On June 29, 2017, the Department of Labor (Department) issued a Request for Information (RFI) related to its examination of the final rule defining “investment advice fiduciary” (Fiduciary Rule) under the Employee Retirement Income Security Act, as amended (ERISA) and the Internal Revenue Code of 1986, as amended (Code). In a series of 17 questions, the RFI seeks public input that could form the basis of new exemptions or changes to the Fiduciary Rule. Several questions focus on specific conditions of the Best Interest Contract (BIC) and Principal Transaction Exemptions. The importance of the financial services industry providing responses to the RFI cannot be understated, since, as we have seen in several challenges to the rule and its exemptions, courts lean heavily on the record before the agency to find support for the agency action.
The Department asks whether the contract and warranty requirements should be altered or eliminated, whether the disclosure requirements should be simplified, and whether the Department could base a streamlined exemption on a model set of policies and procedures. These questions signal that the Department may be open to scaling back some of the more onerous requirements of these exemptions that are currently scheduled to become applicable on January 1, 2018. The RFI also seeks comments on whether the January 1, 2018 applicability date for the exemptions should be delayed, and if so, why, and provides a very short comment period (15 days) on that point.
The RFI also seeks public input on recent innovations in the financial services industry, such as mutual fund clean shares, t-shares, and fee-based annuities, noting that it may be possible to build upon such innovations to create new and more streamlined exemptions and compliance mechanisms. The Department is particularly interested in public input on whether it would be appropriate to adopt a more streamlined exemption or other changes for advisers committed to taking new approaches.
Other questions on which the Department seeks public input include:
- Whether the existing IRA regulatory regime or the adoption of updated standards by the Securities and Exchange Commission (SEC) or other regulators could be incorporated into the Department’s existing exemptions or serve as a basis for a streamlined exemption. This is an important point for comment in light of the financial services industry’s often expressed view that relying upon private plaintiffs for enforcement is a mistake, and that any new standards of conduct applicable to the industry should be enforced by the IRS and by each financial institution’s primary regulator. Given the new SEC chairman’s view that retail accounts should be supervised in a consistent fashion, it seems particularly critical to provide analysis of these issues for the Department’s record.
- Whether the Principal Transaction Exemption should be revised or expanded to better serve investor interests and provide market flexibility. Financial institutions and individual retail investors may well want to comment on the narrow list of assets that can be traded on a principal basis under this exemption. The list currently excludes financial institution debt, foreign currency and any transaction connected to an initial public offering or private placement of equity securities.
- Whether there should be an amendment to the Fiduciary Rule or a streamlined exemption for bank deposits and similar cash investments, such as cash sweep vehicles that make un-conflicted advisor compensation very difficult to accomplish.
- Whether the grandfather rule should be changed to minimize undue disruption and facilitate advice. In this regard, retail investors unable to purchase assets in their grandfathered account may want to seek a new grandfather date after a revised rule and exemptions are finalized.
- Whether PTE 84-24 should be expanded to cover all types of annuities beginning January 1, 2018, or whether providing an exemption for insurance intermediaries to serve as financial institutions would facilitate advice regarding all types of annuities.
- Whether the scope of the Fiduciary Rule’s exclusion for independent fiduciaries with financial expertise should be expanded. In this regard, the financial services industry may want to reiterate a need for a sophisticated investor exception in the IRA context and a selling exception for fully disclosed sales of products and services.
Other issues that commentators may want to raise include:
- The narrowness of the education rule, which does not permit examples of products in the IRA setting
- The breadth of the advice that could make one a fiduciary, especially advice on distributions
- The absence of exceptions for platform providers with respect to IRAs
- The failure to exclude product manufacturers from fiduciary status when they are dealing with distributors
- The unworkability of the sophisticated fiduciary exception, and its added cost and disruptive effect on industry participants
As noted above, public input is also sought on the advisability of extending the January 1, 2018, applicability date of certain parts of the Fiduciary Rule and prohibited transaction exemptions, which were originally scheduled to become applicable on April 10, 2017. Care should be taken to provide estimates of the costs that will be incurred between now and January 1 to operationalize conditions of the BIC Exemption, in particular, that may never be put into effect.
Comments on whether the January 1, 2018, applicability date should be extended must be submitted within 15 days of the RFI’s publication date in the Federal Register, which is expected to be on Thursday, July 6, 2017. Other comments are due within 30 days of the publication date.