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Employee Benefits Security Administration

EBSA Federal Register Notice

Proposed Exemptions; Milan Uremovich, D.D.S., P.C. Profit Sharing Plan and Trust (the Plan) [06/29/2005]

[PDF Version]

Volume 70, Number 124, Page 37434-37440

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DEPARTMENT OF LABOR

Employee Benefits Security Administration

[Application No. D-11175, et al.]

 
Proposed Exemptions; Milan Uremovich, D.D.S., P.C. Profit Sharing 
Plan and Trust (the Plan)

AGENCY: Employee Benefits Security Administration, Labor.

ACTION: Notice of proposed exemptions.

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SUMMARY: This document contains notices of pendency before the 
Department of Labor (the Department) of proposed exemptions from 
certain of the prohibited transaction restrictions of the Employee 
Retirement Income Security Act of 1974 (the Act) and/or the Internal 
Revenue Code of 1986 (the Code).

Written Comments and Hearing Requests

    All interested persons are invited to submit written comments or 
requests for a hearing on the pending exemptions, unless otherwise 
stated in the Notice of Proposed Exemption, within 45 days from the 
date of publication of this Federal Register Notice. Comments and 
requests for a hearing should state: (1) the name, address, and 
telephone number of the person making the comment or request, and (2) 
the nature of the person's interest in the exemption and the manner in 
which the person would be adversely affected by the exemption. A 
request for a hearing must also state the issues to be addressed and 
include a general description of the evidence to be presented at the 
hearing.

ADDRESSES: All written comments and requests for a hearing (at least 
three copies) should be sent to the Employee Benefits Security 
Administration (EBSA), Office of Exemption Determinations, Room N-5649, 
U.S. Department of Labor, 200 Constitution Avenue, NW., Washington, DC 
20210. Attention: Application No. ----, stated in each Notice of 
Proposed Exemption. Interested persons are also invited to submit 
comments and/or hearing requests to EBSA via e-mail or FAX. Any such 
comments or requests should be sent either by e-mail to: 
``moffitt.betty@dol.gov'', or by FAX to (202) 219-0204 by the end of 
the scheduled comment period. The applications for exemption and the 
comments received will be available for public inspection in the Public 
Documents Room of the Employee Benefits Security Administration, U.S. 
Department of Labor, Room N-1513, 200 Constitution Avenue, NW., 
Washington, DC 20210.

Notice to Interested Persons

    Notice of the proposed exemptions will be provided to all 
interested persons in the manner agreed upon by the applicant and the 
Department within 15 days of the date of publication in the Federal 
Register. Such notice shall include a copy of the notice of proposed 
exemption as published in the Federal Register and shall inform 
interested persons of their right to comment and to request a hearing 
(where appropriate).

SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in 
applications filed pursuant to section 408(a) of the Act and/or section 
4975(c)(2) of the Code, and in accordance with procedures set forth in 
29 CFR part 2570, subpart B (55 FR 32836, 32847, August 10, 1990). 
Effective December 31, 1978, section 102 of Reorganization Plan No. 4 
of 1978, 5 U.S.C. App. 1 (1996), transferred the authority of the 
Secretary of the Treasury to issue exemptions of the type requested to 
the Secretary of Labor. Therefore, these notices of proposed exemption 
are issued solely by the Department.
    The applications contain representations with regard to the 
proposed exemptions which are summarized below. Interested persons are 
referred to the applications on file with the Department for a complete 
statement of the facts and representations.

Milan Uremovich, D.D.S., P.C. Profit Sharing Plan and Trust (the Plan), 
Located in Arvada, CO.

[Application No. D-11175]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Act 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, 32847, August 10, 1990).\1\ If the 
exemption is granted, the restrictions of sections 406(a), 406(b)(1) 
and (b)(2) of the Act and the sanctions resulting from the application 
of section 4975 of the Code, by reason of section 4975(c)(1)(A) through 
(E) of the Code, shall not apply to the leasing (the New Lease) by the 
individual account in the Plan of Dr. Milan Uremovich (the Account), of 
certain office space (the Office Space) to Milan Uremovich, D.D.S., 
P.C., (the Employer), a party in interest with respect to the Plan, 
provided that the following conditions are met:
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    \1\ For purposes of this proposed exemption, references to 
specific provisions of Title I of the Act, unless otherwise 
specified, refer also to the corresponding provisions of the Code.
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    (a) The terms and conditions of the New Lease are at least as 
favorable to the Account as those the Account could obtain in a 
comparable arm's length transaction with unrelated parties.
    (b) The fair market rental value of the Office Space leased to the 
Employer is determined by a qualified, independent appraiser.
    (c) The rent charged by the Account under the New Lease and for 
each renewal term is, at all times, not less than the fair market 
rental value of the Office Space, as determined by a qualified, 
independent appraiser. The rental payments under the New Lease are 
adjusted once every five years after the initial term and after each 
renewal term by the qualified, independent appraiser to ensure that the 
New Lease payments are not greater than or less than the fair market 
rental value of the leased space. In no event may the rent be adjusted 
below the rental amount paid for the preceding term of such lease.
    (d) The fair market value of the Office Space represents, at all 
times, no more than 25 percent of the total assets of the Account.
    (e) The Account does not pay any real estate fees, commissions, or 
other expenses with respect to the New Lease.
    (f) The New Lease is a triple net lease under which the Employer, 
as lessee, pays, in addition to the base rent, all normal operating 
expenses associated with the Office Space, including real estate taxes, 
insurance, maintenance, repairs and utilities.
    (g) Dr. Uremovich is the only participant in the Plan whose Account 
is affected by the New Lease.
    (h) Within 90 days of the publication, in the Federal Register, of 
the notice granting this exemption, the Employer files a Form 5330 with 
the Internal Revenue Service (the Service) and pays all applicable 
excise taxes under section 4975(a) of the Code that are attributed to 
the past purchase of the Building by Dr. Uremovoich's individual 
account in the Milan Uremovich, D.D.S., P.C. Profit Sharing Plan (the 
Profit Sharing Plan), a

