sales charges as an individual increases his purchases of 
investment company shares would be covered by the exemption provided 
that all of its conditions are satisfied. In granting PTE 97-11, the 
Department additionally noted in a response to a comment, that 
``letters of intent'' programs in which broker-dealers offer reduced 
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, are similarly covered by the exemption. The 
Department also noted that this conclusion was based on the fact that 
under these ``letters of intent'' programs, if a customer ultimately 
fails to make the anticipated purchases, the broker-dealer would 
reinstate the sales commission on each account on a pro rata basis. 
Thus, the IRA or Keogh Plan would only be assessed that portion of the 
reinstated sales charges related to the IRA and Keogh Plan purchases.
    AFD has requested an amendment to PTE 97-11 to modify the 
definition of the term ``IRA''. In this regard, section III(b) of PTE 
97-11, as previously amended, defines the term ``IRA'' as ``an 
individual retirement account described in Code section 408(a) or an 
education individual retirement account described in section 530 of the 
Code.'' The exemption states further that ``[f]or purposes of the 
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.''
    AFD requests that the term ``IRA'' be amended to include an 
``individual retirement plan'', as such term is defined in section 
7701(a)(37) of the Code. In this regard, section 7701(a)(37) of the 
Code provides that the term ``individual retirement plan'' means ``an 
individual retirement account described in section 408(a)'' and ``an 
individual retirement annuity described in section 408(b)''. Section 
408(a) of the Code, in turn, provides that, the term ``individual 
retirement account'' means ``a trust created or organized in the United 
States for the exclusive benefit of an individual or his beneficiaries, 
but only if the written governing instrument creating the trust meets 
the following requirements* * *'' In this regard, section 408(a) of the 
Code requires that, among other things, no part of the trust funds will 
be invested in life insurance contracts and that the interest of an 
individual in the balance in his account is nonforfeitable. Section 
408(b) of the Code provides that the term ``individual retirement 
annuity'' means ``an annuity contract, or an endowment contract (as 
determined under regulations prescribed by the Secretary), issued by an 
insurance company which meets the following requirements* * *'' In this 
regard, section 408(b) requires, among other things, that the annuity 
contract is not non-transferrable by the owner and that the entire 
interest of the owner is nonforfeitable.
    AFD seeks to amend the definition of the ``IRA'' in PTE 97-11 in 
order to include Individual Retirement Annuities. AFD states that 
allowing annuity owners, or members of their families, to obtain 
reduced sales commissions from independent broker-dealers would be 
consistent with the conditions of PTE 97-11, and would enable 
individuals to receive the same advantages that PTE 97-11 affords to 
persons for whose benefit IRAs are maintained.
    AFD states that programs offering discounted commissions for the 
purchase of mutual fund shares typically determine the amount of such 
discount by aggregating an individual's (and possibly his family's) 
total purchases of the funds offered by the fund ``family''. Thus, 
where the ``family'' also manages variable annuity separate accounts 
invested in mutual funds managed by the adviser to the fund ``family'', 
investments in the variable annuities are aggregated with other 
investments in mutual fund shares for purposes of determining the level 
of commission discounts applicable to the purchase of fund shares.\3\
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    \3\ AFD represents that in determining the aggregate investments 
of an investor in mutual fund shares held through an Individual 
Retirement Account, variable annuities held through an Individual 
Retirement Annuity would typically be included in aggregate 
investments (as would certain other types of retirement plan 
investments, such as SEPS and non-ERISA 403(b) plans.)
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    AFD additionally represents that, similarly, programs offering 
discounted commissions for the purchase of variable annuities often 
determine the amount of such discount by aggregating an individual's 
(and possibly his family's) total investment in variable annuities 
offered by the ``family'' and mutual fund shares of the fund 
``family''. Once the appropriate discount is determined, the reduced 
commission is deducted ``up front'', and the remainder is invested in 
the annuity contract. AFD states that, in the situations described 
above, the mutual funds and the variable annuities are sold by 
independent registered broker-dealers, who are bound to give the 
commission discounts by a selling group agreement with the principal 
underwriter.\4\
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    \4\ The Department notes that where the sales charge is reduced 
under a letter of intent program, in the event the customer does not 
make the anticipated purchases and the broker-dealer reinstates the 
sales charge, the IRA or Keogh Plan is only assessed that portion of 
the of the reinstated charge related to the IRA and Keogh Plan 
purchases.
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    The amendment is appropriate, AFD represents, in that Individual 
Retirement Accounts and Individual Retirement Annuities serve the same 
purpose and are identical in all relevant features, including tax 
benefits. AFD states that although Individual Retirement Accounts and 
Individual Retirement Annuities use different investment vehicles to 
hold their respective assets, such a distinction is irrelevant for 
purposes of the relief provided by PTE 97-11.
    Based on AFD's representations, it appears that Individual 
Retirement Annuities share many of the same characteristics exhibited 
by other investment vehicles covered by the exemption. Thus, the 
Department sees merit in AFD's request that the term ``IRA'' be amended 
to include Individual Retirement Annuities. Accordingly, the Department 
has determined to modify the definition of IRA contained in section 
III(b) of PTE 97-11 to include Individual Retirement Annuities, as such 
term is defined in section 408(b) of the Code. The Department notes 
that all of other the conditions of PTE 97-11 must be satisfied with 
respect to Individual Retirement Annuities, as is the case with 
Individual Retirement Accounts, Education IRAs and Keogh Plans covered 
by the exemption. In this regard, the Department notes that, among 
other things, all reduced sale charges offered under a variable annuity 
contract must be offered by a broker-dealer or its affiliate.\5\
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    \5\ Section II (c) of PTE 97-11 states that: ``The services 
offered under the (relationship brokerage) arrangement are offered 
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.''
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Notice to Interested Persons

    Because many participants in IRAs and Keogh Plans and broker-
dealers sponsoring IRAs or Keogh Plans could

[[Page 41506]]

conceivably be considered interested persons, the only practical form 
of notice is publication in the Federal Register.

General Information

    The attention of interested persons is directed to the following:
    (1) Before an exemption may be granted under section 408(a) of 
ERISA and section 4975(c)(2) of the Code, the Department must find that 
the exemption is administratively feasible, in the interest of the IRAs 
and Keogh Plans and their participants and beneficiaries and protective 
of the rights of the participants and beneficiaries of such plans.
    (2) The proposed amendment, if granted, will be 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) If granted, the proposed amendment will be applicable to a 
transaction only if the conditions specified in the class exemption are 
met.

Written Comments and Hearing Request

    All interested persons are invited to submit written comments or 
requests for a public hearing on the proposed amendment to the address 
and within the time period set forth above. All comments will be made a 
part of the record. Comments and requests for a hearing should state 
the reasons for the writer's interest in the proposed amendment. 
Comments received will be available for public inspection with the 
referenced application at the above address.

Proposed Amendment

    Under 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), the Department proposes to 
amend PTE 97-11 as set forth below:
    Section III(b) is amended to read: ``The term ``IRA'' means an 
individual retirement account described in Code section 408(a), an 
individual retirement annuity described in Code section 408(b) or an 
education individual retirement account described in section 530 of the 
Code. 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.''

Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits 
Administration, U.S. Department of Labor.
[FR Doc. 02-15317 Filed 6-17-02; 8:45 am]
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