1. For internal use only. Not for distribution to the public. A Potential Game-Changer for Retirement Investment Services THE DOL’S NEW FIDUCIARY RULE All investments involve risk, including possible loss of principal. For financial professional and plan sponsor use only. Not for use with the public. Prepared by:

2. Introduction 2 DOL Fiduciary Rule Broadens scope of advisors deemed to be fiduciaries Agenda History and Existing Rules DOL’s New Fiduciary Definition Best Interest Contract Exemption Impact of DOL Rule on IRA Markets Timeline for DOL Fiduciary Rule For financial professional and plan sponsor use only. Not for use with the public.

3. Historical Background on Fiduciary Rules 3 Different Standards Based on Advisor Type Brokers subject to suitability standard under FINRA Rules Registered investment advisers (RIAs) have fiduciary duty under Investment Advisers Act or state law Current ERISA Fiduciary Standard Fiduciary status triggered by advice (and not advisor type) under Employee Retirement Income Security Act (ERISA) Providers of “investment advice” to plan clients for compensation are fiduciaries RIAs (and not brokers) customarily acknowledge ERISA fiduciary status For financial professional and plan sponsor use only. Not for use with the public.

4. Existing ERISA Fiduciary Definition 4 ERISA Fiduciary Status of Advisor Triggered if “investment advice” relating to plan investments is provided for compensation Existing Definition of “Investment Advice” (5-Prong Test) Recommending plan investments Regular basis Mutual understanding Primary basis for plan’s decisions Individualized to plan’s needs For financial professional and plan sponsor use only. Not for use with the public.

5. Rollout of New Fiduciary Rule 5 Overview of Regulatory Process DOL issued a proposed fiduciary rule on April 20, 2015 DOL announced the final rule on April 6, 2016, which was formally published on April 8, 2016 Delayed Effective Date New fiduciary rule becomes effective on April 10, 2017 Many advisors, such as brokers, will be deemed fiduciary advisors for the first time under the new rule For financial professional and plan sponsor use only. Not for use with the public.

6. DOL’s New Fiduciary Definition 6 ERISA Fiduciary Status of Advisor Under New Rule Still triggered if “investment advice” is provided to retirement clients for compensation DOL has clarified that IRA advisors (in addition to plan advisors) may be viewed as fiduciaries New “Investment Advice” Definition Broadly covers recommendations relating to advisability of: o Investments such as securities or other property o Investment Management, such as recommending investment strategies or other advisors o Rollovers from a plan or IRA For financial professional and plan sponsor use only. Not for use with the public.

7. New ‘Investment Advice’ Definition 7 Recommendations and “Investment Advice” Covered recommendations become fiduciary investment advice when: o Advisor acknowledges that he or she is acting as a fiduciary o There is an understanding that the recommendation is based on the retirement client’s particular needs o The recommendation relates to a particular investment decision and it is directed to a specific retirement client For financial professional and plan sponsor use only. Not for use with the public.

8. Implications of DOL Fiduciary Rule 8 Fiduciary Status More Easily Triggered for Advisors Client merely needs to receive advice (and there is no need for a mutual understanding that it will serve as the primary basis for investment decisions) Investment advice potentially includes one-time advice (even if not provided on a regular basis) Advice merely needs to address a particular investment decision or particular investment needs (and therefore does not necessarily need to be individualized) Brokers making covered recommendations are highly likely to be viewed as fiduciaries For financial professional and plan sponsor use only. Not for use with the public.

9. Modified Exclusion for Investment Education 9 Existing Safe Harbor for Non-Fiduciary Education (I.B. 96-1) Plan Information General Financial/Retirement Information Asset Allocation Models Interactive Investment Materials New Exclusion from “Investment Advice“ Definition Expanded to include education for both plans and IRAs Plan-related education generally may reference specific menu options if they are subject to plan sponsor’s oversight IRA-related education cannot reference specific investments For financial professional and plan sponsor use only. Not for use with the public.

10. Critical Need for Exemption Under DOL’s New Rule 10 Broader Fiduciary Definition and Prohibited Transactions Prohibited transaction rules ban fiduciary advisors from earning variable compensation (commissions) Advisors making covered recommendations and receiving commissions (brokers) would be fiduciaries Exemption from prohibited transaction rules would be required for brokers, including advisors to IRAs Best Interest Contract Exemption Released by DOL along with its new fiduciary rule For financial professional and plan sponsor use only. Not for use with the public.

