The Harvard Club ● July 18, 2016 ● © IA Watch 2016 ● 1 Beyond the BICE  Marcia Wagner, The Wagner Law Group, Boston  Jamie Fleckner, Partner, Goodwin Procter, Boston  David Sobel, CCO, Abel/Noser, New York

The Harvard Club ● July 18, 2016 ● © IA Watch 2016 ● 2 PTE and Annuity Sales Benefits and Advantages ◦ Upside is that it is much easier to comply with than BIC Exemption ◦ No written contract or compliance policies ◦ But does not cover VA or FIA sales to Plans/IRAs ◦ No relief for revenue sharing

The Harvard Club ● July 18, 2016 ● © IA Watch 2016 ● 3 PTE and Annuity Sales Requirements for PTE ◦ Conflicts disclosures ◦ Disclosure of commission (repeated annually for ongoing deposits) ◦ Client must provide written authorization of annuity purchase and acknowledge disclosures

The Harvard Club ● July 18, 2016 ● © IA Watch 2016 ● 4 Prohibited Transaction Exemption Formerly Principal Transactions Exemption Applies to purchases/sales of debt securities where advisory firm is on the other side of the transaction Will not apply if advisor is employer, named fiduciary, 3(16) PA, or functional fiduciary

The Harvard Club ● July 18, 2016 ● © IA Watch 2016 ● 5 Prohibited Transaction Exemption Formerly Principal Transactions Exemption Conditions Similar to BICE but includes: ◦ Credit risk assessment ◦ Disclosures ◦ Best execution

The Harvard Club ● July 18, 2016 ● © IA Watch 2016 ● 6 PTE Gives non discretionary and discretionary advisors ability to receive variable compensation (but not revenue sharing) Agent Relief Cross Agency Transactions Broker Relief

The Harvard Club ● July 18, 2016 ● © IA Watch 2016 ● 7 Fee Levelization De Facto Exemption ◦ Fiduciary advisor is permitted to earn transaction-based compensation ◦ However, it must not vary based on investments selected by plan or IRA client ◦ No need for exemption because fee levelization eliminates prohibited transaction to begin with

The Harvard Club ● July 18, 2016 ● © IA Watch 2016 ● 8 Implementing Fee Levelization Potential Areas of Variable Compensation ◦ Commissions and Ticket Charges, Revenue Sharing, Payments from Funds (e.g., sub-TA payments), Proprietary Products (e.g., sweep vehicle) How To Levelize ◦ Need appropriate universe of investment products that pay levelized amount (e.g., 50 bps) ◦ Restructure revenue sharing as flat dollar payments ◦ Replace proprietary products (or fee credit)

The Harvard Club ● July 18, 2016 ● © IA Watch 2016 ● 9 Robo-Advice What Is It? ◦ Asset allocation advice based on computer models ◦ Routinely used for participant-level advice and recommending allocations to plan menu options ◦ Potentially available for IRA investors History

The Harvard Club ● July 18, 2016 ● © IA Watch 2016 ● 10 Computer Model Exemption Relief from Computer Model Exemption ◦ Allows receipt of variable compensation (1) Commissions (e.g., 12b-1 fees) (2) Proprietary Funds ◦ Advice must be non-discretionary and based on computer model

The Harvard Club ● July 18, 2016 ● © IA Watch 2016 ● 11 Requirements for Computer Model Computer Model ◦ Based on generally accepted theories ◦ Must not favor investments that generate more compensation for advisor ◦ Must request client’s risk profile information ◦ Must consider all designated investment options ◦ Requires certification by independent expert ◦ Needs annual audit

The Harvard Club ● July 18, 2016 ● © IA Watch 2016 ● 12 Reasonable Compensation Market value of services rendered and benefits delivered Other relevant factors: nature of underlying asset, complexity of the product, monitoring duties' For bundled services for life insurance and annuity products, consider the value of all guarantees services and benefits “Customary” compensation is not a justification

The Harvard Club ● July 18, 2016 ● © IA Watch 2016 ● 13 Reasonable Compensation Steps to take to ensure reasonable fees ◦ Document/demonstrate the process used to determine reasonableness of fees ◦ Benchmark: What is the market charging for these services

The Harvard Club ● July 18, 2016 ● © IA Watch 2016 ● 14 Sample BIC Contract ●Scope ●Arbitration ●Standard of Care Best Interest standard Advisor compensation ●Warranties ●Disclosures

The Harvard Club ● July 18, 2016 ● © IA Watch 2016 ● 15 Important Information This presentation is intended for general informational purposes only, and it does not constitute legal, tax or investment advice from The Wagner Law Group. Financial advisors and other plan service providers should consult with their own legal counsel to understand the nature and scope of their responsibilities under ERISA and other applicable law. A PPTX