1. DEPARTMENT OF LABOR FINAL REGULATION THE Fiduciary Investment Advice
What You Need to Know Now!
Scott Sinder
Partner
Steptoe & Johnson LLC
Kate Jensen
Associate
Steptoe & Johnson LLC

2. Kevin Mayeux, CAE
NAIFA CEO

3. Basic Architecture of the Rule
Fiduciary?
If fiduciary, prohibited transaction?
If yes, exemption required
Which exemption?

4. DOL Objectives Expand the scope of “fiduciary” activities;
Impose an enforceable “best interest” standard on IRAs through a contract requirement; and
Level compensation for Financial Institutions (“F.I.s”) and Advisors.

5. How Bad it Could have Been
Contract before any advice/recommendation
Variable annuities and proprietary products in question
True fiduciary standard
Direct warranty obligations on advisors
Plan-level advice not allowed?

6. Final Rule Overview
Virtually all recommendations for compensation are fiduciary investment advice
Fiduciaries need an exemption to receive variable and 3rd party compensation (e.g., commissions) under ERISA and the Code
Primary NAIFA exemptions: Best Interest Contract (“BIC”) and PTE 84-24
Enforceable “best interest” standard (duties of care and loyalty; (prudent man test + consideration of business models)

7. Impact on Advisors Almost everyone becomes a fiduciary
New compliance regime and liability for IRAs
Expect changes in business and compensation arrangements with B-Ds, insurance companies, etc.
Adapt sales, marketing and customer service procedures
Education/general information v. advice?
Delivery of contracts, disclosures, etc.
Improve databases to identify retirement accounts/savers
New rules/guidance from B-Ds, RIAs, FINRA, and/or SEC?

8. Inevitable Cost Impact
Increases in Error and Omission premiums
Perhaps exclusions on some sales, marketing and education
Liability exposure/legal challenges (incl. class actions) in state courts for IRAs
Indemnification of F.I.s?
Cost of new delivery systems (contracts, disclosures, etc.)
New Continuing Education, mandatory compliance courses, staff training, etc.

9. Proposed v. Final Fiduciary Definition
DOL trying to cover any/all recommendations/advice as fiduciary advice
Broader definition – covers account type recommendations (brokerage v. advisory) + still covers referrals
No reliance or mutual understanding requirements
Can limit scope/duration of fiduciary relationship
No general seller’s exception (limited to institutional advisors and money managers with $50 mil.)
Education exception still not meaningful

10. Investment Education

11. Proposed v. Final BIC Exemption

12. Employer Plan Sponsors

13. Distributions and Rollovers

14. BIC Contract Requirement

15. Annuities and Proprietary Products

16. Other Improvements – Proposed v. Final BIC
Modified “best interest” standard
Many obligations fall on F.I.s (contract, disclosures, warranties, etc.)
Fewer disclosures overall (no annual fee/comp disclosures; no 1-, 5-, 10-year projections)
New “level fee fiduciary” rules
Better grandfathering and transition rules

17. Proposed v. Final PTE 84-24
Covers fixed annuities—variable and indexed annuities (sold to plans and IRAs) under the BIC
Limited “insurance commission” relief for agents and brokers
Covers securities sales to ERISA plans, not IRAs
Limited “mutual fund commission” relief for principal underwriters (MF issuers)

18. The Final Rule

19. Definition of Fiduciary
Recommend, for compensation:
specific investments
portfolio composition
Roll over or distribute
Other advice professionals
Account arrangements (brokerage v. advisory)
“Recommendation” = reasonably viewed as a suggestion to take a particular course of action

20. Definition of Fiduciary (Cont’d)
Recommendation (for compensation) becomes fiduciary investment advice if:
Advisor acknowledges she is acting as a fiduciary or
It is rendered pursuant to a written or verbal agreement or understanding (not mutual) or
It is directed to a specific recipient or recipients

21. Exception: General Communications
General circulation newsletters
Publicly broadcast talk shows
Remarks at widely attended speeches
Research and reports for general distribution
General marketing materials
General market data

