The proposal would extend the transition period to July 1, 2019.
The US Department of Labor (DOL) has proposed to delay the applicability of additional conditions of the Best Interest Contract (BIC) exemption, Principal Transactions (PrT) exemption, and PTE 84-24 (regarding insurance contracts and annuities) (together, the PTEs) from January 1, 2018 to July 1, 2019. The proposal is subject to a 15-day notice and comment period, ending on September 15, 2017. The DOL has also issued nonenforcement relief related to the PTEs’ prohibitions against class action waivers and qualifications.
Observation: The DOL has clearly indicated its view that firms do not need to adhere to the specific requirements for policies and procedures under the BIC and PrT exemptions during the transition period and are not expressly required to make changes to their compensation and incentive structures. Instead, firms must adopt such “policies and procedures as they reasonably conclude are necessary to ensure that advisers comply with the impartial conduct standards . . . whether by tamping down conflicts of interest associated with adviser compensation, increased monitoring and surveillance of investment recommendations, or other approaches.”
Because the DOL has indicated that it may ultimately change the PTEs’ conditions, and the ultimate shape of the fiduciary rule and its compliance requirements remain uncertain, firms may want to consider this flexibility in structuring their policies and procedures for compliance with the impartial conduct standards during the transition period, so that they can more easily adapt their business models to any changes the DOL proposes to make to the PTEs or fiduciary rule in light of its study.
Observation: The conditions of this streamlined exemption remain unknown, though the DOL has previously indicated an interest in products such as mutual fund clean and T-shares, as well as fee-based annuities. We will continue to monitor developments in this area.
The DOL also solicits comments on whether its temporary enforcement policy, whereby it will not pursue claims against investment advice fiduciaries who are working diligently and in good faith to comply with the new rules and PTEs, should be extended for the same period.
The DOL also issued additional nonenforcement relief in Field Assistance Bulletin (FAB) 2017-03. Citing its position in a brief filed in a pending lawsuit challenging the fiduciary rule and exemptions, the DOL states that it (and the Internal Revenue Service) will not pursue a claim against any fiduciary for a failure to comply with the BIC and PrT exemptions’ prohibition against class action waivers and qualifications that is otherwise scheduled to become applicable (absent an extension or amendment) on January 1, 2018. The FAB states that this policy will continue to apply as long as the PTEs include this prohibition. Thus, this relief will continue even if the transition period is not extended.
Observation: We view the nonenforcement relief, as well as the DOL’s statements recently made in litigation challenging the fiduciary rule, as a strong indication that the DOL will propose to eliminate the restrictions on class action waivers and qualifications in the PTEs. Nonetheless, firms will still want to consider the extent to which an investor’s right to pursue class actions may be limited under other federal and state laws, including FINRA rules applicable to registered broker-dealers.
We strongly encourage interested parties to comment on the proposed extension by September 15, 2017. We caution that until a final rule is published in the Federal Register, the PTEs will continue to reflect the January 1, 2018 applicability date. As such, firms will want to evaluate how best to address this uncertainty in determining their compliance plans.
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
Christine M. Lombardo
Robert L. Abramowitz
William J. Marx
David B. Zelikoff
John G. Ferreira
R. Randall Tracht
Lindsay B. Jackson
Daniel R. Kleinman
Michael B. Richman
Steven W. Stone