Category Archives: fiduciary

The New Fiduciary Rule (39): Qualified Annuity Exchanges

Key Takeaways

  • The DOL’s fiduciary regulation will be effective on September 23 of this year. As a result, beginning on September 23 one-time recommendations to retirement investors can be fiduciary advice and, where the advice is conflicted, the protection afforded by a prohibited transaction exemption will be needed.
  • While some of the requirements (called “conditions”) of PTEs 2020-02 and 84-24 also become effective on September 23, others will not be effective until a full year later…September 23, 2025.
  • The PTE conditions that are effective this September are the Impartial Conduct Standards and the fiduciary acknowledgment disclosure.
  • Both PTE’s treat recommendations to exchange qualified annuities as covered recommendations.
  • This article discusses the requirements in NAIC Model Regulation #275 and the similarities and differences between the Model Rule and the PTE requirements.

The Department of Labor has issued the:

  • final regulation defining fiduciary status for investment advice to retirement investors and
  • related exemptions for prohibited conflicts—PTEs 2020-02 and 84-24.

The exemptions provide relief from prohibited compensation resulting from fiduciary recommendations to “retirement investors”—private sector retirement plans, participants in those plans (including rollover recommendations), and IRAs—individual retirement accounts and individual retirement annuities (including recommendations of transfers and exchanges).

The fiduciary regulation will be effective on September 23, 2024. Parts of the PTEs will be effective on that date, but other parts will not be effective until a year later—September 23, 2025.

The split effective dates for the PTEs are as follows. The Impartial Conduct Standards and the Fiduciary Acknowledgment disclosure are effective September 23, 2024—this year. The remaining conditions in the PTEs are effective on September 23, 2025. That includes all of the remaining disclosures, the policies and procedures, and the annual retrospective review.

A fiduciary recommendation to exchange “qualified annuities” is subject to the new rules. The authority for that conclusion can be found in the regulation’s descriptions of covered recommendations. (“Qualified annuities” is an industry term; the DOL refers to them as IRAs—”individual retirement annuities”, which is also how the Internal Revenue Code labels them.) The following recommendations are included in the description of covered transactions:

  • The advisability of acquiring, holding, disposing of, or exchanging, securities or other investment property.
  • Rolling over, transferring, or distributing assets from a plan or IRA, including recommendations as to whether to engage in the transaction, the amount, the form, and the destination of such a rollover, transfer, or distribution.

So it’s clear that recommending qualified annuity exchanges is subject to the fiduciary rules (beginning September 23, 2024) and I don’t think it requires explanation that the insurance agent’s commission is a conflict of interest that is a prohibited transaction.

That means that a PTE—prohibited transaction exemption—is needed. However, PTEs, including 84-24 and 2020-02, have conditions that must be satisfied in order to obtain the relief that they provide.  Both of those PTEs can provide relief for recommendations of annuity exchanges. The circumstances in which one or the other will apply are beyond the scope of this article—and have been discussed in other posts, but for purposes of today’s article, it doesn’t matter.  That’s because both require satisfaction of the Care Obligation.

That means that, since the fiduciary regulation and the Impartial Conduct Standards in the PTEs (where the Care Obligation is found) must be satisfied beginning this September 23. That begs the question of, what does the Care Obligation require for annuity exchanges?

Fortunately, there is some guidance in the NAIC Model Regulation—which has been adopted by almost all of the States (with some modifications)—that provides helpful, but not complete, information about the process for evaluating annuity exchanges.

For example, the NAIC Model Regulation says, in part:

The requirements under Subparagraph (a) of this paragraph require a producer to consider the types of products the producer is authorized and licensed to recommend or sell that address the consumer’s financial situation, insurance needs and financial objectives. This does not require analysis or consideration of any products outside the authority and license of the producer or other possible alternative products or strategies available in the market at the time of the recommendation.

Comment: The Care Obligation would also require that.  However, it is not clear if the Care Obligation would also require that, if the annuities available to the producer were inferior to others in the marketplace, the producer would need to decline the sales opportunity. (The NAIC Model Regulation uses the term “producer,” as does PTE 84-24. This article is using “producer” and “agent” interchangeably.)

