DOL Calls into Question Whether Boilerplate Indemnification Language in an IRA Brokerage Agreement Constitutes a Nonexempt Prohibited Transaction


On October 20, the Employee Benefits Security Administration of the U.S. Department of Labor (DOL) issued Advisory Opinion 2011-09A (AO 2011-09A), in which it concludes that relief under Prohibited Transaction Class Exemption 80-26 (PTE 80-26) is not available for an indemnification arrangement involving a futures trading agreement for an individual retirement account (an IRA), raising the question as to whether such indemnification arrangements would be non-exempt prohibited transactions.

AO 2011-09A deals with an arrangement under which the owner of an IRA enters into a futures trading agreement on behalf of the IRA, where the agreement includes an indemnity provision from the IRA owner that secures the broker against any investment-related losses and tax charges related to the account's investment activities that exceed the assets held in the IRA. In short, where such investment-related losses or tax charges exceed the assets held in the IRA account, the agreement would obligate the IRA owner, pursuant to the terms of the indemnity provision, to provide the broker with cash equal to such excess loss amount.

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