We have several questions about the Department of Labor’s (DOL) Fiduciary Rule. We offer CD IRAs and health savings accounts (HSAs). We don’t collect any custodial or periodic fees for these accounts. Are HSAs covered by the rule? How should we handle distributions from our CD IRAs? Can we refer our customers to our wealth management department (without compensating employees for these referrals)?

The DOL rules expressly include health savings accounts in the definition of an IRA, but the new Fiduciary Rule will apply only if your bank is providing “investment advice” (as defined by the new rule) for “compensation” (as defined by the rule) in connection with the HSAs. Similarly, the Fiduciary Rule could apply to distributions from your CDs that are IRAs, but only if your bank is providing investment advice for compensation in connection with the CD IRA distributions.

Whether an account is subject to the new Fiduciary Rule is a very fact-specific question. Further complicating matters, the Fiduciary Rule and the accompanying exceptions are very complex, and commentators’ various interpretations of the rule have yet to be tested in courts or by examiners. The unfortunate consequence is that the financial industry, including your bank, will be operating under some uncertainty until we receive further clarification, whether from the DOL, the courts, or elsewhere.

Even without providing advice on specific investments, your bank could be considered a “fiduciary” simply because it makes an investment recommendation to an IRA beneficiary (including beneficiaries of HSAs and CD IRAs). The new rule defines the term “recommendation” very broadly to include 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 have received a “recommendation” or “suggestion” from an employee, even if they are not receiving advice about specific investments.

However, 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 the term’s definition any commissions and 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.”

As to employee referrals, the DOL does provide some guidance for financial institutions when adopting the new rule’s “Best Interest Contract Exemption.” The “supplementary information” accompanying the Federal Register notice adopting this exemption addresses employee referrals to a bank’s brokerage unit or to an unaffiliated third party in compliance with the laws and regulations governing the sales of securities, insurance and retail nondeposit investment products. In it the DOL notes that “in most cases such referrals will not constitute fiduciary investment advice because they will not constitute a ‘recommendation’ within the meaning of the Regulation or because they will not involve a covered recommendation to hire a non-affiliated third party.” We recommend reviewing your referral practices to ensure that they comply with the laws and regulations referenced in the DOL’s commentary (which is copied below).

Notably, the DOL 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 new rule might apply to your bank.

For resources related to our guidance, please see:

29 CFR 2510.3-21(g)(6)(ii) (“The term ‘IRA’ means any account or annuity described in Code section 4975(e)(1)(B) through (F), including, for example, an individual retirement account described in section 408(a) of the Code and a health savings account described in section 223(d) of the Code.”)

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, Federal Register Notice, Best Interest Contract Exemption (“Bank employees referring a customer to a broker-dealer under the exception may not provide investment advice concerning securities or make specific securities recommendations to the customer under OCC guidance.35 Similar compensation restrictions exist with respect to bank employees’ referrals regarding insurance products36 and investment advisers.37 . . . . Because of the limitations on the activities of bank employees in making referrals, the Department believes in most cases such referrals will not constitute fiduciary investment advice because they will not constitute a ‘recommendation’ within the meaning of the Regulation or because they will not involve a covered recommendation to hire a non-affiliated third party. However, to the extent banks do not choose to structure their operations to avoid providing fiduciary investment advice, the Department concurs with commenters that relief for bank referral compensation is appropriate as long as the arrangement satisfies applicable banking, securities and insurance regulations and the advice is provided in accordance with the Impartial Conduct Standards.”)

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.”)