The Evolving Fiduciary Landscape Tuesday, May 24 11:15 a.m. 12:30 p.m. During this session, industry panelists and FINRA staff will discuss the Department of Labor s proposed conflicts of interest rule (the fiduciary regulation) and will provide an overview of fiduciary requirements and tips to help in meeting your fiduciary responsibilities. Moderator: Thomas Selman Executive Vice President and Legal Compliance Officer FINRA Regulatory Policy Panelists: Timothy Hauser Deputy Assistant Secretary for Program Operations Department of Labor Bruce Maisel Vice President and Chief Compliance Officer Western & Southern Financial Group Richard Matta Principal Groom Law Group Nancy Smith Executive Vice President and Corporate Secretary AARP 2016 Financial Industry Regulatory Authority, Inc. All rights reserved. 1
The Evolving Fiduciary Landscape Panelist Bios: Moderator: Thomas M. Selman, CFA is Executive Vice President, Regulatory Policy, and Legal Compliance Officer of FINRA. He oversees the departments of Corporate Financing, Advertising Regulation, Regulatory Policy, the Legal Compliance Office, and the Office of Emerging Regulatory Issues. Tom joined the organization in 1996. Mr. Selman also holds the Chartered Financial Analyst designation. From 1992 to 1996, Mr. Selman was Associate Counsel at the Investment Company Institute, a trade association for the mutual fund industry. Prior to that time, he served as Special Counsel in the Office of General Counsel at the United States Securities and Exchange Commission, a position he held beginning in 1987. Tom was an Attorney-Advisor to the European Union in Brussels, Belgium, from 1986 to 1987. In addition to his career accomplishments, Mr. Selman has authored articles that were published in Investment Lawyer, The International Lawyer and Insights. Mr. Selman received bachelor's degrees in economics and history from Rice University, and a Doctor of Jurisprudence degree from The University of Texas School of Law, where he was Associate Editor of the Texas Law Review. Panelists: Timothy D. Hauser is the Deputy Assistant Secretary for Program Operations of the Employee Benefits Security Administration (EBSA) and as such is the chief operating officer of the Agency. His responsibilities include overseeing EBSA's regulatory, enforcement and reporting activities. Mr. Hauser joined the Department of Labor in 1991 as a trial attorney for the Plan Benefits Security Division (PBSD), where he represented the Department in federal district court and appellate litigation. From November 2000 until November 2013, Mr. Hauser was the Associate Solicitor of the Division. As the head of PBSD, he was responsible for all of the Department's legal work under ERISA. Before joining the Department of Labor, Mr. Hauser worked as a trial attorney for six years at Legal Aid of Western Missouri. As a Legal Aid attorney, he represented indigent clients in civil litigation in ten rural counties in Missouri. Mr. Hauser graduated from Harvard Law School in 1985. He is also a graduate of the University of Illinois. Bruce W. Maisel is Vice President and Chief Compliance Officer for Western & Southern Financial Group, Cincinnati, OH. He oversees the compliance groups that support Western & Southern s various businesses and legal entities that manufacture and/or distribute insurance, broker-dealer and investment advisory products and services. Mr. Maisel is currently a member of FINRA s Independent Dealer / Insurance Affiliate Committee. Mr. Maisel previously was in legal roles with, among others, Ameriprise Financial Services, Inc., Minneapolis, MN and Charles Schwab & Co., Inc., San Francisco, CA. He started his career with the Heller, Ehrman, White & McAuliffe law firm, San Francisco, CA. Richard K. Matta is a Principal with Groom Law Group in Washington, D.C. His experience includes advising large plan fiduciaries, financial institutions and investment professionals in connection with the structuring and marketing of investment products and financial services to benefit plans and other taxexempt investors. Mr. Matta focuses on the intersection of ERISA Title I (and similar laws applicable to governmental plans) with securities, tax, corporate and banking laws as they relate to (1) financial products including mutual funds, hedge and private equity funds, bank collective trusts, real estate, derivatives and other alternative investments, and (2) financial services including "bundled