The Updated DOL Proposed Regulation Defining Fiduciary: If Finalized, Big Changes Will Occur

Transcription

1 May 1, 2015 EMPLOYEE BENEFITS UPDATE The Updated DOL Prpsed Regulatin Defining Fiduciary: If Finalized, Big Changes Will Occur On April 14, 2015, the U.S. Department f Labr (DOL) issued a new prpsed regulatin defining fiduciary, which wuld expand the circumstances under which cnsultants, advisers, appraisers and thers becme fiduciaries fr purpses f the Emplyee Retirement Incme Security Act f 1974, as amended (ERISA), and the prhibited transactin prvisins f the Internal Revenue Cde f 1986, as amended (the Cde ), as a result f prviding investment advice. The prir prpsed regulatin was issued in 2010 and was subsequently withdrawn after much prtest frm members f the financial cmmunity. In additin t the prpsed regulatin, the DOL issued tw new prpsed prhibited transactin class exemptins and prpsed amendments t, and partial revcatins f, several existing prhibited transactins. In general, it appears that the DOL issued these prpsed exemptins and prpsed amendments t existing exemptins in rder t permit current business practices t cntinue even if financial institutins becme fiduciaries under the prpsed regulatin. Hwever, t cntinue these business practices, significant new cnditins must be satisfied by the applicable fiduciaries. Statutry Definitin f Fiduciary ERISA defines a fiduciary as including a persn (1) wh exercises any discretinary authrity r discretinary cntrl with respect t management f the plan r the management r dispsitin f its assets, r (2) renders investment advice fr a fee r ther cmpensatin, direct r indirect, with respect t any mneys r ther prperty f such plan, r has any authrity t d s. Under the secnd part f this definitin, a persn can be a fiduciary t an ERISA plan even if that persn cannt cause the plan t take any actin with respect t an investment recmmendatin. Five-Part Test Under Existing Regulatin The investment advice prng f ERISA s definitin f fiduciary is the subject f a DOL regulatin issued in In its new prpsed regulatin, the DOL characterizes the existing regulatin as significantly narrwing the plain language f the investment advice prng f ERISA s definitin f fiduciary by creating a five-part test, whereas the statute sets frth a simpler tw-part test. Under the existing regulatin, a persn is treated as a fiduciary by reasn f prviding investment advice if the persn: 1. renders advice as t the value f securities r ther prperty r makes recmmendatins as t the advisability f investing in, purchasing r selling securities r ther prperty, Sidley Austin prvides this infrmatin as a service t clients and ther friends fr educatinal purpses nly. It shuld nt be cnstrued r relied n as legal advice r t create a lawyer-client relatinship. Attrney Advertising - Fr purpses f cmpliance with New Yrk State Bar rules, ur headquarters are Sidley Austin LLP, 787 Seventh Avenue, New Yrk, NY 10019, ; One Suth Dearbrn, Chicag, IL 60603, ; and 1501 K Street, N.W., Washingtn, D.C ,

2 Page 2 2. n a regular basis, 3. pursuant t a mutual agreement, arrangement r understanding, with the plan r a plan fiduciary, that 4. the advice will serve as a primary basis fr investment decisins with respect t plan assets, and that 5. the advice will be individualized based n the particular needs f the plan. DOL s Stated Reasns fr Prpsed Change The preamble t the prpsed regulatin explains that the existing regulatin has nt been updated since 1975 and thse regulatins were adpted befre the existence f participant-directed 401(k) plans, significant investments in IRAs, and the frequent rllvers frm ERISA-prtected plans t IRAs. The DOL is cncerned that advisers t plans and IRAs may give dislyal advice that furthers the advisers wn interests rather than the interests f plan participants and beneficiaries r IRA wners. In the DOL s view, a change t the definitin f fiduciary is apprpriate t better prtect the interests f plans, participants, beneficiaries and IRA wners frm these cnflicts f interest, imprudence and dislyalty. Prpsed New Definitin Under the prpsal, a persn is a fiduciary if that persn prvides, directly t a plan, plan fiduciary, plan participant r beneficiary, IRA r IRA wner with the type f advice r recmmendatins described in item ne belw in exchange fr a fee r ther cmpensatin, whether direct r indirect, AND the persn meets ne f the cnditins described in item tw belw. 1. Type f Advice r Recmmendatin Recmmendatins as t Investments. A recmmendatin as t the advisability f acquiring, hlding, dispsing r exchanging