[Federal Register Volume 78, Number 101 (Friday, May 24, 2013)]
[Notices]
[Pages 31584-31590]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-12362]



[[Page 31584]]

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DEPARTMENT OF LABOR

Employee Benefits Security Administration

[Application Number D-11716]
RIN 1210-ZA21


Notice of Proposed Amendment to Prohibited Transaction Exemption 
80-26 (PTE 80-26) For Certain Interest Free Loans to Employee Benefit 
Plans

AGENCY: Employee Benefits Security Administration, U.S. Department of 
Labor.

ACTION: Notice of Proposed Amendment to PTE 80-26.

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SUMMARY: This document contains a notice of pendency before the 
Department of Labor (the Department) of a proposed amendment to PTE 80-
26. PTE 80-26 is a class exemption that permits parties in interest 
with respect to employee benefit plans to make certain interest free 
loans and extensions of credit to such plans, provided the conditions 
of the exemption are met. The proposed amendment, if adopted, would 
give retroactive and temporary exemptive relief for certain guarantees 
of the payment of debits to plan investment accounts (including IRAs) 
by parties in interest to such plans as well as certain loans and loan 
repayments made pursuant to such guarantees. The proposed amendment 
would affect employee benefit plans described in section 3(3) of the 
Employee Retirement Income Security Act of 1974, as amended (ERISA or 
the Act), and plans described in section 4975(e)(1) of the Internal 
Revenue Code of 1986, as amended (the Code), the participants and 
beneficiaries of such plans, and parties in interest with respect to 
those plans engaging in the described transactions.

DATES: If adopted, the proposed amendment will be effective from 
January 1, 1975, until the date that is six months after the date on 
which an adopted amendment is published in the Federal Register. 
Written comments and requests for a public hearing should be received 
by the Department on or before July 23, 2013.

ADDRESSES: All written comments and requests for a public hearing 
concerning the proposed amendment should be sent to the Office of 
Exemption Determinations, Employee Benefits Security Administration, 
Room N-5700, U.S. Department of Labor, 200 Constitution Avenue NW., 
Washington, DC 20210, Attention: PTE 80-26 Amendment. Interested 
persons are also invited to submit comments and hearing requests to 
EBSA, by the end of the scheduled comment period, via email to: 
[email protected] or by using the Federal eRulemaking portal at 
http://regulations.gov, Docket ID: EBSA-2012-0030 (following the 
instructions for the submission of comments found on this Web site). 
The comments received will be available for public inspection in the 
Public Disclosure Room of the Employee Benefits Security 
Administration, U.S. Department of Labor, Room N-1513, 200 Constitution 
Avenue NW., Washington, DC 20210. Comments and hearing requests will 
also be available online at www.regulations.gov and www.dol.gov/ebsa, 
at no charge.
    Warning: All comments will be made available to the public. Do not 
include any personally identifiable information (such as name, address, 
or other contact information) or confidential business information that 
you do not want publicly disclosed. All comments may be posted on the 
Internet and can be retrieved by most Internet search engines.

FOR FURTHER INFORMATION CONTACT: Chris Motta, Office of Exemption 
Determinations, Employee Benefits Security Administration, U.S. 
Department of Labor, (202) 693-8540 (this is not a toll-free number).

Executive Order 12866 and 13563 Statement

    Under Executive Orders 12866 and 13563, the Department must 
determine whether a regulatory action is ``significant'' and therefore 
subject to the requirements of the Executive Order and subject to 
review by the Office of Management and Budget (OMB). Executive Orders 
13563 and 12866 direct agencies to assess all costs and benefits of 
available regulatory alternatives and, if regulation is necessary, to 
select regulatory approaches that maximize net benefits (including 
potential economic, environmental, public health and safety effects, 
distributive impacts, and equity). Executive Order 13563 emphasizes the 
importance of quantifying both costs and benefits, of reducing costs, 
of harmonizing and streamlining rules, and of promoting flexibility. It 
also requires federal agencies to develop a plan under which the 
agencies will periodically review their existing significant 
regulations to make the agencies' regulatory programs more effective or 
less burdensome in achieving their regulatory objectives.
    Under Executive Order 12866, ``significant'' regulatory actions are 
subject to the requirements of the Executive Order and review by the 
Office of Management and Budget (OMB). Section 3(f) of Executive Order 
12866, defines a ``significant regulatory action'' as an action that is 
likely to result in a rule (1) having an annual effect on the economy 
of $100 million or more, or adversely and materially affecting a sector 
of the economy, productivity, competition, jobs, the environment, 
public health or safety, or State, local or tribal governments or 
communities (also referred to as ``economically significant''); (2) 
creating serious inconsistency or otherwise interfering with an action 
taken or planned by another agency; (3) materially altering the 
budgetary impacts of entitlement grants, user fees, or loan programs or 
the rights and obligations of recipients thereof; or (4) raising novel 
legal or policy issues arising out of legal mandates, the President's 
priorities, or the principles set forth in the Executive Order. 
Pursuant to the terms of the Executive Order, it has been determined 
that this action is not ``significant'' within the meaning of section 
3(f) of the Executive Order and therefore is not subject to review by 
OMB.

