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ONPOINT / A legal update from Dechert

April 2017

DOL Charts a New Course for ERISA's Fiduciary Rule

The U.S. Department of Labor (DOL) published a final rule on April 7, 2017 (Final Extension),1 delaying for 60 days the applicability date of the new rule defining who is a fiduciary under ERISA (Fiduciary Rule)2 and related prohibited transaction exemptions (PTEs).3 As a result, compliance with the Fiduciary Rule and the related PTEs is generally not required until June 9, 2017. A transition period will run from June 9, 2016 to January 1, 2018 (Transition Period) during which the exemptions from the Fiduciary Rule will be available, but only compliance with the Impartial Conduct Standards (described below) condition of those exemptions will be required. Compliance with the remaining conditions of the Best Interest Contract Exemption (BIC Exemption) and with the amendments to Prohibited Transaction Exemption 84-24 (PTE 84-24) – which applies to payment of sales commissions in connection with a plan’s purchase of insurance and annuity contracts – will not be required until January 1, 2018.

Please refer to Dechert’s Newsflash, published shortly after the issuance of the Final Extension, for a discussion of our general views regarding the DOL’s actions.

The chart below provides a high-level summary and timeline of the applicability of the various aspects of the fiduciary rulemaking, and identifies a few discrete issues that industry participants might consider in anticipation of the June 9 applicability date. This chart is not intended to contain a complete and comprehensive list of all relevant applicability dates, but is provided as a general reference to help navigate the Fiduciary Rule.

June 9, 2017 Applicability Date

  • The Final Extension delays the applicability date of the Fiduciary Rule and related PTEs from the original date of April 10 to June 9, on which date the scope and range of those industry participants considered fiduciaries under the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code of 1986 will greatly expand.

  • The Final Extension delays the requirement to provide certain disclosures during the Transition Period.
    • The delayed transition disclosures include: the acknowledgment of fiduciary status; specified disclosures; written commitment to adhere to the Impartial Conduct Standards; and compliance with the recordkeeping requirements of the exemptions. As a result, advisers are not required to notify retirement investors of the Impartial Conduct Standards and are not required to acknowledge (to investors) the advisers’ fiduciary status during the Transition Period.

  • To alleviate the burdens associated with this expanded definition, the DOL provides several exemptions (including the BIC Exemption, the Principal Transaction Class Exemption and PTE 84-24). Qualifying for these exemptions requires compliance with certain conditions, which are relaxed during the Transition Period, as discussed further below.

  • BIC Exemption During the Transition Period: Fiduciaries may rely on the BIC Exemption during the Transition Period by complying with the Impartial Conduct Standards.
    • The level fee fiduciary provision of the BIC Exemption is also available during the Transition Period, and the only applicable requirement for this condition is compliance with the Impartial Conduct Standards.
    • Robo-advisers relying on the level fee fiduciary provision need only comply with the Impartial Conduct Standards during the Transition Period.

  • PTE 84-24 During the Transition Period: The Final Extension delays the applicability of most of the amendments to PTE 84-24 to January 1, 2018 (from the original compliance date of April 10). However, those relying on PTE 84-24 will still need to comply with the Impartial Conduct Standards as of June 9, 2017 and throughout the Transition Period. During the Transition Period, parties receiving compensation in connection with annuity recommendations can rely on the broad transition exemption in the BIC Exemption or they can continue to rely on PTE 84-24, which has historically applied to all annuity products. Note that the BIC Exemption has fewer conditions than PTE 84-24, which currently requires specific disclosures and other conditions not present in the BIC Exemption. Accordingly, fiduciaries may prefer to rely on the BIC Exemption instead of PTE 84-24 during the Transition Period.

  • Other PTEs: At the time the Fiduciary Rule became final, other PTEs were also amended. The applicability of those amendments is also delayed to June 9.

  • Impartial Conduct Standards: During the Transition Period, fiduciaries may only rely on the new exemptions (BIC Exemption and Principal Transaction Class Exemption) and amendments to previously granted exemptions if they adhere to the Impartial Conduct Standards, which generally require that a fiduciary:
    • Provide advice in the retirement investors’ best interest (i.e., advice that is prudent and loyal);
    • Charge no more than reasonable compensation; and
    • Avoid misleading statements.

  • Certain Other Authority: On March 10, the DOL published Field Assistance Bulletin 2017-01, which announced an enforcement hold in case the DOL did not formally delay the Fiduciary Rule before the April 10 applicability date. (The Internal Revenue Service also issued a similar enforcement hold.) Because the Final Extension was issued prior to the original applicability date of the Fiduciary Rule and related PTEs, these enforcement holds are now moot. Note that a set of FAQs published by the DOL in November 2016 and two sets of FAQs published by the DOL in January 2017 continue to be relevant. For further information regarding the November 2016 FAQs, please refer to OnPoint and OnPoint. For further information regarding the January FAQs, please refer to OnPoint.

