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Editor's Note: This proposed amendment was finalized on December 12, 2002. See https://benefitslink.com/DOL/pte97-11-final-amend-2002.html (click)

Proposed Amendment to Prohibited Transaction Exemption 97-11 (PTE 97-11)


[Federal Register: June 18, 2002 (Volume 67, Number 117)]
[Notices]
[Page 41504-41506]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr18jn02-110]

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DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

[Application No.: D-10934]


Proposed 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, Department of
Labor.

ACTION: Notice of proposed amendment to PTE 97-11.

-----------------------------------------------------------------------

SUMMARY: This document contains a notice of pendency before the
Department of Labor (the Department) of a proposed amendment to PTE 97-
11. PTE 97-11 is 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 proposed amendment, if adopted, would affect individuals with
beneficial interests in such plans who receive such services as well as
the broker-dealers who provide such services.
---------------------------------------------------------------------------

    \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 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.

DATES: If adopted, the proposed amendment would be effective as of
January 1, 1998. Written comments and requests for a public hearing
---------------------------------------------------------------------------
should be received by the Department on or before August 2, 2002.

ADDRESSES: All written comments and requests for a public hearing
(preferably three copies) should be addressed to the U.S. Department of
Labor, Office of Exemption Determinations, Pension and Welfare Benefits
Administration, Room N-5649, 200 Constitution Avenue, NW, Washington,
DC 20210, (Attention: D-10934). Interested persons are also invited to
submit comments and/or hearing requests to PWBA via email to
moffittb@pwba.dol.gov or by fax to (202) 219-0204 by the end of the
comment period.

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-
8540, (this is not a toll-free number).

SUPPLEMENTARY INFORMATION: Notice is hereby given of the pendency
before the Department of a proposed amendment to PTE 97-11 (62 FR 5855,
February 7, 1997 as amended, 64 FR 11042, March 8, 1999). 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.\2\ 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. The Department is proposing this amendment in response to
AFD's application.
---------------------------------------------------------------------------

    \2\ 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.
---------------------------------------------------------------------------

    The application was filed pursuant to section 408(a) of ERISA and
section 4975(c)(2) of the Code and in accordance with the procedures
set forth in 29 CFR 2570, subpart B (55 FR 32836, (August 10, 1990)).

    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

[[Page 41505]]

met. In the preamble to the proposal to PTE 97-11 (61 FR 39996 (1996)),
the Department noted that programs in which broker-dealers offer
reduced sales charges as an individual increases his purchases of
investment company shares would be covered by the exemption provided
that all of its conditions are satisfied. In granting PTE 97-11, the
Department additionally noted in a response to a comment, that
"letters of intent" programs in which broker-dealers offer reduced
sales commissions based on the aggregate of a customer's actual
purchases and anticipated purchases over a specified period of time, as
agreed to by the customer, are similarly covered by the exemption. The
Department also noted that this conclusion was based on the fact that
under these "letters of intent" programs, if a customer ultimately
fails to make the anticipated purchases, the broker-dealer would
reinstate the sales commission on each account on a pro rata basis.
Thus, the IRA or Keogh Plan would only be assessed that portion of the
reinstated sales charges related to the IRA and Keogh Plan purchases.

    AFD has requested an amendment to PTE 97-11 to modify the
definition of the term "IRA". In this regard, section III(b) of PTE
97-11, as previously amended, defines 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 states 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 requests that the term "IRA" be amended to include an
"individual retirement plan", as such term is defined in section
7701(a)(37) of the Code. In this regard, section 7701(a)(37) of the
Code provides that the term "individual retirement plan" means "an
individual retirement account described in section 408(a)" and "an
individual retirement annuity described in section 408(b)". Section
408(a) of the Code, in turn, 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,
but only if the written governing instrument creating the trust meets
the following requirements* * *" In this regard, section 408(a) of the
Code requires that, among other things, no part of the trust funds will
be invested in life insurance contracts and that the interest of an
individual in the balance in his account is nonforfeitable. Section
408(b) of the Code provides that the term "individual retirement
annuity" means "an annuity contract, or an endowment contract (as
determined under regulations prescribed by the Secretary), issued by an
insurance company which meets the following requirements* * *" In this
regard, section 408(b) requires, among other things, that the annuity
contract is not non-transferrable by the owner and that the entire
interest of the owner is nonforfeitable.

    AFD seeks to amend the definition of the "IRA" in PTE 97-11 in
order to include Individual Retirement Annuities. AFD states that
allowing annuity owners, or members of their families, to obtain
reduced sales commissions from independent broker-dealers would be
consistent with the conditions of PTE 97-11, and would enable
individuals to receive the same advantages that PTE 97-11 affords to
persons for whose benefit IRAs are maintained.

