DOL Conflict of Interest Proposal: What to Expect? Brought to you by the Advanced Consulting Group of Nationwide Nationwide, the Nationwide N and Eagle and Nationwide is on your side are service marks of Nationwide Mutual Insurance Company. 2015 Nationwide.
Some Things You Need To Know This presentation is for educational purposes only and is not intended to be a solicitation or sale of a specific product or service. The presentation is designed to provide accurate and authoritative information in regard to the subject matter covered. The general information in this presentation is not intended to be nor should it be treated as tax, legal, accounting or other professional advice. Additional issues could exist that would affect the tax treatment of a specific transaction and, therefore, taxpayers should seek advice from an independent tax advisor based on their particular circumstances before acting on any information presented. The Employee Retirement Income Security Act of 1974 ( ERISA ) and the federal tax laws are complex and subject to change. Any information contained herein referencing ERISA or the federal tax laws is not intended to be, nor is it to be construed as, tax or legal advice. Neither Nationwide nor its representatives give legal or tax advice. Please consult your attorney or tax advisor for answers to specific questions. Nationwide Investment Services Corporation, member FINRA. 2
Agenda Executive Summary of the New Proposed Regulations Review of the Existing Rules New Proposed Definition of Investment Advice Fiduciary Carve-outs to the New Proposed Definition Best Interest Contract Exemption ( BICE ) Impact on the Business Practices of Retirement Plan Financial Advisers 3 3
Executive Summary of the New Proposed Regulations The proposal significantly expands the definition of fiduciary investment advice Level-fee advisers generally not affected, except with respect to rollovers Recommending an IRA rollover becomes a fiduciary act requiring level fees; BIC Exemption Educating participants not considered a fiduciary act Comment period ends July 2015; applicability date probably in late 2016 or early 2017 4 4
Executive Summary of BIC Exemption Best Interest Contract ( BIC ) Exemption or BICE Complying with BICE allows advisers and their broker-dealers to receive variable compensation BICE relief only applies for services to: (i) participants; (ii) IRA owners; and (iii) sponsors of small (< 100 participants) non-participant directed plans Contract with the Retirement Investor Stringent financial disclosure requirements Onerous recordkeeping and reporting requirements 5 5
Review of Existing Rules Affecting Investment Advice + Other Services to Plans Nonfiduciary sales professional role Nonfiduciary provider of investment education services to plan participants role Investment advice rendered to plan s trustee or other named fiduciary Potential ERISA section 406(a)(1)(C) PT Potential ERISA sections 406(b)(1),(3) PTs Availability of PT regulatory exemptions 6 6
Review of Existing Rules Affecting Investment Advice to Participants Prohibited Transaction for an adviser to set his or her own compensation or receive additional fees Adv. Op. 2001-09A; independent computer model Adv. Op. 2005-10A; reduce fees by amount of any revenue sharing payments received Eligible Investment Advice Arrangements ( EIAAs ) Field Assistance Bulletin ( FAB ) 2007-01 7 7
Review of Existing Rules Affecting Rollovers Advisory Opinion 2005-23A DOL confirms that providing investment advice to a participant in an ERISA-covered plan is a fiduciary activity Recommending that a participant roll over his or her account balance to an IRA does not constitute investment advice and is a nonfiduciary activity An adviser who is not otherwise a plan fiduciary may recommend that a participant withdraw funds from the plan and invest in an IRA and earn fees on the IRA without becoming a fiduciary 8 8
Existing Definition of Investment Advice Fiduciary: Five-Prong Test Someone who is not a trustee or investment manager [ERISA 3(38)] and who for compensation: Renders advice as to value of securities or other property Does so on a regular basis Does so pursuant to a mutual agreement Provides advice that is the primary basis for the plan s investment decisions Provides individualized advice to the plan s needs 9 9
Proposed Regulations Definition of Investment Advice Fiduciary Key elements of the new definition Applies to both ERISA sec. 3(21)(A)(ii) and Code sec. 4975(e)(3)(B) Encompasses advice for a fee, direct or indirect, to a plan, a plan fiduciary, a plan participant or beneficiary, and (for the first time) to an IRA, or IRA owner Specifies four categories of advice Advice-giver either has fiduciary status or provides individualized advice 10 10
Proposed Regulations Types of Covered Investment Advice Advisability of acquiring, holding, or disposing of securities or other property, including a recommendation to take a distribution or to roll over assets to an IRA Management of securities or other property, including distributions and rollovers Appraisal, fairness opinion, or similar statement concerning value of securities or other property in connection with asset acquisitions by plan or IRA Recommendation of a person who will receive a fee for providing any of foregoing types of advice 11 11
