Understanding The Unwinding Of DOL's Fiduciary Rule

Transcription

1 Understanding The Unwinding Of DOL's Fiduciary Rule By Gerge Sepsaks and Michael Kreps September 10, 2018, 11:50 AM EDT In this article, we discuss the implicatins f the Fifth Circuit s vacatur f the U.S. Department f Labr s fiduciary rule,[1] best interest cntract and principal transactins exemptins,[2] and related amendments t ther prhibited transactin exemptins, r PTEs, in Chamber f Cmmerce f the United States v. United States Department f Labr.[3] By replacing a less restrictive five-part test regulating the scpe f persns wh fit the definitin f an investment advice fiduciary under Sectin 3(21) f the Emplyee Retirement Incme Security Act and Internal Revenue Cde Sectin 4975, the fiduciary rule expanded the types f activities that are cnsidered investment advice subject t ERISA and the prhibited transactin prvisins f the Internal Revenue Cde. The new PTEs and amendments published alng with the fiduciary rule were designed t avid cnflicts f interest and ensure that retirement industry prfessinals wh prvide investment advice (including, fr the first time, t wners f individual retirement accunts, r IRAs) d s in the best interest f their clients. Gerge Sepsaks In respnse t the fiduciary rule, the retirement industry spent millins f dllars in preparatin fr cmpliance. Hwever, after the Fifth s Circuit s entering f its mandate n June 21, 2018, ERISA s definitin f investment advice fiduciaries reverted t the riginal 1975 regulatin s Michael Kreps five-part test. Fr a discussin f the 1975 regulatin, see Investment Advice Fiduciaries and the DOL Regulatins n Fiduciary Status in ERISA Fiduciary Duties Types f ERISA Plan Fiduciaries, available in Lexis Practice Advisr s Emplyee Benefits & Executive Cmpensatin practice area. Grunds fr Vacating the Fiduciary Rule The curt determined that the fiduciary rule cnflicts with the statutry text f ERISA Sectin 3(21) and with the cunterpart prvisin in Internal Revenue Cde Sectin The curt vacated the fiduciary rule n the basis that the cmmn law meaning f the wrd fiduciary requires a relatinship f trust and cnfidence, and that Cngress cdified that cmmn law meaning in the statutry text. It reasned that by attempting t bradly expand the universe f persns t whm fiduciary status is assigned t include rdinary salespersns, such as many brker-dealers and insurance agents, the fiduciary rule cnflicted with the underlying statutry text.[4] Retentin f ERISA Fiduciary Status Pst-Fiduciary Rule Many service prviders that were fiduciaries under the fiduciary rule are likely t retain fiduciary status after the vacatur. ERISA prvides a functinal test fr determining whether a persn becmes a fiduciary meaning that there are several avenues t a service prvider

2 becming a fiduciary. Specifically, ERISA prvides that a persn is a fiduciary f a plan t the extent that persn: Exercises any discretinary authrity r discretinary cntrl respecting management f such plan r exercises any authrity r cntrl respecting management r dispsitin f its assets; Renders investment advice fr a fee r ther cmpensatin, direct r indirect, with respect t any mneys r ther prperty f such plan, r as any authrity r respnsibility t d s; r Has any discretinary authrity r discretinary respnsibility in the administratin f such plan.[5] The curt s ruling affected the DOL s definitin f a fiduciary prviding investment advice under ERISA Sectin 3(21). Hwever, the ruling did nt affect service prviders wh are fiduciaries under ther prngs f the statute. Fr example, discretinary asset managers that maintain discretinary cntrl respecting the dispsitin f the plan s assets r an utsurced plan administratr that maintains discretinary authrity respecting the administratin f the plan will remain unaffected by the Fifth Circuit s ruling. The status f service prviders that make investment recmmendatins t plans r IRAs may change with the return t the five-part test f the 1975 regulatin. Under the five-part test, a persn wuld be deemed t prvide investment advice under ERISA Sectin 3(21) where the persn (1) makes recmmendatins 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; (2) n a regular basis; (3) pursuant t a mutual understanding; (4) that such advice will be a primary basis fr investment decisins; and (5) that the advice will be individualized t the plan.[6] In mst cases, investment advisers will remain fiduciaries as they mst likely will satisfy the five-part test because they are generally hired t prvide investment recmmendatins and mnitring services n a regular basis, and it is understd that such advice is individualized t the plan. Whether the adviser acts as a fiduciary under the five-part test fr purpses f rllver decisins will depend n the status f the Deseret pinin[7] (discussed belw). Similarly, depending n the services that a brker-dealer prvides t ERISA-cvered plans r IRAs, they may r may nt be deemed a fiduciary under ERISA r the Cde. Fr instance, brker-dealers that prvide nging investment recmmendatins t retirement plans r IRAs will likely be fiduciaries under the five-part test. This may be a surprise t brker-dealers that believed that they were nt acting as fiduciaries prir t the DOL s issuance f the fiduciary rule. Prducts and Services Lending Themselves t Fiduciary Status Service prviders shuld evaluate any prduct r service that prvides nging investment recmmendatins t retirement plans, participants r IRAs and ther accunts subject t

