Yesterday, the Department of Labor released its final
rule defining who is a “fiduciary” of an employee benefit plan under the
Employee Retirement Income Security Act of 1974, (ERISA) which includes adding
brokers and advisers providing advice to individual retirement accounts (IRA)
to the definition.
CUNA previously expressed support for the goal of this rule
to protect investors and encourage all advisors to act in the investor’s best
interest. However, we raised concerns
about the overly broad definition of what is considered investment advice, and
took issue with the proposed “education carve out” for the rule which we did
not believe went far enough.
While CUNA remains aware that parts of this rule will add
compliance burdens to credit union service organizations (CUSO), and
potentially credit unions offering certain product and services, we are pleased
that the DOL considered some of our concerns and made some important
modifications to the final rule.
Education v. Advice
Under the final rule, persons who provide investment advice
or recommendations for a fee or other compensation with respect to assets of a
plan or IRA will be considered a fiduciary under the Employee Retirement Income
Security Act of 1974 (ERISA or the Act). As CUNA noted in our comment letter, for a
majority of credit unions offering brokerage services, compliance with this
rule will not sit at the credit union level because many credit unions offering
these services have arrangements with third party brokers that clearly outline
the duties and responsibilities of each party in the arrangement. The third
party offering retirement or IRA services, which in most situations for credit
unions will be a CUSO, will be responsible for their own compliance with
applicable laws and compliance standards, and is usually selling their products
directly to members. However, because of the broad scope of the proposed rule
CUNA expressed concerns to the DOL about whether certain communications between
credit unions and members may also be swept into the rule, which could
implicate the fiduciary rule depending on the compensation structure of credit
union employees.
Specifically, CUNA expressed concerns to the DOL that a
compliance consideration for credit unions is that the definition of
“education” and the “education carve-out” in the proposed rule were overly
broad and do not provide full assurances to credit unions that they are not
included in the rule. In the final rule the DOL listened to these concerns and
provided some clarification on this issue.
The final rule states, “With respect to investment
education in particular, the final rule expressly describes in detail four
broad categories of non-fiduciary educational information and materials,
including (A) plan information, (B) general financial, investment, and
retirement information, (C) asset allocation models, and (D) interactive
investment materials. Additionally, in response to comments on the proposal,
the final rule allows educational asset allocation models and interactive
investment materials provided to participants and beneficiaries in plans to
reference specific investment alternatives under conditions designed to ensure
the communications are presented as hypothetical examples that help
participants and beneficiaries understand the educational information and not
as investment recommendations.”
The final rule further notes, “In particular, they
[commenters] worried that the provisions could be read to create an implication
that any communication that did not technically meet the conditions of a
specific carve-out would automatically meet the definition of investment
advice. This was not the Department’s intention, however, and the Department no
longer uses the term “carve-out” in the final regulation.
We believe this is a significant change that will help
credit unions continue to have conversations with their members about financial
education, and have the ability to provide general information about
opportunities to save and plan for the future.
One thing to note, however, in the clarification of the
investment of education is that the DOL noted that in the IRA context there is
no independent plan fiduciary to review and select investment options so
references to specific investment alternatives are not treated as education
under the education provision in the final rule. This means recommendations about rollovers would be considered
investment advice. It is also important to note though that if credit union
employees are not receiving fees, or other compensation, for recommending IRAs
the fiduciary rule will likely not be triggered. As such, credit unions will
need to review their compensation structure to determine whether this is applicable.
In CUNA’s comment letter to the DOL we also sought
clarification about the definition of advice. The letter stated, “CUNA believes
that it is necessary for the DOL to analyze how it can more narrowly tailor the
definition of 'investment advice' to assure that credit union employees, who
are only tangentially involved in providing investment services, are not
included in the rule.”
The rule provides some clarifications about what is advice.
In general it defines advice as any individual receiving compensation for
making investment recommendations that are individualized or specifically
directed to a particular plan sponsor running a retirement plan (e.g., an
employer with a retirement plan), plan participant, or IRA owner for
consideration in making a retirement investment decision is a fiduciary.
The final rule provides the following examples of what
constitutes advice:
- A recommendation as to the advisability of
acquiring, holding, disposing of, or exchanging, securities or other investment
property, or a recommendation as to how securities or other investment property
should be invested after the securities or other investment property are rolled
over, transferred, or distributed from the plan or IRA.
-
A recommendation as to the management of
securities or other investment property including, among other things,
recommendations on investment policies or strategies, portfolio composition,
selection of other persons to provide investment advice or investment
management services, selection of investment account arrangements (e.g.,
brokerage versus advisory); or recommendations with respect to rollovers,
distributions, or transfers from a plan or IRA including whether, in what
amount, in what form, and to what destination such a rollover, transfer or
distribution should be made.
While CUNA appreciates the elaboration from the DOL on this
question, we believe it would have been helpful to provide a hypothetical
directly relevant to what might be considered advice from credit unions or
other financial institutions when interacting with members or customers. But,
again it’s important to note that this is only relevant to advice provided in
connection with compensation.
BICE
Another change CUNA suggested in its comment letter is
that for those who the rule does define as fiduciaries, there is a lack of
clarity for financial institutions surrounding the Best Interest Contract
Exemption (BICE). The BICE exemption is only applicable to financial
institutions that acknowledge fiduciary status, and as such, it would be more
likely to be used by a CUSO than a credit union. However, questions still
remain about whether a credit union itself could in certain circumstances be
considered a fiduciary.
In the final rule, the DOL provided some
clarification about the BICE. While all of CUNA’s concerns surrounding the
BICE were not addressed, the final rule simplified the BICE. Notably, it
provides clarification about the timing of the BIC for advice to IRA holders, highlighting
that a contract does not have to be executed immediately upon entering into a
conversation about investment options or IRAs. The final rule addressed this by
adjusting the contract requirement to make it clear that it can be incorporated
into other account opening documents and can be entered into before or at the same time the recommended
transaction is executed. It further
notes that advice given before the contract was signed must be covered by the
contract.
Lengthy
Implementation Period
As a result of the significant push back the DOL received
after proposing the rule, including several legislative
efforts supported by CUNA, the Department also provided industry a lengthy
implementation for the rule. Currently
brokers will need to comply with certain aspects of the rule by April 2017 to
take advantage of the BICE. However, the majority of the rule goes into full
effect on Jan. 1, 2018.
The rule notes on this topic, “The Department also
intends to be accessible to affected parties who wish to contact the Department
with individual questions about the final rule. For example, this final rule
specifically provides directions on contacting the Department for further
information about the final rule…Although the Department expects advisers and
firms to make reasonable and good faith efforts to comply with the rule and
applicable exemptions, the Department expects to initially emphasize these
sorts of compliance assistance activities as opposed to using investigations
and enforcement actions as a primary implementation tool as employee benefit
plans, plan sponsors, plan fiduciaries, advisers, firms and other affected
parties make the transition to the new regulatory regime.”
With its attachments
the DOL rules spans over 1000 pages, so CUNA continues to analyze this complex
rule to determine its impact on credit unions. In CUNA’s early review, we are
pleased to see some of the clarifications we suggested were addressed, but
remain vigilant about whether some of the compliance burdens associated with
this rule will detrimentally impact credit unions and CUSOs. For more information, please do not hesitate to contact Leah Dempsey, Senior Director of Advocacy and Counsel.