Tim Hauser - The Final Fiduciary Rule’s Myths and Controversies - D.C. Pension Geeks

Episode Transcript
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Tim Hauser (00:00):
investor people who are themselves advisors.
If you're giving advice to theadvisor, that advisor is a
fiduciary, but the one level upfrom that person isn't.

Matt Intro (00:12):
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

(00:32):
secure retirement for millionsof Americans, you're in the
right place.
Welcome to DC Pension Geeks.

Brian Graff (00:39):
Hello everyone, welcome to yet another edition
of the DC Pension Geeks podcastseries, and we've got a big one.
Today we're welcoming back noneother than Tim Hauser, who is
the senior chief staff officerfor the Department of Labor

(01:00):
Employee Benefit SecurityAdministration.
Everyone knows who you are, tim, so we can dispense with the
introductions and we're here toonce again talk about a
Department of Labor regulation,this time around the final
regulation for what thedepartment's been calling the

(01:21):
retirement security rule.
So, tim, thanks for being here.
Once again, we want to kind ofaddress some of the myths, some
of the controversies around thisrule.
We've gotten lots of questionsfrom members across the ARA
spectrum because this rule, inmany respects, becomes effective

(01:43):
in five months and people areactually starting to think about
how to implement and complywith the regulation, which, of
course, I'm sure Tim, thedepartment is glad to hear.
So let's start with some.
I'm going to start generally.
We're going to focus primarilyon the definition of investment
advice, the regulatorydefinition of investment advice

(02:05):
under ERISA, as well as theprivet transaction exemption,
the updates and the new final2020-02.
So, starting with theregulatory definition of
investment advice, one of themajor criticisms that you're
hearing by those who oppose.

(02:28):
The rule talked about a littlebit in the press is the fact
that you guys proposed this inOctober.
It's now the end of April.
How could you have possiblyresponded to the 20,000 some odd
comment letters or comments, ifyou will that were received by

(02:51):
the department, and I wanted togive you an opportunity to talk
about how the department sort ofprocesses all that information
and what you've done to take alook at all those comments to
take a look at all thosecomments.

Tim Hauser (03:07):
Well, so the way I'm taking that in.
I think I heard two questions.
One was how you know this seemsfast to you, and the second is
how quickly we process thedocuments.
I mean, first I just say that a60-day comment period is pretty
normal for a notice and commentrulemaking.

(03:28):
In the context of thisrulemaking in particular, this
is a rulemaking we have a lot ofexperience with.
We've been at this particularset of issues for quite some
time.
We've had multiple hearings onit at this point.
We've been through multiplerounds of comments which
obviously informed our work andmeant that when we were

(03:53):
considering the most recentround of comments, we were in a
position to really move.
You know, we have quite a bitof familiarity with issues and
the people who are submittingthe comments have quite a bit of
familiarity with our way oflooking at it.
But, that said, 60 days is afairly normal period.

(04:15):
I think we got about 400, Idon't know the exact number, it
was a little more than 400, say425 or so 400, say 425 or so
substantive comments.
We got another just shy of20,000 petitions and you know
that I think were grouped intolike three or four different
groups of or no, it was like 14groups of petitions and you know

(04:43):
, and we go through all of them.
I mean we and we also had ahearing during the comment
period and the hearing workedthe way it was intended, in the
sense that we got comments aspart of the notice and comment
process.
That reflected people'sresponse to what people said at
the hearing, which we alsothought was helpful.

(05:04):
But when we looked at thecomments, we got comments that
seemed to cover the entire rangeof issues that the rule
presented.
It is not.
While I've read a lot of thecomments, it does not
necessarily fall on me to readall of the comments.

(05:25):
We have quite a team of peoplewho together have collectively
read every one of them and wehave a pretty formal process for
going through those comments,digesting them, having
conversations about what wassaid, conversations about what

(05:49):
was said and addressing them inthe rulemaking and the preamble
to the rules and the exemptions.
So I think it was a prettyrobust process and I think we
benefited from just an enormousamount of input that, at least
from my perspective and judgingfrom the comments we got, was
quite complete and enormouslyhelpful and, as I'm sure we'll
talk about we ended up making.

(06:11):
You know, we thought that inany of a number of instances
some of the commenters had thethey made points that merited
change.
I mean, we had.
There were a number ofinstances where I think we went
in maybe thinking one thing wasthe best approach and we went
out thinking now we need to makesome changes here based on what

(06:35):
we heard.
We did that.

Yeah, if you read the preamble, obviously there's
a lot of notations to whatcomments have been saying, of
notations to what comments havebeen saying and, as you point
out, there were a number ofchanges in response to those
comments, including some changesbased on comments that we
submitted, which we appreciated,and so maybe let's talk about
that At a high level.

(06:57):
Tim, focusing again first onthe regulatory definition of
investment advice, can youhighlight what some of those
changes were versus the proposedrule?

Tim Hauser (07:11):
Yeah, so let's.
I tried both to answer yourquestions and to answer the
question I wish you'd askedBrian, that's okay.
So let's start there.
Before I say what's changed,let me tell you what stayed the
same, just to kind of set.
And what's mainly stayed thesame is there were three broad

(07:36):
principles that I think wereimportant to us, and you see
them in the proposal and thefinal, and those principles are
you know, one, if you're holdingyourself out to retirement
investors as a person who'sgiving individualized advice
intended to advance their bestinterest and making a

(07:59):
recommendation kind of on, youknow, as in the context of
somebody's professional bestinterest advisor, that you ought
to be held to that.
That's kind of notion numberone, which, as an ERISA matter,
generally means you're afiduciary.
The second thing is well, ifsomebody is a fiduciary and

(08:20):
they're either a fiduciary to aTitle I plan or they have
conflicts of interest thatrequire a prohibited transaction
exemption, what should theircore obligations be?
And they should be, in our view, that they're going to be
prudent, you know, adhere to anexpert standard of care.
They're going to be loyal,which means they're going to put
the customer first.
They should not overcharge them.

(08:42):
They need to charge no morethan reasonable compensation and
they shouldn't mislead theinvestor.
That, coupled with policies andprocedures to make sure those
things happen, and a fiduciaryacknowledgement and the
exemption big picture, that'spretty much what this project
boils down to.
If you hold yourself out, isn'tit a best interest advisor

(09:05):
that's acting in the customer'sinterest?
You should be that.
And what does that mean?
That means you should beprudent, loyal, not overcharge
and not mislead people.
And then the third premise ofthe project was that the
retirement investors are goingto best be served if it's a
uniform compliance framework forretirement investors.
If you're giving advice in theretirement space, where you're

(09:28):
actually acting in this kind ofposition of trust and confidence
with respect to the investor,really you should play by the
same rules, regardless of whatproduct you're recommending.
People are just as deserving ofadvice that's prudent, loyal,
doesn't involve overcharges ormisleading them if they're
selling insurance as if they'reselling securities or if they're

(09:50):
selling commodities.
It really shouldn't matter.
Those core obligations, whichis what this project mainly
requires those should applyacross the board and all
retirement investors deservethat if they're in this
relationship of trust andconfidence.
So, big picture, those thingsstayed the same, but a lot else

(10:13):
changed quite a bit, and juststarting with the basic
definition.
So we really were trying, whenwe wrote the definition of who's
a fiduciary advisor, to capturethese relationships of trust
and confidence.
But in the proposal one of theways we did that was we set up
three different contexts inwhich we said if you're in one

(10:34):
of these contexts you're goingto be a fiduciary.
And all were, in our view,circumstances where somebody is
in this kind of relationship oftrust and confidence.
But one of them was if thecustomer is an entrusted
discretionary investmentauthority with respect to any of
your assets, you should, youknow to you or your affiliates,

(10:56):
you should be treated as afiduciary.
We got lots of comments backthat said you know, we can
hypothesize for you any of anumber of circumstances where
that would not be the case.
Parties would not really havethat kind of trust and
confidence relationship.
No reasonable person would havethought they were in that kind

(11:17):
of relationship just because anaffiliate or you know, a
different account involve thatkind of relationship and that we
think you're overbroad in thatsense.
And so we struck that provisionfrom the definition.
So that's gone, that's nolonger there.
We modified.

