DOL Issues Rule Delaying Applicability Date of Fiduciary Duty Rule for 60 Days, Until June 9, 2017

On Friday, April 7, 2017, the DOL published its final rule delaying the applicability date of the Fiduciary Duty Rule for 60 days, from April 10, 2017 until June 9, 2017. The full text of the final rule (the Delay Rule), 82 Fed. Reg. 16902, is here.

The Delay Rule has five important parts:

  • The applicability date of the Fiduciary Duty Rule is delayed for 60 days until June 9, 2017 – meaning that the application of a fiduciary standard to persons who make recommendations to retirement investors takes effect on June 9;
  • The applicability date of the Best Interest Contract Exemption (the BICE) and the Principal Transactions Exemption is delayed for 60 days until June 9, 2017;
  • Fiduciaries relying on the BICE and the Principal Transactions Exemption are required to adhere only to the “best interest” standard and the other Impartial Conduct Standards of those exemptions during the transition period from June 9, 2017 through January 1, 2018 – meaning that the other conditions in the BICE and the Principal Transactions Exemption, such as requirements to make specific written disclosures and representations of fiduciary compliance in investor communications, are not required until January 1, 2018;
  • The applicability of amendments to PTE 84-24 is also delayed until January 1, 2018 (thereby allowing indexed and variable annuity transactions to proceed under PTE 84-24 until January 1, 2018, rather than the more strenuous BICE), except that the Impartial Conduct Standards will become applicable on June 9, 2017; and
  • The applicability dates of the amendments to other previous granted PTEs are extended for 60 days until June 9, 2017.

The DOL states the Delay Rule is necessary to enable the DOL to perform the analysis required by Trump’s February 3 Presidential Memorandum on Fiduciary Duty Rule, which instructed the DOL to analyze:

  • Whether the Fiduciary Duty Rule may harm investors’ ability to access retirement savings offerings, products, information or advice;
  • Whether the applicability or implementation of the Fiduciary Duty Rule will cause disruption in the financial services industry that will adversely affect retirees; and
  • Whether the Fiduciary Duty Rule is likely to result in an increase in litigation and consumers’ costs to access the retirement market.

The Presidential Memorandum instructs that, if the DOL answers any of the above questions in the affirmative, then the DOL is required to propose a rule (for notice and comment) “rescinding or revising the [Fiduciary Duty] Rule, as appropriate and as consistent with law.”

Our blog post discussing Trump’s February 3 Memorandum is here.

So, will the DOL act again before June 9, either to push the applicability date out farther, or to revise or rescind the Fiduciary Duty Rule in light of the analysis performed in accordance with Trump’s Memorandum?

The full text of the Delay Rule makes that sound unlikely.

Rather, the DOL states several times that it expects to have its analysis required by the Presidential Memorandum completed by January 1, 2018:

“Based on its review and evaluation of the public comments, the Department has concluded that some delay in full implementation of the Fiduciary Rule and PTEs is necessary to conduct a careful and thoughtful process pursuant to the Presidential Memorandum.” Delay Rule at 16905.

“At the same time, however, the Department has concluded that it would be inappropriate to broadly delay application of the fiduciary definition and Impartial Conduct Standards for an extended period in disregard of its previous findings of ongoing injury to retirement investors.” Delay Rule at 16905.

“[Full compliance] is not required until January 1, 2018, by which time the Department intends to complete the examination and analysis directed by the Presidential Memorandum. In this way, the Fiduciary Rule (i.e., the new fiduciary definition itself) will become applicable after the 60-day delay, and the BIC Exemption and the Principal Transactions Exemption will be available as of that date but these exemptions will only require fiduciaries to adhere to the Impartial Conduct Standards for covered transactions until January 1, 2018, when the remaining conditions will apply unless revised or withdrawn. Delay Rule at 16905.

“In the Department’s view, this approach gives the Department an appropriate amount of time to reconsider the regulatory burdens and costs of the Fiduciary Rule and PTEs, calls for advisers and financial institutions to comply with basic standards for fair conduct during that time, and does not foreclose the Department from considering and making changes with respect to the Rule and PTEs based on new evidence or analyses developed pursuant to the President’s Memorandum.” Delay Rule at 16906.

This means that it appears very likely that the June 9, 2017 applicability date will go forward.

So, firms and financial advisers should expect that, on June 9, 2017, the following provisions will go into effect:

  • They will be fiduciaries to the extent they give investment advice to retirement investors; and
  • They will be subject to the Impartial Conduct Standards, which require that firms and advisers:
    • Provide advice that is in the retirement investors’ best interest (i.e., recommendations that are prudent and loyal);
    • Charge no more than reasonable compensation; and
    • Make no misleading statements about investment transactions, compensation, and conflicts of interest.

The DOL makes clear that it expects firms, during the transition period from June 9, 2017 to January 1, 2018, to “implement procedures to ensure that they are meeting their fiduciary obligations, such as changing their compensation structures and monitoring the sales practices of their advisers to ensure that conflicts [of] interest do not cause violations of the Impartial Conduct Standards, and maintaining sufficient records to corroborate that they are adhering to Impartial Conduct Standards.” Delay Rule at p. 16910.

What happens after that is anyone’s guess. As the DOL states: “[B]etween now and January 1, 2018, the Department will perform the examination required by the President. Following the completion of the examination, some or all of the Rule and PTEs may be revised or rescinded, including the provisions scheduled to become applicable on June 9, 2017.Delay Rule at 16906.

About Julie Firestone

Julie Firestone is a member of Briggs and Morgan's Business Litigation Section and the Financial Markets Group. Julie practices primarily in the following areas: complex commercial disputes and class actions; securities litigation and arbitration; SEC and FINRA regulatory investigation and enforcement; and shareholder and partnership disputes. Julie represents corporations, investment firms, broker-dealers, insurance companies, issuers of securities, registered representatives and insurance agents in class actions, regulatory proceedings and other adversary matters. She also focuses on customer complaints and regulatory compliance, as well as customer disputes in arbitration. Julie’s legal experience includes matters involving securities fraud, breach of contract, common law fraud, RICO, breach of fiduciary duty, suitability, selling away and unauthorized trading.
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