[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