Financial institutions and investment advisors have little certainty about compliance timing

Last year, the Department of Labor (DOL) finalized expansive changes in the definition of a "fiduciary" that applies to both ERISA-governed plans and individual retirement accounts (IRAs). The expanded definition means that a much broader group of institutions and advisors will now be fiduciaries, and therefore will need exemptions from the self-dealing "prohibited transactions" in ERISA and the Internal Revenue Code in order to be paid for their services or securities sales. Exemptions issued with the final regulations included major changes for many advisors and custodians of individual retirement accounts, requiring that they enter into a "Best Interest Contract" with their customers, and make expansive new disclosures about their business structure and compensation policies to help consumers be better informed about the conflicts of interest that industry fee and compensation practices may pose.

The regulations and prohibited transaction exemptions become applicable on April 10, 2017 (the “Applicability Date”). On March 2, 2017, the DOL proposed to delay this Applicability Date for 60 days. But, because the April 10 date was in the final regulations, before the DOL can actually delay application of the new rules, there must be a notice and comment period. It may be that a binding, final rule from the DOL will not come until shortly before, or in the worst-case scenario, shortly after April 10. That final rule might delay the rules to give businesses more time to comply, might delay them and signal that the DOL expects to make changes before the new Applicability Date, or might leave the rules intact and not delay their application.

On March 10, 2017, the Department of Labor issued Field Assistance Bulletin No. 2017-01, titled “Temporary Enforcement Policy on Fiduciary Duty Rule” (the “FAB”). The FAB provides temporary relief from enforcement of the DOL’s Fiduciary Rule and the related prohibited transaction exemptions.

Although the DOL states in the FAB that it hopes to issue a final decision on whether to officially delay the rules before April 10, many financial institutions who will be subject to the Fiduciary Rule have expressed concerns about investor confusion and other marketplace disruption based on uncertainty about whether a final rule implementing any delay will be published before April 10. For example, some financial services firms and advisers are considering distributing communications to existing retirement investor clients and potential plan and IRA customers that, among other things, include language regarding an uncertain applicability date and conditional acknowledgements of fiduciary status (i.e., that the firm will be a fiduciary, but only if the rule becomes applicable.)

In recognition of these concerns, the DOL issued a temporary enforcement policy via the FAB. Under this temporary enforcement policy, the DOL will not take enforcement action for non-compliance with the Fiduciary Rule in two cases:

  1. “Gap” Period: If the DOL decides to extend the Applicability Date and the official delay notice is issued after April 10, 2017, the DOL will not take any enforcement action for non-compliance with the Fiduciary Rule during the “gap” period between April 10, 2017 and the date a final rule extending the Applicability Date is published.
  2. No Delay: If the DOL decides not to delay the Applicability Date, the DOL will not take any enforcement action for failure to satisfy the compliance requirements of the Fiduciary Rule as long as those requirements are met within a “reasonable” period after publication of the decision not to delay. Further, the FAB states that the “Transition Period” disclosures required under the Best Interest Contract Exemption (BICE) and the DOL’s exemption for principal transactions could be provided during the 30-day “cure period” that these two exemptions allow, where disclosures are inadvertently omitted.

Financial institutions should be careful in their reading of the FAB as it only provides relief from DOL enforcement action, not from prohibited transaction excise taxes that could be assessed by the Internal Revenue Service. The temporary enforcement FAB also does not prevent private litigation based on the new rules, if a plan or IRA holder has a contract right of action.

So, while the FAB signals the DOL's enforcement intentions, it does not give financial institutions much additional time to comply, and compliance often requires material changes in business practices. The enforcement reprieve is the statement of only one stakeholder in these changes, so does not provide absolute protection to financial institutions from failure to comply with the Fiduciary Rule beginning on April 10, 2017, absent an official delay being issued before that date.