IRA Commissions

[Guest CJA]

Can a broker or other sales intermediary receive a commission on purchase of Individual Retirement Annuity for herself?

[Gary Lesser]

A broker/agent can not receive a commission on the sale of securities to his or own IRA under the Code. However, there are situations where sales can be made available without certain charges. E.g., mutual funds may be sold to broker-dealer registered representatives (and in some cases certain members of their family) at net asset value (without front end loads for class A purchases), regardless of the purchase size.

Neither can the broker/agent direct that the commission be paid to another broker/agent. I am certain that the firm has a policy that covers this type of purchase.

The agent should check with his or her compliance department on how to effectuate the purchase in his or her own account.

[Peter Gulia]

As Gary Lesser says ….

A person shouldn’t buy an IRA if the transactions would result in providing compensation of any kind to herself, or to someone who’s a relative of the would-be IRA owner. A nonexempt prohibited transaction tax-disqualifies the account from IRA tax treatment, which ordinarily would make the “IRA” unsuitable for the investor.

For this purpose, a relative includes a spouse, ancestor (for example, a parent or grandparent), lineal descendant (for example, a child or grandchild), or a spouse of a lineal descendant. IRC § 4975(e)(2)(F), 4975(e)(6).

Even if not related, there might be a PT if a set of transactions does indirectly what the fiduciary or disqualified person must not do directly, or if the compensation recipient is a person in whom the IRA buyer has an interest that could affect his or her best judgment in making IRA decisions. IRC § 4975©(D)-(F).

Further restrictions might apply under banking, insurance, or securities law.

One solution is to find a “product” that has all sales margins stripped out. Another, as Gary Lesser suggests, is that many funds allow a registered representative of a broker-dealer that has a sales agreement with the fund’s underwriter to buy A shares at net asset value – that is, without the sales load. (Often, this privilege extends to the rep and his or her spouse and children.)

About CJA’s inquiry, an insurance company and its agents sometimes have a similar arrangement by which a licensed producer may buy a different “version” of an annuity contract. For example, a contract issued to a producer might have no “surrender” or contingent deferred sales charge and a reduced mortality-and-expense charge.

Again, this works only if there is no compensation. In my view, this precludes not only money compensation but also production credit and counting toward a “recognition event” (such as, the leading producers’ trip to Hawaii).

For more background, you should buy Gary Lesser’s books:

 Quick Reference to IRAs

 Roth IRA Answer Book

 SIMPLE, SEP, and SARSEP Answer Book.

http://benefitslink.com/GSL/index.html

[jpod]

Resurrecting some ancient history here. Why couldn't the broker rely on DOL's Class Exemption 86-128 to receive commissions for trading in his own account, and if he can rely on it why wouldn't it prevent his IRA from blowing up under IRC Section 408(e)(2)?

[jpod]

Let me re-phrase a bit. I am not talking about purchasing insurance through an individual retirement annuity. I am talking about an IRA for a registered rep of a broker dealer, and that registered rep wants to receive his commissions for trading in his own IRA account. Is that covered by 86-128? If so, doesn't that cure the IRC 408(e)(2) problem?

[mbozek]

I don't have an answer under 86-128 but what does the Brokers compliance dept say about being able to receive the commission under 86-128? IRS does not follow DOL exemptions from PT violation under IRC. In the Flaherty Arden Bowl case,115 TC 269 (2000), IRS applied PT against participant in 401k plan who was not a fid under ERISA but was a fid under IRC 4975.

[jpod]

Appreciate the comments but if we can stick to my question: Assume 86-128 applies (I think it does). Therefore, there is no PT under 4975. In that event, shouldn't 408(e) be inapplicable?

[mbozek]

There is no exemption for brokerage commissions in Pub 590. I don't know of any ruling by the IRS specifically excluding the receipt of IRA commissions by a broker under the PT rules. If you believe that 86-128 would exempt a PT under the IRC then go for it. In any event broker can only receive comp permitted by brokerage.

[jpod]

This is kind of weird but upon closer inspection it appears that while 86-128 says it would apply to avoid the excise taxes under 4975, it does not state (at least explicitly) that it would apply for purposes of IRC 408(e), which makes me think that 408(e) could still be in play. So, never mind.

[Peter Gulia]

Among other conditions, the exemption requires approvals by a fiduciary who is independent of the person who engages in the covered transaction.

The exemption's definitions and special rules states: "A plan fiduciary is independent of a person only if the fiduciary has no relationship to or interest in such person that might affect the exercise of such fiduciary's best judgment as a fiduciary."

[jpod]

FGC: There's the rub: In the case of an IRA, all of the conditions in Section III, including the one you cited, are waived.

[mbozek]

For what its worth excerpt from 86-128, description of exemption states that the exemption provides exemptive relief from 406(b)(3) receipt of commissions by a fiduciary but does not provide relief from 406(a)(1)(A) which prohibits a fiduciary with respect to plan from causing the plan to engage in a transaction that constitutes the direct or indirect sale or exchange of property between a plan and a party in interest.

In the absence of other exemptive relief this latter transaction woud be prohibited.

4975 uses the term disqualified person which includes a fiduciary to the plan.

[Peter Gulia]

jpod, thank you for the helpful learning!