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Secretary of Labor Thomas E. Perez
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 [Notices] [02/07/1997]

EBSA (Formerly PWBA) Federal Register Notice

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 [02/07/1997]

[PDF Version]

Volume 62, Number 26, Page 5855-5857

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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

[[Page 5856]]

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

[[Page 5857]]

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