[Federal Register Volume 81, Number 132 (Monday, July 11, 2016)]
[Rules and Regulations]
[Pages 44784-44792]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-16354]
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
29 CFR Part 2550
[Application No. D-11713; Prohibited Transaction Exemption 2016-02]
ZRIN 1210-ZA25
Class Exemption for Principal Transactions in Certain Assets
Between Investment Advice Fiduciaries and Employee Benefit Plans and
IRAs; Correction
AGENCY: Employee Benefits Security Administration (EBSA), U.S.
Department of Labor.
ACTION: Technical corrections.
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[[Page 44785]]
SUMMARY: This document makes technical corrections to the Department of
Labor's Class Exemption for Principal Transactions in Certain Assets
between Investment Advice Fiduciaries and Employee Benefit Plans and
IRAs (Principal Transactions Exemption), which was published in the
Federal Register on April 8, 2016. The Principal Transactions Exemption
permits principal transactions and riskless principal transactions in
certain investments between a plan, plan participant or beneficiary
account, or an IRA, and a fiduciary that provides investment advice to
the plan or IRA, under conditions to safeguard the interests of these
investors. The corrections either fix typographical errors or make
minor clarifications to provisions that might otherwise be confusing.
DATES:
Issuance date: These technical corrections are issued July 11,
2016, without further action or notice.
Applicability date: The Principal Transactions Exemption, as
corrected herein, is applicable to transactions occurring on or after
April 10, 2017.
FOR FURTHER INFORMATION CONTACT: Brian Shiker, 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:
Background
The Principal Transactions Exemption was granted pursuant to
section 408(a) of the Employee Retirement Income Security Act of 1974
(ERISA) and section 4975(c)(2) of the Internal Revenue Code (the Code),
and in accordance with the procedures set forth in 29 CFR part 2570,
subpart B (76 FR 66637 (October 27, 2011)). It was adopted by the
Department in connection with the publication of a final regulation
defining who is a fiduciary of an employee benefit plan under ERISA as
a result of giving investment advice to a plan or its participants or
beneficiaries (Regulation).\1\ The Regulation also applies to the
definition of a ``fiduciary'' of a plan (including an IRA) under the
Code.
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\1\ 81 FR 20945 (April 8, 2016).
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The Principal Transactions Exemption allows an individual
investment advice fiduciary (an Adviser) and the firm that employs or
otherwise contracts with the Adviser (a Financial Institution) to
engage in principal transactions and riskless principal transactions
involving certain investments, with plans, participant and beneficiary
accounts, and IRAs. The exemption limits the type of investments that
may be purchased or sold and contains conditions which the Adviser and
Financial Institution must satisfy in order to rely on the exemption.
To safeguard the interests of plans, participants and beneficiaries,
and IRA owners, the exemption requires Financial Institutions to give
the appropriate fiduciary of the plan or IRA owner a written statement
in which the Financial Institution acknowledges its fiduciary status
and that of its Advisers. The Financial Institution and Adviser must
adhere to enforceable standards of fiduciary conduct and fair dealing
when providing investment advice regarding the transaction to
Retirement Investors. In the case of IRAs and non-ERISA plans, the
exemption requires that these standards be set forth in an enforceable
contract with the Retirement Investor. Under the exemption's terms,
Financial Institutions are not required to enter into a contract with
ERISA plan investors, but they are obligated to acknowledge fiduciary
status in writing, and adhere to these same standards of fiduciary
conduct, which the investors can effectively enforce pursuant to
section 502(a)(2) and (3) of ERISA. Under this standards-based
approach, the Adviser and Financial Institution must give prudent
advice that is in the customer's Best Interest, avoid misleading
statements, and seek to obtain the best execution reasonably available
under the circumstances with respect to the transaction. Additionally,
Financial Institutions must adopt policies and procedures reasonably
designed to mitigate any harmful impact of conflicts of interest, and
must disclose their conflicts of interest to Retirement Investors.
Finally, Financial Institutions relying on the exemption must obtain
the Retirement Investor's consent to participate in principal
transactions and riskless principal transactions, and the Financial
Institutions are subject to recordkeeping requirements.
Explanation of Corrections
This document makes technical corrections to the Principal
Transactions Exemption as described below. In addition, the document
adds an identifier, Prohibited Transaction Exemption 2016-02, to the
heading of the Principal Transactions Exemption. For convenience, the
text of the corrected exemption is reprinted in its entirety at the
conclusion of this document. The preamble to the originally granted
exemption provides a general overview of the exemption, at 81 FR 21089.
1. In the preamble discussion of the negative consent procedure for
entering into the contract with existing contract holders, page 21102,
the Principal Transactions Exemption states that ``If the Retirement
Investor does terminate the contract within that 30-day period, this
exemption will provide relief for 14 days after the date on which the
termination is received by the Financial Institution.'' However,
Section II(a)(1)(ii) of the exemption text regarding the negative
consent procedure, page 21134, inadvertently failed to include that
sentence. Section II(a)(1)(ii) is corrected to insert that sentence as
the second sentence of the section. This correction will provide
certainty to parties relying on the Principal Transactions Exemption as
to the period of relief following termination of the contract by any
Retirement Investor.
2. The second sentence of Section IV(b) of the Principal
Transactions Exemption, page 21136, repeated the phrase ``in effect.''
The second sentence of Section IV(b) is corrected to delete the
repetitive phrase.