securities r ther prperty, including a recmmendatin t take a distributin frm a plan r IRA r a recmmendatin as t the investment f assets t be rlled ver r therwise distributed. One f the biggest changes included in the prpsed regulatin is the impsitin f fiduciary status n persns wh meet ne f the cnditins in item tw belw and wh prvide recmmendatins regarding taking a distributin frm a plan r IRA r recmmendatins as t the investment f assets t be rlled ver r therwise distributed frm a plan r IRA. Under existing law, thse persns wuld nt be cnsidered t be fiduciaries. The preamble t the prpsed regulatin indicates that a persn des nt becme a fiduciary merely by prviding infrmatin regarding distributin ptins, including the cnsequences assciated with the available types f distributin ptins. Recmmendatins as t Management f Investments. A recmmendatin as t the management f securities r ther prperty, including recmmendatins as t the management f assets t be rlled ver r therwise distributed frm the plan r IRA. The preamble t the prpsed regulatin indicates that, under this prng f the definitin, fiduciary acts include individualized r specifically directed advice and recmmendatins n the exercise f prxy r ther wnership rights. On the ther hand, fiduciary status wuld nt ccur if the recmmendatins are general in nature r are prvided t a brad class f investrs.

3 Page 3 Valuatins f Assets. An appraisal, fairness pinin, r similar statement, whether verbal r written, cncerning the value f securities r ther prperty if prvided in cnnectin with a specific transactin invlving the acquisitin, dispsitin, r exchange, f such securities r ther prperty by the plan r IRA. Under the prpsed regulatin, as was the case with the 2010 prpsal, the DOL changes its lngstanding psitin expressed in Advisry Opinin 76-65A that investment advice des nt include prviding a valuatin f assets. Hwever, as explained belw, the new prpsal, unlike the 2010 prpsal, specifically excludes frm fiduciary status thse persns prviding valuatins t emplyee stck wnership plans. Recmmendatins f Advice Prviders r Other Fiduciaries. A recmmendatin f a persn wh will receive cmpensatin fr prviding any f the types f advice described abve. Under the existing regulatin, many cnsultants that prvide recmmendatins regarding the selectin f investment advisers r ther persns t manage plan assets tk the psitin that they were nt fiduciaries under ERISA. The prpsal, like the 2010 prpsal, changes this result and makes such a cnsultant a fiduciary if the cnsultant meets ne f the cnditins in item 2 belw. The term recmmendatin is defined in the prpsed regulatin as a cmmunicatin that, based n its cntent, cntext and presentatin, wuld reasnably be viewed as a suggestin that the advice recipient engage in r refrain frm taking a particular curse f actin. 2. Cnditins: The persn directly r indirectly: a. represents r acknwledges that it is acting as a fiduciary within the meaning f ERISA with respect t prviding advice r making recmmendatins described in item ne abve; r b. renders the advice pursuant t a written r verbal agreement, arrangement r understanding that the advice is individualized t, r that such advice is specifically directed t, the advice recipient fr cnsideratin in making investment r management decisins with respect t securities r ther prperty f the plan r IRA. The preamble t the prpsed regulatin indicates that if a persn represents that he r she is a fiduciary, the persn may nt later disclaim that representatin and nne f the exclusins discussed belw will apply t such persn. With respect t the secnd cnditin abve, the parties d nt have t have a meeting f the minds regarding whether the plan r IRA will rely n the advice but there must be an understanding that the advice is individualized r specifically directed t the particular advice recipient fr cnsideratin in making investment decisins. Exclusins frm Fiduciary Status The prpsed regulatin specifically excludes certain persns frm being fiduciaries as lng as they d nt represent r acknwledge that they are acting as a fiduciary t a plan. Excluded persns are:

4 Page 4 A cunterparty t a transactin with a plan wh is independent f the plan fiduciary, prvided that either (A) the cunterparty (1) btains certain written representatins frm the independent fiduciary, including that the independent fiduciary exercises authrity in managing the plan s assets, the plan has 100 r mre participants and the independent fiduciary will nt rely n the cunterparty t give fiduciary advice, (2) infrms the independent fiduciary f the nature f the cunterparty s financial interest in the transactin, (3) des nt receive cmpensatin fr prviding investment advice in cnnectin with the transactin, and (4) reasnably believes that the independent plan fiduciary has sufficient expertise t determine whether the transactin is prudent; r (B) the cunterparty (1) reasnably believes that the independent plan fiduciary has respnsibility fr managing at least $100 millin in plan assets, (2) infrms the independent fiduciary that the cunterparty is nt prviding advice in a fiduciary capacity, and (3) des nt receive cmpensatin fr prviding investment advice in cnnectin with the transactin. This exclusin, referred t as the seller s carve-ut, is intended t exclude frm fiduciary status a persn engaging in an arm s length transactin with a plan where it is nt generally expected that the persn is prviding fiduciary investment advice. The seller s carve-ut des nt apply t transactins invlving (1) an IRA, (2) a participant r beneficiary f a plan subject t ERISA with authrity t direct the investment f his r her plan assets r t take a distributin, r (3) a plan that has fewer than 100 participants. Therefre, if an entity prvides investment advice t ne f these entities r persns, the entity is a fiduciary t the IRA r a plan and must cmply with the fiduciary duty and prhibited transactin prvisins f ERISA and/r Sectin 4975 f the Internal Revenue Cde f 1986, as amended. This culd prevent an entity that prvides investment advice t an IRA frm receiving cmpensatin as a result f the IRA investing in the recmmended transactin. Fr example, a prhibited transactin culd ccur if the entity, in its fiduciary capacity, recmmends that an IRA invest in mutual fund shares that pays cmpensatin t the entity. T address this issue, the DOL issued a new prpsed prhibited transactin class exemptin (the Best Interest Cntract Exemptin ) that wuld prvide relief fr this type f transactin if the cnditins f the exemptin are satisfied. Registered swap dealers, security-based swap dealers, majr swap participants, r majr security-based swap participants (Swaps Entities), acting as a swap r security-based swap cunterparty t an emplyee benefit plan, prvided that (1) the plan is represented by a fiduciary independent f the cunterparty, (2) the cunterparty, if a swap r security-based swap dealer, is nt acting as an advisr t the plan in cnnectin with the transactin, and (3) in advance f prviding any recmmendatins with respect t the transactin, the Swaps Entity btains a written representatin frm the independent plan fiduciary that the fiduciary will nt rely n recmmendatins prvided by the Swaps Entity. Cmments n the 2010 Prpsal emphasized the need t harmnize the DOL s rulemaking effrts with rulemaking under the Ddd-Frank Act, including the business cnduct standards f the Securities and Exchange Cmmissin (SEC) and the Cmmdity Futures Trading Cmmissin (CFTC). Amendments made by the Ddd-Frank Act t the Cmmdity Exchange Act and the Securities Exchange Act f 1934 required the CFTC and the SEC t adpt business cnduct standards applicable t Swaps Entities, including business cnduct standards setting frth the respnsibilities f Swaps Entities acting as advisrs t, r entering int r ffering t enter int swaps r security-based swaps with emplyee benefit plans, amng thers. The DOL s expressed intentin in prpsing this carveut is t prvide a clear radmap fr swap

5 Page 5 cunterparties that are Swaps Entities t avid ERISA fiduciary status in arm s length transactins with plans. It might therwise be unclear whether cnduct required f the Swaps Entity in rder t cmply with the applicable CFTC r SEC business cnduct standards might cnstitute fiduciary investment advice under ERISA. Emplyees f any emplyer r emplyee rganizatin spnsring the plan if the emplyee is prviding advice t a plan fiduciary and des nt receive cmpensatin fr that advice beynd the emplyee s nrmal cmpensatin. Prviders f investment platfrms frm which plan fiduciaries select and mnitr investment alternatives fr plan participants t direct investment f their plan accunts, prvided that the platfrm prvider disclses in writing t the plan fiduciaries that it is nt undertaking t prvide impartial advice r give advice in a fiduciary capacity and it merely identifies the investment alternatives and merely prvides bjective financial data t the plan fiduciaries. The preamble t the prpsed regulatin states that fiduciary status shuld nt result merely as a result f making available a platfrm f investments, withut regard t the individualized needs f the plan r its participants and beneficiaries, r as a