March 28, 2024
Volume XIV, Number 88
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DOL Delays Fiduciary Rule
Friday, April 7, 2017

Advisers and financial institutions that provide fiduciary investment advice have an additional 60 days before having to comply with the final regulations defining who is a fiduciary under the Employee Retirement Income Security Act of 1974, as amended (the “Fiduciary Rule”).  On April 4, 2017, the Department of Labor (“DOL”) issued a final rule (the “Final Rule”), which delays the applicability date of the Fiduciary Rule until June 9, 2017 and also extends for 60 days the applicability dates of the Best Interest Contract Exemption (the “BIC Exemption”) and the Class Exemption for Principal Transactions in Certain Assets Between Investment Advice Fiduciaries and Employee Benefit Plans and IRA (the “Principal Transaction Exemption” and collectively, the “Exemptions”).  Advisers and financial institutions relying on the Exemptions as of June 9 need only comply with the impartial conduct standards (as explained below), as the remaining conditions of the Exemptions will not become effective until January 1, 2018, if not withdrawn or revised.  The 60-day delay was proposed by the DOL on March 2, 2017, in response to a directive from President Trump to review the Fiduciary Rule (the “President’s Memorandum”), as explained in this article.

In the Final Rule, the DOL explains that, while its review of the Fiduciary Rule is likely to take more than 60 days, a delay in the application of the Fiduciary Rule and impartial conduct standards for an extended period would not be appropriate, given the DOL’s previous findings of ongoing injury to retirement investors. The impartial conduct standards require advisers and financial institutions to:

  • Give advice that is in the “best interest” of the retirement investor. This best interest standard has two chief components – prudence and loyalty;

  • Charge no more than reasonable compensation; and

  • Make no misleading statements about investment transactions, compensation, and conflicts of interest.

For this reason, the DOL concludes that it can best protect the interests of retirement investors in receiving sound advice, provide greater certainty to the public and minimize the risk of unnecessary disruption by extending the applicability date to June 9, 2017 for the Fiduciary Rule and the impartial conduct standards in the Exemptions. Compliance with the other conditions of the Exemptions, such as requirements to make specific disclosures and representations of fiduciary compliance in written communications with investors is not required until January 1, 2018, by which time the DOL intends to complete the examination directed by the Presidential Memorandum.

The DOL cites the following advantage of the approach set forth in the Final Rule:

  • With the June 9,2017 applicability date for the impartial conduct standards, provides retirement investors with the protection of basic fiduciary norms and standards of fair dealing, while honoring the directive in the President’s Memorandum to review any potential undue burdens.

  • By delaying implementation of the other conditions of the Exemptions until January 1, 2018, eliminates or mitigates the risk of litigation in the IRA marketplace, which was one one of the chief concerns expressed by the financial services industry in connection with the Fiduciary Rule and the Exemptions.

  • Addresses concerns of the financial services industry about uncertainty over whether they need to immediately comply with all of the requirements of the Exemptions.

The DOL leaves open the possibility that it may further extend the January 1, 2018 applicability dates or to grant additional interim relief. The DOL states that the Final Rule does not foreclose the DOL from considering and making changes to the Fiduciary Rule and the Exemptions, based on new evidence or analyses developed pursuant to the President’s Memorandum.

Takeaways for Advisers and Financial Institutions

Effective June 9, 2017, advisers and financial institutions that provide fiduciary investment advice to retirement plan investors will have to comply with the Fiduciary Rule and the impartial conduct standards in the Exemptions. Since, in the view of the DOL, these provisions are generally the least controversial aspects of the DOL’s changes to the rules related to fiduciary investment advice, compliance with the June deadline most likely will not be difficult, especially in light of the 60-day delay.

However, advisers and financial institutions should also look past June 9 to the January 1, 2018 deadline and determine if they will delay or adjust their implementation schedule to meet that deadline. Those advisers and institutions that assume the Fiduciary Rule and Exemptions will be significantly revised or rescinded may want to consider significantly delaying the implementation process pending additional guidance from the DOL.  Alternatively, some of these advisers and institutions may want to consider whether they will incorporate all or portions of the Fiduciary Rule and Exemptions into their business practices, even if rescinded by the DOL.

 

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