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May 11, 2005
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2005-10A
Code Sec. 4975 (c)(1)(E) & (F)
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Sandra Parks Faulkner
Baker and Hostetler LLP
65 East State Street
Columbus, OH 43215
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Kristin H. Ives
Stradley Ronon Stevens & Young LLP
2600 One Commerce Square
Philadelphia, PA 19103-7098
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Dear Ms. Faulkner and Ms. Ives:
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This is in response to your application, on behalf of
COUNTRY Trust Bank (Bank), for an exemption from the prohibited transaction
provisions of section 4975 of the Internal Revenue Code (the Code) with
respect to a combination of services the Bank provides to certain individual
retirement accounts (IRAs) under the CoMPAS Program.
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On the basis of the facts and representations contained
in your submission, it is the view of the Department that, for the reasons
discussed below, the transactions with respect to which you have requested
exemptive relief would not, to the extent executed in a manner consistent
with such facts and representations, violate section 4975(c)(1)(E) and (F)
of the Code. Accordingly, we have determined that the appropriate response
to your request is an advisory opinion, rather than an exemption under
section 4975(c)(2) of the Code.(1)
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You represent that the Bank is a federally chartered
thrift registered as an investment adviser with the U.S. Securities and
Exchange Commission (SEC) under the Investment Advisers Act of 1940
(Advisers Act). The Country Managed Portfolio Account Service (i.e., CoMPAS)
Program involves the Bank’s investment of assets of IRAs participating in
the CoMPAS Program in accordance with certain model investment strategies
(Investment Strategies). The CoMPAS Program is made available to all types
of IRAs, including traditional IRAs, prototype IRAs, Roth IRAs, Simplified
Employee Pension IRAs (SEP-IRAs) and SIMPLEs (collectively referred to
herein as “IRAs”). IRAs maintained by employees of the Bank or any of
its affiliates are also eligible to participate in the CoMPAS Program.(2)
The CoMPAS Program will also be offered in the future to plans
qualified under section 401(a) of the Code, such as plans described under
Code section 401(k).(3)
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Under the CoMPAS Program, the Bank serves as trustee or
custodian of the IRAs. The Bank’s duties with respect to the IRAs
typically include accounting, record-keeping, administrative, tax reporting,
and shareholder services. The Bank provides investment advice to IRA Holders
by recommending investment of IRA assets in a manner consistent with one of
five model Investment Strategies developed by the Bank. The Bank recommends
a definitive Investment Strategy after reviewing and analyzing
questionnaires completed by the individuals who establish IRAs or by the IRA
beneficiaries (collectively referred to herein as “IRA Holders”).
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You represent that the Bank has sole responsibility to
review, evaluate and recommend an appropriate Investment Strategy for an IRA
Holder. An IRA Holder maintains the ultimate authority to direct the
investment of an IRA. An IRA Holder may direct his or her IRA to be invested
pursuant to a recommended Investment Strategy, another Investment Strategy,
or may decline to participate in the CoMPAS Program.
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If the IRA Holder participates in the CoMPAS Program, the
Bank implements the Investment Strategy for the IRA in accordance with the
CoMPAS IRA Agreement (Agreement) entered into by each IRA Holder. The
Agreement gives the Bank authority to invest in the chosen Investment
Strategy, make certain adjustments to the Investment Strategy (Investment
Strategy Adjustments), and engage in purchases and sales of Fund shares to
rebalance the IRA’s portfolio in accordance with the terms of the
Agreement.
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The Bank serves as the investment adviser and custodian
for mutual funds (Affiliated Funds) registered under the Investment Company
Act of 1940 (1940 Act), as amended. Currently, there are three Affiliated
Funds that are available for investment by the IRAs under the CoMPAS
Program, pursuant to certain Investment Strategies recommended by the Bank.
The Affiliated Funds are a diversified series of the COUNTRY Mutual Funds
Trust (CMFT), an open-end management investment company registered under the
1940 Act and organized as a Delaware business trust. Overall responsibility
for management of each Affiliated Fund rests with the CMFT’s Board of
Trustees (Board of Trustees). The Board of Trustees manages the Affiliated
Funds in accordance with the laws of the State of Delaware governing
business trusts. The Board of Trustees elects CMFT’s officers to actively
supervise the Affiliated Funds’ day-to-day operations.
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The Bank, in its capacity as investment adviser and
custodian to the Affiliated Funds, bears all expenses incurred in connection
with the performance of its duties, other than the cost of securities
(including brokerage commissions) purchased for the Affiliated Funds.
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Neither the Bank nor any affiliate of the Bank serves as
the named distributor for any Affiliated Fund. The Affiliated Funds’
principal underwriter and distributor is Quasar Distributors, LLC (Quasar).
