Federal Register, Volume 81 Issue 68 (Friday, April 8, 2016)
[Federal Register Volume 81, Number 68 (Friday, April 8, 2016)]
[Rules and Regulations]
[Pages 21139-21147]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-07927]
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
29 CFR Part 2550
[Application Number D-11687]
ZRIN 1210-ZA25
Amendment to Prohibited Transaction Exemption (PTE) 75-1, Part V,
Exemptions From Prohibitions Respecting Certain Classes of Transactions
Involving Employee Benefit Plans and Certain Broker-Dealers, Reporting
Dealers and Banks
AGENCY: Employee Benefits Security Administration (EBSA), U.S.
Department of Labor.
ACTION: Adoption of amendment to PTE 75-1, Part V.
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SUMMARY: This document contains an amendment to PTE 75-1, Part V, a
class exemption from certain prohibited transactions provisions of the
Employee Retirement Income Security Act of 1974 (ERISA) and the
Internal Revenue Code (the Code). The provisions at issue generally
prohibit fiduciaries of employee benefit plans and individual
retirement accounts (IRAs), from lending money or otherwise extending
credit to the plans and IRAs and receiving compensation in return. PTE
75-1, Part V, permits the extension of credit to a plan or IRA by a
broker-dealer in connection with the purchase or sale of securities;
however, it originally did not permit the receipt of compensation for
an extension of credit by broker-dealers that are fiduciaries with
respect to the assets involved in the transaction. This amendment
permits investment advice fiduciaries to receive compensation when they
extend credit to plans and IRAs to avoid a failed securities
transaction. The amendment affects participants and beneficiaries of
plans, IRA owners, and fiduciaries with respect to such plans and IRAs.
DATES: Issuance date: This amendment is issued June 7, 2016.
Applicability date: This amendment is applicable to transactions
occurring on or after April 10, 2017. See Applicability Date, below,
for further information.
FOR FURTHER INFORMATION CONTACT: Susan Wilker, Office of Exemption
Determinations, Employee Benefits Security Administration, U.S.
Department of Labor, (202) 693-8824 (this is not a toll-free number).
SUPPLEMENTARY INFORMATION: The Department is amending PTE 75-1, Part V
on its own motion, pursuant to ERISA section 408(a) and Code section
4975(c)(2), and in accordance with the procedures set forth in 29 CFR
part 2570, subpart B (76 FR 66637 (October 27, 2011)).
Executive Summary
Purpose of Regulatory Action
The Department grants this amendment to PTE 75-1, Part V, in
connection with its publication today, elsewhere in this issue of the
Federal Register, of a final regulation defining who is a ``fiduciary''
of an employee benefit plan under ERISA as a result of giving
investment advice to a plan or its participants or beneficiaries
(Regulation). The Regulation also applies to the definition of a
``fiduciary'' of a plan (including an IRA) under the
[[Page 21140]]
Code. The Regulation amends a prior regulation specifying when a person
is a ``fiduciary'' under ERISA and the Code by reason of the provision
of investment advice for a fee or other compensation regarding assets
of a plan or IRA. The Regulation amends a prior regulation, dating to
1975, specifying when a person is a ``fiduciary'' under ERISA and the
Code by reason of the provision of investment advice for a fee or other
compensation regarding assets of a plan or IRA. The Regulation takes
into account the advent of 401(k) plans and IRAs, the dramatic increase
in rollovers, and other developments that have transformed the
retirement plan landscape and the associated investment market over the
four decades since the existing regulation was issued. In light of the
extensive changes in retirement investment practices and relationships,
the Regulation updates existing rules to distinguish more appropriately
between the sorts of advice relationships that should be treated as
fiduciary in nature and those that should not.
This amendment to PTE 75-1, Part V, allows broker-dealers that are
investment advice fiduciaries to receive compensation when they extend
credit to plans and IRAs to avoid failed securities transactions
entered into by the plan or IRA. In the absence of an exemption, these
transactions would be prohibited under ERISA and the Code. In this
regard, ERISA and the Code generally prohibit fiduciaries from lending
money or otherwise extending credit to plans and IRAs, and from
receiving compensation in return.
ERISA section 408(a) specifically authorizes the Secretary of Labor
to grant and amend administrative exemptions from ERISA's prohibited
transaction provisions.\1\ Regulations at 29 CFR 2570.30 to 2570.52
describe the procedures for applying for an administrative exemption.
In granting this amended exemption, the Department has determined that
the exemption is administratively feasible, in the interests of plans
and their participants and beneficiaries and IRA owners, and protective
of the rights of participants and beneficiaries of plans and IRA
owners.
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\1\ Code section 4975(c)(2) authorizes the Secretary of the
Treasury to grant exemptions from the parallel prohibited
transaction provisions of the Code. Reorganization Plan No. 4 of
1978 (5 U.S.C. app. at 214 (2000)) (``Reorganization Plan'')
generally transferred the authority of the Secretary of the Treasury
to grant administrative exemptions under Code section 4975 to the
Secretary of Labor. To rationalize the administration and
interpretation of dual provisions under ERISA and the Code, the
Reorganization Plan divided the interpretive and rulemaking
authority for these provisions between the Secretaries of Labor and
of the Treasury, so that, in general, the agency with responsibility
for a given provision of Title I of ERISA would also have
responsibility for the corresponding provision in the Code. Among
the sections transferred to the Department were the prohibited
transaction provisions and the definition of a fiduciary in both
Title I of ERISA and in the Code. ERISA's prohibited transaction
rules, 29 U.S.C. 1106-1108, apply to ERISA-covered plans, and the
Code's corresponding prohibited transaction rules, 26 U.S.C.
4975(c), apply both to ERISA-covered pension plans that are tax-
qualified pension plans, as well as other tax-advantaged
arrangements, such as IRAs, that are not subject to the fiduciary
responsibility and prohibited transaction rules in ERISA.
