[Federal Register Volume 80, Number 75 (Monday, April 20, 2015)]
[Proposed Rules]
[Pages 22004-22010]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-08836]


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DEPARTMENT OF LABOR

Employee Benefits Security Administration

29 CFR Part 2550

[Application Number D-11687]
ZRIN 1210-ZA25


Proposed Amendment to Prohibited Transaction Exemption (PTE) 75-
1, Part V, Exemptions From Prohibitions Respecting Certain Classes of 
Transactions Involving Employee Benefit Plans and Certain Broker-
Dealers, Reporting Dealers and Banks

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

ACTION: Notice of Proposed Amendment to PTE 75-1, Part V.

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SUMMARY: This document contains a notice of pendency before the 
Department of Labor of a proposed amendment to PTE 75-1, Part V, a 
class exemption from certain prohibited transactions provisions of the 
Employee Retirement Income Security Act of 1974 (ERISA) and the 
Internal Revenue Code (the Code). The provisions at issue generally 
prohibit fiduciaries of employee benefit plans and individual 
retirement accounts (IRAs), from lending money or otherwise extending 
credit to the plans and IRAs and receiving compensation in return. PTE 
75-1, Part V, permits the extension of credit to a plan or IRA by a 
broker-dealer in connection with the purchase or sale of securities; 
however, it does not permit the receipt of compensation for an 
extension of credit by broker-dealers that are fiduciaries with respect 
to the assets involved in the transaction. The amendment proposed in 
this notice would permit investment advice fiduciaries to receive 
compensation when they extend credit to plans and IRAs to avoid a 
failed securities transaction. The proposed amendment would affect 
participants and beneficiaries of plans, IRA owners, and fiduciaries 
with respect to such plans and IRAs.

DATES: Comments: Written comments concerning the proposed class 
exemption must be received by the Department on or before July 6, 2015.
    Applicability: The Department proposes to make this amendment 
applicable eight months after publication of the final amendment in the 
Federal Register.

ADDRESSES: All written comments concerning the proposed amendment to 
the class exemption should be sent to

[[Page 22005]]

the Office of Exemption Determinations by any of the following methods, 
identified by ZRIN: 1210-ZA25:
    Federal eRulemaking Portal: http://www.regulations.gov at Docket ID 
number: EBSA-2014-0016. Follow the instructions for submitting 
comments.
    Email to: [email protected].
    Fax to: (202) 693-8474.
    Mail: Office of Exemption Determinations, Employee Benefits 
Security Administration, (Attention: D-11687), U.S. Department of 
Labor, 200 Constitution Avenue NW., Suite 400, Washington, DC 20210.
    Hand Delivery/Courier: Office of Exemption Determinations, Employee 
Benefits Security Administration, (Attention: D-11687), U.S. Department 
of Labor, 122 C St. NW., Suite 400, Washington, DC 20001.
    Instructions. All comments must be received by the end of the 
comment period. 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 will also be 
available online at www.regulations.gov, at Docket ID number: EBSA-
2014-0016 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 Social 
Security number, 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: Susan Wilker, Office of Exemption 
Determinations, Employee Benefits Security Administration, U.S. 
Department of Labor, (202) 693-8824 (this is not a toll-free number).

SUPPLEMENTARY INFORMATION: The Department is proposing this amendment 
on its own motion, pursuant to ERISA section 408(a) and Code section 
4975(c)(2), and in accordance with the procedures set forth in 29 CFR 
part 2570, subpart B (76 FR 66637 (October 27, 2011)).
    Public Hearing: The Department plans to hold an administrative 
hearing within 30 days of the close of the comment period. The 
Department will ensure ample opportunity for public comment by 
reopening the record following the hearing and publication of the 
hearing transcript. Specific information regarding the date, location 
and submission of requests to testify will be published in a notice in 
the Federal Register.

