[Federal Register Volume 61, Number 148 (Wednesday, July 31, 1996)]
[Notices]
[Pages 39996-40000]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-19484]
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DEPARTMENT OF LABOR
[Exemption Application D-09707]
Proposed Class Exemption 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, U. S. Department
of Labor
ACTION: Notice of Proposed Class Exemption.
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SUMMARY: This document contains a notice of pendency before the
Department of Labor (the Department) of a proposed class exemption from
the prohibited transaction restrictions of the Employee Retirement
Income Security Act of 1974 (ERISA) and the Internal Revenue Code of
1986 (the Code). The proposed class exemption would permit the receipt
of services at reduced or no cost by an individual for whose benefit an
individual retirement account (IRA) 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.
If granted, the exemption would affect individuals with beneficial
interests in such plans who receive such services as well as the
broker-dealers who provide such services.
DATES: Written comments and requests for a public hearing must be
received by the Department on or before September 16, 1996.
ADDRESSES: All written comments (at least three copies) and requests
for a public hearing should be sent to: Office of Exemption
Determinations, Pension and Welfare Benefits Administration, Room N-
5649, U. S. Department of Labor, 200 Constitution Avenue, N.W.,
Washington, DC 20210, (Attn: D-09707). The application for exemption
and comments received from interested persons will be available for
public inspection in the Public Documents Room, Pension and Welfare
Benefits Administration, U. S. Department of Labor, room N-5638, 200
Constitution Avenue, N.W., Washington, DC.
FOR FURTHER INFORMATION CONTACT: Allison Padams, Office of Exemption
Determinations, Pension and Welfare Benefits Administration, U. S.
Department of Labor, (202) 219-8971, (This is not a toll-free number);
or Paul D. Mannina, Plan Benefits Security Division , Office of
Solicitor, U. S. Department of Labor (202) 219-9141, (This is not a
toll-free number.)
SUPPLEMENTARY INFORMATION: Notice is hereby given of the pendency
before the Department of a proposed exemption 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. This exemption was requested in an exemption application
filed on behalf of the Securities Industry Association (the SIA or the
Applicant). The Applicant is a securities industry trade association
representing the business interests of more than 700 securities firms
in North America which collectively account for ninety percent of the
securities firm revenue in the United States. The members of the SIA
are, among other things, engaged in the business of providing brokerage
and investment advisory services to the public. The Applicant
represents that IRAs and Keogh Plans constitute approximately less than
one-third of assets of the accounts managed by broker-dealers.
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 part 2570, subpart B, (55 FR 32836, August 10,
1990.) 1
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\1\ Section 102 of Reorganization Plan No. 4 of 1978 (43 FR
47713, October 17, 1978) 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.
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Background
Section 4975(c)(1) (D), (E) and (F) of the Code prohibits the
transfer to, or use by or for the benefit of, a disqualified person of
the income or assets of a plan; an act by a disqualified person who is
a fiduciary whereby he deals with the income or assets of the plan in
his own interest or for his own account; and the receipt of any
consideration for his own personal account by any disqualified person
who is a fiduciary from any party dealing with the plan in
[[Page 39997]]
connection with a transaction involving the income or assets of the
plan.2
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\2\ With respect to those IRAs that are part of a Simplified
Employee Pension described in section 408(k) of the Code, references
to section 4975(c)(1)(D), (E) and (F) should be read to refer as
well to the parallel provisions of ERISA.
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The term ``disqualified person'' as defined in section 4975(e)(2)
of the Code includes a fiduciary and a person providing services to the
plan. Persons who exercise discretionary authority or control over the
assets of the plan are subject to the prohibitions contained in section
4975 of the Code.3 The receipt of reduced or no cost services by
an individual under an arrangement in which plan assets are taken into
account for purposes of pricing the services is a prohibited
transaction.4 Such prohibited transactions are generally subject
to taxation under section 4975 of the Code or the loss of exemption
from tax by reason of section 408(e)(2)(A) of the Code. In the absence
of an exemption, the individual who receives reduced or no cost
services as a result of establishing or maintaining his or her IRA or
Keogh Plan would benefit from the use of his or her plan's assets in
violation of section 4975 of the Code.
