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Investment Management Institute

2017

Volume One

CORPORATE LAW AND PRACTICECourse Handbook Series

Number B-2309

Co-ChairsBarry P. Barbash

Paul F. Roye


35

Fiduciary Rule—Executive Summary (April 7, 2016)

Erin K. Cho

Groom Law Group, Chartered

If you find this article helpful, you can learn more about the subject by going to www.pli.edu to view the on demand program or segment for which it was written.

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April 7, 2016

Fiduciary Rule – Executive Summary

On April 6, 2016, the U.S. Department of Labor (“DOL”) made available its much-anticipated final regulation on the definition of “fiduciary” under section 3(21)(a)(ii) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). The new rule will have a profound impact on the retirement system and how services are provided throughout the industry. The package of materials released by DOL includes the following:

A final regulation re-defining who is a “fiduciary” by reason of providing investment advice to a plan or an IRA (the “Final Regulation”);

Final versions of the Best Interest Contract Exemption (“BIC Exemption”), related supplemental exemptions, and the new prohibited transaction class exemption for principal transactions in certain investments (the “Principal Transactions Exemption”);and

Final amendments to several existing prohibited transaction class exemptions, including prohibited transaction class exemption PTE 84-24 (“PTE 84-24”), currently the primary source of prohibited transaction exemptive relief for the sale of insurance and annuity products to plans and IRAs.

From a broad perspective, DOL did not deviate from its original goal of significantly expanding the types of communications that constitute fiduciary investment advice, particularly with respect to rollovers. And the Final Regulation and accompanying exemptions reflect a favoring of fee-leveling over commission-based compensation. That said, the retirement industry should take some solace in the fact DOL made many improvements to the new rules.Although it still remains to be seen whether the rules will be workable, the breadth of the changes is significant, and DOL has committed to working on sub-regulatory guidance over the coming months to help with implementation.

The Final Regulation, changes to existing class exemptions, and certain elements of the BIC Exemption will be effective 60 days after the date of their publication in the Federal Register. Despite this relatively early effective date, the terms of the rules generally delay their applicability until April 10, 2017. In the case of the BIC Exemption, special transition relief further delays the applicability of most conditions until January 1, 2018.

This alert provides an executive summary of the new rules and briefly discusses the future of the Final Regulation and related exemptions.

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I. Executive Summary

A. Overview

The Final Regulation – sometimes referred to as the conflicted advice rule – is the most consequential change to the laws governing retirement plans since the passage of ERISA over four decades ago. It significantly expands the universe of those who are subject to fiduciary responsibility under ERISA and the Internal Revenue Code of 1986, as amended, for providing investment advice and generally conditions the availability of exemptive relief on the adherence to a new “best interest” standard of care on those advising IRA holders. The Final Regulation is also accompanied by several new or amended prohibited transaction class exemptions (including the BIC Exemption), which will require fundamental changes to how advisers, broker-dealers, banks, insurance companies, and consultants provide services and are compensated.

The Final Regulation is the result of a long rulemaking process that began in 2010 when DOL issued its first Notice of Proposed Rule Making regarding the definition of “investment advice.” The proposal was quickly withdrawn in reaction to widespread criticism and remained dormant until it was re-proposed in 2015 (“2015 Proposed Regulation”). The 2015 Proposed Regulation generated fierce debate, reflected in the thousands of comment letters submitted on both sides of the issue, testimony provided over the course of a multi-day hearing last August,and hundreds of meetings between DOL and the regulated community.

B. Key Changes in Final Regulation

Although the Final Regulation preserves many key elements of the 2015 Proposed Regulation, DOL did make several important concessions. The most significant changes include the following:

“Hire me” – The Final Regulation clarifies that recommending oneself or one’s affiliate to provide investment advice or investment management services is not, by itself, the type of recommendation that necessarily leads to fiduciary status. However, if the “hire me” recommendation is coupled with a rollover recommendation, or effectively includes a recommendation as to how to invest or manage plan or IRA assets, the adviser will not be shielded from fiduciary status. In the latter case, the adviser would likely need to use the BIC Exemption. This could substantially limit the utility of an otherwise favorable change.

Scope of a “Recommendation” – The Final Regulation also more closely aligns the definition of a “recommendation” with FINRA guidance, indicating that communications need to be more tailored to the particular recipient to be a recommendation. The definition still includes a “suggestion,” which is a broad standard, but there are specific exclusions from the definition of “recommendation” for general communications (e.g.,general marketing materials and other widely circulated communications).

Participant Education – The Final Regulation excludes from the description of a “recommendation” investment education, including asset allocation models and

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interactive materials that reference specific investments or products available under ERISA-covered plans (provided that certain conditions are met). Importantly, thischange does not extend to education provided to IRAs or IRA holders.

Exception for Sales – Under the Final Regulation, advice provided to a fiduciary independent of the adviser in the context of an arm’s-length sale, loan, exchange or other investment-related transaction will not result in fiduciary status for the adviser if the independent fiduciary is a bank, insurance company, registered investment adviser, registered broker dealer, or manages or controls total assets of at least $50 million (aggregated across clients, and not limited to plan or IRA clients) and certain other conditions are met. This change should help address the “wholesaler” or “daisy chain” issue, but the relief is more conditional than expected in that it requires disclosures to otherwise sophisticated financial intermediaries and may require representations from such firms.

Platform Exception – The Final Regulation affirms that offering a platform of investment alternatives to a fiduciary of a participant-directed defined contribution plan will not be viewed as a fiduciary recommendation, and there is language in the preamble suggesting that the “segmenting” of platforms based on general categories is permitted. DOL also clarified that platform providers may provide RFP responses or objective financial data regarding alternatives meeting objective criteria established by a plan sponsor without triggering fiduciary status.

Welfare Plans – DOL clarified that the Final Regulation does not include recommendations with respect to welfare plans (e.g., health, disability, or term life insurance policies) if those products do not have an investment component. However, DOL did not exclude HSAs from the scope of the Final Regulation, so marketing HSAs together with group health insurance will have to be carefully monitored.

C. Key Changes to BIC Exemption

DOL made important changes to the BIC Exemption that reflect the significant advocacy efforts by the financial services industry and likely make the exemption somewhat more workable for a variety of firms. From DOL’s perspective, greater reliance on the BIC Exemption will further its goal of creating an actionable a best interest standard for IRAs. In this regard, DOL made the following important changes to the BIC Exemption:

DOL eliminated the requirement that a separate written contract be entered into for recommendations to ERISA Title I plans and participants, since those plans and participants have recourse through ERISA’s civil enforcement provisions. In lieu of the contract, the financial institution of the adviser making such recommendations is generally required, among other things, to provide a unilateral writing acknowledging fiduciary status and to provide disclosures. Where a financial institution proposes a rollover for purposes of providing level advice (i.e., advice where compensation does not vary either at the adviser level or at the financial institution level), the financial institution is not required to provide the same warranties or disclosures, but is required to document

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the specific reason or reasons the rollover recommendation was in the client’s best interest.

DOL retained the contract requirement when advisers seek to use the BIC Exemptionwhen providing advice to IRA holders so as to provide a contract-based private right of action. The requirements for contract formation have been eased somewhat in that the contract document may be incorporated into other account opening documentation and may be signed either electronically or manually by the client. In the case of already existing accounts, a “negative consent” process is available for forming the contract(during a transition period).

DOL eliminated the requirement that the individual adviser be a party to the BICExemption contract, merely requiring a contract between the client and the financial institution that employs or retains the individual adviser.

The BIC Exemption was amended to apply to recommendations of any asset as opposed to the restricted list of assets included in the proposed exemption.

DOL expanded the availability of the BIC Exemption to small businesses that sponsor participant-directed plans. This is intended to address the “gap” problem we brought to DOL’s attention.

The BIC Exemption contains special provisions clarifying how it can be used for recommendations of proprietary products, including a requirement that financial institutions determine that the limitations are not so severe that the adviser will generally be unable to satisfy the exemption’s best interest standard and other requirements.

DOL eliminated the annual disclosure and disclosures requiring 1, 5, and 10 year projections as well as the proposed exemption’s data retention requirements. However, DOL retained the conflict of interest disclosure requirement and website disclosure requirement. The final exemption also requires certain disclosures in the contract and, in certain circumstances, prior to or at the time of a transaction (and no less frequently than annually). Moreover, those subject to the BIC Exemption can request more detailed disclosures on costs and fees.

The BIC Exemption contains a streamlined “level fee” provision, which enables advisers and financial institutions that receive only a level fee in connection with the advice they provide to rely on the exemption without entering into a contract so long as special attention is paid and documentation is kept to show that certain specific recommendations, including a recommendation to rollover assets from an employer plan to an IRA, are in the customer's best interest. Importantly, no contract is required. However, the level fee condition extends to all affiliates, so for example, it may not provide a basis to recommend a rollover into an arrangement otherwise covered by an exemption that only requires level fees for the adviser (e.g., ERISA section 408(b)(14)).

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The BIC Exemption includes a grandfathering provision that allows for receipt of compensation from previously acquired assets. The grandfather provision includes recommendations to hold, as well as systematic purchase agreements but requires that any additional advice satisfy the best interest and reasonable compensation requirements.

D. Key Changes to PTE 84-24

Consistent with its “encouragement” of the BIC Exemption, DOL has limited the circumstances in which those recommending insurance products or proprietary mutual funds may rely on PTE 84-24. The key changes to PTE 84-24 are as follows:

PTE 84-24 is no longer available for recommendations of variable annuities, indexed annuities, and similar contracts to IRAs or plans. (The proposed exemption would havepermitted plans to purchase variable annuities in reliance on PTE 84-24. These will now need to be covered by the BIC Exemption).

The “commissions” covered for sales of fixed rate annuity contracts to plans and IRAs and mutual fund shares to plans have been narrowly defined (excluding, for example, revenue sharing).

Any recommendations covered under PTE 84-24 must meet the same impartial conduct standards applicable to BIC Exemption-users.

E. Effective Date

The Final Regulation is effective 60 days after it is published in the Federal Register. However, the Final Regulation and several conditions of the BIC Exemption (e.g., the acknowledgement of fiduciary status, adhering to the best interest standard, and certain conflict of interest disclosures) have a delayed applicability date of April 10, 2017. Other requirements of the BIC Exemption (e.g., the contract requirement and certain representations and warranties regarding firm conflicts) will not go into full effect until January 1, 2018. In the period between publication and January 1, 2018, an interim rule that mirrors the conditions of the existing regulation will be in effect.

II. Future of the Final Regulation

Notwithstanding the issuance of the Final Regulation and related exemptions, DOL has indicated that it will work with stakeholders on further guidance. There will also be efforts this year to stop the new rules in Congress and the courts.

A. Additional DOL Guidance

The Final Regulation and related exemptions are extremely complex, and there are a number of issues that were left unaddressed. Typically, DOL provides additional guidance after the release of major regulations, and this case appears to be no exception. DOL has stated that it“will work with interested parties on compliance assistance activities and materials.” The

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agency also “invites stakeholders to identify areas or specific issues where they believe additional clarifying guidance is needed.”

B. Potential Congressional Action

The Republican-controlled Congress is almost certain to take steps to overturn or halt implementation of the Final Regulation. In fact, a recent post on Speaker of the House Paul Ryan’s blog declared that House Republicans are “determined to do everything possible to protect consumers and stop this rule.” Immediately after the release of the Final Regulation,Republicans on several committees of jurisdiction released statements criticizing it.

Sources on the Hill have indicated that Congress may soon attempt to overturn the Final Regulation using the Congressional Review Act (“CRA”). The CRA creates a window of time in which Congress can utilize a “fast track” process for considering administrative rules. The process significantly limits procedural roadblocks in the Senate (e.g., the filibuster) and, in essence, allows Congress to overturn a final regulation with a simple majority vote. A successful CRA challenge nullifies the rule at issue, and the agency is prohibited from reissuing the same regulation again or promulgating a regulation that is substantially similar. However, as a practical matter, CRA challenges are rarely successful because they can be vetoed by the President, and it would require a two-thirds vote in both the House and Senate to override the veto.

It is very likely that, because of certain timing requirements, any CRA challenge to the Final Regulation will occur in this Congress. The action would almost certainly be vetoed by President Obama, and it will likely be difficult for Congress to override the veto.

Another potential avenue for intervention is for Congress to pass legislation to override the Final Regulation. There have been several bills to that effect introduced. The most discussed is a pair of bipartisan sister bills – the Affordable Retirement Advice Protection Act (H.R. 4293; S. 2502) and the SAVERS Act of 2015 (H.R. 4294; S. 2505) – which would statutorily redefine “investment advice,” narrowing the scope when compared to the Final Regulation. Together, the bills would also hold those providing IRA-related investment advice to a best interest standard of care and would require additional disclosures of conflicts and fees.

The bills were approved by the House Education and Workforce Committee and the House Ways and Means Committee in February on mostly party-line votes, despite their bipartisan co-sponsorship. House leadership has, in the past, indicated that the bills could be considered by the House but that they would be merged together. Similar legislation has been introduced in the Senate but does not yet have Democratic support and has not been considered by the relevant committees. President Obama would likely veto the bills if they were to pass Congress.

A third and final option for opponents is to try to halt implementation of the Final Regulation using Congress’s power of the purse. Congress makes annual appropriations for government operations through specific funding bills, and those bills almost always includepolicy riders. In 2011, for example, DOL’s funding appropriation contained a prohibition on the

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use of funds to finalize the fiduciary rule as proposed in 2010. (The rider was dropped from subsequent funding bills.) Congress must pass an appropriations package before the end of September, and it is possible Congress could insert a provision halting the Final Regulation.However, Democrats in the House and Senate have previously blocked such efforts.

C. Litigation

A number of organizations have already indicated they are considering challenging the Final Regulation in court. At the moment, it is unclear exactly what arguments will be made, but there are at least two potential legal theories. First, a plaintiff could argue that DOL failed to satisfy the requirements for agency rulemaking under the Administrative Procedure Act. In other words, DOL failed to take all of the procedural steps necessary for the Final Regulation to have the force and effect of law. A second potential argument is that DOL lacked the statutory authority to promulgate all or part of the Final Regulation (e.g., the authority to impose ERISA-like requirements on IRAs).

Regardless of the merits of either argument, litigation is often slow moving and may not be completed before the industry must comply with the Final Regulation. It is possible for a court to stay a rule pending the outcome of an action. However, that is often a high bar, requiring a court to determine, among other things, that the plaintiff has a likelihood of prevailing on the merits and will suffer irreparable harm if a stay is not granted.

III. Summary Materials

In addition to this executive summary, please see below for links to additional information:

A memorandum outlining the key elements and scope of the Final Regulation;

An outline of the finalized BIC Exemption;

An outline of the changes to PTE 84-24;

An outline of the finalized Principal Transactions Exemption;

A chart showing the final amendments to existing prohibited transaction class exemptions; and

An outline of the “Hire Me” Issue.

The Final Regulation and related exemptions raise a host of consequential issues. We will continue to provide updates as we further analyze the proposal and its implications, and we invite you to contact us for assistance in evaluating how the Final Regulation will impact your business.

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April 8, 2016

Fiduciary Rule – Advice Definition



Final versions of the Best Interest Contract Exemption (the “BIC Exemption”), related supplemental exemptions, and the new prohibited transaction class exemption for principal transactions in certain investments (the “Principal Transactions Exemption”); and

Final amendments to several existing prohibited transaction class exemptions, including prohibited transaction class exemption (“PTE”) 84-24, currently the primary source of prohibited transaction exemptive relief for the sale of insurance and annuity products to plans and IRAs.

The Final Regulation, changes to existing class exemptions, and certain elements of the BIC Exemption will be effective 60 days from the date of their publication in the Federal Register (i.e., June 7, 2016). Despite this relatively early effective date, the terms of the rules generally delay their applicability until April 10, 2017. In the case of the BIC Exemption, special transition relief further delays the applicability of most conditions until January 1, 2018.

This client alert provides an overview of the Final Regulation. For an analytical summary of the BIC Exemption, the Principal Transactions Exemption, and changes to PTE 84-24 and other existing exemptions, please see our client alerts covering those subjects.


The Final Regulation generally adopts the same, broad, definition of fiduciary advice proposed by DOL in April 2015 (the “2015 Proposed Regulation”). In an effort to address criticisms and provide more clarity, DOL has revised the categories of advice covered under the rule (“covered advice”) and provided more specific guidance on what qualifies – and does not qualify – as a “recommendation” for purposes of the Final Regulation.

In keeping with DOL’s stated consumer protection goals, the Final Regulation is clearly focused on ensuring that recommendations regarding rollovers and plan distributions are fiduciary in nature. As a result, after April 10, 2017, most IRA rollovers will require the BIC Exemption.

DOL responded to a key criticism of the proposed rule by clarifying in the Final

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Regulation that a recommendation of oneself or an affiliate to provide investment advisory or management services is not, without more, a fiduciary recommendation. However, this (“Hire me”) clarification does not apply to any accompanying rollover or investment recommendation,which will still result in fiduciary status.

II. Overview of the Final Regulation

The Final Regulation substantially expands the universe of entities and persons who will qualify as fiduciaries by reason of the provision of investment advice under ERISA section 3(21)(A)(ii) and section 4975(e)(3) of the Internal Revenue Code of 1986, as amended, (the “Code”). It is the most significant change to the laws governing retirement plans since ERISA was passed over 40 years ago. Under the current regulatory definition that has applied since 1975, a non-discretionary investment adviser could become a fiduciary subject to ERISA’s fiduciary and prohibited transaction rules only if the adviser met each prong of a five-part test. Under the current regulation, fiduciary status would be triggered only if such an adviser (1) rendered advice to the plan as to the value of, or advisability of investing in or holding, securities or other property, (2) on a regular basis, (3) pursuant to a mutual agreement or understanding, (4) that the advice would be a primary basis for decision making, and (5) that the advice would be individualized based on the particular needs of the plan. Like the 2015 Proposed Regulation, the Final Regulation effectively eliminates the “regular basis,” “mutual understanding,” and “primary basis” requirements of existing law, subjecting a far more expansive universe of activities to ERISA’s strict fiduciary rules.

Clearly one of DOL’s key objectives in writing the Final Regulation is to capture any person or entity that makes recommendations with respect to taking (or not taking) a rollover distribution from a plan or IRA, or making any distribution or transfer from a plan or IRA, and subject them to fiduciary standards. In doing so, DOL has rescinded a 2005 advisory opinion in which it stated that advice with respect to taking an otherwise permissible plan distribution did not amount to fiduciary advice. See DOL Adv. Op. 2005-23A (Dec. 7, 2005).

While DOL did make many refinements to its 2015 Proposed Regulation in response to literally thousands of comments received in letters, meetings, and public hearings, many issues remain unresolved. To this end, DOL has publicly committed to working with the regulated community through the transition to compliance with the new regulatory regime.

Key changes to the fiduciary definition in the Final Regulation include:

“Covered advice” has been distilled down to two categories: (1) recommendations as to the advisability of purchasing or holding securities or other investment property, including recommendations as to how proceeds from rollovers and distributions should be invested, and (2) advice with respect to the management of securities or other investment property, including, but not limited to recommendations:

o of other persons to provide advice or management services, o as to whether to select a brokerage or advisory account arrangement, o with respect to rollovers, transfers, or distributions from a plan or IRA, including

whether, in what amount, and in what form, and to what destination, the rollover, transfer, or distribution should be made.

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Valuations and appraisals are not included in the Final Regulation as a category of covered advice. DOL has reserved valuation issues for further consideration in a future DOL rulemaking.

Guidance as to what will qualify as a covered “recommendation” has been enhanced, incorporating principles DOL has adopted from FINRA suitability pronouncements and SEC guidance under the Investment Advisers Act.

Unlike the 2015 Proposed Regulation, the Final Regulation is not organized to include “carve-outs.” Rather, under the Final Regulation, certain activities are included within a “safe harbor” category of activities deemed not to involve a “recommendation” and therefore, not to give rise to advice fiduciary status. These activities include:

Providing a platform to a plan fiduciary of an individual account, participant-directed plan, provided certain conditions are met;

Certain selection and monitoring activities, including, in response to an RFP, providing a sample investment menu, provided certain conditions are met;

General communications not reasonably viewed as an investment recommendation, including, among other things, commentary on television or radio and prospectuses; and

Investment Education (discussed further, below).

The Final Regulation also includes certain exceptions for activities that would involve a “recommendation,” but are nevertheless deemed not to give rise to fiduciary status. Theseactivities were characterized as “carve-outs” in the 2015 Proposed Regulation, but are simply described as exceptions under the Final Regulation. They include:

A Seller’s Exception – dramatically rewritten from the 2015 Proposed Regulation, the seller’s exception in the Final Regulation eliminates the reference to 100 or more participant plans and applies to IRAs and ERISA plans represented by investment professionals and financial institutions; and

A revised Swap Transaction Exception.

