On November 29, 2017, the Department of Labor (“DOL”) granted an extension of the transition period for the Fiduciary Rule’s Best Interest Contact Exemption and Principal Transaction Exemption, and delayed the applicability date of the amendments to Prohibited Transaction Exemption 84-24 (“PTE 84-24”). The new transition period will end on July 1, 2019, rather than January 1, 2018. The DOL also extended the temporary enforcement policy in Field Assistance Bulletin 2017-02 to July 1, 2019. Thus, financial institutions and advisers impacted by the Fiduciary Rule and related exemptions remain subject to the same requirements as they have been since June 9, 2017, when the Fiduciary Rule and the Impartial Conduct Standards became applicable.
The Fiduciary Rule (the “Rule”) defines who is a fiduciary under ERISA Section 3(21)(A)(ii) as a result of providing investment advice and recommendations for a fee to an employee benefit plan or its participants. The Rule also defines fiduciary for purposes of the Internal Revenue Code. Under the revised definition, the circumstances under which an individual becomes a fiduciary significantly expanded. In addition, the DOL issued new prohibited transaction exemptions, as well as amendments to existing exemptions, in conjunction with the broader definition. As described below, the Rule has been a source of controversy since its inception.
The Department issued the Fiduciary Rule on April 8, 2016. The Rule and the new prohibited transaction exemptions, referred to as the Best Interest Contract (“BIC”) Exemption and the Principal Transaction Exemption, as well as amendments to various existing exemptions, including PTE 84-24, were set to become applicable on April 10, 2017. Prior to this date, the President issued a memorandum that directed the DOL to analyze the Rule’s impact on access to retirement information and financial advice. As result of the President’s memorandum, the DOL proposed a 60-day delay of the Rule’s applicability date and requested public comments regarding the Rule. On April 7, 2017, the DOL issued a final rule that extended the Rule’s applicability date from April 10, 2017 to June 9, 2017. In addition, the final rule made only the Impartial Conduct Standards under the BIC Exemption, the Principal Transaction Exemption, and PTE 84-24, applicable from June 9, 2017 through January 1, 2018. Thus, the expanded definition of fiduciary under the Rule became applicable to financial institutions and advisers providing investment advice and recommendations for a fee as of June 9, 2017. To meet any applicable exemption requirements, however, such financial institutions and advisers only have to comply with the Impartial Conduct Standards of giving prudent advice that is in retirement investors’ best interest, charge no more than reasonable compensation, and avoid misleading statements from June 9, 2017 through January 1, 2018. The DOL, however, continued with its requests for public comments in connection with the Rule by issuing a Request for Information (“RFI”) on July 6, 2017. The RFI solicited public comments regarding changes to the Rule, including new exemptions and extending the applicability date of the remaining requirements under the BIC and Principal Transaction Exemptions, as well as PTE 84-24.
On August 31, 2017, the DOL proposed to extend the applicability date for the remaining requirements from January 1, 2018 to July 1, 2019. Based on its evaluation of public comments, the DOL adopted the proposal. As a result, financial institutions and advisers who rely upon the BIC Exemption are not required to enter into enforceable written contracts with IRA owners or adopt new policies and procedures in connection with conflict mitigation until July 1, 2019. Similarly, the additional contract and policy and procedure requirements under the Principal Transaction Exemption and the amendment under PTE 84-24 that revokes the availability of the exemption for fixed indexed annuities are not applicable until July 1, 2019.
While the extended transition period provides financial institutions and advisers with certainty regarding the rules and standards that apply under the Fiduciary Rule and its related exemptions until July 1, 2019, the DOL clearly states that the extension is to provide more time to evaluate whether changes to the Rule and exemptions are advisable and to coordinate with other regulators, including the SEC, FINRA, and NAIC. As a result, we expect future changes to the Rule and that the controversy will continue.