plan fiduciaries. It is axiomatic that a person without discretionary authority is
not acting as a fiduciary. In fact, the very notion of extending fiduciary status
to Custodians is at odds with ERISA’s functional definition of fiduciary. A
person is a fiduciary only to the extent that person is performing a fiduciary
function® and the mere transmittal of valuation information is not a fiduciary
function. Similarly, one can fairly characterize the role Custodians serve in
satisfying the reporting obligations of the Code as a mere ministerial role,
which again is a type of role that ERISA clearly views as non-fiduciary.

Moreover, to impose fiduciary status in this context would be to fundamentally
transform the nature of the relationship between a Custodian and an IRA or
plan. As a fiduciary with respect to a valuation of a hard-to-value asset, a
Custodian would have to engage in a rigorous process to satisfy its duty of
prudence and loyalty.” The precise nature of the fiduciary process would be
highly fact-specific but it would certainly entail inquiries into the underlying
nature of a wide universe of alternative investments. This is simply not the
role that a Custodian serves, and it would be wholly inappropriate for ERISA
to dictate the nature and character of the relationship between Custodians
and IRAs and plans.

Imposing a fiduciary status on Custodians would also not serve the policy
concern that is motivating the Department. Custodians do not operate under
any conflict of interest, nor are they in a position to exert any influence over
plan decisions when they furnish plan reports to satisfy tax law requirements.
The Custodian is merely compiling the information provided by third parties.

Imposition of fiduciary status could also have enormous consequences.
According to a May 2010 report from the Investment Company Institute, IRAs
hold more than $4.2 trillion in retirement assets, which represents more than
one-quarter of all U.S. retirement wealth. It is critically important that
Custodians continue to offer cost-effective administrative services to millions
of Americans diligently saving for retirement. Extending fiduciary status to the

° Mertens v. Hewitt Assocs., 508 U.S. 248, 262 (1993).

"ERISA § 404(a).


3

reasonable FMV from uncooperative general partners are told not to
deal with these people on a fiduciary basis in the future unless the
partnership agrees to re-appraise its assets periodically, under
written contract. Investors should seek the same kind of
assurances.

Unfortunately, because there are no specific rules or
regulations dealing directly with this issue under the Code, we
cannot answer each question posed individually We do, however
appreciate your comments on this issue, and hope that the general
information provided in this letter will be helpful to you. If you
have any further questions, please call Cheryl Press of my staff at
(202) 622-6030.

Sincerely,
O orien (pine

A. Thomas Brisendine

Chief, Branch 1

Office of the Associate
Chief Counsel

(Employee Benefits and
Exempt Organizations)


Conclusion

For the reasons discussed above, we urge the Department to modify the final
regulation to explicitly provide that Custodians who furnish valuations of hard-
to-value assets prepared by third-parties on plan reports are not investment
fiduciaries. The absence of such a clarification would have enormous
implications for our retirement system.

Thank you for your consideration of our views and request. Please contact
us at 941 724 0900 or mimohr.e.d.rita@comcast.net with any questions.

Tom W. Anderson, President, RITA
Mary L. Mohr, Executive Director, RITA

Enclosure


furnishing of valuation reports would result in higher costs and potentially
fewer service providers to self-directed IRAs. Custodians do not currently
carry fiduciary insurance and, more than likely, would be unable to obtain it,
even at a high cost. Some Custodians could even exit the industry, leaving
fewer providers to administer retirement plans — and at higher costs to
consumers. This, in turn, could result in fewer investment choices, less
investment diversification, and, therefore, higher investment risk for
Americans savers.

We realize that the Department has at times raised questions about whether
the fiduciaries of some ERISA-covered retirement plans are satisfying their
obligations and taking the appropriate steps to reasonably ascertain the value
of assets for which there is no generally recognized market. However, it is
clear that any such perceived problems are not attributable to Custodians,
and it would be wholly inappropriate to impose fiduciary responsibility upon
Custodians in order to address such an issue.

