On April 7, 2017, the Department of Labor (“DOL”) published the extension of the applicability date for the Conflicts of Interest Rule, otherwise known as the DOL Fiduciary Rule, in the Federal Register. The 60-day extension designates June 9, 2017 as the new applicability date but leaves unchanged the final rule’s full applicability date of January 1, 2018. Accordingly, the extension has designated the time between June 9, 2017 and January 1, 2018 as the “Transition Period.”
The Presidential Memorandum dated February 3, 2017 directed the DOL to conduct a review of the Fiduciary Rule to determine its impact on Americans’ ability to gain access to financial advice regarding their retirement investments. As part of the review, the memorandum directed the DOL to examine the following:
- Whether the applicability of the Fiduciary Rule and associated Prohibited Transaction Exemptions (“PTEs”) would harm investors by reducing access to investment advice
- Whether the applicability of the Fiduciary Rule and associated PTEs would cause disruptions within the retirement industry that would negatively affect investors’ access to advice and products
- Whether the applicability of the Fiduciary Rule and associated PTEs would cause an increase in litigation which would result in an increase in costs to firms and investors
As part of this review, the DOL held a comment period through March 17, 2017, regarding the proposed delay. The DOL will also accept comments through April 17, 2017, regarding the review of the Fiduciary Rule mandated by the Presidential Memorandum.
By the time it announced the delay, the DOL had received 15,000 comments in support of a 60-day or greater delay and 178,000 comments opposed. Those in support of the delay suggested the DOL Fiduciary Rule would result in increased costs and a corresponding decrease in services to investors. Those in opposition to the delay cited the increased cost to investors as a result of conflicted advice given by advisers. In describing the rationale for the decision to delay the April 10, 2017, applicability date of the Fiduciary Rule, the DOL noted that adherence to the rule would result in a chaotic transition as financial institutions endeavored to comply with the rule, causing investor confusion and reduced access to advisory services.
In delaying the applicability date to June 9, 2017, the DOL also changed certain requirements of the DOL Fiduciary Rule, as well as the associated PTEs firms and advisers need to follow during the Transition Period. During the Transition Period firms and advisers must
- adhere to the definition of a fiduciary as outlined in the DOL Fiduciary Rule, and
adhere to the Impartial Conduct Standards with regard to retirement plans and IRAs covered by the rule:
- Act in the customer’s “Best Interest”
- Charge no more than reasonable compensation
- Give no misleading statements
The following changes apply to the Transition Period:
- Previously required disclosures are not applicable.
The following more prohibitive aspects of the Best Interest Contract and Principal Transaction Exemptions are not applicable:
- Contract Provision
- Notwithstanding the 60-day delay of the PTEs, firms and advisers still need to adhere to the Impartial Conduct Standards to comply during the Transition Period.
The Transition Period delays amendments to PTE 84-24 as follows:
- The PTE still covers variable and fixed-index annuities.
- For recommendations subject to this PTE, firms and advisers need only adhere to the Impartial Conduct Standards.
- The Transition Period also delays any amendments to previously approved exemptions for 60 days.
The ultimate fate of the current Fiduciary Rule remains unknown while the DOL conducts its reviews pursuant to the Presidential Memorandum. The filing also indicates that the DOL may impose further delays during its review.
The uncertainty surrounding the DOL Fiduciary Rule raises questions about how firms and advisers should proceed. At the very least, firms should expect to comply with the requirements of the Impartial Conduct Standards:
Act in the customer’s “Best Interest”
- Define what is considered to be in the customer’s best interest
- Train advisers in the best-interest standard as defined by the firm
- Determine what documentation may be needed to evidence the best-interest standard
Charge no more than reasonable compensation
- Review compensation plans to determine what may be considered reasonable
- Contact clearing firms and/or product suppliers regarding how they help firms to determine reasonable compensation
- Document a reasonable basis for determining compensation
Give no misleading statements
- Include as part of the training of advisers for the best-interest standard
In summary, while the DOL Fiduciary Rule has been delayed, it has not been eliminated. The delay grants the industry an additional 60 days to comply with the rule, and during the Transition Period firms only need to adhere to the Impartial Conduct Standards while providing investment advice to retirement investors. Although the requirements for compliance during the Transition Period have eased, firms must have some type of program in place to evidence adherence to these standards. Firms also need to plan for compliance based on the most recent information as long as the rule’s future remains unknown.
For More Information
If you have questions regarding any of these issues or requirements, please contact your ACA consultant or Dee Stafford at 310-322-8840.