Clifford E. Kirsch W. Mark Smith April 25, 2016 The Impact of the DOL Fiduciary Duty Rule on Bank Broker-Dealer Distribution of Securities and Insurance All Rights Reserved. This communication is for general informational purposes only and is not intended to constitute legal advice or a recommended course of action in any given situation. This communication is not intended to be, and should not be, relied upon by the recipient in making decisions of a legal nature with respect to the issues discussed herein. The recipient is encouraged to consult independent counsel before making any decisions or taking any action concerning the matters in this communication. This communication does not create an attorney-client relationship between Sutherland and the recipient.
Clifford E. Kirsch Partner Sutherland Asbill & Brennan LLP W. Mark Smith Partner Sutherland Asbill & Brennan LLP 2
Statutory Structure in a Nutshell Applies to both ERISA plans and IRAs If only providing services: Appropriate and helpful services Arrangement terminable on reasonably short notice Plan/IRA pays no more than reasonable compensation Disclosure if covered service provider to plan [ERISA #408(b)(2), IRC #4975(d)(2)] 3
Statutory Structure in a Nutshell If also a fiduciary (e.g., by providing investment advice for a fee): Duties of prudence and loyalty (ERISA plans only) Prohibited transaction rules against self-dealing, conflicted interests (ERISA plans only) and kickbacks Standards are violated if fiduciary/affiliate receives additional revenue as a result of advice Disclosure is not a cure/exemption required [ERISA #404, #406, IRC #4975] 4
1975 Investment Advice Fiduciary Definition For a direct or indirect fee, a person: 1. Renders advice as to the value of securities or other property, or makes recommendations as to the advisability of investing in, purchasing or selling securities or other property 2. On a regular basis 3. Pursuant to a mutual agreement, arrangement or understanding, written or otherwise, with the plan or a plan fiduciary, that 4. The advice will serve as a primary basis for investment decisions with respect to plan assets, and that 5. The advice will be individualized based on the particular needs of the plan. 5
DOL Reasons for Revising the Rule It s a DC world Existing definition narrows statute Tax subsidies justify broad fiduciary definition Existing definition impairs enforcement One-time advice may be critical Retirement investors cannot distinguish between fiduciary and non-fiduciary advisers CEA estimates $17 billion annual cost due to conflicted advice 6
DOL Fiduciary Reproposal Scope of Final Rule Scope of Final Rule ERISA Plans IRC #4975(e) IRAs Traditional IRA accounts and annuities Roth IRA Archer medical savings accounts Health savings accounts Coverdell education savings accounts Private sector 403(b) ERISA plans 7
Final Rule Definition Person meets at least one in each column, for a direct/indirect fee (including to an affiliate) in connection with a plan/ira Service Makes a recommendation regarding: 1. Acquiring, holding, disposing of or exchanging investment 2. How investment should be invested after rollover, transfer or distribution 3. Management of investment Status 1. Admitted fiduciary 2. Provides advice pursuant to a written or verbal agreement, arrangement or understanding that the advice is based on the particular needs of the recipient 3. Directs advice to recipient regarding a particular management investment decision Recommendation = 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 a particular course of action (modeled on FINRA guidance) 8
Exclusions from Investment Advice Seller transactions Swap counterparty Employee communications Platform marketing Selection and monitoring assistance General marketing communications Providing investment education 9
Investment Education Changes in the Final Rule CATEGORY OF INVESTMENT EDUCATION PLAN INFORMATION GENERAL INVESTMENT INFORMATION ASSET ALLOCATION MODELS INTERACTIVE INVESTMENT MATERIALS SIGNIFICANT CHANGES IN FINAL RULE Includes descriptions of product features; investor rights and obligations; fees and expenses Includes effects of fees and expenses on the rate of return May identify specific investment alternatives if the investment is a DIA under a plan subject and (i) the person who develops or markets the model identifies all of the other DIAs with similar risk/return characteristics; and (ii) the model is accompanied by a statement that identifies where information on those investment alternatives can be obtained, including fee information. May identify specific investment alternatives if the alternative is specified by the plan participant, beneficiary or IRA owner, or if the investment is a DIA under a plan and the materials: (i) identify all the other DIAs available under the plan with similar risk/return characteristics; and (ii) are accompanied by a statement that identifies where information in the alternatives can be obtained, including fee information. 10
New BIC Exemption Exempts any form of compensation to adviser of financial institution, affiliate, or related entity regarding advice to a retirement investor concerning assets Written contract (IRAs and non-erisa plans only) 1. Acknowledge fiduciary status 2. Impartial conduct standards (best interest, reasonable comp, no misleading statements) 3. Disclosures about material conflicts of interest/other matters 4. Warranties (e.g., comp structure) 5. No exculpatory/waiver of class action provisions Disclosures Transaction disclosure Public website Disclosure to DOL Recordkeeping and Access Permissible compensation Many forms permitted, including commissions, trailing commissions, sales loads, 12b-1 fees and revenue sharing Differential compensation permitted under certain conditions Best interests, website link, fees Conflicts of interest, fees, policies, incentives One-time notice to DOL Access by DOL/IRS, participants, IRA owners 11