[[Page 37435]]

predecessor to the current Plan, and the leasing of Office Space in the 
Building by the Profit Sharing Plan Account and the Account to Dr. 
Uremovich.

Summary of Facts and Representations

    1. The Employer (or the Applicant) is a Colorado corporation 
engaged in the business of providing dental services. Dr. Uremovich is 
the corporation's sole shareholder. Since 1974, the Employer has 
operated a dental practice in a single story building (the Building) 
containing 7,219 square feet of space. The Building is located at 11890 
W. 64th Avenue. (This address is also known as ``11890 Ralston, Arvada, 
Colorado.'') Until October 1, 2001, the Employer sponsored two 
retirement plans, the Profit Sharing Plan and the Milan Uremovich, 
D.D.S., P.C. Money Purchase Plan and Trust (the Money Purchase Plan), 
which were then merged into the current ``Milan Uremovich, D.D.S., P.C. 
Profit Sharing Plan and Trust'' (otherwise referenced herein as ``the 
Plan'').
    The Plan provides for individually directed accounts wherein each 
Plan participant exercises investment discretion over the assets of 
their respective accounts. Dr. Uremovich and Carol Uremovich, his wife, 
serve as the directed trustees of the Plan. As of September 30, 2004, 
the Plan had total aggregate assets of $2,706,515 and 7 participants, 
including Dr. Uremovich. Also as of that same date, the Account had 
total assets of $2,312,063. Among the assets of the Plan that are 
currently allocated to Dr. Uremovich's Account is the Building in which 
the Employer conducts its dental practice.
    2. Prior to the October 1, 2001 merger of the Profit Sharing Plan 
and the Money Purchase Plan, Dr. Uremovich directed his Profit Sharing 
Plan Account to purchase the Building. The Applicant represents that 
the acquisition of the Building presented an opportunity for the Profit 
Sharing Plan Account to diversify its portfolio holdings among equity, 
bonds, and property assets. Furthermore, at the time of the purchase, 
equity and fixed income prices were falling while commercial real 
estate prices were rising thereby making the Building a good 
investment.
    The Profit Sharing Plan Account acquired the Building for the total 
cash consideration of $386,000. The seller was a former joint venture 
group (the Joint Venture Group) comprised of Donald G. Richards, Edward 
J. Seibert, Jr., and Dr. Uremovich. Each joint venturer held a \1/3\ 
ownership interest in the Building, as tenants in common. The Profit 
Sharing Plan Account paid no real estate fees or commissions in 
connection with the acquisition of the Building. At that time, the 
purchase price represented 58% of the Profit Sharing Plan Account's 
assets and 50% of the Profit Sharing Plan's total assets. The Applicant 
states the Building was and continues to be clear of any mortgages or 
encumbrances.
    3. On August 20, 2000, Dr. Uremovich had the Building appraised by 
Mr. Richard DeFord, S.R.A., a qualified, independent appraiser, who was 
the President of DeFord and Associates, an independent appraisal firm 
located in Lakewood, Colorado. Dr. Uremovich was contemplating 
dissolving the Joint Venture Group and therefore requested that Mr. 
DeFord establish the Building's fair market value. In a limited scope 
appraisal, Mr. DeFord placed the fair market value of the Building at 
$353,000 as of August 20, 2000. Mr. DeFord stated that the Building, 
based on its overall condition and 100% occupancy, would sell at the 
appraised value within 12 months. Therefore, he recommended the value 
of the Building be discounted for the period of time required to sell 
such property.
    The Joint Venture Group also retained the services of Messrs. Basil 
S. Katsarous, MAI, SRA and Daniel K. Sorrells, Associate Appraiser/
Certified General Appraiser, who were affiliated with West Terra (West 
Terra), a real estate appraisal and consulting firm located in Denver, 
Colorado, to determine the fair market value of the Building. In an 
appraisal report dated November 10, 2000, the appraisers placed the 
fair market value of the Building at $375,000 and the fair market 
rental value of the rentable space in the Building at $15 per square 
foot as of August 23, 2000.
    It is represented by the Applicant that the Building's $386,000 
purchase price was ultimately determined by averaging both the DeFord 
and West Terra appraisals. In addition, the Profit Sharing Plan Account 
paid 6.5% above the averaged price for a total purchase amount of 
$386,000. At the time of the January 31, 2001 purchase transaction, 
none of the underlying appraisals were updated to reflect the then 
current fair market value of the Building.
    4. As part of the terms of the purchase transaction, the Profit 
Sharing Account assumed the existing leases in force. Among the lessees 
was the Employer, which was already leasing 1,366 square feet of Office 
Space in the Building from the Joint Venture Group under the provisions 
of a written lease (the First Lease). The First Lease had an expiration 
date of November 4, 2001 and required a monthly rental of $1,708. The 
First Lease also provided for annual adjustments to the Colorado 
Consumer Price Index.
    The other lessees in the Building were, and continue to be, 
unrelated parties. They are James Gallagher, D.M.D. and Calm Spirit 
Acupuncture, Inc.
    On June 1, 2001, the Profit Sharing Plan Account negotiated with 
the Employer to increase the amount of square footage under the First 
Lease from 1,366 square feet to 2,400 square feet pursuant to an 
amendment to the First Lease. The amendment was not executed in writing 
nor was there a corresponding increase in the rental amount.
    On November 5, 2001, the Applicant explains that a new written 
lease (the Second Lease) was entered into between the Employer and the 
newly-merged Plan for an additional five year period ending on December 
1, 2006. The Second Lease was allocated exclusively to Dr. Uremovich's 
Account in the Plan as was the First Lease.\2\ The Second Lease 
provides for a monthly rent of $4,000, which represented a rental 
increase to $20 per square foot from the former rental amount of $15 
per square foot. The Second Lease also provides that the rent be 
adjusted each year in accordance with the Colorado Consumer Price 
Index. Although the Second Lease was initially silent about which party 
would be responsible for paying for utilities, real estate taxes and 
insurance with respect to the leased premises, it did provide that the 
Account would not be required to pay for any leasehold improvements.
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    \2\ Because the Building and the New Lease have been allocated 
to Dr. Uremovich's Account in the Plan, the ``Account'' rather than 
``the Plan'' is hereinafter deemed to be the lessor for the purposes 
of this exemption.
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    In May 2003, the Second Lease was amended in order to clarify 
certain of its provisions. In this regard, the Plan and the Employer 
agreed that (a) the Employer would be responsible for paying its pro 
rata share of real estate taxes, insurance and leasehold improvements 
associated with the Office Space it occupied; (b) the annual rental 
payment under such lease would be adjusted each November 1 during the 
term of the Second Lease to reflect increases in the Colorado Consumer 
Price Index made during the preceding year, but not decreases; (c) at 
the time of expiration of the Second Lease on December 1, 2006, the 
Employer would be eligible to renew the lease for two additional two 
year terms; (d) the lease rate at the beginning of a renewal term would 
be determined by a qualified, independent appraiser; and (e) during the 
second year of each renewal term

