On March 1, the Department of Labor (DOL) proposed a 60-day delay of the April 10, 2017 applicability date of its fiduciary conflict-of-interest rule and related prohibited transaction exemptions (PTEs). The delay was announced shortly after President Trump issued a memorandum directing the secretary of labor to review the rule to determine whether it adversely affects the ability of Americans to gain access to retirement information and financial advice. Although a 60-day delay is less than the 180 days many had expected, the announcement provides some certainty as to the rule’s future, at least for now.
As discussed in a WorkCite article last year, the rule revamps the standards for determining when a party is a fiduciary as to an ERISA plan or IRA by virtue of providing investment advice for a fee. Because the rule substantially expands existing standards as to what constitutes “investment advice,” a broader range of brokers, insurance agents, advisers and financial service providers will now be treated as fiduciaries and will therefore become subject to ERISA’s fiduciary responsibility requirements (and certain related tax rules applicable to IRAs).
In connection with this change, the DOL also issued new and revised PTEs, which permit providers of fiduciary investment advice to continue to receive certain forms of compensation and engage in certain transactions without violating applicable prohibited transaction rules.
In October 2016, the DOL issued its first wave of substantive guidance on the rule in the form of answers to 34 FAQs. In January 2017, shortly before the president’s inauguration, a second round of guidance was issued with answers to 30 FAQs.
Regulatory Freeze Pending Review
The stated “effective date” of the rule was June 7, 2016, and, before this week’s announcement, the stated “applicability date” was April 10, 2017. These dates are significant in light of the Jan. 20 “regulatory freeze” memorandum to the heads of executive departments and agencies that was issued soon after the inauguration by Reince Priebus, assistant to the president and chief of staff. The Priebus memo directs such department and agency heads in part as follows:
With respect to regulations that have been published in the [Federal Register] but have not taken effect, as permitted by applicable law, [you should] temporarily postpone their effective date for 60 days from the date of this memorandum, subject to the exceptions described in paragraph 1, for the purpose of reviewing questions of fact, law, and policy they raise. Where appropriate and as permitted by applicable law, you should consider proposing for notice and comment a rule to delay the effective date for regulations beyond that 60-day period. In cases where the effective date has been delayed in order to review questions of fact, law, or policy, you should consider potentially proposing further notice-and-comment rulemaking.
The “paragraph 1” exceptions referred to above are those allowed by the director or acting director of the Office of Management and Budget for emergency situations or other urgent circumstances relating to health, safety, financial or national security matters.
This week’s delay announcement as to the rule and the PTEs reflects the DOL’s interpretation that the delay ordered by the Priebus memo applies to the applicability date of the rule and the PTEs.
The Trump Memo
On Feb. 3, 2017, President Trump issued his own memorandum directing the secretary of labor to prepare an economic and legal analysis concerning the likely impact of the rule on “the ability of Americans to gain access to retirement information and financial advice.” Among other things, the analysis must consider:
- whether the anticipated applicability of the rule has harmed or is likely to harm investors due to a reduction in access to retirement savings offerings, retirement product structures, retirement savings information, or related financial advice;
- whether the anticipated applicability of the rule has resulted in any disruption within the retirement services industry that may adversely affect investors or retirees; and
- whether the rule is likely to cause an increase in litigation or an increase in the prices that investors and retirees must pay to gain access to retirement services.
The president’s memo states that if an affirmative determination is made as to any of these considerations, or if a conclusion is reached for any other reason after review that the rule is inconsistent with empowering Americans to make their own financial decisions, then the rule should be rescinded or revised, as appropriate and consistent with law.
Not surprisingly, the DOL’s April 2016 nearly 400-page regulatory impact analysis of the fiduciary conflict-of-interest rule examined many of the considerations outlined in the Trump memo. Overall, the DOL concluded in this analysis that “structural secondary effects will be highly positive” and that “[n]egative effects generally will be confined to short-term frictions.”
What Happens Now?
The stated goal of the proposed delay is to make it possible for the DOL “to take additional steps (such as completing its examination, implementing any necessary additional extension(s), and proposing and implementing a revocation or revision of the rule) without the rule becoming applicable beforehand.”
Comments on the proposed delay must be submitted to the DOL on or before March 17, 2017. The DOL is particularly interested in market responses to the rule and the PTEs to date and has compiled an extensive list of relevant questions for commenters to address. The DOL has indicated that upon completion of its examination, it may decide to (i) allow the rule and PTEs to become applicable, (ii) issue a further extension of the applicability date, (iii) propose to withdraw the rule, or (iv) propose amendments to the rule.
The DOL has acknowledged that its examination of the rule and the PTEs pursuant to the president’s memo, together with possible resultant actions to rescind or amend the rule, could require more time than the proposed 60-day extension would provide. The DOL therefore wants to know from commenters what costs and benefit considerations it should consider if the applicability date is further delayed, for six months, a year, or more. Given the complexity of the issues, and the time it will take for the DOL to review the comments to the delay proposal, it would not be surprising if the applicability date of the rule and the PTEs is extended for much longer than 60 days, or even indefinitely.
We will follow up with WorkCite updates as developments occur as to the rule and the PTEs.