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Perspectives on Proposed DOL “Fiduciary Rule”

November 19, 2015

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Definition / Background

Chris Robino

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2010 Proposed Regulations

• Oct. 21, 2010 DOL released initial proposed regulations to modify the definition of a “fiduciary”.

• Greatly expanded the definition of fiduciary to include any person who provides investment advice to employee retirement plans and participants for a fee.

• Did not include related prohibited transaction exemptions.

• Controversial proposal met with considerable industry and bipartisan congressional criticism.

• DOL withdrew the proposal on Sept. 19, 2011, indicating their intent to revise and re-propose the regulation.

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2015 Re-Proposal

• April 14, 2015 DOL released the re-proposed regulation.

• Rebranded as “Conflicted Advice” regulations.

• Eliminates the current five-part test.

• Broadens definition of “Investment Advice Fiduciary”. – Covers advice directly to a plan, plan fiduciary, participant or

beneficiary, IRA or IRA holder.

– Covers recommendations as to the advisability of acquiring, holding, disposing or exchanging securities, including distribution or rollover recommendations, and recommendations of a person who will provide covered advice for a fee.

• Includes two new prohibited transaction class exemptions, and amendments to several existing PTEs.

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2015 Re-Proposal

• The DOL has received thousands of comment letters.

• In mid August the DOL held four days of public hearings on the proposal.

• Both political parties have commented on the re-proposal, however there is no broad based bi-partisan opposition.

• DOL at work on revisions for the final regulations.

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Agenda

• Definition / Background

• Introductions

• Overview and Issues

• Exemptions

• Implications & Action

• What is coming next?

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Perspectives on Proposed DOL “Fiduciary Rule”

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Chris Robino

Vice President, ERISA ComplianceBoston Financial / DST Retirement Solutions

Chris has been with Boston Financial for three years supporting DST RS. Chris is responsible for managing compliance with ERISA and other relevant regulations as they relate to DST RS business, while also working with regulatory agencies and legal staff to resolve complex compliance

issues. Prior to joining the organization Chris worked as a compliance consultant for John Hancock Signature Services, and spent over ten years combined with Putnam Investments and Mercer HR Services as an ERISA Regulatory Consultant and Relationship Manager.

Chris received his JD from New England Law Boston in 1999 and has over 14 years’ experience in the qualified retirement plan recordkeeping industry. Chris is a member of the SPARK Government Relations Committee and the ASPPA Government Affairs Committee.

crobino@bostonfinancial.com

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Michael HadleyPartnerDavis & Harman LLP

Michael practices in the area of employee benefits, advising clients on the full range of tax, ERISA, and other laws affecting benefit plans. He has a particular focus on helping financial institutions that sell products to defined contribution and defined benefit plans, IRAs and similar plans navigate the special rules that govern those plans.

He also provides clients with strategic advice, plan design, counseling, and compliance assistance for qualified plans, 403(b) and 457 plans, non-qualified executive compensation, employment agreements, and health and other welfare plans.

Mr. Hadley is a frequent speaker on the latest retirement savings policy developments coming out of Congress and the regulatory agencies and has testified before Treasury, IRS, and Department of Labor (including the recent hearings before the DOL on the proposed conflicted advice regulation).

A sampling of articles he has authored or co-authored: ERISA Compliance for Investment Advisers: A Q&A Guide To DOL’s 408(b)(2) Disclosure Regulation, Investment Lawyer, Vol. 20, No. 7 (July 2013); The Economics of Providing 401(k) Plans: Services, Fees, and Expenses, 2010 ICI Research Perspective, Vol.17, No. 4 (June 2011); and 401(k) Plans: A 25-Year Retrospective, ICI Research Perspective, Vol. 12, No. 2 (Nov. 2006).

mlhadley@davis-harman.com

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Theresa Seys

Vice President & Chief CounselAmeriprise Financial

Theresa Seys is Vice President and Chief Counsel at Ameriprise Financial, Inc., a leading diversified financial services company, where she leads the Retail Retirement, Compensation and Benefits practice group. She has over fifteen years of experience as counsel for large financial services organizations. She was previously appointed by the Secretary of Labor to serve on the ERISA Advisory Council to the Department of Labor. Members of the ERISA Advisory Council are experts who focus on issues important to the Department and Americans regarding retirement and health care security. She has testified at both the 2011 and 2015 Employee Benefits Security Administration's public hearings on their proposed regulations on the definition of fiduciary with respect to investment advice -- focusing largely on the potential impact to individual retirement accounts (IRAs) and small business plans.

theresa.seys@ampf.com

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CPE CODE:

890

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Overview and Issues

Michael Hadley / Theresa Seys

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ERISA and Fiduciary Advice For 35+ years, DOL has maintained a consistent

definition regarding whether “investment advice” will give rise to fiduciary status.