SUPPLEMENTARY INFORMATION: Notice is hereby given of the pendency 
before the Department of a proposed amendment to PTE 80-26.\1\ PTE 80-
26 provides an exemption from the restrictions of section 406(a)(1)(B) 
and (D) and section 406(b)(2) of ERISA and from the taxes imposed by 
section 4975(a) and (b) of the Code, by reason of section 4975(c)(1)(B) 
and (D) of the Code.
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    \1\ 45 FR 28545 (April 29, 1980), as corrected at 45 FR 35040 
(May 23, 1980) and amended at: 65 FR 17540 (April 3, 2000); 67 FR 
9483 (March 1, 2002); 67 FR 9485 (March 1, 2002); and 71 FR 17917 
(April 7, 2006).
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    The proposed amendment was requested by the Securities Industry and 
Financial Markets Association (SIFMA) 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 (76 FR 66637, 
October 27, 2011).\2\ SIFMA requests that the relief provided by this 
proposed amendment to PTE 80-26 include relief from section 406(b)(1) 
of ERISA and section 4975(c)(1)(E) of the Code.\3\ In addition to 
proposing certain relief requested by SIFMA, the

[[Page 31585]]

Department is proposing on its own motion another amendment to PTE 80-
26.
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    \2\ Section 102 of the Reorganization Plan No. 4 of 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 of the Code to the Secretary of Labor.
    \3\ Hereinafter, references to specific provisions of ERISA 
should be read as referring also to the corresponding provisions of 
section 4975 of the Code.
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A. General Background

    The prohibited transaction provisions of the Act generally prohibit 
transactions between a plan and a party in interest (including a 
fiduciary) with respect to such plan. Specifically, section 
406(a)(1)(B) and (D) of the Act provides that a fiduciary with respect 
to a plan shall not cause the plan to engage in a transaction, if he 
knows or should know that such transaction constitutes a direct or 
indirect--
    (B) lending of money or other extension of credit between the plan 
and a party in interest; and
    (D) transfer to, or use by or for the benefit of, a party in 
interest, of any assets of the plan.
    Section 4975(c)(1)(B) and (D) of the Code contain parallel 
provisions with respect to plans described in section 4975(e)(1) of the 
Code.
    Accordingly, unless a statutory or administrative exemption is 
applicable, loans, including interest free loans, extensions of credit, 
and repayment of such loans, between a plan and a party in interest, 
are prohibited.
    In addition, section 406(b)(1) and (b)(2) of the Act prohibits a 
fiduciary with respect to a plan from dealing with the assets of the 
plan in his own interest or for his own account, and from acting in his 
individual capacity or any other capacity in any transaction involving 
the plan on behalf of a party (or representing a party) whose interests 
are adverse to the interests of the plan or the interests of its 
participants or beneficiaries. Section 4975(c)(1)(E) of the Code 
contains a parallel provision to section 406(b)(1) of the Act. Section 
4975 of the Code does not contain a parallel provision with respect to 
section 406(b)(2) of the Act.
    Prohibited transactions that involve plans described in section 
4975(e)(1) of the Code, including individual retirement accounts 
(IRAs), are generally subject to taxation under section 4975 of the 
Code. Additionally, section 408(e)(2) of the Code provides that if, 
during any taxable year of the individual for whose benefit any IRA is 
established, that individual or his or her beneficiary (hereinafter, an 
IRA Owner) engages in any transaction prohibited by section 4975 with 
respect to such account, such account ceases to be an IRA as of the 
first day of such taxable year.

B. Description of Class Exemption

    The general exemption in PTE 80-26,\4\ as amended effective 
December 15, 2004, permits the lending of money or other extension of 
credit from a party in interest or disqualified person to an employee 
benefit plan, and the repayment of such loan or other extension of 
credit in accordance with its terms or other written modifications 
thereof, if:
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    \4\ The general exemption is set forth in section IV of PTE 80-
26. Sections I-III of the exemption provided relief for limited time 
periods, all of which have expired.
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    (a) No interest or other fee is charged to the plan, and no 
discount for payment in cash is relinquished by the plan, in connection 
with the loan or extension of credit;
    (b) The proceeds of the loan or extension of credit are used only--
    (1) for the payment of ordinary operating expenses of the plan, 
including the payment of benefits in accordance with the terms of the 
plan and periodic premiums under an insurance or annuity contract, or
    (2) for a purpose incidental to the ordinary operation of the plan;
    (c) The loan or extension of credit is unsecured;
    (d) The loan or extension of credit is not directly or indirectly 
made by an employee benefit plan;
    (e) The loan is not described in section 408(b)(3) of ERISA and the 
regulations promulgated thereunder (29 CFR 2550.408b-3) or section 
4975(d)(3) of the Code and the regulations promulgated thereunder (26 
CFR 54.4975-7(b)); and
    (f)(1) Any loan described in section IV(b)(1) that is entered into 
on or after April 7, 2006 and that has a term of 60 days or longer must 
be made pursuant to a written loan agreement that contains all of the 
material terms of such loan;
    (2) Any loan described in (b)(2) of this paragraph that is entered 
into for a term of 60 days or longer must be made pursuant to a written 
loan agreement that contains all of the material terms of such loan.
    For transactions that meet these conditions, the restrictions of 
ERISA section 406(a)(1)(B) and (D) and ERISA section 406(b)(2), and the 
taxes imposed by section 4975(a) and (b) of the Code, by reason of 
section 4975(c)(1)(B) and (D) of the Code, do not apply.
    The most recent amendment to PTE 80-26 was finalized on April 7, 
2006, but was generally effective December 15, 2004. The purpose of the 
amendment was to eliminate a requirement of the exemption that the 
proceeds of certain loans or extensions of credit be used only for a 
period of no more than three business days.\5\ Additionally, as part of 
the amendment, the Department added conditions (e) and (f), above. The 
effective date of those conditions relates to the date of the 
publication of the final amendment as opposed to the effective date of 
the proposed amendment.
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    \5\ See Amendment to Prohibited Transaction Exemption 80-26 (PTE 
80-26) for Certain Interest Free Loans to Employee Benefit Plans, 71 
FR 17917 (April 7, 2006).
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    On March 1, 2002, the Department adopted an amendment affecting 
several class exemptions, including PTE 80-26.\6\ The amendment defines 
the terms ``employee benefit plan'' and ``plan'' for purposes of the 
affected class exemptions as ``an employee benefit plan described in 
ERISA section 3(3) and/or a plan described in section 4975(e)(1) of the 
Code.'' Accordingly, the Department clarified that PTE 80-26 provided 
relief for transactions involving IRAs.
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    \6\ 67 FR 9483.
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C. Background on This Proposed Amendment to PTE 80-26

