After nearly a month of regulatory machinations and behind-the-scenes lobbying, the Department of Labor has released a proposed rule that would delay the “applicability date” of its recently enacted “conflict of interest” (or “fiduciary”) regulation (the “Fiduciary Rule”). The 60-day delay in the applicability of the Fiduciary Rule would have only an indirect effect on employers, but is of great interest to investment advisors and other service providers.
Although the proposed delay had been widely anticipated, it was for a shorter period than had been expected (60 as opposed to 180 days), and it took longer than expected for the federal Office of Management and Budget (“OMB”) to release the DOL’s proposal. Rumors abound concerning the rationale behind the shorter proposed extension of the applicability date and the OMB’s unhurried action in releasing the DOL’s delay proposal. Interested parties will have 15 days after the proposed rule is published in the Federal Register to submit comments on the proposed delay in the applicability date, and 45 days to submit comments on the Fiduciary Rule itself.
Finalized last April, the Fiduciary Rule has not been short on controversy. As noted in our whitepaper on the Rule, it took the DOL two tries that generated thousands of comments from advocates on both sides of the issue to arrive at the final product. The Rule is intended to clarify when advisors who provide investment recommendations to a plan or its participants become “fiduciaries” under ERISA and the Tax Code, and to ensure that such advisors act in the best interests of advice recipients. The Rule became effective last year but was drafted such that it would not become “applicable” to financial advisors and other service providers until April 10, 2017. On February 3, 2017, President Trump ordered the DOL to reexamine the Rule and determine whether it should be rescinded or modified. (Our February 6, 2017, article summarizes the President’s Executive Order.) The proposed delay in the applicability date is intended to effectuate that order.
The DOL’s new action comes in the form of a proposed rule that would extend for 60 days (until June 9, 2017) the April 10 applicability date of the Fiduciary Rule. The applicability date of the new and revised prohibited transaction exemptions that were issued in conjunction with the Fiduciary Rule (including the Best Interest Contract Exemption) also would be delayed until June 9, 2017. The proposed rule includes a very short, 15-day period in which interested parties may submit comments on the proposed delay. The DOL will take a few days to consider those comments, and then presumably issue a final rule implementing the delayed applicability date.
After a series of meetings over the past two weeks with industry representatives (including many who favor the Final Rule), the OMB classified the DOL’s proposal to delay – and potentially modify or rescind – the Fiduciary Rule as “economically significant.” This designation could make it more difficult for the DOL to unravel the Rule. The DOL’s new proposed rule invites comments concerning whether the benefits of the proposed delay – including the potential reduction in compliance costs for advisors should the DOL ultimately decide to rescind or modify the Fiduciary Rule – justify the potential costs of the delay – including the potential losses to investors who may continue to receive conflicted investment advice.
In addition to the delayed applicability date, however, the proposed rule also requests comments on the merits of the Fiduciary Rule itself. Commenters have been given a longer – though still relatively tight – 45-day period in which to submit remarks on that subject. (The DOL explained that it most likely could not complete the thorough reexamination of the Fiduciary Rule directed by President Trump by the scheduled April 10 applicability date, necessitating the 60-day extension of that date.) The proposed rule invites comments on the effect that the Fiduciary Rule has had on investors and investment advisors to date, articulating a series of more than 20 questions that may be relevant to the DOL’s reevaluation.
At this point, we expect that the DOL’s proposal to extend the April 10, 2017, applicability date will be finalized shortly after the expiration of the 15-day comment period. This will push the date by which advisors must comply with the Fiduciary Rule to June 9, 2017 (assuming the DOL does not extend the applicability date again). This will give the DOL time to collect and evaluate comments on the merits of the Fiduciary Rule in light of the issues identified in the President’s February 3 Executive Order.
The DOL acknowledges that it will have several options after completing its reexamination of the Fiduciary Rule. These include:
- Allowing the Rule and prohibited transaction exemptions to become applicable on June 9, 2017, without change;
- Proposing a further extension of the applicability date;
- Proposing a complete withdrawal of the Fiduciary Rule and exemptions; or
- Proposing amendments to the Fiduciary Rule and/or exemptions.
In the meantime, the pending litigation filed by opponents of the Fiduciary Rule will presumably proceed. Supporters of the Fiduciary Rule (many of whom have already spent millions of dollars and made significant business adjustments in an effort to comply with it) have hinted at litigation should the DOL decide to withdraw or substantially alter the Rule. There will undoubtedly be more drama in D.C. in the coming weeks.