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3 See section 4975(e)(3) of the Code.
4 See Advisory Opinion 89-12A (July 14, 1989.)
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In recognition of the business practice of banks offering services
at reduced or no cost to encourage individuals to establish IRAs and
Keogh Plans, the Department granted PTE 93-33 (58 FR 31053, May 28,
1993, as amended, 59 FR 22686, May 2, 1994).5 PTE 93-33 permits
the receipt of reduced or no cost banking services by individuals for
whose benefit individual retirement accounts or Keogh Plans are
established or maintained pursuant to an arrangement in which the
account balance of the IRA or Keogh Plan is taken into account for
purposes of determining eligibility to receive such services provided
the conditions of the exemption are met. The conditions of PTE 93-33
require that: (a) the IRA or Keogh Plan, the account balance of which
is taken into account for purposes of determining eligibility to
receive services at reduced or no cost, is established and maintained
for the exclusive benefit of the participant covered under the IRA or
Keogh Plan, his or her spouse or their beneficiaries; (b) the services
must be of the type that the bank itself could offer consistent with
applicable federal and state banking law; (c) the services are provided
by the bank (or affiliate of the bank) in the ordinary course of the
bank's business to customers who qualify for reduced or no cost banking
services but do not maintain an IRA or Keogh Plan with the bank; (d)
for purposes of determining eligibility to receive services at reduced
or no cost, the account balance required by the bank for the IRA or
Keogh Plan is equal to the lowest balance required for any other type
of account which the bank includes to determine eligibility to receive
reduced or no cost services; and (e) the rate of return on the IRA or
Keogh Plan investment is no less favorable than the rate of return on
an identical investment that could have been made at the same time at
the same branch of the bank by a customer of the bank who is not
eligible for (or who does not receive) reduced or no cost services.
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5 PTE 93-33 amended and redesignated PTE 93-2 (58 FR 3561,
January 11, 1993).
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Summary of the Application
According to the Applicant, broker-dealers have also developed the
capacity to view accounts on an aggregate basis as a result of enhanced
computer capabilities, and in response to customer demands. The
Applicant represents that broker-dealers have offered premium brokerage
service arrangements to customers who maintain total accounts equaling
a minimum value or generating a minimum amount of commissions or fees.
Under a typical ``relationship'' brokerage arrangement, all of an
individual's accounts including those established by members of the
individual's family are viewed on an aggregate basis, rather than
individually.
The Applicant represents that broker-dealers are limited in the
types of services they may offer to customers. Both the New York Stock
Exchange (NYSE) and the National Association of Securities Dealers
(NASD) (and corresponding requirements of other exchanges) require that
broker-dealers ``know their customer'' 6 such that any investments
recommended by a broker- dealer to a customer must be suitable for the
customer in light of, among other things, his investment experience,
financial condition and age. In addition, broker-dealers have an
obligation to act in the customer's best interests with respect to the
customer's investment in securities effected through the broker-dealer.
In this regard, the Applicant states that by causing a customer to make
a particular securities investment by offering incentives, the broker-
dealer could be deemed to have violated the NYSE or NASD suitability
rules unless the investment was in all respects suitable for the
customer.
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6 See NYSE Rule 406 and NASD Article III, Section 2 of the
Rules of Fair Practice.
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The Applicant further represents that, although each broker-dealer
firm establishes its own programs, services provided under a
relationship brokerage program typically have investment oriented
components. Services often include financial planning services, direct
deposit/debit and automatic fund transfer privileges, enhanced account
statements, toll-free access to a client service center, check writing
privileges, debit/credit cards, special newsletters and reduced
brokerage and asset management fees.
The Applicant believes that including IRAs and Keogh Plans in
relationship brokerage programs would be beneficial to IRAs and Keoghs.
For example, a broker-dealer may choose to offer customers reduced
brokerage fees as part of its relationship brokerage program. Under
such an arrangement, IRAs and Keogh Plans may be able to realize the
benefits derived from economies of scale. Fees such as commissions and
professional asset management fees often decline in relative terms as
the size of the assets under management increases. Thus, including the
assets of an IRA or Keogh Plan would lower the cost to the IRA or Keogh
Plan compared to the cost it would pay for the same service on an
independent basis.
