DOL’s Final Rule Defining the Term Fiduciary Webinar for Insured Retirement Institute Members Richard K. Matta Thomas Roberts Stephen M. Saxon April 8, 2016

Overview of Significant Changes The Final Regulation – Overview of Significant Changes Covered advice Recommendations of securities and other property including recommendations of rollover amounts, forms, distinctions and investments Recommendations of third parties (not one’s self or affiliates) to provide management or advice services

The Final Regulation (Cont’d.) Seller’s exception dramatically re-written to now apply only to ERISA plans and IRAs represented by certain types of investment professionals and to plans with $50 million or more in assets

“Hire Me” A recommendation that one’s self or one’s affiliates be hired is non-fiduciary But investment transactions (including rollovers) undertaken for purposes of receiving one’s advisory or management services are fiduciary

PTE 84-24 Available only to cover sales of fixed rate annuity contracts Variable and fixed indexed products are excluded

The Final Best Interest Contract (BIC) Exemption A kindler, gentler version of the proposal Much more expansive - Available to cover both plan-level and participant/IRA holder advice - Also available to cover robo advice if fee levellized Far less onerous contract formation and IT intensive disclosures Remains true to DOL’s “North Star” – an enforceable Best Interest standard of conduct

Final BIC: Three Pathways for Relief For advice to IRA investors (and IRA holders): a bi-lateral BIC contract pathway For advice to “ERISA investors” (plan fiduciaries not eligible for seller’s exception): a unilateral set of acknowledgements and disclosures pathway For “Level Fee Fiduciaries” providing rollover recommendations: a “streamlined” pathway

Final BIC Relief Elements Element II(b): The Fiduciary Acknowledgement The Financial Institution affirmatively states in writing that it and its advisers act as fiduciaries under ERISA, or the Code or both with respect to investment recommendations

Final BIC Relief Elements Element II(c): Impartial Conduct Standards: The Financial Institution affirmatively states that it and its advisers will Provide advice that is in the investor’s best interest (i.e., prudent and “without regard” to competing financial or other interests) Not receive compensation that is in excess of what is reasonable Not make materially misleading statements about the transaction, fees and compensation or material conflicts

Final BIC Relief Elements Element II(d): Warranties Financial Institution affirmatively warrants Adoption of policies and procedures Identification of material conflicts and BIC compliance officer – identify by name, a person responsible for addressing material conflicts and adherence to impartial conduct standards No use of quotes, appraisals, etc. except to the extent designed to avoid a misalignment of interests

Final BIC Relief Elements Element II(e): Disclosures In writing, at or prior to execution of the recommended transaction, the Financial Institution must prominently disclose Best Interest standard of care Scope of services How services will be paid for (e.g., commissions) Material conflicts of interests Compensation from third parties Investor’s right to obtain copies of policies and procedures adopted under II(d) and specific cost and comp disclosures A link to Financial Institution’s III(b) website Limitations on universe of products based on proprietary products or third party payments Contact info Whether the investment will be monitored Note – Good faith errors curable within 30 days

Final BIC Relief Elements Element II(f): Ineligible provisions The Financial Institution may not Disclaim or limit its or Advisor’s liability Require waiver or qualification of investor’s right to participate in class action Require mediation of claims in different venues

BIC Relief Pathway #1: A Bi-lateral Contract to Cover Advice to IRA Investors Requires all of the Relief Disclosure Elements in II(b) – II(f) (fiduciary acknowledgement, impartial conduct standards, warranties, disclosures, absence of ineligible provisions) In a bi-lateral contract with the retail investor Manual or e-signature of client needed for new accounts Negative consent procedure for contracts in place prior to January 1, 2018

Why? ERISA enforcement rights BIC Relief Pathway #2: A Unilateral Set of Acknowledgements and Disclosures Provided to ERISA Plan Investors All of the same as in Relief Pathway #1, but no bi-lateral contract required Why? ERISA enforcement rights

BIC Relief Pathway #3: For Level Fee Fiduciaries BIC Relief Elements Required: II(b) Fiduciary Acknowledgement II(c) Impartial Conduct Standard Elements Not Required: II(d) Warranties II(e) Disclosures Special Requirement: The Financial Institution must document why a rollover recommendation or a switch from a commission-based to a level fee arrangement is in investor’s Best Interest

BIC Web Disclosure Freely accessible to public Updated quarterly Discussion of business model and material conflicts Typical account fee schedule Written description of policies and procedures List of all product manufacturers and other parties providing third party payments Compensation and incentive arrangements for advisors Note: Good faith errors may be cured within 7 days

Special Relief for Proprietary Product and Third Party Payment Restrictions Best Interest standard deemed satisfied if – Investor is provided with written disclosure of restrictions Investor is fully informed of material conflicts Financial Institution reasonably concludes restrictions will not cause imprudent recommendations Compensation is reasonable Advisors recommendation is not based on Advisor’s own financial interest or interests other than investment objectives, risk tolerance, financial circumstances and needs of investor

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