Executive Summary

Purpose of Regulatory Action

    The Department is proposing this amendment to PTE 75-1, Part V, in 
connection with its proposed regulation under ERISA section 
3(21)(A)(ii) and Code section 4975(e)(3)(B) (Proposed Regulation), 
published elsewhere in this issue of the Federal Register. The Proposed 
Regulation specifies when an entity is a fiduciary by reason of the 
provision of investment advice for a fee or other compensation 
regarding assets of a plan or IRA (i.e., an investment advice 
fiduciary). If adopted, the Proposed Regulation would replace an 
existing regulation that was adopted in 1975. The Proposed Regulation 
is intended to take into account the advent of 401(k) plans and IRAs, 
the dramatic increase in rollovers, and other developments that have 
transformed the retirement plan landscape and the associated investment 
market over the four decades since the existing regulation was issued. 
In light of the extensive changes in retirement investment practices 
and relationships, the Proposed Regulation would update existing rules 
to distinguish more appropriately between the sorts of advice 
relationships that should be treated as fiduciary in nature and those 
that should not.
    This notice proposes an amendment to PTE 75-1, Part V, that would 
allow broker-dealers that are investment advice fiduciaries to receive 
compensation when they extend credit to plans and IRAs to avoid failed 
securities transactions entered into by the plan or IRA. In the absence 
of an exemption, these transactions would be prohibited under ERISA and 
the Code. In this regard, ERISA and the Code generally prohibit 
fiduciaries from lending money or otherwise extending credit to plans 
and IRAs, and from receiving compensation in return.
    ERISA section 408(a) specifically authorizes the Secretary of Labor 
to grant administrative exemptions from the prohibited transaction 
provisions.\1\ Regulations at 29 CFR 2570.30 to 2570.52 describe the 
procedures for applying for an administrative exemption. Before 
granting an exemption, the Department must find that it is 
administratively feasible, in the interests of plans, their 
participants and beneficiaries and IRA owners, and protective of the 
rights of participants and beneficiaries of such plans and IRA owners. 
Interested parties are permitted to submit comments to the Department 
through July 6, 2015. The Department plans to hold an administrative 
hearing within 30 days of the close of the comment period.
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    \1\ Code section 4975(c)(2) authorizes the Secretary of the 
Treasury to grant exemptions from the parallel prohibited 
transaction provisions of the Code. Reorganization Plan No. 4 of 
1978 (5 U.S.C. app. at 214 (2000)) generally transferred the 
authority of the Secretary of the Treasury to issue administrative 
exemptions under Code section 4975 to the Secretary of Labor. This 
amendment to PTE 75-1, Part V, would provide relief from the 
indicated prohibited transaction provisions of both ERISA and the 
Code.
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Summary of the Major Provisions

    The amendment to PTE 75-1, Part V, proposed in this notice would 
allow investment advice fiduciaries that are broker-dealers to receive 
compensation when they lend money or otherwise extend credit to plans 
or IRAs to avoid the failure of a purchase or sale of a security. The 
proposed exemption contains conditions that the broker-dealer lending 
money or otherwise extending credit must satisfy in order to take 
advantage of the exemption. In particular, the potential failure of the 
securities transaction may not be a result of the action or inaction of 
the fiduciary, and the terms of the extension of credit must be at 
least as favorable to the plan or IRA as terms the plan or IRA could 
obtain in an arm's length transaction with an unrelated party. Certain 
advance written disclosures must be made to the plan or IRA, in 
particular, with respect to the rate of interest or other fees charged 
for the loan or other extension of credit.

Regulatory Impact Analysis

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

[[Page 22006]]

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'' 
regulatory actions); (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, 
OMB has determined that this action is ``significant'' within the 
meaning of Section 3(f)(4) of the Executive Order. Accordingly, the 
Department has undertaken an assessment of the costs and benefits of 
the proposed amendment, and OMB has reviewed this regulatory action.