services" arrangements, investment advisory and managed account programs, brokerage and wrap products, ESG investing, IRAs and wealth management, and service provider "alliance" agreements. His experience extends to helping plan fiduciaries with governance / compliance audits and development of compliance programs. Mr. Matta has worked with clients in obtaining scores of DOL prohibited transaction exemptions and advisory opinions, as well as SEC/FINRA guidance and IRS rulings. Mr. Matta co-chairs Groom s IRA practice where he advises financial institutions on IRA and HSA products, services and prohibited transaction issues. He also advises high net worth individuals on self-directed IRA issues including investments in private funds, real estate, and operating businesses. Nancy M. Smith is a member of AARP s Executive Team and as Corporate Secretary oversees corporate governance and board relations. Ms. Smith has extensive experience in financial, regulatory, compliance and legislative issues. She was appointed by the SEC to serve on its Equity Market 2016 Financial Industry Regulatory Authority, Inc. All rights reserved. 2
Structure Advisory Committee to represent the views of individual investors as the committee examines and advises the SEC on the structure and operations of the U.S. equities markets. She also currently serves on the Financial Industry Regulatory Authority s Investor Issues Committee. Previously, Ms. Smith worked at both AARP Services and AARP Financial (AFI), serving as a Vice President overseeing compliance and investment advisory services. She cofounded and directed RestoreTheTrust.com, a nonpartisan campaign funded by the Rockefeller Family Fund to educate investors on the need to pass the Sarbanes-Oxley Act. She also was vice president of FOLIOfn, an online brokerage. After serving as New Mexico s director of securities, she served as director of the Office of Investor Education and Assistance at the Security and Exchange Commission, where she led its plain-english initiative and represented consumer views. She also served on the staff of the U.S. House of Representatives Subcommittee on Telecommunications and Finance. She earned a bachelor s degree and a law degree from Georgetown University in Washington, D.C. 2016 Financial Industry Regulatory Authority, Inc. All rights reserved. 3
FINRA Annual Conference May 23 25, 2016 Washington, DC The Evolving Fiduciary Landscape
Panelists Moderator Thomas Selman, Executive Vice President and Legal Compliance Officer, FINRA Regulatory Policy Panelists Timothy Hauser, Deputy Assistant Secretary for Program Operations, Department of Labor (DOL) Bruce Maisel, Vice President and Chief Compliance Officer, Western & Southern Financial Group Richard Matta, Principal, Groom Law Group Nancy Smith, Executive Vice President and Corporate Secretary, AARP FINRA Annual Conference 2016 FINRA. All rights reserved. 1
DOL 2016 Fiduciary Rule General Overview FINRA Annual Conference Richard K. Matta May 24, 2016
Background on Current Law ERISA and the Internal Revenue Code (IRC) define the term fiduciary to include persons that give investment advice for a fee ERISA imposes standards of care and loyalty on fiduciaries to plans but not IRAs All fiduciaries must avoid prohibited transactions unless an exemption is available 3
Overview of Final Rule April 6, 2016 final regulation re-defines investment advice to a plan or an IRA Final BIC Exemption Other new and amended prohibited transaction exemptions Additional DOL guidance Commitment to addressing issues Effective date April 10, 2017 (Jan. 1, 2018 for some requirements) 4
Key Take-Aways Significantly expands universe of ERISA advice fiduciaries Focus is on IRA rollovers Investment managers benefit from sales exception changes good but not perfect Valuations not covered 5
Final Rule Key Questions Is there a covered recommendation? How is it delivered? Is recipient covered and is there a fee? Is there an exception? 6
