The Department of Labor Proposed Regulation Investment Fiduciary Advice: What You Need to Know Now! Juli McNeely, LUTCF, CLU, CFP NAIFA President Kevin Mayeux, CAE NAIFA CEO Judi Carsrud Director Government Relations

Kevin Mayeux, CAE Welcome and thank you for joining us

Juli McNeely NAIFA: The Voice of the Advisor

NAIFA is Influential  May 4 - White House meeting with NEC & DOL  May 20 - DOL technical meeting  June 3 - DOL follow-up  June 21 - Formal comments  July 1 - FINRA meeting  August 11 - Testified before DOL

NAIFA is Influential  September 10 - Testified at Financial Services Committee Hearing  September 16 - Compliance & Ethics Forum for Life Insurers Annual Meeting presentation  September 18 - House Financial Protection and Life Insurance Caucus presentation  September 25 - Senate Financial Protection and Life Insurance Caucus presentation

How You Can Get Involved Educate yourself Educate your clients Contribute to IFAPAC / Join APIC

Judi Carsrud What the rule says, what it means, what you can do

DOL Proposed Regulation Defines Investment Advice Fiduciary Includes rules for receiving commissions, selling proprietary products Draws line between education and advice Requires a contract between retirement saver, advisor and broker-dealer, insurance company Extensive new disclosures

Investment Advice Fiduciary An advisor who provides advice for a fee is a fiduciary under DOL rules Under current rule, exceptions if advice is one-time only or if not under a mutual understanding that client will rely on advice Under new rule, those exceptions not available

Advice For a Fee… If you charge a fee for services, such as a flat fee, asset management fee, hourly fee – and you do NOT receive any other compensation – no commissions, no revenue sharing fees, no health insurance payments, etc. – you are a fiduciary and must work in the best interest of the client.

Advice for a Commission… If you receive a commission or a revenue sharing fee or other compensation that is DIFFERENT based upon the recommendation you make, you also are a fiduciary and must work in the best interest of your client HOWEVER, because you receive “conflicted compensation,” “differential compensation,” “prohibited compensation” – you must satisfy further complicated rules.

Current Rules Under current rules, if you only provide advice on a one-time basis – you are not a fiduciary. If your client and you do not have a mutual understanding that client will rely on your advice, or if your advice is not the primary basis for the client decision – you are not a fiduciary. If you are not a fiduciary, you can receive conflicted compensation. Some NAIFA members are likely fiduciaries under current rules…but satisfy an available PTE.

No Conflicted Compensation The DOL rule requires that fiduciaries work in the clients’ best interest – without any conflicts of interest – with care, prudence and loyalty – this is true under current rules and is not new news. The DOL provides “exemptions” to this rule if certain conditions and requirements are satisfied…these are called “prohibited transaction exemptions” (PTEs)

PTEs PTE allows advisors to recommend products offered by the plan provider and to receive a commission or other conflicted compensation if certain disclosures are provided…. There are other PTEs that may also allow a fiduciary to receive conflicted compensation.

The New Proposal Under proposed rule, it will not matter if the advice is one-time only, or if there is a mutual understanding, or if the client is relying upon your advice or recommendation…. Under the proposed rule, the PTEs have been revised or revoked and a new PTE is proposed. The new PTE, called the Best Interest Contract Exemption, or BIC exemption, is the crux of the concern with the proposal as written.

The BIC Exemption

Requires a contract between the client, the advisor and the “financial institution” (B-D, insurance company, bank, etc…) that: – Acknowledges everyone is acting in the clients’ best interest – Discloses conflicts and costs in dollar amounts over 1, 5 and 10 year periods – Warranties that procedures to mitigate conflicts are in place – but the examples provided basically exclude any third party compensation (commission) – Extensive data retention and disclosures

The BIC is Costly The contract then allows client to sue advisor for breach of contract IN ADDITION to any and all ERISA remedies under current DOL rules Financial institutions must create public websites that include impossible amounts of data regarding every possible investment that could be offered in a retirement plan, including IRAs A costly, confusing and complicated set of requirements will drive out advisors, B-Ds, insurance companies

PTEs for Annuities The rule changes the PTE dealing with annuities and with proprietary products Requires BIC for some transactions PTE for other transactions

Clients’ Best Interest? Of course! How would NAIFA members stay in business if they did not serve their clients?

How it Impacts Your Business When working with employers in setting up retirement plans When working with employees who have 401(k) type accounts When advising on rolling plan assets to an IRA When recommending a fixed or indexed annuity When recommending a variable annuity

Advising ERs on Plan Set Up Encouraging employers to set up retirement plans is one of the many ways NAIFA members are improving retirement readiness If you are paid via a percentage of total assets (ex: 50 bps or 75 bps) – There is No conflicted compensation – No need to satisfy one of the exemptions – Still a fiduciary, required to work in client best interest

Advising ERs on Plan… Commissions on the investments into mutual funds, including 12b-1 fees are NOT ALLOWED – The BIC exemption is not available when advising ERs – You must either charge a flat fee or % of assets - or you cannot provide assistance

When Advising on Rollover to IRA If investing in mutual funds, or a variable annuity, will need to meet requirements of the BIC exemption If investing in fixed annuity, will need to meet requirements of PTE 84-24

When Advising Plan Participants Will need to meet the requirements of the BIC exemption if you are paid commissions on the investments recommended If paid a % of plan assets, you will not need a PTE

NAIFA National is the Leading Voice Hundreds of meetings with lawmakers Participate and attend hearings, briefings Letters from lawmakers to DOL

Pursuit of All Strategies Time is running out!  Hearings  Meetings with DOL to get rule right  Meetings with lawmakers  Appropriation Process  Legislative Alternatives

Timing DOL goal is to have final and effective by November 2016 We expect the final rule to be published early 2016 and effective 10 months later… Congress may take action to require SEC first, defund the DOL rulemaking, legislate a rule that works

What Can You Do? Have your non-NAIFA colleagues join NOW Call your legislators Have your clients write the DOL and lawmakers Use social media tools on NAIFA website Submit Op-eds in local newspapers

Colleague & Consumer Engagement Visit

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