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115th Congress } { Rept. 115-894
HOUSE OF REPRESENTATIVES
2d Session } { Part 1
======================================================================
PROTECTING ADVICE FOR SMALL SAVERS ACT OF 2017
_______
August 10, 2018.--Ordered to be printed
_______
Mr. Hensarling, from the Committee on Financial Services, submitted the
following
R E P O R T
together with
MINORITY VIEWS
[To accompany H.R. 3857]
[Including cost estimate of the Congressional Budget Office]
The Committee on Financial Services, to whom was referred
the bill (H.R. 3857) to amend the Securities Exchange Act of
1934 to establish standards of conduct for brokers and dealers
that are in the best interest of their retail customers, having
considered the same, report favorably thereon without amendment
and recommend that the bill do pass.
Purpose and Summary
On September 27, 2017, Representative Ann Wagner introduced
the ``Protecting Advice for Small Savers Act of 2017'', or
``PASS Act'', which repeals the final rule of the U.S.
Department of Labor (DOL) titled ``Definition of the Term
`Fiduciary' Conflict of Interest Rule--Retirement Investment
Advice'' and related prohibited transaction exemptions
published on April 8, 2016. The bill also amends the second
subsection (k) of Section 15 of the Securities Exchange Act of
1934 to require a broker-dealer to act in the retail customer's
best interest when providing a recommendation, which must
reflect (i) reasonable diligence and (ii) the reasonable care,
skill, and prudence that a broker-dealer would exercise based
on the customer's investment profile. The bill also requires a
broker-dealer to provide increased disclosures to the customer
before the broker-dealer may purchase a securities product on
behalf of that customer, including disclosures regarding the
type and scope of services the broker-dealer provides, the
standard of conduct that applies to the relationship, the types
of compensation the broker-dealer receives, and any material
conflict of interest.
Background and Need for Legislation
On February 23, 2015, President Obama announced his support
for the DOL to issue rules--which is not the agency designated
by Congress to oversee and regulate investment advice regarding
securities--to amend the definition of ``investment advice'' to
expand the class of financial professionals subject to
fiduciary duties covered by the Employee Retirement Income
Security Act (ERISA) for the purpose of curbing the effects of
perceived conflicts of interest in the marketing and
development of retirement investments. In support of this
proposal, President Obama, the DOL, and investor advocates
claimed that: (i) current consumer protections for investment
advice in the retail and small retirement plan markets are
inadequate; and (ii) the current regulatory environment creates
perverse incentives that ultimately cost retirement savers
billions of dollars a year. According to President Obama's
White House, the DOL's proposal sought ``to crack down on
irresponsible behavior in today's market for financial advice
by better aligning the rules between employer-based retirement
savings plans and IRAs.''
The DOL estimated that conflicted advice by broker-dealers
costs retirees about $17 billion in lost returns annually. No
study directly supports this estimation, however; and the
number instead comes from a flawed calculation by the
proposal's proponents who couple unsupported generalizations
and extrapolations with other empirical data to reach a desired
result. At a September 10, 2015, joint hearing of the
Subcommittees on Capital Markets and Government Sponsored
Entities and Oversight and Investigations about the
consequences of the DOL's proposal, Paul Stevens, the CEO of
the Investment Company Institute, testified:
Regardless of the number used--$17 billion or $18
billion per year--the claims have no basis. The
calculations underlying these numbers misinterpret and
incorrectly apply the findings of the very same
academic research cited as the foundation of the
claims, and do not consider the significant harm to
retirement savers that is sure to result if the
Department adopts the rules as currently drafted. In
fact, these assertions do not stand up when tested
against actual experience and data. Correcting for the
Department's many errors and omissions, we find that
the Department's proposal, if adopted, will result in
net losses to investors of $109 billion over 10 years.
On April 20, 2015, the DOL issued a Notice of Proposed
Rulemaking that sought public comment on its proposed
amendments to the definition of a fiduciary and related
exemptions. The DOL received significant opposition to the
proposed rule, and many market participants believed that the
proposal was unworkable as drafted and could negatively impact
$17.6 trillion in retirement assets, harm investors, and
disrupt the U.S. capital markets. The DOL proposal, as drafted,
was not business-neutral and was grounded in the misguided
notion that for every investor charging fees based on the
amount of assets under management is superior in every respect
to charging commission-based fees.
Critics of the DOL proposal also pointed out that the
Securities and Exchange Commission (SEC) is the agency that
Congress designated to oversee and regulate the conduct of
persons providing investment advice and effecting securities
transactions in the United States. Title IX of the Dodd-Frank
Act provided authority to harmonize the standards applicable to
broker-dealers and investment advisers. Section 913 of the
Dodd-Frank Act required the SEC to report to the House
Financial Services and Senate Banking Committee on the
standards of care applicable to broker-dealers and investment
advisers. Additionally, Section 913 permits--but does not
require--the SEC to issue rules that address these standards of
care.
Accordingly, the DOL should not define how an investor
receives financial advice. On June 17, 2015, former Secretary
of Labor Thomas Perez testified before the House Committee on
Education and the Workforce that the DOL had coordinated with
the SEC in the development of the fiduciary duty proposal and
that the staffs of the two agencies had worked closely
throughout the drafting process. But former SEC Commissioner
Daniel Gallagher contradicted this assertion, who said in his
comment letter to the proposed rule that he was not included in
any conversations about the DOL rulemaking. Former Commissioner
Gallagher further commented that ``[f]rom a distance--a place
where a presidentially-appointed SEC Commissioner should not be
in this context--it appears that any interaction between staffs
at DOL and the SEC and all of these discussions with [then-SEC]
Chair White have borne no fruit.'' Further undermining
Secretary Perez's assertions is a February 2016 Senate Homeland
Security and Government Affairs staff report, which revealed
that DOL prioritized expediency in quickly issuing the
rulemaking over expressed policy concerns about the rule from
career, non-partisan professional staff at the SEC, regulatory
experts at the Office of Information and Regulatory Affairs
(OIRA) within the Office of Management and Budget (OMB), and
officials at the Department of Treasury. As noted above, the
proposed rule does not contemplate or even mention potential
SEC rules or the SEC's existing regime for regulating broker-
dealers and investment advisers.
Furthermore, Congress has mandated that any registered
broker or dealer must be a member of a registered securities
association--in this case, the Financial Industry Regulatory
Authority (FINRA). The federal securities laws and FINRA rules
comprehensively regulate all aspects of a broker-dealer's
business. Among the many requirements enforced by FINRA are
that broker-dealers deal fairly with customers, adhere to just
and equitable principles of trade, and ensure that
recommendations are suitable for customers. Broker-dealers also
must establish rigorous systems for compliance and supervision,
which are examined regularly by FINRA and the SEC--facts the
DOL ignored.
On February 3, 2017, President Trump signed an executive
memorandum that ordered the DOL to review its fiduciary rule
and whether it ``may adversely affect the ability of Americans
to gain access to retirement information and financial
advice.'' The rule's expanded fiduciary definition and
Impartial Conduct Standards went into effect on June 9, 2017,
and the remaining rule's requirements, such as the Best
Interest Contract exemption, has been delayed until July 1,
2019, while the DOL continues to review the rule.
If changes are necessary to the delivery of financial
advice, the capital markets regulatory authorities should
undertake the action necessary to address any perceived
inadequacies to protect investors of all sizes--not the DOL. On
June 1, 2017, Chairman Jay Clayton issued a request for public
comment regarding the standards of conduct applicable to
investment advisers and broker-dealers to assess the current
regulatory framework to guide any potential SEC regulatory
actions.
Several notable events occurred subsequent to the
Committee's action to report H.R. 3857 to the House with a
favorable recommendation. On March 15, 2018, the U.S. Court of
Appeals for the 5th Circuit ruled, in a 2-to-1 decision\1\,
that the DOL abused its authority and acted unreasonably in
promulgating its 2016 fiduciary rule and related exemptions.
The 5th Circuit's decision reversed a 2016 Texas district court
decision and vacated the fiduciary rule and related exemptions
in their entirety and on June 21, 2018, the 5th Circuit issued
its formal mandate to officially vacate the DOL rule.\2\
Furthermore, on April 18, 2018, the SEC voted to propose a
package of rulemakings and interpretations designed to enhance
the quality and transparency of investors' relationships with
investment advisers and broker-dealers while preserving access
to a variety of types of advice relationships and investment
products.\3\ Also known as ``Regulation Best Interest'', the
SEC's proposal would require a broker-dealer when making a
recommendation to a retail customer to act in the best interest
of that customer at the time the recommendation is made. Under
the proposed rule, the best-interest obligation would be
satisfied through disclosure; a duty of care requiring the
broker-dealer to exercise reasonable diligence, care, skill and
prudence when dealing with the customer; and two conflict of
interest obligations requiring the broker-dealer establish,
maintain, and enforce written policies and procedures and
disclose, mitigate, or eliminate material conflicts.
Additionally, broker-dealers would be required to issue Form
CRS to new customers outlining the summary of their financial
relationship. Form CRS would prohibit stand-alone broker-
dealers from using the titles ``adviser'' or ``advisor,'' which
the SEC deemed to be too similar to an ``investment adviser''
which has a separate fiduciary duty. Form CRS would require
financial advisors to provide investors with information
regarding the types of servicesoffered, fees the customers will
pay, and certain conflicts of interest that may exist. The
proposed rule was issued with a 90 day comment period.\4\
---------------------------------------------------------------------------
\1\Chamber of Commerce of the United States of America, et al. v.
United States Department of Labor, 2018 U.S. App. LEXIS 6472 (5th Cir.
2018).
\2\https://www.naifa.org/NAIFA/media/Communications/NAIFA-Blog/CA5-
Mandate.pdf.
\3\https://www.sec.gov/news/press-release/2018-68.
\4\https://www.sec.gov/rules/proposed/2018/34-83062.pdf.
---------------------------------------------------------------------------
With the 5th Circuit's ruling to vacate the DOL fiduciary
rule and the SEC actions to propose Regulation Best Interest,
the expert regulator is acting on the standards of conduct that
financial advisers adhere to regarding personalized investment
advice, following the will of Congress set forth in Dodd-Frank.
Hearings
The Committee on Financial Services' Subcommittee on
Financial Institutions held a hearing examining matters
relating to H.R. 3857 on April 26, 2017, April 28, 2017 and
July 13, 2017.
Committee Consideration
The Committee on Financial Services met in open session on
October 11, 2017, and October 12, 2017, and ordered H.R. 3857
to be reported favorably to the House by a recorded vote of 34
yeas to 26 nays (recorded vote no. FC-86), a quorum being
present.
Committee Votes
Clause 3(b) of rule XIII of the Rules of the House of
Representatives requires the Committee to list the record votes
on the motion to report legislation and amendments thereto. The
sole recorded vote was a motion by Chairman Hensarling to
report the bill favorably to the House. That motion was agreed
to by a recorded vote of 34 yeas to 26 nays (Record vote no.
FC-86), a quorum being present.
Committee Oversight Findings
Pursuant to clause 3(c)(1) of rule XIII of the Rules of the
House of Representatives, the findings and recommendations of
the committee based on oversight activities under clause
2(b)(1) of rule X of the Rules of the House of Representatives,
are incorporated in the descriptive portions of this report.
Performance Goals and Objectives
Pursuant to clause 3(c)(4) of rule XIII of the Rules of the
House of Representatives, the Committee states that H.R. 3857
will promote investor protection and ensure that individuals
have access to professional investment advice by creating a
best-interest standard that is appropriately designed for
broker dealers, that incorporates pre-existing regulatory
requirements and imposes additional requirements, and by re-
establishing the SEC as the expert regulator.
New Budget Authority, Entitlement Authority, and Tax Expenditures
In compliance with clause 3(c)(2) of rule XIII of the Rules
of the House of Representatives, the Committee adopts as its
own the estimate of new budget authority, entitlement
authority, or tax expenditures or revenues contained in the
cost estimate prepared by the Director of the Congressional
Budget Office pursuant to section 402 of the Congressional
Budget Act of 1974.
Congressional Budget Office Estimates
Pursuant to clause 3(c)(3) of rule XIII of the Rules of the
House of Representatives, the following is the cost estimate
provided by the Congressional Budget Office pursuant to section
402 of the Congressional Budget Act of 1974:
U.S. Congress,
Congressional Budget Office,
Washington, DC, December 11, 2017.
Hon. Jeb Hensarling,
Chairman, Committee on Financial Services,
House of Representatives, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for H.R. 3857, the PASS Act
of 2017.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Stephen
Rabent.
Sincerely,
Keith Hall,
Director.
Enclosure.
H.R. 3857--PASS Act of 2017
H.R. 3857 would repeal regulations issued by the Department
of Labor that are commonly referred to as the fiduciary rule
and would direct the Securities and Exchange Commission (SEC)
to develop a new standard to govern the conduct of brokers and
dealers. CBO estimates that implementing H.R. 3857 would have
an insignificant effect on the federal budget.
Under current law, brokers and dealers must act as
fiduciaries when they provide financial advice concerning
pension and retirement plans; that is, their advice must be in
the sole interest of the client. The Department of Labor issued
the fiduciary rule on April 8, 2016; some parts took effect on
June 9, 2017, and under current law, the rule takes full effect
on January 1, 2018. H.R. 3857 would reinstate previously
existing regulations.
H.R. 3857 also would amend the Securities Exchange Act of
1934 to establish a new standard of conduct for brokers and
dealers. Under the bill, brokers and dealers would be required
to make recommendations that are in the customer's best
interest at the time the recommendation is given. They also
would be required to make certain disclosures to customers
regarding the standard of conduct and possible conflicts of
interest. Under the bill, some individuals and financial
institutions that comply with those requirements would be
exempt from certain prohibitions on transactions under the
Employee Retirement Income Security Act of 1974 and the
Internal Revenue Code of 1986.
Using information from the SEC, CBO estimates that
implementing H.R. 3857 would cost $2 million over the 2018-2022
period for the agency to issue new guidance on the broker
dealer standard of conduct and to expand examination and
enforcement efforts to review compliance. However, because the
SEC is authorized to collect fees sufficient to offset its
annual appropriation, CBO estimates that the net effect on
discretionary spending would be negligible, assuming
appropriation actions consistent with that authority.
CBO and the staff of the Joint Committee on Taxation
estimate that the bill would have a negligible effect on
revenues over the 2018-2027 period. Because enacting H.R. 3857
would affect revenues, pay-as-you-go procedures apply. Enacting
H.R. 3857 would not affect direct spending.
CBO estimates that enacting H.R. 3857 would not increase
net direct spending or significantly affect on-budget deficits
in any of the four consecutive 10-year periods beginning in
2028.
H.R. 3857 contains no intergovernmental mandates as defined
in the Unfunded Mandates Reform Act (UMRA).
If the SEC increased fees to offset the costs of
implementing the additional regulatory activities required by
the bill, H.R. 3957 would increase the cost of an existing
mandate on private entities that are required to pay those
fees. Using information from the SEC, CBO estimates that the
increase in fees to offset those costs would amount to about $2
million over the 2018-2022 period and would fall well below the
annual threshold for private-sector mandates established in
UMRA ($156 million in 2017, adjusted annually for inflation).
On September 18, 2017, CBO transmitted a cost estimate of
H.R. 2823, the Affordable Retirement Advise for Savers Act, as
ordered reported by the House Committee on Education and the
Workforce on July 19, 2017. That bill has provisions similar to
those in H.R. 3857 and CBO's estimate of the budgetary effects
of those provisions are the same for both bills.
The CBO staff contacts for this estimate are Stephen Rabent
(for federal costs) and Logan Smith (for mandates). The
estimate was approved by H. Samuel Papenfuss, Deputy Assistant
Director for Budget Analysis.
Federal Mandates Statement
This information is provided in accordance with section 423
of the Unfunded Mandates Reform Act of 1995.
The Committee has determined that the bill does not contain
Federal mandates on the private sector. The Committee has
determined that the bill does not impose a Federal
intergovernmental mandate on State, local, or tribal
governments.
Advisory Committee Statement
No advisory committees within the meaning of section 5(b)
of the Federal Advisory Committee Act were created by this
legislation.
Applicability to Legislative Branch
The Committee finds that the legislation does not relate to
the terms and conditions of employment or access to public
services or accommodations within the meaning of the section
102(b)(3) of the Congressional Accountability Act.
Earmark Identification
With respect to clause 9 of rule XXI of the Rules of the
House of Representatives, the Committee has carefully reviewed
the provisions of the bill and states that the provisions of
the bill do not contain any congressional earmarks, limited tax
benefits, or limited tariff benefits within the meaning of the
rule.
Duplication of Federal Programs
In compliance with clause 3(c)(5) of rule XIII of the Rules
of the House of Representatives, the Committee states that no
provision of the bill establishes or reauthorizes: (1) a
program of the Federal Government known to be duplicative of
another Federal program; (2) a program included in any report
from the Government Accountability Office to Congress pursuant
to section 21 of Public Law 111-139; or (3) a program related
to a program identified in the most recent Catalog of Federal
Domestic Assistance, published pursuant to the Federal Program
Information Act (Pub. L. No. 95-220, as amended by Pub. L. No.
98-169).
Disclosure of Directed Rulemaking
Pursuant to section 3(k) of H. Res. 5, (115th Congress),
the following statement is made concerning directed
rulemakings: The Committee estimates that the bill requires no
directed rulemakings within the meaning of such section.
Section-by-Section Analysis of the Legislation
Section 1. Short title
This section cites H.R. 3857 as the ``Protecting Advice for
Small Savers Act of 2017'' or the ``PASS Act of 2017''.
Section 2. Repeal of Department of Labor fiduciary rule
This section repeals the Department of Labor final rule
titled ``Definition of the Term `Fiduciary' Conflict of
Interest Rule--Retirement Investment Advice'' published on
April 8, 2016.
Section 3. Standards of conduct for brokers and dealers
This section amends the second subsection (k) of section 15
of the Securities Exchange Act of 1934 by establishing a
standard of conduct for broker-dealers making recommendations
to retail customers. Broker-dealers must make a recommendation
that is in the best interest of the retail customer and that
reflects reasonable diligence and reasonable care, skill, and
prudence by a broker-dealer, based on the customer's investment
profile.
Additionally, the bill requires increased disclosures to
the retail customers before buying securities products on
behalf of the customer, including: the type and scope of
services the broker-dealer provides; the standard of conduct
that applies to the relationship; the types of compensation the
broker-dealer receives; and any material conflict of interest.
The bill also clarifies what is not a violation of the
standard of conduct, including: the receipt of compensation,
including transaction-based compensation, by a broker dealer;
the recommendation by a broker-dealer to a retail customer of
principal transactions; or the recommendation of affiliated,
unaffiliated, or proprietary products and services. The bill
does not contain a requirement that a broker-dealer recommend
the least expensive product.
The bill also states that complying with the new standard
of conduct does not mean that such a person is a ``fiduciary''
under the Employee Retirement Income Security Act of 1974
(ERISA), section 4975 of the Internal Revenue Code of 1986, the
Investment Advisers Act of 1940, or any other applicable
Federal, State or local regulatory regime.
Further, the bill amends section 913 of the Dodd-Frank Wall
Street Reform and Consumer Protection Act to establish the SEC
as the expert regulator for broker-dealers and the products
that they sell to customers and grants rulemaking authority to
the SEC to help facilitate compliance with the best-interest
standard, only if such rulemaking does not impose any
obligation that is in addition to, duplicative of, or
inconsistent with the standard as set out in the legislation.
The bill provides exemptions from ERISA and the Internal
Revenue Code to allow for State insurance regulators to adopt
and implement practices on a nationwide basis for the sale of
annuity contracts that is similar to the standard of conduct.
Changes in Existing Law Made by the Bill, as Reported
In compliance with clause 3(e) of rule XIII of the Rules of
the House of Representatives, changes in existing law made by
the bill, as reported, are shown as follows (existing law
proposed to be omitted is enclosed in black brackets, new
matter is printed in italic, and existing law in which no
change is proposed is shown in roman):
SECURITIES EXCHANGE ACT OF 1934
TITLE I--REGULATION OF SECURITIES EXCHANGES
* * * * * * *
registration and regulation of brokers and dealers
Sec. 15. (a)(1) It shall be unlawful for any broker or dealer
which is either a person other than a natural person or a
natural person not associated with a broker or dealer which is
a person other than a natural person (other than such a broker
or dealer whose business is exclusively intrastate and who does
not make use of any facility of a national securities exchange)
to make use of the mails or any means or instrumentality of
interstate commerce to effect any transactions in, or to induce
or attempt to induce the purchase or sale of, any security
(other than an exempted security or commercial paper, bankers'
acceptances, or commercial bills) unless such broker or dealer
is registered in accordance with subsection (b) of this
section.
(2) The Commission, by rule or order, as it deems consistent
with the public interest and the protection of investors, may
conditionally or unconditionally exempt from paragraph (1) of
this subsection any broker or dealer or class of brokers or
dealers specified in such rule or order.
(b)(1) A broker or dealer may be registered by filing with
the Commission an application for registration in such form and
containing such information and documents concerning such
broker or dealer and any persons associated with such broker or
dealer as the Commission, by rule, may prescribe as necessary
or appropriate in the public interest or for the protection of
investors. Within forty-five days of the date of the filing of
such application (or within such longer period as to which the
applicant consents), the Commission shall--
(A) by order grant registration, or
(B) institute proceedings to determine whether
registration should be denied. Such proceedings shall
include notice of the grounds for denial under
consideration and opportunity for hearing and shall be
concluded within one hundred twenty days of the date of
the filing of the application for registration. At the
conclusion of such proceedings, the Commission, by
order, shall grant or deny such registration. The
Commission may extend the time for conclusion of such
proceedings for up to ninety days if it finds good
cause for such extension and publishes its reasons for
so finding or for such longer period as to which the
applicant consents.
