In an op-ed published last week in The Wall Street Journal, Labor Secretary Alexander Acosta stated that the Department of Labor (“DOL” or “Department”) will not delay the June 9th compliance date for the DOL fiduciary rule while the Department seeks public input on the rule as laid out in President Donald Trump’s February 3 memorandum.
In the article, titled “Deregulators Must Follow the Law, So Regulators Will Too”, Acosta noted that “We have carefully considered the record in this case, and the requirements of the Administrative Procedure Act, and have found no principled legal basis to change the June 9 date while we seek public input,” He additionally wrote that “Respect for the rule of law leads us to the conclusion that this date cannot be postponed” and that “Trust in Americans’ ability to decide what is best for them and their families leads us to the conclusion that we should seek public comment on how to revise this rule.”
On the same day, the DOL issued Field Assistance Bulletin No. 2017-02, instituting a temporary enforcement policy related to the fiduciary rule, which states in part that “during the phased implementation period ending on January 1, 2018, the Department will not pursue claims against fiduciaries who are working diligently and in good faith to comply with the fiduciary duty rule and exemptions, or treat those fiduciaries as being in violation of the fiduciary duty rule and exemptions.”
The DOL also released guidance regarding the transition period for the fiduciary rule in the Conflict of Interest – Frequently-Asked-Question guide. In that FAQ, it was noted that firms and their advisers must comply with the exemptions’ conditions after June 9th compliance date if they receive compensation for investment advice in a manner that would violate the prohibited transaction rules, and to that end, firms and advisers must either structure their compensation arrangements to avoid prohibited transactions or they must comply with an exemption such as the Best Interest Contract (“BIC”) Exemption or Principal Transactions Exemption.
Thus, on the June 9th compliance date, the fiduciary rule’s amended definition of fiduciary advice will first apply and the BIC Exemption and Principal Transactions Exemption will become available to fiduciary advisers. At the outset, however, and for a transition period extending until January 1, 2018, fewer conditions will apply to financial institutions and advisers that seek to rely upon the exemptions.
Impartial Conduct Standards
During the transition period, financial institutions and advisers must comply with the “impartial conduct standards” which are consumer protection standards that ensure that advisers adhere to fiduciary norms and basic standards of fair dealing. The standards specifically require advisers and financial institutions to:
- Give advice that is in the “best interest” of the retirement investor. This best interest standard has two chief components: prudence and loyalty:
- Under the prudence standard, the advice must meet a professional standard of care as specified in the text of the exemption;
- 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 firm;
- Charge no more than reasonable compensation; and
- Make no misleading statements about investment transactions, compensation, and conflicts of interest.
Full Compliance Date
Absent further action from the DOL, the transition period ends on January 1, 2018, and full compliance with all of the exemptions’ conditions is required for firms and advisers that choose to engage in transactions that would otherwise be prohibited under ERISA and the Internal Revenue Code. These conditions importantly include, among other things, requirements to execute a contract with IRA investors with certain enforceable promises, make specified disclosures, and implement specified policies and procedures to protect retirement investors from advice that is not in their best interest. The contract could require the IRA investor to pursue individual claims through arbitration, but must preserve the investors’ ability to bring class action claims in court.
As the June 9th compliance date is just over two weeks away, advisers need to prepare and deliver notification to customers subject to the fiduciary rule that includes an affirmation of fiduciary status and the best interest standard of care and inventory and disclose material conflicts of interest, information regarding proprietary products or services offered and 3rd party payments.