To Be or Not to Be... A Fiduciary: Navigating the Fiduciary Regulation

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Lesley Cunningham
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includes recommendation of distributions and rollovers. includes recommendations of fiduciary advisers.

1 To Be or Not to Be... A Fiduciary: Navigating the Fiduciary Regulation FRED REISH, ESQ. October 24, 2016 Structure of Fiduciary Package Expansion of definition of fiduciary investment advice: covers most investment sales practices. includes recommendation of distributions and rollovers. includes recommendations of fiduciary advisers. Financial conflicts are prohibited, but exemptions: for insurance and fixed rate annuities. Best Interest Contract Exemption (BICE) for all assets. To Be or Not to Be... A Fiduciary: Navigating the Fiduciary Regulation - October 24,

2 Impact: Fiduciary Rule The rule applies to investment recommendations to: Plan fiduciaries. Fiduciary advisers. and to investment and distribution recommendations to: Participants IRA owners Applicability date: April 10, To Be or Not to Be... A Fiduciary: Navigating the Fiduciary Regulation - October 24, Definition of Fiduciary A person becomes a fiduciary when he or she provides investment or investment management recommendations to a plan, a plan fiduciary, participant or beneficiary, or an IRA owner, under an arrangement where the advice is individualized to, or specifically directed to, the investor. To Be or Not to Be... A Fiduciary: Navigating the Fiduciary Regulation - October 24,

3 Definition of Recommendation A recommendation is a communication that, based on its content, and presentation, would reasonably be viewed as a suggestion that the advice recipient engage in or refrain from taking a particular course of action. [Emphasis added.] Consider: Recommendation/suggestion versus information/ education versus hire me. To Be or Not to Be... A Fiduciary: Navigating the Fiduciary Regulation - October 24, Excluded from Fiduciary Definition Platform exception RFPs and RFIs Selection and monitoring assistance To Be or Not to Be... A Fiduciary: Navigating the Fiduciary Regulation - October 24,

4 Seller s Carve-Out Exception for independent fiduciaries with financial expertise. Conditions: recommendations made to a plan in an arm s length transaction; where there is generally no expectation of fiduciary investment advice; provided specific conditions are met. Note: Not for small plans (e.g., under $50 million), participants or IRA owners. Wholesaler s exception. To Be or Not to Be... A Fiduciary: Navigating the Fiduciary Regulation - October 24, Excluded from Fiduciary Definition General communications. Investment education: plan information. general financial investment, and retirement information. asset allocation models. interactive investment materials. To Be or Not to Be... A Fiduciary: Navigating the Fiduciary Regulation - October 24,

5 Impact of Changes to Definition The regulation will cause most common investment practices to plans and IRAs to be classified as fiduciary investment advice, implicating the: Duty of loyalty Duty of prudence Duty for reasonable compensation (fee-for-service concept) Duty for reasonable costs To Be or Not to Be... A Fiduciary: Navigating the Fiduciary Regulation - October 24, Best Interest Standard Investment advice is in the best interest of a retirement investor when the fiduciary adviser acts with 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,... Note: Roles of Financial Institution and adviser. To Be or Not to Be... A Fiduciary: Navigating the Fiduciary Regulation - October 24,

6 Best Interest Standard... based on the investment objectives, risk tolerance, financial circumstances, and needs of the retirement investor,... Note: Individualized to the investor. To Be or Not to Be... A Fiduciary: Navigating the Fiduciary Regulation - October 24, Best Interest Standard... without regard to the financial or other interests of the adviser, Financial Institution or any Affiliate, Related Entity, or other party. Note: Duty of loyalty. To Be or Not to Be... A Fiduciary: Navigating the Fiduciary Regulation - October 24,

7 A Prudent Process An informed and reasoned decision, applying: Generally accepted investment theories; and Prevailing investment industry practices. Documentation under conservative approach: Suitability information. Reputable software. Database. Reports. Periodic communication. To Be or Not to Be... A Fiduciary: Navigating the Fiduciary Regulation - October 24, Prohibited Transaction Rules Both ERISA and the Code prohibit fiduciary advice: that results in receipt of compensation by the adviser * from a party other than the plan; or where the adviser * causes himself to receive a benefit (e.g., compensation). * adviser includes affiliates. Note: Level fee and third party payments. Compensation: Money or monetary value... but for rule. To Be or Not to Be... A Fiduciary: Navigating the Fiduciary Regulation - October 24,

8 DOL Investigations of Advisers [RIA] has agreed to pay $1,265, to 13 pension plans to resolve alleged violations of ERISA. An investigation... found that the... fiduciary investment adviser made investments in mutual funds on behalf of ERISA-covered defined benefit plan clients and received 12b-1 fees from those funds.... [RIA] failed... to use those fees for the benefit of the plans either by directly crediting the amounts to the plans or by offsetting other fees the plans would be obligated to pay the company. Note: Same concept applies to IRAs. To Be or Not to Be... A Fiduciary: Navigating the Fiduciary Regulation - October 24, Perez v. Ramsay, (No. 14-cv-6733, W.D. N.Y., Filed December 29, 2014) Ramsay provided investment advisory services to ERISAcovered plans and also owned a TPA that administered the plans: The DOL alleges that Ramsay caused himself and his companies to be paid fees and commissions which were not properly disclosed to or authorized by the plans; The DOL also alleges Ramsay used his fiduciary authority to cause the plans to invest in a higher fee fund when the same fund portfolio was available in a lower fee class. To Be or Not to Be... A Fiduciary: Navigating the Fiduciary Regulation - October 24,