The Commission shall grant such registration if the Commission
finds that the requirements of this section are satisfied. The
order granting registration shall not be effective until such
broker or dealer has become a member of a registered securities
association, or until such broker or dealer has become a member
of a national securities exchange, if such broker or dealer
effects transactions solely on that exchange, unless the
Commission has exempted such broker or dealer, by rule or
order, from such membership. The Commission shall deny such
registration if it does not make such a finding or if it finds
that if the applicant were so registered, its registration
would be subject to suspension or revocation under paragraph
(4) of this subsection.
(2)(A) An application for registration of a broker or dealer
to be formed or organized may be made by a broker or dealer to
which the broker or dealer to be formed or organized is to be
the successor. Such application, in such form as the
Commission, by rule, may prescribe, shall contain such
information and documents concerning the applicant, the
successor, and any persons associated with the applicant or the
successor, as the Commission, by rule, may prescribe as
necessary or appropriate in the public interest or for the
protection of investors. The grant or denial of registration to
such an applicant shall be in accordance with the procedures
set forth in paragraph (1) of this subsection. If the
Commission grants such registration, the registration shall
terminate on the forty-fifth day after the effective date
thereof, unless prior thereto the successor shall, in
accordance with such rules and regulations as the Commission
may prescribe, adopt the application for registration as its
own.
(B) Any person who is a broker or dealer solely by reason of
acting as a municipal securities dealer or municipal securities
broker, who so acts through a separately identifiable
department or division, and who so acted in such a manner on
the date of enactment of the Securities Acts Amendments of
1975, may, in accordance with such terms and conditions as the
Commission, by rule, prescribes as necessary and appropriate in
the public interest and for the protection of investors,
register such separately identifiable department or division in
accordance with this subsection. If any such department or
division is so registered, the department or division and not
such person himself shall be the broker or dealer for purposes
of this title.
(C) Within six months of the date of the granting of
registration to a broker or dealer, the Commission, or upon the
authorization and direction of the Commission, a registered
securities association or national securities exchange of which
such broker or dealer is a member, shall conduct an inspection
of the broker or dealer to determine whether it is operating in
conformity with the provisions of this title and the rules and
regulations thereunder: Provided, however, That the Commission
may delay such inspection of any class of brokers or dealers
for a period not to exceed six months.
(3) Any provision of this title (other than section 5 and
subsection (a) of this section) which prohibits any act,
practice, or course of business if the mails or any means or
instrumentality of interstate commerce is used in connection
therewith shall also prohibit any such act, practice, or course
of business by any registered broker or dealer or any person
acting on behalf of such a broker or dealer, irrespective of
any use of the mails or any means or instrumentality of
interstate commerce in connection therewith.
(4) The Commission, by order, shall censure, place
limitations on the activities, functions, or operations of,
suspend for a period not exceeding twelve months, or revoke the
registration of any broker or dealer if it finds, on the record
after notice and opportunity for hearing, that such censure,
placing of limitations, suspension, or revocation is in the
public interest and that such broker or dealer, whether prior
or subsequent to becoming such, or any person associated with
such broker or dealer, whether prior or subsequent to becoming
so associated--
(A) has willfully made or caused to be made in any
application for registration or report required to be
filed with the Commission or with any other appropriate
regulatory agency under this title, or in any
proceeding before the Commission with respect to
registration, any statement which was at the time and
in the light of the circumstances under which it was
made false or misleading with respect to any material
fact, or has omitted to state in any such application
or report any material fact which is required to be
stated therein.
(B) has been convicted within ten years preceding the
filing of any application for registration or at any
time thereafter of any felony or misdemeanor or of a
substantially equivalent crime by a foreign court of
competent jurisdiction which the Commission finds--
(i) involves the purchase or sale of any
security, the taking of a false oath, the
making of a false report, bribery, perjury,
burglary, any substantially equivalent activity
however denominated by the laws of the relevant
foreign government, or conspiracy to commit any
such offense;
(ii) arises out of the conduct of the
business of a broker, dealer, municipal
securities dealer municipal advisor,,
government securities broker, government
securities dealer, investment adviser, bank,
insurance company, fiduciary, transfer agent,
nationally recognized statistical rating
organization, foreign person performing a
function substantially equivalent to any of the
above, or entity or person required to be
registered under the Commodity Exchange Act (7
U.S.C. 1 et seq.) or any substantially
equivalent foreign statute or regulation;
(iii) involves the larceny, theft, robbery,
extortion, forgery, counterfeiting, fraudulent
concealment, embezzlement, fraudulent
conversion, or misappropriation of funds, or
securities, or substantially equivalent
activity however denominated by the laws of the
relevant foreign government; or
(iv) involves the violation of section 152,
1341, 1342, or 1343 or chapter 25 or 47 of
title 18, United States Code, or a violation of
a substantially equivalent foreign statute.
(C) is permanently or temporarily enjoined by order,
judgment, or decree of any court of competent
jurisdiction from acting as an investment adviser,
underwriter, broker, dealer, municipal securities
dealer municipal advisor,, government securities
broker, government securities dealer, security-based
swap dealer, major security-based swap participant,
transfer agent, nationally recognized statistical
rating organization, foreign person performing a
function substantially equivalent to any of the above,
or entity or person required to be registered under the
Commodity Exchange Act or any substantially equivalent
foreign statute or regulation, or as an affiliated
person or employee of any investment company, bank,
insurance company, foreign entity substantially
equivalent to any of the above, or entity or person
required to be registered under the Commodity Exchange
Act or any substantially equivalent foreign statute or
regulation, or from engaging in or continuing any
conduct or practice in connection with any such
activity, or in connection with the purchase or sale of
any security.
(D) has willfully violated any provision of the
Securities Act of 1933, the Investment Advisers Act of
1940, the Investment Company Act of 1940, the Commodity
Exchange Act, this title, the rules or regulations
under any of such statutes, or the rules of the
Municipal Securities Rulemaking Board, or is unable to
comply with any such provision.
(E) has willfully aided, abetted, counseled,
commanded, induced, or procured the violation by any
other person of any provision of the Securities Act of
1933, the Investment Advisers Act of 1940, the
Investment Company Act of 1940, the Commodity Exchange
Act, this title, the rules or regulations under any of
such statutes, or the rules of the Municipal Securities
Rulemaking Board, or has failed reasonably to
supervise, with a view to preventing violations of the
provisions of such statutes, rules, and regulations,
another person who commits such a violation, if such
other person is subject to his supervision. For the
purposes of this subparagraph (E) no person shall be
deemed to have failed reasonably to supervise any other
person, if--
(i) there have been established procedures,
and a system for applying such procedures,
which would reasonably be expected to prevent
and detect, insofar as practicable, any such
violation by such other person, and
(ii) such person has reasonably discharged
the duties and obligations incumbent upon him
by reason of such procedures and system without
reasonable cause to believe that such
procedures and system were not being complied
with.
(F) is subject to any order of the Commission barring
or suspending the right of the person to be associated
with a broker, dealer, security-based swap dealer, or a
major security-based swap participant;
(G) has been found by a foreign financial regulatory
authority to have--
(i) made or caused to be made in any
application for registration or report required
to be filed with a foreign financial regulatory
authority, or in any proceeding before a
foreign financial regulatory authority with
respect to registration, any statement that was
at the time and in the light of the
circumstances under which it was made false or
misleading with respect to any material fact,
or has omitted to state in any application or
report to the foreign financial regulatory
authority any material fact that is required to
be stated therein;
(ii) violated any foreign statute or
regulation regarding transactions in
securities, or contracts of sale of a commodity
for future delivery, traded on or subject to
the rules of a contract market or any board of
trade;
(iii) aided, abetted, counseled, commanded,
induced, or procured the violation by any
person of any provision of any statutory
provisions enacted by a foreign government, or
rules or regulations thereunder, empowering a
foreign financial regulatory authority
regarding transactions in securities, or
contracts of sale of a commodity for future
delivery, traded on or subject to the rules of
a contract market or any board of trade, or has
been found, by a foreign financial regulatory
authority, to have failed reasonably to
supervise, with a view to preventing violations
of such statutory provisions, rules, and
regulations, another person who commits such a
violation, if such other person is subject to
his supervision; or
(H) is subject to any final order of a State
securities commission (or any agency or officer
performing like functions), State authority that
supervises or examines banks, savings associations, or
credit unions, State insurance commission (or any
agency or office performing like functions), an
appropriate Federal banking agency (as defined in
section 3 of the Federal Deposit Insurance Act (12
U.S.C. 1813(q))), or the National Credit Union
Administration, that--
(i) bars such person from association with an
entity regulated by such commission, authority,
agency, or officer, or from engaging in the
business of securities, insurance, banking,
savings association activities, or credit union
activities; or
(ii) constitutes a final order based on
violations of any laws or regulations that
prohibit fraudulent, manipulative, or deceptive
conduct.
(5) Pending final determination whether any registration
under this subsection shall be revoked, the Commission, by
order, may suspend such registration, if such suspension
appears to the Commission, after notice and opportunity for
hearing, to be necessary or appropriate in the public interest
or for the protection of investors. Any registered broker or
dealer may, upon such terms and conditions as the Commission
deems necessary or appropriate in the public interest or for
the protection of investors, withdraw from registration by
filing a written notice of withdrawal with the Commission. If
the Commission finds that any registered broker or dealer is no
longer in existence or has ceased to do business as a broker or
dealer, the Commission, by order, shall cancel the registration
of such broker or dealer.
(6)(A) With respect to any person who is associated, who is
seeking to become associated, or, at the time of the alleged
misconduct, who was associated or was seeking to become
associated with a broker or dealer, or any person
participating, or, at the time of the alleged misconduct, who
was participating, in an offering of any penny stock, the
Commission, by order, shall censure, place limitations on the
activities or functions of such person, or suspend for a period
not exceeding 12 months, or bar any such person from being
associated with a broker, dealer, investment adviser, municipal
securities dealer, municipal advisor, transfer agent, or
nationally recognized statistical rating organization, or from
participating in an offering of penny stock, if the Commission
finds, on the record after notice and opportunity for a
hearing, that such censure, placing of limitations, suspension,
or bar is in the public interest and that such person--
(i) has committed or omitted any act, or is subject
to an order or finding, enumerated in subparagraph (A),
(D), (E), (H), or (G) of paragraph (4) of this
subsection;
(ii) has been convicted of any offense specified in
subparagraph (B) of such paragraph (4) within 10 years
of the commencement of the proceedings under this
paragraph; or
(iii) is enjoined from any action, conduct, or
practice specified in subparagraph (C) of such
paragraph (4).
(B) It shall be unlawful--
(i) for any person as to whom an order under
subparagraph (A) is in effect, without the consent of
the Commission, willfully to become, or to be,
associated with a broker or dealer in contravention of
such order, or to participate in an offering of penny
stock in contravention of such order;
(ii) for any broker or dealer to permit such a
person, without the consent of the Commission, to
become or remain, a person associated with the broker
or dealer in contravention of such order, if such
broker or dealer knew, or in the exercise of reasonable
care should have known, of such order; or
(iii) for any broker or dealer to permit such a
person, without the consent of the Commission, to
participate in an offering of penny stock in
contravention of such order, if such broker or dealer
knew, or in the exercise of reasonable care should have
known, of such order and of such participation.
(C) For purposes of this paragraph, the term ``person
participating in an offering of penny stock'' includes any
person acting as any promoter, finder, consultant, agent, or
other person who engages in activities with a broker, dealer,
or issuer for purposes of the issuance or trading in any penny
stock, or inducing or attempting to induce the purchase or sale
of any penny stock. The Commission may, by rule or regulation,
define such term to include other activities, and may, by rule,
regulation, or order, exempt any person or class of persons, in
whole or in part, conditionally or unconditionally, from such
term.
(7) No registered broker or dealer or government securities
broker or government securities dealer registered (or required
to register) under section 15C(a)(1)(A) shall effect any
transaction in, or induce the purchase or sale of, any security
unless such broker or dealer meets such standards of
operational capability and such broker or dealer and all
natural persons associated with such broker or dealer meet such
standards of training, experience, competence, and such other
qualifications as the Commission finds necessary or appropriate
in the public interest or for the protection of investors. The
Commission shall establish such standards by rules and
regulations, which may--
(A) specify that all or any portion of such standards
shall be applicable to any class of brokers and dealers
and persons associated with brokers and dealers;
(B) require persons in any such class to pass tests
prescribed in accordance with such rules and
regulations, which tests shall, with respect to any
class of partners, officers, or supervisory employees
(which latter term may be defined by the Commission's
rules and regulations and as so defined shall include
branch managers of brokers or dealers) engaged in the
management of the broker or dealer, include questions
relating to bookkeeping, accounting, internal control
over cash and securities, supervision of employees,
maintenance of records, and other appropriate matters;
and
(C) provide that persons in any such class other than
brokers and dealers and partners, officers, and
supervisory employees of brokers or dealers, may be
qualified solely on the basis of compliance with such
standards of training and such other qualifications as
the Commission finds appropriate.
The Commission, by rule, may prescribe reasonable fees and
charges to defray its costs in carrying out this paragraph,
including, but not limited to, fees for any test administered
by it or under its direction. The Commission may cooperate with
registered securities associations and national securities
exchanges in devising and administering tests and may require
registered brokers and dealers and persons associated with such
brokers and dealers to pass tests administered by or on behalf
of any such association or exchange and to pay such association
or exchange reasonable fees or charges to defray the costs
incurred by such association or exchange in administering such
tests.
(8) It shall be unlawful for any registered broker or dealer
to effect any transaction in, or induce or attempt to induce
the purchase or sale of, any security (other than or commercial
paper, bankers' acceptances, or commercial bills), unless such
broker or dealer is a member of a securities association
registered pursuant to section 15A of this title or effects
transactions in securities solely on a national securities
exchange of which it is a member.
(9) The Commission by rule or order, as it deems consistent
with the public interest and the protection of investors, may
conditionally or unconditionally exempt from paragraph (8) of
this subsection any broker or dealer or class of brokers or
dealers specified in such rule or order.
(10) For the purposes of determining whether a person is
subject to a statutory disqualification under section 6(c)(2),
15A(g)(2), or 17A(b)(4)(A) of this title, the term
``Commission'' in paragraph (4)(B) of this subsection shall
mean ``exchange'', ``association'', or ``clearing agency'',
respectively.
(11) Broker/dealer registration with respect to
transactions in security futures products.--
(A) Notice registration.--
(i) Contents of notice.--
Notwithstanding paragraphs (1) and (2),
a broker or dealer required to register
only because it effects transactions in
security futures products on an
exchange registered pursuant to section
6(g) may register for purposes of this
section by filing with the Commission a
written notice in such form and
containing such information concerning
such broker or dealer and any persons
associated with such broker or dealer
as the Commission, by rule, may
prescribe as necessary or appropriate
in the public interest or for the
protection of investors. A broker or
dealer may not register under this
paragraph unless that broker or dealer
is a member of a national securities
association registered under section
15A(k).
(ii) Immediate effectiveness.--Such
registration shall be effective
contemporaneously with the submission
of notice, in written or electronic
form, to the Commission, except that
such registration shall not be
effective if the registration would be
subject to suspension or revocation
under paragraph (4).
(iii) Suspension.--Such registration
shall be suspended immediately if a
national securities association
registered pursuant to section 15A(k)
of this title suspends the membership
of that broker or dealer.
(iv) Termination.--Such registration
shall be terminated immediately if any
of the above stated conditions for
registration set forth in this
paragraph are no longer satisfied.
(B) Exemptions for registered brokers and
dealers.--A broker or dealer registered
pursuant to the requirements of subparagraph
(A) shall be exempt from the following
provisions of this title and the rules
thereunder with respect to transactions in
security futures products:
(i) Section 8.
(ii) Section 11.
(iii) Subsections (c)(3) and (c)(5)
of this section.
(iv) Section 15B.
(v) Section 15C.
(vi) Subsections (d), (e), (f), (g),
(h), and (i) of section 17.
(12) Exemption for security futures product exchange
members.--
(A) Registration exemption.--A natural person
shall be exempt from the registration
requirements of this section if such person--
(i) is a member of a designated
contract market registered with the
Commission as an exchange pursuant to
section 6(g);
(ii) effects transactions only in
securities on the exchange of which
such person is a member; and
(iii) does not directly accept or
solicit orders from public customers or
provide advice to public customers in
connection with the trading of security
futures products.
(B) Other exemptions.--A natural person
exempt from registration pursuant to
subparagraph (A) shall also be exempt from the
following provisions of this title and the
rules thereunder:
(i) Section 8.
(ii) Section 11.
(iii) Subsections (c)(3), (c)(5), and
(e) of this section.
(iv) Section 15B.
(v) Section 15C.
(vi) Subsections (d), (e), (f), (g),
(h), and (i) of section 17.
(c)(1)(A) No broker or dealer shall make use of the mails or
any means or instrumentality of interstate commerce to effect
any transaction in, or to induce or attempt to induce the
purchase or sale of, any security (other than commercial paper,
bankers' acceptances, or commercial bills), or any security-
based swap agreement by means of any manipulative, deceptive,
or other fraudulent device or contrivance.
(B) No broker, dealer, or municipal securities dealer shall
make use of the mails or any means or instrumentality of
interstate commerce to effect any transaction in, or to induce
or attempt to induce the purchase or sale of, any municipal
security or any security-based swap agreement involving a
municipal security by means of any manipulative, deceptive, or
other fraudulent device or contrivance.
(C) No government securities broker or government securities
dealer shall make use of the mails or any means or
instrumentality of interstate commerce to effect any
transaction in, or to induce or to attempt to induce the
purchase or sale of, any government security or any security-
based swap agreement involving a government security by means
of any manipulative, deceptive, or other fraudulent device or
contrivance.
(2)(A) No broker or dealer shall make use of the mails or any
means or instrumentality of interstate commerce to effect any
transaction in, or to induce or attempt to induce the purchase
or sale of, any security (other than an exempted security or
commercial paper, bankers' acceptances, or commercial bills)
otherwise than on a national securities exchange of which it is
a member, in connection with which such broker or dealer
engages in any fraudulent, deceptive, or manipulative act or
practice, or makes any fictitious quotation.
(B) No broker, dealer, or municipal securities dealer shall
make use of the mails or any means or instrumentality of
interstate commerce to effect any transaction in, or to induce
or attempt to induce the purchase or sale of, any municipal
security in connection with which such broker, dealer, or
municipal securities dealer engages in any fraudulent,
deceptive, or manipulative act or practice, or makes any
fictitious quotation.
(C) No government securities broker or government securities
dealer shall make use of the mails or any means or
instrumentality of interstate commerce to effect any
transaction in, or induce or attempt to induce the purchase or
sale of, any government security in connection with which such
government securities broker or government securities dealer
engages in any fraudulent, deceptive, or manipulative act or
practice, or makes any fictitious quotation.
(D) The Commission shall, for the purposes of this paragraph,
by rules and regulations define, and prescribe means reasonably
designed to prevent, such acts and practices as are fraudulent,
deceptive, or manipulative and such quotations as are
fictitious.
(E) The Commission shall, prior to adopting any rule or
regulation under subparagraph (C), consult with and consider
the views of the Secretary of the Treasury and each appropriate
regulatory agency. If the Secretary of the Treasury or any
appropriate regulatory agency comments in writing on a proposed
rule or regulation of the Commission under such subparagraph
(C) that has been published for comment, the Commission shall
respond in writing to such written comment before adopting the
proposed rule. If the Secretary of the Treasury determines, and
notifies the Commission, that such rule or regulation, if
implemented, would, or as applied does (i) adversely affect the
liquidity or efficiency of the market for government
securities; or (ii) impose any burden on competition not
necessary or appropriate in furtherance of the purposes of this
section, the Commission shall, prior to adopting the proposed
rule or regulation, find that such rule or regulation is
necessary and appropriate in furtherance of the purposes of
this section notwithstanding the Secretary's determination.
(3)(A) No broker or dealer (other than a government
securities broker or government securities dealer, except a
registered broker or dealer) shall make use of the mails or any
means or instrumentality of interstate commerce to effect any
transaction in, or to induce or attempt to induce the purchase
or sale of, any security (other than an exempted security
(except a government security) or commercial paper, bankers'
acceptances, or commercial bills) in contravention of such
rules and regulations as the Commission shall prescribe as
necessary or appropriate in the public interest or for the
protection of investors to provide safeguards with respect to
the financial responsibility and related practices of brokers
and dealers including, but not limited to, the acceptance of
custody and use of customers' securities and the carrying and
use of customers' deposits or credit balances. Such rules and
regulations shall (A) require the maintenance of reserves with
respect to customers' deposits or credit balances, and (B) no
later than September 1, 1975, establish minimum financial
responsibility requirements for all brokers and dealers.
