DOL: Final Definition of “Fiduciary”

Impact on Communications Compliance

•Who is a fiduciary?•What’s an “adviser?”•What’s a “recommendation?”•What’s NOT a

“recommendation?”•Disclosure• Impact of the fiduciary

standard on other regulations•Q&A

Agenda

Who is a fiduciary?

In and Out

In• Agents• Investment Adviser

Representatives• Registered

Representatives

Out• Sorry

In• IRAs• Small 401(k)• Large 401(k)• 403(b)• etc.

Out• Non-qualified

accounts

In•Variable Annuities•Indexed Annuities•Mutual Funds•Brokerage Accounts•Fee accounts•etc.

Out• Any investment not permitted for use with qualified accounts or IRAs

In•Account Management•Buy / Sell / Hold Recommendations

•Rollovers / transfers•Portfolio composition•Advisor / Platform recommendations

Out•General Communications•Education•Employees• Information provided to expert fiduciaries

• Swaps / Securities Swaps

“Advisers” Account Type

InvestmentsTransactions &

Recommendations

What’s an adviser?

By using the term ‘‘adviser,’’ the Department does not intend to refer only to investment advisers registered under the Investment Advisers Act of 1940 or under state law. For example, as used herein, an adviser can be an individual or entity who is, among other things, a representative of a registered investment adviser, a bank or similar financial Institution, an insurance company, or a broker-dealer.

What’s an Adviser?

The final rule clarifies and rationalizes the definition of fiduciary investment advice. The rule covers: recommendations by a person who represents or acknowledges that they are acting as a fiduciary within the meaning of the Act or the Code; advice rendered pursuant to a written or verbal agreement, arrangement, or understanding that the advice is based on the particular investment needs of the advice recipient; and advice directed to a specific advice recipient or recipients regarding the advisability of a particular investment or management decision with respect to securities or other investment property of the plan or IRA.

Who Makes Recommendations?

What’s a recommendation?

Under the final rule, 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.

What is a Recommendation?

(b)(1) For purposes of this section, ‘‘recommendation’’ means 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. The determination of whether a ‘‘recommendation’’ has been made is an objective rather than subjective inquiry. In addition, the more individually tailored the communication is to a specific advice recipient or recipients about, for example, a security, investment property, or investment strategy, the more likely the communication will be viewed as a recommendation. Providing a selective list of securities to a particular advice recipient as appropriate for that investor would be a recommendation as to the advisability of acquiring securities even if no recommendation is made with respect to any one security. Furthermore, a series of actions, directly or indirectly (e.g., through or together with any affiliate), that may not constitute a recommendation when viewed individually may amount to a recommendation when considered in the aggregate. It also makes no difference whether the communication was initiated by a person or a computer software program.

Defining Recommendations

What’s NOT a recommendation?

(2) The provision of services or the furnishing or making available of information and materials in conformance with paragraphs (b)(2)(i) through (iv) of this section is not a ‘‘recommendation’’ for purposes of this section. Determinations as to whether any activity not described in this paragraph (b)(2) constitutes a recommendation must be made by reference to the criteria set forth in paragraph (b)(1) of this section.

Not a recommendation…

“To further clarify the meaning of recommendation, the final rule provides examples of services or materials that are not treated as a recommendation. These include services or materials that provide general communications and commentary on investment products (such as television, radio, and public media talk show commentary, remarks in widely attended speeches and conferences, and financial newsletters), marketing or making available a menu of investment alternatives that a plan fiduciary could choose from, identifying investment alternatives that meet objective criteria specified by a plan fiduciary, and providing information and materials that constitute investment education or retirement education.”

pg 7. REGULATING ADVICE MARKETS: DEFINITION OF THE TERM “FIDUCIARY” CONFLICTS OF INTEREST - RETIREMENT INVESTMENT ADVICE: REGULATORY IMPACT ANALYSIS FOR FINAL RULE AND EXEMPTIONS http://www.dol.gov/ebsa/pdf/conflict-of-interest-ria.pdf

What is Not a Recommendation?

Disclosures

Disclosure alone has proven ineffective to mitigate conflicts in advice… Some research suggests that even if disclosure about conflicts could be made simple and clear, it could be ineffective—or even harmful.

The same gap in expertise that makes investment advice necessary and important frequently also prevents investors from recognizing bad advice or understanding advisers’ disclosures.