Specifically, section 102(a) of the Reorganization Plan provides the
Department of Labor with ``all authority'' for ``regulations,
rulings, opinions, and exemptions under section 4975 [of the Code]''
subject to certain exceptions not relevant here. Reorganization Plan
section 102. In President Carter's message to Congress regarding the
Reorganization Plan, he made explicitly clear that as a result of
the plan, ``Labor will have statutory authority for fiduciary
obligations. . . . Labor will be responsible for overseeing
fiduciary conduct under these provisions.'' Reorganization Plan,
Message of the President. This amended exemption provides relief
from the indicated prohibited transaction provisions of both ERISA
and the Code.
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Summary of the Major Provisions
The amendment to PTE 75-1, Part V, allows investment advice
fiduciaries that are broker-dealers to receive compensation when they
lend money or otherwise extend credit to plans or IRAs to avoid the
failure of a purchase or sale of a security. The exemption contains
conditions that the broker-dealer lending money or otherwise extending
credit must satisfy in order to take advantage of the exemption. In
particular, the potential failure of the securities transaction may not
be caused by the fiduciary or an affiliate, and the terms of the
extension of credit must be at least as favorable to the plan or IRA as
terms the plan or IRA could obtain in an arm's length transaction with
an unrelated party. Certain advance written disclosures must be made to
the plan or IRA, in particular, with respect to the rate of interest or
other fees charged for the loan or other extension of credit.
Executive Order 12866 and 13563 Statement
Under Executive Orders 12866 and 13563, the Department must
determine whether a regulatory action is ``significant'' and therefore
subject to the requirements of the Executive Order and subject to
review by the Office of Management and Budget (OMB). Executive Orders
12866 and 13563 direct agencies to assess all costs and benefits of
available regulatory alternatives and, if regulation is necessary, to
select regulatory approaches that maximize net benefits (including
potential economic, environmental, public health and safety effects,
distributive impacts, and equity). Executive Order 13563 emphasizes the
importance of quantifying both costs and benefits, of reducing costs,
of harmonizing and streamlining rules, and of promoting flexibility. It
also requires federal agencies to develop a plan under which the
agencies will periodically review their existing significant
regulations to make the agencies' regulatory programs more effective or
less burdensome in achieving their regulatory objectives.
Under Executive Order 12866, ``significant'' regulatory actions are
subject to the requirements of the Executive Order and review by the
OMB. Section 3(f) of Executive Order 12866, defines a ``significant
regulatory action'' as an action that is likely to result in a rule (1)
having an annual effect on the economy of $100 million or more, or
adversely and materially affecting a sector of the economy,
productivity, competition, jobs, the environment, public health or
safety, or State, local or tribal governments or communities (also
referred to as ``economically significant'' regulatory actions); (2)
creating serious inconsistency or otherwise interfering with an action
taken or planned by another agency; (3) materially altering the
budgetary impacts of entitlement grants, user fees, or loan programs or
the rights and obligations of recipients thereof; or (4) raising novel
legal or policy issues arising out of legal mandates, the President's
priorities, or the principles set forth in the Executive Order.
Pursuant to the terms of the Executive Order, OMB has determined that
this action is ``significant'' within the meaning of Section 3(f)(4) of
the Executive Order. Accordingly, the Department has undertaken an
assessment of the costs and benefits of the proposal, and OMB has
reviewed this regulatory action. The Department's complete Regulatory
Impact Analysis is available at www.dol.gov/ebsa.
Regulation Defining a Fiduciary
As explained more fully in the preamble to the Regulation, ERISA is
a comprehensive statute designed to protect the interests of plan
participants and beneficiaries, the integrity of employee benefit
plans, and the security of retirement, health, and other critical
benefits. The broad public interest in ERISA-covered plans is reflected
in its imposition of fiduciary responsibilities on parties engaging in
important plan activities, as well as in the tax-favored status of plan
assets and investments. One of the chief ways in which ERISA protects
employee benefit plans is by
[[Page 21141]]
requiring that plan fiduciaries comply with fundamental obligations
rooted in the law of trusts. In particular, plan fiduciaries must
manage plan assets prudently and with undivided loyalty to the plans
and their participants and beneficiaries.\2\ In addition, they must
refrain from engaging in ``prohibited transactions,'' which ERISA does
not permit because of the dangers posed by the fiduciaries' conflicts
of interest with respect to the transactions.\3\ When fiduciaries
violate ERISA's fiduciary duties or the prohibited transaction rules,
they may be held personally liable for the breach.\4\ In addition,
violations of the prohibited transaction rules are subject to excise
taxes under the Code.
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\2\ ERISA section 404(a).
\3\ ERISA section 406. ERISA also prohibits certain transactions
between a plan and a ``party in interest.''
\4\ ERISA section 409; see also ERISA section 405.
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The Code also has rules regarding fiduciary conduct with respect to
tax-favored accounts that are not generally covered by ERISA, such as
IRAs. In particular, fiduciaries of these arrangements, including IRAs,
are subject to the prohibited transaction rules and, when they violate
the rules, to the imposition of an excise tax enforced by the Internal
Revenue Service. Unlike participants in plans covered by Title I of
ERISA, IRA owners do not have a statutory right to bring suit against
fiduciaries for violations of the prohibited transaction rules.
Under this statutory framework, the determination of who is a
``fiduciary'' is of central importance. Many of ERISA's and the Code's
protections, duties, and liabilities hinge on fiduciary status. In
relevant part, ERISA section 3(21)(A) and Code section 4975(e)(3)
provide that a person is a fiduciary with respect to a plan or IRA to
the extent he or she (i) exercises any discretionary authority or
discretionary control with respect to management of such plan or IRA,
or exercises any authority or control with respect to management or
disposition of its assets; (ii) renders investment advice for a fee or
other compensation, direct or indirect, with respect to any moneys or
other property of such plan or IRA, or has any authority or
responsibility to do so; or, (iii) has any discretionary authority or
discretionary responsibility in the administration of such plan or IRA.
The statutory definition deliberately casts a wide net in assigning
fiduciary responsibility with respect to plan and IRA assets. Thus,
``any authority or control'' over plan or IRA assets is sufficient to
confer fiduciary status, and any persons who render ``investment advice
for a fee or other compensation, direct or indirect'' are fiduciaries,
regardless of whether they have direct control over the plan's or IRA's
assets and regardless of their status as an investment adviser or
broker under the federal securities laws. The statutory definition and
associated responsibilities were enacted to ensure that plans, plan
participants, and IRA owners can depend on persons who provide
investment advice for a fee to provide recommendations that are
untainted by conflicts of interest. In the absence of fiduciary status,
the providers of investment advice are neither subject to ERISA's
fundamental fiduciary standards, nor accountable under ERISA or the
Code for imprudent, disloyal, or biased advice.