9 Issues for TPAs TPA retirement plans. Affiliated advisers: Payments from providers. Referrals to advisers. To Be or Not to Be... A Fiduciary: Navigating the Fiduciary Regulation - October 24, Fiduciary Regulation Prohibited transaction exemptions: PTE for insurance contracts and fixed-rate annuity contracts. Best Interest Contract Exemption (BICE) for all investments and insurance products (including indexed and variable annuities). Applicability date: April 10, 2017 (but certain BICE conditions delayed until January 1, 2018). To Be or Not to Be... A Fiduciary: Navigating the Fiduciary Regulation - October 24,

10 Prohibited Transaction Consequences Pure level fee advisers: Plans Participants IRAs Rollovers Commissioned or variable comp advisers: Plans Participants IRAs Rollovers To Be or Not to Be... A Fiduciary: Navigating the Fiduciary Regulation - October 24, PTCE Major conditions for exemption for insurance commissions (but not revenue sharing): Adviser must act in best interest of plan or IRA. Statements about recommended investments, fees, material conflicts and other matters must not be misleading. continued... To Be or Not to Be... A Fiduciary: Navigating the Fiduciary Regulation - October 24,

11 PTCE Continued... Compensation (e.g., commissions) must be reasonable for services. Commissions must be disclosed. Charges, surrender fees, etc., must be disclosed. Transaction must be approved in writing. To Be or Not to Be... A Fiduciary: Navigating the Fiduciary Regulation - October 24, Best Interest Contract Exemption (BICE) The BIC exemption for Retirement Investors : A participant in an ERISA-governed plan who can direct the investment of his account or take a distribution; An owner of an IRA; or A Retail Fiduciary of a plan or IRA. To Be or Not to Be... A Fiduciary: Navigating the Fiduciary Regulation - October 24,

12 Best Interest Contract Exemption (BICE) BICE has a number of requirements: A written contract for an IRA (or plan not covered by ERISA) or written disclosure for an ERISA retirement plan before a transaction: The contract is between the Financial Institution and the investor. The contract or disclosure must acknowledge fiduciary status. continued... To Be or Not to Be... A Fiduciary: Navigating the Fiduciary Regulation - October 24, Best Interest Contract Exemption (BICE) Continued... The contract or disclosure agrees to Impartial Conduct Standards, including adherence to Best Interest standard and limiting compensation to reasonable amounts. Importance of services. Monitoring. The agreement must affirmatively warrant certain conduct by the adviser and the Financial Institution, including no misleading statements. Impact on adviser compensation (transition period). continued... To Be or Not to Be... A Fiduciary: Navigating the Fiduciary Regulation - October 24,

13 The BIC Exemption Continued... The contract must be signed, or the disclosure made, no later than point-of-sale, but the provisions must be retroactive. Other Requirements Transaction disclosures. Right to detailed information on request. Website disclosures. Contact information at Financial Institution. Notification to DOL. Record retention. Arbitration and class action litigation. To Be or Not to Be... A Fiduciary: Navigating the Fiduciary Regulation - October 24, Best Interest Contract Exemption (BICE) Transition Scenarios: Pure level fee advice. Grandfathering for pre-existing accounts. Transition period. Amendment of existing contracts by negative consent. To Be or Not to Be... A Fiduciary: Navigating the Fiduciary Regulation - October 24,

14 Distribution and Rollovers Fiduciary advice includes:... 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; But... prohibited transaction issues and exemptions. To Be or Not to Be... A Fiduciary: Navigating the Fiduciary Regulation - October 24, Advice, Education and Rollovers However, an adviser does not act as a fiduciary by providing participants with information about plan or IRA distribution options, including the consequences associated with the available types of distributions. Notes: Education versus recommendation. See, e.g., FINRA Regulatory Notice To Be or Not to Be... A Fiduciary: Navigating the Fiduciary Regulation - October 24,

15 Distribution Considerations In many (but not all) cases, terminating participants have the following four options: Leave the money in the plan; Transfer the money to the plan of a successor employer. Roll the money over into an IRA; or Take a taxable distribution. To Be or Not to Be... A Fiduciary: Navigating the Fiduciary Regulation - October 24, Education Process for Distributions Definition of distribution education Distribution options Considerations for choosing: Brochure Q&As Discussion Participant acknowledgment No recommendation or advice; no references to specific investments ( suggestion ) To Be or Not to Be... A Fiduciary: Navigating the Fiduciary Regulation - October 24,

16 Recommendations of Rollovers and Transfers Considerations and process for plan distributions and rollovers. Considerations and process for transfers of IRAs. Advisers changing firms. Prohibited transaction exemptions: PTE Level Fee Fiduciary. BICE. To Be or Not to Be... A Fiduciary: Navigating the Fiduciary Regulation - October 24, Questions? To Be or Not to Be... A Fiduciary: Navigating the Fiduciary Regulation - October 24,

FRED REISH, ESQ. 1800 Century Park East, Suite 1500 Los Angeles, CA 90067 (310) 203-4047 (310) 229-1285 [fax] Fred.Reish@DBR.com www.linkedin.com/in/fredreish www.fredreish.com www.drinkerbiddle.

17 FRED REISH, ESQ Century Park East, Suite 1500 Los Angeles, CA (310) (310) [fax] FOLLOW FRED ON CALIFORNIA DELAWARE ILLINOIS NEW JERSEY NEW YORK PENNSYLVANIA WASHINGTON DC WISCONSIN 2016 Drinker Biddle & Reath LLP All rights reserved. A Delaware limited liability partnership 17

The DOL s Fiduciary Rule: What It Means to Advisers FRED REISH, ESQ.

The DOL s Fiduciary Rule: What It Means to Advisers FRED REISH, ESQ. April 7, 2015 Structure of Fiduciary Package The DOL s definition of fiduciary investment advice: covers most investments sales practices.