Additionally, IRA and Keogh Plans also may benefit if a broker-
dealer provides a customer with a combined account statement or other
account management tools (automatic transfers and telephone access)
because the individual can easily view the assets of all of his or her
various accounts at the same time. This in turn could enable the
individual to formulate a total investment strategy taking into account
the retirement needs of the individual. Further, because many of the
additional services provided under relationship brokerage arrangements
are investment oriented, an individual may be able to more effectively
and efficiently invest his or her assets. Thus, the Applicant states
that such services provide a benefit which is equally important and
useful to the individual in his or her capacity as the manager of the
investments of the IRA or Keogh Plan.
Discussion of the Proposed Exemption
1. Scope
The exemption proposed herein by the Department would provide
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)
[[Page 39998]]
of the Code, including the loss of exemption of an individual
retirement account (IRA) pursuant to section 408(e)(2)(A) of the Code,
by reason of section 4975(c)(1) (D), (E) and (F) of the Code for 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
IRA or Keogh Plan account value or the service fees generated by the
IRA or Keogh Plan are taken into account for purposes of determining
eligibility to receive such services.7
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\7\ The exemption if granted, would apply only to IRAs and Keogh
Plans that are not ``employee benefit plans'' covered by title I of
ERISA except for Simplified Employee Pensions (SEPs) described in
section 408(k) of the Code which provide the participants with the
unrestricted authority to transfer their SEP balances to IRAs
sponsored by different financial institutions. See 29 CFR 2510.3-
2(d) and 29 CFR 2510.3-3(b).
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2. Proposed Conditions
The proposed exemption contains conditions (described below) which
are viewed by the Department as necessary to ensure that the retirement
income of IRA and Keogh Plan participants is not jeopardized by
relationship brokerage programs.
Under the proposal, the IRA or Keogh Plan whose account value or
service fees generated by the IRA or Keogh Plan is taken into
consideration for purposes of determining eligibility to receive
services at reduced or no cost, must be established and maintained for
the exclusive benefit of the participant covered under the IRA or Keogh
Plan, his or her spouse or their beneficiaries. The term ``account
value'' is defined in section III(d) as investments in cash or
securities held in the account for which market quotations are readily
available. The term ``account value'' does not include investments
offered by the broker-dealer (or affiliate) exclusively to IRAs and
Keogh Plans.
The proposed exemption limits the services that may be offered by
broker-dealers under a relationship brokerage program to those services
that the broker-dealer itself may offer consistent with all applicable
federal and state laws regulating broker-dealers. This condition would
exclude the provision of services that are not investment oriented. For
example, broker-dealers could not offer restaurant or travel discounts
under this class exemption. However, the term ``service'' is defined in
section III(g) to include incidental products of a de minimis value.
The Department notes that this definition would permit broker-dealers
to provide such products as free debit/credit cards.
The Investment Company Institute (ICI) requested that the
Department clarify that the proposed exemption would provide relief for
a relationship brokerage program whereby a broker-dealer offers reduced
sales charges with respect to the purchase of investment company shares
as the size of the purchase increases. In this regard, a broker-dealer
would aggregate total purchases of all of a customer's accounts,
including IRAs and Keogh Plans. Thus, a broker-dealer would set a
schedule of commission rates that vary according to the size of the
transaction. For example, for transactions totaling an amount of less
than $10,000, the sales charge would be 6.5%; for a transaction of
$10,000 but less than $25,000, the sales charge would be 6.0%, and for
a transaction of $25,000 but less than $50,000, the sales charge would
be 5.00%. The Department notes that such programs would be covered by
the proposed exemption provided that all of the conditions of the
proposal are met.8
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\8\ In this regard, the Department notes that the programs
described by the ICI as ``letter of intent programs,'' in which
broker-dealers reduce sales commissions based on the aggregate of a
customer's actual purchases and anticipated purchases, as agreed to
by the customer, raise additional issues that are outside the scope
of this proposed exemption.
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Under the proposal, the services must be provided by the broker-
dealer (or an affiliate of the broker-dealer) in the ordinary course of
the broker-dealer's business to customers who are eligible for reduced
or no cost services, but do not maintain IRAs or Keogh Plans with the
broker-dealer. Thus, no relief would be provided for a service that was
offered solely to customers who maintain IRAs or Keogh Plans with the
broker-dealer.