3. The definition of ``Adviser'' in Section VI(a) of the Principal
Transactions Exemption, page 21137, provided, in relevant part, that an
Adviser ``means an individual who: (1) Is a fiduciary of a Plan or IRA
solely by reason of the provision of investment advice described in
ERISA section 3(21)(A)(ii) or Code section 4975(e)(3)(B), or both, and
the applicable regulations, with respect to the Assets involved in the
transaction (emphasis added).'' In contrast, Section I(c)(1)(i) of the
Principal Transactions Exemption, page 21133, excludes an Adviser that
``has or exercises any discretionary authority or discretionary control
respecting management of the assets of the Plan, participant or
beneficiary account, or IRA involved in the transaction or exercises
any discretionary authority or control respecting management or the
disposition of the assets[.]'' In using the word ``solely'' in Section
VI(a), the Department did not intend to prevent Advisers from using the
Principal Transactions Exemption if they have discretionary authority
over other assets of the Plan or IRA that are not subject to the
investment advice, or if they previously had, or subsequently gain,
discretionary authority over assets of the Plan or IRA. To avoid any
doubt as to the availability of the Principal Transactions Exemption
under these circumstances, Section VI(a)(1) is corrected to delete the
word ``solely.'' In
[[Page 44786]]
addition, Section VI(a)(1) used the term ``Assets,'' which was intended
to refer to the assets of the Plan or IRA, but was not a defined term
in the exemption. Section VI(a)(1) is further corrected to replace the
word ``Assets'' with the phrase ``the assets of the Plan or IRA.''
4. The definition of Financial Institution in Section VI(e)(1), (2)
and (3) of the Principal Transactions Exemption, page 21137-8, sets
forth the three types of entities that can be Financial Institutions
under the exemption, separated by the conjunction ``and'' between
subsection VI(e)(2) and (3). The Department did not intend to require
that a Financial Institution satisfy each of subsections VI(e)(1), (2)
and (3). For clarity, the conjunction ``and'' following subsection
VI(e)(2) is deleted and replaced by the conjunction ``or.''
5. In the preamble discussion of the definition of Principal Traded
Asset, page 21096, the exemption states that a Principal Traded Asset
for purposes of the class exemption includes an investment that is
permitted to be purchased under an individual exemption granted by the
Department after the issuance date of the exemption, that provides
relief for investment advice fiduciaries to engage in the purchase of
the investment in a principal transaction or riskless principal
transaction with a Plan or IRA under the same conditions as this
exemption. However, Section VI(j) of the exemption text, page 21138,
which defines Principal Traded Asset, incorrectly uses the term
effective date rather than issuance date. Subsection VI(j)(iv) is
corrected to replace the word ``effective'' with the word ``issuance.''
This correction will provide certainty to parties relying on the
Principal Transactions Exemption as to definition of the Principal
Traded Asset.
Based on the limited, corrective purpose of these changes, the
Department finds for good cause that notice and public comment
procedure is unnecessary. These corrections have been made as part of a
routine determination, and are expected to be insignificant in nature
and impact. All of the corrections either fix typographical errors or
clarify provisions that might otherwise be confusing. The corrections
set forth in this document will not alter the analysis and data
contained in the RIA applicable to the rulemaking nor alter the
assessment of its costs and benefits. The Department's complete RIA is
available at https://www.dol.gov/ebsa/pdf/conflict-of-interest-ria.pdf.
Paperwork Reduction Act Statement
As part of its continuing effort to reduce paperwork and respondent
burden, the Department 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) in minimized, collection instructions are clearly
understood, and the Department can properly assess the impact of
collection requirements on respondents.
As discussed above, the Department is issuing technical corrections
to its final Principal Transactions Exemption which was published in
the Federal Register on April 8, 2016 (81 FR 21089). All of the
corrections either fix typographical errors or make minor
clarifications to provisions that might otherwise be confusing. The
collections of information for the final exemption were approved under
OMB control number 1210-0157, which is currently scheduled to expire on
June 30, 2019.
In FR Doc. 2016-07926, appearing on page 21089 in the Federal
Register of Friday, April 8, 2016, the following corrections are made.
On pages 21133 through 21139, the Principal Transactions Exemption is
corrected to read as follows:
Exemption
Section I--Exemption
(a) In general. ERISA and the Internal Revenue Code prohibit
fiduciary advisers to employee benefit plans (Plans) and individual
retirement plans (IRAs) from self-dealing, including receiving
compensation that varies based on their investment recommendations.
ERISA and the Code also prohibit fiduciaries from engaging in
securities purchases and sales with Plans or IRAs on behalf of their
own accounts (Principal Transactions). This exemption permits certain
persons who provide investment advice to Retirement Investors (i.e.,
fiduciaries of Plans, Plan participants or beneficiaries, or IRA
owners) to engage in certain Principal Transactions and Riskless
Principal Transactions as described below.
(b) Exemption. This exemption permits an Adviser or Financial
Institution to engage in the purchase or sale of a Principal Traded
Asset in a Principal Transaction or Riskless Principal Transaction with
a Plan, participant or beneficiary account, or IRA, and receive a mark-
up, mark-down or other similar payment as applicable to the transaction
for themselves or any Affiliate, as a result of the Adviser's and
Financial Institution's advice regarding the Principal Transaction or
Riskless Principal Transaction. As detailed below, Financial
Institutions and Advisers seeking to rely on the exemption must
acknowledge fiduciary status, adhere to Impartial Conduct Standards in
rendering advice, disclose Material Conflicts of Interest associated
with Principal Transactions and Riskless Principal Transactions and
obtain the consent of the Plan or IRA. In addition, Financial
Institutions must adopt certain policies and procedures, including
policies and procedures reasonably designed to ensure that individual
Advisers adhere to the Impartial Conduct Standards; and retain certain
records. This exemption provides relief from ERISA section 406(a)(1)(A)
and (D) and section 406(b)(1) and (2), and the taxes imposed by Code
section 4975(a) and (b), by reason of Code section 4975(c)(1)(A), (D),
and (E). The Adviser and Financial Institution must comply with the
conditions of Sections II-V.
