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PLI – Investment Management Institute 2017:
The DOL Fiduciary Rule- Where are we now?
March 23, 2017
Overview of the Panel
What’s Happened?
Comment Periods
Issues and New Routes
2
Overview of the Panel
Elimination of the 5-Part Test
Exceptions or Exemptions
3
Overview of the Rule
On April 6, 2016, the DOL issued final regulations expanding the definition of fiduciary
to employee plans and IRAs for purposes of ERISA and related provisions under
Section 4975 of the Internal Revenue Code (the Code)
The suite of regulations and new and amended class exemptions (collectively, the final
rule) includes the following:
Final regulation re-defining who is a “fiduciary” by reason of providing investment advice to a
plan or IRA
Best Interest Contract exemption (BIC)
Principal Transaction exemption
Amendments to several existing prohibited transaction class exemptions (generally limits the
availability of these amended exemptions, and also imposes the Impartial Conduct
Standards)
PTEs -75-1, 77-4, 80-83, 83-1, 84-24 and 86-128
Final regulation, amendments to class exemptions, and certain conditions of the BIC,
were expected to become applicable on April 10, 2017, and certain disclosure and
other provisions not applicable until January 1, 2018 (the January 1, 2018 applicability
date would not be delayed – so far).
4
Definition of Fiduciary under Final Rule
Under ERISA Section 3(21), a person is a fiduciary if the person –
Exercises any discretion over the management or investment of
the ERISA Plan’s or IRA’s assets;
Renders investment advice for a fee or other compensation, direct
or indirect, with respect to any money or other property of the
Plan, or has any authority or responsibility to do so, or
Has any discretion over the plan’s administration
The final rule is not about “discretionary” investment management
5
Definition of Fiduciary under Final Rule (cont.)
Final rule defining fiduciary is much broader than the old five-part
test:
Under the rule issued by the DOL in 1975, a person would be an
“investment advice fiduciary” if the person: (1) renders advice as
to the value of securities or makes recommendations as to the
advisability of investing in, purchasing or selling securities; (2) on
a regular basis; (3) pursuant to a mutual agreement,
arrangement or understanding that; (4) the advice will serve as
the primary basis for investment decisions, and that; (5) the
advice will be individualized based on the particular needs of the
plan
Under the five-part test, regulation distinguished sales conversations
from tailored advice
6
Definition of Fiduciary under Final Rule (cont.)
7
A recommendation as to how securities or investment
property should be invested after a rollover, transfer or
distribution to or from an IRA
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
A recommendation as to the advisability of
acquiring, holding, disposing of or
exchanging securities or investment
property
The person represents or
acknowledges acting as a fiduciary
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
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 IRA
OR
OR
TO A Plan, plan fiduciary,
plan participant or
beneficiary, IRA or
IRA owner
A fee or other
compensation (direct or
indirect)
FOR
IF
OR
OR
One Important Exception to the Definition of Investment Advice –
Independent Fiduciary Exception
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
Reasonable belief that counterparty is a fiduciary to the plan or IRA and
capable of evaluating investment risks / exercising independent judgment
Seller cannot provide impartial advice / advice in a fiduciary capacity
Describe nature of the seller’s financial interests
No direct compensation from the plan, plan fiduciary, plan participants or
beneficiaries, IRA or IRA owner for investment advice
8
New Prohibited Transaction Exemptions - Introduction
The final rule provides two new PTEs:
The primary purpose of the BIC Exemption is to permit transactions that otherwise
would be prohibited on the basis of conflict of interest when a fiduciary adviser receives
compensation as a result of the fiduciary adviser’s advice to a plan participant or IRA
investor. The BIC Exemption permits such payments (e.g., commissions, 12b-1 fees
and revenue sharing to the financial institution), provided the fiduciary adviser satisfies
certain requirements, which are designed to reduce the risk of the fiduciary adviser
providing conflicted advice
The primary purpose of the Principal Transaction Exemption is to permit principal
and riskless principal transactions between a fiduciary adviser or financial institution
and a plan or IRA, with respect to principal traded assets (i.e., certain debt securities,
CDs and unit investment trusts), provided that the fiduciary adviser and institution
