to employee benefit plans with respect to which they are fiduciaries. The Agencies are also granting a retroactive exemption with regard to transactions which have occurred since May 1, 1978. The exemption affects broker-dealers who provide services to employee benefit plans, and participants and beneficiaries of such plans. FOR FURTHER INFORMATION CONTACT: Daniel J. Shapiro, Esq., Office of the Solicitor, Plan Benefits Security Division, Room C4508, U.S. Department of Labor, 200 Constitution Avenue, N.W., Washington, D.C. 20210, (202) 523-7931;

INFORMA

SUPPLEMENTAL TION: On May 5, 1978, notice was published in the Federal Register (43 FR 19481), that the Agencies had under consideration a proposed extension until December 1, 1978, of a class exemption from the restrictions of section 406 of the Employee Retirement Income Security Act of 1974 (ERISA) [Pub. L. 93-406, 1974-3 С.В. 1, 48] and from the taxes imposed by section 4975(a) and (b) of the Internal Revenue Code of 1954 (the Code) by reason of section 4975(c) (1) of the Code. Specifically, the Agencies proposed an extension of paragraph I(a) of Prohibited Transaction Exemption 75-1 [1975-2 С.В. 543]; that portion of the exemption expired on May 1, 1978.1 The pertinent portion of Prohibited Transaction Exemption 75-1 relates to certain securities transactions effected on behalf of employee benefit plans by persons who are fiduciaries of the plan. The extension of the class exemption was requested in an application filed

Prohibited Transaction Exemption 75-1 was published in the Federal Register on October 31, 1975 (40 FR 50845).

by the Securities Industry Association (SIA). The Agencies have also received four applications for individual exemptions which might relate to this extension. To the extent that the transactions which are the subject of those applications are of the type described in this exemption, such transactions will be exempted if they satisfy the terms and conditions of this exemption.

In granting the pertinent portion of Exemption 75-1 in 1975, the Agencies determined that securities brokerdealers regularly provided research, information and advice concerning securities, and effected agency transactions for the purchase or sale of securities, in the ordinary course of their business as broker-dealers, and that the provision of a combination of such services by a fiduciary with regard to employee benefit plans would constitute prohibited transactions under ERISA and the Code unless a

statutory or administrative exemption

was

available. The Agencies took note that in the future most transactions by plan fiduciaries that would be covered by the relevant portion of Exemption 75-1 also would, in effect, be prohibited by section 11(a) of the Securities Exchange Act of 1934 (Exchange Act), as amended by the

Securities Acts Amendments Act of

1975 (Pub. L. 94-29, 89 Stat. 110). That section prohibits any member of a national securities exchange from effecting any transaction on such exchange for an account with respect to which it or an associated person thereof exercises investment discretion.

The Agencies noted also that section 11(a) of the Exchange Act provided an exception from the prohibition described above until May 1,

1978 for members of a national securities exchange who were members on May 1, 1975. The Conference Report relating to the Securities Acts Amendments of 1975 (H.R. Rep. No.

94-229, 94th Cong., 1st Sess. (1975)) had indicated, at page 107, that it was the view of the conferees that the Agencies should grant an exemption from the prohibited transaction provisions of the Act and the Code to permit broker-dealers to continue to provide brokerage services to plans with respect to which they exercised investment discretion until May 1, 1978, in order to conform the pertinent provisions of ERISA and the Code to section 11(a) of the Exchange Act and thereby permit brokerdealers to phase out, in an orderly fashion, the business of both serving as investment advisers to plans and providing brokerage services to such plans.3

Therefore, with respect to a person who was a plan fiduciary, Prohibited Transaction Exemption 75-1 provided, in part, an exemption for effecting securities transactions on behalf of employee benefit plans and for functions performed incidental to the effecting of such transactions. The pertinent part of the exemption was available whether or not the transaction was effected on a national securities exchange, but it applied only to persons effecting securities transactions on May 1, 1975 and it was available only until May 1, 1978. The availability of Prohibited Transaction Exemption 75-1 was also subject to certain other conditions.

In publishing the notice of the proposed extension of paragraph I(a) of Prohibited Transaction Exemption 75-1, the Agencies took note of, among other things, the fact that both houses of Congress had at that time passed bills which would postpone the full effectiveness of section 11(a) of the Exchange Act beyond May 1, 1978, although no such legislation had yet been enacted into law. The SIA had suggested that, in view of these and other developments, the Agencies

* See also Conference Report on ERISA, H.R. Rep. No. 93-1280, 93d Cong., 2d Sess. 309-10 (1974) [1974-3 С.В. 416].

should reconsider their earlier determination that the transactions described above should not be permitted after May 1, 1978.

