Stephen P. Wilkes, Esq. Livia Q. Aber , Esq.

1. Fiduciary Regulations: • Year in Review Stephen P. Wilkes, Esq. Livia Q. Aber, Esq.

2. Agenda • Demise of the Fiduciary Rule • Temporary Enforcement Policy • Current State: • “Investment Advice” Under DOL’s Five Part Test • Plan Distributions and Rollover Advice under Adv. Op. 2005-23A • Rollovers Under FINRA Notice 13-45 • SEC Proposals • Background – Dodd-Frank Act • Regulation BI • Release No. 34-83063 – Form CRS • Release No. IA-4889 – Fiduciary Standard of Conduct for RIAs • Comment Letters • Other Agencies – CFP Board, NAIC • Market and Regulatory Trends • Enforcement Trends: State Initiatives • Regulatory Agendas

3. Demise of the Fiduciary Rule U.S. Chamber of Commerce v. DOL (Court of Appeals for Fifth Circuit) • On March 15, 2018, the court vacated the Fiduciary Rule, Best Interest Contract Exemption and related PTEs, in toto • Conflicted with statutory text of ERISA 3(21)(A)(ii) • Congress sought to codified meaning of fiduciary in statutory text, and consequently DOL could not extend definition to include sales persons such as broker-dealers and insurance agents • Unreasonable under Administrative Procedures Act and Chevron • DOL infringed upon SEC turf • Arbitrary and capricious treatment of variable and fixed indexed annuities • Imposition of legally unauthorized contract terms to enforce the new regulations • DOL officially dead on June 21, 2018 as a result of the Fifth Circuit mandate

4. Temporary Enforcement Policy Field Assistance Bulletin 2018-02 • From June 9, 2017 until final regulations issued or other guidance, DOL will not pursue prohibited transaction claims, nor will IRS impose excise taxes, against investment adviser fiduciaries “working diligently and in good faith to comply with Impartial Conduct Standards” • Private parties and state regulators can still take action • Impartial Conduct Standards (ICS): • Give advice that is in investor’s “best interest” • Charge no more than reasonable compensation • Make no misleading statements • FAB 2018-02 prompted by Fifth Circuit decision, which left those who had taken steps to comply with the Fiduciary Rule wondering whether they could rely on the ICS

5. “Investment Advice” Under the DOL’s Five-Part Test DOL’s Five-Part Test Restored • Fiduciary status can be imposed on an investment advice provider to an ERISA plan if, the advisor, for a direct or indirect fee or other compensation: • Renders advice as to the value or advisability of buying, selling or investing in securities or other property • On a regular basis • Pursuant to a mutual agreement, arrangement, or understanding, written or otherwise • That the services will serve as a primary basis for investment decisions; and • The advice will be individualized to the plan based on the particular needs of the plan regarding such matters as investment policies or strategy, overall portfolio composition, and diversification.

6. Plan Distributions and Rollover Advice under Adv. Op. 2005-23A Advisory Opinion 2005-23A Restored • Advisors provided any fiduciary advice to the plan sponsor or the plan’s participants who engaged in rollover recommendations would trigger a prohibited transaction • On the other hand, non-fiduciary advisers can freely advice participants on rolling accounts to IRAs and how proceeds should be invested could capture rollover assets • Advisor may be engaged in a separate non-fiduciary capacity by the participant unrelated to its status as a plan fiduciary -- guidance is unclear

7. Rollovers under FINRA Notice 13-45 Suitability of Rollover • Investment profile, including the participant’sage, investments outside the plan, financial situation; tax status; investment goals and experience, investment time horizon, liquidity needs, risk tolerance; and any other information • Compare plan and IRA in terms of investment options, fees and expenses, services, potential withdrawal penalties, protection from creditors, applicability of MRDs, etc. • Written supervisory procedures • Training

8. SEC Proposals - Background Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 • Permitted SEC to provide standard of conduct for broker-dealers and investment advisers providing personalized investment advice about securities to retail customers • Required SEC staff to conduct study to evaluate the effectiveness of existing standards of care and whether there are gaps