(c) Scope of this exemption: This exemption does not apply if:
(1) The Adviser: (i) Has or exercises any discretionary authority
or discretionary control respecting management of the assets of the
Plan, participant or beneficiary account, or IRA involved in the
transaction or exercises any discretionary authority or control
respecting management or the disposition of the assets; or (ii) has any
discretionary authority or discretionary responsibility in the
administration of the Plan, participant or beneficiary account, or IRA;
or
(2) The Plan is covered by Title I of ERISA and (i) the Adviser,
Financial Institution or any Affiliate is the employer of employees
covered by the Plan, or (ii) the Adviser or Financial Institution is a
named fiduciary or plan administrator (as defined in ERISA section
3(16)(A)) with respect to the Plan, or an Affiliate thereof, that was
selected to provide investment advice to the plan by a fiduciary who is
not Independent.
Section II--Contract, Impartial Conduct, and Other Conditions
The conditions set forth in this section include certain Impartial
Conduct Standards, such as a Best Interest standard, that Advisers and
Financial Institutions must satisfy to
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rely on the exemption. In addition, this section requires Financial
Institutions to adopt anti-conflict policies and procedures that are
reasonably designed to ensure that Advisers adhere to the Impartial
Conduct Standards, and requires disclosure of important information
about the Principal Transaction or Riskless Principal Transaction. With
respect to IRAs and Plans not covered by Title I of ERISA, the
Financial Institutions must agree that they and their Advisers will
adhere to the exemption's standards in a written contract that is
enforceable by the Retirement Investors. To minimize compliance
burdens, the exemption provides that the contract terms may be
incorporated into account opening documents and similar commonly-used
agreements with new customers, and the exemption permits reliance on a
negative consent process with respect to existing contract holders. The
contract does not need to be executed before the provision of advice to
the Retirement Investor to engage in a Principal Transaction or
Riskless Principal Transaction. However, the contract must cover any
advice given prior to the contract date in order for the exemption to
apply to such advice. There is no contract requirement for
recommendations to Retirement Investors about investments in Plans
covered by Title I of ERISA, but the Impartial Conduct Standards and
other requirements of Section II(b)-(e) must be satisfied in order for
relief to be available under the exemption, as set forth in Section
II(g). Section II(a) imposes the following conditions on Financial
Institutions and Advisers:
(a) Contracts with Respect to Principal Transactions and Riskless
Principal Transactions Involving IRAs and Plans Not Covered by Title I
of ERISA. If the investment advice resulting in the Principal
Transaction or Riskless Principal Transaction concerns an IRA or a Plan
that is not covered by Title I, the advice is subject to an enforceable
written contract on the part of the Financial Institution, which may be
a master contract covering multiple recommendations, that is entered
into in accordance with this Section II(a) and incorporates the terms
set forth in Section II(b)-(d). The Financial Institution additionally
must provide the disclosures required by Section II(e). The contract
must cover advice rendered prior to the execution of the contract in
order for the exemption to apply to such advice and related
compensation.
(1) Contract Execution and Assent.
(i) New Contracts. Prior to or at the same time as the execution of
the Principal Transaction or Riskless Principal Transaction, the
Financial Institution enters into a written contract with the
Retirement Investor acting on behalf of the Plan, participant or
beneficiary account, or IRA, incorporating the terms required by
Section II(b)-(d). The terms of the contract may appear in a standalone
document or they may be incorporated into an investment advisory
agreement, investment program agreement, account opening agreement,
insurance or annuity contract or application, or similar document, or
amendment thereto. The contract must be enforceable against the
Financial Institution. The Retirement Investor's assent to the contract
may be evidenced by handwritten or electronic signatures.
(ii) Amendment of Existing Contracts by Negative Consent. As an
alternative to executing a contract in the manner set forth in the
preceding paragraph, the Financial Institution may amend Existing
Contracts to include the terms required in Section II(b)-(d) by
delivering the proposed amendment and the disclosure required by
Section II(e) to the Retirement Investor prior to January 1, 2018, and
considering the failure to terminate the amended contract within 30
days as assent. If the Retirement Investor does terminate the contract
within that 30-day period, this exemption will provide relief for 14
days after the date on which the termination is received by the
Financial Institution. An Existing Contract is an investment advisory
agreement, investment program agreement, account opening agreement,
insurance contract, annuity contract, or similar agreement or contract
that was executed before January 1, 2018, and remains in effect. If the
Financial Institution elects to use the negative consent procedure, it
may deliver the proposed amendment by mail or electronically, provided
such means is reasonably calculated to result in the Retirement
Investor's receipt of the proposed amendment, but it may not impose any
new contractual obligations, restrictions, or liabilities on the
Retirement Investor by negative consent.
(2) Notice. The Financial Institution maintains an electronic copy
of the Retirement Investor's contract on the Financial Institution's
Web site that is accessible by the Retirement Investor.
(b) Fiduciary. The Financial Institution affirmatively states in
writing that the Financial Institution and the Adviser(s) act as
fiduciaries under ERISA or the Code, or both, with respect to any
investment advice regarding Principal Transactions and Riskless
Principal Transactions provided by the Financial Institution or the
Adviser subject to the contract, or in the case of an ERISA Plan, with
respect to any investment advice regarding Principal Transactions and
Riskless Principal Transactions between the Financial Institution and
the Plan or participant or beneficiary account.
(c) Impartial Conduct Standards. The Financial Institution states
that it and its Advisers agree to adhere to the following standards
and, they in fact, comply with the standards:
(1) When providing investment advice to a Retirement Investor
regarding the Principal Transaction or Riskless Principal Transaction,
the Financial Institution and Adviser provide investment advice that
is, at the time of the recommendation, in the Best Interest of the
Retirement Investor. As further defined in Section VI(c), such advice
reflects the care, skill, prudence, and diligence under the
circumstances then prevailing that a prudent person acting in a like
capacity and familiar with such matters would use in the conduct of an
enterprise of a like character and with like aims, based on the
investment objectives, risk tolerance, financial circumstances, and
needs of the Retirement Investor, without regard to the financial or
other interests of the Adviser, Financial Institution, or any Affiliate
or other party;
(2) The Adviser and Financial Institution seek to obtain the best
execution reasonably available under the circumstances with respect to
the Principal Transaction or Riskless Principal Transaction.
