From the September 2017 issue of Investment Advisor • Subscribe!

DOL Files to Delay Fiduciary Rule's January Compliance Date

Agency seeks 18-month extension for more onerous PTEs; opponents, supporters of rule weigh in

Labor Secretary Alexander Acosta (Win McNamee/Getty Images) Labor Secretary Alexander Acosta (Win McNamee/Getty Images)

As anticipated, the Department of Labor in early August filed with the Office of Management and Budget to extend by 18 months the January applicability date of its fiduciary rule's more onerous prohibited transaction exemptions.

(Related: Vanguard, TD Ameritrade Cheer DOL’s Move to Delay Rule)

Labor Secretary Alexander Acosta announced in an Aug. 9 filing (with the court in the case brought against Labor by Thrivent Financial for Lutherans) that Labor had asked OMB to extend the transition period and delay applicability for the following three exemptions from Jan. 1, 2018, to July 1, 2019:

  • The best-interest contract exemption, which fiduciary rule opponents say would be the contract that sparks a slew of class-action lawsuits;

  • Class exemption for principal transactions in certain assets between investment advice fiduciaries and employee benefit plans and IRAs; and

  • Prohibited Transaction Exemption 84-24, which deals with the treatment of annuities.

Opponents and supporters of DOL's rule were quick to weigh in on the proposed compliance extension. Steve Saxon, partner at Groom Law Group, the big employee-benefits law firm, characterized Labor's move as “continued agony.”

“We will be in limbo for another two years, at least,” Saxon said. “In a way,” delaying compliance with the rule's prohibited transaction exemptions from Jan. 1, 2018, to July 1, 2019, is “a double-edged sword.”

Added Saxon: “A lot of us wanted a delay, we needed a delay for those financial institution clients that need to put in a new disclosure regime” to comply with the rule; “we want DOL to make changes” to the rule, particularly regarding the best-interest contract exemption, but it's also a case of “be careful what you wish for,” he said.

Despite litigation that's still in play regarding the rule, Saxon explained, “the rule is in effect, and the BIC is currently in effect — we have transition relief, but the DOL won; it's in effect and will be unless [Labor] substantially restructures the rule.”

Saxon argues that non-enforcement relief needs to be extended as well. The IRS and Labor provided such relief for the PTEs until Jan. 1, “the date the transition period ended,” Saxon said. “But now that the transition period has been extended to July 1, 2019, we need the non-enforcement relief to be extended as well.”

The fiduciary regulation “is in full effect,” added Fred Reish, partner in Drinker Biddle & Reath's employee benefits and executive compensation practice group in Los Angeles. “But the DOL is looking at it to see if they want to make changes.”

Added Reish: “The three exemptions — BICE, 84-24 and Principal Transactions — are in effect, but only the less burdensome transition versions.” With Labor's request to OMB, “the full, and more demanding, versions of those exemptions were pushed out to July 1, 2019,” he said.

Transition BICE, Reish explained, “requires only ‘adherence to’ the Impartial Conduct Standards,” which took effect on June 9. “Some of the requirements that were pushed out” under Labor's request to OMB “are: a contract where the advisor is obligated to comply with BICE, warranties of performance by the advisor (and supervisory entity), disclosures, permission of class-action lawsuits, and so on,” he added.

OMB Review

OMB has 90 days to review Labor's request to extend the compliance deadline. Once approved, Labor's proposal will be published in the Federal Register and public comments will be taken, likely for 15 days.

Delaying the compliance deadline for the more onerous PTEs will also allow time for a new assistant secretary of Labor's Employee Benefits Security Administration to be nominated; that was expected to take place during Congress’ August recess, Erin Sweeney, counsel with Miller & Chevalier in Washington, told IA in an Aug. 10 interview.

Before a plan is approved by OMB, which Sweeney sees as likely in November, “proponents and opponents” of the rule “are going to want to set up OMB meetings to explain why they believe the delay is appropriate” or not.

While details of Labor's proposal won't be visible until OMB approval, Sweeney told ThinkAdvisor.com that she believes “the basis for this delay is going to be that the industry is just not ready for the fiduciary rule [and] that everybody needs more time” to comply, specifically regarding the new clean shares and T shares, and to see if “there's any way to restructure the sales of annuities that may be compliant with fiduciary rules.”

The new clean or Z share, as well as T share classes have cropped up to help brokerage firms comply with the rule, but the regulatory approval process, Sweeney said, is “taking longer than everyone anticipated”; while there's been some regulatory progress, the shares are not “readily available.” The “ideal platform [under the fiduciary rule] would be clean shares, [which have] no distribution fee at all,” she stated.

Supporters Speak Out

Micah Hauptman, financial services counsel at the Consumer Federation of America — a staunch advocate of Labor's fiduciary rule — said that while specifics of the 18-month delay proposal have yet to be released, as CFA “made clear” in its comment letter in response to Labor's request for information, “retirement savers need and deserve the full protections of the rule on Jan. 1.”

On that date, the Federation says, “the full protections” of BICE, the principal transactions exemption and amendments to PTE 84-24 are currently scheduled to be implemented. “Without complete implementation of these PTEs, the full protections and benefits of the fiduciary rule won't be realized, and retirement savers will continue to suffer the harmful consequences of conflicted advice,” the consumer group wrote.

Duane Thompson, senior policy analyst at Fi360, a fiduciary training and technology company, said that while Labor's “proposed 18-month delay goes against the clear trend in the marketplace toward fiduciary accountability, it is not a surprise.”

The delay, Thompson said, “will likely sow confusion among investors over who is legally required to act in their best interest, and prolong inconsistent standards of service and accountability within the industry. However, increased investor awareness and market momentum are driving more firms to embrace fiduciary status regardless of the rule.”

SIFMA Weighs In

Lisa Bleier, managing director and associate general counsel for the Securities Industry and Financial Markets Association, said during an Aug. 10 media call that SIFMA is “pleased” with Labor's request for an extension and looks forward to commenting. “There will be a lot of new information for the department to consider,” she explained.

Bleier noted that SIFMA told Labor in its recent comment as part of the department's request for information, “it's not just exemptions that need to change,” but also parts of the rule itself.

Also discussed on the call was a recently released Deloitte & Touche LLP study, commissioned by SIFMA, which surveyed a cross-section of SIFMA members to analyze how financial institutions have responded to the fiduciary rule. The study revealed that:

  • Fifty-three percent of study participants reported limiting or eliminating access to advice in retirement brokerage accounts, affecting an estimated 10.2 million accounts and $900 billion in AUM.

  • Ninety-five percent of study participants indicated that they had reduced access to or choices within the products offered to retirement savers as a result of efforts to comply with the rule. Products affected include mutual funds, annuities, structured products, fixed income, private offerings and more, affecting approximately 28.1 million accounts.

  • Survey participants’ indicated that they spent approximately $595 million preparing for the initial June 9 deadline and expect to spend over $200 million more before the end of 2017.

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