11. Best Interest Contract (BIC) Exemption 11 Purpose of Exemption Enables fiduciary advisors to earn variable compensation Brokers serving as fiduciaries would be able to earn commissions Exemption covers fiduciary advice provided to “retail” plans with less than $50 million in assets, as well as IRAs Scope of BIC Exemption Provides relief for variable compensation earned in connection with non-discretionary investment advice only. Imposes numerous requirements on individual advisor and firm that are designed to mitigate conflicts of interest For financial professional and plan sponsor use only. Not for use with the public.

12. Overview of BIC Exemption 12 BIC Exemption’s “Impartial Conduct Standards” Advice must be in “Best Interest” of retirement client “Best Interest” standard is similar to customary “Prudent Man” standard for fiduciaries under ERISA Only reasonable compensation may be earned No misleading statements Additional Operational Requirements Requirements vary by type of retirement client o IRAs and Sole Proprietor Plans (such as solo 401(k) plans) o Employer-Sponsored Plans (with employee benefits) For financial professional and plan sponsor use only. Not for use with the public.

13. For IRAs and Sole Proprietor Plans 13 Operational Requirements Under BIC Exemption Written contract o Must include fiduciary standards and general disclosures for compensation and conflicts Transaction disclosures for each recommended investment focusing on fiduciary standards and conflicts Web disclosures focusing on business model and conflicts Specific compensation figures available upon request Compliance policies must address conflicts of interest o Individual advisor’s differential compensation must be based on neutral factors tied to differences in services (such as time needed to recommend particular investment) For financial professional and plan sponsor use only. Not for use with the public.

14. For Employer-Sponsored Plans 14 Operational Requirements Under BIC Exemption Written statement and disclosures o Must include fiduciary standards and general disclosures for compensation and conflicts o No written contract is required (as plan clients have legal rights under ERISA, even without a contract) Other operational requirements mirror those for IRAs and Sole Proprietor Plans o Transaction disclosures o Web disclosures o Specific compensation figures available upon request o Compliance policies For financial professional and plan sponsor use only. Not for use with the public.

15. Rollover Advice from Level Fee Fiduciaries 15 Required Compliance Under BIC Exemption Advisors who earn level compensation only (Level Fee Fiduciaries), such as RIAs, generally will not need to comply with BIC Exemption when offering regular investment advice However, an exemption is necessary for Level Fee Fiduciaries when offering rollover advice o Conflict arises if rollover advice (fiduciary advice) triggers rollover and additional compensation for advisor o BIC Exemption offers relief to Level Fee Fiduciaries with these types of conflicts o Streamlined operational requirements are available for Level Fee Fiduciaries For financial professional and plan sponsor use only. Not for use with the public.

16. BIC Exemption for Level Fee Fiduciaries 16 Streamlined Requirements Under BIC Exemption Rollover advice from Level Fee Fiduciaries must meet Impartial Conduct Standards Streamlined operational requirements for advisor include: o Providing written statement of fiduciary status o Internally documenting advisor’s reasons for concluding that rollover advice is in client’s Best Interest For financial professional and plan sponsor use only. Not for use with the public.

17. Transition Relief Under BIC Exemption 17 Fewer BIC Requirements Apply During Transition Period DOL’s new rule becomes effective as of April 10, 2017 Advisor may elect to comply with reduced number of requirements for BIC Exemption during Transition Period Transition Period is from April 10, 2017 to January 1, 2018 Reduced BIC Requirements for Transition Period Advice must meet Impartial Conduct Standards Reduced operational requirements for advisor include: o Providing written statement of fiduciary status and conflicts disclosures For financial professional and plan sponsor use only. Not for use with the public.

18. Grandfathered Brokerage Clients 18 For Investment Transactions Prior to April 10, 2017 Relief for brokers earning ongoing commission trail from investments sold to retirement clients prior to April 10, 2017 No need to comply with regular BIC Exemption requirements for commissions from these “grandfathered” transactions Requirements for Grandfathered Transactions Original transaction did not violate prohibited transaction rules Compensation must be reasonable Other conditions apply For financial professional and plan sponsor use only. Not for use with the public.

19. Recap of Best Interest Class Exemption 19 BIC Exemption Requirements Similar requirements apply to all retirement clients (but written contract only required for IRAs and sole proprietor plans) Streamlined requirements available for rollover advice from Level Fee Fiduciaries Reduced requirements available during Transition Period Observations Impacts brokers offering investment advice for commissions Also affects RIAs offering rollover advice For financial professional and plan sponsor use only. Not for use with the public.