Background

Proposed Regulation

    As explained more fully in the preamble to the Department's 
Proposed Regulation under ERISA section 3(21)(A)(ii) and Code section 
4975(e)(3)(B), also published in this issue of the Federal Register, 
ERISA is a comprehensive statute designed to protect the interests of 
plan participants and beneficiaries, the integrity of employee benefit 
plans, and the security of retirement, health, and other critical 
benefits. The broad public interest in ERISA-covered plans is reflected 
in the imposition of stringent fiduciary responsibilities on parties 
engaging in important plan activities, as well as in the tax-favored 
status of plan assets and investments. One of the chief ways in which 
ERISA protects employee benefit plans is by requiring that plan 
fiduciaries comply with fundamental obligations rooted in the law of 
trusts. In particular, plan fiduciaries must manage plan assets 
prudently and with undivided loyalty to the plans and their 
participants and beneficiaries.\2\ In addition, they must refrain from 
engaging in ``prohibited transactions,'' which ERISA forbids because of 
the dangers posed by the fiduciaries' conflicts of interest with 
respect to the transactions.\3\ When fiduciaries violate ERISA's 
fiduciary duties or the prohibited transaction rules, they may be held 
personally liable for the breach.\4\ In addition, violations of the 
prohibited transaction rules are subject to excise taxes under the 
Code.
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    \2\ ERISA section 404(a).
    \3\ ERISA section 406. ERISA also prohibits certain transactions 
between a plan and a ``party in interest.''
    \4\ ERISA section 409; see also ERISA section 405.
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    The Code also has rules regarding fiduciary conduct with respect to 
tax-favored accounts that are not generally covered by ERISA, such as 
IRAs. Although ERISA's general fiduciary obligations of prudence and 
loyalty do not govern the fiduciaries of IRAs, these fiduciaries are 
subject to the prohibited transaction rules. In this context, 
fiduciaries engaging in the prohibited transactions are subject to an 
excise tax enforced by the Internal Revenue Service. Unlike 
participants in plans covered by Title I of ERISA, IRA owners do not 
have a statutory right to bring suit against fiduciaries for violation 
of the prohibited transaction rules and fiduciaries are not personally 
liable to IRA owners for the losses caused by their misconduct. Nor can 
the Secretary of Labor bring suit to enforce the prohibited 
transactions rules on behalf of IRA owners.
    Under the statutory framework, the determination of who is a 
``fiduciary'' is of central importance. Many of ERISA's protections, 
duties, and liabilities hinge on fiduciary status. In relevant part, 
section 3(21)(A) of ERISA and section 4975(e)(3) of the Code provide 
that a person is a fiduciary with respect to a plan or IRA to the 
extent he or she (i) exercises any discretionary authority or 
discretionary control with respect to management of such plan or IRA, 
or exercises any authority or control with respect to management or 
disposition of its assets; (ii) renders investment advice for a fee or 
other compensation, direct or indirect, with respect to any moneys or 
other property of such plan or IRA, or has any authority or 
responsibility to do so; or, (iii) has any discretionary authority or 
discretionary responsibility in the administration of such plan or IRA.
    The statutory definition deliberately casts a wide net in assigning 
fiduciary responsibility with respect to plan and IRA assets. Thus, 
``any authority or control'' over plan or IRA assets is sufficient to 
confer fiduciary status, and any persons who render ``investment advice 
for a fee or other compensation, direct or indirect'' are fiduciaries, 
regardless of whether they have direct control over the plan's or IRA's 
assets and regardless of their status as an investment adviser or 
broker under the federal securities laws. The statutory definition and 
associated fiduciary responsibilities were enacted to ensure that plans 
and IRAs can depend on persons who provide investment advice for a fee 
to provide recommendations that are untainted by conflicts of interest. 
In the absence of fiduciary status, the providers of investment advice 
would neither be subject to ERISA's fundamental fiduciary standards, 
nor accountable for imprudent, disloyal, or tainted advice under ERISA 
or the Code, no matter how egregious the misconduct or how substantial 
the losses. Plans, individual participants and beneficiaries, and IRA 
owners often are not financial experts and consequently must rely on 
professional advice to make critical investment decisions. The 
significance of financial advice has become still greater with 
increased reliance on participant-directed plans and IRAs for the 
provision of retirement benefits.
    In 1975, the Department issued a regulation, at 29 CFR 2510.3-
21(c)(1975) defining the circumstances under which a person is treated 
as providing ``investment advice'' to an employee benefit plan within 
the meaning of section 3(21)(A)(ii) of ERISA (the ``1975 
regulation'').\5\ The 1975 regulation narrowed the scope of the 
statutory definition of fiduciary investment advice by creating a five-
part test that must be satisfied before a person can be treated as 
rendering investment advice for a fee. Under the 1975 regulation, for 
advice to constitute ``investment advice,'' an adviser who does not 
have discretionary authority or control with respect to the purchase or 
sale of securities or other property of the plan must--(1) render 
advice as to the value of securities or other property, or make 
recommendations as to the advisability of investing in, purchasing or 
selling securities or other property (2) on a regular basis (3) 
pursuant to a mutual agreement, arrangement or understanding, with the 
plan or a plan fiduciary that (4) the advice will serve as a primary 
basis for investment

[[Page 22007]]