3 Internal Revenue Cde Sectin 4975 where they receive direct r indirect cmpensatin. This includes rb-advisers r investment educatin prviders as it is nt uncmmn fr thse vendrs t prvide advice under the five-part test withut being aware f their status as a fiduciary. Status f Plicies and Prcedures Adpted t Cmply With the Fiduciary Rule Service prviders shuld review any and all plicies and prcedures implemented as a result f the fiduciary rule t determine whether their nging implementatin makes sense. Ntwithstanding the vacatur f the fiduciary rule, there is a risk that ther regulatrs culd enfrce a service prviders plicies t the extent that they re nt fllwed internally. Fr instance, the enfrcement sectin f the Massachusetts Securities Divisin f the Office f the Secretary f the Cmmnwealth filed a Scttrade-Administrative-Cmplaint-E pdf" target="_blank">cmplaint against a service prvider based n alleged vilatins f their internal plicies and prcedures adpted in light f the fiduciary rule. Imprtantly, that cmplaint alleged vilatins f Massachusetts state law, nt the fiduciary rule.[8] Certain service prviders may decide t keep in place certain plicies implemented in respnse t the fiduciary rule. Fr instance, firms expecting t take advantage f the DOL s temprary nnenfrcement plicy (discussed belw) may keep plicies and prcedures in place fr the time being t demnstrate cmpliance with the temprary nnenfrcement plicy. Mrever, as discussed belw, we suspect that the best interest cncept is nt ging away any time sn, meaning that plicies and prcedures emplyed by service prviders t ensure that brkers and advisers make best interest recmmendatins may be required by ther laws in the future. SEC s Prpsed Regulatin Best Interest Versus the Fiduciary Rule and Best Interest Cntract Exemptin The U.S. Securities and Exchange Cmmissin was substantially influenced by the DOL in its prmulgatin f its prpsed regulatin (regulatin best interest), as the SEC cited t the best interest cntract exemptin, r BIC exemptin, 340 times within the preamble t regulatin best interest. While regulatin best interest largely tracks existing suitability requirements, it als incrprates several cncepts raised by the DOL under the BIC exemptin. Having said that, the SEC s effrt prvides an arguably reduced standard f care and maintains less extensive disclsure bligatins than the BIC exemptin.[9] Regulatin best interest wuld require that brker-dealers and their assciated persns act in the best interest f the retail custmer at the time the recmmendatin is made withut placing the financial r ther interest f the brker-dealer r natural persn wh is an assciated persn making the recmmendatin ahead f the interest f the retail custmer. [10] Unlike the fiduciary rule and BIC exemptin, the SEC s best interest standard f care des nt require that the recmmendatin be made withut regard t the financial r ther interests f the brker-dealer.[11] A brker-dealer is deemed t cmply with regulatin best interest if it satisfies the regulatin s three cre bligatins: (1) the care bligatin, (2) the cnflict f interest

