Latham & Watkins Benefits, Cmpensatin & Emplyment Practice and Financial Institutins Industry Grup June 23, 2016 Number 1984 The Cld Cmfrt f the Best Interest Cntract Exemptin The BIC Exemptin t the new DOL Fiduciary Rule ffers sme relief, but at a ptentially prhibitive cst. The US Department f Labr (the DOL) recently frced the mst significant change t the investment cmmunity since the enactment f the Emplyee Retirement Incme Security Act f 1974 (ERISA). The DOL has expanded the scpe f ERISA s fiduciary duties and prtectins in final regulatins (the Final Rule), defining a fiduciary under ERISA and the Internal Revenue Cde f 1986 (the Cde) (see ur prir Client Alert fr an verview f the Final Rule). Hwever, in adpting the Final Rule, the DOL did make sme cncessins t industry practices f recmmending prprietary prducts and ther investments that generate third-party payments, by als adpting the Best Interest Cntract Exemptin (the BIC Exemptin) t the prhibited transactins prvisins f ERISA and the Cde. Withut the BIC Exemptin, these practices therwise wuld be prhibited as fiduciaries generally cannt receive cmpensatin that varies based n their investment advice. Hwever, the BIC Exemptin cmes at a steep price, impsing extensive cmpliance csts in the frm f new disclsure requirements, as well as new plicies and prcedures requirements, discussed in depth belw. The exemptin als substantially increases litigatin risk by prviding IRA and ther retirement plan investrs (Retirement Investrs) a new private enfrcement right against financial advisers. Best Interest Cntract Exemptin Key Takeaways The BIC Exemptin is nt an exemptin frm the definitin f a fiduciary under the Final Rule. Quite the ppsite, it prvides an exemptin frm the prhibited transactin rules f ERISA and the Cde fr thse financial advisers wh are fiduciaries under the Final Rule prvided the fiduciaries affirmatively acknwledge in writing that they act as fiduciaries t a Retirement Investr and cmply with extensive ther requirements. The BIC Exemptin allws financial advisers t recmmend prprietary prducts r investments that generate third-party payments (r t restrict the universe f recmmended investments t such prducts). At the heart f the BIC Exemptin is the Best Interest Cntract that financial advisers are required t execute with each Retirement Investr t whm they prvide advice. The Final Rule is highly prescriptive with respect t the cntent f the Best Interest Cntract, and cmpliance with it. Failure t cmply with the BIC Exemptin and the Best Interest Cntract culd result in prhibited transactins, triggering penalty taxes under the Cde as well as expsure t ther fiduciary liability claims. The mst imprtant aspect f the Best Interest Cntract is that the financial adviser must affirmatively state that it and its advisers are fiduciaries, and that the investment advice prvided is, at the time f the recmmendatin, in the best interest f the Retirement Investr. Als, the advisr may nt earn a fee in Latham & Watkins perates wrldwide as a limited liability partnership rganized under the laws f the State f Delaware (USA) with affiliated limited liability partnerships cnducting the practice in the United Kingdm, France, Italy and Singapre and as affiliated partnerships cnducting the practice in Hng Kng and Japan. The Law Office f Salman M. Al-Sudairi is Latham & Watkins assciated ffice in the Kingdm f Saudi Arabia. Under New Yrk s Cde f Prfessinal Respnsibility, prtins f this cmmunicatin cntain attrney advertising. Prir results d nt guarantee a similar utcme. Results depend upn a variety f factrs unique t each representatin. Please direct all inquiries regarding ur cnduct under New Yrk s Disciplinary Rules t Latham & Watkins LLP, 885 Third Avenue, New Yrk, NY 10022-4834, Phne: +1.212.906.1200. Cpyright 2016 Latham & Watkins. All Rights Reserved.
