Final_Temp_TD8635

r

'

Federal Register / Vol. 60,No. 244 / Wednesday, December 20, 1995 / Rules and Regulations 65547

or dates on which remuneration is
considered paid to a director.
(ii)SeparatetreafmentofpubIicIy
held subsidiaries. Notwithstanding
paragraph (i)(l) of this section, the rule
in paragraph (c) (I) (ii) of this section that
treats publicly held subsidiaries as
separately subject to section 162(m) is
d e c t i v e as of the first regularly
scheduled meeting of the shareholders
of the publicly held subsidiary that
occurs more than 12 months after
December 2, 1994. The rule for stockbased compensation set forth in
paragmph (fl(3) of this section win ,
apply for this purpose, except that the
grant m u s t occur before the shareholder
meeting specified in this paragaph
(i) ( 2 )(id. Taxpayen may choose to rely
on the rule referred to in the first
sentence of this paragraph (j) (2)(i i) for
the period prior to the eflective date of
the rule.
(iii) Subsidiaries rbat become separate
p a r a g r a p h (h)(3):
publicly held corporations.
,
Example. Corporation Z adopted a stock
NO'wjthstanding
paragraph
fi)tl)
of this
option plan in 1991. Pursuant to Rule 1 6 b
ofa publicly
section, i i a
3 under rhe Exchange Act, the stock option
field torparation becomes a separate
pIan has been adminisrered by disinterested
dirtctors and was apprvved by Corporation Z publicly held corporation as described
shareholders. Under I ~ terms
F
of rhe plan,
in paragraph (0(4)(i)of this section,
shareholder approval i s not required again
then, for the duration of the reliance
until 2001. In addition th? term5 oilhe sloth period dacribed jn paragraph (T)(2) of
op~ionplan include an a g r r g a t c lirnit on the this section. ,hp
of paragraph (o(1)
number OF share< available under the plan.
of
sec,ion are ueatedas applying
Option grants under the Corporation Z plan
(and the rulrs of paragraph (0 (4) of this
are made with an cxcrclse price equal to or
seclion do not apply) to remuneration
greater than the I a l r market value or
Corporation stock. Compensation
paid ro covered employees of h a t new
attributable to the e w r r c i r e o r o p ~ l o n s!ha, arp publicly held c o r ~ r a r i o npursuant to a
plan or agrcerncnt that exisred prior to
granted under rhc plan befort: the car:'-5,
the date5 specified in paragraph (h)(3)(11)
Pecc~nbcr2. 1994, provided that the
t h i s seciion will t r t r e a ~ e das sa~isfyingthc
rrea[menl that remuneration as
requ ircments of phfbglaph (c) of fh15 section
pprfomance.based is in accordance
for qualified performarice.based
with a reasonable. good faith
compensation. rc-gnrdltss of whcn thc
intcrprelarion of section It;2(rn).
oprions a r e exercised
However, if remuneration i s paid to
(i) (Reserved)
covered employees of that new publicly
(j) Effective date--(I)In general.
held corporation pursuant to a plan or
Section 162(m)and this section apply l o agrecm~nr
exisred prior to
compensalion lhar i5 otherwise
December 2, 1994, but that
deductible by ithe corporation in a
renjuneration is nor performance-based
taxable year beginning a n or aftcr
under a rcasonable. good faith
January I , 1994.
ir~tcrpreratinnof section 162Im).the
(2) Delayed effecrire da tc lor certain
rulcs of paragraph (1) (1) of this section
provjsion~-(i) Date on which
will bc treated as applying only until
rem ur~eratiot~
is considered paid.
the first rcgi~larlyscheduled meeting of
Notwirhsrandi ng paragraph (i)(1) of this shareholders that occurs more than 12
section. the rules in the second sentence months aftcr December 2. 1994. T h e
of each o l paragraphs (e)(3)(ii)(A).
rules of paragraph (0 (4) of this secrion
will apply a s of ~ h a first
i
regularly
(e)(3)(ii)(B),and (e)(3)(ii)(C)of this
section for dclerrnining the date or dates schedt~ledmeeting. The rule Tor stocko n which remuneration is considered
based compensation set forth in
paragraph (0 (3) of this section will
paid to a director are effective for
apply for purposes of this paragraph
taxable years beginning on or after
January 1, 1995. Prior to those taxable
(j)(2)(iii) , except that the grant must
years, ;axpayers must follow the rules in occur before the shareholder meet in^
paragraphs (c) (3)(ii)(A). (e)(3)(ii)@).a n d specified in the preceding sentence ilf
the remuneration is not performance(c) (3)(ii) (C) of [his s e a ion or another
rcasonable, good faith interpretation -of based under a reasonable, good faith
inlerpretalion of section 16Z(m).
section lGZ(m) with rcspecr to the date
shall continue and may be relied upon
until b e carlies1 of(A) The expiration or material
modificafion of t h e plan or agreement;
(B) The issuance of all employer stock
a n d other compensalion t h a t has been
all ocaled under the plan; or
(C) 7 h e first meeting of shareholders
at which directors are to be elected that
occurs after December 31, 1996.
(i i i ) Srock -based compensation. This
paragraph (h)(3)will apply to any
cornpensarion received pursuant t o the
exercise of a stock option or stock
appreciation right, or Che substantial
vesting of restricred property, granted
under a plan or agreemPnt described in
paragraph (h)(3)
(i) of this section if the
granl occurs on or tdore the earliest of
the evcnts specified in paragraph
01)(31(Ii) of this section.
(iv) Example. The following example
illus~ralesthe application of this