    On October 27, 2009, the Department issued Advisory Opinion 2009-
03A, which states that the grant by an IRA Owner to a broker of a 
security interest in the IRA Owner's non-IRA accounts with the broker, 
in order to cover indebtedness of, or arising from, the IRA, would be 
an impermissible ``extension of credit'' under section 4975(c)(1)(B) of 
the Code. Thereafter, on October 20, 2011, the Department issued 
Advisory Opinion 2011-09A, which states that an IRA Owner's agreement 
to indemnify the broker for losses suffered by the IRA account with the 
broker (hereinafter, an indemnification agreement) \7\ is not within 
the scope of relief provided by PTE 80-26. The Department opined that 
the proceeds of such an indemnification agreement would not be used to 
pay ordinary operating expenses of the plan or for a purpose incidental 
to the ordinary operation of the plan, as required by section IV(b) of 
the exemption.
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    \7\ The Department notes that various terms are used throughout 
this proposed amendment to PTE 80-26 to describe the types of 
provisions at issue. For example, there are references to ``security 
interests,'' ``indemnification agreements,'' and ``cross-
collateralization agreements,'' discussed below. For simplicity, 
where possible, the Department uses the term indemnification 
agreement to refer generically to such provisions.
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    Subsequent to the issuance of Advisory Opinion 2011-09A, several 
practitioners informally notified the Department that documents 
governing the investment of an IRA's or any other

[[Page 31586]]

plan's assets frequently contain provisions that may raise issues under 
section 406(a)(1)(B) of the Act as well as section 4975(c)(1)(B) of the 
Code, both of which prohibit the lending of money or other extensions 
of credit between a plan and a party in interest or disqualified 
person. These practitioners state that account opening agreements, 
described below, contain standard ``cross-collateralization'' 
provisions which permit a broker or other financial institution 
(hereinafter, unless otherwise noted, a financial institution) to 
transfer assets between multiple accounts that an individual has 
established with the financial institution in order to cover 
investment-related losses or costs attributable to one such account. 
For example, where an IRA Owner opens an IRA and a personal investment 
account with a financial institution, and executes with the financial 
institution an account opening agreement that has a cross-
collateralization provision covering both accounts, the financial 
institution would be authorized, pursuant to the cross-
collateralization provision, to, thereafter, either: Transfer assets 
from the IRA Owner's personal investment account to the IRA to cover 
certain losses or costs or expenses attributable to the IRA; or 
transfer assets from the IRA to the IRA Owner's personal investment 
account to cover certain losses or costs or expenses attributable to 
the personal investment account. The Department understands the 
mechanics of the former arrangement to operate as follows: if an 
expense attributable to an IRA is debited to that account, and the 
amount of such debit exceeds the amount of assets held in the account, 
a cross-collateralization provision permits a financial institution to 
debit the IRA Owner's personal investment account for that expense, and 
make a corresponding credit of the same amount to the IRA account.
    The practitioners expressed concern that, consistent with Advisory 
Opinion 2009-03A, a cross-collateralization provision that constitutes 
a grant to a financial institution of a security interest in an IRA 
Owner's non-IRA accounts with the financial institution in order to 
cover indebtedness of the IRA, may be an impermissible ``extension of 
credit'' under section 4975(c)(1)(B) of the Code. The practitioners 
expressed further concern that, consistent with Advisory Opinion 2011-
09A, such impermissible ``extension of credit'' may not be within the 
scope of relief provided by PTE 80-26.
    On December 12, 2011, the Internal Revenue Service (the IRS) issued 
Announcement 2011-81. The Announcement provides temporary relief with 
respect to IRAs in circumstances in which the IRA Owners have signed 
certain indemnification agreements or granted certain security 
interests that may have an effect on their IRAs. Specifically, in the 
Announcement the IRS states that ``[p]ending further action by the 
[Department] and until issuance of further guidance from the IRS 
superseding [the Announcement], the IRS will determine the tax 
consequences relating to an IRA without taking into account the 
consequences that might otherwise result from a prohibited transaction 
under section 4975 due to entering into any indemnification agreement 
or any cross-collateralization agreement similar to the agreements 
described in [the Department's] Advisory Opinions 2009-03A and 2011-
09A, provided there has been no execution or other enforcement pursuant 
to the agreement against the assets of an IRA of the individual 
granting the security interest or entering into the cross-
collateralization agreement.''

