[Federal Register Volume 60, Number 244 (Wednesday, December 20, 1995)]
[Rules and Regulations]
[Pages 65547-65550]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-30684]
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DEPARTMENT OF THE TREASURY
26 CFR Part 1
[TD 8635]
RIN 1545-AS92
Nonbank Trustee Net Worth Requirements
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final and temporary regulations.
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SUMMARY: This document contains regulations that provide guidance to
nonbank trustees with respect to the adequacy of net worth requirements
that must be satisfied in order to be or
[[Page 65548]]
remain an approved nonbank trustee. These regulations affect nonbank
trustees and custodians of individual retirement accounts, and nonbank
custodians of qualified plans and tax-sheltered annuities.
EFFECTIVE DATE: These regulations are effective December 20, 1995.
FOR FURTHER INFORMATION CONTACT: Marjorie Hoffman, (202) 622-6030 (not
a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
On December 6, 1994, temporary regulations (TD 8570) under section
401 were published in the Federal Register (59 FR 62570). A notice of
proposed rulemaking (EE-38-94), cross-referencing the temporary
regulations, was published in the Federal Register (59 FR 62644) on the
same day. The temporary regulations provide guidance on the adequacy of
net worth requirements for nonbank trustees and custodians of
individual retirement plans, and for nonbank custodians of custodial
accounts of qualified plans and tax-sheltered annuities.
After consideration of all of the comments, the temporary
regulations are replaced and the proposed regulations are adopted as
revised by this Treasury decision. Because section 401(d)(1), under
which Sec. 1.401-12 was originally issued, was repealed by section
237(a) of the Tax Equity and Fiscal Responsibility Act of 1982, Public
Law 97-248 (1982), these final regulations also move all the rules for
nonbank trustees and custodians that were previously in Sec. 1.401-
12(n) to Sec. 1.408-2.
Explanation of Provisions
The fiduciary conduct rules for nonbank trustees and custodians
under longstanding Treasury regulations require nonbank trustees and
custodians to maintain a minimum amount of net worth in order to
qualify as an approved nonbank trustee or custodian. Under this
requirement, the nonbank trustee or custodian's net worth must exceed
the greater of a specified dollar amount or a percentage of the value
of all assets held in fiduciary accounts of retirement plans. A primary
objective of this adequacy-of-net-worth requirement has been to ensure
that nonbank trustees and custodians maintain a level of solvency
commensurate with their financial and fiduciary responsibilities.
Under the general net worth requirement, nonbank trustees and
custodians may not accept new accounts unless their net worth exceeds
the greater of $100,000 or four percent of the value of all assets held
in fiduciary accounts. Additionally, nonbank trustees and custodians
must take whatever steps are necessary (including the relinquishment of
fiduciary accounts) to ensure that their net worth exceeds the greater
of $50,000 or two percent of the value of all assets held by them in
fiduciary accounts.
For passive nonbank trustees and custodians (qualified nonbank
entities that have no discretion to direct the investment of assets),
the percentage requirements are lower. Specifically, passive nonbank
trustees and custodians may not accept new accounts unless their net
worth exceeds the greater of $100,000 or two percent of the value of
all assets held in fiduciary accounts. Additionally, they must take
appropriate action (including the relinquishment of fiduciary accounts)
to ensure that their net worth exceeds the greater of $50,000 or one
percent of the value of assets held in their fiduciary accounts.
The proposed and temporary regulations provide a special rule for
passive nonbank trustees and custodians that are broker-dealers and
members of the Securities Investor Protection Corporation (SIPC). The
proposed and temporary regulations provide that, to the extent that
assets held in any fiduciary accounts are insured by SIPC in the event
of the member's liquidation ($500,000 per account, $100,000 of which
may be cash), the assets will be disregarded in determining the value
of assets held in fiduciary accounts by the trustee or custodian for
purposes of the percentage part of the net worth requirement.
The final regulations adopt the provisions of the proposed and
temporary regulations. In addition, in response to comments, the final
regulations extend the SIPC-related relief to all nonbank trustees and
custodians that are broker-dealers and members of SIPC rather than
limiting the relief to passive nonbank trustees and custodians. The
final regulations provide that the amount of the minimum net worth
requirement for nonbank trustees and custodians that are SIPC members
is reduced by either two percent of assets insured by SIPC (in the case
of the minimum net worth requirement that applies to a trustee or
custodian accepting additional accounts) or one percent of assets
insured by SIPC (in the case of the minimum net worth requirement that
must be satisfied to avoid a mandatory relinquishment of accounts). An
example in the regulations illustrates this rule.
The final regulations also retain the rule in the proposed and
temporary regulations that increased the initial net worth requirement
for all nonbank trustees and custodians. The purpose of the rule is to
better assure that the enterprises are sound and well-funded during
their start-up period. This initial net worth requirement requires all
new entities applying for nonbank trustee or custodian status to have a
net worth of not less than $250,000 for the most recent taxable year
preceding the applicant's initial application.