III. Discussion and Observations

A. Covered Advice

Under the Final Regulation, a person will be deemed to be rendering investment advice as to the assets of a plan or IRA, and therefore subject to ERISA’s fiduciary standards, if the person provides to a plan, plan fiduciary, plan participant or beneficiary, IRA, or IRA owner, for a fee orother compensation one of two types of “covered advice” —

recommendations as to the advisability of acquiring, holding, disposing of, orexchanging, securities or other investment property, or a recommendation as to how

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securities or other investment property should be invested after the securities or otherinvestment property are rolled over, transferred, or distributed from the plan or IRA; or

recommendations as to the management of securities or other investment property,including, recommendations on investment policies or strategies, portfolio composition,selection of other persons to provide investment advice or investment management services, selection of investment account arrangements (e.g., brokerage versus advisory);or recommendations with respect to rollovers, transfers, or distributions from a plan orIRA, including whether, in what amount, in what form, and to what destination such arollover, transfer, or distribution should be made.

In order to be deemed to be rendering fiduciary investment advice, a person making a recommendation described in either category must also (1) represent or acknowledge that it is acting as a fiduciary, (2) render the advice pursuant to a written or verbal agreement, arrangement, or understanding that the advice is based on the particular needs of the recipient, or(3) with regard to the advisability of a particular investment or management decision, direct the advice to a specific recipient or set of recipients (the “additional conditions”). The preamble to the Final Regulation makes clear that DOL intended that virtually any recommendation regarding the decision to rollover assets to an IRA, even absent a recommendation on how to invest the assets, would still be deemed to be rendering fiduciary investment advice.

B. Definition of Recommendation

As a threshold matter, in order to be fiduciary advice, the communication must be a “recommendation” as defined under the Final Regulation. The Final Regulation includes a new provision devoted to providing additional clarity around when a communication will be deemed a “recommendation.” This provision first defines the term “recommendation” as “a communication that, based on its context, context, and presentation, would reasonably be viewed as a suggestion that the advice recipient engage in or refrain from taking a particular course of action.” This definition is identical to the language in the 2015 Proposed Regulation.

DOL explained in the preamble that rather than directly incorporating FINRA guidance, which could be changed in the future, the Final Regulation is consistent with FINRA’s current approach. Thus, the Final Regulation incorporates several principles included in current FINRA and SEC guidance. These principals are incorporated in the form of examples and statements describing the contours of the term “recommendation” for purposes of the definition, and include the following:

Determining whether a recommendation has occurred involves an “objective” rather than a “subjective” inquiry;

The more individualized a communication is to the recipient, the more likely it will be a recommendation;

Providing a list of securities deemed, “appropriate” for the recipient will be deemed a recommendation, even if no security from the list is individually recommended;

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Actions and communications can be aggregated to form a recommendation, even if individually, such actions or communications would not constitute a recommendation; and

Communications initiated by a person or by a computer (e.g., robo-advice) can both give rise to a recommendation.

Because of the breadth of the fiduciary definition, it seems likely that the question of whether a communication involves a “recommendation” will be a critical issue for firms as they evaluate risks and approaches going forward.

In addition to these principals, the Final Regulation includes four specific types of communications which will not be deemed “recommendations” for purposes of the rule. These are discussed, in section D., below.

C. Covered Recipients of Advice and Welfare Plan Issues

Under the Final Regulation, a covered recommendation may give rise to fiduciary status if it is presented to any one of the following recipients: a plan, a plan fiduciary, plan participant or beneficiary, IRA, or IRA owner. The term “plan” is defined to include ERISA-covered plansin addition to qualified plans subject to section 4975 of the Code. The term “IRA” is defined to include IRAs, HSAs, Archer Medical Savings Accounts (“MSAs”) and Coverdell education Savings Accounts. As a recipient of advice, the term “fiduciary” is expressly defined to include any fiduciary within the meaning of ERISA section 3(21)(A) of ERISA. This broad definition pulls in recommendations made to named fiduciaries, members of the plan’s fiduciary committee(s), trustees, professional investment advisers, and managers (whether or not appointed as 3(38) investment managers) as well as managers of ERISA-covered investment funds (including collective investment trusts and insurance company separate accounts).

A significant issue raised by commenters concerned whether it was appropriate to extend fiduciary status to recommendations made to professional fiduciaries such as financial institutions and investment advisers who may lack discretion to act on behalf of the plan or IRA. DOL addressed this issue by providing a conditional exclusion for recommendations provided to certain investment professionals. That exclusion is described in more detail below in section IV.B.1.

Under the 2015 Proposed Regulation, commenters were concerned that a recommendation of an insurance contract to provide benefits under a fully or partially insured welfare plan could have qualified as a fiduciary recommendation. This is because the 2015Proposed Regulation included within fiduciary status any recommendation with respect to “securities or other property” of the plan. DOL resolved this issue in two ways. First, DOL has revised the operative language of the definition piece to cover advice with respect to the advisability of purchasing (etc.) “securities or other investment property.” Moreover, DOL added a new definition that makes clear that health, disability, or term life insurance policies and other property that does not contain an investment component would not give rise to fiduciary status. While this language is not a wholesale carve-out for welfare plans, this language should give relief to brokers and agents who market, and earn commissions in connection with many of the insurance contracts customarily purchased by fully or partially insured group welfare plans.

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In addition, although many commenters argued that HSAs should be carved out of the rule for various reasons, DOL determined that investment advice provided in connection with an HSA should retain the potential to yield fiduciary status. As a result, HSAs, including MSAs and Coverdale Education Savings Accounts remain covered by the Final Regulation. We note that although recommendations of investments to HSAs could create fiduciary status under DOL’s rule, that DOL’s refined threshold test refers to recommendations with respect to “securities or other investment property” suggests that a recommendation of an HSA product itself would not be a fiduciary activity, provided no recommendations with respect to the investment of HSA assets are made.

D. Exclusions from Fiduciary Status

The 2015 Proposed Regulation contained a number of so-called “carve-outs” from fiduciary status. DOL’s use of the term “carve-out” was in itself problematic, and many commenters questioned whether failing to meet the technical terms of one of the carve-outs meant that the activity necessarily would yield fiduciary status. DOL made a very helpful change to the Final Regulation by eliminating the term “carve-out” from the rule. Instead, DOL has restructured the former carve-outs and instead presented them as two separate categories of non-fiduciary activities. The first category is several activities that DOL has determined are not fiduciary in nature because DOL does not view them as “recommendations” within the meaning of the Final Regulation. The second category of non-fiduciary activities includes three activities that will not be considered fiduciary activities, except where the person acknowledges fiduciary status in connection with the activity.

1. Activities Deemed not to Involve a “Recommendation”

Under the Final Regulation, the following activities are not considered “recommendations:”

a. Platform Providers

The 2015 Proposed Regulation contained a carve-out from fiduciary status for “platform providers.” While DOL did not significantly change the platform provider exclusion in the Final Regulation, DOL has provided a number of important clarifications concerning the scope of the exclusion in the preamble. This exclusion applies to making available to a plan fiduciary of a plan, without regard to the plan’s individualized needs, a platform of investment alternatives into which participants and beneficiaries may direct their accounts, provided a disclaimer is provided making clear that the person is not providing impartial advice or acting as a fiduciary.

First, contrary to requests from many commenters, DOL has made clear that it did not intend to extend the platform provider exception to IRAs because, unlike ERISA plans, they generally have no independent fiduciary to represent them. As a result, DOL has made clear that the exclusion applies only to platforms offered to ERISA-covered plans (including ERISA-covered 403(b) plans) and qualified plans subject to section 4975 of the Code, but not IRAs or non-ERISA HSAs. Moreover, the platform exception would not apply to the offering of a platform to individual participants and beneficiaries of an ERISA plan, such as in the context of marketing brokerage window products to 401(k) plan participants.

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The exclusion retains a condition that the platform provider must make the platform available “without regard to the individualized needs of the plan or its participants.” In helpful preamble discussion, DOL made clear that providers can offer some variation among the platforms presented to potential plan customers without running afoul of the requirement to avoid individualizing the platform to a particular plan. For example, DOL clarified that offering platforms that vary based on market segments or industries would be permitted, as well as offering different platforms for small, medium, and large plans. Finally, DOL received a number of requests to further specify what would constitute a “platform,” including whether a variable annuity contract could itself qualify as a platform. On this issue, while DOL largely sidestepped further defining the term “platform,” it did make clear that in developing the final platform exclusion, it did not intend to limit the types of investment alternatives available, exclude lifetime income products, mandate any specific number of investment alternatives, or exclude platforms consisting solely of proprietary products. DOL cautioned that any specific recommendation of an underlying investment alternative on a platform would continue to be fiduciary advice, so those that communicate sample platforms to plan sponsors may need to exercise care in presenting platforms to their customers.

b. Selection and Monitoring Assistance

Like the 2015 Proposed Regulation, the Final Regulation retains an exclusion for selection and monitoring assistance provided in connection with offering a platform, but it has been revised in several significant ways. First, consistent with the platform exclusion, DOL made clear that the exclusion applies only to ERISA-covered plans (including ERISA-covered 403(b) plans) and qualified plans subject to section 4975 of the Code, but not IRAs or non-ERISA HSAs. The exception still covers identifying investment alternatives that meet objective criteria specified by the plan fiduciary (i.e., expense ratios, type of asset, credit qualify).However, DOL has added a new condition requiring that the person who identifies investment alternatives must disclose any financial interest the person has in any of the identified options and the precise nature of that interest.

Second, the exception has been expanded to explicitly cover RFP responses. The exception now explicitly covers responses to RFPs and RFIs (or similar solicitations) that involve identifying investment alternatives or sample lineups based only on the size of the plan or its current investment alternatives (or both), provided the response is written and discloses any financial interest that the person has in any of the investment alternatives. This exception will be very helpful in providing sample lineups and alternatives for a fund mapping transactions,provided the required disclosures are provided.

c. General Communications

The Final Regulation now contains guidance clarifying DOL’s view that certain generalized communications about investments do not qualify as “recommendations” within the meaning of the Final Regulation. Specifically, the Final Regulation makes clear that making available “general communications that a reasonable person would not view as an investment recommendation” such as newsletters, commentary in public broadcast talk shows, remarks in widely attended conferences, research reports prepared for general circulation, general market data, price quotes, performance reports, or prospectuses. To explain this exclusion, DOL stated that the Final Regulation was not intended to regulate the media or the entertainment industry

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and made clear that in developing this exception, DOL relied on FINRA guidance addressing similar issues under the broker suitability rules. Nonetheless, DOL included a potentially problematic caution, stating that any labels placed on the communication will not determine whether the communication would constitute a fiduciary “recommendation.” DOL made clear that the requirement that a reasonable person would not view the materials as a recommendation must be met in each case, regardless of any labels placed on the communication. DOL advised that there could be circumstances where the communication “clearly” meets the requirements to be a fiduciary “recommendation” regardless of any labels suggesting otherwise.

d. Investment Education

As in the 2015 Proposed Regulation, DOL attempted to exclude the provision of investment education (“Investment Education”) from the definition of fiduciary advice. The Final Regulation would supersede and replace the commonly used Interpretive Bulletin 96-1, 29 CFR 2509.96-1 (“IB 96-1”). IB 96-1 generally permits the furnishing of (i) plan information, (ii)general financial, investment and retirement information, (iii) asset allocation models, and (iv)interactive investment material by a plan sponsor to its participants (but has been widely understood to apply more broadly to other persons, an understanding that was confirmed in the Final Regulation). Notably, in a departure from IB 96-1, the 2015 Proposed Regulation precluded investment allocation models, used for “education” purposes, from referring to a specific investment product available under the plan or IRA.

For the most part, the Final Regulation adopted the 2015 Proposed Regulation’s provisions on Investment Education. DOL still considers the furnishing of information or materials related to the four categories of Investment Education delineated in IB 96-1 as fallingshort of a “recommendation,” provided the conditions of the Final Regulation are satisfied. This is true regardless of (i) who furnished the information or materials, (ii) the frequency with which the information is provided, (iii) the form in which the information is provided, or (iv) whether an individual category of information is provided alone or with other categories of information. DOL also continues to make clear that the distinction between non-fiduciary education and fiduciary advice applies equally to information or materials provided to plan fiduciaries, plan participants, and IRA owners.

However, the Final Regulation establishes different rules for providing education in theplan and IRA markets. Specifically, under the Final Regulation, an asset allocation model or interactive investment material may not identify any specific product or investment alternative available under an IRA but may identify a designated investment alternative (a “DIA”), as that term is defined in the participant disclosure regulation, offered under a participant directed plan that is subject to oversight by a plan fiduciary that is independent from the person who developed or marketed the investment alternative and the model. When identifying specific DIAs, the model or interactive materials must also identify any other DIAs offered under the plan that have similar risk and return characteristics and must include a statement indicating that those other DIAs have similar risk and return characteristics and identifying where a plan participant can obtain additional information regarding those other DIAs. DOL’s stated rationale for this disparate treatment is that IRAs lack an independent plan fiduciary to review and prudently narrow the universe of possible options and therefore, identifying a specific investment product to an IRA owner would rise to the level of a “recommendation.”

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The preamble to the Final Regulation contained several helpful clarifying pieces of guidance regarding Investment Education. Importantly, DOL stated its view that an employer or plan sponsor would generally not become an investment advice fiduciary merely because the employer or plan sponsor engaged a service provider to provide investment advice or because a service provider engaged to provide Investment Education crossed the line and provided investment advice in a particular case. Additionally, DOL stated that it did not believe that an employer would be receiving a fee or compensation under the rule merely because the plan is structured so the employer does not pay plan expenses that are paid out of an ERISA budget account funded with revenue sharing generated by investments under the plan. Finally, DOL expressly confirmed that merely providing information to IRA and plan investors about features, terms, fees and expenses, and other characteristics of investment products available to the IRA or plan investor falls within the “plan information” category of Investment Education under the Final Regulation.

2. Other Non-Fiduciary Activities

Under the Final Regulation, the following activities are not considered fiduciary activities unless the person acknowledges fiduciary status in connection with the activity.

a. Transactions with Independent Plan Fiduciaries

In response to comments that the thresholds for the seller’s or counterparty carve-out set forth in the 2015 Proposed Regulation were impractical, DOL replaced the carve-out with an exception for transactions with independent fiduciaries with financial expertise. The exception includes the provision of any advice to a fiduciary of a plan or an IRA or a “plan asset” entity within the meaning of section 3(42) of ERISA who is independent of the adviser with respect to an arm’s length sale, purchase, loan, exchange, or other transaction related to the investment of securities or other investment property. An independent fiduciary is either a U.S. bank or insurance company, a U.S. registered adviser or broker-dealer, or a fiduciary that holds, or has under management or control, total assets of at least $50 million. The $50 million threshold includes both plan and non-plan assets. The conditions of the exception, which can be fulfilled by written representations, are:

The person knows or reasonably believes that the independent fiduciary is capable of evaluating investment risks independently, both in general and with regard to particular transactions and investment strategies;

The person fairly informs the independent fiduciary that the person is not undertaking to provide impartial investment advice, or to give advice in a fiduciary capacity, in connection with the transaction, and fairly informs the independent fiduciary of the existence and nature of the person’s financial interests;

The person knows or reasonably believes that the independent fiduciary is a fiduciary under ERISA, the Code, or both, with respect to the transaction, and is responsible for exercising independent judgment in evaluating the transaction; and

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The person does not receive a fee or other compensation directly from the plan, plan fiduciary, plan participant or beneficiary, IRA, or IRA owner for the provision of investment advice (as opposed to other services in connection with the transaction).

This exception could alleviate concerns related to “wholesaling” activities or “daisy chain” relationships if product manufacturers and other financial service providers receive assurances or representations that the financial intermediaries with direct relationships to plans and participants qualify as independent fiduciaries. The wholesale service providers may also need to disclose their financial interests and disclaim any intent to provide impartial investment advice.

One lingering uncertainty is whether the exception extends to sales of services, including asset management services. Despite numerous requests for clarification on this point, DOL replaced the words “bilateral contract” with “exchange or other transaction related to the investment of securities or other investment property.” Further, while the exception has been extended to smaller plans and IRAs, there remains an issue if those investors are not represented by an independent fiduciary. For example, hedge and private equity fund managers or placement agents who engage with plans or IRAs that qualify as “accredited investors” under the securities laws but are not represented by an independent fiduciary can, depending upon the context, face exposure with respect to the communications and materials they provide to smaller plans and IRAs. While alternative investments can be offered under the BIC Exemption, the conditions of the BIC Exemption are impractical in the private investment fund context. Representations in subscription documents and disclaimers in offering materials should be reviewed and if necessary, revised. Moreover, in our experience, most IRAs, even sizable accounts, are not represented by an independent investment professional such that this exclusion could be used.

b. Swap Transactions

The Final Regulation retains an exception from fiduciary investment advice in respect of communications in connection with swap transactions subject to Dodd-Frank’s Business Conduct Standards. Specifically, the exception applies to communications by a swap dealer, security-based swap dealer, major swap participant, major security-based swap participant, or a swap clearing firm (“Swap Dealer/Clearing Firm”) to an employee benefit plan in connection with a swap or security-based swap, as defined in the Commodity Exchange Act and Securities Exchange Act, respectively, if certain conditions are met. The conditions are:

the plan is represented by an ERISA fiduciary independent of the Swap Dealer/Clearing Firm;

in the case of a swap dealer or security-based swap dealer, it is not acting as an advisor (under Dodd-Frank) to the plan in connection with the transaction;

the Swap Dealer/Clearing Firm does not receive a fee or other compensation directly from the plan or plan fiduciary for the provision of investment advice (as opposed to other services) in connection with the transaction; and

in advance of providing any recommendations with respect to the transaction, the Swap Dealer/Clearing Firm obtains a written representation from the independent fiduciary that

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the independent fiduciary understands that the Swap Dealer/Clearing Firm is not undertaking to provide impartial investment advice or to give advice in a fiduciary capacity, in connection with the transaction, and that the independent fiduciary is exercising independent judgment in evaluating the recommendation.

We note that the third prong is newly-added.

DOL clarified a number of aspects of this exception. First, the exception applies to both cleared and non-cleared swaps. Second, clearing firms (i.e., members of a clearing agency, but not the clearing agency or derivatives clearing organization itself) are expressly included to account for certain services they may provide in swap transactions. Third, the exception does not change the conclusions set forth in DOL Advisory Opinion 2013-01A (on the basis that such Advisory Opinion did not involve interpretations of section 3(21)(A)(ii) of ERISA). Fourth, IRAs are not covered under this exception. Fifth, DOL was not inclined to broaden this exception to cover other classes of investments such as alternatives or futures that are not subject to the Business Conduct Standards. DOL explains that transactions with IRAs or that involve other classes of investments could use the “independent fiduciary with plan expertise” exception.

3. Employees of the Plan Sponsor

DOL has retained the fiduciary exclusion for employees of the plan sponsor, but the exception has been refined significantly by DOL to prevent potential abuses. The exclusion now covers two distinct activities by employees of the sponsor (or of an affiliate). First, the exclusionapplies to employees who provide advice to the plan sponsor or an employee, other than in the recipient’s capacity as a participant in the plan, provided the employee receives no fee or other compensation in connection with the advice other than the employee’s normal compensation. This rule is intended to cover employees working in a company’s human resources or financial departments who provide recommendations directly to the plan’s named fiduciaries (i.e., the plan’s investment committee), or to the CFO who then communicates the recommendations to the plan’s fiduciary decision-makers.

In addition, the exception covers employees of the sponsor (or an affiliate) whocommunicate information about the plan and distribution options to participants, subject to certain conditions designed to prevent the exclusion from covering employees who are in fact employed to provide investment recommendation to plan participants. This exclusion requires that the person who communicates with participants must not have specific job responsibilities for the provision of investment advice, the person must not be registered or licensed under federal or state securities or insurance laws, and the advice must not require such registration or licensing. DOL explained this provision as covering a situation where an employee of the plan sponsor inadvertently gives investment advice to plan participants. It is also designed to block a financial institution from sharing its employees with the plan sponsor under a “dual employment” structure, whereby the financial institution attempts to evade the rule by having its employees or registered representatives provide fiduciary advice under a ruse of employment by the plan sponsor. Importantly, the employee must not receive any direct or indirect compensation in connection with the advice beyond the employee’s normal compensation from the employer.

