DEPARTMENT OF LABOR (DOL) FIDUCIARY RULE IMPLICATIONS FOR CORPORATE FIDUCIARIES

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1 James Marion DEPARTMENT OF LABOR (DOL) FIDUCIARY RULE IMPLICATIONS FOR CORPORATE FIDUCIARIES NEW YORK BANKER S ASSOCIATION (NYBA) TRUST & INVESTMENT CONFERENCE SEPTEMBER 22, 2016 National Fiduciary Executive, U.S. Trust, Bank of America Private Wealth Management

2 Disclosure IMPORTANT: This brief summary is for discussion purposes only. It does not contain legal, tax, investment, or insurance advice and cannot be relied upon for implementation and/or protection from penalties. Always consult with your independent attorney and tax advisor for legal and tax advice. U.S. Trust operates through Bank of America N.A., and other subsidiaries of Bank of America Corporation. Bank of America N.A., Member FDIC. Investment Products: Are Not FDIC Insured Are Not Bank Guaranteed May Lose Value 2016 Bank of America Corporation. All rights reserved. 2

3 How did we get here? Part Test 1 In 1975, the Department issued regulations that significantly narrowed the breadth of the statutory definition of fiduciary investment advice very different context and investment advice marketplace. if advisers are not fiduciaries, they may operate with conflicts of interest that they need not disclose Non-fiduciaries may give imprudent and disloyal advice 1 Department of Labor Fiduciary Policies 3

4 2010 Proposed Rule expand definition of investment advice by eliminating Part Test Massive criticism Withdrawn in response to opposition 2015 Reproposal April 20, 2015 Thousands of comment letters Multiple rounds of hearings Attempts to mobilize Congress April 6, 2016 Final Rule! 4

5 Key Dates: Publication in Federal Register: April 6, 2016 Effective Date: June 7, 2016 (60 days after Publication) Applicability Date: April 10, 2017 Transition for BICE: January 1, 2018 (also Principal Transaction Exemption) 5

6 What does the Rule do? Defines Fiduciary for ERISA and the Internal Revenue Code by redefining: Investment Advice - and - Recommendation Applies ERISA standards to Individual Retirement Accounts by way of the prohibited transaction provisions of the Internal Revenue Code. 6

7 Industry Reaction: Strong opposition from industry Multiple lawsuits filed in Federal Court. Two of note: Northern District of Texas Chamber of Commerce of the United States of America v. Perez, Civil Action No. 16-cv-1476 (N.D. Texas) (June 1, 2016). District of Columbia The National Association for Fixed Annuities v. Perez, Civil Action No. 1:16- cv-1035 (D.D.C.) (June 2, 2016). Political Strategy 7

8 Key Definition: Recommendation means a communication that, based on its content, context and presentation, would reasonably be viewed as a suggestion that the advice recipient engage in or refrain from taking a particular course of action. The determination of whether a recommendation has been made is an objective rather then subjective inquiry. In addition, the more individually tailored the communication is to a specific advice recipient or recipients about, for example, a security, investment property, or investment strategy, the more likely the communication will be viewed as a recommendation. Providing a selective list of securities to a particular advice recipient as appropriate for that investor would be a recommendation as to the advisability of acquiring securities even if no recommendation is made with respect to any one security. Furthermore, a series of actions, directly or indirectly (e.g., through or together with any affiliate), that may not constitute a recommendation when viewed individually may amount to a recommendation when considered in the aggregate. It also makes no difference whether the communication was initiated by a 2 person or a computer software program. (emphasis added) 2 Department of Labor Fiduciary Policies 8

9 Below are examples of recommendations which the DOL considers fiduciary investment advice: Recommendations with respect to the purchase, hold or sale of securities or an investment strategy, or other property in a Covered Client s account; Recommendations to rollover, transfer, or take a distribution from a retirement plan like a 401(k), whether or not that conversation results in a specific investment recommendation, but will not include communications that are only educational in nature, as described below; Recommending an investment manager (although not if an adviser is recommending the client hire the adviser for his or her own services); Recommending the selection of an investment account arrangement, including a brokerage or investment advisory account, and moving from a brokerage to a feebased account or vice versa; or Recommending investment policies or strategies. 9

10 Key Definition: Investment Advice For purposes of section 3(21)(A)(ii) of the Employee Retirement Income Security Act of 1974 (Act) and section 4975 (e)(3)(b) of the Internal Revenue Code (Code), except as provided in paragraph (c) of this section, a person shall be deemed to be rendering investment advice with respect to moneys or other property of a plan or IRA described in paragraph (g)(6) of this section if (1) Such person provides to a plan, plan fiduciary, plan participant or beneficiary, IRA, or IRA owner the following types of advice for a fee or other compensation, direct or indirect: (i) A recommendation as to the advisability of acquiring, holding, disposing of, or exchanging, securities or other investment property, or a recommendation as to how securities or other investment property should be invested after the securities or other investment property are rolled over, transferred, or distributed from the plan or IRA. (ii) A recommendation as to the management of securities or other investment property, including, among other things, recommendations on investment policies or strategies, portfolio composition, selection of other persons to provide investment advice or investment management services, selection of investment account arrangements (e.g., brokerage versus advisory); or recommendations with respect to rollovers, transfers, or distributions from a plan or IRA, including whether, in what amount, in what form, and to what destination such a rollover, transfer, or distribution should be made; and 3 Department of Labor Fiduciary Policies

