Navigating the Department of Labor's Fiduciary Investment Advice Regulations

1. THE DEPARTMENT OF LABOR FINAL REGULATION Fiduciary Investment Advice What You Need to Know Now! Kate Jensen Associate Steptoe & Johnson LLC Scott Sinder Partner Steptoe & Johnson LLC

2. Kevin Mayeux, CAE NAIFA CEO

3. Basic Architecture of the Rule • Fiduciary? • If fiduciary, prohibited transaction? • If yes, exemption required • Which exemption?

4. DOL Objectives • Expand the scope of “fiduciary” activities; • Impose an enforceable “best interest” standard on IRAs through a contract requirement; and • Level compensation for Financial Institutions (“F.I.s”) and Advisors.

5. How Bad it Could have Been • Contract before any advice/recommendation • Variable annuities and proprietary products in question • True fiduciary standard • Direct warranty obligations on advisors • Plan-level advice not allowed?

6. Virtually all recommendations for compensation are fiduciary investment advice Fiduciaries need an exemption to receive variable and 3rd party compensation (e.g., commissions) under ERISA and the Code Primary NAIFA exemptions: Best Interest Contract (“BIC”) and PTE 84-24 Enforceable “best interest” standard (duties of careand loyalty; (prudent man test + consideration of business models) Final Rule Overview

7. Almost everyone becomes a fiduciary • New compliance regime and liability for IRAs • Expect changes in business and compensation arrangements with B-Ds, insurance companies, etc. • Adapt sales, marketing and customer service procedures • Education/general information v. advice? • Delivery of contracts, disclosures, etc. • Improve databases to identify retirement accounts/savers • New rules/guidance from B-Ds, RIAs, FINRA, and/or SEC? Impact on Advisors

8. Increases in Error and Omission premiums • Perhaps exclusions on some sales, marketing and education • Liability exposure/legal challenges (incl. class actions) in state courts for IRAs • Indemnification of F.I.s? • Cost of new delivery systems (contracts, disclosures, etc.) • New Continuing Education, mandatory compliance courses, staff training, etc. Inevitable Cost Impact

9. DOL trying to cover any/all recommendations/advice as fiduciary advice • Broaderdefinition – covers account type recommendations (brokerage v. advisory) + still covers referrals • No reliance or mutual understanding requirements • Can limit scope/duration of fiduciary relationship • No general seller’s exception (limited to institutional advisors and money managers with $50 mil.) • Education exception still not meaningful Proposed v. Final Fiduciary Definition

10. Investment Education

11. Proposed v. Final BIC Exemption

12. Employer Plan Sponsors

13. Distributions and Rollovers

14. BIC Contract Requirement

15. Annuities and Proprietary Products

16. Other Improvements – Proposed v. Final BIC • Modified “best interest” standard • Many obligations fall on F.I.s (contract, disclosures, warranties, etc.) • Fewer disclosures overall (no annual fee/comp disclosures; no 1-, 5-, 10-year projections) • New “level fee fiduciary” rules • Better grandfathering and transition rules

17. Proposed v. Final PTE 84-24 • Covers fixed annuities—variable and indexed annuities (sold to plans and IRAs) under the BIC • Limited “insurance commission” relief for agents and brokers • Covers securities sales to ERISA plans, not IRAs • Limited “mutual fund commission” relief for principal underwriters (MF issuers)

18. The Final Rule

19. Definition of Fiduciary Recommend, for compensation: • specific investments • portfolio composition • Roll over or distribute • Other advice professionals • Account arrangements (brokerage v. advisory) “Recommendation” = reasonably viewed as a suggestion to take a particular course of action

20. Definition of Fiduciary (Cont’d) Recommendation (for compensation) becomes fiduciary investment advice if: • Advisor acknowledges she is acting as a fiduciary or • It is rendered pursuant to a written or verbal agreement or understanding (not mutual) or • It is directed to a specific recipient or recipients