D. Request for Exemptive Relief by SIFMA

    The Securities Industry and Financial Markets Association (SIFMA) 
submitted a letter to the Department dated December 12, 2011. In the 
letter, SIFMA states that, prior to Advisory Opinion 2009-03, most 
practitioners believed that indemnification agreements and other grants 
of security interests such as those described in Advisory Opinions 
2009-03A and 2011-09A, if never called upon, did not violate the 
prohibited transaction provisions of ERISA or the Code. According to 
SIFMA, most practitioners believed further that even if these 
indemnification agreements were seen as prohibited transactions, PTE 
80-26 extended exemptive relief to such transactions. SIFMA indicated 
that indemnification agreements were commonly used in futures, 
brokerage, options and other similar agreements.
    In the December 12, 2011 letter, SIFMA states also that Code 
section 408(e)(2)(A) provides that if an individual who is an IRA Owner 
engages in any transaction with his or her IRA that is prohibited by 
Code section 4975, the IRA is treated as if it were distributed (and 
thus loses its tax-qualified status) as of the first day of the year in 
which the transaction took place. SIFMA expresses concern that after 
Advisory Opinion 2009-03A, the practical impact of Advisory Opinion 
2011-09A is that, absent immediate relief, millions of IRA Owners may 
be concerned that their accounts could be disqualified and subject to 
taxation as of the date they entered into the indemnification 
agreement.
    Likewise, according to SIFMA, relief is necessary for plans other 
than IRAs because of the Department's conclusion that an 
indemnification agreement, uncalled upon, violates section 
4975(c)(1)(B) of the Code. Since the wording of section 406(a)(1)(B) of 
the Act contains nearly identical language, SIFMA expressed concern 
that standard indemnification agreements entered into with other types 
of plans may, in the Department's view, violate that section of the Act 
as well. In SIFMA's view, retroactive relief would eliminate concerns 
about potentially incorrect past Form 5500 filings, and eliminate 
questions from auditors with respect to past related party 
transactions.
    SIFMA subsequently submitted an application for a class exemption 
or amendment to PTE 80-26. Therein, SIFMA states that brokerage, 
futures and other investment agreements (``Account Opening 
Agreements'') typically contain language requiring all ``related 
accounts'' to indemnify the service provider against debits in an 
account, regardless of whether those debits are caused by unpaid fees, 
unpaid taxes, unpaid third-party fees, or trading losses. According to 
SIFMA, indemnification language contained in Account Opening Agreements 
is not uniform, and the term ``related accounts'' may not be defined 
with specificity.
    SIFMA provided several examples regarding the mechanics of an 
indemnification agreement. SIFMA describes a scenario, for instance, in 
which an IRA has an Account Opening Agreement with a broker-dealer 
which provides that if a debit arises in the IRA account that remains 
unpaid after demand, the IRA owner, who also has a personal account at 
the broker-dealer, guarantees the payment of the debit from that 
personal account. If, for example, the IRA account directs that a 
security be sold but fails to deliver the security for settlement, and 
there are costs to cancel the trade, there will be a debit to the IRA 
that could be charged to the IRA owner's personal account if 
insufficient funds exist in the IRA account. SIFMA also noted that 
indemnification agreements can involve situations in which funds are 
available in a plan account but would result in adverse consequences if 
they were used to pay the indebtedness. An IRA that owns a private fund 
interest that is not immediately liquid, but needs to pay an accountant 
to prepare a UBIT return is

[[Page 31587]]

an example. The accountant's fee causes a debit in the IRA account that 
cannot be satisfied without liquidating the private fund interest under 
unfavorable terms. Consequently, pursuant to the indemnification 
agreement, the debit may be charged to the IRA owner's personal 
account. Each of these examples could apply to a plan sponsor who 
establishes the plan's account and maintains a corporate account with 
the same financial institution.
    SIFMA requests three categories of exemptive relief for IRAs and 
other plans. First, SIFMA requests a retroactive exemption, effective 
January 1, 1975, for indemnification agreements, as described herein, 
in favor of a financial institution entered into by an IRA or any other 
plan, regardless of whether the indemnification agreement has been 
called upon, executed or enforced.
    Second, SIFMA requests a temporary exemption that would provide 
relief for such indemnification agreements until a date that is 12 
months after final relief is issued. According to SIFMA, this temporary 
relief, if granted, would provide banks and nonbank custodians, 
brokers, futures commission merchants and other financial institutions 
the time necessary to determine how to amend their account documents to 
either eliminate the indemnification agreements or to revise the 
provisions in a way that will be compliant with the Department's 
position.
    Third, SIFMA requests a prospective exemption to explicitly permit 
plan sponsors, the self-employed, and IRA Owners to indemnify their 
IRAs and other plans so that these entities may continue to engage in 
short sales, margin transactions, options and futures.

