DOL Confirms June 9th Applicability Date of The Fiduciary Rule and Exemptions
The U.S. Department of Labor ("DOL") has confirmed that it will not seek to further delay the June 9, 2017 applicability date of the new fiduciary rule defining investment advice ("Fiduciary Rule"), the Best Interest Contract Exemption ("BICE") and other related exemptions. The DOL has issued a temporary enforcement policy ("FAB No. 2017-02") and a new set of Conflict of Interest FAQs (the "FAQs") that focus on the new transition period, from June 9, 2017 to January 1, 2018. This action follows its April 7, 2017 final rule (the "Delay Rule") which delayed the applicability date by 60 days from April 10, 2017 to June 9, 2017.
As a result, June 9th is the date on which persons who provide investment advice (including rollover advice) for a fee or other compensation (direct or indirect) will be deemed to be fiduciaries under the Fiduciary Rule. During the shortened transition period (June 9, 2017 to January 1, 2018), financial institutions wishing to rely on the BICE, the Class Exemption for Principal Transactions or Prohibited Transaction Exemption 84-24 in order to receive variable compensation related to the advice they give, need only comply with the respective Impartial Conduct Standards ("ICS") in these exemptions.
For the BICE, the ICS consists of three component standards: (i) receiving no more than reasonable compensation, (ii) refraining from making materially misleading statements, and (iii) providing advice in accordance with the best interest standard of care. The best interest standard has two chief components: prudence and loyalty. The FAQs state that under the prudence standard, advice given must meet a professional standard of care as set forth in the BICE, and that "under the loyalty standard, the advice must be based on the interests of the customer, rather than the competing financial interest of the adviser or the firm."
Many are asking what it means to comply with the ICS in isolation when other related requirements (e.g., contracts, written disclosures and representations, designation of a person or persons responsible for addressing material conflicts of interest and ensuring adherence to the ICS, etc.) have been waived until January 1, 2018. The FAQs clarify that conflicts of interest may exist during the transition period without rendering the BICE unavailable or resulting in a failure to comply with the ICS. During the transition period, the DOL expects financial institutions to adopt such policies and procedures as they reasonably conclude are necessary to ensure compliance with the ICS; however, they have the flexibility to choose precisely how to accomplish this. Thus, to the extent not already done, financial institutions should continue to review current compensation structures, identify conflicts of interest, and implement conflict mitigation strategies. Having some form of policy documentation that is aligned with the ICS in place by June 9th may be helpful in demonstrating legal compliance.
Changes to other pre-existing class exemptions amended by the DOL in connection with the Fiduciary Rule (PTEs 75-1, 77-4, 80-83, 83-1 and 86-128) are applicable and in full effect on June 9, 2017.
June 9th is also the date on which the definition of investment education under DOL Interpretive Bulletin 96-1 ("IB 96-1") is no longer applicable. While the "safe harbor" in IB 96-1 covers participant education only, investment education under the Fiduciary Rule includes investment education delivered to plan sponsors and IRA owners as well. Asset allocation models and interactive materials must not recommend or reference a specific investment option, unless they are being provided to a defined contribution plan with investment options that are subject to oversight by a plan fiduciary. Additionally, investment options with similar return-risk characteristics must be identified, and a statement must be provided explaining how more information can be obtained on investment options. Investment advisory agreements and disclosures pertaining to education services, asset allocation models and interactive materials may need to be reviewed and revised to reflect this new definition.
The FAQs provide additional information on DOL and IRS enforcement during the June 9, 2017 to January 1, 2018 transition period. FAB No. 2017-02 provides that during the transition period the DOL will not pursue claims (and the IRS will not assess the excise tax) against fiduciaries who are working diligently and in good faith to comply with the Fiduciary Rule and related exemptions. This is consistent with the DOL's previous statements that it intends to take a compliance assistance posture both in the period before January 1, 2018 and for some time after.
While the June 9th applicability date is firm, it is not beyond the realm of possibility that the date on which the transition period ends, January 1, 2018, could be delayed. The FAQs indicated that the DOL is still conducting the review of the Fiduciary Rule mandated by the White House and that the DOL intends to issue a new Request for Information ("RFI") regarding possible changes to the Fiduciary Rule. The DOL also said that "the RFI will specifically ask for public comment on whether an additional delay in the January 1, 2018 [full] applicability date would allow for more effective retirement assistance and help avoid needless expense." This suggests that Secretary Acosta intends to consider changes to the Fiduciary Rule and the BICE and is at least willing to consider an additional delay. In an April 2017 conference call, the Securities Industry and Financial Markets Association ("SIFMA") told members to prepare to comply with the final rule. It is certainly possible that there will be no meaningful changes to the Fiduciary Rule and related exemptions, but we think that, at the moment, it is too early to say with any certainty whether the DOL will make any changes. Based on the FAQs and Secretary Acosta's May 22, 2017 Wall Street Journal opinion piece, however, it seems clear that Secretary Acosta is committed to the mandated review, to getting additional public input, and to giving affected businesses sufficient time to react to any changes that may be made.
Please contact us with any questions you may have. We will continue to keep you posted regarding any changes in the law resulting from the DOL's ongoing examination of the Fiduciary Rule.