excess f reasnable cmpensatin. By having t explicitly acknwledge fiduciary status, financial advisers will n lnger be able t argue that they were simply acting in a sales capacity, r therwise that their statements did nt cnstitute advice prvided n a regular basis. The BIC Exemptin brings significant cmpliance csts t financial advisers, as they will be required t develp and implement new plicies and prcedures that cmply with the BIC Exemptin. While certain existing cmpliance systems can be leveraged t cmply with the BIC Exemptin, there are significant practical nuances in develping and adhering t cmmunicatin prtcls under the new landscape fr example, hw t deal with prviding advice t clients that maintain bth nn-retirement accunts and IRA accunts. Additinal steps will be required at the utset f each interactin t determine what type f client (r ptential client) a financial advisr is dealing with, as advice t Retirement Investrs will need t fit within the BIC Exemptin while advice t ther clients will nt. In any event, all firms are advised t begin implementatin sner rather than later in rder t meet the first phase f requirements that will becme effective as f April 10, 2017. The BIC Exemptin allws investment advisers wh charge a level fee (Level Fee Fiduciary) t cmply with a reduced set f requirements, referred t by sme as BIC Light. We expect that many industry participants (especially brker-dealers) will seek t restrict their fferings t fixed-fee arrangements such as the traditinal advisry mdel (r the new rb-advisry mdel) in rder t fit within the definitin f a Level Fee Fiduciary. The reduced requirements applicable t Level Fee Fiduciaries under BIC Light are intended t allw advisers t recmmend rllver transactins, and therwise transitin their clients away frm cmmissin-based brkerage relatinships t fee-based advisry relatinships, withut having t execute Best Interest Cntracts. The recmmendatins still create fiduciary liability, and must be in the investr s best interest. These transitins remain challenging under BIC Light, since firms are required t dcument the specific reasns why recmmendatins t rllver and/r switch accunt types are in the Retirement Investr s best interest. Such dcumentatin culd be particularly difficult with clients wh have utilized a buy and hld investment strategy, where firms will need t ensure they are cvered against claims f reverse churning. Transitining these buy and hld investrs t level fee accunts may prve difficult t justify, unless the level fee is a minimal percentage f accunt assets and the accunt receives highly tailred investment advice (as wuld be the case with sphisticated rb-advice arrangements). Brkerage firms especially may want t cnsider frcing the transitin t level fee arrangements befre the relevant prvisins f the Final Rule becme applicable n January 1, 2018, t avid this pitfall. Als, because cncepts such as best interest and reasnable cmpensatin are nt defined in the BIC Exemptin, legal prceedings will likely flesh these terms ut ver time a prcess that is necessarily reactive, thereby adding t the uncertainty and csts financial advisers face. Ntably, a Best Interest Cntract cannt include prvisins that purprt t waive a Retirement Investr s right t bring r participate in class actins, nr can a Best Interest Cntract include prvisins disclaiming liability, limiting cmpensatry remedies (including via a liquidated damages clause) r waiving r qualifying Retirement Investrs right t pursue a class actin. Hwever, a Best Interest Cntract can include prvisins in which Retirement Investrs agree t arbitrate individual disputes, as well as prvisins waiving Retirement Investrs rights t punitive damages r rescissin as cntract remedies, in each case, t the extent permitted by applicable law. As a result f these requirements, financial advisrs cannt rely n much f the language nw fund in standard disclaimer clauses. The end result is that financial advisrs will likely see an increase in class actins as the plaintiffs bar lks t take advantage f a new avenue fr litigatin incentivized based n a belief whether right r wrng that they can frmulate a facially sufficient cmplaint that then requires the parties t prceed t discvery. Latham & Watkins June 23, 2016 Number 1984 Page 2