  • Enforcement/Litigation: There is an evolving issue regarding litigation risk for providers of investment-related services to individual retirement accounts (IRAs). Because most IRAs are not subject to ERISA, IRA owners do not generally have a private right of action under the Fiduciary Rule when their providers take the position that they are not fiduciaries. In addition, while IRA owners would have had a private right of action under the BIC Exemption where their providers were fiduciaries seeking relief under the BIC Exemption, this private right of action is not available during the Transition Period. Furthermore, if the BIC Exemption undergoes revision, the private right of action may be eliminated altogether. As a result, the level of risk to providers when dealing with IRAs may differ compared to the level of the risk when dealing with ERISA-covered retirement plans (such as 401(k) plans).

January 1, 2018 Applicability Date

  • Barring any further changes to the Fiduciary Rule and related PTEs, full compliance with the remaining conditions of the new PTEs (BIC Exemption and Principal Transaction Class Exemption) and amendments to existing PTEs (including PTE 84-24) will be required as of January 1, 2018.

  • PTE 84-24 will no longer be available for transactions involving variable or fixed-indexed annuities.

New Compliance Obligations/Dates

Requirement Compliance Date Considerations
New definition of “fiduciary” June 9, 2017 Industry participants should consider whether the definitions supporting fiduciary status (i.e., “recommendation” and “investment advice”) apply.

Exception from fiduciary status for advising independent fiduciaries

  • Written fiduciary disclaimer required
  • Reliance on representations permitted
June 9, 2017 Independent Fiduciary Exception (also referred to as the “counterparty exception” or “sophisticated independent fiduciary exception”): In order to qualify for this exception relying advisers must comply with certain conditions, some of which can be satisfied by written disclosures.

Exception from fiduciary status for swaps and security-based swaps transactions

  • Written representations required
  • Written acknowledgment required
June 9, 2017 Swaps and Security-Based Swaps Transactions Exception: An independent fiduciary must provide (to the person making a recommendation) a written representation that the person making the recommendation is not providing impartial advice and is not acting in a fiduciary capacity. In addition, the independent fiduciary must acknowledge in writing that it is exercising independent business judgment.
Exclusion from fiduciary status for providing investment education material June 9, 2017 Education Exclusion: Providers seeking to rely on this safe harbor should consider including any disclosures/disclaimers as to investment education material, and confirm that conditions of the exclusion are satisfied for interactive web-based tools and interfaces.

Exclusion from fiduciary status for platform providers

  • Written disclosures required
June 9, 2017 Platform Provider Exclusion: Providers seeking to rely on this safe harbor should make written disclosures regarding impartial advice and the adviser’s fiduciary capacity.

Impartial Conduct Standards under

  • BIC Exemption
  • PTE 84-24
  • Other exemptions: Principal Transaction Class Exemption and PTEs 75-1, 77-4, 80-83, 83-1, and 86-128
June 9, 2017 Those relying on the listed exemptions during the Transition Period must comply with the Impartial Conduct Standards.

PTE 84-24: Industry participants may want to consider whether relying on the BIC Exemption during the Transition Period is preferable to relying on existing PTE 84-24.

Remaining requirements of

  • BIC Exemption
  • PTE 84-24
  • Other exemptions: Principal Transaction Class Exemption and PTEs 75-1, 77-4, 80-83, 83-1, and 86-128
January 1, 2018 BIC Exemption: Written and disclosure requirements need not be satisfied until after the Transition Period ends.

PTE 84-24: This exemption will no longer be available for transactions involving fixed-indexed annuity contracts and variable annuity contracts.

 

Next Steps

The timeline depicted in the chart above is intended to clarify which aspects of the DOL’s final rulemaking will become applicable on June 9, 2017, rather than January 1, 2018. Despite previous widespread expectations that the Fiduciary Rule would never become applicable – or at least would be subject to a series of further delays – it now seems likely that the new general definition of fiduciary and the rules surrounding the new Impartial Conduct Standards will become effective on June 9. A reasonable response to this situation for some firms will be to plan for June 9 by assessing whether their activities with respect to retirement investors will result in their becoming fiduciaries and, if so, whether they can (and are willing to) rely on the BIC Exemption or some other exemption.

During the Transition Period, the DOL will continue to review, and may revise significant parts of, the fiduciary regulation and the related exemptions before the January 1, 2018 full-compliance date. This regulatory situation is fluid and uncertain and, while it seems possible that the detailed written and procedural aspects of the BIC Exemption will be scaled back, perhaps substantially, it also remains possible that compliance with all of the remaining conditions of the exemptions could be required as of January 1, 2018.

Certain firms may want to navigate this landscape differently than others, depending on, among other considerations, their client base, business models and compliance capabilities. All affected firms should follow DOL developments closely in the coming months.

 

Footnotes

1) The Final Extension is available here.

2) The Fiduciary Rule is available here.

3) The PTEs are available here; here; here; here; and here.

 
 

This update was authored by:

 
K. Susan Grafton
Partner
Washington, D.C. / New York
T: +1 202 261 3399 / +1 212 698 3611
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Andrew L. Oringer
Partner
New York
T: +1 212 698 3571
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Mark D. Perlow
Partner
San Francisco
T: +1 415 262 4530
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Christine Ayako Schleppegrell
Associate
Washington, D.C.
T: +1 202 261 3357
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Luzia D. Santos
Associate
Boston
T: +1 617 728 7174
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