4 bligatin, and (3) the disclsure bligatin.[12] These bligatins are discussed belw. Care Obligatin The care bligatin requires that brker-dealers exercise reasnable diligence, care, skill and prudence t: Understand the ptential risks and rewards assciated with a recmmendatin and have a reasnable basis t believe that the recmmendatin culd be in the best interest f at least sme retail custmers; Have a reasnable basis t believe that the recmmendatin is in the best interest f a particular retail custmer based n the retail custmer s investment prfile and the ptential risk and rewards assciated with the recmmendatin; and Have a reasnable basis t believe that a series f recmmended transactins, even if in the retail custmer s best interest when viewed in islatin, is nt excessive and is in the retail custmer s best interest when taken tgether in light f the retail custmer s investment prfile.[13] While the care bligatin largely tracks existing suitability rules under the Financial Industry Regulatry Authrity in that it wuld require that brker-dealers cntinue t abide by reasnable basis suitability, custmer-specific suitability and quantitative suitability, the prpsed rule des include what can be described as a prcess element similar t that fund under DOL rules and regulatins.[14] The inclusin f the term prudence fr instance, is nt fund under existing securities rules.[15] Cnflict f Interest Obligatin The SEC s cnflict f interest bligatin requires that brker-dealers (1) establish, maintain and enfrce written plicies and prcedures reasnably designed t identify, and at a minimum disclse, r eliminate, all material cnflicts f interest that are assciated with recmmendatins cvered by regulatin best interest, and (2) establish, maintain and enfrce written plicies and prcedures reasnably designed t identify, and disclse and mitigate, r eliminate, material cnflicts f interest arising frm financial incentives assciated with such recmmendatins.[16] The SEC s interpretatin f the term financial incentive is very brad. Fr example, the SEC described material cnflicts that arise frm financial incentives t include the fllwing: Cmpensatin practices established by the brker-dealer including fees and charges fr prducts sld. Emplyee cmpensatin r emplyment incentives (e.g., qutas, bnuses, sales cntests, r special awards, differential r variable cmpensatin, and incentives tied t appraisals r perfrmance reviews).

5 Cmpensatin practices invlving third parties, including cmpensatin fr subaccunting r administrative services t a mutual fund, receipt f cmmissins r sales charges, r ther differential r variable cmpensatin, whether paid by the retail custmer r a third party. Sales f prpriety prducts r services r prducts f affiliates and principal transactins.[17] In the case f material cnflicts f interests assciated with financial incentives, the prpsal wuld require brker-dealers t either eliminate the cnflict entirely, r mitigate the cnflict in additin t prviding disclsure. The SEC described that material cnflicts f interests culd be mitigated thrugh varius cnflict mitigatin strategies.[18] Ntwithstanding the freging, the SEC did describe that certain material cnflicts f interest arising frm financial incentives may be difficult t mitigate and may be mre apprpriately avided in their entirety. Thse practices include the payment r receipt f certain nncash cmpensatin taking the frm f sales cntests, trips, prizes and ther similar bnuses based n sales f certain securities r accumulatin f assets under management. [19] As described belw, many f these cnflicts f interest were als f interest t the DOL when issuing the fiduciary rule and BIC exemptin. Fr instance, the SEC s statements that certain cnflicts are s pervasive that they may be difficult t mitigate is cnsistent with the DOL s prhibitin against the use f qutas, appraisals, bnuses and sales cntests within the warranty sectins f the BIC exemptin.[20] Under the regulatin best interest, brker-dealers wuld be permitted t exercise their judgment t determine whether a cnflict can be effectively disclsed r require sme ther cnflict mitigatin strategy. Imprtantly, the SEC stated that it wuld be reasnable fr a brker-dealer t use a risk-based cmpliance and supervisry system that wuld allw the brker-dealer t fcus n specific areas f their business that pse the greatest risk f nncmpliance.[21] Thus, unlike the BIC exemptin s warranty requirements, which strictly prhibited certain cnflicts f interest, the SEC rules require nly that the brker-dealer enfrce written plicies and prcedures t mitigate r eliminate such cnflicts. Disclsure Obligatin Regulatin best interest als requires that brker-dealers satisfy the disclsure bligatin. Imprtantly, a brker-dealer s disclsure bligatin is in additin t and distinct frm the Frm CRS bligatin which must be satisfied by bth brker-dealers and registered investment advisers.[22] The disclsure bligatin requires that, prir t r at the time f a recmmendatin, the brker-dealer, r a r natural persn wh is an assciated persn f a brker r dealer, reasnably disclse t the retail custmer, in writing, the material facts relating t the scpe and terms f the relatinship with the retail custmer and all material cnflicts f interest assciated with the recmmendatin. [23] At the utset, the SEC ntes that brker-dealers shuld have the flexibility t make disclsures by varius means. [24] The material facts relating t the scpe f the relatinship and which must be disclsed wuld include the fllwing:

6 That the brker-dealer is acting in a brker-dealer capacity with respect t the recmmendatin. The fees and charges that apply t the retail custmer s transactins, hldings and accunts. The type and scpe f services prvided by the brker-dealer, including mnitring the perfrmance f the retail custmer s accunt.[25] Additinally, the disclsure bligatin requires that the brker-dealer explicitly disclse all material cnflicts f interest assciated with the recmmendatin. Interestingly, the SEC highlighted that firms are nly required t reasnably disclse material cnflicts f interest. In the SEC s view, this means that cmpliance with the disclsure bligatin will be measured against a negligence standard as ppsed t the strict liability standard generally assciated with the BIC exemptin.[26] Effect f the Fiduciary Rule n Financial Industry Cmpensatin Structures The fiduciary rule and interpretive guidance issued by the department affected cmpensatin structures f financial prfessinals in a dramatic way. In this respect, the BIC exemptin s warranty requirements required the financial institutin t warrant that its plicies and prcedures did nt permit the use r reliance upn qutas, appraisals, perfrmance r persnnel actins, bnuses, cntexts, special awards, differential cmpensatin, r ther actins r incentives that are intended r wuld reasnably be expected t cause advisers t make recmmendatins that are nt in the best interest f the retirement investr. [27] The BIC exemptin expressly described that differential cmpensatin culd be paid t financial prfessinals if it was based n neutral factrs that resulted frm different levels f service required in the delivery f different types f investments.[28] The DOL issued additinal guidance under the BIC exemptin affecting brker-dealer cmpensatin practices addressing, fr example, certain back-end recruitment cmpensatin paid t brker-dealers that were changing firms.[29] The DOL viewed large all r nthing arrangements that were cntingent upn the adviser meeting a prductin r assets under management target as incnsistent with the warranty requirements under the BIC exemptin.[30] Similarly, firms relying n the BIC exemptin were required t revisit escalating cmpensatin grids. This is because under the BIC exemptin s warranty prvisins, questins were raised as t whether a firm culd prvide a greater prprtin f revenue t advisers that were mre prductive. While the DOL answered that cmpensatin grids were permitted, cmpensatin grids were required t be tailred t avid certain cnflicts. Fr instance, the DOL warned that revenue that was fed int a cmpensatin grid shuld be the same within prduct categries and that differentials between prduct categries must be justified by neutral factrs. Grids were required t prvide nly fr gradual increases in cmpensatin and increases in cmpensatin were unable t be retractive. In the DOL s

7 view, retractive grids were likely t create acute cnflicts f interest.[31] We expect that many firms will revert t prir arrangements as a result f the Fifth Circuit s vacatur f the fiduciary rule. Hwever, many f these sales practices were als scrutinized by the SEC and specifically described as ptentially prblematic within its prpsed regulatin best interest. Therefre, it remains t be seen whether financial institutins will revert back t all cmpensatin mdels that were in place prir t the fiduciary rule. Changes t Service Prvider Custmer Agreements and Disclsures Service prviders shuld review all client-facing agreements t ensure that they reflect the current state f the law and have nt inadvertently established a heightened standard f care thrugh cntract. Service prviders shuld als establish a game plan in the event that they accepted fiduciary status via cntract in respnse t the fiduciary rule. Separately, thse wh revised agreements and issued disclsures t satisfy the exemptin fr independent fiduciaries with financial expertise that prvided relief frm the fiduciary rule shuld review thse agreements and disclsures t determine whether sme r all f the disclsures remain necessary.[32] In ur experience, sme f the disclsures prvided in respnse t this exemptin have been helpful in defining the relatinship between the parties and have been retained within underlying agreements. Status f Rllver Recmmendatins as Fiduciary Investment Advice The answer t this issue is largely unclear. Much depends n whether the Deseret advisry pinin again cnstitutes the DOL s interpretatin f the law. In a 2005 advisry pinin t Deseret Mutual Fund Administratrs, the DOL cncluded that an investment adviser wh was nt therwise a fiduciary wuld nt be deemed a fiduciary with respect t the ERISA plan slely n the basis f making a recmmendatin t a plan participant t take a plan distributin and invest it in an IRA, even if the adviser gave specific advice as t hw t invest the distributed funds.[33] In reaching this cnclusin, the DOL interpreted its prefiduciary rule investment advice regulatin.[34] The Deseret advisry pinin stated further, hwever, that where a plan fficer wh is already a fiduciary t the plan respnds t questins regarding a plan distributin r the investment f amunts withdrawn frm the plan, such fiduciary wuld be exercising discretinary management ver the plan. With the fiduciary rule vacated, sme have suggested that the Deseret advisry pinin is restred. We think the utcme is nt entirely clear. This leaves pen the very real pssibility that, if the Deseret advisry pinin is restred, a curt may defer t the DOL s reasning resulting in the DOL s applicatin f fiduciary status fr a ne-time rllver recmmendatin prvided by a persn wh is already a fiduciary. Hwever, the status f the law in this area is largely unclear. Alternative Exemptive Relief Pst-Vacatur f the BIC Exemptin The DOL has issued a temprary nnenfrcement plicy fr thse service prviders wh accepted fiduciary status under the fiduciary rule but may n lnger rely n the BIC exemptin as a result f the vacatur by the Fifth Circuit.[35] Field Assistance Bulletin effectively extended the initial transitin relief under the BIC exemptin n an nging

