A handful of areas in credit unions' trust and investmentservices realm could be affected by the Treasury Department'sproposed Consumer Financial Protection Agency.

Broadly speaking, the proposed agency would work with otherregulators to have wider authority over consumer-oriented financialproducts such as mortgages and credit cards. At the very least, thenew entity would work to strengthen the SEC's investor protectionsby increasing disclosures, protecting whistleblowers, andestablishing a fiduciary duty for broker-dealers, according to theTreasury's proposal. Some employers would be required to offerautomatic individual retirement accounts with investment choicesmandated by statute or regulation and offer stronger encouragementto beef up 401(k) retirement plan participation.

MEMBERS Trust Services said it is keeping an eye on how the CFPAwould impact its operations. In 2003, the credit union-ownedcompany converted to a federal thrift, enabling it to offer trustservices to members nationwide; however, there is talk ofeliminating the Office of Thrift Supervision.

“MEMBERS does not anticipate substantive changes to existingprocesses 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 thisinstance, MEMBERS Trust's reverse mortgage division will likely beunder the purview of this new agency, with a focus on consumerdisclosure such as streamlined revisions to the APR calculationsand the timing of disclosures, Archibald said. Meanwhile,interstate branching, considered to be a core feature of the thriftcharter, may fall under the proposed national bank supervisorcharter. That would allow MEMBERS Trust to continue to operatenationwide.

The proposed legislation would also define fiduciary duty forbroker-dealers offering investment advice and harmonize theregulation of investment advisers and broker-dealers. Archibaldsaid this regulatory shift, coupled with the proposed regulation ofhedge funds, “is a significant departure from the currentregulatory schema.”

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

By contrast, fiduciaries are required, by the duty of loyalty,to ensure that investment practices and recommendations are in theclient's best interests. The two standards often lead to verydifferent 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 “sophisticatedinvestors” as defined under the securities laws or to otherinvestors “after a mountain of disclosures are provided,” Archibaldsaid.

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

“Given that fiduciaries on average are charging anywhere from1.00%-1.50% for similar services, broker-dealers will likely haveto take a hard look at whether their fee structure is appropriateunder the new fiduciary standard unless additional services areprovided,” Archibald said.

Discussions to regulate financial advisers and broker-dealershave started to heat up. Both would have a duty to have a fiduciaryresponsibility when they provide advice to their clients. On July10, the Obama administration proposed giving the SEC more oversightof compensation, conflicts of interest and sales practices.

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

Investment sales practices may also change to meet the newfiduciary standard, which could lead a slower sales cycle to gathermore information and conduct more individualized investmentreviews, Archibald said.

“As a fall-out of this provision, it is possible that industryactivists could seek that all providers of advice, regardless ofwhether they are banks or broker-dealers, come under SECregulation.”

CUNA Mutual Group staffers were in Washington last week to offertheir take on how the proposed agency would impact credit unions'use of credit insurance. Most of the focus has been here ratherthan on retail investment programs, said Larry Blanchard, aconsultant with CUNA Mutual's corporate and legislative affairsdivision. For the most part, additional disclosures the agency isseeking would be the meatiest portion for credit union investmentservices, he noted. Mutual funds, for instance, would likelycontinue to fall under SEC regulations, said Chris Roe, senior vicepresident of corporate and legislative affairs at CUNA Mutual.

“There's a draft that Treasury put out that did not include SECconsumer protections,” Roe said, adding that similar legislationrecently proposed by House Financial Services Committee ChairmanBarney Frank (D-Mass.) nearly mirrors Treasury's proposal of whatthe CFPA would do.

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