(11:37):
The second context was focusedon this notion of individualized
advice and from somebody actingin your best interest.
We changed that in a number ofways.
The new test I will read it toyou because I think it's
important, but it's the personmakes professional investment
recommendations to investors ona regular basis as part of its

(12:00):
business.
The word professional there isnew.
We added it.
We wanted to stress that we'renot talking about an HR guy, you
know, making a recommendation.
We're really talking aboutsomebody who regularly makes
investment recommendations topeople as part of their business
.
So that's one.
And we said that that personhas to make a recommendation and

(12:23):
the recommendation has to bemade under circumstances and
this language is all now new.
That would indicate to areasonable investor in like
circumstances that therecommendation is based on
review of the retirementinvestor's particular needs or
individual circumstances,reflects the application of
professional or expert judgmentto the investor's particular

(12:44):
needs or individualcircumstances, and that it may
be relied upon by the retirementinvestor as intended to advance
a retirement investor's bestinterest.
That's a lot of words becausethere's a lot packed in there,
but basically what we're tryingto get at is this needs to be
somebody who regularly makesinvestment recommendations as

(13:05):
part of their business, it'stheir profession, it's what they
do and it's an objective test.
A reasonable investor, lookingat the circumstances, would
conclude that this person isgiving individualized advice,
they're applying theirprofessional judgment to the
customer's individualcircumstances and they're
holding themselves out as actingin the investor's best interest

(13:28):
.
We think if you do all of thosethings, you really are in a
relationship of trust andconfidence in the investor, and
the investor has a right toinspect that you're going to be
prudent, loyal, not materiallymislead them and not overcharge
them.
So that's the second test and,as I said, it's been revised in
significant ways.

(13:48):
The third revision to thedefinition was as before.
There's a provision that saysif you specifically say I'm a
fiduciary, you are.
But we narrowed it because thefact is, who is or isn't a
fiduciary?
The question of whethersomebody is a fiduciary kind of
depends on, well, what legalregime are you talking about?

(14:09):
Different legal regimes use theword fiduciary to cover
different kinds of conduct anddifferent relationships.
So we weren't trying to pick upevery time somebody said they
are a fiduciary in one of thoseother capacities.
So we amended it to say ifyou've represented to the
investor that you're a fiduciaryunder Title I or Title II of

(14:31):
ERISA.
So the idea is are you holdingyourself out literally as an
ERISA fiduciary, so that's it?
Are you doing thisindividualized best interest
advice or did you tell theperson you're their ERISA
fiduciary?
If you did, you're picked up.
Now.
Please interrupt me if I'mgoing on too long, Brian.

No, it's okay.
I think this is important.

Tim Hauser (14:52):
information people should hear Are there other
changes and I want to again thisis one of the criticisms.
This is in response to avariety of comments, but one of
the critiques we got is we'renot sure if you guys have an
objective test or a subjectivetest here, and it's important to
us that it be objective becausewe need you know.

(15:12):
We shouldn't be governed by theunreasonable expectations of an
investor who maybe thought wewere in a certain kind of
relationship, even though nobodyelse would have thought that,
and so we fix that.
The rule, as before, says thatyou can have disclaimers, but
you have to make sure thatthey're consistent with the way

(15:34):
you're holding yourself out,otherwise you can't have a
boiler plate disclaimer, say,look, I'm not your best interest
advisor, but then have all yourother communications, your
advertisements, your everyinteraction with the customer
point in the exact oppositedirection.
If you don't want to besomebody's best interest advisor
, then don't be it, but beconsistent.

(15:56):
There's a new provision that weadded that underlines the point
that a sales pitch that doesn'tmeet the test above is out, and
we thought that was importantbecause it really is the case
that you can make arecommendation under this rule
and if you fail the test Idescribed.
You know you neither said youwere a best you, neither said

(16:18):
you were an ERISA fiduciary, noryou held yourself out as giving
individualized best interestadvice.
You can make a recommendationand if you fail those tests
you're not going to be afiduciary and you're not going
to be subject to theseprovisions.
That's implicit in thestatement of the rule itself,
but it deserved being broughtout, partly because it's

(16:40):
different than the way that thesecurities law work.
Under Reg BI, if you make arecommendation to a retail
investor and you're a brokerdealer, you're subject to the
best interest standard.
You know kind of period.
It doesn't matter whetheryou're in this kind of trust and
confidence relationship.
We felt under the Fifth Circuittest that's not an option.

(17:00):
I mean we wanted to stay withinthe Fifth Circuit's opinion.
We didn't do that.
It is possible to make arecommendation and fall short of
meeting this test and we domake the point that if that's
the case you're not a fiduciaryDo you mind if I interject that
Because you said something thatI think is a nuance that I

(17:23):
believe most people don'tappreciate.

I think what I heard you say is that your
definition of what constitutes acovered recommendation for
purposes of ERISA is actually inmany cases narrower than SEC
Reg BI because of thatexpectation that it's reasonable

(17:51):
for the investor to believethis is a relationship of trust
and confidence.
Is that accurate?

Tim Hauser (17:57):
Yeah.
So I assume all your listenersthis isn't a RISA geek program
know that we lost in the FifthCircuit in 2016 when we tried a
fiduciary advice rule.
The Fifth Circuit had many,many criticisms of that 2016
rule and we did our level bestin this rulemaking to heed what

(18:24):
they told us.
And one of the things they toldus is this isn't it's not
enough that you just made adirect recommendation, for
example, to a retail investor.
There has to be the right kindof relationship.
That's not true of Reg BI, regBI.
You'd make a recommendation toa retail investor, you're picked
up and our rule it's gotta bemore than that.

(18:45):
You have to make therecommendation and there has to
be this kind of relationship.

And if you're a broker dealer and you're using
you know.
One of the concerns that brokerdealers have, understandably,
is do I have to have differentpractices and procedures and
policies in place to evaluatewhat's covered under this
definition versus what I've beenusing now for several years for
Reg BI?
And what I'm hearing is no, butin fact you may end up having

(19:13):
more things being treated ascovered by the final rule than
might be necessary because ofthe fact that Reg BI is broader
in terms of what constitutes acovered recommendation.

Tim Hauser (19:25):
Reg BI is broader in terms of what constitutes a
covered recommendation, right, Imean.
So the SEC rule is both broaderand narrower.
Right, it's broader, as in thesense of picking up every
recommendation to a retailinvestor about a security is
broader than our rule.
But obviously we pick uprecommendations that don't
involve securities.
We pick up recommendations topeople who aren't retail

(19:51):
investors the small businessperson constructing a 401k
lineup, the planned fiduciariesof all sizes.
So what I would say is we arebroader in that sense and we
pick up all investment productrecommendations and we are more
uniform with respect toretirement investors, in that

(20:13):
everybody is subject to what'sessentially the same rules, but
there are ways in which the SEC,you know, when it comes to
recommendations to retailinvestors, is broader, and I
think that's right.

Anything else you want to cover in terms of
changes?

Tim Hauser (20:30):
Yeah.
So other changes.
We also don't go into greatdetail about how to distinguish.
Something that's important isthat for advice, for a
communication, to count asfiduciary advice, there has to
be a recommendation.
And a recommendation really isa call to action.

(20:53):
It's you know, you're tellingthe investor essentially you
should do this or don't do that.
Or you know, leave your moneywhere it is, move it, pursue
this investment strategy.
It's a call to action in thatsense.
So we follow the SEC guidancein that sense we also reaffirm

(21:15):
in the preamble but in the regtext as well, we reaffirm that
mere information or educationdoesn't count as advice.
So before we said that in thepreamble.
So I don't think this is a hugechange in position, but we added
to the text of the reg that youknow mere information or
education isn't advice.
So if you're just telling peoplehere's, you know, here's the

(21:38):
performance history of thisinvestment, here's what the fees
and expenses are, here's whatyour fund lineup is, here are
the attributes of thoseinvestments, if you're doing
some very basic giving peoplesome very basic investment
principles, if you're givingthem some of the conventional
wisdom about you know takingadvantage of your employer match

(22:00):
and you know makingcontributions to the plan and
the like.
That's not what we're talkingabout as an investment
recommendation.
And if you again, since this isa RISA geek audience, I'll use
shorthand, but if you thinkabout IBE 96.1, which is the

(22:22):
education information guidancedocument as well, for that
matter is our 2016 rulemaking,where we described quite a few
things that we thought wereinformation or education rather
than advice.
Well, we didn't just take allthat stuff and put it in the
text of this rule.
Those principles still apply.
So if you're looking forguidance on the line between

(22:45):
education, on the one hand, orinformation on the one hand and
the advice on the other, youshould look to those sources.
We also, in the preamble,invite comment about whether we
shouldn't update those documentsand issue separate guidance on,
to get more detail on whatcounts as mere education or
information, as opposed tofiduciary advice.

So let me drill down a little bit on that, if
you don't mind me interrupting,because I think that's an
important point that you justmade, that you believe
professionals in the industry,because there's lots of
questions obviously coming up interms of where that line is
drawn and people's perceptionsof.
Maybe you've changed that line.

(23:27):
You keep on reiterating thatthat's not really what the
intent of the rule was.
Rule per se, there'sinformation in there from a
contextual standpoint that willgive people a sense of the fact

(23:48):
you know what is and what is noteducation, because one example
it sounds like you agree withthat, correct?