(B) Consistent with this title, the Commission, in
consultation with the Commodity Futures Trading Commission,
shall issue such rules, regulations, or orders as are necessary
to avoid duplicative or conflicting regulations applicable to
any broker or dealer registered with the Commission pursuant to
section 15(b) (except paragraph (11) thereof), that is also
registered with the Commodity Futures Trading Commission
pursuant to section 4f(a) of the Commodity Exchange Act (except
paragraph (2) thereof), with respect to the application of: (i)
the provisions of section 8, section 15(c)(3), and section 17
of this title and the rules and regulations thereunder related
to the treatment of customer funds, securities, or property,
maintenance of books and records, financial reporting, or other
financial responsibility rules, involving security futures
products; and (ii) similar provisions of the Commodity Exchange
Act and rules and regulations thereunder involving security
futures products.
(C) Notwithstanding any provision of sections
2(a)(1)(C)(i) or 4d(a)(2) of the Commodity Exchange Act
and the rules and regulations thereunder, and pursuant
to an exemption granted by the Commission under section
36 of this title or pursuant to a rule or regulation,
cash and securities may be held by a broker or dealer
registered pursuant to subsection (b)(1) and also
registered as a futures commission merchant pursuant to
section 4f(a)(1) of the Commodity Exchange Act, in a
portfolio margining account carried as a futures
account subject to section 4d of the Commodity Exchange
Act and the rules and regulations thereunder, pursuant
to a portfolio margining program approved by the
Commodity Futures Trading Commission, and subject to
subchapter IV of chapter 7 of title 11 of the United
States Code and the rules and regulations thereunder.
The Commission shall consult with the Commodity Futures
Trading Commission to adopt rules to ensure that such
transactions and accounts are subject to comparable
requirements to the extent practicable for similar
products.
(4) If the Commission finds, after notice and opportunity for
a hearing, that any person subject to the provisions of section
12, 13, 14, or subsection (d) of section 15 of this title or
any rule or regulation thereunder has failed to comply with any
such provision, rule, or regulation in any material respect,
the Commission may publish its findings and issue an order
requiring such person, and any person who was a cause of the
failure to comply due to an act or omission the person knew or
should have known would contribute to the failure to comply, to
comply, or to take steps to effect compliance, with such
provision or such rule or regulation thereunder upon such terms
and conditions and within such time as the Commission may
specify in such order.
(5) No dealer (other than a specialist registered on a
national securities exchange) acting in the capacity of market
maker or otherwise shall make use of the mails or any means or
instrumentality of interstate commerce to effect any
transaction in, or to induce or attempt to induce the purchase
or sale of, any security (other than an exempted security or a
municipal security) in contravention of such specified and
appropriate standards with respect to dealing as the
Commission, by rule, shall prescribe as necessary or
appropriate in the public interest and for the protection of
investors, to maintain fair and orderly markets, or to remove
impediments to and perfect the mechanism of a national market
system. Under the rules of the Commission a dealer in a
security may be prohibited from acting as broker in that
security.
(6) No broker or dealer shall make use of the mails or any
means or instrumentality of interstate commerce to effect any
transaction in, or to induce or attempt to induce the purchase
or sale of, any security (other than an exempted security,
municipal security, commercial paper, bankers' acceptances, or
commercial bills) in contravention of such rules and
regulations as the Commission shall prescribe as necessary or
appropriate in the public interest and for the protection of
investors or to perfect or remove impediments to a national
system for the prompt and accurate clearance and settlement of
securities transactions, with respect to the time and method
of, and the form and format of documents used in connection
with, making settlements of and payments for transactions in
securities, making transfers and deliveries of securities, and
closing accounts. Nothing in this paragraph shall be construed
(A) to affect the authority of the Board of Governors of the
Federal Reserve System, pursuant to section 7 of this title, to
prescribe rules and regulations for the purpose of preventing
the excessive use of credit for the purchase or carrying of
securities, or (B) to authorize the Commission to prescribe
rules or regulations for such purpose.
(7) In connection with any bid for or purchase of a
government security related to an offering of government
securities by or on behalf of an issuer, no government
securities broker, government securities dealer, or bidder for
or purchaser of securities in such offering shall knowingly or
willfully make any false or misleading written statement or
omit any fact necessary to make any written statement made not
misleading.
(8) Prohibition of referral fees.--No broker or dealer, or
person associated with a broker or dealer, may solicit or
accept, directly or indirectly, remuneration for assisting an
attorney in obtaining the representation of any person in any
private action arising under this title or under the Securities
Act of 1933.
(d) Supplementary and Periodic Information.--
(1) In general.--Each issuer which has filed a
registration statement containing an undertaking which
is or becomes operative under this subsection as in
effect prior to the date of enactment of the Securities
Acts Amendments of 1964, and each issuer which shall
after such date file a registration statement which has
become effective pursuant to the Securities Act of
1933, as amended, shall file with the Commission, in
accordance with such rules and regulations as the
Commission may prescribe as necessary or appropriate in
the public interest or for the protection of investors,
such supplementary and periodic information, documents,
and reports as may be required pursuant to section 13
of this title in respect of a security registered
pursuant to section 12 of this title. The duty to file
under this subsection shall be automatically suspended
if and so long as any issue of securities of such
issuer is registered pursuant to section 12 of this
title. The duty to file under this subsection shall
also be automatically suspended as to any fiscal year,
other than the fiscal year within which such
registration statement became effective, if, at the
beginning of such fiscal year, the securities of each
class, other than any class of asset-backed securities,
to which the registration statement relates are held of
record by less than 300 persons, or, in the case of a
bank, a savings and loan holding company (as defined in
section 10 of the Home Owners' Loan Act), or a bank
holding company, as such term is defined in section 2
of the Bank Holding Company Act of 1956 (12 U.S.C.
1841), 1,200 persons persons. For the purposes of this
subsection, the term ``class'' shall be construed to
include all securities of an issuer which are of
substantially similar character and the holders of
which enjoy substantially similar rights and
privileges. The Commission may, for the purpose of this
subsection, define by rules and regulations the term
``held of record'' as it deems necessary or appropriate
in the public interest or for the protection of
investors in order to prevent circumvention of the
provisions of this subsection. Nothing in this
subsection shall apply to securities issued by a
foreign government or political subdivision thereof.
(2) Asset-backed securities.--
(A) Suspension of duty to file.--The
Commission may, by rule or regulation, provide
for the suspension or termination of the duty
to file under this subsection for any class of
asset-backed security, on such terms and
conditions and for such period or periods as
the Commission deems necessary or appropriate
in the public interest or for the protection of
investors.
(B) Classification of issuers.--The
Commission may, for purposes of this
subsection, classify issuers and prescribe
requirements appropriate for each class of
issuers of asset-backed securities.
(e) Notices to Customers Regarding Securities Lending.--Every
registered broker or dealer shall provide notice to its
customers that they may elect not to allow their fully paid
securities to be used in connection with short sales. If a
broker or dealer uses a customer's securities in connection
with short sales, the broker or dealer shall provide notice to
its customer that the broker or dealer may receive compensation
in connection with lending the customer's securities. The
Commission, by rule, as it deems necessary or appropriate in
the public interest and for the protection of investors, may
prescribe the form, content, time, and manner of delivery of
any notice required under this paragraph.
(f) The Commission, by rule, as it deems necessary or
appropriate in the public interest and for the protection of
investors or to assure equal regulation, may require any member
of a national securities exchange not required to register
under section 15 of this title and any person associated with
any such member to comply with any provision of this title
(other than section 15(a)) or the rules or regulations
thereunder which by its terms regulates or prohibits any act,
practice, or course of business by a ``broker or dealer'' or
``registered broker or dealer'' or a ``person associated with a
broker or dealer,'' respectively.
(g) Every registered broker or dealer shall establish,
maintain, and enforce written policies and procedures
reasonably designed, taking into consideration the nature of
such broker's or dealer's business, to prevent the misuse in
violation of this title, or the rules or regulations
thereunder, of material, nonpublic information by such broker
or dealer or any person associated with such broker or dealer.
The Commission, as it deems necessary or appropriate in the
public interest or for the protection of investors, shall adopt
rules or regulations to require specific policies or procedures
reasonably designed to prevent misuse in violation of this
title (or the rules or regulations thereunder) of material,
nonpublic information.
(h) Requirements for Transactions in Penny Stocks.--
(1) In general.--No broker or dealer shall make use
of the mails or any means or instrumentality of
interstate commerce to effect any transaction in, or to
induce or attempt to induce the purchase or sale of,
any penny stock by any customer except in accordance
with the requirements of this subsection and the rules
and regulations prescribed under this subsection.
(2) Risk disclosure with respect to penny stocks.--
Prior to effecting any transaction in any penny stock,
a broker or dealer shall give the customer a risk
disclosure document that--
(A) contains a description of the nature and
level of risk in the market for penny stocks in
both public offerings and secondary trading;
(B) contains a description of the broker's or
dealer's duties to the customer and of the
rights and remedies available to the customer
with respect to violations of such duties or
other requirements of Federal securities laws;
(C) contains a brief, clear, narrative
description of a dealer market, including
``bid'' and ``ask'' prices for penny stocks and
the significance of the spread between the bid
and ask prices;
(D) contains the toll free telephone number
for inquiries on disciplinary actions
established pursuant to section 15A(i) of this
title;
(E) defines significant terms used in the
disclosure document or in the conduct of
trading in penny stocks; and
(F) contains such other information, and is
in such form (including language, type size,
and format), as the Commission shall require by
rule or regulation.
(3) Commission rules relating to disclosure.--The
Commission shall adopt rules setting forth additional
standards for the disclosure by brokers and dealers to
customers of information concerning transactions in
penny stocks. Such rules--
(A) shall require brokers and dealers to
disclose to each customer, prior to effecting
any transaction in, and at the time of
confirming any transaction with respect to any
penny stock, in accordance with such procedures
and methods as the Commission may require
consistent with the public interest and the
protection of investors--
(i) the bid and ask prices for penny
stock, or such other information as the
Commission may, by rule, require to
provide customers with more useful and
reliable information relating to the
price of such stock;
(ii) the number of shares to which
such bid and ask prices apply, or other
comparable information relating to the
depth and liquidity of the market for
such stock; and
(iii) the amount and a description of
any compensation that the broker or
dealer and the associated person
thereof will receive or has received in
connection with such transaction;
(B) shall require brokers and dealers to
provide, to each customer whose account with
the broker or dealer contains penny stocks, a
monthly statement indicating the market value
of the penny stocks in that account or
indicating that the market value of such stock
cannot be determined because of the
unavailability of firm quotes; and
(C) may, as the Commission finds necessary or
appropriate in the public interest or for the
protection of investors, require brokers and
dealers to disclose to customers additional
information concerning transactions in penny
stocks.
(4) Exemptions.--The Commission, as it determines
consistent with the public interest and the protection
of investors, may by rule, regulation, or order exempt
in whole or in part, conditionally or unconditionally,
any person or class of persons, or any transaction or
class of transactions, from the requirements of this
subsection. Such exemptions shall include an exemption
for brokers and dealers based on the minimal percentage
of the broker's or dealer's commissions, commission-
equivalents, and markups received from transactions in
penny stocks.
(5) Regulations.--It shall be unlawful for any person
to violate such rules and regulations as the Commission
shall prescribe in the public interest or for the
protection of investors or to maintain fair and orderly
markets--
(A) as necessary or appropriate to carry out
this subsection; or
(B) as reasonably designed to prevent
fraudulent, deceptive, or manipulative acts and
practices with respect to penny stocks.
(i) Limitations on State Law.--
(1) Capital, margin, books and records, bonding, and
reports.--No law, rule, regulation, or order, or other
administrative action of any State or political
subdivision thereof shall establish capital, custody,
margin, financial responsibility, making and keeping
records, bonding, or financial or operational reporting
requirements for brokers, dealers, municipal securities
dealers, government securities brokers, or government
securities dealers that differ from, or are in addition
to, the requirements in those areas established under
this title. The Commission shall consult periodically
the securities commissions (or any agency or office
performing like functions) of the States concerning the
adequacy of such requirements as established under this
title.
(2) Funding portals.--
(A) Limitation on state laws.--Except as
provided in subparagraph (B), no State or
political subdivision thereof may enforce any
law, rule, regulation, or other administrative
action against a registered funding portal with
respect to its business as such.
(B) Examination and enforcement authority.--
Subparagraph (A) does not apply with respect to
the examination and enforcement of any law,
rule, regulation, or administrative action of a
State or political subdivision thereof in which
the principal place of business of a registered
funding portal is located, provided that such
law, rule, regulation, or administrative action
is not in addition to or different from the
requirements for registered funding portals
established by the Commission.
(C) Definition.--For purposes of this
paragraph, the term ``State'' includes the
District of Columbia and the territories of the
United States.
(3) De minimis transactions by associated persons.--
No law, rule, regulation, or order, or other
administrative action of any State or political
subdivision thereof may prohibit an associated person
of a broker or dealer from effecting a transaction
described in paragraph (3) for a customer in such State
if--
(A) such associated person is not ineligible
to register with such State for any reason
other than such a transaction;
(B) such associated person is registered with
a registered securities association and at
least one State; and
(C) the broker or dealer with which such
person is associated is registered with such
State.
(4) Described transactions.--
(A) In general.--A transaction is described
in this paragraph if--
(i) such transaction is effected--
(I) on behalf of a customer
that, for 30 days prior to the
day of the transaction,
maintained an account with the
broker or dealer; and
(II) by an associated person
of the broker or dealer--
(aa) to which the
customer was assigned
for 14 days prior to
the day of the
transaction; and
(bb) who is
registered with a State
in which the customer
was a resident or was
present for at least 30
consecutive days during
the 1-year period prior
to the day of the
transaction; or
(ii) the transaction is effected--
(I) on behalf of a customer
that, for 30 days prior to the
day of the transaction,
maintained an account with the
broker or dealer; and
(II) during the period
beginning on the date on which
such associated person files an
application for registration
with the State in which the
transaction is effected and
ending on the earlier of--
(aa) 60 days after
the date on which the
application is filed;
or
(bb) the date on
which such State
notifies the associated
person that it has
denied the application
for registration or has
stayed the pendency of
the application for
cause.
(B) Rules of construction.--For purposes of
subparagraph (A)(i)(II)--
(i) each of up to 3 associated
persons of a broker or dealer who are
designated to effect transactions
during the absence or unavailability of
the principal associated person for a
customer may be treated as an
associated person to which such
customer is assigned; and
(ii) if the customer is present in
another State for 30 or more
consecutive days or has permanently
changed his or her residence to another
State, a transaction is not described
in this paragraph, unless the
associated person of the broker or
dealer files an application for
registration with such State not later
than 10 business days after the later
of the date of the transaction, or the
date of the discovery of the presence
of the customer in the other State for
30 or more consecutive days or the
change in the customer's residence.
(j) Rulemaking To Extend Requirements to New Hybrid
Products.--
(1) Consultation.--Prior to commencing a rulemaking
under this subsection, the Commission shall consult
with and seek the concurrence of the Board concerning
the imposition of broker or dealer registration
requirements with respect to any new hybrid product. In
developing and promulgating rules under this
subsection, the Commission shall consider the views of
the Board, including views with respect to the nature
of the new hybrid product; the history, purpose,
extent, and appropriateness of the regulation of the
new product under the Federal banking laws; and the
impact of the proposed rule on the banking industry.
(2) Limitation.--The Commission shall not--
(A) require a bank to register as a broker or
dealer under this section because the bank
engages in any transaction in, or buys or
sells, a new hybrid product; or
(B) bring an action against a bank for a
failure to comply with a requirement described
in subparagraph (A),
unless the Commission has imposed such requirement by
rule or regulation issued in accordance with this
section.
(3) Criteria for rulemaking.--The Commission shall
not impose a requirement under paragraph (2) of this
subsection with respect to any new hybrid product
unless the Commission determines that--
(A) the new hybrid product is a security; and
(B) imposing such requirement is necessary
and appropriate in the public interest and for
the protection of investors.
(4) Considerations.--In making a determination under
paragraph (3), the Commission shall consider--
(A) the nature of the new hybrid product; and
(B) the history, purpose, extent, and
appropriateness of the regulation of the new
hybrid product under the Federal securities
laws and under the Federal banking laws.
(5) Objection to commission regulation.--
(A) Filing of petition for review.--The Board
may obtain review of any final regulation
described in paragraph (2) in the United States
Court of Appeals for the District of Columbia
Circuit by filing in such court, not later than
60 days after the date of publication of the
final regulation, a written petition requesting
that the regulation be set aside. Any
proceeding to challenge any such rule shall be
expedited by the Court of Appeals.
(B) Transmittal of petition and record.--A
copy of a petition described in subparagraph
(A) shall be transmitted as soon as possible by
the Clerk of the Court to an officer or
employee of the Commission designated for that
purpose. Upon receipt of the petition, the
Commission shall file with the court the
regulation under review and any documents
referred to therein, and any other relevant
materials prescribed by the court.
(C) Exclusive jurisdiction.--On the date of
the filing of the petition under subparagraph
(A), the court has jurisdiction, which becomes
exclusive on the filing of the materials set
forth in subparagraph (B), to affirm and
enforce or to set aside the regulation at
issue.
(D) Standard of review.--The court shall
determine to affirm and enforce or set aside a
regulation of the Commission under this
subsection, based on the determination of the
court as to whether--
(i) the subject product is a new
hybrid product, as defined in this
subsection;
(ii) the subject product is a
security; and
(iii) imposing a requirement to
register as a broker or dealer for
banks engaging in transactions in such
product is appropriate in light of the
history, purpose, and extent of
regulation under the Federal securities
laws and under the Federal banking
laws, giving deference neither to the
views of the Commission nor the Board.
(E) Judicial stay.--The filing of a petition
by the Board pursuant to subparagraph (A) shall
operate as a judicial stay, until the date on
which the determination of the court is final
(including any appeal of such determination).
(F) Other authority to challenge.--Any
aggrieved party may seek judicial review of the
Commission's rulemaking under this subsection
pursuant to section 25 of this title.
(6) Definitions.--For purposes of this subsection:
(A) New hybrid product.--The term ``new
hybrid product'' means a product that--
(i) was not subjected to regulation
by the Commission as a security prior
to the date of the enactment of the
Gramm-Leach-Bliley Act;
(ii) is not an identified banking
product as such term is defined in
section 206 of such Act; and
(iii) is not an equity swap within
the meaning of section 206(a)(6) of
such Act.
(B) Board.--The term ``Board'' means the
Board of Governors of the Federal Reserve
System.
(j) The authority of the Commission under this section with
respect to security-based swap agreements shall be subject to
the restrictions and limitations of section 3A(b) of this
title.
(k) Registration or Succession to a United States Broker or
Dealer.--In determining whether to permit a foreign person or
an affiliate of a foreign person to register as a United States
broker or dealer, or succeed to the registration of a United
States broker or dealer, the Commission may consider whether,
for a foreign person, or an affiliate of a foreign person that
presents a risk to the stability of the United States financial
system, the home country of the foreign person has adopted, or
made demonstrable progress toward adopting, an appropriate
system of financial regulation to mitigate such risk.
(l) Termination of a United States Broker or Dealer.--For a
foreign person or an affiliate of a foreign person that
presents such a risk to the stability of the United States
financial system, the Commission may determine to terminate the
registration of such foreign person or an affiliate of such
foreign person as a broker or dealer in the United States, if
the Commission determines that the home country of the foreign
person has not adopted, or made demonstrable progress toward
adopting, an appropriate system of financial regulation to
mitigate such risk.
[(k) Standard of Conduct.--
[(1) In general.--Notwithstanding any other provision
of this Act or the Investment Advisers Act of 1940, the
Commission may promulgate rules to provide that, with
respect to a broker or dealer, when providing
personalized investment advice about securities to a
retail customer (and such other customers as the
Commission may by rule provide), the standard of
conduct for such broker or dealer with respect to such
customer shall be the same as the standard of conduct
applicable to an investment adviser under section 211
of the Investment Advisers Act of 1940. The receipt of
compensation based on commission or other standard
compensation for the sale of securities shall not, in
and of itself, be considered a violation of such
standard applied to a broker or dealer. Nothing in this
section shall require a broker or dealer or registered
representative to have a continuing duty of care or
loyalty to the customer after providing personalized
investment advice about securities.
[(2) Disclosure of range of products offered.--Where
a broker or dealer sells only proprietary or other
limited range of products, as determined by the
Commission, the Commission may by rule require that
such broker or dealer provide notice to each retail
customer and obtain the consent or acknowledgment of
the customer. The sale of only proprietary or other
limited range of products by a broker or dealer shall
not, in and of itself, be considered a violation of the
standard set forth in paragraph (1).]
(k) Standard of Conduct for Recommendations to Retail
Customers.--
(1) In general.--The standard of conduct for a broker
or dealer (or registered representative) when providing
recommendations to a retail customer is as follows:
(A) Recommendation to retail customer.--When
a broker or dealer (or registered
representative) makes a recommendation to a
retail customer, the recommendation shall be in
the retail customer's best interest at the time
it is made by--
(i) reflecting reasonable diligence;
and
(ii) reflecting the reasonable care,
skill, and prudence that a broker or
dealer (or registered representative)
would exercise based on the customer's
investment profile.
(B) Disclosure to retail customer.--
(i) In general.--Before a broker or
dealer (or registered representative)
executes a transaction for the first
time for each retail customer based on
a recommendation to such retail
customer, such broker or dealer (or
registered representative) shall
disclose prior to the point of sale to
such customer, in a clear and concise
manner--
(I) the type and scope of
services the broker or dealer
(or registered representative)
provides;
(II) the standard of conduct
that applies to the
relationship;
(III) the types of
compensation the broker or
dealer (or registered
representative) receives; and
(IV) any material conflict of
interest.
