The Department of Labor (DOL) has released its much anticipated proposal to further delay full compliance with the fiduciary rule. The DOL is proposing to delay full implementation of the best interest contract (BIC) exemption and other prohibited transaction exemptions from January 1, 2018, to July 1, 2019.
Prior to this proposal, a transition period has been in place that began June 9, 2017, and was scheduled to end January 1, 2018. It requires compliance with some—but not all—of the provisions of the final rule.
This is good news for community banks, as the DOL has previously clarified that IRAs—along with Archer medical savings accounts (MSAs), health savings accounts (HSAs), and Coverdell education savings accounts (ESAs)—are included in the scope of the final rule. With the fiduciary rule’s transition period now extended, investment fiduciaries are required to only meet the regulations’ Impartial Conduct Standards, which require that they receive only reasonable compensation, make no misleading statements, and act in their clients’ best interest.
The DOL’s announcement also represents the latest delay to a rule that has been nearly seven years in the making.
The DOL first issued proposed regulations in October 2010, but withdrew them in 2011 in the face of heated opposition from the industry and members of Congress, only to re-propose them in 2015. After holding four days of public hearings on the proposed regulations, hearing from more than 70 witnesses, and receiving thousands of comment letters, the DOL issued the final rule in April 2016.
The final rule was effective June 7, 2016, 60 days after it was published in the Federal Register. But the implementation date was extended so that brokers and advisers were not governed by the conduct and disclosure rules until April 10, 2017. A transition period for compliance with the BIC exemption was put in place from that date until January 1, 2018, if certain conditions were met. Full compliance with the exemption was required as of January 1, 2018.
Donald Trump’s victory in the 2016 presidential election raised the hopes of the rule’s opponents that the rule would either be repealed or watered-down. That has not happened. Instead, the DOL in March announced a 60-day delay of the fiduciary rule implementation date from April 10, 2017, to June 9, 2017. And, in the days prior to announcing its proposal to further delay full compliance with the fiduciary rule, the DOL has signaled that it will take a more relaxed enforcement stance during the fiduciary rule’s transition period.
The DOL announced in Field Assistance Bulletin (FAB) 2017-02 that during the initial compliance phase of the rule, enforcement policy will focus on good faith efforts to comply rather than strict adherence to the rule. While the rule’s Impartial Conduct Standards will apply during the initial compliance phase from June 9, 2017, through January 1, 2018, which is now extended, the DOL made clear in FAB 2017-02 that it “…will not pursue claims against fiduciaries who are working diligently and in good faith to comply with the fiduciary rule and exemptions, or treat those fiduciaries as being in violation of the fiduciary rule and exemptions.”
The DOL also announced in FAB 2017-03 that it will not enforce the rule’s prohibition on investment advice contracts requiring clients to waive their right to participate in class-action lawsuits resulting from fiduciary breaches. The final fiduciary rule prohibits certain arbitration provisions in investment advice contracts and clauses that require participants to waive their right to participate in class-action lawsuits.
Critics of the DOL’s fiduciary rule—including the Investment Company Institute and the U.S. Chamber of Commerce—urged the DOL to delay full implementation of the final rule.
The banking trade associations have also expressed concerns with the DOL’s fiduciary rule. In a comment letter earlier this year, the Independent Community Bankers of America (ICBA) stated that it believes that the final rule harms investors because it reduces access to certain retirement savings offerings. The ICBA expressed support for the DOL’s March proposal to extend the April 10, 2017, implementation date by 60 days.
In August, the American Bankers Association (ABA) shared with the DOL the results of its member survey to determine banks’ understanding of the fiduciary rule and its impact on banks and their retirement savings customers. The ABA reported that many banks find the fiduciary rule unclear and confusing. Nearly one-third of survey respondents reported eliminating or reducing the number of retirement products or services available to customers as a result of the fiduciary rule. The ABA letter requested that bank IRA and certificate of deposit programs be excluded from the fiduciary rule.
In releasing its proposal to delay full compliance with the fiduciary rule, the DOL noted that the purpose of the delay is “to give the Department of Labor the time necessary to consider possible changes and alternatives…” to the previously issued guidance. The DOL is accepting public comment during a 15-day comment period that ends September 15, 2017.
While procrastinators and opponents of the rule may be pleased with the delay, many are left wondering how to proceed. Major financial firms have spent millions of dollars to comply with the rule. And many firms have overhauled their entire business model to move away from commission-based retirement accounts, and built marketing campaigns to demonstrate that they are acting in their clients’ best interest. If the rule is repealed, will these firms reverse course and go back to commission-based retirement accounts? If the rule is substantially changed, what will it cost to come into compliance with the changed rule?
Absent a crystal ball, the only certainty is uncertainty. Given the multiple delays, additional requests for comments and DOL reviews, and the relaxed enforcement stance, it is becoming much more likely that under the Trump administration, the Obama-era fiduciary rule will not be implemented in its current form. Community banks would be well-advised to carefully monitor the evolving timelines for compliance with the DOL’s fiduciary rule and any changes to the final rule in order to ensure compliance.