By: Empower Retirement legislative and regulatory affairs
The U.S. Department of Labor’s (DOL) fiduciary rule redefining “investment advice for a fee” was scheduled to go into effect on April 10, 2017, with full compliance of the Best Interest Contract (BIC) exemption effective on January 1, 2018. The fiduciary rule includes
- A new definition of fiduciary advice
- Clarifications and exceptions for activities not considered advice
- Amendments to existing prohibited transaction exemptions
- Creation of the BIC, a new prohibited transaction exemption
On February 3, 2017, the DOL received a Presidential Memorandum asking it to review the fiduciary rule, prepare a new legal and economic analysis, and revise or rescind the rule as appropriate based on that analysis. On April 4, 2017, the DOL published a final rule (delay rule) explaining how it intends to adjust its compliance deadlines in order to complete the requested analysis.
The delay rule extends the date for compliance for 60 days, making the new applicability date June 9, 2017. This means the broadened definition of what is considered fiduciary activity (including rollover conversations) will go into effect as of that date. This includes:
- The elimination of the “mutual understanding,” “regular basis” components of the current five-part test
- Replacement with the much broader definition of a recommendation or suggestion as well as all of the exceptions or clarifications regarding platform providers, education and transactions with independent fiduciaries with financial expertise
- All other aspects of the general rule
Notably, while the DOL acknowledges it will not have completed the requested analysis by June 9, it has also stated it does not anticipate any further delays and will conduct its analysis of whether the fiduciary rule should be revised or rescinded after making it effective in its current form.
The delay rule also delays the applicability date of the BIC for 60 days, until June 9, 2017, and maintains the current deferred applicability date for some components of the BIC of January 1, 2018. Most surprising, however, is that the delay rule makes significant changes regarding what is required from those intending to use the BIC (including use of the “streamlined” or “level-fee” BIC) during the transition period from June 9, 2017, through January 1, 2018. The BIC previously required:
1) adherence to impartial conduct standards;
2) provision of a disclosure document that, among other things,
- a) acknowledged fiduciary status and provided disclosures regarding proprietary products and third-party payments,
- b) described any material conflicts of interest, and
- c) identified the person responsible for monitoring compliance with the transition rule; and
3) maintenance of records demonstrating compliance.
The BIC also required significant compliance practices and procedures to be put in place in 2017 by the company using the BIC. The delay rule eliminates all of these transition period requirements except for the requirement to comply with impartial conduct standards. Those standards require someone intending to use the BIC to act in the best interest of the customer, receive reasonable compensation and not make materially misleading statements during the transition period.
The delay rule also addressed the compliance deadlines for other prohibited transaction exemptions that were amended as part of the fiduciary rule. The compliance deadlines for amended PTE 84-24 (which covers sales of fixed-index and variable annuities) and for the Principal Transaction exemption were delayed until January 1, 2018, although people intending to use them must still comply with the impartial conduct standards during the transition period. Changes to the other prohibited transaction exemptions impacted by the fiduciary rule will go into effect on June 9, 2017.
The DOL indicated that it expects to complete its updated analysis and publish any proposed changes in advance of the January 1, 2018, deadline, so it does not expect that compliance deadline to change.
Although the DOL states in the preamble to the delay rule that it should not be viewed as prejudging the outcome of its examination, the approach it took suggests it may be more open to making changes to the BIC and other exemptions that now generally have a January 1, 2018, compliance deadline than to making changes to the core rule and exceptions. We will continue to keep you up to date on developments regarding the DOL’s fiduciary rule and how any changes may impact you.