What just happened?
The Department of Labor has issued a final rule that delays the applicability date of the Fiduciary Rule from April 10, 2017 to June 9, 2017. The compliance date of January 1, 2018 has not been delayed.
The rule granting the delay will become effective on April 10.
The delay applies to the following rules:
- The revised definition of “fiduciary” under ERISA and the Internal Revenue Code;
- The Best Interest Contract Exemption (the “BICE”);
- The Class Exemption for Principal Trades in Certain Assets Between Investment Advice Fiduciaries and Employee Benefit Plans and IRAs (the “Principal Trade Class Exemption”);
- Amendments to Prohibited Transaction Exemption (“PTE”) 84-24 (except for the Impartial Conduct Standards); and
- The applicability dates of PTEs 75-1, 77-4, 80-83, 83-1, and 86-128.
The delay also modifies the requirements for firms and their representatives who wish to use the BICE, the Principal Trade Class Exemption, and PTE 84-24 as of the applicability date. These fiduciaries are now only required to adhere to the Impartial Conduct Standards between June 9, 2017 and January 1, 2018. Requirements to deliver an acknowledgement of fiduciary status to retirement investors and to make certain written disclosures are now delayed until January 1, 2018.
The DOL stated that the delay is “necessary to enable the Department to perform” the examination of the Fiduciary Rule required by President Trump in a Presidential Memorandum issued in February “and to consider possible changes with respect to the Fiduciary Rule and PTEs based on new evidence or analysis developed pursuant to the examination.”
Public and industry interest in the Fiduciary Rule is high. During the 15-day comment period, the DOL received approximately 193,000 comment and petition letters. Of these, approximately 15,000 supported delay and/or repeal of the rule, while 178,000 opposed a delay and/or generally supported the rules as they stand.[i]
The DOL stated that by implementing the Impartial Conduct Standards on June 9 while delaying other parts of the BICE and other PTEs to January 1, “much of the potential investor gains predicted in the Rule’s regulatory impact analysis published on April 8, 2016, will commence on June 9, 2017 and accrue prospectively while the Department performs the examination mandated by the president and considers potential changes to the Rules and PTEs.”
The DOL cautioned that the delay of the applicability date “should not be viewed as prejudging the outcome” of the review mandated by President Trump.
What does this mean?
First and foremost, it means that persons providing services to retirement investors can confidently hold off on implementing their DOL plans until June 9.
Next, it means that the revised definition of “fiduciary” is also delayed. Firms can continue their current practices until June 9.
Finally, it means that compliance with specific provisions of the Best Interest Contract Exemption, the Principal Trade Class Exemption, and PTE 84-24 has been delayed until the compliance date of January 1, 2018. Between June 9 and January 1, firms and their representatives will be held to the Impartial Conduct Standards:
- At the time of the recommendation, the fiduciary firm and its representatives must provide advice in the “Best Interest” of the Retirement Investor. Under this standard, “Best Interest” means that the firm and its representatives must “act with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims would exercise based on the investment objectives, risk tolerance, financial circumstances, and the needs of the Retirement Investor without regard to the financial or other interests of the Adviser, Financial Institution or any Affiliate, Related Entity, or other party.”
- The recommended transaction may not cause the firm, its representatives, its affiliates or its related parties to receive, directly or indirectly, more than reasonable compensation.
- The firm and its representatives may not make materially misleading statements to a Retirement Investor. This includes statements about the transaction, fees or compensation, material conflicts of interest, or other relevant matters.
DOL is still receiving comments regarding the sweeping review of the Fiduciary Rule required by President Trump’s Memorandum. The period for these comments ends on April 17. It is entirely possible that, following the end of the comment period, the DOL will issue further rules that amend or withdraw the Fiduciary Rule.
We are also watching appeals to judicial rulings upholding the Fiduciary Rule to see if any parties successfully request additional delays or injunctions to the June 9 applicability date while appeals are pending.
What should firms do now?
Firms should be prepared to comply with the Impartial Conduct Standards by June 9. While the specific components of the Best Interest Contract Exemption (BICE) and other PTEs have been postponed to June 9, the underlying rationales for many of them are found in the Impartial Conduct Standard.