(ii) Content of disclosure.--The
Commission may issue regulations
determining the content of the
disclosure required in clause (i). Such
regulations may provide for a
disclosure of fees received by the
broker or dealer, whether from the
retail customer or a third party, prior
to the execution of the transaction.
(C) Material conflict of interest.--A broker
or dealer (or registered representative) shall
avoid, disclose, or otherwise reasonably manage
any material conflict of interest with a retail
customer.
(2) Nonviolation of standard of conduct.--The
following is not, by itself, a violation of the
standard of conduct described in paragraph (1):
(A) The receipt of compensation, including
transaction-based compensation, by a broker or
dealer (or registered representative) or any
affiliate of such broker or dealer (or
registered representative).
(B) The recommendation by a broker or dealer
(or registered representative) to a retail
customer of principal transactions (including
cross transactions), or the recommendation of
affiliated, unaffiliated, or proprietary
products or services, or a limited range of
products or services.
(3) No requirement to recommend least expensive
product.--Nothing in this subsection shall require a
broker or dealer (or registered representative) to
recommend the least expensive security or investment
strategy (however quantified) or to analyze all
possible securities, other products, or investment
strategies before making a recommendation.
(4) Definitions.--In this subsection:
(A) Compensation.--The term ``compensation''
includes commissions or sales charges, or other
fees or variable compensation, for or related
to the sale of securities or for the servicing
of customer accounts, whether paid by the
retail customer or received from a third party.
(B) Customer's investment profile.--The term
``customer's investment profile'' has the
meaning of such term as described in Rule 2111
of the Financial Industry Regulatory Authority
as of the date of the enactment of this
subsection.
(C) Institutional account.--The term
``institutional account'' has the same meaning
given such term in Rule 4512 of the Financial
Industry Regulatory Authority as of the date of
the enactment of this subsection.
(D) Material conflict of interest.--The term
``material conflict of interest'' means a
financial interest of a broker or dealer (or
registered representative) that a reasonable
person would expect to affect the impartiality
of a recommendation.
(E) Reasonable diligence.--The term
``reasonable diligence'' has the meaning of
such term as described in Rule 2111 of the
Financial Industry Regulatory Authority as of
the date of the enactment of this subsection.
(F) Recommendation.--The term
``recommendation'' means either of the
following recommendations (under the meaning
ascribed to such term in Rule 2111 of the
Financial Industry Regulatory Authority) for
which the broker or dealer (or registered
representative) making the recommendation
receives or will receive compensation:
(i) A non-discretionary
recommendation to buy, hold, or sell
securities, or to follow an investment
strategy involving securities, for
taxable or non-taxable accounts.
(ii) A non-discretionary
recommendation to rollover or transfer
assets in an employer-sponsored
retirement plan to an individual
retirement account.
(G) Retail customer.--The term ``retail
customer'' means a natural person or legal
entity, or the legal representative of such
natural person or legal entity, in each case
other than an institutional account, who--
(i) receives a recommendation from a
broker or dealer (or registered
representative); and
(ii) implements such recommendation
with such broker or dealer primarily
for personal, family, retirement, or
household purposes.
(5) Supersession.--The provisions of this subsection
shall supersede and preempt State law, other than a
State law that regulates insurance products that are
not securities, insofar as they may now or hereafter
relate to a broker or dealer, or registered
representative of a broker or dealer.
(6) Fiduciary status under erisa, the internal
revenue code, the investment advisers act of 1940, or
other fiduciary regimes.--The fact that a person may
owe, or may in fact comply with, the standard of
conduct under this subsection shall not mean or create
any presumption that such person is a ``fiduciary''
under the Employee Retirement Income Security Act of
1974 (29 U.S.C. 1001 et seq.), section 4975 of the
Internal Revenue Code of 1986, the Investment Advisers
Act of 1940 (15 U.S.C. 80b et seq.), or any other
Federal, State, or local statutory or regulatory
fiduciary regime.
[(l) Other Matters.--The Commission shall--
[(1) facilitate the provision of simple and clear
disclosures to investors regarding the terms of their
relationships with brokers, dealers, and investment
advisers, including any material conflicts of interest;
and
[(2) examine and, where appropriate, promulgate rules
prohibiting or restricting certain sales practices,
conflicts of interest, and compensation schemes for
brokers, dealers, and investment advisers that the
Commission deems contrary to the public interest and
the protection of investors.
[(m) Harmonization of Enforcement.--The enforcement authority
of the Commission with respect to violations of the standard of
conduct applicable to a broker or dealer providing personalized
investment advice about securities to a retail customer shall
include--
[(1) the enforcement authority of the Commission with
respect to such violations provided under this Act; and
[(2) the enforcement authority of the Commission with
respect to violations of the standard of conduct
applicable to an investment adviser under the
Investment Advisers Act of 1940, including the
authority to impose sanctions for such violations, and
the Commission shall seek to prosecute and sanction violators
of the standard of conduct applicable to a broker or dealer
providing personalized investment advice about securities to a
retail customer under this Act to same extent as the Commission
prosecutes and sanctions violators of the standard of conduct
applicable to an investment advisor under the Investment
Advisers Act of 1940.]
(n) Disclosures to Retail Investors.--
(1) In general.--Notwithstanding any other provision
of the securities laws, the Commission may issue rules
designating documents or information that shall be
provided by a broker or dealer to a retail investor
before the purchase of an investment product or service
by the retail investor.
(2) Considerations.--In developing any rules under
paragraph (1), the Commission shall consider whether
the rules will promote investor protection, efficiency,
competition, and capital formation.
(3) Form and contents of documents and information.--
Any documents or information designated under a rule
promulgated under paragraph (1) shall--
(A) be in a summary format; and
(B) contain clear and concise information
about--
(i) investment objectives,
strategies, costs, and risks; and
(ii) any compensation or other
financial incentive received by a
broker, dealer, or other intermediary
in connection with the purchase of
retail investment products.
(o) Authority to Restrict Mandatory Pre-dispute
Arbitration.--The Commission, by rule, may prohibit, or impose
conditions or limitations on the use of, agreements that
require customers or clients of any broker, dealer, or
municipal securities dealer to arbitrate any future dispute
between them arising under the Federal securities laws, the
rules and regulations thereunder, or the rules of a self-
regulatory organization if it finds that such prohibition,
imposition of conditions, or limitations are in the public
interest and for the protection of investors.
* * * * * * *
----------
SECTION 913 OF THE DODD-FRANK WALL STREET REFORM AND CONSUMER
PROTECTION ACT
[SEC. 913. STUDY AND RULEMAKING REGARDING OBLIGATIONS OF BROKERS,
DEALERS, AND INVESTMENT ADVISERS
[(a) Definition.--For purposes of this section, the term
``retail customer'' means a natural person, or the legal
representative of such natural person, who--
[(1) receives personalized investment advice about
securities from a broker or dealer or investment
adviser; and
[(2) uses such advice primarily for personal, family,
or household purposes.
[(b) Study.--The Commission shall conduct a study to
evaluate--
[(1) the effectiveness of existing legal or
regulatory standards of care for brokers, dealers,
investment advisers, persons associated with brokers or
dealers, and persons associated with investment
advisers for providing personalized investment advice
and recommendations about securities to retail
customers imposed by the Commission and a national
securities association, and other Federal and State
legal or regulatory standards; and
[(2) whether there are legal or regulatory gaps,
shortcomings, or overlaps in legal or regulatory
standards in the protection of retail customers
relating to the standards of care for brokers, dealers,
investment advisers, persons associated with brokers or
dealers, and persons associated with investment
advisers for providing personalized investment advice
about securities to retail customers that should be
addressed by rule or statute.
[(c) Considerations.--In conducting the study required under
subsection (b), the Commission shall consider--
[(1) the effectiveness of existing legal or
regulatory standards of care for brokers, dealers,
investment advisers, persons associated with brokers or
dealers, and persons associated with investment
advisers for providing personalized investment advice
and recommendations about securities to retail
customers imposed by the Commission and a national
securities association, and other Federal and State
legal or regulatory standards;
[(2) whether there are legal or regulatory gaps,
shortcomings, or overlaps in legal or regulatory
standards in the protection of retail customers
relating to the standards of care for brokers, dealers,
investment advisers, persons associated with brokers or
dealers, and persons associated with investment
advisers for providing personalized investment advice
about securities to retail customers that should be
addressed by rule or statute;
[(3) whether retail customers understand that there
are different standards of care applicable to brokers,
dealers, investment advisers, persons associated with
brokers or dealers, and persons associated with
investment advisers in the provision of personalized
investment advice about securities to retail customers;
[(4) whether the existence of different standards of
care applicable to brokers, dealers, investment
advisers, persons associated with brokers or dealers,
and persons associated with investment advisers is a
source of confusion for retail customers regarding the
quality of personalized investment advice that retail
customers receive;
[(5) the regulatory, examination, and enforcement
resources devoted to, and activities of, the
Commission, the States, and a national securities
association to enforce the standards of care for
brokers, dealers, investment advisers, persons
associated with brokers or dealers, and persons
associated with investment advisers when providing
personalized investment advice and recommendations
about securities to retail customers, including--
[(A) the effectiveness of the examinations of
brokers, dealers, and investment advisers in
determining compliance with regulations;
[(B) the frequency of the examinations; and
[(C) the length of time of the examinations;
[(6) the substantive differences in the regulation of
brokers, dealers, and investment advisers, when
providing personalized investment advice and
recommendations about securities to retail customers;
[(7) the specific instances related to the provision
of personalized investment advice about securities in
which--
[(A) the regulation and oversight of
investment advisers provide greater protection
to retail customers than the regulation and
oversight of brokers and dealers; and
[(B) the regulation and oversight of brokers
and dealers provide greater protection to
retail customers than the regulation and
oversight of investment advisers;
[(8) the existing legal or regulatory standards of
State securities regulators and other regulators
intended to protect retail customers;
[(9) the potential impact on retail customers,
including the potential impact on access of retail
customers to the range of products and services offered
by brokers and dealers, of imposing upon brokers,
dealers, and persons associated with brokers or
dealers--
[(A) the standard of care applied under the
Investment Advisers Act of 1940 (15 U.S.C. 80b-
1 et seq.) for providing personalized
investment advice about securities to retail
customers of investment advisers, as
interpreted by the Commission and the courts;
and
[(B) other requirements of the Investment
Advisers Act of 1940 (15 U.S.C. 80b-1 et seq.);
[(10) the potential impact of eliminating the broker
and dealer exclusion from the definition of
``investment adviser'' under section 202(a)(11)(C) of
the Investment Advisers Act of 1940 (15 U.S.C. 80b-
2(a)(11)(C)), in terms of--
[(A) the impact and potential benefits and
harm to retail customers that could result from
such a change, including any potential impact
on access to personalized investment advice and
recommendations about securities to retail
customers or the availability of such advice
and recommendations;
[(B) the number of additional entities and
individuals that would be required to register
under, or become subject to, the Investment
Advisers Act of 1940 (15 U.S.C. 80b-1 et seq.),
and the additional requirements to which
brokers, dealers, and persons associated with
brokers and dealers would become subject,
including--
[(i) any potential additional
associated person licensing,
registration, and examination
requirements; and
[(ii) the additional costs, if any,
to the additional entities and
individuals; and
[(C) the impact on Commission and State
resources to--
[(i) conduct examinations of
registered investment advisers and the
representatives of registered
investment advisers, including the
impact on the examination cycle; and
[(ii) enforce the standard of care
and other applicable requirements
imposed under the Investment Advisers
Act of 1940 (15 U.S.C. 80b-1 et seq.);
[(11) the varying level of services provided by
brokers, dealers, investment advisers, persons
associated with brokers or dealers, and persons
associated with investment advisers to retail customers
and the varying scope and terms of retail customer
relationships of brokers, dealers, investment advisers,
persons associated with brokers or dealers, and persons
associated with investment advisers with such retail
customers;
[(12) the potential impact upon retail customers that
could result from potential changes in the regulatory
requirements or legal standards of care affecting
brokers, dealers, investment advisers, persons
associated with brokers or dealers, and persons
associated with investment advisers relating to their
obligations to retail customers regarding the provision
of investment advice, including any potential impact
on--
[(A) protection from fraud;
[(B) access to personalized investment
advice, and recommendations about securities to
retail customers; or
[(C) the availability of such advice and
recommendations;
[(13) the potential additional costs and expenses
to--
[(A) retail customers regarding and the
potential impact on the profitability of their
investment decisions; and
[(B) brokers, dealers, and investment
advisers resulting from potential changes in
the regulatory requirements or legal standards
affecting brokers, dealers, investment
advisers, persons associated with brokers or
dealers, and persons associated with investment
advisers relating to their obligations,
including duty of care, to retail customers;
and
[(14) any other consideration that the Commission
considers necessary and appropriate in determining
whether to conduct a rulemaking under subsection (f).
[(d) Report.--
[(1) In general.--Not later than 6 months after the
date of enactment of this Act, the Commission shall
submit a report on the study required under subsection
(b) to--
[(A) the Committee on Banking, Housing, and
Urban Affairs of the Senate; and
[(B) the Committee on Financial Services of
the House of Representatives.
[(2) Content requirements.--The report required under
paragraph (1) shall describe the findings, conclusions,
and recommendations of the Commission from the study
required under subsection (b), including--
[(A) a description of the considerations,
analysis, and public and industry input that
the Commission considered, as required under
subsection (b), to make such findings,
conclusions, and policy recommendations; and
[(B) an analysis of whether any identified
legal or regulatory gaps, shortcomings, or
overlap in legal or regulatory standards in the
protection of retail customers relating to the
standards of care for brokers, dealers,
investment advisers, persons associated with
brokers or dealers, and persons associated with
investment advisers for providing personalized
investment advice about securities to retail
customers.
[(e) Public Comment.--The Commission shall seek and consider
public input, comments, and data in order to prepare the report
required under subsection (d).
[(f) Rulemaking.--The Commission may commence a rulemaking,
as necessary or appropriate in the public interest and for the
protection of retail customers (and such other customers as the
Commission may by rule provide), to address the legal or
regulatory standards of care for brokers, dealers, investment
advisers, persons associated with brokers or dealers, and
persons associated with investment advisers for providing
personalized investment advice about securities to such retail
customers. The Commission shall consider the findings
conclusions, and recommendations of the study required under
subsection (b).
[(g) Authority to Establish a Fiduciary Duty for Brokers and
Dealers.--
[(1) Securities Exchange Act of 1934.--Section 15 of
the Securities Exchange Act of 1934 (15 U.S.C. 78o) is
amended by adding at the end the following:
[``(k) Standard of Conduct.--
[``(1) In general.--Notwithstanding any other
provision of this Act or the Investment Advisers Act of
1940, the Commission may promulgate rules to provide
that, with respect to a broker or dealer, when
providing personalized investment advice about
securities to a retail customer (and such other
customers as the Commission may by rule provide), the
standard of conduct for such broker or dealer with
respect to such customer shall be the same as the
standard of conduct applicable to an investment adviser
under section 211 of the Investment Advisers Act of
1940. The receipt of compensation based on commission
or other standard compensation for the sale of
securities shall not, in and of itself, be considered a
violation of such standard applied to a broker or
dealer. Nothing in this section shall require a broker
or dealer or registered representative to have a
continuing duty of care or loyalty to the customer
after providing personalized investment advice about
securities.
[``(2) Disclosure of range of products offered.--
Where a broker or dealer sells only proprietary or
other limited range of products, as determined by the
Commission, the Commission may by rule require that
such broker or dealer provide notice to each retail
customer and obtain the consent or acknowledgment of
the customer. The sale of only proprietary or other
limited range of products by a broker or dealer shall
not, in and of itself, be considered a violation of the
standard set forth in paragraph (1).
[``(l) Other Matters.--The Commission shall--
[``(1) facilitate the provision of simple and clear
disclosures to investors regarding the terms of their
relationships with brokers, dealers, and investment
advisers, including any material conflicts of interest;
and
[``(2) examine and, where appropriate, promulgate
rules prohibiting or restricting certain sales
practices, conflicts of interest, and compensation
schemes for brokers, dealers, and investment advisers
that the Commission deems contrary to the public
interest and the protection of investors.''.
[(2) Investment Advisers Act of 1940.--Section 211 of
the Investment Advisers Act of 1940, is further amended
by adding at the end the following new subsections:
[``(g) Standard of Conduct.--
[``(1) In general.--The Commission may promulgate
rules to provide that the standard of conduct for all
brokers, dealers, and investment advisers, when
providing personalized investment advice about
securities to retail customers (and such other
customers as the Commission may by rule provide), shall
be to act in the best interest of the customer without
regard to the financial or other interest of the
broker, dealer, or investment adviser providing the
advice. In accordance with such rules, any material
conflicts of interest shall be disclosed and may be
consented to by the customer. Such rules shall provide
that such standard of conduct shall be no less
stringent than the standard applicable to investment
advisers under section 206(1) and (2) of this Act when
providing personalized investment advice about
securities, except the Commission shall not ascribe a
meaning to the term `customer' that would include an
investor in a private fund managed by an investment
adviser, where such private fund has entered into an
advisory contract with such adviser. The receipt of
compensation based on commission or fees shall not, in
and of itself, be considered a violation of such
standard applied to a broker, dealer, or investment
adviser.
[``(2) Retail customer defined.--For purposes of this
subsection, the term `retail customer' means a natural
person, or the legal representative of such natural
person, who--
[``(A) receives personalized investment
advice about securities from a broker, dealer,
or investment adviser; and
[``(B) uses such advice primarily for
personal, family, or household purposes.
[``(h) Other Matters.--The Commission shall--
[``(1) facilitate the provision of simple and clear
disclosures to investors regarding the terms of their
relationships with brokers, dealers, and investment
advisers, including any material conflicts of interest;
and
[``(2) examine and, where appropriate, promulgate
rules prohibiting or restricting certain sales
practices, conflicts of interest, and compensation
schemes for brokers, dealers, and investment advisers
that the Commission deems contrary to the public
interest and the protection of investors.''.
[(h) Harmonization of Enforcement.--
[(1) Securities Exchange Act of 1934.--Section 15 of
the Securities Exchange Act of 1934, as amended by
subsection (g)(1), is further amended by adding at the
end the following new subsection:
[``(m) Harmonization of Enforcement.--The enforcement
authority of the Commission with respect to violations of the
standard of conduct applicable to a broker or dealer providing
personalized investment advice about securities to a retail
customer shall include--
[``(1) the enforcement authority of the Commission
with respect to such violations provided under this
Act; and
[``(2) the enforcement authority of the Commission
with respect to violations of the standard of conduct
applicable to an investment adviser under the
Investment Advisers Act of 1940, including the
authority to impose sanctions for such violations, and
the Commission shall seek to prosecute and sanction violators
of the standard of conduct applicable to a broker or dealer
providing personalized investment advice about securities to a
retail customer under this Act to same extent as the Commission
prosecutes and sanctions violators of the standard of conduct
applicable to an investment advisor under the Investment
Advisers Act of 1940.''.
[(2) Investment Advisers Act of 1940.--Section 211 of
the Investment Advisers Act of 1940, as amended by
subsection (g)(2), is further amended by adding at the
end the following new subsection:
[``(i) Harmonization of Enforcement.--The enforcement
authority of the Commission with respect to violations of the
standard of conduct applicable to an investment adviser shall
include--
[``(1) the enforcement authority of the Commission
with respect to such violations provided under this
Act; and
[``(2) the enforcement authority of the Commission
with respect to violations of the standard of conduct
applicable to a broker or dealer providing personalized
investment advice about securities to a retail customer
under the Securities Exchange Act of 1934, including
the authority to impose sanctions for such violations,
and
the Commission shall seek to prosecute and sanction violators
of the standard of conduct applicable to an investment adviser
under this Act to same extent as the Commission prosecutes and
sanctions violators of the standard of conduct applicable to a
broker or dealer providing personalized investment advice about
securities to a retail customer under the Securities Exchange
Act of 1934.''.]
SEC. 913. OBLIGATIONS OF BROKERS AND DEALERS AND OTHER PERSONS AND
ENTITIES.
(a) Rulemaking.--
(1) Rulemaking by the commission.--The Commission may
issue regulations as the Commission determines is
necessary to facilitate compliance by brokers and
dealers (including their registered representative)
with the obligations of such brokers and dealers (and
their registered representative) under the second
subsection (k) of section 15 of the Securities Exchange
Act of 1934 only if such rulemaking does not impose any
obligation related to standard of care on a broker or
dealer (or its registered representative) that is in
addition to, duplicative of, or inconsistent with, the
obligations set forth in such subsection.
(2) Rulemaking by the secretary of labor and the
secretary of the treasury.--After the date of the
enactment of the PASS Act of 2017, the Secretary of
Labor and the Secretary of the Treasury shall not
promulgate any regulation under the Employee Retirement
Income Security Act of 1974 (29 U.S.C. 1001 et seq.) or
section 4975 of the Internal Revenue Code of 1986,
respectively, defining the circumstances under which a
person is considered a fiduciary that would impose any
obligation on a broker or dealer (or its registered
representative) or on a life insurer fulfilling the
term ``insurance company'' as defined in section
3(a)(2) of the Securities Act of 1933 (or its agents or
distributors) that is in addition to, duplicative of,
or inconsistent with, the obligations set forth in such
subsection (k) of section 15 of the Securities Exchange
Act of 1934 (15 U.S.C. 78o).
