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By Debra J. Linder

In 2016, the Department of Labor (DOL) issued its final “conflicts of interest” rule, which broadens the definition of “fiduciary” and the scope of investment advice under the Employee Retirement Income Security Act of 1974, as amended (ERISA). In addition, the DOL finalized its Best Interest Contract Exemption (BICE), which outlines the conditions for certain fee arrangements and other exemptions. The final fiduciary rule is generally effective April 10, 2017; however, the conditions imposed by BICE are being phased in, with full compliance required by January 1, 2018.

As of this writing, the new rules provide that a “fiduciary” generally includes a person who renders investment advice for a fee or other compensation. “Investment advice” now encompasses recommendations about buying, holding, selling or exchanging investments; recommendations about managing investments; and recommendations regarding rollovers and distributions from or to a qualified retirement plan or an individual retirement account (IRA). A “recommendation” includes any communication reasonably viewed as suggesting that the individual take (or not take) a particular course of action, and can include a series of communications. The person must either acknowledge that he or she is a fiduciary; provide the advice under some type of an agreement, arrangement, or understanding; or direct advice to a specific individual about whether an investment decision is advisable. Finally, the advice must be provided to, among others, a participant in a qualified plan or an IRA owner.

The new rules contain a variety of exceptions. For example, general market commentary or investment education is not considered investment advice. Certain marketing activities (i.e., “hire me”) are also exempt, as long as they do not provide information tailored to the individual’s specific investment needs. If no exception applies, the arrangement may trigger a prohibited transaction under ERISA, unless it complies with the conditions for an exemption described in BICE. One such exemption for banks and their employees involves compensation paid under a “bank networking arrangement.”

A “bank networking arrangement” is defined as an arrangement for the referral of retail non-deposit investment products that satisfies federal banking, securities and insurance regulations, under which employees of banks and other financial institutions refer customers to an unaffiliated investment adviser, insurance company or broker-dealer. Under this exemption, the employee, bank or financial institution can receive compensation under the referral arrangement if the recommendation provided is prudent and in the best interests of the customer, the fees received are reasonable, and no materially misleading statements have been made about the recommendation, the fees or potential conflicts of interest. If these conditions are met, the referral fee will not trigger a prohibited transaction under ERISA.

But what about affiliated investment advisers, insurance companies or broker-dealers? The DOL recently clarified that referrals to affiliates who are providers of retail non-deposit investment products should not be considered investment advice for which a prohibited transaction exemption is required, so long as no investment recommendation is made in connection with the referral. Instead, the DOL compared this type of referral to marketing activities.

Some have questioned whether the new fiduciary rules will survive. Whatever happens, banks should review their referral and other arrangements to ensure compliance with the new rules, and may want to consider training employees on what they can and cannot say to avoid triggering them.


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