22. Exception: Investment Education
4 types:
Plan information
General financial, investment, and retirement information
Asset allocation models
Interactive investment materials
For ERISA participants only, allocation models and interactive materials may ID specific products already selected by plan sponsor
No meaningful ed. for plan sponsors

23. Counterparty (“Seller’s) Carve-Out
Applies to IRAs and Plans
Requirements:
Advice delivered to independent fiduciary of plan/IRA who is a regulated financial services provider or manages $50 million +
Arm’s length transaction
Disclosure: not providing impartial advice + any financial interest
Advisor receives no comp for advice from the investor

24. Best Interest Contract Exemption
Catch-all: is available for all fiduciary advice (incl. rollovers and distributions) related to any type of product/asset
Provides relief from ERISA and Code prohibited compensation rules (i.e., allows advisors and F.I.s to continue receiving traditional comp)

25. BIC Requirements - Overview
Contract (IRAs Only)
Written statement of fiduciary status
Impartial Conduct Standards
“Best interest” standard
Reasonable compensation
No misleading statements
Warranties
Impartial Conduct Standards will be met
Policies and Procedures (level comp)
Disclosures (incl. web mandate for F.I.s)

26. BIC “Best Interest” Standard
Advisor must act - with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person would exercise acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims, based on the investment objectives, risk tolerance, financial circumstances, and needs of the Retirement Investor, without regard to the financial or other interests of the Adviser, Financial Institution or any Affiliate, Related Entity, or other party.

27. BIC Requirements – Warranties
Financial Institution must warrant -
It/its advisors comply with the “best interest” std;
Compensation is “reasonable”
No comp practices that induce conflicts of interest
Written policies and procedures in place “reasonably and prudently designed” to ensure that its advisors adhere to these requirements

28. BIC Requirements – Warranties (Cont’d)
Level compensation warranty: neither the F.I. nor its advisors use or rely upon –
“quotas, appraisals, performance or personnel actions, bonuses, contests, special awards, differential compensation or other actions or incentives that are intended or would reasonably be expected to cause Advisers to make recommendations that are not in the Best Interest of the Retirement Investor”

29. BIC Requirements – Disclosures
Financial Institution must disclose:
“Best interest” standard, services provided, how (generally) investor will pay for services
Material conflicts of interest, fees/charges imposed on investor, 3rd party comp
That investor has the right, upon request, to obtain more specific information (e.g., policies and procedures, specific comp amounts and arrangements, etc.)
Link to Institution’s web page (with specific disclosures, incl. compensation arrangements)
Whether ongoing monitoring will occur

30. BIC Requirements – Level Fee Fiduciaries
When F.I. and advisor receive only level comp, disclosed in advance
Do NOT have to comply with:
Contract
Warranties
BIC disclosures (incl. web disclosures)
Recordkeeping requirements

31. BIC Requirements – Level Fee Fiduciaries (Cont’d)
DO have to comply with:
Statement of fiduciary status
Impartial conduct standards (“best interest” standard, reasonable comp, no misleading statements)
Special rules for limited proprietary/3rd party comp product offerings
Special rollover documentation

32. BIC – Level Fee Fiduciaries (Cont’d)
For recommendations to roll over from ERISA plans to IRAs, the F.I. must document:
why it is in the client’s “best interest,” and
consideration of the alternatives (e.g., leave the money in the plan) and the relative fees/expenses and services involved
For recommendations to roll over between IRAs or from a commission-based to a fee-based account, the LFF must document:
the services that will be provided for the fee

33. BIC Requirements – Proprietary Products
Limiting advice/sales to proprietary products will be deemed to satisfy “best interest” standard if –
Investor is informed of product offering limitations and any material conflicts of interest
F.I. documents offering limitations and conflicts of interest, and reasonably concludes that limitations will not result in unreasonable comp or imprudent recommendations
General BIC requirements are satisfied (incl. modified “best interest” standard)