decisions with respect to plan assets, and that (5) the advice will be 
individualized based on the particular needs of the plan. The 
regulation provides that an adviser is a fiduciary with respect to any 
particular instance of advice only if he or she meets each and every 
element of the five-part test with respect to the particular advice 
recipient or plan at issue. A 1976 Department of Labor Advisory Opinion 
further limited the application of the statutory definition of 
``investment advice'' by stating that valuations of employer securities 
in connection with employee stock ownership plan (ESOP) purchases would 
not be considered fiduciary advice.\6\
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    \5\ The Department of Treasury issued a virtually identical 
regulation, at 26 CFR 54.4975-9(c), which interprets Code section 
4975(e)(3).
    \6\ Advisory Opinion 76-65A (June 7, 1976).
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    As the marketplace for financial services has developed in the 
years since 1975, the five-part test may now undermine, rather than 
promote, the statutes' text and purposes. The narrowness of the 1975 
regulation allows professional advisers, consultants and valuation 
firms to play a central role in shaping plan investments, without 
ensuring the accountability that Congress intended for persons having 
such influence and responsibility when it enacted ERISA and the related 
Code provisions. Even when plan sponsors, participants, beneficiaries 
and IRA owners clearly rely on paid consultants for impartial guidance, 
the regulation allows consultants to avoid fiduciary status and the 
accompanying fiduciary obligations of care and prohibitions on disloyal 
and conflicted transactions. As a consequence, these advisers can steer 
customers to investments based on their own self-interest, give 
imprudent advice, and engage in transactions that would otherwise be 
categorically prohibited by ERISA and Code, without any liability under 
ERISA or the Code.
    In the Department's Proposed Regulation defining a fiduciary under 
ERISA section 3(21)(A)(ii) and Code section 4975(e)(3)(B), the 
Department seeks to replace the existing regulation with one that more 
appropriately distinguishes between the sorts of advice relationships 
that should be treated as fiduciary in nature and those that should 
not, in light of the legal framework and financial marketplace in which 
plans and IRAs currently operate.\7\ Under the Proposed Regulation, 
plans include IRAs.
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    \7\ The Department initially proposed an amendment to its 
regulation under ERISA section 3(21)(A)(ii) and Code section 
4975(e)(3)(B) on October 22, 2010, at 75 FR 65263. It subsequently 
announced its intention to withdraw the proposal and propose a new 
rule, consistent with the President's Executive Orders 12866 and 
13563, in order to give the public a full opportunity to evaluate 
and comment on the new proposal and updated economic analysis.
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    The Proposed Regulation describes the types of advice that 
constitute ``investment advice'' with respect to plan or IRA assets for 
purposes of the definition of a fiduciary at ERISA section 3(21)(A)(ii) 
and Code section 4975(e)(3)(B). The proposal provides, subject to 
certain carve-outs, that a person renders investment advice with 
respect to a plan or IRA if, among other things, the person provides, 
directly to a plan, a plan fiduciary, a plan participant or 
beneficiary, IRA or IRA owner one of the following types of advice:
    (1) A recommendation as to the advisability of acquiring, holding, 
disposing or exchanging securities or other property, including a 
recommendation to take a distribution of benefits or a recommendation 
as to the investment of securities or other property to be rolled over 
or otherwise distributed from a plan or IRA;
    (2) A recommendation as to the management of securities or other 
property, including recommendations as to the management of securities 
or other property to be rolled over or otherwise distributed from the 
plan or IRA;
    (3) An appraisal, fairness opinion or similar statement, whether 
verbal or written, concerning the value of securities or other 
property, if provided in connection with a specific transaction or 
transactions involving the acquisition, disposition or exchange of such 
securities or other property by the plan or IRA; and
    (4) A recommendation of a person who is also going to receive a fee 
or other compensation for providing any of the types of advice 
described in paragraphs (1) through (3), above.
    In addition, to be a fiduciary, such person must either (1) 
represent or acknowledge that it is acting as a fiduciary within the 
meaning of ERISA or the Code with respect to the advice, or (2) render 
the advice pursuant to a written or verbal agreement, arrangement or 
understanding that the advice is individualized to, or that such advice 
is specifically directed to, the advice recipient for consideration in 
making investment or management decisions with respect to securities or 
other property of the plan or IRA.
    For advisers who do not represent that they are acting as ERISA or 
Code fiduciaries, the Proposed Regulation provides that advice rendered 
in conformance with certain carve-outs will not cause the adviser to be 
treated as a fiduciary under ERISA or the Code. For example, under the 
``seller's carve-out,'' counterparties in arm's length transactions 
with plans may make investment recommendations without acting as 
fiduciaries if certain conditions are met.\8\ Similarly, the proposal 
contains a carve-out from the fiduciary status for providers of 
appraisals, fairness opinions, or statements of value in specified 
contexts (e.g., with respect to ESOP transactions). The proposal 
additionally carves out from fiduciary status the marketing of 
investment alternative platforms, certain assistance in selecting 
investment alternatives and other activities. Finally, the Proposed 
Regulation contains a carve-out from fiduciary status for the provision 
of investment education.
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    \8\ Although the preamble adopts the phrase ``seller's carve-
out'' as a shorthand way of referring to the carve-out and its 
terms, the regulatory carve-out is not limited just to sellers but 
rather applies more broadly to counterparties in arm's length 
transactions with plan investors with financial expertise.
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Prohibited Transactions

    The Department anticipates that the Proposed Regulation will cover 
many broker-dealers who do not currently consider themselves to be 
fiduciaries under ERISA or the Code. If the Proposed Regulation is 
adopted, these entities will become subject to the prohibited 
transaction restrictions in ERISA and the Code that apply to 
fiduciaries. The lending of money or other extension of credit between 
a fiduciary and a plan or IRA, and the plan's or IRA's payment of 
compensation to the fiduciary in return may be prohibited by ERISA 
section 406(a)(1)(B) and Code section 4975(c)(1)(B) and (D).
    As relevant to this notice, the Department understands that broker-
dealers can be required, as part of their relationships with clearing 
houses, to complete securities transactions entered into by the broker-
dealer's customers, even if a particular customer does not perform on 
its obligations. If a broker-dealer is required to advance funds to 
settle a trade entered into by a plan or IRA, or purchase a security 
for delivery on behalf of a plan or IRA, the result can potentially be 
viewed as a loan of money or other extension of credit to the plan or 
IRA. Further, in the event a broker-dealer steps into a plan's or IRA's 
shoes in any particular transaction, it may charge interest or other 
fees to the plan or IRA. These transactions potentially violate ERISA 
section 406(a)(1)(B) and Code section 4975(c)(1)(B) and (D).

