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

DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

[Prohibited Transaction Exemption 97-11; Application D-09707]

Class Exemption for the Receipt of Certain Investment Services by

Individuals for Whose Benefit Individual Retirement Accounts or

Retirement Plans for Self-Employed Individuals Have Been Established or

Maintained

AGENCY: Pension and Welfare Benefits Administration, U.S. Department of

Labor.

ACTION: Grant of class exemption.

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SUMMARY: This document contains a final class exemption from the

prohibited transaction restrictions of the Employee Retirement Income

Security Act of 1974 (ERISA) and the Internal Revenue Code of 1986 (the

Code). The class exemption permits the receipt of services at reduced

or no cost by an individual for whose benefit an individual retirement

account (IRA) or, it self-employed, a Keogh Plan is established or

maintained, or by members of his or her family, from a broker-dealer,

provided that the conditions of the exemption are met. The exemption

affects individuals with beneficial interests in such plans who receive

such services as well as the broker-dealers who provide such services.

EFFECTIVE DATE: February 7, 1997.

FOR FURTHER INFORMATION CONTACT: Allison Padams, Office of Exemption

Determinations, Pension and Welfare Benefits Administration, U.S.

Department of Labor, (202) 219-8971, (This is not a toll-free number);

or Paul D. Mannina, Plan Benefits Security Division, Office of

Solicitor, U.S. Department of Labor (202) 219-9141, (This is not a

toll-free number).

SUPPLEMENTARY INFORMATION: On July 31, 1996, the Department of Labor

(the Department) published a notice in the Federal Register (61 FR

39996) of the pendency of a proposed class exemption from the

restrictions of sections 406(a)(1)(D) and 406(b) of ERISA and the

sanctions resulting from the application of sections 4975 (a) and (b),

4975(c)(3) and 408(e)(2) of the Code by reason of section 4975(c)(1)

(D), (E) and (F) of the Code. This exemption was requested in an

exemption application filed on behalf of the Securities Industry

Association (the SIA or the Applicant). The application was filed

pursuant to section 408(a) of ERISA and section 4975(c)(2) of the Code

and in accordance with the procedures set forth in 29 CFR part 2570,

subpart B, (55 FR 32836, August 10, 1990.) \1\

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\1\ Section 102 of Reorganization Plan No. 4 of 1978 (43 FR

47713, October 17, 1978) generally transferred the authority of the

Secretary of the Treasury to issue administrative exemptions under

section 4975(c)(2) of the Code to the Secretary of Labor.

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The notice of pendency gave interested persons an opportunity to

comment or request a public hearing on the proposal. No requests for a

public hearing were received by the Department. Two public comments

were received by the Department. Upon consideration of the record as a

whole, the Department has determined to grant the proposed exemption

subject to certain modifications. These modifications and the comments

are discussed below.

Discussion of the Comments Received

One commenter sought clarification of the language in the preamble

to the notice of proposed exemption which addressed the Investment

Company Institute's inquiry as to whether the exemption would provide

relief for a relationship brokerage program whereby a broker-dealer

offers reduced sales charges with respect to the purchase of investment

company shares as the size of the purchase increases. In this regard, a

broker-dealer would aggregate total purchases of all of a customer's

accounts, including IRAs and Keogh Plans. Thus, a broker-dealer would

set a schedule of commissions or rates that vary according to the size

of the transaction. Specifically, the commenter requests that the

Department clarify that the exemption covers ``rights of accumulation''

programs as described in the National Association of Securities

Dealers' Rules of Fair Practice in which a broker dealer takes into

account both a customer's present purchases of shares and the aggregate

quantity of securities previously purchased by the customer. The

Department notes that such programs would be covered by the exemption

provided that all the conditions of the exemption are satisfied.

In addition, the commenter requests that the Department reconsider

its views stated in footnote 8 of the Preamble relating to ``letter of

intent programs'' in which broker-dealers reduce sales commissions

based on the aggregate of a customer's actual purchases and anticipated

purchases over a specified period of time, as agreed to by the customer

(the Target Amount). The commenter states that the letter of intent is

not a binding obligation on the customer to purchase the Target Amount.

Rather, if the customer holds

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less than the Target Amount in his accounts at the end of the specified

period, the sales charge is adjusted upward for the shares purchased

during such period, and the customer is required to pay the same sales

charge he would have paid if he had not participated in the letter of

intent program. For example, an individual purchases shares of a mutual

fund under a letter of intent program which requires the individual to

purchase a total of $100,000 of mutual fund shares within 13 months of

the initial purchase. The individual makes an initial purchase of

$2,000 for his or her IRA account. In addition, the individual makes a

$3,000 purchase for a non-IRA/Keogh account and pays a reduced sales

charge associated with both purchases. An escrow arrangement is

established with regard to the $5,000 in purchases to secure payment of

the higher sales charge in the event the investor fails to purchase the

intended number of shares during the specified period. During the 13-

month period, the individual only purchases another $5,000 amount for

his non-IRA/Keogh account. In accordance with the program, an unreduced

sales charge must be reinstated. the broker-dealer would assess each

account its prorata share of the reinstated sales charge. Thus, the IRA

would only pay 20% of the total amount of money owed for the reinstated

sales charge (the IRA purchased $2,000 of the total $10,000 purchased

or 20%). The commenter represents that under letter of intent programs,

IRA and Keogh Plans would be treated as favorably as any other type of

account that a broker-dealer includes in the letter of intent program.

