[Federal Register Volume 59, Number 233 (Tuesday, December 6, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-29702]


[[Page Unknown]]

[Federal Register: December 6, 1994]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 8570]
RIN 1545-AS96

 

Nonbank Trustee Net Worth Requirements

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Temporary regulations.

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SUMMARY: This document contains temporary regulations that provide 
guidance to nonbank trustees with respect to the adequacy of net worth 
requirements of Sec. 1.401-12(n) (6) and (7) of the Income Tax 
Regulations. The text of these temporary regulations also serves as the 
text of the proposed regulations set forth in the notice of proposed 
rulemaking on this subject in the Proposed Rules section of this issue 
of the Federal Register.

DATES: These regulations are effective December 6, 1994.

FOR FURTHER INFORMATION CONTACT: Judith E. Alden, (202) 622-6030 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    This document contains amendments to the Income Tax Regulations (26 
CFR part 1) under section 401(d)(1). Sections 1022(c), 1022(d), and 
2002(a)(2) of the Employee Retirement Income Security Act of 1974 
(ERISA), Pub. L. 93-406 (1974), amended sections 401(d), 401(f), and 
408 of the Internal Revenue Code (Code) to permit an entity that is not 
a bank to be a trustee or a custodian for purposes of those Code 
sections if such entity demonstrates to the satisfaction of the 
Secretary of the Treasury that it will administer the trust and hold 
assets in a manner consistent with the law. Although section 401(d)(1) 
was repealed by section 237(a) of the Tax Equity and Fiscal 
Responsibility Act of 1982, Pub. L. 97-248 (1982), the regulations 
under section 401(d)(1) remain in force and effect to the extent that 
they govern the determination of whether an entity can be a nonbank 
trustee or custodian for purposes of Treasury Regulation 
Secs. 1.401(f)-1 and 1.408-2(d). Section 1.401-12(n)(6)(ii) of the 
regulations, proposed in 1975 and finalized in 1979 under section 
401(d)(1) of the Code, sets forth net worth requirements for nonbank 
trustees based on the greater of a specified dollar amount or a 
percentage of the value of all assets held by the nonbank trustee in 
fiduciary accounts. A primary objective of this adequacy of net worth 
requirement has been to ensure that nonbank trustees maintain a level 
of solvency commensurate with their financial and fiduciary 
responsibilities.
    Pursuant to the existing net worth requirements, nonbank trustees 
may not accept new accounts unless their net worth exceeds the greater 
of $100,000 or four percent of the value of all assets held in 
fiduciary accounts. Additionally, nonbank trustees must take whatever 
steps are necessary (including the relinquishment of fiduciary 
accounts) to ensure that their net worth exceeds the greater of $50,000 
or two percent of the value of assets held in their fiduciary accounts. 
While similar requirements apply to passive nonbank trustees (qualified 
nonbank entities that have no discretion to direct the investment of 
assets), the percentage requirements for these trustees are lower. 
Specifically, passive nonbank trustees may not accept new accounts 
unless their net worth exceeds the greater of $100,000 or two percent 
of the value of all assets held in fiduciary accounts and they must 
take appropriate action (including the relinquishment of fiduciary 
accounts) to ensure that their net worth exceeds the greater of $50,000 
or one percent of the value of assets held in their fiduciary accounts.
    The IRS has received comments that this requirement is unduly 
restrictive in the case of passive trustees who are broker-dealers 
regulated by the Securities and Exchange Commission (SEC) and who are 
required to have their fiduciary accounts protected by the Securities 
Investor Protection Corporation (SIPC). SIPC, established by Congress 
in 1970, insures customer assets and funds held by a U.S. broker-dealer 
in the case of an insolvency in an amount of up to $500,000 per 
customer, of which $100,000 may be cash. Thus, with respect to SIPC 
protected assets, the on-going net worth requirement provides little if 
any increase in protection of assets held in fiduciary accounts. 
Accordingly, these temporary regulations provide that SIPC protected 
assets will be disregarded in determining the value of assets held in 
fiduciary accounts by passive trustees for purposes of the percentage 
prong of the net worth requirement.
    These temporary regulations also increase the initial net worth 
requirement for all nonbank trustees to better assure that enterprises 
are sound and well-funded during their start-up period. Under the 
existing net worth requirements, every nonbank trustee must have an 
initial net worth that exceeds $100,000. Under these temporary 
regulations, all entities applying for nonbank trustee status must have 
a net worth of not less than $250,000 for the most recent taxable year 
preceding the applicant's initial application. The existing net worth 
requirements, as modified for SIPC protected assets, will continue to 
apply on an on-going basis after a nonbank trustee has obtained the 
approval of the IRS.
    In the absence of evidence that the on-going net worth requirements 
fail to meet the underlying objectives, these requirements (except with 
respect to SIPC protected assets) remain unchanged. However, the IRS 
recognizes that the nonbank trustee requirements have been in effect 
since 1979. Accordingly, the IRS and Treasury would welcome comments 
concerning the net worth requirements generally, as well as other 
aspects of the 1979 regulations.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in EO 12866. Therefore, a 
regulatory assessment is not required. It also has been determined that 
section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) 
and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to 
these regulations, and, therefore, a Regulatory Flexibility Analysis is 
not required. Pursuant to section 7805(f) of the Internal Revenue Code, 
these temporary regulations will be submitted to the Chief Counsel for 
Advocacy of the Small Business Administration for comment on their 
impact on small business.

