Anderson,chip nafa

AUGUST 5-7, 2015 THE VENETIAN | LAS VEGAS

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Regulatory Environment Update: How the DOL Fiduciary Proposal

Could Impact YOU

By Chip Anderson, Executive Director, NAFA

Presented August 5, 2015

AUGUST 5-7, 2015 THE VENETIAN | LAS VEGAS

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“The wrong execution of the right idea?”

- Timothy Hutton as Cadet Major Brian Moreland, Taps (1981)

What Do We Have Here?

AUGUST 5-7, 2015 THE VENETIAN | LAS VEGAS

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Is it a proposal to: • Protect retirement savings? • Impose a uniform standard? • Eliminate conflicts of interest?

In theory, it is intended to do all the above. But as written, the consequences could be dramatically different.

What Is the DOL Fiduciary Proposal?

AUGUST 5-7, 2015 THE VENETIAN | LAS VEGAS

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• Released April 14, 2015, published in the Federal Register April 20

• Modification to the definition of fiduciary and investment advice under 1975 ERISA

• Amending Internal Revenue Code to have parallel provisions identifying ALL advisors (including insurance agents) as fiduciaries

A Breakdown of the Current Proposal

AUGUST 5-7, 2015 THE VENETIAN | LAS VEGAS

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It’s all in the timing!

• Tibble vs. Edison International before the Supreme Court • Obama’s push to take action before his term ends • DOL’s oversight of ERISA • Fiduciary Standard vs. Suitability Standard

Why the DOL and Why Now?

AUGUST 5-7, 2015 THE VENETIAN | LAS VEGAS

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How Did We Get Here? SEPTEMBER 1974 EMPLOYEE RETIREMENT INCOME SECURITY ACT (ERISA)

ENACTED

OCTOBER 1975 DEFINITION OF FIDUCIARY IDENTIFIED UNDER ERISA

JULY 2010 DODD-FRANK ACT EFFECTIVE

OCTOBER 2010 NOTICE OF PROPOSED RULEMAKING: CONFLICT OF INTEREST RULE-INVESTMENT ADVICE FROM DOL/EBSA

AUGUST 5-7, 2015 THE VENETIAN | LAS VEGAS

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How Did We Get Here? JANUARY 2011 SEC RELEASES STUDY ON FIDUCIARY STANDARDS FOR

BROKER-DEALERS & INVESTMENT ADVISERS

MARCH 2011 DOL/EBSA HOLDS PUBLIC HEARINGS ON CONFLICT OF INTEREST RULE-INVESTMENT ADVICE

SEPTEMBER 2011

DOL/EBSA WITHDRAWS NOTICE OF PROPOSED RULEMAKING ON CONFLICT OF INTEREST RULE-INVESTMENT ADVICE

MARCH 2013 REQUEST FOR INFORMATION: DUTIES OF BROKERS, DEALERS, & INVESTMENT ADVISERS FROM SEC

AUGUST 5-7, 2015 THE VENETIAN | LAS VEGAS

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Will History Repeat Itself? JANUARY 2015 CEA MEMO ON FIDUCIARY STANDARD REPROPOSAL LEAKED

FEBRUARY 2015 WHITE HOUSE RELEASES FACT SHEET & CEA REPORT ON CONFLICTED ADVICE; REMARKS BY PRESIDENT OBAMA TO AARP

APRIL 2015 DOL RELEASES RE-PROPOSAL OF CONFLICTS OF INTEREST RULE

MAY-JULY 2015 PUBLIC COMMENT PERIOD OPEN ON PROPOSED RULE

AUGUST 10-13, 2015

PUBLIC HEARINGS TO TAKE PLACE ON PROPOSED RULE

SEPTEMBER 2015 ???

AUGUST 5-7, 2015 THE VENETIAN | LAS VEGAS

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• Definition of fiduciary under 1975 ERISA (current law): Regulation 29 CFR 2510.3-21(c) defines the circumstances under which a person renders ``investment advice'' to an employee benefit plan within the meaning of section 3(21)(A)(ii) of ERISA. A person who renders ``investment advice'' under the regulation, and receives a fee or other compensation, direct or indirect, for doing so, is a fiduciary under section 3(21)(A)(ii).