E. Scope and Purpose of the Proposed Amendment

    As described in further detail below, this proposed amendment, if 
adopted, would provide retroactive and temporary relief, as requested 
by SIFMA. Such relief would be provided for a ``Covered Extension of 
Credit.'' The exemption defines this term as an indemnification 
agreement, cross-collateralization agreement or other grant of a 
security interest in favor of a financial institution, as set forth in 
an Account Opening Agreement between a plan and the financial 
institution, by which (1) assets in a Plan Account guarantee the 
payment of amounts debited to a Related Account, or (2) assets in a 
Related Account guarantee the payment of amounts debited to a Plan 
Account. The term Covered Extension of Credit does not include a loan 
or payment under such agreement or security interest. A Plan Account is 
an account established with a financial institution by an employee 
benefit plan as defined in section 3(3) of ERISA or a plan as defined 
in section 4975(e)(1) of the Code. A Related Account is an account 
established pursuant to an Account Opening Agreement with the financial 
institution that also covers a Plan Account and/or guarantees the 
payment of debits to the Plan Account.
    Retroactive and temporary relief is additionally proposed for the 
lending of money (a Covered Loan) by a Related Account to a Plan 
Account, pursuant to a Covered Extension of Credit, if the Related 
Account is not itself a Plan Account. Thus, although exemptive relief 
is being proposed herein for a Covered Extension of Credit between a 
Plan Account and a Related Account, where such Related Account may 
itself be a Plan Account, exemptive relief for a Covered Loan would not 
apply to loans from Plan Accounts. Finally, the retroactive and 
temporary relief extends to the repayment by a Plan Account to a 
Related Account of a Covered Loan (Covered Repayment).
    The Department is proposing the relief described above solely to 
enable financial institutions to remove Covered Extensions of Credit 
from Account Opening Agreements and conclude any outstanding Covered 
Loans that may exist. The Department believes that broad retroactive 
and temporary exemptive relief for Covered Extension of Credit 
arrangements is appropriate due to apparently widespread 
misunderstanding as to the application of the prohibited transaction 
provisions and PTE 80-26 to the subject transactions. The Department is 
of the view that, due to practitioners' good faith belief in their 
compliance with the prohibited transaction and class exemption 
provisions as applied to these transactions, it is appropriate to 
propose exemptive relief that, if adopted, would enable an IRA to 
maintain its status under the Code, notwithstanding that the IRA has 
been subject to a Covered Extension of Credit arrangement. Similarly, 
the Department believes that it is appropriate to propose relief that 
would enable a plan fiduciary to avoid the costs and uncertainties that 
may otherwise have arisen from the plan's participation in a Covered 
Extension of Credit arrangement. The Department has also included 
retroactive relief from section 406(b)(1) of ERISA and section 
4975(c)(1)(E) of the Code to cover the situation in which a plan 
fiduciary entered into an indemnification agreement which would have 
permitted payment of debits by a Plan Account to a Related Account 
maintained by such plan fiduciary.\8\
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    \8\ The Department notes however, that a sponsor of a plan 
subject to Title I of ERISA who entered into an account opening 
agreement permitting indemnification by the plan of the sponsor's 
corporate accounts, where such plan sponsor actually maintained a 
corporate account with the same financial institution, may have 
engaged in a violation of section 404 of ERISA. Class exemptions, 
including the one proposed herein, if granted, do not provide relief 
for fiduciaries with respect to the fiduciary responsibility 
provisions of section 404.
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    The Department is not proposing permanent prospective exemptive 
relief herein for Covered Extensions of Credit (and loans and loan 
repayments resulting therefrom), as requested by SIFMA. In this regard, 
SIFMA has not proposed conditions that would address the proper 
oversight, monitoring, and reporting of a Covered Loan or a Covered 
Repayment, or that would otherwise support a finding that Covered 
Extension of Credit arrangements are protective of affected IRAs or 
other plans. The Department notes, however, that future exemptive 
relief may be available to the extent all of the requisite findings 
under section 408(a) of ERISA can be made.

F. Description of the Proposed Amendment

    The proposed amendment, if adopted, would add a new section to PTE 
80-26, entitled Section V. Temporary Exemption, and would also re-
designate the Definitions section of PTE 80-26 as Section VI. 
Definitions. The proposed amendment does not otherwise affect the 
relief set forth in section IV of the existing class exemption.
    As proposed, section V would contain relief from ERISA sections 
406(a)(1)(B) and (D) and 406(b)(1) and (b)(2), as well as Code sections 
4975(a) and (b), by reason of section 4975(c)(1)(B), (D) and (E), for: 
(1) A Covered Extension of Credit; (2) a Covered Loan to a Plan Account 
that is made in connection with a Covered Extension of Credit; and (3) 
a Covered Repayment. The terms Covered Extension of Credit, Covered 
Loan, Plan Account, Covered Repayment, Related Account and Account 
Opening Agreement are defined in section VI of the proposed amendment, 
and are also described below.
    If adopted as proposed, the relief contained in section V would 
extend from January 1, 1975, until the date that is six months after 
the date a final amendment is adopted in the Federal Register. The 
Department believes that six months prospective relief provides 
financial institutions ample time to remove Covered Extensions of 
Credit

[[Page 31588]]

