Today, the DOL released its full proposal to extend the transition period by 18 months for the full implementation of the Best Interest Contract Exemption (“BICE”), the Principal Transactions Exemption, and PTE 84-24 (relating to sales of annuities and other transactions involving insurance companies and agents) (collectively, the “Fiduciary Compensation Exemptions” or the “Exemptions”). The proposal, which would extend the transition period from January 1, 2018 to July 1, 2019, was first announced by the DOL in early August in a court filing. Today’s release (to be published in the Federal Register tomorrow) is the formal proposal to amend the exemptions and contains much more information from the DOL as to why the delay is needed. Additionally, today the DOL issued Field Assistance Bulletin (“FAB”) 2017-03, which provides some guidance and prompts at least one important question on DOL enforcement related to the Exemptions.
What is the substance of the DOL’s proposed extension?
The proposed amendments are straightforward: Each of the Fiduciary Compensation Exemptions is amended so that the “Transition Period” (i.e., the period in which the exemption is available but compliance with the full conditions of the exemption is not necessary) is extended from January 1, 2018 to July 1, 2019. During the extended Transition Period, financial service providers or other fiduciaries seeking to use one of the Exemptions need only comply with the Impartial Conduct Standards, which the DOL today summarized as (1) “giving prudent investment advice that is in retirement investor’s best interests,” (2) charging no more than reasonable compensation, and (3) avoiding misleading statements. The proposal makes no changes to the new Fiduciary Rule, which came into effect on June 9, 2017.
Why does the DOL believe the delay is needed?
The DOL believes that the delay is necessary for several reasons, but primarily because the DOL has not yet completed its review of the Fiduciary Rule and the Exemptions, mandated by President Trump on February 3, 2017. The Fiduciary Rule and the Fiduciary Compensation Exemptions were initially scheduled to come into full effect on April 10, 2017, but the DOL delayed that date to June 9. The DOL requested public comments on March 2, 2017, and again on July 6, 2017, about the issues raised by the President’s review order, including whether further delay was needed. The DOL received hundreds of comments in response to these requests. Reviewing the comments, the DOL concluded that a delay is necessary because it has not completed its review and strongly suggested that there could be changes to the Fiduciary Compensation Exemptions or even alternative exemptions once that review was completed but that no changes or alternatives could realistically be implemented by January 1, 2018. Several commenters noted that it would be costly and unfair to Financial Institutions to prepare to comply with the Exemptions in their current format if there were a realistic possibility that the Exemptions would be changed. Other commenters point to the risk that retirement investors would be needlessly confused if they received communications driven by the Exemptions and subsequent, different communications, based on changes to the Exemptions. The DOL was sympathetic to these concerns and clearly expressed a desire to stop the full implementation of the Exemptions until it had completed the mandated review and identified any changes or alternatives to the Exemptions.
The DOL also noted that on June 1, 2017, the Chairman of the SEC announced that the SEC wanted public comments on standards of conduct for retirement advisers and that it would not be possible to coordinate in any meaningful way with the SEC on issues affecting retirement investors before January 1, 2018.
Does the DOL proposal provide any information about possible changes to the Fiduciary Compensation Exemptions?
Although the DOL proposal is formally limited to announcing the proposed extension, two items in the DOL’s discussion of the comments are intriguing.
Possible Changes or Alternatives to the Fiduciary Compensation Regulations. The DOL makes several statements that suggest that the DOL is seriously considering changes to the Exemptions or even new and alternative exemptions for transactions that are currently covered only by the BICE and the other Exemptions. Specifically, the DOL stated that the mandated review “will help identify any potential alternative exemptions or conditions that could reduce costs and increase benefits to all affected parties.” Indeed, the first paragraph of the proposal refers to possible changes or alternatives to the Exemptions and the proposal contains over a dozen references to possible alternative conditions, exemptions, or approaches. Although the proposal gives no hint of what these alternatives might be, it seems clear that the DOL is very open to material changes to the Exemptions or even new exemptions that would take the place of the BICE and other Exemptions.