Proposed Regulations Status of the Advice-Giver The advice-giver represents or acknowledges that he/she is acting as a fiduciary The advice-giver renders the advice pursuant to a written or verbal agreement that the advice is individualized for consideration in making investment or management decisions with respect to plan and/or IRA property 12 12
Carve-Outs to Definition of Investment Advice Fiduciary under Prop. Regs. Counterparty Transactions Large plan (100+ participants) or large assets ($100M or more); fiduciary has financial expertise Swap transactions Employees working on the plan with no fee Platform providers Selection and monitoring assistance Financial reports and valuations for ESOPs, investment funds and reporting + disclosure Investment education 13 13
Overview of ERISA Prohibited Transactions Party in Interest ERISA sec. 406(a)(1) party in interest PTs (A) sale, exchange, or leasing of property (B) lending of money or other extension of credit (C) furnishing of goods, services, or facilities (D) transfer to, or use by or for the benefit of, a party in interest any assets of the plan Party in interest includes a fiduciary, service provider, employer, employee, among others 14 14
Overview of ERISA Prohibited Transactions - Fiduciary ERISA sec. 406(b) fiduciary PTs (1) fiduciary self-dealing; dealing with plan assets for his/her own interest or account (2) dual loyalties; cannot represent a party in a transaction involving plan assets whose interests are adverse to those of the plan (3) anti-kickback; cannot receive any consideration for his/her personal account from any party dealing with the plan in a transaction involving plan assets 15 15
Statutory PT Exemptions There are 20 enumerated statutory PT exemptions under ERISA sec. 408(b); three that are relevant to financial advisers include (2) services necessary for the establishment or operation of the plan, if no more than reasonable compensation is paid therefor (14) exempts compensation paid to advisers under eligible investment advice arrangements [408(g)] for investment advice to participants (17) allows a nonfiduciary advisor to sell assets to a plan for no more than adequate consideration 16 16
Transactions of a Plan with Fiduciaries DOL Regs. Sec. 2550-408b-2(e) (1) a fiduciary may not use its authority, control, or responsibility to cause a plan to pay it an additional fee, nor may it receive compensation from a third party in connection with a transaction (2) a fiduciary does not engage in a transaction described in (1) if an independent fiduciary approves of the compensation arrangement (3) services without compensation are exempt; i.e., if the employer pays, then no fiduciary violation 17 17
Penalties for Prohibited Transactions Financial Penalty Code Sec. 4975 Excise tax = 15% of amount involved for each year or part thereof in which transaction is uncorrected Additional tax = 100% of amount involved if transaction not corrected within the taxable period ERISA liability for a fiduciary breach that does not involve a prohibited transaction 409(a) personal liability to restore losses 501 criminal penalties; $100K fine + 10 years jail 502(a) lawsuits to enjoin activity 18 18
Description of the Best Interest Contract ( BIC ) Exemption or BICE Fiduciary advisers may not receive variable compensation or compensation from third parties BICE permits advisers and their financial institutions to receive compensation for services provided in connection with purchase, sale, or holding of an asset by a plan, participant account, or IRA as a result of advice to retirement investors Participant-directed account IRA owner Non-participant directed plan with < 100 participants 19 19
Contractual Requirements of BICE Written contract by and between adviser and the financial institution with the retirement investor Must acknowledge fiduciary status Must agree to impartial conduct standards Adviser and financial institution must provide certain affirmative warranties Must disclose material conflicts of interest Cannot contain mandatory arbitration clauses or other limitations on liability 20 20
Specific BICE Disclosure Requirements Transaction disclosure for each asset purchase Chart providing 1-, 5-, and 10-year total projected costs and reasonable assumptions about investment performance Annual disclosure List of assets purchased and sold Total dollar amount of fees and expenses Total dollar amount of adviser compensation Financial institution webpage 21 21
BICE Range of Investment Options Generally, a financial institution must offer a broad range of investments Financial institution may limit range of investments If such limited range still allows for advice that is in the best interest of the retirement investor If the compensation received in connection with purchase, sale, or holding of an asset is not in excess of the services fair market value If adviser provides certain written disclosures 22 22
BICE Disclosure and Recordkeeping for Financial Institutions Must notify DOL of its intent to rely on BICE Data maintenance and recordkeeping for a 6-year period for each asset purchased, sold, or held Inflows Outflows Holdings Returns 23 23
Specific BIC Exemptions Insurance and Annuity Contract Exemption If certain conditions are met, BICE permits a plan, participant account, or IRA to purchase an annuity or insurance contract from an insurance company that is a service provider to the plan or IRA Exemption for Pre-Existing Transactions If certain conditions are met, the adviser may receive variable or third-party compensation as a result of advice that occurred prior to the date the regulations are finalized 24 24