At another point, the NAIC Model Regulation says:

The consumer profile information, characteristics of the insurer, and product costs, rates, benefits and features are those factors generally relevant in making a determination whether an annuity effectively addresses the consumer’s financial situation, insurance needs and financial objectives, but the level of importance of each factor under the care obligation of this paragraph may vary depending on the facts and circumstances of a particular case. However, each factor may not be considered in isolation.

Comment: This is similar to what the Care Obligation would require. However, satisfaction of the DOL’s Care Obligation would be measured by the standard of a hypothetical knowledgeable person, while the NAIC’s standard is that of someone with similar licensure.  It’s not clear if the DOL standard is higher than the NAIC’s, but it is possible since the DOL’s standard could be interpreted to include a broader range of knowledge of products and services that might be in the best interest of the retirement investor.

Later in the NAIC Model Regulation, it says:

In the case of an exchange or replacement of an annuity, the producer shall consider the whole transaction, which includes taking into consideration whether:  

(i) The consumer will incur a surrender charge, be subject to the commencement of a new surrender period, lose existing benefits, such as death, living or other contractual benefits, or be subject to increased fees, investment advisory fees or charges for riders and similar product enhancements;  

(ii) The replacing product would substantially benefit the consumer in comparison to the replaced product over the life of the product; and  

(iii) The consumer has had another annuity exchange or replacement and, in particular, an exchange or replacement within the preceding 60 months.

Comment: The Care Obligation would almost certainly be interpreted to be consistent with this.  Interestingly, the NAIC Model Regulation requires some comparison with the existing qualified annuity before recommending a replacement.  However, it does not require a similar analysis before recommending a rollover from a retirement plan to a qualified annuity (as do the SEC and the DOL rules).

There is a related disclosure requirement in the NAIC Model Rule that has some relevancy to our discussion:

Prior to or at the time of the recommendation or sale of an annuity, the producer shall have a reasonable basis to believe the consumer has been informed of various features of the annuity, such as the potential surrender period and surrender charge, potential tax penalty if the consumer sells, exchanges, surrenders or annuitizes the annuity, mortality and expense fees, investment advisory fees, any annual fees, potential charges for and features of riders or other options of the annuity, limitations on interest returns, potential changes in non-guaranteed elements of the annuity, insurance and investment components and market risk. 

Comment: To the extent that any of these factors weren’t required to be considered by the NAIC rules discussed earlier in this article, I believe that the DOL’s Care Obligation would require that a producer consider them in making a fiduciary recommendation—as opposed to just disclosing them.

Concluding Thoughts

The requirements in the NAIC Model Regulation are consistent with satisfaction of the Care Obligation in PTEs 84-24 and 2020-02.  However, in a given case they may not be enough.  As a result, thought should be given to augmenting the NAIC compliance process with additional considerations for the PTE’s best interest process.

Viewing the PTEs from the perspective of producers, the Impartial Conduct Standards and the Fiduciary Acknowledgement are effective for them on September 23 of this year.

With regard to the requirements for documentation, supervision, disclosures, and policies and procedures, the firms (e.g., insurance companies and broker-dealers) will not need to have those in place until September 23 of 2025.

However, that is not the full story for all of the firms.  Where the qualified annuity exchanges must use PTE 2020-02 for relief, the firms are “co-fiduciaries” with the agents this September 23.  That means that the firms must satisfy the Care Obligation and deliver the Fiduciary Acknowledgement.  And to satisfy the Care Obligation, the firms will likely need a process that is more demanding than the NAIC Model Regulation’s.

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The New Fiduciary Rule (38):The Fiduciary Acknowledgment

Key Takeaways

  • The DOL’s fiduciary regulation will be effective on September 23 of this year. As a result, beginning on September 23 one-time recommendations to retirement investors can be fiduciary advice and, where the advice is conflicted, the protection afforded by a prohibited transaction exemption will be needed.
  • While some of the requirements (called “conditions”) of PTEs 2020-02 and 84-24 also become effective on September 23, others will not be effective until a full year later…September 23, 2025.
  • The PTE conditions that are effective this September are the Impartial Conduct Standards and the fiduciary acknowledgment disclosure.
  • This article discusses the fiduciary acknowledgment.