The bttm line is, financial advisers with Retirement Investr accunts that want t recmmend prprietary prducts r prducts that generate third-party payments (r that restrict available investments t these prducts, in whle r in part) will need t cmply with the BIC Exemptin t sme extent, t btain exemptin frm the prhibited transactin rules. This will result in significant cmpliance csts and increased litigatin risks. Best Interest Cntract Exemptin Overview The BIC Exemptin prvides a cunterweight t the Final Rule a framewrk within which registered investment advisers, brker-dealers, insurance cmpanies and their respective agents and representatives, can cntinue t receive certain fees and cmpensatin that therwise wuld be prhibited in cnnectin with advising plan participants, beneficiaries, IRAs, IRA wners and certain plan fiduciaries (including small plan spnsrs). Scpe The BIC Exemptin is nly available t the fllwing: Advisers: an individual wh is (1) an ERISA r Cde fiduciary slely by reasn f the prvisin f investment advice with respect t the assets f the plan r IRA invlved in the recmmended transactin, r (2) an emplyee, independent cntractr, agent r registered representative f a Financial Institutin. Financial Institutins: an entity that emplys r therwise retains the Adviser and is als (1) an SEC- r state-registered investment adviser, (2) a bank r similar financial institutin, (3) a statequalified insurance cmpany, r (4) an SEC-registered brker-dealer. 1 Affiliates: persns directly r indirectly cntrlling, cntrlled by, r under cmmn cntrl with the Adviser r Financial Institutin, where cntrl means the pwer t exercise a cntrlling influence ver the management r plicies f a persn ther than an individual; fficers, directrs, partners, emplyees, r relatives f the Adviser r Financial Institutin; and crpratins r partnerships f which the Adviser r Financial Institutin is an fficer, directr r partner. Related Entities: any entity ther than an Affiliate in which the Adviser r Financial Institutin has an interest that may affect the exercise f its best judgment as a fiduciary. Additinally, the BIC Exemptin nly applies in the cntext f investment advice given t a Retirement Investr, which is defined as: (1) a participant r beneficiary f a plan with authrity t direct the investment f assets in his r her plan accunt r t take a distributin; (2) the beneficial wner f an IRA acting n behalf f the IRA; r (3) a retail fiduciary f a plan r IRA (i.e., a fiduciary ther than a bank, insurance cmpany, registered investment adviser, registered brker-dealer r a fiduciary respnsible fr the management f at least US$50 millin in assets). Cntract Requirement Fr a particular investment recmmendatin t qualify fr the BIC Exemptin, the advice must be prvided pursuant t a written cntract executed between the Financial Institutin and the Retirement Investr (and enfrceable against the Financial Institutin), which must include specific language and disclsures (the Cntract). The Cntract may be a master cntract that cvers multiple recmmendatins, and may be a standalne dcument r incrprated int an investment advisry agreement; investment prgram agreement; Latham & Watkins June 23, 2016 Number 1984 Page 3
accunt pening agreement; insurance r annuity cntract r applicatin; similar dcument; r amendment theret. The Cntract des nt need t be executed at the mment a Retirement Investr walks thrugh the dr, but instead must be executed prir t r at the same time as the executin f the recmmended transactin. As part f the phase-in fr cmpliance with the Final Rule, existing cntracts with Retirement Investrs (defined as cntracts executed befre January 1, 2018) may be amended t include the language required by the BIC Exemptin. The ntice f amendment can be delivered by mail r electrnically, and a Retirement Investr s failure t terminate the cntract within 30 days may be cnsidered assent t the terms f the amended cntract (i.e., the amendment may be effected by negative cnsent). This negative cnsent prng cmes in respnse t industry cncern, that btaining affirmative cnsent frm each individual existing client wuld be impracticable. Nte, hwever, that the amendment may nt impse any new cntractual bligatins, restrictins r liabilities n the Retirement Investr by negative cnsent. A cpy f the amended cntract must be made accessible t the Retirement Investr n the Financial Institutin s website ging frward. Required and Prhibited Cntractual Prvisins The BIC Exemptin requires that the Cntract include certain prvisins, warranties and disclsures, and that the Cntract refrain frm including certain ther prvisins. Ntably, the BIC Exemptin prhibits certain disclaimers and limitatins f liability that are cmmn in current brkerage accunt and investment advisry dcumentatin. Accrdingly, firms