How will the Department of Labor’s Fiduciary Rule affect our bank’s trust department? Our trust department serves as custodian for self-directed IRA trust accounts and charges the beneficiaries a flat annual fee. We do not provide investment advice; the beneficiaries direct the IRA’s investments. When directed by a beneficiary, our trust department occasionally purchases shares of mutual funds from companies that are not affiliates of the bank. Two of the companies sent us letters stating that they aren’t considered investment advice fiduciaries.

Whether your bank is subject to the new Fiduciary Rule is a very fact-specific question. Even without providing advice on specific investments, your bank’s trust department could be considered a “fiduciary” simply because it makes an investment recommendation to an IRA beneficiary. The rule defines the term “recommendation” very broadly, including in its definition any communication that “would reasonably be viewed as a suggestion.” Consequently, it is possible that merely suggesting a particular type of investment account or product could be viewed as a “recommendation” that is subject to the Fiduciary Rule. Needless to say, it could be difficult to determine whether any of your customers has received a “recommendation” or “suggestion” from an employee, even if they are not receiving advice about specific investments.

The Fiduciary Rule will not apply if your institution does not receive compensation (whether direct or indirect) “in connection with . . . the provision of investment advice.” The rule also defines the term “compensation” broadly, including in its definition any commissions or certain other types of compensation if they “would not have been paid but for the transaction or service or if eligibility for or the amount of the fee or compensation is based in whole or in part on the transaction or service.” It remains an open question whether a flat annual fee charged for trust custodial services will be treated as compensation paid in connection with investment advice under the new rule.

Even if your bank is recommending investments in unaffiliated mutual funds and is receiving compensation for those recommendations, you might be able to continue this practice without change under the new Best Interest Contract (BIC) exception to the Fiduciary Rule. The BIC exception permits banks and their employees to refer customers to retail non-deposit investment products provided by a non-affiliate under certain circumstances. However, operating under the BIC exemption involves adherence to impartial conduct standards, extensive disclosure and recordkeeping requirements, and the potential for litigation. We recommend consulting with your bank counsel to determine whether this exception might apply to your trust department’s practices.

Notably, the Department of Labor has issued guidance stating that it “will not pursue claims against fiduciaries who are working diligently and in good faith to comply with the fiduciary duty rule and exemptions” until January 1, 2018. We recommend taking full advantage of this temporary stay of enforcement by working closely with your bank counsel to determine whether and how the rule might apply to your bank.

For resources related to our guidance, please see:

29 CFR 2510.3-21(a) (“ . . . a person shall be deemed to be rendering investment advice with respect to moneys or other property of a plan or IRA described in paragraph (g)(6) of this section if (1) Such person provides to a plan, plan fiduciary, plan participant or beneficiary, IRA, or IRA owner the following types of advice for a fee or other compensation, direct or indirect: (i) A recommendation as to the advisability of acquiring, holding, disposing of, or exchanging, securities or other investment property, or a recommendation as to how securities or other investment property should be invested after the securities or other investment property are rolled over, transferred, or distributed from the plan or IRA; (ii) 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 (e.g., brokerage versus advisory); 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 (2) With respect to the investment advice described in paragraph (a)(1) of this section, the recommendation is made either directly or indirectly (e.g., through or together with any affiliate) by a person who: (i) Represents or acknowledges that it is acting as a fiduciary within the meaning of the Act or the Code; (ii) Renders the advice pursuant to a written or verbal agreement, arrangement, or understanding that the advice is based on the particular investment needs of the advice recipient; or (iii) 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.”)
29 CFR 2510.3-21(g)(3) (“The term ‘fee or other compensation, direct or indirect’ means, for purposes of this section and section 3(21)(A)(ii) of the Act, any explicit fee or compensation for the advice received by the person (or by an affiliate) from any source, and any other fee or compensation received from any source in connection with or as a result of the purchase or sale of a security or the provision of investment advice services, including, though not limited to, commissions, loads, finder's fees, revenue sharing payments, shareholder servicing fees, marketing or distribution fees, underwriting compensation, payments to brokerage firms in return for shelf space, recruitment compensation paid in connection with transfers of accounts to a registered representative's new broker-dealer firm, gifts and gratuities, and expense reimbursements. A fee or compensation is paid “in connection with or as a result of” such transaction or service if the fee or compensation would not have been paid but for the transaction or service or if eligibility for or the amount of the fee or compensation is based in whole or in part on the transaction or service.”)
29 CFR 2510.3-21(b) (“For purposes of this section, ‘recommendation’ means a communication that, based on its content, context, and presentation, would reasonably be viewed as a suggestion that the advice recipient engage in or refrain from taking a particular course of action. . . .”)
Department of Labor, Conflict of Interest FAQs (Part II), page 11 (January 2017) (“ . . . if the financial institution actually recommends a particular account type or service, that would be a fiduciary investment advice recommendation under the Rule.”
Department of Labor, Best Interest Contract Exemption (“As detailed below, Financial Institutions and Advisers seeking to rely on the exemption must adhere to Impartial Conduct Standards in rendering advice regarding retirement investments. In addition, Financial Institutions must adopt policies and procedures designed to ensure that their individual Advisers adhere to the Impartial Conduct Standards; disclose important information relating to fees, compensation, and Material Conflicts of Interest; and retain records demonstrating compliance with the exemption.”)
Department of Labor, Conflict of Interest FAQs (Part I), page 15 (October 27, 2016) (“Section II(i) of the BIC Exemption provides conditions applicable to advisers who are bank employees, and financial institutions that are banks or similar financial institutions or savings associations, who receive compensation pursuant to a ‘bank networking”)
Department of Labor, Field Assistance Bulletin No. 2017-02 (May 22, 2017) (“Accordingly, during the phased implementation period ending on January 1, 2018, the Department will not pursue claims against fiduciaries who are working diligently and in good faith to comply with the fiduciary duty rule and exemptions, or treat those fiduciaries as being in violation of the fiduciary duty rule and exemptions.”)