Tim Hauser - Navigating the Maze of Fiduciary Standards

Calling the latest iteration of the fiduciary rule “the third installment of a long running regulatory series,” American Retirement Association CEO Brian Graff went directly to the source, speaking with EBSA COO Tim Hauser about the Retirement Security Rule.

The two fiduciary regulation ‘veterans’ sit down for a (very) comprehensive discussion the primary reasons EBSA thought it necessary to update the regulatory definition of investment advice and the goals and objectives in doing so.

Episode Transcript

Speaker 1 (00:00):
If you're making recommendations about something
as important as people'sretirement and you're doing that
in circumstances where theythink they're getting
individualized advice that'sbased on their interests, not
your interests, that you'reacting in their best interest,
you should be held to afiduciary standard.

Speaker 2 (00:19):
DC Pension Geeks brings you exclusive
conversations with topretirement policymakers and
regulators in and aroundWashington DC, hosted by Brian
Graff, an attorney, accountant,former Capitol Hill staffer and
CEO of the American RetirementAssociation.
If you're looking for aninsider's view of all the twists
and turns that Washington takeson the road to ensuring a

(00:40):
secure retirement for millionsof Americans, you're in the
right place.
Welcome to DC Pension Geeks.

Speaker 3 (00:46):
Well, hello everybody .
It's another in our series ofpodcasts, DC Pension Geeks, and
we've got a big one today withnone other than Tim Hauser, who
is the Deputy AssistantSecretary for EBSTA, essentially
the Senior Career Officer.
Tim has actually participatedin this podcast before, but we

(01:11):
have a little thing to talkabout called the Retirement
Security Regulation, so I'mgoing to just jump right into it
and start with the questions.
Is that okay, Tim?

Speaker 1 (01:21):
Sure.

Speaker 3 (01:23):
So this is the third installment, I'll call it of a
long-running regulatory seriesthat both of us have been
working on for quite some time,and so one of the questions is
in light of the fact that 2020O2 is out there, and given the

(01:43):
fact that whenever there'sregulatory action in this area,
it is, to say the least,controversial, what were the
primary reasons why EBSTAbelieved it was necessary to
update the regulatory definitionof investor advice?

Speaker 1 (02:00):
They think there are a number of premises, a number
of goals behind this effort, andmaybe I'll just tell you what
our objectives are and then youcan tell me what you think.
But the first is we do want itto be the case that if you're

(02:20):
holding yourself out as aninvestment professional,
providing individualized adviceto people based on their best
interest, you should be held toit.
If you're makingrecommendations about something
as important as people'sretirement and you're doing that

(02:41):
in circumstances where theythink they're getting
individualized advice, it'sbased on their interests, not
your interests, that you'reacting in their best interest,
you should be held to afiduciary standard and you
should be treated as a fiduciary.
And what that means is just asa practical matter.
It means that you should begiving advice that's prudent.

(03:03):
You adhere to an expert standardof care.
You should be giving advicethat's loyal, so you don't
subordinate your customer'sinterest to your own competing
financial interests.
You should take no more than areasonable compensation from
people.
You shouldn't overcharge themand you shouldn't make
misleading statements.
That, in essence, is what thisproject is.

(03:26):
It's about making sure thatwhen you hold yourself out if
you're an investmentprofessional and you're holding
yourself out to folks as someonewho they can rely upon for
getting to their best interestin retirement.
You ought to be held to thesebasic standards.
You ought to be treated as afiduciary, and that's how the
rule has been structured.
It focuses on threecircumstances where we think

(03:47):
it's fair to say you're holdingyourself out that way and then,
if you are, you're going to besubject to these standards.
And there's some morecomplexities to it, but very big
picture of that pretty much iswhat this rule is about.
Other goals here are one wethink that the federal law, or

(04:10):
RISA, contemplates a uniformstandard.
There's one test for whetheryou're an investment advisor for
a fee under our statute,whether you're a fiduciary
advisor for a fee, and there isno distinction in the statute
based on whether you'rerecommending mutual funds,

(04:33):
insurance products, commodities,collectibles, crypto, whatever
real estate.
It's one standard and we thinkthat makes a lot of sense.
There should be one standardand people should compete for
retirement investors' businessbased on what's in their best

(04:53):
interest rather than nothing.
Advice should not be driven ormotivated by whether one product
or one category of advisor issubject to tighter or looser
regulation.
Everyone should just competeunder the same standard and then
at that point the market can doits job and participants can be

(05:15):
protected.
The other big reason well, twomore big reasons, brian and I
apologize for kind of going onhere, but one more, I think,
motivating factor for us is thatthere are a bunch of gaps right
now that regulatory gaps whenit comes to advice for

(05:36):
retirement investors.
The SEC made a significant stepforward for investors when it
promulgated regulation bestinterest.
But regulation best interestdoesn't extend outside of
securities and it doesn't extendoutside of retail investors.

(05:57):
So, for example, if a broker ismaking a recommendation to a
small plan sponsor who's tryingto figure out what goes on their
fund lineup, it's not going tobe covered by regulation best
interest.
Non-securities aren't covered.
You know, like fixed indexannuities, like commodities,

(06:18):
like real estate, and the NAICsmade some significant progress
too toward a best intereststandard, but it doesn't comport
exactly either with the ERISAstandard or with regulation best
interest.
So we've tried to come up withone sort of uniform standard

(06:40):
that applies across the board.
And the other thing is it'sjust this rule.
The 1975 rule that's in effectright now has been in effect for
, you know, all of those yearsand it has not been modernized
that entire time.
And the reality is the markethas really really changed in the
intervening period.
It used to be a world of definedbenefit plans which were

(07:04):
managed by professional moneymanagers.
The people getting advice weretypically investment
professionals.
You fast forward to now andyou're talking about a plan
universe where a lot of very,very important decision making
responsibility has been turnedover to small plan sponsors,
mid-sized plan sponsors, planparticipants, beneficiaries,

(07:28):
people who are not themselvesexperts on you, know all the
complexities of investment, butare dependent on these
professionals they deal with forgood advice, and those
professionals, in addition,often have fairly significant
conflicts of interest, and theconcern is that those conflicts
of interest can drive thatadvice in bad ways if there

(07:50):
aren't some guardrails putaround it.
So those are the goals we'retrying to achieve Put some
guardrails around it, make surepeople honor the you know when
they present themselves as bestinterest advisors, that they're
held to that standard, and makesure that that five-part test
under the current reg isn'tactually working to defeat

(08:11):
legitimate expectations of trustand confidence and to defeat,
you know, anyone being obligatedin this space to actually
adhere to some fairly simpleprecepts of fair dealing with
their customers.

Speaker 3 (08:24):
So you know, 2020-02, in its current form in prior to
the proposal, had theseimpartial conduct standards that
embedded a lot of this, butwhat I hear you saying is
uniformity across all productlines and two more of a
transaction-based approach toevaluating whether someone has

(08:51):
provided advice under RISA akinto what Reg VI did.
Is that correct?

