The latest chapter in the 6-1/2 year history of the Department of Labor (DOL) final Fiduciary Rule is a 60-day delay of part of the final regulations, and a delay until January 1, 2018 for certain disclosures and other requirements of class exemptions affecting compensation primarily of investment advisers to retirement savings. The delays are in response to the President’s February 3rd memorandum requiring the DOL to study and report back on certain effects of the Rule. While opposition to delaying the Rule was overwhelming (with 193,000 public comments opposing delay and 15,000 favoring), the DOL decided to delay the application of the Rule nevertheless.
The final regulations, which were to become applicable on April 10, 2016, expand the definition of an ERISA fiduciary and provide a means for investment advisers to receive otherwise prohibited compensation, as long as certain conditions are met under class exemptions. The final regulations seek to prevent excessive, often hidden charges to the public on investments recommended for their retirement savings which are not in their best interests.
The recent DOL announcement resulted in the following delays affecting investment advisers and other fiduciaries:
- Delay of Expanded Fiduciary Definition. The DOL amended the definition of “fiduciary” from a person who regularly provides investment advice to an ERISA plan or individual retirement account (IRA), to one who, for a fee, ever provides an investment recommendation or appraisal. That definition will now be applicable on June 9, 2017.
- Impartial Conduct Standards. The Impartial Conduct Standards track the loyalty and prudence requirements of an ERISA fiduciary, and require the fiduciary to act in the best interests of plans, IRAs, plan participants and IRA owners when making recommendations. In addition, the application of the Impartial Conduct Standards require fiduciaries to provide advice in the plan investors’ best interest, charge no more than reasonable compensation, and avoid misleading statements. The Impartial Conduct Standards will also be applicable on June 9, 2017.
- BICE and Principal Transaction Exemptions. The Best Interest Contract Exemption (“BICE”) and Principal Transaction in Certain Assets Between Investment Advice Fiduciaries and Employee Benefit Plan (“Principal Transactions”) allow investment advisers to receive compensation for their advice, otherwise prohibited by ERISA and the Code. Both these exemptions require compliance with the Impartial Conduct Standards. Beginning on June 9, 2017, an adviser need only meet the Impartial Conduct Standards, and not the other conditions of the BICE or Principal Transactions exemptions. The remaining conditions of these exemptions, including those requiring written disclosures and representations of fiduciary compliance, are not required until January 1, 2018. There is no specific BICE or Principal Transactions protection before June 9, 2017.
- Insurance and Annuities. The applicability of the amendments to PTE 84-24 involving insurance and fixed rate annuity contracts is delayed to January 1, 2018, except for the Impartial Conduct Standards which take effect on June 9, 2017. After January 1, 2018, PTE 84-24, as amended, would no longer permit sales of fixed indexed annuity contracts and variable annuity contracts. However, from June 9, 2017 until January 1, 2018, PTE 84-24 will continue to apply to fixed indexed annuity contracts and variable annuity contracts, provided that the adviser complies with the Impartial Conduct Standards.
- Other Class Exemptions. Other previously granted exemptions, PTE 75-1, 77-4, 80-83, 83-1 and 86-128 take effect on June 9, 2017.
The DOL’s decision to delay the Fiduciary Rule, even in the face of overwhelming public opposition, signals that the DOL is trying to address the President’s directive while still retaining the core provisions of the Rule. The short delay on implementing the expanded definition of “fiduciary” and the Impartial Conduct Standards is evidence that the DOL prioritizes these elements of the Rule and is unlikely to change them.
However, a longer delay on the more controversial aspects of the Rule, such as the notice and disclosure requirements under BICE, and insurance contract sales PTE 84-24 may signal future changes. The DOL noted that it is considering broader relief for the insurance industry.
The fate of the controversial provisions of BICE and the other class exemptions will become clearer as the DOL approaches the January 1, 2018 applicability date. Until then, efforts should continue to meet the rules of the exemptions by January 1, 2018 if investment advisers intend to rely on that relief.