• Duty of care, full disclosure of any conflicts of interest, acting in best interest of the client

• 5-part test used to trigger fiduciary status

The Way It Is

AUGUST 5-7, 2015 THE VENETIAN | LAS VEGAS

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The Way It Is The 1974 ERISA Law 5-part test, all five which need to be satisfied in order to be considered acting as a fiduciary. A person is a fiduciary if he/she does not have discretionary authority over plan assets and who for compensation:

1. Gives advice as the value of securities or other property 2. On a regular basis 3. Pursuant to a mutual agreement that the advice will; 4. Serve a primary basis for investment decisions; And 5. The advice is individualized (to the particular needs of the plan)

AUGUST 5-7, 2015 THE VENETIAN | LAS VEGAS

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The Way It Is The 2015 proposed rule:

EXPANDS who would be considered a fiduciary by removing the “regular” and “primary basis” (nos. 2 & 4 ) from definition. Now could be just one-time advice that is merely used “for consideration” by consumer.

AUGUST 5-7, 2015 THE VENETIAN | LAS VEGAS

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The Way It Could Be • New proposed definition of fiduciary:

Any individual receiving compensation for providing advice that is individualized or specifically directed to a particular plan sponsor, plan participant, or IRA owner for consideration in making a retirement investment decision will now be a fiduciary

• Providing general plan/product information would be deemed investment advice

AUGUST 5-7, 2015 THE VENETIAN | LAS VEGAS

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• Does NOT include a seller’s exception but does provide a new “best interest contract exemption” PTE

• Would create a dual regulatory environment where suitability will apply to non-qualified markets, fiduciary duty to qualified plans such as IRA and 401(k) rollovers

• Ultimately resulting in less choice and access for middle-class consumers

The Way It Could Be (continued)

AUGUST 5-7, 2015 THE VENETIAN | LAS VEGAS

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• According to proposal: “The advisor must provide a range of assets broad enough to enable the advisor to make recommendations with respect to all asset classes reasonably necessary to serve the best interests of the retirement investor in light of his/her investments, risk tolerance and specific financial circumstances …”

• 3-way contract signed by consumer, advisor and third party with numerous disclosures, warranties, acknowledgement of fiduciary status

The Best Interest Contract Exemption

AUGUST 5-7, 2015 THE VENETIAN | LAS VEGAS

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• Carrier rating?

• Products costs/fees?

• Asset classes?

• Other?

DOL would have authority over ERISA covered plans, Internal Revenue Code over other plans

How Do You Define “Best Interest”?

AUGUST 5-7, 2015 THE VENETIAN | LAS VEGAS

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• Advisor must furnish various disclosures and project for 1-, 5- and 10-year periods dollar amounts of investments and potential performance PRIOR to any sales

• Existing state and federal insurance and securities laws may be conflicting with these new requirements

• More extensive record-keeping will be required, increased E&O coverage

• Ultimately, many will leave the market due to unwillingness to attempt to comply with these onerous standards

How Will Advisors Be Impacted?

AUGUST 5-7, 2015 THE VENETIAN | LAS VEGAS

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• Compliance programs will have to change and likely the products offered as well

• May encourage carriers to make products within a particular asset class more similar

• Proposal requires public websites that disclose everything about transaction, how product is sold and compensation

How Will Carriers Be Impacted?

AUGUST 5-7, 2015 THE VENETIAN | LAS VEGAS

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NAFA has: • Established a working group responsible for addressing initiatives

related to the issue • Sponsored many visits to Washington, D.C., including member

meetings with Congressional representatives in June • Organized and participated in a face-to-face meeting with the DOL

in D.C. in July • Officially filed its public comment letter July 21 • Working with other trade groups and associations to

protect member interests

What Is Being Done?

AUGUST 5-7, 2015 THE VENETIAN | LAS VEGAS

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• Be knowledgeable of the issue as it progresses • Join with NAFA and other groups working to protect your

interests-Go to NAFA.com for up to date information • Be prepared to participate in grassroots efforts led by

NAFA and fellow trades if/when necessary • Write to your members of Congress expressing your

concerns

What Can You Do?

AUGUST 5-7, 2015 THE VENETIAN | LAS VEGAS

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Questions?

AUGUST 5-7, 2015 THE VENETIAN | LAS VEGAS

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Thank you for your time.

www.NAFA.com [email protected]