Speaker 1 (08:58):
Yes, I mean I think that the regulatory structure
we're putting forward is very,very in step with
regulation-best interest.
If you've, and with 2020-02, ifyou've really taken
regulation-best interest and therequirements of 2020-02 and

(09:21):
those impartial conductsseriously and built the
compliance structures to complywith them, I think you'll be in
good shape under this package aswell.

Speaker 3 (09:31):
And that's a big part of our goal.
Can you expand on that a littlebit?
You know, because a lot ofpeople have been saying you know
why is this necessary?
Because Reg VI is out there, orwhat are you know, have been
wondering what the differencesare between what 2020-02, as
proposed, is requiring versusReg VI.
Maybe identify some of thematerial differences.

Speaker 1 (09:54):
Yeah, sure, so some of the things are first, 2020-02
, I mean, everyone in thisaudience, I imagine, is aware of
this fact, but 2020-02 is justone exemption among many that
are available for advice andit's probably, of the exemptions
that are currently applicable,is probably the most protective

(10:17):
with respect to advice, and sopart of this was just to say
look, we want everybody underOrissa to be working under a
common framework.
You know you shouldn't cobbleto get you.
There shouldn't be a patchworkof different exemptions
available for advice.
There should be a kind of acommon standard that's available

(10:42):
for advice arrangements.
But, as I said before, theother important piece are their
regulation.
Best interests made huge strides, I think, in the marketplace
and protection for retirementinvestors, but there's lots that
it doesn't cover.
It doesn't cover advice to theplan fiduciary who's overseeing

(11:05):
a fund lineup and makingimportant decisions about what
to offer to participants inparticular.
It doesn't cover non-securities.
It doesn't cover variouscategories of insurance products
.
So all of those things aremotivational for us as well.
So we are trying to come upwith the rule here that honors

(11:29):
legitimate customer expectationsabout what kind of relationship
they have with their advisor,In accordance with the Fifth
Circuit's opinion in the chambercase.
That makes sure that when theyhave that kind of relationship
they're going to be prudent,loyal, not overcharged folks,
you know, get more thanreasonable comp and not be

(11:51):
misleading.
And make sure that that appliesin a fairly uniform way to
everybody.
That's in the plan space and inthe IRA space, and that also
respects the Fifth Circuit'sopinion that we should be very

(12:14):
careful about sticking with theremedies that ERISA provides.
So what you'll see in this aswell is we do not create a bunch
of new remedies for violationshere.
If you give advice in the plancontext, you're just subject to
the enforcement provisions ofTitle I of ERISA.

(12:34):
If you give advice in the IRAcontext, post-rollover and
excise taxes is potentially whatyour liability is.
We are not.
There is no contract like inthe 2016 role.
There is no warrantyrequirement is in the 2016 role
and we also, while it's notreally a remedy issue.

(12:55):
The other thing we'd heard alot from the industry last time
around was they really, reallyhated this requirement that we
put in the rule in theexemptions that folks post a
public website that disclosedall the compensation they got
from third parties in connectionwith recommendations.
You won't see that either.

Speaker 3 (13:13):
So this is Although you asked for comments on it.

Speaker 1 (13:16):
We absolutely asked for comments on whether that'd
be a good idea and whether thatwouldn't better promote a
tamping down of conflicts and-.

Speaker 3 (13:27):
I think it's fair to say you'll get similar comments
on that subject.

Speaker 1 (13:31):
I would not be surprised.

Speaker 3 (13:34):
So one of the things that the critics have been kind
of really harping on is andsimilar to the arguments that
were made in 2016, is that therule is going to interfere with
business models.
It's going to prohibit certainforms of compensation.

(13:55):
Can you address that?
Are there things that EPSA istrying to root out, or is that
just an argument based on thatreally isn't what is intended by
the proposal.

Speaker 1 (14:09):
Yeah, so a couple of things there.
One again, if you just go backto what I said at the outset at
bottom, if you're subject tothis rule as a fiduciary, what
it's going to require you to dois be prudent, loyal, not
overcharge, not materiallymislead people, and a financial

(14:29):
institution is going to need tohave policies and procedures too
that are reasonably calculated.
A reasonable person looking atthese policies and procedures
will conclude that, as a whole,they're going to ensure that the
folks who are makingrecommendations are prudent,
loyal, not overcharging and notmaking misrepresentations.

(14:52):
And there's going to be arequirement for a retrospective
review every year.
Let's take a look, see whetherthere are policies and
procedures are working, andthere's a requirement that you
actually think hard aboutrollovers and document what you
do At bottom.
That's what the rule those are.
If you internalize all of thosethings, that's what this rule

(15:13):
really requires.
And the question is well, whywould?
What is the problem with any ofthose things?
How would they?
What is the business model thatprevents somebody from giving
advice that's prudent or loyalor that doesn't involve
overcharging people or thatrequires misrepresentations?
I don't think a broker modeldoesn't require that you breach

(15:37):
these requirements.
The insurance independentproducers and insurance agents
surely can give advice that'sprudent and loyal and doesn't
involve overcharging or relyingto people, et cetera, et cetera.
So I don't.
We've tried to accommodateevery possible business model
here.
We've made it clear if you readthe preamble to the amended

(16:00):
version of 2020-02,.
We've gone out of our way tomake clear that, of course,
you're entitled.
You can work on a commissionbasis.
You can work on a basis wherethere's a restricted menu of
options that you recommend,based on the compensation they
provide to you.
You just have to adhere tothese basic safeguards.
So we don't think there's anyreason to think that any

(16:24):
business model out there isn'tconsistent with this.
But there is an expectationthat you're going to tamp down
conflicts of interest, so you'regonna manage them, that you're
gonna make sure that what'sdriving the train when it comes
to investment advice is what'sin the customer's interest, not
a conflict or an incentivestructure that's misaligned with

(16:47):
the customer's interests.

Speaker 3 (16:50):
So again, no intent to prohibit commission-based or
proprietary products, correct?

Speaker 1 (16:57):
Correct.
Not only that, I mean we go outof our way to point out that
commission-based arrangementsare sometimes exactly what's the
right thing for customers.
If you're a buy and holdcustomer who's not looking for
ongoing advice, and an ongoingadvisory fee can be the exact
wrong thing for you, and in thatcase that would be what created
a prudence problem.

(17:17):
There's no thumb in the scalein this rule for in favor of one
compensation model as opposedto another, as long as you're
managing conflicts.

Speaker 3 (17:30):
So, as a fair say that with respect to those
things, it's really not the factthat someone is getting a
commission per se or gettingwhatever the compensation
structure is.
This really goes back to anissue that I know the
department's had for a very longtime.
It really which I think theyhave seen, you have seen, as one

(17:51):
of the root concerns aroundconflicts, and this is the issue
of differential compensation.
Right, it's not so much thefact that there's a commission
or other forms of comp, it's thefact that there's differential
compensation that exists thatcreates the conflict.
Is that a fair statement?