Five-part test, requiring that advice is offered for a fee, is individualized, is given on a regular basis, and the parties have a mutual understanding that the advice will serve as a primary basis for investment decisions. Industry has organized itself around this definition. Applies to plans and IRAs.

Bottom line: Under current law, most brokers and many consultants and financial advisers are not fiduciaries.

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That Was Then, This Is Now

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The Long Road To The Proposal

Original

Proposal

DOL Pulls

Proposal New DOL

SecretaryReproposal

Released

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2015 Proposal

All recommendations regarding Purchasing, holding, or selling securities or other property

Distributions and rollovers

Management of securities

Value of a security or other property

Other advice providers

Are fiduciary advice if directed at recipient or individualized to advice recipient

Limited exceptions for 401(k) educational materials, some services to retirement plan sponsors

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What Does That Mean?

Selling a product is a fiduciary act

Helping a plan sponsor with a menu is a fiduciary act

Recommending how an employee allocate his/her account is a fiduciary act

Recommending a rollover is a fiduciary act

Recommending securities or annuities for a IRA is a fiduciary act

Almost all brokers, insurance agents, and financial advisers are fiduciaries for IRAs and 401(k) plan clients

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Not Affected

Accounts other than corporate DB/DC plans, IRAs, HSAs, Archer MSAs Non-qualified retail fund and brokerage accounts

State and local municipality governmental plans Church plans Non-ERISA trusts and endowments Non-qualified annuities Individual life insurance/COLI/BOLI

Variable life may be covered if used in qualified plan

Group health insurance (covered but likely to be cut out)

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So What If I’m A Fiduciary?

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Fiduciary Prohibited Transactions

Absent an Exemption… No self-dealing. Fiduciary may not deal with plan assets in

own interest or for its own account. Includes using fiduciary authority to cause plan to pay additional fee to someone in which fiduciary has interest

No conflicted actions. Fiduciary may not act in a transaction on behalf of party whose interests are adverse

No third party payments. Fiduciary may not receive consideration for personal account from a person dealing with the plan in connection with transaction involving plan assets

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What Does That Mean?

Absent an exemption from DOL: Your advice can’t affect your compensation (no

commissions) You cannot control your own compensation Strict limits on non-monetary payments You can’t advise someone to buy your proprietary

products

Disclosure (Form ADV etc.) is no excuse Compliance with SEC and FINRA rules is no excuse

ERISA liability and 15% excise tax each year IRAs included

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Exemptions

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CPE CODE:

322

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Best Interest Contract Exemption What is covered?

Receipt of compensation in connection with a purchase,sale or holding of an “Asset.” Asset is defined and does not cover all investments available today for retail accounts.

Who may receive compensation?

Advisers

Financial Institutions

Affiliates and Related Entities

To whom may advice be given?

Retirement Investors

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Retirement Investors

Includes-

participant in participant-directed plan, 401(k)/403(b);

IRA & HSA owners; and

a plan sponsor of a non-participant-directed planthat has fewer than 100 participants.

Does not include-

Plan sponsors of participant-directed plans

In other words, 401(k) plan sponsors with less than 100 employees or less than $100mm in assets receive no help

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Does NOT Cover

Discretionary advice programs

Principal Trading (has its own exemption)

401(k) plan affiliated with Advisor, Financial Institution

Advisor’s own plan

Robo Advice

Certain investments already in IRA accounts today:

The term “Assets” includes publicly-traded equity anddebt, MFs, ETFs, etc.

Excludes - future or put, call, straddle, or any other option, alternative investments, non-traded REITs.

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What compensation is covered?

The exemption allows for “otherwise prohibited compensation” for both affiliated and unaffiliated products if you meet every condition and requirement of the exemption.

Presumably can retain compensation that varies based on investment recommendations

Implicitly, includes commissions, revenue sharing, 12b-1s, sub-TAs, shareholder servicing, marketing support payments, & other compensation

Notwithstanding Department commentary, examples provided by theDepartment in the Preamble call into question how and whether suchcompensation continues to be feasible – e.g., “differential compensation” based on “neutral factors.”

