Compliance November 29, 2007

IRS Issues 2007 Cumulative List of Changes for Plan Qualification

The Internal Revenue Service has issued Notice 2007-94 describing the 2007 Cumulative List of changes for plan qualification requirements.
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According to the notice, the 2007 Cumulative List reflects law changes under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA); the Pension Funding Equity Act of 2004; the American Jobs Creation Act of 2004 (AJCA); the Gulf Opportunity Zone Act of 2005,; and the U.S. Troop Readiness, Veterans’ Care, Katrina Recovery, and Iraq Accountability Appropriations Act.

The list includes, among other things:

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  • Final Regulations under § 401(a) of the Code regarding permissible normal retirement ages;
  • Section 401(a)(17) of the Code as amended by § 611(c) of EGTRRA to increase the compensation limit to $200,000;
  • Section 401(a)(31) as amended by § 643(b) of EGTRRA to allow employees’ after-tax contributions to be rolled over under certain circumstances;
  • Section 401(a)(31)(B) as amended by § 657(a) of EGTRRA (as amended by § 411(t) of JCWAA) to provide for the automatic rollover of certain mandatory distributions (effective date March 28, 2005);
  • EGTRRA modification of the definition of eligible rollover distribution to exclude hardship distributions;
  • Section 401(k)(2) and § 401(k)(10) of the Code as amended by § 646(a)(1) of EGTRRA to permit distributions of elective deferrals from a § 401(k) plan upon severance from employment;
  • Revision of the regulations relating to safe harbor hardship distributions of elective deferrals from § 401(k) plans so that the time the employee is prohibited from making elective and employee contributions is reduced from one year to six months after a hardship distribution;
  • Section 401(k)(11) of the Code as amended by § 611(f) of EGTRRA to increase the maximum amount of qualified salary reduction contributions that can be made to SIMPLE 401(k) plans;
  • Section 401(m)(9) of the Code as amended by § 666 of EGTRRA to eliminate the multiple use test;
  • Section 402A of the Code as added by § 617 of EGTRRA to offer optional treatment of elective deferrals as designated Roth contributions to defined contribution plans, effective for taxable years beginning after December 31, 2005;
  • Section 409(p) of the Code as added § 656 of EGTRRA relating to restrictions on the allocation of employer securities in an ESOP maintained by an S corporation;
  • Final Regulations permitting some employees of tax-exempt organizations to be excluded when determining whether a § 401(k) plan meets the § 410(b) minimum coverage requirements, and
  • Section 411(a) of the Code as amended by § 633 of EGTRRA (as amended by § 411(o) of JCWAA) to provide for faster vesting of matching contributions.

In addition, the list includes changes made to Section 415 of the code and other miscellaneous law changes.

Plans submitted for qualification to the IRS must include changes from the 2007 list as well as changes in prior lists previously published by the IRS (See IRS Adds EGTRRA and PPA Provisions to Qualification Requirements).

Notice 2007-94 is here.

Compliance November 29, 2007

FINRA Fines Rafferty for Violations Related to Late Trading and Market-Timing

The Financial Industry Regulatory Authority (FINRA) has sanctioned Rafferty Capital Markets, LLC, of Garden City, New York, for facilitating improper market-timing practices and for failing to have an adequate supervisory system to prevent deceptive market timing and late trading, among other violations.
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According to an announcement, FINRA ordered Rafferty to refrain from opening new mutual fund brokerage accounts for any new or existing customers for 90 days. The firm was fined $350,000 and ordered to pay $59,605 in restitution to two mutual fund families in connection with customer profits derived from improper market-timing.

In addition, Rafferty was ordered to review its procedures and certify that it has established systems and procedures to prevent late trading and deceptive market-timing, to retain electronic communications, and to record the times of receipt and entry of mutual fund orders.

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FINRA said it found that from about January 2001 through August 2003 the firm assisted six hedge fund customers in circumventing market-timing restrictions and escaping detection by opening and using multiple related customer accounts, as well as by using different broker branch codes for market-timing, among other methods.

From April 2001 through April 2002, the firm, acting through two brokers, permitted two hedge fund clients to continue market-timing while circumventing attempts by mutual fund companies to block or restrict such trading, FINRA claimed, resulting in approximately 118 additional mutual fund exchanges and yielding a net profit of about $59,605 at the expense of long-term investors in the mutual funds.

The regulator said Rafferty Capital lacked procedures designed to ensure that brokers who received notices of restricted or rejected mutual fund trades would notify their supervisors or the compliance department. In addition, there were no systems or procedures regarding how the firm should respond when receiving such notices.

FINRA decided the firm failed to establish, maintain, or enforce supervisory systems and written procedures reasonably designed to prevent and detect late trading.

During its investigation, FINRA also found that within the period January 2001 through July 2003, Rafferty Capital failed to:

  • preserve and maintain copies of all e-mail communications relating to the firm’s business;
  • create records accurately reflecting time of entry of 948 mutual fund orders;
  • create and preserve records of time of receipt of 26 mutual fund orders; and
  • maintain records of preliminary mutual fund orders from customers and originals of mutual fund orders that were changed or cancelled, including records relating to the cancellation of the orders.

Rafferty Capital neither admitted nor denied the charges.

Investors can obtain more information about, and the disciplinary record of, any FINRA-registered broker or brokerage firm by using www.finra.org/brokercheck.

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