Speaker 1 (18:09):
Yes, I think to a significant degree.
You wanna be very careful aboutincentivizing people, about
giving them special incentivesto recommend products that are
actually worse for the consumerthan other alternatives.

Speaker 3 (18:27):
Or that the recommendation is based on what
you're getting versus what'sbest for the particular.

Speaker 1 (18:33):
Right, that's right.

Speaker 3 (18:35):
I mean, it could be perfectly fine to have
differential compensation If, infact, the advice being given is
in the clear best interest ofthe investor, correct?

Speaker 1 (18:47):
Yes, I mean it's again.
The key thing from ourstandpoint is do you have
policies and procedures in placeto make sure that the conflict
isn't what's driving therecommendation?
And it's not really.
In a lot of circumstances, it'snot really gonna be possible to
make everything perfectly equalor to bring every conflict out
of this marketplace.

(19:08):
I don't think you can do that,and that's not our expectation.
It's about, though, beingcareful not to introduce
conflicts where there's no needfor them and making sure that,
when there are conflicts, you'rebeing very careful to monitor,
manage, control them and makesure that's not what's driving

(19:29):
the recommendation.

Speaker 3 (19:32):
So let me get into some specific things.
One of the many disclosures in2020, you know two that are
required to avail oneself of theexemption is this and you
mentioned this earlier it'sacknowledgement that the
advisors quote, I'm reading fromthe rules is providing
fiduciary investment advice andis a fiduciary under ERISA.

(19:52):
Is the ERISA reference intended?
Is there some desire by EPSISso that more Americans know what
ERISA is?
Or I mean seriously, is that?

Speaker 1 (20:07):
It's in everyone's best interest that they know
what ERISA is.
Okay, but that is not our goal.
No, the key thing is what wewant to be.
What we want there to beclarity about is are you
stepping up to be an ERISAfiduciary or not?
And we think there ought to beclarity upfront in your
relationship with the investoron that point.

(20:29):
You know if you're gonna complywith this regime you kind of
with this regulatory package.
You need to know if you're afiduciary, because things flow
from that and your customersshould know whether you're
choosing to be a fiduciary ornot.
So that's the goal.
What we had seen, you know andthis isn't everybody we'd seen
some fairly good disclosureunder 2020-02, as it's currently

(20:53):
written.
But we'd also seen somedisclosure that looked
approximately like this it saidwe acknowledge that we are
fiduciaries to the extent wefall within the five-part test
set out in the 1975 regulation.
Well, you know that kind ofdisclosure doesn't tell you, the
customer, anything.
You know you're not committingto being a fiduciary when you

(21:14):
make a recommendation.
The customer has no basis forknowing you're a fiduciary when
you make a recommendation.
So we're just saying look, makeup, decide if you're going to
be a fiduciary.
Here you're gonna need toacknowledge that when you make a
recommendation you're doing anERISA fiduciary or is a
fiduciary under the code.
If you're not a fiduciary, youdon't have need of the exception

(21:34):
because you don't run into afile of the Prevative
Transaction Rules in the firstplace.

Speaker 3 (21:39):
So connected to that, questions have come in around
the fact that the SEC has itsown rules about holding oneself
out as an investment advisor andthat triggers investment
advisory status under SEC ruleswhich, as you're probably aware,

(22:01):
would prohibit commission-basedcompensation.
So can you clarify that?
You know this is sort ofconnected to coordination with
the SEC, that you guys have haddiscussions with them and that
there's no intent here.
By holding oneself as an ERISAfiduciary does not mean you're
necessarily an SEC fiduciary.

Speaker 1 (22:22):
It doesn't right, it doesn't mean you're, it doesn't
mean you fall under the AdvisorsAct, I mean I think is the most
precise way of saying it.
I mean at this point, when youlook at the conduct standards
that govern advisors under theAdvisors Act, under the SEC, and
you look at the conductstandards that apply to brokers

(22:46):
under regulation best interest,they're both, you know, familiar
fiduciary status, fiduciaryprinciples derived from the
common law of fiduciary behavior.
I mean it includes essentiallyprudence, loyalty, you know fall
, and fair disclosure.
It's very, very similar asbetween brokers and advisors,

(23:11):
what the standard is, it's afairly uniform best interest
standard with probably the keydifference in being an advisor
under the Advisors Act and beinga broker in the standards that
cover broker dealers is thatthere's not kind of a default
assumption in the case of abroker dealer that you have an
ongoing duty to monitor, whereasin the Advisors Act there is a

(23:34):
sort of default that you have aduty to monitor.
But that's one area where ERISAdeparts a bit from the
securities laws in the firstplace.
I mean ERISA's functional testof fiduciary status is a
transactional test.
Always You're fiduciary to theextent you give advice for a fee

(23:55):
, direct or indirect, and you'renot a fiduciary to the extent
under that prong, to the extentyou're not giving advice.
So it's always under ERISA.
Fiduciary status under theadvice definition is always
transactional.
Were you a fiduciary withrespect to this transaction in
this instance?
And we don't, you know.
For that reason we don't reallyimpose an ongoing duty to

(24:18):
monitor as a default on advisorsat all.
It really is a question of doyou meet this test?

Speaker 3 (24:27):
So is it?
So you know, either has been orare there.
I do know that you guys havebeen in conversations with the
SEC because you've said that,mentioned it in the rule and
you've also said that publicly.
Has this particular issue comeup and would there be a
willingness to at least makesure that what you're requiring

(24:49):
here doesn't necessarilyunintentionally trigger a broken
someone who is otherwise abroker, who might be getting a
commission, which is allowedunder the proposed rule, doesn't
mean that they're going to betreated as an investment advisor
under the 40 Act, because thatwould then create a problem for
that broker in terms ofreceiving the commission.

Speaker 1 (25:11):
Yeah, I mean we've, I don't this.
This, this rule doesn't createthat problem and we've, we've.
We have worked pretty closelywith staff over at the SEC on
this, so I don't, I don't seethat issue.

Speaker 3 (25:25):
Great.

Speaker 1 (25:27):
Brian, could I back up for just a minute and
thinking and thinking about thisrule?
I do.
I do want to go back to thecustomer's expectation point,
the retirement investor'sexpectation, and just describe
with this, this, how this ruleworks to to determine fiduciary
status.
Because if you think back to2016 and that rulemaking, you

(25:51):
know we went from the five parttest, which which the five part
test has a problem that it makesit very, very easy for people
to avoid fiduciary status, evenas they're holding themselves
out as fiduciaries.
I mean really.
I mean you can imagine, forexample, imagine somebody who is
at retirement age they'vethey've got their entire life

(26:11):
savings and they're trying todecide on an annuity purchase
and they're sitting across thetable from from somebody who
makes recommendations aboutannuities, who holds themselves
out as an expert, who, who, whogoes in tremendous detail over
their financial circumstances,over their financial needs, even

(26:33):
tells them look, I'm, I'm doingwhat's best for you here, I'm
making recommendations that arebest for you.
And you can imagine, for thatmatter, that it's completely
clear to both parties that theperson who understands how these
annuities work and understands,you know, investments is is the
advisor, it's, it's the agent,it's, it's not the customer.