This new initial net worth requirement applies only to applications
received after January 5, 1995. Previously approved nonbank trustees
and custodians need only satisfy the ongoing net worth requirement.
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in EO 12866. Therefore, a
regulatory assessment is not required. It also has been determined that
section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5)
and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to
these regulations, and, therefore, a Regulatory Flexibility Analysis is
not required. Pursuant to section 7805(f) of the Internal Revenue Code,
the notice of proposed rulemaking preceding these regulations was
submitted to the Small Business Administration for comment on its
impact on small business.
Drafting Information
The principal author of these regulations is Marjorie Hoffman,
Office of the Associate Chief Counsel, (Employee Benefits and Exempt
Organizations) IRS. However, other personnel from the IRS and Treasury
Department participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 is amended by adding
an entry in numerical order to read as follows:
Authority: 26 U.S.C. 7805. * * *
Sec. 1.401-12 also issued under 26 U.S.C. 401(d)(1). * * *
[[Page 65549]]
Secs. 1.401-12 and 1.408-2 [Amended]
Par. 2. Paragraph (n) of Sec. 1.401-12 is redesignated as paragraph
(e) of Sec. 1.408-2 and the authority citation immediately following
Sec. 1.401-12 is removed.
Sec. 1.401-12T [Removed]
Par. 3. Section 1.401-12T is removed.
Sec. 1.401(f)-1 [Amended]
Par. 4. Section 1.401(f)-1 is amended by:
1. Removing the language ``section 401(d)(1) and the regulations
thereunder'' and adding ``Sec. 1.408-2(e)'' in its place in the last
sentence of paragraph (b)(1)(ii).
2. Removing the language ``401(d)(1) and adding ``408(n)'' in its
place in paragraph (d)(1).
Par. 5. Section 1.408-2 is amended by:
1. Removing the language ``401(d)(1)'' and adding ``408(n)'' in its
place in paragraph (b)(2)(i).
2. Removing the language ``(b)(2)(ii)'' and adding ``(e)'' in its
place in paragraph (b)(2)(i).
3. Removing paragraph (b)(2)(ii).
4. Redesignating (b)(2)(iii) as (b)(2)(ii).
5. Removing newly designated paragraphs (e)(1) and (e)(9).
6. Further redesignating paragraphs (e)(2) through (e)(8) as
paragraphs (e)(1) through (e)(7), respectively.
7. Removing the language ``For the plan years to which this
paragraph applies, the'' and adding ``The'' in its place, and removing
the language ``(c)(1)(i)'' and adding ``(b)'' in its place, in the
first sentence of newly designated paragraph (e)(1).
8. Removing the language ``401'' and adding ``408'' in its place,
and removing the language ``(n)(3) to (n)(7)'' and adding ``(e)(2) to
(e)(6)'' in its place, in the second sentence of newly designated
paragraph (e)(1).
9. Removing the language ``Commissioner of Internal Revenue,
Attention: E:EP, Internal Revenue Service, Washington, D.C. 20224'' and
adding ``the address prescribed by the Commissioner in revenue rulings,
notices, and other guidance published in the Internal Revenue Bulletin
(see Sec. 601.601(d)(2)(ii)(b) of this chapter)'' in its place in the
third sentence of newly designated paragraph (e)(1), in the last
sentence of newly designated (e)(6)(9)(iv), and in the first sentence
of newly designated (e)(6)(v)(B).
10. Removing the language ``(n)(8)'' and adding ``(e)(7)'' in its
place in the last sentence of newly designated paragraph (e)(1).
11. Removing the language ``(n)(6)'' and adding ``(e)(5)'' in its
place in newly designated paragraph (e)(2)(iv).
12. Redesignating newly designated paragraph (e)(5)(ii)(A) as
paragraph (e)(5)(ii)(E).
13. Removing the language ``(n)(7)(i)(A)'' and adding
``(e)(6)(i)(A)'' in its place in newly designated paragraph
(e)(5)(ii)(B)(2) and in newly designated paragraph (e)(5)(ii)(C)(2).
14. Removing the language ``(n)(6)(iii)(A)'' and adding
``(e)(5)(iii)(A)'' in its place in newly designated paragraph
(e)(5)(iii)(B).
15. Removing the language ``(n)(6)(vi)'' and adding ``(e)(5)(vi)''
in its place in newly designated paragraph (e)(5)(v)(A).
16. Removing the language ``(n)(6)(viii)(C)'' and adding
``(e)(5)(viii)(C)'' in its place in newly designated paragraph
(e)(5)(vi).
17. Removing the language ``(n)(3)(v)'' and adding ``(e)(2)(v)'' in
its place, and removing the language ``(n)(8)'' and adding ``(e)(7)''
in its place, in newly designated paragraph (e)(5)(viii).
18. Removing the language ``(n)(6)(i)(A)(3)'' and adding
``(e)(5)(i)(A)(3)'' in its place, and removing the language
``(n)(5)(ii)(E)'' and adding ``(e)(4)(ii)(E)'' in its place, in the
third sentence of newly designated paragraph (e)(6)(i)(A).
