Department of Labor issues Final Fiduciary Rule

The Department of Labor (DOL) has released its long-awaited final fiduciary rule and clarified that IRAs—along with Archer medical savings accounts (MSAs), health savings accounts (HSAs), and Coverdell education savings accounts (ESAs)—are included in the scope of the final rule.

The final rule expands the definition of “fiduciary” under the Employee Retirement Income Security Act of 1974 (ERISA), by redefining “investment advice” to encompass activities that occur within pension and retirement plans, but that do not constitute investment advice under the existing definition of investment advice. The DOL’s expanded definition of fiduciary of an employee benefit plan adds brokers and advisers providing advice to IRA, MSA, and HSA owners and ESA participants to the definition.

The application of the final rule to MSAs, HSAs, and ESAs has received little media or industry attention, but it should come as no surprise, given the path taken by DOL to apply the rule to IRAs. Although IRAs were first authorized by ERISA, the DOL does not have direct regulatory authority over IRAs. IRA provisions are found only in the Internal Revenue Code (IRC) and fall outside of ERISA’s purview. Therefore, the Department of the Treasury—rather than the DOL—oversees most issues regarding IRAs.

However, under Executive Order 12108, authority over certain issues related to prohibited transactions under IRC Section (Sec.) 4975, that govern the treatment of IRAs, was transferred from the Treasury Department to the DOL. The DOL has asserted that its authority over the prohibited transaction rules that govern IRAs extends to other non-ERISA plans covered by IRC Sec. 4975, including MSAs, HSAs, and ESAs, and grants the DOL authority to include these plans in the scope of the final rule.

As defined in the final rule, investment advice includes providing investment or investment management recommendations, and includes recommendations to buy or sell investments, receive a distribution or execute a rollover or transfer, and manage investments. In addition to the receipt of direct or indirect compensation, for the relationship to rise to fiduciary status, there must be

• a representation or acknowledgement that the adviser is acting in a fiduciary capacity;
• advice given pursuant to a verbal or written agreement, arrangement, or understanding that it is individualized to the recipient; or
• advice or a recommendation regarding an investing or account management decision related to a retirement plan, IRA, MSA, HSA, or ESA.

The key to determining whether “fiduciary investment advice” has been given is whether a “recommendation” has occurred. This is defined as a communication that “would be reasonably viewed as a suggestion” to take a particular course of action, or refrain from doing so. The more the advice is tailored to the recipient, the more likely it will be viewed as a recommendation.

The final rule will add additional compliance burdens to brokers and advisers providing advice to IRA, MSA, and HSA owners and ESA participants, including credit union service organizations (CUSOs) and, potentially, credit unions. Fortunately, the DOL made substantial changes to the proposed rule to incorporate feedback it received through written comments and public hearings, including a number of credit union concerns that the Credit Union National Association (CUNA) highlighted in the two comment letters it submitted during the comment period.

As with any new regulation, allowing adequate time for implementation is essential, and the final rule extends the implementation date. Although the final rule is effective June 7, 2016, 60 days after it was published in the Federal Register, brokers and advisers will not be governed by the conduct and disclosure rules until April 10, 2017. And, a transition period for compliance with the best interest contract (BIC) exemption will be in place from that date until January 1, 2018, if certain conditions are met. Full compliance with the exemptions will be required as of January 1, 2018.

Compliance with the BIC exemption—the contractual agreement between brokers and advisers and the recipients of their advice—also is simplified under the final rule. In cases where a signed BIC agreement is required—such as in an IRA rollover situation—the contract can be incorporated into other account opening documents, and can be entered into before or at the same time as the investment transaction is executed, instead of the time at which the investments are initially recommended.

The final rule also clarifies the definitions of “investment advice” and “investment education” and provides a non-exhaustive list of certain types of communications that generally are not considered recommendations. The final rule clarifies that general communications such as newsletters, marketing materials, public presentations, investment reports, and nonpersonal information will not be considered recommendations giving rise to fiduciary status. For example, advising IRA owners that they are required to take a required minimum distribution from their IRA would not be treated as investment advice under the final rule.

This change should allow credit unions to continue to provide members with general information about retirement savings and planning for the future. CUNA was concerned that under the proposed regulation, credit union members who look to their credit unions for information on saving for retirement would not have access to the financial advice that they need.

It will take some time to fully analyze the DOL’s final rule, which is more than 600 pages in length. Credit unions generally will not be subject to the rule if they are not offering investment advice for a fee. However, credit unions should note that the final rule clarifies that the term “investment property” includes certificates of deposit and similar products. Credit unions would be well-advised to carefully review the final rule and how it will affect their policies and procedures. This is especially true if they offer investment services through CUSOs or third-party brokers, or plan to offer investment services in the future.