(26:54):
The customer is puttingthemselves at at.
You know they're they'rerelying completely on the
advisor.
Under the five part test, though, of our current rule, that that
relationship assuming this isthe first time that people have
have you know, this is the firsttime the person's getting

(27:15):
professional advice from thisentity would be treated as non
fiduciary, even though you knowtheir person's holding
themselves out is giving bestinterest advice, making a
recommendation that's probablythe single most important advice
person's going to ever receive.
They both understand that thereliance is complete.
Never, though, and the personcould even say I'm your
fiduciary, I'm acting in yourbest interest, they would still

(27:38):
fail under our five part testbecause they it's not given on a
regular basis.
We don't think that makes sense.
On the other hand, when we didthe 2016 rule, you know we had
we essentially said that retailcustomer in that situation, as
long as there was a directrecommendation to them, they're
going to be treated as afiduciary is, and they got a fee

(28:02):
, commission, you know, a UM,whatever, no matter what, almost
without regard to the contextof the relationship and whether
the customer had any expectationat all that this was somebody
who they were going to rely uponand trust and confidence and
making an investment decision.
The new rule is between thosethe you know, the poll of the

(28:23):
five part test and the 2016 rule.
It says, in order for you to bea fiduciary, there are just
three circumstances.
We're going to make you advicefiduciary.
One is you tell the person I'myour fiduciary, say that you
should be a fiduciary.
The second is is if you're inthe business.
As a regular part of yourbusiness, you make investment

(28:46):
recommendations and you'remaking the recommendation under
circumstances indicating thatit's based on the particular
needs or individualcircumstances of the investor
and you'll be relied upon as abasis for investment decisions
that are in the investor's bestinterest.
The third circumstance is ifthe customer has literally given
you authority over investmentsthey're letting, they've given

(29:08):
you discretionary authority.
We think that suggests arelationship of trust and
confidence, but that's it.
This isn't the 2016 rule.
This is.
This is really very, veryfocused on what is the
relationship between the personmaking the recommendation and
use the customer, and is it onewhere the person really
reasonably should expect thatthey can rely upon this advice

(29:30):
is based on their interests.
That's the focal point, and wethink that's what the fifth
circuit was looking for, and wethink it's both significantly
narrower than 2016 rule, but itis broader than the five part
test, which which the five parttest works great in the sense
that if you meet all five partsof that test, there should be no

(29:52):
doubt that that you're in arelationship of trust and
confidence with the personmaking the recommendation.
The problem is like my exampleof the people sitting across the
table talking about the annuitypurchase for all of their
retirement savings is it's underinclusive.
There are situations where itreally dishonors the customer's
reasonable expectationsretirement investors reasonable

(30:14):
expectations by saying they'renot going to be a fiduciary, no
matter how they held themselvesout, and that's not right.
We're fixing it.

Speaker 3 (30:22):
I appreciate that further application of what you
guys were trying to accomplish.
So you know, when the rulefirst came out, the first thing
I did because you know, kind ofanticipated that you guys were
going to address regular basisproblem of the five part test I
go to Acrobat, I Google regularbasis and and lo and behold, I

(30:43):
get the regular basis as part oftheir business test.
So my first reaction is what sois that part of me was like is
that because they were trying tosay this is what we meant all
along?
This was supposed to mean, oror why do you think that was
important to include thatelement to this?

Speaker 1 (31:05):
Because that, that element, that that element in
particular of the three waysthat you can get fiduciary
status here, is a function ofwhat people's reasonable
expectations are about therelationship.
I mean, that's what we're aimedat across the board.
They're reasonable expectationsand we think that's.
You know they have a reasonableexpectation when somebody's

(31:28):
holding themselves out is givingindividualized advice based on
their interests, and they're aninvestment professional, they're
in the business.
Part of what they do is makeinvestment recommendations.
If, on the other hand, you'retalking to your car dealer or
your uncle and they tell you youknow, pull this money out of.
I borrowed you for that, butanyway right, you know, if
you're going to pull this moneyout of, pull the money out of

(31:50):
your iron by this, by this Lexusor whatever, we don't know.
Nobody thinks that that'sinvestment advice.
That they're you know.
They don't think they have kindof a fiduciary relationship
with the car dealer.
It's, it's.
It's different when you're anactual investment professional.

Speaker 3 (32:06):
So let me give you a couple of common examples here.
Oftentimes like, say, a healthcare broker right will recommend
to a retirement retirement planadvisor.
You know occasionally when theysee an opportunity for a health
care client to that that oughtto consider putting a plan in

(32:28):
and they get a referral fee.
Is that an example of asituation where they're not in
the regular basis, not on aregular basis as part of their
business Providing retirementadvice?

Speaker 1 (32:41):
Yeah, I think that's, I think that's that's fair.
I mean, bear in mind too thisthis rule doesn't treat as
investment advicerecommendations on what health
plan to get or what.

Speaker 3 (32:52):
No, no, no, I'm saying that the health brokers
recommending a retirement planadvisor.

Speaker 1 (32:56):
He says on on top of every.
You know, in addition to givingyou advice on how to and what
kind of health plan to to get,here's, here's, here's a tip on,
here's something you should,you should, put in your first
that I know was great with plansand you should.

Speaker 3 (33:15):
I would recommend you talk to him or her about
putting a plan in for yourworkers.

Speaker 1 (33:20):
Yeah, I mean it's as written.
Unless that, unless the adviceis regularly given as to so
little bit more complicated.

Speaker 3 (33:29):
Oftentimes, wealth people tend to specialize on
individual investing adviceversus plan advice, so there's
some often called wealthadvisors.
If a wealth advisor willoccasionally give a
recommendation to anotheradvisor who is a plan advisor

(33:52):
but get a referral referral fee,how do you see that fitting in
with the regular?
Because it's investment relatedbut it's not plan investment
related?

Speaker 1 (34:03):
I mean you're so you're saying that.
Let me just make sure Iunderstand the hypothetical.
So the person is a wealthadvisor.
They give advice on how toinvest your customers assets.
Usually they don't give thatadvice with respect to
risk-covered plans, but in thisinstance say they do or or, or
they.

Speaker 3 (34:22):
They are recommending somebody else to be the advisor
, so it's.
I've got somebody I know downthe street their retirement plan
advisor.
You're looking for someone to.
You're considering a plan foryour businesses employees.

Speaker 1 (34:39):
You should talk to that person right now
recommending themselves, butrecommending somebody get a
referral.
Yeah, no, I think they'repotentially going to fall within
this test if they regularlymake those recommendations.
Well, if they regularly makeinvestment recommendations even
if it's not related to plans.

Speaker 3 (35:01):
Okay, All right.
So moving on.
All right, One quick clarifyingquestion that keeps coming up,
Tim, even though I think I knowwhat the answer is.

(35:22):
There's nothing in thisproposal that would would
preclude seps and simple IRAsfrom being potentially covered
if the elements are otherwisesatisfied.
Correct?

