We are issuing the latest update to our recent Alerts regarding the final rules issued by the Department of Labor (“DOL”) with respect to fiduciaries under the Employee Retirement Income Security Act of 1974 (“ERISA”) and the DOL’s Best Interest Contract Exemption (“BIC Exemption”) from ERISA’s prohibited transactions provisions. The DOL has released its proposed rule to delay the April 10, 2017 applicability date of the Fiduciary Rule (the “Applicability Date”) as well as the BIC Exemption and Prohibited Transaction Exemption 84-24 (“PTE 84-24”), seeking to delay the Applicability Date for a period of 60 days1. The proposed rule is scheduled to be published in the Federal Register on March 2, 2017. The DOL is requesting public comment not only on the proposed 60-day delay of the Applicability Date but also the questions raised in President Trump’s February 3, 2017 Memorandum (the “Memorandum”) directing the Secretary of the DOL to undertake a review of the Fiduciary Rule as well as “generally on questions of law and policy concerning the final rule and PTEs.” There will be a 15-day comment period with respect to the proposal to delay the Applicability Date, running from the date that the proposed rule is published in the Federal Register, or through March 17, 2017. There will be a 45-day comment period with respect to the examination of the Fiduciary Rule required under the Memorandum, or through April 16, 2017.
Insofar as the proposed 60-day delay in the Applicability Date is concerned, the DOL justified the delay on two grounds. First, in light of the fact that “[t]here are approximately 45 days until the …” Applicability Date goes into effect, the DOL observed that “it may take more time than that to complete the examination mandated by the President’s Memorandum.” Second, in the absence of a delay in the Applicability Date, the DOL observed, “if the examination prompts the Department to propose rescinding or revising the rule, affected advisers, retirement investors and other stakeholders might face two major changes in the regulatory environment rather than one.” According to the DOL, “[t]his could unnecessarily disrupt the marketplace, producing frictional costs that are not offset by commensurate benefits.” The 60-day delay would thus “make it possible for the Department to take additional steps (such as completing its examination, implementing any necessary additional extension(s), and proposing and implementing a revocation or revision of the rule) without the rule becoming applicable beforehand,” thereby “spar[ing]” “advisers, investors and other stakeholders … the risk and expenses of facing two major changes in the regulatory environment.” The DOL did note, however, that “[t]he negative consequence” of the proposed 60-day delay is “the potential for retirement investor losses from delaying the application of fiduciary standards to their advisers.”
The DOL considered, but ultimately rejected, a 180-day delay in the Applicability Date. It had been reported that the DOL’s delay proposal would call for a 180-day delay, based on the 180-day delay language that was originally contained in, but deleted from, the Memorandum. The proposed rule does not provide any insight into why the DOL opted not to seek a 180-day delay in the Applicability Date instead of a 60-day delay, apart from observing that under the regulatory impact analysis that accompanied the Fiduciary Rule, a 180-day delay “would reduce the same portion of potential investor gains from the rule by $441 million in the first year and $2.7 billion over 10 years, while relieving industry of 180-days of day-to-day compliance burdens, worth an estimated $126 million.”
In light of the magnitude of the DOL’s undertaking in conducting the review of the Fiduciary Rule mandated by the Memorandum and the likelihood that such review will not be completed by April 10, 2017, it seems likely that the DOL will approve, following the public comment period, the proposed 60-day delay in the Applicability Date. The fact that the DOL has decided to propose a 60-day delay in the Applicability Date rather than the reported 180-day delay demonstrates that the DOL likely concluded that it will be able to both complete its examination of the Fiduciary Rule and determine whether to seek to rescind or revise the rule by June 9, 2017, which would become the new applicability date by extension. In light of the fast approaching deadline for implementing the standards required by the Fiduciary Rule, we expect that the DOL’s proposal for a 60-day delay in the Applicability Date will become finalized before the end of March 2017.