Drafting Information

    The principal author of these regulations is Judith E. Alden, 
Office of the Associate Chief Counsel, (Employee Benefits and Exempt 
Organizations). However, other personnel from the IRS and Treasury 
Department participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 continues to read, 
in part, as follows:

    Authority: 26 U.S.C. 7805 * * *

    Par. 2. Section 1.401-12T is added to read as follows:


Sec. 1.401-12T  Requirements for qualification of trusts and plans 
benefiting owner-employees (temporary).

    (a) through (n)(6)(i) For guidance, see Sec. 1.401-12(a) through 
(n)(6)(i).
    (n)(6)(ii) Adequacy of net worth--(A) Initial net worth 
requirement. In the case of applications received after January 5, 
1995, no initial application will be accepted by the Commissioner 
unless the applicant has a net worth of not less than $250,000 
(determined as of the end of the most recent taxable year). Thereafter, 
the applicant must satisfy the adequacy of net worth requirements of 
paragraph (n)(6)(ii)(B), of this section.
    (B) On-going net worth requirement. For guidance, see Sec. 1.401-
12(n)(6)(ii)(B).
    (7) Special rules--(i) Passive trustee.
    (A) through (B). For guidance, see Sec. 1.401-12(n)(7)(i) (A) 
through (B).
    (C) For purposes of determining whether a passive nonbank trustee 
who is a broker or dealer within the meaning of 15 U.S.C. Sec. 78lll 
satisfies the net worth requirements of subparagraph (n)(6)(ii)(B), 
assets held by the passive trustee in fiduciary accounts and protected 
by the Securities Investor Protection Corporation (SIPC) created under 
the Securities Investor Protection Act of 1970 (15 U.S.C. Sec. 78aaa et 
seq., as amended) will not be included in determining the value of 
assets held in fiduciary accounts by the passive nonbank trustee. Such 
assets are only disregarded, however, in determining the value of 
assets held in fiduciary accounts by the passive trustee to the extent 
the assets are protected by SIPC.
    (ii) [Reserved]
Margaret Milner Richardson,
Commissioner of Internal Revenue.
    Approved: November 3, 1994.
Leslie Samuels,
Assistant Secretary of the Treasury.
[FR Doc. 94-29702 Filed 12-5-94; 8:45 am]
BILLING CODE 4830-01-U