In 1975, the Department issued a regulation, at 29 CFR 2510.3-
21(c)(1975), defining the circumstances under which a person is treated
as providing ``investment advice'' to an employee benefit plan within
the meaning of ERISA section 3(21)(A)(ii) (the ``1975 regulation'').\5\
The 1975 regulation narrowed the scope of the statutory definition of
fiduciary investment advice by creating a five-part test for fiduciary
advice. Under the 1975 regulation, for advice to constitute
``investment advice,'' an adviser must (1) render advice as to the
value of securities or other property, or make recommendations as to
the advisability of investing in, purchasing or selling securities or
other property (2) on a regular basis (3) pursuant to a mutual
agreement, arrangement or understanding, with the plan or a plan
fiduciary that (4) the advice will serve as a primary basis for
investment decisions with respect to plan assets, and that (5) the
advice will be individualized based on the particular needs of the
plan. The 1975 regulation provided that an adviser is a fiduciary with
respect to any particular instance of advice only if he or she meets
each and every element of the five-part test with respect to the
particular advice recipient or plan at issue.
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\5\ The Department of Treasury issued a virtually identical
regulation, at 26 CFR 54.4975-9(c), which interprets Code section
4975(e)(3).
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The market for retirement advice has changed dramatically since the
Department first promulgated the 1975 regulation. Individuals, rather
than large employers and professional money managers, have become
increasingly responsible for managing retirement assets as IRAs and
participant-directed plans, such as 401(k) plans, have supplanted
defined benefit pensions. At the same time, the variety and complexity
of financial products have increased, widening the information gap
between advisers and their clients. Plan fiduciaries, plan participants
and IRA investors must often rely on experts for advice, but are unable
to assess the quality of the expert's advice or effectively guard
against the adviser's conflicts of interest. This challenge is
especially true of retail investors with smaller account balances who
typically do not have financial expertise, and can ill-afford lower
returns to their retirement savings caused by conflicts. The IRA
accounts of these investors often account for all or the lion's share
of their assets and can represent all of savings earned for a lifetime
of work. Losses and reduced returns can be devastating to the investors
who depend upon such savings for support in their old age. As baby
boomers retire, they are increasingly moving money from ERISA-covered
plans, where their employer has both the incentive and the fiduciary
duty to facilitate sound investment choices, to IRAs where both good
and bad investment choices are myriad and advice that is conflicted is
commonplace. These rollovers are expected to approach $2.4 trillion
cumulatively from 2016 through 2020.\6\ These trends were not apparent
when the Department promulgated the 1975 regulation. At that time,
401(k) plans did not yet exist and IRAs had only just been authorized.
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\6\ Cerulli Associates, ``Retirement Markets 2015.''
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As the marketplace for financial services has developed in the
years since 1975, the five-part test has now come to undermine, rather
than promote, the statutes' text and purposes. The narrowness of the
1975 regulation has allowed advisers, brokers, consultants and
valuation firms to play a central role in shaping plan and IRA
investments, without ensuring the accountability that Congress intended
for persons having such influence and responsibility. Even when plan
sponsors, participants, beneficiaries, and IRA owners clearly relied on
paid advisers for impartial guidance, the 1975 regulation has allowed
many advisers to avoid fiduciary status and disregard basic fiduciary
obligations of care and prohibitions on disloyal and conflicted
transactions. As a consequence, these advisers have been able to steer
customers to investments based on their own self-interest (e.g.,
products that generate higher fees for the adviser even if there are
identical lower-fee products available), give imprudent advice, and
engage in transactions that would otherwise be prohibited by ERISA and
the Code
[[Page 21142]]
without fear of accountability under either ERISA or the Code.
In the Department's amendments to the 1975 regulation defining
fiduciary advice within the meaning of ERISA section 3(21)(A)(ii) and
Code section 4975(e)(3)(B), (the ``Regulation'') which are also
published in this issue of the Federal Register, the Department is
replacing the existing regulation with one that more appropriately
distinguishes between the sorts of advice relationships that should be
treated as fiduciary in nature and those that should not, in light of
the legal framework and financial marketplace in which IRAs and plans
currently operate.\7\ The Regulation describes the types of advice that
constitute ``investment advice'' with respect to plan or IRA assets for
purposes of the definition of a fiduciary at ERISA section 3(21)(A)(ii)
and Code section 4975(e)(3)(B). The Regulation covers ERISA-covered
plans, IRAs, and other plans not covered by Title I, such as Keogh
plans, and health savings accounts described in section 223(d) of the
Code.
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\7\ The Department initially proposed an amendment to its
regulation defining a fiduciary within the meaning of ERISA section
3(21)(A)(ii) and Code section 4975(e)(3)(B) on October 22, 2010, at
75 FR 65263. It subsequently announced its intention to withdraw the
proposal and propose a new rule, consistent with the President's
Executive Orders 12866 and 13563, in order to give the public a full
opportunity to evaluate and comment on the new proposal and updated
economic analysis. The first proposed amendment to the rule was
withdrawn on April 20, 2015, see 80 FR 21927.
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As amended, the Regulation provides that a person renders
investment advice with respect to assets of a plan or IRA if, among
other things, the person provides, directly to a plan, a plan
fiduciary, plan participant or beneficiary, IRA or IRA owner, the
following types of advice, for a fee or other compensation, whether
direct or indirect:
(i) A recommendation as to the advisability of acquiring, holding,
disposing of, or exchanging, securities or other investment property,
or a recommendation as to how securities or other investment property
should be invested after the securities or other investment property
are rolled over, transferred or distributed from the plan or IRA; and
(ii) A recommendation as to the management of securities or other
investment property, including, among other things, recommendations on
investment policies or strategies, portfolio composition, selection of
other persons to provide investment advice or investment management
services, types of investment account arrangements (brokerage versus
advisory), or recommendations with respect to rollovers, transfers or
distributions from a plan or IRA, including whether, in what amount, in
what form, and to what destination such a rollover, transfer or
distribution should be made.