Investment Education for IRA Owners

We also note that the Proposed Rule would exempt from the definition of
“investment advice” certain common practices of defined contribution plans,
including the provision for educational materials and making available through
a platform a variety of mutual funds and other securities. These are both
valid exemptions and should also apply to IRAs. Owners of self-directed
IRAs should not be deprived of the educational materials available to plan
participants. Also, a directed IRA custodian that makes available through a
platform a variety of mutual funds and other securities should not be
considered a fiduciary. Otherwise, such account owners will be forced to deal
with other service providers that may indeed be trying to sell particular
investments.


In most cases, the lack of regulations in this area is not a
problem. For example, publicly-traded stock will have a specific
value on December 31. A bank account will have a specific balance
at any given time. Participants in these instances will generally
be able to determine the current and fair value of their IRA’s based
on their accessibility to this information. However, it is more
difficult for individuals to determine the market value of their IRA
investment when this information is not listed on an established
security exchange or is not available to them at the bank or
elsewhere.

There has been some discussion at the IRS on the problem of the
reporting of FMV of investments that are not listed on a public
exchange, but no specific action has been taken. In order to
prepare guidelines for the reporting of FMV of limited partnership
interests, for example, we must first decide how we are going to
define FMV for this issue, and how often we will require a valuation
determination. In order to determine these issues, we would have to
have substantial discussion with those people, like yourself, who
are involved in the limited partnership market, and who raise equity
capital for investment through the partnership vehicle. Moreover,
while the reporting obligation belongs to the trustee or issuer,
generally only the limited partnership’s general partners have the
necessary information to determine the FMV of those interests
accurately. So long as the trustee reports the information that it
receives from the partners, it is under no obligation to appraise
the investment independently. However, if this information is
unreasonable on it’s face, a trustee may want to re-evaluate whether
to continue in a fiduciary relationship with the partnership.

The information returns are for the benefit of the taxpayers.
However, taxpayers who invest their IRA funds in non-publicly traded
partnerships know that they have invested in risky ventures. Even
if the general partners are not forthcoming with the fair market
value information, the trustees who are obligated to report FMV do
not have to determine value independently to fulfill their
obligation under the Code.

In the absence of guidelines from the IRS, some industry groups
have come up with their own guidelines for determining FMV. These
guidelines require a good faith effort by general partners to
provide reasonable fair market value information to trustees, which
the trustees may use to satisfy their reporting obligations. If the
trustees so desire, they are free to arrive at their own
determination of FMV. Generally, a new appraisal is required every
three to five years. As you state in your letter, the industry that
markets these investments believe that the public will only invest
with them in the future if the public has the ability to determine
the worth (or lack thereof) of their investments. Moreover,
trustees who call the IRS seeking information on how to get a


RITA

Retirement Industry Trust Association
Connecting companies in the self-directed retirement industry

MARY L. MOHR
EXECUTIVE DIRECTOR

January 26, 2011

FILED ELECTRONICALLY

Office of Regulations and Interpretations
Employee Benefits Security Administration
U.S. Department of Labor

200 Constitution Avenue, NW, Room N-5655
Washington, DC 20210

Re: Proposed Definition of Fiduciary

Dear Sir or Madam:

The Retirement Industry Trust Association (“RITA”) appreciates this
opportunity to comment on the proposed regulation published by the
Department of Labor (the “Department”) on October 22, 2010, which would
redefine who is a fiduciary for purposes of the Employee Retirement Income
Security Act of 1974 (“ERISA”) and the prohibited transaction provisions of
the Internal Revenue Code (the “Code”)."

