November 28, 2021

Volume XI, Number 332


Department of Labor Releases New Fiduciary Rule Enforcement Policy and FAQs

Despite rumors to the contrary, the June 9 applicability date for the Fiduciary Rule remains unchanged (though compliance is not required until 11:59 PM on that day). The DOL confirmed this through the release this week of a Non-Enforcement Policy and new Frequently Asked Questions (FAQs) regarding the Fiduciary Rule transition period (June 9, 2017 to December 31, 2017). This Alert is our first in a series. It provides a brief overview of the guidance. Subsequent Alerts will focus on the issues relevant to specific businesses. 

Here are the highlights:

  • Applicability Date: June 9 is the applicability date for the fiduciary regulation itself and for the exemptions released in conjunction with the regulation.

  • Grandfathering: Under the Best Interest Contract Exemption (BICE), transactions entered into prior to the “applicability date” remain in effect on their existing terms (subject to various conditions and limitations). The guidance confirms that June 9 is the deadline for grandfathered accounts. 

  • Changes May be Ahead: The DOL will solicit additional public input for possible regulatory changes to the Fiduciary Rule and its exemptions in the form of a Request for Information (RFI). The RFI will include questions on whether the transition period should be further extended “to allow for a smoother implementation” of new business models and other market changes that have been introduced in preparation for the Fiduciary Rule’s applicability date. Thus, it is possible that the reduced compliance requirements of the transition period could be extended beyond the end of the year.

  • Temporary Enforcement Policy: During the transition period, the DOL and the IRS will not pursue claims against fiduciaries “who are working diligently and in good faith to comply” with the Fiduciary Rule and its exemptions. It is not entirely clear what this standard requires, though the DOL did give some hints (discussed later). However, the DOL pointed out that this temporary enforcement policy will not prevent private litigation.

  • Transition BICE: The FAQs confirm that during the transition period, the only requirements for BICE that will apply are the Impartial Conduct Standards (i.e., the “best interest” standard, no misleading statements, and reasonable compensation). Other requirements of BICE, such as disclosures and contracts, will not be required. The FAQs also explain that robo-advice providers that receive a level fee – as well as other level-fee advisers to the extent necessary – may rely on BICE during the transition period, so long as they comply with the Impartial Conduct Standards.

  • Policies and Procedures: Notwithstanding the acknowledgement that only the Impartial Conduct Standards must be satisfied under BICE during the transition period, the DOL says that it expects financial institutions “to adopt such policies and procedures as they reasonably conclude are necessary to ensure advisers” comply with those standards. The DOL goes on to suggest various ways that firms may safeguard compliance, including increased monitoring and surveillance of adviser sales practices and recommendations, and documenting the bases for recommendations. Though not clear, this may be a requirement to show that fiduciaries are “working diligently and in good faith to comply.” 

  • PTE 84-24: The FAQs confirm that PTE 84-24, as it existed prior to the Fiduciary Rule, remains in force except that the Impartial Conduct Standards must also be satisfied. The DOL also explains that PTE 84-24 relief during the transition period is available for the payment of commissions to insurance agents, brokers, pension consultants and investment company principal underwriters, even if a portion of that commission is paid to another entity, such as an independent marketing organization in the form of a gross dealer concession, override or similar payment. 

  • Participant Communications: The FAQs provide several examples of participant communications that would be considered educational (i.e., offering plan information and general financial, investment and retirement information) and not fiduciary advice. We will discuss some of the details in subsequent alerts. 

  • Transactions With an Independent Fiduciary: An exception in the Fiduciary Rule says that recommendations made to an independent fiduciary with financial expertise are not considered investment advice. The entities that are considered “independent fiduciaries” are banks, insurance carriers, broker dealers, registered investment advisers or other independent fiduciaries that manage or control at least $50 million. For this exception to apply, the party making the recommendation must reasonably believe that the independent fiduciary fits the definition. In the FAQs, the DOL explains that the reasonable belief requirement can be satisfied by relying on a written representation from the counterparty, and that negative consent to a written representation satisfies this condition. 

While the guidance contains few surprises, firms and advisers should take note of the DOL’s emphasis on compliance with the Impartial Conduct Standards and, in particular, the expectation that firms will adopt policies and procedures that insure compliance with these standards.

© 2021 Faegre Drinker Biddle & Reath LLP. All Rights Reserved.National Law Review, Volume VII, Number 151

About this Author

Bruce Ashton, Drinker Biddle Law Firm Los Angeles, Employment Benefits Attorney

Bruce L. Ashton has more than 35 years of experience handling employee benefits matters. His practice concentrates on representing plan service providers (including RIAs, independent record-keepers, third-party administrators, broker-dealers and insurance companies) in fulfilling their obligations under ERISA. His experience includes representing public and private sector plans and their sponsors, negotiating the resolution of plan qualification issues under IRS remedial correction programs, advising and defending fiduciaries on their obligations and...

Joan M. Neri, Counsel, Drinker Biddle, Employee Benefits, Executive Compensation

Her practice focuses on all aspects of employee benefits counseling.  Joan represents plan service providers (including registered investment advisers, third party administrators, and recordkeepers) in fulfilling their obligations under ERISA.  Joan also represents plan sponsor clients on the design of qualified retirement plans (including ESOPs), nonqualified executive compensation plans and welfare benefit plans, day-to-day plan administrative issues and transactional planning involving benefit plan acquisitions, plan mergers and plan terminations.  Joan has represented major publicly-...

K.Elise Norcini Corporate Attorney

K. Elise Norcini provides representation to a variety of corporate, institutional and tax-exempt clients regarding employee benefits and executive compensation issues. Elise is a contributor to Drinker Biddle’s Broker-Dealer Law Blog, which provides practical insights on litigation, regulatory, compliance and fiduciary issues impacting broker-dealers.

Prior to joining Drinker Biddle, Elise was in-house legal counsel at The Northern Trust Company and, in part, represented Northern in...