Quasar is a wholly owned subsidiary of Firstar Bank NA and is not an
affiliate of the Bank. Neither Quasar nor any of its affiliates provide any
investment advice or make any recommendations to the IRA Holders in
connection with the IRAs’ participation in the CoMPAS Program. COUNTRY
Capital Management Company (CCMC), a broker-dealer affiliated with the Bank,
serves as a selected dealer for the Affiliated Funds pursuant to a dealer
agreement with Quasar. However, as discussed further below, no portion of
any fees paid by an Affiliated Fund to Quasar will be used to compensate
CCMC for investments in the Affiliated Funds made by IRAs participating in
the CoMPAS Program.(4)
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The three Affiliated Funds currently available for
investment under the CoMPAS Program, pursuant to certain recommended
Investment Strategies, are the COUNTRY Growth Fund, the COUNTRY Short-Term
Bond Fund, and the COUNTRY Bond Fund.
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Mutual Funds that are unrelated to the Bank (Third Party
Funds) are also available for investment under the CoMPAS Program. Third
Party Funds are separate diversified series of open-end management
investment companies registered under the 1940 Act. No Third Party Fund’s
sponsor, administrator, distributor, investment adviser or sub-adviser is
affiliated with the Bank. The Affiliated Funds and Third Party Funds are
collectively referred to herein as “the Funds.”
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You represent that the Bank and its affiliates are
entitled to receive three types of fees: (i) investment advisory fees (the
Advisory Fees) from the Affiliated Funds; (ii) non-advisory fees from the
Affiliated Funds (Non-Advisory Fees); and (iii) a Management Fee paid by
each IRA. With respect to Non-Advisory Fees paid by the Affiliated Funds,
the Bank and its affiliates are entitled to receive custodial fees and fees
paid pursuant to each Affiliated Fund’s Plan of Distribution (12b-1 fees).(5)
For its custodial services, you state that the Bank currently receives
no additional compensation from any of the Affiliated Funds. You represent
that the Bank has waived receipt of all fees otherwise due under a custodial
arrangement it has entered into with CMFT on behalf of the Affiliated Funds.
With respect to 12b-1 fees, you represent that neither the Bank nor an
affiliate receives or will receive any 12b-1 fees on any assets invested in
the Affiliated Funds pursuant to the CoMPAS Program. However, if
circumstances change, you represent that all Non-Advisory Fees, including
any 12b-1 fees, will be offset against the Management Fee.
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You represent that the total fees that are paid to the
Bank and its affiliates constitute no more than reasonable compensation for
the services provided to the IRA. Any fees received by the Bank from sources
other than the IRA, such as the Advisory Fees and Non-Advisory Fees, are
applied to offset the IRA’s legal obligation to the Bank (such as the
Management Fee, discussed below). You state that under no circumstances will
any fees received by the Bank or an affiliate from sources other than the
IRA increase the total compensation received by the Bank and its affiliates.(6)
All Advisory Fees payable to the Bank and other fees paid to the Bank
or its affiliates are disclosed in each Affiliated Fund’s prospectus and
statement of additional information.
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The Advisory Fees that the Bank or an affiliate receives
as a result of investment by the IRAs in the Affiliated Funds are calculated
and accrued daily and paid monthly based on the Affiliated Fund’s average
daily net assets. The Bank may, from time to time, waive all or a portion of
the Advisory Fee. The Board of Trustees, including a majority of Trustees
who are not “interested persons,” as that term is defined in the 1940
Act, must approve each fee arrangement between the Bank and an Affiliated
Fund.
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Each Affiliated Fund pays Quasar a monthly 12b-1 fee,
which may be used by Quasar to provide distribution assistance or to
compensate financial intermediaries, broker-dealers or similar entities for
providing shareholder services.(7)
You represent that Quasar does not retain any portion of the 12b-1
fees. No portion of the 12b-1 fees paid to Quasar are currently used by
Quasar to compensate a broker-dealer affiliated with the Bank (e.g., CCMC)
for investments in the Affiliated Funds made by the IRAs under the CoMPAS
Program. In addition, neither the Bank nor an affiliate currently receive,
or will receive, any compensation, including 12b-1 fees, from the Third
Party Funds for investments made by the IRAs under the CoMPAS Program.