(b) Exemption Available to Certain Persons With Respect to
Manufacture or Sale of Annuities.--
(1) Exemption.--With respect to the manufacture or
sale of annuities within paragraphs (2) or (8) of
section 3(a) of the Securities Act of 1933 (15 U.S.C.
77c(a)) or section 989J of the Dodd-Frank Wall Street
Reform and Consumer Protection Act (15 U.S.C. 77c
note), a person regulated by a State insurance
regulator may rely on the exemptions in section
408(b)(21) of the Employee Retirement Income Security
Act of 1974 (29 U.S.C. 1108(b)(21)) and section
4975(d)(24) of the Internal Revenue Code of 1986 (as
added by the PASS Act of 2017) only if--
(A) such person adopts and implements
practices on a nationwide basis for the sale of
annuity contracts that meet or exceed the
minimum requirements set forth in the second
subsection (k) of section 15 of the Securities
Exchange Act of 1934 (15 U.S.C. 78o) and such
person is subject to regulation or examination
by a State insurance regulator for purposes of
assessing market conduct; or
(B) such person complies with a standard
substantially similar to such subsection (k)
and is regulated by a State insurance regulator
with respect to annuities within paragraphs (2)
or (8) of section 3(a) of the Securities Act of
1933 (15 U.S.C. 77c(a)) or section 989J of the
Dodd-Frank Wall Street Reform and Consumer
Protection Act (15 U.S.C. 77c note).
(2) Coordination and cooperation.--Upon the request
of any State insurance regulator, the Commission or the
Financial Industry Regulatory Authority shall provide
such reasonable assistance to the requesting Authority
as needed in connection with the coordination or
implementation of this section.
(3) Definition of state insurance regulator.--As used
in this subsection, the term ``State insurance
regulator'' means the principal insurance regulatory
authority of a State, the District of Columbia, any
territory of the United States, Puerto Rico, Guam,
American Samoa, the Trust Territory of the Pacific
Islands, the Virgin Islands, and the Northern Mariana
Islands.
(c) Additional Exemptions.--A person who complies with a
standard substantially similar to the second subsection (k) of
section 15 of the Securities Exchange Act of 1934 (15 U.S.C.
78o) may rely on the exemptions in section 408(b)(21) of the
Employee Retirement Income Security Act of 1974 (29 U.S.C.
1108(b)(21)) and section 4975(d)(24) of the Internal Revenue
Code of 1986 (as added by the PASS Act of 2017) only if such
person 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
person maintains its principal office and place of
business; or
(2) a bank or similar financial institution
supervised by the United States or a 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)).
----------
EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974
* * * * * * *
TITLE I--PROTECTION OF EMPLOYEE BENEFIT RIGHTS
* * * * * * *
Subtitle B--Regulatory Provisions
* * * * * * *
Part 4--Fiduciary Responsibility
* * * * * * *
EXEMPTIONS FROM PROHIBITED TRANSACTIONS
Sec. 408. (a) The Secretary shall establish an exemption
procedure for purposes of this subsection. Pursuant to such
procedure, he may grant a conditional or unconditional
exemption of any fiduciary or transaction, or class of
fiduciaries or transactions, from all or part of the
restrictions imposed by sections 406 and 407(a). Action under
this subsection may be taken only after consultation and
coordination with the Secretary of the Treasury. An exemption
granted under this section shall not relieve a fiduciary from
any other applicable provision of this Act. The Secretary may
not grant an exemption under this subsection unless he finds
that such exemption is--
(1) administratively feasible,
(2) in the interests of the plan and of its
participants and beneficiaries, and
(3) protective of the rights of participants and
beneficiaries of such plan.
Before granting an exemption under this subsection from section
406(a) or 407(a), the Secretary shall publish notice in the
Federal Register of the pendency of the exemption, shall
require that adequate notice be given to interested persons,
and shall afford interested persons opportunity to present
views. The Secretary may not grant an exemption under this
subsection from section 406(b) unless he affords an opportunity
for a hearing and makes a determination on the record with
respect to the findings required by paragraphs (1), (2), and
(3) of this subsection.
(b) The prohibitions provided in section 406 shall not apply
to any of the following transactions:
(1) Any loans made by the plan to parties in interest
who are participants or beneficiaries of the plan if
such loans (A) are available to all such participants
and beneficiaries on a reasonably equivalent basis, (B)
are not made available to highly compensated employees
(within the meaning of section 414(q) of the Internal
Revenue Code of 1986) in an amount greater than the
amount made available to other employees, (C) are made
in accordance with specific provisions regarding such
loans set forth in the plan, (D) bear a reasonable rate
of interest, and (E) are adequately secured. A loan
made by a plan shall not fail to meet the requirements
of the preceding sentence by reason of a loan repayment
suspension described under section 414(u)(4) of the
Internal Revenue Code of 1986.
(2) Contracting or making reasonable arrangements
with a party in interest for office space, or legal,
accounting, or other services necessary for the
establishment or operation of the plan, if no more than
reasonable compensation is paid therefor.
(3) A loan to an employee stock ownership plan (as
defined in section 407(d)(6)), if--
(A) such loan is primarily for the benefit of
participants and beneficiaries of the plan, and
(B) such loan is at an interest rate which is
not in excess of a reasonable rate.
If the plan gives collateral to a party in interest for
such loan, such collateral may consist only of
qualifying employer securities (as defined in section
407(d)(5)).
(4) The investment of all or part of a plan's assets
in deposits which bear a reasonable interest rate in a
bank or similar financial institution supervised by the
United States or a State, if such bank or other
institution is a fiduciary of such plan and if--
(A) the plan covers only employees of such
bank or other institution and employees of
affiliates of such bank or other institution,
or
(B) such investment is expressly authorized
by a provision of the plan or by a fiduciary
(other than such bank or institution or
affiliate thereof) who is expressly empowered
by the plan to so instruct the trustee with
respect to such investment.
(5) Any contract for life insurance, health
insurance, or annuities with one or more insurers which
are qualified to do business in a State, if the plan
pays no more than adequate consideration, and if each
such insurer or insurers is--
(A) the employer maintaining the plan, or
(B) a party in interest which is wholly owned
(directly or indirectly) by the employer
maintaining the plan, or by any person which is
a party in interest with respect to the plan,
but only if the total premiums and annuity
considerations written by such insurers for
life insurance, health insurance, or annuities
for all plans (and their employers) with
respect to which such insurers are parties in
interest (not including premiums or annuity
considerations written by the employer
maintaining the plan) do not exceed 5 percent
of the total premiums and annuity
considerations written for all lines of
insurance in that year by such insurers (not
including premiums or annuity considerations
written by the employer maintaining the plan).
(6) The providing of any ancillary service by a bank
or similar financial institution supervised by the
United States or a State, if such bank or other
institution is a fiduciary of such plan, and if--
(A) such bank or similar financial
institution has adopted adequate internal
safeguards which assure that the providing of
such ancillary service is consistent with sound
banking and financial practice, as determined
by Federal or State supervisory authority, and
(B) the extent to which such ancillary
service is provided is subject to specific
guidelines issued by such bank or similar
financial institution (as determined by the
Secretary after consultation with Federal and
State supervisory authority), and adherence to
such guidelines would reasonably preclude such
bank or similar financial institution from
providing such ancillary service (i) in an
excessive or unreasonable manner, and (ii) in a
manner that would be inconsistent with the best
interests of participants and beneficiaries of
employee benefit plans.
Such ancillary services shall not be provided at more
than reasonable compensation.
(7) The exercise of a privilege to convert
securities, to the extent provided in regulations of
the Secretary, but only if the plan receives no less
than adequate consideration pursuant to such
conversion.
(8) Any transaction between a plan and (i) a common
or collective trust fund or pooled investment fund
maintained by a party in interest which is a bank or
trust company supervised by a State or Federal agency
or (ii) a pooled investment fund of an insurance
company qualified to do business in a State, if--
(A) the transaction is a sale or purchase of
an interest in the fund,
(B) the bank, trust company, or insurance
company receives not more than reasonable
compensation, and
(C) such transaction is expressly permitted
by the instrument under which the plan is
maintained, or by a fiduciary (other than the
bank, trust company, or insurance company, or
an affiliate thereof) who has authority to
manage and control the assets of the plan.
(9) The making by a fiduciary of a distribution of
the assets of the plan in accordance with the terms of
the plan if such assets are distributed in the same
manner as provided under section 4044 of this Act
(relating to allocation of assets).
(10) Any transaction required or permitted under part
1 of subtitle E of title IV.
(11) A merger of multiemployer plans, or the transfer
of assets or liabilities between multiemployer plans,
determined by the Pension Benefit Guaranty Corporation
to meet the requirements of section 4231.
(12) The sale by a plan to a party in interest on or
after December 18, 1987, of any stock, if--
(A) the requirements of paragraphs (1) and
(2) of subsection (e) are met with respect to
such stock,
(B) on the later of the date on which the
stock was acquired by the plan, or January 1,
1975, such stock constituted a qualifying
employer security (as defined in section
407(d)(5) as then in effect), and
(C) such stock does not constitute a
qualifying employer security (as defined in
section 407(d)(5) as in effect at the time of
the sale).
(13) Any transfer made before January 1, 2026, of
excess pension assets from a defined benefit plan to a
retiree health account in a qualified transfer
permitted under section 420 of the Internal Revenue
Code of 1986 (as in effect on the date of the enactment
of the Surface Transportation and Veterans Health Care
Choice Improvement Act of 2015).
(14) Any transaction in connection with the provision
of investment advice described in section 3(21)(A)(ii)
to a participant or beneficiary of an individual
account plan that permits such participant or
beneficiary to direct the investment of assets in their
individual account, if--
(A) the transaction is--
(i) the provision of the investment
advice to the participant or
beneficiary of the plan with respect to
a security or other property available
as an investment under the plan,
(ii) the acquisition, holding, or
sale of a security or other property
available as an investment under the
plan pursuant to the investment advice,
or
(iii) the direct or indirect receipt
of fees or other compensation by the
fiduciary adviser or an affiliate
thereof (or any employee, agent, or
registered representative of the
fiduciary adviser or affiliate) in
connection with the provision of the
advice or in connection with an
acquisition, holding, or sale of a
security or other property available as
an investment under the plan pursuant
to the investment advice; and
(B) the requirements of subsection (g) are
met.
(15)(A) Any transaction involving the purchase or
sale of securities, or other property (as determined by
the Secretary), between a plan and a party in interest
(other than a fiduciary described in section 3(21)(A))
with respect to a plan if--
(i) the transaction involves a block trade,
(ii) at the time of the transaction, the
interest of the plan (together with the
interests of any other plans maintained by the
same plan sponsor), does not exceed 10 percent
of the aggregate size of the block trade,
(iii) the terms of the transaction, including
the price, are at least as favorable to the
plan as an arm's length transaction, and
(iv) the compensation associated with the
purchase and sale is not greater than the
compensation associated with an arm's length
transaction with an unrelated party.
(B) For purposes of this paragraph, the term ``block
trade'' means any trade of at least 10,000 shares or
with a market value of at least $200,000 which will be
allocated across two or more unrelated client accounts
of a fiduciary.
(16) Any transaction involving the purchase or sale
of securities, or other property (as determined by the
Secretary), between a plan and a party in interest if--
(A) the transaction is executed through an
electronic communication network, alternative
trading system, or similar execution system or
trading venue subject to regulation and
oversight by--
(i) the applicable Federal regulating
entity, or
(ii) such foreign regulatory entity
as the Secretary may determine by
regulation,
(B) either--
(i) the transaction is effected
pursuant to rules designed to match
purchases and sales at the best price
available through the execution system
in accordance with applicable rules of
the Securities and Exchange Commission
or other relevant governmental
authority, or
(ii) neither the execution system nor
the parties to the transaction take
into account the identity of the
parties in the execution of trades,
(C) the price and compensation associated
with the purchase and sale are not greater than
the price and compensation associated with an
arm's length transaction with an unrelated
party,
(D) if the party in interest has an ownership
interest in the system or venue described in
subparagraph (A), the system or venue has been
authorized by the plan sponsor or other
independent fiduciary for transactions
described in this paragraph, and
(E) not less than 30 days prior to the
initial transaction described in this paragraph
executed through any system or venue described
in subparagraph (A), a plan fiduciary is
provided written or electronic notice of the
execution of such transaction through such
system or venue.
(17)(A) Transactions described in subparagraphs (A),
(B), and (D) of section 406(a)(1) between a plan and a
person that is a party in interest other than a
fiduciary (or an affiliate) who has or exercises any
discretionary authority or control with respect to the
investment of the plan assets involved in the
transaction or renders investment advice (within the
meaning of section 3(21)(A)(ii)) with respect to those
assets, solely by reason of providing services to the
plan or solely by reason of a relationship to such a
service provider described in subparagraph (F), (G),
(H), or (I) of section 3(14), or both, but only if in
connection with such transaction the plan receives no
less, nor pays no more, than adequate consideration.
(B) For purposes of this paragraph, the term
``adequate consideration'' means--
(i) in the case of a security for which there
is a generally recognized market--
(I) the price of the security
prevailing on a national securities
exchange which is registered under
section 6 of the Securities Exchange
Act of 1934, taking into account
factors such as the size of the
transaction and marketability of the
security, or
(II) if the security is not traded on
such a national securities exchange, a
price not less favorable to the plan
than the offering price for the
security as established by the current
bid and asked prices quoted by persons
independent of the issuer and of the
party in interest, taking into account
factors such as the size of the
transaction and marketability of the
security, and
(ii) in the case of an asset other than a
security for which there is a generally
recognized market, the fair market value of the
asset as determined in good faith by a
fiduciary or fiduciaries in accordance with
regulations prescribed by the Secretary.
(18) Foreign exchange transactions.--Any foreign
exchange transactions, between a bank or broker-dealer
(or any affiliate of either), and a plan (as defined in
section 3(3)) with respect to which such bank or
broker-dealer (or affiliate) is a trustee, custodian,
fiduciary, or other party in interest, if--
(A) the transaction is in connection with the
purchase, holding, or sale of securities or
other investment assets (other than a foreign
exchange transaction unrelated to any other
investment in securities or other investment
assets),
(B) at the time the foreign exchange
transaction is entered into, the terms of the
transaction are not less favorable to the plan
than the terms generally available in
comparable arm's length foreign exchange
transactions between unrelated parties, or the
terms afforded by the bank or broker-dealer (or
any affiliate of either) in comparable arm's-
length foreign exchange transactions involving
unrelated parties,
(C) the exchange rate used by such bank or
broker-dealer (or affiliate) for a particular
foreign exchange transaction does not deviate
by more than 3 percent from the interbank bid
and asked rates for transactions of comparable
size and maturity at the time of the
transaction as displayed on an independent
service that reports rates of exchange in the
foreign currency market for such currency, and
(D) the bank or broker-dealer (or any
affiliate of either) does not have investment
discretion, or provide investment advice, with
respect to the transaction.
(19) Cross trading.--Any transaction described in
sections 406(a)(1)(A) and 406(b)(2) involving the
purchase and sale of a security between a plan and any
other account managed by the same investment manager,
if--
(A) the transaction is a purchase or sale,
for no consideration other than cash payment
against prompt delivery of a security for which
market quotations are readily available,
(B) the transaction is effected at the
independent current market price of the
security (within the meaning of section
270.17a-7(b) of title 17, Code of Federal
Regulations),
(C) no brokerage commission, fee (except for
customary transfer fees, the fact of which is
disclosed pursuant to subparagraph (D)), or
other remuneration is paid in connection with
the transaction,
(D) a fiduciary (other than the investment
manager engaging in the cross-trades or any
affiliate) for each plan participating in the
transaction authorizes in advance of any cross-
trades (in a document that is separate from any
other written agreement of the parties) the
investment manager to engage in cross trades at
the investment manager's discretion, after such
fiduciary has received disclosure regarding the
conditions under which cross trades may take
place (but only if such disclosure is separate
from any other agreement or disclosure
involving the asset management relationship),
including the written policies and procedures
of the investment manager described in
subparagraph (H),
(E) each plan participating in the
transaction has assets of at least
$100,000,000, except that if the assets of a
plan are invested in a master trust containing
the assets of plans maintained by employers in
the same controlled group (as defined in
section 407(d)(7)), the master trust has assets
of at least $100,000,000,
(F) the investment manager provides to the
plan fiduciary who authorized cross trading
under subparagraph (D) a quarterly report
detailing all cross trades executed by the
investment manager in which the plan
participated during such quarter, including the
following information, as applicable: (i) the
identity of each security bought or sold; (ii)
the number of shares or units traded; (iii) the
parties involved in the cross-trade; and (iv)
trade price and the method used to establish
the trade price,
(G) the investment manager does not base its
fee schedule on the plan's consent to cross
trading, and no other service (other than the
investment opportunities and cost savings
available through a cross trade) is conditioned
on the plan's consent to cross trading,
(H) the investment manager has adopted, and
cross-trades are effected in accordance with,
written cross-trading policies and procedures
that are fair and equitable to all accounts
participating in the cross-trading program, and
that include a description of the manager's
pricing policies and procedures, and the
manager's policies and procedures for
allocating cross trades in an objective manner
among accounts participating in the cross-
trading program, and
(I) the investment manager has designated an
individual responsible for periodically
reviewing such purchases and sales to ensure
compliance with the written policies and
procedures described in subparagraph (H), and
following such review, the individual shall
issue an annual written report no later than 90
days following the period to which it relates
signed under penalty of perjury to the plan
fiduciary who authorized cross trading under
subparagraph (D) describing the steps performed
during the course of the review, the level of
compliance, and any specific instances of non-
compliance.
The written report under subparagraph (I) shall also
notify the plan fiduciary of the plan's right to
terminate participation in the investment manager's
cross-trading program at any time.
(20)(A) Except as provided in subparagraphs (B) and
(C), a transaction described in section 406(a) in
connection with the acquisition, holding, or
disposition of any security or commodity, if the
transaction is corrected before the end of the
correction period.
(B) Subparagraph (A) does not apply to any
transaction between a plan and a plan sponsor or its
affiliates that involves the acquisition or sale of an
employer security (as defined in section 407(d)(1)) or
the acquisition, sale, or lease of employer real
property (as defined in section 407(d)(2)).
(C) In the case of any fiduciary or other party in
interest (or any other person knowingly participating
in such transaction), subparagraph (A) does not apply
to any transaction if, at the time the transaction
occurs, such fiduciary or party in interest (or other
person) knew (or reasonably should have known) that the
transaction would (without regard to this paragraph)
constitute a violation of section 406(a).
(D) For purposes of this paragraph, the term
``correction period'' means, in connection with a
fiduciary or party in interest (or other person
knowingly participating in the transaction), the 14-day
period beginning on the date on which such fiduciary or
party in interest (or other person) discovers, or
reasonably should have discovered, that the transaction
would (without regard to this paragraph) constitute a
violation of section 406(a).
(E) For purposes of this paragraph--
(i) The term ``security'' has the meaning
given such term by section 475(c)(2) of the
Internal Revenue Code of 1986 (without regard
to subparagraph (F)(iii) and the last sentence
thereof).
(ii) The term ``commodity'' has the meaning
given such term by section 475(e)(2) of such
Code (without regard to subparagraph (D)(iii)
thereof).
(iii) The term ``correct'' means, with
respect to a transaction--
(I) to undo the transaction to the
extent possible and in any case to make
good to the plan or affected account
any losses resulting from the
transaction, and
(II) to restore to the plan or
affected account any profits made
through the use of assets of the plan.
(21) Any transaction involving a recommendation made
by a broker or dealer (including its registered
representative), or other persons or entities, that is
subject to the requirements of the second subsection
(k) of section 15 of the Securities Exchange Act of
1934 (15 U.S.C. 78o(k)).
(c) Nothing in section 406 shall be construed to prohibit any
fiduciary from--
(1) receiving any benefit to which he may be entitled
as a participant or beneficiary in the plan, so long as
the benefit is computed and paid on a basis which is
consistent with the terms of the plan as applied to all
other participants and beneficiaries;
(2) receiving any reasonable compensation for
services rendered, or for the reimbursement of expenses
properly and actually incurred, in the performance of
his duties with the plan; except that no person so
serving who already receives full time pay from an
employer or an association of employers, whose
employees are participants in the plan, or from an
employee organization whose members are participants in
such plan shall receive compensation from such plan,
except for reimbursement of expenses properly and
actually incurred; or
(3) serving as a fiduciary in addition to being an
officer, employee, agent, or other representative of a
party in interest.
(d)(1) Section 407(b) and subsections (b), (c), and (e) of
this section shall not apply to a transaction in which a plan
directly or indirectly--
(A) lends any part of the corpus or income of the
plan to,
(B) pays any compensation for personal services
rendered to the plan to, or
(C) acquires for the plan any property from, or sells
any property to,
any person who is with respect to the plan an owner-employee
(as defined in section 401(c)(3) of the Internal Revenue Code
of 1986), a member of the family (as defined in section
267(c)(4) of such Code) of any such owner-employee, or any
corporation in which any such owner-employee owns, directly or
indirectly, 50 percent or more of the total combined voting
power of all classes of stock entitled to vote or 50 percent or
more of the total value of shares of all classes of stock of
the corporation.
(2)(A) For purposes of paragraph (1), the following shall be
treated as owner-employees:
(i) A shareholder-employee.
(ii) A participant or beneficiary of an individual
retirement plan (as defined in section 7701(a)(37) of
the Internal Revenue Code of 1986).
(iii) An employer or association of employees which
establishes such an individual retirement plan under
section 408(c) of such Code.