Scenario #1 Sales of Products to Plan Fiduciaries w/o Ancillary Investment Advice Current regulatory regime Adviser is not a fiduciary ERISA sec. 408(b)(17) applies PTE 84-24 applies if life insurance and/or annuity contracts and/or mutual funds involved Proposed regulatory regime Current regulatory regime applies, so long as no investment advice is provided Counterparty carve-out Platform provider carve-out 25 25
Scenario #2 - Sales of Products to Plan Fiduciaries with Ancillary Advice Current regulatory regime Adviser may be compensated by means of commissions, fees, or both Disclosure requirements must be met Independent fiduciary must approve Proposed regulatory regime Counterparty and platform provider carve-outs N/A Adviser may be compensated by means of commissions, fees, or both; BICE applies to small db plans 26 26
Scenario #3 Investment Advice to Plan Fiduciary w/o any Product Sale Current regulatory regime - Assuming that the advice-giver meets the five-part test under the current regulatory definition of "investment advice fiduciary," the comments presented under Scenario #2 would apply, albeit without the product sales considerations Proposed regulatory regime - All the statements contained in Scenario #2 apply here, albeit without the product sales considerations 27 27
Scenario #4 3(38) Investment Manager w/o any Product Sale Current regulatory regime RIA acting as investment manager is a fiduciary Level fee compensation Avoid 406(b)(1) PT [self-dealing] and 406(b)(3) PT [anti-kickback] Proposed regulatory regime Same considerations as for current regulatory regime 28 28
Scenario #5 Adviser Works with Plan Participants on Rollovers Current regulatory regime [Adv. Op. 2005-23A] Advice on how to invest in exchange for fee makes one a fiduciary Recommendation to roll over is not a fiduciary act No prohibited transaction to receive fees on IRA Proposed regulatory regime Recommendation of a distribution or rollover is a fiduciary act Compensation may not vary unless BICE applies 29 29
Scenario #6 Adviser Provides Investment Advice to Plan Participants Current regulatory regime Five-part investment advice fiduciary test EIAA level fees or computer model FAB 2007-1; prior PTEs on investment advice continue Proposed regulatory regime New definition did not alter guidance on EIAAs or FAB 2007-1 If applicable, BICE might allow access to otherwise prohibited compensation 30 30
Scenario #7 Sales of Annuities + Mutual Funds to IRA Owners w/o Advice Current regulatory regime Not subject to ERISA, provided it is not a rollover Adviser may receive commission or fee on the sale Proposed regulatory regime Order-takers are not fiduciaries; PTE 84-24 applies Changes to PTE 84-24 limit ability to rely thereon Any advice makes adviser a fiduciary Practically, this transaction is fiduciary in nature BICE is available 31 31
Scenario #8 Sales of Annuities + Mutual Funds to IRA Owners w/advice Current regulatory regime Not subject to ERISA if not a rollover Adviser may receive commission and/or fee Proposed regulatory regime Fiduciary transaction under the new prop rules Levelized compensation No compensation from third parties BICE is available 32 32
Scenario #9 Financial Education Services to Participants + IRA Owners Current regulatory regime Not a fiduciary activity if carried out in accordance with Interpretive Bulletin 96-1 Proposed regulatory regime There is a carve-out from definition of investment advice fiduciary for investment education services 33 33
DOL Fiduciary Rule Timeline for Implementation DOL Assistant Sec. Phyllis Borzi: The SEC regulates Securities. We regulate retirement products. Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2015 2016 2017 34 Office of the Chief Legal and Governance Officer
Industry Impacts Broadly expands definition of who is a fiduciary (in scope: any type of agent, broker dealers, insurance companies and their affiliates) Covers qualified retirement plans and IRAs (including rollovers and distributions) Creates bias for low-cost products and a bias against annuities Industry trend away from commission based/brokerage model to fee-based model (with higher minimum account balances) Industry trend favoring large-plan market over small-plan market Increases risk of litigation (including private right of action for IRA owners & class Imposes unworkable (cost-prohibitive) point of sale, disclosure and recordkeeping requirements Creates regulatory uncertainty re: oversight, examinations and enforcement 35 Office of the Chief Legal and Governance Officer
Key Messages & Advocacy Strategy KEY MESSAGES Industry Accepts Best Interest Standard Seller s Exemption Must Be Expanded Preserve Existing Industry Business Model Investment Education Exemption Must Be Expanded 1. COMMENT PERIOD Nationwide Comment Letter ADVOCACY STRATEGY 2. CAPITOL HILL Staff & Member Briefings Best Interest Leg. Alternative Appropriations Strategy 3. PUBLIC Grassroots Paid Advertising Earned Media 4. LEGAL CHALLENGE 5. POLITICAL Administrative Procedures Act Legal Challenge Political Action Committee (PAC) & Civic Action Committee (CAP) Events 36 Office of the Chief Legal and Governance Officer
For further information, please contact our National Sales Desk at 800-321-6064 37 37