BIC Exemption Full-blown BIC IRA investors/non-erisa investors Bi-lateral contract Unilateral BIC ERISA investors Unilateral acknowledgements/disclosures Streamlined BIC Level fee fiduciaries Streamlined requirements Bank networking provision 12
Complex of Remaining Exemptions PTE 84-24 Allows certain parties to receive commissions when plans and IRAs purchase insurance an annuity contracts and mutual funds. In the absence of the exemption, the receipt of such payments would be treated as a prohibited transaction. As amended, amended exemption limits such relief to the purchase of fixed rate annuity contracts and insurance contracts (by plans and IRAs) and mutual fund shares (by plans only) and narrows the definition of permissible commissions. Unavailable for variable and fixed index annuities (relief now available under BIC Exemption) Covers traditional sales compensation (12b-1 fees, revenue sharing payments, administrative fees/payments or marketing fees/payments not permitted) 13
Complex of Remaining Exemptions PTE 84-24 Changes from the 2015 Proposal Relief revoked for indexed annuities and similar annuities (as well as variable annuities). Clarifies that relief applies to rollover or distribution transactions. Group fixed annuities must guarantee return of principal net of reasonable compensation and provide a guaranteed declared minimum interest rate in order to qualify for relief. Expands net permissible compensation for insurance and annuities to include certain employee benefits, and would include payments made through third parties. Clarifies that relief extends to receipt of compensation by insurance company. Preamble suggests that gross dealer concession and overrides will be considered commissions. 14
Complex of Remaining Exemptions PTE 75 1, PARTS III, IV PTE 75 1, PART V EXEMPTION COVERED ACTIVITY FINAL CHANGES PTE 75 1, PART Sales of nonproprietary Revoked, and now covered in PTE 86 II(2) mutual funds by broker 128 dealer Underwriting and market making Extension of credit to a plan/ira in connection with a securities transaction Incorporates Impartial Conduct Standards from the BICE (without the warranty); serious violations of other applicable law may void the exemption under these standards Revised: (1) to permit investment advice fiduciaries to receive compensation on arm s length credit extended to avoid a failed securities transaction (other than a failure caused by the fiduciary) if Rule 10b 16 or comparable disclosure is provided in advance and (2) recordkeeping provisions 15
Complex of Remaining Exemptions EXEMPTION COVERED ACTIVITY FINAL CHANGES PTE 77 4 Allocation by discretionary asset management fiduciary to proprietary mutual funds Incorporates impartial conduct standards from the BICE (without the warranty) PTE 80 83 Use of proceeds from the sale of securities to reduce or retire indebtedness Incorporates impartial conduct standards from the BICE (without the warranty) PTE 83 1 Mortgage pool investment trusts Incorporates impartial conduct standards from the BICE (without the warranty) 16
Complex of Remaining Exemptions EXEMPTION COVERED ACTIVITY FINAL CHANGES New PTE Principal Transactions Permits financial institutions to effect principal transactions and riskless principal transactions in principal traded assets Financial institution must acknowledge fiduciary status, adhere to impartial conduct standards and implement policies and procedures designed to prevent violations of impartial conduct standards Financial institution must seek to obtain best execution reasonably available for principal transactions, provide a written confirmation complying with SEC Rule 10b 10, and provide an annual list of principal transactions effected 17
Complex of Remaining Exemptions EXEMPTION COVERED ACTIVITY FINAL CHANGES PTE 86 128 Receipt of commission for the Revoked for investment advice execution of securities fiduciaries to IRAs in securities and transactions by a fiduciary; agency cross transactions agency cross transactions Clarifies that 408(b)(2) relief, and disclosures, may be required in addition to PTE 86 128 compliance Relief available only for brokerage commission or sales load paid by the plan/ira for executing the transaction; no relief for any form of indirect compensation Adds relief for non IRA principal transactions in nonproprietary mutual funds; only compensation permitted is the commission (sales load) disclosed by the mutual fund; retains conditions from PTE 75 1 requirement 18
Sutherland Commentary Compliance Strategy The regulatory structure permits a three-tier compliance strategy to deal with conflicted interest and other fiduciary considerations: Avoiding fiduciary status: the circumstances in which this will be a viable compliance strategy have been narrowed. If a fiduciary, negate any conflicted interest by, e.g., enterprisewide fee leveling, or returning the economic benefit of any varying revenue to the plan or IRA, or by outsourcing the advice leading to that varying revenue to an independent financial expert. If a fiduciary and the conflicted interest cannot be negated, rely on an applicable statutory or administrative PTE. The BIC Exemption may be a universally applicable compliance solution. Various other exemptions for specific investment products. 19
Important Dates Final Rule and Exemptions Implementation Timeline April 10 June 7 BICE, Principal Transactions Exemption relief fully available subject to limited conditions April 10, 2017 January 1, 2018 1 year Transition Period 60 days Final Rule Issued Effective Date Final Rule officially becomes law; no longer subject to amendment Applicability Date Final Rule fully applicable; PTE relief fully available Final Rule and complex of exemptions fully applicable; PTE relief subject to all conditions 20
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