Interesting Angles on the DOL’s Fiduciary Rule #22


Posted on October 4, 2016, by Fred Reish in BICE, DOL Activity, fiduciary, prohibited transaction. Comments Off on Interesting Angles on the DOL’s Fiduciary Rule #22

This is my twenty-second article about interesting observations concerning the fiduciary rule and exemptions.

While the application of the new fiduciary rule and prohibited transaction exemptions to broker dealers and investment advisers is fairly obvious — if not fully understood, there has been little in the way of discussion about its application to banks. This post highlights some of those issues.

In a prior Angles article, I talked about how the fiduciary rule applies to referrals of advisers and how the prohibited transaction rules impact solicitors’ fees (see Angles No. 12). There is a similar issue for banks. For example, it appears to be a fairly common practice for employees at bank branches to recommend that customers set up IRAs and put the money into certificates of deposit, and for the bank employees to receive bonuses for the IRAs investments in the CDs (or, alternatively, to receive credits towards bonuses based on a variety of factors, including the IRA investments). Based on the wording of the new fiduciary rule, if a bank employee recommends that an IRA invest in a certificate of deposit, and is compensated directly or indirectly for that recommendation, it is a fiduciary act for compensation. (The bonus, or bonus credit, is the compensation.) Since the bank employee is being paid compensation that is not stated and level, the payment is a prohibited transaction. That means that an exemption is needed. (There are differing opinions within the banking community about whether a bank deposit exemption is available. The specific issue is whether the bank deposit exemption covers the payment to the employee.)

To complicate matters, what if the bank customer is retiring and asks about rolling over his 401(k) account? If the bank employee recommends a rollover, that would be fiduciary advice under ERISA. As such, the bank and its employee would need to develop the recommendation through a prudent process, considering at the least the investments, services and expenses in the plan and the proposed IRA. In addition, the recommendation could be a prohibited transaction, and an exemption would be needed.

The story doesn’t end there. Similar referral and compensation arrangements also exist for referrals to a bank’s trust department, affiliated investment adviser and affiliated broker-dealer. While the Best Interest Contract Exemption is generally available for compensation for these types of referrals, it may be difficult for banks to comply, since the cost and effort of BICE compliance can be significant, but the amounts paid under these referral arrangements are, at least for each individual referral, relatively small.

As we continue working with clients on compliance issues for the new rules, it is becoming increasingly clear that there are a significant number of unanticipated consequences.

The views expressed in this article are the views of Fred Reish, and do not necessarily reflect the views of Drinker Biddle & Reath.







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