The DoL’s proposed fiduciary regulation is the most controversial ERISA initiative since the enactment of the statute in 1974. If adopted as proposed, the regulation will have significant impact on financial institutions selling products to IRAs and 401(k) plans. The proposed changes would essentially open up the $7 trillion IRA market to ERISA, impacting the sale of investment products, from mutual funds to variable annuities, to IRAs. The proposal would also change the definition of an “advice fiduciary,” making it easier for the DoL to assert claims against persons or entities selling investment products or gathering assets. In this session, we’ll discuss the impact of the DoL proposal for your business, from the stand-point of what needs to be changed to make the proposal “workable” and what you’ll need to do to comply if the proposal is adopted without change. Specifically, this session will focus on: Changes to the definition of Investment Advice Fiduciary Fiduciary status “carve-outs” for sales presentations The new Best Interest Contract Exemption for IRAs Changes to PTE 84-24 and other Exemptions Guest Speaker: Steve Saxon, Principal, Groom Law Group

1. 2015 Fiduciary Proposal –
Fundamental Shifts
Stephen M. Saxon
Groom Law Group
June 15, 2015
BPAS PARTNER CONFERENCE

2. 2
Overview
 Regulation defining an investment advice fiduciary
 Extremely Controversial
 Introduced by President Obama
 AARP February 2015
 Politically significant
 Regulation published in Federal Register April 20
 Comments due July 21
 Hearing in Mid-August
 Finalization
 Mid 2016
 January 2017

3. Overview
 Legislation
 Defining Best Interest Standard
 Defunding DOL Regulation
 Working with SEC
 Need to Support Legislation
 Possibility of Enactment
 Making DOL Think Twice
 DOL Recent Expression of Interest
 Making the Proposal “Workable”
 Meeting with Regulated Community
 Why you Need to Comment
3

4. Overview
 SEISMIC SHIFTS
 Expansion of Fiduciary Status
 Consumer Protection and Fragmentation
 ERISA-fication of IRAs
 Principle-Based Class Exemption
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5. 5
Illustration: Current State
Fiduciary
Advice
Fee, recommendation of
securities or other property,
regular basis, mutual
understanding, primary basis
Non-Fiduciary
Education
General plan info, investing info,
asset allocation models,
interactive materials
Sales
Activities
No mutual
understanding, no
regular basis
Regular basis sales,
individualized, mutual
understanding develops
over time
Failure to meet IB 96-1
requirements
Recommending
a manager

6. 6
Illustration: Expansion of
Fiduciary Definition
Fiduciary Advice
“Covered Advice”
+
Acknowledge
Status OR
Functional Test
Education
Platform and
Monitoring
Employee
advice to
a fiduciary
Valuation
Sales
IRAs
IRAs
Ps & Bs
Plans
Large Plans
IRAs
Ps & Bs
Small
plans
IF >$100 AUM
ID
investment
product
For
transaction
Fs
For transaction,
but solely used
for reporting

7. 7
Shift #1 – Expansion of
Fiduciary Definition
 Implications
 Fundamental sales problem
 Comments should focus on definition as well as
carve-outs.
 Scope of “recommendation” definition
 Fee “incident to the transaction”
 “Specifically directed to” vs. materiality

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Shift #2 – Consumer
Protection and Fragmentation
 “The proposed rule, and related exemptions, would
increase consumer protection for plan sponsors,
fiduciaries, participants, beneficiaries and IRA
owners.” 80 Fed Reg 21928 (Apr. 20, 2015)
 Variations of this statement are repeated at least 10
times in the proposal.

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Shift #2 –Consumer
Protection and Fragmentation
 The 2015 Proposal’s “retail” / “institutional” distinction
represents a new shift toward consumer protection
Retail Investors Institutional Investors
Participants and Beneficiaries Large Plans (>100 Ps)
IRA Owners Plans managed by investment
manager with more than $100
million AUM
Small Plans (<100 Ps)

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Shift #2 – Consumer
Protection and Fragmentation
 Lack of financial and investment expertise by “retail”
investors is DOL’s primary rationale for consumer
protection approach
 DOL also identifies support in PPA cross-trading
exemption for large plans (over $100 million) and the
fact that PPA investment advice exemption does not
apply to plan-level advice

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Shift #2 –Consumer
Protection and Fragmentation
Although there are limited exceptions, Congress and
DOL generally have not differentiated among retirement
plan types in connection with exemptions:
 5 of 7 PPA exemptions
 Including 408(b)(17)
 2002 Amendment of 12 existing class PTEs to clarify
inclusion of IRAs

12. 12
Shift #2 –Consumer
Protection and Fragmentation
Implications:
 Comments could introduce limited retail investor
carve-out based on sophistication

13. 13
Shift #3 –ERISA-fication of
IRAs
Impartial Conduct Standards include:
 Best Interest (prudence) Standard
 Reasonable Compensation
 No Misleading Statements
 Affirmative duty to disclose “material
conflicts of interest”

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Shift #3 –ERISA-fication of
IRAs
Impartial Conduct Standards can be viewed
as “trade off” of standard of care for ability
to receive conflicted compensation

15. 15
Shift #3 –ERISA-fication of
IRAs
Impartial
Conduct
Standards
Code PT
Relief for
Conflicted
Payments
Enforcement
Mechanism
BIC Yes Yes / Limited Contract
77-4 / 84-
24 / 86-
128
Yes Limited DOL/IRS
408(g) Disclosure and
reasonable
comp
Limited DOL/IRS
Level Fee No N/A IRS

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Shift #3 –ERISA-fication of
IRAs
Implications:
 Likely inclusion of Impartial Conduct Standards
in future exemptions
 Users will have to grapple with why
reasonable compensation and prohibition on
misleading statements elements are not
encompassed within “best interest” standard
 DOL may not be satisfied with disclosure-
based exemptive relief

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Shift #4 –”Principles-based”
Exemption Approach
 “Rather than create a set of highly prescriptive
transaction-specific exemptions, which has
generally been the regulatory approach to date,
the [BIC] exemption would flexibly accommodate
a wide range of current business practices, while
minimizing the harmful impact of conflicts of
interest on the quality of advice.”
 80 Fed Reg 21960, 21961 (Apr. 20, 2015)

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Shift #4 – “Principles-based”
Exemption Approach
 BIC broadly applies to transactions and
compensation models to a subset of plans
 BIC conditions are extensive
 Failure of warranty conditions results in
contractual liability but not loss of the
exemption
 New rule is based on combination of duty of
loyalty and private right of action

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Shift #4 – “Principles-based”
Exemption Approach
Implications:
 BIC represents more than a “trade-off”
requiring standard of care in exchange for
exemption for conflicted payments – it also
includes a contract-based enforcement
mechanism that is unprecedented
 Will future individual exemptions patterned off
of existing class exemptions be required to
include contractual warranties?

20. 20
Questions?