In addition, in order to be treated as a fiduciary, such person,
either directly or indirectly (e.g., through or together with any
affiliate), must: represent or acknowledge that it is acting as a
fiduciary within the meaning of ERISA or the Code with respect to the
advice described; represent or acknowledge that it is acting as a
fiduciary within the meaning of ERISA or the Code; render the advice
pursuant to a written or verbal agreement, arrangement or understanding
that the advice is based on the particular investment needs of the
advice recipient; or direct the advice to a specific advice recipient
or recipients regarding the advisability of a particular investment or
management decision with respect to securities or other investment
property of the plan or IRA.
The Regulation also provides that as a threshold matter in order to
be fiduciary advice, the communication must be a ``recommendation'' as
defined therein. The Regulation, as a matter of clarification, provides
that a variety of other communications do not constitute
``recommendations,'' including non-fiduciary investment education;
general communications; and specified communications by platform
providers. These communications which do not rise to the level of
``recommendations'' under the Regulation are discussed more fully in
the preamble to the final Regulation.
The Regulation also specifies certain circumstances where the
Department has determined that a person will not be treated as an
investment advice fiduciary even though the person's activities
technically may satisfy the definition of investment advice. For
example, the Regulation contains a provision excluding recommendations
to independent fiduciaries with financial expertise that are acting on
behalf of plans or IRAs in arm's length transactions, if certain
conditions are met. The independent fiduciary must be a bank, insurance
carrier qualified to do business in more than one state, investment
adviser registered under the Investment Advisers Act of 1940 or by a
state, broker-dealer registered under the Securities Exchange Act of
1934 (Exchange Act), or any other independent fiduciary that holds, or
has under management or control, assets of at least $50 million, and:
(1) The person making the recommendation must know or reasonably
believe that the independent fiduciary of the plan or IRA is capable of
evaluating investment risks independently, both in general and with
regard to particular transactions and investment strategies (the person
may rely on written representations from the plan or independent
fiduciary to satisfy this condition); (2) the person must fairly inform
the independent fiduciary that the person is not undertaking to provide
impartial investment advice, or to give advice in a fiduciary capacity,
in connection with the transaction and must fairly inform the
independent fiduciary of the existence and nature of the person's
financial interests in the transaction; (3) the person must know or
reasonably believe that the independent fiduciary of the plan or IRA is
a fiduciary under ERISA or the Code, or both, with respect to the
transaction and is responsible for exercising independent judgment in
evaluating the transaction (the person may rely on written
representations from the plan or independent fiduciary to satisfy this
condition); and (4) the person cannot receive a fee or other
compensation directly from the plan, plan fiduciary, plan participant
or beneficiary, IRA, or IRA owner for the provision of investment
advice (as opposed to other services) in connection with the
transaction.
Similarly, the Regulation provides that the provision of any advice
to an employee benefit plan (as described in ERISA section 3(3)) by a
person who is a swap dealer, security-based swap dealer, major swap
participant, major security-based swap participant, or a swap clearing
firm in connection with a swap or security-based swap, as defined in
section 1a of the Commodity Exchange Act (7 U.S.C. 1a) and section 3(a)
of the Exchange Act (15 U.S.C. 78c(a)) is not investment advice if
certain conditions are met. Finally, the Regulation describes certain
communications by employees of a plan sponsor, plan, or plan fiduciary
that would not cause the employee to be an investment advice fiduciary
if certain conditions are met.
Prohibited Transactions
The Department anticipates that the Regulation will cover many
investment professionals who did not previously consider themselves to
be fiduciaries under ERISA or the Code. Under the Regulation, these
entities will be subject to the prohibited transaction restrictions in
ERISA and the Code that apply specifically to fiduciaries. The lending
of money or other extension of credit between a fiduciary and a plan or
IRA, and the plan's or IRA's payment of
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compensation to the fiduciary in return may be prohibited by ERISA
section 406(a)(1)(B) and Code section 4975(c)(1)(B) and (D). Further,
ERISA section 406(b)(1) and Code section 4975(c)(1)(E) prohibit a
fiduciary from dealing with the income or assets of a plan or IRA in
his own interest or his own account. ERISA section 406(b)(2), which
does not apply to IRAs, provides that a fiduciary shall not ``in his
individual or in any other capacity act in any transaction involving
the plan on behalf of a party (or represent a party) whose interests
are adverse to the interests of the plan or the interests of its
participants or beneficiaries.'' ERISA section 406(b)(3) and Code
section 4975(c)(1)(F) prohibit a fiduciary from receiving any
consideration for his own personal account from any party dealing with
the plan or IRA in connection with a transaction involving assets of
the plan or IRA.
Parallel regulations issued by the Departments of Labor and the
Treasury explain that these provisions impose on fiduciaries of plans
and IRAs a duty not to act on conflicts of interest that may affect the
fiduciary's best judgment on behalf of the plan or IRA.\8\ The
prohibitions extend to a fiduciary causing a plan or IRA to pay an
additional fee to such fiduciary, or to a person in which such
fiduciary has an interest that may affect the exercise of the
fiduciary's best judgment as a fiduciary. Likewise, a fiduciary is
prohibited from receiving compensation from third parties in connection
with a transaction involving the plan or IRA, or from causing a person
in which the fiduciary has an interest which may affect its best
judgment as a fiduciary to receive such compensation.\9\
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\8\ Subsequent to the issuance of these regulations,
Reorganization Plan No. 4 of 1978, 5 U.S.C. App. (2010), divided
rulemaking and interpretive authority between the Secretaries of
Labor and the Treasury. The Secretary of Labor was given
interpretive and rulemaking authority regarding the definition of
fiduciary under both Title I of ERISA and the Internal Revenue Code.
Id. section 102(a) (``all authority of the Secretary of the Treasury
to issue [regulations, rulings opinions, and exemptions under
section 4975 of the Code] is hereby transferred to the Secretary of
Labor'').