[[Page 22008]]

Prohibited Transaction Exemptions

    ERISA and the Code counterbalance the broad proscriptive effect of 
the prohibited transaction provisions with numerous statutory 
exemptions. For example, ERISA section 408(b)(14) and Code section 
4975(d)(17) specifically exempt transactions resulting from the 
provision of fiduciary investment advice to a participant or 
beneficiary of an individual account plan or IRA owner, including 
extensions of short term credit for settlements of securities trades, 
where the advice, resulting transaction, and the adviser's fees meet 
certain conditions. The Secretary of Labor may grant administrative 
exemptions under ERISA and the Code on an individual or class basis if 
the Secretary finds that the exemption is (1) administratively 
feasible, (2) in the interests of plans, their participants and 
beneficiaries and IRA owners, and (3) protective of the rights of the 
participants and beneficiaries of such plans and IRA owners.
    Over the years, the Department has granted several conditional 
class exemptions from the prohibited transactions provisions of ERISA 
and the Code. The Department has, for example, permitted investment 
advice fiduciaries to receive compensation from a plan or IRA (i.e., a 
commission) for executing or effecting securities transactions as agent 
for the plan.\9\ Elsewhere in this issue of the Federal Register, a new 
``Best Interest Contract Exemption'' is proposed for the receipt of 
compensation by fiduciaries who provide investment advice to IRAs, plan 
participants, and certain small plans. Receipt by fiduciaries of 
compensation that varies, or compensation from third parties, as a 
result of advice to plans, would otherwise violate ERISA section 406(b) 
and Code section 4975(c). As part of the re-proposal of the regulation 
defining a fiduciary, the Department is proposing to condition these 
existing and newly-proposed exemptions on the fiduciary's commitment to 
adhere to certain impartial professional conduct standards; in 
particular, when providing investment advice that results in varying or 
third-party compensation, investment advice fiduciaries will be 
required to act in the best interest of the plans and IRAs they are 
advising.
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    \9\ See PTE 86-128, Exemption for Securities Transactions 
Involving Employee Benefit Plans and Broker-Dealers, 51 FR 41686 
(November 18, 1986), as amended, 67 FR 64137 (October 17, 2002).
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    The class exemptions described above do not provide relief for any 
extensions of credit that may be related to a plan's or IRA's 
investment transactions. PTE 75-1, Part V,\10\ permits such an 
extension of credit to a plan or IRA by a broker-dealer in connection 
with the purchase or sale of securities. Specifically, the Department 
has acknowledged that the exemption is available for extensions of 
credit for: the settlement of securities transactions; short sales of 
securities; the writing of option contracts on securities, and 
purchasing of securities on margin.\11\
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    \10\ 40 FR 50845 (October 31, 1975), as amended, 71 FR 5883 
(February 3, 2006).
    \11\ See Preamble to PTE 75-1, Part V, 40 FR 50845 (Oct. 31, 
1975); ERISA Advisory Opinion 86-12A (March 19, 1986).
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    Relief under PTE 75-1, Part V, is limited in that the broker-dealer 
extending credit may not have or exercise any discretionary authority 
or control (except as a directed trustee) with respect to the 
investment of the plan or IRA assets involved in the transaction, nor 
render investment advice within the meaning of 29 CFR 2510.3-21(c) with 
respect to those plan assets, unless no interest or other consideration 
is received by the broker-dealer or any affiliate of the broker-dealer 
in connection with the extension of credit. Therefore, broker-dealers 
that are deemed fiduciaries under the amended regulation would not be 
able to receive compensation for extending credit under PTE 75-1, Part 
V.
    As part of its development of the Proposed Regulation, the 
Department has considered public input indicating the need for 
additional prohibited transaction exemptions for investment advice 
fiduciaries. The Department was informed that relief was needed for 
broker-dealers to extend credit to plans and IRAs to avoid failed 
securities transactions, and to receive compensation in return. In the 
Department's view, the extension of credit to avoid a failed securities 
transaction falls within the contours of the existing relief provided 
by PTE 75-1, Part V, for extensions of credit ``[i]n connection with 
the purchase or sale of securities.'' Accordingly, broker-dealers that 
are not fiduciaries may receive compensation for extending credit to 
avoid a failed securities transaction. The Department is proposing this 
amendment to extend such relief to investment advice fiduciaries.