8 basis thrugh a nnenfrcement plicy. While FAB is nt an exemptin and culd be rescinded at any time by the DOL, it may be relied upn while it remains effective t the extent that there is an versight in cmpliance with ther available exemptins. Otherwise, service prviders shuld review hw they are cmpensated and cnsider ther available exemptins that may permit the receipt f cmpensatin. Many exemptins which have been arund fr years prir t the fiduciary rule have been reinstated. Therefre, service prviders shuld lk t these exemptins (many f which are described belw) in rder t map ut an effective exemptin strategy. Expanded Exemptive Relief Pst-Vacatur f Amendments t Existing PTEs As nted abve, the result f the vacatur is that the DOL s changes t prhibited transactin exemptins under the fiduciary rule are als rescinded. While the DOL s changes t certain f the exemptins, including PTE 77-4, PTE 80-83, PTE, 83-1, were limited t the inclusin f the impartial cnduct standards, ther exemptins cmmnly relied n by the industry, including PTEs and were substantially mdified and the brad relief previusly available under these exemptins was n lnger available.[36] The DOL s justificatin fr these changes was that service prviders wuld nw have exemptive relief available t them fr cmmn brkerage and annuity transactins under the BIC exemptin.[37] Fr instance, under the fiduciary rule, the DOL amended PTE 84-24, making it inapplicable t mutual fund transactins fr IRAs and limiting its applicatin t certain annuity sales transactins.[38] Similarly, PTE which was cmmnly relied upn in IRA transactins was largely rescinded. [39]These exemptins will likely be resurrected with the vacatur. PTE and are discussed belw. PTE The Fifth Circuit s decisin will likely reverse these changes t PTE Imprtantly, with the lss f the BIC exemptin, it is imprtant t fcus n the types f transactins cvered by PTE and the terms and cnditins under which relief will be available. PTE prvides exemptive relief fr the sale f shares, f a registered investment cmpany (i.e., a mutual fund) if certain cnditins are met.[40] Specifically, regarding mutual fund shares PTE exempts: The "effecting" f a plan's purchase f mutual fund shares by the mutual fund principal underwriter r its affiliates; and The receipt f sales cmmissins by the principal underwriter r its affiliates in cnnectin with sales f shares f the mutual fund.[41] In cnnectin with plan purchases f insurance and annuity cntracts, PTE exempts:

9 The plan s purchase f an insurance r annuity cntract frm an insurance cmpany; The effecting f the plan s purchase f the insurance r annuity cntract by an insurance agent r brker r their affiliates; and The receipt f sales cmmissins in cnnectin with the sale f an insurance r annuity cntract by an insurance agent r brker r their affiliates.[42] The cnditins under PTE include, amng thers, certain "general" cnditins, "relatinship" cnditins, as well as disclsure and apprval cnditins. General Cnditins: The general cnditins under Sectin IV f PTE require that: The transactin is effected in the rdinary curse f business f the principal underwriter, insurance cmpany, r insurance agent r brker The transactin is n arm's length terms; and The cmbined ttal f all fees, cmmissins and ther cnsideratin is reasnable.[43] Relatinship Cnditins: The relatinship cnditins, under Sectin V(a) f PTE 84-24, prhibit the principal underwriter, insurance cmpany, insurance agent r brker and any f their affiliates frm having certain types f relatinships with the plan. Specifically, they may nt be: A trustee f the plan (ther than a nndiscretinary trustee wh des nt render investment advice with respect t any assets f the plan); A plan administratr (within the meaning f ERISA Sectin 3(16) and Internal Revenue Cde Sectin 414(g)); An emplyer any f whse emplyees are cvered by the plan; r A fiduciary wh is expressly authrized in writing t manage, acquire r dispse f the assets f the plan n a discretinary basis.[44] Disclsure and Apprval Cnditins: The disclsure and apprval cnditins under Sectins V(b) and (c) f PTE require that, befre the transactin is effected, an independent plan fiduciary receive certain infrmatin in writing, including infrmatin abut sales cmmissin, and any ther charges, fees, discunts, penalties r adjustments that may be impsed in cnnectin with the purchase, hlding, exchange r sale f the recmmended securities r annuity cntract. In the case f sales f shares f mutual funds, the disclsure may be satisfied by distributin f the mutual fund prspectus if it cntains the required infrmatin.[45] Based n the disclsure, an independent plan fiduciary must apprve the investment befre