must carefully cnsider the effect f these prhibitins when incrprating the required BIC Exemptin prvisins int existing accunt dcuments (r, in sme cases, when deciding whether t cntinue t perate under a business mdel that requires reliance n the BIC Exemptin). While certain investment advisry agreements may need t be substantially revised, the revisins required fr brkerage accunt agreements shuld be less sweeping (fr example, the typical FINRA arbitratin prvisins that exist in brkerage accunt agreements wuld remain valid). The fllwing tables summarize the required and prhibited cntractual prvisins under the BIC Exemptin. The disclsures and descriptins f Material Cnflicts f Interest 2 and Third Party Payments 3 (described belw) may instead be included utside f the Cntract, in a separate written disclsure dcument prvided t the Retirement Investr, s lng as such disclsure is clear and prminent. Required Cntractual Prvisins Acknwledgement f fiduciary status The Financial Institutin must affirmatively state that it and its Advisers act as fiduciaries under ERISA and/r the Cde with respect t any investment advice that is cvered by the Cntract Acknwledgement f impartial cnduct standards The Financial Institutin must affirmatively state that it and its Advisers will adhere t (and must in fact cmply with) the fllwing Impartial Cnduct Standards: The Financial Institutin and Adviser will prvide investment advice that is, at the time f the recmmendatin, in the Best Interest 4 f the Retirement Investr The recmmended transactin(s) must nt cause the Financial Institutin, Adviser r their Affiliates r Related Entities t receive, directly r indirectly, cmpensatin that is in excess f reasnable cmpensatin as defined by ERISA and the Cde Statements made by the Financial Institutin and its Advisers t the Retirement Investr abut the recmmended transactin(s), fees and cmpensatin, Material Cnflicts f Interest, and any ther matters relevant t a Retirement Investr s investment decisins, must nt be materially misleading at the time they are made Latham & Watkins June 23, 2016 Number 1984 Page 4
Required Cntractual Prvisins Warranties as t plicies and prcedures The Financial Institutin must affirmatively warrant (and must in fact cmply with) the fllwing: The Financial Institutin has adpted and will cmply with written plicies and prcedures reasnably and prudently designed t ensure adherence t the Impartial Cnduct Standards In frmulating its plicies and prcedures, the Financial Institutin has (1) specifically identified and dcumented its Material Cnflicts f Interest; (2) adpted measures reasnably designed t prevent Material Cnflicts f Interest frm causing vilatins f the Impartial Cnduct Standards; and (3) designated a persn respnsible fr addressing Material Cnflicts f Interest and mnitring the Advisers adherence t the Impartial Cnduct Standards The Financial Institutin s plicies and prcedures require that neither the Financial Institutin nr (t the best f its knwledge) any Affiliate r Related Entity use r rely upn qutas, appraisals, perfrmance r persnnel actins, bnuses, cntests, special awards, differential cmpensatin r ther actins that are intended r wuld reasnably be expected t cause Advisers t make recmmendatins that are nt in the Best Interest f the Retirement Investr Disclsures and descriptins f Material Cnflicts f Interest and Third Party Payments In the Cntract r in a separate written disclsure dcument prvided t the Retirement Investr, the Financial Institutin must clearly and prminently: State the Best Interest standard f care wed by the Financial Institutin and the Adviser t the Retirement Investr and describe hw the Retirement Investr will pay fr services Describe Material Cnflicts f Interest, disclse any fees r charges the Financial Institutin, its Affiliates r the Adviser impses upn the Retirement Investr r the Retirement Investr s accunt, and state the types f cmpensatin that the Financial Institutin, its Affiliates and the Adviser expect t receive frm third parties in cnnectin with investments recmmended t Retirement Investrs Infrm the Retirement Investr that it has the right t btain cpies, free f charge, f the Financial Institutin s written descriptin f its plicies and prcedures, as well as the specific disclsure f csts, fees and cmpensatin, including Third Party Payments, related t recmmended transactins Include a link t the Financial Institutin s website and infrm the Retirement Investr that mdel cntract disclsures and the Financial Institutin