DOL Fiduciary Q&A Round 2

The Department of Labor issued a second round of frequently asked questions on its fiduciary conflict of interest rule.  Compliance with the rule is required on April 10, 2017, but the rule, guidance and FAQs still leave a lot to be desired on how to comply.  This is one of the many rules that President Trump has targeted to get rid of, but credit unions should still plan on being compliant if it does not go away.

The first round of FAQs did little to help credit unions understand their requirements, and the second round follows the same path.

From the two rules, some guidance was offered to credit unions:

The DOL’s first round of FAQs include the following question and answer –

Q20. The BIC Exemption provisions regarding Bank Networking Arrangements address referrals by banks and bank employees only to non-affiliated financial institutions such as registered investment advisers, insurance companies or broker dealers. Why isn’t relief provided for referrals to affiliates? 

Under the Rule, a recommendation of other persons to provide investment advice or investment management services constitutes fiduciary investment advice, and receipt of compensation as a result of such advice is a prohibited transaction requiring compliance with an exemption. In contrast, marketing oneself or an affiliate (when it is disclosed as such), without otherwise making an investment recommendation covered by the Rule, does not constitute investment advice that may result in a prohibited transaction. Referrals to affiliates who are providers of retail non-deposit investment products therefore generally would not be considered fiduciary investment advice giving rise to a prohibited transaction for which an exemption is required. (Highlighting added)

This FAQ appears to provide guidance that when a credit union offers marketing materials for a CUSO, this would likely not cause fiduciary status. It also appears to further clarify that referrals to CUSOs, without specific recommendations, would also not cause fiduciary status. While this provides additional clarification, credit union employees receiving compensation for a specific recommendation or referral such as an IRA, should still review the rule for applicability.

From the Department of Labor’s second round of FAQs, the following question and answer was posed –

Q19. A financial institution offers a self-directed brokerage program, an investment advice program, a discretionary investment management program, and an on-line model portfolio program (e.g., robo-advice). A prospective customer approaches the financial institution and says she wants to roll over her money from her qualified plan into an IRA with the financial institution. A representative of the financial institution explains the services provided in each of the programs and tells the customer that the financial institution is a recognized leader in the industry for providing high-quality services with fees that are lower than many of its competitors. Does this constitute an investment recommendation under the Rule?

No. The Rule covers the recommendations of others to provide investment advice or investment management services and recommendations on the selection of investment account arrangements (e.g., brokerage versus advisory). Here, the financial institution, through the representative, only recommended itself, not another person to provide investment advice and investment management services, and the description of the range of services that the financial institution can provide does not constitute a recommendation of any particular account type as appropriate for the prospective customer merely because the financial institution represented that it provides high-quality services for competitive fees. However, if the financial institution actually recommends a particular account type or service, that would be a fiduciary investment advice recommendation under the Rule.  (Highlighting added)

The final rule is available at:  https://s3.amazonaws.com/public-inspection.federalregister.gov/2016-07924.pdf

From these questions, the credit union should be able to refer members to investment CUSOs or to their own products, but not recommend a specific investment or IRA, without falling under the fiduciary status definition.

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