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

Transcription

1 The DOL s Fiduciary Rule: What It Means to Advisers FRED REISH, ESQ. April 7, 2015

2 Structure of Fiduciary Package The DOL s definition of fiduciary investment advice: covers most investments sales practices. includes recommendations of investment managers. includes recommendation of distributions and rollovers. Financial conflicts of interest are prohibited, but exemptions: for insurance products, except variable annuities to IRAs. Best interest contract exemption (BICE) for some assets to plans and IRAs. The DOL's Fiduciary Rule: What It Means to Advisers - April 7,

3 Impact: Fiduciary Rule The rule applies to investment sales or advice to: Plans and to investment and distribution advice to: Participants IRA owners Applicability date. The DOL's Fiduciary Rule: What It Means to Advisers - April 7,

4 Definition of Fiduciary A person becomes a fiduciary when he or she renders investment advice by: providing investment or investment management recommendations to a plan, a plan fiduciary, participant or beneficiary, or an IRA owner, and... The DOL's Fiduciary Rule: What It Means to Advisers - April 7,

5 Definition of Fiduciary acting under an arrangement that the advice is individualized to, or specifically directed to, the recipient for consideration in making investment or management decisions. Changes: Continue to have broad definition. Result is sales will be treated as advice. Clarified to permit marketing. The DOL's Fiduciary Rule: What It Means to Advisers - April 7,

6 Definition of Recommendation 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 DOL's Fiduciary Rule: What It Means to Advisers - April 7,

7 Impact of Changes to Definition The regulation will cause most common investment sales 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 The DOL's Fiduciary Rule: What It Means to Advisers - April 7,

8 Definition of Fiduciary A recommendation to take a distribution of benefits or a recommendation about the investment of money to be rolled over or otherwise distributed from the plan or IRA is a fiduciary act. Outcome: The DOL continues to believe distribution recommendations should be fiduciary advice. Included in BICE. Level fee advisers. The DOL's Fiduciary Rule: What It Means to Advisers - April 7,

9 Advice, Education and Rollovers However, one does not act as a fiduciary merely by providing participants with information about plan or IRA distribution options, including the consequences associated with the available types of distributions. Note: Education versus recommendation. See, e.g., FINRA Regulatory Notice The DOL's Fiduciary Rule: What It Means to Advisers - April 7,

10 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 The DOL's Fiduciary Rule: What It Means to Advisers - April 7,

11 SEC Information Request Reasonableness of Recommendations Provide any written disclosures and any scripts used during the six months regarding: a. distribution options (i.e., maintaining assets in a former employer s plan, transferring assets to a new employer s plan, rolling assets over to an IRA, or taking a lump sum distribution), the tax implications of those options, and other considerations... continued... The DOL's Fiduciary Rule: What It Means to Advisers - April 7,

12 SEC Information Request Continued... b. conflicts of interest or financial interests that Registrant or its representatives have in recommending any specific product or account type; c. the various types of account options available to clients (i.e., IRA Rollover), including the account-level fees and expenses and services provided.; and continued... The DOL's Fiduciary Rule: What It Means to Advisers - April 7,

13 SEC Information Request Continued... d. the various investment options available to clients (i.e., structured products, REITS, variable annuities, mutual funds, and ETFs), including information regarding product-specific fees and expenses, revenue sharing, loads, commissions, and other charges. The DOL's Fiduciary Rule: What It Means to Advisers - April 7,

14 Education Carve-Outs Proposal: A new condition of the carve-out for investment education is that the information and materials not include advice or recommendations about specific investments. Change: Asset allocation models permitted for plans, but not for IRAs. The DOL's Fiduciary Rule: What It Means to Advisers - April 7,

15 Seller s Carve-Out Under the seller s carve-out, the rule does not treat as fiduciary advice recommendations made to a plan in an arm s length transaction where there is generally no expectation of fiduciary investment advice, provided that the carve-out s specific conditions are met. Note: Not for small plans, participants or IRA owners. No change. The DOL's Fiduciary Rule: What It Means to Advisers - April 7,

16 Prohibited Transaction Rules Both ERISA and the Internal Revenue Code prohibited transaction rules 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: Concept of level fee is misunderstood. Compensation: Money or monetary value. The DOL's Fiduciary Rule: What It Means to Advisers - April 7,

17 Considerations for Conflict Advisers should consider two approaches for compliance: Eliminating conflicts of interest: pure level fee offsets pay-overs Use of exemptions BICE The DOL's Fiduciary Rule: What It Means to Advisers - April 7,