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IV. Temporary Definition of Fiduciary Rule – Paragraph (j)

The new definition of fiduciary investment advice legally applies to conduct beginning on April 10, 2017, one year from the date of publication. However, because DOL views this as a major rule, and likely because DOL wants to avoid any challenge under the Congressional Review Act, the Final Regulation will replace DOL’s 1975 definition of fiduciary investment advice in the formal Code of Federal Regulations within 60 days of publication. Given that the Code of Federal Regulations will be amended prior to April of 2017 with the Final Regulation,DOL has added a special new paragraph, paragraph (j), to make clear to the regulated community the DOL’s 1975 definition of fiduciary regulation still applies in the interim. New paragraph (j) is identical to the five-part definition of fiduciary investment advice that has applied since 1975, and should not cause any persons who avoid fiduciary status under the current regulation to become a fiduciary before April 10, 2017.

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April 8, 2016

Fiduciary Rule – Best Interest Contract Exemption






This client alert provides an overview of the finalized changes to the BIC Exemption. For an analytical summary of the Final Regulation, PTE 84-24, the Principal Transactions Exemption, and changes to other existing exemptions, please see our client alerts covering those subjects.

I. Rationale for Exemption

In the absence of an exemption, receipt by a fiduciary adviser of compensation paid by the plan, participant or beneficiary, or IRA, or its receipt of commissions, sales loads, 12b-1 fees, revenue sharing, or other payments from third parties that provide investment products would violate the prohibited transaction provisions of ERISA sections 406(a)(1)(D) and 406(b) because the amount of the fiduciary’s compensation would be affected by the investment advice it provides. DOL views prohibited compensation as the receipt of compensation by a fiduciary that varies based upon the

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investment advice given by the fiduciary and the receipt of compensation by fiduciaries from third parties in connection with their advice. As such, the final BIC Exemption covers commissions paid directly by the plan or IRA, as well as “Third Party Payments,” which include sales charges when not paid directly by the plan, participant or beneficiary account, or IRA; gross dealer concessions; revenue sharing payments; 12b-1 fees; distribution, solicitation, or referral fees; volume-based fees; fees for seminars and educational programs; and any other compensation, consideration or financial benefit provided to the Financial Institution or an Affiliate or Related Entity by a third party as a result of a transaction involving a plan, participant or beneficiary account, or IRA.

According to DOL, the final BIC Exemption is designed to: (i) promote the provision of investment advice that is untainted by conflicts of interest and is in the best interest of retail investors, such as plan participants and beneficiaries, IRA owners, and small plans (particularly when such IRAs and plans are not represented by knowledgeable fiduciaries); and (ii) facilitate the continued provision of advice to such retail investors by permitting Advisers to receive brokerage or insurance commissions, 12b-1 fees, revenue sharing payments, and other forms of direct and indirect compensation, even though the receipt of such compensation otherwise gives rise to nonexempt prohibited transactions under ERISA and/or the Internal Revenue Code of 1986, as amended (“Code”).

Notably, DOL has made substantial changes to the BIC Exemption since it proposed the BIC Exemption last spring. Many of those changes are intended to make compliance with the BIC Exemption easier for advisers and their supervising institutions. We believe that DOL has accomplished this goal at least in part. However, the BIC Exemption continues to include substantial disclosure and compliance requirements. The BIC Exemption still employs a “standards-based approach” at the center of which is a requirement to (i) adhere to Impartial Conduct Standards in rendering advice, (ii) adopt,implement, and follow policies and procedures designed to mitigate the dangers posed by “Material Conflicts of Interest,”1 (iii) disclose important information relating to fees, compensation, and conflicts, and (iv) retain documents and data relating to investmentrecommendations. Further, DOL has broadened the applicability of the BIC Exemption to a larger group of investors and transactions. Finally, the BIC Exemption retains substantially similar remedial provisions found in the proposed BIC Exemption so that IRA owners can bring class action suits against Advisers and their supervising institutions for failing to meet the “Best Interest”2 and other BIC Exemption

1 The final BIC Exemption defines “Material Conflict of Interest” as when an Adviser or Financial Institution has a financial interest that a reasonable person would conclude could affect the exercise of its best judgment as a fiduciary in rendering advice to a Retirement Investor.

2 According to the final BIC Exemption, investment advice is in the “Best Interest” of the Retirement Investor when the Adviser and Financial Institution providing the advice act with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims, based on the investment objectives, risk tolerance, financial circumstances, and needs of the Retirement Investor, without regard to the financial or other interests of the Adviser, Financial Institution or any Affiliate, Related Entity, or other party.

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requirements, thus using the threat of litigation and actual litigation to enforce the BIC Exemption requirements.

II. Covered Transactions and Relief Provided

The exemption would provide relief from the restrictions of ERISA sections 406(a)(1)(D) and 406(b) and Code sections 4975(c)(1)(D), (E), and (F) for the receipt of prohibited compensation by “Advisers,” “Financial Institutions,” “Affiliates,” and “Related Entities” for services provided in connection with the provision of investment advice to a “Retirement Investor.” (Note: these terms and others in quotation marks are defined throughout the summary.)

The final BIC Exemption does not use the term “Assets,” which was used in the proposed BIC Exemption. Therefore, the final BIC Exemption is available to exempt prohibited transactions that arise by reason of the payment of otherwise prohibited compensation in connection the recommendation of any security or investment product.

o This is welcome news for Advisers and Financial Institutions that recommend covered calls, non-publicly traded REITS, alternative investment funds, structured notes, and other securities and products that were not included in the definition of “Assets.” However, in the preamble, DOL said that it “expects that Advisers and Financial Institutions providing advice will exercise special care when assets are hard to value, illiquid, complex, or particularly risky.” Further, DOL stated that a Financial Institution “must give special attention” in its oversight of the policies and procedures “surrounding such investments.” DOL will be looking at recommendations of such securities and products during its investigations.

The final BIC Exemption exempts prohibited transactions that arise by reason of the payment of prohibited compensation in connection with the provision of “investment advice.” Therefore, the final BIC Exemption applies to investment advice provided in connection with recommendations of distributions and rollovers, as well as of investment managers and investment advice providers.

o DOL stated that its intent always was that the BIC Exemption would cover these recommendations. However, this is a helpful clarification.

These provisions of the BIC Exemption are intended by DOL to be coordinated with the DOL’s changes to PTE 84-24, which no longer covers prohibited transactions that arise in connection with the payment of otherwise prohibited compensation for the sale of annuities that are not fixed rate annuities, e.g., variable annuities, indexed annuities. Therefore, in order to receive prohibited compensation in connection with recommending these products, the Adviser and Financial Institution must comply with the BIC Exemption.

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III. Covered Recipient of Advice

A “Retirement Investor” is a (i) participant or beneficiary of a plan subject to Title I of ERISA with authority to direct the investment of assets in his or her plan account or to take a distribution (“ERISA Plan”), (ii) a participant or beneficiary of a plan described in section 4975(e)(1)(A) of the Code with authority to direct the investment of assets in his or her plan account or to take a distribution (“Other Plan”), (iii) the beneficial owner of an IRA acting on behalf of the IRA, or (iv) a Retail Fiduciary with respect to anERISA Plan, Other Plan, or IRA. A “Retail Fiduciary” is a fiduciary that is not a registered investment adviser, registered broker-dealer, insurance company, or plan fiduciary that holds, manages, or controls $50 million or more of assets.

By adding the Retail Fiduciary component to the definition of Retirement Investor, DOL addresses what we at Groom identified as the “gap problem.” The proposed BIC Exemption and the proposed changes to the existing prohibited transactionexemptions resulted in a situation where Advisers and Financial Institutions would be prohibited from receiving commissions and Third Party Payments in connection with advice given to certain plans including participant-directed defined contributions plansand large pension and other trustee-directed plans. This change to the definition of Retirement Investor from the proposed BIC Exemption provides relief for the receipt of otherwise prohibited compensation with regard to a broader array of investors for which prohibited transaction exemptive relief is needed.

IV. Covered Providers of Advice

Investment advice fiduciaries – both individual “Advisers” and the “Financial Institutions” that employ or otherwise contract with them – and their “Affiliates” and “Related Entities” may obtain relief under the BIC Exemption.

An “Adviser” is an employee, independent contractor, agent, or registered representative of a “Financial Institution” who satisfies applicable law and licensing with respect to the receipt of the compensation.

A “Financial Institution” is a registered investment adviser, bank, insurance company, or registered broker-dealer that employs an Adviser or otherwise retains the Adviser as an independent contractor, agent, or registered representative.

The definition of Financial Institution in the final BIC Exemption includes an option whereby an organization may apply for an independent prohibited transaction exemption pursuant to which the entity will be recognized as a Financial Institution for purposes of applying an exemption that mirrors the BIC Exemption. We believe this was added to accommodate situations where Advisers are not supervised by entities that qualify as a Financial Institution.

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An “Affiliate” is (i) any person directly or indirectly through one or more intermediaries, controlling, controlled by, or under common control with the Adviser or Financial Institution, (ii) any officer, director, partner, employee, or relative of the Adviser or Financial Institution; and (iii) any corporation or partnership of which the Adviser or Financial Institution is an officer, director, or partner.

A “Related Entity” is any entity other than an Affiliate in which an Adviser or Financial Institution has an interest that may affect the exercise of its best judgment as a fiduciary.

V. Exclusions

The Exemption does not cover the receipt of prohibited compensation in the following circumstances:

If the Adviser, Financial Institution, or Affiliate is the employer of employees covered by the ERISA Plan.

If the Adviser or Financial Institution is a named fiduciary or plan administrator (or an affiliate thereof) with respect to an ERISA Plan, unless the Adviser or Financial Institution was selected to provide advice by an independent fiduciary.

If the compensation is received as a result of a principal transaction between the Financial Institution and the ERISA Plan, participant or beneficiary account, or IRA, unless the transaction is a riskless principal transaction.

If the compensation is received by an Adviser or Financial Institution as a result of investment advice that is generated solely by an interactive website in which computer software-based models or applications provide investment advice to Retirement Investors based on personal information each investor supplies through the website without any personal interaction or advice from an individual Adviser, unless the robo-advice provider is a Level Fee Fiduciary (as described below).

The Adviser has or exercises discretion with respect to the recommended transaction.

VI. Conditions of Relief

Unlike the proposed BIC Exemption, the final BIC Exemption offers Advisers and Financial Institutions an opportunity to comply with a “streamlined” BIC Exemption in the case of a “Level Fee Fiduciary” and a “Bank Networking Agreement.” In all other cases, full compliance with the BIC Exemption is required.

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A. Level Fee Fiduciary

1. Eligibility

This streamlined exemption is available if the only fee received by the Financial Institution, the Adviser, and any Affiliate in connection with advisory or investment management services to the ERISA Plan, Other Plan, or IRA assets is a Level Fee that is disclosed in advance to the Retirement Investor. A “Level Fee” is a fee or compensation that is provided on the basis of a fixed percentage of the value of the assets or a set fee that does not vary with the particular investment recommended, rather than a commission or other transaction-based fee. While robo-advice is generally not covered by the BICExemption, this exemption is available if the advice provider is a Level Fee Fiduciary.

Because the Level Fee requirement applies to Financial Institution, the Adviser,and any Affiliate, the utility of the streamlined approach is questionable for many advice programs and arrangements.

2. Streamlined Requirements

Prior to, or at the same time as, the execution of the recommended transaction, the Financial Institution must provide the Retirement Investor with a written statement of the Financial Institution’s and its Adviser’s fiduciary status;

The Financial Institution and Adviser must comply with the Impartial Conduct Standards;

In the case of a recommendation to roll over from an ERISA Plan to an IRA, the Financial Institution must document the specific reason or reasons why the recommendation was considered to be in the Best Interest of the Retirement Investor. This documentation must include consideration of the Retirement Investor’s alternatives to a rollover, including leaving the money in his or her current employer’s plan, if permitted, and must take into account the fees and expenses associated with both the ERISA Plan and the IRA. The documentation should also discuss whether the employer pays for some or all of the plan’s administrative expenses, as well as the different levels of services and investments available under each option; and,

In the case of a recommendation to rollover from another IRA or to switch from a commission-based account to a Level Fee arrangement, the Level Fee Fiduciary must document the reasons why the arrangement is considered to be in the Best Interest of the Retirement Investor, as well as specify the services that will be provided for the fee.

In the preamble, DOL unequivocally recognized a conflict in providing distribution and rollover advice even when after the distribution and rollover the Adviser, Financial Institution, and their Affiliates receive compensation in a manner that does not

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give rise to a fee conflict. For example, in the absence of the distribution and rollover from a plan or IRA not maintained by the Financial Institution, the Adviser and Financial Institution will not get paid. Therefore, an exemption is needed to address the conflict. It appears that the BIC Exemption may be the only exemption available to address this conflict.

Additionally, the justification of moving a Retirement Investor from a commission-based account to a Level Fee arrangement is important. This requirementappears to be in response to Adviser and Financial Institution questions whether compliance with the BIC Exemption requires all Retail Investors to be forced into a “fee-based” account. DOL appears to be stating that this is not the case and that doing so may violate the “Best Interest” requirement under the Impartial Conduct Standards.

B. Bank Networking Arrangement

To the extent an employee of a bank, and a Financial Institution that is a bank or similar financial institution receives compensation pursuant to a “Bank Networking Arrangement” in connection with providing investment advice to a Retirement Investor, the bank employee and Financial Institution are exempt from the prohibitions of ERISA sections 401(a)(1)(D) and 406(b), so long as the advice adheres to the Impartial Conduct Standards.

A “Bank Networking Arrangement” is an arrangement for the referral of retail nondeposit investment products that satisfies applicable federal banking, securities, and insurance regulations, under which employees of a bank refer bank customers to an unaffiliated investment adviser, broker or dealer, or insurance company (each meeting certain registration qualifications).

Importantly, bank personnel may provide “investment advice,” as defined in the Final Regulation, and receive compensation in circumstances that are not a Bank Networking Arrangement. In such circumstances, the personnel and bank may need to rely on one or more prohibited transaction exemptions.

C. Generally Applicable Exemption

1. Written Contract

As the first condition, the Financial Institution must enter into an enforceable contract with IRAs and Other Plans pursuant to which the Financial Institution agrees that it, and its Advisers, will comply with the BIC Exemption’s standards. Importantly, DOL concluded that a contract is not necessary with regard to an ERISA Plan because the remedial provisions of ERISA largely give the plan’s participants and beneficiariesthe rights and remedies intended to be created under the BIC Exemption’s contract requirements, e.g., the right to bring a class action to recover damages.

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The contract must be entered prior to, or simultaneous with, the execution of a recommended transaction, rather than before a recommendation was made (which waswholly impracticable). Further, the contract terms may be incorporated into account opening documents and other commonly-used agreements with new customers (including master agreements). However, in the case of an ERISA Plan where no contract is required, the conditions of the BIC Exemption may be complied with in some form of written statement. Lastly, the final BIC Exemption offers a safe harbor, under limited circumstances, for the failure to enter a written contract.

In the case of securities or products distributed through broker dealers or other entities that are “Financial Institutions,” the product manufacturer need not be a party to the BIC Exemption contract in order for the BIC Exemption to be available. However, in the case where the products are recommended by Advisers who are not associated with or supervised by entities that are not Financial Institutions (e.g., certain selling or marketing organizations) an issue arises whether a product manufacturer must become a party to the BIC Exemption contract in order for the BIC Exemption to be available.

2. Acknowledge Fiduciary Status

The Financial Institution must affirmatively state in writing that the Financial Institution and the Adviser(s) act as fiduciaries under ERISA, the Code, or both, with respect to any investment advice provided by the Financial Institution or the Adviser subject to a contract or, in the case of an ERISA plan, with respect to any investment recommendations regarding the Plan or participant or beneficiary account.

The fact that the Adviser is not required to be a party to the contract is a welcome change, particularly for Financial Institutions whose Advisers provide advice by telephone and because of the high turnover among Advisers experienced by some Financial Institutions.

3. Impartial Conduct Standards

Under the BIC Exemption, the Financial Institution must state on its own behalf,and on behalf of its Advisers, that they will adhere to “Impartial Conduct Standards,” as described below, when providing investment advice to the Retirement Investor. With respect to ERISA Plans, these standards need only be complied with (and not separately stated in a written document).

The fiduciary, at the time of the recommendation, must provide advice in the “Best Interest” of the Retirement Investor. “Best Interest” is defined to require the Adviser and Financial Institution to “act with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims would exercise based on the investment objectives, risk tolerance, financial circumstances, and the needs of the Retirement Investor without regard to the financial or other interests of the

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Adviser, Financial Institution or any Affiliate, Related Entity, or other party.” This definition was modified from what was offered in the proposed BICExemption in order to “more closely track the statutory language of ERISA section 404(a).”3 We note that DOL stated in the final BIC Exemption’s preamble that the “Best Interest” standard, and the “without regard to” clause, are intended to reflect the duties of loyalty and prudence under ERISA and trust law. Consequently, according to DOL, the standard is not designed to prohibit the provision of advice from investment menus that are restricted to proprietary products, or generate third party payments.

Notwithstanding these assurances, the “with regard to” language may still present unnecessary litigation risk to Advisers and Financial Institutions relying on the BIC Exemption. Furthermore, to confuse matters, DOL eliminated the “without regard to” language from the “Best Interest” standard in situations where Financial Institutions limit, in whole or in part, recommendations of Advisers to proprietary products and investments that make Third Party Payments to the Financial Institution.

The recommended transaction may not cause the Financial Institution, Adviser or their Affiliates, or Related Entities to receive, directly or indirectly, compensation for their services that is in excess of reasonable compensation, within the meaning of ERISA section 408(b)(2) and Code section 4975(d)(2). Notably, DOL confirmed in the preamble to the BIC Exemption that an Adviser and Financial Institution do not necessarily have to recommend a transaction that is the lowest cost or that generates the lowest fees.

The fiduciary may make only “not materially misleading” statements about the recommended transaction, fees, Material Conflicts of Interest (as described below), and any other matters relevant to a Retirement Investor’s investment decisions. We note that this is measured at the time the statement is made. DOL did not adopt suggestions to incorporate a reliance element.

4. Warranties

The following substantive provisions must be met. For IRAs and Other Plans, the Financial Institution must “warrant” in the contract (see above) that it has satisfied and will satisfy these conditions. With respect to ERISA Plans, for which no contract is necessary, these conditions may be satisfied without having to warrant their satisfaction. In either case, the conditions must in fact be complied with.

The Financial Institution must warrant that it has adopted, and will comply with, written policies and procedures that are reasonably “and prudently” designed to

3 DOL expressly said that the Best Interest standard does not incorporate as one of its elements FINRA’s “suitability” obligation imposed upon broker-dealers. The failure to satisfy the suitability standard will result in the failure to satisfy the Best Interest standard; however, a recommendation in accordance with the suitability obligation may or may not satisfy the Best Interest standard.

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ensure that its Advisers adhere to the Impartial Conduct Standards, described below.4

The Financial Institution must warrant that its policies and procedures require that neither the Financial Institution nor (to the best of its knowledge) any Affiliate or Related Entity (as those terms are defined in the BIC Exemption) use or rely upon quotas, appraisals, performance or personnel actions, bonuses, contests, special awards, differential compensation, or other actions or incentives that are intended or would reasonably be expected to cause Advisers to make recommendations that are not in the Best Interest of the Retirement Investor. Importantly, this warranty would not preclude the Financial Institution, its Affiliates, or Related Entities from providing Advisers with differential compensation (whether in type or amount, and including, but not limited to, commissions) based on investment decisions by plans, participant or beneficiary accounts, or IRAs, provided that such policies and procedures and incentive practices, when viewed as a whole, are reasonably and prudently designed to avoid a misalignment of the interests of Advisers with the interests of the Retirement Investors they serve as fiduciaries. The BIC Exemption expressly provides that such compensation practices may include differential compensation based on neutral factors that are a function of differences in the services delivered to the Retirement Investor with respect to the different types of investments. Moreover, DOL cited an infrequently traded account as an example of where transaction-based compensation may be more appropriate than level compensation.

The Financial Institution must also warrant that it has specifically identified and documented its Material Conflicts of Interest, which exist when an Adviser or Financial Institution has a financial interest that a reasonable person would conclude could affect the exercise of its best judgment as a fiduciary in rendering advice to a Retirement Investor. In addition, the Financial Institution must adopt measures reasonably and prudently designed to prevent Material Conflicts of Interest from causing violations of the Impartial Conduct Standards. Interestingly, the BIC Exemption now requires that the Financial Institution designate one or more persons, whether identified by name, title, or function, who are responsible for addressing Material Conflicts of Interest and monitoring their Advisers’ adherence to the Impartial Conduct Standards.

The final BIC Exemption does not contain the warranty that the Financial Institution and the Adviser comply with all applicable laws included in the proposed BICExemption.