Tim Hauser (23:54):
Yeah, I mean the way I would put it probably is
absent.
Some further guidance here.
One thing I can tell you forsure is the department is not
going to be taking the positionthat something that we would
have treated as information oreducation in 2016 or under 96.1,
we're not going to say thatthat stuff is fiduciary advice

(24:16):
without, like, a new rule or newguidance or something.
You should be confident thatwe're not trying, as part of
this project, to move any ofthose lines.

I believe in 2016,.
There was a specific exception,because we've gotten this
question More and more providers, advisors, record keepers are
sending individualized emails toparticipants.
Hey, you're only saving thispercentage of your pay.
It's less than the match rate.
You should consider going up tothe match rate and under the

(24:49):
2016 proposal, that was notconsidered advice.
And what you're saying is it'snot considered advice here.

Tim Hauser (24:56):
Yes, and I cannot even imagine a scenario in which
we're going to tell somebodyyou're in trouble for telling
people to take advantage of that.

That's right Good, I'm glad.

Tim Hauser (25:06):
We support savings.

We share that with you.
And then and I guess kind ofrelated to this, to that
question is what I would just.
I mean a fairly common scenariowhere you've got a plan advisor
, you know their job is to bethe plan advisor, they do an
enrollment meeting and you knowsomebody comes up to them and

(25:32):
they are asked you know somequestions.
Hey, what should I do?
Here's a little bit of mysituation.
And the advisor, or someone onthe advisor's team off the cuff
kind of suggests hey, you mightwant to consider this.
You know target advice given tothat.
You know one or twoparticipants that might come up

(26:08):
at the end of an enrollmentmeeting.
I guess the question is is thatyou know it is somewhat more
individualized, but there's alsoa provision in the rule that
says that you have to get paidfor the advice in order for it
to be covered and you've gotthis sort of but for standard

(26:30):
and so you're not.
The advice is not in thisinstance, being given in a way
that they're being paid becauseof that particular incidental
advice, if you follow what I'msaying.

Tim Hauser (26:46):
Well, not for sure I mean.
So I think I would need of thearrangement here.
Is there's an expectation thatthe guy's going to field these
questions, and that is part ofthe arrangement.

(27:07):
From time to time he's givingkind of individualized advice
and you know it's kind of partof his service arrangement with
the plan.
Then I would say, well, if hetripped through all the elements
of the test and he made aspecific recommendation, it's
going to count.

I don't know from your hypothetical that I exactly
heard a recommendation there,and the context I think matters
a lot too about whether he'sreally holding himself out as
giving kind of you know bestinterest, thoroughly, thorough
advice that would be areasonable person, would think

(27:47):
is is is the relationship oftrust and confidence, as opposed
to sort of hey, what do youthink about this?
And that you know I, you knowthere's always going to be some
facts and circumstances here andin general people have been
hesitant, based on 96.1, to kindof cross over that line.
I just wanted to see you knowthe degree of softness that

(28:09):
exists when you know thesesituations fairly typically
happen.

Tim Hauser (28:15):
Yeah.
I just yes, I mean, there isit's.
If you want to be absolutelysure you're not a fiduciary,
then I think you want to.
You want to shoot for a lot ofclarity on whether you're giving
individualized advice andwhether you're acting in the
customer's best interest.

You want to be awfully careful about holding
yourself out, as you know, in away that the world that
individualization, you know,based on the professional review
of an investor's particularneeds or circumstances, is
really key to your approach here.
And you know we have beengetting lots of questions

(28:59):
related to hire me situationsand you know you were asked by a
lot of commentators for a hireme exclusion specifically.
Do you want to talk a littlebit?
Why you didn't, why did you not, why did you choose not to do
that?

Tim Hauser (29:17):
Well, there is.
I wouldn't say we chose not to.
I wouldn't call it an exception, but if you look at the
definitions, I've covered whatcounts as investment advice.
In the first place, we sayrecommendations of other people
to serve in an investment role,including in an investment

(29:42):
advice role, but not toutingyourself.
You can tout your own servicesto somebody.
You can negotiate for your owncompensation in a non-fiduciary
capacity.
What tends to be challenging inthis marketplace, this um, in
this marketplace, is the twothings tend to move hand in hand

(30:02):
.
An awful lot.
You get people at the same timethat they're touting their own
services, um and andrecommending that you use them,
which is not fiduciary in ourview.
They're also making investmentrecommendations about pursue
this kind of account, pursuethis investment strategy, invest

(30:25):
in these things.
Don't invest in that hold,don't hold rollover.
Those things are all fiduciaryand the communications tend to
be mixed a bit.
But you absolutely can saythere is no one better than
Brian Graff for advice.
Come to Brian, I'm worth extraand that's not going to get you

(30:51):
in fiduciary and again, I thinkwhat you're saying is similar
almost to some degree, like thewhole education advice line.

As long as the degree to which you are avoiding
those individualizedrecommendations that are based
on the particular needs of theretirement investor, the more
likely you're not going to beseen as quote providing
fiduciary advice and it's onlybeing viewed as a hire me or
sales conversation.

Tim Hauser (31:21):
Yeah, I mean.
Well, the recommendation does.
This needs to be individualizedadvice, and obviously I mean
none of these concepts.
We're all lawyers probably onthe call.

Well, no, not on this.

Tim Hauser (31:35):
There's lots of non-lawyers here on the call on
the, on the, not on this.
There's lots of non-lawyershere.
Well, we're all in the business, but.
But everybody is capable offinding ambiguities at the
margins.
But but that's but.
This is a requirement forindividualized recommendations.
So, so that you're not going tobe a fiduciary unless you said
I'm, I'm.

This is a fiduciary communication Under Title I of
the code.
So you mentioned other personsrecommending somebody else.
That's not a sales transaction,that's not a hire me
conversation.
So just to clarify, if I'mrecommending another advisor in

(32:19):
an affiliated organization, youknow, let's say I'm a plant
advisor, I'm recommendinganother advisor in the same firm
that is going to do your.

Tim Hauser (32:30):
If you're, if you're recommending your firm, that's,
that's that's covered.

That's covered.
That's right.
Okay, and this rule shouldn't,and, consequently, based on what
you just said, the fact thatyou have I'm sorry, when you
said that's covered, I meanthat's not fiduciary.
Correct, per se.

Tim Hauser (32:51):
We are communicating on this.

Yes, unless of course you then drift into the
individualized recommendationand similarly, if the fact that
you have an existing fiduciaryrelationship shouldn't matter
either.
So I'm a planned fiduciaryadvisor, I'm recommending.
A participant says, hey, I needto give, I'm interested in
giving advice.

(33:12):
I say, you know I don't do that, it's not part of my
arrangement.
But I'd like to recommendAdvisor X if you're interested.
And once again that's a hire meconversation and then that's
not viewed as another person.

Tim Hauser (33:29):
I'm following you, you're recommending, you're,
you're, you're actuallyrecommending now another firm or
another.

No, no, same firm, I'm just it's.
I already have, I'm a planfiduciary, I'm a participant.
Comes to me.

Tim Hauser (33:43):
You're saying, you're saying you should go, you
should, you should we're.
We're good for this advice, notme personally, but my firm is
Correct, same thing.

It's a.
It's a hire me conversation.
You also mentioned disclaimersand just to clarify there, you
know, once again, hinging onthis individualized
recommendation, if I'm a planadvisor and I'm my plan

(34:12):
investment committee isinterested in a managed account
solution, I want to suggest ourfirm to do it myself to do it I
can provide examples of whatI've done for other plans.
But as long as it's not anindividualized recommendation
based on the particular needsand circumstances of that
particular plan client, thenit's again, you can make a

(34:36):
disclaimer and it's just a hireme conversation.

Tim Hauser (34:39):
But you're saying now that the examples you're
giving are of like portfolioallocations.

Yeah, exactly, here's how I've constructed
managed accounts for other plans, as an example of what I would
do for your plan.

Tim Hauser (34:55):
So I think it's very facts and circumstances.
I mean, it really is this kindof objective test.
What would a reasonable personthink you're doing?
I mean there is kind of a wink,wink, nod, nod sort of way.
I could be imagining yourhypothetical where you're really
suggesting to the customer andthe reasonable customer is going

(35:16):
to say, no, this guy's tellingme this is what I should be
doing.
On the other hand, there's thefacts and circumstances test
where you said this is the kindof work I've done for other
folks.
Here's the kind of strategiesI've pursued.
Here's my references.
You can go talk to them, and I'dbe happy to do this kind of

(35:39):
work for you too and tell youwhat's right for you.
But we're going to, but I'm notdoing that just yet and you can
avoid.

And I'm not doing that and, as such, you know,
what I'm presenting to you isnot.