Framework for Analyzing Investment Advice Fiduciary Status under the 2016 Final Regulation A Person is an Investment Advice Fiduciary IF he or she makes certain recommendations to certain recipients, for a fee, and either acknowledges fiduciary status or the arrangement otherwise meets other conditions, unless certain exceptions apply. A recommendation as to the advisability of acquiring, holding, disposing of or exchanging securities or investment property OR A recommendation as to how securities or investment property should be invested after a rollover, transfer or distribution to or from an IRA OR A recommendation as to the management of securities or other investment property, including, but not limited to recommendations on: Investment policies or strategies Portfolio composition Selection of other persons to provide investment advice or management services Selection of account arrangements (brokerage vs. advisory) Whether, in what amount and in what form and to what destination to take a rollover or distribution from a plan or IRA TO A Plan, plan fiduciary, plan participant or beneficiary, IRA or IRA owner FOR A fee or other compensation (direct or indirect) IF The person represents or acknowledges acting as a fiduciary OR The person directs advice to a specific recipient or recipients regarding the advisability of a particular investment or management decision with respect to securities of other investment property of the plan OR or IRA The person renders advice pursuant to an agreement, arrangement or understanding (written or verbal) that the advice is based on the particular investment needs of the recipient See following pages for discussion of definition of recommendation and exceptions 7
Framework for Analyzing Investment Advice Fiduciary Status under the 2016 Final Regulation A recommendation is a communication that, based on its content, context and presentation, would reasonably be viewed as a suggestion that the advice recipient engage in or refrain from taking a particular course of action. Recommendation Characteristics NOT a Recommendation Objective not subjective The more individually tailored a communication is to a specific recipient, the more likely it is to be a recommendation Select lists of securities characterized as appropriate for an investor would constitute a recommendation, even if no one security is recommended Actions may be aggregated to form a recommendation, even if no individual action is a recommendation Non-individualized platforms offered to participant-directed ERISA plans, if certain conditions met Selection and monitoring including RFP response sample line-ups if certain conditions met Certain types of general communications that a reasonable person would not view as an investment recommendation Investment education permits education similar to that currently allowed under IB 96-1, but populating asset allocation models or interactive materials with specific investment alternatives not permitted for IRAs 8
Framework for Analyzing Investment Advice Fiduciary Status under the 2016 Final Regulation Certain activities, even if they involve a recommendation are excepted from fiduciary status, provided the person conducting the activity has not acknowledged that it is a fiduciary with respect to the recommendation or advice given. Advice in connection with an arm s length sale, purchase, loan, exchange or other transaction related to the investment of securities or other property, where the plan is represented by: A Bank, Insurance Company, RIA or Broker-dealer; or A fiduciary with custody, management or control of assets of at least $50 million Advice in connection with swap transactions Advice provided by an employee of a plan sponsor Certain other conditions apply to each exception 9
Questions and Implications Hire me limited relief Rollovers covered and covered again Platform provider limits Seller s exception / BIC eligibility relationship 10
BIC Exemption A kinder, gentler BIC? Broader coverage Available to cover both plan-level and participant/ira holder advice Less onerous contract formation Fewer IT intensive disclosures Remains true to DOL s North Star Enforceable best interest standard of conduct 11
Three Pathways Pathway 1 Full BIC For advice to IRA investors Bi-lateral contract Pathway 2 Unilateral BIC For advice to ERISA investors Unilateral set of acknowledgements and disclosures Pathway 3 BIC Lite For Level Fee Fiduciaries providing rollover recommendations Streamlined requirements 12
BIC Relief Elements Fiduciary Acknowledgement Impartial Conduct Standards Prudence and loyalty Reasonable compensation No materially misleading statements 13
BIC Relief Elements Warranties Adoption of policies and procedures Identification of material conflicts and BIC compliance officer No use of quotas, appraisals, etc. except to the extent designed to avoid a misalignment of interests Disclosures In writing At or prior to execution of transaction Good faith errors curable within 30 days 14
