Overview
Action Items
- Identify which of your bank activities and employees will be subject to the new fiduciary investment advice rule, especially with respect to IRAs.
- Determine whether and how to comply with the terms of the BICE (described below).
- Determine whether to change any of your existing fee arrangements and contracts to satisfy another exemption such as the "BICE light" for level fee fiduciaries.
The U.S. Department of Labor's ("DOL's") final rule expands who is an investment advice fiduciary by redefining "investment advice" for ERISA and Internal Revenue Code prohibited transaction purposes. It results in many more professionals and financial institutions that make investment related recommendations to employee benefit plans, IRAs and HSAs being considered fiduciaries. As fiduciaries, they must act with prudence and loyalty and, without a prohibited transaction exemption, they cannot receive conflicted compensation such as commissions and 12b-1 fees. That is why this rule is frequently called the "conflict of interest" rule.
Because this final rule covers IRAs and HSAs, it will apply to nearly all banks, not just those which provide services to tax-qualified retirement plans.
Expanded Definition
An adviser will be an investment advice fiduciary under the new rule if the adviser provides a tax-qualified retirement plan, IRA or HSA with certain "recommendations" for a fee and either (a) represents or acknowledges its fiduciary status; (b) gives advice pursuant to a written or verbal agreement, arrangement or understanding that the advice is based on the particular investment needs of the recipient; or (c) directs the advice to a specific recipient or recipients regarding the advisability of a particular investment or management decision with respect to securities or other investment properties of the tax-qualified retirement plan, IRA or HSA.
A recommendation is a communication that, based on its content, context, and presentation, would reasonably be viewed as a suggestion that the recipient take or not take a particular course of action. It includes recommendations to buy or sell securities or other investment property; recommendations of how to invest amounts that are rolled over, transferred or distributed from the plan or IRA; and recommendations as to the management of securities or other investment property including whether, in what amount, in what form, and to what destination a rollover, transfer or distribution should be made. Certain limited exceptions are not recommendations, including general communications, investment education and "hire me" type communications.
Best Interest Contract Exemption (The "BICE")
A fiduciary may continue to receive common forms of compensation that would otherwise be prohibited as a conflict of interest, so long as the advisers and their financial institutions are willing to adhere to the new “best interest” standard of care and the requirements of the BICE. The BICE requirements are extensive and include:
- Acknowledgement of fiduciary status;
- Adoption of policies and procedures reasonably designed to mitigate any harmful impact of conflicts of interest;
- Disclosures about conflicts and cost of advice;
- Record retention; and
- If the advice is provided to an IRA or HSA investor or a non-ERISA plan, the financial institution must enter into a contract with the investor that sets forth the standards of fiduciary conduct and fair dealing. It is this contract with the IRA or HSA investor that will give these investors the right to make breach of contract claims similar to breach of fiduciary duty claims that can be brought by tax-qualified retirement plan investors.
We Can Help You
Please contact any of the key contacts listed below or another member of the Firm, if you have any questions or would like additional information concerning these issues.