Description of the Proposal

    This proposed amendment would add a new Section (c) to PTE 75-1, 
Part V, that would provide an exception to the requirement that 
fiduciaries not receive compensation under the exemption. Section (c) 
would provide that a fiduciary within the meaning of ERISA section 
3(21)(A)(ii) or Code section 4975(e)(3)(B) may receive reasonable 
compensation for extending credit to a plan or IRA to avoid a failed 
purchase or sale of securities involving the plan or IRA.
    In conjunction with such relief, Section (c) includes several 
conditions. First, the potential failure of the purchase or sale of the 
securities may not be the result of the action or inaction by the 
broker-dealer or any affiliate.\12\ Additionally, the terms of the 
extension of credit must be at least as favorable to the plan or IRA as 
the terms available in an arm's length transaction between unaffiliated 
parties.
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    \12\ Because of this limitation, the Department views it as 
unnecessary to condition this exemption on the fiduciary's adherence 
to the impartial conduct standards, including the best interest 
standard, that are incorporated into the newly proposed exemptions 
and proposed amendments to other existing exemptions.
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    Finally, the plan or IRA must receive written disclosure of certain 
terms prior to the extension of credit. This disclosure does not need 
to be made on a transaction by transaction basis, and can be part of an 
account opening agreement or a master agreement. The disclosure must 
include the rate of interest or other fees that will be charged on such 
extension of credit, and the method of determining the balance upon 
which interest will be charged. The plan or IRA must additionally be 
provided with prior written disclosure of any changes to these terms.
    The required disclosures are intended to be consistent with the 
requirements of Securities and Exchange Act Rule 10b-16,\13\ which 
governs broker-dealers' disclosure of credit terms in margin 
transactions. The Department understands that it is the practice of 
many broker-dealers to provide such disclosures to all customers, 
regardless of whether the customer is presently opening a margin 
account. To the extent such disclosure is provided, the disclosure 
terms of the proposed exemption would be satisfied.
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    \13\ 17 CFR 240.10b-16.
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    The proposal would define the term ``IRA'' as any trust, account or 
annuity described in Code section 4975(e)(1)(B) through (F), including, 
for example, an individual retirement account described in section 
408(a) of the Code and a health savings account described in section 
223(d) of the Code.\14\ The

[[Page 22009]]

proposed amendment also would revise the recordkeeping provisions of 
the exemption to require the broker-dealer engaging in the covered 
transaction, as opposed to the plan or IRA, to maintain the records. 
The proposed revision to the recordkeeping requirement would make it 
consistent with other existing class exemptions as well as the 
recordkeeping provisions of the other notices of proposed exemption 
published in this issue of the Federal Register.
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    \14\ The Department has previously determined, after consulting 
with the Internal Revenue Service, that plans described in 
4975(e)(1) of the Code are included within the scope of relief 
provided by PTE 75-1 because it was issued jointly by the Department 
and the Service. See PTE 2002-13, 67 FR 9483 (March 1, 2002) 
(preamble discussion). For simplicity and consistency with the other 
new proposed exemptions and proposed amendments to other existing 
exemptions published elsewhere in this issue of the Federal 
Register, the Department has proposed this specific definition of 
IRA.
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Applicability Date

    The Department is proposing that compliance with the final 
regulation defining a fiduciary under ERISA section 3(21)(A)(ii) and 
Code section 4975(e)(3)(B) will begin eight months after the 
publication of the final regulation in the Federal Register 
(Applicability Date). The Department proposes to make this amendment, 
if granted, applicable on the Applicability Date.

No Relief Proposed From ERISA Section 406(a)(1)(C) or Code Section 
4975(c)(1)(C) for the Provision of Services

    If the proposed amendment is granted, the exemption will not 
provide relief from a transaction prohibited by ERISA section 
406(a)(1)(C), or from the taxes imposed by Code section 4975(a) and (b) 
by reason of Code section 4975(c)(1)(C), regarding the furnishing of 
goods, services or facilities between a plan and a party in interest or 
between an IRA and a disqualified person. The provision of investment 
advice to a plan or IRA is a service to the plan or IRA and compliance 
with this exemption will not relieve an investment advice fiduciary of 
the need to comply with ERISA section 408(b)(2), Code section 
4975(d)(2), and applicable regulations thereunder.