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Conditions

Written contract - prior to advice (creates a private right of action for IRA owners)

Acknowledge fiduciary status

Commit to adhere to “Impartial Conduct Standards” Receive no more than Reasonable Compensation & make no

misleading statements

Commit to provide advice in “Best Interest”

“act with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person would exercisebased on the investment objectives, risk tolerance, financialcircumstances, and the needs of the Retirement Investor without regard to the financial or other interests of the Adviser, FinancialInstitution or any Affiliate, Related Entity, or other party.”

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Conditions/Requirements Continued

Provide certain warranties

Comply with all applicable federal and state laws

Adopt written policies and procedures

Specifically identify material conflicts of interest andadopt measures to mitigate; and

Avoid use quotas, appraisals, performance or personnel actions, bonuses, contests, special awards,differential compensation or other actions orincentives to the extent they would tend toencourage Advisers to make recommendations thatare not in the best interest of Retirement Investors.

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Disclosures (also conditions) Point of Sale

All-in cost and anticipated future costs to Retirement Investor “Total cost” to the Retirement Investor for 1-, 5- and 10- year

periods expressed as a dollar amount, assuming an investmentof the dollar amount recommended by the Adviser, andreasonable assumptions about investment performance

Annual Disclosure

A list identifying each Asset purchased or sold during theapplicable period and the price at which the Asset waspurchased or sold;

Total dollar amount of all fees and expenses paid by theRetirement Investor, both directly and indirectly, with respect toeach Asset; and

Total dollar amount of all compensation received by the Adviserand Financial Institution, directly or indirectly, from any party,as a result of each Asset sold, purchased or held.

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Conditions Continued Public website

direct and indirect material compensation within the last365 days;

source of the compensation; and

how the compensation varies within and among Assetclasses

Disclose to Department reliance on BIC Exemption.

The Financial Institution must maintain and, upon request,

disclose to the Department 6 years of client data within 6

months. Department reserves right to publish this data at an

advisor level.

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What is coming next?

Michael Hadley / Theresa Seys

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Time Line From Here?

*DOL proposal is 8 months from final rule

DOL

HearingsComments

Close Final Rule Effective Date

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Congress is Aware and Concerned 540,000+ letters sent to Members of Congress Congressional Hearings

House Education and Workforce: June 2015 Senate HELP Subcommittee: July 2015 House Financial Services: September 2015 House Ways & Means Subcommittee: September 2015

More than 250 Members of Congress have sent letters to DOL expressing concerns 96 House Democrats – Majority of House D caucus Republicans call for reproposal, Democrats offer specific

concerns but stop short of reproposal Sec. Perez meeting, talking & texting with Members

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Possible Legislative Actions

1. Defunding via Appropriations Process

House and Senate spending bills would block DOL from moving forward

2. The Retail Investor Protection Act, H.R. 1090

Passed the House in October 2015

3. Possible Bipartisan Compromise Legislation

Congress reasserts its authority and updates the rules via legislation rather than regulation

No silver bullets: each has a small chance of success

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CPE CODE:

108

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What is Different? 2010 vs. 2015

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Implications & Action

Michael Hadley / Theresa Seys

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IRA and Rollover Advice Under Proposal

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Impact on Asset Managers

Managing pension institutional (ERISA) business –you are already a fiduciary

Managing mutual fund/ETF – you are never a fiduciary

Impact on your distribution partners

Load funds discouraged (although not completely prohibited)

12b-1/revenue sharing also discouraged (although not completely prohibited)

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Implications for Insurance Product Manufacturers

Primary effect is annuities issued in qualified plans and IRAs

Limited/no effect on life insurance, travel insurance, health insurance

Fee pressure, more disclosure of fees and commissions

New compliance rules for proprietary sales

Will my sales force be fiduciaries? If so, what exemption strategy will I use?

My distribution partners must adapt

New transparency in distribution relationships

Assist in their compliance programs

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Impact on Brokers

Must do three analyses:

1. Will the Broker use the BIC Exemption? If not, how will it continue to do business? Will it use 408(g) instead? Other solutions?

2. If the Broker decides to use the BIC Exemption, how will it mitigate litigation and regulatory risk?

3. If the Broker decides to use the BIC Exemption, how will it do so in an operationally compliant manner?

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Bottom Line for Operations

I’m a fund operations professional. What should I be doing right now?

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Operational Action Steps

Most firms have formed “working groups” to coordinate a response. Ensure all affected business lines are involved. Operations and shareholder service professional should be

in working team. Catalog the ways in which you communicate with

shareholders – what will be needed to ensure routine communications are educational and not fiduciary

Ask – what will be our business response? Then – what operational solutions will be needed to get

there? How do we manage risks associated with our distribution

partners being fiduciaries?

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Perspectives on Proposed DOL “Fiduciary Rule”