Michael P. Kreps Thomas Roberts Charting a New Course: DOL Fiduciary Rule Transition – Real World Applications and Effects Michael P. Kreps Thomas Roberts

Washington Update DOL Developments RFIs (SEC and DOL) Outlook in Congress

The Transactions With Independent Fiduciaries With Financial Expertise or “IFE” Exception “Blizzards” of IFE letters Generally (but not always) seek to acquire representations through negative consent Often lack uniformity; may include terms not required by the IFE

The “IFE” Exception: Watch-outs for IFE Letter Recipients For annuity manufacturers: Avoid acknowledging or representing fiduciary status with respect to fund selection or de- selection Consider providing a standard representation to fund partners that the manufacturer entity is not a fiduciary for purposes of fund-related communications

The “IFE” Exception: Watch-outs for Recipients of IFE Letters For annuity distributors: Avoid giving blanket reps that you are always a fiduciary (preserve your firm’s ability to itself rely on the IFE) Avoid the pitfall of acknowledging that you are free from conflicts Keep it simple by representing: broker-dealer status, capacity of evaluating fund-related investment risks, independence from the fund provider, and status as an advice fiduciary with respect to direct, retail retirement client relationships only

Transition Period PTE 84-24 Prohibited Transaction Exemption Relief Strategies Transition Period BIC When providing investment advice, Financial Institution and Advisers must adhere to the Best Interest Standard of Conduct Statements by the Financial Institution and Advisers must not be materially misleading Recommended transaction will not cause Financial Institution or Advisor or Affiliates or Related Entities to compensation for services in excess of “reasonable compensation” Transition Period PTE 84-24 When providing investment advice, the insurance agent or broker or insurance company must adhere to the Best Interest Standard of Conduct Statements must not be materially misleading – but failure to disclose a Material Conflict of Interest is itself deemed materially misleading Combined totals of all fees and compensation received by insurance agent or broker and insurance company must not exceed reasonable compensation Sales Compensation (including overrides) must be disclosed in writing Any affiliations between agent and insurance company or limitation in agent’s ability to recommend product must be disclosed Written customer acknowledgement and disclosures required

Transition Period BIC No specific written disclosure requirement DOL expects Advisers to be candid about their compensation arrangements and any limitations on investment offerings Financial Institution availability issues

Transition Period PTE 84-24 Appears to be the exemption of choice for IMOs and FMOs (why?) Potential stumbling block: upline override compensation disclosures

DOL’s Temporary Enforcement Policy “[D]uring the phased implementation period ending on January 1, 2018, the Department will not pursue claims against fiduciaries who are working diligently and in good faith to comply with the fiduciary duty rule and exemptions, or treat those fiduciaries as being in violation of the fiduciary duty rule and exemptions” – DOL Field Assistance Bulletin No. 2017-02 (May 22, 2017)

A Choice of Approaches for Managing Transition Period Compliance “[F]inancial institutions retain flexibility to choose precisely how to safeguard compliance with the impartial conduct standards, whether by tamping down conflicts of interest associated with adviser compensation, increased monitoring and surveillance of investment recommendations or other approaches or combinations of approaches” – DOL Conflict of Interest FAQs (Transition Period) May, 2017

Tamping Down Conflicts of Interest Associated With Advisor Compensation Identify potential sources of acute conflicts Consider potential mitigation

Increased Monitoring and Surveillance Documenting client needs, objectives and circumstances Explanations of how a product recommendation is a good fit Back-end review: question why a more financially lucrative product was recommended when other available products might address client needs equally well

Other Approaches Emphasis on fiduciary rule training Adoption of Transition Period policies and procedures

Other Issues Commission splitting arrangements and referrals Future status of client relationships established under Transition Period PTE 84-24 “Clean” shares Potential for new PTEs

Questions Mike Kreps mkreps@groom.com Tom Roberts troberts@groom.com