On April 4, 2017, the Department of Labor (the Department) released a final rule (to be published in the Federal Register on April 7, 2017) extending for 60 days the applicability dates of the fiduciary rule, the Best Interest Contract (BIC) exemption, and the Class Exemption for Principal Transactions in Certain Assets Between Investment Advice Fiduciaries and Employee Benefit Plans and IRAs (Principal Transactions Exemption), as well as the applicability dates for the amendments to certain other class exemptions. Although this extension provides regulated parties with additional time to come into compliance with the Department’s new regulations, the Department appears to hint in the final rule that parts of the fiduciary rule and related prohibited transaction exemptions (PTEs) may be here to stay.
The fiduciary rule, the BIC exemption, and the Principal Transactions Exemption will now become applicable on June 9, 2017 (as opposed to the original applicability date of April 10, 2017). The extension also amends the transition relief in Section IX of the BIC exemption and Section VII of the Principal Transactions Exemption to require that, from June 9, 2017 until January 1, 2018, fiduciaries only need to adhere to the impartial conduct standards. Those standards require that the financial institution and its advisers act prudently and without regard to the financial or other interests of the adviser, financial institution or any affiliate, related entity, or other party; receive no more than reasonable compensation; and refrain from making materially misleading statements in connection with the investment recommendation.
During the transition period, financial institutions will not be required to affirmatively state that the financial institution and its advisers act as fiduciaries with respect to the recommendation. Nor will they be required to disclose exactly what the impartial conduct standards require and affirmatively state that they complied with those standards in making the recommendation. Likewise, the financial institution will not be required to make certain other disclosures originally required during the transition period, including whether proprietary products are offered or third party payments are received, and what limitations are placed on the universe of certain investment recommendations, among others. Finally, the financial institution will not be required during the transition period to comply with the recordkeeping requirements of the BIC exemption, nor will it need to designate a person responsible for addressing conflicts and monitoring adherence to the impartial conduct standards.
The final rule also delays the applicability date of the amendments to PTE 84-24, allowing insurance agents to continue to rely on this class exemption, rather than the BIC exemption, until January 1, 2018, for all types of fixed, variable, and indexed annuities. However, the impartial conduct standards of PTE 84-24 will become applicable on June 9, 2017. In addition, the final rule delays the applicability dates of the amendments to all of the other previously granted exemptions (PTEs 75-1, 77-4, 80-83, 83-1, and 86-128) until June 9, 2017.
The extension of the applicability dates of the fiduciary rule, the BIC exemption, the Principal Transactions Exemption, and the amendments to other previously granted exemptions is scheduled to be published in the Federal Register on April 7, 2017, and will become effective on the date of publication. The amended text of the BIC exemption, the Principal Transactions Exemption, and PTE 84-24 will appear in full on the Employee Benefits Security Administration’s (EBSA) website.
The Department acknowledged in issuing this 60-day extension that the re-examination of the fiduciary rule and related PTEs required by President Trump’s February 3, 2017 memorandum (the President’s Memorandum) is likely to take more time to complete than the 60-day extension will afford. Nonetheless, the Department determined that it would be “inappropriate” to delay the application of the fiduciary rule and the impartial conduct standards of the related PTEs for more than 60 days. While conceding the possibility that the fiduciary rule could be repealed pursuant to the President’s Memorandum, the Department nonetheless determined that the fiduciary rule should go into effect prior to the completion of that study. The final rule states specifically that “stakeholders can plan on and prepare for compliance with the fiduciary rule and the PTEs’ Impartial Conduct Standards beginning June 9, 2017” (emphasis added).
Several other points in the final rule deserve mention. First, while the Department says the recordkeeping requirements need not be met until January 1, 2018, the preamble to the final rule suggests that the applicability of the fiduciary rule will require records to be kept to prove compliance. Second, while the warranties under the BIC exemption are not required during the transition period, the preamble suggests that advisor compensation needs to be conflict free under the best interest standard. We find both of these statements troubling.
Given the tone of the final rule, we are skeptical that any additional relief will be forthcoming to extend—beyond June 9, 2017—the applicability dates of the fiduciary rule and related PTEs (as revised to require only compliance with the impartial conduct standards between June 9, 2017 and January 1, 2018). This course is surprising in the Department’s dismissal of more recent cost data, and in its failure to accommodate or acknowledge the confusion and chaos that will be caused by the implementation of the fiduciary rule before the Department can complete its presidentially-mandated study. It does not appear that the Department considered the amount of preparation that financial institutions would need to comply with the sophisticated investor test, the new education rules, or the expansive rollover rules in giving the industry only 60 days to comply with those requirements, while giving nearly eight months to comply with the full BIC exemption. Unless the Department has prejudged the results of the president’s mandated study, it seems hard to understand why the Department concluded that it is in anyone’s interest to implement a rule that could be revised or repealed.
We will continue to monitor for any additional developments.