11 Key Definition (cont d): Investment Advice (continued) (2) With respect to the investment advice described in paragraph (a)(1) of this section, the recommendation is made either directly or indirectly (e.g., through or together with any affiliate) by a person who: (i) Represents or acknowledges that it is acting as fiduciary within the meaning of the Act or the Code; (ii) Renders the advice pursuant to a written or verbal agreement, arrangement, or understanding that the advice is based on the particular investment needs of the advice recipient; or (iii) Directs the advice to a specific advice recipient or recipients regarding the advisability of a particular investment or management decision with respect to the securities or other investment property of the plan or IRA. (emphasis added) 11

12 Impartial Conduct Standards 4 The Financial Institution affirmatively states that it and its Advisers will adhere to the following standards and, they in fact, comply with the standards: (1) When providing investment advice to the Retirement Investor, the Financial Institution and the Adviser(s) provide investment advice that is, at the time of the recommendation, in the Best Interest of the Retirement Investor. As further defined in Section VII(d), such advice reflects the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person 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; (2) The recommended transaction will not cause the Financial Institution, Adviser or their Affiliates or Related Entities to receive, directly or indirectly, compensation for their services that is in excess of reasonable compensation within the meaning of ERISA section 408(b)(2) and Code section 4975(d)(2). (3) Statements by the Financial Institution and its Advisers to the Retirement Investor about the recommended transaction, fees and compensation, Material Conflicts of Interest, and any other matters relevant to a Retirement Investor s investment decisions, will not be materially misleading at the time they are made. 4 Department of Labor Fiduciary Policies 12

13 Scope of Fiduciary Duty investment advice 5 A person who is a fiduciary with respect to a plan or IRA by reason of rendering investment advice (as defined in paragraph (a) of this section) for a fee or other compensation, direct or indirect, with respect to any securities or other investment property of such plan or IRA, or having any authority or responsibility to do so, shall not be deemed to be a fiduciary regarding any assets of the plan or IRA with respect to which such person does not have any discretionary authority, discretionary control or discretionary responsibility, does not exercise any authority or control, does not render investment advice (as described in paragraph (a)(1) of this section) for a fee or other compensation, and does not have any authority or responsibility to render such investment advice, provided that nothing in this paragraph shall be deemed to: (1) Exempt such person from the provisions of section 405(a) of the Act concerning liability for fiduciary breaches by other fiduciaries with respect to any assets of the plan; or (2) Exclude such person from the definition of the term party in interest (as set forth in section 3(14)(B) of the Act) or disqualified person (as set forth in section 4975(e)(2) of the Code) with respect to any assets of the employee benefit plan or IRA. 5 Department of Labor Fiduciary Policies 13

14 Recommendation - Does Not Include: Platform marketing Platform selection and monitoring General communication Investment education General Carve-Outs from Investment Advice: Sophisticated counterparties Swap transactions Employee communications 14

15 Best Interest Contract Exemption (BICE) 6 (or BIC Exemption) Prohibited Transaction Exemption intended to preserve long-standing business arrangements, i.e., 12b-1 fees or revenue shares. Strict compliance with disclosure and contract requirements. Two versions: Full BIC and Level Fee Fiduciary (BIC Light) Full BIC-general characteristics What does BIC Light get you? 6 Department of Labor Fiduciary Policies 15

16 BIC (Cont d) Full BIC is not available for discretionary accounts Full BIC is intended to address traditional brokerage arrangements BIC for a day

17 Bank Trust Department Potential Impacts 1. New regime for IRAs ERISA Fiduciary Standard Fundamental changes in traditional fee schedules Increased litigation risk 2. IRA rollovers BIC for a day Planning conversations and advice 3. Differential Billing by asset class traditional pricing 17

18 Bank Trust Department Potential Impacts 4. Indirect compensation Soft dollars Spread on bank sweep vehicles 5. Billing and Rebating practices (i.e., when we do not bill on certain assets) Consider whether we can continue to use rebating or not bill on certain positions to maintain the level fee fiduciary status 6. Non-Cash Compensation (e.g., does the receipt of gift, gratuities or non-cash compensation cause the platform to be a variable compensation platform and U.S. Trust to not qualify as a level fee fiduciary?) 18

19 Works Cited Department of Labor - Fiduciary Policies 19