result f prviding general financial infrmatin, such as histric perfrmance f asset classes and f the platfrm investment ptins. In additin, the preamble clarifies that this exclusin applies nly t the prvisin f platfrms t plans and nt t IRAs. Persns prviding appraisals, fairness pinins r statements f value t (A) an emplyee stck wnership plan, (B) a plan assets fund in which mre than ne plan invests, r (C) a plan, plan fiduciary, plan participant, IRA r IRA wner slely fr purpses f satisfying reprting and disclsure requirements f ERISA r ther applicable law. Prviders f investment educatin t a plan, plan fiduciary, plan participant, IRA r IRA wner, prvided that the educatin des nt include recmmendatins with respect t specific investment prducts r recmmendatins n investment, management r the value f particular prperty. The prpsed regulatin describes the types f infrmatin that cnstitutes investment educatin and includes infrmatin abut the terms r peratin f the plan, the benefits f participating in the plan, general financial, investment and retirement infrmatin, asset allcatin mdels and interactive investment materials that prvide the means fr estimating future retirement needs. T avid fiduciary status, the prpsal will require a persn prviding an investment platfrm r general financial infrmatin t review applicable agreements t ensure that they cntain apprpriate disclaimers and disclsures t satisfy the cnditins f the prpsal. Executin f Securities Transactins The prpsed regulatin sets frth the cnditins under which a registered brker-dealer, reprting dealer r a U.S. bank will nt be cnsidered t be a fiduciary slely by reasn f executing securities transactins fr a plan in the rdinary curse f its business pursuant t the instructins f a fiduciary f a plan r IRA. These cnditins are that (a) the brker-dealer, dealer r bank is nt the fiduciary r an affiliate f the fiduciary, (b) the fiduciary s instructins specify the security t be purchased r sld, a price range within which the security is t

6 Page 6 be purchased r sld, a time span during which the transactin may ccur, and the minimum r maximum quantity f the security that may be purchased r sld. Effective Date and Due Date fr Cmments The regulatin is prpsed t be effective 180 days after publicatin f the final regulatin. Cmments t the prpsed regulatin are due n July 6, The DOL intends t hld a public hearing 30 days fllwing the end f the cmment perid. Specifically, in additin t general cmments n the prpsed regulatin, the DOL is requesting cmments n the fllwing: whether the DOL shuld issue a separate streamlined exemptin that wuld allw advisers t receive therwise prhibited cmpensatin in cnnectin with investments in certain high-quality lw-fee investments, subject t fewer cnditins; whether the DOL shuld adpt sme r all f the standards develped by FINRA in defining cmmunicatins that rise t the level f a recmmendatin fr purpses f distinguishing between investment educatin and investment advice under ERISA; whether the prpsed seller's carve-ut shuld be available fr advice given directly t plan participants, beneficiaries and IRA wners; the apprpriate scpe f the seller's carve-ut and whether the plan size limitatin f 100 plan participants and 100 millin dllar asset requirement in the prpsal are apprpriate cnditins r whether ther cnditins wuld be mre apprpriate; the types f platfrms and ptins that may be ffered t IRA wners, hw they may be similar t, r different frm, platfrms ffered in cnnectin with participant-directed individual accunt plans, and whether it wuld be apprpriate fr service prviders nt t be treated as fiduciaries under this carve-ut when marketing such platfrms t IRA wners; whether the scpe f platfrm carve-ut shuld be limited t large plans; whether the changes t the scpe f investment educatin described in the carve-ut are apprpriate; and whether it is apprpriate t cver and treat nn-erisa plans, such as Health Savings Accunts (HSAs), Archer Medical Savings Accunts and Cverdell Educatin Savings Accunts under the prpsed regulatin in a manner similar t IRAs as t bth cverage and applicable carve-uts. New Exemptins and Changes t Existing Exemptins On the same day that the DOL released the prpsed regulatin changing the definitin f fiduciary, the DOL issued a new prpsed prhibited transactin class exemptin titled the Best Interest Cntract Exemptin, and anther new prpsed prhibited transactin class exemptin that wuld permit principal transactins in certain debt securities. In additin, the DOL issued prpsed amendments t and partial revcatins f several existing exemptins.