I;'

Taxpayers may choose to rely on the
d e s of paragraph (f)(4) of this section
fortheperiodpriortotheapplimble
effective date referred to in the fmt or
second sentence of this paragraph
b) (2)(iii).
(iv) Bonus pooh. N~rwithslanding
paragraph b)(l) of thiz s ~ t i o nthe
, rul~s
in paragraph (e) (2) (iii)(A) that lirnil the
sum of individual percentages of a
bonus pool to 100 percent will nol
apply to remuneration paid before
January 1 , 2001, based on performance
in any performance period that began
prjor to Decembcr 20, 1995.
(v) Compcnsatiun based on a
or base pay.
percentage of
Notwithstanding paragraph (j)(l)ofthis
section. h e rquirement in paragraph
(e)(4) (i) of this wclion that. in the case
of c e r h i n formulas based on a
percenlage of salary or base pay. a
corporarion disclose ro shareholders the
,,j,,,
dollarmount of
compensation that could be paid to the
employee, will apply only to plans
approved by shareholder3 aftcr April 30.

1995.
PART 6 0 2 4 M B C O N f ROL NUMBERS
UNDER THE PAPERWORK

REDUCTION ACT

Par. 3.The authority citation for part
602

to read as

Authority: 26 U.S.C. 7805.

5 602.101 [Amended]
Par. 4. In s 602.101, paragraph (c) is
amended by adding the e n q " 1.162-

27. . . . 1545-1466" in numerical order
to t h e table.
Margaret Milner Richardson,
Commissioner of111rernal Revenue.
Approved: December 12. 1995.
Leslie Samuels,
Assistant Secretary o f the Treasury.
[FRDoc. 95-30869 Filed 12-19-95; 8:45 am]
3'LLwG 'ODE

--14

26 CFR Part f

VD 86351
RIN 1545-AS92

Nonbank Trustee Net Worth
Requirements
AGENCY: Internal Revenue Servicc (IRS),
Treasury.
ACTION: Final and temporary
regulalions.
SUMMARY: This

document contains
regulations that provide guidance to
nonbank lnrstees with respect to the
adequacy of net wonh requirements that
m u s t he sa~isfiedin ordur t o he 01

p

65548 Federal Register / Vol. 60,No. 244 / Wednesday, December 20. 1995 / Rules and Regulations
remain an approved nonbank vustee.

These regulations aflect t~onbank
trustees and cusiodians o f individual
retiremen! accounls, and nonbank
custodians of qualilied plans and taxsheltercd annuities.
EFFECflVE DATE: These regulations a r e
effec~iveDecember 20. 1995.

m FURFHER

I N F O R M A S I ~CONTACT:

Marjorie Hoffman. (202) 622-6030
a toll-free number).

(not

Background

On h c r m b e r 6. 1994, temporary
regulations (TD 8570) under section 401
were published in the Federal Registc.
(59 FR 62570) A notice of proposed
rulemaking (EE-38-94), crossreferencing the remporary regulations.
was published in the Federal Regjs~er
(59 FR 62644) on the same day. The
temporary regulations provide guidance
on the adequacy of nel wor!h
requircmenls for nonbank trustees and
cuslodlans of individual retirement
plans, and for nonbank custodians of
custodial accounts of qualified plans
a n d lax-sheilered annuities.
After consideration of all or Lhe
comments, the temporary regulations
are replaced and thy proposed
regulations are adopled as revised by
this Treasury decision. Bccause section
401(d)(l). under which 5 1.401-12 was
originallv issued, was repealed by
sect inn 237(a) of !he Tax Equify and
Fiscal Rcsponsibil~~y
Act or 1982 Public
Law Y 7-248 ( I 982). these i ~ n a l
regulations aIsn move all thc rules for
nonbank trustees and custodians that
were previously in 5 1.401-12(n) to