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For the provision of asset allocation, custody and
related services, the Bank charges each IRA participating in the CoMPAS
Program an annual investment fee (i.e., the Management Fee) equal to 1.75%
on the first $50,000, 1.5% on the next $250,000, and 1.25% on all assets
over $300,000. The Bank may increase or decrease the Management Fee from
time to time. In the case of a Management Fee increase, the Bank will notify
each IRA Holder of the impending increase at least thirty (30) days prior to
its effective date. The notice will: (1) include a Termination Advisory; (2)
remind the IRA Holder of the right to withdraw from the CoMPAS Program or to
transfer to another Investment Strategy without penalty; and (3) provide
that absent an affirmative action, the new fee will be effective as of a
given date no earlier than 30 days after such notice and Termination
Advisory is sent. The Management Fee is assessed monthly, in arrears, on the
IRA’s value as of the last business day of the month. You state that the
Management Fee is deducted directly from the IRA’s assets.
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You represent that fees paid to Quasar or its affiliates
are not subtracted from the Management Fee because neither Quasar nor any of
Quasar’s affiliates provide any investment advice or make any
recommendations in connection with an IRA Holder’s participation in the
CoMPAS Program. In addition, as noted earlier, Quasar and its affiliates are
not affiliated with the Bank and its affiliates.
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At issue is whether the receipt by the Bank or an
affiliate of fees from the Affiliated Funds resulting from services provided
by the Bank to the IRAs participating in the CoMPAS Program violates section
4975(c)(1)(E) or (F) of the Code.
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Section 4975(e)(1) of the Code, in relevant part, defines
the term “plan” to include an individual retirement account described in
section 408(a) of the Code.(8)
Section 4975(e)(2)(A) of the Code defines the term “disqualified
person” to include a fiduciary. Section 4975(e)(3) of the Code defines the
term “fiduciary” to mean any person who (A) exercises any discretionary
authority or control with respect to the management of such plan or
exercises any authority or control with respect to management or disposition
of plan assets; (B) renders investment advice for a fee or other
compensation, direct or indirect, with respect to any moneys or other
property of such plan, or has any authority or responsibility to do so; or
(C) has any discretionary authority or discretionary responsibility in the
administration of such plan.
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The Bank, in its provision of investment advice to an IRA
Holder participating in the CoMPAS Program regarding a recommended
Investment Strategy, acts as a fiduciary pursuant to Code section
4975(e)(3)(B). The Bank also acts as a fiduciary for the IRAs participating
in the CoMPAS Program by making Investment Strategy Adjustments to the IRAs
and by implementing transactions for the rebalancing of the IRAs.
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Section 4975(c)(1)(C) of the Code prohibits the
furnishing of goods, services or facilities between a plan and a
disqualified person. Section 4975(c)(1)(D) of the Code prohibits any
transfer to, or use by or for the benefit of, a disqualified person of the
income or assets of a plan. Section 4975(c)(1)(E) of the Code prohibits any
act by a disqualified person who is a fiduciary whereby he deals with the
income or assets of a plan in his own interest or for his own account.
Section 4975(c)(1)(F) of the Code prohibits the receipt of any consideration
for his own personal account by any disqualified person who is a fiduciary
from any party dealing with the plan in connection with a transaction
involving the income or assets of the plan.
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Section 4975(d)(2) of the Code exempts from the
prohibitions of section 4975(c) any contract, or reasonable arrangement,
made with a disqualified person for office space, or legal, accounting, or
other services necessary for the establishment or operation of the plan, if
no more than reasonable compensation is paid therefore. In this regard,
section 54.4975-6(a) of the Pension Excise Tax Regulations contains a
discussion of what constitutes a “necessary service” (section
54.4975-6(a)(2)) under “a reasonable contract or arrangement” (section
54.4975-6(a)(3)) for “reasonable compensation” (section
54.4975-6(a)(4)).
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Thus, to the extent that an arrangement for services
provided to the IRAs by the Bank under the CoMPAS Program meets the
statutory requirements for an exemption under section 4975(d)(2) of the Code
(which is an inherently factual question upon which the Department will not
opine), the Bank would be able to perform such services and receive fees,
provided that all conditions of the exemption are met.
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Section 54.4975-6(a)(1) of the Pension Excise Tax
Regulations provides that section 4975(d)(2) does not contain an exemption
for acts described in section 4975(c)(1)(E) and 4975(c)(1)(F). Section
54.4975-6(a)(1) provides that such acts are separate transactions not
described in section 4975(d)(2). As explained in section 54.4975-6(a)(5), a
fiduciary may not use the authority, control or responsibility which makes
such person a fiduciary to cause a plan to pay an additional fee to such
fiduciary (or to a person in which such fiduciary has an interest which may
affect the exercise of such fiduciary’s best judgment as a fiduciary) to
provide a service. Nor may a fiduciary use the authority, control or
responsibility which makes such person a fiduciary to cause a plan to enter
into a transaction involving plan assets whereby such fiduciary (or a person
in which such fiduciary has an interest which may affect the exercise of
such fiduciary’s best judgment as a fiduciary) will receive consideration
from a third party in connection with such transaction.