[[Page 37436]]

under the Second Lease, the rent would be adjusted upward to reflect 
increases in the Colorado Consumer Price Index, but would never be 
adjusted downward.
    It is represented that all times under the Second Lease, the 
Employer has paid rent in a timely manner and there have been no 
defaults or delinquencies in rental payments.
    5. The Applicant represents that legal counsel failed to inform Dr. 
Uremovich that the Building purchase and Lease transactions would 
constitute prohibited transactions in violation of the Act. In this 
regard, approximately 20 months after the transactions (i.e., September 
2002), Dr. Uremovich had a conversation with different legal counsel 
regarding updates to the Plan documents. In the course of the 
conversation, Dr. Uremovich was made aware of the prohibited 
transactions entered into by the Employer and the Profit Sharing Plan 
Account. Subsequent to the conversation, Dr. Uremovich filed an 
exemption application with the Department.
    6. In conjunction with the preparation of the exemption 
application, Dr. Uremovich consulted an independent real estate broker, 
Mr. Charles S. Ochsner, President of REMAX Alliance of Arvada, 
Colorado, a commercial and residential real estate brokerage firm, to 
determine the fair market rental value of the Office Space occupied by 
the Employer. In a ``look back'' appraisal report dated January 21, 
2003, Mr. Ochsner concluded that the fair market rental value of such 
Office Space was between $18-$21 per square foot for the period of 
November 2001 through January 2003. Mr. Ochsner noted that the Building 
was in good condition, situated in a very convenient location, and had 
ample parking. He also noted that the Employer occupied the prime lease 
space in the Building in terms of view and location. Therefore, Mr. 
Ochsner concluded that the lease rate paid by the Employer was within 
an acceptable range of fair market value rent.
    7. Lease rates in the Building were also analyzed by Mr. Richard 
DeFord. Taking into account other comparable rentals and the condition, 
location, and features of the Building, Mr. DeFord concluded in a 
``look back'' appraisal report dated May 14, 2003, that the fair market 
rental value of the Office Space occupied by the Employer was $20 per 
square foot for the period January 30, 2001 through February 1, 2003. 
Mr. DeFord noted that this rate was in line with rental rates for good 
quality dental space in 2001. In arriving at this figure, Mr. DeFord 
explained that he took into account the fact that lease rates were high 
for dentists and doctors because of the extra costs associated with 
this type of lessee. According to Mr. DeFord, dentist and doctor 
facilities require more water and air hookups, as well as many small 
``check-up'' rooms.
    8. Because the Building purchase and the Lease transactions appear 
to reflect less than arm's length dealings between the Employer and the 
Plan Accounts and were prohibited transactions in violation of the Act, 
the Department is not prepared to provide exemptive relief for such 
transactions. In this regard, the Profit Sharing Plan Account paid a 
6.5 percent premium over the average of the two independent appraisals 
in order to acquire the Building. In addition, Dr. Uremovich did not 
obtain contemporaneous independent appraisals of the Building at the 
time of the acquisition, at the inception of the First and Second 
Leases, or when the Employer sought an increase in rental space. 
Further, the Department notes that the Building represented a large 
percentage of the Profit Sharing Plan Account's total assets at the 
time of acquisition.
    Therefore, the Applicant represents that within 90 days of the 
publication, in the Federal Register, of the notice granting the 
exemption, the Employer will File a Form 5330 with the Service and pay 
all applicable excise taxes that are due. However, in order that the 
Employer may continue leasing the Office Space from the Account under 
the provisions of a new, written lease, the Applicant requests a 
prospective administrative exemption from the Department.
    9. Thus, the New Lease will be effective on the date the grant 
notice is published in the Federal Register. It will have an initial 
term of five years and will require a minimum rent of $4,130 per month 
or $49,560 per year. Such rental amount will be based upon the fair 
market rental value of the Office Space as determined by Michael J. 
Martin, CFA, MAI,\3\ a qualified, independent appraiser, on the date 
the New Lease is entered into by the parties. On April 16, 2005, Mr. 
Martin determined that the fair market rental value of the Office Space 
was $20.65 per square foot. Following the conclusion of the initial 
term, the New Lease may be renewed for two additional terms, each of 5 
year's duration.