RITA is a non-profit national trade group comprised of federally- and state-
regulated banks and trust companies that engage in the custody or
administration of more than 400,000 retirement accounts holding more than
$55 billion in assets. RITA members generally act as directed custodians or
non-discretionary trustees of self-directed IRAs and business retirement
plans, many holding alternative assets that are not traded on public
exchanges. Such assets may include real estate (domestic and foreign),
private equity, private company debt, promissory notes, second trust deeds,
limited liability company interests, limited partnership interests, tax liens,
REITS and precious metals allowed by the Internal Revenue Code. Since

' 75 Fed. Reg. 65,263.

4251 Pasadena Circle [Mf Sarasota, FL 34233 Ml Phone 941.724.0900 MM Fax 941.866.7321 i | www.ritaus.org


internal Revenue Service Department of the Treasury

po. Box rand
n Franklin Station ele.
Washington, OG 20084 Exhibit A
. Person to Contact:

ike Posey, President Ghervi E.. Sress
Retirement Industry Trust Assoc Telephone Nutibe
e/o Sterling Trust Company G02 2622-6030
4547 Lakeshore Drive, Suite 4 ‘eter Reply to:
Waco, Texas 78710 SC:EBEO:1 TR: 39-00396-93

mae AG 6 ad

Dear Mr. Posey:

is is in res
the reporting of t

ponse to your letter of May 20, 1993, concerning
fair market values (*FMV*) Fox nonpublicly
traded securities within Individual Retirement Accounts ("IRA") to
the taxpayer on Form 5498. We appreciat ) conmment s and concerns
expressed in your letter on this subject and “hope the following

information is helpful to you.

Sects 408(1) of the Internal Revenue Code of 1986 (‘the
Code") requires the trustes or issuer of an TRA to report co
information beth to the individuals for whom t plan accour
maintaimed and to the Internal Revenue Service ("IRS"). One of the
items that must be furnished to both the IRS and the Taxpayer is the
FMV of the assets held in the account at the end of each calendar
year. In the case of the required report ing to the account holder,
this reporting obligation must be sat isfied no later than January 31
of the calendar year following the calendar year to which suc
reports rélate. Trustees are also required to repc the December
31 FMV information on the annual Form $498, which is filed with the
TRS by May 31 of the following yeax. The statement of value to an
account holder need not be reported on a Porm 5498

Trustees must furnish the FMV information each year, even if no
contributions were made for that year However, if the trustee or
issuer furnished a statement of the FMV to the account holder by
January 31, and no contributions were made by the participant for
the reporting year, the truatee or issuer need not furnish another
statement (oer Form $498} to the account holder tc regort zero
contributions.

A trustee who fails te satisfy these reporting obligations is
ct to penalties under section €693(a} of the Cede in the amount
@ for each such failure. As you know, there are presently no
fic guidelines (regulations, revenue procedures, or otherwise)
ming hrustees how to satisfy the IRS‘s reporting requirements
he value of agsets held by IRA’s, and there are no
itions of FMV for the various underlying investments
that must be used by the trustee or issuer in order to comply with
ERS guidelines. Rather, trustees and issuers are expected to be
Eeneonaele in oe determination of FMY, but they are net required
c IRS guidelines, and are not psnalized at this
metheds they use’ to report FMV.



The Proposed Rule includes an exception that further raises the possibility
that Custodians would be treated as plan fiduciaries. The exception provides
as follows:

For purposes of paragraph (c)(1)(i) of this section, the
term “advice, or appraisal or fairness opinion” shall
not include the preparation of a general report or
statement that merely reflects the value of an
investment of a plan or a participant or beneficiary,
provided for purposes of compliance with the reporting
and disclosure requirements of the Act, the Internal
Revenue Code, and the regulations, forms and
schedules issued thereunder, unless such report
involves assets for which there is not a generally
recognized market and serves as a basis on which a
plan may make distributions to plan participants and
beneficiaries.°

The inference created by this exception is that preparation of a general report
or statement that reflects the value of an asset for which there is no generally

recognized value would be considered fiduciary investment advice.