(i) Financial Institutions that are FINRA members shall satisfy
this Section II(c)(2) if they comply with the terms of FINRA rules 2121
(Fair Prices and Commissions) and 5310 (Best Execution and
Interpositioning), or any successor rules in effect at the time of the
transaction, as interpreted by FINRA, with respect to the Principal
Transaction or Riskless Principal Transaction.
(ii) The Department may identify specific requirements regarding
best execution and/or fair prices imposed by another regulator or self-
regulatory organization relating to additional Principal Traded Assets
pursuant to Section VI(j)(1)(iv) in an individual exemption that may be
satisfied as an alternative to the standard set forth in Section
II(c)(2) above.
(3) Statements by the Financial Institution and its Advisers to the
Retirement Investor about the Principal Transaction or Riskless
Principal Transaction, fees and compensation related to the Principal
Transaction or Riskless Principal Transaction, Material
[[Page 44788]]
Conflicts of Interest, and any other matters relevant to a Retirement
Investor's decision to engage in the Principal Transaction or Riskless
Principal Transaction, will not be materially misleading at the time
they are made.
(d) Warranty. The Financial Institution affirmatively warrants, and
in fact complies with, the following:
(1) The Financial Institution has adopted and will comply with
written policies and procedures reasonably and prudently designed to
ensure that its individual Advisers adhere to the Impartial Conduct
Standards set forth in Section II(c);
(2) In formulating its policies and procedures, the Financial
Institution has specifically identified and documented its Material
Conflicts of Interest associated with Principal Transactions and
Riskless Principal Transactions; adopted measures reasonably and
prudently designed to prevent Material Conflicts of Interest from
causing violations of the Impartial Conduct Standards set forth in
Section II(c); and designated a person or persons, identified by name,
title or function, responsible for addressing Material Conflicts of
Interest and monitoring Advisers' adherence to the Impartial Conduct
Standards;
(3) The Financial Institution's policies and procedures require
that neither the Financial Institution nor (to the best of the
Financial Institution's knowledge) any Affiliate uses or relies on
quotas, appraisals, performance or personnel actions, bonuses,
contests, special awards, differential compensation or other actions or
incentives that are intended or would reasonably be expected to cause
individual Advisers to make recommendations regarding Principal
Transactions and Riskless Principal Transactions that are not in the
Best Interest of the Retirement Investor. Notwithstanding the
foregoing, the requirement of this Section II(d)(3) does not prevent
the Financial Institution or its Affiliates from providing Advisers
with differential compensation (whether in type or amount, and
including, but not limited to, commissions) based on investment
decisions by Plans, participant or beneficiary accounts, or IRAs, to
the extent that the policies and procedures and incentive practices,
when viewed as a whole, are reasonably and prudently designed to avoid
a misalignment of the interests of Advisers with the interests of the
Retirement Investors they serve as fiduciaries;
(4) The Financial Institution's written policies and procedures
regarding Principal Transactions and Riskless Principal Transactions
address how credit risk and liquidity assessments for Debt Securities,
as required by Section III(a)(3), will be made.
(e) Transaction Disclosures. In the contract, or in a separate
single written disclosure provided to the Retirement Investor or Plan
prior to or at the same time as the execution of the Principal
Transaction or Riskless Principal Transaction, the Financial
Institution clearly and prominently:
(1) Sets forth in writing (i) the circumstances under which the
Adviser and Financial Institution may engage in Principal Transactions
and Riskless Principal Transactions with the Plan, participant or
beneficiary account, or IRA, (ii) a description of the types of
compensation that may be received by the Adviser and Financial
Institution in connection with Principal Transactions and Riskless
Principal Transactions, including any types of compensation that may be
received from third parties, and (iii) identifies and discloses the
Material Conflicts of Interest associated with Principal Transactions
and Riskless Principal Transactions;
(2) Except for Existing Contracts, documents the Retirement
Investor's affirmative written consent, on a prospective basis, to
Principal Transactions and Riskless Principal Transactions between the
Adviser or Financial Institution and the Plan, participant or
beneficiary account, or IRA;
(3) Informs the Retirement Investor (i) that the consent set forth
in Section II(e)(2) is terminable at will upon written notice by the
Retirement Investor at any time, without penalty to the Plan or IRA,
(ii) of the right to obtain, free of charge, copies of the Financial
Institution's written description of its policies and procedures
adopted in accordance with Section II(d), as well as information about
the Principal Traded Asset, including its purchase or sales price, and
other salient attributes, including, as applicable: The credit quality
of the issuer; the effective yield; the call provisions; and the
duration, provided that if the Retirement Investor's request is made
prior to the transaction, the information must be provided prior to the
transaction, and if the request is made after the transaction, the
information must be provided within 30 business days after the request,
(iii) that model contract disclosures or other model notice of the
contractual terms which are reviewed for accuracy no less than
quarterly and updated within 30 days as necessary are maintained on the
Financial Institution's Web site, and (iv) that the Financial
Institution's written description of its policies and procedures
adopted in accordance with Section II(d) is available free of charge on
the Financial Institution's Web site; and
(4) Describes whether or not the Adviser and Financial Institution
will monitor the Retirement Investor's investments that are acquired
through Principal Transactions and Riskless Principal Transactions and
alert the Retirement Investor to any recommended change to those
investments and, if so, the frequency with which the monitoring will
occur and the reasons for which the Retirement Investor will be
alerted.
(5) The Financial Institution will not fail to satisfy this Section
II(e), or violate a contractual provision based thereon, solely because
it, acting in good faith and with reasonable diligence, makes an error
or omission in disclosing the required information, or if the Web site
is temporarily inaccessible, provided that (i) in the case of an error
or omission on the web, the Financial Institution discloses the correct
information as soon as practicable, but not later than 7 days after the
date on which it discovers or reasonably should have discovered the
error or omission, and (ii) in the case of other disclosures, the
Financial Institution discloses the correct information as soon as
practicable, but not later than 30 days after the date on which it
discovers or reasonably should have discovered the error or omission.