The extension of the exemption was proposed in accordance with the procedure set forth in ERISA Procedures 75-1 (41 FR 18471, April 28, 1975) and Rev. Proc. 75-26, 1975-1 С.В. 722. Interested persons were invited to submit written comments on the proposed extension and the Agencies held a public hearing on the matter on June 12, 1978. Almost all of the persons filing written comments and appearing at the public hearing supported an extension of the pertinent portion of Prohibited Transaction Exemption 75-1.4

Commentators pointed out that, subsequent to issuance of notice of the proposed extension, Congress had passed and the President had signed a bill which amended section 11(a) of the Exchange Act to delay the full effectiveness of that section for nine months, from May 1, 1978 to February 1, 1979.5 It was argued that Congress, in enacting this amendment, had recognized that the relief afforded by the legislation would be available with respect to transactions effected for employee benefit plans only if the Agencies extended the exemption, and that Congress had expressed its expectation that the Agencies would provide such relief. It was also argued

*Most of the persons filing comments, and all of those appearing at the hearing, were broker-dealers or represntatives of broker-dealers.

* Pub. L. 95-283, 95th Cong. 2d Sess. (1978).

* In its report accompanying the bill, the Senate Committee stated:

In order to avoid confusion and undue disruption respecting securities transactions involving employee benefit plans subject to [ERISA], the Committee expects that [the Agencies] will act expeditiously to extend [Prohibited Transaction Exemption 75-1]. S. Rep. No. 95-763, 95th Cong. 2d Sess. 5-6 (1978).

Similarly, the House Committee stated:

The Committee believes that the continuation of [Exemption 75-1] would foster the objectives of this bill and would

that, if the prohibited transaction provisions of ERISA prevented broker-dealers who managed plan accounts from effecting transactions for the plans while at the same time the amended section 11 (a) of the Exchange Act permitted those brokerdealers to effect transactions for other types of accounts which they managed, there might be instances where it would be impossible for the brokerdealers to arrange purchases or sales of particular stocks for the plans at prices as favorable as those paid or received by the other accounts.

Additionally, in urging that the proposed extension be granted, many commentators contended that failure to adopt the extension would create disruption in existing arrangements for plans without any demonstrable benefit or protection for the plans.

The only commentator objecting to the proposed extension was the American Council of Life Insurance (ACLI). The ACLI suggested that the provision of both investment management and brokerage services by broker-dealers to plan accounts results in an unacceptable conflict of interest which is contrary to the intent of ERISA. Furthermore, the ACLI asserted that broker-dealers have had sufficient notice that the exemption would expire to enable them to make other arrangements regarding the multiple services previously performed for ERISA accounts.

After consideration of the written comments and the views presented at the hearing, the Agencies have decided that it would be appropriate to extend the pertinent portion of Prohibited Transaction Exemption 75-1 until the amended section 11(a) of the Exchange Act becomes fully ef

be consistent with the desire of the Congress that, to the maximum degree consistent with the policies of ERISA [the Agencies] conform those ERISA prohibitions applicable to securities firms and municipal securities dealers to the provisions and policies of the Exchange Act. H. Rep. No. 95-1010, 95th Cong. 2d Sess. 5 (1978).

fective on February 1, 1979. The Agencies have also determined to make the exemption retroactive to May 1, 1978. In adopting the original exemption until May 1, 1978, the Agencies noted that, in enacting ERISA, Congress had expressed its expectation that the Agencies would act consistently with any action taken by Congress in connection with the general issue of institutional investment management by brokers which was then under consideration. The Agencies' decision to adopt the original exemption was based largely upon this expression of congressional intent, coupled with a similar indication of congressional intent when Congress passed section 11(a) the following year. Similar considerations militate in favor of the extension now being granted until February 1, 1979.9

7

See Conference Report on ERISA, note 3, supra.

* See H.R. Rep. No. 94-229, 94th Cong., 1st Sess. 107 (1975).