\9\ 29 CFR 2550.408b-2(e); 26 CFR 54.4975-6(a)(5).
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As relevant to this notice, the Department understands that broker-
dealers can be required, as part of their relationships with clearing
houses, to complete securities transactions entered into by the broker-
dealer's customers, even if a particular customer does not perform on
its obligations. If a broker-dealer is required to advance funds to
settle a trade entered into by a plan or IRA, or purchase a security
for delivery on behalf of a plan or IRA, the result can potentially be
viewed as a loan of money or other extension of credit to the plan or
IRA. Further, in the event a broker-dealer steps into a plan's or IRA's
shoes in any particular transaction, it may charge interest or other
fees to the plan or IRA. These transactions potentially violate ERISA
section 406(a)(1)(B) and Code section 4975(c)(1)(B) and (D).
Prohibited Transaction Exemptions
As reflected in the prohibited transaction provisions, ERISA and
the Code strongly disfavor conflicts of interest. In appropriate cases,
however, the statutes provide exemptions from the broad prohibitions on
conflicts of interest. For example, ERISA section 408(b)(14) and Code
section 4975(d)(17) specifically exempt transactions involving the
provision of fiduciary investment advice to a participant or
beneficiary of an individual account plan or IRA owner, including
extensions of short term credit for settlements of securities trades,
if the advice, resulting transaction, and the adviser's fees meet
stringent conditions carefully designed to guard against conflicts of
interest.
In addition, the Secretary of Labor has discretionary authority to
grant administrative exemptions under ERISA and the Code on an
individual or class basis, but only if the Secretary first finds that
the exemptions are (1) administratively feasible, (2) in the interests
of plans and their participants and beneficiaries and IRA owners, and
(3) protective of the rights of the participants and beneficiaries of
such plans and IRA owners. Accordingly, fiduciary advisers may always
give advice without need of an exemption if they avoid the sorts of
conflicts of interest that result in prohibited transactions. However,
when they choose to give advice in which they have a conflict of
interest, they must rely upon an exemption.
Pursuant to its exemption authority, the Department has previously
granted several conditional administrative class exemptions that are
available to fiduciary advisers in defined circumstances. The
Department has, for example, permitted investment advice fiduciaries to
receive compensation from a plan (i.e., a commission) for executing or
effecting securities transactions as agent for the plan.\10\ Elsewhere
in this issue of the Federal Register, a new ``Best Interest Contract
Exemption'' is granted for the receipt of compensation by fiduciaries
that provide investment advice to IRAs, plan participants and
beneficiaries, and certain plan fiduciaries. Receipt by fiduciaries of
compensation that varies, or compensation from third parties, as a
result of advice to plans, would otherwise violate ERISA section 406(b)
and Code section 4975(c). As part of the Department's regulation
defining a fiduciary under ERISA section 3(21)(A)(ii), the Department
is conditioning these existing and newly-granted exemptions on the
fiduciary's commitment to adhere to certain impartial professional
conduct standards; in particular, when providing investment advice that
results in varying or third-party compensation, investment advice
fiduciaries will be required to act in the best interest of the plans
and IRAs they are advising.
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\10\ See PTE 86-128, Exemption for Securities Transactions
Involving Employee Benefit Plans and Broker-Dealers, 51 FR 41686
(November 18, 1986), as amended, 67 FR 64137 (October 17, 2002), as
further amended elsewhere in this issue of the Federal Register.
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The class exemptions described above do not provide relief for any
extensions of credit that may be related to a plan's or IRA's
investment transactions. PTE 75-1, Part V,\11\ permits such an
extension of credit to a plan or IRA by a broker-dealer in connection
with the purchase or sale of securities. Specifically, the Department
has acknowledged that the exemption is available for extensions of
credit for: The settlement of securities transactions; short sales of
securities; the writing of option contracts on securities, and
purchasing of securities on margin.\12\
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\11\ 40 FR 50845 (October 31, 1975), as amended, 71 FR 5883
(February 3, 2006).
\12\ See Preamble to PTE 75-1, Part V, 40 FR 50845 (Oct. 31,
1975); ERISA Advisory Opinion 86-12A (March 19, 1986).
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Relief under PTE 75-1, Part V, was historically limited in that the
broker-dealer extending credit was not permitted to have or exercise
any discretionary authority or control (except as a directed trustee)
with respect to the investment of the plan or IRA assets involved in
the transaction, nor render investment advice within the meaning of 29
CFR 2510.3-21(c) with respect to those plan assets, unless no interest
or other consideration was received by the broker-dealer or any
affiliate of the broker-dealer in connection with the extension of
credit. Therefore, broker-dealers that are considered fiduciaries under
the amended regulation would not be able to receive compensation for
extending credit under PTE 75-1, Part V, as it existed prior to this
amendment.
As part of its development of the Regulation, the Department
considered public input indicating the need for
[[Page 21144]]
additional prohibited transaction exemptions for investment advice
fiduciaries. The Department was informed that relief was needed for
broker-dealers to extend credit to plans and IRAs to avoid failed
securities transactions, and to receive compensation in return. In the
Department's view, the extension of credit to avoid a failed securities
transaction currently falls within the contours of the existing relief
provided by PTE 75-1, Part V, for extensions of credit ``[i]n
connection with the purchase or sale of securities.'' Accordingly,
broker-dealers that are not fiduciaries, e.g., those who execute
transactions but do not provide advice, were permitted receive
compensation for extending credit to avoid a failed securities
transaction under the exemption as originally granted. The Department
proposed this amendment to extend such relief to investment advice
fiduciaries.