9. Background – Dodd-Frank Act • Study on Investment Advisers and Broker-Dealers was released in January 2011 and made two key points • SEC should implement a uniform fiduciary standard of conduct for broker-dealers and investment-advisers - “to act in the best interest of customers without regard to the financial or other interest of the broker-dealer or investment adviser providing the advice” • SEC should harmonization regulatory requirements of brokers dealers and investment advisers if it would provide additional investor protection • SEC rules apply to securities transaction, not insurance transactions • Variable annuities are securities; fixed annuities and fixed indexed annuities are not securities

10. SEC’s Proposed BD Standards and Other Guidance • On April 18, 2018, SEC issued a set of three proposed rules: • Release No. 34-83062 - regulates the standard of conduct for broker-dealers (“Regulation BI”) • Release No. 34-83063 - requires broker-dealers and investment advisers to deliver a new form CRS • Release No. IA-4889 - SEC proposed an interpretation of the fiduciary standard of conduct for investment advisers and sought comments on proposals to modernize and enhance the rules regarding the standard of conduct by registered investment advisers • Regulation BI is separate and distinct from fiduciary duty under Adviser’s Act • Regulation BI has no effect upon SEC’s interpretation of investment adviser’s fiduciary obligations

11. Regulation BI Standard of Conduct – Best Interest Obligation • To act in best interest of the retail customerat the time the recommendation is made without placing the financial or other interest of the broker, dealer or a natural person who is an associated person of a broker or dealer making the recommendation ahead of the interest of the retail customer” • Broker-dealer unable to waive compliance • Retail customer cannot agree to waive protection • No private right of action or right of rescission • Enforcing entity of Regulation BI could be FINRA

12. Regulation BI Standard of Conduct – Best Interest Obligation • “Best interest” • Not defined in proposal • Preamble – “best interest” depends upon facts and circumstances of particular recommendation and particular retail customer, along with the four components of Regulation BI (below)

13. Regulation BI • “Recommendation” • Not defined in the proposal • Preamble - interpreted consistent with FINRA rules in context of broker-dealer suitability • whether it “reasonably could be construed as a “call to action’” and “reasonably would influence an investor to trade a particular security or group of securities” • facts and circumstances and not subject to a bright-line test • Applicable to discretionary transactions - treated as implicitly recommended • Excluded activities – e.g., general investment advice, limited investment analysis tools such as retirement savings calculator

14. Regulation BI • Triggered “at the time” the recommendation is made • Does not extend beyond a particular recommendation or require broker dealer to monitor an account • Does not require a broker dealer to refuse to execute an order contrary to broker-dealer recommendation • Does not apply to self-directed accounts or other unsolicited transactions by a retail customer

15. Regulation BI • Applies to securities transactions or investment strategy involving securities • “Securities transaction” involved the sale, purchase, exchange of a security • Includes recommendations to roll over or transfer assets from one type of account to another (e.g., rollover or transfer of assets from an ERISA account to an IRA) • “Investment strategy” includes explicit recommendations to hold a security or regarding the manner in which it is to be purchased or sold (e.g., recommendation to purchase securities on margin, liquefy home mortgages, recommendations to hold securities

16. Regulation BI • “Retail customer” • any “person, or legal representative of such person…who receives a recommendation [regarding] a securities transaction or investment strategy involving securities…and uses the information for personal, family or household purposes. • IRA owner or participant in 401(k) plan would be a retail customer • Plan sponsor or other applicable fiduciary would not be a retail customer • If Proposed Regulation Best Interest is finalized in current form, DOL will need to address this situation

17. Regulation BI Three Components of Best Interest Obligation • Disclosure Obligation • Care Obligation • Conflict of Interest Obligation • Policies and procedures to identify and disclose or eliminate all material conflicts of interest that are associated with recommendations • Policies and procedures to identify, and disclose and mitigate, or eliminate, material conflicts of interest arising from financial incentives associated with recommendations