To the extent compliance with this requires Advisers and Financial
Institutions to obtain information from entities that are not closely
affiliated with them, they may rely in good faith on information and
assurances from the other entities, as long as they do not know that
the materials are incomplete or inaccurate. This good faith reliance
applies unless the entity providing the information to the Adviser and
Financial Institution is (1) a person directly or indirectly through
one or more intermediaries, controlling, controlled by, or under common
control with the Adviser or Financial Institution; or (2) any officer,
director, employee, agent, registered representative, relative (as
defined in ERISA section 3(15)), member of family (as defined in Code
section 4975(e)(6)) of, or partner in, the Adviser or Financial
Institution.
(f) Ineligible Contractual Provisions. Relief is not available
under the exemption if a Financial Institution's contract contains the
following:
(1) Exculpatory provisions disclaiming or otherwise limiting
liability of the Adviser or Financial
[[Page 44789]]
Institution for a violation of the contract's terms;
(2) Except as provided in paragraph (f)(4) of this section, a
provision under which the Plan, IRA or the Retirement Investor waives
or qualifies its right to bring or participate in a class action or
other representative action in court in a dispute with the Adviser or
Financial Institution, or in an individual or class claim agrees to an
amount representing liquidated damages for breach of the contract;
provided that, the parties may knowingly agree to waive the Retirement
Investor's right to obtain punitive damages or rescission of
recommended transactions to the extent such a waiver is permissible
under applicable state or federal law; or
(3) Agreements to arbitrate or mediate individual claims in venues
that are distant or that otherwise unreasonably limit the ability of
the Retirement Investors to assert the claims safeguarded by this
exemption.
(4) In the event provision on pre-dispute arbitration agreements
for class or representative claims in paragraph (f)(2) of this section
is ruled invalid by a court of competent jurisdiction, this provision
shall not be a condition of this exemption with respect to contracts
subject to the court's jurisdiction unless and until the court's
decision is reversed, but all other terms of the exemption shall remain
in effect.
(g) ERISA Plans. For recommendations to Retirement Investors
regarding Principal Transactions and Riskless Principal Transactions
with Plans that are covered by Title I of ERISA, relief under the
exemption is conditioned upon the Adviser and Financial Institution
complying with certain provisions of Section II, as follows:
(1) Prior to or at the same time as the execution of the Principal
Transaction or Riskless Principal Transaction, the Financial
Institution provides the Retirement Investor with a written statement
of the Financial Institution's and its Advisers' fiduciary status, in
accordance with Section II(b).
(2) The Financial Institution and the Adviser comply with the
Impartial Conduct Standards of Section II(c).
(3) The Financial Institution adopts policies and procedures
incorporating the requirements and prohibitions set forth in Section
II(d)(1)-(4), and the Financial Institution and Adviser comply with
those requirements and prohibitions.
(4) The Financial Institution provides the disclosures required by
Section II(e).
(5) The Financial Institution and Adviser do not in any contract,
instrument, or communication purport to disclaim any responsibility or
liability for any responsibility, obligation, or duty under Title I of
ERISA to the extent the disclaimer would be prohibited by ERISA section
410, waive or qualify the right of the Retirement Investor to bring or
participate in a class action or other representative action in court
in a dispute with the Adviser or Financial Institution, or require
arbitration or mediation of individual claims in locations that are
distant or that otherwise unreasonably limit the ability of the
Retirement Investors to assert the claims safeguarded by this
exemption.
Section III--General Conditions
The Adviser and Financial Institution must satisfy the following
conditions to be covered by this exemption:
(a) Debt Security Conditions. Solely with respect to the purchase
of a Debt Security by a Plan, participant or beneficiary account, or
IRA:
(1) The Debt Security being purchased was not issued by the
Financial Institution or any Affiliate;
(2) The Debt Security being purchased is not purchased by the Plan,
participant or beneficiary account, or IRA in an underwriting or
underwriting syndicate in which the Financial Institution or any
Affiliate is an underwriter or a member;
(3) Using information reasonably available to the Adviser at the
time of the transaction, the Adviser determines that the Debt Security
being purchased:
(i) Possesses no greater than a moderate credit risk; and
(ii) Is sufficiently liquid that the Debt Security could be sold at
or near its carrying value within a reasonably short period of time.
(b) Arrangement. The Principal Transaction or Riskless Principal
Transaction is not part of an agreement, arrangement, or understanding
designed to evade compliance with ERISA or the Code, or to otherwise
impact the value of the Principal Traded Asset.
(c) Cash. The purchase or sale of the Principal Traded Asset is for
cash.
Section IV--Disclosure Requirements
This section sets forth the Adviser's and the Financial
Institution's disclosure obligations to the Retirement Investor.
(a) Pre-Transaction Disclosure. Prior to or at the same time as the
execution of the Principal Transaction or Riskless Principal
Transaction, the Adviser or the Financial Institution informs the
Retirement Investor, orally or in writing, of the capacity in which the
Financial Institution may act with respect to such transaction.
(b) Confirmation. The Adviser or the Financial Institution provides
a written confirmation of the Principal Transaction or Riskless
Principal Transaction. This requirement may be satisfied by compliance
with Rule 10b-10 under the Securities Exchange Act of 1934, or any
successor rule in effect at the time of the transaction, or for
Advisers and Financial Institutions not subject to the Securities
Exchange Act of 1934, similar requirements imposed by another regulator
or self-regulatory organization.