s written descriptin f its plicies and prcedures are available free f charge n the website Disclse t the Retirement Investr whether the Financial Institutin ffers Prprietary Prducts 5 r receives Third Party Payments with respect t any recmmended investments Ntify the Retirement Investr f any limitatins placed n the universe f investments that the Adviser may ffer fr purchase, sale, exchange r hlding, t the extent that the Financial Institutin r Adviser limits investment recmmendatins, in part r in whle, t Prprietary Prducts r investments that generate Third Party Payments (nte that the ntice is insufficient if it merely states that investment recmmendatins may be limited based n whether the investments are Prprietary Prducts r generate Third Party Payments withut specific disclsure f the extent t which recmmendatins are, in fact, limited n that basis) Describe whether r nt the Financial Institutin will mnitr the Retirement Investr s investments and alert the Retirement Investr t any recmmended change t thse investments, and, if s, the Financial Institutin must prvide the frequency with which the mnitring will ccur and the reasns fr which the Retirement Investr will be alerted Prhibited Cntractual Prvisins Exculpatry prvisins Prvisins that disclaim r therwise limit liability f the Adviser r Financial Institutin fr a vilatin f the Cntract s terms Waiver f class actin r liquidated damages prvisins Prvisins whereby the Retirement Investr waives r qualifies its right t bring r participate in a class actin, r agrees t an amunt representing liquidated damages fr breach f the Cntract (hwever, a waiver f a right t btain punitive damages r rescissin f recmmended transactins is permitted) Certain arbitratin/mediatin prvisins Agreements t arbitrate r mediate disputes in venues that are distant r therwise unreasnably limit the ability f the Retirement Investr t assert claims Latham & Watkins June 23, 2016 Number 1984 Page 5
Disclsure Requirements In additin t the disclsures that must be included in the Cntract, the Financial Institutin must prvide additinal (1) transactin-based disclsures, and (2) web-based disclsures t Retirement Investrs. The general requirements fr the additinal disclsures required by the BIC Exemptin are described in the fllwing table. Transactin-Based Disclsure Timing Des nt need t be repeated fr subsequent recmmendatins f the same investment prduct made within ne year f a previus disclsure (unless there are material changes t the subject t the disclsure) Web-Based Disclsure Must be updated n less than quarterly (r, in the case f changes t the mdel Cntract r ther mdel ntice f cntractual terms, within 30 days f the change) Frm Single written dcument Financial Institutin s website Clear and prminent disclsure T the extent that the infrmatin required is prvided in ther disclsure dcuments that are made public (such as a Frm ADV, Part II), the web-based disclsure requirement may be satisfied by psting thse dcuments t the website, explaining that the required disclsures can be fund in thse dcuments, and prviding a link t where the disclsures can be fund Cntent State the Best Interest standard f care wed t the Retirement Investr and describe any Material Cnflicts f Interest State that the Financial Institutin ffers Prprietary Prducts r receives Third Party Payments with respect t the purchase, sale, exchange r hlding f recmmended investments State the limitatins placed n the universe f investments that the Adviser may recmmend t the Retirement Investr (nte that this ntice is insufficient if it nly states that investment recmmendatins may be limited based n whether the investments are Prprietary Prducts r generate Third Party Payments, withut specific disclsure f the extent t which recmmendatins are, in fact, limited n that basis) Infrm the Retirement Investr f his r her right t btain cpies f the Financial Institutin s written descriptin f its plicies and prcedures, as well as ther specific disclsures f csts, fees and ther cmpensatin, including Third Party Payments in relatin t recmmended transactins Include a link t the Financial Institutin s website and state that mdel cntract disclsures and the written descriptin f its plicies and prcedures are available n the website, free f charge Discuss the Financial Institutin s business mdel and the Material Cnflicts f Interest assciated with that business mdel Prvide schedule f Financial Institutin s typical accunt r cntract fees and service charges List all investment prduct manufacturers and