Current Status of the DOL Fiduciary Rule

After two years of public comments and discussion, the U.S. Department of Labor (“DOL” or “Department”) released the fiduciary rule in its final form On April 6, 2016.  Under the new rule, the “fiduciary” is defined as a person who provides recommendations or advice for a fee to a plan, a plan fiduciary, a plan participant, or an IRA owner for a fee regarding: (i) the advisability of acquiring, holding, disposing, or exchanging plan or IRA assets; (ii) the investment of assets after those assets are rolled over, transferred, or distributed from a plan or IRA; and (iii) the management of those assets. The new regulation became effective on June 7, 2016, and the final rule was to become generally effective on April 10, 2017; however, certain aspects of the prohibited transaction class exemptions were not to be fully effective until January 1, 2018.  And then Washington got involved, again …

On February 3, 2017, President Trump issued a Presidential Memorandum calling for a review of the implementation of the fiduciary rule, which was followed up on March 10, when the DOL issued a proposal to extend the applicability date 60 days, from April 7, 2017 to June 9, 2017 and required anyone relying on the BIC Exemption and related Principal Transaction Exemption to adhere to the impartial conduct standards during the transition period through January 1, 2018.

On May 22, 2017, Labor Secretary Alexander Acosta stated in an op-ed published in The Wall Street Journal, that the DOL would 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 date, 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.”

Current DOL Guidance

The DOL 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 9, 2017, 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.

Transition Period

Commencing on June 9th, the fiduciary rule’s amended definition of fiduciary advice first applied and the BIC Exemption and Principal Transactions Exemption 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. During the transition period, the standards that financial institutions and advisers must comply with are: (i) the adviser must acknowledge fiduciary status; (ii) advisers must comply with “impartial conduct standards”; and (iii) advisers must make disclosures regarding any services it provides that are subject to disclosure, including specifically, material conflicts of interest, including compensation and proprietary products and 3rd party payments.

The “impartial conduct standards”, 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: (i) give advice that is in the “best interest” of the retirement investor.  The 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 and 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.

 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.

The Fiduciary Rule – Current State of Affairs

While highly unusual at this point in the rulemaking process, all the signals being communicated from Washington – the DOL, the SEC and the Legislative Branch – are that the rule as drafted, has to be replaced.

To that end, on August 31, the DOL set a 15-day comment period for an 18-month delay in the full implementation of the fiduciary rule, from January 1, 2018 to July 1, 2019.  The comment period expired on September 15, and with comments, both for and against a delay in hand, by all appearances, all bets are on the DOL forging ahead with the 18-month delay.  The “DOL needs to propose its changes to the [best-interest contract] exemption and related exemptions,” said Steve Saxon, partner at Groom Law Group in Washington. “In order to obtain comments on these changes and hold hearings, DOL would need to offer these changes this fall to give providers time to get ready before July 2019.”

With the above in motion, it was noted in the September 25, 2017 edition of ThinkAdvisor that the Labor Department’s proposal to delay the full implementation of the fiduciary rule to July 2019 will likely meet a legal challenge from consumer advocate groups, according to several sources.  “If they finalize the delay as it is proposed, Labor should expect a legal challenge,” said Micah Hauptman, an attorney with the Consumer Federation of America, which filed a comment letter opposing the delay of the scheduled implementation of the rule.

As usual in these type of lawsuits, the issue will turn on a technicality, that being whether the DOL has adequately justified the necessity of a delay, which executive agencies are required to do under the Administrative Procedure Act.  Opponents of the delay have also claimed that Labor’s proposal doesn’t accurately cite its statutory authority to postpone implementation of the fiduciary rule.  At the core of consumer advocates’ position is whether Labor is actually proposing a stay of the rule under the guise of a simple delay of the rule.

With respect to the SEC, in early October, SEC Chairman Jay Clayton told lawmakers in Washington, at a hearing, titled “Examining the SEC’s Agenda, Operations and Budget,” that the agency is “working on” a fiduciary rule proposal and that while he “initially focused on” cybersecurity upon becoming chairman, the “other initial” focus he has is on a fiduciary rule-making.  When asked what the SEC’ “next step” was concerning a fiduciary rule-making Clayton noted that “it would be a rule proposal” and he went on to say that the agency was “working on such a proposal. We want to work with the Department of Labor. If this were easy, it would already be fixed. We’ve got a lot to do. But I’m confident that we’re going to put forward something”.

It is anticipated the House Financial Services Committee will mark up on Representative Ann Wagner’s proposed bill, the Protecting Advice for Small Savers Act of 2017, H.R. 3857 by mid-October.  Wagner’s bill is intended to repeal the Labor Department’s fiduciary rule, keeps fiduciary rule-making under the SEC’s jurisdiction and establishes a “best-interest” standard for broker-dealers.  Wagner is a strong opponent to the fiduciary rule, as evidenced by her recent comments that her bill repeals Labor’s rule, “period. Full stop. And it gets the Department of Labor out of the broker-dealer space.”

To further motivate Washington, Nevada has proposed its own fiduciary rule, and other states are discussing taking action on behalf of their citizens.  With the fear that financial institutions would have to comply with not only DOL rules, but also the laws of various other jurisdictions, it will be imperative that the issue be clarified on a federal level.

With the above in mind, it appears that the primary issue at this point is whether the DOL issues the 18-month extension, which will provide the time for opponents of the rule to address the rule-making process for an amended fiduciary rule.  In the event the extension is not issued, the financial industry will continue to get closer to the full implementation date of January 1, 2018, with little clarity.  In any event, as the whole process is as clear as mud to most, we can look forward to more confusion and chaos surrounding the rule for the foreseeable future.