18. Regulation BI Disclosure Obligation • Before or at time of recommendation, broker-dealer reasonably discloses in writing to the retail customer material facts relating to scope and terms of the relationship and all material conflicts of interest associated with the recommendation • SEC wanted to provide flexibility, so is not mandating form, specific timing or method of disclosure • Guidelines: • Adequacy of disclosure depends upon facts and circumstances • Clear, concise, and understandable • Avoid legal jargon, highly technical business terms, and multiple negatives

19. Regulation BI • “Material facts” would include: • Broker-dealer is acting in a broker-dealer capacity • Fees and charges • The type and scope of services (e.g., monitoring of retail customer’s account, margin, cash management, discretionary authority, and access to research) • Additional disclosure might be required • Some duplication with Form CRS (i.e., fees), but more information required to satisfy Disclosure Obligation (e.g., ranges of other fees, such as commissions, mark-ups and mark downs, and sales commissions)

20. Regulation BI • “Material conflict of interest” • A conflict of interest that a reasonable person would expect might incline a broker dealer, consciously or unconsciously, to make a recommendation that is not disinterested • Disclosed material conflicts of interest would include material conflicts associated with • Proprietary products • Products of affiliates or a limited range of products • One share class versus another share class of a mutual fund • Securities underwritten by the firm or a broker-dealer affiliate • Rollover or transfer of assets from one type of account to another • Allocation of investment opportunities among retail customers, such as IPO allocation

21. Regulation BI Care Obligation BD, in making the recommendation, exercises reasonable diligence, care, skill, and prudence to: • understand the potential risks and rewards associated with the recommendation, and have a reasonable basis to believe that the recommendation could be in the best interest of at least some retail customers; • have a reasonable basis to believe that the recommendation is in the best interest of a particular retail customer based on the retail customer’s investment profile and the potential risks and rewards associated with the recommendation; and • have a reasonable basis to believe that a series of recommended transactions, even if in the retail customer's best interest when viewed in isolation, is not excessive and is in the retail customer’s best interest when taken together in light of the retail customer’s investment profile. • Least expensive or least remunerative security is not required • No requirement to analyze all possible securities, all other products, or all investment strategies to recommend the best security

22. Regulation BI • understand the potential risks and rewards associated with the recommendation, and have a reasonable basis to believe that the recommendation could be in the best interest of at least some retail customers • Pertains to a particular security or strategy recommended • To satisfy this requirement, a BD would need to • undertake reasonable diligence, (i.e., reasonable investigation and inquiry) to understand the potential risks and rewards of the recommended security or strategy, and • have a reasonable basis to believe that the recommendation would be in the best interest of at least some retail customers. based on that understanding.

23. Regulation BI • Reasonable diligence factors would include: • Complexity and risks of strategy, BD’s familiarity with security or strategy • Cost • Investment objectives • Characteristics-including special or unusual features • Liquidity • Risks and potential benefits • Liquidity • Volatility • Likely performance of market and economic conditions • Expected return on security or investment strategy • Financial incentives to recommend the security or investment strategy

24. Regulation BI • have a reasonable basis to believe that the recommendation is in the best interest of a particular retail customer based on the retail customer’s investment profile and the potential risks and rewards associated with the recommendation • Investor profile includes, without limitation, retail customer’s: • Age • Other investments financial situations and needs • Tax status • Investment objectives • Investment experience • Investment time horizon • Liquidity needs • Risk tolerance • Any other information retail customer discloses to broker-dealer

25. Regulation BI • If retail customer’s information is unavailable despite broker dealer’s reasonable diligence, must determine whether it has sufficient information to properly evaluate whether recommendation is in customer’s best interest • If broker-dealer knows or has reason to know that a retail customer’s investment profile has changed, must make reasonable effort to obtain that information prior to making recommendation • Absent knowledge that retail customer’s investment profile is inaccurate, broker-dealer may rely upon information in the existing customer’s investor profile