ther parties with whm the Financial Institutin maintains arrangements that prvide Third Party Payments t either the Adviser r the Financial Institutin, a descriptin f any such arrangements, including a statement f whether and hw the arrangements impact Adviser cmpensatin, and a statement f any benefits the Financial Institutin prvides t the investment prduct manufacturers r ther parties in exchange fr the Third Party Payments Disclse f the Financial Institutin s cmpensatin and incentive arrangements including, if applicable, any incentives (cash r nn-cash) fr recmmending particular prducts, investments r actins, including a full and fair descriptin f any pay-ut r cmpensatin grids, but nt including infrmatin that is specific t any individual Adviser s cmpensatin Prvide mdel Cntract r ther mdel ntice f the cntractual terms Prvide written descriptin f plicies and prcedures Latham & Watkins June 23, 2016 Number 1984 Page 6
Dcumentatin and Internal Plicies and Prcedures The BIC Exemptin als requires certain dcumentatin and internal plicies and prcedures f Financial Institutins and Advisers, as fllws: The Financial Institutin must dcument in writing (1) its limitatins n the universe f recmmended investments; (2) the Material Cnflicts f Interest assciated with any cntract, agreement, r arrangement prviding fr its receipt f Third Party Payments r assciated with the sale r prmtin f Prprietary Prducts; and (3) any services it will prvide t Retirement Investrs in exchange fr Third Party Payments, as well as any services r cnsideratin it will furnish t any ther party, including the payr, in exchange fr the Third Party Payments. The Financial Institutin must reasnably determine (and dcument in writing the basis fr its determinatins), after cnsideratin f the plicies and prcedures established pursuant t the BIC Exemptin, that the limitatins and Material Cnflicts f Interest will nt cause the Financial Institutin r its Advisers t recmmend imprudent investments. The Financial Institutin must adpt, mnitr, implement, and adhere t plicies and prcedures and incentive practices that meet the terms required t be disclsed t Retirement Investrs in the Cntract. Neither the Financial Institutin nr (t the best f its knwledge) any Affiliate r Related Entity may use r rely upn qutas, appraisals, perfrmance r persnnel actins, bnuses, cntests, special awards, differential cmpensatin r ther actins r incentives that are intended r wuld reasnably be expected t cause the Adviser t make imprudent investment recmmendatins, t subrdinate the interests f the Retirement Investr t the Adviser s wn interests, r t make recmmendatins based n the Adviser s cnsideratins f factrs r interests ther than the investment bjectives, risk tlerance, financial circumstances and needs f the Retirement Investr. Substantive Requirements f Recmmendatins The BIC Exemptin als requires certain facts t be true with respect t each recmmendatin made: At the time f any recmmendatin, the amunt f cmpensatin and ther cnsideratin reasnably anticipated t be paid, directly r indirectly, t the Adviser, Financial Institutin, r their Affiliates r Related Entities fr their services in cnnectin with the recmmended transactin may nt be in excess f reasnable cmpensatin. The Adviser s recmmendatin reflects the care, skill, prudence and diligence under the circumstances then prevailing that a prudent persn acting in a like capacity and familiar with such matters wuld use in the cnduct f an enterprise f a like character and with like aims, based n the investment bjectives, risk tlerance, financial circumstances and needs f the Retirement Investr. The Adviser s recmmendatin is nt based n the financial r ther interests f the Adviser r n the Adviser s cnsideratin f any factrs r interests ther than the investment bjectives, risk tlerance, financial circumstances and needs f the Retirement Investr. Recrdkeeping and Ntificatin Requirements Financial Institutins must ntify the DOL by email f their intentin t rely n the BIC Exemptin prir t receiving cmpensatin in reliance n the BIC Exemptin. Additinally, Financial Institutins must retain fr a perid f six years, in a manner that is reasnably accessible fr examinatin by the DOL, IRS, Latham & Watkins June 23, 2016 Number 1984 Page 7