from clients' Account Opening Agreements, particularly in light of the 
fact that financial institutions were put on notice of the Department's 
views on these indemnification agreements in 2011.
    The transactions described in section V of this proposed amendment 
are subject to several of the existing conditions applicable to loans 
and extensions of credit described in section IV (b)(1) or (b)(2) of 
PTE 80-26. Section V provides that, in connection with a Covered 
Extension of Credit, Covered Loan or Covered Repayment: no interest or 
other fee may be charged to the IRA or plan; no discount for payment in 
cash is relinquished by the IRA or any other plan; and no Covered Loan 
is made by an IRA or any other plan. As noted previously, exemptive 
relief is being proposed herein for a Covered Loan only to the extent 
that, among other things, the Covered Loan is made to a Plan Account by 
a non-plan Related Account. Section V provides also that a Covered Loan 
may not be the type of loan described in section 408(b)(3) of ERISA and 
the regulations promulgated thereunder (29 CFR 2550.408b-3) or section 
4975(d)(3) of the Code and the regulations promulgated thereunder (26 
CFR 54.4975-7(b)).
    The Department is proposing several additional conditions that 
would be applicable to the covered transactions. In this regard, 
section V of the proposed amendment requires that a Covered Extension 
of Credit be set forth in a written brokerage, futures and other 
investment agreement (i.e., an Account Opening Agreement) between an 
IRA or any other plan and a financial institution, and that such 
financial institution be subject to oversight by a regulatory agency or 
a self-regulatory organization. The Department believes that such 
oversight is necessary given the lack of independent safeguards 
associated with Covered Extensions of Credit, as such arrangements are 
understood by the Department.
    The Department believes also that a Covered Loan from a Related 
Account to a Plan Account should arise from an account debit to the 
Plan Account that is lawful under relevant federal laws, rules and 
regulations. Accordingly, section V requires that any Covered Loan by a 
Related Account to a Plan Account must result from a lawful Plan 
Account-incurred cost (including a fee, expense, investment loss, or 
tax). To ensure that the proposed amendment is administratively 
feasible, section V requires that, for purposes of the proposed 
amendment, the amount of a Covered Loan from a Related Account to a 
Plan Account shall be no greater than the amount of the cost, fee, 
expense, loss or tax incurred by the Plan Account (which must be, as 
noted above, a lawful cost under applicable law, rules and regulations) 
for which the Covered Loan is being made. The amount of any Covered 
Repayment of a Covered Loan by a Plan Account to a Related Account must 
be no greater than the original Covered Loan amount. Accordingly, 
where, for example, a Plan Account has incurred a $50 expense that 
meets the terms of the proposed amendment, the Covered Loan amount by a 
Related Account to the Plan Account must be no greater than $50, and 
any Covered Repayment by the Plan Account to the Related Account must 
also not exceed $50.
    Section VI of the proposed amendment adds six defined terms to that 
section. The term Covered Extension of Credit is defined to mean an 
indemnification agreement, cross-collateralization agreement or other 
grant of a security interest in favor of a financial institution, as 
set forth in an Account Opening Agreement between a plan and the 
financial institution, which guarantees the payment of debits to (or 
by) a Plan Account by (or to) a Related Account. The Department notes 
that this definition is intended to provide broad relief for Plan 
Accounts that have been subject to a Covered Extension of Credit, and 
that remain subject to a Covered Extension of Credit until six months 
following the date on which this proposed amendment is adopted. The 
scope of the term Covered Loan is narrower. This term is defined in 
section VI to mean the lending of money by a Related Account to a Plan 
Account, including by means of a debit to the Related Account and a 
corresponding credit to the Plan Account, where the Covered Loan is 
made pursuant to a Covered Extension of Credit. As such, the term 
Covered Loan does not include a loan by a Plan Account to a Related 
Account, notwithstanding that such loan may be authorized by an Account 
Opening Agreement. A Covered Repayment is defined to mean a repayment 
by a Plan Account to a Related Account of a Covered Loan. A Plan 
Account is defined to mean an account established with a financial 
institution by an employee benefit plan as defined in section 3(3) of 
ERISA or a plan as defined in section 4975(e)(1) of the Code. The term 
Related Account is defined in section VI to mean an investment account 
established with a financial institution by a person or entity, where 
such account is subject to an Account Opening Agreement with the 
financial institution that also covers a Plan Account and/or guarantees 
the payment of debits to the Plan Account. Finally, the term Account 
Opening Agreement is defined as a written brokerage, futures or other 
investment agreement.

G. Additional Proposed Amendments on the Department's Own Motion

    As noted above, PTE 80-26 was most recently amended effective 
December 15, 2004. Therein, the Department eliminated a previous 
requirement of the exemption that the proceeds of certain loans or 
extensions of credit be used only for a period of no more than three 
business days. The Department also added two new conditions, conditions 
IV(e) and (f). Condition IV(e) provides that: ``[t]he loan is not 
described in section 408(b)(3) of ERISA and the regulations promulgated 
thereunder (29 CFR 2550.408b-3) or section 4975(d)(3) of the Code and 
the regulations promulgated thereunder (26 CFR 54.4975-7(b))[.]''
    To clarify that this condition applies equally to extensions of 
credit, the Department is proposing to amend condition IV(e) as 
follows:

    ``[t]he loan or other extension of credit is not described in 
section 408(b)(3) of ERISA and the regulations promulgated 
thereunder (29 CFR 2550.408b-3) or section 4975(d)(3) of the Code 
and the regulations promulgated thereunder (26 CFR 54.4975-
7(b))[.]''

    Additionally, for consistency, the Department is proposing to 
replace the phrase ``loan or extension of credit,'' wherever it is used 
in sections of PTE 80-26 that have not expired, with the phrase ``loan 
or other extension of credit.''

