We still are trying to determine whether we are a fiduciary. If we are, what is the impact on the bank? As a fiduciary, what does the bank need to do?

If considered a fiduciary under the Fiduciary Rule, your bank and its employees would be required to comply with the Employee Retirement Income Security Act (ERISA) fiduciary standards, which include putting customers’ best interests first and avoiding self-dealing, conflicts of interest, imprudence and disloyalty. Importantly, your bank and its employees would not be permitted to receive compensation from third parties (such as commission payments) unless qualifying for a “prohibited transaction exception.” Complying with these exceptions, such as the new Best Interest Contract exception, involves adherence to impartial conduct standards, extensive disclosure and recordkeeping requirements, and the potential for litigation.

If your bank is considered a fiduciary and continues to provide investment advice for compensation under an exception, it is likely that your compliance costs will increase. The Department of Labor’s regulatory impact analysis for the Fiduciary Rule provided a variety of cost estimates based on the size and type of fiduciary, among other factors; its estimates range from $5,420 to $15,086,559 for startup costs and $500 to $3,875,045 for annual ongoing costs.

For resources related to our guidance, please see:

Regulatory Impact Analysis, Regulating Advice Markets (April 2016), printed pages 259, 260 (Figure 6-2 and Figure 6-3 summarize the average total start-up costs and average total annual ongoing costs of compliance with the Fiduciary Rule and related exceptions.)

Regulatory Impact Analysis, Regulating Advice Markets (April 2016), printed page 29 (“The Internal Revenue Code . . . and ERISA together require that plan and IRA fiduciaries refrain from engaging in ‘prohibited transactions,’ unless the transaction is covered by an exemption in the statute, or granted by the Secretary of Labor. Of particular relevance here are the prohibitions on self-dealing and receiving payments from third parties dealing with the plan or IRA in connection with a transaction involving assets of the plan or IRA. In this manner, ERISA and the Code focus on the elimination or mitigation of conflicts of interest. Thus, under ERISA and the Code, fiduciary advisers are generally prohibited from making recommendations with respect to which they have a financial conflict of interest unless the Department of Labor first grants an exemption with conditions designed to protect the interests of plan participants and IRA owners. . . .”)

29 USC 1106(b) (“A fiduciary with respect to a plan shall not (1) deal with the assets of the plan in his own interest or for his own account, (2) in his individual or in any other capacity act in any transaction involving the plan on behalf of a party (or represent a party) whose interests are adverse to the interests of the plan or the interests of its participants or beneficiaries, or (3) receive any consideration for his own personal account from any party dealing with such plan in connection with a transaction involving the assets of the plan.”)

26 USC 4975(c)(1), Tax on prohibited transactions (“(c)(1) For purposes of this section, the term ‘prohibited transaction’ means any direct or indirect . . . (E) act by a disqualified person who is a fiduciary whereby he deals with the income or assets of a plan in his own interests or for his own account; or (F) receipt of any consideration for his own personal account by any disqualified person who is a fiduciary from any party dealing with the plan in connection with a transaction involving the income or assets of the plan.”)

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 arrangement.’ As defined in the BIC Exemption, bank networking arrangements involve the referral by banks and their employees to non-affiliates who are providers of retail non-deposit investment products, in accordance with applicable banking, securities and insurance regulations.”)