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

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.1 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) 2 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).3 In addition, as with traditional IRAs, the Education

IRA balance can be transferred to different sponsoring

institutions.4 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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