4 DOL explained in the preamble that “[t]he exemption’s goal is not to wring out every potential conflict, no matter how slight, but rather to ensure that Financial Institutions and Advisers put Retirement Investors’ interests first, take care to minimize incentives to act contrary to investors’ interests, and carefully police those conflicts that remain.”

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5. Policies and Procedures Related to Conflicts

In formulating its policies and procedures, the Financial Institution must specifically identify and document Material Conflicts of Interest and adopt measures “reasonably and prudently designed” to prevent those material conflicts from causing violations of the Impartial Conduct Standards. These policies must provide that the Financial Institution does not allow, and, to the best of the Financial Institution’s knowledge, any Affiliate or Related Entity, to use quotas, appraisals, performance or personnel actions, bonuses, contests, special awards, differential compensation, or other actions or incentives to the extent they “would reasonably be expected” to cause individual Advisers to make recommendations that are not in the Best Interest of Retirement Investors.

These policies and procedures do not prevent the Financial Institution, its Affiliates, or Related Entities from providing Advisers with differential compensation (whether in type or amount, and including, but not limited to, commissions) based on investment decisions by plans, participant or beneficiary accounts, or IRAs, to the extent that the Financial Institution’s policies and procedures and incentive practices, when viewed as a whole, are reasonably and prudently designed to avoid a misalignment of the interests of Advisers with the interests of the Retirement Investors they serve as fiduciaries. The BICExemption expressly permits differential compensation based on neutral factors that are tied to variations in the services delivered to the Retirement Investor with respect to the different types of investments (rather than where the differential amounts based on the specific investment recommendation).

While DOL notes that a “level-fee” structure, in which compensation for Advisers does not vary based on the particular investment product recommended, is not required to satisfy this condition, it provides five examples of “possible approaches” Financial Institutions could take to mitigate conflicts of interest. DOL emphasized that these examples are not exhaustive of potentially permissible policies and procedures, “are not intended to provide detailed descriptions of all the attributes of strong and effective policies and procedures,” and that “these examples and the policies and procedures are not intended as mere ‘check the box’ exercises, but rather must involve the adoption and monitoring of meaningful policies and procedures reasonably and prudently designed to ensure Advisers’ adherence to the Impartial Conduct Standards.” The examples include:

o Independently certified computer models. The Adviser interacts directly with the Retirement Investor, but provides investment advice that is in accordance with an unbiased computer model created by an independent third party. In a footnote, DOL clarified that BIC Exemption relief is not available if the information produced by the computer model is not conveyed by a person. DOL also confirmed that this example does not nullify prior DOL guidance on differential compensation, such as DOL

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Advisory Opinion 2001-09A, and that relief may be separately provided by section 408(b)(14) of ERISA.

o Rewards for Best Interest Advice. The Financial Institution’s policies and procedures establish a compensation structure that is reasonably designed to align the interests of the Adviser with the interests of the Retirement Investor.

o Asset-based compensation. The Financial Institution pays the Adviser a percentage, which does not vary based on the types of investments, of the dollar amount of assets invested by the Retirement Investor with the Adviser. Furthermore, the Adviser earns the same percentage on the same payment schedule, regardless of how the Retirement Investor’s assets are allocated between different investments, and the Financial Institution gives particular attention to recommendations that increase the Adviser’s base (e.g., advice to roll money out of a plan into IRA investments that generate fees for the Adviser).

o Fee offsets. The Financial Institution establishes a fee schedule for its and its Advisers’ services. The fees are both reasonable (in relation to the services provided) and are not themselves intended, nor reasonably expected, to cause Advisers to violate the Impartial Conduct Standards. It accepts transaction-based payments directly from the plan, participant or beneficiary account, or IRA, and/or from third party investment providers. To the extent the payments from third party investment providers exceed the established fee for a particular service, such amounts are rebated to the plan, participant or beneficiary account, or IRA. The Adviser retains only the amount of compensation set forth in the fee schedule.

The following example was included in the preamble to the proposed BICExemption. DOL included it in the preamble to the final BIC with a greater emphasis on a stringent supervisory structure.

Commissions and stringent supervisory structure. The Financial Institution establishes payment structures under which transactions involving different investment products result in differential compensation to the Adviser based on a reasonable assessment of the time and expertise necessary to provide prudent advice on the product or other reasonable and objective neutral factors (e.g., time or complexity of work involved). The Adviser’s compensation is not a function of how much revenue or profits a particular investment product generates for the Financial Institution. Moreover, the Financial Institution adopts a stringent supervisory structure to ensure that Advisers’ recommendations are based on the customer’s financial interest. DOL provided examples of a prudent supervisory structure, including:

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o A system to monitor and supervise Adviser recommendations, evaluate the quality of the advice individual customers receive, properly train Advisers, and correct any identified problems. Particular attention is given to recommendations associated with higher compensation and recommendations at key liquidity events of an investor (e.g., rollovers);

o Systems to evaluate whether Advisers recommend imprudent reliance on investment products sold by or through the Financial Institution;

o The use of metrics for behavior (e.g., red flags), comparing an Adviser’s behavior against those metrics, and basing compensation in part on them;

o Penalizing Advisers and supervisors (including the branch manager) by reducing compensation based on the receipt of customer complaints or indications that conflicts are not being carefully managed, and/or using clawback provisions to revoke some or all of deferred compensation based on the failure to properly manage conflicts of interest;

o Appointment of a committee to assess the risks and conflicts associated with new investment products, determine the prudence of the products for Retirement Investors, and assess the adequacy of the Financial Institution’s procedures to police any associated conflicts of interest;

o Ensuring that no Adviser nor any supervisor (including the branch manager) participates in any revenue sharing from a “preferred provider,” earns more for the sale of a product issued by a “preferred provider,” or earns more for the sale of a proprietary product over other comparable products, and ensuring that the Adviser discloses to customers the payments that the Financial Institution and its Affiliates have received from a preferred provider or for a proprietary product; and,

o Periodically reviewing (and revising, if necessary) the policies and procedures.

In the preamble to the final BIC Exemption, DOL stated that while Financial Institutions retain the latitude to design their compensation structures, the DOL expects that the Financial Institution will undertake a prudent process in designing and monitoring the structure and to correct any violations (isolated or systemic).

6. Prohibited Contract Terms

The contract with the Retirement Investor (as applicable) must not contain the following terms. If the terms are included, the BIC Exemption is not available.

An exculpatory provision that disclaims or otherwise limits liability for an Adviser’s or Financial Institution’s violations of the contract’s terms.

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The plan’s, IRA’s, or Retirement Investor’s agreement to waive or qualify its right to bring or participate in a class action or other representative action in acontract dispute with the Adviser or Financial Institution, or in an individual or class claim agrees to an amount representing liquidated damages for breach of the contract. Newly added by the final BIC Exemption is an ability for the parties to knowingly agree to waive the Retirement Investor’s right to obtain punitive damages or rescission of recommended transactions, to the extent such a waiver is permissible under applicable state or federal law.

These provisions are in DOL’s view essential to the effectiveness of the BICExemption because compliance with the BIC Exemption as to IRAs is enforced through the threat of litigation or the conduct of litigation.

7. Disclosures

The final BIC Exemption does not include some of the more onerous disclosures required in the proposed BIC Exemption, including projected fees and an extensive annual disclosure requirement. However, the disclosure obligations under the final BIC Exemption are substantial. DOL divided the disclosures into three categories: (i)Contract Disclosures, (ii) Transaction Disclosures, and (iii) Web Disclosures. We discuss those in turn.

Contract Disclosures. Either in contract (where the recipient is an IRA or Other Plan) or in a written statement (where the recipient is an ERISA plan), the Financial Institution must “clearly and prominently” provide a writing, prior to, or at the same time as, the execution of the recommended transaction, that:

o States the Best Interest standard of care owed by the Adviser and Financial Institution to the Retirement Investor; informs the Retirement Investor of the services provided by the Financial Institution and the Adviser; and describes how the Retirement Investor will pay for services;

o Describes Material Conflicts of Interest; discloses any fees or charges the Financial Institution, its Affiliates, or the Adviser impose upon the Retirement Investor or the Retirement Investor’s account; and states the types of compensation that the Financial Institution, its Affiliates, and the Adviser expect to receive from third parties in connection with investments recommended to Retirement Investors;

o Informs the Retirement Investor that the Retirement Investor has the right to obtain copies of the Financial Institution’s written description of its policies and procedures (described above), as well as the specific disclosure of costs, fees, and compensation regarding recommended transactions, to permit the Retirement Investor to make an informed judgment about the costs of the transaction and about the significance and

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severity of the Material Conflicts of Interest, and describes how the Retirement Investor can get the information, free of charge; provided that if the Retirement Investor’s request is made prior to the transaction, the information must be provided prior to the transaction, and if the request is made after the transaction, the information must be provided within 30 business days after the request;

In this and other circumstances, the Retirement Investor may request more detailed information. DOL made this part of a “two-tiered” approach to disclosure where more general information is initially provided and then more detailed information is provided upon request.

o States whether the Financial Institution offers proprietary products or receives third party payments with respect to any recommended investment;

o Includes a link to the Financial Institution’s website (as part of the website disclosure requirement) and informs the Retirement Investor that: (i) model contract disclosures updated as necessary on a quarterly basis are maintained on the website, and (ii) the Financial Institution’s written description of its policies and procedures are available free of charge on the website;

o Provides contact information (telephone and email) for a representative of the Financial Institution that the Retirement Investor can use to contact the Financial Institution with any concerns about the advice or service they have received; and,

o Describes whether or not the Adviser and Financial Institution will monitor the Retirement Investor’s investments and alert the Retirement Investor to any recommended change to those investments, and, if so monitoring, the frequency with which the monitoring will occur and the reasons for which the Retirement Investor will be alerted. Importantly, a duty to monitor may be imposed based what was communicated (in any number of documents) to the Retirement Investor. Also, DOL said that certain investments (particularly, complex ones) cannot be prudently recommended “in the first place” without a duty to monitor the investment on an ongoing basis.

Please note that the BIC Exemption provides that the Financial Institution will not fail to satisfy these required disclosures (or violate a contractual provision based thereon) “solely because” it, when acting in “good faith and with reasonable diligence,” makes an error or omission in disclosing the required information, provided that the Financial Institution discloses the correct information as soon as practicable, but not later than 30 days

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after the date on which it discovers or reasonably should have discovered the error or omission.

Transaction Disclosures. A point of sale disclosure must be provided to the Retirement Investor prior to or at the time of the execution of an investment transaction in a standalone document or a clearly broken out section of a contract. If an Adviser subsequently makes a recommendation with respect to the same product, a new disclosure is only required if a year has passed or if there has been a material change. It must provide a disclosure that:

o States the Best Interest standard of care owed by the Adviser and Financial Institution to the Retirement Investor and describes any Material Conflicts of Interest.

o Informs the Retirement Investor that the Retirement Investor has the right to obtain copies of the Financial Institution’s written description of its conflict mitigation policies, as well as specific disclosure of costs, fees,and other compensation including third party payments regarding recommended transactions. Financial arrangements can be described in the form of dollar amounts, percentages, formulas, or other means reasonably calculated to present a materially accurate description of the arrangements.

o Includes a link to the Financial Institution’s website, informs the Retirement Investor of the information available through the Web Disclosures (discussed below), and notifies the Retirement Investor that the information is available free.

Web Disclosures. The Financial Institution must maintain a public webpage, which provides the following information, freely accessible to the public (but that can require a user name and password) that is updated not less than quarterly. DOL eliminated the requirement that this disclosure be in a machine readable format and now allows Financial Institutions to place the web disclosure behind a log in. This could limit the ability to data-mine Financial Institutions’ websites.

o A discussion of the Financial Institution’s business model and the Material Conflicts of Interest associated with that business model.

o A schedule of typical account or contract fees and service charges.

o A model contract or other model notice of the contractual terms andcertain required disclosures under the BIC Exemption.

o A written description of the Financial Institution’s policies and procedures that accurately describes or summarizes key components of the policies and procedures relating to conflict-mitigation and incentive practices in a

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manner that permits Retirement Investors to make an informed judgment about the stringency of the Financial Institution’s protections against conflicts of interest.

o To the extent applicable, a list of all product manufacturers and other parties with whom the Financial Institution maintains arrangements that provide third party payments to either the Adviser or the Financial Institution with respect to specific investment products or classes of investments recommended to Retirement Investors; a description of the arrangements, including a statement on whether and how these arrangements impact Adviser compensation, and a statement on any benefits the Financial Institution provides to the product manufacturers or other parties in exchange for the third party payments.

o Disclosure of the Financial Institution’s compensation and incentive arrangements with Advisers including, if applicable, any incentives (including both cash non-cash compensation or awards) to Advisers for recommending particular product manufacturers, investments, or categories of investments to Retirement Investors, or for Advisers to move to the Financial Institution from another firm or to stay at the Financial Institution, and a full and fair description of any payout or compensation grids, but not including information that is specific to any individual Adviser’s compensation or compensation arrangement. Products may be grouped by categories.

Further Conditions Applicable for Proprietary Products and Third Party Payments to Financial Institutions. Additional conditions apply if a Financial Institution limits an Adviser’s investment recommendations in whole or part, to proprietary products or to investments that generate third party payments:

o Prior to, or at the same time as, the execution of the recommended transaction, the Retirement Investor is clearly and prominently informed in writing that the Financial Institution offers proprietary products or receives Third Party Payments with respect to the purchase, sale, exchange, or holding of recommended investments, and the Retirement Investor is informed in writing of the limitations placed on the universe of investments that the Adviser may recommend to the Retirement Investor;

o Prior to, or at the same time as, the execution of the recommended transaction, the Retirement Investor is fully and fairly informed in writing of any material conflicts of interest that the Financial Institution or Adviser have with respect to the recommended transaction, and the Adviser and Financial Institution comply with the disclosure requirements, described above;

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o The Financial Institution documents in writing its limitations on the universe of recommended investments; documents in writing the Material Conflicts of Interest associated with any contract, agreement, or arrangement providing for its receipt of Third Party Payments or associated with the sale or promotion of proprietary products; documents in writing any services it will provide to Retirement Investors in exchange for Third Party Payments, as well as any services or consideration it will furnish to any other party, including the payor, in exchange for the Third Party Payments; reasonably concludes that the limitations on the universeof recommended investments and Material Conflicts of Interest will not cause the Financial Institution or its Advisers to receive compensation in excess of reasonable compensation for Retirement Investors; reasonably determines that these limitations and material conflicts of interest will not cause the Financial Institution or its Advisers to recommend imprudent investments; and documents in writing the bases for its conclusions;

o The Financial Institution adopts, monitors, implements, and adheres to policies and procedures and incentive practices that are reasonably designed to mitigate conflicts; neither the Financial Institution nor (to the best of its knowledge) any Affiliate or Related Entity uses or relies upon quotas, appraisals, performance or personnel actions, bonuses, contests, special awards, differential compensation, or other actions or incentives that are intended or would reasonably be expected to cause the Adviser to make imprudent investment recommendations, to subordinate the interests of the Retirement Investor to the Adviser’s own interests, or to make recommendations based on the Adviser’s considerations of factors or interests other than the investment objectives, risk tolerance, financial circumstances, and needs of the Retirement Investor;

o At the time of the recommendation, the amount of compensation and other consideration reasonably anticipated to be paid, directly or indirectly, to the Adviser, Financial Institution, or their Affiliates or Related Entities for their services in connection with the recommended transaction is not in excess of reasonable compensation within the meaning of ERISA section 408(b)(2);

o The Adviser’s recommendation reflects the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims, based on the investment objectives, risk tolerance, financial circumstances, and needs of the Retirement Investor, and the Adviser’s recommendation is not based on the financial or other interests of the Adviser or on the Adviser’s consideration of any factors or interests other than the investment objectives, risk tolerance, financial circumstances, and needs of the Retirement Investor. Unlike elsewhere in the BIC Exemption, this

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standard of care does not contain, “without regard to the financial or other interests of the Adviser, Financial Institution or any Affiliate, Related Entity, or other party.” This adds some uncertainty about whether compensation to the Financial Institution may be taken into account.

DOL Disclosure. Before receiving prohibited compensation in reliance of the BIC Exemption, the Financial Institution must notify DOL of its intention to rely on this Exemption. The disclosure is provided to DOL via email. As a positive development, DOL declined to accept comments suggesting that it create an online database where third-parties can verify what Financial Institutions are relying on the BIC Exemption.

8. Data Retention

The proposed BIC Exemption would have required a Financial Institution to maintain and, upon request, disclose to DOL information related to “Inflows,” “Outflows,” “Holdings,” and “Returns.” Financial Institutions noted that developing systems to compile this data would be an enormous and costly undertaking. The final BIC Exemption eliminated this requirement.

9. Recordkeeping

The language in the recordkeeping section is largely unchanged in the final BICExemption. A Financial Institution using the BIC Exemption will be required to comply with certain recordkeeping requirements to demonstrate that they complied with the BIC Exemption’s requirements and would be required to provide DOL and others with access to the Financial Institution’s records. Failure to maintain records for a transaction will result in the loss of the BIC Exemption for such transaction. An employee or representative of DOL or the Internal Revenue Service may examine privileged trade secrets or privileged commercial or financial information of the Financial Institution, or information identifying other individuals.

VII. Exemption for Purchases and Sales, including Insurance and Annuity Contracts

Prohibited Transaction. Sections 406(a)(1)(A) and 406(a)(1)(D) of ERISA and counterparts under the Code prohibit the purchase by a Retirement Investor of an investment product from a Financial Institution that is a service provider (or other “party in interest” or “disqualified person”).

Applicable Exemption. The restrictions of ERISA section 406(a)(1)(A) and 406(a)(1)(D) shall not apply to the purchase of an investment product by a Retirement Investor if:

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o The transaction is effected by a Financial Institution in the ordinary course of business.

o The Financial Institution, Affiliates, and Related Entities receive no more than reasonable compensation within the meaning of ERISA section 408(b)(2).

o The terms of the transaction are at least as favorable to the Retirement Investor as terms generally available in an arm’s length transaction with an unrelated party.

DOL significantly broadened this Exemption in two ways. As proposed, the Exemption was limited to transactions involving insurance or annuity contracts. Additionally, the proposed BIC Exemption had only offered relief to transactions for cash. The BIC Exemption was also broadened to permit plan fiduciaries and IRA owners to transact in-kind.

VIII. Potential Sources of Liability for Advice Fiduciaries Who Fail to Comply with the Terms of the BIC Exemption

Contractual liability to IRA owners. IRA owners can also participate in class actions. Liquidated damages provisions are invalid, but waivers of punitive damages or rescission rights are valid to the extent permitted under applicable laws.

Liability under ERISA section 502(a)(2) and (3) to plans, plan participants, and beneficiaries to recover any loss in value to the plan (including the loss in value to an individual account), or to obtain disgorgement of any wrongful profits or unjust enrichment. Plans or plan participants and beneficiaries could participate in ERISA class actions.

Liability under ERISA section 502(a)(2) and (3) in connection with suits by DOLfor claims related to employee benefit plans but not IRAs. Statutory penalty under ERISA section 502(l) for up to 20 percent of the amount recovered by DOL.

Excise tax to the Internal Revenue Service of generally 15% of the amount involved for pension plans, HSAs and IRAs.

IX. Exemption for Pre-Existing Transactions

Rationale for Exemption. Some Advisers and Financial Institutions may have, prior to the applicability date, provided advice without considering themselves fiduciaries. Their receipt, after the applicability date, of compensation attributable to advice provided as to the purchase, holding, sale, or exchange of securities or other property (i) acquired before the applicability date, or (ii)

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acquired pursuant to a purchase program established before the applicability date,might otherwise raise prohibited transaction concerns. The Exemption for Pre-Existing Transactions would provide relief for the receipt of this compensation.

The Exemption is also intended to assist those Advisers and Financial Institutions who were considered fiduciaries before the Applicability Date, but who entered into transactions involving plans and IRAs before that date in accordance with the terms of a prohibited transaction exemption that has since been amended.

Transactions Covered and Relief. The exemption provides relief from ERISA sections 406(a)(1)(A), 406(a)(1)(D) and 406(b) and Code sections 4975(c)(1)(A), (D), (E), and (F) for the receipt of compensation by an Adviser, FinancialInstitution, and any Affiliate and Related Entity, for advice provided as to the purchase, holding, sale, or exchange of securities or other property (i) acquired before the applicability date, or (ii) acquired pursuant to a purchase program established before the applicability date.

