DOL Announces Temporary Enforcement Policy and Proposes to Extend Application of Rules Under Best Interest Contract Exemption by 60 Days
In response to a February 3, 2017 memorandum by the President to the Secretary of Labor, on March 2, 2017, the DOL proposed to extend for 60 days the applicability date for final rules on the Best Interest Contract Exemption (the “BIC Exemption”), the Principal Transactions Exemption, certain other prohibited transaction exemptions, and the definition of who is a “fiduciary” under ERISA and the Internal Revenue Code.
The final rule defining a “fiduciary,” promulgated on April 8, 2016, significantly broadened the class of persons treated as fiduciaries with regard to an employee benefit plan by including persons who provide investment advice or recommendations regarding plan assets in exchange for compensation. Administrative class exemptions from the prohibited transaction rules provided very specific rules that broker-dealers, insurance agents and investment advisors were required to follow in order to avoid engaging in prohibited transactions, which if engaged in would subject them to excise taxes and civil liability. Together, these “Rules” have been viewed as over-reaching and burdensome by the investment advisor and financial services communities. Plan sponsors and fiduciaries commonly viewed the Rules as one more plan administration due diligence “headache.”
By Notice published on March 10, 2017, the DOL also announced a temporary enforcement policy on the Rules. The extension and temporary enforcement policies materially impact employers, plan fiduciaries and financial service providers, who were concerned that confusion as to the effective date of, in particular, the BIC Exemption, would cause significant issues with inadvertent non-compliance and breaches of fiduciary duties in ERISA plan administration.
In the March 2nd publication, the DOL proposed to extend for 60 days the Rules that are otherwise applicable on April 10, 2017. The new applicability dates are proposed to be extended from April 10, 2017 to June 9, 2017 for, specifically, the fiduciary rule, the BIC Exemption, the Class Exemption for Principal Transactions in Certain Assets Between Investment Advice Fiduciaries and Employee Benefit Plans and IRAs, and Prohibited Transactions Exemptions (“PTEs”) 84-24, 86-128, 75-1, 77-4, 80-83, and 83-1.
The DOL temporary enforcement policy of March 10, 2017 provides that:
• If the proposed rule providing for a 60-day extension of the applicability dates of the Rules becomes final, the DOL will not initiate enforcement action against an investment advisor or financial institution due to non-compliance with the Rules during the “gap” period between the original applicability date of April 10, 2017, and the date the DOL issues a final determination which officially extends the Rules’ applicability date to June 9, 2017; and
• In the event the DOL decides not to extend the April 10, 2017 applicability date of the Rules, the DOL will not initiate enforcement action against an investment advisor or financial institution that fails to comply with the Rules, but corrects the non-compliance, and thus satisfies the rules, within a “reasonable period.” The DOL will treat the 30-day cure period under the BIC Exemption as a “reasonable period” for cure for incidents of non-compliance.
The DOL says it will consider publishing other relief from these Rules as the need for such relief becomes evident. In the March 10th Notice, the DOL stressed, however, that the provision of temporary enforcement relief should not be taken as foreshadowing a determination that applicability dates will, in fact, be extended to June 9, 2017. It is this author’s opinion that the temporary enforcement relief should also not be construed as any evidence that the DOL will back off the aggressive compliance posture reflected by the these Rules in future rulemaking.