Paperwork Reduction Act Statement

    As part of its continuing effort to reduce paperwork and respondent 
burden, the Department of Labor conducts a preclearance consultation 
program to provide the general public and Federal agencies with an 
opportunity to comment on proposed and continuing collections of 
information in accordance with the Paperwork Reduction Act of 1995 
(PRA) (44 U.S.C. 3506(c)(2)(A)). This helps to ensure that the public 
understands the Department's collection instructions; respondents can 
provide the requested data in the desired format; reporting burden 
(time and financial resources) is minimized; collection instruments are 
clearly understood; and the Department can properly assess the impact 
of collection requirements on respondents.
    Currently, the Department is soliciting comments concerning the 
proposed information collection request (ICR) included in the Proposed 
Amendment to Prohibited Transaction Exemption (PTE) 75-1, Part V, 
Exemptions from Prohibitions Respecting Certain Classes of Transactions 
Involving Employee Benefit Plans and Certain Broker-Dealers, Reporting 
Dealers and Banks, as part of its proposal to amend its 1975 rule that 
defines when a person who provides investment advice to an employee 
benefit plan or IRA becomes a fiduciary. A copy of the ICR may be 
obtained by contacting the PRA addressee shown below or at http://www.RegInfo.gov.
    The Department has submitted a copy of the Proposed Amendment to 
PTE 75-1, Part V, to the Office of Management and Budget (OMB) in 
accordance with 44 U.S.C. 3507(d) for review of its information 
collections. The Department and OMB are particularly interested in 
comments that:
     Evaluate whether the collection of information is 
necessary for the proper performance of the functions of the agency, 
including whether the information will have practical utility;
     Evaluate the accuracy of the agency's estimate of the 
burden of the collection of information, including the validity of the 
methodology and assumptions used;
     Enhance the quality, utility, and clarity of the 
information to be collected; and
     Minimize the burden of the collection of information on 
those who are to respond, including through the use of appropriate 
automated, electronic, mechanical, or other technological collection 
techniques or other forms of information technology, e.g., permitting 
electronic submission of responses.
    Comments should be sent to the Office of Information and Regulatory 
Affairs, Office of Management and Budget, Room 10235, New Executive 
Office Building, Washington, DC 20503; Attention: Desk Officer for the 
Employee Benefits Security Administration. OMB requests that comments 
be received within 30 days of publication of the Proposed Investment 
Advice Initiative to ensure their consideration.
    PRA Addressee: Address requests for copies of the ICR to G. 
Christopher Cosby, Office of Policy and Research, U.S. Department of 
Labor, Employee Benefits Security Administration, 200 Constitution 
Avenue NW., Room N-5718, Washington, DC 20210. Telephone (202) 693-
8410; Fax: (202) 219-5333. These are not toll-free numbers. ICRs 
submitted to OMB also are available at http://www.RegInfo.gov.
    As discussed in detail below, Section (c)(3) of the proposed 
amendment requires that prior to the extension of credit, the plan must 
receive from the fiduciary written disclosure of (i) the rate of 
interest (or other fees) that will apply and (ii) the method of 
determining the balance upon which interest will be charged in the 
event that the fiduciary extends credit to avoid a failed purchase or 
sale of securities, as well as prior written disclosure of any changes 
to these terms. Section (d) requires broker-dealers engaging in the 
transactions to maintain records demonstrating compliance with the 
conditions of the PTE. These requirements are information collection 
requests (ICRs) subject to the Paperwork Reduction Act.
    The Department believes that the disclosure requirement is 
consistent with the disclosure requirement mandated by the Securities 
and Exchange Commission (SEC) in 17 CFR 240.10b-16(1) for margin 
transactions. Although the SEC does not mandate any recordkeeping 
requirement, the Department believes that it would be a usual and 
customary business practice for financial institutions to maintain any 
records necessary to prove that required disclosures had been 
distributed in compliance with the SEC's rule. Therefore, the 
Department concludes that these ICRs produce no additional burden to 
the public.

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 ERISA section 408(a) and Code section 4975(c)(2) 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 
ERISA section 404 which require, among other things, that a fiduciary 
discharge his or her duties respecting the plan solely in the interests 
of the plan's participants and beneficiaries and in a prudent fashion 
in accordance with ERISA section 404(a)(1)(B);
    (2) Before a class exemption amendment may be granted under

[[Page 22010]]

ERISA section 408(a) and Code section 4975(c)(2), the Department must 
find that the class exemption as amended is administratively feasible, 
in the interests of the plan and of its participants and beneficiaries 
and IRA owners, and protective of the rights of the plan's participants 
and beneficiaries and IRA owners;
    (3) If granted, a class exemption is applicable to a particular 
transaction only if the transaction satisfies the conditions specified 
in the class exemption; and
    (4) If granted, this amended class exemption 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.