(c) Annual Disclosure. The Adviser or the Financial Institution
sends to the Retirement Investor, no less frequently than annually,
written disclosure in a single disclosure:
(1) A list identifying each Principal Transaction and Riskless
Principal Transaction executed in the Retirement Investor's account in
reliance on this exemption during the applicable period and the date
and price at which the transaction occurred; and
(2) A statement that (i) the consent required pursuant to Section
II(e)(2) is terminable at will upon written notice, without penalty to
the Plan or IRA, (ii) the right of a Retirement Investor in accordance
with Section II(e)(3)(ii) to obtain, free of charge, information about
the Principal Traded Asset, including its salient attributes, (iii)
model contract disclosures or other model notice of the contractual
terms, which are reviewed for accuracy no less frequently than
quarterly and updated within 30 days if necessary, are maintained on
the Financial Institution's Web site, and (iv) the Financial
Institution's written description of its policies and procedures
adopted in accordance with Section II(d) are available free of charge
on the Financial Institution's Web site.
(d) The Financial Institution will not fail to satisfy this Section
IV solely because it, acting in good faith and with reasonable
diligence, makes an error or omission in disclosing the required
information, or if the Web site is temporarily inaccessible, provided
that (i) in the case of an error or omission on the web, the Financial
Institution discloses the correct information as soon as practicable,
but not later than 7 days after the date on which it discovers or
reasonably should have discovered the error or omission, and (ii) in
the case of other disclosures, the Financial Institution discloses the
correct information as soon as practicable, but not later than 30 days
after the date on which it discovers or reasonably should have
discovered the error or omission. To the extent compliance with the
disclosure requires Advisers and Financial Institutions to obtain
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information from entities that are not closely affiliated with them,
the exemption provides that they may rely in good faith on information
and assurances from the other entities, as long as they do not know
that the materials are incomplete or inaccurate. This good faith
reliance applies unless the entity providing the information to the
Adviser and Financial Institution is (1) a person directly or
indirectly through one or more intermediaries, controlling, controlled
by, or under common control with the Adviser or Financial Institution;
or (2) any officer, director, employee, agent, registered
representative, relative (as defined in ERISA section 3(15)), member of
family (as defined in Code section 4975(e)(6)) of, or partner in, the
Adviser or Financial Institution.
(e) The Financial Institution prepares a written description of its
policies and procedures and makes it available on its Web site and
additionally, to Retirement Investors, free of charge, upon request.
The description must accurately describe or summarize key components of
the policies and procedures relating to conflict-mitigation and
incentive practices in a manner that permits Retirement Investors to
make an informed judgment about the stringency of the Financial
Institution's protections against conflicts of interest. Additionally,
Financial Institutions must provide their complete policies and
procedures to the Department upon request.
Section V--Recordkeeping
This section establishes record retention and availability
requirements that a Financial Institution must meet in order for it to
rely on the exemption.
(a) The Financial Institution maintains for a period of six (6)
years from the date of each Principal Transaction or Riskless Principal
Transaction, in a manner that is reasonably accessible for examination,
the records necessary to enable the persons described in Section V(b)
to determine whether the conditions of this exemption have been met,
except that:
(1) If such records are lost or destroyed, due to circumstances
beyond the control of the Financial Institution, then no prohibited
transaction will be considered to have occurred solely on the basis of
the unavailability of those records; and
(2) No party other than the Financial Institution that is engaging
in the Principal Transaction or Riskless Principal Transaction shall be
subject to the civil penalty that may be assessed under ERISA section
502(i) or to the taxes imposed by Code sections 4975(a) and (b) if the
records are not maintained or are not available for examination as
required by Section V(b).
(b)(1) Except as provided in Section V(b)(2) or as precluded by 12
U.S.C. 484, and notwithstanding any provisions of ERISA sections
504(a)(2) and 504(b), the records referred to in Section V(a) are
reasonably available at their customary location for examination during
normal business hours by:
(i) Any duly authorized employee or representative of the
Department or the Internal Revenue Service;
(ii) any fiduciary of the Plan or IRA that was a party to a
Principal Transaction or Riskless Principal Transaction described in
this exemption, or any duly authorized employee or representative of
such fiduciary;
(iii) any employer of participants and beneficiaries and any
employee organization whose members are covered by the Plan, or any
authorized employee or representative of these entities; and
(iv) any participant or beneficiary of the Plan, or the beneficial
owner of an IRA.
(2) None of the persons described in subparagraph (1)(ii) through
(iv) are authorized to examine records regarding a Prohibited
Transaction involving another Retirement Investor, or trade secrets of
the Financial Institution, or commercial or financial information which
is privileged or confidential; and
(3) Should the Financial Institution refuse to disclose information
on the basis that such information is exempt from disclosure, the
Financial Institution must by the close of the thirtieth (30th) day
following the request, provide a written notice advising the requestor
of the reasons for the refusal and that the Department may request such
information.
(4) Failure to maintain the required records necessary to determine
whether the conditions of this exemption have been met will result in
the loss of the exemption only for the transaction or transactions for
which records are missing or have not been maintained. It does not
affect the relief for other transactions.
Section VI--Definitions
For purposes of this exemption:
(a) ``Adviser'' means an individual who:
(1) Is a fiduciary of a Plan or IRA by reason of the provision of
investment advice described in ERISA section 3(21)(A)(ii) or Code
section 4975(e)(3)(B), or both, and the applicable regulations, with
respect to the assets of the Plan or IRA involved in the transaction;
(2) Is an employee, independent contractor, agent, or registered
representative of a Financial Institution; and
(3) Satisfies the applicable federal and state regulatory and
licensing requirements of banking, and securities laws with respect to
the covered transaction.
(b) ``Affiliate'' of an Adviser or Financial Institution means:
(1) Any person directly or indirectly, through one or more
intermediaries, controlling, controlled by, or under common control
with the Adviser or Financial Institution. For this purpose, the term
``control'' means the power to exercise a controlling influence over
the management or policies of a person other than an individual;
(2) Any officer, director, partner, employee, or relative (as
defined in ERISA section 3(15)) of the Adviser or Financial
Institution; or
(3) Any corporation or partnership of which the Adviser or
Financial Institution is an officer, director, or partner of the
Adviser or Financial Institution.