Speaker 1 (35:38):
That's right.

Speaker 3 (35:38):
So they are considered the question or risk
of plans that potentially couldbe subject to the rule and
advice with respect to thoseplans would be covered.
Yes, All right.
A lot of the questions aroundplan advice pertain to the
threshold element of whether theperson is making a

(36:00):
recommendation that isindividually tailored Very
important.
So I'm just going to assumethat if a person is recommending
a retirement plan provider, aplatform with literally
thousands of QCIPs to choosefrom, and it's the plan sponsors
responsibility to choose fromthose QCIPs to construct a menu,

(36:25):
that that's not going to beindividually tailored investment
advice.
Just take that for granted.
But it is very common for plansto be sold that allow planned
participants to choose frominvestment options for
pre-constructed lists of fundoptions for each major asset
class.
So let's say there's like fiveinvestment options for each

(36:50):
asset class.
It's a pre-packaged product andthe advisor doesn't have any
flexibility with respect to thisproduct.
They're just saying here's aplan with these options and all
of the options are essentiallypre-selected by the platform

(37:12):
provider to give participantsfive or so choices for each
asset class.
Is that individually tailored?

Speaker 1 (37:23):
So maybe backing up, I mean what counts as a
recommendation for purposes ofthis rule, a recommendation,
really we're using the word inthe same sense as under the
securities laws and is the sameway Finner and the SEC would
talk about it.
It's effectively, you know,affects the circumstances test.
And the question is this a callto action Is express or

(37:48):
implicit the notion that by this, hold this, take this
investment management approach,hire this other, this third
party for providing investmentservices, as opposed to
circumstances where you're notreally recommending any

(38:08):
particular investment strategyor investment type of investment
account or approach toinvestment management or any
particular product.
And the question in thisscenario is you're bringing up
is well, which is it when youlook at the facts and
circumstances?

(38:29):
So one could imagine, forexample, a platform provider
dealing directly with the planand they just say look, this is
what I offer.
I'm not going to make anyrecommendations to you.
This is if you're going to dealwith me.
This is what's on my productshelf, this is what's available

(38:49):
to you.
You might want to go getsomebody to advise you whether
this is good.
You know good or bad for you,but that's not me.
Another circumstance is thatyou know they really go out of
their way to pitch a particularset of options that's available

(39:09):
on the platform or to suggestthat these options are better
than other options, and it'svery fact and context dependent.
It's a question on therecommendation issue Are you
really suggesting to the personthat they should go with this
product or this lineup or thatthey should narrow their entire

(39:31):
search to this small selection?

Speaker 3 (39:36):
So you're saying you know, when an advisor let's say
it's an independent advisor issaying you should you know, if
you want a 401k plan, here's aproduct offered by a you know
particular record keeper.
The record keeper's productsare, you know, the product is,

(39:58):
excuse me, eight asset classes,five funds in each, so 40
different funds thatparticipants can choose from.
In that instance because thereare other products in the
universe that might be out thereyou see that as being a
recommendation.

Speaker 1 (40:16):
I mean it could be.
It just depends on what thecontext is and how it's lined up
.
I mean, if the employer, forexample, had gone to the person
and said I'm looking forproviders that offer packages
that meet the followingattributes, and the person just,

(40:36):
and the person just goes outthere and finds a bunch of those
packages and says here's abunch.
But if, on the other hand, theperson really is saying
reasonably understood, they'rereally saying you should go with
this provider or you should usethis package of investments, or

(40:57):
it depends.
An approach here, brian, is, iffolks may want to look at the
back in, we currently have aninterpretive bulletin out that
deals with the line betweeneducation and advice Right In

(41:20):
96-1, I mean we aren't upendingthat the things that would be
considered education under thatdocument as opposed to advice,
it's still education.
And similarly, if you look atin 2016, when we wrote the rule,
we had a very long set ofprovisions that described how to

(41:43):
draw the line between educationand advice in a variety of
circumstances, including some ofthese platform provider kind of
circumstances.
I don't think I think that thatguidance in those lines are
still in much the same place.
I mean as far as whether you'remaking a recommendation or not.

(42:06):
All of that discussion went tothis narrow question of is
something a recommendation or isit really just education and
guidance?
I think that's still how ourthinking works here.

Speaker 3 (42:22):
I think that's an important point to make, because
there's the individuallytailored element, which is kind
of related to what the questionsI've been asking, but there is
the fresh, more question ofwhether someone's making a
recommendation or they're justproviding education.
I think that's going to be oneof the critical lines that
people are going to be thinkingabout, because it's a fairly.
The scenario I presented to you, particularly in the smaller

(42:45):
plan market, is very, verycommon, as I'm sure you know.

Speaker 1 (42:49):
Absolutely.
And one thing, brian, I'm sureyou're ahead of me on this, but
for anyone else too, this iswhat we're interested in
receiving comments on everyaspect of the rule, but this in
particular seems like aproductive area to me.
If people have specific viewson whether we should say more

(43:12):
about what counts as arecommendation and what doesn't,
whether we should have anexpress test in the statute,
whether we should delineate avariety of scenarios that count
as recommendations and thatdon't count as recommendations
but rather really should betreated as education, we'd be
very interested in hearing, youknow.

Speaker 3 (43:35):
Yeah, I think that could be very helpful, so I
appreciate you saying that.
So we talked about proprietaryproducts and you made it clear
that there is no per seprohibition against them.
There's some language in thepreamble to 2020 to that, you

(43:56):
know, not surprisingly, iscreated a bunch of questions and
some confusion, and so I wantto provide this example just to
make sure that we fullyunderstand what the intent is.
So let's assume you've gotsomeone recommending a
retirement plan product with aninvestment menu that has that

(44:20):
I've suggested for the plansthat they've suggested for the
plan sponsor.
Excuse me, it includes someproprietary products of the
financial services company andsome that are not manufactured
by that same financial servicescompany.
The advisor in this example isan employee of the financial

(44:40):
institution that produces thoseproprietary products.
The compensate they'vestructured this, like many in
the plan world, as you know, alot of the industries gravitate
towards level compensation, inlarge part to address the
concerns that EPS has beenraising for a long time around

(45:03):
potential conflicts.
And the advisor's comp is levelregardless of whatever options
are chosen, and there are no,you know, bonuses or other comp
that are tied to recommendingproprietary products.
It's been the generalunderstanding that this scenario

(45:26):
would have been able to availitself of 2020-02.
Is there anything different ineither the proposed rule or the
exemption that would change thatview?

Speaker 1 (45:37):
That if you did all that you wouldn't you'd be good
to go.
No, I mean, if you've wrung outconflicts to that degree,
certainly that would comply withpolicies and procedures
requirement.

Speaker 3 (45:52):
And there is an.
In fact, for those listeningwho may not have spent multiple
days reading the regulations andthe favorite transactions, like
we have, there's actually inthe preamble an outline of
potential policies andprocedures specific to
proprietary products.

(46:12):
That, I think, is new, correct.

