In a recent advisory opinion (2009-03A), the Department of Labor (the “DOL”) held that a cross-collaterization between a personal brokerage account and that person’s IRA brokerage account could be viewed as a prohibited transaction under Section 4975 of the Internal Revenue Code. The DOL concluded that a cross-collaterization is essentially an extension of credit between an IRA owner (fiduciary) and an IRA.

It is our understanding that brokerage agreements typically require cross-collaterizations between the accounts that use the same taxpayer ID number, and that an IRA account normally uses the IRA owner’s social security number as its taxpayer ID number. In light of the recent DOL pronouncement, this practice raises serious concerns. Accordingly, individuals should review their brokerage agreements for any cross-collaterization clauses or, alternatively, should maintain their IRAs and personal accounts with separate brokerage firms. Maintaining multiple IRAs at a single brokerage firm will not raise this concern.

______________________________________________________________________

If you have any questions about this memo, please feel free to call John Ryan at (212) 574-1679 or Michael O’Brien at (212) 574-1505.