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News September 11, 2017 Issue

DOL Proposes Fiduciary Rule Exemptions Delay, Considers Further Measures

The Department of Labor keeps finding ways to prevent key elements tied to its Fiduciary Rule from taking effect. The latest: an 18-month application date delay on three Rule exemptions, the likelihood that the DOL will "in the near future" propose "a new and more streamlined class exemption," and calls for comments in several other areas.

"The Department is proposing to extend the transition period in the Best Interest Contract Exemption and Principal Transaction Exemption for 18 months until July 1, 2019, and to delay the applicability date of certain amendments to [the Prohibited Transactions exemption] for the same period," the DOL said in its proposal, published in the Federal Register August 31.

The Department said that it will use the additional time to further reexamine the Fiduciary Rule and its exemptions, as called for by President Trump this past February, as well as to consult with the SEC on standards of conduct for advisers and broker-dealers. The DOL said that the delayed deadline would also allow advisers and broker-dealers to avoid incurring what may prove to be unnecessary compliance costs.

Going in an entirely new direction is also apparently an option. "The Department also anticipates that it will propose in the near future a new and more streamlined class exemption built in large part on recent innovations in the financial services industry," the DOL said in its proposal.

The public has until September 15 to submit comments on the delay proposal.

Advisers and broker-dealers would be mistaken to think this lets them off the compliance hook. "This is not a get out of jail free, do nothing until July 2019 card," said Wagner Law Group partner Stephen Wilkes. "The prudent course of action for those affected is to assume that the BIC exemption and other exemptions will be fully effective on January 1, 2018. The proposed amendments to defer until July 1, 2019, while likely to be adopted, are not yet final." Advisers could perhaps "modulate their implementation efforts a bit" given the likelihood of a change, but "we cannot be caught unawares" in the event the amendments as proposed are not adopted, he said.

Latest in a long line of delays

The current proposal is the most recent in a line of proposals that in one way or another have pushed back the compliance date for the Fiduciary Rule and/or the exemptions related to it. The Rule, written during the Obama administration, had an original applicability date of April 10, 2017. Then, with a new president and Treasury secretary in office, the following occurred:

February 3, 2017. President Trump issued a memorandum calling for the DOL to reexamine the impact of the Rule (ACA Insight, 2/13/17).

March 2. The Department proposed delaying the Rule and related exemptions by 60 days, while also seeking comments on law and policy questions raised in the presidential memorandum (ACA Insight, 3/6/17). Nearly 200,000 comments and petition letters were received in regard to the proposed delay.

April 7. The DOL adopted a final rule extending the applicability date of the Rule and the exemptions to June 9 (ACA Insight, 4/10/17).

May 22. In a field office bulletin, the Department said it would not enforce the Rule or the exemption requirements against advisers, broker-dealers and others until January 1, 2018, the end of the phased implementation period (ACA Insight, 6/5/17).

June 29. The DOL issued a request for information to augment some of the public commentary it had previously received. It also sought comments regarding extending the January 1, 2018 deadline further for the BIC exemption, the Principal Transactions exemption, and the Prohibited Transaction exemption (ACA Insight, 7/10/17).

August 31. The Department proposed delaying the applicability dates of the extensions until July 1, 2019, while also stating it plans to introduce a streamlined class exemption.

In the summary to its proposed amendments, the DOL states that the "primary purpose" behind them "is to give the Department of Labor the time necessary to consider possible changes or alternatives. . . . The Department is particularly concerned that, without a delay in the applicability dates, regulated parties may incur undue expenses to comply with conditions or requirements that it ultimately determines to revise or repeal."

"The only BIC requirement that applies during the transition period is compliance with the ‘impartial conduct standards," said Drinker Biddle partner Joan Neri. These include operating in the investor’s best interest, charging a reasonable fee, and not making any materially misleading statements. "Yet," she noted, "the DOL seems, in this proposal, to be adding another condition to those standards." The DOL repeats the statement it made earlier in its May frequently asked questions that it expects financial institutions to adopt policies and procedures they reasonably conclude are necessary to ensure compliance with the impartial conduct standards. This reiteration suggests that the DOL may view this as a requirement to show that advisers are, in fact, ‘working diligently and in good faith to comply’ with the Rule."

"In light of the presidential memorandum and comments received in connection with the original delay, the Department reviewed the comments and was able to determine fairly quickly that a further delay may be justified," said Skadden Arps ERISA counsel Jeffrey Lieberman. However, he noted, "this is still a proposal, so comments could affect the ultimate outcome, but it does seem unlikely that some significant delay would not occur."

The three exemptions

The proposed amendments would affect the following three exemptions to the DOL’s Fiduciary Rule:

  • BIC exemption. This would require those providing fiduciary retirement advice, in many cases, to enter into enforceable written contracts with investors, stating that fiduciaries will act in the best interest of the investor. This has raised concerns among advisers and broker-dealers because, as the DOL states in its proposed amendments, "IRA owners, who do not have statutory enforcement rights under ERISA, would be able to enforce their contractual rights under state law."
  • Class Exemption for Principal Transactions. This exemption would permit an adviser or financial institution to take part in the purchase or sale of a principal traded asset in certain transactions with a plan, participant or beneficiary account, or IRA, and receive a mark-up, mark-down or other similar payment for themselves or an affiliate. It also includes a contract requirement.
  • Prohibited Transaction Exemption. Under this exemption, a person who serves as a fiduciary for employee benefit plans would be allowed to execute securities transactions under certain circumstances.

Requests for comment

The DOL also took the opportunity in its comments to the proposed amendments, to announce that it is seeking comments on additional areas of the Rule or the exemptions. These include:

  • Enforcement. The Department noted that it was considering whether to continue its current non-enforcement position in light of the additional extension, and wants comments providing advice. However, said Lieberman, "given the uncertainties surrounding the Rule, it seems likely the DOL will continue some non-enforcement policy."
  • Delay structure. The Department wants comments on just how it should structure the 18 month delay, saying it wants to do so "in a way that could be beneficial to retirement investors and to market participants." The DOL "requests comments regarding what event or action on the part of the Department should begin the period by which the end of the delay is measured (e.g., the end of the Department’s examination pursuant to the presidential memorandum, issuance of a proposed or final new [exemptions] or a statement that the Department does not intend any further changes or revisions."
  • Tiered approach. The DOL wants to know if such an approach would be beneficial. "The Department is interested in comments that provide insight as to any relative benefits or harms of these three different delay approaches," it said, identifying the following three possible approaches: 1) a delay set for a time certain, including the 18 months proposed by this document; 2) a delay that ends a specified period after the occurrence of a specific event; and 3) a tiered approach where the delay is set for the earlier or the later of a) a time certain and b) the end of a specified period after the occurrence of a specific event.
  • Behavior. This would involve conditioning any delay of the transition period "on the behavior of the entity seeking relief under the transition period," the DOL said. For instance, it said, a covered fiduciary might take steps to "harness recent innovations in investment products and services." While the proposed amendments do not suggest this approach, "the Department solicits comments" on it, "in particular the benefits and costs of this suggestion, and ways in which the Department could ensure the workability of such an approach."

The proposed delay of 18 months, along with talk of new streamlined exemptions as an alternative to the BIC exemption, show that "the DOL is listening to some of the more practical comments coming from the industry, and following the philosophical position of the White House" said Wilkes.