Alert February 26, 2008

OTS Issues Guidelines on the Payment of Fees for the Referral of Trust Business

The OTS issued updated guidelines (the “Guidelines”) on the payment of fees for the referral of trust business.  The Guidelines are intended to assist federal savings associations (“FSAs” and each an “FSA”) in structuring a referral fee program that will meet its fiduciary duty of loyalty and avoid any conflict of interest, while also recognizing that FSAs are no longer subject to registration under the Investment Advisers Act of 1940.  The Guidelines state that trust account customers impacted by a referral fee program should receive a referral fee disclosure from the FSA prior to payment of the referral fee.  The OTS states that the disclosure should be in writing and contain, at a minimum, the following information:

  • The name of the referring party and the FSA;
  • The nature of the relationship, including any affiliation, between the referring party and the FSA;
  • The terms of the referral arrangements, including a description of the compensation paid or to be paid to the referring party;
  • A statement that the referral fee will not result in any increased charge to the customer;
  • A statement indicating that only the FSA will provide fiduciary services; and
  • The extent of any support services the referring party will perform.

The OTS also states that when establishing a referral fee program, an FSA should ensure that:

  • The referral fee agreement is in writing and includes: (a) a description of any support services the referring party will perform for the FSA; (b) a statement that those support services will be performed in a manner consistent with the instructions of the FSA and in accordance with provisions of law; and (e) the compensation to be paid to the referring party;
  • The referral fee program is approved by the board of directors and annually reviewed by senior management;
  • The referral fees are reasonable under the circumstances and do not result in the customer paying any additional amount for trust services;
  • The customer is provided with a written referral fee disclosure;
  • Fee arrangements are terminated when the account closes;
  • Fee arrangements with affiliates or subsidiaries are in compliance with the restrictions with affiliates or subsidiaries;
  • Fee arrangements for employee benefit plans subject to the Employee Retirement Income Security Act of 1974 ("ERISA") do not violate any ERISA provisions, particularly as addressed in ERISA Section 406 - Prohibited Transactions; and
A copy of the master referral fee agreement and referral fee disclosure is maintained by the FSA.