Conditions.

o The compensation is received pursuant to an agreement, arrangement, or understanding that was entered into prior to the applicability date and that has not expired or come up for renewal post-applicability date.

o The original purchase, exchange, holding, or sale of the securities or property was not a non-exempt prohibited transaction under ERISA section 406 and Code section 4975 on the date it occurred.

o The compensation is not received in connection with an additional amount invested in the security or other property acquired before the applicability date. (An exchange within a mutual fund family or a variable annuity contract is permitted as long as the exchange does not result in the Adviser, Financial Institution, and their Affiliates and Related Entities, receiving more compensation than they were entitled to receive prior to the applicability date.).

o The amount of compensation paid to the Adviser, Financial Institution, or their Affiliates or Related Entities, is not in excess of reasonable compensation under ERISA section 408(b)(2) and Code section 4975(d)(2).

o Any advice provided after the applicability date satisfies the Best Interest standard.

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April 8, 2016

Fiduciary Rule – Prohibited Transaction Exemption 84-24



Final versions of the Best Interest Contract Exemption (the “BIC Exemption”),related supplemental exemptions, and the new prohibited transaction class exemption for principal transactions in certain investments (the “Principal Transactions Exemption”); and



This client alert provides an overview of the finalized changes to PTE 84-24. For an analytical summary of the Final Regulation, BIC Exemption, the Principal Transactions Exemption, and changes to other existing exemptions, please see our client alerts covering those subjects.


PTE 84-24 has been substantially trimmed. It no longer provides exemptive relieffor transactions involving Fixed-Indexed Annuities or Variable Rate Annuities. Now, it only provides relief for Fixed Rate Annuity Contracts sold to plans and IRAs and for sales of mutual funds by principal underwriters to plans. The amendments to PTE 84-24clarify that exemptive relief is available for sales of Fixed Rate Annuity Contracts in connection with rollover recommendations. Finally, fiduciaries seeking shelter under PTE 84-24 from the prohibited transaction prohibitions of ERISA sections 406(a)(1)(A)-(D) and 406(b), must comply with the “Impartial Conduct Standards” that DOL also

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introduced in the BIC Exemption. PTE 84-24’s narrowed scope effectively leaves the BIC Exemption as the sole source of exemptive relief for sales of annuity products other than fixed.

II. Pre-Amendment PTE 84-24

PTE 84-24, in its present form (the “Pre-Amendment Exemption”), provides relief from ERISA sections 406(a)(1)(A)–(D) and 406(b), and the parallel Internal Revenue Code provisions, for the following transactions with respect to plans and IRAs—

The receipt of commissions by an agent, broker, or pension consultant in connection with the purchase of an insurance or annuity contract;

The receipt of commissions by a principal underwriter in connection with the purchase of mutual fund shares;

The effecting by an insurance agent or broker, pension consultant, or investment company principal underwriter of a transaction for the purchase, with plan assets,of an insurance or annuity contract or securities issued by an investment company; and

The purchase of an insurance or annuity contract.

Several conditions apply to the relief granted by the Pre-Amendment Exemption.The transaction must be on terms at least as favorable as an arm’s length transaction with an unrelated party would be, no more than “reasonable compensation,” within the meaning of ERISA section 408(b)(2), may be paid, and the transaction must be effected in the “ordinary course” of the business of the insurance agent or broker, pension consultant, insurance company, or investment company principal underwriter. Generally, an independent fiduciary, such as a plan’s named fiduciary, must also approve the transaction after receiving disclosures concerning fees and whether the agent, broker, or consultant is limited by contract from recommending certain investments.

As of the applicability date of April 10, 2017, the changes described below will apply to PTE 84-24 (to the “Amended Exemption”).

III. Key Changes to PTE 84-24

A. Covered Insurance and Annuity Products

PTE 84-24 is amended to significantly limit the scope of relief available to cover sales of annuity products. Only sales of Fixed Rate Annuity Contracts are covered. The Amended Exemption defines a Fixed Rate Annuity Contract as an immediate or deferred annuity providing benefits that do not vary based on the investment experience of a separate account maintained by the insurer and that either (1) satisfies applicable state nonforfeiture laws at the time of issue or, (2) in the case of a group fixed annuity, guarantees the return of principal net of reasonable compensation and provides a

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guaranteed declared minimum interest rate in accordance with the applicable state nonforfeiture laws for individual deferred annuities.

Moreover, the Amended Exemption explicitly no longer covers sales to IRAs or plans of either Fixed-Indexed or Variable Annuity Contracts. An appendix to the Amended Exemption provides a comparison chart of the features of Fixed Rate Annuities, Fixed-Indexed Annuities, and Variable Annuities, as DOL sees them.

For Fixed-Indexed and Variable Annuity sales, the BIC Exemption is available. In the preamble to the Amended Exemption, DOL explains that it ultimately determined that the conditions of the Pre-Amendment Exemption were insufficiently protective to safeguard the interests of plans and IRAs in investing in Fixed-Indexed and Variable Annuity products in light of the complexity, risks, and enhanced conflicts associated with those products. In DOL’s view, the BIC Exemption’s conditions, which include a contractual commitment to adhere to the Impartial Conduct Standards when transacting with IRA owners, adoption and adherence to anti-conflict policies and procedures, and required disclosures, are better suited to address the conflicts of interest that accompany those products.

We also note that the Amended Exemption now includes a distinction between annuity contracts and other, non-annuity insurance contracts. The Amended Exemptioncontinues to be available for such other forms of insurance (e.g., various types of life insurance), to the extent that recommendations to purchase that insurance constitute investment advice. The Final Regulation provides that fiduciary advice does not include recommendations to purchase “health insurance policies, disability insurance policies, term life insurance policies, and other property to the extent the policies or property do not contain an investment component.”

In summary, the Amended Exemption provides relief only for --

The receipt of “Insurance Commissions” (as newly defined) in connection with the purchase of a Fixed Rate Annuity Contract with assets of a plan or IRA;

The receipt of “Mutual Fund Commissions” (newly defined) in connection with the purchase of mutual fund shares with assets of a plan;

The effecting of a transaction for the purchase of Fixed Rate Annuity Contracts or other insurance contracts with assets of a plan or IRA, or of mutual fund shares with assets of a plan (e.g., the provision of services in connection with these purchases); and

The purchase from an insurer of Fixed Rate Annuity Contracts and other insurance contracts with assets of a plan or IRA.

B. Rollover Transactions

Some commentators requested clarification that PTE 84-24 would cover the sale of annuity products in connection with rollover transactions. The Amended Exemption

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includes new language indicating that rollover-related sales of Fixed Rate Annuity Contracts are covered.

C. Reasonable Compensation

DOL has changed the definition of reasonable compensation for purposes of the Amended Exemption to require that the “combined total of all fees and compensation received . . . for their services does not exceed reasonable compensation within the meaning of ERISA section 408(b)(2) and Code section 4975(d)(2).” DOL explains that this change was made in order to harmonize the definitions of reasonable compensation across the Amended Exemption and the BIC Exemption.

In the preamble to the Amended Exemption, DOL clarified that the determination of whether compensation is reasonable depends on the facts and circumstances, and factors to consider include, among other things, (1) the market pricing of service(s) provided and the underlying, asset(s), (2) the scope of monitoring, and (3) the complexity of the product. Further, DOL stated that providers are not required to recommend the investment with the lowest cost, without regard to other relevant factors. In the preamble to the Amended Exemption, DOL notes that “spread” (e.g., the difference between the fixed return credited to the contractholder and the insurer’s general account investment experience) should not be treated as compensation for this purpose.

D. Insurance Commissions and Benefits for Statutory Employees

DOL narrowed the scope of permissible commissions paid to fiduciary advisers for insurance sales. A “commission” is now a defined term, meaning “a sales commission paid by the insurance company to the insurance agent or broker or pension consultant for the service of effecting the purchase of a Fixed Rate Annuity Contract or insurance contract, including renewal fees and trailers, but not revenue sharing payments, administrative fees, or marketing payments.”

On the positive side, DOL did extend relief for other types of adviser compensation. Some insurance agents may be eligible to qualify for employee benefits such as health care and retirement benefits if they meet certain production thresholds for sales of the sponsoring company’s products. Some commenters requested clarification that the receipt of these benefits would be covered by PTE 84-24.

The Amended Exemption clarifies that it provides relief for an insurance agent’s receipt of employee benefits in connection with the sale of annuities and insurance contracts. DOL further clarified that an agent’s receipt of health or pension benefitswould not violate the Impartial Conduct Standards “in and of itself,” so long as the payment of the benefits is not structured in a way to undermine the insurance agent’s ability to comply with the standards.

E. Disclosure Requirements

As noted above, the Pre-Amendment Exemption required the provision of certain disclosures (“Transaction Disclosures”) prior to the execution of a transaction. Additional disclosures were required if an additional purchase was made and three years

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had passed since the prior disclosure or if there were material changes to the information in the initial disclosure.

Under the Amended Exemption, an advice fiduciary must still provide a Transaction Disclosure in writing and in an easy to read and understand format prior to the execution of a transaction. With respect to recommendations to purchase annuities and insurance contracts, the Transaction Disclosure must include:

A disclosure of the insurance commission for the first year and for each of the succeeding renewal years that will be paid by the insurance company to the provider of advice (and, if applicable, a separate identification of any amount of the commission that will be paid to any other person as a gross dealer concession,override, or similar payment);

A statement of any charges, fees, discounts, penalties, or adjustments which may be imposed in connection with the purchase, holding, exchange, termination, or sale of the contract; and

If the provider of advice is an affiliate of the insurance company or the products it can recommend are limited by its relationship with an insurance company, a description of the nature of the affiliation, limitation, or relationship.

With respect to recommendations to purchase annuities and insurance products, as well as mutual fund securities, the commission must be expressed, to the extent feasible, as an absolute dollar figure, and if not feasible, as a percentage of gross annual premium payments, asset accumulation value, or contract value.

Also, the Amended Exemption updated the frequency of new Transaction Disclosures that must be provided in connection with additional purchases — the disclosures must now be provided every year, instead of every three years.

F. Impartial Conduct Standards

The Impartial Conduct Standards (e.g., duty to act in the best interest of the plan or IRA and the duty to avoid misleading statements) have been retained in the Amended Exemption in largely the same form as proposed. As with the BIC Exemption, the Impartial Conduct Standards of the Amended Exemption have been modified slightly to include a reference to ERISA’s “prudent expert” standard of care. The AmendedExemption provides that –

. . . a fiduciary acts in the “Best Interest” of the Plan or IRA when the fiduciary acts with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims, based on the investment objectives, risk tolerance, financial circumstances and needs of the Plan or IRA, without regard to the financial or other interests of the fiduciary, any affiliate or other party.

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G. Mutual Funds

Historically, the Pre-Amendment Exemption allowed an investment company’s principal underwriter (or an affiliate) to receive commissions in connection with a plan’s or IRA’s purchase of mutual fund shares. Consistent with the proposed amendment, the Amended Exemption excludes relief for such mutual fund sale to IRAs.

The Amended Exemption also retains the proposed amendment’s narrowdefinition of covered “mutual fund commissions.” Mutual fund commissions are nowdefined as a commission or sales load paid either by the plan or the investment company for the service of effecting or executing the purchase of investment company securities.Importantly, mutual fund commissions do not include a 12b-1 fee, revenue sharing payment, administrative fee, or a marketing fee. Thus, the Amended Exemption will not cover many forms of common compensation in the industry. The preamble to the Amended Exemption expressly refers principal underwriters advising IRAs towards use of the BIC Exemption.

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April 8, 2016

Fiduciary Rule – Principal Transactions in Certain Assets






This client alert provides an overview of the Principal Transactions Exemption. For an analytical summary of the Final Regulation, BIC Exemption, and other existing exemptions, please see our client alerts covering those subjects.


The Principal Transactions Exemption provides relief from the prohibited transaction rules for a purchase or sale of certain assets in principal transactions and riskless principal transactions between a plan (including a participant or beneficiary account within a participant-directed plan) or IRA and a Financial Institution (as defined in Part II.C.), as a result of an Adviser’s (as defined in Part II.C.) or Financial Institution’s advice. The assets a plan or IRA may purchase under the Principal Transactions Exemption are limited to certain Debt Securities(as defined in Part II.B.), unit investment trusts, and certificates of deposit, but a plan or IRA may sell any security or other investment property under the Principal Transactions Exemption. The Adviser and Financial Institution must acknowledge fiduciary status, agree to follow

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“Impartial Conduct Standards” as described below, and disclose information to the plan or IRA at the time of the covered transactions, annually, and upon request.

Below we describe the major changes to the Principal Transactions Exemption that were made since it was proposed and provide an overview of the Exemption in its final form.

II. Principal Transactions Exemption

A. Major Changes from Proposed Exemption

Covered Assets. The Principal Transactions Exemption no longer provides relief for principal transactions in Debt Securities only. Now, the Exemption also provides relief for a covered advice recipient’s purchase of unit investment trusts or certificates of deposit. Further, the Principal Transactions Exemption broadly permits sales of any“securities or other investment property.”

The Two-Quote Requirement. DOL has removed the requirement that the price of the covered security be at least as favorable to the plan or IRA as the contemporaneous price offered by two ready and willing counterparties that are not affiliates of the Financial Institution or Adviser. Some commented that this condition would not have been workable.

Streamlined Contract and Disclosure Requirements. As with the BIC Exemption, DOLloosened some of the written contract requirements and information that must be disclosed. For example, DOL eliminated the written contract requirement for planscovered by Title I of ERISA, provided for the amendment of existing contracts with non-Title I plan and IRA clients through a “negative consent” process, and removed the proposed Principal Transactions Exemption’s requirement that mark-ups and mark-downs be disclosed in connection with the principal transaction.

B. Covered Transactions and Relief Provided

The Principal Transactions Exemption would provide relief from the restrictions of sections 406(a)(1)(A) and (D), 406(b)(1) and (2), and Internal Revenue Code of 1986, as amended (“Code”) sections 4975(c)(1)(A), (D), and (E) for the following:

Purchases of “Debt Securities,” unit investment trusts, and certificates of deposit by “Retirement Investors” from Financial Institutions in principal transactions in exchange for mark-ups, mark-downs, or other payments to Advisers or Financial Institutions or their Affiliates (as defined in Part II.D.), as a result of the Adviser’s or Financial Institution’s advice.

o Covered Debt Securities include those defined in Rule 10b-10(d)(4) of theSecurities Exchange Act of 1934 that are: U.S. dollar-denominated, issued by a U.S. corporation and offered pursuant to registration statements under the Securities Act of 1933; U.S. agency Debt Securities as defined in FINRA rule

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6710(I) or its successor; “Asset Backed Securities” as defined in FINRA rule 6710(m) or its successor, guaranteed by an Agency as defined in FINRA rule 6710(k) or its successor, or a Government Sponsored Enterprise as defined in FINRA rule 6710(n) or its successor; or U.S. treasury securities as defined in FINRA rule 6710(p) or its successor. The Rule 10b-10(d)(4) definition is fairly broad and may include not only traditional debt but also, for instance, structured notes.

o DOL also stated that investment advice fiduciaries may apply for individual prohibited transaction exemptions that would permit them to sell additional categories of investments in principal transactions to a plan or IRA.

Sales of “securities or other investment property” from “Retirement Investors” to “Financial Institutions” in principal transactions.

In addition to principal transactions, the Principal Transactions Exemption also covers purchases and sales of the above covered securities in “riskless principal transactions,” which are defined as transactions where a Financial Institution purchases or sells assets to offset contemporaneous transactions with Retirement Investors. DOL noted in the preamble to the Principal Transactions Exemption that it intended to cover riskless principal transactions in the proposed exemption, but it was necessary to specify that riskless principal transactions are covered because they are functionally similar to agency transactions. References to “principal transactions” in this overview include “riskless principal transactions.”

C. Covered Providers

The Principal Transactions Exemption distinguishes between individuals who provide advice and the institutions they represent:

Advisers: Individual fiduciaries of plans and IRAs, solely by reason of providing investment advice, who are employees, independent contractors, agents, or registered representatives of “Financial Institutions” (defined below).

Financial Institutions: Registered investment advisers at the state or federal level; banks or similar institutions; and registered brokers or dealers that (i) employ Advisers and (ii) customarily purchase or sell Debt Securities for their own account in the ordinary course of business. This definition does not include insurance companies.

D. Covered Advice Recipient

Retirement Investors includes (i) a fiduciary of a non-participant directed plan, (ii) a participant or beneficiary of a plan who has the authority to direct the investment of his or her account, and (iii) the beneficial owner of an IRA acting on behalf of the IRA.

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E. Exclusions

The Principal Transactions Exemption is not available if:

The Adviser is a “discretionary” fiduciary.The plan is covered by Title I of ERISA, and either (i) the Adviser, Financial Institution, or an affiliate is the employer/plan sponsor; or (ii) the Adviser or Financial Institution is a named fiduciary or administrator of the plan or an affiliate thereof that was selected to provide investment advice to the plan by a fiduciary who is not “independent.”

For this purpose, “independent” means that the person (i) is not the Adviser, Financial Institution, or an affiliate thereof; (ii) does not receive compensation from the Adviser, Financial Institution, or an affiliate in excess of 2% of its annual revenues; and (iii) does not have a relationship with or interest in the Adviser, Financial Institution, or an affiliate that might affect the exercise of the person’s best judgment.

F. Conditions

Existence and Terms of Contract. For transactions with IRAs and non-Title I plans, there must be a written contract with the Financial Institution. The contract must be entered into before engaging in principal transactions, but the contract may be executed after the advice to enter into the principal transaction is given, so long as the contract covers the advice retroactively. The contract must contain the following terms:

o Affirmative statement that the Adviser and Financial Institution are “fiduciaries” with respect to investment recommendations regarding principal transactions.

o Agreement by the Adviser and Financial Institution to comply with the following“Impartial Conduct Standards”:

Provide investment advice that is, at the time of the recommendation, in the “best interest” of the IRAs or non-Title I plans;

Seek to obtain “best execution,” which may include compliance with FINRA rules 2121 and 5310, if the Financial Institution is a FINRA member; and

Provide statements regarding the covered securities, fees, material conflicts of interest, principal transactions, and other matters that are not materially misleading at the time they are made.

o Warranties by the Adviser and Financial Institution that:

The Financial Institution has adopted written policies and procedures designed to mitigate the impact of material conflicts of interest and ensure that Advisers adhere to the above-described standards of conduct;

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The Financial Institution has specifically identified material conflicts of interest and has adopted measures to prevent them from causing violations of the above-described standards of conduct;

The Financial Institution has adopted written policies and procedures to address how credit risk and liquidity assessments for covered Debt Securities will be made; and

Neither the Financial Institution or its affiliates uses quotas, appraisals, bonuses, etc., if doing so would encourage the Advisers to make recommendations regarding principal transactions that are not in the IRAs or non-Title I plan’s “best interest”.

The preamble to the Principal Transactions Exemption notes that if the Adviser or Financial Institution fails to comply with the warranties, the Principal Transactions Exemption will still be available, but IRAs and non-Title I plans will be able to sue the Adviser or Financial Institution for breach of contract.

o Disclosures regarding principal transactions, including the circumstances under which principal transactions will be used and the types of compensation the Adviser and Financial Institution would receive, and identification and disclosure of material conflicts of interest associated with principal transactions.

o For contracts executed after January 1, 2018, the IRA’s or non-Title I plan’saffirmative written consent. Financial Institutions may use negative consent with respect to existing clients.

o A statement noting that the IRA’s or non-Title I plan’s consent is terminable at will by the Retirement Investor at any time by written notice, without penalty.

o A statement that the IRA or non-Title I plan has the right to obtain, free of charge, (i) copies of the Financial Institution’s written description of its policies and procedures adopted in connection with the Principal Transactions Exemption, (ii)information about the securities involved in the principal transactions, including their price, credit quality, yield, and duration, and (iii) model contractual disclosures or model notice of contractual terms, which are reviewed for accuracy on a quarterly basis;

o A statement that the Financial Institution’s written description of the policies and procedures adopted by the Financial Institution in connection with the Principal Transactions Exemption are maintained on the Financial Institution’s website is required to maintain under the contract; and

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o A statement describing whether the Financial Institution or Adviser will monitor the IRA’s or non-Title I plan’s investments and provide alerts on recommended changes, and, if so, the frequency with which the monitoring will occur and why the IRA or non-Title I plan would be alerted.

Terms Prohibited in the Written Contract. The written contract must not contain exculpatory terms disclaiming or limiting the Adviser’s or Financial Institution’s liability for violating the terms of the contract or provisions by which the IRA or non-Title I planwaives or qualifies its right to bring or participate in class actions or representative actions in court in disputes with the Adviser or Financial Institution, although individual claims may be arbitrated.

ERISA Plans. Financial Institutions are not required to enter into enforceable contractswith plans covered under Title I of ERISA. However, the Financial Institution would still be required to (i) provide a written statement affirming its fiduciary status, (ii) adhere to the same Impartial Conduct Standards, (iii) adopt and enforce the same policies and procedures, (iv) provide the same disclosures, and (v) refrain from including the same prohibited contract terms in its general services contract with the plan, all as described above.

