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Regulation and Compliance > Federal Regulation > DOL

DOL Fiduciary Delay Would Be ‘Double-Edged Sword,’ Lawyer Says

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Opponents and supporters of the Department of Labor’s fiduciary rule were quick to react to Labor filing on Thursday with the Office of Management and Budget to delay by 18 months compliance with the rule’s more onerous prohibited transaction exemptions, with one ERISA attorney characterizing the move as “continued agony.”

“We will be in limbo for another two years, at least,” Steve Saxon, partner at Groom Law Group, told ThinkAdvisor in a Thursday interview. “In a way,” Saxon said, delaying compliance with the rule’s prohibited transaction exemptions from Jan. 1, 2018 to July 1, 2019 is “a double-edged sword.”

While “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, and “we want DOL to make changes” to the rule, particularly regarding the best-interest contract exemption, it’s also a case of “be careful what you wish for.”

Litigation that’s still in play regarding the rule aside, Saxon continued, “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 they [Labor] substantially restructure 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,” Reish 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,” Reish said.

In a Wednesday filing with the court in the case being brought against Labor by Thrivent Financial for Lutherans, Labor Secretary Alexander Acosta told the court that Labor submitted to OMB proposed amendments to three exemptions:

  • The best-interest contract exemption, which opponents of the rule argued is the contract that would spark 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 for certain transactions involving insurance agents and brokers, pension consultants, insurance companies, and investment company principal underwriters.

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; it is said this will happen during Congress’ August recess, according to Erin Sweeney, counsel with Miller & Chevalier in Washington.

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 that she believes “the basis for this delay is going to be that the industry is just not ready for the fiduciary rule … 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,” Sweeney said.

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, he 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.”

Lisa Bleier, managing director and associate general counsel for the Securities Industry and Financial Markets Association, said on a Thursday 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 said.

Bleier noted that SIFMA told Labor in its recent comment as part of 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, 2017, deadline and expect to spend over $200 million more before the end of 2017. 

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