26. Regulation BI • have a reasonable basis to believe that a series of recommended transactions, even if in the retail customer's best interest when viewed in isolation, is not excessive and is in the retail customer’s best interest when taken together in light of the retail customer’s investment profile • What constitutes a series of recommended transactions depends upon facts and circumstances • No single test defines excessive, three factors taken into account • Turnover ratio • Cost-to-equity ratio • Use of in-and-out trading

27. Regulation BI Conflict of Interest Obligation: First Element • BDs must establish, maintain, and enforce written policies and procedures reasonably designed to identify and [at a minimum] disclose or eliminate all material conflicts of interest that are associated with the recommendation • Risk-based compliance and supervisory system to promote compliance suffices • No requirement to conduct a detailed review of each recommendation

28. Regulation BI • Broker-dealers have flexibility in designing policies and procedures, but should consider: • Policies and procedures outlining how firm identifies material conflicts and material conflicts arising from financial incentives • Clearly identifying all material conflicts of interest and how the firm intends to deal with them • Robust compliance review and monitoring systems • Processes to escalate identified instances of noncompliance to appropriate personnel for remediation • Procedures that clearly designate responsibility to business lines personnel for supervision of functions and persons, including determination of compensation • Processes for a periodic review and testing of the adequacy and effectiveness of the policies and procedures • Training on the policies and procedures

29. Regulation BI Conflict of Interest Obligation: Second Element • BDs must establish maintain and enforce written policies and procedures reasonably designed to identify, and disclose and mitigate, or eliminate, material conflicts of interest arising from financial incentives associated with such recommendation • SEC’s preliminary view of financial incentives include: • Compensation practices established by broker-dealers, including fees and other charges for services provided and products sold • Employee compensation or employment incentives such (e.g., quotas, bonuses, sales contests, special awards, differential or variable compensation, incentives tied to appraisals or performance reviews • Compensation practices involving third parties • Receipt of commissions or sales charges • Sales of proprietary products or services, or products of affiliates • Principal transactions

30. Release No. 34-83063 - Form CRS • New Form CRS • Broker-dealers and investment advisers required to deliver to retail customers a short “relationship summary” including: • Principal types of services offered • Applicable fees • Applicable legal standard of conduct • Certain conflicts of interest • Firm’s registration status with the SEC • Associated and supervised person’s status with the firm • Broker-dealers and associated natural persons cannot use “adviser” or “advisor “ in certain circumstances

31. Results of Form CRS Testing • On November 8, 2018, the SEC released the results of its investor testing of the proposed Form CRS • Testing included (i) on-line survey and (ii) “qualitative in-depth interviews” • Survey findings: • Positive about format and content • Helpful for making informed decisions about investment accounts and services • Helpful for understanding key terms and conflicts of interest and as serving as a basis for conversations with the investment professionals • Interview findings: • Improved understanding • But confusion as to different accounts types and difference between registered representative and IAR • “Fees and Costs” section was overwhelming, could not reconcile “Obligations” and “Conflicts of Interest” sections

32. Release No. IA-4889 - Fiduciary Standard of Conduct for RIAs • SEC proposed interpretation of fiduciary standard of conduct for investment advisors • SEC sought comments on proposals to modernize and enhance standard of conduct for RIAs

33. Comment Letters to SEC on Proposed Regulation BI • The SEC has received thousands of comment letters • Investor groups, a letter from a coalition of 17 Attorneys General, National Federation of Independent Businesses, financial professionals, National Society of Compliance Professionals, etc.

34. Investor Advisory Committee Recommendations for Regulation BI • AIC is an SEC committee designed to represent the interests of investors • On November 7, 2018, AIC voted to make certain recommendation to the SEC to improve Regulation BI. • Four main recommendations: • Clarify “best interest” for broker-dealers and investment advisors • Clarify that the best interest standard is a fiduciary duty • Expand covered accounts to include retirement rollover accounts, for example • Conduct a usability test of proposed Form CRS