7 Page 7 Prpsed Best Interest Cntract Exemptin Relief. This new prpsed exemptin wuld permit Advisers, Financial Institutins, and their affiliates and related entities t receive cmpensatin fr services prvided t Retirement Investrs in cnnectin with a purchase, sale r hlding f an Asset by a Plan, participant r beneficiary accunt, r IRA, as a result f the Adviser s and Financial Institutin s advice. The preamble t the prpsed exemptin explains the purpse f the exemptin as fllws: t prmte the prvisin f investment advice that is in the best interest f retail investrs such as plan participants and beneficiaries, IRA wners, and small plans. ERISA and the Cde generally prhibit fiduciaries frm receiving payments frm third parties and frm acting n cnflicts f interest, including using their authrity t affect r increase their wn cmpensatin, in cnnectin with transactins invlving a plan r IRA. Certain types f fees and cmpensatin cmmn in the retail market, such as brkerage r insurance cmmissins, 12b-1 fees and revenue sharing payments, fall within these prhibitins when received by fiduciaries as a result f transactins invlving advice t the plan participants and beneficiaries, IRA wners and small plan spnsrs. T facilitate cntinued prvisin f advice t such retail investrs and under cnditins designed t safeguard the interests f these investrs, the exemptin wuld allw certain investment advice fiduciaries, including brker-dealers and insurance agents, t receive these varius frms f cmpensatin that, in the absence f an exemptin, wuld nt be permitted under ERISA and the Cde. Adviser is defined generally as a fiduciary f a plan r IRA, by reasn f prviding investment advice, wh is an emplyee, independent cntractr, agent r registered representative f a Financial Institutin. Financial Institutin means the entity that emplys the Adviser r therwise retains such individual and that is a registered investment adviser, bank r insurance cmpany. Retirement Investrs are defined as: (1) a participant r beneficiary f an ERISA plan with authrity t direct the investment f his r her plan assets r t take a distributin; (2) an IRA wner acting n behalf f the IRA; r (3) a plan spnsr (r any emplyee, fficer r directr f the spnsr) f a nnparticipant-directed plan subject t ERISA that has fewer than 100 participants, t the extent it has authrity t make investment decisins fr the plan. Asset is defined as bank depsits, CDs, shares r interests in registered investment cmpanies (mutual funds), bank cllective funds, insurance cmpany separate accunts, exchange-traded REITs, exchangetraded funds, crprate bnds ffered pursuant t a registratin statement under the Securities Act f 1933, agency debt securities, U.S. Treasury securities, insurance and annuity cntracts (bth securities and nn-securities), guaranteed investment cntracts, and exchange-traded equity securities. The definitin specifically excludes frm the term Asset a security future r a put, call, straddle r any ther ptin t buy an equity security frm r sell an equity security t anther withut being bund t d s. The relief des nt apply (a) t ERISA plans fr which the Adviser, Financial Institutin r any affiliate is the plan spnsr r a named fiduciary r plan administratr that was selected t prvide advice t the plan by a fiduciary wh is nt independent, (b) when the Adviser engages in a principal transactin with the

8 Page 8 Retirement Investr, (c) t cmpensatin received by an Adviser r Financial Institutin as a result f investment advice that is generated slely by an interactive web site withut persnal interactin r advice frm an Adviser, r (d) t Advisers wh have full investment discretin and are nt merely prviding investment advice. Cnditins fr Relief. The prpsed exemptin cntains many cnditins in rder fr the relief t apply. a. Written Cntract. The Adviser and Financial Institutin must enter int a written cntract with the Retirement Investr that (1) affirmatively states that the Adviser and Financial Institutin are fiduciaries, (2) requires the Adviser and Financial Institutin t cmply with the Impartial Cnduct Standards (described belw), (3) cntains warranties frm the Adviser and Financial Institutin that they will cmply with applicable law, that the Financial Institutin has written prcedures t minimize cnflicts and cmply with the Impartial Cnduct Standards, and has nt established financial incentives r qutas that encurage an Adviser t make recmmendatins that are nt in the Best Interest f the Retirement Investr, (4) disclses material cnflicts f interest, states that the Retirement Investr has the right t receive cmplete infrmatin abut all the fees assciated with the investments it has made and states whether the Financial Institutin ffers prprietary prducts r receives payments frm thirdparties with respect t investments and the address f the website required by the