Speaker 1 (46:16):
Yes.
So we specifically wanted togive an example of one approach
to offering proprietary productsthat would work, that we would
view as complying with thepolicies and procedures
requirements.
So we laid it out.
It's not meant to be theexclusive way to deal with it,
it's just meant to.

(46:37):
We want to be crystal clear.
There's you can chargecommissions, you can.
You can limit a menu toproprietary products, as long as
the compensation is reasonableand it's fairly disclosed and
your conflicts are fairlydisclosed.
It's just going to be aquestion of are you complying
with the basic fiduciary?

Speaker 3 (46:57):
Yeah, and just to be clear again, to emphasize my
example, there was a mixture ofproprietary and non-proprietary.
There's also no prohibition ifthe menu is entirely proprietary
.
As long as you know, all of theother policies and procedures
have been complied with correct.

Speaker 1 (47:12):
That's right and you're complying with the
impartial conduct standards.

Speaker 3 (47:16):
Yeah, that's an.
I think that's an importantpoint for people to hear,
because there's folks that areout there suggesting otherwise.
Advice to plan participantswith respect to plan investments
is definitely covered by theproposed rule and this now also

(47:37):
clearly applies withrecommendations with respect to
rollovers.
The plan fiduciary in mostcases is not going to know if a
participant is separatelyworking with an unaffiliated
advisor with respect to thatparticipant's plan account.
The proposal makes it clearco-fiduciary liability still

(48:03):
exists.
So can you just have you guysdiscuss, or can you discuss,
whether and to what degree APSICexpects the plan fiduciaries to
monitor what these other Orissafiduciaries may be doing, who
are now more likely to be Orissafiduciaries under the proposal?

Speaker 1 (48:23):
So what's the kind of scenario you're worried about
here, Brian?

Speaker 3 (48:26):
Well, this.
So right now, you know Advisorstalking to participants about
rollovers.
In many cases, right or wrong,they position themselves so
they're not subject to a RISA.
Now, under this proposal, ifyou're giving advice to a
participant about a rollover,about effectuating a rollover

(48:48):
transaction, almost certainlyyou're gonna be subject to
Aris's fiduciary standard.

Speaker 1 (48:54):
So there's good if you're holding yourself out the
right way and you correct.

Speaker 3 (48:58):
Let's assume all that is it's certainly going to
bring much, many more advisorsand their financial institutions
into being subject to Arisa.
Concerns been raised by planfiduciaries.
You know we're we'reresponsible for the plan.
We don't know If a participantis talking to someone who may

(49:23):
violate the you know the rules,but there we're all.
We're all fiduciaries withrespect to the same set of plan
assets.
Is there some duty to monitorthat we're not appreciating here
because of the potential Gofiduciary liability.

Speaker 1 (49:38):
I mean certainly if it's like an advice arrangement
that the plan has set up or oryou know that that would that
potentially has with it anobligation to monitor.
But if you're talking about aCircumstance where the plan
participant is is dealing withsomebody they've selected, kind
of they're on their owninitiative, I don't I don't

(50:01):
really see when that's, butwhere an extra kind of fiduciary
obligation would come from.
You know, unless I supposetheoretically, you know, one of
the plans fiduciaries was awareof this kind of A relationship
and and was aware that theperson had engaged in some

(50:22):
conduct or something that shouldgive rise to this.
Oh sure, sure but you know,absent, like if I know that the
person's a criminal and theirrecommendations and I know
because they they in fact tookthe money from me and some
previous incarnation yeah, maybethen you had an obligation to
step up and say something.
But by and large, the, the plan,the plans fiduciaries don't

(50:44):
have kind of an overarchingobligation to, to be making
inquiries about who plannedparticipants are working with on
their own initiative and andhow those Relationships are are
going.
I don't believe and okay,certainly this rule doesn't.
I mean that that's kind of acommon problem and the with the

(51:05):
functional test of fiduciarystatus generally, there can be
quite a range of fiduciaries outthere and the obligation of the
plan administrator in the namefiduciary and the investment
committee fiduciaries and thesefolks is is is you know they
should be prudent and theyshould be mindful of, of, of you

(51:27):
know, those things they shouldreasonably know about, but they
don't.
They don't have a duty to startquestioning all of the
Participants about all of thedifferent mischief they might be
getting into on their own.

Speaker 3 (51:38):
Maybe.
Maybe that you know, emphasizesthe importance and certainly
something that we stress as anorganization of plan sponsors
educating participants aboutwhat they should be looking for
as they get closer to retirementand be thinking about when it
comes to their retirementaccounts and what they could be.
You know what they should bedoing In terms of potential

(52:01):
distributions.
Another kind of enforcementrelated question the rule and
this is not new to the rule, butthe the the potential loss of
the availability of theexemption is for ten years is
obviously a very seriousconsequence and you know now

(52:22):
that the proposal the proposalwould be expansive in terms of
the number of advisors andinstitutions that would
potentially fall under theumbrella of Eresa.
So, while these companies havetens of thousands of employees

(52:42):
and, although not common,sometimes employees violate
rules, assuming the institutionotherwise complies with the
exemptions, policies andprocedures and and timely
response to employee violations,can you discuss how Epsa will
address enforcement in thosesituations?

Speaker 1 (53:05):
There's their.
I mean he asked to theinstitution's responsibility for
the individuals making therecommendations.
I mean right, right, I meangenerally.
There's a correction provisionand and and both the 2020-02
exemption 84, 24.
I mean that maybe I should havesaid already the basic

(53:26):
structure here is is, if thisregulatory package moves to
final, final version as it isnow, there's, there's two basic
exemptions available and they'rebroadly similar.
It's just one is forindependent insurance agents and
the other is for everybody, butboth of them, either way, have
correction provisions and andWithin a reasonable period,

(53:51):
after you reasonably should haveknown about a breach, you have
an opportunity to fix it and ifyou fix it, that's, that's fine,
you're good to go and and don'tlose benefit of the exemption
or You're treated as if therethere wasn't a violation of the
exemptions conditions in thefirst place.

(54:13):
And then, as far as just ageneral enforcement strategy for
For this moving forward, Ithink it's fair to say that our
our Efforts, especially early on, would I want to get ahead of
us.
This isn't a final rule yet,but but I mean we'll be focused

(54:33):
on compliance.
I mean people who are workinghard to comply with this
document, and you're dealingwith legitimate issues Of how to
structure arrangements tocomply, resolving arguable
ambiguities and the Regulatorystructure coming up with
approaches that they thoughtwould work.

(54:54):
But but, but didn't?
I mean, we're gonna work withthose people, that's that's
great here.
Yeah.

Speaker 3 (55:02):
I think that's important.
I think it'll you know I'llcertainly reduce some Concerns
that folks, if the rule shouldbecome final, would have with
respect to the potentialconsequences, because you know
Footfalls happen.
I think the principle you'resaying is that as long as
they're not systemic, they'renot being ignored, there's
policies and procedures in place.