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    \3\ Michael J. Martin, CFA, MAI, is the founder of Meta Advisory 
Services, Inc. of Centennial, Colorado. He has over twenty years of 
experience in real estate, business and finance valuations. In May 
2005, upon Mr. DeFord's unavailability, the Applicant retained the 
services of Mr. Martin to update the DeFord November 24, 2003 
appraisal report. In addition, Mr. Martin will also update the April 
16, 2005 fair market rental update on the date of the New Lease's 
execution.
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    10. Rent for any of the two renewal periods under the New Lease 
will be determined at the outset of such renewal period in an amount no 
less than the Office Space's fair market value as established by a 
qualified, independent appraiser, but it will be for no less than the 
preceding lease term's rental value.
    Under the New Lease, the Employer will pay all damages, costs and 
expenses which the Account may suffer or incur by reason of any default 
of the Employer or failure to comply with New Lease covenants, and all 
Office Space costs associated with real estate taxes, fire insurance 
premiums, water rent, sewer rent, electricity, gas, cost of 
maintenance, repairs, utilities and agrees to indemnify and hold the 
Account harmless against all claims, which might arise from the 
Applicant's use of the Office Space. The New Lease will also require 
the Employer to maintain personal and property liability insurance on 
the leased premises. The Account will pay no fees or commissions in 
connection with the administration of the New Lease.
    11. The Applicant represents that the New Lease is in the best 
interest of the Account because it will help maintain the value of the 
Account's investment in commercial real estate by ensuring that the 
property has a strong, long-term anchor tenant. Further, the New Lease 
will help the Account maintain a suitable stream of income from its 
investment.
    12. In summary, it is represented that the proposed transaction 
will satisfy the statutory criteria for an administrative exemption 
under section 408(a) of the Act because:
    (a) The terms and conditions of the New Lease will be at least as 
favorable to the Account as those the Account could obtain in a 
comparable arm's length transaction with unrelated parties.
    (b) The fair market rental value of the Office Space leased to the 
Employer at the inception of the New Lease and for each renewal term 
will be determined by a qualified, independent appraiser.
    (c) The rent charged by the Account under the initial term of the 
New Lease and for each renewal term will, at all times, be no less than 
the fair market rental value of the Office Space, as determined by a 
qualified, independent appraiser. The rental payments under the New 
Lease will be adjusted once every five years after the initial term and 
after each renewal term by the qualified, independent appraiser to 
ensure that the New Lease payments are not greater

[[Page 37437]]

than or less than the fair market rental value of the leased space. In 
no event may the rent be adjusted below the rental amount paid for the 
preceding term of such lease.
    (d) The fair market value of the Office Space will represent, at 
all times, no more than 25 percent of the total assets of the Account.
    (e) The Account will not pay any real estate fees, commissions, or 
other expenses with respect to the New Lease.
    (f) The New Lease is a triple net lease under which the Employer, 
as lessee, will pay, in addition to the base rent, all normal operating 
expenses associated with the Office Space, including real estate taxes, 
insurance, maintenance, repairs and utilities.
    (g) Dr. Uremovich is the only participant in the Plan, whose 
Account will be affected by the New Lease.
    (h) Within 90 days of the publication, in the Federal Register, of 
a notice granting this proposed exemption, the Employer will file a 
Form 5330 with the Service and pay all excise taxes applicable under 
section 4975(a) of the Code that are attributed to the former Profit 
Sharing Plan Account's purchase of the Building and leasing of the 
Office Space therein to Dr. Uremovich by the Profit Sharing Plan 
Account and the Account.

Notice to Interested Persons

    Because Dr. Uremovich is the only participant in the Plan whose 
Account has been affected by the transactions, the Department has 
determined that there is no need to distribute the notice of proposed 
exemption to interested persons. Therefore, the comments and requests 
for a hearing are due 30 days after the date of publication of the 
notice of pendency in the Federal Register.

FOR FURTHER INFORMATION CONTACT: Ms. Silvia M. Quezada of the 
Department, telephone (202) 693-8553. (This is not a toll-free number).

