The Shifting Landscape of DOL Fiduciary Rule Implementation

Transcription

1 The Shifting Landscape of DOL Fiduciary Rule Implementation Mutual Fund Directors Forum Webinar 2017 Dechert LLP

2 Speakers Jay Haines Senior Vice President and Deputy General Counsel Fidelity Investments James Whetzel Divisional General Counsel and Vice President for Financial Advice and Solutions Group USAA Rana Jewel Wright Assistant General Counsel and Director Bank of America Christine Ayako Schleppegrell Senior Associate Dechert LLP The Shifting Landscape of DOL Fiduciary Rule Implementation 2

3 DOL Fiduciary Rule: purpose, scope, and timeline The Shifting Landscape of DOL Fiduciary Rule Implementation 3

4 Purpose and Scope Addresses conflicts of interest associated with compensation for the sale of financial products, including mutual fund shares, to retirement investors Directly impacted: Intermediaries providing services/selling products to ERISA plans, individual retirement accounts ( IRAs ), and other non-erisa plans. These intermediaries could now be considered fiduciaries Indirectly impacted: Funds, their boards of directors/trustees and investment advisers are not fiduciaries The Shifting Landscape of DOL Fiduciary Rule Implementation 4

5 Fiduciary Rule Defines who is a fiduciary under ERISA and the Internal Revenue Code Extends fiduciary status to brokers and others making investment recommendations to retirement plans and IRAs, including recommendations about distributions and rollovers Applies to providers of nondiscretionary investment advice Exclusions, exceptions, and exemptions include: Best Interest Contract Exemption ( BICE ) BIC Lite streamlined exemption for level fee fiduciaries The Shifting Landscape of DOL Fiduciary Rule Implementation 5

6 DOL Fiduciary Rule Timeline December 2016 IM Guidance Update on mutual fund fee structure February 3, 2017 Presidential Memorandum April 10, 2017 Original compliance date June 1, 2017 Chair Clayton Request for Public Comment July 1, 2017 Nevada Fiduciary Standard PRESENT April 8, 2016 Final Rule January 11, 2017 Capital Group Letter on clean shares March 10, 2017 TEP* to address compliance date gap^ May 22, 2017 TEP* to address Transition Period June 9, 2017 Begin Transition Period: compliance date for rule and certain parts of exemptions August 30, 2017 Enforcement Policy on arbitration provision January 1, 2018 End Transition Period: anticipated compliance date for remaining parts of exemptions * TEP stands for Temporary Enforcement Policy. Compliance date gap refers to the period between the April 10 applicability date and announcement of the delay. The Shifting Landscape of DOL Fiduciary Rule Implementation 6

7 Industry Impact of the Fiduciary Rule The Shifting Landscape of DOL Fiduciary Rule Implementation 7

8 Impact on Mutual Fund Distribution Intermediaries (that are fiduciaries) selling mutual fund shares are required to comply with the fiduciary rule and exemptions in order to continue traditional payment arrangements The fiduciary rule impacts the ability of these intermediaries to receive the following types of compensation in connection with the sale of mutual fund shares: Compensation that differs by product Third-party compensation (including revenue sharing, 12b-1 fees, shareholder servicing fees, sub-ta fees, commissions, and sales loads) The Shifting Landscape of DOL Fiduciary Rule Implementation 8

9 Impact on Mutual Fund Distribution (cont.) Intermediaries are demanding new compensation structures (ex. standardized payments) and products (ex. new share classes) in order to comply Funds are responding to intermediary demands for product offerings and compensation arrangements that align with the exemptions The Shifting Landscape of DOL Fiduciary Rule Implementation 9

10 Impact on Mutual Fund Distribution (cont.) Industry Response New share classes (T shares, clean shares) New compensation structures Products for plans and IRA platforms are being selected based on whether the product provides neutral compensation across fund families Remove mutual funds from IRA brokerage accounts Discontinue IRA brokerage accounts or shift to advisory accounts The Shifting Landscape of DOL Fiduciary Rule Implementation 10

11 Discussion on Implementation The Shifting Landscape of DOL Fiduciary Rule Implementation 11

12 Innovative Products and Compensation The BICE and the fiduciary rule discuss products and compensation structures designed to address conflicts of interest. In its recent Request for Information, the DOL discussed innovative products, including clean shares and T shares, and is currently considering a new product-based exemption What trends have you seen as intermediaries find new and different ways to preserve existing payment streams despite regulatory uncertainty? What product innovations, if any, has your firm developed? The Shifting Landscape of DOL Fiduciary Rule Implementation 12

13 Operational Challenges The fiduciary rule and exemptions impose additional burdens on intermediaries seeking to continue traditional payment arrangements What aspects of the fiduciary rule and exemptions are most concerning from an operational standpoint? From a product marketing or distribution standpoint? What challenges are you facing? The Shifting Landscape of DOL Fiduciary Rule Implementation 13

14 Impact on Distribution Product offerings and opportunities for retirement investors to receive investment advice have become more limited Once examination of the fiduciary rule is complete, will product offerings expand? How has the fiduciary rule impacted your business and distribution models? The Shifting Landscape of DOL Fiduciary Rule Implementation 14

15 Delay of January 1, 2018 Compliance Date The DOL recently proposed to delay the January 1 compliance date to July 1, 2019 U.S. Chamber of Commerce v. DOL, 5 th Circuit Court of Appeals (initial District Court filing 6/1/16) consolidated legal challenge seeking to vacate the fiduciary rule and exemptions What impact, if any, will the delay have on your compliance efforts? How would your firm approach an extended Transition Period? The Shifting Landscape of DOL Fiduciary Rule Implementation 15

16 Recent SEC and DOL Comment Periods SEC Chair Clayton Request for Public Comment Standards of conduct for investment advisers and broker-dealers DOL fiduciary rule implementation DOL Request for Information Part 1: whether to extend the January 1, 2018 compliance date Part 2: seeking input on new exemptions and changes to existing rule/exemptions DOL 18-Month Delay Proposal Delay the compliance date to July 1, 2019 Extend Transition Period relief The Shifting Landscape of DOL Fiduciary Rule Implementation 16

17 SEC / DOL Coordination Secretary Acosta and Chair Clayton have agreed to work constructively toward the adoption of a workable fiduciary standard On June 1, 2017 Chair Clayton requested public comment on implementation of the DOL fiduciary rule. This comment period remains open Chair Clayton recently announced that the SEC will propose its own fiduciary rule What do you anticipate will result from SEC / DOL coordination? The Shifting Landscape of DOL Fiduciary Rule Implementation 17

18 Role of the Board of Directors As intermediaries work toward compliance, boards may be asked to approve proposals Designed to align product features and compensation structures across mutual fund families For specific share classes or specific share class features In connection with these proposals, boards may decide to consider Whether innovative products created in response to the fiduciary rule will benefit investors Impact on fund flows Ability of shareholders to continue to invest in the funds Impact on smaller fund complexes The Shifting Landscape of DOL Fiduciary Rule Implementation 18

19 Compliance Dates Fiduciary rule and certain conditions of exemptions June 9, 2017 Transition Period June 9 January 1 Remaining conditions of exemptions January 1, 2018 The Shifting Landscape of DOL Fiduciary Rule Implementation 19

20 Questions? The Shifting Landscape of DOL Fiduciary Rule Implementation 20

21 For further information, visit our website at dechert.com. Dechert practices as a limited liability partnership or limited liability company other than in Dublin and Hong Kong.