(55:22):
You're gonna work with theorganization to make you know,
to help correct things and andperhaps improve the system so it
doesn't happen again exactlyand and there's cure provisions
built into both exemptions.

Speaker 1 (55:34):
You can.
You can fix mishaps.

Speaker 3 (55:37):
So you've mentioned annuities a few times, so I want
to.
I want to talk about that alittle bit because I Personally
am a fan of annuities.
I think they play an incrediblyimportant role in terms of
providing Guaranteed income fortool.
You know really millions ofAmerican workers who Are looking

(55:59):
for some type of guaranteedlifetime income that they can
count on of throughout theretirement and relating to plans
.
As I know you're aware, thisbeen a kind of work done To
develop right retirement incomesolutions for retirement plans

(56:19):
and participants.
We believe at this organizationthat it's it's extremely
important as millions ofAmericans approach Retirement
with assets in their accountsbut no, currently no really
clear retirement income plan.

(56:41):
Prior to the White House rolloutof the proposed rule, the
Council of Economic Advisersissued a blog post specifically
on fixed index annuities.
That I I thank me I franklythought was pretty harsh and we

(57:01):
think, unfairly and incompletelyanalyze the consideration
surrounding the product.
You mentioned one aboutCommissions versus, you know,
advisor based arrangements thatreally don't Move assets around
and continue to charge for longperiods of time, and so, in

(57:23):
light of that and this has comeup some plan sponsors and plan
fiduciary advisors have haveWondered whether EPSA has any
fundamental concerns withannuities or similar lifetime
income products.
Fundamentally so, given thatthese products are integral to
the retirement income solutionscurrently be considered by plan

(57:46):
sponsors and their fiduciaryadvisors.
Can you, can you, address theseconcerns that are that are
being raised right now?

Speaker 1 (57:56):
Yes, I mean it.
Then Certainly both 2020 and8424, as proposed, are available
for the recommendation ofannuities and annuities.
Good annuities Can be animportant part of the solution,
I think, for for people inretirement it's very, very hard

(58:19):
to to figure out how to manageyour the decumulation phase of
retirement.
It's there is a Sense in whichsome of these arrangements and
some of these annuity contractscan kind of substitute to
Imperfectly sometimes maybe, butbut for the loss of the defined

(58:39):
benefit Kind of plans.
I mean they they can provide aguaranteed income stream for
people and in their retirement,and and and and reduce mortality
and other risks for theinvestors.
So they're clearly importantinvestments, and well thought

(59:03):
out, prudent recommendations areimportant and should be
encouraged.
That's not to say, though, thatthere's no concern in leaving
that marketplace kind ofrelatively unregulated by ERISA.

(59:25):
The fact is that indexedannuities, which I think are the
product that was singled out bythe CEA, are quite complicated
products.
I mean, they singled out afairly straightforward version
of a fixed indexed annuity, butthe reality is, in the past
couple decades there's been anexplosion in the number of types

(59:49):
of indexed annuities, of thenumbers of indices that one can
get reflected in indexedannuities on the marketplace and
these are complicated productsand one of the challenges for
them is it's fairly easy for theconsumer to think that if they

(01:00:11):
look at the relevant indexthat's cited in, say, the name
of the annuity product and lookat how it's performed over the
past few years, they have apretty good understanding of
what they're going to bereceiving moving forward.
Except that there's downsideprotection so that they have no
downside, and it's fairly easyfor consumers to end up with a

(01:00:38):
product that they're buyingsomething that isn't exactly
what they expected.
I mean, for example, it's notthe case that you can't lose
money on an index annuity.
Most of the time there's afairly significant period in
which a significant part of yourassets are locked up and if you
try to get them, you're goingto pay a fairly steep penalty.

(01:00:59):
So if you have need forwithdrawal earlier on that's
greater maybe than originallyanticipated, for example you can
end up really really paying thepiper and you can lose money.
There's to understand whatyou're getting from the index.
You have to understand how theparticipation works in the index
.
You have to understand how thecaps work.

(01:01:21):
You have to understand how thebuffers and floors work.
You have to understand, ifthere are, if there's a spread
fee or an administrative ormanagerial fee associated with
it.
You have to understand thatthey're fairly complicated
products and even as a matter ofcomparing with an index, you
need to understand whetheryou're being credited with

(01:01:43):
dividends.
Usually you're not, as comparedto the way the index typically
works.
So it's just.
It's not that any particularcategory of annuity is
presumptively bad or that we'rehostile to these annuities.
What's important to point outis that a regulatory regime that

(01:02:07):
says we are going topreferentially let people
recommend these products andtransactions that may involve
the entirety of somebody'ssavings and do it in a
circumstance where they'reholding themselves out as
somebody who's acting in thecustomer's best interest and

(01:02:28):
giving individualizedrecommendations and nevertheless
have no fiduciary obligationwhatsoever, that's not a good
regulatory regime.
Everyone is going to benefitand everyone's going to be
better off if people recommendannuities.
But when they're recommendingannuities and holding themselves

(01:02:50):
out as having the expertisenecessary to analyze some of
these products, if theyrecommend them in a fiduciary
capacity, which means they'reprudent, loyal, don't overcharge
and don't mislead people.
That's all it's about.
But as far as annuities beingper se problematic, I don't
agree.
I mean with it's Well, I'mgoing to agree with that.

Speaker 3 (01:03:10):
I mean, I think the concern and I recognize this is
the, you know, not always sayingpeople don't appreciate that
the administrations are very bigand complex and EPSA does not
control what the Council ofEconomic Advisers does.
But I think the concern aboutthe CEA blog was that, by

(01:03:33):
singling out this particularproduct, it inferred that there
was something fundamentallywrong about the product, which
you know, to be frank with you,I disagree with because you know
there is.
Let me be clear I recognizethat the issues that you're

(01:03:55):
raising, I think, are primarilyissues of transparency and
making sure that the investorunderstands what it is that he
or she is buying.

Speaker 1 (01:04:05):
They're also brand making sure that the person
making a recommendation isrecommending a product that's
good for the customer.

Speaker 3 (01:04:12):
Fair enough, but I think those would.
Others would argue that the NAICmodel rule is attempting to do
that.
I think you know the reality iswith that particular product.
Obviously, you know, bycontrolling the downside risk

(01:04:32):
right and there is which issomething that a lot of
investors want, they want to beassured that their losses will
not be catastrophic.
And you know, recognizing alsothat there's typically caps that
are the trade-off and thatthere are costs for ensuring

(01:04:52):
downside risk as well astypically some type of death
benefit in the meantimesometimes, that all of those
things have a cost and there'snothing per se wrong with the
fact that those things have acost.
And so I guess what concernedme about the particular blog and

(01:05:14):
the focus on that particularproduct is it's just, in my
opinion, it's distracting fromthe general principle which is
all products should have thisstandard of care.
If there's advice under ERISAand you know we're not saying
one is necessarily worse thanthe other it's really

(01:05:35):
situational and it's really forthe principles, the principle of
best interest, to determinewhat is a good option for a
particular retirement investor,as opposed to saying this

(01:05:55):
particular line of products aresuspect.