BIC Relief Elements Ineligible contract provisions Disclaim or limit its or advisor s liability Require waiver or qualification of investor s right to participate in class action Require mediation of claims in unreasonable or distant venues Permissible limitations Mandatory arbitration for non-class actions Punitive damages Right of rescission 15
BIC Web Disclosure Freely accessible to public Updated quarterly Discussion of business model and material conflicts Typical account fee schedule Written description of policies and procedures List of all product manufacturers and other parties providing third party payments Compensation and incentive arrangements for advisors Good faith errors may be cured within 7 days 16
Pathway 1 IRA Investors Bilateral contract to cover advice to IRA investors Requires all of the relief elements Fiduciary acknowledgement Impartial conduct standards Warranties Disclosures Absence of ineligible provisions Manual or e-signature of client needed for new accounts Negative consent procedure for contracts in place prior to January 1, 2018 17
Pathway 2 ERISA Plans Same as pathway 1 Except no bi-lateral contract required Reason ERISA enforcement rights 18
Pathway 3 BIC Lite Level fee fiduciaries Levelized for advisor and financial institution BIC elements required Fiduciary acknowledgement Impartial conduct standards Elements not required Warranties Disclosures Special Requirement Financial institution must document why a rollover recommendation or a switch from a commission-based to a level fee arrangement is in investor s best interest 19
Proprietary Products Investor is provided with written disclosure of restrictions Investor is fully informed of material conflicts Financial Institution reasonably concludes restrictions will not cause imprudent recommendations Compensation is reasonable Advisors recommendation is not based on advisor s own financial interest or interests other than investment objectives, risk tolerance, financial circumstances and needs of investor 20
PTE 84-24 Significantly narrowed the scope of relief No longer covers variable or fixed indexed products for Plans or IRAs Now available only (including in the rollover context) for - Receipt of Insurance Commissions (narrowly defined) on fixed rate annuity contracts and insurance contracts (IRAs and plans) Receipt of Mutual Fund Commissions (narrowly defined) (plans) 21
PTE 84-24 New definitions of Insurance Commission and Mutual Fund Commission Only a traditional sales commission is covered Effect: Receipt of revenue sharing in connection with plan investments in funds not permitted 22
PTE 84-24 Reasonable compensation - now tracks section 408(b)(2) Includes new Impartial Conduct Standards 23
Principal Transactions Provides section 406(a) and 406(b) relief for a principal transaction between a Retirement Investor and a Financial Institution, including The purchase by a Retirement Investor from a Financial Institution, of Debt Securities, UITs and CIDs, on the recommendation of the Adviser or Financial Institution The sale of securities or other investment property by the Retirement Investor to the Financial Institution on the recommendation of the Adviser or Financial Institution Purchases and sales in riskless principal transactions 24
Principal Transactions Conditions (BIC-like) Written contract for IRAs (executed prior to transaction, not advice) Fiduciary status Impartial Conduct Standards (including best execution) Disclosures & Warranties No contract required for Plans (but similar conditions) 25
Principal Transactions Disclosure pre-transaction confirmations annual on request Exclusions Adviser or Financial Institution is discretionary fiduciary Adviser or Financial Institution is sponsor or named fiduciary or section 3(16) administrator (certain circumstances) 26
PTE 86-128 Then... Historically, this PTE is used in 2 ways Affiliated Brokerage: Advice or discretionary fiduciary recommended or selected affiliated broker to execute plan or IRA trades (and broker receives commissions) Mutual Funds: Fiduciary recommended or selected unaffiliated mutual funds for plan or IRA, effected purchase of mutual fund shares and received revenue sharing or other third party payments 27