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Conversely, a fiduciary does not engage in an act
described in section 4975(c)(1)(E) if the fiduciary does not use any of the
authority, control or responsibility which makes such person a fiduciary to
cause a plan to pay additional fees for a service provided by such fiduciary
or to pay a fee for a service furnished by a person in which such fiduciary
has an interest which may affect the exercise of such fiduciary’s best
judgment as a fiduciary.
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Therefore, the receipt of Advisory and Non-Advisory Fees
by the Bank and its affiliates attributable to assets of IRAs participating
in the CoMPAS Program would not violate section 4975(c)(1)(E) or (F) of the
Code if the Management Fees received by the Bank are reduced by an amount
equal to such fees and the receipt of such fees does not cause the Bank’s
compensation to exceed the amount of the Management Fees agreed to by the
IRA Holder.(9)
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However, if the provision of services by the Bank to an
IRA under the CoMPAS Program results, in operation, in a divergence of
interests between the Bank and the IRA, or an incorrect offset of
service-related fees, then violations of section 4975(c)(1)(E) and (F) of
the Code could occur. Thus, the Department is unable to rule that the Bank’s
receipt of fees as a result of services provided to the IRAs participating
in the CoMPAS Program would not, in operation, violate section 4975(c)(1)(E)
and (F) of the Code.
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Finally, with respect to the possible use of the CoMPAS
Program by other qualified retirement plans, such as Code section 401(k)
plans, that may be considered an “employee benefit plan” covered by
Title I of ERISA, the Department notes that the same analysis and
conclusions would apply for purposes of the prohibited transaction
provisions contained in section 406(a) and (b) of ERISA. In such instances,
the general fiduciary responsibility provisions of ERISA would also apply to
the arrangement.
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This letter constitutes an advisory opinion under ERISA
Procedure 76-1, 41 FR 36281 (Aug. 27, 1976). The letter is issued subject to
the provisions of that procedure, including section 10 thereof, relating to
the effect of advisory opinions.
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In view of this letter, the Department believes that no
further action is necessary with respect to your exemption application.
Accordingly, your exemption application is closed without further action.
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Sincerely,
Louis J. Campagna
Chief, Division of Fiduciary Interpretations
Office of Regulations and Interpretations
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Under Presidential Reorganization Plan
No. 4 of 1978, effective December 31, 1978 [5 USC App. at 214 (2000
ed.)], the authority of the Secretary of the Treasury to issue
interpretations regarding section 4975 of the Code has been transferred,
with certain exceptions not here relevant, to the Secretary of Labor and
the Secretary of the Treasury is bound by the interpretations of the
Secretary of Labor pursuant to such authority.
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The Department assumes for purposes of
this opinion that the IRAs covering individuals who are employees of the
Bank or an affiliate would not be considered “employee benefit plans”
subject to Title I of the Employee Retirement Income Security Act of
1974, as amended (ERISA), as described in 29 CFR §2510.3-2(d).
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To the extent that such a plan would
be considered an “employee benefit plan” for purposes of Title I of
ERISA, the prohibited transaction provisions contained in section 406 of
ERISA would be applicable.
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The Department expresses no opinion
herein as to whether additional prohibited transaction concerns are
raised with respect to the hiring of CCMC by Quasar to provide brokerage
services for a Fund.
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A Plan of Distribution is a plan
adopted under Rule 12b-1 of the 1940 Act.
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The Department notes that the IRAs
should be entitled to any such fees that exceed the IRA’s liability to
the Bank, in order for the Bank to avoid receiving excess fees through a
use of its discretionary authority or control as a fiduciary, thereby
raising fiduciary self-dealing concerns. See Advisory Opinion 97-15A
(May 22, 1997). However, the Department is expressing no opinion herein
as to the propriety of such a pass-through of fees under Federal
securities laws. Questions concerning the application of the Federal
securities laws are within the jurisdiction of the SEC.
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The current maximum 12b-1 fee is 0.25
percent of the average daily net assets of each Affiliated Fund.
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Section 408(a) of the Code provides
that the term “individual retirement account” means a trust created
or organized in the United States for the exclusive benefit of an
individual or his beneficiaries if the written governing instrument
creating the trust meets certain requirements.
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See generally Advisory Opinion 97-15A
(May 22, 1997)(for a discussion of fee offsets by a bank, acting as a
plan trustee, to avoid fiduciary self-dealing with respect to
compensation received from mutual funds).
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