Tim Hauser (35:53):
You know, I'm not purporting to give you
individualized advice and I'mnot purporting to give you a
recommendation on how to advanceyour best interest.
You know, I'm just I'm lettingyou know that you should hire me
and and I have all of theseskills and I've applied these
skills to do all these differentthings.
I mean that is one thing welearned from this, that that I

(36:13):
learned I probably it was moreme than some of the members of
the team here but when I thinkabout hiring people, you know
I'll look at writing samples andthe like, but and I'll check
references.
But I don't typically like sayyou know, I've got some briefs

(36:34):
on a reg project, do I'd likeyou to write the briefs and do
the reg project for me and thenI'll take a look at them and
decide whether to hire you forthat role.
I mean that would just be odd.
What you do is I look at theircredentials, I interview them
about their skills and theirexperience, I check the
references.
But we did hear from a lot ofcommenters who said, yeah, but

(36:56):
in the investment managementworld it often doesn't work that
way.
The way we sell our services inthe very first instance as part
of the request for proposal, iswe literally give the customer
very specific advice based onwhat they told us about their
individual circumstances.
We were not comfortable saying,well, that's never going to

(37:19):
cross the line and be advice.
If you're really givingindividualized advice, you're
telling them this is what'sgoing to advance your best
interest and you end up gettingcompensated for it.
That's fiduciary.
On the other hand, if the RFPis about you being an investment
manager, we gave a specialexemption that essentially just

(37:42):
says if you're going to be there, if you gave the advice in the
context of an RFP and you signup to be their investment
manager, as long as you wereprudent, loyal, didn't mislead,
didn't overcharge, that's fine.
You don't have to adhere, youdon't have to do the disclosures

(38:04):
, the policies and procedures,the other requirements that are
in that exemption.
So that was responsive to that.
One other change to the advicerule that that's worth I mean to
the advice definition that'sworth highlighting is the
definition of retirementinvestor.
That changed too.
The concern we were hearing wasfrom there are a number of
folks who develop tools, giverecommendations, you know,

(38:31):
provide guidance to people whodon't actually make the
investment decisions for theplan, but rather give investment
advice themselves to the plans.
We ruled that out and said thatthat doesn't count as fiduciary
advice.
You know we're excluding fromthe definition of retirement
investor people who arethemselves advisors.

(38:52):
If you're giving advice to theadvisor, that advisor is a
fiduciary, but the one level upfrom that person isn't.
The idea was, to us, aretirement investor into this
project is somebody who'sactually empowered to make
investment decisions and to takeaction based on the advice,
rather than the person who'sgoing to in turn make advice.

(39:15):
And I think that was responsiveto those comments and concerns
from people who kind of arewholesalers, right.

And also sub-advisory work.
That was also very a lot ofcomments that the rule as
proposed could have swept inthat sort of that B2B type of
advice relationship where theprincipal plan advisor is
relying on other folks toprovide some advisory work and

(39:43):
what you're saying is the planadvisor, advice to the plan
advisor isn't.
The plan advisor isn't aretirement investor if they're
not empowered to make actualdecisions on behalf of the plan.

Tim Hauser (39:58):
Yeah, so just going on with some changes, because
there are some important ones inthe exemption that I think are
very Before we do that, let mefollow up with a few more
questions on the rule.

So you mentioned one of the key changes was
adding the word professional tothe investment you know in
advance of or in connection toan investment recommendation,
and that was in response toconcerns that we, on behalf of

(40:30):
PSCA, some others have maderegarding the rule potentially
sweeping in HR.
Folks who are often talking toparticipants about their
distribution options Actuaries,who are always worried about
things are often asked toprovide advice with respect to

(40:53):
the timing of a lump sumdistribution.
To the timing of a lump sumdistribution.
It's not really the cornerstoneof what their job is in terms
of evaluating the funding rulesand the funding requirements of
a defined benefit plan.
But, as you point out, in therule the advice respecting
distributions is covered,including distributions with

(41:15):
respect to defined benefit plans, and so you know, actuaries
certainly are professionals, andthe concern is, if they're
doing this sort of incidental toyou know their primary role as
an actuary, are they potentiallycovered by the rule?

Tim Hauser (41:33):
So that's an interesting question.
That's an interesting question,I mean here's.
What I would say is that let'sgo through all the things that
have to happen for an actuary tobe a fiduciary in that context,
I think and also let's just saya word about what the
implications are, because you'rehypothetical.

(41:55):
I'm not hearing any prohibitedtransaction there.

Well, let's assume the plan assets are paying for
the actuary's fees.

Tim Hauser (42:01):
Yeah, but I'm also assuming the actuary doesn't get
more or less based on theanswer to his question.
That's correct, right?
He's just getting whatever thefee is for the actuarial
services.
So there's not really aprohibited transaction there.
The question is just but areyou it's Title I, it's advice to
a Title I plan and you'resubject to Section 404 of the

(42:25):
statute, which includes prudenceand loyalty, and you know all
of the ERISA obligations andmaybe they're concerned about
that.
So they don't have theprivative transaction provisions
, they don't have to worry aboutcomplying with 2020-02 or 84-24
.
But could they trip the wire?

(42:46):
Well, if they regularly aremaking recommendations about
here's when you should make adistribution.
So that's the the firstquestion.
Are they actually making arecommendation as opposed to
just saying look, you want me todo some modeling for you run
some.
Give you some some calculationsof what you know the

(43:10):
implications are likely to be inlight of current interest rates
and it falls short of arecommendation as to timing,
then it's not going to befiduciary.
But if they actually make arecommendation, then potentially
they're a fiduciary, butthey're going to have to give.
I'm going to assume, for sakecase for under your hypothetical
, that they did not say I'm aTitle I or Title II fiduciary.

(43:32):
If they did, they're faked up.
But assuming they didn't, youknow they'd have to be giving a
recommendation based on theindividual circumstances of the
plan, based on theirprofessional judgment.
They probably are right.
I mean they're looking at thespecifics of the plan, they're

(43:54):
making the individualrecommendation, but they also
have to be holding themselvesout as acting in the best
interest of the plan effectively.
I mean they're giving thisadvice to advance the best
interest of a retirementinvestor.
So a participant or the plan ora fiduciary hypothetically they

(44:15):
could do that.
They might not do that Ifthey're paying, if it's a plan
fiduciary looking for theguidance as opposed to the
sponsor, and the plan fiduciaryis, as I guess would be the case
, if the plan assets are payingfor it.
If plan assets aren't, you know,if assets are paying for it and
the question is really what'sin the employer's best interest?

(44:37):
Then I have a whole set ofother issues for the employer.
But you know, if they'reholding themselves out that way,
they could potentially be afiduciary if they're compensated
for the recommendation.
And there I think it's aquestion of like what is this
arrangement with the plan?
Is this part of the servicesthat are being provided to the

(44:59):
plan and compensated?
Do they include?
You know that one of the yeah,one of the services I'm paying
for here is I want you to giveme recommendations on the best
approach for the plan withrespect to timing of
distributions.
If it is, they could get pickedup, but they have to trigger.
The actuary is gonna have tokind of trigger those things to

(45:19):
be a fiduciary.

And you're getting to the but for question too,
which it does come up quite abit if, in that instance you
know, in many cases the actuaryreally isn't getting incidental
compensation for doing this, itmay not even be part of the
arrangement.
They're just, you know, tryingto be helpful.

Tim Hauser (45:38):
Yeah, but if there's an understanding that part of
the arrangement they're just,you know, trying to be helpful,
yeah, but if there's anunderstanding that part of the
services that they're gettingpaid for is to answer this kind
of question, I don't know howsanguine I'd be about.

Understood, and that's why we're asking the
question.

Tim Hauser (45:53):
So I think it's something that actuaries need to
be paying attention to.
There's another series ofquestions to.
There's another series ofquestions, I do think, in a lot
of these transactions thatinvolve professionals talking to
plan fiduciaries you have a lotof.
To some extent, the keys arethe parties can structure this
arrangement to avoid fiduciarystatus.
It's very easy for them toavoid holding themselves out as

(46:18):
kind of best interest advisorsif that's what they want to do.

But also Tim.
It's very common for them to betalking to participants about
this.
Participants may ask that, andso that's different right.

Tim Hauser (46:29):
Right, and you do kind of the same analysis,
exactly, I think.

So a whole series of questions around the platform
provider discussion.
In the final rule Again, a lotof it having to do with hinging
on this recommendations based onthe review of retirement
investors' particular needs andindividual circumstances.
So let me give you an examplewhich is very common.

(46:56):
A platform provider offers themarketplace, either through
advisors or direct-to-plansponsors, a list of, let's say
there's, 10 major investmentcategories large cap, small cap
and in those 10 major categoriesthey offer six or eight

(47:18):
different investment options andit's the plan sponsor's job to
select one from each categoryand that becomes the constructed
plan menu.
And the question is repeatedlyasked is that, you know, because
it's you know, it's not thefull universe of Q-SIPs, it's a

(47:39):
you know more, let's say, 60options for the participant to
choose sorry, for the plansponsor to choose from.
Does that?
Where is that in terms of theline between individualized and
a product offering?

