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Labor secretary declines to further delay fiduciary rule

May 2017

The new Department of Labor (DOL) fiduciary rule and impartial conduct standards will go into effect June 9, new Labor Secretary Alexander Acosta announced late Monday in the Wall Street Journal.

Also Monday, the DOL’s Employment Benefits Security Administration issued Field Enforcement Bulletin 2017-02, which said it “will not pursue claims against fiduciaries who are working diligently and in good faith to comply with the fiduciary duty rule and exemptions” between June 9 and Jan. 1, 2018.

In his op-ed, Acosta wrote, “We have carefully considered the record in this case, and the requirements of the Administrative Procedure Act, and have found no principled legal basis to change the June 9 date while we seek public input. Respect for the rule of law leads us to the conclusion that this date cannot be postponed.” As we previously wrote, the Obama administration regulatory impact analysis made a complete delay complicated.

The current playing field

Monday’s announcement only modestly changes the situation from April 7, when the final rule delaying the applicability date from April 10 to June 9 was published in the Federal Register. As we summarized then, the fiduciary rule (i.e. the new fiduciary definition) will apply as of June 9 and the Best Interest Contract Exemption and Principal Transactions Exemption will be available as of June 9, but those exemptions will only require fiduciaries to adhere to certain impartial conduct standards: (1) providing advice in retirement investors’ best interest; (2) charging no more than reasonable compensation; and (3) avoiding misleading statements. The applicability of other requirements of those exemptions, such as representations of fiduciary compliance, contracts and warranties about firm’s policies and procedures, will not become applicable until Jan. 1, 2018, while the DOL performs the review mandated by the president.

While the enforcement bulletin provides some additional relief in that the DOL will not take enforcement action for violations as long as fiduciaries are making good faith efforts to comply with the fiduciary rule, the safer course of action is to begin complying with the rule June 9. The enforcement bulletin is not binding on investors or plaintiff attorneys, for example.

The DOL also released new guidance in the form of Frequently Asked Questions on Monday.

What’s next?

First, the DOL is going to request more information from the public.  The enforcement bulletin also announced the DOL’s intention to issue a request for information “seeking additional public input on specific ideas for possible new exemptions or regulatory changes based on recent public comments and market developments.” The DOL also will seek comment on whether the new business models and innovative market products developed in response to the fiduciary rule will require more time to implement than the remaining seven-plus months until the Jan. 1, 2018, applicability date. Acosta, too, in his op-ed noted that the DOL will seek additional input.

Second, while the April 7 final rule delaying the applicability date expressed confidence that the underlying rule review mandated by the president would be complete by Jan. 1, 2018. The enforcement bulletin, however, seems to be guiding for future delays of the Jan. 1, 2018, applicability date.  Jan. 1 already seemed to be an aggressive timeline to finish going through all of the new comments, proposing revisions to the rule, receiving comments on those revisions, and then publishing a final rule. The new, future request for information, including whether additional time to comply would smooth the transition to the new rules, only makes it more likely that the Jan. 1, 2018, date is further delayed.

Third, Monday’s developments continue to suggest that the fiduciary rule will be revised. Whereas President Trump’s memorandum ordering an updated economic and legal analysis of the fiduciary rule spoke in terms of revision or rescission, Acosta’s op-ed speaks only in terms of revision. Despite that, Acosta’s op-ed is perhaps the clearest statement yet that the rule will be revised: “Certainly, it is important to ensure that savers and retirees receive prudent investment advice, but doing so in a way that limits choice and benefits lawyers is not what this administration envisions. . . . Trust in Americans' ability to decide what is best for them and their families leads us to the conclusion that we should seek public comment on how to revise this rule.”

Conclusion

The new fiduciary definition and the impartial conduct standards will come into effect June 9, although the DOL has announced that it will not take enforcement action as long as fiduciaries are making good faith efforts to comply with the rule. Meanwhile, the DOL will seek new input on how it should revise the rule. In the meantime, the safest course of action is to try to comply with the impartial conduct standards by June 9 because, even with the enforcement relief, any disputes that arise will emphasize that advisors on retirement accounts are fiduciaries. If you have questions about the changes or how best to comply, please contact the attorneys in Greensfelder’s Securities & Financial Services group.