Retirement Investr and certain thers, the recrds necessary t determine whether the cnditins f the BIC Exemptin were met with respect t any particular transactin. A failure t maintain the necessary recrds will result in the lss f the BIC Exemptin with respect t the transactin r transactins fr which the recrds are missing r have nt been maintained (but the exemptin remains applicable t ther transactins that are supprted by the prper recrds). BIC Light fr ERISA Plans, Level Fee Fiduciaries and Bank Netwrking Arrangements ERISA Plans Under the BIC Exemptin, Financial Institutins and Advisers can adhere t slightly reduced requirements and still cmply with the BIC Exemptin when prviding advice t Retirement Investrs regarding investments in plans cvered by ERISA. Specifically, Financial Institutins are nt required t execute written cntracts with Retirement Investrs, and instead may merely acknwledge the Financial Institutin s fiduciary status. Hwever, Financial Institutins and Advisers must still cmply with the substance f what wuld have been included in the written cntract, including adhering t the Impartial Cnduct Standards and adpting and cmplying with adequate written plicies and prcedures. Additinally, Financial Institutins and Advisers are still required t (1) disclse and describe any Material Cnflicts f Interest and Third Party Payments they receive; (2) cmply with the transactin-based and web-based disclsure requirements; and (3) cmply with the recrdkeeping requirements. Level Fee Fiduciaries The BIC Exemptin prvides fr even further reduced requirements fr Level Fee Fiduciaries Financial Institutins and Advisers that nly receive Level Fees that are disclsed in advance t Retirement Investrs, such as a fixed percentage fee based n assets under management, r a fixed fee that therwise des nt vary accrding t the particular investment recmmended. Level Fee Fiduciaries are required t acknwledge their fiduciary status t Retirement Investrs and t cmply with the Impartial Cnduct Standards. Additinally, if Level Fee Fiduciaries recmmend that a Retirement Investr (1) rll ver frm an ERISA plan t an IRA, r frm anther IRA t an IRA, r (2) mve frm a cmmissin-based accunt t a level fee arrangement, then the Level Fee Fiduciary must dcument the specific reasn r reasns why the recmmendatin was cnsidered t be in the Retirement Investr s best interest. Level Fee Fiduciaries als must cmply with the requirements applicable t Prprietary Prducts and Third Party Payments discussed abve. Hwever, Level Fee Fiduciaries are therwise free frm the remaining BIC Exemptin requirements discussed abve. Specifically, they d nt need t prvide any f the cntract disclsures, transactinbased disclsures r web-based disclsures described abve, and they d nt need t adhere t the recrdkeeping and ntificatin requirements that are generally applicable under the BIC Exemptin. We expect that the Level Fee Fiduciary designatin will be advantageus t Financial Institutins seeking t transitin away frm cmmissin-based accunts in rder t avid the mre burdensme requirements impsed upn fiduciaries under the BIC Exemptin. Hwever, as nted abve, transitining investrs frm cmmissin-based accunts t fee-based accunts in rder t attain Level Fee Fiduciary status culd be challenging given the requirement fr Level Fee Fiduciaries t dcument the specific reasn r reasns why mving t a level fee arrangement is in the Retirement Investr s best interest. Latham & Watkins June 23, 2016 Number 1984 Page 8
Bank Netwrking Arrangements Advisers wh are bank emplyees (in the case f individual Advisers) r banks (in the case f Financial Institutins) may receive cmpensatin under a Bank Netwrking Arrangement 6 in cnnectin with their prvisin f investment advice t a Retirement Investr, prvided that the investment advice adheres t the Impartial Cnduct Standards. The BIC Exemptin s remaining cnditins and requirements d nt apply. Cngressinal Backlash; Industry Challenges Bth industry grups and Huse and Senate Republicans have vcally ppsed the Final Rule since befre its adptin. On May 24, 2016, the Senate vted 56-41 in favr f a jint reslutin, previusly apprved by the Huse f Representatives, that wuld blck implementatin f the Final Rule pursuant t the Cngressinal Review Act. 7 On June 8, 2016, President Obama veted the legislatin. With a tw-thirds majrity in bth chambers necessary t verride the vet, this legislatin is effectively symblic. Lawsuits challenging the Final Rule that industry grups filed this mnth may have a mre meaningful impact. As f June 20, 2016, five lawsuits challenging the Final Rule have been filed (thugh the Secretary f Labr filed an unppsed mtin n June 17, 2016, t cnslidate three f the suits filed in Texas federal curt). The first was filed by the US Chamber f