Based upon the commenter's assertion that the IRA and Keogh Plans only

will be assessed that portion of the reinstated sales charges related

to the IRA and Keogh Plan purchases, the Department is of the view that

letter of intent programs would be covered by the class exemption.

Another commenter urged the Department to modify the definition of

an individual retirement account to include simple retirement accounts

as described in section 408(p) of the Code. The Small Business Job

Protection Act of 1996 (Pub. L. 104-188), effective for taxable years

beginning after December 31, 1996, amended section 408 of the Code to

permit simple retirement accounts. In this regard, the commenter states

that section 408(p)(7) provides that participants of simple employee

pensions have the unrestricted authority to transfer their account

balances without cost or penalty to simple retirement accounts

sponsored by different financial institutions. The Department finds

merit in this comment and has modified section III(b) of the exemption

to include simple retirement accounts. The same commenter urges the

Department to clarify the definition of account value to include

insured investment accounts or insured savings accounts. According to

the commenter, such accounts are established in a separate bank and are

insured by a federal deposit agency. Broker-dealers establish insured

savings accounts whereby the uninvested cash in a clients account is

swept into a separate bank account for a client rather than into a

money market fund. Clients may select such an account as a sweep

vehicle because the assets in the bank account are insured by federal

deposit insurance up to the maximum permitted by law. In this regard,

the commenter represents that a separate program may be maintained for

the broker-dealer's retirement account clients. In response to the

comment, the Department has clarified section III(d) to include

accounts that are insured by a federal deposit insurance agency and

that constitute deposits as that term is defined in section 29 CFR

2550.408(b)-4(c)(3).

General Information

The attention of interested persons is directed to the following:

(1) In accordance with section 408(a) of ERISA and section

4975(c)(2) of the Code, and based upon the entire record, the

Department finds that the exemption is administratively feasible, in

the interests of the IRAs and Keogh Plans and their participants and

beneficiaries and protective of the rights of participants and

beneficiaries of such plans.

(2) The exemption is supplemental to, and not in derogation of, any

other provisions of ERISA and the Code including statutory or

administrative exemptions and transitional rules. Furthermore, the fact

that a transaction is subject to an administrative exemption is not

dispositive of whether the transaction is in fact a prohibited

transaction.

(3) The exemption is applicable to a transaction only if the

conditions specified in the class exemption are met.

Exemption

Accordingly, the following exemption is granted under the authority

of section 408(a) of ERISA and section 4975(c)(2) of the Code and in

accordance with the procedures set forth in 29 CFR part 2570, subpart

B. [55 FR 32836, August 10, 1990].

Section I: Covered Transactions

Effective February 7, 1997, the restrictions of sections

406(a)(1)(D) and 406(b) of ERISA and the sanctions resulting from the

application of section 4975 of the Code, including the loss of

exemption of an IRA pursuant to section 408(e)(2)(A) of the Code, by

reason of section 4975(c)(1)(D), (E) and (F) of the Code, shall not

apply to the receipt of services at reduced or no cost by an individual

for whose benefit an IRA or, if self-employed, a Keogh Plan, is

established or maintained, or by members of his or her family, from a

broker-dealer registered under the Securities Exchange Act of 1934

pursuant to an arrangement in which the account value of, or the fees

incurred for services provided to, the IRA or Keogh Plan is taken into

account for purposes of determining eligibility to receive such

services, provided that each condition of Section II of this exemption

is satisfied.

Section II: Conditions

(a) The IRA or Keogh Plan whose account value or whose fees are

taken into account for purposes of determining eligibility to receive

services under the arrangement is established and maintained for the

exclusive benefit of the participant covered under the IRA or Keogh

Plan, his or her spouse or their beneficiaries.

(b) The services offered under the relationship brokerage

arrangement must be of the type that the broker-dealer itself could

offer consistent with all applicable federal and state laws regulating

broker-dealers.

(c) The services offered under the arrangement are provided by the

broker-dealer (or an affiliate of the broker-dealer in the ordinary

course of the broker-dealer's business to customers who qualify for

reduced or no cost services, but do not maintain IRAs or Keogh Plans

with the broker-dealer.

(d) For purposes of determining eligibility to receive services,

the arrangement satisfies one of the following:

(i) Eligibility requirements based on the account value of the IRA

or Keogh Plan are as favorable as any such requirements based on the

value of any other type of account which the broker-dealer includes to

determine eligibility; and

(ii) Eligibility requirements based on the amount of fees incurred

by the IRA or Keogh Plan are as favorable as any requirements based on

the amount of fees incurred by any other type of

[[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