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DOL Planning Another Fiduciary Rule Reprieve


August 29, 2017

The Department of Labor (DOL) Is Seeking to Further Delay The Implementation Of Tts Controversial Fiduciary Rule

The Department of Labor (DOL) is seeking to further delay the implementation of its controversial fiduciary rule that was promulgated by the Obama Administration. The latest proposed amendments would defer the applicability of the full conditions of the Best Interest Contract Exemption, Principal Transactions Exemption, and Prohibited Transaction Exemption 84-24 (collectively, the “prohibited transaction exemptions”) for another 18 months.

DOL Planning Another Fiduciary Rule Reprieve

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The DOL first referenced its plans in a court filing submitted in connection with a lawsuit, Thrivent Fin. for Lutherans v. Acosta, challenging the fiduciary rule. The agency has now submitted its proposed amendments to the Office of Management and Budget (OMB). Once its review is complete, the proposal will be published in the Federal Register.

Brief Summary of Fiduciary Rule

The DOL’s new rule would radically change the definition of who is a “fiduciary” under the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code of 1986 (Code) that had been in place since ERISA became law. Under the rule’s expanded definition, an individual is a fiduciary if the person receives compensation for providing advice that is individualized or specifically directed to a particular plan sponsor, plan participant, or IRA owner for consideration in making a retirement investment decision. Such decisions can include but are not limited to, what assets to purchase or sell and whether to rollover qualified funds from an employer-based plan to an IRA. These rules expressly excluded general retirement advice, order-taking, and sales pitches to plan fiduciaries possessing financial expertise.

The new fiduciary standards would further mandate that financial advisors to plan sponsors, plan participants, and IRA owners may not receive payments that create conflicts of interest unless they first obtained a new type of prohibited transaction exemption (PTE) known as the “Best Interest Contract Exemption.” As described by the DOL, the new PTE “allows firms to continue to set their own compensation practices so long as they, among other things, commit to putting their client’s best interest first and disclose any conflicts that may prevent them from doing so.”

DOL Delays Implementation

As we have discussed in prior articles, the DOL’s proposed amendments and delayed implementation are the latest in a series of actions initiated by the Trump Administration. The final rule, entitled “Definition of the Term ‘Fiduciary’; Conflict of Interest Rule — Retirement Investment Advice,” had an original applicability date of April 10, 2017. In February, President Donald Trump issued an executive order directing the DOL to conduct an examination of the final rule to determine whether the rule may adversely affect the ability of Americans to gain access to retirement information and financial advice.

The agency ultimately elected to proceed with implementation of the fiduciary rule while it considered future changes. The DOL only extended the effective date of the Rule until June 9, 2017; however, it did alter the requirements of the prohibited transaction exemptions to only require compliance with the “impartial conduct standards” through December 31, 2017. The less onerous standard requires firms and advisers to give advice that is in the “best interest” of the retirement investor; charge no more than reasonable compensation; and make no misleading statements about investment transactions, compensation, and conflicts of interest. If approved, the transition period would now extend until July 1, 2019.

In accordance with the DOL’s “Temporary Enforcement Policy on Fiduciary Duty Rule,” it will not aggressively pursue claims during the transition period. It states the DOL “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.”

In July, the DOL filed a Request for Information. It sought feedback regarding whether delaying the applicability date for full compliance with all the exemptions’ conditions would reduce burdens on financial services providers and benefit retirement investors by allowing for a smoother implementation of those market changes. It stated that the agency was open to the idea of creating additional exemptions.

The latest delay suggests that the DOL is seriously considering substantive amendments to the rule and likely wants more time to consider the public comments it has received. Of course, there is also the possibility that the rule may be totally scrapped as it has been controversial from the beginning. Secretary of Labor Alex Acosta and SEC Chair Jay Clayton have both stated publicly that they are willing to work together to create a uniform investment advice rule that realistically sets reasonable standards for financial advisors providing investment advice to qualified plan participants.

Do you have any questions? Would you like to discuss the matter further? If so, please contact me, Gary Young, at 201-806-3364.

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