The Department of Labor has issued its final regulation defining fiduciary status for investment advice to retirement investors and the related exemptions for prohibited conflicts—PTEs 2020-02 and 84-24. The exemptions provide relief from prohibited compensation resulting from fiduciary recommendations to “retirement investors”—private sector retirement plans, participants in those plans (including rollover recommendations), and IRAs (including recommendations of transfers and exchanges).

The fiduciary regulation will be effective on September 23, 2024. Parts of the PTEs will be effective on that date, but other parts will not be effective until a year later—September 23, 2025.

Continue reading The New Fiduciary Rule (38):The Fiduciary Acknowledgment

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The New Fiduciary Rule (37): Confusion about Incentive Compensation

Key Takeaways

    • The DOL’s fiduciary regulation will be effective on September 23 of this year. As a result, beginning on September 23 one-time recommendations to retirement investors can be fiduciary advice and, where the advice is conflicted, the protection afforded by a prohibited transaction exemption will be needed.
    • While some of the requirements (called “conditions”) of PTEs 2020-02 and 84-24 also become effective on September 23, others will not be effective until a full year later…September 23, 2025.
    • The PTE that may be used in all cases, and must be used in most cases, is PTE 2020-02. However, independent insurance agents may use PTE 84-24.
    • Both PTEs have provisions limiting incentive compensation.

The Department of Labor has issued its final regulation defining fiduciary status for investment advice to retirement investors and the related exemptions for prohibited conflicts—PTEs 2020-02 and 84-24. The exemptions provide relief from prohibited compensation resulting from fiduciary recommendations to “retirement investors”—private sector retirement plans, participants in those plans (including rollover recommendations), and IRAs (including recommendations of transfers and exchanges). The fiduciary regulation will be effective on September 23, 2024. Parts of the PTEs will be effective on that date, but other parts will not be effective until a year later—September 23, 2025.

The split effective dates for the PTEs are as follows. The Impartial Conduct Standards and the Fiduciary Acknowledgement disclosure are effective September 23, 2024—this year. The remaining conditions in the PTEs are effective on September 23, 2025. That includes all of the remaining disclosures, the policies and procedures, and the annual retrospective review.

Continue reading The New Fiduciary Rule (37): Confusion about Incentive Compensation

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The New Fiduciary Rule (36): Confusion about Annual Retrospective Reviews

Key Takeaways

  • The DOL’s fiduciary regulation will be effective on September 23 of this year. As a result, beginning on September 23 one-time recommendations to retirement investors can be fiduciary advice and, where the advice is conflicted, the protection afforded by a prohibited transaction exemption will be needed.
  • While some of the requirements (called “conditions”) of PTEs 2020-02 and 84-24 also become effective on September 23, others will not be effective until a full year later…September 23, 2025.
  • The PTE that may be used in all cases, and must be used in most cases, is PTE 2020-02. However, independent insurance agents may use PTE 84-24.

The Department of Labor has issued its final regulation defining fiduciary status for investment advice to retirement investors and the related exemptions for prohibited conflicts—PTE 2020-02 and 84-24. The exemptions provide relief from prohibited compensation resulting from fiduciary recommendations to “retirement investors”–private sector retirement plans, participants in those plans (including rollover recommendations), and IRAs (including recommendations of transfers and exchanges). The fiduciary regulation will be effective on September 23, 2024. Parts of the PTEs will be effective on that date, but other parts will not be effective until a year later—September 23, 2025.

Unfortunately, that “split” of the effective dates has created a considerable amount of confusion about what needs to be done and when it needs to be done.

Continue reading The New Fiduciary Rule (36): Confusion about Annual Retrospective Reviews

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The New Fiduciary Rule (35): The Education Exception

Key Takeaways

  • The DOL’s final regulation defining non-discretionary fiduciary advice will be effective on September 23 of this year.
  • If a conflicted fiduciary recommendation is made, the requirements (called “conditions”) of PTEs 2020-02 and 84-24 will need to be satisfied in order to retain any compensation resulting from the recommendation.
  • However, absent a fiduciary recommendation, the relief afforded by the exemptions will not be needed.
  • There are three ways to engage with retirement investors without making a recommendation. Those are: “hire me”, education and unsolicited. This article discusses the educational approach.