Tim Hauser (47:56):
So I mean so, just so I understand the hypothetical
here.
So you have a platform providerand essentially they're saying
to the plan you can choosebetween any of the following
lineups, is that?

No, no, they actually.
That actually does exist.
So let's say there's threedifferent lineups, or they offer
, you know, the major asset, themajor investment categories,
and you choose one from eachcategory and they'll give you
like six options for each tochoose from.

(48:29):
Does that make sense?

Tim Hauser (48:34):
Yeah, I mean I think everything is going to hinge on
what the nature of thecommunication is.
I mean, certainly, if whatthey're saying is, look, I've
looked at your plan,circumstances, the investments

(48:54):
I'm putting forward as in yourinterest, based on your
circumstances, they could crossthe line.
If, on the other hand, thenature of what they're doing is
just saying, I mean there are avariety of ways a factual
scenario could play out.
The employer could say, look,I'd like to know a bunch of

(49:28):
funds that meet the followingattributes.
And they say here's what we'vegot that meets those attributes,
not fiduciary.
They could say you know, I'vegone through the universe of
investments and the following,as far as I'm concerned, you
know, after looking at yourcircumstances here, these would
all be great for you, they allare in your best interest, or
kind of an equipoise.
I mean you know that wouldprobably be fiduciary.
It's very.

(49:48):
The more options that are beingoffered up and the less
individualized the advice is,the less likely you have a
recommendation or you've beenpicked up by the rule.
You know.

So let's carry this a little further.
Chris, in the preamble youtalked about PEPs and typically
PEPs small market product.
There is a one lineup.
There is a lineup and you knowsomeone could be an advisor
saying, hey, here's a low costoption for you to consider, and

(50:22):
you know there's, there's andhere's a low cost option for you
to consider and it has aspecific list of you know one
lineup to choose from.
But it's not like the advisorsaying I've evaluated each of
those options and I believethese investment options are in

(50:43):
your best interest.
It's merely I'm suggesting thisas a product for you to offer
as a 401k plan.
You seem to be suggesting inthe preamble that that would not
be considered an individualizedrecommendation.
Is that correct?

Tim Hauser (51:00):
Yeah, I mean I may be just having a hard time
following all the hypotheticalsor I may be reading more into
them than what you're offering,but I mean so just the way I'm
thinking about it and then tellme if I'm answering.
I mean one.
You can offer a platformplatform and you can do that
without making a recommendation.

(51:21):
This is just.
Look, I have a platform here.
I have the investmentsavailable that I do.
I think they're good, but ifyou want advice on whether this
is right for you or which onesyou should pick from what's
available on my platform.
That's not what I do.
You should really, if that'syour scenario.

(51:44):
That's not fiduciary advice.

So you can be like with a PEP.
You can be.
This is the product.
This is a good, low cost way tooffer 401k plan.
I'm not giving you advice withrespect to the investments per
se.
That's obviously.
What you're telling us is thatthat's obviously not an
individualized recommendationthat is subject to the rule.

Tim Hauser (52:08):
Right.
And then, on the flip side, you, you, you can go the other
direction.
You can tell somebody I havethis, this product, I have this
platform and this is exactlywhat's right for you.
Let me tell you why you shouldinvest in this.
Then you get compensated.

(52:29):
On that basis.
You're likely tripping the wire.
It's very context dependent andthe parties have some ability
to define what that relationshipis going to be.

I think in that context, let's switch gears and
move to the PTE 2020-02.

Tim Hauser (52:46):
Yep.
So there are significantchanges in the exemptions and I
just want to make sure we don'tlose them, but that, to my mind,
probably the most important areways in which we've expanded
the scope of relief under theseexemptions.
There are just two exemptionsnow.

(53:10):
Again, our goal was to get asmuch uniformity as possible in
this marketplace, so everyone'scompeting on a level playing
field centered around bestinterest to the extent they have
conflicts or they're givingadvice to a Title I plan, and so
there are two exemptions.
One is broadly available foreverything, essentially.

(53:33):
The other exemption is reallytailored to independent
insurance agents and is meant todeal with the special issues
for people who are independentagents and aren't, you know,
direct employees of theinsurance company whose product
they recommend.
They recommend multipleinsurance companies' products
and don't really have thatemployment relationship with any

(53:55):
of them.
That we thought there were sometweaks we had to make to make
an exemption there.
But, broadly speaking, now2020-02 is the big broadly
available exemption.
You can recommend anythingunder that exemption.
As a practical matter, you canalso recommend insurance
products.
You don't have to use 8424 atall the independent agent

(54:19):
exemption if you don't want.
But probably the most importantthing about 2020-02.
Now and this is a change iswe've expanded its scope.
It used to be limited in therange of products you could
recommend.
We decided that, in light ofthe exemptions impartial conduct

(54:41):
standards, these duties ofprudence and loyalty and not
overcharging and not misleadingyour customers and the
acknowledgement by the firm thatit's acting in a fiduciary
capacity and its oversightresponsibilities, that we
weren't going to put any kind ofthumb on the scale with respect

(55:02):
to particular investmentproducts.
Those duties of loyalty andprudence and the like, coupled
with the acknowledgement,coupled with the other
protections in the exemption,that ought to be enough to let
people essentially recommendanything that's out there in the
market, just understanding thatyou better make sure you know

(55:24):
that some of these products areespecially, have special risks
and special complexity and youwant to be careful about
recommending them.
But you may.
So we expanded it to includeall principal transactions.
It includes robo-advice.
It's a very, very broadexemption that's widely
available now.

(55:45):
That, I think, is verysignificant and it really is
contingent.
We decided we were able to findthat the exemption was
sufficiently participant,protective and that we could
move forward with it, preciselybecause it had these impartial
conduct standards, because ithas a fiduciary acknowledgement

(56:06):
because it has a policies andprocedures, requirements and the
like, and so that's what we'vedone.
That, I think, is a really bigdeal.
In 8424, the exemption, as itwas originally written, only
covered commissions to theinsurance agents narrowly
defined kind of similar to whathappened in 2020-02, which is

(56:30):
broadly available for all typesof compensation, as long as you
comply with the exemptionconditions.
8424, we no longer restrict itto commissions.
It covers any compensation theindependent agent receives.
As long as they comply with theexemption's terms, they can get
it.
We also expanded the scope ofwhat kind of agents can rely on

(56:54):
the exemption a little bit, sopeople who are captive employees
of a company when they'reselling away from that company,
they can rely on the exemptionif, assuming their insurance
employer statutory employerdoesn't have a financial
interest in the transaction.

(57:15):
The key difference between thetwo exemptions apart from some
unique tailoring of what kind ofdisclosure has to happen based
on the difference in themarketplace is just that under
8424, we don't require thesupervising insurance company to
acknowledge fiduciary statusbecause of concerns expressed by

(57:37):
the insurance industry aboutbeing held liable or accountable
as fiduciaries for people theydon't control the way they
control their own employees.
Otherwise, I mean those are thebiggest, most important changes
.
The other changes we had you canbe disqualified under these
exemptions for committing youknow.

(57:58):
You can be disqualified underthese exemptions for committing
various specified felonies, bothforeign and domestic.
We also have provisions inthere for egregious misconduct
that could result in your lossof the exemption, lying to
federal regulatorssystematically failing to pay
excise taxes when you'resupposed to systematic

(58:20):
violations of the exemptions.
But in the proposal we hadgiven ourselves authority to
make those determinations and todisqualify people subject to a
process where they could come inand talk to us on so many days
notice and we would make a finaldecision.
And we got a lot of commentsfrom people who said you know

(58:41):
that's, you're giving yourselftoo much authority there for
disqualifying people.
We're concerned aboutpotentially losing access to
this exemption based on thedetermination made by the
department, as opposed to someimpartial arbiter or something.
We changed that.
So now the findings of thesekinds of factual, the findings

(59:08):
of the sorts of egregiousmisconduct I mentioned, have to
be made by a court in a courtproceeding and they have to be
in a court proceeding and theyhave to be or in a
court-approved settlement.
But we're not going to be the.
We don't resolve these facts.
A court does.

So you have an Article III judge resolving
these issues.
So I think You're imaginingthis would be that would be
happening in the context of sometype of enforcement action that
you guys would be in.

Tim Hauser (59:38):
Yeah, well, it's only in actions brought by
regulators, and I don't remember.
I mean a concern I've heardfolks express, which I think
this takes care of, is theydon't want there's some concern
about, like a class actionplaintiff's attorney using the
potential of finding in a casethey've brought as disqualifying

(01:00:02):
them as leverage, and we saidyeah, and so this avoids that
altogether.
These are going to be actionsbrought by federal or state
regulators, based on theirdetermination, so I think that
was very thoughtful.
We also reduced the disclosuresto bring them in line in the

(01:00:22):
case of 2020-02, with the SECdisclosures to a much greater
degree.
We reduced the disclosures abit under 84-24, bringing them
closer to Reg BI and to theNAIC's model rule, and I feel
like there are a couple otherimportant changes in the

(01:00:44):
exemptions, but Timing of thedisclosure.
Timing of the disclosure.
So one this might have.
Actually you might have madethis comment I'm trying to
remember who made the commentbut a number of folks objected
that our exemptions could beread.