• As noted earlier, the Agencies proposed to extend the exemption only until December 1, 1978. However, subsequent to publication of notice of the proposed extension, the legislation postponing the full effectiveness of section 11 (a) until February 1, 1979 was enacted. For the reasons discussed above, the Agencies believe that the expiration date of the exemption being granted herein should be the same as the corresponding date under section 11(a) as amended. On the other hand, the exemption being adopted herein, like the original one adopted in 1975, will be available with respect only to broker-dealers who were performing the described functions on behalf of a plan on May 1, 1975. This provision of the previous exemption corresponded to a provision of the original section 11(a) which limited the availability of the transitional relief provided in that section to broker-dealers who were members of a national securities exchange on May 1, 1975. Although this "grandfather" date was changed to February 1, 1978 in the amended section 11(a), the Agencies believe that it is appropriate to retain the original "grandfather" date of May 1, 1975 in the exemption. This is because, under the terms of the previous exemption, a broker-dealer who was not performing the described functions on May 1, 1975 on behalf of a plan could not, in the absence of an exemption, have performed such functions on behalf of a plan after the date without engaging in a prohibited transaction.

The Agencies note that certain commentators, in their submissions concerning the proposed exemption, suggested that the Agencies should revise their regulations concerning the definition of fiduciary under ERISA and the Code.10 Specifically, it has been suggested that the Agencies should take the position that a person who is an investment adviser to a plan is not, merely for that reason, a plan fiduciary if prior authorization for each transaction effected for the plan must be obtained from some other person. It is argued that, if such a definition of fiduciary were adopted, a brokerdealer which was a plan's investment adviser would be able to effect securities transactions for the plan without relying upon the class exemption being granted herein provided that each such transaction was approved in advance by another person who was a plan fiduciary, since in such cases the adviser would not be a fiduciary.11

The Agencies believe that such a definition of fiduciary would be inconsistent with section 3 (21) (A) (ii) of ERISA and section 4975(e) (3) (B) of the Code, relating to persons who are fiduciaries by reason of providing investment advice to plans. Nonetheless, the Agencies point out that a broker-dealer which provides investment advice to a plan and is therefore a fiduciary may, under certain circumstances, be able to effect brokerage transactions for the plan without relying upon the class exemption, provided that he/she obtains prior authorization from another plan fiduciary before effecting any such transaction. This is because, as the Agencies

have previously explained, 12 the regulations under section 408(b) (2) of ERISA and section 4975(d) (2) of the Code 13 provide, in effect, that a fiduciary does not engage in a transaction prohibited by section 406(b) (1) of ERISA and section 4975(c) (1) (E) of the Code if the fiduciary does not use any of the authority, control or responsibility which makes such person a fiduciary to cause a plan to pay additional fees for a service furnished by such fiduciary.

A broker-dealer-fiduciary would not be using any of the authority, control or responsibility which makes such person a fiduciary to cause the plan to retain him/her to effect a brokerage transaction for the plan, even if such fiduciary offered his/her services to effect the transaction for the plan, if he/she effected such a transaction only after receiving approval for the transaction from a secondary fiduciary who had no interest in the matter which might affect his/her best judgment as a fiduciary, and who was in possession of sufficient information to enable a reasonable plan fiduciary to reach an independent judgment as to whether the broker-dealer should effect the transaction.

The approving fiduciary, in order to make an independent judgment concerning which broker-dealer should be selected to effect a transaction, would have to possess information as to the size and complexity of the transaction, as well as any other factors which might affect such a selection, including the amount of the brokerage commission to be charged on the transaction and information related to the reasonableness of that commission in relation to the value of the brokerage services and any research services being provided, and in relation to what other brokers would

be expected to charge for similar services. 14

It should be emphasized that where a broker-dealer acts as an investment adviser in recommending securities transactions and a second fiduciary decides whether each such transaction should be entered into, both the broker-dealer and the approving fiduciary are under an obligation to comply with the general fiduciary responsibility requirements of section 404 of ERISA regarding the appropriateness of each such transaction. 15

General Information

The attention of interested persons is directed to the following:

(1) The fact that a transaction is the subject of an exemption granted under section 408(a) of ERISA and section 4975(c) (2) of the Code does not relieve a fiduciary of a plan to which the exemption is applicable from certain other provisions of ERISA, including any prohibited transaction provisions to which the exemption does not apply and the general fiduciary responsibility provisions of section 404 of ERISA which, among other things, require a fiduciary to discharge his duties with respect to the plan solely in the interest of the plan's participants and beneficiaries and in a prudent fashion in accordance with section 404(a) (1) (B) of ERISA.

