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Fiduciary Rule Update — Department of Labor Proposes Extended Transition Period and Other Developments

September 25, 2017

The Department of Labor (DOL) released additional guidance in August 2017 regarding the Fiduciary Rule (last reported in July 2017.)

The DOL's additional guidance is intended to lighten the immediate impact of the Fiduciary Rule's new and revised prohibited transaction exemptions:

  • a proposed 18-month extension of the Fiduciary Rule's transition period;
  • a non-enforcement policy regarding the arbitration limitations required under the DOL's two new prohibited transaction exemptions; and
  • additional Frequently Asked Questions (FAQs) to expand on the Fiduciary Rule's revised definition of investment advice.

While public sector retirement plans are largely exempt from the Fiduciary Rule, service providers to both private and public sector plans have been implementing changes across their entire client base to meet the new requirements.

We continue to monitor Fiduciary Rule developments and will report any updates in future issues of the Employer Bulletin.

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DOL Poised to Extend Fiduciary Rule Transition Period

On August 30, 2017, the DOL released a proposal to extend the Fiduciary Rule's transition period for an additional 18 months until July 1, 2019. The preamble to the proposed extension notes that the primary purpose of the delay is to give the DOL the time necessary to consider possible changes and alternatives to the exemptions affected by the Fiduciary Rule's existing transition period. Comments on the DOL's proposed extension were due before September 15, 2017.

If the DOL's proposal is finalized as proposed, "…[t]he same rules and standards in effect now would remain in effect throughout the duration of the extended Transition Period." This means that, until July 1, 2019, firms relying on the Best Interest Contract Exemption (BICE) would be eligible for exemptive relief as long as they comply with the Impartial Conduct Standards that require advisers to:

  • act in their client's "best interest"
  • make no misleading statements; and
  • earn no more than reasonable compensation.

Also during this period, all annuities could continue to be sold under Prohibited Transaction Exemption (PTE) 84-24 as long as the Impartial Conduct Standards and the other conditions of PTE 84-24, including certain disclosures, are met. This transition period, however, does not apply to the regulation itself, meaning the expanded list of activities that trigger fiduciary status, which went into effect on June 9, 2017, will continue.

DOL Announces Non-Enforcement Policy

Also on August 30, 2017, the DOL announced a new non-enforcement policy regarding the provisions of the BICE and Principal Transactions Exemption that prohibit a financial institution from contractually requiring retirement investors to agree to a waiver or qualification of the retirement investor's right to bring or participate in a class action or other representative action in court — the so-called Arbitration Limitation. The DOL is no longer defending the Arbitration Limitation in its litigation with Fiduciary Rule opponents. In addition, the DOL's new and indefinite non-enforcement policy adopts DOL's litigation position by indicating that the DOL will not pursue a claim against any fiduciary based on its failure to satisfy the Arbitration Limitation condition in the BICE or the Principal Transactions Exemption.

The DOL's announcement also says that the U.S. Treasury Department and Internal Revenue Service will harmonize their enforcement policies with DOL's non-enforcement policy on this issue.  This non-enforcement policy is in addition to prior temporary enforcement relief announced by DOL for fiduciaries acting diligently and in good faith.

DOL Issues Fourth Set of Fiduciary Rule FAQs

The DOL also released a new set of Fiduciary Rule FAQs to expand guidance surrounding the rule's revised definition of investment advice. A summary of those FAQs is provided below:

  • Contribution recommendation.First, the new FAQs make clear that recommendations from service providers to encourage additional savings or contributions to a plan or IRA are not fiduciary advice, provided that investment-related recommendations are not included. Prior FAQ guidance had suggested that it may be fiduciary advice simply to recommend that an individual contribute to a plan or IRA (or increase contributions). The new FAQs also make clear that a recommendation from a service provider to a plan administrator or other plan fiduciary regarding how to increase participation or contributions is not fiduciary advice, provided that investment-related recommendations are not included.
  • 408(b)(2) transition reliefSecond, the new FAQs address the interaction of the new Fiduciary Rule and the "408(b)(2) disclosure" rules, which generally require a service provider to disclose its fiduciary status and inform the plan if that status changes. DOL provided 408(b)(2) transition relief for certain service providers who have become investment advice fiduciaries as a result of the changes that became applicable on June 9, 2017.

During the Fiduciary Rule transition period, any service provider that has newly become a fiduciary as a result of the Fiduciary Rule's changes may be treated as satisfying its 408(b)(2) disclosure obligations even if its disclosures do not expressly use the term "fiduciary." This transition relief is conditioned on the service provider making an accurate and complete description of the services that will be performed under the contract or arrangement. If a service provider has previously said that it is not a fiduciary, it will not be eligible for this transition relief until it has removed or corrected its affirmatively incorrect statement.

In that case, DOL will treat the service provider as satisfying its 408(b)(2) disclosure obligations as long as the corrected disclosures are made "as soon as practicable" after June 9, 2017, even though such changes would otherwise be required under the normal 408(b)(2) rules no more than 60 days after June 9, 2017. Note:  While the 408(b)(2) disclosure rules do not apply to public sector plans, many service providers to public sector retirement plans provide a disclosure of services and fees that is similar to the 408(b)(2) disclosure, including disclosing whether or not the provider will act as a fiduciary.

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