The Fiduciary Rule transition period is extended until mid-2019, with financial institutions having flexibility in complying with the impartial conduct standards during this period.
The US Department of Labor (DOL) has finalized an 18-month extension of the transition period under the new Best Interest Contract (BIC) and the Principal Transactions (PrT) exemptions and the amended Prohibited Transaction Exemption 84-24 (the PTEs). This means that the full conditions (as originally finalized) of the PTEs—including the contract, warranty, and specific policies and procedures and disclosure conditions—will not become applicable until July 1, 2019, subject to the DOL's ongoing review of the Fiduciary Rule and expected changes. In the meantime, exemptive relief under the BIC and PrT will be available so long as fiduciaries comply with the "impartial conduct standards" (ICS) that include prudence, loyalty, reasonable compensation, and disclosure.
Here are some highlights from the release:
- Continued compliance flexibility during the transition
period. Although the DOL emphasized that it expects that
fiduciaries relying on the PTEs will "adopt prudent
supervisory mechanisms to prevent violations of the" ICS, the
DOL also reiterated that they have flexibility as to their approach
to compliance during the transition period and cited its prior
guidance in this regard, including the Conflict of Interest FAQs (Transition
Period).
As discussed in our previous commentary on the Fiduciary Rule, we believe this guidance indicates that the DOL does not view the ICS as per se requiring financial institutions to adopt specific policies and procedures, including new compensation structures (such as by leveling compensation within product categories, or eliminating back-end awards and cliff-vesting in compensation grids). Rather, these requirements would become applicable if and when the full conditions of the BIC and PrT exemptions become applicable.
Nonetheless, the DOL indicated that firms can look to the not-yet-applicable conditions of the exemptions for guidance, and that although compliance with these conditions is not required during the transition period, reliance on them would constitute "good faith compliance" for purposes of the DOL's temporary enforcement policy. The DOL further emphasized that it expects financial institutions will continue to "exercise care" in communications with retirement investors, including fairly disclosing and accurately describing recommended transactions and compensation practices.
- Observation: As the ICS currently
apply under the PTEs, financial institutions should continue to
take meaningful steps to comply with them, including by identifying
and addressing any potential conflicts in providing investment
advice to retirement investors and ensuring effective
disclosures.
However, in developing approaches to compliance, financial institutions may also want to consider the flexibility the DOL has provided, including in light of the ongoing re-examination of the Fiduciary Rule by both the DOL and the US Securities and Exchange Commission (SEC), as well as industry developments and evolution in response to the rule.
- Temporary enforcement relief extended. The DOL
also extended the temporary enforcement relief under Field
Assistance Bulletin 2017-2 to July 1, 2019. This means that during
the extended transition period, the DOL and the Internal Revenue
Service (IRS) will not pursue claims or cite violations against
investment advice fiduciaries who are working "diligently and
in good faith to comply" with their fiduciary duties and to
meet the conditions of the PTEs. According to the DOL, in reviewing
the "compliance efforts of firms and advisers during the
transition period, it will focus on the affirmative steps that
firms have taken to comply with the Impartial Conduct Standards and
to reduce the scope and severity of conflicts of interest that
could lead to violations of those standards." The DOL further
noted that "it remains critically important that firms take
action to ensure that investment recommendations are governed by
the best interests of retirement investors, rather than the
potentially competing financial incentives of the firm or
adviser."
- Observation: As discussed above,
financial institutions should continue to take meaningful steps to
comply with the ICS during the transition period, while taking into
account the flexibility as to the approach that the DOL has adopted
for this period. As such relief is subject to the "diligence
and good faith" condition, firms should consider approaches to
demonstrate satisfaction of this requirement, which may include
maintaining summaries or action plans for complying with the
elements of the ICS, as discussed above.
It is also important to note that the DOL and IRS temporary enforcement policy is not binding on potential litigants or other regulators, including the SEC, the Financial Industry Regulatory Authority (FINRA), bank regulators, or state securities or insurance regulators.
- Observation: As discussed above,
financial institutions should continue to take meaningful steps to
comply with the ICS during the transition period, while taking into
account the flexibility as to the approach that the DOL has adopted
for this period. As such relief is subject to the "diligence
and good faith" condition, firms should consider approaches to
demonstrate satisfaction of this requirement, which may include
maintaining summaries or action plans for complying with the
elements of the ICS, as discussed above.
- Streamlined Exemption Forthcoming. The DOL
again indicated that it intends to formulate and propose a new
streamlined class exemption in the "near future."
- Observation: Although there are no details available on the proposed streamlined exemption, in discussing why it did not adopt a delay that would be conditioned on the financial institution adopting a particular compliance approach or using a particular product structure (e.g., clean shares), the DOL stated that recent marketplace innovations "seem more relevant in the context of considering the development of additional and more streamlined exemption approaches." Thus, we anticipate that the proposed streamlined exemption will incorporate new products or structures in some regard.
- Coordination with Other Regulators. The DOL
reiterated its desire to coordinate with other regulators, such as
the SEC, FINRA, and the National Association of Insurance
Commissioners in developing proposals or changes to the PTEs,
pointing out that the chairman of the SEC is seeking public
comments on the standards of conduct for SEC-regulated entities and
has welcomed the DOL's "invitation to engage as the SEC
moves forward with its examination of the standards of conduct
applicable to investment advisers and broker-dealers, and related
matters."
- Observation: We encourage affected firms to submit comments to the SEC.
- Solicitation of Additional Comments. The DOL also indicated that it remains available to support interested parties in their efforts to comply with the Fiduciary Rule and related PTEs, and to discuss "the compliance approaches they have adopted or plan to adopt." Further, the DOL stated that it welcomes additional comment, input, and data from stakeholders in the community regarding the implementation of the ICS, grandfathering relief under the BIC, and product limitations under the PrT.
This article is provided as a general informational service and it should not be construed as imparting legal advice on any specific matter.