Under the proposal, the determination of eligibility to receive
services at reduced or no cost must be based on the value of the
customer's accounts or on the amount of fees generated by the
customer's accounts. For eligibility requirements based on account
values, the eligibility requirement based on the account value of the
IRA or Keogh Plan must be as favorable as any requirement imposed by
the broker-dealer on any account whose value the broker-dealer includes
to determine eligibility. For example, if a broker-dealer establishes a
$10,000 threshold for the receipt of certain reduced or no cost
services, any combination of accounts (such as personal accounts, IRAs
or Keogh Plans) that equal $10,000 would be sufficient to satisfy the
threshold requirement. In this regard, a broker-dealer could not set a
threshold amount of $10,000 for a customer with a personal account and
a $20,000 threshold for customers maintaining IRAs and Keogh Plans with
the broker-dealer.
For eligibility requirements based on the amount of fees generated,
the proposal requires that the minimum amount of fees which must be
generated by an IRA or Keogh plan be equal to the lowest amount of fees
generated by any other type of account which the broker-dealer includes
to determine eligibility for such programs.9
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\9\ The Applicant describes the following fees as applicable to
relationship brokerage programs: administrative fees (charges for
maintaining an account with the broker-dealer), brokerage fees (fees
for execution of an order to buy or sell securities), wrap fees
(bundled fees under which customers receive more than one service),
service fees (fees for research concerning investment opportunities,
postage and handling charges or ancillary charges such as ATM fees),
custodial fees (fees for serving as IRA or Keogh Plan custodian),
and investment management fees (fees for managing assets).
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The proposal also requires that the combined total of all service
fees or commissions received by the broker-dealer from the IRA or Keogh
Plan must be reasonable within the meaning of sections 4975(d)(2) of
the Code.10 The Department wishes to note that the scope of relief
provided by the proposal is limited to the arrangement under which the
account value of the IRA or Keogh Plan, or the fees generated by the
IRA or Keogh Plan, is taken into account for purposes of determining
eligibility to receive services at reduced or no cost. Thus, no relief
would be provided under the proposed exemption for the provision of
services to the IRA or Keogh Plan or for any self-dealing arising in
connection with the provision of such services. In this regard, see
section 4975(d)(2) of the Code and applicable regulations.
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\10\ Also, the Applicant represents that a broker-dealer is
subject to the NASD Rule set forth in Article III, Section 3 which
provides that charges for services performed must be reasonable.
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Under the proposed exemption, the IRA or Keogh Plan customer who
becomes eligible for relationship brokerage services must be eligible
to receive the same services that are provided to non-IRA or non-Keogh
Plan customers with either account values of the same amount or the
same amount of fees generated. The proposal also requires that the
investment performance of the IRA and Keogh Plan be no less favorable
than the investment performance of identical investments which could
have been made at the same time by a customer of the broker-dealer who
is not eligible for (or who does not receive) reduced or no cost
investment services. This condition
[[Page 39999]]
ensures that the investment performance of an IRA or Keogh Plan will
not be affected due to the inclusion of the IRA or Keogh Plan in the
relationship brokerage program. Thus, under the proposal, a broker-
dealer could not offer an investment to an IRA or Keogh Plan of a
customer who receives reduced or no cost services unless the IRA or
Keogh Plan earns no less than that which could be earned on an
identical investment available to customers of such broker-dealer who
are not eligible for receiving such services.
Notice to Interested Persons
Because many participants in IRAs or Keogh Plans and broker-dealers
sponsoring IRAs or Keogh Plans could be considered interested persons,
the only practical form of notice is publication in the Federal
Register.
General Information
The attention of interested person 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 interests of the
IRAs and Keogh Plans and their participants and beneficiaries and
protective of the rights of participants and beneficiaries of such
plans.
(2) The proposed exemption, 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 exemption 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 exemption 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 exemption.
Comments received will be available for public inspection with the
referenced application at the above address.
Proposed Exemption
On the basis of the facts and representations set forth in the
application and this document, the Department is considering granting
the following exemption under the authority of 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].
