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CCH® PENSION — 11/18/09

Extension To Broker Security Interest In IRA Would Be A Prohibited Transaction

from Spencer’s Benefits Reports: In Advisory Opinion 2009-03A, the Department of Labor’s Employee Benefits Security Administration (EBSA) concludes that it would be a prohibited transaction under IRC Sec. 4975(c)(1)(B) for the owner of an individual retirement account to grant to a brokerage firm a security interest in the assets of the owner’s non-IRA accounts held by the broker as a requirement for establishing an IRA with the broker. The advisory opinion was written by Louis J. Campagna, chief of the division of fiduciary interpretations in the EBSA’s Office of Regulations and Interpretations.

In the situation addressed by Advisory Opinion 2009-03A, an individual has a personal brokerage account with a broker, and the individual wishes to open an IRA with the broker and will self-direct the investments made with the IRA’s assets. In connection with the establishment of the IRA, the broker has asked the individual to agree to a contract provision that would give the broker a first lien and a first priority security interest for the discharge of all indebtedness to the broker. That interest would extend to the individual’s personal assets in the accounts maintained by the broker, including the IRA.

In Advisory Opinion 2009-03A, the EBSA states, “It is the opinion of the Department that the grant by an IRA owner to the broker of a security interest in his non-IRA accounts in order to cover indebtedness of his IRA would be a prohibited transaction under Code Section 4975(c)(1)(B). An IRA owner who would self-direct the investments made by his IRA would be a fiduciary and a disqualified person with respect to the IRA under Code Section 4975(e)(2) and would be subject to the restrictions imposed by Section 4975(c)(1). Section 4975(c)(1)(B) prohibits the direct or indirect lending of money or other extension of credit between a plan and a disqualified person. The granting of a security interest in the IRA owner’s personal accounts to cover indebtedness of the IRA constitutes such an extension of credit.”

The EBSA goes on to conclude, “Here, the requested granting of a security interest in the assets of the IRA owner’s personal accounts to the broker to cover the IRA’s debts to the broker is akin to a guarantee of such debts by the IRA owner. This would amount to an extension of credit from the IRA owner to the IRA. Thus, Section 4975(c)(1)(B) prohibits the granting of such a security interest to the broker.

“The Department notes that to the extent that the situation also would result in the granting by the IRA owner to the broker of a security interest in the IRA’s assets to cover the indebtedness of the IRA owner, prohibited transactions would likewise occur in violation of Code Sections 4975(c)(1)(B), (D), and (E). First, granting such a security interest in the IRA’s assets would amount to an extension of credit by the IRA to the IRA owner, a fiduciary and a disqualified person, and cause a violation of Section 4975(c)(1)(B). Second, Section 4975(c)(1)(D) prohibits the transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan. Thus, in granting the requested security interest in the IRA’s assets, the IRA owner would be transferring or using the IRA’s assets for his own benefit in violation of Section 4975(c)(1)(D). Last, Section 4975(c)(1)(E) prohibits a disqualified person who is a fiduciary from dealing with the income or assets of a plan in his own interest or for his own account. The IRA owner as a disqualified person would be using the IRA’s assets ‘in his own interest or for his own account’ in violation of Section 4975(c)(1)(E).”

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

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