By Sonja Kriegsmann, JD, Guest Author
The Department of Labor (DOL) has issued its long awaited Fiduciary Rule. The Rule expands who is considered a fiduciary when giving retirement investment advice under the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code. Although a final rule was issued, the DOL has subsequently published several issuances that impact both when the Rule becomes effective and the content of the Rule itself. Here’s a timeline of those issuances:
• June 7, 2016 – the Rule was effective with an applicability date of April 10, 2017.
• February 3, 2017 – President Trump issues a Memorandum to the Secretary of Labor directing the DOL to determine whether the Rule might adversely affect consumer’s access to retirement information and financial advice, and requesting an updated economic and legal analysis regarding the impact of the Rule.
• March 2, 2017 – the DOL issues a proposed rule to extend the applicability date and invite comments on the issues raised in the President’s Memorandum.
• April 7, 2017 – the DOL issues a final rule extending the applicability of the Rule to June 9, 2017, with a transition period for complying with some requirements of the Rule and some provisions of the new exemptions until January 1, 2018.
• June 29, 2017 – the DOL issues another Request for Information. The Request indicates that the DOL is still in the process of reviewing comments to its March 2017 proposal, but that it also would like additional input about a further extension of the applicability date for certain parts of the Rule, alternate ways of handling the exemptions, and additional changes to the Rule. (Comments pertaining to a further extension of the applicability date are due 15 days after the Request is published in the Federal Register; all other comments, including those to specific questions raised by the DOL, are due 30 days after publication.)
The intent of the Rule is to require investment advisers to give advice that is in the best interest of their customers, while not prohibiting common compensation arrangements. Instead the DOL takes regulatory action in the form of Prohibited Transaction Exemptions (PTEs). In this case, the prohibited actions are certain types of compensation arrangements, and the PTEs will establish conditions to ensure the adviser is acting in a fiduciary capacity and following basic standards of fair dealing. The conditions and standards must be met before those compensation arrangements will be allowed.
There are several areas where the requirements of the Rule may impact a financial institution, including:
• IRAs consisting of your institution’s deposit products such as certificates of deposit
• Health Savings Accounts
• Archer Medical Savings Accounts
• Coverdell Education Savings Accounts
• Non-deposit investment products, such as insurance annuities, mutual funds, stocks or bonds (either offered through a department of the institution or an affiliate)
• Referring customers to unaffiliated investment advisers for retail non-deposit investment products under a bank networking arrangement
To understand when the bank may be impacted by the Rule, it is first necessary to be able to determine when the requirements of the Rule apply.
The fiduciary requirements under the Rule arise when a person provides investment advice, for direct or indirect fees or compensation, to an employee benefit plan, plan fiduciary, plan participant or beneficiary, IRA, or IRA owner. The investment advice must be in the form of a “recommendation as to the advisability of acquiring, holding, disposing of, or exchanging securities or other investment property” or how the securities or investment property should be invested after they are rolled over or distributed from the plan or IRA. Recommendations relating to managing the securities or investment property (including investment policies or strategies, portfolio composition, selecting other persons to provide investment advice or management services, selecting investment account arrangements) or those relating to rollovers, transfers, or distributions from a plan (such as a 401(k)) or IRA are also included.
Compensation is defined very broadly in the Rule, and includes every type of payment imaginable that is “paid in connection with or as a result of” the purchase or sale of a security or providing investment advice services, “if the fee or compensation would not have been paid but for the transaction or service or if eligibility for or the amount of the fee or compensation is based in whole or in part on the transaction or service.”
The key in determining if investment advice was given is whether a “recommendation” has been made. The Rule defines “recommendation” as “…a communication that based on its content, context, and presentation, would reasonably be viewed as a suggestion that the advice recipient engage in or refrain from taking a particular course of action.” This is a subjective determination based on the facts and circumstances of the situation. The Rule and prefatory materials include several examples and additional guidance for various circumstances such as providing advice to an independent fiduciary with financial expertise, offering investment education, or general information or communications, which are helpful in fleshing out the concept of a “recommendation.” The DOL has also issued 2 sets of FAQs and other materials that provide additional examples and explanation for the Rule and the new and amended PTEs. These materials are available by clicking on the links below.
In several instances, compliance with the Rule will be addressed by someone other than the institution’s compliance team. For example, compliance for the brokerage area will usually be handled by the broker-dealer the bank has contracted with. Likewise, compliance for the sale of insurance investment products will be led by the insurance company partner of the institution. In both of these instances, a review of the contracts with these vendors should clearly outline responsibilities for compliance. In other situations, the PTEs and various exemptions will outline requirements that must be met before a prohibited activity can occur or an exemption will apply. Unfortunately, these are the very areas that continue to be in a state of flux as the DOL completes its review of comments to its March proposal and June request for information.
Other changes (in addition to those expected from the DOL’s continued review of consumer input) may impact this area. Word is that the Trump Administration would like to see further changes, and that the Securities and Exchange Commission may also issue regulations covering this area.
The only certain thing about the Rule is that there are no clear answers to the critical questions at this time. The intent of this article is to make you aware of the key issues and concerns in this area. We will continue to monitor this topic and will provide guidance as it becomes available.