This amended exemption follows a lengthy public notice and comment
process, which gave interested persons an extensive opportunity to
comment on the proposed Regulation and exemption proposals. The
proposals initially provided for 75-day comment periods, ending on July
6, 2015 but the Department extended the comment periods to July 21,
2015. The Department then held four days of public hearings on the new
regulatory package, including the proposed exemptions, in Washington,
DC from August 10 to 13, 2015, at which over 75 speakers testified. The
transcript of the hearing was made available on September 8, 2015, and
the Department provided additional opportunity for interested persons
to comment on the proposals or hearing transcript until September 24,
2015. A total of over 3000 comment letters were received on the new
proposals. There were also over 300,000 submissions made as part of 30
separate petitions submitted on the proposal. These comments and
petitions came from consumer groups, plan sponsors, financial services
companies, academics, elected government officials, trade and industry
associations, and others, both in support and in opposition to the
rule.\13\ The Department has reviewed all comments, and after careful
consideration of the comments, has decided to grant the amendment to
PTE 75-1, Part V, as described herein. For the sake of convenience, the
entire text of PTE 75-1, Part V, as amended, has been reprinted at the
end of this notice.
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\13\ As used throughout this preamble, the term ``comment''
refers to information provided through these various sources,
including written comments, petitions, and witnesses at the public
hearing.
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Discussion of the Final Amendment
I. Scope of Section (c)
As amended, PTE 75-1, Part V, Section (c) provides that a fiduciary
within the meaning of ERISA section 3(21)(A)(ii) or Code section
4975(e)(3)(B) may receive reasonable compensation for extending credit
to a plan or IRA to avoid a failed purchase or sale of securities
involving the plan or IRA. One commenter requested that Section (c) be
broadened to cover all transactions that are covered by other sections
of PTE 75-1, Part V, including short sales, options trading and margin
transactions, but did not suggest any additional protective conditions.
The commenter stated that extension of credit relief is critical to
such transactions.
The Department declined to accept this request. As noted above,
this amendment was intended to be a narrow expansion of the existing
exemption to permit investment advice fiduciaries to receive
compensation for extending credit to avoid a failed securities
transaction. As a condition of the exemption, the proposal stated that
the potential failure of the transaction could not be the result of the
action or inaction by the fiduciary or an affiliate. The proposal
further stated that, due to that limitation, the Department considered
it unnecessary to condition the amended exemption on the protective
impartial conduct standards that were proposed to apply to the other
new and amended exemptions applicable to investment advice fiduciaries
acting in conflicted transactions.
Extensions of credit entered into in connection with short sales,
options trading and margin transactions expose retirement investors to
the potential of losses that exceed their account value. Expanding the
scope of the exemption to permit investment advice fiduciaries to
provide advice on these transactions and earn compensation from the
extension of credit would not be protective under the conditions of the
amended exemption.
In the Department's view, this relief is not critical to all short
sales, options and margin transactions. For example, the Department
understands that some options transactions can occur in a cash account
that does not involve an extension of credit. In addition, self-
directed investors can still engage in the full extent of transactions
that were permitted prior to the Applicability Date of the Regulation,
and broker-dealers that are not fiduciaries will still be able to rely
on the exemption to receive compensation. Finally, investors can
receive unconflicted advice from an adviser regarding margin
transactions entered into with an unaffiliated broker-dealer.
II. Conditions of Relief
In conjunction with the expanded relief in the amended exemption,
Section (c) includes several conditions. First, the potential failure
of the purchase or sale of the securities may not be caused by the
broker-dealer or any affiliate. The Department changed the phrasing of
this requirement in response to a comment, which said that the proposed
phrasing--requiring that the potential failure could not be ``the
result of action or inaction by such fiduciary or affiliate''--was too
vague, possibly overbroad, and would require a fact-intensive inquiry
for every failure of the purchase or sale of securities, leading to a
chaotic aftermath of each failed transaction and increasing cost to the
investor.
According to the commenter, broker-dealers regularly ``work out''
issues relating to settlement failures and have policies and procedures
to allocate costs, including not charging clients when it is the
broker-dealer's fault. Thus, the commenter suggested that the language
be revised to state that the failure ``was not caused'' by the
fiduciary or an affiliate.
The Department accepted this comment. This condition was intended
to ensure that broker-dealers will not profit from charging interest on
settlement failures for which they are responsible. The Department has
determined that the suggested change in phrasing is sufficiently
protective of the plans and IRAs that may be paying interest.
Additionally, under the final amendment, the terms of the extension
of credit must be at least as favorable to the plan or IRA as the terms
available in an arm's length transaction between unaffiliated parties.
The Department did not receive comments on this point and did not make
any changes to the proposed requirement.
Finally, the plan or IRA must receive written disclosure of certain
terms prior to the extension of credit. This disclosure does not need
to be made on a transaction by transaction basis, and can be part of an
account opening agreement or a master agreement. The disclosure must
include the rate of interest or other fees that will be charged on such
extension of credit, and the method of determining the balance upon
which interest will be charged.
[[Page 21145]]
The plan or IRA must additionally be provided with prior written
disclosure of any changes to these terms.
The required disclosures are intended to be consistent with the
requirements of Securities and Exchange Act Rule 10b-16,\14\ which
governs broker-dealers' disclosure of credit terms in margin
transactions. The Department understands that it is the practice of
many broker-dealers to provide such disclosures to all customers,
regardless of whether the customer is presently opening a margin
account. To the extent such disclosure is provided, the disclosure
terms of the exemption is satisfied. The Department received a comment
that this is an appropriate disclosure standard.
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\14\ 17 CFR 240.10b-16.
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III. Definitions and Recordkeeping
Consistent with other class exemptions published elsewhere in this
edition of the Federal Register, the amendment defines the term ``IRA''
as any account or annuity described in Code section 4975(e)(1)(B)
through (F), including, for example, an individual retirement account
described in section 408(a) of the Code and a health savings account
described in section 223(d) of the Code.\15\ The amendment also revises
the recordkeeping provisions of PTE 75-1, Part V, to require the
broker-dealer engaging in the covered transaction, as opposed to the
plan or IRA, to maintain the records.
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\15\ The Department has previously determined, after consulting
with the Internal Revenue Service, that plans described in
4975(e)(1) of the Code are included within the scope of relief
provided by PTE 75-1 because it was issued jointly by the Department
and the Service. See PTE 2002-13, 67 FR 9483 (March 1, 2002)
(preamble discussion). For simplicity and consistency with the other
new exemptions and amendments to other existing exemptions published
elsewhere in this issue of the Federal Register, the Department has
adopted this specific definition of IRA.
