By a notice published in the Federal Register on August 31, 2017, the Department of Labor (DOL) proposed to extend from January 1, 2018, until July 1, 2019, the date for compliance with the full conditions in its new “investment advice” fiduciary definition and related exemptions (Final Rule), which became generally applicable on June 9.
• Under guidance issued in April, the expanded fiduciary definition and the Impartial Conduct Standards for fiduciaries articulated in various exemptions (PTEs) were delayed 60 days, from April 10 to June 9.
• Compliance with other conditions in the Best Interest Contract Exemption or “BICE (PTE 2016-01) and the Principal Transaction Exemption (PTE 2016-02), and with other amendments to PTE 84-24 was delayed until January 1, 2018, at which point full compliance with the Final Rule, without any transitional accommodation, would be required.
• At that time, DOL explained its determination on timing as a balancing of its conclusions that:
– A careful and thoughtful process to address the Final Rule in response to the Presidential memorandum of February 3, 2017, was likely to take more time than a 60-day delay would afford; and
– Providers should not be allowed more time before becoming legally obligated to give investment advice meeting the Impartial Conduct Standards—described as recommendations in the best interest of the retirement investor free from misrepresentations, in exchange for reasonable compensation.
• DOL explicitly noted that, if after receiving comments on the issues raised in the Presidential memorandum (due April 17, and now as augmented by responses to DOL’s June 29 Request for Information), it concluded that significant changes were necessary or more time was required to complete its review of the Final Rule, it retained the ability to further defer the January 1 date or to grant additional interim relief.
After reflection on the commentary it received, DOL has proposed to extend the transition period under BICE, the Principal Transaction Exemption and PTE 84-24 until July 1, 2019.
• DOL explained that in making this proposal, it considered the interests of retirement investors, which it believes are being well served by the Impartial Conduct Standards as in effect during the transition period.
• DOL stated that the delay may be needed to complete its mandated reexamination of the Final Rule, coordinate with the SEC, develop any changes to the Final Rule indicated by that process, and propose its intended streamlined exemption reflecting recent innovations in the financial services industries; as well as to avoid unnecessary costs to financial services providers and confusion for investors if DOL were to compel compliance with conditions currently in the Final Rule that may be revised, repealed or replaced.
• In the notice, DOL specifically asked for comments, inter alia, on alternative ways to formulate this delay, such as an event-driven or tiered approach rather than a time-certain 18 months; on whether compliance conditions should be attached to the delay; and on whether the non-enforcement policy previously adopted by DOL for the current transition period should also be extended by 18 months.
Comments are due September 15.
In addition, on August 30, the DOL issued Field Assistance Bulletin 2017-03, announcing a non-enforcement policy (applicable for both ERISA and prohibited transaction excise tax purposes) with regard to the arbitration limitations contained in the BICE and Principal Transaction Exemption. As currently drafted, neither exemption is available as of the full compliance date (i.e., after the transition period) if the underlying contract or documentation requires a waiver or qualification of the retirement investor’s right to participate in a class action. The US government has since taken the litigation position that it cannot enforce these types of conditions as applied to arbitration agreements because they cannot be reconciled with the Federal Arbitration Act. Accordingly, the Field Assistance Bulletin states that the DOL will maintain the non-enforcement policy for so long as the condition remains part of the exemptions.
Considerations for Service Providers
In the notice, DOL repeated its expectation that, while the warranties otherwise required under the BICE and Principal Transaction Exemption are not required during the transition period, financial institutions should adopt such policies and procedures as they reasonably conclude are necessary for their advisers’ compliance with the Impartial Conduct Standards. During this period, providers have flexibility to choose how to “safeguard” compliance with those standards, whether by “tamping down” conflicts associated with adviser compensation, or increasing monitoring and surveillance of investment recommendations, or by other approaches or a combination of approaches. DOL specifically noted that neither a warranty regarding specific policies and procedures nor compliance with every condition of the PTE is necessary during this transition period.
DOL also verified that PTE 84-24, with the Impartial Conduct Standards, remains available (including to insurance intermediaries) for fixed indexed and variable annuities during the transition period.
The non-enforcement policy for the arbitration limitation, which DOL had signaled in the pending Minnesota litigation challenging the Final Rule, is a helpful development, but a revision to the exemptions will be required for this position to be unambiguously effective in a private litigation setting.
Considerations for Plan Sponsors
This proposal would change only the duration of the transition period under the Final Rule. The response by providers to the Final Rule during the transition period may continue to evolve, based on market developments and other relevant factors, but in this notice DOL is not directing any change in approach for providers. Accordingly, the policies and procedures that plan sponsors developed for the transition period starting June 9 should remain effective if this proposal is adopted, and any incremental process leading into the January 1, 2018, full compliance date can be deferred.
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