Area/Item Highlight: Investments/Conflict of Interest Rule
The Department of Labor (DOL) expanded their definition of a “fiduciary” to include persons who provide investment advice or recommendations for a fee or other compensation with respect to assets of a plan or individual retirement account (IRA). Fiduciaries to plans and/or IRAs are not permitted to engage in certain “prohibited transactions.” These new rules establish certain exemptions from the prohibited transactions to continue to allow certain fee structures, as long as there is adherence to applicable standards designed to ensure that advice is impartial and in the best interest of members and/or non-members.
The effective date of these new rules was June 7, 2016 with an applicability date of June 9, 2017.
Exemption - Exemption
The credit union would be exempt if they do not:
1) Refer members/non-members to broker dealers for non-deposit investment products; and
2) Do not offer investment retirement accounts (IRAs) at the credit union.
Factor 1 - Classification of a Fiduciary
The credit union understands that an employee may be designated as a fiduciary with respect to a plan or IRA by rendering investment advice for a fee or other compensation.
The credit union’s procedures and processes properly identify employees who may be provided compensation (direct or indirect) when providing investment advice as defined below:
• A recommendation as to the advisability of holding, acquiring, disposing of, or exchanging, securities or other investment property or a recommendation as to how it 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, or recommendations with respect to rollovers, transfers, or distributions 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; and
• With respect to the investment advice, a recommendation made either directly or indirectly through or together with any affiliate by a person who:
• Represents or acknowledges that he/she is acting as a fiduciary within the meaning of the Act or code;
• Renders the advice pursuant to a written or verbal agreement, or understanding that the advice is based on the particular investment needs of the advice recipient; or
• Directs the advice to a specific advice recipient or recipients regarding the advisability of a particular investment or management decision with respect to securities or other investment property of the plan or IRA.
Factor 2 - Policies and Procedures to Avoid Conducting Prohibited Transactions
In order to avoid being be considered a fiduciary under the rules, the credit union has policies and procedures in place to do one or both of the following:
1) Provide no compensation either directly or indirectly to credit union employees that result from any transaction associated with the credit union’s term deposit investment retirement accounts.
2) Provide no investment advice to members or non-members, including recommendations with respect to rollovers, transfers, or distributions 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.
If the credit union has no policies and procedures to prohibit one or both of the activities listed above, it has worked with legal counsel to create a Best Interest Contract Exemption compliant with the rules.
Factor 3 - Best Interest Contract Exemption - Bank Networking Arrangements
If the credit union or its employees receive compensation (incentives, bonuses, prizes, etc.) based on the referral of a Retirement Investor to a Broker Dealer they must utilize a Best Interest Contract Exemption specific to Bank Networking Arrangements*. Credit unions that rely on the Best Interest Contract Exemption under the rule:
1) Acknowledge fiduciary status with respect to the investment advice to the Retirement Investor;
2) Adhere to the Impartial Conduct Standards;
3) Implement policies and procedures reasonably and prudently designed to prevent violations of the Impartial Conduct Standards;
4) Refrain from giving or using incentives for Advisers to act contrary to the customer’s best interest; and
5) Fairly disclose the fees, compensation, and Material Conflicts of Interest, associated with their recommendations.
*In order for this exemption to provide relief to the credit union, the arrangement of the referral of retail non-deposit investment products must satisfy applicable federal banking, securities and insurance regulations, under which the credit union employee refers credit union members or non-members to an unaffiliated investment adviser registered under the Investment Advisers Act of 1940 or under the laws of the state in which the adviser maintains its principal office and place of business, insurance company qualified to do business under the laws of a state or a broker or dealer registered under the Exchange Act, as amended.
Factor 4 - Impartial Conduct Standards
The credit union will adhere to, and if they have a third-party relationship with a broker-dealer, oversee and ensure their adherence, to the Impartial Conduct Standards by:
1) Giving advice that is in the Retirement Investor’s Best Interest (i.e., prudent advice that is based on the investment objectives, risk tolerance, financial circumstances, and needs of the Retirement Investor, without regard to financial or other interests of the Adviser, credit union, or the credit union’s affiliates, related entities or other parties);
2) Charging no more than reasonable compensation; and
3) Making no misleading statements about investment transactions, compensation, and conflicts of interest.