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In response to comments received specific to some of the other
exemptions adopted or amended elsewhere in this edition of the Federal
Register, the Department has modified the recordkeeping provision to
clarify which parties may view the records that are maintained by the
broker-dealer. As revised, the exemption requires the records be
``reasonably'' available, rather than ``unconditionally available,''
and does not authorize plan fiduciaries, participants, beneficiaries,
contributing employers, employee organizations with members covered by
the plan, and IRA owners to examine records regarding a transaction
involving another investor. In addition, broker-dealers are not
required to disclose privileged trade secrets or privileged commercial
or financial information to any of the parties other than the
Department. The Department has made these changes to PTE 75-1, Part V
for consistency with the other exemptions adopted or amended today.
IV. No Relief From ERISA Section 406(a)(1)(C) or Code Section
4975(c)(1)(C) for the Provision of Services
The amended exemption does not provide relief from a transaction
prohibited by ERISA section 406(a)(1)(C), or from the taxes imposed by
Code section 4975(a) and (b) by reason of Code section 4975(c)(1)(C),
regarding the furnishing of goods, services or facilities between a
plan and a party in interest or between an IRA and a disqualified
person. The provision of investment advice to a plan or IRA is a
service to the plan or IRA and compliance with this exemption will not
relieve an investment advice fiduciary of the need to comply with ERISA
section 408(b)(2), Code section 4975(d)(2), and applicable regulations
thereunder. The disclosure standards under 408(b)(2) were recently
finalized, and the Department took care to tailor those disclosure
conditions for the plan marketplace. The Department believes that
uniform standards are desirable and will promote broad compliance in
this respect.
Applicability Date
The Regulation will become effective June 7, 2016 and this amended
exemption is issued on that same date. The Regulation is effective at
the earliest possible effective date under the Congressional Review
Act. For the exemption, the issuance date serves as the date on which
the amended exemption is intended to take effect for purposes of the
Congressional Review Act. This date was selected in order to provide
certainty to plans, plan fiduciaries, plan participants and
beneficiaries, IRAs, and IRA owners that the new protections afforded
by the Regulation are officially part of the law and regulations
governing their investment advice providers, and to inform financial
services providers and other affected service providers that the rule
and amended exemption are final and not subject to further amendment or
modification without additional public notice and comment. The
Department expects that this effective date will remove uncertainty as
an obstacle to regulated firms allocating capital and other resources
toward transition and longer term compliance adjustments to systems and
business practices.
The Department has also determined that, in light of the importance
of the Regulation's consumer protections and the significance of the
continuing monetary harm to retirement investors without the rule's
changes, an Applicability Date of April 10, 2017 is appropriate for
plans and their affected financial services and other service providers
to adjust to the basic change from non-fiduciary to fiduciary status.
This amendment has the same Applicability Date; parties may rely on the
amended exemption as of the Applicability Date.
Paperwork Reduction Act Statement
In accordance with the requirements of the Paperwork Reduction Act
of 1995 (PRA) (44 U.S.C. 3506(c)(2)), the Amendment to Prohibited
Transaction Exemption (PTE) 75-1, Part V, Exemptions From Prohibitions
Respecting Certain Classes of Transactions Involving Employee Benefit
Plans and Certain Broker-Dealers, Reporting Dealers and Banks published
as part of the Department's proposal to amend its 1975 rule that
defines when a person who provides investment advice to an employee
benefit plan or IRA becomes a fiduciary, solicited comments on the
information collections included therein. The Department also submitted
an information collection request (ICR) to OMB in accordance with 44
U.S.C. 3507(d), contemporaneously with the publication of the proposed
regulation, for OMB's review. The Department received two comments from
one commenter that specifically addressed the paperwork burden analysis
of the information collections. Additionally many comments were
submitted, described elsewhere in the preamble to the accompanying
final rule, which contained information relevant to the costs and
administrative burdens attendant to the proposals. The Department took
into account such public comments in connection with making changes to
the prohibited transaction exemption, analyzing the economic impact of
the proposals, and developing the revised paperwork burden analysis
summarized below.
In connection with publication of this final amendment to
Prohibited Transaction Exemption (PTE) 75-1, Part V, Exemptions From
Prohibitions Respecting Certain Classes of Transactions Involving
Employee Benefit Plans and Certain Broker-Dealers, Reporting Dealers
and Banks, the Department submitted an ICR to OMB for its request of a
revision to OMB Control Number 1210-0059. The
[[Page 21146]]
Department will notify the public when OMB approves the revised ICR.
A copy of the ICR may be obtained by contacting the PRA addressee
shown below or at http://www.RegInfo.gov. PRA ADDRESSEE: G. Christopher
Cosby, Office of Policy and Research, U.S. Department of Labor,
Employee Benefits Security Administration, 200 Constitution Avenue NW.,
Room N-5718, Washington, DC 20210. Telephone: (202) 693-8410; Fax:
(202) 219-4745. These are not toll-free numbers.
As discussed in detail below, Section (c)(3) of the amendment
requires that prior to the extension of credit, the plan must receive
from the fiduciary written disclosure of (i) the rate of interest (or
other fees) that will apply and (ii) the method of determining the
balance upon which interest will be charged in the event that the
fiduciary extends credit to avoid a failed purchase or sale of
securities, as well as, prior written disclosure of any changes to
these terms. Section (d) requires broker-dealers engaging in the
transactions to maintain records demonstrating compliance with the
conditions of the PTE. These requirements are information collection
requests (ICRs) subject to the Paperwork Reduction Act.
The Department believes that this disclosure requirement is
consistent with the disclosure requirement mandated by the Securities
and Exchange Commission (SEC) in 17 CFR 240.10b-16(1) for margin
transactions. Although the SEC does not mandate any recordkeeping
requirement, the Department believes that it would be a usual and
customary business practice for financial institutions to maintain any
records necessary to prove that required disclosures had been
distributed in compliance with the SEC's rule. Therefore, the
Department concludes that these ICRs impose no additional burden on
respondents.