Cmmerce, alng with eight ther industry grups, in Texas federal curt n June 1, 2016, alleging, amng ther things, that the Final Rule versteps the DOL s authrity, creates unwarranted burdens and liabilities fr financial advisers, and undermines the interests f small business and individual savers by limiting cnsumer chice. Since the first suit was filed, the Natinal Assciatin f Fixed Annuities, the American Cuncil f Life Insurers, the Indexed Annuity Leadership Cuncil and Market Synergy Grup, Inc. have jined with ther plaintiffs in challenging the Final Rule. If yu have questins abut this Client Alert, please cntact ne f the authrs listed belw r the Latham lawyer with whm yu nrmally cnsult: Sandeep Savla sandeep.savla@lw.cm +1.212.906.1359 New Yrk Rbin Struve rbin.struve@lw.cm +1.312.876.7632 Chicag Stephen P. Wink stephen.wink@lw.cm +1.212.906.1229 New Yrk Sean Miller sean.miller@lw.cm +1.212.906.4685 New Yrk Latham & Watkins June 23, 2016 Number 1984 Page 9
Kate Napalkva* kate.napalkva@lw.cm +1.213.389.7552 Ls Angeles *Admitted t practice in New Yrk nly Yu Might Als Be Interested In US Department f Labr s Fiduciary Rule Intrduces a Brave New Wrld Treasury Targets Inversins and Related-Party Debt with Far-Reaching Regulatins SEC Speaks Cnference 2016: Key Takeaways fr Public Cmpanies CFPB Enfrcement Update Client Alert is published by Latham & Watkins as a news reprting service t clients and ther friends. The infrmatin cntained in this publicatin shuld nt be cnstrued as legal advice. Shuld further analysis r explanatin f the subject matter be required, please cntact the lawyer with whm yu nrmally cnsult. The invitatin t cntact is nt a slicitatin fr legal wrk under the laws f any jurisdictin in which Latham lawyers are nt authrized t practice. A cmplete list f Latham s Client Alerts can be fund at www.lw.cm. If yu wish t update yur cntact details r custmize the infrmatin yu receive frm Latham & Watkins, visit http://events.lw.cm/reactin/subscriptinpage.html t subscribe t the firm s glbal client mailings prgram. Endntes 1 2 3 4 5 6 7 Fr purpses f this Client Alert, unless therwise specified, the term Adviser will be used t refer t bth an individual Adviser and a Financial Institutin. A Material Cnflict f Interest exists when an Adviser r Financial Institutin has a financial interest that a reasnable persn wuld cnclude culd affect the exercise f its best judgment as a fiduciary in rendering advice t a Retirement Investr. Third-Party Payments include sales charges when nt paid directly by the Plan, participant r beneficiary accunt, r IRA; grss dealer cncessins; revenue sharing payments; 12b-1 fees; distributin, slicitatin r referral fees; vlume-based fees; fees fr seminars and educatinal prgrams; and any ther cmpensatin, cnsideratin r financial benefit prvided t the Financial Institutin r an Affiliate r Related Entity by a third party as a result f a transactin invlving a Plan, participant r beneficiary accunt, r IRA. Best Interest is defined as acting with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent persn acting in a like capacity and familiar with such matters wuld use in the cnduct f an enterprise f a like character and with like aims, based n the investment bjectives, risk tlerance, financial circumstances and needs f the Retirement Investr, withut regard t the financial r ther interests f the Adviser, Financial Institutin r any Affiliate, Related Entity r ther party. Prprietary Prduct means a prduct that is managed, issued r spnsred by the Financial Institutin r any f its Affiliates. A Bank Netwrking Arrangement is an arrangement fr the referral f retail nn-depsit investment prducts that satisfies applicable federal banking, securities and insurance regulatins, under which emplyees f a bank refer bank custmers t an unaffiliated investment adviser registered under the Investment Advisers Act f 1940 r under the laws f the state in which the adviser maintains its principal ffice and place f business, insurance cmpany qualified t d business under the laws f a state, r brker r dealer registered under the Securities Exchange Act f 1934, as amended. Fr purpses f this definitin, a bank is a bank r similar financial institutin supervised by the United States r a state, r a savings assciatin (as defined in sectin 3(b)(1) f the Federal Depsit Insurance Act (12 U.S.C. 1813(b)(1)). H.J. Res. 88, Disapprving the rule submitted by the Department f Labr relating t the definitin f the term Fiduciary. Latham & Watkins June 23, 2016 Number 1984 Page 10