On April 7, 2017, the Department of Labor (DOL) published in the Federal Register a final regulation1 formally announcing the much anticipated delay of the fiduciary rule. By its terms, the delay moves the rule's applicability date by only 60 days, from April 10, 2017, to June 9, 2017. Although it is possible that an additional delay could be implemented prior to June 9, 2017, the preamble to the final regulation strongly and unexpectedly implies that DOL will let portions of the fiduciary rule take effect on June 9 while it complies with the President's memorandum directing DOL to examine the rule. Given this, entities entering into transactions with plans or IRAs will want to review what action may be necessary to comply with the modified rule, or comply with an exception, by June 9.
As a recap, under the fiduciary rule, many functions that have historically not been fiduciary in nature will become fiduciary, which will greatly increase the reach of the prohibited transaction rules under ERISA and the Internal Revenue Code.2 This major change in the law will have large impacts on financial institutions and investment vehicles that market and sell services and products to IRAs and plans.
During the remainder of 2017, DOL plans to review the rule as instructed by the President's February 3, 2017, directive.3 Accordingly, it remains possible that the rule will ultimately be revised or even repealed in its entirety. In order to bridge the gap between the planned June 9, 2017, effective date of the new fiduciary definition and DOL's ultimate decision on the fate of the rule, DOL announced that the new exemptions, such as the Best Interest Contract Exemption (the BIC exemption), issued in connection with the rule, will generally become effective on June 9, 2017, in a modified form that greatly reduces—but does not entirely eliminate—the requirements that must be satisfied under the exemptions between June 9 and January 1, 2018. For example, the BIC transition exemption was modified to eliminate the burdensome requirement that financial institutions send a transition notice that, among other things, affirmatively states that the financial institution and its advisers will be fiduciaries.
The exemption condition for a fiduciary that DOL left in place is significant—the fiduciary must satisfy the "Impartial Conduct Standards." This requires "providing advice in the retirement investor's best interest; charging no more than reasonable compensation, and avoiding misleading statements." Whether or not a fiduciary satisfies the impartial conduct standards between June 9, 2017, and January 1, 2018, will be determined on a facts and circumstances basis. DOL has previously released extensive guidance on the steps that financial institutions can take toward satisfying the impartial conduct standard, including identifying conflicts of interest, taking steps to mitigate the conflicts, and modifying compensation structures to eliminate compensation programs that, in general, could cause advisers to give advice not in the best interest of retirement investors. Financial institutions that need to rely on any of the new exemptions should prepare to satisfy the Impartial Conduct Standards by June 9.
Investment Vehicles: Sophisticated Investor Exception
Firms that offer and sell interests in hedge funds, private equity funds, securitization vehicles, investment companies, or other registered or private pooled investment products to ERISA plans and IRAs, may be able to rely on the "Sophisticated Investor" exception. Unless this exception is met, the offering may be viewed as fiduciary advice in certain instances. Generally, a "Sophisticated Investor" is a bank, insurance carrier, registered investment adviser, registered broker-dealers, and any independent fiduciary that holds, or has under management or control, total assets of at least $50 million. However, this exemption is not available to IRAs and plans in which the IRA holder or participant (or a relative of either) makes the decision to invest even if they actually are experienced investors. To utilize this exemption, however, offering and subscription documents should be updated to include appropriate disclosure of the fiduciary rule and certain representations and warranties.
Because few options are available for selling and marketing services and products to individual IRAs, some investment vehicles may decide that the best course of action is to cease offering covered services and products to those customers. Funds should make decisions soon as to whether and how to continue offering such services and products to ERISA plans and IRAs on and after June 9, 2017, and prepare to implement those decisions by June 9.
IRAs and Plans That Do not Meet the Sophisticated Investor Exception
As noted above, an individual will not be considered a "Sophisticated Investor" with respect to his or her own IRA or self-directed plan account. For this reason, an individual investing assets of an IRA or such a plan will want to carefully check the offering documents and subscription or other agreements for potential investments to verify that they are permitted by the terms of the offering to make the investment.
Uncertain Future of the Rule
We emphasize that the future of the rule—both in the short and long term—remains unknown. Once a Secretary of Labor is confirmed, it is possible that DOL's position on the rule will change and further delays could be implemented before June 9. Even if DOL retains the June 9 applicability date for the new rule and the associated exemptions with reduced conditions, revision or even repeal of the rule remains likely before January 1, 2018. However, at this time, financial institutions and investment vehicles will need to carefully monitor the situation over the next several months and be prepared to live with the new rule for at least a portion of 2017. Unless the rule is delayed, revised, or repealed, the rule and all of the associated exemptions will come into full effect on January 1, 2018.
1. Federal Register, Department of Labor, Employee Benefits Security Administration, 29 CFR Part 2510.
2. See Arnold & Porter Kaye Scholer Advisory, "Department of Labor Adopts Sweeping Rules Regarding Fiduciary Investment Advice."
3. See Arnold & Porter Kaye Scholer Advisory, " New Administration Moves Toward Repealing or Revising the Department of Labor's Fiduciary Rule."
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.