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 Individuals Have Been Established [12/12/2002]
Volume 67, Number 239, Page 76425-76427
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application Number: D-10934]
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 Individuals Have Been Established or Maintained
AGENCY: Pension and Welfare Benefits Administration, U.S. Department of
Labor.
ACTION: Adoption of amendment to PTE 97-11.
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SUMMARY: This document amends PTE 97-11, 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) \1\ 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 amendment affects individuals with
beneficial interests in such plans who receive such services as well as
the broker-dealers who provide such services.
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\1\ 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) of
the Internal Revenue Code of 1986 (the Code) is an ``individual
retirement account'' described in section 408(a) of the Code.
Therefore, a Roth IRA which is not an employee benefit plan covered
by Title I of ERISA (except for certain Simplified Employee Pensions
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. In this
regard, the Department wishes to clarify that this proposed
modification of section III(b) of PTE 97-11 would include Roth
individual retirement annuities described in section 7701(a)(37)(B)
of the Code.
FOR FURTHER INFORMATION CONTACT: Ms. Allison Padams Lavigne or Mr.
Christopher Motta, Office of Exemption Determinations, Pension and
Welfare Benefits Administration, U.S. Department of Labor, (202) 693-
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8540, (this is not a toll-free number).
SUPPLEMENTARY INFORMATION: On June 18, 2002, the Department proposed an
amendment to PTE 97-11 (67 FR 41504) \2\ 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 Code by reason of section
4975(c)(1)(D), (E) and (F) of the Code.\3\ The amendment to PTE 97-11
was requested in an exemption application dated September 26, 2000,
filed on behalf of American Funds Distributors, Inc. (AFD), a broker-
dealer registered under the Securities Exchange Act of 1934.
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\2\ PTE 97-11 was granted on February 7, 1997 (62 FR 5855) and
amended on March 8, 1999 (64 FR 11042). Any references to PTE 97-11
include the 1999 amendment.
\3\ Section 102 of Reorganization Plan No. 4 of 1978 (43 FR
47713, October 17, 1978 (5 U.S.C. App. 1 (1996)) 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 on the proposed amendment. Two comments were received pursuant
to the provisions 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. No requests for a public hearing were received.
For the sake of convenience, the entire text of PTE 97-11, as
amended, has been reprinted.
1. Description of the Exemption
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 certain conditions are met.
Relief under PTE 97-11, as originally amended, was limited to
transactions involving IRAs, as defined in section III(b) of the class
exemption. In this regard, section III(b) defined the term ``IRA'' as
``an individual retirement account described in Code section 408(a) or
an education individual retirement account described in section 530 of
the Code.'' The exemption stated further that ``(f)or purposes of the
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.''
AFD requested that PTE 97-11 be amended to expand the definition of
IRA contained in section III(b) of PTE 97-11 to include Individual
Retirement Annuities, as such term is defined in section 408(b) of the
Code.
2. Discussion of the Comments Received
The Department received two comments on the proposed amendment to
PTE 97-11. One of the commenters, the American Council of Life Insurers
(ACLI), supported the amendment. The second commenter sought
clarification with respect to the reduction of commissions in
connection with the aggregation of variable annuity contracts and
mutual funds that are offered and/or managed by unaffiliated entities.
Specifically, the commenter asked the Department whether the amendment
to PTE 97-11 is applicable to situations where the distributor of the
annuity contract, the investment manager of the variable annuity
separate account and mutual funds, and the provider of the annuity
contracts are not affiliated.
[[Page 76426]]
As stated above, PTE 97-11 permits a broker-dealer to offer reduced
or no cost services to individuals for whose benefit an IRA or Keogh
Plan is established or maintained, provided that the conditions of the
exemption have been met. The Department notes that the exemption does
not limit relief to those services that are offered pursuant to an
arrangement involving only affiliated entities.
Accordingly, a broker-dealer offering reduced commissions to an
individual in connection with the purchase of a variable annuity
contract under circumstances where the broker-dealer, the investment
manager of the variable annuity separate account and mutual funds, and
the provider of the annuity contracts are unaffiliated would be covered
by the class exemption are met. In particular, the Department notes
that PTE 97-11 requires, among other things, that 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. Additionally, the
services offered under the arrangement must be provided by the broker-
dealer or its affiliate 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.
General Information
The attention of interested persons is directed to the following:
(1) The Department finds that the amendment is administratively
feasible, in the interest 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 amendment 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 amendment is applicable to a transaction only if the
conditions specified in the class exemption are met.
Exemption
Accordingly, PTE 97-11 is amended 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 CFR
32836, August 10, 1990).
Section I: Covered Transactions
Effective January 1, 1998, 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 the 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 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.
(c) For the purpose 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; or
(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 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), an individual retirement annuity
described in Code section 408(b) 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.
(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
[[Page 76427]]
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 or 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 a 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,
investments management fees, custodial fees, and administrative fees.
Dated: Signed at Washington, DC, this 9th day of December, 2002.
Ivan L. Strasfeld,
Director, Office of Exemption Determinations, Pension and Welfare
Benefits Administration, Department of Labor.
[FR Doc. 02-31366 Filed 12-11-02; 8:45 am]
BILLING CODE 4520-29-M
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