18 Prohibited Transaction Consequences For pure level fee advisers: Plans Participants IRAs Rollovers For commissioned or variable comp advisers: Plans Participants IRAs Rollovers The DOL's Fiduciary Rule: What It Means to Advisers - April 7,

19 Impact: Insurance Products How does the rule impact insurance products? Recommendations to plans, participants and IRA owners to purchase insurance policies and annuity contracts would be fiduciary advice......whichimplicatedtheprohibitedtransactionrulesand the need for an exemption. The DOL's Fiduciary Rule: What It Means to Advisers - April 7,

20 Impact: Insurance Products There are two exemptions that would be used for insurance transactions: A new Best Interest Contract Exemption (BICE): For sales to IRAs of annuity contracts that are classified as securities (e.g., individual variable annuity contracts). An amended PTCE for other sales of insurance policies and contracts to plans, participants and IRAs. The DOL's Fiduciary Rule: What It Means to Advisers - April 7,

21 Proposed 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... The DOL's Fiduciary Rule: What It Means to Advisers - April 7,

22 Proposed PTCE Continued... Compensation (e.g., commissions) must be reasonable for services. Commissions must be disclosed as percentage. Charges, surrender fees, etc., must be disclosed. Transaction must be approved in writing. Minor changes. The DOL's Fiduciary Rule: What It Means to Advisers - April 7,

23 Best Interest Standard of Care for IRAs and Plans Investment advice is in the best interest of the retirement investor when the adviser and the financial institution providing the advice act with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person would exercise based on the investment objectives, risk tolerance, financial circumstances, and needs of the retirement investor,... Note: Duty of prudence. Plans = prudent man rule. IRAs = RIA fiduciary standard, except... continued... The DOL's Fiduciary Rule: What It Means to Advisers - April 7,

24 Best Interest Standard of Care for IRAs and Plans Continued 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 in PTE and BICE. The DOL's Fiduciary Rule: What It Means to Advisers - April 7,

25 How does the proposal impact sales of other investments? The proposed BIC exemption for Retirement Investors : A participant in an ERISA-governed plan who can direct the investment of his account or take a distribution; The owner of an IRA; or The sponsors of non-participant directed plans with fewer than 100 participants. Issues and Changes: Exemption for small 401(k) plans. Limited to defined assets. The DOL's Fiduciary Rule: What It Means to Advisers - April 7,

26 The BIC Exemption The BICE exemption has a number of requirements. Perhaps the most significant conditions are: A written contract must be entered into before a recommendation: the contract is tri-party: the adviser, the brokerdealer and the investor. the contract must acknowledge fiduciary status. the contract agrees to Impartial Conduct Standards. the agreement must affirmatively warrant certain conduct by the adviser and the broker-dealer. continued... The DOL's Fiduciary Rule: What It Means to Advisers - April 7,

27 The BIC Exemption Continued... Disclosure Requirements Transactional disclosures must be made about specified costs. Annual disclosures must be made about transactions, costs and compensation. Website disclosures about compensation must be made. Changes: Introductory conversations allowed pre-contract. Elimination of dollar disclosures. The DOL's Fiduciary Rule: What It Means to Advisers - April 7,

28 Covered Asset...includesonly...:Bankdeposits, certificates of deposit (CDs), shares of interests in registered investment companies, bank collective funds, insurance company separate accounts, exchange-traded REITs, exchangetraded funds, corporate bonds offered pursuant to a registration statement under the Securities Act of 1933, agency debt securities as defined in FINRA Rule 6710(l) or its successor, U.S. Treasury securities... insurance and annuity contracts, guaranteed investment contracts, and equity securities... that are exchange-traded securities.... continued... The DOL's Fiduciary Rule: What It Means to Advisers - April 7,

29 Covered Asset Continued... Excluded from this definition is any equity security that is a security future or a put, call, straddle, or other option or privilege of buying an equity security from or selling an equity security to another without being bound to do so. Note: Also excluded are hedge funds, private equity funds, partnerships. Comment: BICE not available, so level fee, non-pt, approach must be used. Consider offsets. The DOL's Fiduciary Rule: What It Means to Advisers - April 7,

30 Overview and Implications The DOL's Fiduciary Rule: What It Means to Advisers - April 7,

31 The DOL's Fiduciary Rule: What It Means to Advisers - April 7,

32 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