General Conditions on the Transactions

o If the plan or IRA is purchasing, as opposed to selling, the Debt Security must not be issued by the Financial Institution or an affiliate; must not be purchased in an underwriting in which the Financial Institution or an affiliate is the underwriter or a member of the underwriting syndicate; and must possess no greater than “moderate credit risk” and be sufficiently liquid to permit sale at/near carryingvalue within a reasonably short period of time. “Moderate credit risk” is not defined in the Principal Transactions Exemption. DOL states the Debt Securityshould have at least average credit-worthiness, and that the standard is similar to that of Rule 6a-5 under the Investment Company Act.

o The principal transaction must not be intended to evade compliance with ERISA or the Code or otherwise impact the value of the asset.

o Only cash purchase or sale transactions are permitted; in-kind transactions are prohibited.

Disclosure Requirements. The Principal Transactions Exemption requires Advisers and Financial Institutions to make several types of disclosures to Retirement Investors, including:

o Pre-transaction disclosures: Prior to a principal transaction or at the time of execution, the Adviser or Financial Institution must provide to the Retirement Investor, orally or in writing, an explanation of the capacity in which the Financial Institution may act with respect to the transaction.

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o Confirmations: The Financial Institution must provide written confirmations of the principal transactions, which may be satisfied by complying with Rule 10b-10under the Securities Exchange Act.

o Annual disclosures: Within 45 days of the end of the applicable year, the Adviser or Financial Institution must provide, in a single disclosure:

A list identifying each principal transaction engaged in during that year,and the date and price at which the Debt Security was purchased or sold;

A statement that the consent of the Retirement Investor (see above discussion under “Existence and Terms of Contract”) is terminable at will without penalty, upon written notice;

A statement that the Retirement Investor may obtain information about the securities that have been traded, free of charge; and

A statement that (i) the Financial Institution’s model contractual disclosures or notice of model contractual terms, which must be reviewed for accuracy on a quarterly basis, and (ii) written description of its policies and procedures adopted in connection with the Principal TransactionsExemption, are available free of charge and on the Financial Institution’swebsite.

o Upon-request disclosures: The Financial Institution must prepare a written description of its policies and procedures and make it available on its website, and additionally provide them to Retirement Investors, free of charge, upon request. The written description must summarize key terms of the policies and procedures as they relate to conflict-mitigation and incentive practices. In addition, as noted above, the Financial Institution must provide information about the securities involved in the principal transactions, and model contractual disclosures or model notice of contractual terms upon request.

o Inaccurate disclosures would not result in the loss of the Principal Transactions Exemption, if they are cured (i) within 7 days of discovery or reasonable discovery if the inaccurate statement is on the Financial Institution’s website, or(ii) within 30 days of discovery or reasonable discovery for all other inaccurate disclosures.

Recordkeeping Requirements. The Principal Transactions Exemption requires compliance with various record retention requirements, summarized as follows:

o For six years from the date of each principal transaction, records necessary to enable (i) DOL or IRS representatives, (ii) plan or IRA fiduciaries (or their employees or representatives), (iii) employers of participants and beneficiaries

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and employee organizations (or their employees or representatives), and (iv) planparticipants or beneficiaries or IRA owners to determine whether the conditions of the Principal Transactions Exemption have been satisfied.

o Such records must be generally reasonably available at their customary location for examination during normal business hours by the individuals identified above.

o There is a carve-out for trade-secrets/privileged and confidential information with respect to examinations by the individual identified above (other than DOL or Internal Revenue Service representatives), as well as disclosures that would be prohibited under federal banking law, 12 U.S.C. 484.

o If the Financial Institution refuses to disclose information claiming that it is exempt from disclosure, the Financial Institution must, within 30 days of the information request, notify the requestor of the reasons for such refusal and that the DOL may request such information.

o DOL also noted that failure to retain required documentation would only cause the loss of the Principal Transactions Exemption with respect to those specifictransactions for which documentation is missing.

G. Effective Date and Transition

All of the conditions of the Principal Transactions Exemption become applicable on January 1, 2018. Nonetheless, from April 10, 2017 to January 1, 2018, a transition period, during which limited conditions would be required, applies. To qualify for relief during the transitional exemption, the Adviser and Financial Institution would be required to comply with the Impartial Conduct Standards (as defined in Part II.E) and the Financial Institution would be required to provide a notice (electronically or by mail) to the Retirement Investor, at or before the time of execution of principal transactions, that:

Affirmatively states the Financial Institution and Adviser’s fiduciary status;

Sets forth the Impartial Conduct Standards and affirmatively states the Financial Institution and Adviser will comply with such standards; and

Identifies and discloses the circumstances in which principal transactions will be made and the material conflicts of interest associated with principal transactions.

The recordkeeping requirements described above would also apply.

III. Implications

DOL has made the Principal Transactions Exemption more useful than in its proposed form by broadening the categories of securities the Principal Transactions Exemption covers and by removing some burdensome requirements, such as obtaining contemporaneous quotes and

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disclosing mark-ups and mark-downs. Nonetheless, a Financial Institution is not permitted under the Principal Transactions Exemption to sell securities it issues, or those it distributes as a member of an underwriting syndicate.

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April 8, 2016

Fiduciary Rule – Final Prohibited Transaction Exemptions (New and Amended)






This client alert provides an overview of the amendments to the existing class exemptions and a summary of the new class exemptions. For a summary of the Final Regulation or a more in-depth analysis of the BIC Exemption, PTE 84-28, or the Principal Transactions Exemption,please see our alerts covering those subjects.

I. DOL’s Exemption Initiative

In the Final Regulation, DOL purported to update the definition of fiduciary “advice” to account for “the advent of 401(k) plans and IRAs, the dramatic increase in rollovers, and otherdevelopments that have transformed the retirement plan landscape” since the original regulation was issued. The Final Regulation greatly expands the circumstances in which a person or a firm offering investment services or products to an ERISA plan or IRA will be considered a fiduciary, thus making critical the availability of exemptive relief based on readily understand conditions.

The linchpin of DOL’s initiative to “to mitigate the effects of harmful conflicts of interest associated with fiduciary investment advice” is the new BIC Exemption. In conjunction with the

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issuance of the BIC Exemption, DOL has also adopted a number of changes to the scope ofexisting PTEs, including completely revoking the relief provided for some IRA transactions.DOL believes that the conditions of the BIC Exemption “better protect” the interests of plans and IRAs in particular than the existing exemptions.

DOL has approved final amendments to the following existing class exemptions:

PTE 75-1, relating to certain principal and mutual fund transactions involving broker-dealers, reporting dealers and banks;

PTE 77-4, relating to the purchase or sale of shares of proprietary mutual funds;

PTE 84-24, relating to certain transactions involving insurance agents and brokers, pension consultants, insurance companies, investment companies and their principal underwriters;

PTE 86-128, relating to a fiduciary’s use of affiliated brokerage;

PTE 80-83, relating to the use of proceeds from the sale of securities to reduce or retire debt of the issuer; and

PTE 83-1, relating to investments in mortgage pool investment trusts.

Many of the key changes in the existing exemptions have the effect, and indeed, were intended to, either foreclose specific types of transactions or drive them, particularly for IRAs, to the BIC Exemption as the exclusive source of relief. For example:

Recommendations of variable and fixed indexed annuities to plans and IRAs are nolonger covered by PTE 84-24, nor will mutual fund recommendations to IRAs be covered by that exemption. Fiduciary advisers must rely on the BIC Exemption for these recommendations.

DOL revoked the section 406(b) relief previously available under Part II of PTE 75-1 for the purchase of mutual fund shares by a plan or IRA where the fiduciary with respect to the assets involved in the transaction is not affiliated with the mutual fund or its principal underwriter.

PTE 86-128 is no longer available to an IRA fiduciary for receipt of commissions in connection with mutual fund purchases. Moreover, only a discretionary fiduciary of an IRA may rely on this exemption to cover commissions for effecting securities transactions and these transactions will now be subject to the full scope of that exemption’s considerable conditions. While DOL did add a new mutual fund relief to PTE 86-128 (similar to that revoked in PTE 75-1), it is not available to IRAs.

The scope of the “commissions” covered by PTE 86-128 and PTE 84-24 has been significantly narrowed, precluding the receipt of mutual fund revenue sharing, shareholder

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servicing and similar insurance-related fees. This effectively eliminates relief for mutual fund advisory programs under these exemptions. Relief for the receipt of these types of less traditional compensation is available under the BIC Exemption.

The “Impartial Conduct Standards” condition found in the BIC Exemption has also been added to PTEs 84-24, 75-1 (Parts III, IV), 86-128, 77-4, 80-83, 83-1 as a condition of relief, but without the requirement that these standards be incorporated into a binding contract. Notably, these standards would not preclude a fiduciary from having a conflict of interest but would require that the conflict and fees be accurately disclosed and that the fiduciary act in the “best interest” of its client “without regard the financial or other interests of the fiduciary or any other party...”

An additional complement to the expanded fiduciary advice definition is the Principal Transactions Exemption permitting fiduciary “Financial Institutions” and “Advisers” to recommend that a plan or IRA purchase certain debt securities, unit investment trusts, and certificates of deposit from the Financial Institution. The exemption would also allow the Financial Institution or Adviser to recommend the sale by the plan or IRA to the Financial Institution of any security or investment property. The exemption is subject to significant conditions.

In addition to these changes related to the broader scope of the investment advice definition, DOL has also adopted the following modifications to existing class exemptions:

The relief for extensions of credit by party-in-interest brokers to plan customers in PTE 75-1, Part V was expanded to permit a fiduciary broker to provide credit and be compensated for it if the loan was required to avoid a failed trade.

The relief available in PTE 86-128 for affiliated brokerage has been expanded in two ways: (1) it is now available to cover commissions paid not only to the fiduciary and affiliated broker-dealers but to “Related Entities,” defined as a person in whom the fiduciary may have an interest that could affect its best judgment, and (2) discretionary trustees are permitted to use the “recapture of profits” provision as an alternative to the section III(h) and (i) conditions.

DOL revoked the relief provided in Parts I(b) and I(c) of PTE 75-1 for the furnishing of services by broker-dealers, noting that it is duplicative of the statutory exemption under section 408(b)(2).

Importantly, as part of this package, DOL has not imposed new disclosure or other conditions on existing statutory exemptions, such as ERISA section 408(b)(4) (bank deposits) or 408(b)(8) (collective trusts and pooled separate accounts). These exemptions also provide relief for the receipt of compensation in connection with the sale of proprietary investments. Nor has it modified key strategies for avoiding a prohibited transaction, such as the “SunAmerica” advisory opinion or fee leveling.

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II. Summaries of the Class Exemptions

Groom has prepared outlines summarizing the new BIC Exemption, the “Pre-Existing Transaction Exemption” (a supplemental exemption under the BIC Exemption), the “Insurance and Annuity Contract Exemption” (a supplemental exemption under the BIC Exemption), the new Principal Transactions Exemption, and the amended PTE 84-24. We have also prepared a chart summarizing the final amendments to the existing prohibited transaction class exemptions.

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t”st

anda

rd is

bas

ed o

n lo

ngst

andi

ng

conc

epts

der

ived

from

ER

ISA

and

the

law

of t

rust

s.

It ef

fect

ivel

y an

d in

tent

iona

lly im

pose

s ER

ISA

-like

pr

uden

ce a

nd lo

yalty

stan

dard

s on

IRA

fidu

ciar

ies a

s a

cond

ition

of r

elie

f. H

eret

ofor

e, IR

A fi

duci

arie

s hav

e no

t bee

n su

bjec

t to

such

stan

dard

, whi

ch m

akes

this

pa

rt of

the

amen

dmen

t ver

y si

gnifi

cant

.

DO

L cl

arifi

ed in

the

final

amen

dmen

ttha

t the

“B

est

Inte

rest

” st

anda

rd a

pplie

s “at

the

time

of th

e tra

nsac

tion.

”In

the

prea

mbl

e to

the

final

exe

mpt

ion,

DO

L co

nfirm

ed th

at “

the

Bes

t Int

eres

t sta

ndar

d is

not

a

hind

sigh

t sta

ndar

d, b

ut ra

ther

is b

ased

on

the

fact

s as

they

exi

sted

at t

he ti

me

of th

e tra

nsac

tion,

” an

d th

at

the

stan

dard

“do

es n

ot m

easu

re c

ompl

ianc

e by

re

fere

nce

to h

ow in

vest

men

ts su

bseq

uent

ly p

erfo

rmed

or

turn

fidu

ciar

ies i

nto

guar

anto

rs o

f inv

estm

ent

perf

orm

ance

...”

In th

e fin

alam

endm

ent,

DO

L re

vise

d th

e de

finiti

on o

f

1-573


Apr

il 8,

201

6

2016

AM

EN

DM

ENT

ST

OE

XIS

TIN

GPR

OH

IBIT

ED

TR

AN

SAC

TIO

NE

XE

MPT

ION

S

2G

LG-2

2631

3.11

of in

tere

st”

exis

ts w

hen

a fid

ucia

ry h

as a

fina

ncia

l int

eres

t tha

t a

reas

onab

le p

erso

n w

ould

con

clud

e co

uld

affe

ct th

e ex

erci

se o

f its

bes

t ju

dgm

ent a

s a fi

duci

ary

in re

nder

ing

advi

ce to

the

plan

or I

RA

ow

ner.

For p

urpo

seso

f the

Impa

rtial

Con

duct

Sta

ndar

ds, “

IRA

”in

clud

es a

ny

acco

unto

r ann

uity

desc

ribed

inIR

C §

4975

(e)(

1)(B

)-(F

),in

clud

ing

a he

alth

sa

ving

s acc

ount

, Arc

her M

SA o

r Cov

erde

ll sa

ving

s acc

ount

.

“Bes

t Int

eres

t” to

mor

e cl

osel

y tra

ck th

e du

ty o

f pr

uden

ce p

rovi

sion

in E

RIS

A §

404.

How

ever

, DO

L re

tain

edth

eco

ntro

vers

ial“

with

out r

egar

d to

” la

ngua

ge

and

reje

cted

requ

ests

to in

corp

orat

e FI

NR

A’s

“s

uita

bilit

y” st

anda

rd in

to th

e de

finiti

on o

f “B

est

Inte

rest

.” D

OL

did

conf

irmin

the

prea

mbl

e to

the

final

exe

mpt

ion

that

it in

tend

s tha

t “w

ithou

t reg

ard

to”

be g

iven

the

sam

e m

eani

ng a

s the

lang

uage

in E

RIS

A

§404

that

requ

ires a

fidu

ciar

y to

act

“so

lely

in th

e in

tere

st o

f” p

artic

ipan

ts a

nd b

enef

icia

ries.

“Rea

sona

ble

Com

pens

atio

n”

DO

L cl

arifi

ed in

the

final

am

endm

ent t

hat t

he

“rea

sona

ble

com

pens

atio

n” st

anda

rd is

the

sam

e as

the

stan

dard

set f

orth

in E

RIS

A §

408(

b)(2

) and

IRC

§4

975(

d)(2

) and

the

regu

latio

ns th

ereu

nder

. In

so

doin

g, D

OL

omitt

ed la

ngua

ge fr

om th

e pr

opos

ed

amen

dmen

tsta

ting

that

such

com

pens

atio

n m

ust b

e re

ason

able

“in

rela

tion

to th

e to

tal s

ervi

ces t

he

fiduc

iary

pro

vide

s to

the

plan

or I

RA

.”

“Mis

lead

ing

Stat

emen

ts”

In re

spon

se to

com

men

ts, D

OL

incl

uded

in th

efin

al

amen

dmen

tlan

guag

e w

hich

cla

rifie

d th

at:

oO

nly

a “m

ater

ially

” m

isle

adin

g st

atem

ent

viol

ated

the

Impa

rtial

Con

duct

Sta

ndar

ds.

oW

heth

er a

stat

emen

t is m

ater

ially

mis

lead

ing

is

to b

e de

term

ined

as o

f the

tim

e th

e st

atem

ent i

s m

ade.

1-574


Apr

il 8,

201

6

2016

AM

EN

DM

ENT

ST

OE

XIS

TIN

GPR

OH

IBIT

ED

TR

AN

SAC

TIO

NE

XE

MPT

ION

S

3G

LG-2

2631

3.11

oA

con

flict

of i

nter

est w

ould

be

cons

ider

ed“m

ater

ial”

onl

y if

a “r

easo

nabl

e pe

rson

” w

ould

co

nclu

de th

at th

e co

nflic

t cou

ld a

ffec

t the

ex

erci

se o

f a fi

duci

ary’

s bes

t jud

gmen

t.

DO

Lal

sode

lete

d la

ngua

ge in

clud

ed in

the

prop

osed

am

endm

ent t

hat s

tate

d th

at a

“fa

ilure

to d

iscl

ose

a m

ater

ial c

onfli

ct o

f int

eres

t...is

dee

med

to b

e a

mis

lead

ing

stat

emen

t.”

PTE

75-

1 Pa

rt II

Part

II(1)

:§40

6(a)

relie

f for

pr

inci

pal t

rans

actio

ns w

ith

brok

er-d

eale

rs o

rban

ks.

Part

II(2)

:§40

6(b)

relie

f for

the

purc

hase

of m

utua

l fun

d sh

ares

if

the

fiduc

iary

is n

ot a

ffili

ated

with

th

e m

utua

l fun

dor

its

unde

rwrit

er.

(Pla

ns a

nd IR

As)

Rev

okes

Par

t II(2

).

Rev

ises

the

reco

rdke

epin

g pr

ovis

ions

of P

art I

I to

shift

the

resp

onsi

bilit

y fo

r m

aint

aini

ng re

cord

s of c

over

ed tr

ansa

ctio

ns fr

om th

e Pl

an o

r IR

A to

the

brok

er-d

eale

r, re

porti

ng d

eale

r, or

ban

ken

gagi

ng in

the

trans

actio

ns.

The

amen

dmen

ts a

lso

expl

ain

the

cons

eque

nces

of f

ailu

re to

mai

ntai

n or

pro

vide

su

ch re

cord

s for

exa

min

atio

n, id

entif

y in

divi

dual

s who

hav

e a

right

to e

xam

ine

such

reco

rds,

and

impo

se c

ondi

tions

on

such

exa

min

atio

ns.

Am

ende

d:81

FR

211

81(A

pril

8, 2

016)

§406

(b) r

elie

f for

the

rece

ipt o

f com

mis

sion

s in

conn

ectio

n w

ith th

e pu

rcha

se o

f mut

ual f

und

shar

es is

now

pr

ovid

ed in

sect

ion

I(b) o

f PTE

86-

128.

That

prov

isio

n,

how

ever

, doe

s not

app

ly to

tran

sact

ions

invo

lvin

g IR

A

asse

ts.

For I

RA

tran

sact

ions

,§40

6(b)

relie

f is p

rovi

ded

unde

r the

B

ICEx

empt

ion,

but

such

relie

f is a

vaila

ble

only

for

advi

ce fi

duci

arie

s.

PTE

86-

128:

§406

(b) r

elie

f for

a -

Afid

ucia

ryus

ing

its

auth

ority

to c

ause

a p

lan

to

pay

a fe

eto

itse

lf or

an

Secu

ritie

s Tra

nsac

tions

Exe

mpt

ion

(sec

tion

I(a))

Spec

ific

chan

ges a

pplic

able

to IR

As:

oR

evok

es re

lief f

or tr

ansa

ctio

ns in

volv

ing

an IR

A w

here

the

Am

ende

d:81

FR

2118

1(A

pril

8, 2

016)

Secu

ritie

s Tra

nsac

tions

Exe

mpt

ion

1-575


Apr

il 8,

201

6

2016

AM

EN

DM

ENT

ST

OE

XIS

TIN

GPR

OH

IBIT

ED

TR

AN

SAC

TIO

NE

XE

MPT

ION

S

4G

LG-2

2631

3.11

affil

iate

d br

oker

-dea

lerf

or

effe

ctin

g or

exe

cutin

g se

curit

ies t

rans

actio

ns; a

ndA

fiduc

iary

actin

g as

an

agen

t in

an a

genc

y cr

oss

trans

actio

n an

d re

ceiv

ing

a co

mm

issi

on fr

om o

ne o

r m

ore

of th

e pa

rties

.

