DOL Issues Final Rule Delaying Applicability Date of Fiduciary Rule and Related Prohibited Transaction Exemptions

Practical Law Legal Update w-007-4120 (Approx. 7 pages)

DOL Issues Final Rule Delaying Applicability Date of Fiduciary Rule and Related Prohibited Transaction Exemptions

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 Section 4975 (26 U.S.C. § 4975) excise taxes that may otherwise apply during the temporary non-enforcement period provided by the 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).

Final Rule Delay

This final rule formally delays the applicability date of the fiduciary rule, the best interest contract exemption (BICE), and the principal transactions exemption, including the transition relief, to June 9, 2017 (see Legal Update, DOL Issues FAQs on the Fiduciary Investment Advice Rule Focused on BICE Compliance).

This means that the fiduciary rule and related exemptions are applicable on June 9, 2017, including adherence to the impartial conduct standards (see Practice Note, Best Interest Contract Prohibited Transaction Exemption: Impartial Conduct Standards), while compliance with the remaining conditions in these exemptions is not required until January 1, 2018. As a result, many of the burdensome conditions of the fiduciary rule and related exemptions will not take effect until January 1, 2018 (assuming they are not further delayed or changed before that date), including:

The requirement for financial service providers and advisers to:
- make written disclosures and representations about fiduciary compliance in communications with retirement plan investors;
- make warranties about policies and procedures; and
- execute the best interest contract.
The prohibition on imposing arbitration requirements on class action claims.

The final rule also delays:

The applicability of the amendment to Prohibited Transaction Exemption 84-24 (49 Fed. Reg. 13208 (April 3, 1984)) until January 1, 2018, except the impartial conduct standards, which will become applicable on June 9, 2017 (see Practice Note, Prohibited Transactions and Exemptions Under ERISA and the Code).
The applicability dates of amendments to other previously granted PTEs related to the fiduciary rule by 60 days (until June 9, 2017).

The preamble states that the DOL's approach in adopting the delay described in this final rule:

Is consistent with the DOL's "compliance first" approach to enforcing the fiduciary rule reflected in DOL FAB 2017-01 (see Legal Update, DOL Issues Temporary Enforcement Policy on Fiduciary Investment Advice Rule). The preamble provides further that the DOL will be focused on compliance assistance both in the period before January 1, 2018, and "for some time after."
Addresses financial service provider industry concerns about uncertainty regarding when compliance with the requirements of BICE and other PTEs was required (particularly with regard to notice and disclosure obligations that would have otherwise become applicable on April 10, 2017) and minimizes the risk of litigation in the IRA market.
Provides the DOL with an appropriate amount of time to consider the regulatory burden and costs of the fiduciary rule and related PTEs.
Does not preclude the DOL from considering or making changes to the fiduciary rule and related PTEs based on new evidence or analyses developed pursuant to the President’s Memorandum.

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

DOL Issues Final Rule Delaying Applicability Date of Fiduciary Rule and Related Prohibited Transaction Exemptions | Practical Law