35. Letter to FINRA Seeking Interpretation of SEC’s Regulation BI Letter from Senators Elizabeth Warren (MA), Cory Booker (NJ) and Sherrod Brown (OH) • Letter dated July 20, 2018 • Inquired about FINRA’s interpretation of Regulation BI • Posed six questions Response from FINRA • Robert Cook, Pres. and CEO of FINRA responded by letter dated Aug. 3, 2018 • FINRA does not independently interpret SEC’s rules, and will enforce them in accordance with SEC interpretation • In the normal course of FINRA examinations and supervision of BDs, it will consult with the SEC to ensure FINRA’s programs remain faithful to the SEC’s interpretation • FINRA does not intend to submit a comment letter to the SEC

36. Certified Financial Planner (CFP) Board • New Code and Standards effective October 1, 2019 • CFPs must act in the “best interest” of clients when providing financial advice. • Does not apply to CFPs not providing financial planning services • ”Fiduciary” acts in utmost good faith, in a manner reasonably believed to be in the best in best of the client • Emphasized professional judgement • Review of all possible options not required • Board brings enforcement actions • Adjudication through internal peer review process

37. National Association of Insurance Commissioners (NAIC) • NAIC’s Annuity and Suitability (A) Working Group charged with reviewing Model Regulations #275 • Changes were first proposed in December 2017, and several iterations since then • Latest draft revised language was released on October 25, 2018 following the NAIC’s interim meeting • Definition of “suitable” – recommendation “consistent with” a consumer’s needs • Duty - “without placing the producer’s or the insurer’s interest ahead of the consumer’s interest” • Key considerations and key topics • Individual states’ insurance commissions can deviate from the model as they see fit

38. Market and Regulatory Trend:Fiduciary Status and Advisory Fees • With Fiduciary Rule demise, BDs debate whether to reinstate commissions and revenue sharing • Market trend appears to support: • Migration of compensation practices away from commission based-compensation to levelized fees on advisory platform • Elimination of third-party payments and revenue sharing arrangements • Acknowledgement of fiduciary status • Going forward, DOL may not narrowly interpret the Five-Part Test • While reinstating commissions is possible during the “limbo” period, it may be a short-lived solution that may put BDs at a competitive disadvantage

39. Enforcement Trends - State Initiatives States Proceed with Fiduciary or “Best Interest Standards” • New York’s DFS – “best interest” standard eff. Aug. 1, 2019 and Feb. 1, 2020 • New Jersey – bill is pending • Nevada – fiduciary duty imposed on “financial planners”, awaiting rule-making • Connecticut – disclosure of conflicts of interest eff. Jan. 1, 2019 State Enforcement of Fiduciary Rule - Massachusetts

40. State Initiative – New York NY Dept of Financial Services (DFS) – Suitability and Best Interest Regulation • On July 18, 2018, NY’s DFS issued the final version of its Suitability and Best Interests in Life Insurance and Annuity Transactions Regulations • Applies all sales of life insurance and annuity products including group life policies, term life and individual and group annuities to New York consumers • “Best interest” – in furtherance of a consumer’s needs and objectives and where only the interests of the consumer are considered in making the recommendation. Producer’s financial compensation or incentives may not influence the recommendation.

41. State Initiative – New York NY Dept of Financial Services (DFS) – Suitability and Best Interest Regulation • Procedures to prevent financial exploitation of consumers must be maintained • ”Best interest” will not be triggered by renewal compensation paid on ongoing payments • Effective August 1, 2019 for annuity contracts, and six months later on Feb. 1, 2020 for life insurance

42. State Initiative – New Jersey Disclosure of Non-Fiduciary Status • On January 9, 2018, legislation reintroduced requiring disclosures by non-fiduciary investment advisors • Compulsory statement: • "I am not a fiduciary. Therefore, I am not required to act in your best interests, and am allowed to recommend investments that may earn higher fees for me or my firm, even if those investments may not have the best combination of fees, risks, and expected returns for you." • Disclosure required at the outset of the relationship and in any investment situation when fiduciary duty does not apply. • Maintain signed acknowledgement that written disclosure was provided