21. Exception: General Communications • General circulation newsletters • Publicly broadcast talk shows • Remarks at widely attended speeches • Research and reports for general distribution • General marketing materials • General market data

22. Exception: Investment Education • 4 types: • Plan information • General financial, investment, and retirement information • Asset allocation models • Interactive investment materials • For ERISA participants only, allocation models and interactive materials may ID specific products already selected by plan sponsor • No meaningful ed. for plan sponsors

23. Counterparty (“Seller’s) Carve-Out • Applies to IRAs and Plans • Requirements: • Advice delivered to independent fiduciary of plan/IRA who is a regulated financial services provider or manages $50 million + • Arm’s length transaction • Disclosure: not providing impartial advice + any financial interest • Advisor receives no comp for advice from the investor

24. Best Interest Contract Exemption • Catch-all: is available for all fiduciary advice (incl. rollovers and distributions) related to any type of product/asset • Provides relief from ERISA and Code prohibited compensation rules (i.e., allows advisors and F.I.s to continue receiving traditional comp)

25. BIC Requirements - Overview • Contract (IRAs Only) • Written statement of fiduciary status • Impartial Conduct Standards • “Best interest” standard • Reasonable compensation • No misleading statements • Warranties • Impartial Conduct Standards will be met • Policies and Procedures (level comp) • Disclosures (incl. web mandate for F.I.s)

26. BIC “Best Interest” Standard Advisor must act - with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person would exercise 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.

27. BIC Requirements – Warranties Financial Institution must warrant - • It/its advisors comply with the “best interest” std; • Compensation is “reasonable” • No comp practices that induce conflicts of interest • Written policies and procedures in place “reasonably and prudently designed” to ensure that its advisors adhere to these requirements

28. BIC Requirements – Warranties (Cont’d) Level compensation warranty: neither the F.I. nor its advisors 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”

29. BIC Requirements – Disclosures Financial Institution must disclose: • “Best interest” standard, services provided, how (generally) investor will pay for services • Material conflicts of interest, fees/charges imposed on investor, 3rd party comp • That investor has the right, upon request, to obtain more specific information (e.g., policies and procedures, specific comp amounts and arrangements, etc.) • Link to Institution’s web page (with specific disclosures, incl. compensation arrangements) • Whether ongoing monitoring will occur

30. BIC Requirements – Level Fee Fiduciaries When F.I. and advisor receive only level comp, disclosed in advance Do NOT have to comply with: • Contract • Warranties • BIC disclosures (incl. web disclosures) • Recordkeeping requirements

31. BIC Requirements – Level Fee Fiduciaries (Cont’d) DO have to comply with: • Statement of fiduciary status • Impartial conduct standards (“best interest” standard, reasonable comp, no misleading statements) • Special rules for limited proprietary/3rdparty comp product offerings • Special rollover documentation

32. BIC – Level Fee Fiduciaries (Cont’d) For recommendations to roll over from ERISA plans to IRAs, the F.I. must document: • why it is in the client’s “best interest,” and • consideration of the alternatives (e.g., leave the money in the plan) and the relative fees/expenses and services involved For recommendations to roll over between IRAs or from a commission-based to a fee-based account, the LFF must document: • why it is in the client’s “best interest,” and • the services that will be provided for the fee

33. BIC Requirements – Proprietary Products Limiting advice/sales to proprietary products will be deemed to satisfy “best interest” standard if – • Investor is informed of product offering limitations and any material conflicts of interest • F.I. documents offering limitations and conflicts of interest, and reasonably concludes that limitations will not result in unreasonable comp or imprudent recommendations • General BIC requirements are satisfied (incl. modified “best interest” standard)

34. Additional Relief for Insurance & Annuity Products • Available for all investment products, but particularly helpful for insurance/annuity products • Provides relief for non-compensation prohibited transactions (i.e., dealing with parties in interest/disqualified persons and service providers) if: • Transaction is effected in ordinary course of business; • Compensation is reasonable; and • Terms are at least as fair as an arm’s length transaction with an unrelated party • Still rely on broader BIC for comp relief • Appears to be no practical impact on advisors