10 the transactin is executed. The independent plan fiduciary wh apprves the transactin may nt be the principal underwriter f the mutual fund and may nt receive, directly r indirectly, any cmpensatin r cnsideratin fr his r her wn persnal accunt in cnnectin with the plan's transactin. With respect t participant-directed plans, disclsures can be made t, and apprval can be btained frm, plan participants.[46] PTE If required cnditins are met, Sectin II(a) f PTE exempts frm ERISA Sectin 406(b) a plan fiduciary's (e.g., a plan investment manager's) use f its authrity t cause a plan t pay a fee fr effecting r executing securities transactins t itself r an affiliated brker-dealer. The language f PTE , Sectin II(a) exempts a plan fiduciary's causing a plan t pay fees fr effecting securities transactins t that "persn." Under Sectin I(a), the term "persn" includes the affiliates f a persn, including (amng thers) any persn directly r indirectly cntrlled, cntrlling, cntrlled by, r under cmmn cntrl with the persn. The exemptin applies nly t agency transactins and nly t the extent that the transactins are nt excessive under the circumstances, in either amunt r frequency.[47] Imprtantly, if securities transactins are effected under PTE n behalf f IRAs that are nt ERISA-cvered plans, n additinal cnditins apply. Hwever, additinal cnditins apply where an investment manager effects transactins fr ERISA-cvered plans thrugh its affiliated brker-dealer, as fllws: Relatinship Cnditins: The plan investment manager engaging in the securities transactins (r any f its affiliates) may nt be the plan administratr, r an emplyer whse emplyees are cvered by the plan.[48] Als, the exemptin is nt available if the investment manager r its affiliate is a discretinary plan trustee (i.e., a trustee ther than a directed trustee), unless the plan has assets ver $50 millin and certain ther cnditins are met).[49] Advance Disclsure and Authrizatin: An independent fiduciary (which may be the plan spnsr r administratr, r, fr a participant-directed plan, the individual participant) must give written authrizatin in advance f any securities transactins that wuld be cvered by the exemptin. [50] Within three mnths befre this authrizatin is given, the investment manager must prvide the independent fiduciary with any reasnably available infrmatin that the investment manager reasnably believes is necessary fr the independent fiduciary t determine whether t make the authrizatin. This includes: A cpy f PTE ; A frm fr terminating the authrizatin; A descriptin f the investment manager's brkerage placement practices; and

11 Any ther reasnably available infrmatin regarding the matter that the authrizing independent fiduciary requests.[51] Plan Terminatin Rights: The independent fiduciary's authrizatin must be terminable at will withut any penalty t the plan. At least annually, the investment manager must prvide the independent fiduciary written ntice f the right t terminate, tgether with a frm that can be used t terminate the authrizatin.[52] Peridic Reprts: The investment manager (r its affiliated brker-dealer affiliate) must prvide t the independent fiduciary either: A cnfirmatin slip within 10 business days f each cvered securities transactin; r A quarterly reprt f all securities transactins (whether executed by the affiliated brker-dealer r therwise) specifically identifying the ttal cmpensatin paid by the plan fr securities transactins and the amunt f such cmpensatin retained by the affiliated brker-dealer.[53] Annual Summary: The independent fiduciary must receive an annual reprt that summarizes infrmatin previusly prvided in the cnfirmatins r quarterly reprts. The reprt must be prvided within 45 days after the end f the perid t which it relates, and must specifically include: The ttal f all securities transactin-related charges incurred by the plan during the perid; The amunt f the securities transactin-related charges retained by the investment manager and its affiliated brker-dealer and the amunt paid ver t ther persns fr executin and ther services; A descriptin f the investment manager's brker placement practices, if the practices materially changed during the year; and Disclsure f the plan's "prtfli turnver rati" calculated in a manner reasnably designed t prvide the independent fiduciary with the infrmatin needed t discharge its duty f prudence.[54] PTE nly prvides exemptive relief frm ERISA Sectin 406(b). Because the prvisin f brkerage services by an affiliate f a plan fiduciary als invlves pssible prhibited transactins under ERISA Sectin 406(a), the brkerage transactins als must satisfy cnditins under the statutry exemptin under ERISA Sectin 408(b)(2), including the cnditin that fees paid by the plan fr brkerage services are nt mre than reasnable.