prpsed exemptin. The written cntract may nt cntain any exculpatry prvisins that disclaim r limit the liability f the Adviser r Financial Institutin fr vilating the terms f the cntract nr may it cntain a waiver r limitatin n the Retirement Investr s right t bring r participate in a class actin invlving the Adviser r Financial Institutin. The Impartial Cnduct Standards referenced abve require that the Adviser and Financial Institutin (1) prvide investment advice that is in the Best Interest f the Retirement Investr (discussed belw), (2) nt make investment recmmendatins that wuld result in mre than reasnable cmpensatin being paid t the Adviser r Financial Institutin and (3) prvide disclsures (described belw) that are nt misleading. The term Best Interest f the Retirement Investr means that the advice prvided by the Adviser and Financial Institutin reflects the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent persn wuld exercise based n the investment bjectives, risk tlerance, financial circumstances, and needs f the Retirement Investr, withut regard t the financial r ther interests f the Adviser, Financial Institutin r any Affiliate, Related Entity, r ther party. This standard is similar t the prudent man standard set frth in ERISA, which applies nly t plans subject t ERISA. If the prpsed exemptin is adpted, this standard wuld require fiduciaries f IRAs, which generally are nt subject t ERISA, t cmply with this prudent persn standard and wuld give IRA wners a cntractual cause f actin against thse fiduciaries fr breaching this standard. b. Disclsure Requirements. The Financial Institutin, prir t the date n which the Retirement Investr makes the recmmended investment, must deliver a disclsure in the frm f a chart that prvides, with respect t each recmmended investment, the Ttal Cst t the

9 Page 9 Retirement Investr f the investment fr 1-, 5- and 10-year perids expressed as a dllar amunt, assuming an investment f the dllar amunt recmmended by the Adviser and reasnable assumptins abut investment perfrmance that are disclsed. Ttal Csts include acquisitin csts, nging csts and dispsitin csts. The prpsed regulatin cntains a mdel chart t be used t satisfy the disclsure requirements. In additin, the Financial Institutin must prvide an annual disclsure, within 45 days f the end f the applicable year. The disclsure must cntain (a) a list the investments purchased r sld during the applicable perid and the applicable purchase r sales price, (b) a statement f the ttal dllar amunt f all fees and expenses paid directly r indirectly by the Retirement Investr with respect t the investments during the applicable perid and (3) a statement f the ttal dllar amunt f all direct and indirect cmpensatin received by the Adviser and Financial Institutin in cnnectin with the investments during the applicable perid. The Financial Institutin must maintains a public webpage that shws (1) the direct and indirect material cmpensatin (expressed as a mnetary amunt r frmula) payable t the Adviser, Financial Institutin and any affiliate fr services prvided in cnnectin with the investments available t Retirement Investrs thrugh the Financial Institutin and (2) the surce f the cmpensatin, and hw the cmpensatin varies within and amng investments. c. Range f Investment Optins. In general, the Financial Institutin is required t ffer t the Retirement Investr a brad range f investment ptins. Hwever, if the fllwing cnditins are satisfied, the ptins may be limited (a) the Financial Institutin must make a written finding that the limitatins d nt prevent the Adviser frm prviding advice that is in the Best Interest f the Retirement Investr, (b) the cmpensatin received by the Financial Institutin r Adviser is reasnable, (c) the Retirement Investr is prvided clear written ntice f the limitatins n investments, and (d) the Adviser ntifies the Retirement Investr if the ffered investments will nt meet the Retirement Investr's needs. d. Disclsures t the DOL. The Financial Institutin must prvide advance ntice t the DOL that it will rely n the exemptin. In additin, the Financial Institutin must maintain certain recrds and prvide infrmatin t the DOL upn request. e. Other Relief. The prpsed exemptin als prvides relief fr investments in certain insurance prducts and fr pre-existing transactins. Prpsed Principal Transactin Exemptin fr Debt Securities Relief. This new prpsed exemptin wuld permit principal transactins in certain debt securities between a plan, plan participant r beneficiary accunt, r an IRA, and a fiduciary that prvides investment advice t the plan r IRA. Withut this exemptin, these transactins generally wuld be prhibited. The exemptin is specifically limited t debt securities and des nt apply t ther types f securities, futures, derivatives r currencies. In the DOL s view, relief was nt needed fr thse ther types f assets because plans and IRAs can invest in thse assets in agency transactins that d nt raise cnflict issues that are assciated with principal transactins. The DOL specifically requests cmments n whether there are additinal assets that