Edward D. Jones & Co., L.P. (the Applicant), Located in St. Louis, 
Missouri

[Application No. D-11216]

Proposed Exemption

    The Department is considering granting an exemption under the 
authority of section 408(a) of the Act 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). If the proposed 
exemption is granted, the restrictions of sections 406(a)(1)(A) through 
(D) of the Act and the sanctions resulting from the application of 
section 4975 of the Code, by reason of section 4975(c)(1)(A) through 
(D) of the Code, shall not apply to the extension of credit to the 
Applicant, by certain IRAs whose assets are held in custodian accounts 
by the Applicant, a party in interest and a disqualified person with 
respect to the IRAs, in connection with the Applicant's use of 
uninvested IRA cash balances (Free Credit Balance(s)) in such accounts, 
provided that the following conditions are met:
    (a) Neither the Applicant nor any affiliate has any discretionary 
authority or control with respect to the investment of the cash 
balances of the IRA that are held in the Free Credit Balance or 
provides investment advice (within the meaning of 29 CFR 2510.3-21(c)) 
with respect to those assets;
    (b) Edward Jones credits the IRA with monthly interest on its Free 
Credit Balance at an annual rate no less than the bank national index 
rate for interest checking, as reported in the Bank Rate Monitor. This 
rate will be subject to a minimum rate level of 10 basis points 
(0.10%);
    (c) The interest rate will be no less than the rate paid by Edward 
Jones on non-IRA Free Credit Balances;
    (d) The IRA independent fiduciary has the ability to withdraw the 
Free Credit Balance at any time without restriction;
    (e) The Applicant provides in writing, to the IRA independent 
fiduciary, prior to any transfer of the IRA's available cash into a 
Free Credit Balance account, an explanation (i) that funds invested in 
a Free Credit Balance are not segregated and may be used in the 
operation of the business of the Applicant; (ii) of the method to be 
used for crediting interest to the Free Credit Balance; and (iii) that 
the funds are payable to the IRA on demand at any time;
    (f) The IRA independent fiduciary approves the transfer of the 
IRA's available cash into a Free Credit Balance account no less 
frequently than once every three months, or once every month if there 
is account activity for the particular month other than the crediting 
of interest, together with or as a part of the customer's statement of 
account; and
    (g) The Applicant periodically provides a written statement 
subsequent to the proposed transaction informing the independent IRA 
fiduciary of the IRA that (i) such funds are not segregated and may be 
used in the operation of the business of such broker or dealer, and 
(ii) such funds are payable on the demand at the customer.

Summary of Facts and Representations

    1. The Applicant is a brokerage firm with its principal office in 
St. Louis, Missouri. It is a member of the National Association of 
Securities Dealers, the New York Stock Exchange and the Chicago Stock 
Exchange. The firm serves as custodian of self-directed IRAs, to which 
it provides brokerage services. As of March 26, 2005, the Applicant had 
2,005,000 IRA accounts, with total assets of $99.7 billion. The IRAs 
fall into three categories:

------------------------------------------------------------------------
                                                 Number of      Assets
                   Category                       Accounts    (billion)
------------------------------------------------------------------------
Traditional IRAs..............................    1,348,000        $90.3
Roth IRAs.....................................      571,000          4.4
SEP-IRAs......................................       86,000          5.0
------------------------------------------------------------------------

    The IRA accountholder is responsible to direct the Applicant with 
respect to the investments to be made, retaining sole responsibility 
for those investment decisions.\4\ Investments are limited to those 
that are legally permissible for an IRA account and that are securities 
that are obtainable through the Applicant in the regular course of its 
business, such as mutual funds, stocks, bonds, certificates of deposit 
and unit trusts. The Applicant charges each IRA account an 
administrative fee of $30 per IRA account (which is sometimes waived), 
as well as fees for brokerage services and reimbursement for its 
reasonable expenses and any taxes paid with respect to the account.
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    \4\ The Applicant will not have any authority, control or 
responsibility concerning the IRAs and, as a result, the Applicant 
has no discretion over uninvested IRA cash balances.
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    2. Under the terms of the Applicant's retirement account 
agreements, the Applicant is pre-authorized to conduct daily sweeps of 
cash for its IRA accounts into a money market fund, to assure that all 
IRA account assets are fully invested. The money market fund used is 
the Edward Jones Money Market Fund (the Cash Fund), which currently 
holds total assets of $10.8 billion. The cash may be a dividend or 
interest payment that is too small to invest, an annual contribution 
awaiting investment, or proceeds from investments, sales or maturities.
    The sweep is conducted automatically, without any discretion 
exercised on the part of the Applicant. All available cash is swept.\5\ 
The IRA accountholder determines when to withdraw the swept cash, so 
that the

[[Page 37438]]

