By Timothy Keehan
On April 6, 2016, the Department of Labor released its final rule that greatly expands who is considered a “fiduciary” under the Employee Retirement Income Security Act and the Internal Revenue Code when investment advice is given. The definition of “fiduciary” is a foundational element of ERISA. The fiduciary rule represents a fundamental shift to the definition that will decisively impact the way banks will make available and deliver retirement products and services to their customers. Although it is both complicated and lengthy (over 1,000 pages of text and explanatory material), it is unclear whether the fiduciary rule will work as intended.The fiduciary rule will require banks to reassess whether and how they will continue to market and sell their retirement products and services to employee benefit plans and to individual retirement accounts. In particular, banks will need to determine whether any of their activities constitutes “advice,” and if so, further determine whether and how they will need to adjust their practices to conform to the fiduciary rule. This may involve a significant change to the way the bank is paid for its services, both in manner as well as amount.
The American Bankers Association pressed DOL for a number of changes from the proposed rule, which was widely viewed as draconian and unworkable. Two significant revisions in particular were made specifically as a result of ABA’s advocacy:
- Bank Employee Referrals. ABA asserted that any bank arrangement for the referral of non-deposit investment products in connection with a “bank networking arrangement,” consistent with Gramm-Leach-Bliley and Regulation R, should not constitute investment advice, and therefore, be exempt from the rule. In response, DOL added language to expressly allow for bank networking arrangements to continue, without implicating the rule. DOL stated that “in most cases such referrals will not constitute fiduciary investment advice because they will not constitute a ‘recommendation’ within the meaning of the [rule]or because they will not involve a covered recommendation to hire a non-affiliated third party.” Banks that choose to provide advice within this arrangement, moreover, need only ensure that the advice is in the customer’s best interest and that the bank avoids misleading statements and receives no more than reasonable compensation.
- Visitorial Powers. ABA raised deep concerns about the proposed rule’s assertion of a DOL role in visiting, inspecting, examining, and otherwise directly supervising banks with regard to their implementation of the rule’s best interest contract exemption (BICE). This would be, among others, a violation of the exclusive visitorial rights of the Comptroller of the Currency under the National Bank Act. ABA further met with Office of Management and Budget staff to reiterate our concerns. In response, DOL expressly referenced the visitorial powers provision in the BICE, thus, prohibiting DOL from coming onto the premises of a national bank or federal savings association to inspect the bank’s/thrift’s books and records.
ABA advocacy further led DOL to drop altogether from the fiduciary Rule the restrictions placed on a bank custodian providing to customers a statement reflecting the value of the account’s assets and investments. A number of other revisions advocated by ABA, as well as other interested parties, were made to the fiduciary rule.
One area of uncertainty still remains – how a bank can market its deposit products to IRA customers without triggering fiduciary status. DOL clarified what does, and what does not, constitute investment advice in the fiduciary rule, and provided examples of communication that would not rise to the level of advice. While ABA welcomes these illustrations, it is still difficult to determine where the dividing line on advice might lie in situations where bank customers are requesting information on bank deposit products (such as certificates of deposit) for possible investment in an IRA or other retirement account. This may come down to a facts-and-circumstances test.
Although the fiduciary rule is effective 60 days after publication in the Federal Register, it has a delayed applicability date of April 10, 2017. In addition, some provisions of the BICE will not go into effect until January 1, 2018. DOL has also indicated that it will work with affected parties on providing additional regulatory guidance.