(2) The exemption set forth herein is supplemental to, and not in derogation of, any other provisions of ERISA, including statutory exemptions and transitional rules. Further more, the fact that a transaction is subject to an administrative or statutory exemption is not dispositive of whether the transaction is in fact a prohibited transaction.

(3) The class exemption is applicable to a particular transaction only if the transaction satisfies the conditions specified in the class exemption.

(4) In accordance with section 408 (a) of ERISA and section 4975(c) (2) of the Code, and based upon the entire record, including the written comments submitted in response to the notice of May 5, 1978, and the hearing held on June 12, 1978, the Agencies make the following determinations:

(i) The class exemption set forth herein is administratively feasible;

(ii) It is in the interests of plans and of their participants and beneficiaries; and

(iii) It is protective of the rights of participants and beneficiaries of plans.

This document does not meet the criteria for significant regulations set forth in paragraph 8 of the proposed Treasury directive appearing in the Federal Register for Wednesday, May 24, 1978 (43 FR 22319).

Exemption

Accordingly, the following exemption is hereby granted under authority of section 408(a) of ERISA and section 4975(c) (2) of the Code and in accordance with the procedures set forth in ERISA Procedure 75-1 (40 FR 18471, April 28, 1975) and Rev. Proc. 75-26, 1975-1 С.В. 722:

Effective May 1, 1978, the restrictions of section 406 of the Employee

Retirement Income Security Act of 1974 and the taxes imposed by section 4975(a) and (b) of the Internal Revenue Code of 1954 (the Code), by reason of section 4975(c) (1) of the Code, shall not apply until February 1, 1979, to the effecting of any securities transaction on behalf of an employee benefit plan by a person who is a fiduciary with respect to the plan, acting in such transaction as agent for the plan, and to the performance by such person of clearance, settlement, or custodial functions incidental to effecting such transaction, if such person ordinarily and customarily effected such securities transactions and performed such functions on May 1, 1975. Signed at Washington, D.C. this 19th day of June 1978.

Prohibited Transaction
Exemption 78-11

DEPARTMENT OF

THE TREASURY

Internal Revenue Service
DEPARTMENT OF LABOR

Pension and Welfare
Benefit Programs

Exemption from the Prohibitions Respecting a Transaction Involving the Leo F. Quinn, P.A. Profit

Sharing Trust

AGENCIES: Department of the Treasury/Internal Revenue Service, Department of Labor.

ACTION: Grant of individual exemption.

SUMMARY: This exemption enables the Leo F. Quinn, P.A. Profit Sharing Trust (the Trust) to sell certain trust assets to Drs. Jacob L. Raney, Charles G. Dalbey and Leo F. Quinn, who are officers, directors, 10 percent or more shareholders and highly compensated employees of Leo F. Quinn, P.A. (the Employer).

FOR FURTHER INFORMATION

CONTACT: Timothy Smith of the Prohibited Transactions Staff of the Employee Plans Division, Internal Revenue Service, 1111 Constitution Avenue, N.W., Washington, D.C. 20224 (Attention: E:EP:PT:1) (202-566-6761). This is not a toll free number.

SUPPLEMENTARY
INFORMATION

On April 25, 1978, notice was published in the Federal Register (43 FR 17561) of the pendency before the Internal Revenue Service and the Department of Labor (the Agencies) of an exemption from the taxes imposed by section 4975 (a) and (b) of the Internal Revenue Code of 1954 (the Code) and from the provisions of section 406(a) (1) (A) and (D), 406(b) (1) and 406(b) (2) of the Employee Retirement Income Security Act of 1974 (the Act) [1974-3 C.B. 1, 48], for a transaction described in an application submitted by the Employer and the trustees of the Trust. The notice set forth a summary of the facts and representations contained in the application for exemption and referred interested persons to the application for a complete statement of the facts and representations. The application has been available for public inspection at the Agencies in Washington, D.C. The notice also invited interested persons to submit comments on the requested exemption to the Internal Revenue Service (the Service). In addition, the notice stated that any interested person might submit a written request that a hearing be held relating to this exemption. No public comments and no requests for a hearing were received by the Service.

