DOL’s Proposed Guidance Regarding Fiduciary Status

1. DOL’s Proposed Guidance Regarding Fiduciary Status The ERISA Industry CommitteeFocusON Call May 11, 2015

2. Agenda • Background • 2015 Proposal • Timing and Process

3. Background

4. Background • Statutory Definition • Current Regulation • 2010 Proposed Regulation

5. Statutory Definition • Generally, a person is a fiduciary with respect to the plan to the extent that he or she: • exercises discretionary authority or control with respect to management of the plan or disposition of its assets; • renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so; or • has any discretionary authority or discretionary responsibility in the administration of such plan See ERISA § 3(21)(A); Code § 4975(e)(3)

6. Current Regulation • Five-Part Test. Fiduciary status if a person: • makes recommendations on investing in, purchasing, or selling securities or other property, or gives advice as to their value, • on a regular basis, • pursuant to a mutual understanding that the advice, • will serve as a primary basis for investment decisions, and • will be individualized to the particular needs of the plan

7. Current Regulation • DOL’s concerns: • Dramatic changes in investment marketplace since 1975 • Too easy to avoid fiduciary responsibility • Many advisors not subject to ERISA • Undisclosed conflicts of interest • Regulation substantially narrower than statute

8. 2010 Proposed Regulation • Status-Based Approach. Fiduciary status if a person: • provides one of the following types of advice: • appraisals or fairness opinions about the value of securities or other property; • recommendations on investing in, purchasing, holding, or selling securities; or • recommendations as to the management of securities or other property; and • meets one of the following conditions: • represents that he or she is acting as an ERISA fiduciary; • is already an ERISA fiduciary to the plan; • is an investment adviser under the Investment Advisers Act of 1940; or • provides the advice pursuant to an agreement or understanding that the advice may be considered in connection with investment or management decisions and will be individualized to the needs of the plan.

9. 2010 Proposed Regulation • Carve Outs. No fiduciary status for: • certain purchasers/sellers adverse to the plan a transaction • general financial/investment information under existing DOL guidance • non-individualized marketing of investment option platforms to 401(k) plan fiduciaries • appraisals to plans for use only for reporting to DOL/IRS

10. 2010 Proposed Regulation • Employers’ concerns: • Overinclusive definition • “May Be Considered” too low a threshold • Ignores “two hat” fiduciary principle • No requirement that advice be individualized • Could capture general employee communications, proxy statements, call center comments, and legal and other non-investment advice • Swaps communications not harmonized with Dodd-Frank • Providing appraisals/fairness opinions =/= investment advice • Offering plan a menu of investment options =/= investment advice • Could chill sponsors’ willingness to provide informal assistance

11. 2015 Proposed Regulation

12. 2015 Proposed Regulation • Content • Analysis

13. 2015 Proposed Regulation : Content • Functional Test. Fiduciary status if a person, in exchange for a fee or other compensation: • provides one of the following types of advice: • investment recommendations, including a decision to roll money out of the plan, • investment management recommendations, • appraisals of investments, or • recommendations of persons to provide investment advice for a fee or to manage plan assets; and • meets one of the following conditions: • represents that he or she is acting as a fiduciary, or • provides advice pursuant to an agreement, arrangement, or understanding that the advice is individualized or specifically directed to the recipient for consideration in making investment or investment management decisions regarding plan assets

14. 2015 Proposed Regulation: Content • Carve Outs. No fiduciary status for: • counterparty’s statements to a “large plan investor with financial expertise” in arm’s length transaction • most offers/recommendations concerning swaps • advice from employee of plan sponsor to ERISA plan fiduciary, as long as no additional compensation is paid • marketing a platform of investment alternatives for participant-directed plans

15. 2015 Proposed Regulation: Content • Carve Outs, cont. No fiduciary status for: • identifying investment alternatives that meet objective criteria • providing an appraisal, fairness opinion or a statement of value to ESOPs, to a collective investment vehicle holding plan assets, or to a plan for reporting and disclosure requirements • providing “investment education” or “retirement education”

16. 2015 Proposed Regulation: Content • Exemptions. • “Best Interest” Contract Exemption • Principal Transaction Exemption • Amendments to Existing PTEs • 86-128 (Exemption for Securities Transactions Involving Employee Benefit Plans and Broker-Dealers) • 84-24 (Class Exemption for Certain Transactions Involving Insurance Agents and Brokers, Pension Consultants, Insurance Companies, Investment Companies and Investment Company Principal Underwriters) • Amendments to other PTEs to conform with Best Interest Contract exemption

17. 2015 Proposed Regulation: Content • DOL Requests for Comment: • Whether to allow streamlined exemption for high-quality, low-fee investments; • Whether to include other non-ERISA arrangements (such as HSAs) in proposal; • Input on the line between advice and education in the context of distribution-related information; • Whether to adopt FINRA standards on which a communication rises to the level of a “recommendation”;

18. 2015 Proposed Regulation: Content • DOL Requests for Comment, cont.: • Whether platform selection carve out should be extended to non-ERISA plans; • The scope of and plan size for the seller’s carve out; and • Whether to delay the application of certain requirements of the Best Interest Contract Exemption.

19. 2015 Proposed Regulation: Analysis • Efforts to Address Concerns with 2010 Proposal. • Responses to overbreadth concerns: • Functional definition of fiduciary • Recognizes “two hat” principle • Requires targeted advice • No fiduciary status for newsletters, generalized proxy statements, and general educational information • Swaps carve out and broadened appraisal carve out • Agreement that merely offering plan a menu of investment options =/= investment advice • Recognition that participant education should be encouraged

20. 2015 Proposed Regulation: Analysis • Primary Concerns: Biggest issue applies to IRA financial advisors–Best Interest Contract Exemption • Held to ERISA-like standards • Required to acknowledge fiduciary status • Expansive disclosures • Private right of action

21. 2015 Proposed Regulation: Analysis • Large Employers’ Concerns • Potential fiduciary status for HR and other employees who interact with participants • “recommendation” definition • compensation issues • Potential fiduciary status of call center employees • Changes in definition of “education” • Contracts with service providers

22. Timing and Process

23. Timing and Process • DOL Timing: • Comments are due July 6, 2015 • Request to extend comment deadline pending • ERIC will comment • Hearing 30 days after comment deadline • Effective date: 60 days after publication in FR • Applicability date: 8 months after publication in FR

24. Questions? Mike Francese 202.662.5413 mfrancese@cov.com