(B) Paragraph (1)(C) shall not apply to a transaction which
consists of a sale of employer securities to an employee stock
ownership plan (as defined in section 407(d)(6)) by a
shareholder-employee, a member of the family (as defined in
section 267(c)(4) of such Code) of any such owner-employee, or
a corporation in which such a shareholder-employee owns stock
representing a 50 percent or greater interest described in
paragraph (1).
(C) For purposes of paragraph (1)(A), the term ``owner-
employee'' shall only include a person described in clause (ii)
or (iii) of subparagraph (A).
(3) For purposes of paragraph (2), the term ``shareholder-
employee'' means an employee or officer of an S corporation (as
defined in section 1361(a)(1) of such Code) who owns (or is
considered as owning within the meaning of section 318(a)(1) of
such Code) more than 5 percent of the outstanding stock of the
corporation on any day during the taxable year of such
corporation.
(e) Sections 406 and 407 shall not apply to the acquisition
or sale by a plan of qualifying employer securities (as defined
in section 407(d)(5)) or acquisition, sale or lease by a plan
of qualifying employer real property (as defined in section
407(d)(4))--
(1) if such acquisition, sale, or lease is for
adequate consideration (or in the case of a marketable
obligation, at a price not less favorable to the plan
than the price determined under section 407(e)(1)),
(2) if no commission is charged with respect thereto,
and
(3) if--
(A) the plan is an eligible individual
account plan (as defined in section 407(d)(3)),
or
(B) in the case of an acquisition or lease of
qualifying employer real property by a plan
which is not an eligible individual account
plan, or of an acquisition of qualifying
employer securities by such a plan, the lease
or acquisition is not prohibited by section
407(a).
(f) Section 406(b)(2) shall not apply to any merger or
transfer described in subsection (b)(11).
(g) Provision of Investment Advice to Participant and
Beneficiaries.--
(1) In general.--The prohibitions provided in section
406 shall not apply to transactions described in
subsection (b)(14) if the investment advice provided by
a fiduciary adviser is provided under an eligible
investment advice arrangement.
(2) Eligible investment advice arrangement.--For
purposes of this subsection, the term ``eligible
investment advice arrangement'' means an arrangement--
(A) which either--
(i) provides that any fees (including
any commission or other compensation)
received by the fiduciary adviser for
investment advice or with respect to
the sale, holding, or acquisition of
any security or other property for
purposes of investment of plan assets
do not vary depending on the basis of
any investment option selected, or
(ii) uses a computer model under an
investment advice program meeting the
requirements of paragraph (3) in
connection with the provision of
investment advice by a fiduciary
adviser to a participant or
beneficiary, and
(B) with respect to which the requirements of
paragraph (4), (5), (6), (7), (8), and (9) are
met.
(3) Investment advice program using computer model.--
(A) In general.--An investment advice program
meets the requirements of this paragraph if the
requirements of subparagraphs (B), (C), and (D)
are met.
(B) Computer model.--The requirements of this
subparagraph are met if the investment advice
provided under the investment advice program is
provided pursuant to a computer model that--
(i) applies generally accepted
investment theories that take into
account the historic returns of
different asset classes over defined
periods of time,
(ii) utilizes relevant information
about the participant, which may
include age, life expectancy,
retirement age, risk tolerance, other
assets or sources of income, and
preferences as to certain types of
investments,
(iii) utilizes prescribed objective
criteria to provide asset allocation
portfolios comprised of investment
options available under the plan,
(iv) operates in a manner that is not
biased in favor of investments offered
by the fiduciary adviser or a person
with a material affiliation or
contractual relationship with the
fiduciary adviser, and
(v) takes into account all investment
options under the plan in specifying
how a participant's account balance
should be invested and is not
inappropriately weighted with respect
to any investment option.
(C) Certification.--
(i) In general.--The requirements of
this subparagraph are met with respect
to any investment advice program if an
eligible investment expert certifies,
prior to the utilization of the
computer model and in accordance with
rules prescribed by the Secretary, that
the computer model meets the
requirements of subparagraph (B).
(ii) Renewal of certifications.--If,
as determined under regulations
prescribed by the Secretary, there are
material modifications to a computer
model, the requirements of this
subparagraph are met only if a
certification described in clause (i)
is obtained with respect to the
computer model as so modified.
(iii) Eligible investment expert.--
The term ``eligible investment expert''
means any person--
(I) which meets such
requirements as the Secretary
may provide, and
(II) does not bear any
material affiliation or
contractual relationship with
any investment adviser or a
related person thereof (or any
employee, agent, or registered
representative of the
investment adviser or related
person).
(D) Exclusivity of recommendation.--The
requirements of this subparagraph are met with
respect to any investment advice program if--
(i) the only investment advice
provided under the program is the
advice generated by the computer model
described in subparagraph (B), and
(ii) any transaction described in
subsection (b)(14)(A)(ii) occurs solely
at the direction of the participant or
beneficiary.
Nothing in the preceding sentence shall
preclude the participant or beneficiary from
requesting investment advice other than that
described in subparagraph (A), but only if such
request has not been solicited by any person
connected with carrying out the arrangement.
(4) Express authorization by separate fiduciary.--The
requirements of this paragraph are met with respect to
an arrangement if the arrangement is expressly
authorized by a plan fiduciary other than the person
offering the investment advice program, any person
providing investment options under the plan, or any
affiliate of either.
(5) Annual audit.--The requirements of this paragraph
are met if an independent auditor, who has appropriate
technical training or experience and proficiency and so
represents in writing--
(A) conducts an annual audit of the
arrangement for compliance with the
requirements of this subsection, and
(B) following completion of the annual audit,
issues a written report to the fiduciary who
authorized use of the arrangement which
presents its specific findings regarding
compliance of the arrangement with the
requirements of this subsection.
For purposes of this paragraph, an auditor is
considered independent if it is not related to the
person offering the arrangement to the plan and is not
related to any person providing investment options
under the plan.
(6) Disclosure.--The requirements of this paragraph
are met if--
(A) the fiduciary adviser provides to a
participant or a beneficiary before the initial
provision of the investment advice with regard
to any security or other property offered as an
investment option, a written notification
(which may consist of notification by means of
electronic communication)--
(i) of the role of any party that has
a material affiliation or contractual
relationship with the fiduciary adviser
in the development of the investment
advice program and in the selection of
investment options available under the
plan,
(ii) of the past performance and
historical rates of return of the
investment options available under the
plan,
(iii) of all fees or other
compensation relating to the advice
that the fiduciary adviser or any
affiliate thereof is to receive
(including compensation provided by any
third party) in connection with the
provision of the advice or in
connection with the sale, acquisition,
or holding of the security or other
property,
(iv) of any material affiliation or
contractual relationship of the
fiduciary adviser or affiliates thereof
in the security or other property,
(v) the manner, and under what
circumstances, any participant or
beneficiary information provided under
the arrangement will be used or
disclosed,
(vi) of the types of services
provided by the fiduciary adviser in
connection with the provision of
investment advice by the fiduciary
adviser,
(vii) that the adviser is acting as a
fiduciary of the plan in connection
with the provision of the advice, and
(viii) that a recipient of the advice
may separately arrange for the
provision of advice by another adviser,
that could have no material affiliation
with and receive no fees or other
compensation in connection with the
security or other property, and
(B) at all times during the provision of
advisory services to the participant or
beneficiary, the fiduciary adviser--
(i) maintains the information
described in subparagraph (A) in
accurate form and in the manner
described in paragraph (8),
(ii) provides, without charge,
accurate information to the recipient
of the advice no less frequently than
annually,
(iii) provides, without charge,
accurate information to the recipient
of the advice upon request of the
recipient, and
(iv) provides, without charge,
accurate information to the recipient
of the advice concerning any material
change to the information required to
be provided to the recipient of the
advice at a time reasonably
contemporaneous to the change in
information.
(7) Other conditions.--The requirements of this
paragraph are met if--
(A) the fiduciary adviser provides
appropriate disclosure, in connection with the
sale, acquisition, or holding of the security
or other property, in accordance with all
applicable securities laws,
(B) the sale, acquisition, or holding occurs
solely at the direction of the recipient of the
advice,
(C) the compensation received by the
fiduciary adviser and affiliates thereof in
connection with the sale, acquisition, or
holding of the security or other property is
reasonable, and
(D) the terms of the sale, acquisition, or
holding of the security or other property are
at least as favorable to the plan as an arm's
length transaction would be.
(8) Standards for presentation of information.--
(A) In general.--The requirements of this
paragraph are met if the notification required
to be provided to participants and
beneficiaries under paragraph (6)(A) is written
in a clear and conspicuous manner and in a
manner calculated to be understood by the
average plan participant and is sufficiently
accurate and comprehensive to reasonably
apprise such participants and beneficiaries of
the information required to be provided in the
notification.
(B) Model form for disclosure of fees and
other compensation.--The Secretary shall issue
a model form for the disclosure of fees and
other compensation required in paragraph
(6)(A)(iii) which meets the requirements of
subparagraph (A).
(9) Maintenance for 6 years of evidence of
compliance.--The requirements of this paragraph are met
if a fiduciary adviser who has provided advice referred
to in paragraph (1) maintains, for a period of not less
than 6 years after the provision of the advice, any
records necessary for determining whether the
requirements of the preceding provisions of this
subsection and of subsection (b)(14) have been met. A
transaction prohibited under section 406 shall not be
considered to have occurred solely because the records
are lost or destroyed prior to the end of the 6-year
period due to circumstances beyond the control of the
fiduciary adviser.
(10) Exemption for plan sponsor and certain other
fiduciaries.--
(A) In general.--Subject to subparagraph (B),
a plan sponsor or other person who is a
fiduciary (other than a fiduciary adviser)
shall not be treated as failing to meet the
requirements of this part solely by reason of
the provision of investment advice referred to
in section 3(21)(A)(ii) (or solely by reason of
contracting for or otherwise arranging for the
provision of the advice), if--
(i) the advice is provided by a
fiduciary adviser pursuant to an
eligible investment advice arrangement
between the plan sponsor or other
fiduciary and the fiduciary adviser for
the provision by the fiduciary adviser
of investment advice referred to in
such section,
(ii) the terms of the eligible
investment advice arrangement require
compliance by the fiduciary adviser
with the requirements of this
subsection, and
(iii) the terms of the eligible
investment advice arrangement include a
written acknowledgment by the fiduciary
adviser that the fiduciary adviser is a
fiduciary of the plan with respect to
the provision of the advice.
(B) Continued duty of prudent selection of
adviser and periodic review.--Nothing in
subparagraph (A) shall be construed to exempt a
plan sponsor or other person who is a fiduciary
from any requirement of this part for the
prudent selection and periodic review of a
fiduciary adviser with whom the plan sponsor or
other person enters into an eligible investment
advice arrangement for the provision of
investment advice referred to in section
3(21)(A)(ii). The plan sponsor or other person
who is a fiduciary has no duty under this part
to monitor the specific investment advice given
by the fiduciary adviser to any particular
recipient of the advice.
(C) Availability of plan assets for payment
for advice.--Nothing in this part shall be
construed to preclude the use of plan assets to
pay for reasonable expenses in providing
investment advice referred to in section
3(21)(A)(ii).
(11) Definitions.--For purposes of this subsection
and subsection (b)(14)--
(A) Fiduciary adviser.--The term ``fiduciary
adviser'' means, with respect to a plan, a
person who is a fiduciary of the plan by reason
of the provision of investment advice referred
to in section 3(21)(A)(ii) by the person to a
participant or beneficiary of the plan and who
is--
(i) 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 fiduciary maintains its principal
office and place of business,
(ii) a bank or similar financial
institution referred to in subsection
(b)(4) or a savings association (as
defined in section 3(b)(1) of the
Federal Deposit Insurance Act (12
U.S.C. 1813(b)(1)), but only if the
advice is provided through a trust
department of the bank or similar
financial institution or savings
association which is subject to
periodic examination and review by
Federal or State banking authorities,
(iii) an insurance company qualified
to do business under the laws of a
State,
(iv) a person registered as a broker
or dealer under the Securities Exchange
Act of 1934 (15 U.S.C. 78a et seq.),
(v) an affiliate of a person
described in any of clauses (i) through
(iv), or
(vi) an employee, agent, or
registered representative of a person
described in clauses (i) through (v)
who satisfies the requirements of
applicable insurance, banking, and
securities laws relating to the
provision of the advice.
For purposes of this part, a person who
develops the computer model described in
paragraph (3)(B) or markets the investment
advice program or computer model shall be
treated as a person who is a fiduciary of the
plan by reason of the provision of investment
advice referred to in section 3(21)(A)(ii) to a
participant or beneficiary and shall be treated
as a fiduciary adviser for purposes of this
subsection and subsection (b)(14), except that
the Secretary may prescribe rules under which
only 1 fiduciary adviser may elect to be
treated as a fiduciary with respect to the
plan.
(B) Affiliate.--The term ``affiliate'' of
another entity means an affiliated person of
the entity (as defined in section 2(a)(3) of
the Investment Company Act of 1940 (15 U.S.C.
80a-2(a)(3))).
(C) Registered representative.--The term
``registered representative'' of another entity
means a person described in section 3(a)(18) of
the Securities Exchange Act of 1934 (15 U.S.C.
78c(a)(18)) (substituting the entity for the
broker or dealer referred to in such section)
or a person described in section 202(a)(17) of
the Investment Advisers Act of 1940 (15 U.S.C.
80b-2(a)(17)) (substituting the entity for the
investment adviser referred to in such
section).
* * * * * * *
----------
INTERNAL REVENUE CODE OF 1986
* * * * * * *
Subtitle D--Miscellaneous Excise Taxes
* * * * * * *
CHAPTER 43--QUALIFIED PENSION, ETC., PLANS
* * * * * * *
SEC. 4975. TAX ON PROHIBITED TRANSACTIONS.
(a) Initial Taxes on Disqualified Person.--There is hereby
imposed a tax on each prohibited transaction. The rate of tax
shall be equal to 15 percent of the amount involved with
respect to the prohibited transaction for each year (or part
thereof) in the taxable period. The tax imposed by this
subsection shall be paid by any disqualified person who
participates in the prohibited transaction (other than a
fiduciary acting only as such).
(b) Additional Taxes on Disqualified Person.--In any case in
which an initial tax is imposed by subsection (a) on a
prohibited transaction and the transaction is not corrected
within the taxable period, there is hereby imposed a tax equal
to 100 percent of the amount involved. The tax imposed by this
subsection shall be paid by any disqualified person who
participated in the prohibited transaction (other than a
fiduciary acting only as such).
(c) Prohibited Transaction.--
(1) General rule.--For purposes of this section, the
term ``prohibited transaction'' means any direct or
indirect--
(A) sale or exchange, or leasing, of any
property between a plan and a disqualified
person;
(B) lending of money or other extension of
credit between a plan and a disqualified
person;
(C) furnishing of goods, services, or
facilities between a plan and a disqualified
person;
(D) transfer to, or use by or for the benefit
of, a disqualified person of the income or
assets of a plan;
(E) act by a disqualified person who is a
fiduciary whereby he deals with the income or
assets of a plan in his own interests or for
his own account; or
(F) receipt of any consideration for his own
personal account by any disqualified person who
is a fiduciary from any party dealing with the
plan in connection with a transaction involving
the income or assets of the plan.
(2) Special exemption.--The Secretary shall establish
an exemption procedure for purposes of this subsection.
Pursuant to such procedure, he may grant a conditional
or unconditional exemption of any disqualified person
or transaction, orders of disqualified persons or
transactions, from all or part of the restrictions
imposed by paragraph (1) of this subsection. Action
under this subparagraph may be taken only after
consultation and coordination with the Secretary of
Labor. The Secretary may not grant an exemption under
this paragraph unless he finds that such exemption is--
(A) administratively feasible,
(B) in the interests of the plan and of its
participants and beneficiaries, and
(C) protective of the rights of participants
and beneficiaries of the plan.
Before granting an exemption under this paragraph, the
Secretary shall require adequate notice to be given to
interested persons and shall publish notice in the
Federal Register of the pendency of such exemption and
shall afford interested persons an opportunity to
present views. No exemption may be granted under this
paragraph with respect to a transaction described in
subparagraph (E) or (F) of paragraph (1) unless the
Secretary affords an opportunity for a hearing and
makes a determination on the record with respect to the
findings required under subparagraphs (A), (B), and (C)
of this paragraph, except that in lieu of such hearing
the Secretary may accept any record made by the
Secretary of Labor with respect to an application for
exemption under section 408(a) of title I of the
Employee Retirement Income Security Act of 1974.
(3) Special rule for individual retirement
accounts.--An individual for whose benefit an
individual retirement account is established and his
beneficiaries shall be exempt from the tax imposed by
this section with respect to any transaction concerning
such account (which would otherwise be taxable under
this section) if, with respect to such transaction, the
account ceases to be an individual retirement account
by reason of the application of section 408(e)(2)(A) or
if section 408(e)(4) applies to such account.
(4) Special rule for Archer MSAs.--An individual for
whose benefit an Archer MSA (within the meaning of
section 220(d)) is established shall be exempt from the
tax imposed by this section with respect to any
transaction concerning such account (which would
otherwise be taxable under this section) if section
220(e)(2) applies to such transaction.
(5) Special rule for Coverdell education savings
accounts.--An individual for whose benefit a Coverdell
education savings account is established and any
contributor to such account shall be exempt from the
tax imposed by this section with respect to any
transaction concerning such account (which would
otherwise be taxable under this section) if section
530(d) applies with respect to such transaction.
(6) Special rule for health savings accounts.--An
individual for whose benefit a health savings account
(within the meaning of section 223(d)) is established
shall be exempt from the tax imposed by this section
with respect to any transaction concerning such account
(which would otherwise be taxable under this section)
if, with respect to such transaction, the account
ceases to be a health savings account by reason of the
application of section 223(e)(2) to such account.
(d) Exemptions.--Except as provided in subsection (f)(6), the
prohibitions provided in subsection (c) shall not apply to--
(1) any loan made by the plan to a disqualified
person who is a participant or beneficiary of the plan
if such loan--
(A) is available to all such participants or
beneficiaries on a reasonably equivalent basis,
(B) is not made available to highly
compensated employees (within the meaning of
section 414(q)) in an amount greater than the
amount made available to other employees,
(C) is made in accordance with specific
provisions regarding such loans set forth in
the plan,
(D) bears a reasonable rate of interest, and
(E) is adequately secured;
(2) any contract, or reasonable arrangement, made
with a disqualified person for office space, or legal,
accounting, or other services necessary for the
establishment or operation of the plan, if no more than
reasonable compensation is paid therefor;
(3) any loan to an leveraged employee stock ownership
plan (as defined in subsection (e)(7)), if--
(A) such loan is primarily for the benefit of
participants and beneficiaries of the plan, and
(B) such loan is at a reasonable rate of
interest, and any collateral which is given to
a disqualified person by the plan consists only
of qualifying employer securities (as defined
in subsection (e)(8));
(4) the investment of all or part of a plan's assets
in deposits which bear a reasonable interest rate in a
bank or similar financial institution supervised by the
United States or a State, if such bank or other
institution is a fiduciary of such plan and if--
(A) the plan covers only employees of such
bank or other institution and employees of
affiliates of such bank or other institution,
or
(B) such investment is expressly authorized
by a provision of the plan or by a fiduciary
(other than such bank or institution or
affiliates thereof) who is expressly empowered
by the plan to so instruct the trustee with
respect to such investment;
(5) any contract for life insurance, health
insurance, or annuities with one or more insurers which
are qualified to do business in a State if the plan
pays no more than adequate consideration, and if each
such insurer or insurers is--
(A) the employer maintaining the plan, or
(B) a disqualified person which is wholly
owned (directly or indirectly) by the employer
establishing the plan, or by any person which
is a disqualified person with respect to the
plan, but only if the total premiums and
annuity considerations written by such insurers
for life insurance, health insurance, or
annuities for all plans (and their employers)
with respect to which such insurers are
disqualified persons (not including premiums or
annuity considerations written by the employer
maintaining the plan) do not exceed 5 percent
of the total premiums and annuity
considerations written for all lines of
insurance in that year by such insurers (not
including premiums or annuity considerations
written by the employer maintaining the plan);
(6) the provision of any ancillary service by a bank
or similar financial institution supervised by the
United States or a State, if such service is provided
at not more than reasonable compensation, if such bank
or other institution is a fiduciary of such plan, and
if--
(A) such bank or similar financial
institution has adopted adequate internal
safeguards which assure that the provision of
such ancillary service is consistent with sound
banking and financial practice, as determined
by Federal or State supervisory authority, and
(B) the extent to which such ancillary
service is provided is subject to specific
guidelines issued by such bank or similar
financial institution (as determined by the
Secretary after consultation with Federal and
State supervisory authority), and under such
guidelines the bank or similar financial
institution does not provide such ancillary
service--
(i) in an excessive or unreasonable
manner, and
(ii) in a manner that would be
inconsistent with the best interests of
participants and beneficiaries of
employee benefit plans;
(7) the exercise of a privilege to convert
securities, to the extent provided in regulations of
the Secretary but only if the plan receives no less
than adequate consideration pursuant to such
conversion;
(8) any transaction between a plan and a common or
collective trust fund or pooled investment fund
maintained by a disqualified person which is a bank or
trust company supervised by a State or Federal agency
or between a plan and a pooled investment fund of an
insurance company qualified to do business in a State
if--
(A) the transaction is a sale or purchase of
an interest in the fund,
(B) the bank, trust company, or insurance
company receives not more than a reasonable
compensation, and
(C) such transaction is expressly permitted
by the instrument under which the plan is
maintained, or by a fiduciary (other than the
bank, trust company, or insurance company, or
an affiliate thereof) who has authority to
manage and control the assets of the plan;
(9) receipt by a disqualified person of any benefit
to which he may be entitled as a participant or
beneficiary in the plan, so long as the benefit is
computed and paid on a basis which is consistent with
the terms of the plan as applied to all other
participants and beneficiaries;
(10) receipt by a disqualified person of any
reasonable compensation for services rendered, or for
the reimbursement of expenses properly and actually
incurred, in the performance of his duties with the
plan, but no person so serving who already receives
full-time pay from an employer or an association of
employers, whose employees are participants in the plan
or from an employee organization whose members are
participants in such plan shall receive compensation
from such fund, except for reimbursement of expenses
properly and actually incurred;
(11) service by a disqualified person as a fiduciary
in addition to being an officer, employee, agent, or
other representative of a disqualified person;
(12) the making by a fiduciary of a distribution of
the assets of the trust in accordance with the terms of
the plan if such assets are distributed in the same
manner as provided under section 4044 of title IV of
the Employee Retirement Income Security Act of 1974
(relating to allocation of assets);
(13) any transaction which is exempt from section 406
of such Act by reason of section 408(e) of such Act (or
which would be so exempt if such section 406 applied to
such transaction) or which is exempt from section 406
of such Act by reason of section 408(b)(12) of such
Act;
(14) any transaction required or permitted under part
1 of subtitle E of title IV or section 4223 of the
Employee Retirement Income Security Act of 1974, but
this paragraph shall not apply with respect to the
application of subsection (c)(1) (E) or (F);
(15) a merger of multiemployer plans, or the transfer
of assets or liabilities between multiemployer plans,
determined by the Pension Benefit Guaranty Corporation
to meet the requirements of section 4231 of such Act,
but this paragraph shall not apply with respect to the
application of subsection (c)(1) (E) or (F);
(16) a sale of stock held by a trust which
constitutes an individual retirement account under
section 408(a) to the individual for whose benefit such
account is established if--
(A) such stock is in a bank (as defined in
section 581) or a depository institution
holding company (as defined in section 3(w)(1)
of the Federal Deposit Insurance Act (12 U.S.C.