Section I: Covered Transactions
Effective (date of publication of final exemption in the Federal
Register), the restrictions of sections 406(a)(1)(D) and 406(b) of
ERISA and the sanctions resulting from the application of section 4975
of the Code, including the loss of exemption of an IRA pursuant to
section 408(e)(2)(A) of the Code, by reason of section 4975(c)(1) (D),
(E), and (F) of the Code, shall not apply to the receipt of services at
reduced or no cost by an individual for whose benefit an IRA or, if
self-employed, a 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 taken into account for purposes of determining
eligibility to receive such services, provided that each condition of
Section II of this exemption is satisfied.
Section II: Conditions
(a) The IRA or Keogh Plan whose account value or whose fees are
taken into account for purposes of determining eligibility to receive
services under the arrangement is established and maintained for the
exclusive benefit of the participant covered under the IRA or Keogh
Plan, his or her spouse or their beneficiaries.
(b) The services offered under the relationship brokerage
arrangement must be of the type that the broker-dealer itself could
offer consistent with all applicable federal and state laws regulating
broker-dealers.
(c) The services offered under the arrangement are provided 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.
(d) For purposes of determining eligibility to receive services,
the arrangement satisfies one of the following:
(i) Eligibility requirements based on the account value of the IRA
or Keogh Plan are as favorable as any such requirements based on the
value of any other type of account which the broker-dealer includes to
determine eligibility; and
(ii) Eligibility requirements based on the amount of fees incurred
by the IRA or Keogh Plan are as favorable as any requirements based on
the amount of fees incurred by any other type of account which the
broker-dealer includes to determine eligibility.
(e) The combined total of all fees for the provision of services to
the IRA or Keogh Plan is not in excess of reasonable compensation
within the meaning of section 4975(d)(2).
(f) The investment performance of the IRA or Keogh Plan investment
is no less favorable than the investment performance on an identical
investment(s) that could have been made at the same time by a customer
of the broker-dealer who is not eligible for (or who does not receive)
reduced or no cost services.
(g) The services offered under the arrangement to the IRA or Keogh
Plan customer must be the same as are offered to non-IRA or non-Keogh
Plan customers with account values of the same amount or the same
amount of fees generated.
Section III: Definitions
The following definitions apply to this exemption:
(a) The term broker-dealer means a broker-dealer registered under
the Securities Exchange Act of 1934.
(b) The term IRA means an individual retirement account described
in Code section 408(a). 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 which provides participants
with the unrestricted authority to transfer their SEP balances to IRAs
sponsored by different financial institutions.
(c) The term Keogh Plan means a pension, profit-sharing, or stock
bonus plan qualified under Code section 401(a) and exempt from taxation
under Code section 501(a) under which some or all of the participants
are employees described in section 401(c) of the Code. For purposes of
this exemption, the term Keogh Plan shall not include a Keogh Plan
which is an employee benefit plan covered by title I of ERISA.
(d) The term account value means investments in cash or securities
held in the account for which market quotations are readily available.
For purposes this exemption, the term account value shall
[[Page 40000]]
not include investments in securities that are offered by the broker-
dealer [or its affiliate] exclusively to IRAs and Keogh Plans.
(e) An affiliate of a broker-dealer includes any person directly or
indirectly controlling, controlled by, or under common control with the
broker-dealer. The term control means the power to exercise a
controlling influence over the management or policies of a person other
than an individual.
(f) The term members of his or her family refers to beneficiaries
of the individual for whose benefit the IRA or Keogh Plan is
established or maintained, who would be members of the family as that
term is defined in Code section 4975(e)(6), or a brother, a sister, or
spouse of a brother or sister.
(g) The term service includes incidental products of a de minimis
value which are directly related to the provision of services covered
by the exemption.
(h) The term fees means commissions and other fees received by the
broker-dealer from the IRA or Keogh Plan for the provision of services,
including, but not limited to, brokerage commissions, investment
management fees, custodial fees, and administrative fees.
Signed at Washington, D.C., this 25th day of July 1996.
Olena Berg,
Assistant Secretary, Pension and Welfare Benefits Administration U.S.
Department of Labor.
[FR Doc. 96-19484 Filed 7-30-96; 8:45 am]
BILLING CODE 4510-29-P