Applicant has no discretion over how long the cash remains in the Cash 
Fund.
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    \5\ The term available cash excludes, for example, the proceeds 
of checks that have not yet cleared, so that Edward Jones is not 
obligated to advance funds against amounts that ultimately may not 
be collected.
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    The Cash Fund is a registered mutual fund that invests primarily in 
U.S. Treasury and government agency securities maturing in 397 days or 
less, with a dollar-weighted average maturity of 90 days or less. As a 
money market fund, it has the goal of maintaining a constant $1.00 net 
asset value per share. It has two classes of shares, Investment Shares 
and Retirement Shares. IRAs for which the Applicant is custodian 
typically invest in the Retirement Shares.
    The investment adviser to the Cash Fund is Passport Research Ltd., 
which is owned 50.5% by a subsidiary of Federated Investors, Inc. and 
49.5% by the Applicant. It receives an annual investment advisory fee 
on a sliding scale of 0.500% of net assets on the first $500 million 
down to 0.400% of net assets over $2 billion--for the most recent 
reported period, its advisory fee was 0.41%. The Cash Fund also pays 
administrative and shareholder services fees to Federated Services 
Company and the Applicant. The Applicant serves as the transfer and 
dividend-disbursing agent for the Cash Fund, and receives a fee that is 
a fixed dollar amount multiplied by the number of shareholder 
accounts.\6\
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    \6\ On December 12, 2004, the Securities and Exchange Commission 
(SEC) instituted cease-and-desist proceedings pursuant to Section 8a 
of the Securities Act of 1993 (Securities Act) and Sections 15(b) 
and 21(c) of the Securities Exchange Act of 1934 against the 
Applicant. The allegations included: (1) That the Applicant violated 
Section 17(a)(2) of the Securities Act, Rule 10b-10 under the 
Securities Exchange Act, Section 17a-4 of the Securities Exchange 
Act, Section 15B of the Securities Exchange Act, and MSRB Rule G-15; 
(2) that the Applicant effected sales in mutual fund shares and 529 
Plans without disclosing its financial incentives to sell the fund 
shares of preferred mutual fund families which compensated the 
Applicant on the basis of revenue sharing; (3) that the Applicant 
effected sales in mutual fund shares and 529 Plans without 
adequately disclosing the amounts and source of remuneration 
received in connection with the transactions either by written 
document or on its public Web site; (4) that the Applicant failed to 
ensure that adequate disclosure was contained in prospectuses and 
Statements of Additional Information (SAIS) concerning revenue 
sharing, directed brokerage payments or other incentives offered to 
the Applicant; (5) that the firm failed to supervise, establish, 
maintain and enforce adequate written supervisory procedures and 
systems related to sales of preferred family mutual funds and 529 
Plans, including the failure to properly review prospectuses and 
SAIS of preferred fund families to make sure that they contained 
adequate disclosures of potential conflicts of interest; and (6) 
that the Applicant improperly encouraged its investment 
representatives to favor the sale of mutual funds and 529 Plans on 
the basis of the amount of revenue the Applicant received in 
connection with those sales. To resolve these allegations, without 
admitting or denying any misconduct, the Applicant has agreed to pay 
$75 million in disgorgement and civil penalties. Going forward, the 
Applicant has agreed, among other things, to place and maintain on 
its Web site specific disclosures showing the information regarding 
these disclosures to its customers. The Applicant is also required 
to establish procedures documenting its basis for adding or removing 
mutual fund families from its preferred list.
    The Applicant represents that no revenue sharing is paid to the 
Applicant in connection with the investment in the money market fund 
since the investment adviser to the fund is partly owned (49.5%) by 
the Applicant. The Applicant further represents that the SEC 
investigation does not affect the proposed exemption because the 
investigation and settlement did not target any conduct relating to 
the money market fund, and the requirements of the settlement do not 
affect the current sweep arrangement.
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    While the Investment Share accounts are subject to a minimum 
average monthly account balance requirement of $2,500, and are charged 
a $3/month minimum balance fee in months when that requirement is not 
met, the Retirement Share accounts are not currently subject to such a 
requirement. As a result, as of September 30, 2003, there were 
1,421,997 Retirement Share accounts holding $2,500 or less--91.0% of 
the Retirement Share accounts, accounting for only 2.1% of total Cash 
Fund assets--and over two-thirds of those (1,088,870 accounts) held 
$100 or less--accounting for under 0.1% of total Cash Fund assets. The 
consequence of having such a large number of small accounts with such 
small balances is to increase the fixed costs attributable to the 
Retirement Shares, particularly the transfer and dividend disbursing 
agent fees that are based in large part on the number of accounts and 
transactions. Thus, while the Investment Shares represent over four 
times as much assets as the Retirement Shares, the transfer and 
dividend disbursing agent fees deducted from the Retirement Shares 
exceed the amount of such fees deducted from the Investment Shares 
($4.8 million versus $4.6 million, for the year ended August 31, 2003). 
The result is that the Retirement Shares currently bear an expense 
ratio of 118 basis points, versus 86 basis points for the Investment 
Shares. Because of the current low interest rates, the cost of transfer 
agency services can result in minimal returns for the Retirement 
Shares--currently down to 0.05%. To alleviate this problem, the 
Applicant is planning to impose on the Retirement Shares the $2,500 
minimum balance requirement, thereby subjecting accounts below that 
balance to the $3/month minimum balance fee. At current market returns, 
the minimum balance fee would more than offset any investment income.
    3. The Applicant seeks exemptive relief to maintain the IRA cash 
balances in the Applicant's broker-dealer account. The type of account 
the Applicant is proposing to use is a customer cash account that holds 
cash on deposit temporarily awaiting investment, drawn principally from 
dividends and interest paid on securities held in the customer's 
securities account. Unlike a subordinated loan, the cash can be 
withdrawn on demand and used for trading and investment activity.
    The Applicant represents that according to the SEC, the Securities 
Investor Protection Corporation would presume that cash balances are 
left in the securities account for the purpose of purchasing 
securities, and would therefore be covered, absent substantial evidence 
to the contrary. The Applicant also represents the following: The cash 
accounts that would be used by the Applicant would not constitute loans 
of the type not covered by SIPC insurance. Even though interest would 
be paid, the accounts would be established pursuant to customer 
relationships for the holding of cash accumulated through dividends, 
interest and sales of securities, with the cash available on demand for 
use in investment transactions. As such, the Applicant represents that 
these would be free credit balances of the type that the SEC has 
acknowledged are covered by SIPC insurance\7\. SIPC covers cash claims 
up to $100,000 and the Applicant represents that a customer's free 
credit balance, of the type Edward Jones contemplates using, would be 
the type of cash that, assuming a ``customer'' relationship, is covered 
as described in SEC Release No. 34-18262 (Nov. 17, 1981), ``Notice to 
Broker-Dealers Concerning Interest-Bearing free Credit Balances\8\.''
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    \7\ The Department expresses no opinion as to whether the Free 
Credit balances are covered by SIPC insurance.
    \8\ The Applicant represents that in an effort to ensure that 
those persons who have contributed capital to the debtor do not 
receive the special protection (priority) afforded customers under 
the Bankruptcy Code and The Securities Investor Protection Act 
(SIPA), Congress has seen fit to include language in both statutes 
to deny this statutory priority to subordinated lenders. In SEC v. 
F.O. Baroff Company, [1973-74] Fed. Sec. L. Rep. ] 94,576 (S.D.N.Y. 
1974) the court dealt with securities that were transferred to a 
broker as, in effect, a loan, to help the broker out of a cash bind. 
Relying in part on the statutory provision described above, the 
court found that because there was no reasonable expectation that 
the securities would be used for trading or investment activity, 
they were not covered by SIPC insurance--the person making the claim 
simply was not in a ``customer'' relationship with the broker.
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    4. The funds will be held by the Applicant as Free Credit Balances, 
and will be treated as debt obligations of the broker-dealer to its 
customers. The Applicant will pay the IRAs interest on