    AFD states that programs offering discounted commissions for the
purchase of mutual fund shares typically determine the amount of such
discount by aggregating an individual's (and possibly his family's)
total purchases of the funds offered by the fund "family". Thus,
where the "family" also manages variable annuity separate accounts
invested in mutual funds managed by the adviser to the fund "family",
investments in the variable annuities are aggregated with other
investments in mutual fund shares for purposes of determining the level
of commission discounts applicable to the purchase of fund shares.\3\
---------------------------------------------------------------------------

    \3\ AFD represents that in determining the aggregate investments
of an investor in mutual fund shares held through an Individual
Retirement Account, variable annuities held through an Individual
Retirement Annuity would typically be included in aggregate
investments (as would certain other types of retirement plan
investments, such as SEPS and non-ERISA 403(b) plans.)
---------------------------------------------------------------------------

    AFD additionally represents that, similarly, programs offering
discounted commissions for the purchase of variable annuities often
determine the amount of such discount by aggregating an individual's
(and possibly his family's) total investment in variable annuities
offered by the "family" and mutual fund shares of the fund
"family". Once the appropriate discount is determined, the reduced
commission is deducted "up front", and the remainder is invested in
the annuity contract. AFD states that, in the situations described
above, the mutual funds and the variable annuities are sold by
independent registered broker-dealers, who are bound to give the
commission discounts by a selling group agreement with the principal
underwriter.\4\
---------------------------------------------------------------------------

    \4\ The Department notes that where the sales charge is reduced
under a letter of intent program, in the event the customer does not
make the anticipated purchases and the broker-dealer reinstates the
sales charge, the IRA or Keogh Plan is only assessed that portion of
the of the reinstated charge related to the IRA and Keogh Plan
purchases.
---------------------------------------------------------------------------

    The amendment is appropriate, AFD represents, in that Individual
Retirement Accounts and Individual Retirement Annuities serve the same
purpose and are identical in all relevant features, including tax
benefits. AFD states that although Individual Retirement Accounts and
Individual Retirement Annuities use different investment vehicles to
hold their respective assets, such a distinction is irrelevant for
purposes of the relief provided by PTE 97-11.

    Based on AFD's representations, it appears that Individual
Retirement Annuities share many of the same characteristics exhibited
by other investment vehicles covered by the exemption. Thus, the
Department sees merit in AFD's request that the term "IRA" be amended
to include Individual Retirement Annuities. Accordingly, the Department
has determined to modify 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. The Department notes
that all of other the conditions of PTE 97-11 must be satisfied with
respect to Individual Retirement Annuities, as is the case with
Individual Retirement Accounts, Education IRAs and Keogh Plans covered
by the exemption. In this regard, the Department notes that, among
other things, all reduced sale charges offered under a variable annuity
contract must be offered by a broker-dealer or its affiliate.\5\
---------------------------------------------------------------------------

    \5\ Section II (c) of PTE 97-11 states that: "The services
offered under the (relationship brokerage) arrangement are offered
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."
---------------------------------------------------------------------------

Notice to Interested Persons

    Because many participants in IRAs and Keogh Plans and broker-
dealers sponsoring IRAs or Keogh Plans could

[[Page 41506]]

conceivably be considered interested persons, the only practical form
of notice is publication in the Federal Register.

General Information

    The attention of interested persons is directed to the following:

    (1) Before an exemption may be granted under section 408(a) of
ERISA and section 4975(c)(2) of the Code, the Department must find that
the exemption 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 proposed amendment, if granted, will be 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) If granted, the proposed amendment will be applicable to a
transaction only if the conditions specified in the class exemption are
met.

Written Comments and Hearing Request

    All interested persons are invited to submit written comments or
requests for a public hearing on the proposed amendment to the address
and within the time period set forth above. All comments will be made a
part of the record. Comments and requests for a hearing should state
the reasons for the writer's interest in the proposed amendment.
Comments received will be available for public inspection with the
referenced application at the above address.

Proposed Amendment

    Under 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 FR 32836, August 10, 1990), the Department proposes to
amend PTE 97-11 as set forth below:

    Section III(b) is amended to read: "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."

Ivan Strasfeld,
Director of Exemption Determinations,
Pension and Welfare Benefits Administration,
U.S. Department of Labor.
[FR Doc. 02-15317 Filed 6-17-02; 8:45 am]
BILLING CODE 4510-29-P
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