GENERAL INFORMATION

The attention of interested persons is directed to the following:

(1) The fact that a transaction is the subject of an exemption granted under section 4975 (c) (2) of the Code

and section 408(a) of the Act does not relieve a fiduciary or party in interest or disqualified person with respect to a plan to which the exemption is applicable from certain other provisions of the Code and the Act. These provisions include any prohibited transaction provisions to which the exemption does not apply and the general fiducary responsibility provisions of section 404 of the Act, which among other things require a fiduciary to discharge his duties respecting the plan solely in the interests of the participants and beneficiaries of the plan and in a prudent fashion in accordance with subsection (a) (1) (B) of section 404 of the Act, nor does the fact the transaction is the subject of an exemption affect the requirement of section 401(a) of the Code that a plan must operate for the exclusive benefit of the employees of the employer maintaining the plan and their beneficiaries.

(2) This exemption does not extend to transactions prohibited under section 4975(c) (1) (F) of the Code and section 406(b) (3) of the Act.

(3) This exemption is supplemental to, and not in derogation of, any other provisions of the Code and the Act, including statutory or administrative exemptions and transitional rules. Furthermore, the fact that a transaction is subject to an administrative or statutory exemption or transitional rule is not dispositive of whether the transaction is in fact a prohibited transaction.

(4) This document does not meet the criteria for significant regulations set forth in paragraph 8 of the proposed Treasury directive appearing in the Federal Register for Wednesday, May 24, 1978 (43 FR 22319).

EXEMPTION

In accordance with section 4975 (c) (2) of the Code and section 408 (a) of the Act and the procedures set forth in Rev. Proc. 75-26, 1975-1 С.В.

722, and ERISA Proc. 75-1 (40 FR 18471, April 28, 1975), and based upon the entire record, the Agencies make the following determinations:

(a) The exemption is administratively feasible;

(b) It is in the interests of the Plan and of the participants and beneficiaries; and

(c) It is protective of the rights of participants and beneficiaries of the Plan.

Accordingly, the following exemption is hereby granted under the authority of section 4975 (c) (2) of the Code and section 408(a) of the Act and in accordance with the procedures set forth in Rev. Proc. 75-26 and ERISA Proc. 75-1.

The taxes imposed by section 4975 (a) and (b) of the Code by reason of section 4975(c) (1) (A), (D) and (E) of the Code and the restrictions of section 406(a) (1) (A) and (D), 406(b) (1) and 406(b) (2) of the Act shall not apply to a transaction involving the sale of approximately 1.18 acres of land located in Boca Raton, Palm Beach County, Florida by the Trust to Drs. Raney, Dalbey and Quinn for $90,000 cash, provided that this amount is not less than the fair market value of the property.

The availability of this exemption is subject to the express conditions that the material facts and representations contained in the application are true and complete and that the application accurately describes all material terms of the transaction consummated pursuant to the exemption.

Signed at Washington, D.C. this 24th day of July, 1978.

Prohibited Transaction Exemption 78-12

DEPARTMENT OF THE

TREASURY

Internal Revenue Service DEPARTMENT OF LABOR

Pension and Welfare Benefit Programs

AMERICAN MEDICAL
ASSOCIATION MEMBERS'
RETIREMENT PLAN

Exemption from the Prohibitions
Respecting a Transaction

AGENCIES: Department of the
Treasury/Internal Revenue Service,
Department of Labor

ACTION: Grant of individual exemption

SUMMARY: This exemption enables the American Medical Association (A.M.A.) to purchase certain parcels of real property from the American Medical Association Members' Retirement Plan (M.R.P.).

FOR FURTHER INFORMATION CONTACT: Gary H. Lefkowitz of the Prohibited Transactions Staff of the Employee Plans Division, Internal Revenue Service, 1111 Constitution Avenue, N.W., Washington, D.C. 20224 (attention: E:EP:PT:2), (202) 566-3045. (This is not a toll free number.)

SUPPLEMENTARY

INFORMATION: On June 13, 1978, notice was published in the Federal Register (43 FR 25513) of the pendency before the Internal Revenue Service and the Department of Labor (the Agencies) of an exemption from the taxes imposed by section 4975(a) and (b) of the Internal Revenue Code of 1954 (the Code) by reason of section 4975(c) (1) (A), (D), or (E) of the Code, and from provisions of sections 406(a) (1) (A) and (D) and 406(b) (1) and (2) of the Employee Retirement Income Security Act of 1974 (the Act) [Pub. L. 93-406, 1974-3 С.В. 1], for a transaction described in an application submitted by the A.M.A., the M.R.P., and the Harris Trust and Savings Bank (Harris Bank) of Chicago, Illinois. The notice set forth a summary of the facts and representations contained in the application for exemption and referred interested persons to