On Tuesday, April 4, 2017, the Department of Labor finalized a delay to the applicability date of the Fiduciary Rule until June 9, 2017
Following President Trump’s February 3, 2017 memorandum (the “Presidential Memorandum”)1 directing the Department of Labor (DOL) to prepare an “updated economic and legal analysis concerning the likely impact” of its “Conflict of Interest Rule” on fiduciary investment advice (the “Rule”) and related prohibited transaction exemptions (PTEs), the DOL finalized a delay to the initial applicability date of the Rule until June 9, 2017.2
The DOL also delayed the initial applicability date of the Best Interest Contract (BIC) Exemption, the Class Exemption for Principal Transactions, and amendments to other previously granted exemptions until June 9, 2017. The applicability date of the Impartial Conduct Standards in these exemptions is extended until June 9, 2017, while compliance with other conditions for transactions covered by these exemptions (e.g., specific disclosures and representations of fiduciary compliance in written communications with investors) is not required until January 1, 2018.3
In addition, the DOL delayed the initial applicability of amendments to PTE 84-24 for certain insurance companies and agents until January 1, 2018 (other than the Impartial Conduct Standards, which will be applicable on June 9, 2017).
The DOL argued that these extensions are necessary to enable it to examine whether the Rule may adversely affect the ability of Americans to gain access to retirement information and financial advice, and to prepare the updated economic and legal analysis pursuant to the Presidential Memorandum. The extensions will also allow the DOL to “consider possible changes with respect to the Rule and PTEs based on new evidence or analysis developed pursuant to the examination.”4
The DOL affirmed that the fiduciary definition and heightened advice standards will be applicable on June 9, 2017
Requirements for June 9, 2017
Beginning on June 9, advisers who provide investment advice and recommendations to retirement investors will be considered fiduciaries and will be required to comply with the Impartial Conduct Standards, which require advisers to (1) make recommendations that are in an investor’s best interest (i.e., advice that is “prudent and loyal”), (2) avoid misleading statements, and (3) charge no more than reasonable compensation for services (which is already an obligation under the Employee Retirement Income Security Act (ERISA)).
The DOL has indicated that there will likely be no further delays to the applicability date of the fiduciary definition and Impartial Conduct Standards.
The DOL has made it exceedingly clear that the new definition of the term “fiduciary” and the Impartial Conduct Standards will become effective on June 9, 2017 and will not be further delayed by the DOL. Specifically, the DOL asserted that, under the new transition approach, impacted parties should “plan on and prepare for compliance with the Rule and the PTEs’ Impartial Conduct Standards beginning on June 9, 2017,” though they will not be subject to the other conditions in the BIC Exemption and Class Exemption for Principal Transactions until “at least January 1, 2018.”5
Further, the DOL emphasized that, after the passage of a year since the Rule and PTEs were published, it finds “little basis for concluding that advisers need more time to give advice that is in the retirement investor’s best interest and free from misrepresentations in exchange for reasonable compensation.”6
Certain conditions previously required during the transition period are no longer applicable
Under the DOL’s new transition approach, the remaining conditions of Section IX of the BIC Exemption and Section VII of the Class Exemption for Principal Transactions—other than the Impartial Conduct Standards—will not be applicable until January 1, 2018.
The conditions that are no longer applicable in the transition period include (1) a written statement of fiduciary status, (2) specified disclosures, (3) a written commitment to adhere to the Impartial Conduct Standards, (4) designation of a person or persons responsible for addressing material conflicts of interest and monitoring advisers’ adherence to the Impartial Conduct Standards, and (5) compliance with certain recordkeeping requirements of the exemptions.
Are you ready for June 9?
Although the revised transition period requirements greatly reduce or eliminate litigation and class action risk, the DOL—in the final rule delaying the initial applicability date—notes that “ERISA provides a cause of action for violations by fiduciary advisers to ERISA-covered plans and plan participants, including violations with respect to rollovers and distributions of plan assets.”7
Because the compliance requirements effective on June 9 (i.e., the expanded definition of the term fiduciary and the Impartial Conduct Standards) represent such a substantial shift from practices that have been in place for decades, impacted parties should carefully assess the preparation efforts that they have taken to date to understand whether they are, in fact, ready to operate in a compliant way.