Possible Changes to the 18-Month Delay or Conditions to the Delay. Although the DOL proposes a “date certain” 18-month delay for the Exemptions, the DOL specifically asked for comments on alternative methods. Specifically, the DOL asked for comments on the potential benefits or harms of three different delay methods: (1) a delay for a time certain, such as the proposed 18-month delay, (2) “a delay that ends a specified period after the occurrence of a specific event,” about which the DOL did not give more detail, and (3) a tiered approach that combines (1) and (2) where the delay is set for the earlier (or later) of (a) a specific time period, or (b) the end of a specific period after the occurrence of a specific event. The DOL also noted that some commenters had suggested any delay should be conditioned on whether the financial institution seeking to rely on one of the Exemptions has or will take steps to use recent innovations in financial products such as “clean shares.” Although the DOL rejected this approach in this proposal, it sought comments on the costs, benefits, and workability of such an approach. The DOL’s request for comments on different types of delay periods suggests that the DOL is open to something other than the proposed, time certain, 18-month delay.
When are comments due?
Comments on the DOL’s proposed 18-month delay are due 15 days after the date the proposal is published in the Federal Register. We anticipate that this means that comments are due on or before September 14, 2017.
What does FAB 2017-03 say?
FAB 2017-03 covers two important points. First, it states that the DOL will not pursue a claim against a fiduciary who relies on the BICE or the Principal Transaction Exemption merely because the fiduciary’s contract with a retirement investor contains an arbitration provision that limits the investor’s ability to bring or participate in a class action in court. The FAB notes that the U.S. government generally and the DOL specifically have stated in recent court filings that they would not defend rules that prevent arbitration agreements from limiting the right to participate in a class action (referred to in the FAB as an “Arbitration Limitation”) because the government now views those rules as inconsistent with the Federal Arbitration Act and prior case law. Thus, to the extent that a Financial Institution has a contract with a retirement investor that contains a provision requiring arbitration and limiting the investor’s right to participate in class actions, the DOL will not take any enforcement action solely because the contract fails to comply with the current conditions of the Fiduciary Compensation Exemptions that forbid such provisions. As noted above, those conditions are not currently applicable and will not be applicable until July 1, 2019 if the Transition Period is extended. But the good news is that contracts with arbitration limitations need not be revised in the short term.
The second important point about FAB 2017-03 is that it does not explicitly extend the DOL’s limited enforcement policy on the Fiduciary Compensation Exemptions, which was announced in FAB 2017-02. In FAB 2017-02, the DOL stated that “during the phased implementation period ending on January 1, 2018, the Department will not pursue claims against fiduciaries who are working diligently and in good faith to comply with the fiduciary duty rule and exemptions, or treat those fiduciaries as being in violation of the fiduciary duty rule and exemptions.” FAB 2017-03 explicitly refers to FAB 2017 -02’s “temporary enforcement policy during this Transition Period through January 1, 2018” and then notes that the DOL is proposing to extend the Transition Period to July 1, 2019. This statement, together with language in the DOL’s proposal including the statement that, during the Transition Period, compliance with the Fiduciary Compensation Exemptions requires only compliance with the Impartial Conduct Standards, would seem to suggest that the DOL’s limited enforcement approach announced in FAB 2017-02 should be extended. However, the DOL proposal explicitly asks for comments on whether the limited enforcement approach should be extended. Thus, it is at present unclear how the DOL will approach enforcement of the Impartial Conduct Standards if the proposed 18-month extension is finalized.
Given the uncertainty generated by the President’s mandated review and, based on the DOL’s proposal, the increasing likelihood of changes or alternatives to the Exemptions, the proposed 18-month delay is welcome. We think it highly likely that the DOL will finalize the proposal in relatively short order (the short, 15-day comment period is evidence of the DOL’s desire to finalize the proposal quickly). Please note, however, that changes to the proposal are possible, especially since the DOL specifically asked for comments on alternative delay periods. Additionally, political or other forces outside the DOL’s control could affect the proposed delay, or at least its finalization. For example, the government’s fiscal year ends on September 30, 2017, and, if the government is shut down due to inability to agree on a budget (even a continuing resolution on a budget), finalization of the 18-month delay could be delayed. Finally, please note that the proposal maintains the Impartial Conduct Standards (discussed above) and the DOL has made clear that financial institutions that rely on the Exemptions must continue to comply with those standards. Given the current uncertainty as to whether the DOL will extend its current limited enforcement policy, caution is warranted.