Speaker 1 (01:05:58):
Yes, I would agree with your last statement.
I mean, I would urge everyoneto just read, if not the
preamble, read the text of theserules.
There's no thumb being put onthe scale in favor of one
product or another.
What's problematic when itcomes to, for example, fixed

(01:06:21):
index annuities, is the extentto which they are not covered by
a standard that's comparable tothe standard applied, for
example, to a recommendation ofa mutual fund to an ERISA
investor.
We just want the same standardapplying across the board, and
that should be coupled with therecognition that these products

(01:06:43):
are complicated and they'resuited for some folks and
they're not suited for others,and different products within
any given category are going tobe right for some investors
rather than other, and there areconflicts of interest that are
fairly significant in this space, and so it's especially

(01:07:04):
important that people makingthese recommendations be subject
to the standard.
I think that the annuity marketand annuity recommendations in
the long run will benefit froman environment where they are
subject to the same bestinterest standard effectively as
others when they holdthemselves out as giving them

(01:07:24):
advice, and when the people whoreally are making really sound
recommendations of theseproducts aren't kind of put at a
disadvantage by folks whoaren't and who are making
recommendations that are reflectincentives that run counter to
what's in the best interest ofthe retirement investor.

(01:07:46):
I agree with you.
I mean there's no anti-annuitybias in this project.
If they can play an importantand helpful role in people's
retirement, Well, we agree withthat.

Speaker 3 (01:08:03):
So there's a question that's come up relating to the
disclosures of 2020-02.
I just want to clarifysomething, and there's a model
disclosure in the preamble for2020-02.
That's extremely helpful.
So thank you for that, againciting the fact that the

(01:08:27):
individual investmentprofessional is subject to the
fiduciary standards of Title Iof ARESA.
But there's also a specificdisclosure around compensation,
including the right of theparticipant to ask for more

(01:08:48):
specificity with respect to theamount of the comp that the
investment professional orfinancial institution receives.
But the clarification I'd liketo ask is the fundamental
disclosure that a retirementinvestor would receive is not
intended to require the specificamount of compensation, but

(01:09:14):
rather that they, for example,would be receiving third-party
compensation.
Is that correct?

Speaker 1 (01:09:27):
So there's some very basic upfront disclosure that
has to occur about.
Let me just pull up.

Speaker 3 (01:09:47):
And we'll edit some of this pause time out, so don't
worry.

Speaker 1 (01:09:51):
That's probably a good thing, but in general, the
disclosure that's required upfront is the acknowledgement of
fiduciary standard of status,the written statement of the
best interest standard of careand then a written description
of the services that you'regoing to be providing and of

(01:10:13):
what your material conflicts areFor detailed disclosure, by and
large under 2020-02, comes onrequest.
The upfront disclosure aboutyour comp is essentially does

(01:10:34):
the investor pay for it directlyor indirectly?
Are there third-party payments?
Is it commissions ortransaction-based that kind of
thing.
But the specifics are youproduce upon request of the
investor.

Speaker 3 (01:10:48):
I appreciate that.
I think that's how we read itas well.
So, importantly, you in theproposal talk about severability
and obviously you know youcan't comment today on the
general subject of whether ornot there'll be likely to be

(01:11:10):
lawsuits, although I cancertainly say the expectation,
at least on our part, is thatthe likelihood in this area of
someone suing is fairly high.
There is, however, as Iindicated in the preamble.

Speaker 1 (01:11:26):
I'm sorry to hear that, Brian.

Speaker 3 (01:11:31):
You know it is what it is when it comes to this
topic.
I think you understand that thepreamble does have a you know
ask the question aboutseverability, should the role be
challenged, and notsurprisingly, you know the issue

(01:11:52):
that we particularly care aboutare pertaining to advice to
plan sponsor fiduciaries.
We see as being somethingdistinctly different than advice
with respect to individualretirement plan investors.
Can you provide some insight asto what EPS is thinking in this
regard?

Speaker 1 (01:12:13):
On the severability issue generally.
Well, I mean, apart from whatwe said in the preamble language
, this is one of those areaswhere, rather than me telling
you what I think, it would makesense for a court to treat a
severable or not severable.

(01:12:34):
This is another area where Ithink, like the education advice
line, it would be enormouslyhelpful to hear from commenters
if they think there areparticular issues or particular
things that ought to be treatedas severable or, conversely,
that none of this makes sense ifyou strike down this provision

(01:12:58):
and should not be treated asseverable.

Speaker 3 (01:13:03):
All right.
Well, we'll certainly be.
You know, as I indicated, youknow commenting in this respect
because you know the issue ofadvice to plan sponsors is
particularly important to you,know the ARA, and you know
particularly so because, as youindicated, currently REGBI

(01:13:25):
doesn't apply to plan sponsoradvice, the NEIC model rule
doesn't apply to plan sponsoradvice, and so, you know, we've
asserted for, as I think youknow, for close to 20 years,
that this is a regulatory gapthat needs to get addressed, and

(01:13:46):
so we're very pleased that thatdepartment chose to do so.
And you know, also, especiallybecause of all of our efforts,
administrations, congresses,efforts to expand retirement
plan coverage, as well as stateefforts to expand retirement
coverage, you know we'reexpecting hundreds of thousands

(01:14:09):
of new plans over the next fiveto seven years, which is great
news.
We want to make sure that thoseplan sponsors, the small
business owners, are gettingadvice that has the protections
of ARISA.

Speaker 1 (01:14:24):
Right and most plan sponsors are not, you know,
themselves investment experts orretirement experts or
investment professionals.
There, in a lot of ways,they're in the exact same boat
as individual participants orbeneficiaries.
They need help making a fairlydifficult decision and they turn
to people who have professionalexpertise and hold themselves

(01:14:48):
out as such, and it's anunfortunate part of the legal
structure here.
I think that under the currentrule, you know, we can hold
potentially that employerresponsible for the mistake and
relying upon the recommendationthey got, but we can't hold
responsible the person who heldthemselves out as the expert and

(01:15:10):
made the recommendation in thefirst place, and that just seems
like a fundamental unfairnessin the way the thing is.

Speaker 3 (01:15:16):
Yeah, a plan fiduciary should reasonably
expect.
That person giving them arecommendation is also subject
to the same set of standards and, in particular, because they
are, not only are they makingthem that decision for
themselves, as you alluded to,but they're making that decision
on behalf of their employees aswell.

(01:15:36):
It's really important.
So thank you for that, tim.
Thank you so much for your time.
We've covered up.
You know we could do this forsix hours, no doubt I'm not
going to put you through thattorture, but really appreciate
you, your willingness to coverall the things that we did cover
, and I'm sure that we'll betalking more about the subject

(01:16:00):
and look forward to, you know,providing our comments and
discussing it more with you andeveryone else at EPSA and
hopefully moving this ballforward.

Speaker 1 (01:16:11):
It's a pleasure.
Thank you, Brian.
Thank you.