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DOL Proposes 60-Day Delay of Fiduciary Rule in Response to White House Directive

Summary

The future of the fiduciary rule—originally set to be implemented this upcoming April—remains uncertain after the White House directed the United States Department of Labor (DOL) to reevaluate, defer implementation and consider rescinding the controversial new fiduciary rule on February 3, 2017. In response to the White House, the acting US Secretary of Labor announced that the DOL will now consider its legal options to delay the applicability date to comply with the President’s directive.

In Depth

In response to a February 3, 2017 memorandum from the White House, the United States Department of Labor (DOL) published a proposal in the Federal Register on March 2, 2017 to delay the April 10, 2017 applicability date for the controversial new fiduciary rule and related prohibited transaction exemptions by 60 days. The delay will take effect only after the conclusion of a public comment period and publication of the delay in final form in the Federal Register.

Background

The Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code (the Code) govern employee benefit plans. ERISA requires that every employee benefit plan be maintained pursuant to the direction of one or more “fiduciaries.” Anyone serving as an ERISA fiduciary has the authority to control and manage the operation of the plan, but must do so solely in the interest of plan participants and beneficiaries.

Under the new fiduciary rule, the term—and its associated rights and liabilities—would arguably broaden to include anyone receiving compensation for providing "advice" that was for consideration in making a retirement investment decision, and individualized or specifically directed to a plan sponsor, plan participant, or individual retirement account (IRA). As plan fiduciaries, the new fiduciary rule requires that these “fiduciary investment advisors” act in the best interest of their clients as well as disclose any potential conflicts of interest to those clients. New prohibited transaction exemptions released as part of the rule, like the Best Interest Contract Exemption, allow fee-based incentive compensation arrangements to survive, but only in the situations where the incentives are attached to the best interest of the investment advice recipients, not the advisors. This means that these “fiduciary investment advisors” must make recommendations which put the long-term individualized financial needs of plan participants and beneficiaries before tempting compensation incentives.

What is the “New Fiduciary Rule”?

A new set of regulations from the DOL, the fiduciary rule includes:

  1. A new definition of a fiduciary for the purpose of providing “investment advice” to ERISA-governed plans and IRAs.

  2. A new exemption called the “Best Interest Contract Exemption” which allows for a fiduciary investment advisor to receive compensation paid by an employee benefit plan, participant, beneficiary or IRA, as well as commissions, sales loads, 12b-1 fees, revenue sharing or other payments from third parties that provide investment products that would otherwise violate the prohibited transaction provisions of ERISA because of the amount of the fiduciary’s compensation would be affected by the investment advice it provides.

  3. An exemption for principal transactions in which advisors sell certain investments to plans and IRAs out of their own inventory.

  4. Amendments to existing exemptions that would permit advisors to receive compensation for extending credit to plans or IRAs to avoid failed securities transactions.

  5. Amendments to existing exemptions to ensure basic standards of fiduciary conduct.

Since 1975, the only way in which an investment advisor was considered an ERISA fiduciary was if the advisor met every prong in a 5-prong test in regard to the information it provided. The new fiduciary rule eliminates three of the trickier pieces of the old rule. No longer does fiduciary investment advice have to be offered (1) on a regular basis, (2) pursuant to a mutual understanding that the advisor is acting as a fiduciary, and (3) pursuant to the mutual understanding that the advice will be a primary basis for investment decisions with respect to plan assets.

The rule replaces a looser standard that investment advice merely be “suitable,” and extends the reach of ERISA fiduciary standards from advisors working directly with 401(k) and other ERISA-governed plans, to advisors speaking with individuals about existing IRAs as well as possible rollovers of money from a 401(k) or other workplace plan to an IRA. While the DOL doesn't generally oversee IRAs, the DOL is authorized to write rules for "prohibited transactions" involving IRAs, which the new fiduciary rule includes. 

The DOL believes that the new regulations are a principals-based approach to align advisors’ interests with participants and IRA owners while leaving the individual advisors and employing firms with the flexibility and discretion necessary to determine how best to satisfy these basic standards in light of the unique attributes of their business. In practice, the fiduciary rule threatens to steer participant investment options toward fee-based investment products and cheaper passive investments over those that pay advisors a commission.

Opposition from the White House

The Trump White House has taken the position that the fiduciary rule, as written, may limit consumer choice and access to retirement information and financial advice. The White House also expressed concern that the fiduciary rule may have dramatic and unintended consequences for the financial advice industry, which may adversely affect investors or retirees.

