Fiduciary Rule Delayed 60 Days - DOL delays application of Fiduciary rule. ERISA plan fiduciaries and service providers struggle during period of uncertainty

by Pillsbury Winthrop Shaw Pittman LLP
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Takeaways

  • The DOL delayed the applicability date of the Fiduciary rule and some of the Prohibited Transaction Exemption rules for 60 days until June 9, 2017. Compliance with other requirements, including the requirement to make specific written disclosures and representations of fiduciary compliance in investor communications, is not required until January 1, 2018.
  • During the 60-day delay, the DOL will examine whether the Fiduciary rule may adversely affect the ability of Americans to gain access to retirement information and financial advice.
  • Advisors that have already taken significant steps to comply with the Fiduciary rule may continue to implement newly adopted procedures and service models with respect to retirement (and related forms of) investment advice.

On April 7, 2017, the Department of Labor (DOL) published a final rule delaying the applicability date of the “Fiduciary” rule and certain “Prohibited Transaction Exemption” rules (the Rules) for 60 days from April 10, 2017 until June 9, 2017. The final rule specifically (1) extends the applicability date of the Fiduciary rule, the “Best Interest Contract Exemption” (BICE), and the “Principal Transactions Exemption” for 60 days until June 9, 2017, and (2) requires that fiduciaries relying on these exemptions for covered transactions adhere only to the ‘‘best interest’’ standard and the other “Impartial Conduct Standards” of these Prohibited Transaction Exemptions during a transition period from June 9, 2017 until January 1, 2018. The Impartial Conduct Standards generally require that advisors and financial institutions provide investment advice that is in the investors’ best interest, receive no more than reasonable compensation, and avoid material misrepresentations to investors about recommended transactions. In the final rule, the DOL stated that it will not delay the applicability date of these provisions beyond June 9, 2017. Compliance with other requirements, including the requirement to make specific written disclosures and representations of fiduciary compliance in investor communications, is not required until January 1, 2018.

The DOL issued the proposal and final rule in response to the February 3, 2017, Presidential Memorandum (Presidential Memorandum) issued by President Trump to the Secretary of Labor directing the DOL to re-examine the Fiduciary rule. The final rule was issued following the DOL’s proposal on March 2, 2017 to delay the applicability date of the Rules by 60 days. The DOL received over 193,000 comments in response to the proposed delay. Interestingly, 178,000 of those comments opposed any delay in the effective date of the Fiduciary rule. The commentators expressed broad support with proceeding with implementation of the Fiduciary rule to provide the industry with certainty and to adopt a best interest standard for retirement investors.

The DOL’s Fiduciary rule expands the definition of “fiduciary” under Section 3(21) of the Employee Retirement Income Security Act of 1974, as amended (ERISA), to include individuals and entities that provide investment advice for a fee to individual retirement account owners, health savings account holders, ERISA-covered plans and their participants and beneficiaries. In conjunction with this expanded array of advice relationships, the DOL also published guidance on expanded and amended exemptions from the prohibited transaction rules that would allow certain providers of investment advice to continue to receive fees subject to certain safeguards.

During the 60-day delay, as directed by the Presidential Memorandum, the DOL is preparing an “updated economic and legal analysis” examining whether the Fiduciary rule may adversely affect the ability of Americans to gain access to retirement information and financial advice. Specifically, this analysis will consider whether the Fiduciary rule may:

  • reduce access to retirement savings products and investment advice;
  • cause dislocations and disruptions in the retirement services industry that may adversely affect investors; or
  • increase litigation or increase the cost of access to retirement savings services and advice.

If the DOL determines that the Fiduciary rule will likely cause any of these undesirable outcomes or that the Fiduciary rule is inconsistent with the Trump administration’s stated priorities of empowering Americans to make their own financial decisions and to facilitate their ability to save for retirement, the DOL is directed to propose a rule rescinding or revising the Fiduciary rule. Interested parties submitted comments by April 16, 2017 to provide input on whether the Fiduciary rule, as currently drafted, adversely affects retirement investors.

The future of the Fiduciary rule is uncertain. Congress may introduce legislation that could significantly alter the Fiduciary rule. Lawsuits against the DOL challenging the implementation of the Fiduciary rule have been brought in federal district courts in Texas, Washington and Kansas. To date, the DOL has successfully defended its authority and the Fiduciary rule in each of these cases. In the Texas case, the plaintiffs, including the U.S. Chamber of Commerce, alleged that the DOL ignored comments from stakeholders and failed to properly analyze the costs and benefits of the Fiduciary rule when promulgating the regulation. The plaintiffs also argued that the Fiduciary rule’s requirements will cost broker-dealers billions of dollars to implement, could reduce the availability of investment advice, and that BICE violates the First Amendment by restricting advisors’ ability to advise clients. In February, the federal district court in the Texas case held that the DOL acted within its authority and properly considered the costs and benefits when promulgating the Fiduciary rule. The plaintiffs currently have an appeal of the district court’s decision pending before the Fifth Circuit Court of Appeals. To date, there has been no substantive action or opinion in this case.

The uncertain status of the Fiduciary rule places service contract negotiations in limbo. Many service providers, financial institutions, plan sponsors, and plan fiduciaries impacted by the Rules have already taken substantial steps to comply with the new requirements. Interestingly, the DOL asked for input and comments as to what efforts advisors have taken to date to implement the Fiduciary rule and whether—if the Fiduciary rule was rescinded—advisors would continue to comply with the intent of the Fiduciary rule. Accordingly, regardless of whether the Congress, the courts or the DOL take action to alter or altogether rescind the Fiduciary rule, advisors may continue to implement newly-adopted procedures and service models with respect to retirement (and related forms of) investment advice.

We will continue to monitor the implementation of the Rules and provide an update as it becomes available. For further information about the Rules, including information about conflicts of interest and BICE, please see our prior Client Alerts dated May 8, 2015 and the Summer 2016 issue of Perspectives.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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