10 Page 10 are sld primarily in principal transactins and fr which relief shuld be prvided and fr which apprpriate safeguards can be develped. Cnditins fr Relief. The prpsed exemptin cntains many cnditins fr the relief t apply, which are very similar t the cnditins applicable t Prpsed Best Interest Cntract Exemptin. Unlike the Best Interest Cntract Exemptin, this exemptin defines Retirement Investrs t include all ERISA plans, nt nly plans with less than 100 participants and, therefre, the relief is available fr thse plans as well as IRAs. a. Written Cntract. The written cntract must meet the same cnditins that are described abve under Prpsed Best Interest Cntract Exemptin, except that the cntract must disclse the circumstances under which the Adviser and Financial Institutin may engage in principal transactins and the material cnflicts f interest assciated with these transactins, cntains the Retirement Investr s affirmative written cnsent, n a prspective basis, t these transactins, states that the cnsent is terminable at any time with n penalty and that the Retirement Investr has the right t receive cmplete infrmatin abut all the fees assciated with the investments. b. General Cnditins. These cnditins are as fllws (a) the debt security may nt be issued by the Financial Institutin r any affiliate, is nt purchased in an underwriting in which the Financial Institutin r any affiliate is the underwriter r a member, des nt have greater than a mderate credit risk and is liquid, (b) the transactin is nt designed t evade cmpliance with ERISA r the Cde r impact the value f the security, (c) the purchase r sale is fr cash, and (d) the Adviser and Financial Institutin believe the price is at least as favrable as the price that wuld be available in a transactin that is nt a principal transactin and is at least as favrable as the cntempraneus price fr that security r, if a price is nt available fr that security, a cmparable security. c. Disclsure Requirements. Prir t the transactin, the Adviser r Financial Institutin prvides written disclsure t the Retirement Investr that states that the transactin will be executed as a principal transactin and any available pricing infrmatin regarding the security. After the transactin, the Financial Institutin must prvide a written cnfirmatin f the transactin and, thereafter, must prvide annual disclsure regarding the principal transactins. Prpsed Amendment and Partial Revcatin f PTCE PTCE prvides relief fr certain plan transactins invlving insurance agents and brkers, pensin cnsultants, insurance cmpanies and investment cmpany principal underwriters. Specifically, the exemptin allws fiduciaries t receive cmpensatin when plans and IRAs enter int certain insurance and mutual fund transactins recmmended by the fiduciaries as well as certain related transactins. The prpsed amendment wuld require fiduciaries t all plans and IRAs (nt nly the s-called retail investrs) t (a) satisfy the Impartial Cnduct Standards described abve under the Prpsed Best Interest Cntract Exemptin and (b) prvide additinal disclsures including detailed disclsures regarding the cmmissins and the charges, fees, discunts, penalties r adjustments which may be impsed in cnnectin with the purchase, hlding, exchange, terminatin r sale f the insurance cntracts r mutual fund securities. In additin, the prpsed amendment wuld revke the availability f PTCE fr IRA transactins invlving variable

11 Page 11 annuity cntracts and ther annuity cntracts that are securities and mutual fund shares. IRAs wuld be able t engage in transactins invlving such cntracts and mutual fund shares in reliance n the Best Interest Cntract Exemptin if the cnditins f that exemptin are satisfied. Prpsed Amendments t Part III and IV f PTCE 75-1, PTCE 77-4, PTCE 80-1 and PTCE 83-1 The prpsed amendments t these PTCEs (described belw) wuld require fiduciaries t cmply with the Impartial Cnduct Standards described abve under the Prpsed Best Interest Cntract Exemptin. Hwever, these new cnditins wuld apply t all transactins cvered by these exemptins, nt nly t transactins invlving the s-called retail investrs (i.e., plan participants, IRA wners and small plan spnsrs). Part III f PTCE 75-1 prvides relief fr purchases f securities during an underwriting when the fiduciary is als a member f the syndicate. Part IV f PTCE 75-1 prvides fr relief fr principal transactins between a plan and a fiduciary that is a market maker. PTCE 77-4 prvides relief fr investments in pen-end mutual funds where the adviser t the mutual fund is als the fiduciary t the plan r affiliated with