Here are some steps that firms can take between now and June 9 (if they have not already done so):
- Training. Be sure that your officers, staff and reps understand their duties under the Impartial Conduct Standards.
- Compensation. Evaluate current compensation arrangements and verify that they are consistent with what is typically charged in your area. Eliminate instances of “double-dipping” (for example, charging both an advisory fee and a 12b-1 fee for mutual funds in an IRA) as that is presumably “unreasonable.”
- Sales and marketing. Review marketing materials to ensure that statements cannot be construed as “misleading.”
Procedures. While procedures specifically mandated by the BICE are not required until January 1, it will be difficult (if not impossible) to demonstrate compliance with the Impartial Conduct Standards without written procedures showing the specific steps your firm uses to adhere to these standards. Moreover, written procedures are your firm’s first line of defense should a rep fail to comply with the Impartial Conduct Standards.
The Department of Labor has issued a final rule that delays the applicability date of the Fiduciary Rule from April 10, 2017 to June 9, 2017. The compliance date of January 1, 2018 has not been delayed.
The delay also modifies the requirements for firms and their representatives who wish to use the BICE, the Principal Trade Class Exemption, and PTE 84-24 as of the applicability date. These fiduciaries are now only required to adhere to the Impartial Conduct Standards between June 9, 2017 and January 1, 2018. Requirements to deliver an acknowledgement of fiduciary status to retirement investors and to make certain written disclosures are now delayed until January 1, 2018.
Public and industry interest in the Fiduciary Rule is high. During the 15-day comment period, the DOL received approximately 193,000 comment and petition letters. Of these, approximately 15,000 supported delay and/or repeal of the rule, while 178,000 opposed a delay and/or generally supported the rules as they stand.[i]
The DOL cautioned that the delay of the applicability date “should not be viewed as prejudging the outcome” of the review mandated by President Trump.
First and foremost, it means that persons providing services to retirement investors can confidently hold off on implementing their DOL plans until June 9.
Finally, it means that compliance with specific provisions of the Best Interest Contract Exemption, the Principal Trade Class Exemption, and PTE 84-24 has been delayed until the compliance date of January 1, 2018. Between June 9 and January 1, firms and their representatives will be held to the Impartial Conduct Standards:
- At the time of the recommendation, the fiduciary firm and its representatives must provide advice in the “Best Interest” of the Retirement Investor. Under this standard, “Best Interest” means that the firm and its representatives must “act with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims would exercise based on the investment objectives, risk tolerance, financial circumstances, and the needs of the Retirement Investor without regard to the financial or other interests of the Adviser, Financial Institution or any Affiliate, Related Entity, or other party.”
- The recommended transaction may not cause the firm, its representatives, its affiliates or its related parties to receive, directly or indirectly, more than reasonable compensation.
- The firm and its representatives may not make materially misleading statements to a Retirement Investor. This includes statements about the transaction, fees or compensation, material conflicts of interest, or other relevant matters.
We are also watching appeals to judicial rulings upholding the Fiduciary Rule to see if any parties successfully request additional delays or injunctions to the June 9 applicability date while appeals are pending.
Firms should be prepared to comply with the Impartial Conduct Standards by June 9. While the specific components of the Best Interest Contract Exemption (BICE) and other PTEs have been postponed to June 9, the underlying rationales for many of them are found in the Impartial Conduct Standard.
Procedures. While procedures specifically mandated by the BICE are not required until January 1, it will be difficult (if not impossible) to demonstrate compliance with the Impartial Conduct Standards without written procedures showing the specific steps your firm uses to adhere to these standards. Moreover, written procedures are your firm’s first line of defense should a rep fail to comply with the Impartial Conduct Standards.
[i] Despite the fact that approximately 92% of commenters and petitioners opposed the proposed delay and/or expressed support for the rule and PTEs as originally drafted, the DOL stated that “[t]here was no consensus among commenters and petitioners regarding whether, or how long, to delay the applicability date of the rules and PTEs, or even whether to rescind the rule in whole or in part.”