the shifting landscape of dol fiduciary rule...
TRANSCRIPT
© 2017 Dechert LLP
October 12, 2017
The Shifting Landscape of DOL Fiduciary Rule ImplementationMutual Fund Directors Forum Webinar
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Speakers
Jay HainesSenior Vice President and Deputy General CounselFidelity Investments
James WhetzelDivisional General Counsel and Vice President for Financial Advice and Solutions GroupUSAA
Rana Jewel WrightAssistant General Counsel and Director Bank of America
Christine Ayako SchleppegrellSenior AssociateDechert LLP
The Shifting Landscape of DOL Fiduciary Rule Implementation 2October 12, 2017
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DOL Fiduciary Rule: purpose, scope, and timeline
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Purpose and Scope
Addresses conflicts of interest associated with compensation for the sale of financial products, including mutual fund shares, to retirement investors
Directly impacted: Intermediaries providing services/selling products to ERISA plans, individual retirement accounts (“IRAs”), and other non-ERISA plans. These intermediaries could now be considered fiduciaries
Indirectly impacted: Funds, their boards of directors/trustees and investment advisers are not fiduciaries
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Fiduciary Rule
Defines who is a “fiduciary” under ERISA and the Internal Revenue Code Extends fiduciary status to brokers and others making
investment recommendations to retirement plans and IRAs, including recommendations about distributions and rollovers Applies to providers of nondiscretionary “investment
advice” Exclusions, exceptions, and exemptions include:
• Best Interest Contract Exemption (“BICE”)• “BIC Lite” – streamlined exemption for level fee fiduciaries
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DOL Fiduciary Rule Timeline
December2016
IM Guidance Update on
mutual fund fee structure
April 8,2016
Final Rule
January 11,2017
Capital Group Letter on
clean shares
March 10,2017
TEP* to address
compliance date gap^
May 22,2017
TEP* to address
Transition Period
June 9,2017Begin
Transition Period:
compliance date for rule and certain
parts of exemptions
August 30,2017
Enforcement Policy on arbitration provision
January 1,2018
End Transition Period: anticipated compliance
date for remaining parts of exemptions
February 3,2017
Presidential Memorandum
April 10,2017
Original compliance
date
June 1,2017
Chair Clayton Request for
Public Comment
July 1,2017
Nevada Fiduciary Standard
PRESENT
2016 2018
* TEP stands for Temporary Enforcement Policy.Compliance date gap refers to the period between the April 10 applicability date and announcement of the delay.
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Industry Impact of the Fiduciary Rule
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Impact on Mutual Fund Distribution
Intermediaries (that are fiduciaries) selling mutual fund shares are required to comply with the fiduciary rule and exemptions in order to continue traditional payment arrangements
The fiduciary rule impacts the ability of these intermediaries to receive the following types of compensation in connection with the sale of mutual fund shares:
• Compensation that differs by product
• Third-party compensation (including revenue sharing, 12b-1 fees, shareholder servicing fees, sub-TA fees, commissions, and sales loads)
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Impact on Mutual Fund Distribution (cont.)
Intermediaries are demanding new compensation structures (ex. standardized payments) and products (ex. new share classes) in order to comply Funds are responding to intermediary demands for product
offerings and compensation arrangements that align with the exemptions
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Impact on Mutual Fund Distribution (cont.)
Industry Response• New share classes (T shares, clean shares)
• New compensation structures
• Products for plans and IRA platforms are being selected based on whether the product provides neutral compensation across fund families
• Remove mutual funds from IRA brokerage accounts
• Discontinue IRA brokerage accounts or shift to advisory accounts
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Discussion on Implementation
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Innovative Products and Compensation
The BICE and the fiduciary rule discuss products and compensation structures designed to address conflicts of interest. In its recent Request for Information, the DOL discussed innovative products, including clean shares and T shares, and is currently considering a new product-based exemption
What trends have you seen as intermediaries find new and different ways to preserve existing payment streams despite regulatory uncertainty?
What product innovations, if any, has your firm developed?
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Operational Challenges
The fiduciary rule and exemptions impose additional burdens on intermediaries seeking to continue traditional payment arrangements
What aspects of the fiduciary rule and exemptions are most concerning from an operational standpoint?
• From a product marketing or distribution standpoint?
What challenges are you facing?
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Impact on Distribution
Product offerings and opportunities for retirement investors to receive investment advice have become more limited
Once examination of the fiduciary rule is complete, will product offerings expand?
How has the fiduciary rule impacted your business and distribution models?
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Delay of January 1, 2018 Compliance Date
The DOL recently proposed to delay the January 1 compliance date to July 1, 2019
U.S. Chamber of Commerce v. DOL, 5th Circuit Court of Appeals (initial District Court filing 6/1/16) – consolidated legal challenge seeking to vacate the fiduciary rule and exemptions
What impact, if any, will the delay have on your compliance efforts?
How would your firm approach an extended Transition Period?
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Recent SEC and DOL Comment Periods
SEC Chair Clayton Request for Public Comment • Standards of conduct for investment advisers and broker-dealers
• DOL fiduciary rule implementation
DOL Request for Information • Part 1: whether to extend the January 1, 2018 compliance date
• Part 2: seeking input on new exemptions and changes to existing rule/exemptions
DOL 18-Month Delay Proposal • Delay the compliance date to July 1, 2019
• Extend Transition Period relief
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SEC / DOL Coordination
Secretary Acosta and Chair Clayton have agreed to work constructively toward the adoption of a workable fiduciary standard
On June 1, 2017 Chair Clayton requested public comment on implementation of the DOL fiduciary rule. This comment period remains open
Chair Clayton recently announced that the SEC will propose its own fiduciary rule
What do you anticipate will result from SEC / DOL coordination?
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Role of the Board of Directors
As intermediaries work toward compliance, boards may be asked to approve proposals
• Designed to align product features and compensation structures across mutual fund families
• For specific share classes or specific share class features
In connection with these proposals, boards may decide to consider
• Whether innovative products created in response to the fiduciary rule will benefit investors
• Impact on fund flows• Ability of shareholders to continue to invest in the funds• Impact on smaller fund complexes
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Compliance Dates
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Fiduciary rule and certain conditions of exemptions
June 9, 2017
Transition Period June 9 – January 1
Remaining conditions of exemptions
January 1, 2018
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Questions?
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For further information, visit our website at dechert.com.Dechert practices as a limited liability partnership or limited liability company other than in Dublin and Hong Kong.