5 t .408-2.
Explanaljon of Provisions
The fiduciary conducl rules for
nonbar~ktrustees and custodians under
Iongstandlng Treasur)) rcgularions
require nonbank trustees and custodians
ro maintain a m i r i i m m amount of net
worth in ordcr to qualify as an approved
nonbank trustce or custodian. Under
this requirement, (he nonbank trustee or
cuslodian's ne! worth must cxcecd the
greater of a specified dollar amount o r
a percentage of the value oraIl assets
held in Gduciav accounts of retirement
plans. A primary objective of this
adequaryd-net-worlh requirement has
been to ensure that nonbank trustees
a n d custodians maintain a level of
solvency commensurate wiih their
financial and f i d u c i a ~responsibilitles.
Under the genera) nel worth
requirement, nonbank trustees and
custodians may not accept new
accounis unIcss their net worth exceeds
the grealcr o i $100.000 or four percent

of the value or all assets held in
Gduciarj. accounts. Additiomlly,
nonbank ttustees and etrstodiam must
take whatever steps are necessary
(including the re1inqujshment of
fiduciary accouAt.: 10 ensure that their
ner worth exceeds the greater of 150,OOD
or two percent of the value of all assets
held by *em in fiduciary accounts.

For passive nonbank trust- and
cusiodians (qualified nonbank entities
that have no discretion to direct the
investment of assets), h e percentage
requirements are lower. SpecZcally.
passive nonbank trustees and
custodians may not accept new
accounb unless lheir net worth exceeds
the grealer of $100,000or two percent
of the value of all assets held in
fiduciary accounts. Additionally, they
must take appropriate aciiort (including
the relinquishment of fiduciary
accounts) lo ensure that their ner worth
exceeds the greater of $50.000 or one
perccnt of the value of assets held in
lheir fiduciary accounts.
T h e proposed and Iemporary
regulations provide a special rule for
passive nonbank irusttws ar.d
cus~odianrthat are broker-dealers and
members of the Securities Investor
Protection Corporation (SIPC]. T h e
proposed and temporary regulations
provide that, to the extent that assets
held i n any fiduciar). accounts are
insured by SIPC in h e event of the
member's Iiquidation ($500,000 per
account. $100,000 of which may be
cash), 'le assets ~ ' i I be
1 disregarded in
deterrninir '5,- value of arsels held in
fiduciaq accounrs by the trustee or
custodian lor purpses of thc percentage
pan of the net worth requirement.
The final regulalions adopt the
provisions of the proposed and
temporary regulations. In addition, in
rmponse lo comments, the final
regulations extend the SIPC-related
relier to all nonbank trurlees and
custodians that are broker-dealers and
members oi SIPC rathcr than limiling
Lhe relief l o p a ~ s i v enonbank trustees
and custcdians. The final regulations
provide that the amount of the
minimum net worth requirement Tor
nonbank trustees and custodians that
are SIPC members is reduced by either
two percent of assets insured by SIPC
(in t h e case of rhe minimum net worth
rquiremen! thal applies to a trustee or
custodian accepti@additidnal
a c c o u m ) or one percent of assers
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 h e proposed and temporary
reguIntians h a t increased the initial net

worth requirement for all nonbank
trustees and custodians. The purpose of
the rule i s to better assure that the
enlevrises are sound and well-funded
during their stan-up period. n i s initial
net worth requirement requires all new
entities applying for nonbank trustee or
custodian status to have a net worlh of
not less than $250.000for the most
recent taxable year preceding the
applicant's initial application.
This new initial net warth
requirement applies only to applications
recejved after January 5, 1995,
Previously approved nonbank trusrem
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 achon as defined in EO
12866. ThereIore, a regulatory
assessment i s not required. 11also 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 thesc regulations, and.
thereiom, 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 h e Small Business
Administration for comment on its
impact on small business.

Drafting laformation

T h e principal author of these
regulations is Marjorie Hoffman. Office
of the Associate Chief Counsel,

pmployee Benefits and Exempt
Organizations) IRS. However, other
personnel from h e IRS and Treasury
Department participated in their
development.

List o f Subjects i n 26 CFR Part 1
Income taxes, Reporting and
recordkeeping requirements.

Adoption of Amendments to the
Regulations

Accordingly. 26 CFR part 1 is
amended as f o l l ~ w s :

PART 1-INCOME

TAXES

,

Paragraph 1. The aurhority citation
for part 1 is amended by adding an e n q
in numerical order 10read as follows:
Authority. 26 U.S.C. 7805. *
5 1.401-1 2 also issued under 26

U.S.C. 40I(dj(1). * * *

-