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 and establishing the best interest contract exemption (BICE) and other related exemptions under the Employee Retirement Income Security Act (ERISA).
The effect is that the policing power of the DOL will be greatly expanded, reaching over individual retirement accounts (IRA) and the vast majority of investment and advice providers to defined contribution (DC) retirement plans. Suffice it to say, this is a surprising outcome given that the new fiduciary rule and its accompanying exemptions are signature Obama-era regulatory actions that have been flatly criticized by the new president and many members of the Republican Congressional majority.
It stands to reason that the administration won’t aggressively enforce the new standards, but it must be observed that the fiduciary rule effectively establishes new opportunities not just for the DOL to pursue litigation—but also for broader private litigation alleging fiduciary breaches. In other words, just because the DOL will not aggressively enforce this new rulemaking, this does little to address the fact that private litigators will also have a wider opportunity to allege fiduciary breaches under ERISA.
Timely analysis shared by the Wagner Law Group rehearses some other considerations for retirement industry professionals. As the analysis lays outs, technically speaking the DOL has formally started the implementation process, issuing a temporary enforcement policy and a new set of Conflict of Interest FAQs that focus on the transition period stretching from June 9, 2017, to January 1, 2018. This action follows the DOL’s April 7, 2017, final rule which delayed the applicability date by 60 days from April 10, 2017, to June 9, 2017.
“As a result, June 9 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,” the Wagner analysis explains. “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.”
NEXT: Legal considerations for the transition period
The Wagner Law Group says many clients are asking what it means to comply with the impartial conduct standards in isolation when other related requirements—contracts, written disclosures and representations, designation of a person or persons responsible for addressing material conflicts of interest and ensuring adherence to the ICS—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,” the analysis suggests. “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 9 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 9 is also the date on which the definition of investment education under DOL Interpretive Bulletin 96-1 (IB 96-1) is no longer applicable.
As the Wagner analysis explains, “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.”
NEXT: Indignation from industry groups
Responses from industry groups have generally voiced frustration that, after so many suggestions from the administration and Congress that stopping the fiduciary rule was a priority, somehow the rulemaking is still pushing ahead. Many of the statements are carefully crafted to leave open the possibility of further working with the DOL and the Securities and Exchange Commission (SEC) to revise or replace the rulemaking during the transition period.
SIFMA, for example, released a statement from Kenneth Bentsen, Jr., president and CEO. He notes that SIFMA “has long supported the creation of a best interest standard for brokers who provide personalized investment advice, and we continue to believe that the SEC is the appropriate regulator to do so … While we are disappointed that the Department of Labor has chosen not to further delay the rule until the Department has completed a review of the entire rule’s impact on investors, we appreciate Secretary Acosta's recognition of the rule's negative impact and his desire to seek public input … We hope that upon the Department’s completion of its wholesale rule review, they will conclude, as we believe the evidence clearly shows, that dramatic and fundamental changes are appropriate and necessary.”
The Insured Retirement Institute (IRI) sounded a similar note in commentary from President and CEO Cathy Weatherford: “IRI remains committed to supporting a best interest standard for financial professionals; however, the Department of Labor's fiduciary rule is already having harmful impacts on Americans planning for retirement … We commend Secretary Acosta for his continuing commitment to seek and examine public comment on whether to revise or rescind the rule and to collaborate with the SEC during this process. IRI looks forward to working the Department of Labor, the SEC and Congress to develop a best interest standard of care that enables all Americans to achieve a secure and dignified retirement.”
On the likelihood of SEC intervention, Jamie Hopkins, Retirement Income Program Co-Director at The American College, suggests providers should not hold out much hope for an immediate move.
“The SEC was granted authority to promulgate a fiduciary investment standard; however, they have yet to act,” he says. “While the rule is said to be in the works, no one expects to see a final rule anytime soon. This creates another level of uncertainty. Some critics of the DOL fiduciary rule argue that the DOL should wait until the SEC creates a rule so that the two rules do not conflict and that the SEC is really the correct agency to develop such a rule. However, a potential repeal of Dodd-Frank or another deregulatory move could strip the SEC of their power to create a rule. So today, the SEC’s role and potential creation of a different fiduciary rule remains up in the air.”