The Department of Labor’s (DOL) final regulation defining fiduciary status for investment advice to retirement investors is effective on September 23, 2024. The related exemptions—PTE 2020-02 and 84-24—are partially effective on the same date. The exemptions provide relief from prohibited conflicts and compensation resulting from fiduciary recommendations to “retirement investors”—private sector retirement plans, participants in those plans (including rollover recommendations), and IRAs (including transfer and exchange recommendations).

However, the relief provided by the PTEs is not needed unless a conflicted fiduciary recommendation is made. In the preamble to the fiduciary regulation, the DOL described a recommendation as follows:

Whether a person has made a ‘‘recommendation’’ is a threshold element in establishing the existence of fiduciary investment advice. For purposes of the final rule, whether a recommendation has been made will turn on the facts and circumstances of the particular situation, including whether the communication reasonably could be viewed as a ‘‘call to action.
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The Department intends that whether a recommendation has been made will be construed in a manner consistent with the SEC’s framework in Regulation Best Interest.

But not every communication with retirement investors is a recommendation. There are three notable exceptions, two of which are discussed in the preamble to the regulation: education and “hire me.”

“Hire me” was discussed in my last post Fiduciary Rule 34.This article discusses the DOL’s position on investment and retirement education.

As background, the DOL has long held that investment education, if properly done, is not a recommendation and therefore does not cause the provider to be a fiduciary. The “bible” in terms of DOL guidance is Interpretive Bulletin (IB) 96-1.

In the preamble to the new final rule, the DOL definitively said:

  • Similarly, the rule makes clear that mere investment information or education, without an investment recommendation, is not treated as fiduciary advice.
  • The Department agrees that it is important that retirement investors continue to have access to information about the options available to them regarding rolling over, transferring or distributing retirement assets and that these discussions can be purely educational.
  • Paragraph (c)(1)(iii) also makes clear that the mere provision of investment information or education, without an investment recommendation, is not advice within the meaning of the final rule.

That was further confirmed in the regulation itself:

  • Similarly, the mere provision of investment information or education, without an investment recommendation, is not advice within the meaning of this rule.

However, it is not enough to just label a communication as education. As you might imagine, the information must be truly educational. My belief is that one test is whether the information is materially complete and unbiased. But let’s see what the DOL said in the preamble:

In general, for purposes of the final rule, the line between an investment recommendation and investment education or information will depend on whether there is a call to action. Thus, many of the types of information cited by commenters as important to retirement investors could be provided under the final rule without the imposition of fiduciary status. For example, like the SEC in Regulation Best Interest, the Department believes that ‘‘a general conversation about retirement planning, such as providing a company’s retirement plan options’’ to a retirement investor, would not rise to the level of a recommendation.

The preamble continues:

In this regard, the Department confirms that providing educational information and materials such as those described in IB 96–1 will not result in the provision of fiduciary investment advice as defined in the final rule absent a recommendation, regardless of the type of retirement investor to whom it is provided. Information on the benefits of plan participation and on the terms or operation of the plan, as described in the first category of investment education in the IB, clearly could include information relating to plan distributions and distribution options. Additionally, an analysis of the plan information category of investment education applied in the context of IRAs would allow such a plan sponsor or service provider to also provide a wide range non-fiduciary information about IRAs, such as tax benefits associated with rollovers into IRAs.

So, investment and retirement plan information and education will also work, if properly done, for IRA investing and planning and for rollover education.

The preamble goes on to say:

Likewise, the Department confirms that furnishing the categories of investment-related information and materials described in the ‘‘Investment Education’’ provision in the 2016 Final Rule would not result in the provision of fiduciary investment advice under the final rule. The provision in the 2016 Final Rule included, for example, information on ‘‘[g]eneral methods and strategies for managing assets in retirement (e.g., systemic withdrawal payments, annuitization, guaranteed minimum withdrawal benefits).’’

