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.