Washington Pulse: DOL Delays Fiduciary Rule & Eases Compliance

On April 4, the Department of Labor (DOL) released a final regulation delaying its fiduciary rules for 60 days. These rules, which include final DOL regulations and several prohibited transaction exemptions (PTEs), were to take effect on April 10, 2017. In addition to defining investment advice, the rules help investment advice fiduciaries avoid or minimize conflicts of interest for investment advice provided to retirement savers.

Presidential Memorandum Began the Delay Process

The delay process began with a Presidential Memorandum issued February 3, 2017. In that memorandum, President Trump directed the DOL to review its fiduciary rules and prepare an updated economic and legal analysis. The result of this process could ultimately modify the rules.

On March 2, 2017, the DOL announced a 15-day public comment period on the advisability of the 60-day delay that has now been ordered. The DOL received more than 190,000 comments and petition letters.

Delay and Grace Period

For now, the applicability date for the final regulations and exemptions is delayed from April 10, 2017, to June 9, 2017. In addition, a transition period will follow from June 9, 2017, through January 1, 2018, during which time providers of investment advice will be under what might be called “relaxed” compliance requirements. Compliance with certain contentious provisions of the PTEs will be delayed until January 1, 2018. Most prominent among these are the disclosure requirements and the requirement that—for many transactions—there be a legally enforceable contract between an investment advice fiduciary and an investor.

During this grace period, investment advice fiduciaries will be required only to adhere to what the DOL guidance defines as the “impartial conduct standard.” This standard requires investment advice fiduciaries to interact with retirement savers by

  • making only recommendations that are in the retirement investor’s best interest,
  • avoiding misleading statements, and
  • charging no more than reasonable amounts for investment advisory services.

More Comments to Come

Accompanying the DOL’s March 2 request for comment on the 60-day delay of the April applicability date was a second comment request. This request granted 45 days for interested parties to comment on the suitability of the content and requirements of the DOL’s previously finalized fiduciary rules. These comments, which must be provided to the DOL by April 17, 2017, are being sought for the purpose of guiding the agency in the general review of the fiduciary rules requested by President Trump. Opponents have alleged that the ultimate result of compliance with the rules as-issued will be disruption of the financial services industry, and a decrease in the availability of retirement investment advisory services—particularly for clients with low or modest financial resources. Proponents, on the other hand, contend that further delay or weakening of the rules will lead to continued losses experienced by savers who are receiving conflicted investment advice.

President Trump’s Directive to the DOL

President Trump’s February 2 memorandum instructed the DOL to prepare an updated economic and legal analysis of the fiduciary guidance. In that analysis the agency is being asked to take into consideration the following factors.

  • Whether the guidance has harmed, or is likely to harm, investors as a result of reduced access to investment advice
  • Whether the guidance will result in disruption of the retirement advising industry that will adversely affect investors or retirees
  • Whether the guidance is likely to lead to an increase in legal actions between investors and investment advice fiduciaries that could drive up the cost of retirement services for investors and retirees

Beyond these criteria was an additional condition, one that is more subjective and perhaps difficult for an agency to assess. Importantly, as written in the memorandum, this condition stands alone as a potential reason for the DOL “rescinding or revising the fiduciary rule.” It states that the DOL is to assess whether the fiduciary rules are consistent with the Trump administration’s priority “to empower Americans to make their own financial decisions, to facilitate their ability to save for retirement and build the individual wealth necessary to afford typical lifetime expenses.” How these criteria may be judged by the DOL in its analysis is anyone’s guess.

DOL Walked a Tightrope

A substantial amount of the DOL’s announcement of the delay is devoted to explaining the balance the DOL claims to have struck between requests for a longer delay versus immediate effectiveness of the new fiduciary rules. The announcement was carefully and delicately written, attempting to balance accountability to the President and industry critics, with the preferences of consumer advocates and advisors who already embrace a fiduciary standard.

A Gentle DOL Enforcement Hand?

Past communications from the DOL had already left the impression that the agency will not initially be heavy-handed in its enforcement. In FAQs issued in October of 2016, and also in Field Assistance Bulletin 2017-01 announcing a temporary non-enforcement period, the agency made clear that its enforcement “will be marked by an emphasis on assisting … rather than citing violations and imposing penalties…”

The DOL’s final rule further states that “the Department’s focus will be on compliance assistance, both in the period before January 1, 2018, and for some time after.”

What the Future May Hold

The future could potentially hold additional delays, or perhaps revision or withdrawal of the fiduciary guidance, in whole or in part. What is known for certain is that there is a short-term delay for all provisions and a transition period with less stringent fiduciary requirements.