19. Removing the language ``(n)(7)(iii)(A)(3)'' and adding
``(e)(6)(iii)(A)(3)'' in its place in newly designated paragraph
(e)(6)(iii)(C).
20. Revising newly designated paragraph (e)(5)(ii)(A) and adding
paragraph (e)(5)(ii)(D).
21. The revision and addition read as follows:
Sec. 1.408-2 Individual retirement accounts.
* * * * *
(e) * * *
* * * * *
(5) * * *
(ii) Adequacy of net worth--(A) Initial net worth requirement. In
the case of applications received after January 5, 1995, no initial
application will be accepted by the Commissioner unless the applicant
has a net worth of not less than $250,000 (determined as of the end of
the most recent taxable year). Thereafter, the applicant must satisfy
the adequacy of net worth requirements of paragraph (e)(6)(ii) (B) and
(C) of this section.
* * * * *
(D) Assets held by members of SIPC--(1) For purposes of satisfying
the adequacy-of-net-worth requirement of this paragraph, a special rule
is provided for nonbank trustees that are members of the Securities
Investor Protection Corporation (SIPC) created under the Securities
Investor Protection Act of 1970 (SIPA)(15 U.S.C. 78aaa et seq., as
amended). The amount that the net worth of a nonbank trustee that is a
member of SIPC must exceed is reduced by two percent for purposes of
paragraph (e)(5)(ii)(B)(2), and one percent for purposes of paragraph
(e)(5)(ii)(C)(2), of the value of assets (determined on an account-by-
account basis) held for the benefit of customers (as defined in 15
U.S.C. 78fff-2(e)(4)) in fiduciary accounts by the nonbank trustee to
the extent of the portion of each account that does not exceed the
dollar limit on advances described in 15 U.S.C. 78fff-3(a), as amended,
that would apply to the assets in that account in the event of a
liquidation proceeding under the SIPA.
(2) The provisions of this special rule for assets held in
fiduciary accounts by members of SIPC are illustrated in the following
example.
Example--(a) Trustee X is a broker-dealer and is a member of the
Securities Investment Protection Corporation. Trustee X also has
been approved as a nonbank trustee for individual retirement
accounts (IRAs) by the Commissioner but not as a passive nonbank
trustee. Trustee X is the trustee for four IRAs. The total assets of
each IRA (for which Trustee X is the trustee) as of the most recent
valuation date before the last day of Trustee X's taxable year
ending in 1995 are as follows: the total assets for IRA-1 is
$3,000,000 (all of which is invested in securities); the value of
the total assets for IRA-2 is $500,000 ($200,000 of which is cash
and $300,000 of which is invested in securities), the value of the
total assets for IRA-3 is $400,000 (all of which is invested in
securities); and the value of the total assets of IRA-4 is $200,000
(all of which is cash). The value of all assets held in fiduciary
accounts, as defined in Sec. 1.408-2(e)(6)(viii)(A), is $4,100,000.
(b) The dollar limit on advances described in 15 U.S.C.
Sec. 78fff-3(a) that would apply to the assets in each account in
the event of a liquidation proceeding under the Securities Investor
Protection Act of 1970 in effect as of the last day of Trustee X's
taxable year ending in 1995 is $500,000 per account (no more than
$100,000 of which is permitted to be cash). Thus, the dollar limit
that would apply to IRA-1 is $500,000; the dollar limit for IRA-2 is
$400,000 ($100,000 of the cash and the $300,000 of the value of the
securities); the dollar limit for IRA-3 is $400,000 (the full value
of the account because the value of the account is less than
$500,000 and no portion of the account is cash); and the dollar
limit for IRA-4 is $100,000 (the entire account is cash and the
dollar limit per account for cash is $100,000). The aggregate dollar
limits of the four IRAs is $1,400,000.
(c) For 1996, the amount determined under Sec. 1.408-
2(e)(6)(ii)(B) is determined as follows for Trustee X: (1) four
percent of $4,100,000 equals $164,000; (2) two percent of $1,400,000
equals $28,000; and (3) $164,000 minus $28,000 equals $136,000.
Thus,
[[Page 65550]]
because $136,000 exceeds $100,000, the minimum net worth necessary for
Trustee X to accept new accounts for 1996 is $136,000.
(d) For 1996, the amount determined under Sec. 1.408-
2(e)(6)(ii)(C) for Trustee X is determined as follows: (1) two
percent of $4,100,000 equals $82,000; (2) one percent of $1,400,000
equals $14,000; and (3) $82,000 minus $14,000 equals $68,000. Thus,
because $68,000 exceeds $50,000, the minimum net worth necessary for
Trustee X to avoid a mandatory relinquishment of accounts for 1996
is $68,000.
* * * * *
Margaret Milner Richardson,
Commissioner of Internal Revenue.
Approved: December 12, 1995.
Leslie Samuels,
Assistant Secretary of the Treasury.
[FR Doc. 95-30684 Filed 12-19-95; 8:45 am]
BILLING CODE 4830-01-U