Deloitte has been advising many of the industry’s largest and most complex companies in their efforts to transform their business and operating models in order to be not only compliant, but competitive in a fiduciary environment. Based on our experience, we understand the complexity and significant amount of effort that may be needed to comply with just the Impartial Conduct Standards requirements.
Best Interest Advice
Core tenets of complying with the Best Interest Advice standard include mitigating the influence of conflicts of interest in an adviser’s recommendations and following a prudent analysis process in order to arrive at an investment recommendation. The prudent analysis process should be supported by documentation and controls, and for roll-over recommendations, the DOL and Financial Industry Regulatory Authority’s (FINRA) NTM 13-45 require that advisers consider certain documentation and factors in their analysis that may not be current common practice.
Although, as the DOL notes, reasonable compensation standards have long been an ERISA requirement, many impacted organizations have undertaken substantial efforts to evaluate the fees and charges they receive for reasonableness.
Similar to the conflicts mitigation activities that have been foundational to meeting the Best Interest Advice standards, the first step in complying with the Reasonable Compensation standard has often been to identify and inventory the different compensation (e.g., fees and charges) received by the financial institution, adviser and affiliates as the result of investment advice and recommendations to retirement investors. Because these efforts include identifying cash and non-cash compensation received from both investors and third parties, the level of effort required to accurately and completely capture this information has been sizeable.
After identifying the different types of compensation they receive, many have evaluated their existing compensation streams for overall reasonableness and are defining and implementing processes for the financial institution to assess compensation for reasonableness on an upfront and ongoing basis. Additionally, many have designed processes for advisers to evaluate reasonable compensation that are embedded within the prudent analysis process that have been designed to meet the requirements of the Best Interest Advice standard.
Make No Misleading Statements
Like reasonable compensation, truthful and accurate representations and communications have been long standing ERISA requirements and are also addressed by existing FINRA and Securities and Exchange Commission rules. While many have existing processes and controls around these requirements, certain updates and revisions are likely required. The DOL made an important distinction in the Rule, stating that it is not enough for financial institutions and advisers to only “reasonably believe” a statement is accurate. Proactive measures are expected to ensure that statements are not misleading at the time they are made, with particular focus being paid to statements pertaining to roll-over recommendations. Many financial institutions are undertaking a review of existing controls and processes to address potential gaps in advance of June 9.
The DOL noted that, “in the face of uncertainty and widespread questions about the Fiduciary Rule’s future or possible repeal, many financial firms slowed or halted their efforts to prepare for full compliance on April 10.”8 However, now that the DOL has set June 9 as the applicability date for the new definition of the term “fiduciary” and the heightened standards of care that fiduciaries are required to provide, impacted organizations should reengage their efforts for being ready to operate in this new paradigm. This will mean not only restarting any halted efforts for compliance with the Impartial Conduct Standards, but taking a fresh look at decisions made over the past year and assessing readiness for June 9.
Deloitte has been a leading advisor with respect to the DOL Rule since the original proposal in 2010, has assisted leading industry associations with defining and understanding the 2015 Rule proposal, and has assisted many of the largest and most complex financial services companies—both retail advice providers and product manufacturers—as they have prepared to do business and serve customers under the fiduciary standard. As the Rule continues its long and—at times—strange and uncertain journey toward reality, we stand ready to assist our clients with our experience, insights, and perspectives.
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1 The White House, “Presidential Memorandum on Fiduciary Duty Rule,” (February 3, 2017), available at https://www.whitehouse.gov/the-press-office/2017/02/03/presidential-memorandum-fiduciary-duty-rule.
2 Department of Labor, “Definition of the Term “Fiduciary”; Conflict of Interest Rule—Retirement Investment Advice; Best Interest Contract Exemption (Prohibited Transaction Exemption 2016-01); Class Exemption for Principal Transactions in Certain Assets Between Investment Advice Fiduciaries and Employee Benefit Plans and IRAs (Prohibited Transaction Exemption 2016-02); Prohibited Transaction Exemptions 75-1, 77-4, 80-83, 83-1, 84-24 and 86-128),” 82 Fed. Reg. 16902, Final Rule, (April 7, 2017), available at https://www.gpo.gov/fdsys/pkg/FR-2017-04-07/pdf/2017-06914.pdf.
3 Id, at 16905.
4 Id, at 16902.
5 Id, at 16907.
6 Id, at 16905.
7 Id, at 16906.
8 Id, at 16907.