This week, new U.S. Department of Labor Secretary Acosta announced that the final fiduciary regulations would go into effect on June 9, 2017. The Department also issued two pieces of guidance with regard to the regulations also referred to as the “Conflicted Advice Rules”. The guidance consists of a set of FAQs issued by the Employee Benefits Administration (EBSA) and a related Field Assistance Bulletin No. 2017-02, describing a temporary Department enforcement policy for the period between June 9, 2017 “the applicability date” and January 1, 2018 “the full applicability effective date.” https://www.dol.gov/newsroom/releases/ebsa/ebsa20170522
Conflict of Interest FAQs
The FAQs address the expectations of retirement plan fiduciary advisors during the transition period described above. Q&A 1 provides that firms and advisors must comply with the prohibited transaction exemption conditions beginning June 9, 2017, if they receive compensation for investment advice that would otherwise violate the prohibited transaction rules under the new regulations. Advisors must structure their compensation to avoid prohibited transactions (such as with level fee compensation) or they must comply with an exemption such as the Best Interest Contract (BIC) exemption or principal transaction exemption. Variable commissions and other non-level compensation on investments would be permitted if the advisor can satisfy the BIC “best interest” requirements during the transition period.
The BIC exemption requires that advisors give advice that is in the “best interest” of the retirement plan investor (qualified retirement plan or IRA). The Q&As affirm the fiduciary requirements of ERISA, specifically stating that under the requirement of prudence and loyalty, advice on investment options must be based on the interest of the customer rather than what is in the best financial interest of the advisor or the investment firm. The new fiduciary standard requires that advisors charge no more than reasonable compensation and they cannot make misleading statements about investment transactions, compensation, or the existence of conflicts of interest.
Many advisors and investment advisory firms had hoped that with the appointment of a new Secretary of Labor that the rule would be repealed or subject to a significant delay. As the original effective day approached (April 10, 2017), it became clear that the financial services industry had made significant investment in and changes to the way advisors deliver advice to retirement plan investors. It also became clear that recommending investments based on the level of commissions or other fees to the advisor, rather than the interests of the consumer, was going to expose the advisor to significant penalties in the future.
Q&A 3 states, “Compliance with the permitted exemptions is required beginning June 9, 2017”. While the impartial conduct standard is effective June 9, 2017, full compliance, requiring additional significant disclosures and written acknowledgments by the fiduciary will not be required until the January 1, 2018 delayed effective date. The Department of Labor reports that it will continue its analysis and study of the final regulations as directed by President Trump in a February 3rd Presidential Memorandum and indicates that additional changes to the regulations may be proposed.
Field Assistance Bulletin No. 2017-02
This document (the “FAB”) announces a temporary enforcement policy with respect to the prohibited transaction exemptions for the BIC exemption, the class exemption for principal transactions and certain amended existing prohibited transaction class exemptions. This FAB echoes the FAQs stating that the full compliance date for the BIC and principal transaction exemptions are extended to January 1, 2018, and that during the transition period between June 9 and January 1, 2018, impartial conduct and no conflicts of interest by advisors will be required. Under the FAB, the Department announced, “The Department will not pursue claims against fiduciaries who are working diligently and in good faith to comply with fiduciary duty rule and exemptions, or treat those fiduciaries as being in violation of the fiduciary duty rule and exemptions.”
Impact on Plan Sponsors
Employers sponsoring 401(k) and other tax qualified retirement plans will see little direct impact on their plans as a result of these new rules. To the extent that a plan advisor has not accepted fiduciary responsibility under ERISA §§3(21) or 3(38), the advisor will have to associate with an advisor willing to accept fiduciary responsibility or will need to accept fiduciary responsibility in order to continue to provide advice to retirement plan investors. Some broker/dealers have reconfigured their business model to prohibit individual brokers from providing advice to retirement plan fiduciaries in anticipation of the new rules.