PTE 86-128 Now... Affiliated Brokerage Limited for IRAs Must be discretionary (and not advice) fiduciary All conditions now apply Related Entities may receive commissions Narrow definition of commission eliminates revenue sharing Commissions must be received directly from plan or IRA Mutual Funds Adds new mutual fund exemption (replacing 75-1, Part II) Not available for IRAs Includes most of PTE 75-1 conditions as well as most of the PTE 86-128 conditions re affiliated brokerage Applies only to purchase of mutual fund shares Narrow definition of commission eliminates revenue sharing Commissions may be received from plan or mutual fund 28
Other PTEs PTE 75-1, Part II(2) Section 2: Revoked (See amended PTE 86-128) No longer available to cover revenue sharing on unaffiliated fund purchases/recommendations 29
Other PTEs PTE 75-1 Part I Revoked Part I(b) and I(c) relating to broker s nonfiduciary advice and services Duplicative of section 408(b)(2) PTE 75-1 (Part V) Expanded to permit an advice fiduciary to receive reasonable compensation for extending credit to a Plan or IRA to avoid a failed purchase or sale of securities Conditions 30
Other PTEs Added Impartial Conduct Standards PTE 75-1(Part III)(underwritings) PTE 75-1 (Part IV)(market-makers) PTE 77-4 (purchase of affiliated mutual fund shares) PTE 80-83 (using proceeds from securities sale to retire issuer s debt) PTE 83-1 (mortgage pool trusts) 31
The Evolving Fiduciary Landscape Tuesday, May 24 11:15 a.m. 12:30 p.m. Resources Federal Register Resources Employee Benefits Security Administration www.federalregister.gov/agencies/employee-benefits-security-administration Amendment to and Partial Revocation of Prohibited Transaction Exemption (PTE) 84-24 for Certain Transactions Involving Insurance Agents and Brokers, Pension Consultants, Insurance Companies, and Investment Company Principal Underwriters (April 2016) www.federalregister.gov/articles/2016/04/08/2016-07928/amendment-to-and-partial-revocationof-prohibited-transaction-exemption-pte-84-24-for-certain (website) https://s3.amazonaws.com/public-inspection.federalregister.gov/2016-07928.pdf (pdf) Amendment to Prohibited Transaction Exemption (PTE) 75-1, Part V, Exemptions From Prohibitions Respecting Certain Classes of Transactions Involving Employee Benefit Plans and Certain Broker-Dealers, Reporting Dealers and Banks (April 2016) www.federalregister.gov/articles/2016/04/08/2016-07927/amendment-to-prohibited-transactionexemption-pte-75-1-part-v-exemptions-from-prohibitions (website) https://s3.amazonaws.com/public-inspection.federalregister.gov/2016-07927.pdf (pdf) Amendment to and Partial Revocation of Prohibited Transaction Exemption (PTE) 86-128 for Securities Transactions Involving Employee Benefit Plans and Broker-Dealers; Amendment to and Partial Revocation of PTE 75-1, Exemptions From Prohibitions Respecting Certain Classes of Transactions Involving Employee Benefits Plans and Certain Broker-Dealers, Reporting Dealers and Banks. (April 2016) www.federalregister.gov/articles/2016/04/08/2016-07929/amendment-to-and-partial-revocationof-prohibited-transaction-exemption-pte-86-128-for-securities (website) https://s3.amazonaws.com/public-inspection.federalregister.gov/2016-07929.pdf (pdf) Amendments to Class Exemptions 75-1, 77-4, 80-83 and 83-1 (April 2016) www.federalregister.gov/articles/2016/04/08/2016-07930/amendments-to-class-exemptions-75-1- 77-4-80-83-and-83-1 (website) https://s3.amazonaws.com/public-inspection.federalregister.gov/2016-07930.pdf (pdf) 2016 Financial Industry Regulatory Authority, Inc. All rights reserved. 1
Best Interest Contract Exemption (April 2016) www.federalregister.gov/articles/2016/04/08/2016-07925/best-interest-contract-exemption (website) https://s3.amazonaws.com/public-inspection.federalregister.gov/2016-07925.pdf (pdf) Class Exemption for Principal Transactions in Certain Assets Between Investment Advice Fiduciaries and Employee Benefit Plans and IRAs (April 2016) https://www.federalregister.gov/articles/2016/04/08/2016-07926/class-exemption-for-principaltransactions-in-certain-assets-between-investment-advice-fiduciaries (website) https://s3.amazonaws.com/public-inspection.federalregister.gov/2016-07926.pdf (pdf) Definition of the Term Fiduciary ; Conflict of Interest Rule-Retirement Investment Advice (April 2016) https://www.federalregister.gov/articles/2016/04/08/2016-07924/definition-of-the-term-fiduciaryconflict-of-interest-rule-retirement-investment-advice (website) https://s3.amazonaws.com/public-inspection.federalregister.gov/2016-07924.pdf (pdf) 2016 Financial Industry Regulatory Authority, Inc. All rights reserved. 2