General Information

    The attention of interested persons is directed to the following:
    (1) The fact that a transaction is the subject of an exemption 
under section 408(a) of ERISA and section 4975(c)(2) of the Code does 
not relieve a fiduciary, or other party in interest or disqualified 
person with respect to a plan, from certain other provisions of ERISA 
and the Code, including any prohibited transaction provisions to which 
the exemption does not apply and the general fiduciary responsibility 
provisions of section 404 of ERISA which require, among other things, 
that a fiduciary act prudently and discharge his or her duties 
respecting the plan solely in the interests of the participants and 
beneficiaries of the plan. Additionally, the fact that a transaction is 
the subject of an exemption does not affect the requirement of section 
401(a) of the Code that the plan must operate for the exclusive benefit 
of the

[[Page 31589]]

employees of the employer maintaining the plan and their beneficiaries;
    (2) This exemption does not currently extend to transactions 
prohibited under section 406(b)(1) and (3) of the Act or section 
4975(c)(1)(E) or (F) of the Code. If granted, the proposed amendment 
would provide limited relief to certain transactions prohibited under 
section 406(b)(1) of the Act and section 4975(c)(1)(E) of the Code;
    (3) 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 
plan and of its participants and beneficiaries, and protective of the 
rights of participants and beneficiaries of the plan;
    (4) If granted, the proposed amendment is applicable to a 
particular transaction only if the transaction satisfies the conditions 
specified in the exemption; and
    (5) 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 or statutory exemption is not dispositive of whether the 
transaction is in fact a prohibited transaction.

Written Comments and Hearing Request

    The Department invites all interested persons 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 
received 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 at the above address.

Proposed Amendment

    Under section 408(a) of the Act and section 4975(c)(2) of the Code 
and in accordance with the procedures set forth in 29 CFR 2570, Subpart 
B (76 FR 66637, 66644, October 27, 2011), the Department proposes to 
amend PTE 80-26 as set forth below:

Section I. Retroactive General Exemption

    Effective January 1, 1975 until December 14, 2004 the restrictions 
of section 406(a)(1)(B) and (D) and section 406(b)(2) of the Act, and 
the taxes imposed by section 4975(a) and (b) of the Code, by reason of 
section 4975(c)(1)(B) and (D) of the Code, shall not apply to the 
lending of money or other extension of credit from a party in interest 
or disqualified person to an employee benefit plan, nor to the 
repayment of such loan or other extension of credit in accordance with 
its terms or written modifications thereof, if:
    (a) No interest or other fee is charged to the plan, and no 
discount for payment in cash is relinquished by the plan, in connection 
with the loan or extension of credit;
    (b) The proceeds of the loan or extension of credit are used only--
    (1) for the payment of ordinary operating expenses of the plan, 
including the payment of benefits in accordance with the terms of the 
plan and periodic premiums under an insurance or annuity contract, or
    (2) for a period of no more than three business days, for a purpose 
incidental to the ordinary operation of the plan;
    (c) The loan or extension of credit is unsecured; and
    (d) The loan or extension of credit is not directly or indirectly 
made by an employee benefit plan.

Section II: Temporary Exemption

    Effective November 1, 1999 through December 31, 2000, the 
restrictions of section 406(a)(1)(B) and (D) and section 406(b)(2) of 
the Act, and the taxes imposed by section 4975(a) and (b) of the Code, 
by reason of section 4975(c)(1)(B) and (D) of the Code, shall not apply 
to the lending of money or other extension of credit from a party in 
interest or disqualified person to an employee benefit plan, nor to the 
repayment of such loan or other extension of credit in accordance with 
its terms or written modifications thereof, if:
    (a) No interest or other fee is charged to the plan, and no 
discount for payment in cash is relinquished by the plan, in connection 
with the loan or extension of credit;
    (b) The proceeds of the loan or extension of credit are used only 
for a purpose incidental to the ordinary operation of the plan which 
arises in connection with the plan's inability to liquidate, or 
otherwise access its assets or access data as a result of a Y2K 
problem.
    (c) The loan or extension of credit is unsecured;
    (d) The loan or extension of credit is not directly or indirectly 
made by an employee benefit plan; and
    (e) The loan or extension of credit begins on or after November 1, 
1999 and is repaid or terminated no later than December 31, 2000.

Section III. September 11, 2001 Market Disruption Exemption

    Effective September 11, 2001 through January 9, 2002, the 
restrictions of section 406(a)(1)(B) and (D) and section 406(b)(2) of 
the Act, and the taxes imposed by section 4975(a) and (b) of the Code, 
by reason of section 4975(c)(1)(B) and (D) of the Code, shall not apply 
to the lending of money or other extension of credit from a party in 
interest or disqualified person to an employee benefit plan, nor to the 
repayment of such loan or other extension of credit in accordance with 
its terms or written modifications thereof, if:
    (a) No interest or other fee is charged to the plan, and no 
discount for payment in cash is relinquished by the plan, in connection 
with the loan or extension of credit;
    (b) The proceeds of the loan or extension of credit are used only 
for a purpose incidental to the ordinary operation of the plan which 
arises in connection with difficulties encountered by the plan in 
liquidating, or otherwise accessing its assets, or accessing its data 
in a timely manner as a direct or indirect result of the September 11, 
2001 disruption;
    (c) The loan or extension of credit is unsecured;
    (d) The loan or extension of credit is not directly or indirectly 
made by an employee benefit plan; and
    (e) The loan or extension of credit begins on or after September 
11, 2001, and is repaid or terminated no later than January 9, 2002.

