DOL Fiduciary Rule: Answering Advisors' Top Questions Jason Berkowitz Vice President and Counsel, Regulatory Affairs September 7, 2016

Introduction  Goal is to provide general information for financial advisors about the Rule  Provided for informational purposes only, not legal advice  Advisors should consult with their firm’s legal & compliance departments with respect to specific issues/questions  Opinions expressed are IRI’s and not reflective of the opinions of any member company  Full FAQ available in IRI’s DOL Fiduciary Implementation Resource Center at myirionline.orgmyirionline.org

About the Rule 1.What does the DOL Rule do? 2.What is the Best Interest Contract (BIC) Exemption? 3.Are there any exemptions from the DOL rule? 4.When will the DOL rule go into effect? What is the difference between the effective date and the implementation date? How long will I and my firm have to comply with the rule?

About the Rule 5.Will I need special fiduciary insurance (E&O coverage) for the liability imposed under the rule? 6.What should I do if I have questions about how to interpret or apply the rule? Is it possible to ask the DOL for additional guidance?

What does the DOL rule do?  Significantly expands universe of activities making someone a fiduciary  Rollover 401(k) to an IRA  Transition from commission-based brokerage account to fee- based advisory account  Creates uncertainty with treatment of other activities

What is the BIC Exemption?  Sets rules you and your firm must follow to receive commissions and other similar types of compensation  BIC Exemption Requirements  “Best Interest Contract”  Act in the client’s best interest  Receive only “reasonable compensation.”  Establish policies and procedures to prevent material conflicts of interest  Satisfy disclosure obligations

Being an ERISA Fiduciary

1.What does it mean to be a fiduciary under ERISA, and how does fiduciary status affect advisor compensation? 2.What are the differences between fiduciary obligations and the suitability standard? Will being a fiduciary under the DOL rule change my responsibilities to my client? 3.Is there a difference between being a fiduciary under this rule and being a fiduciary under federal securities laws?

Being an ERISA Fiduciary 4.Can my clients and I agree that I will not be a fiduciary in certain situations? 5.If I am a fiduciary for a client’s qualified accounts, will I also be a fiduciary for their nonqualified accounts? 6.If I become a fiduciary under he DOL rule, will I have to operate under advisory agreements with my clients?

What does it mean to be a fiduciary under ERISA?  Act in client’s best interest  Heightened legal obligations  Duty of loyalty  Duty of prudence  No compensation from third parties for recommendations, or “prohibited transactions” And how does fiduciary status affect advisor compensation?

Being a fiduciary under the DOL Rule and federal securities laws: Federal Securities Laws  Must eliminate or make full and fair disclosure of all conflicts of interest What’s the difference? How they treat conflicts of interest DOL Rule  Prohibited from recommending a transaction if you have a conflict of interest unless you qualify for the BIC or another PTE

Compensation 1.How will being a fiduciary under the DOL rule affect how I am compensated? 2.What kinds of compensation can I receive as an ERISA fiduciary? 3.What does “reasonable compensation” mean?

Compensation 4.Will I have to follow rules in the BIC exemption if I only receive fees/other forms of levelized compensation? Does it make a difference if the levelized compensation is at the account level or the product level? 5.How will the DOL rule impact my relationships with existing clients? Can I continue to advise clients on existing investments (including recommendations about subaccount switches) and can I continue to receive trail commissions?

What does “reasonable compensation” mean?  Vague and undefined standard  Now applies to IRAs  Market-based standard  Does not dictate specific amounts of compensation  Facts and circumstances

How will the DOL rule impact my relationships with existing clients?  Non-fiduciary services not impacted  Limited “Grandfathering” provision allows continued services (and compensation) if conditions are met  Use negative consent to enter into best interest contracts (until 1/1/18)  Execute new best interest contracts

BIC and PTE Who has to sign the “best interest contract” and when? What if more than one financial institution is involved in a particular transaction, such as a variable annuity transaction involving the insurer, broker-dealer, and insurance agency? 2.How does the rule impact my client’s ability to sue me if they are unhappy with their investment results?

BIC and PTE I already have to make sure the investments I recommend to my clients are suitable. What more is required to satisfy the “best interest” standard? 4.What do I need to know about the new disclosure requirements under the BIC exemption? 5.What is PTE and how is it used? What are the disclosure requirements and other conditions for selling products under this exemption?

How does the rule impact my client’s ability to sue me if they are unhappy with their investment results?  Contract requirement creates a legal remedy for breach of “best interest” or “reasonable compensation” standards  Based on facts and circumstances at time of recommendation  Clients need to show more than just sub-par investment performance

From suitable to “best interest”  Suitability - recommendations be appropriate to client’s investment objectives, risk tolerance, financial circumstances, and needs  Additionally, you must make recommendations the way a prudent expert would, and put your own interests to the side  Does not require “best possible product”  Documentation is key: client information, universe of products, reasons for recommending a product, educational information, etc. What more is required?

Working With Clients 1.How will the DOL rule impact my ability to provide education to my clients? 2.How will the DOL rule impact my ability to recommend IRA rollovers? 3.How will the DOL rule impact my ability to recommend my firm’s own proprietary products? 4.Will different rules apply depending on whether I am working with a small plan or a large plan?

Understanding the Education Exception  You can provide educational information about financial, investment, and retirement matters without becoming a fiduciary. This includes:  Information about the Terms or Operation of a 401(k) or IRA  General Financial and Investment Concepts  Model Asset Allocation Portfolios  Interactive Investment Materials  Talking about specific investment products will usually cross the line from education to advice Where is the line between Education and Advice?

Questions?