By a notice published in the Federal Register on November 29, 2017, the Department of Labor (DOL) extended from January 1, 2018, until July 1, 2019, the date for compliance with the full conditions in its new “investment advice” fiduciary definition and related exemptions (Final Rule), which became generally applicable on June 9.
• Under guidance issued in April, the expanded fiduciary definition and the Impartial Conduct Standards for fiduciaries articulated in various exemptions (PTEs) were delayed 60 days, from April 10 to June 9.
– Compliance with other conditions in the Best Interest Contract Exemption or “BICE” (PTE 2016-01) and the Principal Transaction Exemption (PTE 2016-02), and with other amendments to PTE 84-24, was delayed from June 9, 2017, until January 1, 2018 (Transition Period), at which point full compliance with the Final Rule, without any transitional accommodation, would be required.
– At that time, DOL explained its determination on timing as a balancing of its conclusions that:
› A careful and thoughtful process to address the Final Rule in response to the Presidential memorandum of February 3, 2017, was likely to take more time than a 60-day delay would afford; and
› Providers should not be allowed more time before becoming legally obligated to give investment advice meeting the Impartial Conduct Standards—described as recommendations in the best interest of the retirement investor free from misrepresentations, in exchange for reasonable compensation.
– DOL explicitly noted that, if after receiving comments on the issues raised in the Presidential memorandum (due April 17, and now as augmented by responses to DOL’s June 29 Request for Information), it concluded that significant changes were necessary or more time was required to complete its review of the Final Rule, it would retain the ability to further defer the January 1 date or to grant additional interim relief.
• On August 31, DOL published a proposal to extend the Transition Period under BICE, the Principal Transaction Exemption and PTE 84-24 until July 1, 2019.
After considering the commentary it received, DOL has extended the Transition Period as proposed, without change. Thus, the same transition rules and standards in effect on June 9 will remain in effect until July 1, 2019. Of particular note, the DOL explained that:
• It needs more time to “carefully and thoughtfully review” the commentary it has received and to honor the President’s directive, as well as to coordinate with the SEC, FINRA, NAIC and other regulators.
• It anticipates proposing a new streamlined class exemption in the near future, which presumably would address innovative products being developed in response to the Final Rule.
• It “sees no compelling reason” to further extend the “grandfathering exemption” (although it did solicit supplemental comments on this point going forward). The applicability date for determining whether a transaction may be grandfathered remains June 9, 2017.
In addition, the DOL announced that its temporary non-enforcement policy first articulated in Field Assistance Bulletin (FAB) 2017-02 is extended (and that the Treasury Department and IRS have confirmed to DOL that similar excise tax relief described in Announcement 2017-04 will remain in effect) during the Transition Period. In the terms of the relief announced in the FAB, the DOL “will not pursue claims against fiduciaries who are working diligently and in good faith to comply with the fiduciary duty rule and exemptions, or treat those fiduciaries as being in violation of the fiduciary duty rule and exemptions.”
Considerations for Service Providers
• Service providers may stand down on expending additional resources on contingency planning for the possibility that the delay of the more onerous conditions of the PTEs would not go forward as expected.
• At the same time, providers should not lose sight of the fact that the remainder of the Final Rule is in full effect—with the expanded definition of fiduciary. Compliance with a PTE is necessary for a fiduciary to cover any conflict of interest prohibited transactions.
– During the extended transition period, the applicable PTE in many cases will be the BICE and its conditions are essentially the Impartial Conduct Standards. Providers should be prepared to demonstrate how they satisfy these conditions, namely that they are: (1) giving prudent advice in the retirement investors’ best interest; (2) charging no more than reasonable compensation; and (3) avoiding misleading statements.
– In that regard, DOL reiterated its view that it expects that advisers and financial institutions will adopt prudent supervisory mechanisms to prevent violations of these standards and that they fairly and accurately describe recommended transactions and compensation practices.
– If a particular transaction is not covered by the BICE because, for example, the adviser is an employer of employees covered under the plan, another PTE will need to be identified.
• DOL directly confirmed its position that advice regarding rollovers of plan assets may be investment advice under ERISA. While one can argue the correctness of this conclusion, providers may be best served to operate under that assumption, even where the provider generally does not service ERISA plans.
Considerations for Plan Sponsors
• Plan sponsors and administrators may wish to confirm that existing plan service providers maintain a comprehensive compliance strategy and will rely (or will continue to rely) on any needed prohibited transaction exemptions.
• In that regard, some providers may have already implemented changes in their services agreements, while others have not. It is also possible that some revisions that had previously been made final will be revisited.