CIEBA Webinar DOL 2015 Fiduciary Proposal Jenny Eller Groom Law Group, Chartered May 20, 2015

2015 Fiduciary Proposal - Overview On April 20, 2014, DOL published: A regulation re-defining who is a “fiduciary” by reason of providing investment advice to a plan or an IRA; Two new prohibited transaction class exemptions; The Best Interest Contract Exemption; The Principal Transaction in Debt Securities Exemption; and Amendments to several existing prohibited transaction class exemptions. 2

2015 Fiduciary Proposal – Process Overview The comment period for the proposed regulation and the exemptions was originally 75 days (until July 6, 2015) – has now been extended to July 20, Public hearings on the proposals will take place the week of August 10, The final rule would be effective 60 days after Federal Register publication, but generally applicable eight months after publication. 3

Current Fiduciary Test ERISA defines 3 ways to become a “fiduciary”– Exercising discretionary authority over the management or a plan or over management or disposition of plan assets. Having or exercising authority to provide investment advice “for a fee or other compensation.” Having or exercising authority over plan administration. 4

Current Fiduciary Test Existing regulations under 3(21)(A) define what constitutes “investment advice” under the second category – using a “five part test”— (1) make recommendations on investing in, purchasing or selling securities or other property, or give advice as to their value (2) on a regular basis (3) pursuant to a mutual understanding that the advice (4) will serve as a primary basis for investment decisions, and (5) will be individualized to the particular needs of the plan. 5

2010 Proposal Eliminated some aspects of the existing 5-part test and expanded the definition of “fiduciary” advice. Did not include any changes to existing PT exemptions, and therefore called into question many existing practices. The 2010 proposal was very controversial and was withdrawn by DOL in September

2015 Proposal – Advice Definition Fiduciary status depends on providing: “Covered Advice” for a fee or other compensation to a plan, plan fiduciary, participant or beneficiary, IRA or IRA Holder: and either directly or indirectly: representing or acknowledging fiduciary status, or providing the advice under an agreement, arrangement or understanding that the advice is individualized to, or specifically directed to, the advice recipient for consideration in making investment or management decisions with respect to securities or other property. 7

2015 Proposal – Advice Definition Covered Advice means a recommendation as to: acquiring, holding, disposing or exchanging securities or other property; the management of securities or other property Any person who will receive a fee for Applies to IRA rollovers and other distributions “Covered Advice” also includes: Appraisals or fairness opinions if made in connection with a specific plan or IRA transaction Recommendations of any person to provide above advice for a fee 8

2015 Proposal – Advice Definition “Recommendation” is broadly defined: “a communication that, based on its content, 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.” 9

2015 Fiduciary Proposal – Exceptions to Fiduciary Status Persons who may otherwise be deemed investment advice fiduciaries may escape fiduciary status under certain “carve-outs.” The carve-outs are only available if neither the adviser, nor its affiliates, have acknowledged or represented fiduciary status. 10

2015 Fiduciary Proposal – Exceptions to Fiduciary Status Carve-Outs Cover: Sales / counterparty transactions and swaps (does not cover IRAs/individuals or small plans) Advice by an employee to its plan sponsor employer Non-individualized marketing by platform provider and associated selection and monitoring assistance (does not cover IRAs) Financial reports and valuations for non- transaction based information necessary to satisfy reporting and disclosure rules Investment education 11

12 Illustration: Current State Fiduciary Advice Fee, recommendation of securities or other property, regular basis, mutual understanding, primary basis Non- Fiduciary Education General plan info, investing info, asset allocation models, interactive materials Sales Activities No mutual understanding, no regular basis Regular basis sales, individualized, mutual understanding develops over time Failure to meet IB 96-1 requirements Recommending a manager

13 Illustration: Expansion of Fiduciary Definition Fiduciary Advice “Covered Advice” + Acknowledge Status OR Functional Test Education Platform and Monitoring Employee advice to a fiduciary Valuation Sales IRAs Ps & Bs Plans Large Plans IRAs Ps & Bs Small plans IF >$100 AUM ID investment product For transaction Fs For transaction, but solely used for reporting

14 “Best Interest Contract Exemption” (BIC) Covers advice to “retail” investors: Participant or beneficiary in participant- directed plan; The beneficial owner of an IRA/HSAs; and A plan sponsor of a non-participant-directed plan that has fewer than 100 participants Does not cover advice to: Plan sponsors of participant-directed plans Plan sponsors of large plans (100 or more)

2015 Proposal –PTE Overview Best Interest Contract Exemption Exemption for Principal Transactions in Debt Securities Significant revisions to: PTE 75-1 PTE PTE Also Revised: PTE 77-4 PTE PTE

2015 Fiduciary Proposal - Top Issues for Plan Sponsors Distribution and Rollover Issues Carve-Outs Seller’s Carve-Out Participant Education Platform / Monitoring Valuation Employee Advice Availability of / Revisions to Existing PTEs 16

2015 Fiduciary Proposal - Top Issues for Plan Sponsors Distribution and Rollover Issues Sponsor advice to employees Provider advice to employees “Fee or other compensation” = any fee or compensation for the advice received by the person or an affiliate from any source and any fee or compensation incident to the transaction Other potential conflicts / exemptions 17

2015 Fiduciary Proposal - Top Issues for Plan Sponsors Seller’s Carve-Out Only applies to counterparty to plan’s investment fiduciary Carve-out requirements will likely result in potential service providers seeking representations from plan fiduciaries at point of sale Concerns about RFPs Questions regarding applicability to services 18

2015 Fiduciary Proposal - Top Issues for Plan Sponsors Participant Education May not identify any specific investment product or service within asset allocation or interactive models Additional distribution information allowed Specifically covers advice to fiduciaries, participants and IRA owners 19

2015 Fiduciary Proposal - Top Issues for Plan Sponsors Platform / Selection and Monitoring Carve Out Platform providers may not consider individualized needs of the plan Participant-directed plans only Written disclosure requirement Objective screens only – no sample line- ups 20

2015 Fiduciary Proposal - Top Issues for Plan Sponsors Valuation Concerns by providers (e.g. custody banks) that information provided in connection with a transaction is carve-out only if “solely” provided to meet reporting and disclosure requirements (e.g., not for fiduciary monitoring purposes) 21

2015 Fiduciary Proposal - Top Issues for Plan Sponsors Employee Advice Compensation limited to “normal” compensation for work performed for the employer 22

2015 Fiduciary Proposal - Top Issues for Plan Sponsors Existing Exemptions PTE Discretionary Mutual Fund programs (including within CITs) (Transition Management) 75-1 – Unaffiliated mutual fund sales 23