On August 9, 2017, the U.S. Department of Labor (DOL) submitted to the Office of Management and Budget (OMB) a proposal to delay until July 1, 2019 the implementation date for those portions of the DOL’s fiduciary rule that are not currently applicable. The fiduciary rule was originally adopted by the DOL in April 2016, with a scheduled implementation date of April 2017. Following a February 2017 presidential memorandum directing the DOL to re-evaluate the effects of the rule, DOL opted for partial implementation, while deferring implementation of other portions for further study.
The rule’s expansion of the term “fiduciary” to cover a broad range of brokers and other financial professionals became applicable on June 9, 2017. On that same date, two new prohibited transaction exemptions, the Best Interest Contract Exemption (“BIC Exemption”) and the Principal Transactions Exemption, became available. However, most of the conditions set forth in these controversial exemptions did not become applicable and, during a transition period scheduled to end on January 1, 2018, compliance with these exemptions only requires adherence to the impartial conduct standards. (That is, the fiduciary must act in the best interest of the client, the fiduciary may not receive unreasonable compensation, and it may not make false or misleading statements.) Under the proposal currently being reviewed by OMB, the transition period would be extended to July 1, 2019.
The full text of the proposal to further delay implementation is not yet publicly available. Once cleared by OMB, the proposed delay will likely be subject to public comment before any formal action is taken by the DOL on the proposal. Therefore, at this stage, the duration of any delay is not clear, nor do market participants have the benefit of DOL’s explanation for its proposal.
Nonetheless, it seems reasonable to infer from the proposal for an 18-month delay that the DOL has concluded that it needs substantial additional time to adequately consider the issues relating to full implementation of the fiduciary rule. Among the issues to be considered are the limited scope of the Principal Transactions Exemption, and the detailed and challenging contract and disclosure requirements set forth in both the BIC and Principal Transaction Exemptions. Making these exemptions workable is crucial if retail retirement investors are to have access to products sold by broker-dealers on a principal basis, and if retail retirement investors wish to continue to have commission-based rather than fee-based accounts. Although it is far too early to project the final outcome, the likelihood of major changes to the BIC and Principal Transaction Exemptions appears to have increased in light of the further delay proposed by DOL.