Section IV. Prospective General Exemption

    Effective as of December 15, 2004, the restrictions of section 
406(a)(1)(B) and (D) and section 406(b)(2) of the Act, and the taxes 
imposed by section 4975(a) and (b) of the Code, by reason of section 
4975(c)(1)(B) and (D) of the Code, shall not apply to the lending of 
money or other extension of credit from a party in interest or 
disqualified person to an employee benefit plan, nor to the repayment 
of such loan or other extension of credit in accordance with its terms 
or written modifications thereof, if:
    (a) No interest or other fee is charged to the plan, and no 
discount for payment in cash is relinquished by the plan, in connection 
with the loan or other extension of credit;
    (b) The proceeds of the loan or other extension of credit are used 
only--
    (1) for the payment of ordinary operating expenses of the plan, 
including the payment of benefits in

[[Page 31590]]

accordance with the terms of the plan and periodic premiums under an 
insurance or annuity contract, or
    (2) for a purpose incidental to the ordinary operation of the plan;
    (c) The loan or other extension of credit is unsecured;
    (d) The loan or other extension of credit is not directly or 
indirectly made by an employee benefit plan;
    (e) The loan or other extension of credit is not described in 
section 408(b)(3) of ERISA and the regulations promulgated thereunder 
(29 CFR 2550.408b-3) or section 4975(d)(3) of the Code and the 
regulations promulgated thereunder (26 CFR 54.4975-7(b)); and
    (f)(1) Any loan described in section IV(b)(1) that is entered into 
on or after April 7, 2006 and that has a term of 60 days or longer must 
be made pursuant to a written loan agreement that contains all of the 
material terms of such loan;
    (2) Any loan described in (b)(2) of this paragraph that is entered 
into for a term of 60 days or longer must be made pursuant to a written 
loan agreement that contains all of the material terms of such loan.

Section V: Temporary Exemption

    The restrictions of section 406(a)(1)(B) and (D) and section 
406(b)(1) and (b)(2) of the Act, and the taxes imposed by section 
4975(a) and (b) of the Code, by reason of section 4975(c)(1)(B), (D) 
and (E) of the Code, shall not apply, from January 1, 1975, until the 
date that is six months following the date a final amendment is 
published in the Federal Register, to: (1) A Covered Extension of 
Credit, as defined in section VI(e); (2) a Covered Loan, as defined in 
section VI(f); and (3) a Covered Repayment (as defined in section 
VI(g)) if:
    (a) No interest or other fee is charged to the plan, and no 
discount for payment in cash is relinquished by the plan, in connection 
with the Covered Extension of Credit, Covered Loan, or Covered 
Repayment;
    (b) The Covered Extension of Credit is set forth in an Account 
Opening Agreement between a plan and a financial institution, where the 
financial institution is subject to oversight by a regulatory agency or 
a self-regulatory organization;
    (c) The Covered Loan is not directly or indirectly made by a plan;
    (d) The Covered Extension of Credit and the Covered Loan are not 
described in section 408(b)(3) of ERISA and the regulations promulgated 
thereunder (29 CFR 2550.408b-3) or section 4975(d)(3) of the Code and 
the regulations promulgated thereunder (26 CFR 54.4975-7(b));
    (e) The Covered Loan arose from a lawful cost (including a fee, 
expense, investment loss or tax); and
    (f) The amount of a Covered Loan from a Related Account to a Plan 
Account is no greater than and relates to an amount debited to the Plan 
Account in connection with an expense described in paragraph (e) of 
this section. The amount of a Covered Repayment of a Covered Loan must 
not be greater than the original Covered Loan amount.

Section VI. Definitions

    (a) For purposes of section II, a ``Y2K problem'' is a disruption 
of computer operations resulting from a computer system's inability to 
process data because such system recognizes years only by the last two 
digits, causing a ``00'' entry to be read as the year ``1900'' rather 
than the year ``2000.''
    (b) For purposes of section III, the ``September 11, 2001 
disruption'' is the disruption to the United States financial and 
securities markets and/or the operation of persons providing 
administrative services to employee benefit plans, resulting from the 
acts of terrorism that occurred on September 11, 2001;
    (c) For purposes of this exemption, the terms ``employee benefit 
plan'' and ``plan'' refer to an employee benefit plan described in 
ERISA section 3(3) and/or a plan described in section 4975(e)(1) of the 
Code;
    (d) For purposes of section V, the term ``Plan Account'' means an 
account established with a financial institution by an employee benefit 
plan described in section 3(3) of ERISA or a plan described in section 
4975(e)(1) of the Code.
    (e) For purposes of section V, the term ``Covered Extension of 
Credit'' means an indemnification agreement, cross-collateralization 
agreement or other grant of a security interest in favor of a financial 
institution, as set forth in an Account Opening Agreement between a 
plan and the financial institution, which guarantees the payment of 
debits to (or by) a Plan Account by (or to) a Related Account, but does 
not include a loan or payment under such agreement or security 
interest;
    (f) For purposes of section V, the term ``Covered Loan'' means a 
loan to a Plan Account by a Related Account, including by means of a 
debit to a Related Account and a corresponding credit to the Plan 
Account, where the Covered Loan is made pursuant to a Covered Extension 
of Credit;
    (g) For purposes of section V, the term ``Covered Repayment'' means 
the repayment by a Plan Account to a Related Account of a Covered Loan.
    (h) For purposes of section V, the term ``Related Account'' means 
an investment account established with a financial institution by a 
person or entity, where such account is subject to an Account Opening 
Agreement with the financial institution that also covers a Plan 
Account and/or guarantees the payment of debits to the Plan Account.
    (i) For purposes of section V, the term ``Account Opening 
Agreement'' means a written brokerage, futures or other investment 
agreement.

    Signed at Washington, DC, this 20th day of May, 2013.
Lyssa E. Hall,
Director, Office of Exemption Determinations, Employee Benefits 
Security Administration, U. S. Department of Labor.
[FR Doc. 2013-12362 Filed 5-23-13; 8:45 am]
BILLING CODE 4510-29-P