Reasons for Requested Clarification

RITA strongly believes that the final regulations should be revised to clarify
that Custodians who furnish valuation information developed by third-parties
in order to satisfy reporting and disclosure requirements under the Code are
not plan fiduciaries by reason of such reporting.

As discussed above, Custodians do not have the authority or discretion to
review, modify or perform valuations. Custodians merely serve as conduits
between persons who perform the valuations and IRA owners and retirement

5 DOL Prop. Reg. § 2510.3-21(c)(2)(iii).


order to comply with reporting requirements of the Code.” These rules
generally require the reporting of values for assets for which there is no
generally recognized market and therefore for which there is no recognized
fair market value. In order to satisfy these reporting obligations with respect
to these hard-to-value assets, Custodians report values provided by third-
parties, such as investment providers and investment managers. Custodians
do not generate values, do not provide appraisals and do not review the
values provided to them for reasonableness or accuracy. In this regard, the
legally binding documents that govern the directed custodian or non-
discretionary trustee relationship almost invariably reflect that the asset
values to be reported by the Custodian must come from plan fiduciaries (e.g.,
trustees or advisors) or the investment sponsors themselves. Custodians do
not have the legal authority to demand from investment sponsors the
information that would be required to independently perform valuations on
alternative assets.

For these reasons, RITA members make a “best efforts” attempt to obtain
valuations for all assets under custody and rely on the valuations provided by
the investment product sponsors and issuers in order to comply with requisite
reporting requirements. This process has been in place since the early 1990s
and has been validated by the IRS.?

Implications of Proposed Rule for Custodians

The Proposed Rule suggests for the first time that Custodians who merely
provide values on plan reports are acting as fiduciaries and have a fiduciary
obligation with respect to such valuations. The Proposed Rule states that any
person who "provides . . . an appraisal" and is otherwise a fiduciary, for
example, by reason of being a directed trustee, is providing fiduciary
investment advice.*

2 See Code §408(i); Treas. Reg. §§ 1.408-5 and 1.408-7. See also IRS Forms 5498 and 1099-R, and Revenue
Ruling 59-60, 1959-1 C.B. 237.

3 See Letter from A. Thomas Brisendine to RITA, dated August, 1993, which is attached as Exhibit A.

* DOL Prop. Reg. § 2510-.3-21(c)(1).

a


1987, RITA has provided its members with a forum to share best practices
regarding the various rules and regulations of the Department and the
Internal Revenue Service (the “IRS”) in connection with the services RITA
members provide to their clients. RITA and its members proactively
participate in the regulatory process governing retirement accounts and have
testified before the Department and the IRS. In that spirit, we are providing
our input on your important proposal, which could be potentially harmful to
our industry and the working Americans we serve.

The sole issue addressed in this letter is the extent to which directed
custodians and non-discretionary trustees of self-directed IRAs and
employer-maintained retirement plans should be treated as fiduciaries by
reason of the valuation reports custodians provide to IRA owner and plan
fiduciaries. As discussed more fully below, we urge the Department to clarify
that directed custodians and non-discretionary trustees who use third-party
valuations of hard-to-value plan assets to complete plan reports required
under the Code are not fiduciaries by reason of such reporting. This
clarification is critical to ensuring the ongoing viability of self-directed IRAs
and retirement plans.

Services Performed by Custodians

As mentioned above, RITA members serve as directed custodians and non-
discretionary trustees (collectively referred to herein as “Custodians”). As the
names suggest, Custodians provide custodial and trustee services.
Custodians do not provide, nor are they paid to provide, valuation services for
their clients. Custodians act only at the direction of their accountholder or
account fiduciary (e.g., IRA accountholder, plan trustee, or investment advisor
appointed by the accountholder or plan trustee). Custodians also do not
provide investment advice and do not influence or affect the investment
decisions made by IRA owners or plan fiduciaries.

Custodians are, however, subject to certain reporting obligations under the
Code. Most notably, Custodians of IRAs must provide annual valuations in