Proposed Amendment

    Under the authority of ERISA section 408(a) and Code section 
4975(c)(2), and in accordance with the procedures set forth in 29 CFR 
part 2570, subpart B (76 FR 66637, October 27, 2011),\15\ the 
Department proposes to amend PTE 75-1, Part V, to read as follows:
---------------------------------------------------------------------------

    \15\ For purposes of this proposed amendment, references to 
ERISA should be read to refer as well to the corresponding 
provisions of the Code.
---------------------------------------------------------------------------

    The restrictions of section 406 of the Employee Retirement Income 
Security Act of 1974 (the Act) and the taxes imposed by section 4975(a) 
and (b) of the Internal Revenue Code of 1986 (the Code), by reason of 
section 4975(c)(1) of the Code, shall not apply to any extension of 
credit to an employee benefit plan or an individual retirement account 
(IRA) by a party in interest or a disqualified person with respect to 
the plan or IRA, provided that the following conditions are met:
    (a) The party in interest or disqualified person:
    (1) Is a broker or dealer registered under the Securities Exchange 
Act of 1934; and
    (2) Does not have or exercise any discretionary authority or 
control (except as a directed trustee) with respect to the investment 
of the plan or IRA assets involved in the transaction, nor does it 
render investment advice (within the meaning of 29 CFR 2510.3-21) with 
respect to those assets, unless no interest or other consideration is 
received by the party in interest or disqualified person or any 
affiliate thereof in connection with such extension of credit.
    (b) Such extension of credit:
    (1) Is in connection with the purchase or sale of securities;
    (2) Is lawful under the Securities Exchange Act of 1934 and any 
rules and regulations promulgated thereunder; and
    (3) Is not a prohibited transaction within the meaning of section 
503(b) of the Code.
    (c) Notwithstanding section (a)(2), a fiduciary within the meaning 
of ERISA section 3(21)(A)(ii) or Code section 4975(e)(3)(B) may receive 
reasonable compensation for extending credit to a plan or IRA to avoid 
a failed purchase or sale of securities involving the plan or IRA if:
    (1) The potential failure of the purchase or sale of the securities 
is not the result of action or inaction by such fiduciary or an 
affiliate;
    (2) The terms of the extension of credit are at least as favorable 
to the plan or IRA as the terms available in an arm's length 
transaction between unaffiliated parties;
    (3) Prior to the extension of credit, the plan or IRA receives 
written disclosure of (i) the rate of interest (or other fees) that 
will apply and (ii) the method of determining the balance upon which 
interest will be charged, in the event that the fiduciary extends 
credit to avoid a failed purchase or sale of securities, as well as 
prior written disclosure of any changes to these terms. This Section 
(c)(3) will be considered satisfied if the plan or IRA receives the 
disclosure described in the Securities and Exchange Act Rule 10b-
16;\16\ and
---------------------------------------------------------------------------

    \16\ 17 CFR 240.10b-16.
---------------------------------------------------------------------------

    (d) The broker-dealer engaging in the covered transaction maintains 
or causes to be maintained for a period of six years from the date of 
such transaction such records as are necessary to enable the persons 
described in paragraph (e) of this exemption to determine whether the 
conditions of this exemption have been met, except that:
    (1) No party other than the broker-dealer engaging in the covered 
transaction shall be subject to the civil penalty which may be assessed 
under section 502(i) of the Act, or to the taxes imposed by section 
4975(a) and (b) of the Code, if such records are not maintained, or are 
not available for examination as required by paragraph (e) below; and
    (2) A prohibited transaction will not be deemed to have occurred 
if, due to circumstances beyond the control of the broker-dealer, such 
records are lost or destroyed prior to the end of such six-year period.
    (e) Notwithstanding anything to the contrary in subsections (a)(2) 
and (b) of section 504 of the Act, the records referred to in paragraph 
(d) are unconditionally available for examination during normal 
business hours by duly authorized employees of (1) the Department of 
Labor, (2) the Internal Revenue Service, (3) plan participants and 
beneficiaries and IRA owners, (4) any employer of plan participants and 
beneficiaries, and (5) any employee organization any of whose members 
are covered by such plan.
    For purposes of this exemption, the terms ``party in interest,'' 
``disqualified person'' and ``fiduciary'' shall include such party in 
interest, disqualified person, or fiduciary, and any affiliates 
thereof, and the term ``affiliate'' shall be defined in the same manner 
as that term is defined in 29 CFR 2510.3-21(e) and 26 CFR 54.4975-9(e). 
Also for the purposes of this exemption, the term ``IRA'' means any 
trust, account or annuity described in Code section 4975(e)(1)(B) 
through (F), including, for example, an individual retirement account 
described in section 408(a) of the Code and a health savings account 
described in section 223(d) of the Code.

    Signed at Washington, DC, this 14th day of April, 2015.
Phyllis C. Borzi,
Assistant Secretary, Employee Benefits Security Administration, 
Department of Labor.
[FR Doc. 2015-08836 Filed 4-15-15; 11:15 am]
BILLING CODE 4510-29-P