The rule is delayed by 60 days, with core elements taking effect June 9 as the DOL conducts a study.
The Department of Labor (DOL) has issued in final form its eagerly awaited delay of changes to the fiduciary investment advice regulation, commonly referred to as the fiduciary rule, and related prohibited transaction exemptions (PTEs). The 60-day delay extends the original April 10, 2017 applicability date to June 9, and the DOL has further delayed the applicability of certain PTE conditions until January 1, 2018.
Importantly, the new expansive definition of fiduciary investment advice and the PTEs’ best interest advice standard (as well as other impartial conduct standards)—core elements of the rule—are now scheduled to take effect in less than 60 days. The DOL also indicated in the release that it has little inclination to further delay these provisions while it examines the rule for potential harms as directed by President Donald Trump’s February 3 memorandum.
Here are the key effects of the delay, subject to the possibility of further changes before the applicability dates occur.
Observation: Although the DOL’s reexamination of the fiduciary rule is ongoing, this change would put the rule’s core element—its broadened definition of fiduciary investment advice—into effect on June 9. This means that, absent further delay, broker-dealers, investment advisers, banks, insurance companies, and other financial institutions will need to consider implementing fundamental changes to their business structures needed to comply with the rule. For example, where a firm intended to solve for the rule by discontinuing or limiting access to advised brokerage arrangements, such changes and any related customer notifications will need to be considered for June 9 implementation.
Observation: Compliance with the impartial conduct standards will, in many cases, require firms to adopt or modify their policies and procedures in potentially significant ways—particularly where the BIC Exemption is relied on to permit variable, transaction-based compensation to the firm or its financial professionals.
Firms should keep in mind the FAQs issued by the DOL concerning conflicts of interest, neutral factors, compensation of the representative, and oversight. While some of these were interpretations of the BIC Exemption’s warranties provision, which would not apply during the transition period, they may still be relevant to the extent they are helpful in demonstrating compliance with the impartial conduct standards.
Observation: Although the transition disclosures and other requirements have been delayed, firms may still wish to consider whether certain disclosures, recordkeeping, and other policies and procedures may be helpful in demonstrating compliance with the impartial conduct standards or may be protective in limiting liability under the rule (including limiting the scope and extent of fiduciary activities).
Observation: Firms will need to consider what operational changes need to be put in place as of June 9 for grandfathered accounts, including account flags and notifying clients of changes to service levels where required.
Observation: Firms can cover the receipt of commissions on the sale of any annuity contract under either PTE 84-24 or the BIC Exemption until January 1, 2018. But compliance with the BIC Exemption may be easier during this time because PTE 84-24 currently requires specific disclosures and that certain other conditions be satisfied, whereas the only condition of the BIC Exemption that applies during this time is the impartial conduct standards.
Observation: Firms that intend to rely on PTE 86-128 for discretionary transactions will need to make sure that IRAs receive the disclosures that were previously required only for Employee Retirement Income Security Act (ERISA) plans as of June 9. Further, if a firm was relying on PTE 86-128 to cover compensation that will no longer be covered on June 9, the firm will need to consider whether another exemption is available (e.g., the BIC Exemption for nondiscretionary advice) or whether its compensation arrangements otherwise need to be restructured.
The full conditions of the BIC Exemption, PrT Exemption, and PTE 84-24 (as amended) become applicable. This means that
In general, this means that, absent further delays or guidance by the DOL, financial institutions affected by the new rules will have to comply beginning June 9. Among other things, reliance on the exceptions for transactions with independent fiduciaries and investment education and platform providers may require action on the part of firms, including providing or updating disclosures. In addition, firms intending to rely on the new or amended PTEs will need to make sure they have appropriate systems in place to meet the impartial conduct standards.
Although not required as a technical matter, firms will want to consider the extent to which policies, procedures, and recordkeeping may be needed to support compliance with the impartial conduct standards. Firms planning to move clients to execution-only arrangements, or to impose limitations on accounts for which they will be relying on the BIC Exemption grandfathering provisions, will want to consider doing so prior to June 9, taking into account any notice requirements under Financial Industry Regulatory Authority (FINRA) rules or other applicable laws.
In addition, absent further delays or guidance by the DOL, the full conditions of the new and amended PTEs will be applicable on January 1, 2018. This means that financial institutions have roughly eight months to build the systems necessary to comply with the extensive disclosure and other requirements under the BIC and PrT exemptions.
We note that the 45-day period for comment regarding the examination directed by the president's memorandum on the fiduciary rule and with respect to the specific areas described in the proposal to delay the rule closes on April 17, 2017. We encourage interested parties to submit comment letters regarding the rule and exemptions.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:
Lisa H. Barton
T. Peter R. Pound
Marla J. Kreindler
Michael M. Philipp
Julie K. Stapel
Craig A. Bitman
Barbara D. Klippert
Robert L. Abramowitz
Brian J. Dougherty
David B. Zelikoff
John G. Ferreira
R. Randall Tracht
Brian J. Baltz
Katrina L. Berishaj
Lindsay B. Jackson
Daniel R. Kleinman
Michael B. Richman
Steven W. Stone