(01:01:04):
The proposal could have beenread as requiring that
disclosures be made at or beforethe time of the recommendation,
but that's a time before theperson is entitled to get
compensated.
They may turn out not to be afiduciary at all.
The transaction hasn't yetoccurred.

(01:01:24):
Can't you give us authority tomake the disclosures prior to
the actual transaction, prior tothe time that compensation is
earned, or before?
But you don't have to give itimmediately when you're making
the recommendation.

(01:01:45):
If it's not, you know if thecoin hasn't yet dropped on your
fiduciary status, for example.
That seemed reasonable and wemade that change, which I hope
makes exemptions much morepractical.
For people.

Brian Graff (01:02:00):
We certainly were very grateful and definitely
welcome that change.
A couple things going back to.
I do want to remind peoplebecause this remarkably still
comes up there's nothing in theproposed or final rule, for that
matter, that creates a privateright of action and prohibits

(01:02:21):
arbitration agreements, correct,that's absolutely correct.

Tim Hauser (01:02:25):
I mean there's a requirement that you acknowledge
your fiduciary status if youwant to take advantage of the
exemption.
But you have no need of theexemption if you're not a
fiduciary.
And there's an obligation thatyou disclose what your
obligations are under ERISA,under the exemption just your
obligations of prudence andloyalty.

(01:02:46):
There's no obligation to enterinto a contract with the
customer and in fact we go outof our way in the preamble to
say and you're welcome tospecifically disclaim any
remedies outside of whateverERISA provides.
You can say listen, we are notcommitting to give you any

(01:03:10):
contractual enforcement right ofany sort.
You just get what you get underERISA and that's it.

And that's all we intend Very important
distinction between this finalrule and what you know, what you
all did in 2016.
So so back to the disclosure,because again this comes up.
There is you mentioned thisearlier this, this, this
conflict or disagreement interms of who's a fiduciary under

(01:03:39):
what set of regulation.
Sec has its own rules aroundwho can and cannot call
themselves a fiduciary.
Generally, commission-basedbrokers can't call themselves a
fiduciary under SEC rules ifthey're commission-based.
But for this rule, acommission-based broker in fact

(01:04:03):
has to say they are fiduciary,but only for purposes of Title I
in the code.

Right, that goes back to what we discussed
earlier.
If you want to use Differentregulatory regimes, use the word
fiduciary in different contexts.
Here, the only acknowledgmentthat would be required to use
the exemption is that you're afiduciary under Title I or II of

(01:04:30):
ERISA.
You're not required toacknowledge fiduciary status
under any other regulatoryregime.
You're not required to sayyou're a fiduciary under any
other regulatory regime.
You just have to acknowledgeyour fiduciary status under
Title I or Title II of ERISA.
You do If you're, especially ifyou're, in the retail market,

(01:04:54):
you I mean, I just would cautionyou want, you want to be
careful about the titles youkind of throw around.

If you're, if you're looking to avoid
fiduciary status, you want to bekind of careful about you know
I've gotten some feedback fromsome in the insurance world that
there's some value to thembeing elite, Some of them by no

(01:05:22):
means a majority.
This is probably that theyembrace.

Can I?
Yes, can I say something aboutthat?
I just want to.
So a lot of our conversationtoday, brian which is completely
understandable has been focusedon different ways.
People can not be fiduciariesunder this rulemaking and I
understand completely wherethat's coming from and really I

(01:06:03):
enormously appreciate thequestions because it kind of
tells me that a whole lot of thepeople you're talking to are
looking at, they're trying tofigure out how this works and
when they're in and when they'reout, and they're trying to
figure out, I think, complianceissues.
But questions like when is anactuary a fiduciary and the like

(01:06:27):
.
They're important obviously tothose folks, but it's not at the
core of this rulemaking.
I mean, what this rulemaking ischiefly going to affect are
broker-dealers, insurance agents, financial planners, people who
really are kind ofunquestionably making investment
recommendations, and thequestion is when are they being

(01:06:49):
fiduciaries, and what I'd liketo say is I mean, I do
understand everybody's desire toavoid fiduciary status, because
people would prefer not to beregulated, no doubt.
But I think that I just want toagain stress that this rule is,

(01:07:14):
at its core, prettystraightforward.
What it asks of you is thatyour recommendations be prudent,
that they be loyal, that youdon't overcharge, you don't
mislead people and that the firmyou're working for has policies
and procedures that make thathappen.
They, annually at least, lookback on the year and see whether

(01:07:35):
or not their controls seem tobe working.
And that, if you're going touse the exemption, you
acknowledge your fiduciarystatus and there's some
disqualification provisions ifyou do fairly egregious things,
including committing felonies.
But a court's going to have todecide that and that is.

(01:07:59):
Those are the obligations, and Idon't believe there's, when
we're talking about the kind ofinvestment recommendations that
are mostly what this rule isgoing to cover recommend, you
know, recommendations ofsecurities, commodities, real
estate, investment strategiesand those sort of things.
I don't think there is a singlemarket where somehow people

(01:08:26):
cannot effectively compete andserve their customers under
standards that require they beprudent, loyal, don't mislead
the customers and don'tovercharge them, and so some of
these arguments I've heard fromfolks who are actually in those
industries recently and aresaying this is, you know, just
expressing enormous apprehensionor suggesting that maybe

(01:08:49):
something really bad mighthappen by virtue of being out to
these obligations I well, letme, let me.
Let me, let me try.
I have more confidence in theseindustries ability to give
prudent, loyal advice thatdoesn't involve misleading or or
or overcharging people thanthan sometimes I think that the
industry does Well, I think.

I think maybe you know part of it is you know the
fact that they're having tochange the way they feel like
they have to the changes, theway they feel like they have to
change the way they have to dobusiness.
And, yes, a big part of that iscompliance, which is what's
driving a lot of the questionsfor me that I've gotten that
we're discussing today.
But related to your point interms of business models, the

(01:09:30):
final rule in its policyprocedures kept a statement that
financial institutions may notuse quotas, appraisals,
performance or personal actions,bonuses, contests, special
awards, differentialcompensation or other similar
actions or incentives in amanner that is intended or that
a reasonable person wouldconclude are likely to result in
obligations that do not meetthe care or loyalty obligations.

(01:09:54):
You know we've discussed thissentence before, in particular
gotten lots of questions arounddifferential compensation,
because you know you go out ofyour way in the preamble saying
we're not intending to bandifferential compensation, ban

(01:10:18):
differential compensation, butthen in the exemption you've got
this standard that says youcan't do differential
compensation in a manner that areasonable person would conclude
it doesn't meet the care orloyalty obligations and people
are struggling with that andmaybe if you could give an
example of what, how you wouldperceive differential

(01:10:39):
compensation operating orworking, that would be
consistent with that.
I think it might help.
I'll be perfectly upfront withyou the way people are

(01:11:09):
responding to this.
They're basically saying thatthey don't see how you can
square differential compensation, in the context of that
sentence, with the care andloyalty obligations.
They're struggling with thiswhere, unless there are
differences, you knowmeaningfully different products
or services.

Obviously, and so no , but right, I mean that's one
obvious point.
I mean to the.
I mean one way to comply is youmake sure that you haven't
created any particular financialincentives as between products
all of which kind of require thesame level of effort and the
like.
But you can draw distinctionswhere different products require

(01:11:39):
different levels of effort ordifferent, and then you can
monitor especially closely maybethe you know on the border
between you know when people arechoosing between those
categories and the like.

Right.
So, for example, I can make, Ican make a very, actually I can
make a very strong argument thatif I, you know, am recommending
an annuity, which is, you know,very complicated transaction,
that there is a, you know,particularly depending on the
product, where you know acommission based fee is going to

(01:12:21):
be more sensible than a buy andhold strategy for the type of
income that this is producing.
That you know that thecommission based annuity product
versus a, you know, target datefund, the differences are, you
know there's a reasonable basisfor those differences is the

(01:12:42):
argument I'm saying.
But is it fair to say, as manypeople have been looking at this
, believe that if you're reallychoosing from among the same set
of the same type, let's saysame category of investments,
let's say it's the same set offixed index annuities, three

(01:13:05):
different options but all fixedindex, no distinguishable
difference in service levelsinvolved in terms of those three
products, hard to imagine howdifferential compensation would
be okay in that scenario.

Yeah, I mean if I were building a compliance
structure myself in thosecircumstances.
But you know I'm not in thisbusiness.
But I would really want to heara justification.
If I'm giving you know more forone product rather than another
, that kind of is aligned withthe customer's interests.

