EBSA’s division chief of fiduciary interpretations, Louis Campagna, recently told practitioners at a meeting on investment adviser regulation the advisory opinion was in response to a request from the American Bankers Association concerning the ability of the banks acting as fiduciaries to advance funds to ERISA-governed accounts without violating prohibited transaction regulations, according to Washington-based legal publisher BNA.
Specifically, the ABA was concerned about ERISA Section 408(b)(6), which provides statutory exemption from prohibited transactions for the provision of “ancillary service by a bank or similar financial institution…if such bank or other institution is a fiduciary of such plan.” William Schmidt of Kirkpatrick & Lockhart, acting as a moderator, said the American Bankers Association request was in response to concern in the banking community that overdraft protection by banks would not be considered an “ancillary service” and thus make these offerings prohibited by ERISA.
Schmidt continued by saying the recent combination of Labor Department advisory opinion Number 79-73(A), which indicated that an advance of monies was not a service, and two Labor Department prohibited transaction exemptions that said banks engaged in foreign currency exchanges were involved in purchase and sales transaction, not ancillary services, led the American Bankers Association to become concerned about how a narrow reading of the term “ancillary service” might affect their business.
However, Campagna quelled their fears by saying banks providing overdraft protection for ERISA-governed accounts were not engaged in “abusive transactions” and “don’t involve the use of banking credit to create an intentional extension of credit.”
Provided as an example by Campagna was a buy and sell transaction by an investment manager of ERISA-governed funds. Where the sale fails to go through, through no fault of the investment manager such as failure of the exchange or a disaster in a foreign country, the monies would not be available for the buy portion of the transaction, he said. In this case, a bank could extend credit to cover the buy portion of the transaction. The provision of that type of credit would be an “ancillary service” that would not cause the bank to be engaged in a prohibited transaction under ERISA, Campagna assured the group.
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