(Pla

ns a

nd IR

As,

but I

RA

con

ditio

nsar

e lim

ited)

fiduc

iary

eng

agin

g in

the

trans

actio

n is

an

advi

ce fi

duci

ary,

th

ereb

y lim

iting

relie

f to

IRA

fidu

ciar

ies w

ho h

ave

disc

retio

nary

aut

horit

y.o

Exte

nds c

ondi

tions

cur

rent

ly a

pplic

able

onl

y to

tran

sact

ions

in

volv

ing

Plan

s (e.

g., w

ritte

n au

thor

izat

ion,

dis

clos

ure

and

repo

rting

) to

trans

actio

ns in

volv

ing

IRA

s.W

ritte

n au

thor

izat

ion

requ

irem

entm

ay b

e sa

tisfie

d w

ith re

spec

t to

an

exis

ting

IRA

cus

tom

erth

roug

h a

“neg

ativ

e co

nsen

t” p

roce

ss.

o“I

RA

” de

fined

asa

ny a

ccou

nt o

r ann

uity

des

crib

ed in

IRC

§4

975(

e)(1

)(B

)-(F

), in

clud

ing

a he

alth

savi

ngs a

ccou

nt, A

rche

r M

SA o

r Cov

erde

ll sa

ving

s acc

ount

.A

dds n

ew c

ondi

tion

–if

the

fiduc

iary

is a

n ad

vice

or d

iscr

etio

nary

fid

ucia

ry w

ith re

spec

t to

the

asse

ts in

volv

ed in

the

trans

actio

n, it

mus

t sa

tisfy

the

Impa

rtial

Con

duct

Sta

ndar

ds.

Add

s a n

ew d

efin

ition

–“C

omm

issi

on”

–th

at li

mits

the

type

s of f

ees

that

may

bere

ceiv

edun

der t

he P

TEto

bro

kera

ge c

omm

issi

ons a

nd

sale

s loa

ds.

All

othe

r pay

men

ts, i

nclu

ding

12b-

1 fe

es,r

even

ue sh

arin

g,

adm

inis

trativ

ean

dm

arke

ting

fees

, are

exc

lude

d fr

om th

e de

finiti

on.

Expa

nds r

elie

f for

tran

sact

ions

in w

hich

Com

mis

sion

sare

pai

d to

“R

elat

ed E

ntiti

es”

as w

ell a

s the

fidu

ciar

y or

its a

ffili

ate.

A “

Rel

ated

En

tity”

is d

efin

ed a

s a p

erso

n in

who

m th

e fid

ucia

rym

ay h

ave

an

inte

rest

that

cou

ld a

ffec

t its

bes

t jud

gmen

t.Pe

rmits

dis

cret

iona

ry tr

uste

es to

use

the

“rec

aptu

re o

f pro

fits”

pr

ovis

ion

as a

n al

tern

ativ

e to

the

sect

ion

III(

h) a

nd (i

)con

ditio

ns.

Add

s new

reco

rdke

epin

g re

quire

men

ts fo

r the

fidu

ciar

y.Th

e am

endm

ents

als

o ex

plai

n th

e co

nseq

uenc

es o

f fai

lure

to m

aint

ain

or

prov

ide

such

reco

rds f

or e

xam

inat

ion,

iden

tify

indi

vidu

als w

ho h

ave

a rig

ht to

exa

min

e su

ch re

cord

s, an

d im

pose

con

ditio

ns o

n su

ch

exam

inat

ions

.

The

IRA

-rel

ated

cha

nges

are

sign

ifica

nt in

that

(1)

IRA

adv

ice

fiduc

iarie

s mus

t now

rely

on

the

BIC

Ex

empt

ion

for t

he re

ceip

t of c

omm

issi

ons f

or

exec

utin

g se

curit

ies t

rans

actio

ns a

nd (2

) the

full

rang

e of

con

ditio

ns w

ill b

e im

pose

d on

dis

cret

iona

ry

fiduc

iarie

sof I

RA

s.M

any

finan

cial

inst

itutio

ns fi

nd

the

cond

ition

s of t

he P

TE to

be

chal

leng

ing

in th

e ca

se

of P

lans

and

may

find

them

eve

n m

ore

soin

the

IRA

mar

ket.

In th

e pr

eam

ble

to th

e fin

al a

men

dmen

t, th

e D

OL

note

d th

at a

lthou

gh a

dvic

e fid

ucia

ries t

o Pl

ans m

ay

cont

inue

to re

ly o

n th

e ex

empt

ion,

PTE

86-

128

“will

no

t pro

vide

relie

f for

a re

com

men

ded

rollo

ver f

rom

an

ERIS

A p

lan

to a

n IR

A, w

here

the

resu

lting

co

mpe

nsat

ion

is a

Com

mis

sion

on

the

IRA

in

vest

men

ts.”

The

BIC

Exe

mpt

ion

shou

ld b

e av

aila

ble

for t

hese

reco

mm

enda

tions

.

The

new

and

mor

e na

rrow

def

initi

on o

f “C

omm

issi

on”

mea

ns th

at th

is e

xem

ptio

n is

cle

arly

no

long

er

avai

labl

e fo

r the

rece

ipt o

f rev

enue

shar

ing

in

conn

ectio

n w

ith m

utua

l fun

dre

com

men

datio

ns o

r pu

rcha

ses b

y Pl

ans o

r IR

As.

Mut

ual F

und

Tran

sact

ions

Exe

mpt

ion

The

new

exe

mpt

ion

incl

udes

mos

t of t

he

cond

ition

s fro

mth

e no

w-r

evok

edPT

E 75

-1, P

art

II(2)

as w

ell a

s mos

t of t

he c

ondi

tions

impo

sed

on

trans

actio

ns c

over

ed b

y se

ctio

n 1(

a) o

fPTE

86-

1-576


Apr

il 8,

201

6

2016

AM

EN

DM

ENT

ST

OE

XIS

TIN

GPR

OH

IBIT

ED

TR

AN

SAC

TIO

NE

XE

MPT

ION

S

5G

LG-2

2631

3.11

New

Mut

ual F

und

Tran

sact

ions

Exe

mpt

ion

(sec

tion

I(b))

Prov

ides

§40

6(a)

(1)(

A),

406(

a)(1

)(D

)and

406

(b)r

elie

f for

afid

ucia

ry

usin

g its

aut

horit

y to

cau

se a

Pla

n to

pur

chas

e of

mut

ual f

und

shar

es

from

the

fiduc

iary

, and

fort

he re

ceip

t ofa

Com

mis

sion

by

the

fiduc

iary

, act

ing

in it

s cap

acity

as a

bro

ker-

deal

er,i

f -o

The

shar

es a

re p

urch

ased

at N

AV

plu

s a c

omm

issi

on, i

n ac

cord

ance

with

app

licab

le se

curit

iesl

awsa

nd re

gula

tions

.o

The

fiduc

iary

satis

fies t

he Im

parti

al C

ondu

ct S

tand

ards

.

In a

dditi

on, t

he fo

llow

ing

cond

ition

s mus

t be

satis

fied:

oTh

e fid

ucia

ry is

a re

gist

ered

bro

ker-

deal

er th

at c

usto

mar

ily

purc

hase

s and

sells

secu

ritie

s for

its o

wn

acco

unt i

n th

e or

dina

ry c

ours

e of

its b

usin

ess.

oTh

e fid

ucia

ry is

not

a p

rinci

pal u

nder

writ

er fo

r, or

aff

iliat

ed

with

, the

mut

ual f

und.

oTh

e fid

ucia

ry is

not

aff

iliat

ed w

ith th

e sp

onso

r, pl

an

adm

inis

tratio

n or

(unl

ess o

ther

exc

eptio

ns a

re m

et)

disc

retio

nary

trus

tee

oTh

e tra

nsac

tions

are

not

exc

essi

ve (i

n am

ount

or f

requ

ency

) and

ar

e en

tere

d in

to o

n ar

m’s

-leng

th te

rms.

oA

dvan

ce a

utho

rizat

ion,

dis

clos

ure,

repo

rting

and

reco

rdke

epin

g re

quire

men

ts a

re m

et.

Writ

ten

auth

oriz

atio

n re

quire

men

t may

be

satis

fied

with

resp

ect t

o an

exi

stin

g no

n-ER

ISA

Pla

n cu

stom

er (e

.g.,

a K

eogh

pla

n) th

roug

h a

“neg

ativ

e co

nsen

t”

proc

ess.

The

exem

ptio

n is

not

ava

ilabl

e fo

r tra

nsac

tions

invo

lvin

g IR

As.

128.

PTE

75-1

, Par

t II(2

) was

wid

ely

unde

rsto

odby

so

me

as a

llow

ing

a fid

ucia

ry to

rece

ive

indi

rect

co

mpe

nsat

ion

(12b

-1 fe

es, r

even

ue sh

arin

g,

shar

ehol

ders

ervi

cing

fees

, etc

.)in

con

nect

ion

with

un

affil

iate

d m

utua

l fun

d tra

nsac

tions

. Th

ena

rrow

de

finiti

on o

f “C

omm

issi

on”

unde

r the

new

ex

empt

ion

will

hav

e a

maj

or im

pact

, as i

t will

ef

fect

ivel

y pr

even

t fid

ucia

ries r

elyi

ng o

n th

e ne

w

exem

ptio

nfr

om re

ceiv

ing

any

com

pens

atio

n w

ith

resp

ect t

o su

ch tr

ansa

ctio

nsot

her t

han

brok

erag

e co

mm

issi

ons a

ndsa

les l

oads

.

In th

e fin

al a

men

dmen

t, D

OL

incl

uded

lang

uage

lim

iting

the

mut

ual f

und

exem

ptio

n to

tran

sact

ions

in

volv

ing

Plan

s.

Alth

ough

the

BIC

Exe

mpt

ion

perm

its IR

A a

dvic

e fid

ucia

ries t

o re

ceiv

e co

mm

issi

ons a

nd o

ther

co

mpe

nsat

ion

from

third

par

ties i

n co

nnec

tion

with

in

vest

men

ts in

shar

es o

f una

ffili

ated

mut

ual f

unds

, no

com

para

ble

relie

f is a

vaila

ble

for d

iscr

etio

nary

fid

ucia

ries.

The

final

am

endm

ent e

limin

ated

a re

fere

nce

in th

e pr

opos

ed a

men

dmen

t to

the

fiduc

iary

act

ing

as

“prin

cipa

l”bu

t ret

aine

d th

e re

quire

men

t tha

t the

m

utua

l fun

d sh

ares

be

purc

hase

d fr

om th

e fid

ucia

ry.

DO

L no

ted

that

this

cha

nge

was

mad

e in

resp

onse

to c

omm

ents

that

“ris

kles

s prin

cipa

l”

1-577


Apr

il 8,

201

6

2016

AM

EN

DM

ENT

ST

OE

XIS

TIN

GPR

OH

IBIT

ED

TR

AN

SAC

TIO

NE

XE

MPT

ION

S

6G

LG-2

2631

3.11

trans

actio

ns m

ay b

e do

cum

ente

d as

age

ncy

trade

s.

Alth

ough

age

ncy

trade

s wou

ld b

eco

vere

d by

se

ctio

n I(a

) of P

TE 8

6-12

8, D

OL

note

d th

at

Sect

ion

I(b) p

rovi

ded

broa

der r

elie

f in

that

itco

vere

d th

e re

ceip

t of c

omm

issi

ons f

rom

bot

h th

e Pl

an a

nd th

e m

utua

l fun

d.

PTE

84-

24:

§406

(a)(

1)(A

)-(D

) and

40

6(b)

rel

ief f

or–

The

rece

ipt o

f com

mis

sion

s by

an a

gent

, bro

ker o

r pen

sion

co

nsul

tant

in c

onne

ctio

n w

ith th

e pu

rcha

se o

f an

insu

ranc

eor

an

nuity

cont

ract

;Th

e re

ceip

t of c

omm

issi

ons b

y a

prin

cipa

l und

erw

riter

in

conn

ectio

n w

ith th

epu

rcha

se o

f m

utua

l fun

dsh

ares

;Th

e ef

fect

ing

by a

n in

sura

nce

agen

t or b

roke

r, pe

nsio

n co

nsul

tant

or i

nves

tmen

t co

mpa

ny p

rinci

pal u

nder

writ

er

of a

tran

sact

ion

for t

he p

urch

ase,

w

ith p

lan

asse

ts, o

f an

insu

ranc

e or

ann

uity

cont

ract

or m

utua

l fu

nd sh

ares

; and

The

purc

hase

of a

n in

sura

nce

or

annu

ity c

ontra

ct.

Cov

ered

Tra

nsac

tions

DO

L re

voke

dth

e re

lief p

revi

ousl

y pr

ovid

ed fo

r -o

The

rece

ipt o

f com

mis

sion

s in

conn

ectio

n th

e pu

rcha

se o

f an

nuiti

esot

her t

han

“Fix

ed R

ate

Ann

uity

Con

tract

s”(i.

e.,

varia

ble

annu

ities

and

inde

xed

annu

ities

)with

ass

ets o

f bot

h Pl

ans a

nd IR

As.

(See

DO

L’s A

ppen

dix

desc

ribin

g th

ese

annu

ities

.)o

The

purc

hase

of m

utua

l fun

d sh

ares

with

ass

ets o

f an

IRA

,in

clud

ing

the

rece

ipto

f rel

ated

com

mis

sion

s.Th

eref

ore,

the

PTE

as a

men

ded

now

cov

ers,

incl

udin

g in

the

cont

ext o

f a

rollo

ver o

r dis

tribu

tion,

onl

y -

oTh

e re

ceip

t of “

Insu

ranc

e C

omm

issi

ons”

in c

onne

ctio

n w

ith th

e pu

rcha

se o

f a F

ixed

Rat

e A

nnui

ty C

ontra

ct w

ith a

sset

s of a

nPl

an o

r IR

A.

oTh

e re

ceip

t of “

Mut

ual F

und

Com

mis

sion

s” in

con

nect

ion

with

th

epu

rcha

se o

f mut

ual f

und

shar

es w

ith a

sset

s of a

Pla

n.

oTh

e ef

fect

ing

of a

tran

sact

ion

for t

he p

urch

ase

of F

ixed

Rat

e A

nnui

ty C

ontra

ctso

r oth

er in

sura

nce

cont

ract

swith

ass

ets o

f aPl

an o

r IR

A, o

r of m

utua

l fun

d sh

ares

with

ass

ets o

f a P

lan.

oTh

e pu

rcha

se o

f Fix

ed R

ate

Ann

uity

Con

tract

s and

oth

er

insu

ranc

e co

ntra

ctsw

ith a

sset

s of a

Pla

n or

IRA

.“F

ixed

Rat

e A

nnui

ty C

ontra

cts”

gen

eral

ly in

clud

e im

med

iate

ann

uity

Am

ende

d:81

FR

211

47(A

pril

8, 2

016)

As a

men

ded,

PTE

84-

24 is

inte

nded

to p

rovi

de “

a m

ore

stre

amlin

ed e

xem

ptio

n fo

r les

s com

plex

ann

uity

pro

duct

s th

at p

rovi

de g

uara

ntee

d lif

etim

e in

com

e.”

Acc

ordi

ng to

D

OL,

the

BIC

Exem

ptio

nis

bet

ter s

uite

d fo

r mor

e co

mpl

ex a

nd le

ss p

redi

ctab

le v

aria

ble

annu

ities

(and

for

sale

s of m

utua

l fun

d sh

ares

to IR

As)

.

Maj

or C

hang

es B

etw

een

the

Prop

osed

and

Fin

al

Am

endm

ent

Rev

oked

exe

mpt

ion

for v

aria

ble

annu

ity sa

les t

o Pl

ansa

nd IR

As

Exte

nded

relie

f to

rollo

ver c

onte

xtSi

mpl

ified

“re

ason

able

com

pens

atio

n” c

ondi

tion

Add

ed re

lief f

or in

sure

r’s r

ecei

pt o

f con

side

ratio

nPe

rmits

fidu

ciar

y ad

vise

r to

be re

late

d to

IRA

ow

ner

Req

uire

s tha

t the

dis

clos

ure

desc

ribe

com

mis

sion

sin

dol

lars

,if f

easi

ble

Req

uire

s tha

t ins

uran

ce d

iscl

osur

es b

e re

peat

ed

ever

y ye

ar (r

athe

r tha

n ev

ery

3 ye

ars)

1-578


Apr

il 8,

201

6

2016

AM

EN

DM

ENT

ST

OE

XIS

TIN

GPR

OH

IBIT

ED

TR

AN

SAC

TIO

NE

XE

MPT

ION

S

7G

LG-2

2631

3.11

(Pla

ns a

nd IR

As)

cont

ract

sand

defe

rred

ann

uity

cont

ract

s iss

ued

by a

n in

sura

nce

com

pany

the

bene

fits o

f whi

ch d

o no

t var

y, in

who

le o

r in

part,

bas

ed

on th

e in

vest

men

t exp

erie

nce

of a

sepa

rate

acc

ount

or a

ccou

nts

mai

ntai

ned

by th

e in

sura

nce

com

pany

or t

he in

vest

men

t exp

erie

nce

of

an in

dex

or in

vest

men

t mod

el.

“IR

A”

incl

udes

any

acco

unto

r ann

uity

desc

ribed

inIR

C

§497

5(e)

(1)(

B)-

(F),

incl

udin

g a

heal

th sa

ving

s acc

ount

, Arc

her M

SA o

r C

over

dell

savi

ngs a

ccou

nt.

Exem

pt P

aym

ents

DO

L ad

ded

new

def

initi

ons -

-“In

sura

nce

Com

mis

sion

” an

d “M

utua

l Fu

nd C

omm

issi

on”

–th

at li

mit

the

type

s of p

aym

ents

age

nts,

brok

ers,

pens

ion

cons

ulta

nts a

nd p

rinci

pal u

nder

writ

ers c

an re

ceiv

eun

der t

he

PTE.

Thes

e te

rms a

re d

efin

ed n

arro

wly

and

do

not i

nclu

de re

venu

e sh

arin

g,

adm

inis

trativ

e or

mar

ketin

g fe

es (e

ven,

app

aren

tly, t

hose

rece

ived

by

insu

rers

rath

er th

an a

dvis

ers)

.o

“Ins

uran

ce C

omm

issi

on”

does

incl

ude

“rel

ated

em

ploy

ee

bene

fits”

(but

not

sala

ries,

bonu

ses o

f em

ploy

ees)

and

“gr

oss

deal

er c

once

ssio

ns”

and

“ove

rrid

es.”

Com

mis

sion

smay

be

paid

indi

rect

ly b

y in

sure

rs, e

.g.,

thro

ugh

third

pa

rty m

arke

ting

orga

niza

tions

.R

elie

f has

bee

n ex

plic

itly

prov

ided

for a

n in

sure

r’sr

ecei

pt o

f co

nsid

erat

ion/

com

pens

atio

nin

con

nect

ion

with

the

sale

of a

Fixe

d R

ate

Ann

uity

Con

tract

or o

ther

insu

ranc

e co

ntra

ct.

New

“Im

parti

al C

ondu

ct S

tand

ards

”C

ondi

tion

Rec

omm

enda

tions

by a

gent

s, br

oker

s, pe

nsio

n co

nsul

tant

s, in

sure

rsan

d pr

inci

pal u

nder

writ

ers t

hat a

re a

dvic

e fid

ucia

ries m

ust s

atis

fy th

e

Perm

its c

over

ed “

Insu

ranc

e C

omm

issi

on”

to

incl

ude

paym

ents

from

par

ties o

ther

than

insu

rer

Add

ition

al C

omm

ents

Rel

ief f

or “

effe

ctin

g” p

urch

ases

:DO

L ap

pear

s to

narr

owly

inte

rpre

t the

exi

stin

g (a

nd re

tain

ed)

exem

ptio

n fo

r “ef

fect

ing”

purc

hase

s of i

nsur

ance

co

ntra

cts a

ndm

utua

lfun

dsh

ares

to c

over

onl

y th

e re

late

d pr

ovis

ion

of se

rvic

es b

y a

party

in in

tere

st.

Prop

rieta

ry p

rodu

cts:

In th

e pr

eam

ble,

DO

L co

nfirm

ed th

at, n

otw

ithst

andi

ng th

e Im

parti

al

Con

duct

Sta

ndar

ds, t

his P

TE is

ava

ilabl

e fo

r the

sa

le o

f pro

prie

tary

pro

duct

s and

the

rece

ipto

f re

late

d co

mm

issi

ons.

Rea

sona

ble

com

pens

atio

n:In

the

prea

mbl

e, D

OL

prov

ides

som

e gu

idan

ce fo

r app

lyin

g th

is

cond

ition

to F

ixed

Rat

e A

nnui

ty C

ontra

cts o

r to

prod

ucts

that

ble

nd se

rvic

es a

nd a

n an

nuity

gu

aran

tee.

Not

ably

, spr

ead

is n

ot c

onsi

dere

d co

mpe

nsat

ion

for t

his p

urpo

se.

1-579


Apr

il 8,

201

6

2016

AM

EN

DM

ENT

ST

OE

XIS

TIN

GPR

OH

IBIT

ED

TR

AN

SAC

TIO

NE

XE

MPT

ION

S

8G

LG-2

2631

3.11

Impa

rtial

Con

duct

Sta

ndar

ds.