12 Gerge M. Sepsaks and Michael P. Kreps are attrneys with Grm Law Grup. This article is excerpted frm Lexis Practice Advisr, a cmprehensive practical guidance resurce that includes practice ntes, checklists, and mdel anntated frms drafted by experienced attrneys t help lawyers effectively and efficiently cmplete their daily tasks. Fr mre infrmatin n Lexis Practice Advisr r t sign up fr a free trial, please click here. Lexis is a registered trademark f RELX Grup, used under license. The pinins expressed are thse f the authr(s) and d nt necessarily reflect the views f the firm, its clients, r Prtfli Media Inc., r any f its r their respective affiliates. This article is fr general infrmatin purpses and is nt intended t be and shuld nt be taken as legal advice. [1] 81 Fed. Reg. 20,946 (April 8, 2016). [2] 81 Fed. Reg. 21,002 (April 8, 2016) as crrected at 81 Fed. Reg. 44,773 (July 11, 2016), and 81 Fed. Reg. 21,089 (April 8, 2016). [3] Chamber f Cmmerce f the United States v. United States Dep t f Labr, 885 F.3d 360 (5th Cir. 2018). [4] Chamber f Cmmerce, 885 F.3d at 369. [5] ERISA 3(21) (29 U.S.C. 1002(21). [6] 29 C.F.R (c)(1)(ii)(B). [7] Deseret Opinin (DOL Adv. Op A, 2005 ERISA LEXIS 24) [8] Enfrcement Sectin f the Mass. Secs. Div. f the Office f the Secy. f the Cmmnwealth v. Scttrade, Inc., 2018 U.S. Dist. LEXIS (D. Mass. 2018). [9] See 83 Fed. Reg. 21,574 (May 9, 2018). [10] Id. at 21,575. [11] Id. at 21,586. [12] Id. at 21, [13] Id. at 21,681. [14] See id. at 21,

13 [15] See id. at 21, 609. [16] Id. at 21,682. [17] Id. at 21,618. [18] Id. at 21, [19] Id. [20] Id. at 21,622. [21] Id. at 21,618. [22] See 83 Fed. Reg. 21,416 (May 9, 2018). [23] 83 Fed. Reg. 21,574, 21,681. [24] Id. at 21,605. [25] Id. at 21,599. [26] Id. at 21,604. [27] 81 Fed. Reg. 21,002, 21,033. [28] Id. at 21,037. [29] Dep t f Labr, Emplyee Benefits Security Adm n, Cnflict f Interest FAQs (Part I- Exemptins) (2016), FAQ 12. [30] Id. [31] Id. at FAQ 9. [32] See 81 Fed. Reg. 20,946, 20,999. [33] DOL Adv. Op A (Dec. 7, 2005), 2005 ERISA LEXIS 24. [34] 29 C.F.R (c). [35] Field Assistance Bulletin [36] See 81 Fed. Reg. 21,208 (Apr. 8, 2016); 81 Fed. Reg. 21,147 (April 8, 2016); 81 Fed. Reg. 21,181 (April 8, 2016).

14 [37] Id. [38] 81 Fed. Reg. 21,147. [39] 81 Fed. Reg. 21,181. [40] See 71 Fed. Reg. 5,887 (Feb. 3, 2006). [41] Id. at 5,889. [42] Id. [43] Id. [44] Id. [45] Id. at 5, [46] Id. at 5,890. [47] See 51 Fed. Reg. 41,686 (Nv. 18, 1986), as amended by 67 Fed. Reg. 64,137 (Oct. 17, 2002) (permitting use f PTE by discretinary trustees and their affiliates if they meet additinal cnditins). [48] PTE , Sectin III(a). [49] PTE , Sectin III(h). [50] PTE , SectinIII(b). [51] PTE , SectinIII(d). [52] PTE , SectinIII(c). [53] PTE , Sectin III(e). [54] PTE , Sectin III(f). Id.