the fiduciary. PTCE prvides relief fr the purchase f a security when the prceeds f the securities issuance may be used t retire r reduce indebtedness t the fiduciary r an affiliate. PTCE 80-1 prvides relief fr certain sales f certificates by the spnsr f a mrtgage pl t a plan r IRA, when the spnsr, trustee r insurer f the mrtgage pl is a fiduciary with respect t the plan r IRA. Prpsed Amendment t Part V f PTCE 75-1 Part V f PTCE 75-1 prvides relief fr the extensin f credit t a plan r IRA by a brker-dealer in cnnectin with the purchase r sale f securities (such as t permit the nrmal settlement f securities transactin and in cnnectin with shrt sales). This exemptin des nt permit the receipt f cmpensatin fr an extensin f credit by brker-dealers that are fiduciaries with respect t the assets invlved in the transactin. The prpsed amendment wuld permit investment advice fiduciaries (but nt fiduciaries with investment discretin) t receive cmpensatin when they extend credit t plans and IRAs t avid a failed securities transactin. Fr the relief t apply, the fllwing cnditins must be satisfied: (a) the ptential failure f the securities transactin may nt be a result f the actin r inactin f the fiduciary, (b) the terms f the extensin f credit must be at least as favrable as the terms available in an arm s length transactin, and (c) advance written disclsure must be made t the plan r IRA with respect t the interest rate r ther fees charged fr the extensin f credit. Prpsed Amendment and Partial Revcatin f PTCE and Parts I(b), I(c) and II(2) f PTCE 75-1 PTCE PTCE permits a fiduciary t cause a plan t pay t such fiduciary r any f its affiliates cmpensatin fr executing securities transactins directed by the fiduciary, prvided that the cnditins f

12 Page 12 the exemptin are satisfied. Under the existing PTCE, mst f these cnditins d nt have t be satisfied fr securities executin transactins invlving IRAs. PTCE als prvides relief fr certain agency crss-transactins (where the fiduciary acts as an agent bth fr the plan r IRA and fr anther party) if the cnditins f the exemptin are satisfied. The prpsed amendment wuld require all fiduciaries t cmply with the Impartial Cnduct Standards described abve under the Prpsed Best Interest Cntract Exemptin, in additin t the existing cnditins f the exemptin. In additin, with respect t fiduciaries f IRAs that exercise discretin (rather than merely prvide investment advice), the exemptin wuld require all f the cnditins f the exemptin t be satisfied with respect t transactins invlving IRAs. With respect t fiduciaries f IRAs that prvide investment advice (rather than exercising discretin), the exemptin wuld n lnger be available with respect t IRAs; instead, investment advice fiduciaries wuld have t rely n the Best Interest Cntract Exemptin fr these transactins. In additin, the prpsed exemptin adds a new sectin that wuld permit a brker-dealer fiduciary t use its authrity t cause a plan r IRA t purchase mutual fund shares frm the brker-dealer, acting as principal, and receive cmmissins, where the transactins are nt excessive in amunt r frequency and the ther cnditins f the exemptin are satisfied. The relief des nt extend t the plan s r IRA s sales f mutual fund shares because the DOL des nt believe that it is necessary fr the sale t be in a principal transactin but requests cmments n this limitatin. Parts I(b), I(c) and II(2) f PTCE Part I(b) f PTCE 75-1 prvides relief frm fr the effecting f securities transactins, including clearance, settlement r custdial functins, by persns wh are nt fiduciaries. Part I(c) f PTCE 75-1 prvides relief fr the furnishing f nn-fiduciary advice regarding securities r ther prperty t a plan r IRA. The prpsed amendment wuld revke these tw parts f PTCE 75-1 because, accrding t the DOL, these exemptins are duplicative f statutry exemptins. Specifically, the DOL indicated that fiduciaries may rely n the necessary services exemptin under Sectin 408(b)(2) f ERISA t exempt these transactins. Part II(2) f PTCE cntains an exemptin fr mutual fund purchases between fiduciaries and plans r IRAs and requires that the fiduciary nt be a principal underwriter fr, r affiliated with, the mutual fund. The prpsed amendment als wuld revke this part f PTCE 75-1 because, as described abve, the prpsed amendments t PTCE wuld include relief fr these transactins. If yu have any questins regarding this Sidley Update, please cntact the Sidley lawyer with whm yu usually wrk, r Beth Dickstein Partner bdickstein@sidley.cm Sidley Emplyee Benefits Practice Our Emplyee Benefits grup is ne f the largest practices f its kind in the United States. Since its establishment in the 1920s, ur lawyers have handled virtually every type f issue invlving emplyee benefits. T receive Sidley Updates, please subscribe at

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