DOL Issues Proposed Rule Delaying Prohibited Transaction Exemptions' Applicability Dates and FAB 2017-03 | Practical Law

DOL Issues Proposed Rule Delaying Prohibited Transaction Exemptions' Applicability Dates and FAB 2017-03 | Practical Law

On August 30, 2017, the Department of Labor (DOL) issued a proposed rule that delays by 18 months to July 1, 2019, the applicability dates of the Best Interest Contract Exemption (BICE), the Principal Transactions Exemption, and Prohibited Transaction Exemption 84-24 associated with the fiduciary investment advice regulation that replaces the existing regulatory interpretation of fiduciary investment advice under Section 3(21)(A)(ii) of the Employee Retirement Income Security Act of 1974 (ERISA) (fiduciary rule). The DOL also issued Field Assistance Bulletin 2017-03 (FAB 2017-03) announcing that the DOL will not pursue claims against fiduciaries who fail to comply with the provisions of the BICE and Principal Transactions Exemption which limit arbitration.

DOL Issues Proposed Rule Delaying Prohibited Transaction Exemptions' Applicability Dates and FAB 2017-03

by Practical Law Employee Benefits & Executive Compensation
Published on 05 Sep 2017 • USA (National/Federal)
On August 30, 2017, the Department of Labor (DOL) issued a proposed rule that delays by 18 months to July 1, 2019, the applicability dates of the Best Interest Contract Exemption (BICE), the Principal Transactions Exemption, and Prohibited Transaction Exemption 84-24 associated with the fiduciary investment advice regulation that replaces the existing regulatory interpretation of fiduciary investment advice under Section 3(21)(A)(ii) of the Employee Retirement Income Security Act of 1974 (ERISA) (fiduciary rule). The DOL also issued Field Assistance Bulletin 2017-03 (FAB 2017-03) announcing that the DOL will not pursue claims against fiduciaries who fail to comply with the provisions of the BICE and Principal Transactions Exemption which limit arbitration.
On August 30, 2017, the DOL issued a proposed rule (82 Fed. Reg. 41365 (Aug. 31, 2017)) that delays the applicability dates for certain provisions associated with the fiduciary investment advice regulation that replaces the existing regulatory interpretation of fiduciary investment advice under ERISA Section 3(21)(A)(ii) (29 U.S.C. § 1002(21)(A)(ii)) (fiduciary rule). In particular, the proposed rule delays the applicability date to July 1, 2019 for the:
  • The Best Interest Contract Exemption (BICE).
  • The Principal Transactions Exemption.
  • PTE 84-24, which was previously amended to revoke relief for fixed indexed annuity contracts and variable annuity contracts.
The DOL also issued Field Assistance Bulletin 2017-03 (FAB 2017-03) announcing that it will not pursue claims against fiduciaries who fail to comply with the provisions of the BICE and the Principal Transactions Exemption, if the sole failure of the fiduciary is a failure to comply with the arbitration limitations in the exemptions.

Background

On April 6, 2016, the DOL issued the fiduciary rule, which broadens the types of advice that qualify as fiduciary investment advice under ERISA Section 3(21)(A)(ii) (29 U.S.C. § 1002(21)(A)(ii)) and Section 4975(e)(3)(B) of the Internal Revenue Code (26 U.S.C. § 4975(e)(3)(B)). In connection with the fiduciary rule, the DOL also issued two new prohibited transaction exemptions (PTEs) and revised several existing PTEs (see Practice Note, Prohibited Transactions and Exemptions Under ERISA and the Code).
In February 2017, President Trump issued a memorandum directing the DOL to review the fiduciary rule, indicating that the rule may not be "consistent" with the priorities of his administration (see Legal Update, President Trump Issues Memorandum Directing DOL to Review Fiduciary Investment Advice Regulation).
In April 2017, the DOL announced that the applicability dates for the fiduciary rule and related PTEs would be delayed from April 10, 2017 to June 9, 2017 (see Legal Update, DOL Issues Final Rule Delaying Applicability Date of Fiduciary Rule and Related Prohibited Transaction Exemptions). That guidance further delayed 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, until January 1, 2018 (the transition period).
In July 2017, the DOL published a request for information (RFI), seeking public comments on whether the applicability dates of certain provisions of the PTEs should be further delayed (see 82 Fed. Reg. 31278 (July 6, 2017)).
For more information on the fiduciary rule and related PTEs, see Fiduciary Investment Advice Toolkit.