(c) Investment advice is in the ``Best Interest'' of the Retirement
Investor when the Adviser and Financial Institution providing the
advice act with the care, skill, prudence, and diligence under the
circumstances then prevailing that a prudent person acting in a like
capacity and familiar with such matters would use in the conduct of an
enterprise of a like character and with like aims, based on the
investment objectives, risk tolerance, financial circumstances, and
needs of the Retirement Investor, without regard to the financial or
other interests of the Adviser, Financial Institution, any Affiliate or
other party.
(d) ``Debt Security'' means a ``debt security'' as defined in Rule
10b-10(d)(4) of the Exchange Act that is:
(1) U.S. dollar denominated, issued by a U.S. corporation and
offered pursuant to a registration statement under the Securities Act
of 1933;
(2) An ``Agency Debt Security'' as defined in FINRA rule 6710(l) or
its successor;
(3) An ``Asset Backed Security'' as defined in FINRA rule 6710(m)
or its successor, that is guaranteed by an Agency as defined in FINRA
rule 6710(k) or its successor, or a Government Sponsored Enterprise as
defined in FINRA rule 6710(n) or its successor; or
[[Page 44791]]
(4) A ``U.S. Treasury Security'' as defined in FINRA rule 6710(p)
or its successor.
(e) ``Financial Institution'' means the entity that (i) employs the
Adviser or otherwise retains such individual as an independent
contractor, agent or registered representative, and (ii) customarily
purchases or sells Principal Traded Assets for its own account in the
ordinary course of its business, and that is:
(1) Registered as an investment adviser under the Investment
Advisers Act of 1940 (15 U.S.C. 80b-1 et seq.) or under the laws of the
state in which the adviser maintains its principal office and place of
business;
(2) A bank or similar financial institution supervised by the
United States or state, or a savings association (as defined in section
3(b)(1) of the Federal Deposit Insurance Act (12 U.S.C. 1813(b)(1)));
or
(3) A broker or dealer registered under the Securities Exchange Act
of 1934 (15 U.S.C. 78a et seq.).
(f) ``Independent'' means a person that:
(1) Is not the Adviser or Financial Institution or an Affiliate;
(2) Does not receive or is not projected to receive within the
current federal income tax year, compensation or other consideration
for his or her own account from the Adviser, Financial Institution or
an Affiliate in excess of 2% of the person's annual revenues based upon
its prior income tax year; and
(3) Does not have a relationship to or an interest in the Adviser,
Financial Institution or an Affiliate that might affect the exercise of
the person's best judgment in connection with transactions described in
this exemption.
(g) ``Individual Retirement Account'' or ``IRA'' means any account
or annuity described in Code section 4975(e)(1)(B) through (F),
including, for example, an individual retirement account described in
Code section 408(a) and a health savings account described in Code
section 223(d).
(h) A ``Material Conflict of Interest'' exists when an Adviser or
Financial Institution has a financial interest that a reasonable person
would conclude could affect the exercise of its best judgment as a
fiduciary in rendering advice to a Retirement Investor.
(i) ``Plan'' means an employee benefit plan described in ERISA
section 3(3) and any plan described in Code section 4975(e)(1)(A).
(j) ``Principal Traded Asset'' means:
(1) for purposes of a purchase by a Plan, participant or
beneficiary account, or IRA,
(i) a Debt Security, as defined in subsection (d) above;
(ii) a certificate of deposit (CD);
(iii) an interest in a Unit Investment Trust, within the meaning of
Section 4(2) of the Investment Company Act of 1940, as amended; or
(iv) an investment that is permitted to be purchased under an
individual exemption granted by the Department under ERISA section
408(a) and/or Code section 4975(c), after the issuance date of this
exemption, that provides relief for investment advice fiduciaries to
engage in the purchase of the investment in a Principal Transaction or
a Riskless Principal Transaction with a Plan or IRA under the same
conditions as this exemption; and
(2) for purposes of a sale by a Plan, participant or beneficiary
account, or IRA, securities or other investment property.
(k) ``Principal Transaction'' means a purchase or sale of a
Principal Traded Asset in which an Adviser or Financial Institution is
purchasing from or selling to a Plan, participant or beneficiary
account, or IRA on behalf of the Financial Institution's own account or
the account of a person directly or indirectly, through one or more
intermediaries, controlling, controlled by, or under common control
with the Financial Institution. For purposes of this definition, a
Principal Transaction does not include a Riskless Principal Transaction
as defined in Section VI(m).
(l) ``Retirement Investor'' means:
(1) A fiduciary of a non-participant directed Plan subject to Title
I of ERISA or described in Code section 4975(c)(1)(A) with authority to
make investment decisions for the Plan;
(2) A participant or beneficiary of a Plan subject to Title I of
ERISA or described in Code section 4975(c)(1)(A) with authority to
direct the investment of assets in his or her Plan account or to take a
distribution; or
(3) The beneficial owner of an IRA acting on behalf of the IRA.
(m) ``Riskless Principal Transaction'' means a transaction in which
a Financial Institution, after having received an order from a
Retirement Investor to buy or sell a Principal Traded Asset, purchases
or sells the asset for the Financial Institution's own account to
offset the contemporaneous transaction with the Retirement Investor.
Section VII--Transition Period for Exemption
(a) In general. ERISA and the Internal Revenue Code prohibit
fiduciary advisers to employee benefit plans (Plans) and individual
retirement plans (IRAs) from receiving compensation that varies based
on their investment recommendations. ERISA and the Code also prohibit
fiduciaries from engaging in securities purchases and sales with Plans
or IRAs on behalf of their own accounts (Principal Transactions). This
transition period provides relief from the restrictions of ERISA
section 406(a)(1)(A) and (D) and section 406(b)(1) and (2), and the
taxes imposed by Code section 4975(a) and (b), by reason of Code
section 4975(c)(1)(A), (D), and (E) for the period from April 10, 2017,
to January 1, 2018 (the Transition Period) for Advisers and Financial
Institutions to engage in certain Principal Transactions and Riskless
Principal Transactions with Plans and IRAs subject to the conditions
described in Section VII(d).
