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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 Individual Have Been Established or Maintained [Notices] [10/21/1998]

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 Individual Have Been Established or Maintained [10/21/1998]

[PDF Version]

Volume 63, Number 203, Page 56231-56233

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DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration
[Application Number: D-10554]

 
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 Individual Have Been Established or Maintained

AGENCY: Pension and Welfare Benefits Administration, U.S. 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) 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.

DATES: If adopted, the proposed amendment would be effective as of 
January 1, 1998. Written comments and requests for a public hearing 
should be received by the Department on or before December 7, 1998.

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 Ave, NW, Washington, DC 
20210, (Attention: D-10554)

FOR FURTHER INFORMATION CONTACT: Ms. Allison Padams Lavigne, Office of 
Exemption Determinations, Pension and Welfare Benefits Administration, 
U.S. Department of Labor, (202) 219-8971, (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). 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 Internal Revenue Code of 1986 (the Code) by reason of 
section 4975(c)(1)(D), (E) and (F) of the Code.<SUP>1</SUP> The 
amendment to PTE 97-11 was requested in an exemption application dated 
December 23, 1997 filed on behalf of the Securities Industry 
Association (SIA). The SIA is a securities industry trade association 
representing the business interests of more than 700 securities firms 
in North America which collectively account for ninety percent of the 
securities firm revenue in the United States. The members of the SIA 
are, among other things, engaged in the business of providing brokerage 
and investment advisory services to the public.
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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 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

[[Page 56232]]

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 the conditions of the exemption are met.
    The SIA has requested an amendment to PTE 97-11 which would expand 
the term ``IRA'' as defined in section III(b) of the exemption to 
include any IRA (currently existing or that Congress may create in the 
future) subject to the provisions of section 408(e) and/or section 4975 
of the Code. The Department has decided not to expand the definition of 
IRA to include any IRA subject to the provisions of section 408(e) or 
section 4975 of the Code because the conditions contained in PTE 97-11 
were developed based upon the specific characteristics of the IRAs and 
Keogh Plans described in section III(b) and (c), respectively. The 
Department does not believe that a sufficient showing has been made 
that the safeguards contained in the exemption would adequately address 
the concerns that the Department may have with regard to an 
unidentified class of IRAs.
    In the alternative, the SIA requests that the Department expand the 
definition of the term IRA to include Roth IRAs and Education IRAs. 
Section III(b) of PTE 97-11 defines the term IRA as an ``individual 
retirement account'' described in section 408(a) of the Code. The 
definition further states that, 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.
    Roth IRAs and Education IRAs were created as part of the Taxpayer 
Relief Act of 1997 (TRA) (Pub. L. 105-34, title III, Sec. 302(a), 
August 5, 1997, 111 Stat 788). Section 302(a) of the TRA amended the 
Code by adding section 408A and section 530 to create Roth IRAs and 
Education IRAs, respectively.
    Section 408A(a) of the Code provides that, except as provided in 
this section, a Roth IRA shall be treated for purposes of this title in 
the same manner as an individual retirement plan. Section 408A(b) of 
the Code provides that for purposes of this title, the term ``Roth 
IRA'' means an individual retirement plan (as defined in section 
7701(a)(37)) which is designated at the time of the establishment of 
the plan as a Roth IRA.
    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) <SUP>2</SUP> of the 
Code is an ``individual retirement account'' described in section 
408(a) of the Code for purposes of the definition of the term ``IRA'' 
contained in section III(b) of PTE 97-11. Therefore, a Roth IRA, as 
described above, which is not an employee benefit plan covered by Title 
I of ERISA (except for certain SEPs 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. Thus, section III(b) of PTE 97-11 does not need to be 
expanded with respect to Roth IRAs.
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    \2\ Section 7701(a)(37) of the Code defines the term 
``individual retirement plan'' to mean: (A) an individual retirement 
account described in section 408(a) of the Code, and (B) an 
individual retirement annuity described in section 408(b) of the 
Code.
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    Section 530(b)(1) of the Code provides in part, that the term 
``education individual retirement account'' means a trust created or 
organized in the United States exclusively for the purpose of paying 
the qualified higher education expenses of the designated beneficiary 
of the trust (and designated as an education individual retirement 
account at the time created or organized). Section 530(b)(1) further 
provides: but only if the written governing instrument creating the 
trust meets the following requirements:

    (A) No contribution will be accepted--(i) unless it is in cash, 
(ii) after the date on which such beneficiary attains age 18, or 
(iii) except in the case of rollover contributions, if such 
contributions would result in aggregate contributions for the 
taxable year exceeding $500; (B) the trustee is a bank (as defined 
in section 408(n) of the Code or another person who demonstrates to 
the satisfaction of the Secretary that the manner in which that 
person will administer the trust will be consistent with the 
requirements of this section or who has so demonstrated with respect 
to any individual retirement plan; (C) no part of the trust assets 
shall not be invested in life insurance contracts; (D) the assets of 
the trust shall not be commingled with other property except in a 
common trust fund or common investment fund; and (E) upon the death 
of the designated beneficiary, any balance to the credit of the 
beneficiary shall be distributed within 30 days after the date of 
death to the estate of such beneficiary.

    The Education IRA is subject to disqualification provisions which 
are similar to those in section 408(e)(2) and (4) of the Code which are 
applicable to IRAs described in section 408(a) of the Code (traditional 
IRAs).<SUP>3</SUP> In addition, as with traditional IRAs, the Education 
IRA balance can be transferred to different sponsoring 
institutions.<SUP>4</SUP> Further, the TRA amended the definition of 
``plans'' as defined in section 4975(e)(1) of the Code to include an 
educational IRA described in section 530 of the Code. Based on the 
SIA's representations, it appears that Education IRAs share many of the 
same characteristics as those IRAs covered by the exemption. Thus, the 
Department sees merit in the SIA's request and, accordingly, has 
modified the definition of IRA in section III(b) of PTE 97-11 to 
include Education IRAs. The Department notes that all of the conditions 
of PTE 97-11 must be satisfied with respect to Education IRAs, as with 
all other IRAs and Keogh Plans covered by the exemption.
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    \3\ See section 530(e) of the Code.
    \4\ See section 530(d)(5) of the Code.
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Notice to Interested Persons

    Because many participants in IRAs and Keogh Plans and broker-
dealers could 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 interests 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.

[[Page 56233]]

    (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) 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.''

    Signed at Washington, DC this 6th day of October 1998.
Alan D. Lebowitz,
Deputy Assistant Secretary for Program Operations, Pension and Welfare 
Benefits Administration, U.S. Department of Labor.
[FR Doc. 98-28213 Filed 10-20-98; 8:45 am]
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