1813(w)(1)),
(B) such stock is held by such trust as of
the date of the enactment of this paragraph,
(C) such sale is pursuant to an election
under section 1362(a) by such bank or company,
(D) such sale is for fair market value at the
time of sale (as established by an independent
appraiser) and the terms of the sale are
otherwise at least as favorable to such trust
as the terms that would apply on a sale to an
unrelated party,
(E) such trust does not pay any commissions,
costs, or other expenses in connection with the
sale, and
(F) the stock is sold in a single transaction
for cash not later than 120 days after the S
corporation election is made;
(17) Any transaction in connection with the provision
of investment advice described in subsection (e)(3)(B)
to a participant or beneficiary in a plan that permits
such participant or beneficiary to direct the
investment of plan assets in an individual account,
if--
(A) the transaction is--
(i) the provision of the investment
advice to the participant or
beneficiary of the plan with respect to
a security or other property available
as an investment under the plan,
(ii) the acquisition, holding, or
sale of a security or other property
available as an investment under the
plan pursuant to the investment advice,
or
(iii) the direct or indirect receipt
of fees or other compensation by the
fiduciary adviser or an affiliate
thereof (or any employee, agent, or
registered representative of the
fiduciary adviser or affiliate) in
connection with the provision of the
advice or in connection with an
acquisition, holding, or sale of a
security or other property available as
an investment under the plan pursuant
to the investment advice; and
(B) the requirements of subsection (f)(8) are
met,
(18) any transaction involving the purchase or sale
of securities, or other property (as determined by the
Secretary of Labor), between a plan and a disqualified
person (other than a fiduciary described in subsection
(e)(3)) with respect to a plan if--
(A) the transaction involves a block trade,
(B) at the time of the transaction, the
interest of the plan (together with the
interests of any other plans maintained by the
same plan sponsor), does not exceed 10 percent
of the aggregate size of the block trade,
(C) the terms of the transaction, including
the price, are at least as favorable to the
plan as an arm's length transaction, and
(D) the compensation associated with the
purchase and sale is not greater than the
compensation associated with an arm's length
transaction with an unrelated party,
(19) any transaction involving the purchase or sale
of securities, or other property (as determined by the
Secretary of Labor), between a plan and a disqualified
person if--
(A) the transaction is executed through an
electronic communication network, alternative
trading system, or similar execution system or
trading venue subject to regulation and
oversight by--
(i) the applicable Federal regulating
entity, or
(ii) such foreign regulatory entity
as the Secretary of Labor may determine
by regulation,
(B) either--
(i) the transaction is effected
pursuant to rules designed to match
purchases and sales at the best price
available through the execution system
in accordance with applicable rules of
the Securities and Exchange Commission
or other relevant governmental
authority, or
(ii) neither the execution system nor
the parties to the transaction take
into account the identity of the
parties in the execution of trades,
(C) the price and compensation associated
with the purchase and sale are not greater than
the price and compensation associated with an
arm's length transaction with an unrelated
party,
(D) if the disqualified person has an
ownership interest in the system or venue
described in subparagraph (A), the system or
venue has been authorized by the plan sponsor
or other independent fiduciary for transactions
described in this paragraph, and
(E) not less than 30 days prior to the
initial transaction described in this paragraph
executed through any system or venue described
in subparagraph (A), a plan fiduciary is
provided written or electronic notice of the
execution of such transaction through such
system or venue,
(20) transactions described in subparagraphs (A),
(B), and (D) of subsection (c)(1) between a plan and a
person that is a disqualified person other than a
fiduciary (or an affiliate) who has or exercises any
discretionary authority or control with respect to the
investment of the plan assets involved in the
transaction or renders investment advice (within the
meaning of subsection (e)(3)(B)) with respect to those
assets, solely by reason of providing services to the
plan or solely by reason of a relationship to such a
service provider described in subparagraph (F), (G),
(H), or (I) of subsection (e)(2), or both, but only if
in connection with such transaction the plan receives
no less, nor pays no more, than adequate consideration,
(21) any foreign exchange transactions, between a
bank or broker-dealer (or any affiliate of either) and
a plan (as defined in this section) with respect to
which such bank or broker-dealer (or affiliate) is a
trustee, custodian, fiduciary, or other disqualified
person person, if--
(A) the transaction is in connection with the
purchase, holding, or sale of securities or
other investment assets (other than a foreign
exchange transaction unrelated to any other
investment in securities or other investment
assets),
(B) at the time the foreign exchange
transaction is entered into, the terms of the
transaction are not less favorable to the plan
than the terms generally available in
comparable arm's length foreign exchange
transactions between unrelated parties, or the
terms afforded by the bank or broker-dealer (or
any affiliate of either) in comparable arm's-
length foreign exchange transactions involving
unrelated parties,
(C) the exchange rate used by such bank or
broker-dealer (or affiliate) for a particular
foreign exchange transaction does not deviate
by more than 3 percent from the interbank bid
and asked rates for transactions of comparable
size and maturity at the time of the
transaction as displayed on an independent
service that reports rates of exchange in the
foreign currency market for such currency, and
(D) the bank or broker-dealer (or any
affiliate of either) does not have investment
discretion, or provide investment advice, with
respect to the transaction,
(22) any transaction described in subsection
(c)(1)(A) involving the purchase and sale of a security
between a plan and any other account managed by the
same investment manager, if--
(A) the transaction is a purchase or sale,
for no consideration other than cash payment
against prompt delivery of a security for which
market quotations are readily available,
(B) the transaction is effected at the
independent current market price of the
security (within the meaning of section
270.17a-7(b) of title 17, Code of Federal
Regulations),
(C) no brokerage commission, fee (except for
customary transfer fees, the fact of which is
disclosed pursuant to subparagraph (D)), or
other remuneration is paid in connection with
the transaction,
(D) a fiduciary (other than the investment
manager engaging in the cross-trades or any
affiliate) for each plan participating in the
transaction authorizes in advance of any cross-
trades (in a document that is separate from any
other written agreement of the parties) the
investment manager to engage in cross trades at
the investment manager's discretion, after such
fiduciary has received disclosure regarding the
conditions under which cross trades may take
place (but only if such disclosure is separate
from any other agreement or disclosure
involving the asset management relationship),
including the written policies and procedures
of the investment manager described in
subparagraph (H),
(E) each plan participating in the
transaction has assets of at least
$100,000,000, except that if the assets of a
plan are invested in a master trust containing
the assets of plans maintained by employers in
the same controlled group (as defined in
section 407(d)(7) of the Employee Retirement
Income Security Act of 1974), the master trust
has assets of at least $100,000,000,
(F) the investment manager provides to the
plan fiduciary who authorized cross trading
under subparagraph (D) a quarterly report
detailing all cross trades executed by the
investment manager in which the plan
participated during such quarter, including the
following information, as applicable: (i) the
identity of each security bought or sold; (ii)
the number of shares or units traded; (iii) the
parties involved in the cross-trade; and (iv)
trade price and the method used to establish
the trade price,
(G) the investment manager does not base its
fee schedule on the plan's consent to cross
trading, and no other service (other than the
investment opportunities and cost savings
available through a cross trade) is conditioned
on the plan's consent to cross trading,
(H) the investment manager has adopted, and
cross-trades are effected in accordance with,
written cross-trading policies and procedures
that are fair and equitable to all accounts
participating in the cross-trading program, and
that include a description of the manager's
pricing policies and procedures, and the
manager's policies and procedures for
allocating cross trades in an objective manner
among accounts participating in the cross-
trading program, and
(I) the investment manager has designated an
individual responsible for periodically
reviewing such purchases and sales to ensure
compliance with the written policies and
procedures described in subparagraph (H), and
following such review, the individual shall
issue an annual written report no later than 90
days following the period to which it relates
signed under penalty of perjury to the plan
fiduciary who authorized cross trading under
subparagraph (D) describing the steps performed
during the course of the review, the level of
compliance, and any specific instances of non-
compliance.
The written report shall also notify the plan fiduciary
of the plan's right to terminate participation in the
investment manager's cross-trading program at any time,
or
(23) except as provided in subsection (f)(11), a
transaction described in subparagraph (A), (B), (C), or
(D) of subsection (c)(1) in connection with the
acquisition, holding, or disposition of any security or
commodity, if the transaction is corrected before the
end of the correction period.
(24) any transaction involving a recommendation made
by a broker or dealer (including its registered
representatives), or other persons or entities, that is
subject to the requirements of the second subsection
(k) of section 15 of the Securities Exchange Act of
1934 (15 U.S.C. 78o(k)).
(e) Definitions.--
(1) Plan.--For purposes of this section, the term
``plan'' means--
(A) a trust described in section 401(a) which
forms a part of a plan, or a plan described in
section 403(a), which trust or plan is exempt
from tax under section 501(a),
(B) an individual retirement account
described in section 408(a),
(C) an individual retirement annuity
described in section 408(b),
(D) an Archer MSA described in section
220(d),
(E) a health savings account described in
section 223(d),
(F) a Coverdell education savings account
described in section 530, or
(G) a trust, plan, account, or annuity which,
at any time, has been determined by the
Secretary to be described in any preceding
subparagraph of this paragraph.
(2) Disqualified person.--For purposes of this
section, the term ``disqualified person'' means a
person who is--
(A) a fiduciary;
(B) a person providing services to the plan;
(C) an employer any of whose employees are
covered by the plan;
(D) an employee organization any of whose
members are covered by the plan;
(E) an owner, direct or indirect, of 50
percent or more of--
(i) the combined voting power of all
classes of stock entitled to vote or
the total value of shares of all
classes of stock of a corporation,
(ii) the capital interest or the
profits interest of a partnership, or
(iii) the beneficial interest of a
trust or unincorporated enterprise,
which is an employer or an employee
organization described in subparagraph (C) or
(D);
(F) a member of the family (as defined in
paragraph (6)) of any individual described in
subparagraph (A), (B), (C), or (E);
(G) a corporation, partnership, or trust or
estate of which (or in which) 50 percent or
more of--
(i) the combined voting power of all
classes of stock entitled to vote or
the total value of shares of all
classes of stock of such corporation,
(ii) the capital interest or profits
interest of such partnership, or
(iii) the beneficial interest of such
trust or estate, is owned directly or
indirectly, or held by persons
described in subparagraph (A), (B),
(C), (D), or (E);
(H) an officer, director (or an individual
having powers or responsibilities similar to
those of officers or directors), a 10 percent
or more shareholder, or a highly compensated
employee (earning 10 percent or more of the
yearly wages of an employer) of a person
described in subparagraph (C), (D), (E), or
(G); or
(I) a 10 percent or more (in capital or
profits) partner or joint venturer of a person
described in subparagraph (C), (D), (E), or
(G).
The Secretary, after consultation and coordination with
the Secretary of Labor or his delegate, may by
regulation prescribe a percentage lower than 50 percent
for subparagraphs (E) and (G) and lower than 10 percent
for subparagraphs (H) and (I).
(3) Fiduciary.--For purposes of this section, the
term ``fiduciary'' means any person who--
(A) exercises any discretionary authority or
discretionary control respecting management of
such plan or exercises any authority or control
respecting management or disposition of its
assets,
(B) renders investment advice for a fee or
other compensation, direct or indirect, with
respect to any moneys or other property of such
plan, or has any authority or responsibility to
do so, or
(C) has any discretionary authority or
discretionary responsibility in the
administration of such plan.
Such term includes any person designated under section
405(c)(1)(B) of the Employee Retirement Income Security
Act of 1974.
(4) Stockholdings.--For purposes of paragraphs
(2)(E)(i) and (G)(i) there shall be taken into account
indirect stockholdings which would be taken into
account under section 267(c), except that, for purposes
of this paragraph, section 267(c)(4) shall be treated
as providing that the members of the family of an
individual are the members within the meaning of
paragraph (6).
(5) Partnerships; trusts.--For purposes of paragraphs
(2)(E)(ii) and (iii), (G)(ii) and (iii), and (I) the
ownership of profits or beneficial interests shall be
determined in accordance with the rules for
constructive ownership of stock provided in section
267(c) (other than paragraph (3) thereof), except that
section 267(c)(4) shall be treated as providing that
the members of the family of an individual are the
members within the meaning of paragraph (6).
(6) Member of family.--For purposes of paragraph
(2)(F), the family of any individual shall include his
spouse, ancestor, lineal descendant, and any spouse of
a lineal descendant.
(7) Employee stock ownership plan.--The term
``employee stock ownership plan'' means a defined
contribution plan--
(A) which is a stock bonus plan which is
qualified, or a stock bonus and a money
purchase plan both of which are qualified under
section 401(a), and which are designed to
invest primarily in qualifying employer
securities; and
(B) which is otherwise defined in regulations
prescribed by the Secretary.
A plan shall not be treated as an employee stock
ownership plan unless it meets the requirements of
section 409(h), section 409(o), and, if applicable,
section 409(n), section 409(p), and section 664(g) and,
if the employer has a registration-type class of
securities (as defined in section 409(e)(4)), it meets
the requirements of section 409(e).
(8) Qualifying employer security.--The term
``qualifying employer security'' means any employer
security within the meaning of section 409(l). If any
moneys or other property of a plan are invested in
shares of an investment company registered under the
Investment Company Act of 1940, the investment shall
not cause that investment company or that investment
company's investment adviser or principal underwriter
to be treated as a fiduciary or a disqualified person
for purposes of this section, except when an investment
company or its investment adviser or principal
underwriter acts in connection with a plan covering
employees of the investment company, its investment
adviser, or its principal underwriter.
(9) Section made applicable to withdrawal liability
payment funds.--For purposes of this section--
(A) In general.--The term ``plan'' includes a
trust described in section 501(c)(22).
(B) Disqualified person.--In the case of any
trust to which this section applies by reason
of subparagraph (A), the term ``disqualified
person'' includes any person who is a
disqualified person with respect to any plan to
which such trust is permitted to make payments
under section 4223 of the Employee Retirement
Income Security Act of 1974.
(f) Other Definitions and Special Rules.--For purposes of
this section--
(1) Joint and several liability.--If more than one
person is liable under subsection (a) or (b) with
respect to any one prohibited transaction, all such
persons shall be jointly and severally liable under
such subsection with respect to such transaction.
(2) Taxable period.--The term ``taxable period''
means, with respect to any prohibited transaction, the
period beginning with the date on which the prohibited
transaction occurs and ending on the earliest of--
(A) the date of mailing a notice of
deficiency with respect to the tax imposed by
subsection (a) under section 6212,
(B) the date on which the tax imposed by
subsection (a) is assessed, or
(C) the date on which correction of the
prohibited transaction is completed.
(3) Sale or exchange; encumbered property.--A
transfer or real or personal property by a disqualified
person to a plan shall be treated as a sale or exchange
if the property is subject to a mortgage or similar
lien which the plan assumes or if it is subject to a
mortgage or similar lien which a disqualified person
placed on the property within the 10-year period ending
on the date of the transfer.
(4) Amount involved.--The term ``amount involved''
means, with respect to a prohibited transaction, the
greater of the amount of money and the fair market
value of the other property given or the amount of
money and the fair market value of the other property
received; except that, in the case of services
described in paragraphs (2) and (10) of subsection (d)
the amount involved shall be only the excess
compensation. For purposes of the preceding sentence,
the fair market value--
(A) in the case of the tax imposed by
subsection (a), shall be determined as of the
date on which the prohibited transaction
occurs; and
(B) in the case of the tax imposed by
subsection (b), shall be the highest fair
market value during the taxable period.
(5) Correction.--The terms ``correction'' and
``correct'' mean, with respect to a prohibited
transaction, undoing the transaction to the extent
possible, but in any case placing the plan in a
financial position not worse than that in which it
would be if the disqualified person were acting under
the highest fiduciary standards.
(6) Exemptions not to apply to certain
transactions.--
(A) In general.--In the case of a trust
described in section 401(a) which is part of a
plan providing contributions or benefits for
employees some or all of whom are owner-
employees (as defined in section 401(c)(3)),
the exemptions provided by subsection (d)
(other than paragraphs (9) and (12)) shall not
apply to a transaction in which the plan
directly or indirectly--
(i) lends any part of the corpus or
income of the plan to,
(ii) pays any compensation for
personal services rendered to the plan
to, or
(iii) acquires for the plan any
property from, or sells any property
to,
any such owner-employee, a member of the family
(as defined in section 267(c)(4)) of any such
owner-employee, or any corporation in which any
such owner-employee owns, directly or
indirectly, 50 percent or more of the total
combined voting power of all classes of stock
entitled to vote or 50 percent or more of the
total value of shares of all classes of stock
of the corporation.
(B) Special rules for shareholder-employees,
etc.
(i) In general.--For purposes of
subparagraph (A), the following shall
be treated as owner-employees:
(I) A shareholder-employee.
(II) A participant or
beneficiary of an individual
retirement plan (as defined in
section 7701(a)(37)).
(III) An employer or
association of employees which
establishes such an individual
retirement plan under section
408(c).
(ii) Exception for certain
transactions involving shareholder-
employees.--Subparagraph (A)(iii) shall
not apply to a transaction which
consists of a sale of employer
securities to an employee stock
ownership plan (as defined in
subsection (e)(7)) by a shareholder-
employee, a member of the family (as
defined in section 267(c)(4)) of such
shareholder-employee, or a corporation
in which such a shareholder-employee
owns stock representing a 50 percent or
greater interest described in
subparagraph (A).
(iii) Loan exception.--For purposes
of subparagraph (A)(i), the term
``owner-employee'' shall only include a
person described in subclause (II) or
(III) of clause (i).
(C) Shareholder-employee.--For purposes of
subparagraph (B), the term ``shareholder-
employee'' means an employee or officer of an S
corporation who owns (or is considered as
owning within the meaning of section 318(a)(1))
more than 5 percent of the outstanding stock of
the corporation on any day during the taxable
year of such corporation.
(7) S corporation repayment of loans for qualifying
employer securities.--A plan shall not be treated as
violating the requirements of section 401 or 409 or
subsection (e)(7), or as engaging in a prohibited
transaction for purposes of subsection (d)(3), merely
by reason of any distribution (as described in section
1368(a)) with respect to S corporation stock that
constitutes qualifying employer securities, which in
accordance with the plan provisions is used to make
payments on a loan described in subsection (d)(3) the
proceeds of which were used to acquire such qualifying
employer securities (whether or not allocated to
participants). The preceding sentence shall not apply
in the case of a distribution which is paid with
respect to any employer security which is allocated to
a participant unless the plan provides that employer
securities with a fair market value of not less than
the amount of such distribution are allocated to such
participant for the year which (but for the preceding
sentence) such distribution would have been allocated
to such participant.
(8) Provision of investment advice to participant and
beneficiaries.--
(A) In general.--The prohibitions provided in
subsection (c) shall not apply to transactions
described in subsection (d)(17) if the
investment advice provided by a fiduciary
adviser is provided under an eligible
investment advice arrangement.
