RIA Compliance Blog
The Department of Labor (DOL) recently indicated in a court filing that it has submitted a proposed rule to the Office of Management and Budget (OMB) to extend the transition period of the Fiduciary Rule and delay the second phase of implementation from January 1, 2018 to July 1, 2019. This proposal is currently under review by the OMB.
The DOL also recently released a new set of FAQ guidance regarding compliance with the Fiduciary Rule during the transition period when providing advice to IRAs, plans covered by the Employee Retirement Income Security Act of 1974 (ERISA), and other plans covered by section 4975 of the Internal Revenue Code (Code). Most of the questions dealt specifically with the prohibited transaction exemption under ERISA section 408(b)(2) for service providers to ERISA plans.
ERISA Section 406(a)(1)(C) prohibits plan fiduciaries from causing a plan to enter into an arrangement with a party in interest for the provision of services, absent some exemption. Parties in interest include fiduciaries, service providers, and the employer whose employees are covered by the plan, as well as certain persons or entities related to those parties. ERISA section 408(b)(2) and Rule 408b-2 thereunder exempt service providers such as investment advisers to ERISA plans from this prohibited transaction provided that the services are necessary for the operation of the plan, the services are furnished under a reasonable contract or arrangement, and no more than reasonable compensation is paid. Rule 408b-2 also requires service providers to provide an initial disclosure statement stating the services to be provided, a description of compensation to be received, and a description of the manner in which compensation will be received, among other things. Investment advisers to ERISA plans who are fiduciaries must also generally disclose that fact.
The first phase of the Fiduciary Rule which became applicable on June 9, 2017 included the revised definition of fiduciary investment advice under ERISA. As a result, certain service providers are now considered fiduciaries under ERISA who previously were not. However, the DOL specified that during the transition period only compliance with the Impartial Conduct Standards of the new Best Interest Contract (BIC) exemption is required. All other provisions of the BIC exemption, including fiduciary status disclosure requirements, were delayed to January 1, 2018.
This raised the question of whether service providers who are considered ERISA fiduciaries under the revised definition must update their 408b-2 disclosure statements to disclose fiduciary status, despite not being required to do so by the BIC exemption until 2018. The DOL resolved this confusion in the negative in their latest set of FAQ guidance. Specifically, the DOL stated that these service providers could satisfy their 408b-2 disclosure requirements by providing an accurate and complete description of the services to be performed, including services that would make the service provider an investment advice fiduciary under the revised definition of fiduciary investment advice, without expressly disclosing fiduciary status or using the term “fiduciary.” The express disclosure of fiduciary status is not required until the applicability date of the full BIC exemption (currently January 1, 2018).
However, the service provider’s contract or disclosure statement with an ERISA pension plan client may not state that the service provider is not a fiduciary or is not providing fiduciary services if that is no longer true. The DOL noted that this is an affirmatively incorrect statement given the revised definition of fiduciary investment advice, and would not be an accurate and complete description of the service provider’s services. The service provider must provide a revised contract or disclosure removing or correcting the affirmatively incorrect answer.
Typically, revisions to 408b-2 disclosures must be disclosed as soon as practicable but no later than 60 days from the date on which the service provider was informed of the change. The DOL noted that a 60-day disclosure period was impractical here given the uncertainty surrounding the Fiduciary Rule and its implementation date. Thus, the DOL stated that service providers who must correct their fiduciary status 408b-2 disclosure will be in compliance if they disclose the change as soon as practicable after June 9, 2017, even if more than 60 days after June 9, 2017.
The DOL also clarified in its newly issued FAQ guidance that general communications including recommendations to contribute to a plan or IRA or to otherwise increase contributions, without recommending any particular investment or investment strategy, would generally not be treated as fiduciary investment advice. Similarly, recommendations to a plan administrator or other plan fiduciary regarding increasing plan participation and contribution rates would generally not be considered fiduciary investment advice. The communications must not include any recommendations regarding specific investment products or management of particular investments.
Parker MacIntyre provides legal and compliance services to investment advisers, broker dealers, registered representatives, hedge funds, and issuers of securities, among others. Our regulatory practice group assists financial service providers with complex issues that arise in the course of their business, including complying with federal and state laws and rules. Please visit our website for more information.