(b) Covered transactions. This provision permits an Adviser or
Financial Institution to engage in the purchase or sale of a Principal
Traded Asset in a Principal Transaction or a Riskless Principal
Transaction with a Plan, participant or beneficiary account, or IRA,
and receive a mark-up, mark-down or other similar payment as applicable
to the transaction for themselves or any Affiliate, as a result of the
Adviser's and Financial Institution's advice regarding the Principal
Transaction or the Riskless Principal Transaction, during the
Transition Period.
(c) Exclusions. This provision does not apply if:
(1) The Adviser: (i) Has or exercises any discretionary authority
or discretionary control respecting management of the assets of the
Plan or IRA involved in the transaction or exercises any discretionary
authority or control respecting management or the disposition of the
assets; or (ii) has any discretionary authority or discretionary
responsibility in the administration of the Plan or IRA; or
(2) The Plan is covered by Title I of ERISA, and (i) the Adviser,
Financial Institution or any Affiliate is the employer of employees
covered by the Plan, or (ii) the Adviser or Financial Institution is a
named fiduciary or plan administrator (as defined in ERISA section
3(16)(A)) with respect to the Plan, or an Affiliate thereof, that was
selected to provide advice to the Plan by a fiduciary who is not
Independent;
(d) Conditions. The provision is subject to the following
conditions:
(1) The Financial Institution and Adviser adhere to the following
standards:
(i) When providing investment advice to the Retirement Investor
regarding the Principal Transaction or Riskless
[[Page 44792]]
Principal Transaction, the Financial Institution and the Adviser(s)
provide investment advice that is, at the time of the recommendation,
in the Best Interest of the Retirement Investor. As further defined in
Section VI(c), such advice reflects the care, skill, prudence, and
diligence under the circumstances then prevailing that a prudent person
acting in a like capacity and familiar with such matters would use in
the conduct of an enterprise of a like character and with like aims,
based on the investment objectives, risk tolerance, financial
circumstances, and needs of the Retirement Investor, without regard to
the financial or other interests of the Adviser, Financial Institution
or any Affiliate or other party;
(ii) The Adviser and Financial Institution will seek to obtain the
best execution reasonably available under the circumstances with
respect to the Principal Transaction or Riskless Principal Transaction.
Financial Institutions that are FINRA members shall satisfy this
requirement if they comply with the terms of FINRA rules 2121 (Fair
Prices and Commissions) and 5310 (Best Execution and Interpositioning),
or any successor rules in effect at the time of the transaction, as
interpreted by FINRA, with respect to the Principal Transaction or
Riskless Principal Transaction; and
(iii) Statements by the Financial Institution and its Advisers to
the Retirement Investor about the Principal Transaction or Riskless
Principal Transaction, fees and compensation related to the Principal
Transaction or Riskless Principal Transaction, Material Conflicts of
Interest, and any other matters relevant to a Retirement Investor's
decision to engage in the Principal Transaction or Riskless Principal
Transaction, are not materially misleading at the time they are made.
(2) Disclosures. The Financial Institution provides to the
Retirement Investor, prior to or at the same time as the execution of
the recommended Principal Transaction or Riskless Principal
Transaction, a single written disclosure, which may cover multiple
transactions or all transactions occurring within the Transition
Period, that clearly and prominently:
(i) Affirmatively states that the Financial Institution and the
Adviser(s) act as fiduciaries under ERISA or the Code, or both, with
respect to the recommendation;
(ii) Sets forth the standards in paragraph (d)(1) of this section
and affirmatively states that it and the Adviser(s) adhered to such
standards in recommending the transaction; and
(iii) Discloses the circumstances under which the Adviser and
Financial Institution may engage in Principal Transactions and Riskless
Principal Transactions with the Plan, participant or beneficiary
account, or IRA, and identifies and discloses the Material Conflicts of
Interest associated with Principal Transactions and Riskless Principal
Transactions.
(iv) The disclosure may be provided in person, electronically or by
mail. It does not have to be repeated for any subsequent
recommendations during the Transition Period.
(v) The Financial Institution will not fail to satisfy this Section
VII(d)(2) solely because it, acting in good faith and with reasonable
diligence, makes an error or omission in disclosing the required
information, provided the Financial Institution discloses the correct
information as soon as practicable, but not later than 30 days after
the date on which it discovers or reasonably should have discovered the
error or omission. To the extent compliance with this Section VII(d)(2)
requires Advisers and Financial Institutions to obtain information from
entities that are not closely affiliated with them, they may rely in
good faith on information and assurances from the other entities, as
long as they do not know, or unless they should have known, that the
materials are incomplete or inaccurate. This good faith reliance
applies unless the entity providing the information to the Adviser and
Financial Institution is (1) a person directly or indirectly through
one or more intermediaries, controlling, controlled by, or under common
control with the Adviser or Financial Institution; or (2) any officer,
director, employee, agent, registered representative, relative (as
defined in ERISA section 3(15)), member of family (as defined in Code
section 4975(e)(6)) of, or partner in, the Adviser or Financial
Institution.
(3) The Financial Institution must designate a person or persons,
identified by name, title or function, responsible for addressing
Material Conflicts of Interest and monitoring Advisers' adherence to
the Impartial Conduct Standards.
(4) The Financial Institution complies with the recordkeeping
requirements of Section V(a) and (b).
Signed at Washington, DC.
Phyllis C. Borzi,
Assistant Secretary, Employee Benefits Security Administration, U.S.
Department of Labor.
[FR Doc. 2016-16354 Filed 7-7-16; 4:15 pm]
BILLING CODE 4510-29-P