In April 2016, the U.S. Department of Labor (DOL) adopted a rule that significantly expands the category of persons deemed fiduciaries when providing investment recommendations to most retail retirement accounts (the “Fiduciary Rule”). On August 31, 2017, the DOL published a proposal to defer full implementation of the Fiduciary Rule until July 1, 2019.1 Persons deemed fiduciaries under this rule may not receive transaction-based compensation or engage in principal transactions with their retail retirement clients, unless they comply with a prohibited transaction exemption (PTE). At the same time that the Fiduciary Rule was adopted, the DOL also adopted two new PTEs, the Best Interest Contract Exemption (“BIC Exemption”) and the Principal Transaction Exemption, to permit fiduciaries to receive transaction-based compensation and to act as principals subject to the strict conditions set forth in the new PTEs.
The Fiduciary Rule and the new PTEs were originally scheduled to be implemented in April 2017. Following numerous legal challenges and a presidential memorandum directing the DOL to re-examine the Fiduciary Rule, the DOL decided to proceed with partial implementation. Thus, on June 9, 2017, the Fiduciary Rule became applicable. However, persons now deemed fiduciaries could continue to receive transaction-based compensation or sell certain securities as principals if they complied with the impartial conduct standards set forth in the BIC and Principal Transaction Exemptions, respectively. The impartial conduct standards require a fiduciary to (i) act in the best interests of the client, (ii) avoid false or misleading statements and (iii) charge no more than reasonable compensation for their services. Applicability of the more onerous conditions set forth in these PTEs was originally deferred until January 1, 2018, with the DOL to conduct its re-examination of the Fiduciary Rule during the transition period.
With this most recent proposal for further delay, the DOL has acknowledged that it will require more time to “carefully and thoughtfully review the substantial commentary… and to honor the President’s directive to take a hard look at any potential undue burden.” Although the DOL had telegraphed this proposed delay several weeks ago, there are important takeaways from the notice published on August 31, 2017.
- The notice strongly suggests that the DOL anticipates coordinating closely with the SEC as it proceeds with its review of the Fiduciary Rule. The notice explicitly cites the DOL’s “desire to coordinate with the SEC” as it considers changes to the Fiduciary Rule. This should be welcome news to SEC regulated broker-dealers and investment advisers who otherwise faced the prospect of differing standards of care for differing types of accounts.
- It appears that the DOL believes much of the anticipated benefit of the Fiduciary Rule has already been achieved through implementation of the impartial conduct standards and the efforts many firms have undertaken to adhere to such standards. When discussing the potential harm to investors from a further delay in full implementation, the DOL states that investor losses “could be relatively small” and adherence to the impartial conduct standards should result in investors receiving “a substantial portion of the estimated gains” forecast from adoption of the Fiduciary Rule. This perspective could indicate that the DOL will be receptive to a significant rollback of some of the deferred requirements set forth in the BIC and Principal Transaction Exemptions, as such provisions may be seen as less necessary given the benefits realized from implementation of the impartial conduct standards.
- At several points in the notice, the DOL emphasized the importance of providing the financial services industry with adequate time to implement any additional requirements. Noting that it wants to avoid a “costly and disorderly transition,” the DOL affirms its objective of finalizing any changes “sufficiently before July 1, 2019, to provide firms with sufficient time to design and implement an orderly transition process.”
Comments on the proposal to further defer full implementation of the Fiduciary Rule are due no later than September 15, 2017.