(01:13:41):
You know, before I signed offon that, if I didn't have
something like different levelsof effort, different you know
kinds of products and the like.
But that said, I think in a waythat is a very efficient,
practical way to manage andmitigate conflicts is where you
have ready opportunities just tomake sure that you're not

(01:14:03):
creating financial incentivesbetween products to avoid them.
And to levelize said we don'tmandate that.
I mean and I think my view wouldbe one can imagine a variety of
scenarios in which it's kind ofunavoidable or where the thing

(01:14:24):
that seems facially kind oflevelized actually creates a
weird incentive.
Some things are just easier torecommend, even though levelized
, than others may be.
You know what I mean, and Idon't know that we're in a
position right now to tellpeople structure your
compensation this way or that.
The key thing from ourperspective is if you do have

(01:14:48):
something that raises concernsabout whether you're
incentivizing people to make arecommendation, not because it's
in the customer's best interest, but because the advisor sees a
personal advantage in makingthat recommendation.
You want to have an answer towhy that incentive is there or
what you're doing to manage it.

(01:15:08):
And it could be part of whatyou're doing is I'm going to
have heightened supervision atthat point.
I know that this productcreates some temptations, maybe
that aren't there for others, orthis compensation does, and for
that reason I'm going to havered flags, or I'm hoping that
folks take the retrospectivereview requirements seriously.

(01:15:36):
I mean, part of the idea is youcreate a good faith compliance
structure that aims at makingsure that your folks are not,
you know, incentivized to makerecommendations that run counter
to the customer's interest andthen when you're looking back
you see, did that work?
Are people actually complyingwith this obligation?

(01:15:58):
Are they making recommendationsthat are prudent and loyal and
don't overcharge?
And if they aren't, then youtweak it and you make
adjustments.
If they are great, but we're alittle bit right now.
I certainly would.
I mean, I can honestly say, inmany circumstances I think
levelizing is your absolute bestthing, but it's not always and

(01:16:21):
it too can involve perverseincentives and we can't get rid
of conflicts in this space.
I mean, you have, in a sense,you have differential
compensation every time.
Your compensation istransaction-based in a sense.
Right, I mean, if they engagein the transaction you're
compensated, if they don't, youget zero.
Still, we're not saying, oh,it's impossible to do that.

(01:16:42):
No, we're saying you're goingto have to supervise.
And the other thing on thatscore and I'm glad you brought
this up, because I almost forgotwe had said something in the
preamble to forgot we had saidsomething in the preamble to the
proposal we suggested that wehave special concern about, like
trips and training events andstuff that are used as

(01:17:02):
incentives for people, which wedo.
I mean you have to be carefulabout making sure that, like the
one thing that stand, the onlything standing between your
advisor and you know, an allexpenses paid luxury trip should
not be an imprudentrecommendation.
You know you want to make surethat.

(01:17:22):
What's driving that?
But we said in the proposal, wesuggested, that we don't see
how you could do that if you'remaking the trip or the training
contingent on the volume ofsales.
And boy did we hear from peopleon that.
You know people said what areyou?
Come on, I'm relying onindependent agents and they're

(01:17:47):
not selling my stuff and Ishould be sending them to a
training event.
I mean there has to be somerecognition that you know,
volume can matter for thesepurposes.
And I would have to say I meanthat's one example where I think
commenters correctly pointedout that we got that wrong.
Not by the same token, watchthose trips, watch that training

(01:18:09):
.
Don't create, you know, do not,you know, create perverse
incentives that make that.
Let me, let me, let me try, butbut you know it's, none of
these rules are.
This is a rule of reason.
It's about managing theconflicts.

So let me let me try to clarify the point about
education that you just made.
Is it correct to say, under thefinal rule, that attendance at
a conference or educationalevent due to an ongoing business
relationship is permissible,but that attendance that is
premised on the sale of certainproducts may raise concerns?

Well, I mean any of it could raise concerns If it's
a legitimate training event andit's Sure, let's assume it's a
legitimate training.

you know, there's plenty of education, all that
stuff.

Yeah, I mean you just want to be careful about
again is the training event.
Are you creating an incentivefor somebody to, you know, make
a recommendation that violatesthe standards?

In other words, if you want to be carrying this
product versus that product,kind of thing where there's
differential compensation.

Right, that could be an example.
It could be just.
You know, it's nominally atraining event, but it's
pointedly noted that thetraining goes on from nine to 10
and T times a 10.

I think that's a general concern for FinBud Right
.

I mean we're no different than others on that
score, but, on the other hand,you absolutely can take into
account.
It can make a difference onwhether you're going to
subsidize a trip, whetherthey're actually making the
investment recommendations foryour firm in the first place,
and and and and there's nothingthat should deter people from

(01:20:04):
offering legitimate training andeducation if, if they're
carefully managing any any youknow potential adverse.

you know conflicts, so you know.
Going back to the, you knowwe're talking a little bit about
rollover context here and soyou know, to some degree, for
the folks in the insurance world, I actually think the final
rule favors insurance relativelyspeaking.
Let me explain why insurancerelatively speaking.

(01:20:38):
Let me explain why Because Ibelieve, based on everything
you're saying, that it is mucheasier to justify and validate
why rolling money out of a planinto an IRA for a lifetime
income product as opposed torolling money from an IRA into a
set of, you know, investmentoptions that are comparable to

(01:21:02):
the ones that are already in theplan, because plans very rarely
today offer lifetime incomesolutions in a defined
contribution environment.
Is that a fair statement?

To me, everything is dependent on the particular
product.
But yes, I think I mean it isthat people don't always think
about their retirement in termsof lifetime income and you know,
how is this income?
How am I going to not outlivemy money?

(01:21:37):
That is an important problemfor people and annuities can be
a great solution for that.
And they can be unique andsometimes your plan doesn't
often, plans don't often offerthat, and that can justify a
recommendation like that.
You know, assuming it's a goodproduct, I mean.

(01:21:58):
But again, to me, I mean I dothink we get more opposition to
this rule from the insuranceindustry than from any other
segment.
Far be it for me to tell themwhat's in their long run
financial interest, what's intheir long run financial

(01:22:20):
interest.
But to me, part of the reasonthere is a natural reluctance.
People have to turn over alifetime of savings to an
insurance company maybe to anyfirm, but especially to an
insurance company that's basedon a promise of a future income
stream.
That's just likepsychologically hard for people,
I think, but I do think it'sand the more you can build up
trust and confidence in thismarketplace and the more people

(01:22:42):
feel like, hey, when thesepeople make a recommendation to
me.
They're willing to stand behindit and it's going to be prudent
, loyal and not overcharges ormisleading me.
I feel like that's going toredound to the benefit of the
industry in the long run and itmay help, you know, it may help
encourage and promote annuitysales, it seems to me.

No, I think that's an interesting take and so you
know.
Another change with respect tothe rollover disclosure is well.
Yeah, this had to do with feesand costs.
Previously, under the proposal,you had to disclose that upon

(01:23:30):
request, disclose that it wasavailable.
Upon request, you change thatso that you have to disclose
fees and costs upfront.
Can you discuss what wasdriving that change?

Honestly on that issue.
I'm not sure there was a hugechange on that score.
I'd have to go back to look atthe proposal to remind myself.
I hate to say it, that's okay.

I mean just.
You know.
As we understand it, the PT nowrequires financial institutions
to provide upfront disclosureof fees and costs, but
previously there was adisclosure that those fees and
costs were going to be madeavailable upon request, and so
that yeah, I think there mayhave been a little talking past

(01:24:21):
each other on what the initialdisclosure was supposed to
include.

That may be, to my mind at least, we were as much
clarifying what was intended inthe first place as anything.
We did intend a two-step kindof thing where there'd be some
basic disclosure up front aboutthe basic fees, conflicts and
the like, and then you could askfor more detail in the second.

Yes, yes.

And we dropped the upon request piece.
We no longer mandate that atall.

So you're saying, basically, the point being that
you want those fees disclosed upfront.
So also there's thisrequirement with rollovers from
plans that they have to show,you know, some type of
comparative analysis between thefees in the plan and the fees

(01:25:13):
in the potential IRA.

On the rollover.

On the rollover yeah, but there is discussion in
the preamble about the use ofreasonable estimates.
Can you kind of walk peoplethrough that?
You know what you'reenvisioning that process to be.
What do they have to do firstin order to be able to rely on
an estimate?

