DOL SFINALREGULATIONANDPROHIBITED TRANSACTIONEXEMPTIONS: IMPACTON DISTRIBUTIONSANDROLLOVERS

Transcription

1 DOL SFINALREGULATIONANDPROHIBITED TRANSACTIONEXEMPTIONS: IMPACTON DISTRIBUTIONSANDROLLOVERS FRED REISH BRUCE ASHTON BRAD CAMPBELL JOSHUA WALDBESER MAY12, 2016

2 Distributions and Rollovers Two Fiduciary Recommendations 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

3 Distributions and Rollovers Two Fiduciary Recommendations (cont d Fiduciary advice also includes: a recommendation as to how securities or other investment property should be invested after the securities or other investment property are rolled over, transferred, or distributed from the plan or IRA

4 Why Prohibited Transactions May Occur ERISA and the Internal Revenue Code prohibit fiduciary investment advice that causes: Variable compensation to adviser (ERISA section 406(b)(1) and IRC section 4975 (c)(1)(e)). Compensation from third party to adviser (ERISA section 406(b)(3) and IRC section 4975(c)(1)(F)). Adviser includes affiliates and other parties in which adviser has an interest that could affect adviser s best judgment.

5 Two Prohibited Transaction Exemptions PTE Insurance contracts. Fixed-rate annuity contracts. Best Interest Contract Exemption (BICE) All investments and insurance products, including indexed and variable annuities.

6 Best Interest Recommendations What is Required? Recommendation to take a distribution Recommendation of plan-to-ira rollover Recommendation of IRA-to-IRA rollover

7 PTE Available for rollover to fixed-rate annuity Adviser can receive only an Insurance Commission and related employee benefits Insurance Commission includes renewal fees and trailers. Excludes revenue sharing, administrative fees or marketing payments. No bonuses, incentive trips, etc.

8 BICE Streamlined Process for Level- Fee Fiduciaries Only conflict is rollover from plan-to-ira, or IRA-to-IRA No variable compensation at any level Factor test for plan-to-ira rollover How does adviser get info? Financial Institution (not adviser) must document Best Interest determination.

9 Education Alternative to BICE and PTE How to apply to distributions? How to apply to plan-to-ira rollovers? Factors from FINRA Notice (but no DOL safe harbor). How to apply to IRA-to-IRA rollovers?

10 Special Issues and Challenges (cont d) Recommending investments and insurance contracts after a distribution is made. a recommendation as to how securities or other investment property should be invested after the securities or other investment property are rolled over, transferred, or distributed from the plan or IRA

11 Special Issues and Challenges (cont d) cont d Investment recommendation or distribution recommendation? BICE and/or PTE invoked?

12 Special Issues and Challenges (cont d) Under BICE, who is the Financial Institution for insurance sales? Broker-dealer for variable annuities. Insurer for indexed annuities? How to oversee adviser?

13 Special Issues and Challenges (cont d) How to make prudent recommendation of an insurance product? Need to vet contract and provider. Selling agreement limitations? Financial Institution can vet at macro level, but adviser must determine Best Interest for retirement investor.

14 Special Issues and Challenges (cont d) How to make prudent recommendations of mutual funds? Vetting by Financial Institution vs. adviser s Best Interest determination. Vetting of individual funds by RIAs. Vetting of fund families by broker-dealers.

15 Special Issues and Challenges (cont d) Recommending different programs in context of rollovers. Different compensation levels between programs. Neutral factor analysis.

16 Special Issues and Challenges (cont d) Impact on grid compensation, where adviser s share based on overall client assets. Cannot be based on recommendations. Must disregard: Fixed-rate annuities purchased in reliance on PTE Recommended rollover and transfer assets.

17 Special Issues and Challenges Fiduciary rule governs recommendation to take a taxable distribution to purchase after-tax annuity or insurance contract.

18 Questions?

19 FRED REISH, ESQ. Partner, Drinker Biddle & Reath, LLP 1800 Century Park East, Suite 1500 Los Angeles, CA (310) (310) [fax] BRADFORD CAMPBELL, ESQ. Counsel, Drinker Biddle & Reath, LLP 1500 K Street, N.W., Ste Washington, DC (202) (202) [fax] Bradford.Campbell@dbr.com BRUCE ASHTON, ESQ. Partner, Drinker Biddle & Reath, LLP 1800 Century Park East, Suite 1500 Los Angeles, CA (310) (310) [fax] Bruce.Ashton@dbr.com CALIFORNIA DELAWARE ILLINOIS NEW JERSEY NEW YORK PENNSYLVANIA WASHINGTON DC WISCONSIN 2015 Drinker Biddle & Reath LLP All rights reserved. A Delaware limited liability partnership JOSHUA WALDBESER, ESQ. Associate, Drinker Biddle & Reath, LLP 191 North Wacker Drive, Suite 3700 Chicago, IL (312) (312) [fax] Joshua.Waldbeser@dbr.com