Proposed Rule

Current Transition Period

Best Interest Contract and Principal Transactions PTEs

The fiduciary rule, the BICE, and the Principal Transactions Exemption became applicable on June 9, 2017. The DOL, however, provided relief during a transition period extending from June 9, 2017 to January 1, 2018. While financial institutions and advisers relying on these PTEs are not required to comply with certain requirements in the PTEs during this period, they must comply with impartial conduct standards. These standards include:
  • Giving prudent advice.
  • Receiving no more than reasonable compensation.
  • Avoiding misleading statements.
Absent a delay, the remaining provisions of these PTEs will become applicable on January 1, 2018.

PTE 84-24

In connection with the issuance of the fiduciary rule and new PTEs, PTE 84-24 was amended to, among other things, add impartial conduct standards as a condition for relief and revoke relief for fixed indexed annuity contracts and variable annuity contracts. The amendment does not apply until January 1, 2018. As a result, parties may rely on PTE 84-24 before January 1, 2018, provided they comply with any existing conditions of the PTE and the impartial conduct standards.

Proposed Delay

The DOL received a wide range of comments on whether the applicability dates for the PTEs should be delayed, including comments arguing that:
  • The applicability dates should not be delayed.
  • The applicability dates should be delayed, with a variety of lengths suggested.
  • The PTEs should be repealed or replaced.
After reviewing the comments, the DOL proposed an 18-month delay, which would extend the transition period until July 1, 2019. The proposed rule extends the rules and conditions that are currently in place during the transition period.
The DOL also requested comments on alternative approaches to determining the length and timing of the delay, including:
  • A delay determined by DOL action (for example, a delay ending 12 months after the DOL finishes its review of the fiduciary rule).
  • A tiered approach where the delay is determined by the earlier or later of:
    • a certain date; or
    • the end of a period following a certain event.
  • A delay conditioned on the behavior of the entity seeking relief.
The DOL noted, however, that the alternative approaches are not likely to alleviate the uncertainty and confusion regarding the fiduciary rule and the related PTEs.

Reasons for the Delay

In proposing an 18-month delay, the DOL stated it believes a delay is necessary because:
  • It has not yet finished its review of the fiduciary rule and related PTEs or the comments received in response to the RFI.
  • It will likely propose a streamlined class PTE based on recent industry innovations, but that proposal and the associated changes could not be implemented before January 1, 2018.
  • Additional time is necessary to coordinate with the leadership of the Securities and Exchange Commission (SEC) regarding new conduct standards for investment advisers and broker-dealers.
  • Absent a delay, financial institutions and advisers will feel compelled to prepare to comply with conditions that will likely be revised or repealed.

FAB 2017-03

FAB 2017-03 provides that the DOL will not pursue claims against fiduciaries who fail to comply with the provisions of the BICE and the Principal Transactions Exemption which limit arbitration. The provisions, which are set to become applicable on January 1, 2018, provide that the PTEs are unavailable if advisers and financial institutions waive or qualify the right of the retirement investor to bring or participate in a class action or other representative action in court in a dispute with the adviser or financial institution (see Practice Notes, Best Interest Contract Prohibited Transaction Exemption: Advice to Retirement Investors for Investments in Plans Covered by Title I of ERISA and Principal Transactions Exemption Under ERISA: Conditions for Transactions with ERISA Plans).