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

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Overview of the Panel

Elimination of the 5-Part Test

Exceptions or Exemptions

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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).

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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

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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

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Definition of Fiduciary under Final Rule (cont.)

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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

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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

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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

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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

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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

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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

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DOL Issued a Proposed Delay

60 Day Delay Subject to 15 Day Notice and Comment

Concurrent 45 Day Comment Period to Address

Presidential Memo

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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

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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?

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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.

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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

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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.

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Footprint of the Rule

Product Design Changes

T- Shares

Clean Shares

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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

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