(B) Eligible investment advice arrangement.--
For purposes of this paragraph, the term
``eligible investment advice arrangement''
means an arrangement--
(i) which either--
(I) provides that any fees
(including any commission or
other compensation) received by
the fiduciary adviser for
investment advice or with
respect to the sale, holding,
or acquisition of any security
or other property for purposes
of investment of plan assets do
not vary depending on the basis
of any investment option
selected, or
(II) uses a computer model
under an investment advice
program meeting the
requirements of subparagraph
(C) in connection with the
provision of investment advice
by a fiduciary adviser to a
participant or beneficiary, and
(ii) with respect to which the
requirements of subparagraphs (D), (E),
(F), (G), (H), and (I) are met.
(C) Investment advice program using computer
model.--
(i) In general.--An investment advice
program meets the requirements of this
subparagraph if the requirements of
clauses (ii), (iii), and (iv) are met.
(ii) Computer model.--The
requirements of this clause are met if
the investment advice provided under
the investment advice program is
provided pursuant to a computer model
that--
(I) applies generally
accepted investment theories
that take into account the
historic returns of different
asset classes over defined
periods of time,
(II) utilizes relevant
information about the
participant, which may include
age, life expectancy,
retirement age, risk tolerance,
other assets or sources of
income, and preferences as to
certain types of investments,
(III) utilizes prescribed
objective criteria to provide
asset allocation portfolios
comprised of investment options
available under the plan,
(IV) operates in a manner
that is not biased in favor of
investments offered by the
fiduciary adviser or a person
with a material affiliation or
contractual relationship with
the fiduciary adviser, and
(V) takes into account all
investment options under the
plan in specifying how a
participant's account balance
should be invested and is not
inappropriately weighted with
respect to any investment
option.
(iii) Certification.--
(I) In general.--The
requirements of this clause are
met with respect to any
investment advice program if an
eligible investment expert
certifies, prior to the
utilization of the computer
model and in accordance with
rules prescribed by the
Secretary of Labor, that the
computer model meets the
requirements of clause (ii).
(II) Renewal of
certifications.--If, as
determined under regulations
prescribed by the Secretary of
Labor, there are material
modifications to a computer
model, the requirements of this
clause are met only if a
certification described in
subclause (I) is obtained with
respect to the computer model
as so modified.
(III) Eligible investment
expert.--The term ``eligible
investment expert'' means any
person which meets such
requirements as the Secretary
of Labor may provide and which
does not bear any material
affiliation or contractual
relationship with any
investment adviser or a related
person thereof (or any
employee, agent, or registered
representative of the
investment adviser or related
person).
(iv) Exclusivity of recommendation.--
The requirements of this clause are met
with respect to any investment advice
program if--
(I) the only investment
advice provided under the
program is the advice generated
by the computer model described
in clause (ii), and
(II) any transaction
described in subsection
(d)(17)(A)(ii) occurs solely at
the direction of the
participant or beneficiary.
Nothing in the preceding sentence shall
preclude the participant or beneficiary
from requesting investment advice other
than that described in clause (i), but
only if such request has not been
solicited by any person connected with
carrying out the arrangement.
(D) Express authorization by separate
fiduciary.--The requirements of this
subparagraph are met with respect to an
arrangement if the arrangement is expressly
authorized by a plan fiduciary other than the
person offering the investment advice program,
any person providing investment options under
the plan, or any affiliate of either.
(E) Audits.--
(i) In general.--The requirements of
this subparagraph are met if an
independent auditor, who has
appropriate technical training or
experience and proficiency and so
represents in writing--
(I) conducts an annual audit
of the arrangement for
compliance with the
requirements of this paragraph,
and
(II) following completion of
the annual audit, issues a
written report to the fiduciary
who authorized use of the
arrangement which presents its
specific findings regarding
compliance of the arrangement
with the requirements of this
paragraph.
(ii) Special rule for individual
retirement and similar plans.--In the
case of a plan described in
subparagraphs (B) through (F) (and so
much of subparagraph (G) as relates to
such subparagraphs) of subsection
(e)(1), in lieu of the requirements of
clause (i), audits of the arrangement
shall be conducted at such times and in
such manner as the Secretary of Labor
may prescribe.
(iii) Independent auditor.--For
purposes of this subparagraph, an
auditor is considered independent if it
is not related to the person offering
the arrangement to the plan and is not
related to any person providing
investment options under the plan.
(F) Disclosure.--The requirements of this
subparagraph are met if--
(i) the fiduciary adviser provides to
a participant or a beneficiary before
the initial provision of the investment
advice with regard to any security or
other property offered as an investment
option, a written notification (which
may consist of notification by means of
electronic communication)--
(I) of the role of any party
that has a material affiliation
or contractual relationship
with the fiduciary adviser, in
the development of the
investment advice program and
in the selection of investment
options available under the
plan,
(II) of the past performance
and historical rates of return
of the investment options
available under the plan,
(III) of all fees or other
compensation relating to the
advice that the fiduciary
adviser or any affiliate
thereof is to receive
(including compensation
provided by any third party) in
connection with the provision
of the advice or in connection
with the sale, acquisition, or
holding of the security or
other property,
(IV) of any material
affiliation or contractual
relationship of the fiduciary
adviser or affiliates thereof
in the security or other
property,
(V) the manner, and under
what circumstances, any
participant or beneficiary
information provided under the
arrangement will be used or
disclosed,
(VI) of the types of services
provided by the fiduciary
adviser in connection with the
provision of investment advice
by the fiduciary adviser,
(VII) that the adviser is
acting as a fiduciary of the
plan in connection with the
provision of the advice, and
(VIII) that a recipient of
the advice may separately
arrange for the provision of
advice by another adviser, that
could have no material
affiliation with and receive no
fees or other compensation in
connection with the security or
other property, and
(ii) at all times during the
provision of advisory services to the
participant or beneficiary, the
fiduciary adviser--
(I) maintains the information
described in clause (i) in
accurate form and in the manner
described in subparagraph (H),
(II) provides, without
charge, accurate information to
the recipient of the advice no
less frequently than annually,
(III) provides, without
charge, accurate information to
the recipient of the advice
upon request of the recipient,
and
(IV) provides, without
charge, accurate information to
the recipient of the advice
concerning any material change
to the information required to
be provided to the recipient of
the advice at a time reasonably
contemporaneous to the change
in information.
(G) Other conditions.--The requirements of
this subparagraph are met if--
(i) the fiduciary adviser provides
appropriate disclosure, in connection
with the sale, acquisition, or holding
of the security or other property, in
accordance with all applicable
securities laws,
(ii) the sale, acquisition, or
holding occurs solely at the direction
of the recipient of the advice,
(iii) the compensation received by
the fiduciary adviser and affiliates
thereof in connection with the sale,
acquisition, or holding of the security
or other property is reasonable, and
(iv) the terms of the sale,
acquisition, or holding of the security
or other property are at least as
favorable to the plan as an arm's
length transaction would be.
(H) Standards for presentation of
information.--
(i) In general.--The requirements of
this subparagraph are met if the
notification required to be provided to
participants and beneficiaries under
subparagraph (F)(i) is written in a
clear and conspicuous manner and in a
manner calculated to be understood by
the average plan participant and is
sufficiently accurate and comprehensive
to reasonably apprise such participants
and beneficiaries of the information
required to be provided in the
notification.
(ii) Model form for disclosure of
fees and other compensation.--The
Secretary of Labor shall issue a model
form for the disclosure of fees and
other compensation required in
subparagraph (F)(i)(III) which meets
the requirements of clause (i).
(I) Maintenance for 6 years of evidence of
compliance.--The requirements of this
subparagraph are met if a fiduciary adviser who
has provided advice referred to in subparagraph
(A) maintains, for a period of not less than 6
years after the provision of the advice, any
records necessary for determining whether the
requirements of the preceding provisions of
this paragraph and of subsection (d)(17) have
been met. A transaction prohibited under
subsection (c) shall not be considered to have
occurred solely because the records are lost or
destroyed prior to the end of the 6-year period
due to circumstances beyond the control of the
fiduciary adviser.
(J) Definitions.--For purposes of this
paragraph and subsection (d)(17)--
(i) Fiduciary adviser.--The term
``fiduciary adviser'' means, with
respect to a plan, a person who is a
fiduciary of the plan by reason of the
provision of investment advice referred
to in subsection (e)(3)(B) by the
person to a participant or beneficiary
of the plan and who is--
(I) 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 fiduciary maintains
its principal office and place
of business,
(II) a bank or similar
financial institution referred
to in subsection (d)(4) or a
savings association (as defined
in section 3(b)(1) of the
Federal Deposit Insurance Act
(12 U.S.C. 1813(b)(1)), but
only if the advice is provided
through a trust department of
the bank or similar financial
institution or savings
association which is subject to
periodic examination and review
by Federal or State banking
authorities,
(III) an insurance company
qualified to do business under
the laws of a State,
(IV) a person registered as a
broker or dealer under the
Securities Exchange Act of 1934
(15 U.S.C. 78a et seq.),
(V) an affiliate of a person
described in any of subclauses
(I) through (IV), or
(VI) an employee, agent, or
registered representative of a
person described in subclauses
(I) through (V) who satisfies
the requirements of applicable
insurance, banking, and
securities laws relating to the
provision of the advice.
For purposes of this title, a person
who develops the computer model
described in subparagraph (C)(ii) or
markets the investment advice program
or computer model shall be treated as a
person who is a fiduciary of the plan
by reason of the provision of
investment advice referred to in
subsection (e)(3)(B) to a participant
or beneficiary and shall be treated as
a fiduciary adviser for purposes of
this paragraph and subsection (d)(17),
except that the Secretary of Labor may
prescribe rules under which only 1
fiduciary adviser may elect to be
treated as a fiduciary with respect to
the plan.
(ii) Affiliate.--The term
``affiliate'' of another entity means
an affiliated person of the entity (as
defined in section 2(a)(3) of the
Investment Company Act of 1940 (15
U.S.C. 80a-2(a)(3))).
(iii) Registered representative.--The
term ``registered representative'' of
another entity means a person described
in section 3(a)(18) of the Securities
Exchange Act of 1934 (15 U.S.C.
78c(a)(18)) (substituting the entity
for the broker or dealer referred to in
such section) or a person described in
section 202(a)(17) of the Investment
Advisers Act of 1940 (15 U.S.C. 80b-
2(a)(17)) (substituting the entity for
the investment adviser referred to in
such section).
(9) Block trade.--The term ``block trade'' means any
trade of at least 10,000 shares or with a market value
of at least $200,000 which will be allocated across two
or more unrelated client accounts of a fiduciary.
(10) Adequate consideration.--The term ``adequate
consideration'' means--
(A) in the case of a security for which there
is a generally recognized market--
(i) the price of the security
prevailing on a national securities
exchange which is registered under
section 6 of the Securities Exchange
Act of 1934, taking into account
factors such as the size of the
transaction and marketability of the
security, or
(ii) if the security is not traded on
such a national securities exchange, a
price not less favorable to the plan
than the offering price for the
security as established by the current
bid and asked prices quoted by persons
independent of the issuer and of the
party in interest, taking into account
factors such as the size of the
transaction and marketability of the
security, and
(B) in the case of an asset other than a
security for which there is a generally
recognized market, the fair market value of the
asset as determined in good faith by a
fiduciary or fiduciaries in accordance with
regulations prescribed by the Secretary of
Labor.
(11) Correction period.--
(A) In general.--For purposes of subsection
(d)(23), the term ``correction period'' means
the 14-day period beginning on the date on
which the disqualified person discovers, or
reasonably should have discovered, that the
transaction would (without regard to this
paragraph and subsection (d)(23)) constitute a
prohibited transaction.
(B) Exceptions.--
(i) Employer securities.--Subsection
(d)(23) does not apply to any
transaction between a plan and a plan
sponsor or its affiliates that involves
the acquisition or sale of an employer
security (as defined in section
407(d)(1) of the Employee Retirement
Income Security Act of 1974) or the
acquisition, sale, or lease of employer
real property (as defined in section
407(d)(2) of such Act).
(ii) Knowing prohibited
transaction.--In the case of any
disqualified person, subsection (d)(23)
does not apply to a transaction if, at
the time the transaction is entered
into, the disqualified person knew (or
reasonably should have known) that the
transaction would (without regard to
this paragraph) constitute a prohibited
transaction.
(C) Abatement of tax where there is a
correction.--If a transaction is not treated as
a prohibited transaction by reason of
subsection (d)(23), then no tax under
subsections (a) and (b) shall be assessed with
respect to such transaction, and if assessed
the assessment shall be abated, and if
collected shall be credited or refunded as an
overpayment.
(D) Definitions.--For purposes of this
paragraph and subsection (d)(23)--
(i) Security.--The term ``security''
has the meaning given such term by
section 475(c)(2) (without regard to
subparagraph (F)(iii) and the last
sentence thereof).
(ii) Commodity.--The term
``commodity'' has the meaning given
such term by section 475(e)(2) (without
regard to subparagraph (D)(iii)
thereof).
(iii) Correct.--The term ``correct''
means, with respect to a transaction--
(I) to undo the transaction
to the extent possible and in
any case to make good to the
plan or affected account any
losses resulting from the
transaction, and
(II) to restore to the plan
or affected account any profits
made through the use of assets
of the plan.
(g) Application of Section.--This section shall not apply--
(1) in the case of a plan to which a guaranteed
benefit policy (as defined in section 401(b)(2)(B) of
the Employee Retirement Income Security Act of 1974) is
issued, to any assets of the insurance company,
insurance service, or insurance organization merely
because of its issuance of such policy;
(2) to a governmental plan (within the meaning of
section 414(d)); or
(3) to a church plan (within the meaning of section
414(e)) with respect to which the election provided by
section 410(d) has not been made.
In the case of a plan which invests in any security issued by
an investment company registered under the Investment Company
Act of 1940, the assets of such plan shall be deemed to include
such security but shall not, by reason of such investment, be
deemed to include any assets of such company.
(h) Notification of Secretary of Labor.--Before sending a
notice of deficiency with respect to the tax imposed by
subsection (a) or (b), the Secretary shall notify the Secretary
of Labor and provide him a reasonable opportunity to obtain a
correction of the prohibited transaction or to comment on the
imposition of such tax.
(i) Cross Reference.--For provisions concerning coordination
procedures between Secretary of Labor and Secretary of the
Treasury with respect to application of tax imposed by this
section and for authority to waive imposition of the tax
imposed by subsection (b), see section 3003 of the Employee
Retirement Income Security Act of 1974.
* * * * * * *
----------
INVESTMENT ADVISERS ACT OF 1940
* * * * * * *
TITLE II--INVESTMENT ADVISERS
* * * * * * *
rules, regulations, and orders
Sec. 211. (a) The Commission shall have authority from time
to time to make, issue, amend, and rescind such rules and
regulations and such orders as are necessary or appropriate to
the exercise of the functions and powers conferred upon the
Commission elsewhere in this title, including rules and
regulations defining technical, trade, and other terms used in
this title, except that the Commission may not define the term
``client'' for purposes of paragraphs (1) and (2) of section
206 to include an investor in a private fund managed by an
investment adviser, if such private fund has entered into an
advisory contract with such adviser. For the purposes of its
rules or regulations the Commission may classify persons and
matters within its jurisdiction and prescribe different
requirements for different classes of persons or matters.
(b) Subject to the provisions of chapter 15 of title 44,
United States Code, and regulations prescribed under the
authority thereof, the rules and regulations of the Commission
under this title, and amendments thereof, shall be effective
upon publication in the manner which the Commission shall
prescribe, or upon such later date as may be provided in such
rules and regulations.
(c) Orders of the Commission under this title shall be issued
only after appropriate notice and opportunity for hearing.
Notice to the parties to a proceeding before the Commission
shall be given by personal service upon each party or by
registered mail or certified mail or confirmed telegraphic
notice to the party's last known business address. Notice to
interested persons, if any, other than parties may be given in
the same manner or by publication in the Federal Register.
(d) No provision of this title imposing any liability shall
apply to any act done or omitted in good faith in conformity
with any rule, regulation, or order of the Commission,
notwithstanding that such rule, regulation, or order may, after
such act or omission, be amended or rescinded or be determined
by judicial or other authority to be invalid for any reason.
(e) Disclosure Rules on Private Funds.--The Commission and
the Commodity Futures Trading Commission shall, after
consultation with the Council but not later than 12 months
after the date of enactment of the Private Fund Investment
Advisers Registration Act of 2010, jointly promulgate rules to
establish the form and content of the reports required to be
filed with the Commission under subsection 204(b) and with the
Commodity Futures Trading Commission by investment advisers
that are registered both under this title and the Commodity
Exchange Act (7 U.S.C. 1a et seq.).
[(g) Standard of Conduct.--
[(1) In general.--The Commission may promulgate rules
to provide that the standard of conduct for all
brokers, dealers, and investment advisers, when
providing personalized investment advice about
securities to retail customers (and such other
customers as the Commission may by rule provide), shall
be to act in the best interest of the customer without
regard to the financial or other interest of the
broker, dealer, or investment adviser providing the
advice. In accordance with such rules, any material
conflicts of interest shall be disclosed and may be
consented to by the customer. Such rules shall provide
that such standard of conduct shall be no less
stringent than the standard applicable to investment
advisers under section 206(1) and (2) of this Act when
providing personalized investment advice about
securities, except the Commission shall not ascribe a
meaning to the term ``customer'' that would include an
investor in a private fund managed by an investment
adviser, where such private fund has entered into an
advisory contract with such adviser. The receipt of
compensation based on commission or fees shall not, in
and of itself, be considered a violation of such
standard applied to a broker, dealer, or investment
adviser.
[(2) Retail customer defined.--For purposes of this
subsection, the term ``retail customer'' means a
natural person, or the legal representative of such
natural person, who--
[(A) receives personalized investment advice
about securities from a broker, dealer, or
investment adviser; and
[(B) uses such advice primarily for personal,
family, or household purposes.
[(h) Other Matters.--The Commission shall--
[(1) facilitate the provision of simple and clear
disclosures to investors regarding the terms of their
relationships with brokers, dealers, and investment
advisers, including any material conflicts of interest;
and
[(2) examine and, where appropriate, promulgate rules
prohibiting or restricting certain sales practices,
conflicts of interest, and compensation schemes for
brokers, dealers, and investment advisers that the
Commission deems contrary to the public interest and
the protection of investors.
[(i) Harmonization of Enforcement.--The enforcement authority
of the Commission with respect to violations of the standard of
conduct applicable to an investment adviser shall include--
[(1) the enforcement authority of the Commission with
respect to such violations provided under this Act; and
[(2) the enforcement authority of the Commission with
respect to violations of the standard of conduct
applicable to a broker or dealer providing personalized
investment advice about securities to a retail customer
under the Securities Exchange Act of 1934, including
the authority to impose sanctions for such violations,
and
the Commission shall seek to prosecute and sanction violators
of the standard of conduct applicable to an investment adviser
under this Act to same extent as the Commission prosecutes and
sanctions violators of the standard of conduct applicable to a
broker or dealer providing personalized investment advice about
securities to a retail customer under the Securities Exchange
Act of 1934.]
* * * * * * *
MINORITY VIEWS
H.R. 3857 is another effort by Republicans to kill the
Department of Labor's (DOL) fiduciary rulemaking, which has
been partially effective for four months now to finally protect
American seniors and retirement savers from conflicted advice
about their retirement assets. Prior to that time, unscrupulous
salespeople masquerading as financial advisers were legally
able to provide retirement savers with conflicted investment
advice that lined their own pockets, but cost savers $17
billion each year.
Many registered investment advisers and other financial
advisers that already abide by a fiduciary standard support the
DOL's fiduciary rule, as do consumer, labor and retirement
groups. Those groups include the Financial Planning Coalition,
AARP, AFL-CIO, NAACP, and Consumer Federation of America. In
addition, nine in ten Americans reportedly agree with the DOL's
rule. An overwhelming majority or around 65% of Americans who
voted for President Trump also appear to support the
regulation.
Nevertheless, H.R. 3857 would repeal the DOL's fiduciary
rule and require SEC registered broker-dealers to comply with a
vague and less protective best interest standard when providing
retail investors with financial advice. This standard is
essentially the current suitability standard. The bill also
would prohibit the DOL from crafting a rule that is
inconsistent with the SEC's regime. With respect to insurance
agents, the bill would provide for substituted compliance to
allow agents to comply with state law where it is substantially
similar to the SEC regime; or, if state law is not
substantially similar to the SEC regime, the insurer
voluntarily adopts a standard that is substantially similar to
the SEC regime. Finally, the bill would effectively undermine
the SEC's rulemaking authority by barring any regulations that
``impose any obligation related to standard of care on a broker
or dealer (or its registered representative) that is in
addition to'' the obligations set forth in the bill.
This bill is contrary to the interests of investors,
retirement savers, and seniors. It is opposed by: AARP;
American Federation of State, County and Municipal Employees;
Americans for Financial Reform; Center for American Progress;
Center for Economic Justice; Committee for the Fiduciary
Standard; Consumer Action; Consumer Federation of America; EPI
Policy Center; Financial Planning Coalition; International
Association of Machinists and Aerospace Workers; National
Active and Retired Federal Employees Association; National
Association of Social Workers; National Organization for Women;
NELP; North American Securities Administrators Association;
Pension Rights Center; Public Citizen; UnidosUS; U.S. PIRG; and
Woodstock Institute.
For all of these reasons, we oppose H.R. 3857.
Maxine Waters.
Keith Ellison.
Michael E. Capuano.
Nydia M. Velazquez.
Wm. Lacy Clay.
Gregory W. Meeks.
Al Green.
Carolyn B. Maloney.
Emanuel Cleaver.
Gwen Moore.
Brad Sherman.
Denny Heck.
Joyce Beatty.
Bill Foster.
