DOL Issues FAB 2017-02 Announcing No Claims Against Fiduciaries During Phased Implementation Period and FAQs Addressing Transition Issues

Practical Law Legal Update w-008-2807 (Approx. 9 pages)

DOL Issues FAB 2017-02 Announcing No Claims Against Fiduciaries During Phased Implementation Period and FAQs Addressing Transition Issues

by Practical Law Employee Benefits & Executive Compensation

Background

The DOL issued the final fiduciary rule on April 6, 2016, and it was scheduled to become applicable on April 10, 2017 (for more information on the fiduciary rule, see Fiduciary Investment Advice Toolkit). In connection with the fiduciary rule, the DOL also issued two new prohibited transaction exemptions (PTEs) as well as revisions to several existing PTEs. The final rule applies to both ERISA-governed employee benefit plans and individual retirement accounts (IRAs).

Several recent changes have been made to the timing of the fiduciary rule, including:

On February 3, 2017, President Trump issued a memorandum indicating that the fiduciary rule may not be "consistent" with the priorities of his administration and directing the DOL to review the fiduciary rule (see President Trump Issues Memorandum Directing DOL to Review Fiduciary Investment Advice Regulation).
On March 1, 2017, the DOL issued a proposed rule that would extend the applicability date of the fiduciary rule by 60 days while it considers the impact of the memorandum on the fiduciary rule (82 Fed. Reg. 12319 (Mar. 2, 2017)) (see Legal Update, DOL Delays Applicability of Fiduciary Investment Advice Rule by 60 Days).
On March 10, 2017, the DOL issued FAB 2017-01 announcing a temporary enforcement policy related to the DOL's proposed rule that would delay for 60 days the applicability date of the fiduciary rule. FAB 2017-01 provides that the DOL will not initiate enforcement actions:
- during any potential gap period that results from the fiduciary rule becoming applicable before the proposed rule extending the applicability date becomes final; or
- in the event the DOL decides not to delay the fiduciary rule (see Legal Update, DOL Issues Temporary Enforcement Policy on Fiduciary Investment Advice Rule).
On March 27, 2017, the Treasury Department and the Internal Revenue Service (IRS) issued Announcement 2017-4 to provide relief from Internal Revenue Code (Code) Section 4975 (26 U.S.C. § 4975) excise taxes that may otherwise apply during the temporary non-enforcement period provided by DOL FAB 2017-01 (see Legal Update, IRS Announcement 2017-4 Provides Temporary Excise Tax Non-applicability Policy for Final Fiduciary Rule to Conform with DOL FAB 2017-01).
On April 4, 2017, the DOL issued a final rule that delays by 60 days the applicability of the fiduciary rule (see Legal Update, DOL Issues Final Rule Delaying Applicability Date of Fiduciary Rule and Related Prohibited Transaction Exemptions). This rule provides that compliance with the fiduciary rule's impartial conduct standards will be required on June 9, 2017, while compliance with the remaining conditions in the PTEs, such as the requirements to execute the best interest contract and make specific written disclosures and representations of fiduciary compliance in communications with investors, is not required until January 1, 2018.
On May 4, 2017, the House Financial Services Committee passed the Financial CHOICE Act of 2017 (H.R. 10), which attempts to repeal the fiduciary rule and stop the DOL from issuing the rule until the SEC issues its own rule on the standards of conduct for broker-dealers and investment advisers (see Legal Update, Financial CHOICE Act Passes House Financial Services Committee).

FAB 2017-02

FAB 2017-02 provides that during a phased implementation period ending on January 1, 2018, the DOL will not:

Pursue claims against fiduciaries who are working diligently and in good faith to comply with the fiduciary rule and related exemptions.
Treat fiduciaries as being in violation of the fiduciary rule or related exemptions.

IRS Announcement 2017-4 provided that the Treasury Department and IRS will not apply Code Section 4975 (26 U.S.C. § 4975) and related reporting obligations regarding any transaction or agreement to which the DOL's temporary enforcement policy, or other subsequent related enforcement guidance, would apply. FAB 2017-02 clarifies that the Treasury Department and IRS have confirmed that, for purposes of applying IRS Announcement 2017-4, FAB 2017-02 constitutes other subsequent-related enforcement guidance.

FAB 2017-02 also provides a detailed history of the recent changes that have been made to the timing of the fiduciary rule (see Background). It describes the DOL's current efforts to analyze the issues raised in President Trump's memorandum, including that the DOL:

Anticipates that it is possible, based on the results of this analysis, that additional changes will be proposed to the fiduciary rule and related PTEs.
Intends to issue a request for information (RFI) seeking additional input on ideas for new exemptions or regulatory changes "based on recent public comments and market developments." The DOL noted that it is aware that financial service providers have begun developing new business models and products to mitigate potential conflicts of interest and that the RFI will specifically ask for public comment on whether an additional delay in the January 1, 2018 applicability date for full compliance would reduce burdens on financial service providers.