35. Grandfathering for Pre-Existing Transactions Advisors may continue to receive prohibited comp (e.g., trailers) on investment property (e.g., variable annuities) acquired before April 10, 2017 if: • Comp is received pursuant to arrangement in place before 4/10/17 and is reasonable • transaction was not prohibited at the time it was made • Comp is not received for additional amounts invested (exchanges w/in MF family or V.A. pursuant to pre-existing arrangement are ok) • Recommendations made after 4/10/17 are in client’s “best interest”

36. BIC Transition Relief From April 10, 2017 until January 1, 2018, advisors and F.I.s are deemed to satisfy the BIC if the F.I. discloses: • It/its advisors are acting as fiduciaries, • It/its advisors adhere to the impartial conduct standards, • Material conflicts of interest • Any limitations based on proprietary/3rd party-comp products

37. Final PTE 84-24 Covers: • Fixed Rate Annuity and insurance contract purchases by IRAs and ERISA Plans • Investment company securities purchases by ERISA Plans Does not cover: • Any variable or indexed annuity purchases • Securities purchases by IRAs

38. Final PTE 84-24 Provides only limited compensation relief for receipt of: • “Insurance Commissions” • Paid by the insurance company; includes renewal fees and trailers, not revenue sharing, admin fees, or mktg fees • “Mutual Fund Commissions” by “principal underwriters” (mutual fund issuers) only for ERISA Plan securities purchases • Paid by plan or investment company; includes sales load, not 12b-1 fees, revenue sharing, admin fee, or mktg fees

39. PTE 84-24 Requirements - Overview • No contract + no direct private right of action for IRAs • Impartial Conduct Standards (= BIC) • Effect transactions in ordinary course of business • Terms of transaction at least as favorable as arm’s length transaction with unrelated party • Recordkeeping by agent/broker • Written disclosures

40. PTE 84-24 Requirements - Disclosures Agent/broker must disclose in writing: • Any affiliation with insurance company whose product is being recommended and nature thereof • Commission (expressed as dollar figure, if feasible) for first year and succeeding renewal years • Statement of any fees, charges, penalties, etc. associated with the contract

41. PTE 84-24 – Disclosures (Cont’d) • Disclosures provided to an independent fiduciary of the Plan or IRA owner • Independent fiduciary/IRA owner must acknowledge receipt (in writing) and approve the transaction • Independent fiduciary may not receive any comp for the transaction from any party involved in the transaction

42. PTE 84-24 – Recordkeeping • Agent/broker obligation • Must keep records (sufficient to determine whether exemption is satisfied) for 6 years • Records must be available for inspection • Failure to keep records results in loss of exemption for transaction(s) for which records are missing, not other transactions

43. Key dates: • Final Rule is effective on June 7, 2016 • New definition of fiduciary investment advice applicable on April 10, 2017 • Full compliance with the BIC by January 1, 2018 • Congress has options, but a “steep climb” • Congressional Review – 60 days, subject to veto • Legislative alternative introduced in House and Senate Status, Timing, Options

44. Next Steps:Understand How it Impacts Your Business Working with new and existing clients Working with employers setting up retirement plans Working with employees who have 401(k)-type accounts Recommendations on rolling ERISA plan assets to an IRA Recommending annuities Recommending propriety products Working with your B/D and RIA partners

45. NAIFA Skill Builder Workshop • Designed to be delivered via state and local associations, this NAIFA skill builder workshop presented by subject matter expert Don Trone, GFS will help you comply with the new fiduciary rule and strategize for your future.

46. NAIFA Skill Builder Workshop • NAIFA ‘s development of this fiduciary workshop is specific to this new DOL rule • Learn decision-making processes, best practices, record-keeping • Available in June! • Watch for more information!