34. Additional Relief for Insurance & Annuity Products
Available for all investment products, but particularly helpful for insurance/annuity products
Provides relief for non-compensation prohibited transactions (i.e., dealing with parties in interest/disqualified persons and service providers) if:
Transaction is effected in ordinary course of business;
Compensation is reasonable; and
Terms are at least as fair as an arm’s length transaction with an unrelated party
Still rely on broader BIC for comp relief
Appears to be no practical impact on advisors

35. Grandfathering for Pre-Existing Transactions
Advisors may continue to receive prohibited comp (e.g., trailers) on investment property (e.g., variable annuities) acquired before April 10, 2017 if:
Comp is received pursuant to arrangement in place before 4/10/17 and is reasonable
transaction was not prohibited at the time it was made
Comp is not received for additional amounts invested (exchanges w/in MF family or V.A. pursuant to pre-existing arrangement are ok)
Recommendations made after 4/10/17 are in client’s “best interest”

36. BIC Transition Relief
From April 10, 2017 until January 1, 2018, advisors and F.I.s are deemed to satisfy the BIC if the F.I. discloses:
It/its advisors are acting as fiduciaries,
It/its advisors adhere to the impartial conduct standards,
Material conflicts of interest
Any limitations based on proprietary/3rd party-comp products

37. Final PTE 84-24
Covers:
Fixed Rate Annuity and insurance contract purchases by IRAs and ERISA Plans
Investment company securities purchases by ERISA Plans
Does not cover:
Any variable or indexed annuity purchases
Securities purchases by IRAs

38. Final PTE 84-24
Provides only limited compensation relief for receipt of:
“Insurance Commissions”
Paid by the insurance company; includes renewal fees and trailers, not revenue sharing, admin fees, or mktg fees
“Mutual Fund Commissions” by “principal underwriters” (mutual fund issuers) only for ERISA Plan securities purchases
Paid by plan or investment company; includes sales load, not 12b-1 fees, revenue sharing, admin fee, or mktg fees

39. PTE 84-24 Requirements - Overview
No contract + no direct private right of action for IRAs
Impartial Conduct Standards (= BIC)
Effect transactions in ordinary course of business
Terms of transaction at least as favorable as arm’s length transaction with unrelated party
Recordkeeping by agent/broker
Written disclosures

40. PTE 84-24 Requirements - Disclosures
Agent/broker must disclose in writing:
Any affiliation with insurance company whose product is being recommended and nature thereof
Commission (expressed as dollar figure, if feasible) for first year and succeeding renewal years
Statement of any fees, charges, penalties, etc. associated with the contract

41. PTE 84-24 – Disclosures (Cont’d)
Disclosures provided to an independent fiduciary of the Plan or IRA owner
Independent fiduciary/IRA owner must acknowledge receipt (in writing) and approve the transaction
Independent fiduciary may not receive any comp for the transaction from any party involved in the transaction

42. PTE 84-24 – Recordkeeping Agent/broker obligation
Must keep records (sufficient to determine whether exemption is satisfied) for 6 years
Records must be available for inspection
Failure to keep records results in loss of exemption for transaction(s) for which records are missing, not other transactions

43. Status, Timing, Options Key dates:
Final Rule is effective on June 7, 2016
New definition of fiduciary investment advice applicable on April 10, 2017
Full compliance with the BIC by January 1, 2018
Congress has options, but a “steep climb”
Congressional Review – 60 days, subject to veto
Legislative alternative introduced in House and Senate

44. Next Steps: Understand How it Impacts Your Business
Working with new and existing clients
Working with employers setting up retirement plans
Working with employees who have 401(k)-type accounts
Recommendations on rolling ERISA plan assets to an IRA
Recommending annuities
Recommending propriety products
Working with your B/D and RIA partners

45. NAIFA Skill Builder Workshop
Designed to be delivered via state and local associations, this NAIFA skill builder workshop presented by subject matter expert Don Trone, GFS will help you comply with the new fiduciary rule and strategize for your future.

46. NAIFA Skill Builder Workshop
NAIFA ‘s development of this fiduciary workshop is specific to this new DOL rule
Learn decision-making processes, best practices, record-keeping
Available in June!
Watch for more information!