United States: DOL Talks Turkey On Fiduciary Rule

Post-Thanksgiving Release Provides Leftovers For 18 Months

On November 27, the day most people returned from a Thanksgiving weekend, the Department of Labor ("DOL" or "Department" ) announced that it is extending the second applicability date with respect to the rollout of the revised definition of investment advice fiduciary from January 1, 2018 to July 1 of 2019. While the rule and its new definition of investment advice fiduciary (the "Fiduciary Rule") continues to be in full force and effect, the Best Interest Contract ("BIC") Exemption and the Principal Transaction Exemption ("PrTE") will continue to require compliance only with the "Impartial Conduct Standards" through June 30, 2019. The DOL acknowledged that it would not be feasible, absent the extension to "accommodate the Department's desire to coordinate with the Securities and Exchange Commission and other regulators, such as the Financial Industry Regulatory Authority and the National Association of Insurance Commissioners in the development of any such proposal or changes."

Institutional banks, broker-dealers, futures commission merchants and other "institutional sell side" capital markets institutions will likely not see dramatic changes resulting from this announcement. By contrast, wealth advisory, discount brokerage and other "retail" facing institutions will likely need to continue to assess their ongoing legal and commercial response in this new elongated period of uncertainty. Similarly, although "buy side" product manufacturers facing institutional clientele and facing institutional "sell side" trading counterparties should not expect sudden changes in their dealings because of this announcement, they likely will need to continue to closely monitor the responses of intermediary institutions to the extent they distribute products and services.

Of potential additional note, the Department also:

• Extended Temporary Enforcement Relief.
  
  
  • The Department explained that although it "has a statutory responsibility and broad authority to investigate or audit employee benefit plans and plan fiduciaries to ensure compliance with the law, compliance assistance for plan fiduciaries and other service providers is also a high priority for the Department." The Department noted that it "has repeatedly said that its general approach to implementation will be marked by an emphasis on assisting (rather than citing violations and imposing penalties on) plans, plan fiduciaries, financial institutions, and others who are working diligently and in good faith to understand and come into compliance with the Fiduciary Rule and [Prohibited Transaction Exemptions ("PTEs")]." [Emphasis supplied].
  • The DOL also noted that "[c]onsistent with that approach, the Department has determined that extended temporary enforcement relief is appropriate and in the interest of plans, plan fiduciaries, plan participants and beneficiaries, IRAs, and IRA owners. Accordingly, during the phased implementation period from June 7, 2016 to July 1, 2019, the Department will not pursue claims against fiduciaries who are working diligently and in good faith to comply with the Fiduciary Rule and applicable provisions of the PTEs, or treat those fiduciaries as being in violation of the Fiduciary Rule and PTEs." [Emphasis supplied].
  • At the same time, however, the Department reminded affected institutions to work "diligently and in good faith to comply" with their fiduciary obligations during the Transition Period. The "basic fiduciary norms and standards of fair dealing" are still required of fiduciaries during the Transition Period." [Emphasis supplied].
• Rejected Comments to Harmonize Treatment of Products Traded in Principal Markets and Other Markets—Rejection of Extended Grandfathering. The DOL also took the opportunity to reject "certain comments beyond the scope of this rulemaking, whether such comments were received pursuant to the August 31 Notice or the RFI."
  
  
  • "For instance, one commenter urged the Department to amend the Principal Transactions Exemption for the Transition Period to remove the limits on products that can be traded on a principal basis, and allow those products that have historically been traded in the principal market to continue to be bought and sold by IRAs and plans, including, but not limited to, foreign currency, municipal bonds, and equity and debt IPOs."
  • "A different commenter requested that the Department revise the 'grandfather' exemption, in section VII of the BIC Exemption, so that grandfathering treatment would apply to recommendations made prior to the expiration of the extended Transition Period (July 1, 2019). Inasmuch as amendments such as these were not suggested in the August 31 Notice, the public did not have notice or a full opportunity to comment on these issues and they are beyond the scope of this final rule. The Department, however, is open to further consideration of the merits of these requests, and the submission of additional relevant information, as part of its ongoing reexamination of the Fiduciary Rule and related exemptions."
• Confirmed Extension Applies to PTCE 84-24. The DOL clarified that Prohibited Transaction Class Exemption ("PTCE 84-24") (as amended) will also benefit from the extended transition relief, with only the Impartial Conduct Standards applicable through June 30, 2019.
• Reiterated Streamline Exemption is Coming. The DOL noted that it "also anticipates that it will propose in the near future a new streamlined exemption."

The DOL also addressed dissenting commenters' views that retirement gains could be eroded by extending the delay. The Department noted that it "believes that many financial institutions are using their compliance infrastructure to ensure that they currently are meeting the requirements of the Impartial Conduct Standards [applicable to the BIC Exemption, PrTE, PTCE 84-24 and other exemptions]." The Department concluded that these good faith efforts "will substantially protect" any investor gains estimated in its 2016 regulatory impact analysis.

If, indeed, the Impartial Conduct Standards are now viewed as "substantially protect[ing]" plans' gains to an extent assumed to be necessary under the Department's 2016 regulatory analysis, one wonders what incremental benefit, if any, the Department believes it can obtain if the other conditions of those exemptions were to be in force. In addition, the 2016 regulatory impact analysis itself has been the subject of significant comment and question, with more than one commentator casting continued doubt on some of the Department's original core assumptions and calculus. And, of course, the President's directive to reexamine the Fiduciary Rule itself provides an opportunity to test those assumptions.

While time will continue to tell how this all plays out, the Department did note that "based on its progress thus far with the review and reexamination directed by the President . . . the Department believes there may be evidence supporting alternatives that reduce costs and increase benefits to all affected parties, while maintaining protections for retirement investors. The Department anticipates that it will have a clearer sense of the range of such alternatives once it completes a careful review of the data and evidence submitted in response to the RFI." Whether or not the "alternatives" alluded to presage significant changes to the exemptions and/or the rule, or hint at a new, separate (steamlined?) exemption or series of exemptions only, remains to be seen.

While absorbing this delay, market participants also await the 5th Circuit's decision in a case that may have dramatic implications for the viability of the Fiduciary Rule and related exemptions, and the planned ascension of Preston Rutledge as the new Assistant Secretary of Labor at the Employee Benefits Security Administration. Along with processing comments to the Department's request for information and responding to the President's earlier memorandum and directive to the Department, the following months are sure to continue to be eventful. This is especially the case if, and to the extent, the SEC begins to offer substantive guidance on its universal fiduciary standard. In other words, notwithstanding the extension of the delay, more will come.

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