Proponents of the rule have argued that it is necessary to enforce the terms and spirit of ERISA by ordering retirement advisors—currently overseeing about $3 trillion in assets—to act in the best interest of their clients and take steps to avoid the conflicts of interest that come about with commission-based compensation. ERISA was written at a time when most employers offered traditional defined-benefit pension plans, without participant direction of investments. Today, most employers offer 401(k) plans, where employees pick their own investments.

The Future of the Rule

While several lawsuits have been filed in challenge to the rule, it has been upheld by federal courts in Kansas, the District of Columbia, and most recently, Texas. On February 8, 2017, a Texas judge rejected arguments by the U.S. Chamber of Commerce, Indexed Annuity Leadership Council, and American Council of Life Insurers, that the rule exceeded the DOL’s authority and created conditions so burdensome that financial professionals would be unable to advise the IRA market and sell annuities to ERISA plans and IRAs.

Recognizing that the fiduciary rule was well within the scope of the DOL’s regulatory authority, the Texas court included a footnote stating that the White House memorandum and the DOL’s possible delay of the applicability date did not make the case moot. At the same time, the ruling influences public perception about whether there are fundamental problems with the fiduciary rule, and puts the onus on the DOL to articulate why a delay is necessary.

DOL Proposal to Delay Fiduciary Rule

The DOL published a proposal in the Federal Register on March 2, 2017 to delay the April 10, 2017 applicability date for the fiduciary rule and related prohibited transaction exemptions by 60 days. The delay will allow the DOL time to review and possibly modify or rescind the fiduciary rule as directed by the White House memorandum.

The Office of Management and Budget (OMB) completed its required review of the proposed delay of the fiduciary rule on February 28, 2017. Notably, the OMB disagreed with the DOL’s designation of the delay as “not economically significant” and changed the designation to “economically significant.” An economically significant regulation is one that is expected to have an impact of $100 million or more on the economy in at least one year. The DOL estimated in its initial publication of the fiduciary rule that the rule could result in potential gains for IRA investors of $33-$36 billion over the first 10 years. Although the impact of a 60-day delay is uncertain, the DOL noted the 60-day delay “could lead to a reduction in those estimated gains of $147 million in the first year and $890 million over 10 years using a three percent discount rate.” However, the DOL also noted that the delay would avoid the potential of two significant regulatory changes that could disrupt the marketplace if the fiduciary rule takes effect on April 10, 2017 as planned and then subsequently is revised or rescinded as recommended in the White House memorandum.

The proposal invites public comment for 15 days (on or before March 17, 2017) on the potential impact of the delay. In addition, public comments will be accepted through April 17, 2017 on the issues raised in the White House memorandum and to a series of questions outlined in the proposal to address potential issues related to the fiduciary rule that may not have been adequately considered by the DOL when drafting the rule. The 60-day delay will take effect only after the conclusion of the initial 15-day public comment period and publication of the delay in final form in the Federal Register.

© 2017 McDermott Will & Emery

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About this Author

Brian J. Tiemann, Labor Attorney, McDermott Law Firm
Partner

Brian J. Tiemann is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Chicago office.   Brian focuses his practice on a variety of employee benefits matters related to pension plans, 401(k) plans, employee stock ownership plans (ESOPs), cafeteria and welfare plans, executive compensation and the implementation of benefit programs for domestic partners of employees.  He is a member of the Firm’s ESOP Affinity Group and has worked with clients to structure and maintain the qualified status of their ESOPs with the Internal Revenue...

312-984-3268
Emily Rickard, McDermott Will Emery, Employee Benefits Matters Lawyer, ERISA Litigation Attorney
Associate

Emily Rickard is an associate in the law firm of McDermott Will & Emery and is based in the Firm’s Washington D.C. office. She focuses her practice on employee benefits matters.

Emily previously served as an ERISA litigation intern within the Plan Benefits Security Division of the Office of the Solicitor at the U.S. Department of Labor in Washington D.C. She studied executive compensation trends while working as a research assistant at Vanderbilt University Law School. She also served as a judicial intern for the Honorable Jane Roth at the U.S. Court of Appeals for the Third Circuit in Philadelphia.

During law school, Emily was active in public interest work. Emily was a program director for the Medical Legal Partnership in Nashville, Tennessee, where she helped provide comprehensive legal aid service for patients at a free medical clinic.

Emily received her J.D. in May 2015 from the Vanderbilt University Law School, where she served as an executive student writing editor for the Vanderbilt Journal of Transnational Law. She earned her B.A. in diplomatic history, magna cum laude, with minors in African Studies and Latin, from the University of Pennsylvania. Emily is a 2014 Gary S. Tell ERISA Litigation Scholar.

Emily is admitted to practice in Illinois. 

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