The proposal would extend the transition period to July 1, 2019.
The US Department of Labor (DOL) has proposed to delay the applicability of additional conditions of the Best Interest Contract (BIC) exemption, Principal Transactions (PrT) exemption, and PTE 84-24 (regarding insurance contracts and annuities) (together, the PTEs) from January 1, 2018 to July 1, 2019. The proposal is subject to a 15-day notice and comment period, ending on September 15, 2017. The DOL has also issued nonenforcement relief related to the PTEs’ prohibitions against class action waivers and qualifications.
Highlights from the Proposed Delay
- The proposal, if adopted, would extend the transition period for compliance to July 1, 2019. While the impartial conduct standards became applicable under the PTEs on June 9, 2017, additional conditions—including contracts, warranties, policies and procedures, and disclosure requirements—would be deferred to July 1, 2019 (rather than becoming applicable on January 1, 2018). The DOL acknowledged that in light of its need to complete the ongoing reexamination of the fiduciary rule (and accompanying exemptions) and its desire to coordinate its approach with the Securities and Exchange Commission, January 1, 2018 may not be a realistic date for the full conditions of the PTEs to become applicable. Observation: Though the delay will not be effective until the DOL issues a final rule, we view the DOL’s proposal and the reasons it gave to support the delay as strong indications that a delay of the January 1 compliance date will be forthcoming. Given the compliance, technology, and other significant costs associated with the additional conditions (e.g., contract drafting and delivery, website builds, and support for on-demand disclosures), and the likelihood of changes based on the ongoing reexamination, we encourage firms to carefully reconsider their plans and commitment of resources for complying with the additional conditions of the PTEs by January 1.
- The DOL again clarifies that the impartial conduct standards do not require fee leveling. In the release for the proposed delay, the DOL reiterated its prior guidance in FAQ 6 of the first set of Transition FAQs that firms do not need to adopt specific policies and procedures to meet the BIC and PrT exemptions’ impartial conduct standards—including with respect to leveling financial advisor compensation. Rather, as described in our prior LawFlash, the DOL indicated that firms have flexibility as to how to safeguard compliance with the impartial conduct standards during this period.
Observation: The DOL has clearly indicated its view that firms do not need to adhere to the specific requirements for policies and procedures under the BIC and PrT exemptions during the transition period and are not expressly required to make changes to their compensation and incentive structures. Instead, firms must adopt such “policies and procedures as they reasonably conclude are necessary to ensure that advisers comply with the impartial conduct standards . . . whether by tamping down conflicts of interest associated with adviser compensation, increased monitoring and surveillance of investment recommendations, or other approaches.”
Because the DOL has indicated that it may ultimately change the PTEs’ conditions, and the ultimate shape of the fiduciary rule and its compliance requirements remain uncertain, firms may want to consider this flexibility in structuring their policies and procedures for compliance with the impartial conduct standards during the transition period, so that they can more easily adapt their business models to any changes the DOL proposes to make to the PTEs or fiduciary rule in light of its study.
- The DOL indicates it will propose a streamlined exemption in the near future. The DOL indicated that “it will propose in the near future a new and more streamlined class exemption built in large part on recent innovations in the financial services industry.”
Observation: The conditions of this streamlined exemption remain unknown, though the DOL has previously indicated an interest in products such as mutual fund clean and T-shares, as well as fee-based annuities. We will continue to monitor developments in this area.
- The DOL requests comments on proposal. The DOL outlines four different delay structures it considered and requests further comments on each:
- A time-certain delay (e.g., 18 months).
- A delay that would end a specified period after the occurrence of a specific event (e.g., a delay lasting until 12 months after the DOL concludes its review as directed by the presidential memorandum).
- A tiered approach (e.g., delaying the end of the transition period until the earlier or the later of (a) a date certain or (b) the end of a period following the occurrence of a defined event).
- A delay conditional on the behavior of the entity seeking relief (e.g., whether the entity is taking steps to use a market innovation to comply with the rule).
The DOL also solicits comments on whether its temporary enforcement policy, whereby it will not pursue claims against investment advice fiduciaries who are working diligently and in good faith to comply with the new rules and PTEs, should be extended for the same period.
Additional Nonenforcement Relief
The DOL also issued additional nonenforcement relief in Field Assistance Bulletin (FAB) 2017-03. Citing its position in a brief filed in a pending lawsuit challenging the fiduciary rule and exemptions, the DOL states that it (and the Internal Revenue Service) will not pursue a claim against any fiduciary for a failure to comply with the BIC and PrT exemptions’ prohibition against class action waivers and qualifications that is otherwise scheduled to become applicable (absent an extension or amendment) on January 1, 2018. The FAB states that this policy will continue to apply as long as the PTEs include this prohibition. Thus, this relief will continue even if the transition period is not extended.
Observation: We view the nonenforcement relief, as well as the DOL’s statements recently made in litigation challenging the fiduciary rule, as a strong indication that the DOL will propose to eliminate the restrictions on class action waivers and qualifications in the PTEs. Nonetheless, firms will still want to consider the extent to which an investor’s right to pursue class actions may be limited under other federal and state laws, including FINRA rules applicable to registered broker-dealers.
What Firms Should Do Now
We strongly encourage interested parties to comment on the proposed extension by September 15, 2017. We caution that until a final rule is published in the Federal Register, the PTEs will continue to reflect the January 1, 2018 applicability date. As such, firms will want to evaluate how best to address this uncertainty in determining their compliance plans.