Disclosure Doesn’t Work

20951, 20981: Federal Register / Vol. 81, No. 68 / Friday, April 8, 2016 / Rules and Regulations

“A disclosure regime, standing alone, would not obviate conflicts of interest in investment advice even if it were possible to flawlessly disclose complex fee and investment structures.”

Well, Disclosure Doesn’t Work by Itself

20982 Federal Register / Vol. 81, No. 68 / Friday, April 8, 2016 / Rules and Regulations

… the Department does not intend this regulation to change the scope or effect of ERISA section 514, including the savings clause in ERISA section 514(b)(2)(A) for state regulation of securities, banking, or insurance laws. The final rule now includes an express provision to that effect in a new paragraph (i). The requirements implemented in the final rule do not alter the fundamental reporting and disclosure requirements of the statute with respect to employee benefit plans, and as such have no implications for the States or the relationship or distribution of power between the national government and the States.

…but, disclosure is still required…

The Department estimates that it would require one hour of legal professional time to draft the disclosure needed under the investment education provision. Therefore, this disclosure would result in approximately 23,500 hours of legal time at an equivalent cost of approximately $3.1 million.

The disclosures needed to satisfy the platform provider, investment education, independent plan fiduciary, and swap transaction provisions of the final rule are information collection requests (ICRs) subject to the Paperwork Reduction Act.

… and we want more of it…

20994 Federal Register / Vol. 81, No. 68 / Friday, April 8, 2016 / Rules and Regulations

Federal Register / Vol. 81, No. 68 / Friday, April 8, 2016 / Rules and Regulations 20995

• Fairly disclose the fees, compensation, and Material Conflicts of Interest, associated with their recommendations. Advisers relying on the exemption must adhere to the Impartial Conduct Standards when making investment recommendations. • The exemption takes a principles-based approach that permits financial

Institutions and Advisers to receive many forms of compensation that would otherwise be prohibited, including, inter alia, commissions, trailing commissions, sales loads, 12b-1 fees, and revenue-sharing payments from investment providers or other third parties to Advisers and Financial Institutions. The exemption is available for advice to retail ``Retirement Investors,'' including IRA owners, plan participants and beneficiaries, and ``retail fiduciaries'' (including such fiduciaries of small participant-directed plans). All Financial Institutions relying on the exemption must notify the Department in advance of doing so, and retain records that can be made available to the Department and Retirement Investors for evaluating compliance with the exemption.

(Some) Disclosure Requirements Best Interest Contract Exemption

What are the “Impartial Conduct Standards?”

Provide Advice With:

•Care •Skill •Prudence •Diligence

What Advisers Need to Consider:

• Investment objectives •Risk tolerance•Financial circumstances •Needs of the Retirement

Investor•Without regard to the

financial or other interests of the Adviser

Impact of the fiduciary standard on other regulations

Photo: NY Daily News August 18, 2015

§ 2510.3–21 Definition of ‘‘Fiduciary.’’(i) Continued applicability of State law regulating insurance, banking, or securities. Nothing in this part shall be construed to affect or modify the provisions of section 514 of Title I of the Act, including the savings clause in section 514(b)(2)(A) for state laws that regulate insurance, banking, or securities.

Insurance Laws in Effect

Timing

Effective Date:June 7, 2016• Start preparations

Applicability Date: April 10, 2017• Liability kicks in

Transition Period: April 10, 2017 ThroughJanuary 1, 2018• Prepare for full

compliance• Notice requirements• Record keeping• Designate a person

for oversight

Full Compliance: January 1, 2018• Full liability and

compliance requirements

BICE and Principle Transactions PTE Transition Period

Transition Period Details: April 10, 2017 through January 1, 2018

Firms must prepare for full compliance with all the conditions of the exemptions

Safeguard the interests of retirement investors.

Firms and advisers must adhere to the impartial conduct standards,

• Acknowledges their fiduciary status and;• Describes their material conflicts of interest, • Disclose whether it recommends Proprietary Products or investments that generate Third

Party Payments• Notify the Retirement Investor of the limitations placed on the universe of investment

recommendations

Provide a notice to retirement investors that, among other things:

• Addressing material conflicts of interest and;• Monitoring advisers' adherence to the impartial conduct standards

Designate a person responsible for:

Meet record keeping requirements

Q&A

Stephen Selby, CRCP

Assistant Vice President, Regulatory ServicesOffice Phone: (860) 285-7858

sselby@LIMRA.comAn Online account is just a click away: https://www.limra.com/Request_Access/