Keep in mind that the DOL is talking about education which, by definition, is somewhat generic and not individualized. The more individualized the communication, the greater the risk that it could be a recommendation subject to the fiduciary and prohibited transaction rules.

The DOL admonishes:

The Department emphasizes that the inquiry in this respect will focus on whether there is a call to action. Thus, the Department cautions providers against steering retirement investors towards certain courses of action under the guise of education. The SEC similarly stated in Regulation Best Interest that while certain descriptive information about employer sponsored plans would be treated as education, rather than as a recommendation, broker-dealers should ‘‘ensure that communications by their associated persons intended as ‘education’ do not cross the line into ‘recommendations.’ ”

As I said earlier, a key to knowing where the line is between education and recommendation is the individualization of the information. The more individualized the communication, the more likely it is a recommendation.

Concluding Thoughts

Yes, “education” still works as an alternative to a fiduciary recommendation. But it must be neutral education and information.

As FINRA pointed out in Regulatory Notice 13-45 (and I believe that the DOL would concur):

Some firms and their associated persons provide educational information to plan participants concerning their retirement choices. Firms that permit educational information only should adopt measures reasonably designed to ensure that the firm and its associated persons do not make recommendations for purposes of Rule 2111 to plan participants. These measures should include training concerning what statements may trigger application of Rule 2111, and consideration of the compensation arrangements that could cause an associated person to make a recommendation. To the extent that a firm prohibits recommendations to plan participants, supervisory personnel of the firm should reasonably monitor the communications to ensure that the prohibition is not compromised.   

To avoid the potential of “education” becoming recommendations, firms should have training and supervision (and hopefully supporting documentation) for the education that they will be delivering.

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The New Fiduciary Rule (34): The “Hire Me” Exception

Key Takeaways

  • The DOL’s final regulation defining non-discretionary fiduciary advice will be effective on September 23 of this year.
  • If a conflicted fiduciary recommendation is made, the requirements (called “conditions”) of PTEs 2020-02 and 84-24 will need to be satisfied in order to retain any compensation resulting from the recommendation.
  • However, absent a fiduciary recommendation, the relief afforded by the exemptions will not be needed.
  • There are three ways to engage with retirement investors without making a recommendation. Those are: “hire me”, education and unsolicited. This article discusses the “hire me” approach.

The Department of Labor’s (DOL) final regulation defining fiduciary status for investment advice to retirement investors is effective on September 23, 2024. The related exemptions—PTE 2020-02 and 84-24—are partially effective on the same date. The exemptions provide relief from prohibited conflicts and compensation resulting from fiduciary recommendations to “retirement investors”–private sector retirement plans, participants in those plans (including rollover recommendations), and IRAs (including transfer and exchange recommendations).

However, the relief provided by the PTEs is not needed unless a conflicted fiduciary recommendation is made. In the preamble to the fiduciary regulation, the DOL described a recommendation as follows:

Continue reading The New Fiduciary Rule (34): The “Hire Me” Exception

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ERISA Moments Ep. 25: The Fiduciary Rules and the Impact on Advisors and Insurance Agents

Take a quick dive into the exciting world of ERISA with Faegre Drinker benefits and executive compensation attorneys Fred Reish and Brad Campbell. In this quick-hit series of updates, Fred and Brad offer a high-level view of current trends and recent ERISA developments.

See the newest episode, The Fiduciary Rules and the Impact on Advisors and Insurance Agents, on the Spotlight on Benefits blog.

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The New Fiduciary Rule (33): The DOL’s Final PTE 84-24

Key Takeaways

  • The DOL’s fiduciary regulation will be effective on September 23 of this year. As a result, beginning on September 23, one-time recommendations to retirement investors can be fiduciary advice and, where the advice is conflicted, the investment professional and financial institution will need the protection afforded by a PTE.
  • While some of the requirements (called “conditions”) of PTEs 2020-02 and 84-24 also become effective on September 23, others will not be effective until a full year later…September 23, 2025.
  • While PTE 2020-02 can be used for banks, investment advisers, broker-dealers, and insurance companies (“financial institutions”), there is an alternative exemption, PTE 84-24, that can be used by independent insurance agents who recommend annuities and life insurance policies that only require an insurance license (“independent producers”).
  • This article covers the final PTE 84-24 and its effective dates, with a focus on compliance issues for September 23 of this year.