20. Comparison to DOL’s Proposed BIC Exemption 20 DOL’s 2015 Proposal Written contract was required for all retirement clients (but now only required for IRAs and sole proprietor plans) Projected cost charts and annual fee activity statements (but these disclosure requirements have been eliminated) Specific compensation figures had to be posted on webpage (but now they only need to be provided upon request) Clarifications Made in Final Rule Level Fee Fiduciaries must comply with BIC Exemption when soliciting rollovers, even if they do not advise plan BIC Exemption’s preamble has examples of compensation structures for individual advisors that address conflicts For financial professional and plan sponsor use only. Not for use with the public.

21. Impact of DOL Rule on IRA Markets 21 Limited Reach of DOL’s Current Fiduciary Rule ERISA generally does not apply to brokers (non-fiduciary advisors) recommending investments for IRAs IRA recommendations are subject to same suitability standard as for regular brokerage accounts Under new rule, brokers (fiduciary advisors) will no longer be able to treat IRAs like regular brokerage accounts New rule will affect advisors without plan clients (who merely have clients with IRAs) For financial professional and plan sponsor use only. Not for use with the public.

22. Anticipated Effect on IRA Advisors 22 Regulation of Brokers as IRA Fiduciaries To earn commissions, brokers will need BIC Exemption Firm’s policies will need to limit or prevent advisor’s ability to steer IRA clients to improper investments for higher payouts Higher compliance costs and restrictions may encourage advisors to stop serving retirement clients Certain advisors may stop offering brokerage services to IRAs, or switch to advisory services (RIA model) RIAs (Level Fee Fiduciaries) still need to comply with BIC Exemption’s streamlined requirements for rollover advice For financial professional and plan sponsor use only. Not for use with the public.

23. BIC Exemption and IRA Enforcement Authority 23 DOL’s Lack of IRA Enforcement Authority DOL has power to define fiduciary status for brokers serving as IRA advisors But DOL cannot enforce prohibited transaction rules against fiduciary advisors to IRAs Only IRS may impose excise tax on IRA fiduciaries New Enforcement Mechanism Under DOL’s New Rule Empowers IRA clients to enforce fiduciary standards through disclosures and contractual rights under BIC Exemption For financial professional and plan sponsor use only. Not for use with the public.

24. Timeline for DOL Fiduciary Rule 24 Implementation Overview New “investment advice” definition becomes effective on April 10, 2017, triggering fiduciary status for certain advisors Transition Period relief available under BIC Exemption from April 10, 2017 through January 1, 2018 New DOL rule is fully phased in as of January 1, 2018 Timing and Implementation for DOL Fiduciary Rule For financial professional and plan sponsor use only. Not for use with the public.

25. Conclusions 25 Moving to Universal Fiduciary Standard DOL seeking to impose fiduciary status on all types of retirement advisors Fiduciary advisors earning commissions will be subject to BIC Exemption (and higher compliance costs) RIAs offering rollover advice may comply with streamlined requirements under BIC Exemption Significant impact on IRA markets Following Up Discuss how DOL fiduciary rule may impact services provided on behalf of plans or IRAs (and related fees) For financial professional and plan sponsor use only. Not for use with the public.

26. The Wagner Law Group has prepared this presentation on behalf of Legg Mason & Co., LLC. Future legislative and regulatory developments may significantly impact the legal analysis provided herein. Please be sure to consult with your own legal counsel concerning such future developments. This presentation is intended for general informational purposes only, and it does not constitute legal, tax or investment advice on the part of The Wagner Law Group or Legg Mason & Co., LLC and its affiliates. Financial advisors should consult with their own legal counsel to understand the potential impact of the U.S. Department of Labor’s new fiduciary rule on the services they provide to plan and IRA clients and the nature and scope of their responsibilities under ERISA and other applicable law. 26 For financial professional and plan sponsor use only. Not for use with the public.

27. The DOL’s New Fiduciary Rule A Potential Game-Changer for Retirement Investment Services Legg Mason is a leading global investment company committed to helping clients reach their financial goals through long term, actively managed investment strategies. Brandywine Global Clarion Partners ClearBridge Investments EnTrustPermal Martin Currie QS Investors RARE Infrastructure Royce & Associates Western Asset 99 Summer Street, 13th Floor Boston, MA 02110 Tel: (617) 357-5200 Fax: (617) 357-5250 www.erisa-lawyers.com For financial professional and plan sponsor use only. Not for use with the public. The Wagner Law Group is not a Legg Mason, Inc. affiliated company. © 2016 Legg Mason Investor Services, LLC, member FINRA, SIPC. ClearBridge Investments, LLC, Brandywine Global Investment Management, LLC, Royce & Associates, LLC, Western Asset Management Company, QS Investors, LLC, EnTrustPermal, RARE Infrastructure, Clarion Partners, Martin Currie and Legg Mason Investor Services, LLC are subsidiaries of Legg Mason, Inc. 629261 PRES278150 5/16