On August 31, 2017, the Department of Labor (DOL) published in the Federal Register a proposal for an additional 18-month delay for full compliance with the agency’s fiduciary investment advice (i.e., conflict-of-interest) rule and several accompanying prohibited transaction exemptions. This proposal would further delay major compliance requirements until July 1, 2019. Public comments are being solicited during a 15-day period that ends September 15, 2017.
The proposed delay would extend the current transition period until July 1, 2019. Previous DOL guidance clarified that during the transition period, financial professionals and firms that give fiduciary investment advice to retirement savers are not required to meet most of the disclosure and contractual requirements found in the final rule and exemptions—including the Best Interest Contract (BIC) exemption. Instead, investment fiduciaries need only meet the Impartial Conduct Standards. These standards require that investment fiduciaries
- receive only reasonable compensation,
- make no misleading statements, and
- act in their clients’ best interest.
Why the Delay?
The DOL states that the purpose of the proposed additional 18-month delay is “to give the Department of Labor the time necessary to consider possible changes and alternatives . . .” to the guidance previously issued. Major stakeholders hold radically different positions on the final rule and exemptions. At the risk of oversimplification, consumer advocates generally support tighter rules for those who give investment advice, while many in the investment provider community are content with the status quo. Registered Investment Advisers, who by definition are fiduciaries to their clients, have generally supported requiring higher standards for those giving investment advice.
Regulatory agencies generally must implement administration policy. President Trump’s campaign platform included a strong anti-regulatory plank. “Job-killing regulations” was an often-heard phrase during the run-up to the election. Shortly after taking office, President Trump directed the DOL “to examine the fiduciary rule to determine whether it may adversely affect the ability of Americans to gain access to retirement information and financial advice.” With the newly proposed delay, many believe that the fiduciary guidance issued under the Obama administration will not take full effect in its current form.
A Key Provision Stricken
In addition to the proposed 18-month delay, the DOL issued Field Assistance Bulletin (FAB) 2017-03. This FAB describes a nonenforcement policy that targets a key provision of the BIC exemption and another exemption known as the Principal Transactions exemption.
The BIC exemption requires investment fiduciaries to adhere to DOL guidance and to act in their clients’ best interest. It is expected to be widely used in advisor relationships with IRA investors, who generally do not have the same fiduciary safeguards that exist for participants in ERISA-governed employer plans.
The BIC exemption prohibits certain arbitration provisions in contracts between financial professionals and investors. Specifically, these contracts cannot force arbitration by requiring clients to waive their right to participate in class-action lawsuits arising from alleged fiduciary breaches. Obama-era DOL leaders considered this provision a vital safeguard because it gave clients full legal recourse for financial harm that might result from inappropriate investment advice. The Principal Transactions exemption, more limited in its scope, also contains this class-action/arbitration clause.
FAB 2017-03 clearly states that the DOL will not enforce the prohibition on advising agreements that waive class-action rights. The agency states that this provision in the BIC and Principal Transactions exemption violates the Federal Arbitration Act and conflicts with other court precedent. As a result, it appears that investment providers will be free to draft advising agreements that require clients to waive their right to participate in legal class actions brought against providers for inappropriate fiduciary investment advice.
Where to Now?
The twisted path of fiduciary guidance has included multiple delays, requests for comment, and reset timetables. What lies ahead for the financial industry and retirement investors remains unclear, but it seems reasonable to expect more changes. As always, Ascensus will be monitoring and analyzing such future developments.