Yeah, there were some Qs and, as we put out in
connection with 2020-02, asbefore it was amended, that
discussed a little bit what ourexpectations were in that regard
.
I don't think that's changed.
I mean, first and foremost, youwant to actually get a handle
on what the fees and expensesare for the participants, so you

(01:25:54):
want to try and get the actualinformation on their particular
plan.
If you can't, there will becircumstances where, for
whatever reason, you can't getthat, or you know, if you can't,
then you can use kind of, butyou need to make some good faith
effort to get them.
Make a good faith effort to getit and you can use proxies if

(01:26:15):
need be.
And, you know, be clear withyour customer on the.
You know I'd be better off if Icould get this information.
I can give you more preciseadvice, but you know you do your
best and you work within thelimits of the information you
have.
I think is the answer, andsometimes that means using a

(01:26:38):
variety of benchmarks andservices to get there.
We require that documentation.
This is another change fromproposal to final.
But we require thatdocumentation for plan to IRA
rollovers.
But we don't require it anymoreunder the exemption for IRA to
IRA rollovers.
But we don't require it anymoreunder the exemption for IRA to
IRA rollovers, which wasresponsive to a number of

(01:27:00):
comments.
I mean, there's still the issuefor, from a compliance
standpoint and if I were runningsomebody's supervision
structure, I would still wantthe documentation, I'd want to
make that record.
I you know, and there's no suchyou it's hard to see how you
make a prudent recommendationwithout taking into account,
well, what are you invested innow and what are you giving up

(01:27:23):
and what are you gaining bymoving from it?
But we don't require thedocumentation except for the
plan to the IRA context, whichwas just fairly core to what we
were trying to achieve here,which was just fairly core to
what we were trying to achievehere.

So another factor that you know should be
considered by the fiduciaryadvisor with respect to
rollovers is the degree to whichemployer or another party pays
administrative fees, and that'screated some confusion because
you know obviously there's anaudit fee that the plan sponsor

(01:27:58):
pays.
I can't imagine that's relevantto the rollover transaction.

I don't think that's the point at all, yeah.

So what are you getting at here?

We're just getting at that.
I mean, what matters obviouslyfor this comparison is what you,
brian Graff.
You're a participant in theplan.
What do you have under the planthat you're giving up?
What are you gaining or losing?
Right, but that can be afunction and part of the fact
that the employer's picking upexpenses that you may now have

(01:28:31):
to incur outside the plan.
That would be reflecting right,that would you know in your
particular experience it's it's,it's right, I mean it's, I mean
I right now, if I, if I pulledmy money out of the thrift plan,
one of the disadvantages um acompeting investment.
You know, I'm in the federalthrift plan as a federal
employee.

(01:28:51):
Right, we have very, very low,very low expenses in that plan.
I mean it's fairly low, partlybecause they're subsidized by
the employer, also because it'sjust a huge, very efficient plan
.

It's the largest plan in the world.

That's right, but I would want to take that into
account.

But that would still be looking at.
You know, what am I paying outof my account?
Versus now, versus what I wouldbe paying?

I mean, I love the Department of Labor.
I you know I love working forthe government, but my focus in
terms of what I'm invested inpre and post retirement will be
on what's what I'm paying.

And that's what makes sense to us too, so I
appreciate the clarification.
Finally, on rollovers, therewas a change in terms of when
the rollover disclosure isrequired.
It's no longer required fromrollovers from IRAs to another
IRA.
Can you talk a little bit aboutwhat the thinking was there?

It really was.
Just we made a deliberateeffort in this in going from
proposal to final in theexemption to make the exemption
as usable as possible, toencourage take-up of the
exemption, to get people underthe fiduciary umbrella I mean to

(01:30:20):
encourage them to use theexemption, which we think is the
core conditions are really goodand, as I said, they're really
important to us.
If we were to lose thosethrough litigation or otherwise,
we'd have to rethink.
You know all the conditionshere.
But we really wanted people, wewanted to encourage take-up, we

(01:30:44):
wanted people to use theexemption, we wanted to minimize
the cost and the burdenassociated with it, and so we
made some decisions that werereally chiefly based on that.
We just, you know, we wereespecially concerned about the
plant IRA rollovers.
That's where we chiefly seenproblems and where we had

(01:31:05):
concerns, and we were hearingfrom a fair quarter of the
industry that IRA to IRArollovers presented unique you
know information challenges forthem and we're causing them
undue concern.
So we made that call.
I mean it's kind of the same.
On the disclosure provisions,if you look at our disclosure

(01:31:26):
provisions in 2020-02, you'llsee we've lined up pretty
significantly with Reg BI andit's partly for that same reason
.
We really wanted to build astructure that, if you're
already complying in good faithon a strong regulatory regime,
keep doing that.
We're not going to make it hardfor you to be prudent, loyal,

(01:31:50):
not overcharge people, notmislead them.
We want you in and we want youdoing that so that I don't.
That really, I think, was thechief thinking there.

Very good.
Last question Can you generallyexplain the effective date?
And then I got a follow-upclarification question.

All right.
Well, chances are slim thatI'll be able to.
The applicability dates areessentially five months.
In five months, the impartialconduct standards, the rule
itself by the way, that'sSeptember 23rd, in case you're

(01:32:29):
counting Thank you.
On September 23rd five monthsfrom publication in the Federal
Register, I assume then thefiduciary advice definition goes
into effect, but the only partof the exemptions that will be
required at that point if youhave conflicts that need an
exemption are going to be theimpartial conduct standards,

(01:32:54):
which are prudence, loyalty, notmisleading people, not
overcharging them and thefiduciary acknowledgement.
The other pieces of theexemption go into effect one
year after that five-month date,so September, what is that?
2025?

2025,.

yes, yeah, and that's the period.
So I mean and again, that wasalso responsive to comments
People thought that we wereover-optimistic and how soon
people could be in compliancewith that.

So just to clarify, the question really is around
the retrospective review review.
Is it accurate to say that in2026, which would be the first
retrospective review would onlybe with respect to that partial
period between September?

23rd 2025 and the end of the year.
Well, I'm going to give ananswer because I'm incapable of
not giving answers.
I'm going to give an answerbecause I'm incapable of not
giving answers, but I'm going toqualify it by saying I may have
to look and correct it, but Ithink the way we structured the
rule is that all those otherobligations, including the

(01:34:07):
retrospective obligation, kickin after that one year period,
after that one year period.
So I think the way it wouldwork is you don't have the
retrospective obligation untilyou get to September of 2025.
And at that point you have anobligation to do it at least
once a year.
So I think you need to do theretrospective review at some

(01:34:31):
point.

Even retroactive, before the September.

I think I again I'm out on a limb here.
I'd have to go back and look atthis detail, but I'm not so
sure.
There's not.
I think you want your policiesand procedures done and standing
up as of September 25.
I think you have theretrospective review is going to

(01:34:59):
be a year after that,potentially right, and then
you're going to be looking backat how did those policies and
procedures work in practice overthis proceeding year.
But I need to go piece through.
I need to parse that languagemyself.

Well, we got a little bit of time, but note
that that question is coming up.

And you know once, when we get there, where you
were with respect to 2020-02.
We did want to make sure thatpeople who, in good faith, built
strong structures to complywith regulation best interest in
2020-02 were rewarded for that,in the sense that those efforts

(01:36:04):
did not go for naught, and Ithink we succeeded in that.
I mean, I think if you tookthose rules really, really
seriously, the exemptionseriously, you're in good shape.
Your compliance burden shouldbe fairly minimal.
But some folks haven't builtthose structures at all, didn't
view themselves as subject tothem, haven't done that work.

(01:36:25):
Obviously, we're aware of thatand we're aware that different
investment products in differentcategories of firms are going
to experience the burden heredifferently.
Our goal in the near term is toget people who are in a
position of trust and confidencewith their customers to act

(01:36:49):
accordingly and to get intocompliance.
Our goal is not going to be to,like you know, go after people
for foot faults or or, or, um,um, you know, slam folks who are
making a good faith effort.
But made a different call thatI would have made, you know I
mean and do you think that thatgeneral enforcement theme will

(01:37:13):
last until?
it'll last, for I mean for.
I mean it'll last.
Certainly it's going to lastthrough the entire transition
period.
I mean I can't really speak forthe future administration.
But I would be shocked if thatwasn't the attitude.
You know we're much moreinterested in promoting

(01:37:35):
compliance here than bringingenforcement actions and we do
wanna figure out.
Well, where are the issues,where are the questions, where
are the ambiguities, what arepeople struggling with?
And people don't necessarilywanna call me up and tell me,
but I wouldn't.
If they could get over theirsuspiciousness, I'd encourage it

(01:37:57):
.
I feel like if you tell uswhere the problems are, where
compliance issues are, where youthink there's some issue of
workability, we can work withyou on it.
If I don't know about them, Ican't help you the same way you
know.

On that positive note, let's close there.
Thanks, tim.
This is.
You know we covered a lot.
It's been incredibly helpful.
Really appreciate your time,thank you.

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Tim Hauser - The Final Fiduciary Rule’s Myths and Controversies

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.css-14f5ked{margin:0;word-break:break-word;display:-webkit-box;-webkit-box-orient:vertical;box-orient:vertical;-webkit-line-clamp:2;overflow:hidden;}Tim Hauser - The Final Fiduciary Rule’s Myths and Controversies