AndyT Posted June 9, 2000 Posted June 9, 2000 This would be a prohibited transaction, correct? The brokerage firm is a party-in-interest and they are essentially loaning money to the plan. Has there ever been a DOL exemption for something like this? ------------------ Andy Treece
Kirk Maldonado Posted June 9, 2000 Posted June 9, 2000 Wouldn't the income be subject to the tax on unrelated debt-financed income? Kirk Maldonado
Jon Chambers Posted June 14, 2000 Posted June 14, 2000 The other issue is that buying on margin could cause a loss greater than the value of the account, which also makes it a prohibited transaction. The quick answer is no buying on margin. This one is pretty clear. ------------------ Jon C. Chambers Principal Schultz Collins Lawson Chambers, Inc. (415) 291-3004 Jon C. Chambers Schultz Collins Lawson Chambers, Inc. Investment Consultants
cathyw Posted June 14, 2000 Posted June 14, 2000 There is a PT class exemption (75-1) which exempts a loan or extension of credit from a broker/dealer to a plan if the proceeds are used for the purchase of securities. However, notwithstanding that buying on margin is not a prohibited transaction, it still is not appropriate for a retirement account.
Kirk Maldonado Posted June 14, 2000 Posted June 14, 2000 Not to put words into Jon's mouth, but I would guess that his PT concern is about who is going to make good if the loss is greater than the account value. I'm guessing that is where his concern arises. If I'm wrong, Jon, please correct me. Kirk Maldonado
Bill Berke Posted June 16, 2000 Posted June 16, 2000 In addition to the UBTI issue (yes, there is taxable income if the net is over $1,000) and the possible PT, there are the fiduciary issues of whether or not margin accounts are appropriate, can/did each participant make an informed investment decision and is the fiduciary liable for permitting an option which could/did result in unusual losses (given the circumstances)or a negative balance. I rarely see pension trusts use margin accounts and have never seen a large plan use margin as part of its investment routine. If, as has been my experience, the use of margin is uncommon then the fiduciary standard may be set. Headaches galore - ergo I agree no margin accounts. [This message has been edited by Bill Berke (edited 06-15-2000).] [This message has been edited by Bill Berke (edited 06-15-2000).]
Jon Chambers Posted June 16, 2000 Posted June 16, 2000 By using the term "prohibited transaction", I may have oversimplified in my earlier post. In the 404© regs [2550.404c-1(d)(2)(ii)(D)], there is a provision that 404© protection does not extend to investments that could result in a loss greater than the participant's total account balance. Such a loss is possible in a margined account. Permitting such an investment may represent a breach of fiduciary duty. If the participant experiences a loss greater than their aggregate account balance, someone will need to make the account whole--probably the fiduciary permitting the breach in the first place. This "guarantee" is unatractive for most fiduciaries, and could lead to prohibited transactions, whereby the make-good contribution is prohibited, but the linkage isn't necessarily direct. Thus, I agree with Kirk's clarification of my position. ------------------ Jon C. Chambers Principal Schultz Collins Lawson Chambers, Inc. (415) 291-3004 Jon C. Chambers Schultz Collins Lawson Chambers, Inc. Investment Consultants
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