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under ERISA section 408(a) and Code section 4975(c)(2) does not relieve
a fiduciary or other party in interest or disqualified person with
respect to a plan from certain other provisions of ERISA and the Code,
including any prohibited transaction provisions to which the exemption
does not apply and the general fiduciary responsibility provisions of
ERISA section 404 which require, among other things, that a fiduciary
discharge his or her duties respecting the plan solely in the interests
of the plan's participants and beneficiaries and in a prudent fashion
in accordance with ERISA section 404(a)(1)(B);
(2) The Department finds that the class exemption as amended is
administratively feasible, in the interests of the plan and of its
participants and beneficiaries and IRA owners, and protective of the
rights of the plan's participants and beneficiaries and IRA owners;
(3) The class exemption is applicable to a particular transaction
only if the transaction satisfies the conditions specified in the class
exemption; and
(4) This amended class 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 or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction.
Exemption
The restrictions of section 406 of the Employee Retirement Income
Security Act of 1974 (the Act) and the taxes imposed by section 4975(a)
and (b) of the Internal Revenue Code of 1986 (the Code), by reason of
section 4975(c)(1) of the Code, shall not apply to any extension of
credit to an employee benefit plan or an individual retirement account
(IRA) by a party in interest or a disqualified person with respect to
the plan or IRA, provided that the following conditions are met:
(a) The party in interest or disqualified person:
(1) Is a broker or dealer registered under the Securities Exchange
Act of 1934; and
(2) Does not have or exercise any discretionary authority or
control (except as a directed trustee) with respect to the investment
of the plan or IRA assets involved in the transaction, nor does it
render investment advice (within the meaning of 29 CFR 2510.3-21) with
respect to those assets, unless no interest or other consideration is
received by the party in interest or disqualified person or any
affiliate thereof in connection with such extension of credit.
(b) Such extension of credit:
(1) Is in connection with the purchase or sale of securities;
(2) Is lawful under the Securities Exchange Act of 1934 and any
rules and regulations promulgated thereunder; and
(3) Is not a prohibited transaction within the meaning of section
503(b) of the Code.
(c) Notwithstanding section (a)(2), a fiduciary under section
3(21)(A)(ii) of the Act or Code section 4975(e)(3)(B) may receive
reasonable compensation for extending credit to a plan or IRA to avoid
a failed purchase or sale of securities involving the plan or IRA if:
(1) The potential failure of the purchase or sale of the securities
is not caused by such fiduciary or an affiliate;
(2) The terms of the extension of credit are at least as favorable
to the plan or IRA as the terms available in an arm's length
transaction between unaffiliated parties;
(3) Prior to the extension of credit, the plan or IRA receives
written disclosure of (i) the rate of interest (or other fees) that
will apply and (ii) the method of determining the balance upon which
interest will be charged, in the event that the fiduciary extends
credit to avoid a failed purchase or sale of securities, as well as
prior written disclosure of any changes to these terms. This Section
(c)(3) will be considered satisfied if the plan or IRA receives the
disclosure described in the Securities and Exchange Act Rule 10b-16;
\16\ and
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\16\ 17 CFR 240.10b-16.
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(d) The broker-dealer engaging in the covered transaction maintains
or causes to be maintained for a period of six years from the date of
such transaction in a manner that is reasonably accessible for
examination, such records as are necessary to enable the persons
described in paragraph (e) of this exemption to determine whether the
conditions of this exemption have been met with respect to a
transaction, except that:
(1) No party other than the broker-dealer engaging in the covered
transaction shall be subject to the civil penalty which may be assessed
under section 502(i) of the Act, or to the taxes imposed by section
4975(a) and (b) of the Code, if such records are not maintained, or are
not available for examination as required by paragraph (e) below; and
(2) A prohibited transaction will not be deemed to have occurred
if, due to circumstances beyond the control of the broker-dealer, such
records are lost or destroyed prior to the end of such six-year period.
(e)(1) Except as provided in paragraph (e)(2) of this exemption,
and notwithstanding anything to the contrary in subsections (a)(2) and
(b) of section 504 of the Act, the records referred to in paragraph (d)
are
[[Page 21147]]
reasonably available at their customary location for examination during
normal business hours by:
(A) An authorized employee or representative of the Department of
Labor or the Internal Revenue Service,
(B) Any fiduciary of a plan that engaged in a transaction pursuant
to this exemption, or any authorized employee or representative of such
fiduciary;
(C) Any contributing employer and any employee organization whose
members are covered by a plan described in paragraph (e)(1)(B), or any
authorized employee or representative of these entities; or
(D) Any participant or beneficiary of a plan described in paragraph
(e)(1)(B), IRA owner or the authorized representative of such
participant, beneficiary or owner.
(2) None of the persons described in paragraph (e)(1)(B)-(D) of
this exemption are authorized to examine records regarding a
recommended transaction involving another investor, or privileged trade
secrets or privileged commercial or financial information, of the
broker-dealer engaging in the covered transaction, or information
identifying other individuals.
(3) Should the broker-dealer engaging in the covered transaction
refuse to disclose information on the basis that the information is
exempt from disclosure, the broker-dealer must, by the close of the
thirtieth (30th) day following the request, provide a written notice
advising the requestor of the reasons for the refusal and that the
Department may request such information.
(4) Failure to maintain the required records necessary to determine
whether the conditions of this exemption have been met will result in
the loss of the exemption only for the transaction or transactions for
which records are missing or have not been maintained. It does not
affect the relief for other transactions.
For purposes of this exemption, the terms ``party in interest,''
``disqualified person'' and ``fiduciary'' shall include such party in
interest, disqualified person, or fiduciary, and any affiliates
thereof, and the term ``affiliate'' shall be defined in the same manner
as that term is defined in 29 CFR 2510.3-21 and 26 CFR 54.4975-9. Also
for the purposes of this exemption, the term ``IRA'' means any account
or annuity described in Code section 4975(e)(1)(B) through (F),
including, for example, an individual retirement account described in
section 408(a) of the Code and a health savings account described in
section 223(d) of the Code.
Signed at Washington, DC, this 1st day of April, 2016.
Phyllis C. Borzi,
Assistant Secretary, Employee Benefits Security Administration,
Department of Labor.
[FR Doc. 2016-07927 Filed 4-6-16; 11:15 am]
BILLING CODE 4510-29-P