Conflict of Interest FAQs

The DOL's Conflict of Interest FAQs provide information on the transition period from June 9, 2017 to January 1, 2018. The FAQs largely repeat much of the information included in the guidance issued by the DOL as a result of President Trump's memorandum (see Background and Fiduciary Investment Advice Toolkit). However, the FAQs do address a few new issues and add helpful information, including:

Q&A 1. Q&A 1 describes the phased implementation period for the fiduciary rule, under which on June 9, 2017, the impartial conduct standards will apply and best interest contract exemption (BICE) and principal transactions exemption will become available to fiduciary advisers. However, most of the onerous conditions of the fiduciary rule will not take effect until January 1, 2018. The impartial conduct standards that become applicable on June 9, 2017 specifically require advisers and financial institutions to:
- give advice that is in the "best interest" of the retirement investor (which requires the advice to meet a professional standard of care as required by the applicable exemption);
- charge no more than reasonable compensation (which, as applied to the principal transactions exemption, specifically refers to the fiduciary's obligation to seek to obtain the best execution reasonably available under the circumstances with respect to the transaction); and
- make no misleading statements about investment transactions, compensation and conflicts of interest.
Q&A 2. Q&A 2 clarifies that parties may rely on PTE 84-24, which was amended to add the impartial conduct standards as a condition for relief and to revoke relief for fixed indexed annuity contracts and variable annuity contracts, subject to the existing conditions of PTE 84-24 and the impartial conduct standards, for recommendations involving all annuity contracts during the transition period (see Legal Update, DOL Issues FAQs on the Fiduciary Investment Advice Rule Focusing on BICE Compliance: PTE 84-24, BICE and Annuities).
Q&A 3. Q&A 3 addresses the issue of compliance with amendments that were made to existing PTEs in connection with the fiduciary rule and clarifies that:
- compliance with the amended exemptions (including the addition of the impartial conduct standards) is required June 9, 2017; and
- the new restrictions on the availability of these exemptions are also applicable June 9, 2017, with an exception for an additional transition rule for certain transactions under PTE 86-128 (see Practice Note, Definition of Fiduciary Investment Advice: Prohibited Transaction Exemptions and the "Best Interest" Standard).
Q&A 4. Q&A 4 specifically anticipates that the DOL may make further changes to the timing or the content of the fiduciary rule and related PTEs based on recent public comments and regulatory changes. It notes that the possibility of brokers' using "clean shares" in the mutual fund market to mitigate conflicts of interest is a promising response to their request for public input and acknowledged that implementing this would be likely to take "significantly more time" than what the DOL envisioned when it set January 1, 2018 as the applicability date for full compliance.
Q&A 5. Q&A 5 specifically negates public comments that the DOL's decision to set a June 9, 2017 compliance date for the impartial conduct standards of the fiduciary rule means that it has effectively concluded its review of the rule and provides that its review of the rule is ongoing.
Q&A 6. Q&A 6 addresses concerns about conflicts of interest for financial service providers and advisers that have not fully made their systems compliant with the fiduciary rule during the transition period. It provides that if fiduciaries adhere to these standards in making investment recommendations subject to the rule, they do not violate BICE or other applicable exemptions, even if their new compensation systems are not yet implemented.
Q&A 7. Q&A 7 clarifies that robo-advice providers and other level-fee advisers may rely on BICE during the transition period, subject to adherence to the impartial conduct standards only (see Legal Update, DOL Issues FAQs on the Fiduciary Investment Advice Rule Focused on BICE Compliance: Level-fee Advisers).
Q&A 8. Q&A 8 provides guidance on the grandfathering relief available in BICE and specifically provides that any new advice with regard to the grandfathered investments must meet the best interest standard (see Legal Update, DOL Issues FAQs on the Fiduciary Investment Advice Rule Focusing on BICE Compliance: BICE Grandfathering Rules).
Q&A 9. Q&A 9 confirms that PTE 84-24 applies to transactions involving IRAs during the transition period, referencing PTE 2002-13 (67 FR 9483 (March 1, 2002)), which describes in the preamble how certain exemptions, including PTE 84-24, apply to plans described in Code Section 4975.
Q&A 10. Q&A 10 describes the types of payments that are covered by PTE 84-24 in the transition period.
Q&A 11. Q&A 11 clarifies that parties do not need to come into full compliance with the impartial conduct standards until 11:59 pm on June 9, 2017, addressing concerns from financial institutions who wish to test new compliance systems over the weekend to reduce the risk of disrupting ongoing advisory services.
Q&A 12. Q&A 12 provides examples of communications to plan participants about increasing contributions to the plan that would not be considered fiduciary investment advice, but rather constitute plan information and general financial, investment and retirement information categories of investment education. The examples include reference to e-mail communications with participants, the use of interactive computer-based tool retirement savings "check-ups," and call center employee interactions with a participant providing information on employer matching contributions (see Legal Update, DOL Issues Second Round of Fiduciary Investment Advice FAQs Clarifying Acceptable Compensation Practices and Financial Service Provider Issues).

For more information on the fiduciary rule, BICE, and the principal transactions PTE, see Practical Law's Fiduciary Investment Advice Toolkit.

DOL Issues FAB 2017-02 Announcing No Claims Against Fiduciaries During Phased Implementation Period and FAQs Addressing Transition Issues | Practical Law