A handful of areas in credit unions' trust and investment services realm could be affected by the Treasury Department's proposed Consumer Financial Protection Agency.

Broadly speaking, the proposed agency would work with other regulators to have wider authority over consumer-oriented financial products such as mortgages and credit cards. At the very least, the new entity would work to strengthen the SEC's investor protections by increasing disclosures, protecting whistleblowers, and establishing a fiduciary duty for broker-dealers, according to the Treasury's proposal. Some employers would be required to offer automatic individual retirement accounts with investment choices mandated by statute or regulation and offer stronger encouragement to beef up 401(k) retirement plan participation.

MEMBERS Trust Services said it is keeping an eye on how the CFPA would impact its operations. In 2003, the credit union-owned company converted to a federal thrift, enabling it to offer trust services to members nationwide; however, there is talk of eliminating the Office of Thrift Supervision.

“MEMBERS does not anticipate substantive changes to existing processes down the road with a new regulator,” said Neil Archibald, general counsel at the Tampa, Fla.-based trust company.

The proposed CFPA's coverage would include mortgages. In this instance, MEMBERS Trust's reverse mortgage division will likely be under the purview of this new agency, with a focus on consumer disclosure such as streamlined revisions to the APR calculations and the timing of disclosures, Archibald said. Meanwhile, interstate branching, considered to be a core feature of the thrift charter, may fall under the proposed national bank supervisor charter. That would allow MEMBERS Trust to continue to operate nationwide.

The proposed legislation would also define fiduciary duty for broker-dealers offering investment advice and harmonize the regulation of investment advisers and broker-dealers. Archibald said this regulatory shift, coupled with the proposed regulation of hedge funds, “is a significant departure from the current regulatory schema.”

“First, brokers have a duty of suitability, which differs significantly from the duty of loyalty. The duty of suitability is as it says, 'brokers are required to ensure that their investment actions and recommendations are suitable for clients as opposed to the best option,'” Archibald explained.

By contrast, fiduciaries are required, by the duty of loyalty, to ensure that investment practices and recommendations are in the client's best interests. The two standards often lead to very different results, Archibald said. With this new standard in mind, wrap fees may become the standard fee arrangement with clients, while transactional billing will be relegated to “sophisticated investors” as defined under the securities laws or to other investors “after a mountain of disclosures are provided,” Archibald said.

The amount of fees billed to clients may also become a significant issue. Currently brokerage firms charge on average between 1.75% and 2.25% for services, he pointed out.

“Given that fiduciaries on average are charging anywhere from 1.00%-1.50% for similar services, broker-dealers will likely have to take a hard look at whether their fee structure is appropriate under the new fiduciary standard unless additional services are provided,” Archibald said.

Discussions to regulate financial advisers and broker-dealers have started to heat up. Both would have a duty to have a fiduciary responsibility when they provide advice to their clients. On July 10, the Obama administration proposed giving the SEC more oversight of compensation, conflicts of interest and sales practices.

“The SEC will determine appropriate rules so that the fiduciary duty is implemented in the right way for the right context. That will take some significant rulemaking,” Michael Barr, Treasury assistant secretary for financial institutions, said in a July 13 article on TheHill.com.

Investment sales practices may also change to meet the new fiduciary standard, which could lead a slower sales cycle to gather more information and conduct more individualized investment reviews, Archibald said.

“As a fall-out of this provision, it is possible that industry activists could seek that all providers of advice, regardless of whether they are banks or broker-dealers, come under SEC regulation.”

CUNA Mutual Group staffers were in Washington last week to offer their take on how the proposed agency would impact credit unions' use of credit insurance. Most of the focus has been here rather than on retail investment programs, said Larry Blanchard, a consultant with CUNA Mutual's corporate and legislative affairs division. For the most part, additional disclosures the agency is seeking would be the meatiest portion for credit union investment services, he noted. Mutual funds, for instance, would likely continue to fall under SEC regulations, said Chris Roe, senior vice president of corporate and legislative affairs at CUNA Mutual.

“There's a draft that Treasury put out that did not include SEC consumer protections,” Roe said, adding that similar legislation recently proposed by House Financial Services Committee Chairman Barney Frank (D-Mass.) nearly mirrors Treasury's proposal of what the CFPA would do.

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