RIA Compliance Blog
The Department of Labor (DOL) recently published its proposal to extend the transition period of the Fiduciary Rule and delay the second phase of implementation from January 1, 2018 to July 1, 2019. Currently only adherence to the impartial conduct standards is required for compliance with the Best Interest Contract (BIC) exemption during the transition period, as well as for certain other prohibited transaction exemptions issued or revised in connection with the Fiduciary Rule. Compliance with the full provisions of the BIC exemption and the other related exemptions is not required until the second phase of implementation of the Fiduciary Rule, which is currently set for January 1, 2018.
If adopted, the same requirements in effect now for compliance with the BIC exemption and related exemptions would remain in effect for the duration of the extended transition period. The DOL stated that the primary purpose for seeking to extend the transition period was to allow the DOL sufficient time to review the substantial commentary it has received and consider possible changes or alternatives to the Fiduciary Rule exemptions. The DOL noted its concern that without a delay in the applicability date, financial institutions would incur expenses attempting to comply with certain conditions or requirements of the newly issued or revised exemptions that are ultimately revised or repealed.
The DOL stated that it anticipates it will propose in the near future a “new and more streamlined class exemption built in large part on recent innovations in the financial services industry.” These recent innovations include the development of “clean shares” of mutual funds by some broker-dealers, which the DOL discussed approvingly in its first set of transition period FAQ guidance. “Clean shares” would not include any form of distribution-related payment to the broker, but would instead have uniform commission levels across different mutual funds that would be set by the financial institution. In this way, the firm could mitigate conflicts of interest by substantially insulating advisers from the incentive to recommend certain mutual funds over others. However, these types of innovations will take time to develop.
The DOL also expressed its desire to coordinate with the SEC in the development of investment advice fiduciary standards. The SEC recently issued a request for comment seeking comments on the standards of conduct applicable to investment advisers and broker-dealers when providing investment advice to retail investors, both retirement and non-retirement. Many commentators have expressed the view that the SEC is the appropriate regulatory agency to establish investment advice fiduciary standards, including SEC Commissioner Michael Piwowar. The SEC stated in its request for comment that coordination with other regulatory bodies in areas overseen by multiple regulatory agencies was important.
Lastly, the DOL requested comments on ways to structure this delay and whether the DOL should condition the delay on the behavior of entities seeking relief under the Transition Period. The DOL also requested comments on whether to also extend the temporary enforcement policy issued in May of this year providing that the DOL would not pursue claims against investment advice fiduciaries working diligently and in good faith to comply with the conditions of the exemptions during the phased implementation period ending on January 1, 2018.
Comments must be submitted within 15 days of publication in the Federal Register, or September 15th. The short 15-day comment period signals that the DOL may be looking to fast-track this proposal and publish the final rule delaying the applicability date before the current January 1, 2018 applicability date.
In addition to beginning the process to extend the Fiduciary Rule’s transition period, the DOL also issued a Temporary Enforcement Bulletin regarding the limitation of arbitration provision in the BIC exemption and the new Class Exemption for Principal Transactions. Both of these exemptions contain a provision making the exemptions unavailable if the adviser’s contract with a retirement investor includes a waiver or qualification of the retirement investor’s right to bring or participate in a class action or other representative action in court. This provision is currently scheduled to become applicable on January 1, 2018 when the full provisions of the exemptions go into effect.
This arbitration limitation provision has been challenged in court as inconsistent with the Federal Arbitration Act and certain cases thereunder, and the United States government has recently taken the position that it is no longer defending this provision as applied to arbitration agreements preventing investors from participating in class-action litigation. Furthermore, in another related case the DOL took the position that the arbitration limitation provision should be vacated as it applies to arbitration clauses because it cannot be harmonized with the Federal Arbitration Act. Therefore the arbitration limitation provision will almost certainly be excluded from the final versions of the BIC exemption and Principal Transactions Exemption.
Accordingly, the DOL announced in its Temporary Enforcement Bulletin that it will not pursue any claims against a fiduciary solely based on the failure to comply with the arbitration limitation provision of the BIC exemption and the Principal Transactions Exemption. Similarly, the IRS will not seek excise taxes under 26 U.S.C. § 4975 against any such fiduciary, consistent with its position in regards to all of the DOL temporary enforcement policies issued thus far relating to the Fiduciary Rule. This non-enforcement policy will apply as long as the exemptions include the arbitration limitation provision.
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