[[Page 37439]]

the amounts at no less than the bank national index rate for interest 
checking, as reported in the Bank Rate Monitor.
    This rate will remain be subject to a minimum rate level of 10 
basis points (0.10%), so as not to disadvantage the IRAs transferring 
assets from the Retirement Shares of the Cash Fund (which currently are 
earning 5 basis points (0.05%)). The Applicant will commit to use, for 
purposes of determining the monthly Free Credit Balance interest rate, 
the targeted Bank Rate Monitor rate in effect on the first day of the 
month during which the interest is to be paid.
    A Free Credit Balance can be called on demand, and cannot be 
treated as part of the broker-dealer's capital for minimum net capital 
purposes--it is not an investment in the broker-dealer, but rather 
customer funds. In addition, customer Free Credit Balances of the type 
that would be used here are subject to reserve requirements, which are 
designed to assure that these funds are used solely for the broker-
dealer's customer-related business and are protected against misuse and 
insolvency.
    5. Free Credit Balances are defined by federal securities law 
regulations as ``liabilities of a broker or dealer to customers that 
are subject to immediate cash payment to customers on demand, whether 
resulting from sales of securities, dividends, interest, deposits or 
otherwise (17 CFR 240.15c3-3(a)(8)).'' Until a Free Credit Balance 
amount is repaid, it can be used in connection with the operation of 
the broker-dealer's business. Rule 15c3-2 under the Securities Exchange 
Act of 1934 (Rule 15c3-2) requires a broker-dealer to establish 
adequate procedures governing the use of its Free Credit Balances, 
providing as follows: (1) Each customer for whom a credit balance is 
carried will be given or sent, together with or as a part of the 
customer's statement of account, whenever sent but not less frequently 
than once every three months, a written statement informing such 
customer of the amount due to the customer by such broker or dealer on 
the date of such statement; and (2) The statement must contain a 
written notice that (a) such funds are not segregated and may be used 
in the operation of the business of such broker or dealer, and (b) such 
funds are payable on the demand of the customer. In compliance with 
these requirements, the Applicant will provide a statement on customer 
account statement in accordance with Rule 15c3-2.
    Customers with Free Credit Balances are further protected by a 
special reserve requirement. If the Applicant's total amounts owed or 
payable to its customers that are attributable to, among other things, 
Free Credit Balances exceed (subject to certain adjustments) the total 
amounts receivable by the Applicant from certain sources related to its 
customer accounts, the Applicant is required to maintain a minimum 
level of deposits in a segregated special reserve account at a bank (17 
CFR 240.15c3-3(e). Because Free Credit Balances are treated as part of 
the assets and liabilities of the broker-dealer, they can be used in 
the Applicant's business and thereby reduce its borrowing needs. The 
Applicant will receive this benefit from the change; it also will lose 
transfer agency and other fees it will otherwise receive from the money 
market fund.
    6. Compliance with the terms of the exemption will be monitored by 
IRA fiduciaries independent of the Applicant, the IRA accountholders, 
who will initially approve the cash sweep into the Free Credit Balance 
accounts and monitor the balances in those accounts through receipt of 
quarterly or monthly statements. For this reason, the Applicant 
represents that the exemption will be administratively feasible because 
the Department will not have to monitor the exemption's implementation 
or enforcement.
    7. Because the Applicant plans to impose a minimum balance 
requirement (subject to a minimum balance fee) of $2,500 on the 
Retirement Shares of the Cash Fund, uninvested cash below that level 
will, under current market conditions, earn income that is less than 
the fee imposed if swept into the Cash Fund. Absent exemptive relief, 
the IRAs could suffer an economic loss on this cash in the form of lost 
principal and/or investment income. If the requested exemption is 
granted, making the Free Credit Balance option available, the small 
amounts of cash deposited in the Free Credit Balance account will be 
able to earn income pending investment.
    8. Under the terms of the requested exemption, those IRA accounts 
withdrawing from the Cash Fund will earn interest on their Free Credit 
Balances that will not decrease below 0.10%, a rate that exceeds the 
0.05% rate they were earning in the money market fund at the time of 
withdrawal. The interest rate also will be no less than the same rate 
paid by the Applicant on non-IRA Free Credit Balances. The independent 
fiduciaries of those IRAs will be able to withdraw the Free Credit 
Balances and reinvest them in other assets upon demand at any time. The 
arrangement under which available cash will be invested in Free Credit 
Balance accounts at the Applicant will be subject to the approval of an 
IRA independent fiduciary with respect to each IRA following full 
disclosure. The IRA independent fiduciary will be able to monitor the 
accumulation in the Free Credit Balance account through quarterly or 
monthly reports, and would be on notice of the interest rate to be 
earned and that the amounts are payable to the IRA on demand at any 
time.
    9. In summary, the Applicant represents that the proposed 
transaction satisfies the statutory criteria for an administrative 
exemption under section 408(a) of the Act and section 4975(c)(2) of the 
Code because: (a) Neither the Applicant nor any affiliate has any 
discretionary authority or control with respect to the investment of 
the cash balances of the IRA that are held in the Free Credit Balance 
or provides investment advice (within the meaning of 29 CFR 2510.3-
21(c)) with respect to those assets; (b) the Applicant credits the IRA 
with monthly interest on its Free Credit Balance at an annual rate no 
less than the bank national index rate for interest checking, as 
reported in the Bank Rate Monitor. This rate will be subject to a 
minimum rate level of 10 basis points (0.10%); (c) The interest rate 
will be no less than the rate paid by the Applicant on non-IRA Free 
Credit Balances; (d) The IRA has the ability to withdraw the Free 
Credit Balance at any time without restriction; (e) The Applicant 
provides in writing to the IRA independent fiduciary, prior to any 
deposit of the IRA's available cash into a Free Credit Balance account, 
an explanation (i) that funds invested in a Free Credit Balance are not 
segregated and may be used in the operation of the business of the 
Applicant; (ii) of the method to be used for crediting interest to the 
Free Credit Balance; and (iii) that the funds are payable to the IRA on 
demand at any time; (f) The IRA independent fiduciary approves the 
deposit of the IRA's available cash into a Free Credit Balance account 
no less frequently than once every three months, or once every month if 
there is account activity for the particular month other than the 
crediting of interest, together with or as a part of the customer's 
statement of account; and (g) The Applicant provides a written 
statement subsequent to the proposed transaction informing the IRA 
independent fiduciary that (i) such funds are not segregated and may be 
used in the operation of the business of such broker or dealer, and 
(ii) such funds are payable to IRA on demand.

