Department of Labor Fiduciary Rule: What’s Next?

Brush up on fiduciary rule basics and find out what’s required during the transition period between June 9 and January 1.

The Department of Labor (DOL) delayed the “applicability date” for the fiduciary (“conflict of interest”) rule from Apr. 10, 2017, to June 9, 2017. Certain provisions in the rule’s exemptions are further delayed to January 1, 2018, while the DOL conducts its ongoing examination of the fiduciary rule as directed by President Trump’s February 2017 memorandum.

What’s required during this transition period between June 9 and January 1? The DOL recently released a set of frequently asked questions to provide additional information on the issues surrounding the transition period. But before we take a look at some of these issues, let’s review a few fiduciary rule basics:

  1. The fiduciary rule is generally limited to investment advice concerning IRAs and Employee Retirement Income Security Act (ERISA)-covered retirement plans.
  2. Generally speaking, a person is an investment advice fiduciary if s/he provides “investment advice” for a fee or other compensation.
  3. Covered “investment advice” is defined as a “recommendation” to a plan, plan fiduciary, plan participant and beneficiary, IRA, or IRA owner for a fee or other compensation, direct or indirect. In other words, do any credit union employees:
  • Make “recommendations” regarding investments (e.g., buying, holding, selling, or exchanging securities or other investment property) or the management of investments (e.g., rollovers, transfers, or distributions from a plan or IRA); and 
  • Receive direct or indirect fees or other compensation in connection with the transaction or service. The fee or compensation must be paid “in connection with or as a result of” the transaction or service (e.g., commission or bonus, as opposed to a base salary that would be paid regardless of the transaction).

The “and” is key: the rule will apply if both prongs are satisfied. If you outsource investment services, you’ve probably already heard from your provider about its plans to implement the rule.  But, if you have any concerns regarding coverage, we strongly suggest that your credit union consult legal counsel.

  1. Note that many types of communications are not considered “recommendations” (i.e., fiduciary investment advice) under the rule and willnottrigger compliance, including general communications (general circulation newsletters, general marketing materials etc.) and investment education (general financial, investment and retirement information, and asset allocation models and interactive investment materials, etc.).5. If you’re covered by the rule: Under ERISA and the Internal Revenue Code, parties providing fiduciary investment advice to plan sponsors, plan participants, and IRA owners are not permitted to receive payments creating conflicts of interest without complying with protective conditions in a “prohibited transaction exemption.” Therefore, financial institutions, investment companies, and investment advisers must either structure their compensation arrangements to avoid prohibited transactions or comply with an exemption, such as the Best Interest Contract (BIC) Exemption or Principal Transactions Exemption.

Now back to the question at hand: What’s required during this transition period between June 9, 2017, and Jan. 1, 2018?

The fiduciary rule’s amended definition of fiduciary investment advice applied on Friday, June 9, 2017. On that same date, the BIC Exemption and Principal Transactions Exemption became available to fiduciary advisers. However, for a transition period extending until Jan. 1, 2018, fewer conditions will apply to financial institutions and advisers that want to rely upon the exemptions.

During the transition period, financial institutions and advisers must comply with the “impartial conduct standards, which are consumer protection standards that ensure advisers adhere to fiduciary norms and basic standards of fair dealing. The standards specifically require advisers and financial institutions to:

  • Give advice that is in the “best interest” of the retirement investor. This best interest standard has two chief components: prudence and loyalty.
    • Under the prudence standard, the advice must meet a professional standard of care as specified in the text of the exemption;
    • Under the loyalty standard, the advice must be based on the interests of the customer, rather than the competing financial interest of the adviser or firm.
  • Charge no more than reasonable compensation; and
  • Make no misleading statements about investment transactions, compensation, and conflicts of interest.

For institutions that want to rely on the exemptions, full compliance with all of the exemptions’ conditions will be required once the transition period ends on January 1, 2018 (absent further action by the DOL). These conditions include, among other things, requirements to execute a contract with IRA investors with certain enforceable promises, make specified disclosures, and implement specified policies and procedures to protect retirement investors from advice that is not in their best interest.

This is obviously the snapshot version of the very complex rule and FAQs. For more detailed information, visit:

Source:  CUNA Compliance Blog

Questions? Contact the Compliance Hotline: 1.800.546.4465, compliance@nwcua.org.

Question of the Week

Our member lost his ATM card sometime in the last 10 days. There have been several unauthorized transactions on his account. He wrote his PIN on the back of the card. Do we have to credit his account with the money, even though he was negligent?

Unfortunately, Reg E doesn’t have a provision for consumer negligence, even if the PIN was written on the card.  If a member reports a card lost or stolen within two business days of learning of the loss or theft, the member is liable for a maximum of $50. The liability can increase to $500 if the loss is reported after two business days. The member may have additional liability if they do not report the card lost or stolen and also do not report the unauthorized activity within 60 days of receiving their periodic statement.

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The FRB announced that it has approved an extended transition period of up to five years for certain financial institutions.

Federal Deposit Insurance Corporation (FDIC)

The FDIC announced that it has adopted the Supervisory Guidance on Model Risk Management issued by the FRB and OCC, with some technical changes. The guidance addresses model risk management expectations including model development, implementation, and use.

The FDIC released the First Quarter 2017 State Profile Data.

Office of the Comptroller of the Currency (OCC)

The OCC issued bulletin 2017-21, which provides FAQs regarding Third Party Relationship Risk Management.

Office of Foreign Assets Control (OFAC)

OFAC has updated the SDN list as of June 12, 2017. The last update prior to this was June 6, 2017.

Questions? Contact the Compliance Hotline: 1.800.546.4465; compliance@nwcua.org.