Whi

le n

ot re

quire

d as

a c

ondi

tion

for r

elie

f, B

IC-li

ke “

polic

ies a

nd

proc

edur

es”

prov

ide

“use

ful g

uida

nce”

for r

ecom

men

datio

ns u

nder

PT

E84

-24.

Dis

clos

ure

to a

nd C

onse

ntof

Pla

n Fi

duci

ary

or IR

A O

wne

rIn

sura

nce

disc

losu

res m

ust b

e re

peat

ed e

very

yea

r and

still

requ

ire

affir

mat

ive

(not

neg

ativ

e) c

onse

ntof

the

Plan

fidu

ciar

y or

IRA

ow

ner.

Dis

clos

ed c

omm

issi

ons s

houl

d be

exp

ress

ed a

s a d

olla

r fig

ure,

if

feas

ible

, and

mus

t inc

lude

gro

ss d

eale

r con

cess

ions

and

ove

rrid

es.

“Des

crip

tion”

of f

ees b

ecom

es a

mor

e sp

ecifi

c “s

tate

men

t.”IR

A o

wne

r pro

vidi

ng c

onse

nt n

eed

not b

e in

depe

nden

t of t

he fi

duci

ary

advi

ser (

e.g.

, age

nts m

ay re

com

men

d Fi

xed

Rat

e A

nnui

ty C

ontra

cts t

o fa

mily

mem

bers

.)

Rec

ordk

eepi

ng R

equi

rem

ents

:The

se a

re st

ream

lined

to si

mpl

y re

quire

that

the

agen

t, br

oker

, pen

sion

con

sulta

nt, i

nsur

eror

prin

cipa

l und

erw

riter

eng

agin

g in

th

e co

vere

d tra

nsac

tion

mai

ntai

n re

cord

s dem

onst

ratin

g co

mpl

ianc

e w

ith th

e PT

E’s c

ondi

tions

.

PTE

75-

1 Pa

rt I:

Part

I(a):

expi

red.

Part

I(b):

§406

relie

f for

ef

fect

ing

secu

ritie

s tra

nsac

tions

by

a n

on-f

iduc

iary

par

ty in

in

tere

st a

ctin

g as

age

nt.

Part

I(c):

§406

relie

f for

the

furn

ishi

ng o

f non

-fid

ucia

ry

advi

ce re

the

valu

e of

secu

ritie

s or

the

advi

sabi

lity

of in

vest

ing.

Rev

okes

Par

t I(b

) -Se

e ER

ISA

§40

8(b)

(2),

IRC

§49

75(d

)(2)

, and

regu

latio

ns

ther

eund

erfo

r the

se se

rvic

es.

Rev

okes

Par

t I(c

) -Se

e §4

08(b

)(2)

,IR

C §

4975

(d)(

2), a

nd re

gula

tions

th

ereu

nder

for t

hese

serv

ices

.

Am

ende

d:81

FR

211

81 (A

pril

8, 2

016)

DO

L no

ted

that

the

relie

f pro

vide

d in

Par

ts I(

b) a

nd I(

c) o

f PT

E 75

-1 is

dup

licat

ive

of th

e re

lief a

vaila

ble

unde

r the

se

stat

utor

y pr

ovis

ions

and

thei

r cor

resp

ondi

ng re

gula

tions

.A

lthou

gh b

roke

rs-d

eale

rs g

ener

ally

hav

e no

t rel

ied

excl

usiv

ely

on th

e re

lief p

rovi

ded

unde

r PTE

75-

1 Pa

rt I

for t

he fu

rnis

hing

of s

ervi

ces,

the

revo

catio

n of

this

relie

f do

es e

limin

ate

a po

tent

ially

use

ful s

afeg

uard

in th

e ev

ent

of a

tech

nica

l vio

latio

n of

the

fee

disc

losu

re re

quire

men

ts

1-580


Apr

il 8,

201

6

2016

AM

EN

DM

ENT

ST

OE

XIS

TIN

GPR

OH

IBIT

ED

TR

AN

SAC

TIO

NE

XE

MPT

ION

S

9G

LG-2

2631

3.11

(Pla

ns a

nd IR

As)

set f

orth

in re

gula

tions

issu

ed u

nder

ER

ISA

§40

8(b)

(2),

PTE

75-

1 Pa

rt II

I:§4

06 re

lief f

or

the

purc

hase

of s

ecur

ities

in a

n un

derw

ritin

gfr

om a

per

son

othe

r th

an a

fidu

ciar

y w

here

the

fiduc

iary

is

a m

embe

r of t

heun

derw

ritin

g sy

ndic

ate.

(Pla

ns a

nd IR

As)

Add

s new

con

ditio

n –

ifth

e fid

ucia

ry is

an

advi

ce o

r dis

cret

iona

ry fi

duci

ary

with

resp

ect t

o th

e as

sets

invo

lved

in th

e tra

nsac

tion,

it m

ust s

atis

fyth

eIm

parti

al C

ondu

ct S

tand

ards

.

For f

urth

er d

etai

ls, s

ee a

bove

dis

cuss

ion

rega

rdin

g PT

E 77

-4.

Am

ende

d:81

FR

212

08 (A

pril

8, 2

016)

See

abov

e di

scus

sion

rega

rdin

g PT

E 77

-4.

PTE

75-

1 Pa

rt IV

:§4

06 re

lief f

or

the

purc

hase

of s

ecur

ity fr

om a

fid

ucia

ry m

arke

t mak

er.

(Pla

ns a

nd IR

As)

Add

s new

con

ditio

n –

if th

e fid

ucia

ry is

an

advi

ce o

r dis

cret

iona

ry fi

duci

ary

with

resp

ect t

o th

e as

sets

invo

lved

in th

e tra

nsac

tion,

it m

ust s

atis

fyth

eIm

parti

al C

ondu

ct S

tand

ards

.

For f

urth

er d

etai

ls, s

ee a

bove

dis

cuss

ion

rega

rdin

g PT

E 77

-4.

Am

ende

d:81

FR

212

08 (A

pril

8, 2

016)

See

abov

e di

scus

sion

rega

rdin

g PT

E 77

-4.

PTE

75-

1 Pa

rt V

:§40

6 re

lief f

or th

e ex

tens

ion

of c

redi

t by

a pa

rty in

in

tere

stpr

ovid

ed it

is n

ot a

n ad

vice

or

dis

cret

iona

ry fi

duci

ary

(unl

ess n

o co

mpe

nsat

ion

or in

tere

st is

re

ceiv

ed).

(Pla

ns a

nd IR

As)

Expa

nds r

elie

f to

perm

it an

adv

ice

fiduc

iary

to re

ceiv

e re

ason

able

co

mpe

nsat

ion

for e

xten

ding

cre

dit t

o a

Plan

or IR

A to

avo

id a

faile

d pu

rcha

se

or sa

le o

f sec

uriti

es if

:

The

fiduc

iary

(or a

n af

filia

te) d

idn’

t cau

se th

e po

tent

ial f

ailu

re;

The

term

s of t

he e

xten

sion

of c

redi

t are

at l

east

as f

avor

able

to th

e Pl

anor

IRA

as t

he te

rms a

vaila

ble

in a

n ar

m’s

leng

th tr

ansa

ctio

n be

twee

n un

affil

iate

d pa

rties

;

Am

ende

d:81

FR

211

39(A

pril

8, 2

016)

DO

L re

ject

ed re

ques

ts fr

om c

omm

ente

rs th

at th

e am

endm

ent b

e br

oade

ned

to c

over

all

trans

actio

ns th

at a

re

incl

uded

in o

ther

sect

ions

of P

TE 7

5-1,

Par

t V (s

uch

as

shor

t sal

es, o

ptio

ns tr

adin

g an

d m

argi

n tra

nsac

tions

), fin

ding

that

such

relie

f is n

ot c

ritic

al to

all

such

oth

er

trans

actio

ns.

1-581


Apr

il 8,

201

6

2016

AM

EN

DM

ENT

ST

OE

XIS

TIN

GPR

OH

IBIT

ED

TR

AN

SAC

TIO

NE

XE

MPT

ION

S

10G

LG-2

2631

3.11

The

Plan

or IR

A re

ceiv

es w

ritte

n di

sclo

sure

,prio

rto

the

exte

nsio

n of

cr

edit,

rega

rdin

g (i)

the

rate

of i

nter

est o

r oth

er fe

es th

at w

ill a

pply

and

(ii

) the

met

hod

of d

eter

min

ing

the

bala

nce

upon

whi

ch in

tere

st w

ill b

e ch

arge

d, a

nd re

ceiv

es p

rior w

ritte

n di

sclo

sure

of a

ny c

hang

es to

thes

e te

rms;

and

The

fiduc

iary

mai

ntai

ns, f

or si

x ye

ars f

rom

the

date

of t

he tr

ansa

ctio

n an

d in

a m

anne

r tha

t is r

easo

nabl

y ac

cess

ible

for e

xam

inat

ion,

reco

rds

nece

ssar

y to

ena

ble

certa

in p

erso

ns (i

nclu

ding

DO

L an

d IR

S re

pres

enta

tives

and

pla

n fid

ucia

ries)

to d

eter

min

e w

heth

er th

e co

nditi

ons o

f thi

s exe

mpt

ion

have

bee

n m

et.

The

amen

dmen

t shi

fts th

e bu

rden

of c

ompl

ying

with

the

reco

rdke

epin

g re

quire

men

ts fr

omth

e Pl

anor

IRA

toth

e br

oker

-dea

ler e

ngag

ing

in th

e tra

nsac

tion.

It a

lso

clar

ifies

whi

ch p

artie

s may

vie

w th

e re

cord

s tha

t are

mai

ntai

ned

by th

e br

oker

-dea

ler a

nd p

lace

s cer

tain

con

ditio

ns o

n th

e ex

amin

atio

n of

such

re

cord

s.

DO

L ac

know

ledg

ed c

once

rns f

rom

com

men

ters

that

la

ngua

ge in

the

prop

osed

am

endm

ent r

equi

ring

that

faile

d pu

rcha

ses o

r sal

es o

f sec

uriti

es n

ot b

e “t

he re

sult

of a

ctio

n or

inac

tion

by su

ch fi

duci

ary

or a

ffili

ate”

was

too

vagu

e,

poss

ibly

ove

rbro

ad a

nd m

ight

invo

lve

fact

-inte

nsiv

e in

quiri

es re

gard

ing

such

failu

res,

and

repl

aced

such

la

ngua

ge w

ith th

e si

mpl

er “

is n

ot c

ause

d by

” co

nditi

on.

PTE

80-

83:

§406

(a)(

1)(A

)-(D

)rel

ief f

or th

e pu

rcha

se o

f a se

curit

y in

apu

blic

offe

ring

whe

n th

e pr

ocee

ds m

ay

be u

sed

by th

e is

suer

tore

tire

inde

bted

ness

toa

party

in

inte

rest

.

§406

(a)(

1)(A

)-(D

)and

406

(b)(

1),

(2)r

elie

f for

the

purc

hase

of a

se

curit

y in

a p

ublic

off

erin

g

Add

s new

con

ditio

n –

if th

e fid

ucia

ry is

an

advi

ce o

r dis

cret

iona

ry fi

duci

ary

with

resp

ect t

o th

e as

sets

invo

lved

in th

e tra

nsac

tion,

it m

ust s

atis

fy th

e Im

parti

al C

ondu

ct S

tand

ards

.

For f

urth

er d

etai

ls, s

ee a

bove

dis

cuss

ion

rega

rdin

g PT

E 77

-4.

Am

ende

d:81

FR

212

08 (A

pril

8, 2

016)

See

abov

e di

scus

sion

rega

rdin

g PT

E 77

-4.

1-582


Apr

il 8,

201

6

2016

AM

EN

DM

ENT

ST

OE

XIS

TIN

GPR

OH

IBIT

ED

TR

AN

SAC

TIO

NE

XE

MPT

ION

S

11G

LG-2

2631

3.11

whe

n th

e pr

ocee

ds m

ay b

e us

ed

by th

e is

suer

tore

tire

or re

duce

inde

bted

ness

to th

e ba

nk

fiduc

iary

or a

n af

filia

te.

(Pla

ns a

nd IR

As)

PTE

83-

1:§4

06(a

) and

407

relie

f for

the

sale

of m

ortg

age

pool

cer

tific

ates

(in

the

initi

al is

suan

ce o

f ce

rtific

ates

).§4

06(a

), 40

6(b)

relie

f for

the

sale

of

mor

tgag

e po

ol c

ertif

icat

es (i

n th

e in

itial

issu

ance

of

certi

ficat

es) b

y th

e po

ol sp

onso

rto

the

plan

whe

re th

e sp

onso

r,tru

stee

or i

nsur

er is

a fi

duci

ary.

(Pla

ns a

nd IR

As)

Add

s new

con

ditio

n –

if th

e fid

ucia

ry is

an

advi

ce o

r dis

cret

iona

ry fi

duci

ary

with

resp

ect t

o th

e as

sets

invo

lved

in th

e m

ortg

age

pool

cer

tific

ate

trans

actio

n,

it m

ust s

atis

fy th

e Im

parti

al C

ondu

ct S

tand

ards

.

For f

urth

er d

etai

ls, s

ee a

bove

dis

cuss

ion

rega

rdin

g PT

E 77

-4.

Am

ende

d:81

FR

212

08 (A

pril

8, 2

016)

See

abov

e di

scus

sion

rega

rdin

g PT

E 77

-4.

1-583


1-584


1

April 8, 2016

Fiduciary Rule – “Hire Me”






This client alert provides an overview of the “hire me” issue. For an analytical summary of the Final Regulation, BIC Exemption, the Principal Transactions Exemption, and changes to other existing exemptions, please see our client alerts covering those subjects.

I. Fee Based Advice Models and the “Hire Me” Conundrum

Most financial advisers and firms serving the retail segment of the financial services marketplace had been closely following DOL’s proposed BIC Exemption. Some appear to have concluded – even before seeing the final version – that compliance with the BIC Exemption should be avoided at all costs, as it would not only be extremely challenging but could also subject individual advisers and firms to costly litigation risk, including potential class action litigation risk, arising out of alleged violations of the “best interest” promise that lies at the heartof the exemption. While a number of the BIC Exemption’s most onerous provisions were eliminated, there may still be a number of reasons for wanting to avoid it.

Since the BIC Exemption was proposed last year, many firms have been searching forstrategies that could permit them to avoid complying with the BIC Exemption while still providing a high level of service to their retail clients. One much discussed strategy is a

1-585


2

fiduciary advice model that is free of financial conflicts; this model is inspired by DOL guidance to the effect that a fiduciary adviser would not have a conflict of interest under the prohibited transaction provisions of ERISA and the Internal Revenue Code of 1986, as amended, if any 12b-1, shareholder services or sub-transfer agent fees attributable to a client’s investments in mutual funds are used to benefit the client, either as a dollar-for-dollar offset against the fees the client would be obligated to pay to the adviser for its services or as amounts credited directly to the account. See, e.g., Advisory Opinions 97-15A and 97-16A (May 22, 1997).

Under such a “level fee” program, whereby the individual adviser and the firm would both be compensated at exactly the same rate irrespective of the investment products recommended to the client, the adviser and the firm would be fiduciaries, but, while making recommendations within the program, would be free of fiduciary conflicts that would require relief under the BIC Exemption or other DOL exemptions. A related model is based on the DOL “SunAmerica” advisory opinion, and, in this model, the adviser’s fiduciary conflict is addressed (arguably eliminated) by implementing the advice of an unrelated (and unbiased) financial expert(who is paid a level fee).

Another strategy is to couple investment advisory services with one or more existing prohibited transaction exemptions, such as the “investment advice” exemption in ERISA section 408(b)(14)/(g) (level fees or computer model), PTE 86-128 for purely commission-based compensation (e.g., Exchange-Traded Funds or “A” shares), or PTE 77-4 for proprietary fund sales.

However, it might be premature to conclude that such levelized fee or alternative exemption strategies are a cure-all for “avoiding the BIC” while doing business – including rollover business – in the retail space. The potential Achilles’ heel of these strategies is that before the adviser and the firm can begin providing fiduciary advice under either approach, they first need to sell the advisory service itself. Moreover, in the vast majority of cases the advice program offered for sale can only be implemented for individuals who first roll over 401(k) plan or IRA account monies to a new IRA that is compatible with the advice program providers’ platform.

The problem is that under the Final Regulation, a person renders investment advice as a fiduciary not merely when recommending the purchase, sale or holding of securities or other investment property, but in other contexts as well, including recommending (i) a rollover distribution or (ii) the engagement of a person who, for a fee or other compensation, would provide advice (whether on a discretionary or non-discretionary basis).

This brings us to the “hire me” conundrum. If, under the Final Regulation, a person is acting as a fiduciary when recommending a fee based investment advice or management program (including its own or its affiliate’s), that person’s financial interest in earning fee based compensation upon being engaged results in a conflict that would itself require exemptive relief.In turn, the most likely – and possibly only – source of exemptive relief appears to be the BIC Exemption; ironically the very result that the levelized fee model was intended to avoid in the first instance.

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3

II. What Does the Final Regulation Say?

As it turns out, the Final Regulation clearly provides that one does not become a fiduciary merely by marketing oneself or an affiliate as a potential advice fiduciary, unless that recommendation is coupled with an investment recommendation. Thus, a fee-based adviser can freely “recommend” his or her services. However, this may be a pyrrhic victory because the vast majority of such “hire me” recommendations are likely to be made in conjunction with aninvestment recommendation.

In particular, the Final Regulation makes it clear that a recommendation to roll over plan or IRA assets is always an investment recommendation. Moreover, the Final Regulation (or its preamble) indicates that any of the following are also investment recommendations:

Recommending that someone not roll over but keep his/her assets where they are,

Recommending investment policies or strategies,

Recommending that someone move from a commission-based account to a fee-based account,1 and

Recommending – as part of the sales presentation – that an investor use a particular investment or fund.

The following scenarios are less clear, but could also involve an investment recommendation:

Recommending between a new commission-based account and a new fee-based account,and

Recommending between two advisory options (with different levels of service and fees).

In other words, just about the only situations in which a suggestion to “hire me” is –perhaps – not a fiduciary recommendation are (1) taking cold calls from customers who have already made the rollover decision or (2) advising a plan fiduciary to terminate its existing advisory relationship and replace it with another.

To the extent that a level fee adviser wishes to market his or her services in connection with a rollover (or in any of the other contexts noted above), he or she will need to rely on the BIC Exemption or some other exemption. However, in this situation, the BIC Exemption may be the only available exemption. The BIC Exemption does contain a streamlined “level fee” option, which enables advisers and financial institutions that receive only a level fee in connection with the advice they provide to rely on the exemption without entering into a contract so long as special attention is paid and documentation kept to show that certain specific recommendations, including a recommendation to rollover assets from a plan to an IRA, are in

1 Many financial institutions have proposed simply directing customers into fee-based accounts. The preamble to the Final Regulation makes it clear that DOL believes doing so in inappropriate cases may constitute a prohibited transaction.

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4

the customer's best interest. While no bilateral contract is required, a written acknowledgement of fiduciary status with respect to the rollover recommendation must be furnished to the advice recipient along with an affirmative statement to abide by DOL’s “Impartial Conduct Standards”(essentially, a unilateral contract for purposes of affording the participant rolling over with enforcement rights under ERISA). Moreover, since the level fee condition extends to all affiliates, the streamlined BIC Exemption may not provide relief for recommending a rollover into an arrangement if the program’s fees are levelized only at the firm level and not across the entire organization.

In this respect, advisers hoping to avoid the BIC Exemption in the rollover context by relying on the “level fee” or “computer model” (“robo-adviser”) exemptions in ERISA section 408(b)(14)/408(g) may be out of luck.2 While section 408(b)(14) covers any “transaction” in connection with the provision of investment advice to a participant or IRA, we suspect that the rollover recommendation will be viewed by DOL as a separate and distinct transaction not “in connection with” the subsequent level fee or “robo” advice. Using a non-exemption strategy such as “SunAmerica” likewise may be blocked. The BIC Exemption likely will be needed to “bridge the gap.” (And once you are forced to use the BIC Exemption to sell your service, is there a strong reason to use a different approach when actually providing that service?).Luckily, even in the case of a rollover recommendation that does not satisfy the streamlined exemption, no contract is required if the recommendation involves taking a distribution from an ERISA plan. However, absent 100% level fees, recommending a rollover from one IRA to another will likely require a written contract and compliance with the full BIC Exemption.

2 Financial institutions may be investigating the section 408(b)(14)/408(g) option with the expectation of earning additional compensation for affiliates.

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NOTES

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NOTES

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