[[Page 37440]]

Notice to Interested Persons

    Notice of the proposed exemption shall be given to all interested 
persons in the manner agreed upon by the applicant and Department 
within 15 days of the date of publication in the Federal Register. 
Comments and requests for a hearing are due forty-five (45) days after 
publication of the notice in the Federal Register.

FOR FURTHER INFORMATION CONTACT: Khalif Ford of the Department, 
telephone (202) 693-8540. (This is not a toll-free number.)

General Information

    The attention of interested persons is directed to the following:
    (1) The fact that a transaction is the subject of an exemption 
under section 408(a) of the Act and/or section 4975(c)(2) of the Code 
does not relieve a fiduciary or other party in interest or disqualified 
person from certain other provisions of the Act and/or the Code, 
including any prohibited transaction provisions to which the exemption 
does not apply and the general fiduciary responsibility provisions of 
section 404 of the Act, which, among other things, require a fiduciary 
to discharge his duties respecting the plan solely in the interest of 
the participants and beneficiaries of the plan and in a prudent fashion 
in accordance with section 404(a)(1)(b) of the Act; nor does it affect 
the requirement of section 401(a) of the Code that the plan must 
operate for the exclusive benefit of the employees of the employer 
maintaining the plan and their beneficiaries;
    (2) Before an exemption may be granted under section 408(a) of the 
Act and/or section 4975(c)(2) of the Code, the Department must find 
that the exemption is administratively feasible, in the interests of 
the plan and of its participants and beneficiaries, and protective of 
the rights of participants and beneficiaries of the plan;
    (3) The proposed exemptions, if granted, will be supplemental to, 
and not in derogation of, any other provisions of the Act and/or the 
Code, including statutory or administrative exemptions and transitional 
rules. Furthermore, the fact that a transaction is subject to an 
administrative or statutory exemption is not dispositive of whether the 
transaction is in fact a prohibited transaction; and
    (4) The proposed exemptions, if granted, will be subject to the 
express condition that the material facts and representations contained 
in each application are true and complete, and that each application 
accurately describes all material terms of the transaction which is the 
subject of the exemption.

    Signed in Washington, DC, this 23rd day of June, 2005.
Ivan Strasfeld,
Director of Exemption Determinations, Employee Benefits Security 
Administration, U.S. Department of Labor.
[FR Doc. 05-12834 Filed 6-28-05; 8:45 am]

BILLING CODE 4510-29-P