[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

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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

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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

[[Page 44790]]

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