The U.S. Department of Labor has announced a 60-day extension of the applicability dates of its controversial fiduciary rule and related exemptions, including the Best Interest Contract Exemption.
The announcement follows a Feb. 3 presidential memorandum which directed the department to examine the fiduciary rule to ensure that it does not adversely affect the ability of Americans to gain access to retirement information and financial advice.
In April 2016, the Department of Labor finalized a new rule that creates a fiduciary duty for brokers and registered investment advisers who offer retirement advice. It provides exemptions that, if applied for and granted, would allow these advisers to maintain fee-based arrangements.
The Presidential Memorandum directed the Labor Department to review the rule “to determine whether it may adversely affect the ability of Americans to gain access to retirement information and financial advice.” As part of this examination, it was directed to prepare an updated economic and legal analysis concerning the likely impact of the rule. That analysis will consider, among other things:
Whether the anticipated applicability of the rule has harmed or is likely to harm investors due to a reduction of Americans' access to certain retirement savings offerings, retirement product structures, retirement savings information, or related financial advice;
whether it has resulted in dislocations or disruptions within the retirement services industry that may adversely affect investors or retirees;
and whether the Fiduciary Duty Rule is likely to cause an increase in litigation, and an increase in the prices that investors and retirees must pay to gain access to retirement services.
If the Labor Department concludes that the rule is “inconsistent” with Administration priorities, it was told to “publish for notice and comment a proposed rule rescinding or revising the rule, as appropriate and as consistent with law.”
Under the terms of the extension, announced by the Department of Labor on April 4, advisers to retirement investors will be treated as fiduciaries and have an obligation to give advice that adheres to “impartial conduct standards” beginning on June 9, rather than on April 10, 2017, as originally scheduled.
These fiduciary standards require advisers to adhere to a best interest standard when making investment recommendations, charge no more than reasonable compensation for their services and refrain from making misleading statements.
The agency also requested public comments on issues raised by the presidential memorandum, and related questions. It “urges commenters to submit data, information and analyses responsive to the requests, so that it can complete its work pursuant to the memorandum as carefully, thoughtfully and expeditiously as possible.”
Through Jan. 1, 2018, when all of the exemptions’ conditions are scheduled to become fully applicable, the Department intends to complete its review under the presidential memorandum and decide whether to make or propose further changes to the fiduciary rule or associated exemptions.
In the absence of further action, the delay does not affect the requirement to enter into a Best Interest Contract and other requirements that are currently scheduled for Jan. 1, 2018.
Summary of extensions
The fiduciary definition in the Fiduciary Rule published on April 8, 2016, and impartial conduct standards in these exemptions, are applicable on June 9, while compliance with the remaining conditions in these exemptions, such as requirements to make specific written disclosures and representations of fiduciary compliance in communications with investors, is not required until Jan. 1, 2018.
The relevant applicability dates are changed in the following ways:
The Department extends for 60 days the applicability date of the final regulation, published on April 8, 2016, defining who is a “fiduciary” under the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code of 1986.
It also extends for 60 days the applicability dates of the Best Interest Contract Exemption and the Class Exemption for Principal Transactions. It requires that fiduciaries relying on these exemptions for covered transactions adhere only to the impartial conduct standards (including the best interest standard), as conditions of the exemptions during the transition period from June 9 through Jan. 1, 2018.
The Department also delays the applicability of amendments to Prohibited Transaction Exemption 84-24 (relating to annuities) until Jan. 1, 2018, other than the impartial conduct standards, which will become applicable on June 9. Finally, the department extends for 60 days the applicability dates of amendments to other previously granted exemptions related to fiduciary advice.
The extensions will be published in the April 7, 2017, edition of the Federal Register and can also be viewed on the Employee Benefits Security Administration’s website, along with associated documents.