Earlier this week, Secretary of Labor Alexander Acosta indicated in a Wall Street Journal op-ed article that there will be no further delay as to the parts of the fiduciary rule issued by the Department of Labor (DOL) that are currently scheduled to become applicable June 9. Although the secretary suggests that future changes to the fiduciary rule are possible, he has confirmed that the rule (or some form thereof) is here to stay. In connection with this article, the DOL released additional guidance, including an important new enforcement policy, as to the June 9 applicability date and subsequent transition period.
As we discussed in a WorkCite article last year, the fiduciary rule revamps the standards for determining when a party is a fiduciary as to an ERISA plan or individual retirement account (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 working with retirement plans subject to ERISA will now be treated as fiduciaries and will therefore become subject to ERISA’s fiduciary responsibility requirements and certain related tax rules. Those tax rules will also apply such persons who work with IRAs.
In connection with the fiduciary rule, the DOL also issued new and revised prohibited transaction exemptions (PTEs) that would permit fiduciaries providing investment advice to continue to receive certain forms of compensation and engage in certain transactions without violating applicable prohibited transaction rules.
June 9, 2017 Applicability Date
This past February, President Trump issued a memorandum directing the DOL to conduct further examination of the fiduciary rule to determine whether it might adversely affect Americans’ ability to obtain retirement information and financial advice. In response to that memorandum, the DOL took the following action:
- New Rule and PTEs. The applicability date of the fiduciary rule, the new PTEs — the best interest contract exemption (BIC Exemption) and the exemption for principal transactions in certain debt securities (Principal Transaction Exemption) — and the amendments to various existing PTEs was delayed until this coming June 9.
- BIC Exemption, Principal Transactions Exemption and PTE 84-24. The necessity to fully comply with all of these exemptions (as amended) was delayed until Jan. 1, 2018. Instead, from June 9, 2017, through Jan. 1, 2018, a fiduciary need only satisfy the following so-called “impartial conduct standards” to qualify for exemptive relief under these PTEs:
- Providing advice in the retirement investors’ best interest;
- Charging no more than reasonable compensation (and as to the Principal Transactions Exemption, seek the best execution reasonably available under the circumstances as to the transaction); and
- Avoiding misleading statements.
- Other Substantive Provisions. More of the substantive provisions of the PTEs have been delayed until Jan. 1, 2018, including the following: written representations and commitments about fiduciary compliance; execution of a “best interest” contract; warranties about policies and procedures; and the prohibition on imposing arbitration requirements on class claims.
Secretary Acosta’s article states that although courts have upheld the fiduciary rule as consistent with Congress’s delegated authority, the rule as-written may not align with President Trump’s deregulatory goals. Consequently, he indicates that the DOL has concluded that it is necessary to seek additional public input on the entire rule. And, importantly, he specifically invites the Securities and Exchange Commission to move forward in its own rule-making, in light of its critical expertise in this area.
Despite announcing a wholesale review of the fiduciary rule, Secretary Acosta stated that he has found “no principled legal basis to change the June 9 [applicability] date while we seek public input. Respect for the rule of law leads us to the conclusion that this date cannot be postponed.” Therefore, his article confirms that the June 9 applicability date will go into effect.
In connection with the secretary’s article, the DOL released additional guidance, including an important new enforcement policy, as to the June 9 applicability date and subsequent transition period.
New Enforcement Policy
Field Assistance Bulletin No. 2017-02 (the FAB) reiterates the DOL’s position that compliance assistance for plan fiduciaries and other service providers is a high priority. Consistent with that approach, the FAB provides a new, temporary enforcement policy as to the fiduciary rule.
Specifically, during the phased implementation period from June 9, 2017, until Jan. 1, 2018, the DOL:
- will not pursue claims against fiduciaries who are working diligently and in good faith to comply with the fiduciary duty rule and its exemptions;
- will not treat those fiduciaries as being in violation of the rule and exemptions; and
- has confirmed that the Internal Revenue Service (IRS) has extended the prohibited transaction excise tax relief provided by the IRS in Announcement 2017-4 to any transactions or agreements to which the FAB applies.
Additional FAQ Guidance
An additional set of 15 frequently asked questions (FAQs) also has been issued by the DOL. The FAQs primarily address issues relating to the transition period. However, they also address non-transition-period topics such as issues related to robo-advice and investment education.
The FAB states that the DOL is actively engaging in a careful analysis of the issues raised in the president’s February memorandum and reiterates the possibility, based on the results of the examinations, that additional changes in the fiduciary rule may be forthcoming. Additionally, the FAB states that the DOL intends to issue a request-for-information seeking additional public input:
The Department also intends to issue a Request for Information (RFI) in the near future seeking additional public input on specific ideas for possible new exemptions or regulatory changes based on recent public comments and market developments. The Department is also aware that after the fiduciary duty rule and PTEs were issued firms have begun to develop new business models and innovative market products to mitigate conflicts of interest. The RFI will specifically ask for public comment on whether it is likely to take more time to implement these new approaches than what the Department envisioned when it set January 1, 2018, as the applicability date for full compliance with all of the exemptions’ conditions, and, if so, whether an additional delay in the January 1, 2018 applicability date would reduce burdens on financial services providers and benefit retirement investors by allowing for a smoother implementation of those market changes.
Given the nature of the information likely to be solicited in the forthcoming RFIs, it would not be unreasonable to expect some kind of delay to the Jan. 1, 2018, transition-period deadline.