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News July 10, 2017 Issue

DOL Seeks Public Input on Further Delay and Changes in Fiduciary Rule Exemptions

The dust is far from settled when it comes to Department of Labor Fiduciary Rule exemptions.

The DOL on June 29 issued a "request for information" seeking public input on extending the applicability date of certain exemptive provisions associated with the Fiduciary Rule, as well as possibly changing the requirements of those provisions in the exemptions. The result, if extended dates are adopted and/or those exemptive requirements are changed, may bring relief, confusion and perhaps some frustration to advisers who would otherwise have had to comply with all the exemptive provisions by January 1.

"Public input on the Fiduciary Duty Rule and [related exemptions] has suggested that it may be possible in some instances to build upon recent innovations in the financial services industry to create new and more streamlined exemptions and compliance mechanisms," the DOL said in its request. These innovations and mechanisms include the development of:

  • Mutual fund "clean shares," which would not carry a front-end load, deferred sales charge or other asset-based fee for sales or distribution;
  • Fee-based annuities; and
  • New technology, as well as advisory and data services, that would help satisfy the supervisory requirements contained within the exemptions.

The Department did not suggest a specific new applicability date for the exemptive provisions. It allowed 15 days for public comments on the date extension, and 30 days for public comments on topics that might relate to changes in the exemptions themselves. The comment period will begin when the request for information is published in the Federal Register.

"Given the information requested in the request for information and the amount of time it will take to evaluate that information, it is likely that an extension will be issued," said Drinker Biddle partner Joan Neri. "The focus of the request for information is on minimizing the overall compliance burden."

Recent history

The DOL’s request for information is the latest in a chain of delays involving the Fiduciary Rule and its exemptions since the Trump administration took office. The Rule, which applies a fiduciary definition to all financial institutions, including advisers and broker-dealers, that provide retirement investment advice to investors was originally published, along with the exemptions, on April 8, 2016, with an applicability date of April 10, 2017.

One of those exemptions was the Best Interest Contract (BIC) exemption, which in many cases would require those providing fiduciary retirement advice to enter into contracts with clients. Those contracts would be required to state that fiduciaries will act in the best interest of the client. Another is an exemption for principal transactions.

Most of the exemptions, known as "prohibited transaction exemptions," are conditioned on what are known as the "impartial conduct standards:" providing advice in retirement investors’ best interest, charging reasonable compensation, and avoiding misleading statements. Those exemptive provisions are currently in effect.

On February 3 of this year, President Trump issued a Presidential Memorandum directing the DOL to further analyze the likely impact of the Fiduciary Rule in terms of how it would affect retirees receiving retirement advice (ACA Insight, 2/13/17). The Department on March 2 then delayed both the Rule and the exemptions for 60 days, and also sought public comment on general questions concerning both (ACA Insight, 3/6/17).

On April 7, the DOL adopted a final rule extending the applicability date of the Fiduciary Rule and the exemptions to June 9, while requiring fiduciaries relying on the exemptions to follow the impartial conduct standards until January 1, 2018, at which time the full compliance requirements would kick in (ACA Insight, 4/10/17). The Department on May 22 said it would not seek enforcement against fiduciaries until January 1, if those fiduciaries worked diligently and in good faith (ACA Insight, 6/5/17).

Now, with the issuance of its new request for information, it is beginning to look like the content of the exemptions themselves may change and/or the January 1 compliance date may be pushed further back.

It should be noted, said Mayer Brown partner Lennine Occhino, that "the January 1 date affects only certain of the compliance requirements of the full BIC exemption. I haven’t seen any advisers that intend to rely on full BIC. At most, I have seen some advisers choosing to rely on the so called ‘BIC lite,’ also known as the ‘level fee BIC,’ for advice with respect to plan distributions and IRA rollovers. The Fiduciary Rule and conditions for BIC lite are fully in effect now."

BIC lite is a streamlined version of the full BIC exemption. It allows advisers with acceptable "level" fees to avoid some of the more onerous requirements of the full exemption. These include mandatory provisions in contracts with clients; formulating policies that prohibit quotas, bonuses and contracts under certain circumstances; and website disclosures.

The questions

"The Department is particularly interested in public input on whether it would be appropriate to adopt an additional more streamlined exemption or other rule change for advisers committed to taking new approaches . . . based on the potential for reducing conflicts of interest and increasing transparency," the DOL’s request for information states.

"If commenters believe more time would be necessary to build the necessary distribution and compliance structures for such innovations, the Department is interested in information related to the amount of time expected to be required," the request for information continued.

Occhino suggested that "the questions may provide some insight into amendments under consideration by the DOL."

Following is a summary of 18 question areas that the DOL, in its request for information, asked for comments on. The full wording for each topic can be found in the actual document.

  1. Would a delay in the January 1, 2018 applicability date of the provisions in the BIC exemption, Principal Transactions exemption and amendments [to other exemptions] reduce burdens on financial service providers and benefit retirement investors by allowing for more efficient implementation responsive to recent market developments? Would such a delay carry any risk?
  2. What has the regulated community done to comply with the Rule and [prohibited transaction exemptions] to date, particularly including the period since the June 9, 2017 applicability date? Are there market innovations that the Department should be aware of?
  3. Do the Rule and [prohibited transaction exemptions] appropriately balance the interests of consumers in receiving broad-based investment advice while protecting them from conflicts of interest?
  4. To what extent do the incremental costs of the additional exemption conditions (those that become effective on January 1) exceed the associated benefits and what are those costs and benefits? Are there better alternative approaches?
  5. What is the likely impact on advisers’ and firms’ compliance incentives if the Department eliminated or substantially altered the contract requirement for IRAs? What should be changed?
  6. What is the likely impact on adviser’ and firms’ compliance incentives if the Department eliminated or substantially altered the warranty requirements? What should be changed?
  7. Would mutual fund clean shares allow distributing financial institutions to develop policies and procedures that avoid compensation incentives to recommend one mutual fund over another? If not, why? What legal or practical impediments do financial institutions face in adding clean shares to their product offerings? How long is it anticipated to take for mutual fund providers to develop clean shares and for distributing financial institutions to offer them, including the time required to develop policies and procedures that take clean shares into account?
  8. How would advisers be compensated for selling fee-based annuities?
  9. Are there other innovations that hold similar potential to mitigate conflicts and increase transparency for consumers? Do these or other innovations create an opportunity for a more streamlined exemption?
  10. Could the Department base a streamlined exemption on a model set of policies and procedures, including policies and procedures suggested by firms to the Department?
  11. If the [SEC] or other regulators were to adopt updated standards of conduct applicable to the provision of investment advice to retail investors, could a streamlined exemption or other change be developed for advisers that comply with or are subject to those standards?
  12. Are there ways in which the Principal Transactions exemption could be revised or expanded to better serve investor interests and provide market flexibility?
  13. Are there ways to simplify the BIC exemption disclosures or to focus the investor’s attention on a few key issues, subject to more complete disclosure upon request?
  14. Should recommendations to make or increase contributions to a plan or IRA be expressly excluded from the definition of investment advice?
  15. Should there be an amendment to the Rule or streamlined exemption for particular classes of investment transactions involving bank deposit products and HSAs?
  16. To what extent are firms and advisers relying on the existing grandfather provision? Has the provision affected the availability of advice to investors?
  17. If the Department provided an exemption for insurance intermediaries to serve as financial institutions under the BIC exemption, would this facilitate advice regarding all types of annuities?
  18. To the extent changes would be helpful, what are those changes and what are the issues best addressed by changes to the Rule or by providing additional relief through a prohibited transactions exemption?