satisfy certain requirements
9
BIC Exemption – DOL FAQ clarification (October 2016)
Compensation under the BIC Exemption, such as quotas, appraisals, bonuses, special awards, cannot be used if they are reasonably expected to cause advisers to make recommendations that are not in the best interest of the retirement investor
This limitation does not, categorically, preclude the use of escalating grids that are volume-based, but certain factors must be considered and a determination must be made that the grids do not run counter to the fundamental obligation to provide advice that is in the customer’s best interest
Factors to consider include: Avoiding passing along a firm-level conflict But OK to define “compensable” revenue that goes into the grid in such a
way that it is level within different broad categories of investments based on neutral factors
Avoiding having non-neutral factors Neutral factors = time and complexity associated with recommending
investments within different product categories
10
BIC Exemption – DOL FAQ clarification (October 2016)
Grids with gradual increases are less likely to create impermissible incentives Avoid retroactivity Adequate oversight of recommendations when escalating grids are in place
and adviser is approaching a threshold Recruitment Bonuses
Sign-on awards or bonuses not tied to the movement of accounts or assets to the firm are permissible under the full BIC Exemption
Back-end awards that are tied to the adviser’s satisfaction of revenue or asset targets should be avoided on a going-forward basis. OK for firms to honor pre-existing obligations (as of October 27, 2016) that are reasonable
11
Current Timeline
February 3rd– Presidential Memorandum on the DOL Rule
March 2nd – Publication of Proposed Delay in Federal Register
March 10th- Temporary Enforcement Policy on Fiduciary Rule Issued
March 17th – Comment Period on Delay Closes
March 27th – DOL Submits Final Delay to OMB
April 6th – OMB Completes Final Review of Final Delay
April 7th – Final Delay Published in Federal Register and Takes Effect (Possible CRA Issue)
April 17th – Comment Period on Presidential Memo Closes
June 9th – Fiduciary Rule Takes Effect
12
Presidential Memorandum
Whether the DOL rule has harmed or is likely to harm
investors due to a reduction in access retirement savings
offerings, products, information or financial advice
Whether the applicability date of the rule has resulted in
dislocations or disruptions
Whether the rule is likely to cause an increase in litigation
and prices to gain access to retirement services
13
DOL Issued a Proposed Delay
60 Day Delay Subject to 15 Day Notice and Comment
Concurrent 45 Day Comment Period to Address
Presidential Memo
14
Delay Comments
500 + comments were submitted
Industry comments supporting a delay focus
upon:
Marketplace disruption
Likelihood of changes being made to rule and
need to avoid duplication of compliance startup
costs
15
Substantive Comments
(45 Days)
DOL Crafted Its Own List of Questions for Responding to
Presidential Memo which include:
Are firms making changes to their target markets? Are some firms moving to
abandon or deemphasize the small IRA investor or small plan market
segments?
Are firms making changes to their line-ups of investment products, and/or
product pricing?
Are firms making changes to their advisory services, and/or to the pricing of
those services?
Has implementation or anticipation of the rule led investors to shift
investments between asset classes or types, and or are such changes
expected in the future?
16
Temporary Non-Enforcement Policy on Rule
Field Assistance Bulletin No. 2017-01
If DOL issues a delay after April 10, or does not issue a
delay, the DOL will not engage in any enforcement action
based on non-compliance with the rule or related
exemptions during a 30 day period.
17
Wish List of Changes for Asset Managers include:
Broaden “Hire Me” exception
Broaden Investment Education exception
Modify the definition of “independent fiduciary” to
include smaller plans and IRAs
18
Possible Alternative Routes
APA Section 705 Delay
Section 705 Allows Agencies to Delay Rules if “Interest of Justice” Requires
Standard for reviewing courts is whether it is likely an injunction would be
granted
Four courts have denied injunctions
Legal System
Convince a Court to:
Stay the Rule Pending Appeal
Certify a Settlement that Strikes Down the Rule
Hold the Rule Invalid
Have Congress Act:
Congress could kill the rule legislatively.
19
Footprint of the Rule
Product Design Changes
T- Shares
Clean Shares
20
Footprint of the Rule
(even if the rule goes away)
Elimination of the 5-part test
Changes in:
Manufacturer/Distributor Relationships
Product offerings and design
Compensation arrangements
21
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