DOL Proposes 18-Month Extension of Fiduciary Rule Transition Period
On August 28, 2017, the Department of Labor (DOL) proposed to extend the transition period for implementation of the fiduciary rule by 18 months 1until July 1, 2019 while it continues to consider whether to revise or rescind the rule as directed by the President earlier this year.2 This proposed extension is very welcome news for the financial services industry since the existing transition period is set to expire on January 1, 2018 3 and coming into full compliance with the rule by that date would be a costly and complex undertaking4.
As noted above, the President previously directed DOL to reevaluate the rule and to consider the rule's revision or repeal. As part of DOL's response to the President's instructions, in July 2017 DOL published in the Federal Register a request for comments and information5on a number of issues relating to the fiduciary rule, including, among others, (i) whether there have been market innovations that DOL should consider during its review of the rule, (ii) what would the impact be if the DOL eliminated the contract requirement with IRAs under the Best Interest Contract Exemption (BIC Exemption), (iii) generally, whether a streamlined exemption might be appropriate for products utilizing "clean shares" or "T shares," (iv) can the BIC Exemption's disclosure requirements be simplified, and (v) should there be a simplified rule or streamlined exemption for bank deposit products? In response, DOL received a large number of comments from opponents and advocates of the rule. DOL intends to review these comments during the proposed extended transition period.
Extension Proposal Requests Comments
DOL has asked in the proposal for comments regarding the length, as well as the scope, of the extended transition period. Comments are requested as to whether the transition period should extend a fixed period of time from the date that DOL takes certain actions, such as its final announcement as to whether and how the rule will be revised (if at all), as well as to whether a tiered transition period may be appropriate. Also, DOL has requested comments as to whether the current "working diligently and in good faith" transition compliance standard should remain in effect during the proposed extended transition period. Interested financial institutions and/or industry trade associations should consider commenting on the extension proposal.
DOL's Compliance Expectations During Existing Transition Period
In the preamble to the proposal, DOL specifically reminds financial institutions that, during the existing transition period, DOL "expects financial institutions to adopt such policies and procedures as they reasonably conclude are necessary to ensure that advisers comply with the impartial conduct standards" and that they "retain flexibility to choose precisely how to safeguard compliance with the impartial conduct standards, whether by tamping down conflicts of interest associated with adviser compensation, increased monitoring and surveillance of investment recommendations, or other approaches or combinations of approaches." Reinforcing these expectations, DOL also notes in the preamble that it understands "that many financial institutions already have completed or largely completed work to establish policies and procedures necessary to make many of the business structure and practice shifts necessary to support compliance with the Fiduciary Rule and Impartial Conduct Standards (e.g., drafting and implementing training for staff, drafting client correspondence and explanations of revised product and service offerings, negotiating changes to agreements with product manufacturers as part of their approach to compliance with the PTEs, changing employee and agent compensation structures, and designing product offerings that mitigate conflicts of interest)."
Any financial institution whose transition efforts may fall short of DOL's expectations should consider accelerating their compliance program to ensure that they are satisfying the "working diligently and in good faith" standard.
Recent Fiduciary Claims Against Financial Institutions
Thematically related to the fiduciary rule, we note that the plaintiffs' bar continues to bring fiduciary breach claims against financial institutions alleging, among other things, that financial institutions have caused retirement assets to be invested in proprietary products that are allegedly both underperforming and comparatively expensive in breach of their fiduciary duties. In one recent example, a class action was recently certified on behalf of employees suing a major financial institution who allege, among other things, that the defendants "Selected and Retained High Cost Proprietary Funds in the Plan in their Own Self-Interest and at the Expense of Plan Participants."6 Because of the high degree of interest in fiduciary compliance by the DOL, IRS, federal and state bank and securities regulators, FINRA, and the plaintiffs' bar, among others, financial institutions are at high risk of having their fiduciary practices and compliance, particularly with respect to high-fee and/or affiliated products, scrutinized and should prepare accordingly.
© 2017 Arnold & Porter Kaye Scholer LLP. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.
See Proposed Rules.
See Arnold & Porter Kaye Scholer Advisory, "New Administration Moves Toward Repealing or Revising the Department of Labor's Fiduciary Rule."
See Arnold & Porter Kaye Scholer Alert, "Fiduciary Rule to Become Applicable on June 9"
See Arnold & Porter Advisory, "Department of Labor Adopts Sweeping Rules Regarding Fiduciary Investment Advice."
See Proposed Rules.