43. State Initiative – New Jersey NJ Bureau of Securities • On September 17, 2018 Governor announced Bureau’s intent to amend state’s securities laws to establish a fiduciary standard • On October 15, 2018 Bureau issued a notice of pre-proposal requesting comments • No details known other than what is stated in the notice of pre-proposal • “[Bureau] is soliciting comments regarding amendment to its rule to require that broker-dealers, agents, investment advisers, and investment adviser representatives be subject to a fiduciary duty. Specifically, …making it a dishonest or unethical business practice for failing to act in accordance with a fiduciary duty when recommending to a customer, an investment strategy, or the purchase, sale, or exchange of any security or securities, or providing investment advisory services to a customer.” • Hearings will be held on November 2nd and November 19th • Comment period ends on December 14th

44. State Initiative – Nevada Senate Bill 383 - Fiduciary Duty • Effective July 1, 2017, fiduciary duty imposed on “financial planners” which includes financial institutions and investment advisers rendering investment advice to NV-based clients • Investors may sue financial planners for economic losses (and all costs of litigation and attorneys' fees) that result from following the financial planner's investment advice if the planner: (i) violated an element of his fiduciary duty; (ii) was grossly negligent in offering investment advice (taking into account the client's investment goals and financial circumstances); or (iii) otherwise violated Nevada law in recommending the investment or service at issue.

45. State Initiative – Nevada Senate Bill 383 - Fiduciary Duty • Fiduciary duty has yet to be defined through rule-making, but it would appear to require: (i) disclosure of compensation at account opening; (ii) continual monitoring of investment strategies and products suggested by financial institutions and investment advisers in view of their clients' financial condition; and (iii) liability for financial institutions and investment advisers breaching their fiduciary duty • NV securities administrator hopes to release proposed regulations soon

46. State Initiative – Connecticut Duty to Disclose Fiduciary Status of Financial Planners • An Act Protecting the Interests of Consumers Doing Business with Financial Planners • Effective July 5, 2017, financial planners providing financial planning or investment advisory services to CT consumers must disclose whether they are fiduciaries, upon request • “Financial planner” is “a person offering individualized financial planning or investment advice to a consumer for compensation where such activity is not otherwise regulated by state or federal law.” • “Fiduciary duty” is “a duty to act with prudence in the best interests of a consumer with undivided loyalty to such consumer.”

47. State Initiative – Connecticut Disclosure of Conflicts of Interest • Beginning on or after Jan. 1, 2019, any company that administers a non-ERISA 403(b) plan offered by a political subdivision of the state of CT to the employees of such political subdivision, must disclose to each plan participant any conflict-of-interest with the plan • Upon initial enrollment and at least annually thereafter • Disclosure must include: (i) the fee ratio and return, net of fees, for each investment; and (ii) the fees paid to any person who, for compensation, engages in the business of providing investment advice to participants in the retirement plan either directly or through publications or writings. 

48. State Initiatives - Massachusetts Enforcement of Fiduciary Rule • On Feb. 1, 2018, Securities Division of the Office of the Sec’y of the Commonwealth filed an administrative complaint against Scottrade, Inc. • Alleging violation of state law • Adoption of policies and procedures designed to comply with the Fiduciary Rule which were not followed when it launches two sales contests • Scottrade’s attempt to move case to federal court failed • If MA is successful, other states may bring similar lawsuits • Take Away: Follow the policies and procedures, change them if they are no longer appropriate

49. State Initiatives – Maryland October 10, 2018 Hearing re: Conflicts of Interest • Currently, investment advisors in Maryland are already subject to a fiduciary duty standard • The Senate Finance Committee hearing on October 10th discussed how to best address conflicts of interest among financial representatives who provide advice to consumers • One suggestion floated at the hearing was to extend the existing fiduciary standard applicable to investment advisors to all financial professionals

50. Regulatory Agendas • On October 17, 2018, various agencies, including the DOL and SEC, released their regulatory agendas describing upcoming rulemakings and other regulatory actions the administration expects to publish through the end of the year and in 2019 • SEC regulatory agenda has set a target date pf September 2019 to finalize its proposed package of investment advice rule making • EBSA regulatory agenda hopes to have fiduciary rule cleanup regulations finalized by September 2019