On April 25, 2024, the Department of Labor published its final regulation defining fiduciary status for investment advice and the related exemptions—PTE 2020-02 and 84-24. The exemptions provide relief from prohibited conflicts and compensation resulting from fiduciary recommendations to “retirement investors”–private sector retirement plans, participants (including rollovers), and IRAs (including transfers and exchanges). The fiduciary regulation and exemptions will be effective on September 23, 2024, although compliance with some of the conditions in the exemptions will be further delayed.

For context, all financial institutions—broker-dealers, investment advisory firms, banks and insurance companies–can use PTE 2020-02 for the protection it affords. However, broker-dealers, investment advisers, and banks must use PTE 2020-02 for relief for their conflicted fiduciary recommendations. In addition, relief for insurance products that are treated as securities (e.g., variable and registered annuities) can only be found under 2020-02. Finally, if an insurance product is sold by an employee or statutory employee of an insurance company, PTE 2020-02 must be used for relief.

Continue reading The New Fiduciary Rule (33): The DOL’s Final PTE 84-24

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The New Fiduciary Rule (32): The DOL’s Final PTE 2020-02

Key Takeaways

  • The DOL’s fiduciary regulation will be effective on September 23 of this year. As a result, beginning on September 23 one-time recommendations to retirement investors can be fiduciary advice and, where the advice is conflicted, the investment professional and financial institution will need the protection afforded by a PTE.
  • While some of the requirements (called “conditions”) of PTEs 2020-02 and 84-24 also become effective on September 23, others will not be effective until a full year later…September 23, 2025.
  • The PTE that must be used for all investment professionals and financial institutions—other than for independent insurance agents—is PTE 2020-02.
  • As a result, financial institutions need to be working on implementing the first part of the PTE’s requirements…so that compliant practices and disclosures are in place by September 23—just months from now.

On April 25, 2024, the Department of Labor published its final regulation defining fiduciary status for investment advice and the related exemptions—PTE 2020-02 and 84-24. The exemptions provide relief from prohibited conflicts and compensation resulting from fiduciary recommendations to “retirement investors”–private sector retirement plans, participants (including rollovers), and IRAs (including transfers and exchanges). The fiduciary regulation and exemptions will be effective on September 23, 2024, although compliance with some of the conditions in the exemptions will be further delayed.

Let’s look at the final of PTE 2020-02 and its effective dates.

Continue reading The New Fiduciary Rule (32): The DOL’s Final PTE 2020-02

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The New Fiduciary Rule (31):The DOL’s Final Fiduciary Definition Compared to the Proposal

Key Takeaways

  • The DOL’s fiduciary regulation and the amended Prohibited Transaction Exemptions (PTEs) 2020-02 and 84-24 will be effective on September 23 of this year.
  • However, some of the requirements (called “conditions”) of PTEs 2020-02 and 84-24 will not be effective until a full year later…September 23, 2025.
  • As a result, broker-dealers, investment advisers, banks, and insurance companies need to begin the work on compliance with the new fiduciary definition and parts of the PTEs…so that compliant practices and disclosures are in place by September 23—just months from now.

On April 25, 2024, the Department of Labor published its final regulation on defining fiduciary status for investment advice, and the related exemptions, in the Federal Register. The exemptions provide relief from prohibited conflicts and compensation resulting from fiduciary recommendations to “retirement investors”–private sector retirement plans, participants (including rollovers), and IRAs (including transfers and exchanges). The fiduciary regulation and exemptions will be effective on September 23, 2024, although compliance with some of the conditions in the exemptions will be further delayed.

Let’s look at the primary definition of non-discretionary fiduciary advice in the proposed regulation and compare it to the definition in the final regulation. This is the first step in complying with the new rules, since compliance with the PTEs will only be need for fiduciary recommendations that involve conflicts of interest.

Continue reading The New Fiduciary Rule (31):The DOL’s Final Fiduciary Definition Compared to the Proposal

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