The DOL’s “Fiduciary” rule expands the definition of “fiduciary” under Section 3(21) of the Employee Retirement Income Security Act of 1974, as amended (ERISA), to include individuals and entities that provide investment advice for a fee to individual retirement account owners, health savings account holders, ERISA-covered plans and their participants and beneficiaries. In conjunction with this expanded array of advice relationships, the DOL also published guidance on expanded and amended exemptions from the prohibited transaction rules that would allow certain providers of investment advice to continue to receive fees subject to certain safeguards.
The Fiduciary rule and Prohibited Transaction rule (the Rules) are currently scheduled to begin to take effect on April 10, 2017. On March 2, 2017, the DOL’s Employee Benefits Security Administration proposed to extend the applicability date of both Rules by 60 days. Because the Rules are “final rules,” any delay or change must be effectuated through the formal rulemaking process, including a notice and comment period. Interested parties must submit comments to the DOL regarding whether a delay in the Rules is appropriate by March 17, 2017. The DOL will then evaluate the comments and determine whether to delay the Rules’ applicability date. It is likely that the DOL will delay the applicability date of the DOL’s Rules until at least June 9, 2017. The DOL is concerned that if such Rules were to take effect as scheduled and subsequently be amended or rescinded it would require advisors and investors to be subject to two major changes rather than one.
The DOL also requested comments on the issues raised in the Presidential Memorandum. Interested parties must submit comments by April 16, 2017 on whether the Fiduciary rule, as currently drafted, will adversely affect retirement investors.
The Presidential Memorandum directs the DOL to prepare an ‘updated economic and legal analysis’ examining whether the Fiduciary rule may adversely affect the ability of Americans to gain access to retirement information and financial advice.
Specifically, such analysis should consider whether the Fiduciary rule may:
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reduce access to retirement savings products and investment advice;
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cause dislocations and disruptions in the retirement services industry that may adversely affect investors; or
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increase litigation or increase the cost of access to retirement savings services and advice.
If the DOL determines that the Fiduciary rule will likely cause any of these undesirable outcomes or that the rule is inconsistent with the administration’s stated priorities of empowering Americans to make their own financial decisions and to facilitate their ability to save for retirement, the DOL is directed to propose a rule rescinding or revising the rule.
The future of the Rules is uncertain. Congress may introduce legislation that could significantly alter the Fiduciary rule. Lawsuits against the DOL challenging the implementation of the Fiduciary rule have been brought in federal district courts in Texas, Washington and Kansas. To date, the DOL has successfully defended its authority and the Fiduciary rule in each of these cases. In the Texas case, the plaintiffs, including the U.S. Chamber of Commerce, alleged that the DOL ignored comments from stakeholders and failed to properly analyze the costs and benefits of the Fiduciary rule when promulgating the regulation. The plaintiffs also argued that the Fiduciary rule’s requirements will cost broker-dealers billions of dollars to implement, could reduce the availability of investment advice, and that the best interests contract exemption (BICE) violates the First Amendment by restricting advisors’ ability to advise clients. In February, the federal district court in the Texas case held that the DOL acted within its authority and properly considered the costs and benefits when promulgating the Fiduciary rule. The plaintiffs currently have an appeal of the district court’s decision pending before the Fifth Circuit Court of Appeals.
Advisors may continue to implement newly adopted procedures and service models with respect to retirement (and related forms of) investment advice.
The uncertain status of the Rules places service contract negotiations in limbo. Many service providers, financial institutions, plan sponsors, and plan fiduciaries impacted by the Rules have already taken substantial steps to comply with the new requirements. Interestingly, the DOL has asked for input and comments as to what efforts advisors have taken to date to implement the Rules and whether—if the Rules were rescinded—advisors would continue to comply with the intent of the Rules. Accordingly, regardless of whether the Congress, the courts or the DOL take action to delay the effective date of, or alter or altogether rescind, the Rules, advisors may continue to implement newly adopted procedures and service models with respect to retirement (and related forms of) investment advice.
We will continue to monitor the implementation of the Rules and provide an update as it becomes available. For further information about the Rules, including information about conflicts of interest and BICE, please see our prior Client Alerts dated May 8, 2015 and the Summer 2016 issue of Perspectives.
